“财经英语”教学材料
复旦大学经济学系
周翼
zhou-yi@fudan.edu.cn
(The articles, data, pictures and other information hereinafter may be from
sources by different authors.)
1
Journal of Economic Literature Classification System
A - General Economics and Teaching
A1 - General Economics
A10 - General A11 - Role of Economics; Role of Economists; Market for Economists
A12 - Relation of Economics to Other Disciplines A13 - Relation of Economics to
Social Values A14 - Sociology of Economics A19 - Other
A2 - Economics Education and Teaching of Economics
A20 - General A21 - Pre-college A22 - Undergraduate A23 - Graduate A29 - Other
A3 - Multisubject Collective Works
A30 - General A31 - Multisubject Collected Writings of Individuals A32 Multisubject Conference Volumes A39 - Other
B - Schools of Economic Thought and Methodology
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B0 - General
B00 - General
B1 - History of Economic Thought through 1925
B10 - General B11 - Preclassical B12 - Classical B13 - Neoclassical through 1925
B14 - Socialist; Marxist B15 - Historical; Institutional B19 - Other
B2 - History of Economic Thought since 1925
B20 - General B21 - Microeconomics B22 - Macroeconomics B23 - Econometrics;
Quantitative Studies B24 - Socialist; Marxist B25 - Historical; Institutional;
Evolutionary; Austrian B29 - Other
B3 - History of Thought: Individuals
B30 - General B31 - Individuals
B4 - Economic Methodology
B40 - General B41 - Economic Methodology B49 - Other
B5 - Current Heterodox Approaches
B50 - General B51 - Socialist; Marxian; Sraffian B52 - Institutional; Evolutionary
B53 - Austrian B59 - Other
C - Mathematical and Quantitative Methods
C0 - General
C00 - General
C1 - Econometric and Statistical Methods: General
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C10 - General C11 - Bayesian Analysis C12 - Hypothesis Testing C13 - Estimation
C14 - Semiparametric and Nonparametric Methods C15 - Statistical Simulation
Methods; Monte Carlo Methods C16 - Specific Distributions C19 - Other
C2 - Econometric Methods: Single Equation Models
C20 - General C21 - Cross-Sectional Models; Spatial Models C22 - Time-Series
Models C23 - Models with Panel Data C24 - Truncated and Censored Models* C25 Discrete Regression and Qualitative Choice Models C29 - Other
[* Truncated (截断) and Censored (删失) Models:
Censored data points are those whose measured properties are not known precisely,
but are known to lie above or below some limiting sensitivity. Truncated data points
are those which are missing from the sample altogether due to sensitivity limits.
The truncated regression model occurs when part of the data is missing. For example,
if we had data on wages and years of schooling for a sample of employed persons.
Some persons are excluded from the sample because the wage that they would receive
if they were employed is less than the minimum wage. So the data would be missing
for all persons who were not working. If we are just interested in the relationship
between wages and education for the subpopulation of employed workers then OLS
might be appropriate. But if we are interested in this relationship for all workers,
employed or not, then OLS would give misleading results.]
C3 - Econometric Methods: Multiple/Simultaneous Equation Models
C30 - General C31 - Cross-Sectional Models; Spatial Models C32 - Time-Series
Models C33 - Models with Panel Data C34 - Truncated and Censored Models C35 Discrete Regression and Qualitative Choice Models C39 - Other
C4 - Econometric and Statistical Methods: Special Topics
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C40 - General C41 - Duration Analysis C42 - Survey Methods C43 - Index Numbers
and Aggregation C44 - Statistical Decision Theory; Operations Research C45 Neural Networks and Related Topics C49 - Other
C5 - Econometric Modeling
C50 - General C51 - Model Construction and Estimation C52 - Model Evaluation and
Testing C53 - Forecasting and Other Model Applications C59 - Other
C6 - Mathematical Methods and Programming
C60 - General C61 - Optimization Techniques; Programming Models; Dynamic
Analysis C62 - Existence and Stability Conditions of Equilibrium C63 Computational Techniques C65 - Miscellaneous Mathematical Tools C67 Input–Output Models C68 - Computable General Equilibrium Models C69 - Other
C7 - Game Theory and Bargaining Theory
C70 - General C71 - Cooperative Games C72 - Noncooperative Games C73 Stochastic and Dynamic Games C78 - Bargaining Theory; Matching Theory C79 Other
C8 - Data Collection and Data Estimation Methodology; Computer Programs
C80 - General C81 - Methodology for Collecting, Estimating, and Organizing
Microeconomic Data C82 - Methodology for Collecting, Estimating, and Organizing
Macroeconomic Data C87 - Econometric Software C88 - Other Computer Software
C89 - Other
C9 - Design of Experiments
C90 - General C91 - Laboratory, Individual Behavior C92 - Laboratory, Group
Behavior C93 - Field Experiments C99 - Other
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D - Microeconomics
D0 - General
D00 - General
D1 - Household Behavior and Family Economics
D10 - General D11 - Consumer Economics: Theory D12 - Consumer Economics:
Empirical Analysis D13 - Household Production and Intrahousehold Allocation D14 Personal Finance D18 - Consumer Protection D19 - Other
D2 - Production and Organizations
D20 - General D21 - Firm Behavior D23 - Organizational Behavior; Transaction
Costs; Property Rights D24 - Production; Capital and Total Factor Productivity;
Capacity D29 - Other
D3 - Distribution
D30 - General D31 - Personal Income, Wealth, and Their Distributions D33 - Factor
Income Distribution D39 - Other
D4 - Market Structure and Pricing
D40 - General D41 - Perfect Competition D42 - Monopoly D43 - Oligopoly and
Other Forms of Market Imperfection D44 - Auctions D45 - Rationing; Licensing
D46 - Value Theory D49 - Other
D5 - General Equilibrium and Disequilibrium
D50 - General D51 - Exchange and Production Economies D52 - Incomplete Markets
D57 - Input–Output Analysis D58 - Computable and Other Applied General
Equilibrium Models D59 - Other
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D6 - Welfare Economics
D60 - General D61 - Allocative Efficiency; Cost–Benefit Analysis D62 - Externalities
D63 - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
D64 - Altruism D69 - Other
D7 - Analysis of Collective Decision-Making
D70 - General D71 - Social Choice; Clubs; Committees; Associations D72 Economic Models of Political Processes: Rent-Seeking, Elections, Legislatures, and
Voting Behavior D73 - Bureaucracy; Administrative Processes in Public
Organizations; Corruption D74 - Conflict; Conflict Resolution; Alliances D78 Positive Analysis of Policy-Making and Implementation D79 - Other
D8 - Information and Uncertainty
D80 - General D81 - Criteria for Decision-Making under Risk and Uncertainty D82 Asymmetric and Private Information D83 - Search; Learning; Information and
Knowledge D84 - Expectations; Speculations D85 - Network Formation D89 - Other
D9 - Intertemporal Choice and Growth
D90 - General D91 - Intertemporal Consumer Choice; Life Cycle Models and Saving
D92 - Intertemporal Firm Choice and Growth, Investment, or Financing D99 - Other
E - Macroeconomics and Monetary Economics
E0 - General
E00 - General
E1 - General Aggregative Models
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E10 - General E11 - Marxian; Sraffian; Institutional; Evolutionary E12 - Keynes;
Keynesian; Post-Keynesian E13 - Neoclassical E17 - Forecasting and Simulation E19
- Other
E2 - Consumption, Saving, Production, Employment, and Investment
E20 - General E21 - Consumption; Saving E22 - Capital; Investment (including
Inventories); Capacity E23 - Production E24 - Employment; Unemployment; Wages
E25 - Aggregate Factor Income Distribution E26 - Informal Economy; Underground
Economy E27 - Forecasting and Simulation E29 - Other
E3 - Prices, Business Fluctuations, and Cycles
E30 - General E31 - Price Level; Inflation; Deflation E32 - Business Fluctuations;
Cycles E37 - Forecasting and Simulation E39 - Other
E4 - Money and Interest Rates
E40 - General E41 - Demand for Money E42 - Monetary Systems; Standards;
Regimes; Government and the Monetary System E43 - Determination of Interest
Rates; Term Structure of Interest Rates E44 - Financial Markets and the
Macroeconomy E47 - Forecasting and Simulation E49 - Other
E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
E50 - General E51 - Money Supply; Credit; Money Multipliers E52 - Monetary
Policy (Targets, Instruments, and Effects) E58 - Central Banks and Their Policies E59
- Other
E6 - Macroeconomic Policy Formation, Macroeconomic Aspects of Public Finance,
Macroeconomic Policy, and General Outlook
E60 - General E61 - Policy Objectives; Policy Designs and Consistency; Policy
Coordination E62 - Fiscal Policy; Public Expenditures, Investment, and Finance;
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Taxation E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy;
Stabilization E64 - Incomes Policy; Price Policy E65 - Studies of Particular Policy
Episodes E66 - General Outlook and Conditions E69 - Other
F - International Economics
F0 - General
F00 - General F01 - Global Outlook F02 - International Economic Order; Economic
Integration and Globalization: General
F1 - Trade
F10 - General F11 - Neoclassical Models of Trade F12 - Models of Trade with
Imperfect Competition and Scale Economies F13 - Commercial Policy; Protection;
Promotion; Trade Negotiations F14 - Country and Industry Studies of Trade F15 Economic Integration F16 - Trade and Labor Market Interactions F17 - Trade
Forecasting and Simulation F18 - Trade and Environment F19 - Other
F2 - International Factor Movements and International Business
F20 - General F21 - International Investment; Long-Term Capital Movements F22 International Migration F23 - Multinational Firms; International Business F29 - Other
F3 - International Finance
F30 - General F31 - Foreign Exchange F32 - Current Account Adjustment;
Short-Term Capital Movements F33 - International Monetary Arrangements and
Institutions F34 - International Lending and Debt Problems F35 - Foreign Aid
F36 - Financial Aspects of Economic Integration F37 - International Finance
Forecasting and Simulation F39 - Other
F4 - Macroeconomic Aspects of International Trade and Finance
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F40 - General F41 - Open Economy Macroeconomics F42 - International Policy
Coordination and Transmission F43 - Economic Growth of Open Economies F47 Forecasting and Simulation F49 - Other
G - Financial Economics
G0 - General
G00 - General
G1 - General Financial Markets
G10 - General G11 - Portfolio Choice G12 - Asset Pricing G13 - Contingent Pricing;
Futures Pricing G14 - Information and Market Efficiency; Event Studies G15 International Financial Markets G18 - Government Policy and Regulation G19 Other
G2 - Financial Institutions and Services
G20 - General G21 - Banks; Other Depository Institutions; Mortgages G22 Insurance; Insurance Companies G23 - Pension Funds; Other Private Financial
Institutions G24 - Investment Banking; Venture Capital; Brokerage G28 Government Policy and Regulation G29 - Other
G3 - Corporate Finance and Governance
G30 - General G31 - Capital Budgeting; Investment Policy G32 - Financing Policy;
Capital and Ownership Structure G33 - Bankruptcy; Liquidation G34 - Mergers;
Acquisitions; Restructuring; Corporate Governance G35 - Payout Policy G38 Government Policy and Regulation G39 - Other
H - Public Economics
H0 - General
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H00 - General
H1 - Structure and Scope of Government
H10 - General H11 - Structure, Scope, and Performance of Government H19 - Other
H2 - Taxation, Subsidies, and Revenue
H20 - General H21 - Efficiency; Optimal Taxation H22 - Incidence H23 Externalities; Redistributive Effects; Environmental Taxes and Subsidies H24 Personal Income and Other Nonbusiness Taxes and Subsidies H25 - Business Taxes
and Subsidies H26 - Tax Evasion H27 - Other Sources of Revenue H29 - Other
H3 - Fiscal Policies and Behavior of Economic Agents
H30 - General H31 - Household H32 - Firm H39 - Other
H4 - Publicly Provided Goods
H40 - General H41 - Public Goods H42 - Publicly Provided Private Goods H43 Project Evaluation; Social Discount Rate H49 - Other
H5 - National Government Expenditures and Related Policies
H50 - General H51 - Government Expenditures and Health H52 - Government
Expenditures and Education H53 - Government Expenditures and Welfare Programs
H54 - Infrastructures; Other Public Investment and Capital Stock H55 - Social
Security and Public Pensions H56 - National Security and War H57 - Procurement
H59 - Other
H6 - National Budget, Deficit, and Debt
H60 - General H61 - Budget; Budget Systems H62 - Deficit; Surplus H63 - Debt;
Debt Management H69 - Other
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H7 - State and Local Government; Intergovernmental Relations
H70 - General H71 - State and Local Taxation, Subsidies, and Revenue H72 - State
and Local Budget and Expenditures H73 - Interjurisdictional Differentials and Their
Effects H74 - State and Local Borrowing H77 - Intergovernmental Relations;
Federalism H79 - Other
H8 - Miscellaneous Issues
H80 - General H81 - Governmental Loans, Loan Guarantees, and Credits H82 Governmental Property H83 - Public Administration H87 - International Fiscal Issues
H89 - Other
I - Health, Education, and Welfare
I0 - General
I00 - General
I1 - Health
I10 - General I11 - Analysis of Health Care Markets I12 - Health Production:
Nutrition, Mortality, Morbidity, Substance Abuse and Addiction, Disability, and
Economic Behavior I18 - Government Policy; Regulation; Public Health I19 - Other
I2 - Education
I20 - General I21 - Analysis of Education I22 - Educational Finance I28 Government Policy I29 - Other
I3 - Welfare and Poverty
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I30 - General I31 - General Welfare; Basic Needs; Living Standards; Quality of Life
I32 - Measurement and Analysis of Poverty I38 - Government Policy; Provision and
Effects of Welfare Programs I39 - Other
J - Labor and Demographic Economics
J0 - General
J00 - General
J1 - Demographic Economics
J10 - General J11 - Demographic Trends and Forecasts J12 - Marriage; Marital
Dissolution; Family Structure J13 - Fertility; Family Planning; Child Care; Children;
Youth J14 - Economics of the Elderly J15 - Economics of Minorities and Races J16 Economics of Gender J17 - Value of Life; Foregone Income J18 - Public Policy J19 Other
J2 - Time Allocation, Work Behavior, and Employment Determination and Creation
J20 - General J21 - Labor Force and Employment, Size, and Structure J22 - Time
Allocation and Labor Supply J23 - Employment Determination; Job Creation;
Demand for Labor; Self-Employment J24 - Human Capital; Skills; Occupational
Choice; Labor Productivity J26 - Retirement; Retirement Policies J28 - Safety;
Accidents; Industrial Health; Job Satisfaction; Related Public Policy J29 - Other
J3 - Wages, Compensation, and Labor Costs
J30 - General J31 - Wage Level and Structure; Wage Differentials by Skill, Training,
Occupation, etc. J32 - Nonwage Labor Costs and Benefits; Private Pensions J33 Compensation Packages; Payment Methods J38 - Public Policy J39 - Other
J4 - Particular Labor Markets
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J40 - General J41 - Contracts: Specific Human Capital, Matching Models, Efficiency
Wage Models, and Internal Labor Markets J42 - Monopsony; Segmented Labor
Markets J43 - Agricultural Labor Markets J44 - Professional Labor Markets and
Occupations J45 - Public Sector Labor Markets J48 - Public Policy J49 - Other
J5 - Labor–Management Relations, Trade Unions, and Collective Bargaining
