Smorgasbord

Robert Fredona, Sophus A. Reinert, and Teresa da Silva Lopes survey "Forms of Capitalism" (Business History Review, Spring 2024, 98:1, pp. 3-35, https://www.cambridge.org/core/journals/business-history-review/article/forms-of-capitalism/03192B7DAF615944FAC5FA7E44A17261).

"Simple dictionary definitions aside, after a century and a half of good faith attempts by some of our keenest minds, we don't seem any closer to meaningful agreement about the definition of capitalism or the historical boundaries of the phenomenon. The caution proposed by Weber in defining 'religion'—'definition can be attempted, if at all, only at the conclusion of the study'—should perhaps be applied to studies of 'capitalism' in equal or greater proportion. Some definitions seem too inclusive. N.S.B. Gras's own definition, for example: 'a system of getting a living through the use of capital,' by which he means 'goods or trained abilities used in producing other goods or services.' Even more inclusive is Deirdre McCloskey's. She has argued with panache that capitalism and the market economy, which 'contrary to what you might have heard, has existed since the caves,' are synonymous. 'Market participants are capitalists. You are, for example.' Some seem rather too exclusive: despite his protests to the contrary, Braudel's insistence on separating capitalism—'a world apart where an exceptional kind of capitalism goes on, to my mind the only real capitalism'—from both material life and the market economy, and finding it only in the 'shadowy zone' of great merchants and monopolists 'hovering above the sunlit world of the market economy,' seems rigid and artificial (or at least excessively Olympian).… Many of capitalism's staunchest defenders tell us that capitalism without competition isn't capitalism at all. Peter Thiel—a capitalist by all the definitions we've read— tells us, no, 'actually capitalism and competition are opposites.' The best definitions risk being somewhat boring. The most interesting ones seem less interested in capitalism's form than its spirit.  … Many of the newly-coined 'forms' of capitalism that we listed above—perhaps especially the most outré ones, like 'sugar daddy capitalism' or 'Candy Crush capitalism'—may be ways of identifying not new 'forms of capitalism' in the traditional sense but new characteristics of a capacious and polythetically-defined capitalism. Along the same lines, but from a different vantage point, we might think about what the characteristics are that are shared by both 'managerial capitalism' and 'booty capitalism,' or 'mercantile capitalism' and 'casino capitalism.' From either perspective, though, we might put it this way: capitalisms form a family."

Douglas A. Irwin presents "Does Trade Reform Promote Economic Growth? A Review of Recent Evidence" (World Bank Research Observer, February 2025, 40:1, 147-184, https://academic.oup.com/wbro/advance-article-abstract/doi/10.1093/wbro/lkae003/7658088).

"The findings from recent research, however, have been remarkably consistent. For developing countries that are behind the technological frontier and have significant import restrictions, there appears to be a measurable economic payoff from more liberal trade policies. … [A] variety of studies using different measures of policy have found that economic growth is roughly 1.0–1.5 percentage points higher for countries that undertake trade reforms. Several studies suggest that this gain cumulated to about 10–20 percent higher income after a decade. The effect is heterogeneous across countries, because countries differ in the extent of their reforms and the context in which reform took place. Understanding that heterogeneity, which is sometimes attributed to labor market rigidities, financial frictions, or service-sector in puts, merits further research. At a microeconomic level, the gains in industry productivity from reducing tariffs on imported intermediate goods are even more sharply identified. They show up time and again in country after country."

Mario Larch, Serge Shikher, and Yoto V. Yotov discuss "Estimating Gravity Equations: Theory Implications, Econometric Developments, and Practical Recommendations" (Drexel University, LeBow College of Business, Center for Global Policy Analysis Working Paper 25-01, January 3, 2025, https://ideas.repec.org/p/drx/wpaper/2025001.html).  

"The gravity equation of trade is the most successful empirical model in (international) economics, and hundreds of thousands of academic papers and policy reports have used the gravity model to estimate the effects of various determinants of trade flows. Proper estimation of the gravity equation will lead to consistent and unbiased estimates of the trade elasticities for various policies. … [W]e believe that (apart from the other data) most, if not all, of the developments in the estimating trade gravity literature, are directly applicable to gravity settings beyond international trade, e.g., commuting, migration, FDI, financial-asset flows, cross-border patents, mergers, and acquisitions, etc., … We make the following five recommendations within the 'Data' category: (i) Use data on bilateral trade flows for all possible countries; (ii) Use administrative data, on nominal trade flows in common currency, at delivered prices; (iii) Use disaggregated data; (iv) Use panel data for consecutive years; and (v) Include domestic trade data. We also make six additional recommendations on the 'Estimation' of the gravity model: (vi) Estimate gravity in its multiplicative form using PPML [Poisson Pseudo Maximum Likelihood]; (vii) Use exporter-time and importer-time fixed effects; (viii) Employ asymmetric country pair fixed effects; (ix) Carefully model bilateral trade costs; (x) Allow non-discriminatory trade costs; and (xi) Cluster standard errors. Finally, we make four recommendations regarding the 'Heterogeneous' trade costs and policy effects: (xii) Obtain disaggregated policy estimates; (xiii) Allow for dynamic adjustments in the trade costs; (xiv) Consider other types and sources of heterogeneity; and (xv) Consider using heterogeneity-robust DiD [difference-in-difference] methods."

