Wall Street Journal Book Review Is Wrong About The Beard Thesis

It was in a review of David S. Brown's book Beyond the Frontier. (April 29). Here is the link:

A Heartland View of History.

Here is the relevant passage:

"The big idea in Beard's (Charles Beard) masterwork, "An Economic Interpretation of the Constitution of the United States" (1913), was that the Founding Fathers were, in his words, "with a few exceptions, immediately, directly, and personally interested in, and derived economic advantage from, the establishment of the new system." At first violently attacked, his thesis came to be widely accepted in the 1930s. "By introducing the idea that self-interest influenced the framers," Mr. Brown writes, "Beard forced students of the American past to consider the Constitution as an economic rather than a merely legal, let alone divinely inspired, text." Nevertheless, Beard's thesis was thoroughly demolished in the 1950s by the Texas-born historian Forrest McDonald and several other scholars -- an accomplishment that Mr. Brown, strangely, neglects to mention. Mr. McDonald argued, for instance, that on close examination, there was "virtually no correlation" between the Framers' actual economic interests and their votes at the Constitutional Convention."

But more recent scholarship (mainly by economist Robert McGuire, whom we will hear from below) using modern statistical techniques supports the Beard thesis. The WSJ actually had a book review which said something similar a few years ago. I wrote a letter to the editor explaining what McGuire had done and that he had published research in many top journals (not to mention a book). But the WSJ did not print it.

McGuire's book is called To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. New York: Oxford University Press, 2003. xii +395 pp. $24.95 (hardback), ISBN: 0-19-513970-4.

It has received some good reviews which you can read
here and here and here.

McGuire has published several articles on this in The American Economic Review and the Journal of Economic History over the last 20 years. His findings are summarized in his book. To truly understand the data (and the voting behavior of convention delegates), McGuire used a multivariate statistical approach. This allows us to see that slave owners truly were less likely to favor the Constitution than merchants. Simple tallies of votes are not sophisticated enough. All other factors must be held constant when trying to discover the true relationship between two variables.

Here is what professor McGuire wrote to me in an email:

"... an economic interpretation that supports Beard in the broad general sense that economic interests mattered (not necessarily all of Beard's specifics mattered as he claimed) has been the prevailing view among economic historians for nearly three decades. ... these studies used the data that McDonald collected (as well as a host of other data on economic and ideological interests); but these are data that McDonald did not formally analyze in his book according to any modern standard. ... a likely reason that I and others have been ignored by traditional historians is because of the general nature of their methodology; it is quantitative and statistical. (See my reference to John Murray's essay below.) (Farley Grubb has several papers on bankers' rent seeking and the monetary powers included in the Constitution and Heckelman and Dougherty have a couple or so papers that re-examine my work).

McDonald himself never said that economic intetrests did not matter at all; he said they did not matter along Beard's specific dichotomy of realty versus personalty and that the specific interests of the founders could not be aligned on one side of an issue with other specific interests on another side. He felt the interests were too varied and dispersed across supporters and opponents of the Constitution so that patterns could not be indicated. Moreover, McDonald has really been misinterpreted by most of his own supporters to claim that economic interets did NOT matter at all.

John Murray, University of Toledo, ...tried to explain why historians have ignored my work, basically arguing that traditional historians ignore economic historians unless they are forced to pay attention because of a media/publicity
blitz."

Who Was Alex P. Keaton's Favorite Economist? Milton Friedman

Click on the following video link to find out:

Who Was Alex P. Keaton's Favorite Economist?

You will only have to watch a few minutes to find out. It is from the 1980s sitcom "Family Ties." Michael J. Fox played Alex Keaton. In this episode he tells another character that Milton Friedman was his favorite economist.

A Public Health Announcement

Just in case you con't know, that is actor Tony Shalhoub, who plays the obsessive-compulsive detective "Adrian Monk" on the USA Network. He really has not said anything publicly (that I know of) about the swine flu.

How Much Does It Cost To Raise A Child?

I don't know since I don't have any kids. But this article, How much does it really cost to have a baby? has some numbers. Here is one exerpt:

"According to the U.S. Department of Agriculture, families who make more than $74,900 a year will spend an average of $289,380 per child over 18 years (this does not take into account college savings). In one year, the average parents spend $4,300 in child care, an additional $1,525 in food, and $2,900 on a bigger home."

That all sounds like alot of money. Some of my students are parents. I am curious to see if you have anything to say about this issue.