J50 - General J51 - Trade Unions: Objectives, Structure, and Effects J52 - Dispute
Resolution: Strikes, Arbitration, and Mediation J53 - Labor–Management Relations;
Industrial Jurisprudence J54 - Producer Cooperatives; Labor Managed Firms J58 Public Policy J59 - Other
J6 - Mobility, Unemployment, and Vacancies
J60 - General J61 - Geographic Labor Mobility; Immigrant Workers J62 Occupational and Intergenerational Mobility J63 - Turnover; Vacancies; Layoffs J64 Unemployment: Models, Duration, Incidence, and Job Search J65 - Unemployment
Insurance; Severance Pay; Plant Closings J68 - Public Policy J69 - Other
J7 - Discrimination
J70 - General J71 - Discrimination J78 - Public Policy J79 - Other
J8 - Labor Standards: National and International
J80 - General J81 - Working Conditions J82 - Labor Force Composition J83 Workers' Rights J88 - Public Policy J89 - Other
K - Law and Economics
K0 - General
K00 - General
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K1 - Basic Areas of Law
K10 - General K11 - Property Law K12 - Contract Law K13 - Tort Law and Product
Liability K14 - Criminal Law K19 - Other
K2 - Regulation and Business Law
K20 - General K21 - Antitrust Law K22 - Corporation and Securities Law K23 Regulated Industries and Administrative Law K29 - Other
K3 - Other Substantive Areas of Law
K30 - General K31 - Labor Law K32 - Environmental, Health, and Safety Law K33 International Law K34 - Tax Law K35 - Personal Bankruptcy Law K39 - Other
K4 - Legal Procedure, the Legal System, and Illegal Behavior
K40 - General K41 - Litigation Process K42 - Illegal Behavior and the Enforcement
of Law K49 - Other
L - Industrial Organization
L0 - General
L00 - General
L1 - Market Structure, Firm Strategy, and Market Performance
L10 - General L11 - Production, Pricing, and Market Structure; Size Distribution of
Firms L12 - Monopoly; Monopolization Strategies L13 - Oligopoly and Other
Imperfect Markets L14 - Transactional Relationships; Contracts and Reputation;
Networks L15 - Information and Product Quality; Standardization and Compatibility
L16 - Industrial Organization and Macroeconomics; Macroeconomic Industrial
Structure; Industrial Price Indices L19 - Other
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L2 - Firm Objectives, Organization, and Behavior
L20 - General L21 - Business Objectives of the Firm L22 - Firm Organization and
Market Structure: Markets vs. Hierarchies; Vertical Integration L23 - Organization of
Production L24 - Contracting Out; Joint Ventures L25 - Firm Size and Performance
L29 - Other
L3 - Nonprofit Organizations and Public Enterprise
L30 - General L31 - Nonprofit Institutions L32 - Public Enterprises L33 - Comparison
of Public and Private Enterprises; Privatization; Contracting Out L39 - Other
L4 - Antitrust Policy
L40 - General L41 - Monopolization; Horizontal Anticompetitive Practices L42 Vertical Restraints; Resale Price Maintenance; Quantity Discounts L43 - Legal
Monopolies and Regulation or Deregulation L44 - Antitrust Policy and Public
Enterprise, Nonprofit Institutions, and Professional Organizations L49 - Other
L5 - Regulation and Industrial Policy
L50 - General L51 - Economics of Regulation L52 - Industrial Policy; Sectoral
Planning Methods L59 - Other
L6 - Industry Studies: Manufacturing
L60 - General L61 - Metals and Metal Products; Cement; Glass; Ceramics L62 Automobiles; Other Transportation Equipment L63 - Microelectronics; Computers;
Communications Equipment L64 - Other Machinery; Business Equipment;
Armaments L65 - Chemicals; Rubber; Drugs; Biotechnology L66 - Food; Beverages;
Cosmetics; Tobacco L67 - Other Consumer Nondurables: Clothing, Textiles, Shoes,
and Leather L68 - Appliances; Other Consumer Durables L69 - Other
L7 - Industry Studies: Primary Products and Construction
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L70 - General L71 - Mining, Extraction, and Refining: Hydrocarbon Fuels L72 Mining, Extraction, and Refining: Other Nonrenewable Resources L73 - Forest
Products: Lumber and Paper L74 - Construction L78 - Government Policy L79 Other
L8 - Industry Studies: Services
L80 - General L81 - Retail and Wholesale Trade; Warehousing L82 - Entertainment;
Media (Performing Arts, Visual Arts, Broadcasting, Publishing, etc.) L83 - Sports;
Gambling; Recreation; Tourism L84 - Personal and Professional Services L85 - Real
Estate Services L86 - Information and Internet Services; Computer Software L87 Postal and Delivery Services L88 - Government Policy L89 - Other
L9 - Industry Studies: Transportation and Utilities
L90 - General L91 - Transportation: General L92 - Railroads and Other Surface
Transportation: Autos, Buses, Trucks, and Water Carriers L93 - Air Transportation
L94 - Electric Utilities L95 - Gas Utilities; Pipelines; Water Utilities L96 Telecommunications L97 - Utilities: General L98 - Government Policy L99 - Other
M - Business Administration and Business Economics; Marketing; Accounting
M0 - General
M00 - General
M1 - Business Administration
M10 - General M11 - Production Management M12 - Personnel Management M13 Entrepreneurship M14 - Corporate Culture; Social Responsibility M19 - Other
M2 - Business Economics
M20 - General M21 - Business Economics M29 - Other
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M3 - Marketing and Advertising
M30 - General M31 - Marketing M37 - Advertising M39 - Other
M4 - Accounting and Auditing
M40 - General M41 - Accounting M42 - Auditing M49 - Other
M5 - Personnel Economics
M50 - General M51 - Firm Employment Decisions; Promotions (hiring, firing,
turnover, part-time, temporary workers, seniority issues) M52 - Compensation and
Compensation Methods and Their Effects (stock options, fringe benefits, incentives,
family support programs, seniority issues) M53 - Training M54 - Labor Management
(team formation, worker empowerment, job design, tasks and authority, job
satisfaction) M55 - Labor Contracting Devices: Outsourcing; Franchising; Other M59
- Other
N - Economic History
N0 - General
N00 - General N01 - Development of the Discipline: Historiographical; Sources and
Methods
N1 - Macroeconomics and Monetary Economics; Growth and Fluctuations
N10 - General, International, or Comparative N11 - U.S.; Canada: Pre-1913 N12 U.S.; Canada: 1913– N13 - Europe: Pre-1913 N14 - Europe: 1913– N15 - Asia
including Middle East N16 - Latin America; Caribbean N17 - Africa; Oceania
N2 - Financial Markets and Institutions
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N20 - General, International, or Comparative N21 - U.S.; Canada: Pre-1913 N22 U.S.; Canada: 1913– N23 - Europe: Pre-1913 N24 - Europe: 1913– N25 - Asia
including Middle East N26 - Latin America; Caribbean N27 - Africa; Oceania
N3 - Labor and Consumers, Demography, Education, Income, and Wealth
N30 - General, International, or Comparative N31 - U.S.; Canada: Pre-1913 N32 U.S.; Canada: 1913– N33 - Europe: Pre-1913 N34 - Europe: 1913– N35 - Asia
including Middle East N36 - Latin America; Caribbean N37 - Africa; Oceania
N4 - Government, War, Law, and Regulation
N40 - General, International, or Comparative N41 - U.S.; Canada: Pre-1913 N42 U.S.; Canada: 1913– N43 - Europe: Pre-1913 N44 - Europe: 1913– N45 - Asia
including Middle East N46 - Latin America; Caribbean N47 - Africa; Oceania
N5 - Agriculture, Natural Resources, Environment, and Extractive Industries
N50 - General, International, or Comparative N51 - U.S.; Canada: Pre-1913 N52 U.S.; Canada: 1913– N53 - Europe: Pre-1913 N54 - Europe: 1913– N55 - Asia
including Middle East N56 - Latin America; Caribbean N57 - Africa; Oceania
N6 - Manufacturing and Construction
N60 - General, International, or Comparative N61 - U.S.; Canada: Pre-1913 N62 U.S.; Canada: 1913– N63 - Europe: Pre-1913 N64 - Europe: 1913– N65 - Asia
including Middle East N66 - Latin America; Caribbean N67 - Africa; Oceania
N7 - Transport, International and Domestic Trade, Energy, and Other Services
N70 - General, International, or Comparative N71 - U.S.; Canada: Pre-1913 N72 U.S.; Canada: 1913– N73 - Europe: Pre-1913 N74 - Europe: 1913– N75 - Asia
including Middle East N76 - Latin America; Caribbean N77 - Africa; Oceania
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N8 - Micro-Business History
N80 - General, International, or Comparative N81 - U.S.; Canada: Pre-1913 N82 U.S.; Canada: 1913– N83 - Europe: Pre-1913 N84 - Europe: 1913– N85 - Asia
including Middle East N86 - Latin America; Caribbean N87 - Africa; Oceania
N9 - Regional and Urban History
N90 - General, International, or Comparative N91 - U.S.; Canada: Pre-1913 N92 U.S.; Canada: 1913– N93 - Europe: Pre-1913 N94 - Europe: 1913– N95 - Asia
including Middle East N96 - Latin America; Caribbean N97 - Africa; Oceania
O - Economic Development, Technological Change, and Growth
O1 - Economic Development
O10 - General O11 - Macroeconomic Analyses of Economic Development O12 Microeconomic Analyses of Economic Development O13 - Agriculture; Natural
Resources; Energy; Environment; Other Primary Products O14 - Industrialization;
Manufacturing and Service Industries; Choice of Technology O15 - Human
Resources; Income Distribution; Migration O16 - Financial Markets; Saving and
Capital Investment O17 - Formal and Informal Sectors; Shadow Economy;
Institutional Arrangements O18 - Regional, Urban, and Rural Analyses O19 International Linkages to Development; Role of International Organizations
O2 - Development Planning and Policy
O20 - General O21 - Planning Models; Planning Policy O22 - Project Analysis O23 Fiscal and Monetary Policy in Development O24 - Trade Policy; Factor Movement
Policy; Foreign Exchange Policy O29 - Other
O3 - Technological Change; Research and Development
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O30 - General O31 - Innovation and Invention: Processes and Incentives O32 Management of Technological Innovation and R&D O33 - Technological Change:
Choices and Consequences; Diffusion Processes O34 - Intellectual Property Rights:
National and International Issues O38 - Government Policy O39 - Other
O4 - Economic Growth and Aggregate Productivity
O40 - General O41 - One, Two, and Multisector Growth Models O42 - Monetary
Growth Models O47 - Measurement of Economic Growth; Aggregate Productivity
O49 - Other
O5 - Economywide Country Studies
O50 - General O51 - U.S.; Canada O52 - Europe O53 - Asia including Middle East
O54 - Latin America; Caribbean O55 - Africa O56 - Oceania O57 - Comparative
Studies of Countries
P - Economic Systems
P0 - General
P00 - General
P1 - Capitalist Systems
P10 - General P11 - Planning, Coordination, and Reform P12 - Capitalist Enterprises
P13 - Cooperative Enterprises P14 - Property Rights P16 - Political Economy P17 Performance and Prospects P19 - Other
P2 - Socialist Systems and Transitional Economies
P20 - General P21 - Planning, Coordination, and Reform P22 - Prices P23 - Factor
and Product Markets; Industry Studies; Population P24 - National Income, Product,
and Expenditure; Money; Inflation P25 - Urban, Rural, and Regional Economics;
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Housing; Transportation P26 - Political Economy; Property Rights P27 - Performance
and Prospects P28 - Natural Resources; Energy; Environment P29 - Other
P3 - Socialist Institutions and Their Transitions
P30 - General P31 - Socialist Enterprises and Their Transitions P32 - Collectives;
Communes; Agriculture P33 - International Trade, Finance, Investment, and Aid P34
- Financial Economics P35 - Public Economics P36 - Consumer Economics; Health,
Education, Welfare, and Poverty P37 - Legal Institutions; Illegal Behavior P39 Other
P4 - Other Economic Systems
P40 - General P41 - Planning, Coordination, and Reform P42 - Productive Enterprises;
Factor and Product Markets; Prices; Population P43 - Public Economics; Financial
Economics P44 - National Income, Product, and Expenditure; Money; Inflation P45 International Trade, Finance, Investment, and Aid P46 - Consumer Economics;
Welfare and Poverty P47 - Performance and Prospects P48 - Legal Institutions;
Property Rights P49 - Other
P5 - Comparative Economic Systems
P50 - General P51 - Comparative Analysis of Economic Systems P52 - Comparative
Studies of Particular Economies P59 - Other
Q - Agricultural and Natural Resource Economics
Q0 - General
Q00 - General Q01 - Sustainable Development
Q1 - Agriculture
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Q10 - General Q11 - Aggregate Supply and Demand Analysis; Prices Q12 - Micro
Analysis of Farm Firms, Farm Households, and Farm Input Markets Q13 Agricultural Markets and Marketing; Cooperatives; Agribusiness Q14 - Agricultural
Finance Q15 - Land Ownership and Tenure; Land Reform; Land Use; Irrigation Q16 R&D; Agricultural Technology; Agricultural Extension Services Q17 - Agriculture in
International Trade Q18 - Agricultural Policy; Food Policy Q19 - Other
Q2 - Renewable Resources and Conservation; Environmental Management
Q20 - General Q21 - Demand and Supply Q22 - Fishery Q23 - Forestry Q24 - Land
Q25 - Water Q26 - Recreational Aspects of Natural Resources Q28 - Government
Policy Q29 - Other
Q3 - Nonrenewable Resources and Conservation
Q30 - General Q31 - Demand and Supply Q32 - Exhaustible Resources and Economic
Development Q33 - Resource Booms Q38 - Government Policy Q39 - Other
Q4 - Energy
Q40 - General Q41 - Demand and Supply Q42 - Alternative Energy Sources Q43 Energy and the Macroeconomy Q48 - Government Policy Q49 - Other
Q5 - Environmental Economics
Q50 - General Q51 - Valuation of Environmental Effects Q52 - Pollution Control
Costs; Distributional Effects Q53 - Air Pollution; Water Pollution; Noise; Hazardous
Waste; Solid Waste Q54 - Climate; Natural Disasters Q55 - Technological Innovation
Q56 - Environment and Development; Environment and Trade; Sustainability;
Environmental Accounting Q57 - Ecological Economics: Ecosystem Services;
Biodiversity Conservation; Bioeconomics Q58 - Government Policy Q59 - Other
R - Urban, Rural, and Regional Economics
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R0 - General
R00 - General
R1 - General Regional Economics
R10 - General R11 - Regional Economic Activity: Growth, Development, and
Changes R12 - Size and Spatial Distributions of Regional Economic Activity R13 General Equilibrium and Welfare Economic Analysis of Regional Economies R14 Land Use Patterns R15 - Econometric and Input–Output Models; Other Models R19 Other
R2 - Household Analysis
R20 - General R21 - Housing Demand R22 - Other Demand R23 - Regional
Migration; Regional Labor Markets; Population R29 - Other
R3 - Production Analysis and Firm Location
R30 - General R31 - Housing Supply and Markets R32 - Other Production and Pricing
Analysis R33 - Nonagricultural and Nonresidential Real Estate Markets R34 - Input
Demand Analysis R38 - Government Policies; Regulatory Policies R39 - Other
R4 - Transportation Systems
R40 - General R41 - Transportation: Demand; Supply; Congestion; Safety and
Accidents R42 - Government and Private Investment Analysis R48 - Government
Pricing; Regulatory Policies R49 - Other
R5 - Regional Government Analysis
R50 - General R51 - Finance in Urban and Rural Economies R52 - Land Use and
Other Regulations R53 - Public Facility Location Analysis; Public Investment and
Capital Stock R58 - Regional Development Policy R59 - Other
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Z - Other Special Topics
Z0 - General
Z00 - General
Z1 - Cultural Economics
Z10 - General Z11 - Economics of the Arts and Literature Z12 - Religion Z13 - Social
Norms and Social Capital Z19 - Other
2
Adam Smith (1723-1790)
Edited by David R. Henderson
With The Wealth of Nations Adam Smith installed himself as the fountainhead of
contemporary economic thought. Currents of Adam Smith ran through David Ricardo
and Karl Marx in the nineteenth century, and through Keynes and Friedman in the
twentieth.