David Chambers, Elroy Dimson, Antti Ilmanen, and Paul Rintamäki discuss "Long-Run Asset Returns" (Annual Review of Financial Economics, 2024, volume 16).

"First, we address one of the central questions in empirical asset pricing, namely, whether stocks consistently beat bonds over the long run. As we noted above, this evidence relies primarily on data series starting in 1900 or, in the case of the United States, 1926, when the University of Chicago's CRSP data starts. In this section, we first discuss the history of stock and bond returns before 1900/1926 … The main message is that the US equity premium over (government) bonds at and above 5% in the 1900s was considerably higher than estimates for the 1800s ranging between +1.6% and –0.6%. … The 224-year estimate of the annualized UK equity-bond premium is in the range of 2–3%, which is again well below the twentieth-century premium of 4–5%."

Yaqub Chaudhary and Jonnie Penn warn "Beware the Intention Economy: Collection and Commodification of Intent via Large Language Models" (Harvard Data Science Review, December 30, 2024, https://hdsr.mitpress.mit.edu/specialissue5).

"The rapid proliferation of large language models (LLMs) invites the possibility of a new marketplace for behavioral and psychological data that signals intent. This brief article introduces some initial features of that emerging marketplace. We survey recent efforts by tech executives to position the capture, manipulation, and commodification of human intentionality as a lucrative parallel to—and viable extension of—the now-dominant attention economy, which has bent consumer, civic, and media norms around users' finite attention spans since the 1990s. We call this follow-on the intention economy. We characterize it in two ways. First, as competition, initially, between established tech players armed with the infrastructural and data capacities needed to vie for first-mover advantage on a new frontier of persuasive technologies. Second, as a commodification of hitherto unreachable levels of explicit and implicit data that signal intent, namely those signals borne of combining (a) hyper-personalized manipulation via LLM-based sycophancy, ingratiation, and emotional infiltration and (b) increasingly detailed categorization of online activity elicited through natural language."

Melissa Kearney and Luke Pardue have edited a collection of six essays in Strengthening Americas Economic Dynamism (Aspen Economic Strategy Group, December 2024, https://www.economicstrategygroup.org/publication/strengthening-americas-economic-dynamism/). For example, David Deming, Christopher Ong, and Lawrence H. Summers discuss, "Technological Disruption in the US Labor Market." 

"We measure changes in the structure of the US labor market going back over a century. We find, perhaps surprisingly, that the pace of change has slowed over time. The years spanning 1990 to 2017 were less disruptive than any prior period we measure, going back to 1880. This comparative decline is not because the job market is stable today but rather because past changes were so profound. General-purpose technologies (GPTs) like steam power and electricity dramatically disrupted the twentieth-century labor market, but the changes took place over decades. We argue that AI could be a GPT on the scale of prior disruptive innovations, which means it is likely too early to assess its full impacts. Nonetheless, we present four indications that the pace of labor market change has accelerated recently, possibly due to technological change."

The other authors and titles are: Michael R. Strain, "Protectionism is Failing and Wrongheaded: An Evaluation of the Post-2017 Shift toward Trade Wars and Industrial Policy"; Brad Setser, "The Surprising Resilience of Globalization: An Examination of Claims of Economic Fragmentation"; Zachary Liscow, "State Capacity for Building Infrastructure"; Jason Furman "Eight Questions—and Some Answers—On the U.S. Fiscal Situation"; and Jennifer Doleac, "Why Crime Matters, and What to Do About It."

EU Competitiveness

Mario Draghi has authored "The future of European competitiveness," two volumes of analysis and recommendations totaling nearly 400 pages (European Commission, September 2024, https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en).