Male sex hormone may affect stock trades

This was actually a post from about a year ago. But it follows up on the last post about genes affecting investment decisions. The extra credit question on this week's quiz was "name a gene that affects investment decisions." Someone answered testosterone. Not a bad guess, but it is a hormone.

That is the name of an article you can read here. Here is an excerpt:

"Coates and Joe Herbert studied male financial traders in London, taking saliva samples in the morning and evening. They found that levels of two hormones, testosterone and cortisol, affected traders.

Those with higher levels of testosterone in the morning were more likely to make an unusually big profit that day, the researchers found. Testosterone, best known as the male sex hormone, affects aggression, confidence and risk-taking. Cortisol is tied to uncertainty, novelty and unpredictability, "which pretty much describes a trader's life," Coates said in a telephone interview.

Coates and Herbert's study comes less than two weeks after U.S. researchers reported that young men shown erotic pictures were more likely to make a larger financial gamble than if they were shown a picture of something scary, such as a snake, or something neutral, such as a stapler."

Is Your Investing Personality in Your DNA?

That was the title of a WSJ article that you can read by clicking here.

Here are some key exerpts:

"Consider the FAAH gene. Roughly 25% of people with European ancestry carry the 385A allele of this gene. That tends to damp their brains' fear circuitry and to intensify their brains' reaction to the prospect of making money. Or take the DRD2 gene. Some 20% of Caucasians have an allele that can make them respond more intensely to gambles, even when no skill is involved."

Some people have brains that "crave the immediate gratification of a quick profit. "Controlling this kind of impulsive response to reward," says Dr. Hariri, "is crucial to success in many aspects of life" -- like investing, where impatience often lowers returns.

"Perhaps 20% of the variation in risk-taking among individuals is genetically determined; the rest comes from our upbringing, experience, education and training."

"But during scary times like these, says Dr. Hariri, "environmental stresses can play a critical role in unmasking any underlying biases determined by your genes." In other words, bear markets give nature the upper hand."

Layoffs May Be More Costly Than The Alternative

There is an interesting article called Layoffs not an option for some businesses. You might think that all a company has to do is layoff workers when the recessions hits. There may be good reasons to limit layoffs:

-when the economy picks up again, your company will be ready to ramp up production

-you can freeze hiring or cut seasonal workers

-you can cut or freeze salaries

-cut pension payments

-cut back on hours

-you have to train new workers you hire later on

-you avoid severance cots

-layoffs can hurt morale

-workers you hire later on may cost more

How Many Home Runs Would Babe Ruth Have Hit If Baseball Had Been Integrated In His Era?

To see the answer click here. And yes, economics is involved! In case you don't know, before 1947, all major league baseball players were white (there had been a few native Americans and light skinned hispanics, but not many). Ruth held the career HR record with 714 until Hank Aaron broke it in 1974. But since Ruth never had to face pretty much anything but white guys, there must have been some good pitchers he did not have to face. Had he faced more good pitchers, perhaps he would have hit fewer HRs. How many fewer is what I discuss at the above link.

My Favorite Economist Is Joseph Schumpeter

A student emailed me the correct answer tonight. It was Michelle Garza of the internet microeconomics course. Congratulations! She did a good job of following the hints. Recall the hint: "It will be "safe" to search for the answer even if you thought it might not be."

What is the opposite of being safe? It is dangerous and this blog is called "The Dangerous Economist?" Why is it called that? I have a link that explains why. Here is what it says:

"Why is this blog called The Dangerous Economist? Back in the early 1990s, I wrote a paper called "The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?" It compares the entrepreneur in capitalism to the hero in mythology. I was never able to get it published in an academic journal. One referee even said the idea was dangerous. I doubt much harm would have befallen the U.S. economy had this paper been published. It is now online at

Creative Destroyers

A shorter version is at

Shorter Version

If you clicked on the link about why I chose this name for my blog and then these articles and read them you would have discovered some of the things that I list below and they would have pointed you to Schumpeter.

The process whereby innovations occur was called "Creative Destruction" by Schumpeter in his bookd Capitalism, Socialism, and Democracy. "Creative Destruction" was

"The opening of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation if I may use that biological term-that incessantly revolutionizes the economic structure from with in, incessantly destroying the old one, incessantly creating the new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in" (p. 83).