Adam Smith was born in a small village in Kirkcaldy, Scotland. There his widowed
mother raised him until he entered the University of Glasgow at age fourteen, as was
the usual practice, on scholarship. He later attended Balliol College at Oxford,
graduating with an extensive knowledge of European literature and an enduring
contempt for English schools.
He returned home, and after delivering a series of well-received lectures, was made
first chair of logic (1751), then chair of moral philosophy (1752), at Glasgow
University.
He left academia in 1764 to tutor the young duke of Buccleuch. For over two years
they lived and traveled throughout France and into Switzerland, an experience that
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brought Smith into contact with contemporaries Voltaire, Jean-Jacques Rousseau,
François Quesnay, and Anne-Robert-Jacques Turgot. With the life pension he had
earned in the service of the duke, Smith retired to his birthplace of Kirkcaldy to write
The Wealth of Nations. It was published in 1776, the same year the American
Declaration of Independence was signed and in which his close friend David Hume
died. In 1778 he was appointed commissioner of customs. This job put him in the
uncomfortable position of having to curb smuggling, which, in The Wealth of Nations,
he had upheld as a legitimate activity in the face of "unnatural" legislation. Adam
Smith never married. He died in Edinburgh on July 19, 1790.
Today Smith's reputation rests on his explanation of how rational self-interest in a
free-market economy leads to economic well-being. It may surprise those who would
discount Smith as an advocate of ruthless individualism that his first major work
concentrated on ethics and charity. In fact, while chair at the University of Glasgow,
Smith's lecture subjects, in order of preference, were natural theology, ethics,
jurisprudence, and economics, according to John Millar, Smith's pupil at the time. In
The Theory of Moral Sentiments, Smith wrote: "How selfish soever man may be
supposed, there are evidently some principles in his nature which interest him in the
fortune of others and render their happiness necessary to him though he derives
nothing from it except the pleasure of seeing it."
At the same time, Smith had a benign view of self-interest. He denied the view that
self-love "was a principle which could never be virtuous in any degree." Smith argued
that life would be tough if our "affections, which, by the very nature of our being,
ought frequently to influence our conduct, could upon no occasion appear virtuous, or
deserve esteem and commendation from anybody."
To Smith sympathy and self-interest were not antithetical; they were complementary.
"Man has almost constant occasion for the help of his brethren, and it is in vain for
him to expect it from their benevolence only," he explained in The Wealth of Nations.
Charity, while a virtuous act, could not alone provide the essentials for living.
Self-interest was the mechanism that could remedy this shortcoming. Said Smith: "It
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is not from the benevolence of the butcher, the brewer, or the baker, that we can
expect our dinner, but from their regard to their own interest."
Someone earning money by his own labor benefits himself. Unknowingly, he also
benefits society, because to earn income on his labor in a competitive market, he must
produce something others value. In Adam Smith's lasting imagery, "By directing that
industry in such a manner as its produce may be of greatest value, he intends only his
own gain, and he is in this, as in many other cases, led by an invisible hand to
promote an end which was no part of his intention."
The five-book series of The Wealth of Nations sought to reveal the nature and cause
of a nation's prosperity. The main cause of prosperity, argued Smith, was increasing
division of labor. Smith gave the famous example of pins. He asserted that ten
workers could produce 48,000 pins per day if each of eighteen specialized tasks was
assigned to particular workers. Average productivity: 4,800 pins per worker per day.
But absent the division of labor, a worker would be lucky to produce even one pin per
day.
Just how individuals can best apply their own labor or any other resource is a central
subject in the first book of the series. Smith claimed that an individual would invest a
resource, for example, land or labor, so as to earn the highest possible return on it.
Consequently, all uses of the resource must yield an equal rate of return (adjusted for
the relative riskiness of each enterprise). Otherwise reallocation would result. This
idea, wrote George Stigler, is the central proposition of economic theory. Not
surprisingly, and consistent with another Stigler claim that the originator of an idea in
economics almost never gets the credit, Smith's idea was not original. French
economist Turgot had made the same point in 1766.
Smith used this insight on equality of returns to explain why wage rates differed.
Wage rates would be higher, he argued, for trades that were more difficult to learn,
because people would not be willing to learn them if they were not compensated by a
higher wage. His thought gave rise to the modern notion of human capital (see Human
Capital). Similarly, wage rates would also be higher for those who engaged in dirty or
unsafe occupations (see Job Safety), such as coal mining and butchering, and for
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those, like the hangman, who performed odious jobs. In short, differences in work
were compensated by differences in pay. Modern economists call Smith's insight the
theory of compensating wage differentials.
Smith used numerate economics not just to explain production of pins or differences
in pay between butchers and hangmen, but to address some of the most pressing
political issues of the day. In the fourth book of The Wealth of Nations—published,
remember, in 1776—Smith tells Great Britain that her American colonies are not
worth the cost of keeping. His reasoning about the excessively high cost of British
imperialism is worth repeating, both to show Smith at his numerate best, and to show
that simple clear economics can lead to radical conclusions:
A great empire has been established for the sole purpose of raising up a nation
of customers who should be obliged to buy from the shops of our different
producers all the goods with which these could supply them. For the sake of
that little enhancement of price which this monopoly might afford our
producers, the home-consumers have been burdened with the whole expense
of maintaining and defending that empire. For this purpose, and for this
purpose only, in the two last wars, more than a hundred and seventy millions
has been contracted over and above all that had been expended for the same
purpose in former wars. The interest of this debt alone is not only greater than
the whole extraordinary profit, which, it ever could be pretended, was made by
the monopoly of the colony trade, but than the whole value of that trade, or
than the whole value of the goods, which at an average have been annually
exported to the colonies.
Smith vehemently opposed mercantilism—the practice of artificially maintaining a
trade surplus on the erroneous belief that doing so increased wealth. The primary
advantage of trade, he argued, was that it opened up new markets for surplus goods
and also provided some commodities at less cost from abroad than at home. With that,
Smith launched a succession of free trade economists and paved the way for David
Ricardo's and John Stuart Mill's theories of comparative advantage a generation later.
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Adam Smith has sometimes been caricatured as someone who saw no role for
government in economic life. In fact, he believed that government had an important
role to play. Like most modern believers in free markets, Smith believed that the
government should enforce contracts and grant patents and copyrights to encourage
inventions and new ideas. He also thought that the government should provide public
works, such as roads and bridges, that, he assumed, would not be worthwhile for
individuals to provide. Interestingly, though, he wanted the users of such public works
to pay in proportion to their use. One definite difference between Smith and most
modern believers in free markets is that Smith favored retaliatory tariffs.
Retaliation to bring down high tariff rates in other countries, he thought, would work.
"The recovery of a great foreign market," he wrote "will generally more than
compensate the transitory inconvenience of paying dearer during a short time for
some sorts of goods."
Some of Smith's ideas are testimony to his breadth of imagination. Today, vouchers
and school choice programs are touted as the latest reform in public education. But it
was Adam Smith who addressed the issue more than two hundred years ago:
Were the students upon such charitable foundations left free to choose what
college they liked best, such liberty might contribute to excite some emulation
among different colleges. A regulation, on the contrary, which prohibited even
the independent members of every particular college from leaving it, and
going to any other, without leave first asked and obtained of that which they
meant to abandon, would tend very much to extinguish that emulation.
Smith's own student days at Oxford (1740-46), whose professors, he complained, had
"given up altogether even the pretense of teaching," left Smith with lasting disdain for
the universities of Cambridge and Oxford.
Smith's writings were both an inquiry into the science of economics and a policy
guide for realizing the wealth of nations. Smith believed that economic development
was best fostered in an environment of free competition that operated in accordance
with universal "natural laws." Because Smith's was the most systematic and
comprehensive study of economics up until that time, his economic thinking became
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the basis for classical economics. And because more of his ideas have lasted than
those of any other economist, Adam Smith truly is the alpha and the omega of
economic science.
3
Cisco Files Lawsuit Against Huawei Technologies
Suit Seeks to Prohibit Copying of Cisco's Intellectual Property
SAN JOSE, Calif., January 23, 2003 - Cisco Systems, Inc. (NASDAQ: CSCO), today
announced that it has filed a lawsuit against Huawei Technologies, Co., LTD and its
subsidiaries, Huawei America, Inc. and FutureWei Technologies, Inc. over Huawei's
unlawful copying of Cisco's intellectual property. Cisco's suit, filed in the United
States District Court for the Eastern District of Texas, alleges that Huawei unlawfully
copied and misappropriated Cisco's IOS software, including source code, copied
Cisco documentation and other copyrighted materials, and infringed numerous Cisco
patents. Cisco seeks remedies to prohibit the continued misappropriation of its
intellectual property by Huawei and recover damages resulting from Huawei's illegal
actions. Cisco also served a cease and desist letter on Spot Distribution, a Huawei
distributor located in the United Kingdom, for distributing Huawei products that copy
Cisco's intellectual property.
"Cisco's technological leadership is the result of significant investment in research and
development, and it is Cisco's responsibility to protect its intellectual property," said
Mark Chandler, Vice President and General Counsel, Cisco Systems, Inc. "Cisco does
not take any legal action lightly. However, Huawei has unlawfully copied Cisco's
intellectual property and refused Cisco's numerous attempts to resolve these issues. As
a result, Cisco has no choice but to protect its technology and the interests of its
shareholders through legal action."
Cisco's complaint addresses the following claims:
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
Copying of IOS source code: Cisco alleges that Huawei has copied portions
of the Cisco IOS source code and included the technology in its operating
system for its Quidway routers and switches. Huawei's operating system
contains a number of text strings, file names, and bugs that are identical to
those found in Cisco's IOS source code.

Copying of Cisco's technical documentation: Cisco alleges that Huawei has
copied extensively from Cisco's copyrighted technical documentation and
included whole portions of Cisco's text in Huawei's user manuals for Quidway
routers and switches.

Copying of Command Line Interface: Cisco alleges that Huawei has copied
Cisco's Command Line Interface (CLI) and corresponding screen displays.
CLI, a key component of Cisco's copyrighted IOS software, is the user
interface that enables users to communicate with the routers. Extensive
portions of Cisco's CLI and help screens appear verbatim in Huawei's
operating system for its Quidway routers and switches.

Patent infringement: Cisco alleges that Huawei is infringing at least five
Cisco patents related to proprietary routing protocols and has included these
technologies in its Quidway routers and switches.
"Innovation and competition are the lifeblood of our industry and must be preserved.
But copying is not innovation and the misappropriation of intellectual property is not
competition," Chandler continued.
Cisco is seeking a preliminary and permanent injunction prohibiting Huawei from
using, selling, marketing, or distributing versions of their Quidway routers and
switches that infringe Cisco's intellectual property. Cisco also is seeking monetary
damages as compensation for Huawei's misappropriation of Cisco's intellectual
property.