"The EU has set out a range of ambitions – such as achieving high levels of social inclusion, delivering carbon neutrality and increasing geopolitical relevance – which depend on maintaining solid rates of economic growth. However, EU economic growth has been persistently slower than in the US over the past two decades, while China has been rapidly catching up. The EU-US gap in the level of GDP at 2015 prices has gradually widened from slightly more than 15% in 2002 to 30% in 2023 … The main driver of these diverging developments has been productivity … Slower productivity growth has in turn been associated with slower income growth and weaker domestic demand in Europe: on a per capita basis, real disposable income has grown almost twice as much in the US as in the EU since 2000. At the same time, three external conditions – in trade, energy and defence – that supported growth in Europe after the end of the Cold War have been fading. First, even as domestic growth slowed, [b]etween 2000 and 2019, international trade as a share of GDP rose from 30% to 43% in the EU, whereas in the US it rose from 25% to 26%. … However, the multilateral trading order is now in deep crisis and the era of rapid world trade growth looks to have passed … Second, as relations normalised with Russia, Europe was able to satisfy its demand for imported energy by procuring ample pipeline gas … But this source of relatively cheap energy has now disappeared at huge cost to Europe. The EU has lost more than a year of GDP growth while having to re-direct massive fiscal resources to energy subsidies and building new infrastructure for importing liquefied natural gas. Third, the era of geopolitical stability under US hegemony allowed the EU largely to separate economic policy from security considerations, as well as to use the "peace dividend" from lower defence spending to support its domestic goals. The geopolitical environment is however now in flux owing to Russia's unwarranted aggression against Ukraine, deteriorating US-China relations and rising instability in Africa, which is a source of many commodities that are critical to the world economy."

The IMF Regional Economic Outlook reports on "Europe: A Recovery Short of Europe's Full Potential" (October 2024, https://www.imf.org/en/Publications/REO/EU/Issues/2024/10/24/regional-economic-outlook-Europe-october-2024).

"Europe's productivity gap with the global frontier can be traced back to a more limited market size, capital market constraints, skilled labor shortages, and stalled structural reforms. Firm-data analysis shows that Europe's segmented good and services markets are keeping businesses from becoming larger, spending more on R&D, and exploiting economies of scale. Moreover, fragmented capital markets mean that firms do not draw enough on equity financing. As a result, business dynamics are dampened especially in the services sector where start-ups tend to operate with large intangible capital. … There is widespread agreement on the sources of Europe's growth weakness. Recently released expert studies come to a similar conclusion that Europe's low productivity is related to lack of market depth and scale. … Remaining barriers are considered to be still substantial and have resulted in less investment and innovation than necessary to accelerate growth and productivity to levels seen in other advanced regions. However, value chain integration has stalled since the last decade … and substantial barriers to goods and trade flows remain … New IMF analysis finds that in 2020 trade costs within Europe were equivalent to a sizable ad-valorem tariff of 44 percent for the average manufacturing sector compared to 15 percent between US states, and as high as 110 percent in the case of services sectors …"

Yann Coatanlem and Oliver Coste focus on European technology firms in their discussion of "Cost of Failure and Competitiveness in Disruptive Innovation" (Institute for Economic Policymaking at Bocconi University, Policy Brief, September 2024, https://iep.unibocconi.eu/publications/policy-briefs/policy-brief-n24-cost-failure-and-competitiveness-disruptive-innovation).

"It is now widely understood that the R&D intensity gap of the European Union against the United States is driven by tech sectors: the United States private R&D in tech is now 6 time higher than in the EU. … Leveraging a combination of financial analysis, empirical observations, and limited existing literature, we estimate that restructuring costs (that include much more than severance packages) are approximately 10 times higher in countries with high labor protection, such as in Western Europe, than in countries with low labor protection such as in the United States."

Interviews

Jon Hartley interviews Myron Scholes on "Academic Finance, Black-Scholes Options Pricing, and Regulation" ("Capitalism and Freedom in the 21st Century" podcast, January 5, 2025, https://capitalismandfreedom.substack.com/p/episode-43-myron-scholes-stanford). On the Black Scholes option pricing model:

"The underlying theory was published in the Journal of Political Economy with the model or given its assumptions. Now we know that every model has an assumption, every model has an error, every model is an incomplete description of reality. How well does the model do in making predictions? And that's the key. Basically the model has done very well over time. There's a lot of people who say the model doesn't do this, the model doesn't do that, but it does pretty darn great. … At the time the Black-Scholes model was published was coincident with the birth of the first listed options trading in the Chicago Board Options Exchange in Chicago. … That was in 1973. Then it was the case that there was the old grizzly traders who thought they had the experience from the over-the-counter market and the new young Turks … So here's an idea with experience only and intuition versus a model. And the young guys had the model … Fisher Black made sheets of paper which talked about the delta and the pricing at different levels of the stock price relative to the exercise price. And they could look at the sheets. And there was a war between the grizzly intuition people and the model people, the young Turks who had no intuition, but they had the model. And in a matter of about six months or so, the young Turks had wiped out the grizzlies, okay, the intuition people."

Joe Walker interviews Eugene Fama on the topic "For Whom is the Market Efficient?" (The Joe Walker podcast, December 31, 2024, https://josephnoelwalker.com/eugene-fama-156/).

