Knowledge that Transforms

Capitalism and law go together in Geoffrey M. Hodgson's comprehensive analysis of the intellectual history and practical development of the capitalist system in Western Europe and North America. Given the breadth and depth of Professor Hodgson's reading in political economy and his reflections on its implications for the present and future of global capitalism, his book deserves to be widely read. Labeling his approach legal institutionalism, he argues that a legal system that supports capitalism and the market is necessary but not sufficient to sustain a fair and efficient economic system. The state makes efficient markets possible, but it must also deal with the inevitable tensions and the fundamental asymmetry between labor and capital. Tensions arise because labor cannot be used as collateral for the loans that are needed for large-scale capitalist enterprise. Hodgson has not developed the political implications of his conclusions in any detail, but his work ought to inspire research that explores the implications of his arguments for ongoing projects of nation building. (JEL D72, K10, O43, P14, P16)

The two books being reviewed are concerned with the importance of slavery in the antebellum US South for the economic development of the Northern states. One (Schermerhorn) deals primarily with Southern financial arrangements facilitating the sales of slaves and cotton. The other (Baptist) presents a broader picture of masters' treatment of slaves, as well as how the incomes of slaveowners spurred the demand for Northern industrial production. The review argues that both books overstate the importance of slavery and cotton production for US economic growth. (JEL J15, N11, N31, N51, P16)

Understanding the nature of capitalism has been a central theme of economics. The collapse of the Eastern Bloc and the global financial crisis spurred the reemergence of the political economy as a new frontier and the revival of interest in the nature of capitalism. János Kornai's book Dynamism, Rivalry, and the Surplus Economy: Two Essays on the Nature of Capitalism fills an important intellectual gap in understanding the dynamic nature of capitalism by comparing it with its mirror image, socialism. To further develop the themes contained in the book, serious challenges are posed theoretically and empirically, as well as in subjects, such as hybrid capitalism. (JEL L32, P12, P14, P16, P26, P31)

This essay reviews Dani Rodrik's superb book Economics Rules and argues that it can serve as an ideal platform for discussing what economists can and should accomplish. The essay comments on some of the major issues in contemporary economics examined in the book: whether economics is a science, the meaning of economic models, the nature of “facts” in economics, and others. It also touches on issues that the book overlooks, such as the sociology of the profession, the teaching curriculum in economics, and the dismal situation of publishing in economics. (JEL A11, B40, C50)

Alvin Roth's Who Gets What—And Why provides a richly accessible introduction to his pioneering work on market design. Much of economics ignores the institutions that allocate goods, blithely assuming that the mythical Walrasian auctioneer will handle everything perfectly. But markets do fail and Roth details those failures, like the market for law clerks that unravels because clerks and judges commit to each other too quickly. Roth combines theory and pragmatic experience to show how the economist can engineer successful markets. He has even enabled welfare-improving trades in kidney exchanges, where law and social repugnance forbids cash payments. (JEL C78, D47)

In this article, we review the book Economic Interdependence and War by Dale C. Copeland, and take this opportunity to describe and discuss the current debate on the topic from an interdisciplinary perspective. We also provide novel insights on the measurability of dependence expectations' effects on conflict, using the interaction with geography and endowment asymmetries. (JEL D74, D84, F14, F51, Q34)

I review the economic characteristics of the climate problem, focusing on the choice of discount rates in the presence of a stock externality, risk and uncertainty/ambiguity, and the role of integrated assessment models (IAMs) in analyzing policy choices. I suggest that IAMs can play a role in providing qualitative understanding of how complex systems behave, but are not accurate enough to provide quantitative insights. Arguments in favor of action on climate issues have to be based on aversion to risk and ambiguity and the need to avoid a small but positive risk of a disastrous outcome. ( JEL D61, H43, Q48, Q54, Q58)

The New Deal during the 1930s was arguably the largest peace-time expansion in federal government activity in American history. Until recently, there had been very little quantitative testing of the microeconomic impact of the wide variety of New Deal programs. Over the past decade scholars have developed new panel databases for counties, cities, and states and then used panel data methods on them to examine the impact of New Deal spending and lending policies for the major New Deal programs. In most cases, the identification of the effect comes from changes across time within the same geographic location after controlling for national shocks to the economy. Many of the studies also use instrumental variable methods to control for endogeneity. The studies find that public works and relief spending had state income multipliers of around one, increased consumption activity, attracted internal migration, reduced crime rates, and lowered several types of mortality. The farm programs typically aided large farm owners but eliminated opportunities for share croppers, tenants, and farm workers. The Home Owners' Loan Corporation's purchases and refinancing of troubled mortgages staved off drops in housing prices and home ownership rates at relatively low ex post cost to taxpayers. The Reconstruction Finance Corporation's loans to banks and railroads appear to have had little positive impact, although the banks were aided when the RFC took ownership stakes. (JEL D72, E61, L52, N41, N42)

In this paper, I suggest that the history of the classification system used by the American Economic Association (AEA) to list economic literature and scholars is a relevant proxy to understand the transformation of economics science throughout the twentieth century. Successive classifications were fashioned through heated discussions on the status of theoretical and empirical work, data and measurement, and proper objects of analysis. They also reflected the contradictory demands of users, including economists but also civil servants, journalists, publishers, librarians, and the military, and reflected rapidly changing institutional and technological constraints. Until the late 1940s, disagreements on the general structure of the classification dominated AEA discussions. As the subject matters, methods, and definition of economics rapidly evolved after the war, methodological debates raged on the status of theoretical and empirical work and the degree of unification of the discipline. It was therefore the ordering and content of major categories that was closely discussed during the 1956 revision. The 1966 revision, in contrast, was fueled by institutional and technical transformations rather than intellectual ones. Classifiers essentially reacted to changes in the way economists' work was evaluated, the nature and size of the literature they produced, the publishing industry, and the use of computer facilities. The final 1988–90 revision was an attempt by the Journal of Economic Literature (JEL) editors to translate the mature core fields structure of their science into a set of codes and accommodate the new types of applied work economists identified themselves with. The 1990 classification system was only incrementally transformed in the next twenty years, but that the AEA is currently considering a new revision may signal more profound changes in the structure of economics. (JEL A14)

We survey the literature on dynamic elections in the traditional settings of spatial preferences and rent seeking under perfect and imperfect monitoring of politicians. We define stationary electoral equilibrium, which encompasses notions used by Barro (1973), Ferejohn (1986), Banks and Sundaram (1998), and others. We show that repeated elections mitigate the commitment problems of politicians and voters, and that a responsive democracy result holds under general conditions. Term limits, however, attenuate the responsiveness finding. We also touch on related applied work, and we point to areas for fruitful future research, including the connection between dynamic models of politics and economics. ( JEL D72, D82, D83)