4
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David Ricardo (1772-1823)
Edited by David R. Henderson
David Ricardo was one of those rare people who achieved tremendous success and
lasting fame. After his family disinherited him for marrying outside his Jewish faith,
Ricardo made a fortune as a stockbroker and a loan broker. When he died, his estate
was worth over $100 million in today's dollars. At age twenty-seven, after reading
Adam Smith's The Wealth of Nations, Ricardo got excited about economics. He wrote
his first economics article at age thirty-seven and then spent only fourteen years—his
last ones—as a professional economist.
Ricardo first gained notice among economists over the "bullion controversy." In 1809
he wrote that England's inflation was the result of the Bank of England's propensity to
issue excess bank notes. In short, Ricardo was an early believer in the quantity theory
of money, or what is known today as monetarism.
In his Essay on the Influence of a Low Price of Corn on the Profits of Stock (1815),
Ricardo articulated what came to be known as the law of diminishing returns. One of
the most famous laws of economics, it holds that as more and more resources are
combined in production with a fixed resource—for example, as more labor and
machinery are used on a fixed amount of land—the additions to output will diminish.
Ricardo also opposed the protectionist Corn Laws, which restricted imports of wheat.
In arguing for free trade, Ricardo formulated the idea of comparative costs, today
called comparative advantage. Comparative advantage—a very subtle idea—is the
main basis for most economists' belief in free trade today. The idea is this: a country
that trades for products that it can get at lower cost from another country is better off
than if it had made the products at home.
Say, for example, that Poorland can produce one bottle of wine with five hours of
labor and one loaf of bread with ten hours. Richland's workers, on the other hand, are
more productive. They produce a bottle of wine with three hours of labor and a loaf of
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bread with one hour. One might think at first that because Richland requires fewer
labor hours to produce either good, it has nothing to gain from trade.
Think again. Poorland's cost of producing wine, although higher than Richland's in
terms of hours of labor, is lower in terms of bread. For every bottle produced,
Poorland gives up half of a loaf, while Richland has to give up three loaves to make a
bottle of wine. Therefore, Poorland has a comparative advantage in producing wine.
Similarly, for every loaf of bread it produces, Poorland gives up two bottles of wine,
but Richland gives up only a third of a bottle. Therefore, Richland has a comparative
advantage in producing bread.
If they exchange wine and bread one-for-one, Poorland can specialize in producing
wine and trading some of it to Richland, and Richland can specialize in producing
bread. Both Richland and Poorland will be better off than if they hadn't traded. By
shifting, say, ten hours of labor out of producing bread, Poorland gives up the one loaf
that this labor could have produced. But the reallocated labor produces two bottles of
wine, which will trade for two loaves of bread. Result: trade nets Poorland one
additional loaf of bread. Nor does Poorland's gain come at Richland's expense.
Richland gains also, or else it would not have traded. By shifting three hours out of
producing wine, Richland cuts wine production by one bottle but increases bread
production by three loaves. It trades two of these loaves for Poorland's two bottles of
wine. Richland has one more bottle of wine than it had before, and an extra loaf of
bread.
These gains come, Ricardo observed, because each country specializes in producing
the good for which its comparative cost is lower.
Writing a century before Paul Samuelson and other modern economists popularized
the use of equations, Ricardo is still esteemed for his uncanny ability to arrive at
complex conclusions without any of the mathematical tools now deemed essential. As
economist David Friedman put it in his 1990 textbook, Price Theory, "The modern
economist reading Ricardo's Principles feels rather as a member of one of the Mount
Everest expeditions would feel if, arriving at the top of the mountain, he encountered
a hiker clad in T-shirt and tennis shoes."
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One of Ricardo's chief contributions, arrived at without mathematical tools, is his
theory of rents. Borrowing from Malthus, with whom Ricardo was closely, but often
diametrically, associated, Ricardo explained that as more land was cultivated, farmers
would have to start using less productive land. But because a bushel of corn from less
productive land sells for the same price as a bushel from highly productive land,
tenant farmers would be willing to pay more to rent the highly productive land. Result:
the landowners, not the tenant farmers, are the ones who gain from productive land.
This finding has withstood the test of time. Economists use Ricardian reasoning today
to explain why agricultural price supports do not help farmers per se but do make
owners of farmland wealthier. Economists use similar reasoning to explain why the
beneficiaries of laws that restrict the number of taxicabs are not cab drivers per se but
rather those who owned the limited number of taxi medallions (licenses) when the
restriction was first imposed.
5
War Seen Undermining IT Sales
Merrill Lynch Says Some Firms Could Miss Financial Targets
SAN FRANCISCO, March 24, 2003 — The Iraq war is set to undermine U.S. and
European technology spending to the extent that some computer companies could
miss their financial targets, Merrill Lynch said on Monday.
ABOUT 17 PERCENT of large U.S. and European companies said they would slow
their information technology spending because of the war, according to Merrill’s
latest TechStrat survey of chief information officers at 50 U.S. and 25 European
corporations. The research also found that a quick war would not result in much
uptick in spending, with only 10 percent predicting an increase.
The survey results offer some hard proof on concerns by Wall Street analysts
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that the war could disrupt IT spending in the crucial last weeks of the March quarter,
traditionally the busiest period for most IT companies. Steven Milunovich, analyst at
Merrill, said the survey showed that the war-related slowdown “may be sufficient to
cause back end loaded companies to miss earnings”.
“Once the war ends, few users expect to accelerate spending, underscoring the
structural problems that are the true cause of the downturn,” he added.
The threat of war has been reported by several computer companies as delaying
IT contracts. Last week Oracle, the largest enterprise software company, said February
sales fell “precipitously” across all geographies.
Merrill said that IT vendors that have less recurring revenue, such as Sun
Microsystems or EMC, are at most risk for missing their earnings for their March
quarter.
A majority of IT spending occurs in the last two to three weeks of each calendar
quarter. This is because corporate IT buyers know that most vendors are under
pressure to make their end of quarter financial targets and are likely to grant large
discounts.
If the war weighs heavily on IT spending, this will likely be apparent in the coming
two weeks and show up as earnings warnings in advance of full financial results in
mid-April.
The TechStrat survey also found some emerging trends in purchasing. Interest
in Microsoft’s Windows-based servers - large business computers - was high, and so
was interest in servers based on the free Linux operating system.
Mainframe computer sales, however, showed a large drop, with only 8 per cent
of those asked saying they were increasing their spending on “Big Iron”. This could
be because International Business Machines is preparing to launch its latest
mainframe computer, codenamed “T-Rex”, in the summer, and customers are holding
back in advance of that launch.
IBM, with its broad base of hardware, software, and services, came out well in
the survey as companies said they preferred to buy IT solutions from one vendor.
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“The advantage is ‘one throat to choke’,” Mr. Milunovich said. This trend does
not bode well for vendor partnerships which is the approach taken by
Hewlett-Packard and Sun Microsystems.
6
Markets and Crises: A History Lesson
NEW YORK, Oct. 22, 2002 — It’s an old chestnut: Stock markets hate uncertainty,
and the uncertainty of the outcome of the conflict with Iraq is certainly contributing to
the weakness in the stock market. But throughout the last 100 years, the markets have
reacted differently to wars and other crises.
THE 20TH CENTURY has seen its share of big shocks and crises, including World
War I, the Great Depression, Pearl Harbor and World War II, the Korean War, the
Cuban missile crisis, the Kennedy assassination, Watergate, the Gulf War, the
Oklahoma City bombing, the World Trade Center bombing in 1993 and the Sept. 11
terrorist attacks.
Through it all, there has been the stock market, reacting to each of these crises,
but as market historians note, each in a different way.
Take wars, for example. Are they good or bad for the stock market?
“What you see going into wars is that any uncertainty or saber rattling causes
the market to go down,” says Jeff Hirsch, who edits “Stock Trader’s Almanac.” “Once
something decisive happens, Wall Street gets comfortable that things will be resolved,
prices tend to go up.”
A BANNER YEAR
In World War I, the stock market closed for four months as the war began in
1914. When it reopened, the Dow Jones industrial average was down about 30 percent.
But the war ended a recession that began in 1913, and 1915 turned out to be a banner
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year, with the Dow up over 80 percent.
“Nineteen-fifteen turned out to be the best year in the history of the Dow in
percentage terms because the U.S. and brokers figured out how much they were going
to make from war contracts,” says John Steele Gordon, who wrote “The Great Game:
The Emergence of Wall Street as a Great Power.” “Companies like Bethlehem Steel
went up 400 percent in one year.”
When the United States entered the war in 1917, the markets dipped again, and
then again later in 1917 during the Bolshevik revolution in Russia. But the markets
already were recovering by the time the war ended in late 1918.
When World War II broke out in 1939, the markets were still recovering from
the Great Depression, but shortly after the Germans took Paris in the middle of 1940,
market sentiment soured. The Dow dropped about 20 percent.
The Dow dropped 3.5 percent on the first trading day after the attack on Pearl Harbor
and was still down nearly 10 percent six months later. But that was the bottom, and
the huge war effort began moving the markets up.
SMOOTH SAILING
“The market hit its lows in the spring of ’42, a few months after Pearl Harbor,
and after that it was clear sailing for the stock market,” says Roger Ibbotson, a market
historian and professor at the Yale School of Management.
But the two world wars were major global events, and in both cases helped pull
the United States out of economic slumps. Those economic rebounds — combined
with victory in both wars — helped the market rally. But few events, even sudden
shocking events, can reverse the underlying economic trends and their effect on the
stock market.
“The economic trends are going to guide where the stock market is going in the
long run,” says Ibbotson. “A shock is going to affect a day or a month but it is not
necessarily going to affect the longer term.”
Take the Kennedy assassination. The market dropped nearly 3 percent on the
day of the assassination. But the economy was in the middle of a multi-year
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expansion, so six months after the assassination, the Dow was up 12 percent.
Or take the resignation of Richard Nixon in 1974. The market dropped about 1.5
percent the next trading day. You would think clearing up the uncertainty would rally
the markets, but an overriding economic weakness continued to weigh on the markets.
SLIDING INTO A FUNK
“The economy was slipping into the funk of 1973-74, a major recession, a deep
one, and economics govern the market,” says John Prestbo of Dow Jones Indexes.
“And so all this sideshow about Watergate was maybe a little bit of uncertainty on the
political side, but the economics of the day took the markets where it needed to go,
down.”
And when Iraq invaded Kuwait in August 1990, the market dropped 6% in
three days. But it began rallying in October, as the United States was gearing up for
operation Desert Storm and investors believed the economic climate might improve. It
continued rallying into the Gulf War in January 1991.
Even the World Trade Center bombing in 1993 and the Oklahoma City
bombing in 1995 didn’t stop the Dow from advancing. It was taking its cue from the
continuing economic expansion.
In the week and a half following last year’s terrorist attacks, the Dow dropped
14%, but then rallied as investors believed the attack created bargains because the
economy would soon improve. That assumption proved to be mistaken.
QUESTION OF THE DAY
And what about the current conflict with Iraq?
“I think the market is pricing in an invasion right now, and I think it’s pretty
well discounted at this point,” says Prestbo.
But the uncertainty of the outcome still weights on the markets.
“If it’s swift, the Iraqi government collapses and the military refuses to follow
orders, I think you’ll see a boom in the stock market,” says Gordon, the author. “If it
turns out to be a protracted struggle in the streets of Baghdad, then you’ll see a real
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bear market.”
7
Stocks Retreat as Baghdad Falls
Dow Industrials Drop 101; Nasdaq Composite Loses 26
April 9, 2003 — Stocks closed Wednesday’s session with hefty losses, despite scenes
of jubilation on the streets of Baghdad, as Iraqis celebrated the apparent collapse of
Saddam Hussein’s regime. Traders said the market had already anticipated a
successful end to the war and was now focused on earnings news and the
still-sluggish economy.
THE DOW JONES INDUSTRIAL AVERAGE closed the session down 100.98 points,
or 1.2 percent, at 8,197.94, having rallied as much as 89 points mid-way through the
morning. The Dow lost a point on Tuesday.
The Nasdaq Composite index closed Wednesday’s session down 26.20 points,
or 1.9 percent, at 1,356.74. The technology-laced index lost 7 points Tuesday.
Markets in Europe and Asia closed slightly lower.
TRADERS WATCH AS BAGHDAD FALLS
After a wobbly open, stocks climbed modestly in early trading, as Wall Street’s
trading desks watched live television coverage of U.S. tanks rolling into the center of
Baghdad. Iraqi citizens greeted the advancing troops, and celebrated with cheers and
dancing as U.S. troops pulled down a 20-foot high statue of the Iraqi president.
U.S. stock futures had pointed to a lower open before the scenes were televised,
then perked up as images of the arrival of U.S. troops were aired.
But stocks sold off mid-session, deepening their decline towards the close.
Traders said the Iraqi celebrations hadn’t triggered an expected rally in stock prices
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because Wall Street has already discounted a successful conclusion to the war and is
now turning its attention to the still-sluggish U.S. economy and the onset of
first-quarter earnings season.
“I think were getting to a point where a lot of what happens [in Iraq] is already
priced into the market,” said Nicholas Angilletta, head of retail trading for Salomon
Smith Barney, in a CNBC interview. “We’re starting to hear people talk about
earnings reports coming out next week — a topic they haven’t talked about for weeks
[because of the war].”
Hugh Johnson, First Albany’s market strategist, told CNBC that the market’s
much-anticipated post-war rally had actually taken place on Monday morning, when
the Dow industrials surged 243 points following news that U.S. troops had stormed
into central Baghdad, signifying the conflict in Iraq would soon be at an end.
The market gave up its gains Monday afternoon, closing the session with
moderate gains. Portfolio managers who had positioned their portfolios for an
imminent end to the Iraq war unwound those positions Monday, Johnson explained.
“You might see more rallies in the future as we get more news that this war is
definitively over,” he noted.
1Q EARNINGS SEASON IN FOCUS
Wall Street sifted through another batch of quarterly earnings warnings
Wednesday, a sign for investors that the market’s problems will not necessarily
disappear when the conflict in Iraq ends. Companies will start to report their earnings
for the first quarter of the year in earnest next week.
Early Wednesday, Abbott Laboratories said its first-quarter earnings fell because
of higher costs related to the launch of a new rheumatoid arthritis drug, Humira. The
drug maker’s share price rose a fraction to $40.21.
After Tuesday’s close, travel commerce company Sabre Holdings warned its
first-quarter results would miss forecasts, issuing its second such warning in a month.