In his book The Hero with a Thousand Faces, Joseph Campbell described the action of the hero with

"The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return: which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder: fabulous forces are there encountered and a decisive victory is won: the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man. "(p. 30)

Campbell (1968) also has a section called "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero" (p. 38). The connection to Schumpeter's theory of creative destruction is clear. A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. But even more to the point is the fact that the hero finds that the world "suffers from a symbolical deficiency" (p. 37) and that "the hero appears on the scene in various forms according to the changing needs of the race" (p. 38). The changing needs and the deficiency may directly correspond to the changing market conditions or the changing desires for products. The entrepreneur IS the first person to perceive the need or opportunity for market profits.

Joseph Campbell's book inspired George Lucas to make the Star Wars movies.

Obama To Pitch For The White Sox

April first 2009 will go down in history. Click White Sox Sign Obama For Left-handed Bullpen Support to read all about it.

The Ranger (The San Antonio College Newspaper) Quotes My Second Favorite Economist

The article is Students fear recession will affect education. My second favorite economist is the guy who says:

"If you save $4,000 a year for 40 years and earn an annual rate of return of 8 percent, you will have a million dollars."

So, you might wonder, if this guy is only my second favorite economist, who is my favorite? Hint: it is not Adam Smith, Milton Friedman, John Maynard Keynes, Simon Kuznets, Martin Feldstein, Skidelsky or even Dambisa Moyo (but she is third, for rather obvious reasons).

The first student to email me the correct answer (who is Cy's favorite economist) will get 5 points added to your next test. I will allow you to get 4 tries. After 4, you're done. Another hint: It will be "safe" to search for the answer even if you thought it might not be.

South Park Tackles The Economy

There is an episode called "Margaritaville" which you can watch if you go to

http://www.southparkstudios.com/

It is about the current economic problems. Click on where it says Margaritaville. It is very funny and creative. If any of my students think they see anything in the episode that reminds you of what you have learned this semester, I would like to get your comments. Also, the father of one of the creators of South Park is an economics professor.

Hat Tip: Eddika Shestko

Do You Always Learn More From Failure Than Success?

Try googling:

"learn more from failure than success"

and you get over 1,000 hits. But the New York Times Sunday business section had an article called Try, Try Again, or Maybe Not. It discusses research that calls this idea into question. Here is the intro:

"IF at first you don’t succeed, it doesn’t matter that you tried. That seems to be the message of a working paper prepared recently by a team at Harvard Business School. The study found that when it comes to venture-backed entrepreneurship, the only experience that counts is success."

Here is another key passage:

"The study looked at several thousand venture-capital-backed companies from 1986 to 2003.

Professor Gompers and his co-authors Anna Kovner, Josh Lerner and David S. Scharfstein found that first-time entrepreneurs who received venture capital funding had a 22 percent chance of success. Success was defined as going public or filing to go public; Professor Gompers says the results were similar when using other measures, like acquisition or merger.

Already-successful entrepreneurs were far more likely to succeed again: their success rate for later venture-backed companies was 34 percent. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers: 23 percent.

In other words, trying and failing bought the entrepreneurs nothing — it was as if they never tried. Or, as Professor Gompers puts it, “for the average entrepreneur who failed, no learning happened.”"

What Economists Say About "March Madness"

The first article is March Madness It Is, Economically by ANDREW ZIMBALIST. Does all the money from the NCAA basketball tournament help the schools? No:

"Amid this cornucopia, the schools themselves are usually the losers. According to the NCAA's latest Revenues and Expenses report, in 2005-06 the median Division I men's basketball team generated revenue of $480,000 and had operating costs of $1.33 million, yielding a net operating loss of $850,000. If capital expenses and full university overhead were included, these results would be even more dismal."

But the coaches do well:

"In 2005-06, the head coaches of the 65 Division I teams in Madness had an average maximum compensation of $959,486, with the top paid coach earning a guaranteed salary of $2.1 million and a maximum salary of $3.4 million. Equally startling, the average compensation of these 65 coaches is double or more that of the typical university president."

But if your school has a winning sports team, doesn't that mean more applications? Maybe, but:

"Not surprisingly, those high-schoolers who apply to a college because it has a good basketball team do not tend to score high in the SATs or in class rank. As a result, basketball success may temporarily drive up applications, but it does not raise the quality of the student body."

The other article is The Real March Madness by RICHARD VEDDER and MATTHEW DENHART. One thing they mention is that the student-athletes get very little of the revenue they generate in the form of scholarships. Then:

"If all of that money from ticket sales and television rights isn't going to student-athletes, where does it end up? In 2006, salaries for coaches and administrators accounted for nearly 32% of total athletic-department expenses."

