Econ­o­mists with big ideas

CityPress - - Business -

Big idea: De­vel­oped coun­tries talk a lot about the free mar­ket but re­ally use their power and fi­nan­cial strength to profit at the ex­pense of emerg­ing economies. Chang’s ideas are con­tro­ver­sial, cen­tring on the role that in­ter­na­tional bod­ies such as the In­ter­na­tional Mon­e­tary Fund and World Bank play in the world econ­omy. In books such as Kick­ing Away the Lad­der and The Myth of Free Trade, he ar­gues that the gov­ern­ments of big­ger economies help out their own com­pa­nies, while preach­ing the ben­e­fits of the free mar­ket to de­vel­op­ing na­tions Big idea: The rule of law must be sus­pended for fi­nan­cial mar­kets in a cri­sis, or the whole sys­tem will col­lapse. Pistor, who won the Max Planck aca­demic re­search award in 2012, is de­vel­op­ing a le­gal the­ory of fi­nance to work out how laws af­fect its shape and com­po­si­tion. She dis­cov­ered that, in a cri­sis, the reg­u­la­tions that build mar­kets aren’t worth the pa­per they’re printed on. Po­lit­i­cal power is the driv­ing force be­hind who gets hit in the heat of the mo­ment Big idea: Fi­nan­cial col­lapses don’t hap­pen at ran­dom and aren’t in­evitable. They come from com­plex bar­gains be­tween politi­cians and bankers that spi­ral out of a gov­ern­ment’s con­trol. That’s one of the rea­sons the US has had 12 ma­jor bank­ing crises since 1840, while Canada has had none Big idea: CEOs are re­warded for luck rather than per­for­mance. Also, em­ploy­ers judge ap­pli­cants on their name as much as their qual­i­fi­ca­tions. Ber­trand is one the rea­sons there’s been such a share­holder back­lash against CEO pay, af­ter prov­ing their huge bonuses were based on luck rather than ge­nius. In a 2003 pa­per, she and Send­hil Mul­lainathan also fa­mously replied to help-wanted ads in Chicago and Bos­ton with fake names. Some ap­pli­cants used names like Emily and Greg, while oth­ers used names like Lak­isha and Ja­mal. “The re­sults show sig­nif­i­cant dis­crim­i­na­tion against AfricanAme­r­i­can names,” the au­thors wrote. “White names re­ceive 50% more call-backs for in­ter­views.” Big idea: You don’t need money to make a sta­ble mar­ket for some­thing. Roth, along with Lloyd Shap­ley, won the No­bel prize in 2012 for show­ing that peo­ple can make a mar­ket based on mu­tu­ally ben­e­fi­cial swaps rather than cash to sat­isfy a spe­cific need. This was par­tic­u­larly use­ful for eas­ing the short­age of kid­ney donors in the US. Roth used game the­ory to pair up donors with pa­tients they didn’t know, mak­ing it eas­ier for peo­ple to swap their or­gans and find matches Big idea: Bond­hold­ers can of­ten work to­gether to get con­ces­sions from a bor­rower. Portes, now pro­fes­sor of eco­nom­ics at Lon­don Busi­ness School, laid down the ground­work for col­lec­tive-ac­tion clauses, where sov­er­eign bond­hold­ers use their bar­gain­ing power to im­pose con­di­tions on a debtor coun­try. The work has been es­pe­cially im­por­tant for places like Greece and Ar­gentina Big idea: Far from hurt­ing growth, aus­ter­ity mea­sures can ac­tu­ally help economies re­cover. In 2009, Alesina and Sil­via Ardegna pub­lished a pa­per called Large Changes in Fis­cal Pol­icy: Taxes Ver­sus Spend­ing. It was an im­por­tant part of the de­bate in the years that fol­lowed about whether aus­ter­ity and re­duc­ing debt or boost­ing gov­ern­ment spend­ing were the best strate­gies for economies re­cov­er­ing

Big idea: Trust­ing your risk mod­els will lose you money in a cri­sis. Risk mod­els will gen­er­ally tend to have the same out­comes when ev­ery­thing is go­ing well, even if they have dif­fer­ent math­e­mat­i­cal foun­da­tions. This tricks peo­ple into think­ing they...

Big idea: Good­hart’s Law. Good­hart said that as soon as gov­ern­ments or cen­tral banks make a statis­tic or mea­sure, such as those used in the stock mar­ket, into im­plicit pol­icy tar­gets, they cease to be­come re­li­able as mea­sures of re­al­ity. This is...

Here are some of the lead­ing econ­o­mists chang­ing the world through aca­demic re­search

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