Sabre, which runs the Web site Travelocity.com, blamed its shortfall on the war in
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Iraq. The firm’s share price rose 6 percent to $17.03.
German automaker DaimlerChrysler said Wednesday a tougher business
climate this year will make it harder to raise profits to forecast levels, despite the
encouraging signs in the first quarter. The firm’s U.S.-traded share price rose 1.1
percent to $32.74.
Also, tool maker Stanley Works said it would cut jobs and close plants and
issued a profit warning, sending it stock price down 11.6 percent to $21.12. But
NCR’s shares added 11.1 percent, closing at $20.40. The high-tech firm said its
first-quarter loss would be smaller than expected.
The market wavered throughout Tuesday’s trading session, closing barely
changed, as Wall Street digested a handful of earnings warnings and news that
Saddam Hussein and one or both of his sons may be dead.
Late Monday, a U.S. warplane dropped four huge bombs on a residential
complex where intelligence reports said Hussein and his sons were attending a
meeting. U.S. officials said it will likely be several days before the Pentagon can
determine the Iraqi leader’s fate.
MURDOCH CLOSES HUGHES DEAL
After Wednesday’s closing bell, Rupert Murdoch’s News Corp. announced it
has struck a deal to take control of DirecTV, a subsidiary of General Motors’ Hughes
Electronics, gaining a foothold in the U.S. satellite television market.
After Tuesday’s close, stocks ratings firm Standard & Poor’s said it will add
Federated Investors to its benchmark Standard & Poor’s 500-stock index. It will also
drop Pharmacia, a drug maker being bought by larger rival Pfizer, from the S&P 500
index.
Also, number-four U.S. bank Wells Fargo said it plans to sell $3 billion of
30-year convertible bonds to private investors, one of the largest U.S. sales of the
stock-bond hybrids, according to sources familiar with the sale.
No big economic reports were due out Wednesday. On Thursday, data on U.S.
chain store sales, weekly unemployment claims, and import and export prices are due
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for release. Friday brings retail sales data and the University of Michigan’s consumer
sentiment index.
The dollar was mixed, trading at 1.0755 dollars to the euro and 120.19 yen to
the dollar, compared with 1.0718 dollars and 119.80 yen late Tuesday in New York.
8
Karl Marx (1818-1883)
By Janet Beales
Edited by David R. Henderson
Karl Marx was communism's most zealous intellectual advocate. His comprehensive
writings on the subject laid the foundation for later political leaders, notably V. I.
Lenin and Mao Tse-tung, to impose communism on over twenty countries.
Marx was born in Trier, Prussia (now Germany), in 1818. He studied philosophy at
universities in Bonn and Berlin, earning his doctorate in Jena at the age of
twenty-three. His early radicalism, first as a member of the Young Hegelians, then as
editor of a newspaper suppressed for its derisive social and political content,
preempted any career aspirations in academia and forced him to flee to Paris in 1843.
It was then that Marx cemented his lifelong friendship with Friedrich Engels. In 1849
Marx moved to London, where he continued to study and write, drawing heavily upon
works by David Ricardo and Adam Smith. Marx died in London in 1883 in somewhat
impoverished surroundings, never having held a job in England and relying on Engels
for financial support.
At the request of the Communist League, Marx and Engels coauthored their most
famous work, "The Communist Manifesto," published in 1848. A call to arms for the
proletariat—"Workers of the world, unite!"—the manifesto set down the principles on
which communism was to evolve. Marx held that history was a series of class
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struggles between owners of capital (capitalists) and workers (the proletariat). As
wealth became more concentrated in the hands of a few capitalists, he thought, the
ranks of an increasingly dissatisfied proletariat would swell, leading to bloody
revolution and eventually a classless society.
It has become fashionable to think that Karl Marx was not mainly an economist but
instead had integrated various disciplines—economics, sociology, political science,
history, and so on. But Mark Blaug, a noted historian of economic thought, points out
that Marx wrote "no more than a dozen pages on the concept of social class, the
theory of the state, and the materialist conception of history." Marx, writes Blaug,
wrote "literally 10,000 pages on economics pure and simple."
According to Marx capitalism contained the seeds of its own destruction.
Communism was the inevitable end to the process of evolution begun with feudalism
and passing through capitalism and socialism. Marx wrote extensively about the
economic causes of this process in Capital, with volume one published in 1867 and
the later two volumes, heavily edited by Engels, published posthumously in 1885 and
1894.
He was a masterful economist and his rigorous analysis of capitalism in Capital is
testament to the twenty years of scholarship that led up to its completion. The labor
theory of value, decreasing rates of profit, and increasing concentration of wealth
were key components of Marx's economic thought. His comprehensive treatment of
capitalism stands in stark contrast, however, to his treatment of socialism and
communism, which Marx handled only superficially. He declined to speculate on how
those two economic systems would operate.
9
Alfred Marshall (1842-1924)
Edited by David R. Henderson
- 42 -
Alfred Marshall was the dominant figure in British economics (itself dominant in
world economics) from about 1890 until his death in 1924. His specialty was
microeconomics—the study of individual markets and industries, as opposed to the
study of the whole economy. His most important book was Principles of Economics.
In it Marshall emphasized that the price and output of a good are determined by both
supply and demand: the two curves are like scissor blades that intersect at equilibrium.
Modern economists trying to understand why the price of a good changes still start by
looking for factors that may have shifted demand or supply. They owe this approach
to Marshall.
To Marshall also goes credit for the concept of price-elasticity of demand, which
quantifies buyers' sensitivity to price.
Marshall also originated the concept of consumer surplus. He noted that the price is
typically the same for each unit of a commodity that a consumer buys, but the value to
the consumer of each additional unit declines. A consumer will buy units up the point
where the marginal value equals the price. Therefore, on all units previous to the last
one, the consumer reaps a benefit by paying less than the value of the good to himself.
The size of the benefit equals the difference between the consumer's value of all these
units and the amount paid for the units. This difference is called the consumer surplus,
for the surplus value or utility enjoyed by consumers. Marshall also introduced the
concept of producer surplus, the amount the producer is actually paid minus the
amount that he would willingly accept. Marshall used these concepts to measure the
changes in well-being from government policies such as taxation. Although
economists have refined the measures since Marshall's time, his basic approach to
what is now called welfare economics still stands.
Marshall wanted to understand how markets adjusted to changes in supply or demand
over time. Therefore, he introduced the idea of three periods. First is the market
period, the amount of time for which the stock of a commodity is fixed. Second, the
short period is the time in which the supply can be increased by adding labor and
other inputs but not by adding capital (Marshall's term was "appliances"). Third, the
long period is the amount of time taken for capital ("appliances") to be increased.
- 43 -
To make economics dynamic rather than static, Marshall used the tools of classical
mechanics, including the concept of optimization. With these tools he, like
neoclassical economists who have followed in his footsteps, took as givens
technology, market institutions, and people's preferences. But Marshall was not
satisfied with his approach. He once wrote that "the Mecca of the economist lies in
economic biology rather than in economic dynamics." In other words, Marshall was
arguing that the economy was an evolutionary process in which technology, market
institutions, and people's preferences evolve along with people's behavior.
Rarely did Marshall attempt a statement or position without expressing countless
qualifications, exceptions, and footnotes. Marshall showed himself to be an astute
mathematician—he studied math at St. John's College, Cambridge—but limited his
quantitative expressions so that he might appeal to the layman.
Marshall himself was born into a middle-class family in London and raised to enter
the clergy. He defied his parents' wishes and became an academic in mathematics and
economics.
10
John Maynard Keynes (1883-1946)
Edited by David R. Henderson
So influential was John Maynard Keynes that an entire school of modern thought
bears his name.
Many of his ideas were revolutionary; almost all are controversial. Keynesian
economics serves as a sort of yardstick that can define virtually all economists who
came after Keynes.
Keynes was born in Cambridge and attended King's College, Cambridge, where he
earned his degree in mathematics in 1905. He remained there for another year to study
under Alfred Marshall and Arthur Pigou, whose scholarship on the quantity theory of
- 44 -
money led to Keynes's Tract on Monetary Reform many years later. After leaving
Cambridge, Keynes took a position with the civil service in Britain. While there, he
collected the material for his first book in economics, Indian Currency and Finance,
in which he described the workings of India's monetary system. He returned to
Cambridge in 1908 as a lecturer, then took a leave of absence to work for the British
Treasury. He worked his way up quickly through the bureaucracy and, by 1919, was
the Treasury's principal representative at the peace conference at Versailles. He
resigned because he thought the Treaty of Versailles was overly burdensome to the
Germans.
Upon resigning, he returned to Cambridge to resume teaching. Keynes was a
prominent journalist and speaker, and one of the famous Bloomsbury Group of
literary greats, which included Virginia Woolf and Bertrand Russell. At the 1944
Bretton Woods Conference, where the International Monetary Fund was established,
Keynes was one of the architects of the postwar system of fixed exchange rates. In
1925 he married the Russian ballet dancer Lydia Lopokova. He was made a lord in
1942. Keynes died on April 21, 1946, survived by his father, John Neville Keynes,
also a renowned economist in his day.
Keynes became a celebrity before becoming one of the most respected economists of
the century. What gained him his celebrity status was his eloquent book The
Economic Consequences of the Peace. Keynes wrote it to object to the punitive
reparations payments imposed on Germany by the Allied countries after World War I.
The amounts demanded by the Allies were so large, he wrote, that a Germany that
tried to pay them would stay perpetually poor and, therefore, politically unstable. We
now know that Keynes was right. Besides its excellent economic analysis of
reparations, Keynes's book contained an insightful analysis of the Council of Four
(Clemenceau of France, Prime Minister Lloyd George of Britain, President Woodrow
Wilson of the United States, and Vittorio Orlando of Italy).
Keynes wrote: "The Council of Four paid no attention to these issues [which included
making Germany and Austro-Hungary into good neighbors], being preoccupied with
others,—Clemenceau to crush the economic life of his enemy, Lloyd George to do a
- 45 -
deal and bring home something which would pass muster for a week, the President to
do nothing that was not just and right." (Ch. 6, par. VI.2)
In the twenties Keynes was a believer in the quantity theory of money (today called
monetarism). His writings on the topic were essentially built upon the principles he
had learned from his mentors, Marshall and Pigou. In 1923 he wrote Tract on
Monetary Reform, and later he published Treatise on Money, both on monetary policy.
His major policy view was that the way to stabilize the economy was to stabilize the
price level, and that to do that the government's central bank must lower interest rates
when prices tend to rise and raise them when prices tend to fall.
Keynes's ideas took a dramatic change, however, as unemployment in Britain dragged
on during the interwar period, reaching levels as high as 20 percent. Keynes
investigated other causes of Britain's economic woes, and The General Theory of
Employment, Interest and Money was the result.
Keynes's General Theory revolutionized the way economists think about economics.
It was path breaking in several ways. The two most important are, first, that it
introduced the notion of aggregate demand as the sum of consumption, investment,
and government spending. Second, it showed (or purported to show) that full
employment could be maintained only with the help of government spending.
Economists still argue about what Keynes thought caused high unemployment. Some
think that Keynes attributed unemployment to wages that take a long time to fall. But
Keynes actually wanted wages not to fall, and advocated in the General Theory that
wages be kept stable. A general cut in wages, he argued, would decrease income,
consumption, and aggregate demand. This would offset any benefits to output that the
lower price of labor might have contributed.
Why shouldn't government, thought Keynes, fill the shoes of business by investing in
public works and hiring the unemployed? General Theory advocated deficit spending
during economic downturns to maintain full employment. Keynes's conclusion
initially met with opposition. At the time, balanced budgets were standard practice
with the government. But the idea soon took hold and the United States government
- 46 -
put people back to work on public works projects. Of course, once policymakers had
taken deficit spending to heart, they could not let it go.
Contrary to some of his critics' assertions, Keynes was a relatively strong advocate of
free markets. It was Keynes, not Adam Smith, who said "there is no objection to be
raised against the classical analysis of the manner in which private self-interest will
determine what in particular is produced, in what proportions the factors of
production will be combined to produce it, and how the value of the final product will
be distributed between them." Keynes believed that once full employment was
achieved by fiscal policy measures, the market mechanism could then operate freely.
"Thus," continued Keynes, "apart from the necessity of central controls to bring about
an adjustment between the propensity to consume and the inducement to invest, there
is no more reason to socialize economic life than there was before."
Little of Keynes's original work survives in modern economic theory. Instead, his
ideas have been endlessly revised, expanded, and critiqued. Keynesian economics
today, while having its roots in The General Theory, is chiefly the product of work by
subsequent economists including John Hicks, James Tobin, Paul Samuelson, Alan
Blinder, Robert Solow, William Nordhaus, Charles Schultze, Robert Heller, and
Arthur Okun. The study of econometrics was created, in large part, to empirically
explain Keynes's macroeconomic models. Yet the fact that Keynes is the wellspring
for so many outstanding economists is testament to the magnitude and influence of his
ideas.
11
Foreign investors can trade A shares in China
Chinese authorities have finally given foreign investors the go-ahead to trade US$176
billion worth of listed A shares by approving the long-awaited qualified foreign
institutional investors (QFII) scheme.
The scheme, discussed for years, will formally be introduced on December 1,
- 47 -
according to a circular jointly released by the China Securities Regulatory
Commission and the People's Bank of China yesterday.
Foreign investors that satisfy designated qualifications will be able to invest in A
shares listed in Shanghai and Shenzhen (which are now only open to domestic
investors), treasury and corporate bonds and other financial instruments approved by
the Chinese authorities, it said.
The move closely follows a first step by the government on Sunday to open up
non-tradable State-held and institutional shares.
The two changes, which open up US$500 billion of A shares to foreign investors, will
greatly boost investor confidence by infusing fresh and much needed funding into the
market, said Xu Hongyuan, a senior researcher at the State Information Centre. In the
long term, the entry of qualified foreign investors will also bring more rational
investment sentiment to the bourses and help upgrade the composition of investors.
The circular said foreign investors had to set up a special renminbi account with
domestic banks, which will act as custodians for the assets used for investment, and
use domestic securities companies while trading.
Also, it only permits each licensed foreign investor to acquire up to 10 per cent of
stocks in a domestic listed firm.
All investment will follow the guidelines set by the government over the ratio of
foreign investment in different industries. Certain foreign exchange quotas will be
granted for the remittance of capital in and out of China.