It is true that some students go to the pros and make big money. But

"Of course, for the students who go on to the pros, putting off their financial bonanza won't be a big deal. But most college athletes do not make the pros. They may not even end up with the basic skills necessary to succeed in other workplaces, since only a minority of student-athletes in major sports even graduate (25% in top-ranked University of Connecticut men's basketball, for example). Long practices and missed classes make it difficult to succeed academically. A recent study funded by the Andrew W. Mellon Foundation shows the academic performance of athletes is lower than non-athletes even at Division III schools."

Housing And The Financial Crisis

Economist Mark Thoma gives a good overview of all the factors that came together to create the financial crisis with Who's the Villain in the Crisis? Of course, housing is part of the story and it makes me think of what my wife and I have encountered over the last several years while looking for a house (we rent an apartment now).

It always ended up that once we figured in a down payment of about 20%, that our monthly payment, including the mortgage, fees, taxes (maybe condo fees in those cases), etc. would be $300 (or more) a month than our rent. And the house that we looked at would not be as nice as our apartment, maybe it would be a little smaller and required some work. Then there would be a lawn to mow. Sometimes the backyard was just dirt that would turn to mud when it rains.

Some people say that if you buy a house "you build up equity." So? That only does you any good if later on take out a home equity loan (some owners have been borrowing against their equity or the value of their homes for consumption spending-I don't know how much this went on but less is going on now since the price of houses has fallen). Even if you can sell your house at a profit years later, you then have to find another place to live. If you buy another house, then it eats up your profit (unless you are lucky enough to find an under priced house or are just plain good at finding bargains). You could move back to an apartment and enjoy spending the profit, but you are right back where you started.

Also remember that if you are spending alot less on an apartment over the years, then you are also building up money due to compound interest, just like building up equity in your house. There was never any guarantee that home values would continue to rise so you had no guarantee that housing would be a better investment than putting the money in, say, a retirement account.

Then you could say, "at least you have a house, it is a place to live." But so is an apartment. And recall that the houses my wife and I looked at were not so great. Our rent was much less than what our monthly house payments would have been. I have had extra money taken out of my paycheck for my retirement account. So in that way, I have been building up equity.

And the strange thing is that housing prices did not rise as much in San Antonio as they did in other parts of the country. The discrepancies between buying a house and renting an apartment would have been bigger elsewhere, meaning they made less economic sense. It seems like we all should have been able to figure out something was terribly wrong. Maybe some peopled did, but not many of us.

This site shows that the vacancy rates for apartments were high and still rising when the crisis hit Housing Vacancies and Homeownership. Homeowners can deduct their interest payments from their tax returns and government sponsored entities like Fannie Mae make it easier to buy houses. One reason given for this has been that homeowners are better citizens and more community minded so that there are positive externalities from owning homes. But it might not have been a good idea to push so many people into home ownership. Maybe people who liked to buy and own houses in the past were good citizens and community minded. It is not clear that owning a house made them that way.

Two Items: Jay Leno And Arthur Guinness

In honor of St. Patrick's Day, the Heroes of Capitalism blog has an entry on Arthur Guinness, founder of the Guinnes brewing company. A true hero, indeed! They mention that "Guinness signed a 9000-year lease in 1759 with St. James Gate Brewery for an annual rent of £45."

Now to Jay Leno. He is doing a free show in Detroit. He mainly wanted it to be for people who have lost their jobs. So free tickets were given away. But some of them are getting sold on eBay, reportedly for as much as $800. Leno does not like this, which you can read about in Leno: Take tickets for free show off eBay. He doesn't want people making money off the idea. But an unemployed worker might be better off with $800 than going to see Leno's show. I don't think Leno should object to that. Either way, unemployed workers are helped.

But Leno brought this on himself. People only had to say they were unemployed to get the tickets. Since we know that there is no such thing as a free lunch, there is the possibility that some people who are not unemployed got tickets for the sole purpose of selling them. Maybe Leno should have required proof of being unemployed, but still let people sell them. Let the unemployed worker choose what makes him or her better off, money or Leno's show. Leno also could have charged for a show in Detroit and tell everyone he was going to donate the money to the poor or unemployed. A benefit show.

Harvard professor Greg Mankiw also addresses this issue with Jay Leno disses the free market.

Update: EBay Halts Sale of Free Leno Tickets

Prohibited Goods Easily Got Into Texas Prisons

To read all about it, go to Prison contraband was booming trade, an article in today's Express-News. Guards smuggle in items for the prisoners and if they get caught they usually face mimimal penalties. What are some of the items that prisoners can get there hands on?

