Knowledge that Transforms

Geography, flat or not, creates special relationships between buyers and sellers who reside in the same neighborhoods, but Friedman turns this metaphor inside-out by using The World is Flat to warn us of the perils of a relationship-free world in which every economic transaction is contested globally. In his “flat” world, your wages are set in Shanghai. In fact, most of the footloose relationship-free jobs in apparel and footwear and consumer electronics departed the United States several decades ago, and few U.S. workers today feel the force of Chinese and Indian competition, notwithstanding the alarming anecdotes about the outsourcing of intellectual services. Of course, standardization, mechanization, and computerization all work to increase the number of footloose tasks, but innovation and education work in the opposite direction, creating relationship-based activities—like the writing of this review. It may only be personal conceit, but I imagine there is a reason why the Journal of Economic Literature asked me to do this review.

The authors discuss recent empirical research on how globalization has affected income inequality in developing countries. They begin with a discussion of conceptual issues regarding the measurement of globalization and inequality. Next, they present empirical evidence on the evolution of globalization and inequality in several developing countries during the 1980s and 1990s. The authors then examine the channels through which globalization may have affected inequality, discussing theory and evidence in parallel. They conclude with directions for future research.

When the quality of a good is at the discretion of the seller, how can buyers assure that the seller provides the mutually efficient level of quality? Contracts that provide a bonus to the seller if the quality is acceptable or impose a penalty on the seller if quality is unacceptable can, in theory, provide efficient incentives. But how are such contracts enforced? While the courts can be used, doing so involves high real costs. Informal enforcement, involving a loss of reputation and future access to the market for any party that defaults on a contract, may often be a better alternative. This paper explores the use of both formal and informal enforcement mechanisms, provides a rationale for a variety of observed market mechanisms, and then generates a number of testable hypotheses.

Recent social experiments have evaluated two reforms of the unemployment insurance (UI) system: reemployment bonuses and job search programs. The bonus experiments show that economic incentives affect the length of UI receipt and provide weak evidence that an earlier return to work does not decrease earnings. The experiments do not show the favorability of a permanent bonus program as they ignore its effect on the number of the claimants. The job search experiments test several more promising reforms. Nearly all of the combinations of services and increased enforcement reduce UI receipt and have favorable cost/benefit analyses. Earnings often increase, though the estimates are imprecise.

Research on the macroeconomic impact of capital account liberalization finds few, if any, robust effects of liberalization on real variables. In contrast to the prevailing wisdom, I argue that the textbook theory of liberalization holds up quite well to a critical reading of this literature. Most papers that find no effect of liberalization on real variables tell us nothing about the empirical validity of the theory because they do not really test it. This paper explains why it is that most studies do not really address the theory they set out to test. It also discusses what is necessary to test the theory and examines papers that have done so. Studies that actually test the theory show that liberalization has significant effects on the cost of capital, investment, and economic growth.

Since Ronald H. Coase's (1937) seminal paper, a rich set of theories has been developed that deal with firm boundaries in vertical or input–output structures. In the last twenty-five years, empirical evidence that can shed light on those theories also has been accumulating. We review the findings of empirical studies that have addressed two main interrelated questions: First, what types of transactions are best brought within the firm and, second, what are the consequences of vertical integration decisions for economic outcomes such as prices, quantities, investment, and profits. Throughout, we highlight areas of potential cross-fertilization and promising areas for future work.

The Stern Review calls for immediate decisive action to stabilize greenhouse gases because “the benefits of strong, early action on climate change outweighs the costs.” The economic analysis supporting this conclusion consists mostly of two basic strands. The first strand is a formal aggregative model that relies for its conclusions primarily upon imposing a very low discount rate. Concerning this discount-rate aspect, I am skeptical of the Review's formal analysis, but this essay points out that we are actually a lot less sure about what interest rate should be used for discounting climate change than is commonly acknowledged. The Review's second basic strand is a more intuitive argument that it might be very important to avoid possibly large uncertainties that are difficult to quantify. Concerning this uncertainty aspect, I argue that it might be recast into sound analytical reasoning that might justify some of the Review's conclusions. The basic issue here is that spending money to slow global warming should perhaps not be conceptualized primarily as being about consumption smoothing as much as being about how much insurance to buy to offset the small change of a ruinous catastrophe that is difficult to compensate by ordinary savings.

Thorstein Veblen proposed that economics should be reconstructed as a “post-Darwinian” science. One of the aims of this essay is to explore the meaning of this statement. A second aim is to show that American institutional economics had largely abandoned this commitment to Darwinian principles by the time of Veblen’s death. In this context, the appearance of the book by David Hamilton (1953)—especially with its original title of Newtonian Classicism and Darwinian Institutionalism—is all the more remarkable. It reestablished the Veblenian links between Darwinism and institutionalism that most institutionalists had abandoned. The first part of this essay summarizes the philosophical and analytical meaning of Darwinism and counters some prominent misunderstandings in this area. The second part shows how Veblen had incorporated these Darwinian ideas into his thinking. The third part shows how institutionalists after Veblen abandoned these Darwinian ideas. Having established this context, the fourth part emphasizes the importance of Hamilton’s contribution. What Is Darwinism? A host of misunderstandings surround the question of Darwinism and its relation with the social sciences. Contrary to widespread suppositions, Darwinism does not support any form of racism, sexism, nationalism, or imperialism or provide any moral justification for “the survival of the fittest. ” Furthermore, Darwinism does not imply that militant conflict is inevitable, that human inequalities or power or wealth are inevitable, that cooperation or altruism are unimportant or unnatural, that evolution always leads

Diversified business groups, consisting of legally independent firms operating across diverse industries, are ubiquitous in emerging markets. Groups around the world share certain attributes but also vary substantially in structure, ownership, and other dimensions. This paper proposes a business group taxonomy, which is used to formulate hypotheses and present evidence about the reasons for the formation, prevalence, and evolution of groups in different environments. In interpreting the evidence, the authors pay particular attention to two aspects neglected in much of the literature: the circumstances under which groups emerge and the historical evidence on some of the questions addressed by recent studies. They argue that business groups are responses to different economic conditions and that, from a welfare standpoint, they can sometimes be “paragons” and, at other times, “parasites.” The authors conclude with an agenda for future research.