"It is only a transitional measure before the renminbi becomes fully convertible under
the capital account and such restrictions will be gradually loosened," Xu said.
Yan Xiaoqing, chief representative for Belgium-based Fortis Investment Management
in Shanghai, said he was "glad to hear the news" because a more open Chinese stock
market has been expected for so long.
According to the circular, a foreign asset management company has to have five years
of experience in the sector and have managed at least US$10 billion in assets last
fiscal year. Similar thresholds have also been set for insurers, securities houses and
commercial banks, who can all apply for a QFII licence.
Yan said most global investment companies will qualify under the conditions and
those with an interest in Asia will be keen to enter the Chinese market.
Xu said Chinese enterprises should also improve their performance to be more
- 48 -
appealing to foreign investors.
Under the rules, QFII applicants must submit their investment proposal, accounting
reports and commitment for medium and long-term investment.
They also have to be cleared of any major irregularities in their home market over the
past three years.
12
Hull, John (1997): Options, Futures and Other Derivatives, Prentice Hall. >>
Chapter 1: Introduction
【内容请见“附件 1”】
13
YAHOO! Finance
China Stocks Go for the Gold
by Mick Weinstein
Posted on Friday, August 15, 2008, 12:00AM
As athletes continue to wow us from Beijing, the current medals count mirrors
another global ranking. On a purchasing power parity basis, The People's Republic of
China now has the second largest economy in the world after the U.S., with gross
domestic product clocking in at over $6.9 trillion. Investors are well aware of China's
massive expansion. Its economy is 10 times larger than it was 20 years ago, and
continues to grow at a torrid 10 percent each year.
Enthusiasm for the domestic Chinese stock market and in Chinese stocks traded in the
U.S. peaked around the fall of 2007, and it's been almost straight downhill since. As
Bespoke Investment Group observes, with "Chinese growth and prosperity displayed
- 49 -
on our TV sets each night throughout the Olympics, it's hard to imagine that China's
stock market could be doing so poorly." Yet that market's shown a "classic bubble
pattern," with the Shanghai Composite down 60% since last October. "Anyone hoping
that the Olympics would give ailing Chinese stocks a boost has gotten a rude
awakening." Bespoke's simple chart tells the story.
Yet given the very real and massive growth in China, the big selloff leaves many
market bloggers wondering if now is the time to jump back into China.
• Jim Tripon, editor of the China Stock Digest, notes: "Historically, the Olympics host
country's stock index captures a nice bounce following the event. Over the last six
Olympiads, the average gain for host countries' stock indexes has been 19% in the six
months following the games, and 26% in the 12 months after the games. None of that
effect has been apparent in China yet, where markets continue to suffer in spite of
robust economic growth. Both the Shanghai Market ETF (FXI) and the Hong Kong
Market ETF (EWH) are down this week... [yet] from an investment viewpoint, many
stocks in China are getting downright cheap."
• Portfolio manager Roger Nusbaum of Arizona's Your Source Financial sold his
Chinese exposure early last year, and had been waiting for an opportunity to re-enter.
Earlier this week, when Shanghai hit that 60% selloff point from its peak, Nusbaum
bought a Chinese telecom stock. "I have never thought the mania in China was worse
than the bubble in tech stocks, so I have always felt the decline would be less than
75%. Fifty percent declines don't occur that often, and so 60% seems like a reasonable
overshoot of cutting in half."
- 50 -
• For outstanding macroeconomic insight on China, start reading the blog of Professor
Michael Pettis of Peking University - China Financial Markets. This week, Pettis
observed "sloppiness" and panic selling at the stock market in spite of the "festive"
Olympic atmosphere. Pettis thinks there may now be "some government-inspired
buying, or even patriotic Olympic-related buying, or more measures from the
authorities aimed at propping up the markets, but if none of those, I think the very bad
mood could be extended... expectations about the transformational consequences of
the Olympics are unrealistically high, and I think there is bound to be some
disappointment."
• Martin Hutchinson says that given the fact that Chinese manufacturing output will
exceed that of the U.S. by next year, "a substantial part of any investor's portfolio
should be in China and any other countries where manufacturing is growing as a
percentage of the world total." In particular, Hutchinson encourages investors to look
at Acer Inc., Dr. Reddy's Laboratory Ltd. and Aluminum Corp. of China Ltd. (ACH),
an integrated aluminum smelter focused on the Chinese market.
• China market expert Shaun Rein recently stated that "while the Olympics is a great
- 51 -
thing for China, and the world stage should applaud China for how far and fast it has
come, do not overestimate how much two weeks can really positively impact the
bottom-lines of companies... it might actually hurt revenue numbers." Rein disclosed
holding just two China stocks traded in the U.S. - China Mobile (CHL) and Focus
Media (FMCN).
• Finally, fund manager Zach Scheidt likes this Chinese medical company. Stockpickr
predicts these five China stocks are "poised to double." The Sun reviews the July
performance of 84 U.S.-traded Chinese ADRs. Stockerblog lists ten high-yielding
Chinese stocks. And Justice Litle provides six reasons why China will soon be a buy
again.
For ongoing coverage of China stocks, visit Seeking Alpha's China stock sector page.
14
Yang, Xiaokai (2001): Economics: New Classical versus Neoclassical Framework,
Blackwell Publishers. >> Part Ⅰ: Economic Environment >> Introduction
【内容请见“附件 2”】
15
The Bank of Sweden Prize in Economic Sciences in
Memory of Alfred Nobel 2002
– Information for the Public
Traditionally, economic theory has relied on the assumption of a "homo œconomicus",
whose behavior is governed by self-interest and who is capable of rational
decision-making. Economics has also been regarded as a non-experimental science,
where researchers – as in astronomy or meteorology – have had to rely exclusively on
field data, that is, direct observations of the real world. During the last two decades,
however, these views have undergone a transformation. Controlled laboratory
experiments have emerged as a vital component of economic research and, in certain
- 52 -
instances, experimental results have shown that basic postulates in economic theory
should be modified. This process has been generated by researchers in two areas:
cognitive psychologists who have studied human judgment and decision-making, and
experimental economists who have tested economic models in the laboratory. This
year’s prize is awarded to the innovators in these two fields: Daniel Kahneman and
Vernon Smith.
Psychological and experimental economics
Experimental economics
The first experiments in economics were aimed at testing what is perhaps the most
fundamental result in economic theory: under perfect competition, the market price
establishes an equilibrium between supply and demand at the level, where the value
assigned to a good by a marginal buyer is as high as that of a marginal seller. In
Vernon Smith’s early laboratory experiments, subjects were randomly designated
roles as buyers and sellers with different valuations of a good, expressed as a lowest
acceptable selling price and a highest acceptable buying price, respectively. Given the
distribution of such "reservation prices", Smith was able to determine the theoretical
equilibrium price – the price which is acceptable to equally many sellers as buyers. As
early as 1962, when he published the results of his first experiments, Smith found,
much to his surprise, that the prices obtained in the laboratory were very close to their
theoretical values, even though subjects lacked the information necessary to calculate
the equilibrium price. Smith and other researchers, among them Charles Plott, later
carried out many similar experiments to test the agreement with theory, and have by
and large confirmed the initial results. In addition, they found the outcome to be
driven by the exact design of the market mechanism.
Many experiments have concerned the outcome of auctions, which are traditionally
used to organize markets for raw materials and shares or other financial instruments.
More recently, auctions have also been designed for deregulation and privatization of
public monopolies, such as broadcasting rights. The theory of price formation
distinguishes four basic auction forms used in the sale of a single object:
1. the English auction, where buyers announce their bids in an increasing order
until no higher bid is submitted;
2. the Dutch auction, where a high initial bid is gradually lowered until a buyer
melds his acceptance;
3. the first-price auction, with sealed bids, where the highest bidder pays his own
bid to the seller; and
4. the sealed-bid second-price auction, where the highest bidder pays the second
highest bid.
In controlled experiments, Smith and his colleagues were able to test several
theoretical predictions. For example, they found – as foreseen by theory – that a seller
can expect the same revenue in English and second-price auctions. Meanwhile, they
- 53 -
were able to refute the theoretical prediction of equivalence between the Dutch and
the first-price auction. Their experiments also demonstrated that the English and
second-price auctions produced the highest average selling price, followed by the
first-price auction and, lastly, the Dutch auction.
Smith also initiated the use of laboratory experiments as a "wind tunnel", where
proposed auction mechanisms for privatization and public procurement can be tested
in advance. Since these mechanisms are frequently complex and it is difficult to
assess their performance solely on the basis of theoretical considerations, the
experimental method becomes particularly useful. In similar experiments, Smith has
evaluated different mechanisms for allocating airport time slots using
computer-assisted markets. He has also evaluated various means of organizing energy
markets in Australia and New Zealand, where the results have influenced actual
market design.
The values at stake on real-world markets are often of a wholly different magnitude
than the rewards which can be offered in an experimental setup. In particular, while
emphasizing the importance of monetary incentives in experiments, Smith has
developed methods where such incentives are not only sufficiently strong, but also
designed to enhance the probability that the results would be applicable in real market
situations. A major problem is that subjects’ own (and unobserved) preferences can
affect their behavior in an experiment. Consequently, a subject who is assigned the
role of buyer, with a given demand function for a good, will not simply behave in
accordance with this demand curve. Smith introduced a technique, known as the
induced-value method, which solves this problem and provides the subject with
incentives to behahe experimenter intended. Through this and other contributions, as
well as a series of practical recommendations for appropriate procedures in the
laboratory, Smith has set methodological standards for what constitutes a good
experiment in economic research.
Psychology and economics
Economic research often assumes that people are motivated primarily by material
incentives and make decisions in a rational way. They are assumed to assess the state
of the economy and the effects of their behavior by processing available information
according to standard statistical principles. This approach has been formulated
axiomatically in so-called expected-utility theory, which is the predominant economic
theory for decisions under uncertainty.
The prevailing view in psychology in general, and cognitive psychology in particular,
is to regard a human being as a system that codes and interprets available information
in a conscious manner, but where other, less conscious factors also govern decisions
in an interactive process. Such elements include perception, mental models for
interpreting specific situations, emotions, attitudes and memories of earlier decisions
and their consequences.
- 54 -
In extensive research on human behavior based on surveys and experiments, Daniel
Kahneman and other psychologists have called into question the assumption of
economic rationality in some decision situations. Real-world decision-makers
frequently appear not to evaluate uncertain events according to the laws of probability;
nor do they seem to make decisions according to the theory of expected-utility
maximization.
In a series of studies, Kahneman – in collaboration with the late Amos Tversky – has
shown that people are incapable of fully analyzing complex decision situations when
the future consequences are uncertain. Under such circumstances, they rely instead on
heuristic shortcuts or rules of thumb(经验法则). A fundamental bias is nicely
illustrated in Kahneman and Tversky’s own experimental data on the way individuals
judge random events. Most experimental subjects assign the same probabilities in
small and large samples, without taking into account that uncertainty about (the
variance of) the mean declines drastically with sample size. People thus seem to
adhere to a law of small numbers, without due consideration of the law of large
numbers in probability theory. In a well-known experiment, subjects regarded it as
equally likely that, on a given day, more than 60 percent of the births would be boys
in a small hospital (with few births) as well as in a large hospital (where many
children were born).
Similarly, an investor who recognizes that a fund manager beats the index two years
in a row may conclude that the manager is systematically more competent than the
average investor, whereas the true statistical implication is much weaker. Such
shortsightedness in interpreting data might well help clarify various phenomena on
financial markets that are difficult to explain with prevailing models – such as the
ostensibly unmotivated large fluctuations to which stock markets are often exposed.
In financial economics, a lively research area, behavioral finance, has evolved which
applies insights from psychology in an attempt to understand the functioning of
financial markets.
Another rule of thumb is representativeness. Kahneman and Tversky carried out an
experiment in which subjects were asked to categorize individuals as a "salesman" or
a "member of parliament" on the basis of given descriptions. When a randomly
chosen individual was portrayed as interested in politics and participating in debates,
most subjects thought he was a member of parliament, regardless of the fact that the
relatively higher share of salespersons in the population increases the likelihood that
he was a salesman. Even after subjects were informed that the proportions of
members of parliament and salespersons in the population had been altered
substantially, it did not seem to matter for the results.
Kahneman has thus demonstrated that in situations with uncertainty, human judgment
often exploits rules of thumb which systematically contradict fundamental
- 55 -
propositions in probability theory. His most influential contribution, however,
concerns decision-making under uncertainty. A striking finding is that individuals are
much more sensitive to the way an outcome deviates from a reference level (often the
status quo) than to the absolute outcome. When faced with a sequence of decisions
under risk, individuals thus appear to base each decision on its gains and losses in
isolation rather than on the consequences of a decision for their wealth as a whole.
Moreover, most individuals seem to be more averse to losses, relative to a reference
level, than partial to gains of the same size. These and other results contradict
predictions from the traditional theory of expected-utility maximization.
Not satisfied with having criticized standard theories of decision-making under
uncertainty, Kahneman and Tversky also developed an alternative, known as prospect
theory, intended to provide explanations for empirical observations. Prospect theory
and its extensions can be used to better explain behavioral patterns which appear to be
anomalies from the perspective of traditional theory: the propensity to sign up for
costly small-scale insurance for appliances; willingness to drive many miles for a few
dollars’ discount on a minor purchase, but reluctance to do so in order to save the
same amount on a more expensive good; or resistance to lowering consumption in
response to bad news about lifetime income.
Two merging research areas
Modern research at the border line between economics and psychology has shown
that concepts such as bounded rationality, restricted self-interest and limited
self-control are important factors behind a range of economic phenomena. In
particular, insights from psychology have had a strong impact on contemporary
developments in financial economics. Why, then, has it taken such a long time for
these ideas to gain recognition in economic research? One explanation is that
experimental methods have only recently permeated economics. As a result of
experimental research on the relation between price formation and market institutions,
a growing number of economists have begun to regard experimental methods as
indispensable research tools. Today, a new generation of economists is the catalyst in
a gradual amalgamation of two previously distinct research traditions in experimental
economics and economic psychology. Daniel Kahneman and Vernon Smith, the key
figures within these traditions, have contributed to an exciting renewal of economic
research.