"Knives and drugs, cell phones and smokeless tobacco. Even McDonald's hamburgers. Texas prisons were a virtual bazaar of prohibited and illicit goods smuggled in by guards and correctional employees who rarely faced the harshest punishment possible when caught, according to a San Antonio Express-News review."

It seems that it is hard to stop markets from forming when people want something, even prisoners. It may be hard for the state to punish the guards too much since their salaries are low. If you fired all the guards who broke the rules, you might not have enough. The article also mentions that at a low pay, the guards are tempted to make a little extra cash helping the prisoners. What do you have to lose but a low paying job. And again, the penalties are not that severe if you do get caught. Friends or relatives of the prisoners often contact the guards to get the trades and sales going.

Update: Another article states:

"For months, perhaps longer, the Montague County Jail was "Animal House" meets Mayberry. Inside the small brick building across from the courthouse, inmates had the run of the place, having sex with their jailer girlfriends, bringing in recliners, taking drugs and chatting on cell phones supplied by friends or guards, according to authorities. They also disabled some of the surveillance cameras and made weapons out of nails."

Go to Texas jail was an Animal House, authorities say.

When Will the Recession Be Over?

To find out what 11 experts said last week in the NY Times go to When Will the Recession Be Over?. The experts include economics professors (one Nobel prize winner) and private sector executives. Here is the one from Alan Blinder (all entries are about this link):

"It Can’t Last Forever

HERE’S the hard truth: Nobody knows when this recession will end. Economic forecasting is a dark art, and predicting when recessions begin and end is its weakest link. That said, my best guess is that growth will return in the fourth quarter of this year. Why?

First, recessions don’t last forever. If the economy continues to slide through the third quarter, as I anticipate it will, this will be the longest American recession since World War II. Housing must hit bottom at some point. For several years now, declining expenditures on homebuilding have subtracted roughly a percentage point from gross domestic product growth. The change from minus 1 percent to (at least) zero will add a full point to growth. Auto sales are also not likely to keep falling at recent rates. Second, Washington’s large economic stimulus should add more than 5 percent to real gross domestic product over two years.

Third, the price of oil plummeted from a peak of around $145 a barrel last summer to around $40 a barrel today. Since the $145 price was fleeting, let’s call the “true” decline from $100 to $40, which means the bill Americans pay for imported oil fell by about $300 billion dollars a year.

But here’s the rub. My forecast assumes that no other (big) shoes will drop. Sad to say, shoes have been dropping like rain.

Alan S. Blinder is a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve."

Slave Redemption in Sudan

In my ECON 1301 class this week we read chapter 8 of the book The Economics of Public Issues. It seeems like a good idea to buy a slave and set him or her free. But the "redeemers" have often wanted to buy large groups of slaves to redeem. This has encouraged people to capture slaves in the first place. Then it puts more money in the hands of the slave traders who buy more weapons. Some people runs scams, selling people that were not really slaves. Below are links to the three articles listed in the book's bibliography.

The False Promise of Slave Redemption

Ripping Off Slave ‘Redeemers’

Fake slaves con aid agencies in Sudanese liberation scam

The following link has links to lots of info on this issue and different views

Policy Debate: Do slave redemption programs reduce the problem of slavery?

Finally, there was a movie made in 1971 that you can read about at the Internet Movie Database called Skin Game. It was about a fake slave being sold over and over again as a scam. Here is the synopsis:

"Quincy Drew and his black friend Jason O'Rourke have pulled off every dodge known for conning a well-heeled sucker, but it wasn't until they hit on the old skin game that they started to clean up. The game is simple. Jason, though born a free man in New Jersey, poses as Quincy's slave as the pair ride through Missouri and Kansas in 1857. Quincy picks a likely mark in each town, sells Jason to him for top money and rides out of town. Then Quincy and Jason get back together on the road to another town, because if Jason can't just run off after dark, Quincy finds a way to spring him loose."

A Video of My Lecture On Entrepreneurs As Heroes

I gave a talk in 2007 at Pepperdine University called "Who Says Entrepreneurs Are Heroes?" You can watch it if you click here. It was part of the HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL. You can also watch it by clicking on the arrow in the picture below. I come on after a short introduction by Elliot McGucken, who put the conference together. After about the 2 minute introduction I come on and it lasts about 18 minutes. You can read a text version of this at Who Says Entrepreneurs Are Heroes?




Permalink