"Well, for almost everybody, the market is efficient in the sense that they don't have information that's not already built into prices. People who have special information, the market's not efficient for them. So let's say insiders, for example, typically have special information. So as far as they're concerned, this stock is not priced totally efficiently because they have information they know will change the price. But for everybody else, assuming it's efficient, it may be a really good approximation. … So if you say, tell me about professional investors, I'll say a very small fraction of them show evidence of having information that isn't already built into the price. … If I go out to the public, alright, the market's efficient for everybody out there. … [T]his is what I call the joint hypothesis problem. You can't tell me that prices reflect all available information unless you take a stance on what the price should be. So you have to have some model that tells me, for example, what is risk and what's the relation between risk and expected return. And then we can look at deviations from that and see if the market is efficient. … You need a model that tells you how prices get formed. So in the jargon that's called a model of market equilibrium. You need to join that with efficiency, then I can test it in the context of whatever model you tell me is determining prices. … [S]o you cannot test market efficiency without a story about risk and return, which is a market equilibrium issue. The reverse is also true. You can't test models of market equilibrium without market efficiency. So these two things are like joined at the hip. They can't be separated. People who do market efficiency, they almost don't exist anymore. Everybody takes it for granted in the academic sphere. It's considered uninteresting to test. But everybody that does market efficiency understands the joint hypothesis problem. But it's not that widely recognized among the people who do asset risk and return models. It's implicitly assumed, but they never make it explicit."

Andrew Peaple interviews "Barry Naughton on the State of the Xi Jinping Economy," subtitled "The economist discusses Beijing's recent stimulus efforts, and the long-term problems building up as China's leader implements his model for the country." (The Wire China website, January 5, 2025, https://www.thewirechina.com/2025/01/05/barry-naughton-on-the-state-of-the-xi-jinping-economy/.)

"[N]one of the things that we've seen to prop up demand and keep institutional structures intact have yet involved a substantial resolution of large amounts of debt. He [Xi Jinping] keeps refinancing, kicking the can down the road, injecting some funds into the system to keep anybody from failing, but without resolving any of the problems. That's really a problem, because at a certain point you have to clean up the mess. … Japan spent almost a decade trying to painlessly restructure a financial system that had suffered a huge reduction in the value of its assets. It was the fundamental problem that lay behind the so-called 'Lost Decade' in Japan; and now China seems to be repeating some parts of that. … China's not really experiencing significant productivity growth. That is astonishing, because if we look at this economy that's implementing all these new technologies, we think, wow, that's gotta produce some kind of explosive growth in productivity. But we don't see it.  And it's fundamentally because, for example, China is investing in lots of semiconductor equipment plants that are losing immense amounts of money; it's investing in thousands of miles of high speed rail that go where nobody wants to go. There are just these huge, long run implicit costs from not improving the efficiency of your society. Now, of course, on some level, Xi Jinping is making a gamble that all these technologies will at some point come together and produce a sudden surge of productivity. And he might be right. We can't say for sure that he's not. But thus far, he's very much not."

Discussion Starters

Clark Packard and Scott Lincicome explore "Presidential Tariff Powers and the Need for Reform" (Cato Institute, October 9, 2024, Briefing Paper No. 179, https://www.cato.org/briefing-paper/presidential-tariff-powers-need-reform).

"Several US laws provide the president with vast and discretionary authority to unilaterally impose sweeping trade restrictions, and no institution—not Congress, not domestic courts, not US international agreements—provides a quick, surefire check on such actions. Thus, while the durable implementation of broad and damaging US tariffs is not guaranteed, its risk—and related economic and geopolitical risks—will remain real and substantial until US law is changed to limit presidential tariff powers. We therefore recommend Congress enact such amendments immediately."

Paolo Santori investigates "Domination vs. Persuasion: The Role of Libido Dominandi in Adam Smith's Thought" (Review of Politics, 2025, pp. 1-18, https://www.cambridge.org/core/journals/review-of-politics/article/domination-vs-persuasion-the-role-of-libido-dominandi-in-adam-smiths-thought/EA4FCC30F38FC56CDFDE2A17F1976ACD). From the abstract:

"Adam Smith argued that human beings naturally desire to dominate others and that they enjoy it. He showed how ancient masters, landlords, and economic actors in some eighteenth-century English and colonial markets were driven by their love of domination against their own economic interests. … This article … [shows] that, for Smith, the love of domination has nothing to do with the love of praise but that most of the pleasure people derive from it is to see their ends promoted by others without the need to persuade them about the utility of those ends. This understanding locates the love of domination outside commercial society where, under certain socio-economic circumstances, mutual persuasion among individuals is the rule."