16
ALTERNATIVE HYPOTHESES FOR RISK ANALYSIS
The Expected Utility Hypothesis (EUH)
- 56 -
The Expected Utility Hypothesis provides the basis for most of the research on the economics
of risk (see Friedman and Savage). Under the EUH, individuals make decisions among
alternative wealth levels x by maximizing EU(x), where U(x) is sometimes called a von
Neumann - Morgenstern utility function defined up to a positive linear transformation.
Is the EUH consistent with the fact that both insurance and gambling behavior are commonly
observed.
Friedman and Savage proposed to explain this by arguing that, for most
individuals, the utility function U(x) is probably concave (corresponding to risk aversion
and a positive willingness to insure) for low monetary rewards, but convex (corresponding to
risk loving and a positive willingness to gamble) for some high monetary rewards.
In this
context, a particular individual can both insure and gamble at the same time and still be
consistent with the EUH.
However, the EUH hypothesis has been under attack on the ground that it is
not always consistent with actual behavior under risk. We have shown that under
some assumptions (assumptions A1 - A5), behavior under risk is necessarily consistent
with the EUH. Thus, arguing that the EUH is not consistent with risk behavior is
equivalent to arguing that some of these assumptions are not appropriate. Each of
these assumptions has been challenged in the literature. For example, the ordering
assumption (e.g., as in "fuzzy sets") and the transitivity assumption (e.g., as in "regret
theory") have been questioned. Also, the continuity assumption (assumption A3),
and the independence assumption (assumption A2) have been the subject of much
scrutiny.
Relaxing the independence assumption
The Allais paradox
Let the random variable x take three possible values: x1 < x2 < x3, where pi =
Pr(x = xi), i = 1, 2, 3,
i pi = 1. Under the EUH, it follows that
EU(x) = p1U(x1) + (1-p1-p3)U(x2) + p3U(x3).
Let U0 be some reference utility level such that EU(x) = U0. Then
U0 = p1U(x1) + (1-p1-p3)U(x2) + p3U(x3),
or
p3 =  +  p1,
where the intercept  = (U0-U(x2))/(U(x3)-U(x2)), and the slope  =
-(U(x1)-U(x2))/(U(x3)-U(x2)) > 0. The equation {p3 =  +  p1} above represents the
indifference curves between p1 and p3, holding expected utility constant at U0. Note
- 57 -
that  and  are parameters that do not depend on p, and that  does not depend on U0.
It follows that the indifference curves between p1 and p3 are linear and parallel to each
other for different values of U0. This is an implication of the independence
assumption (i.e. of the linearity in the probabilities).
However, there is evidence that the indifference curves are not always parallel.
This has been interpreted as evidence that the independence assumption (or the
linearity in the probabilities) is not consistent with risk behavior.
Example: The Allais paradox.
Choose between
.a1 = receiving $1000 with probability 1,
.a2 = receiving $5000 with probability .10
$1000 with probability .89
$0 with probability .01
Then choose between
.a3 = receiving $5000 with probability .10
$0 with probability .90
.a4 = receiving $1000 with probability .11
$0 with probability .89.
Allais and others have found that the majority of individuals prefer a1 over a2, and a3
over a4. This ranking is inconsistent with the EUH. To see that, let U(0) = 0,
U(1000) = u, and U(5000) = 1. Then, under the EUH, choosing a1 over a2 implies
u > .10 + (.89)u
or
u > 10/11.
Alternatively, under the EUH, choosing a3 over a4 implies
.1 > (.11)u
or
u < 10/11.
Obviously, the two inequalities cannot hold simultaneously, indicating that the EUH is
not consistent with the choices of the majority of individuals. This is interpreted as
evidence that preferences are not linear in the probabilities and thus violate the
independence assumption in the EUH.
Prospect theory: Kahneman and Tversky (KT)
KT propose some modifications to the EUH:
. KT reject asset integration where preferences are expressed in terms of
terminal wealth x = w + a. Instead, they propose that risk preferences depend only
on the net gain "a".
. KT propose a preference function W(.) of the form
W(.) = i q(pi)U(ai)
where ai is the i-th realization of the random variable "a", i = 1, ..., n, U(.) is the utility
function of the decision maker, pi = Pr(a = ai), and q(.) is a weight function.
. KT propose that the weight function q(p) is nonlinear: it tends to "underweight" high
probabilities and "overweight" low probabilities. Note that this nonlinearity contradicts the
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independence assumption in the EUH.
. KT propose that the utility function U(a) is concave for gains, convex for
losses, and has a kink at "a" = 0 such that $1 of gains is "worth less" than $1 of losses.
17
HP takes aim at Lenovo/IBM with mobility push
New notebooks part of plan to seize market lead
By Tom Krazit, IDG News Service
February 02, 2005
Hewlett-Packard (HP) on Wednesday declared its intention to become the leading
vendor in notebook shipments by the end of 2005, specifically targeting IBM's
notebook customers as that business becomes part of Lenovo Group.
"The IBM/Lenovo announcement is a great opportunity for HP. We want to reclaim
the worldwide number one position in market share for HP notebooks," said Ted
Clark, senior vice president and general manager of HP's Mobile Computing Global
Business Unit, in a news conference at the Fairmont Hotel in San Jose, California.
The Palo Alto, California, company backed up those statements Wednesday with the
launch of new products in five different categories of business notebooks, which
Clark called the largest commercial notebook launch in the company's history. The
new systems range from lightweight ultraportable notebooks to full-featured desktop
replacement models and come with a variety of security, reliability, and usability
features as well as Intel's new mobile chipset technology.
HP said it is clear that IBM's sale of its PC division to Lenovo has caused IBM
customers to openly question their relationship with the company, and HP has already
been actively involved in discussions with current IBM customers, Clark said.
"Every time there is disruption in the marketplace, it creates opportunities," said
Margaret Franco, business notebook marketing director, in an interview following
HP's news conference.
HP needs to capitalize on those opportunities with products that offer business
customers more than just the advances in mobile technology delivered by Intel, which
almost all notebook companies will also adopt, said Dan Forlenza, vice president of
business notebooks in the Mobile Computing Business Unit.
- 59 -
The new notebooks emphasize reliability features such as the HP Mobile Data
Protection System, which improves the stability of the notebook's hard drive with
better cushioning. This feature is different from similar hard-drive protection
technologies available from IBM and market leader Dell in that it protects users
against everyday usage rather than catastrophic events such as the notebook falling off
a table, Forlenza said.
HP also wanted to make the new products more usable for mobile professionals when
they are in the office. It introduced docking stations that offer one-button release and
make it easier to connect notebooks than with previous models, Forlenza said.
All the new PCs will be available by the end of March, with a few of the models
available immediately. More information on all the new notebooks can be found on
HP's Web site.
The company's goal with its new mobile technology is to attract new users without
having to sacrifice the profitability of its PC division, Clark said.
HP Chief Technology Officer Shane Robison echoed that sentiment earlier this week
when he said HP's competitive advantage is its research and development arm, which
generates many of the new features that make their way into notebooks such as the
ones launched Wednesday. Those premium features differentiate HP from its rivals,
and users are willing to pay extra for features they can't find from other vendors, he
said in an interview.
The PC business is notoriously lean, and only Dell has been able to generate
consistent profits over the last few years. One of the reasons behind IBM's sale of its
PC group was a desire to exit the low-margin business. HP recently merged its PC
group with its highly profitable printer group in the hopes that some of the printer
group's strategies would improve the PC business.
With PC growth expected to fall to single digits over the next two years, the only way
for companies to grow faster than the market is to take share from their competitors,
said Sam Bhavnani, an analyst with Current Analysis in La Jolla, California. HP faces
several challenges in the retail segment of the market, where resurgent competitors
such as Gateway and Toshiba compete aggressively for the shelf space needed to
display new products, he said.
HP's event focused mostly on the commercial market, but the company will unveil
new consumer notebooks for the retail market fairly soon, an HP spokeswoman said.
18
- 60 -
Fiorina out, HP stock soars
CEO who engineered Compaq merger leaving after fight with board;
will walk away with $21 million
February 10, 2005: 9:15 AM EST
By Paul R. La Monica, CNN/Money senior writer
NEW YORK (CNN/Money) - Hewlett-Packard Co. Chairman and CEO Carly
Fiorina, one of the most powerful women in corporate America, is leaving the
troubled computer maker after being forced out by the company's board.
Shares of HP jumped 6.9 percent in heavy trading on the New York Stock Exchange
Wednesday on the news. But at one point, the stock was up as much as 10.5 percent.
"The stock is up a bit on the fact that nobody liked Carly's leadership all that much,"
said Robert Cihra, an analyst with Fulcrum Global Partners. "The Street had lost all
faith in her and the market's hope is that anyone will be better."
Fiorina, the only female CEO at a company in the Dow Jones industrial average, had
been with HP since 1999. But the company's controversial deal to buy Compaq in the
spring of 2002 -- after a bruising proxy fight led by one of the Hewlett family heirs -has not produced the shareholder returns or profits she had promised.
"While I regret the board and I have differences about how to execute HP's strategy, I
respect their decision," Fiorina said in a statement released by the company.
On a conference call with reporters, executives said Fiorina was not terminated for
cause and that she would receive severance pay -- and a company spokesman said
she'll get a payout of approximately $21 million, including stock options (see
correction).
Fiorina told analysts in December that Hewlett Packard had seriously considered
breaking up the company on three separate occasions but each time decided against it.
Some industry analysts had argued HP should either split off its lucrative printer and
imaging business, or break HP into separate firms, with one focusing on consumers
and the other on corporations.
But during a conference call Wednesday morning, HP CFO Robert Wayman, who
was named interim CEO, suggested that no major changes in strategy would take
place following Fiorina's departure.
- 61 -
"We continue to believe we have the right ingredients for success in the marketplace,"
Wayman said during the call with Wall Street analysts.
HP stock has been a laggard compared to the shares of rivals such as Dell and IBM).
Shares were trading at only about 13 times 2005 earnings estimates before the
announcement, while shares of IBM and Dell traded at 17 times and 26 times
forecasts for the current year.
And even after factoring HP's big move Wednesday, the stock was still trading at
around the same price it was at when the company announced its merger with
Compaq in September 2001.
The legendary Palo Alto, Calif.-based company has struggled to generate profits in
the cutthroat hardware business, particularly in personal computers. In fact, slowing
sales and stiff competition in the PC business led IBM to announce last year that it
would sell its PC unit to China's Lenovo Group -- a deal that some lawmakers are
eyeing for what they call national security concerns.
PCs aren't the only trouble spot for HP. In the market for servers -- the computers
used to build corporate networks -- analysts say HP has been squeezed by IBM on the
high end and Dell on the low end.
The troubles at HP were among the factors that prompted Fortune to demote Fiorina
to No. 2 on its list of most powerful women in business, behind eBay CEO Meg
Whitman. Fiorina had been No 1 since the list was created in 1998.
Fortune also has a cover story in the current issue entitled, "Why Carly's big bet is
failing" with the tag line: "Buying Compaq hasn't paid off for HP's investors. And
there's no easy way out."
In its statement, the board said it will start hunting for a new CEO immediately, and
that Wayman will remain as CFO. Patricia Dunn, an HP director since 1998, was
named non-executive chairman.
During the conference call, Dunn said no other executive changes were planned,
adding that a recent round of negative press had no impact on the board's decision.
HP also said it will report results as scheduled after the market close on Feb. 16.
It said it expects results to be in line with the consensus of analyst expectations, after
excluding special items. Analysts expect HP to report a profit of 37 cents a share on
that basis, up 5 percent from a year ago, on sales of $20.9 billion, up 7 percent.
- 62 -
But Dell, by way of comparison, is expected to report an 18 percent increase in sales
and 25 percent jump in profits when it reports its fiscal fourth-quarter results after the
closing bell Thursday.
So what's next?
Although Dunn and Wayman both said during Wednesday's call that no major
strategic changes were coming, investors were still hoping that a new CEO might be
in favor of a split-up.
"Hewlett's news will certainly help HP's stock, the technology sector and the overall
market," said Timothy Ghriskey, stock market strategist and president of Ghriskey
Capital Partners. "There's been speculation that it could also be the prelude to the
breakup of the company into two or more pieces."
But what ultimately happens to HP will largely depend on who the next CEO is.
Dunn and Wayman did not rule out promoting someone from within the company. If
that were the case, the most likely candidate would be Vyomesh ("VJ") Joshi. He had
been the widely respected head of HP's printing and imaging division and was
recently put in charge of a new unit that combines the printing and PC businesses.
During the call, one analyst asked Wayman whether the company was concerned
about Joshi leaving if he were not named the new CEO. Wayman would not
comment.
But Fulcrum's Cihra said investors appeared to be banking on HP hiring some fresh
blood to shake up the company, regardless of what Dunn and Wayman said.
"Saying they will stick with the current strategy is all the board can say," Cihra said.
"I wouldn't expect Wayman to change strategy as an interim CEO. The board isn't
likely to make any hard determinations until they get a new CEO."
Michael Mahoney, managing director with EGM Capital, a San Francisco-based
hedge fund that has no position in HP, said one long shot possibility would be for HP
to bring back former Compaq head Michael Capellas, now the CEO of long-distance
telecom firm MCI.
MCI has been rumored to be a takeover target of Baby Bells Qwest and Verizon, so
Capellas could very well need another job soon. However, Mahoney said that
Capellas would only be the right person for the job if HP's board decides that drastic
action is needed.
- 63 -
"If the goal was to sell the business, Capellas could be an interesting pick," said
Mahoney. "But HP has a dilemma. Do you shrink the company and change it or
emphasize the core roots?"
Influential tech analyst Steven Milunovich of Merrill Lynch also endorsed Capellas,
writing in a research report Wednesday that Capellas was his first choice for the job.
Milunovich added though that it would be important for HP to hold on to Joshi.
Correction: An earlier version of this story quoted a company spokesman incorrectly
stating that Fiorina's $21 million payout does not include stock options. CNN/Money
regrets the error.
19
The Bank of Sweden Prize in Economic Sciences in
Memory of Alfred Nobel 2003
– Information for the Public
Statistical Methods for Economic Time Series
When estimating relationships, making forecasts and testing hypotheses from
economic theory, researchers frequently use data in the form of time series –
chronological sequences of observations – to study macroeconomic variables.
Consumption in an economy may thus depend on total labor income and wealth, real
interest rates, the age distribution of the population, etc. The simplest conceivable
textbook example of such a relationship is a static, linear expression with only two
variables:
According to this equation, the variable t (for instance, consumption in quarter t)
depends on the variable xt (for instance, income during the same period). The last,
random-error, term et denotes the variation in t which cannot be explained by the
model. By means of time series for the variables t and xt, the parameters
can be estimated using statistical methods (known as regression analysis). Valid
conclusions presuppose that the methods are well adapted to the specific properties of
the time series. This year’s laureates have developed methods that capture two key
properties of many economic time series: nonstationarity and time-varying volatility.
- 64 -
Nonstationarity, Common Trends and Cointegration
Many macroeconomic time series are nonstationary: a variable, such as GDP, thus
follows a long-run trend, where temporary disturbances affect its long-term level. In
contrast to stationary time series, nonstationary series do not exhibit any clear-cut
tendency to return to a constant value or a given trend. Figure 1 shows two examples
of such time series. The jagged curve, with large short-run variations, represents the
exchange rate between the Japanese yen and the U.S. dollar for each month since
1970. The smoother curve shows the consumer price level in Japan in relation to that
in the U.S. during the same period.
Figure 1: Logarithm of the Japanese yen/U.S. dollar exchange-rate
index and the logarithm of the quotient between the consumer price
index for Japan and the consumer price index for the U.S.; monthly
observations, January 1970–May 2003.
Statistical Pitfalls
For a long time, despite the fact that macroeconomic time series are often
nonstationary, researchers only had access to standard methods developed for
stationary data. In 1974, Clive Granger (and his colleague Paul Newbold)
demonstrated that estimates of relationships between nonstationary variables could
yield nonsensical results by erroneously indicating significant relationships between
wholly unrelated variables. (In the above equation, the problem arises if the random
error et is nonstationary. A standard test may then indicate that
even though the true value is 0.)
Statistical pitfalls can also give rise to misleading results in cases where a relationship
does in fact exist. In particular, it may be difficult to distinguish between temporary
and permanent relationships among nonstationary time series. For example, economic
theory postulates that, in the long run, a stronger exchange rate should be associated
with relatively slower price increases, because prices expressed in a common currency
- 65 -
cannot deviate too much from one another. Such a tendency is also revealed in Figure
1, where the yen became stronger against the dollar over the period, while the price
level in the U.S. rose in relation to the Japanese price level. In the short run, however,
expectations and capital movements have such a pervasive effect on the exchange rate
that standard methods may be inadequate for precise estimation of the long-run
relationship.
A common approach to dealing with the problem of nonstationary data had been to
specify statistical models as relationships between differences, i.e., rates of increase.
Instead of using the exchange rate and the relative price level, one would estimate the
relationship between currency depreciation and relative inflation. If the rates of
increase are indeed stationary, traditional methods provide valid results. But even if a
statistical model based solely on difference terms can capture the short-run dynamics
in a process, it has less to say about the long-run covariation of the variables. This is
unfortunate because economic theory is often formulated in terms of levels and not
differences.
Owing to the properties of nonstationary data, it therefore became a challenge to find
methods which could trace the potential long-run relationships concealed by the noise
of short-run fluctuations. The work of Clive Granger has generated such a
methodology for statistical analysis.
Granger's Contribution
In research published during the 1980s, Granger developed concepts and analytical
methods that combine short-run and long-run perspectives. The key to these methods,
and to valid statistical inference, is his discovery that a specific combination of two
(or more) nonstationary series may be stationary. Economic theory often makes
exactly such predictions: if there is an equilibrium relationship between two economic
variables, they may deviate from the equilibrium in the short run, but will adjust
towards the equilibrium in the longer run. For example, conventional theory predicts a
long-term equilibrium exchange rate, where price levels expressed in a common
currency are on parity with each other. Granger minted the term cointegration for a
stationary combination of nonstationary variables.
Granger also demonstrated that the joint dynamics among cointegrated variables may
be expressed in a so-called error-correction model. Such a model is not only
statistically sound, but can also be given a meaningful economic interpretation. For
example, the dynamics in exchange rates and prices are driven by two simultaneous
forces: a tendency to smooth out deviations from the long-run equilibrium exchange
rate, and short-run fluctuations around the adjustment path towards this long-run
equilibrium.
The concept of cointegration would not have become useful in practice without
powerful statistical methods for estimation and testing of hypotheses. Clive Granger
- 66 -
and Robert Engle introduced such methods in a remarkably influential article
published in 1987. Here, they present a test of the hypothesis that a number of
nonstationary variables are not cointegrated, as well as a two-step method for
estimating the error-correction model. Improved methods, which have now become
standard, were later developed by Søren Johansen.
In subsequent work and in collaboration with other researchers, Granger has extended
cointegration analysis in several respects, including the ability to handle series with
seasonal patterns (seasonal cointegration) and series where adjustment towards
equilibrium does not occur until the deviation exceeds a critical value (threshold
cointegration).
Applications
Clive Granger’s work has transformed the way economists deal with time-series data.
Today, tests of stationarity and cointegration are carried out routinely as a
stepping-stone to the specification of dynamic econometric models. Cointegration
analysis has turned out to be particularly valuable in systems where short-term
dynamics are affected by large random disturbances, while long-term variations are
simultaneously constrained by economic equilibrium relationships. An example is the
relation between exchange rates and price levels. Other examples include the relation
between consumption and wealth (which have to be consistent with one another in the
long run, although consumption is much smoother than wealth in the short run),
dividends and stock prices (where stock prices follow the development of dividends in
the long run, but exhibit substantially larger fluctuations in the short run) and interest
rates of different maturities (where long and short rates are linked together by
expectations regarding future short rates, even if they move in different directions in
the short run).
Time-Varying Volatility and Arch
Risk evaluation is at the core of activities on financial markets. Investors assess
expected returns of an asset against its risk. Banks and other financial institutions
would like to ensure that the value of their assets does not fall below some minimum
level that would expose the bank to insolvency. Such evaluations cannot be made
without measuring the volatility of asset returns. Robert Engle developed improved
methods for carrying out these kinds of evaluations.
Figure 2 shows the returns on an investment in the NYSE stock index (the Standard
& Poor 500) for all stock-market days between May 1995 and April 2003. The returns
averaged 5.3 percent per year. At the same time there were days, when the
fluctuations in prices were greater (plus or minus) than 5 percent. The standard
deviation* in daily returns measured over the entire period was 1.2 percent. Closer
inspection reveals, however, that the volatility varies over time: large changes
(upwards or downwards) are often followed by further large fluctuations, and small
- 67 -
changes tend to be followed by small fluctuations. This is clearly illustrated in Figure
3, which shows how the standard deviation, measured over the last four weeks, moved
over time. Evidently, the standard deviation varied considerably, from approximately
0.5 percent during calm periods to nearly 3 percent during more turbulent episodes.
Many financial time series are characterized by similar time variation in volatility.
Figure 2: Percentage daily returns on an investment in the Standard &
Poor 500 stock index, May 16, 1995–April 29, 2003.
Figure 3: Standard deviation for percentage daily returns on an
investment in the Standard & Poor 500 stock index, May 16,
1995–April 29, 2003, computed from data for the four preceding
weeks.
Engle’s Contribution
Figure 3 shows backward-looking calculations of time-varying volatility. But
investors and financial institutions need forward-looking evaluations – forecasts – of
volatility during the next day, week and year. In an outstanding article in 1982, Robert
Engle formulated a model which allows such evaluations.
Statistical models of asset returns can only explain a fraction of the variation from one
day to the next. Most of the volatility is thus embedded in the random error term (et in
the introductory equation) – or, in other words, in the model’s forecasting error. In
- 68 -
standard statistical models, the expected variance of the random error is assumed to be
constant over time. Obviously, this is far from capturing the large variations in asset
returns depicted in Figure 3.
Engle assumed instead that the variance of the random error in a certain statistical
model, in a certain time period, systematically depends on previously realized random
errors, so that large (small) errors tend to be followed by large (small) errors. In
technical terms, the random variable displays autoregressive conditional
heteroskedasticity. His approach has therefore become acronymized ARCH. In our
example, the model now contains not only a forecasting equation for asset returns, but
also a number of parameters showing how the variance of the random error in this
equation depends on forecasting errors in earlier periods. Engle demonstrated how
ARCH models could be estimated and introduced a practical test for the hypothesis
that the conditional variance of the random error is constant.
In subsequent work and in collaboration with students and colleagues, Engle
developed this concept in several different directions. The best-known extension is the
generalized ARCH model (GARCH) developed by Tim Bollerslev in 1986. Here, the
variance of the random error in a certain period depends not only on previous errors,
but also on the variance itself in earlier periods. This development has turned out to be
very useful; GARCH is the model most often applied today.
Applications
In his first article on ARCH, Engle used his model of time-varying volatility to study
inflation. Not before long, however, it became clear that the most important
applications were to be found in the financial sector, where activities aim at handling
and pricing different types of risk. Price-setting models thus represent the relation
between prices of securities and volatility: the expected returns on specific shares
depend on the covariance between the return on the share and the market portfolio
(according to the CAPM developed by Sharpe, Economics Laureate in 1990), option
prices depend on the variance in the return on the underlying asset (according to the
Black-Scholes formula, awarded the Economics Prize in 1997 to Merton and Scholes),
etc.
In joint work with other researchers, Engle has captured these relationships by
developing models (GARCH-M) where expected returns depend on time-varying
variances and covariances, thereby becoming time-varying themselves.
What are the practical implications of time-varying volatility? If a GARCH model is
applied to the stock returns in Figure 2, conditional volatility, expressed as a standard
deviation, fluctuates between 0.5 and 3 percent during the period in question. If an
investor has a portfolio corresponding to the Standard & Poor 500, how much capital
would she risk losing the next day? Given a forecasted standard deviation of 0.5
percent, her loss – with 99 percent probability – would not exceed 1.2 percent of the
- 69 -
value of the portfolio. If the forecasted standard deviation were 3 percent, the
corresponding capital loss would be as high as 6.7 percent. Similar calculations of
value at risk are crucial in modern risk analysis when banks and other institutions
compute the market risk in their securities portfolios. Since 1996, an international
agreement (the so-called Basle rules) also prescribes the use of value at risk in the
control of banks’ capital requirements. Through its use in these and other contexts, the
ARCH frame-work is an indispensable tool for risk assessment in the financial sector.
* The standard deviation is defined as the square root of the variance, which gives the
average squared deviation from the mean value of a series. The variance for T
observations of a variable xt with mean value
can thus be computed as
The Laureates
Robert F. Engle:
American citizen. Born in 1942, in Syracuse, NY, USA. Ph.D. from Cornell
University in 1969; Michael Armellino Professor of Management of Financial
Services at New York University, NY, USA.
Clive W. J. Granger:
British citizen. Born 1934, in Swansea, Wales. Ph.D. from University of Nottingham in 1959;
emeritus Professor of Economics at University of California at San Diego, USA.
20
Europe Parliament Throws Out Patent Bill
Thu Feb 17,11:20 AM ET – Yahoo – Business-AP
BRUSSELS, Belgium - The European Parliament on Thursday threw out a bill
backed by big high-tech companies that would have allowed software that is part of a
mechanical device — such as a mobile phone — to be patented.
Heads of political factions in the European Union's assembly agreed unanimously to
send the proposal back to the EU's head office. The move was expected to delay the
- 70 -
passage of the bill by several months at least and could see it substantially redrafted or
scrapped.
The decision sparked concern from one industry group who argued that patent
protection would spur innovation in Europe.
"Where intellectual property can be adequately protected, European creators can
prosper," said Hugo Lueders, director for public policy in Europe of CompTIA, an
umbrella organization for technology companies.
"The benefits of the agreement have been obscured by special interests, working to
muddy the waters," he claimed.
Debate over the bill has divided those who say patents are needed to reward
companies for innovation and opponents who argue that would stifle innovation by
shutting out smaller companies from open-source software.
Supporters of the bill said it struck a compromise harmonizing national patent laws on
so-called "computer-implemented inventions," within Europe, while stopping short of
the U.S. system that allows patenting of business methods or computer programs such
as Amazon.com Inc.'s "one-click" shopping technique.
Thursday's decision means the EU's executive arm, the European Commission, will
now have to decide whether to resubmit the software directive, which must be
approved by both the parliament and the 25 EU governments.
Opponents called for the bill to be scrapped. "Software is very well protected already
by the existing copyright system," said the parliament's United Left group. "Software
patents lead to the creation of excessive monopolies."
21
Poland's Stand Against European Patents Was
Heroic
Mon Feb 14, 2005, 6:35 AM ET
Jim Rapoza - eWEEK
During the presidential debates last year, late-night comedians got a lot of mileage out
of President Bush's many references to another country involved in the coalition in
- 71 -
Iraq: Poland. Poland's military contributions may or may not be funny, but the country
has become one of my heroes—although not for anything it's done in Iraq.
No, the reason I want to cheer and thank Poland is because of its efforts in the war
against software patents.
For the past few years, there has been a concerted effort in the industry to put
U.S.-style software patents in place in the European Union. These efforts met several
legislative defeats early, which was only logical: I can't see how any European
executive, software vendor or legislator would look at U.S. software patents and think,
"Hey, that system is working great! Let's do the same thing here!"
However, the forces behind the push for European patents include some of the biggest
software vendors in the United States, which are clearly operating under the theory of,
"If I have to work with a dumb system, then everyone has to work with a dumb
system." After some early defeats, these forces leveraged their supporters in the
European government to attempt to get software patents passed through backdoor
committee and bureaucratic methods.
When these runarounds were attempted, it was often Poland that stood in the way and
said "no thanks" to software patents. (Clearly, Poland didn't see the benefit of having
small European developers crushed under a wave of questionable patents from U.S.
companies.)
Poland delayed the process enough that software patent opponents could lobby their
representatives to vote against software patents. This finally culminated in an early
February decision by the Legal Affairs Committee of the European Parliament to
essentially scrap the current software patents directive and start from scratch.
This doesn't mean that software patents are dead in Europe—the pro-patent groups
will re-marshal their forces. But it could be years before they get as close to success
as they were.
All of us in the software community should take advantage of this window of
opportunity, however small, to figure a way out of this software patent morass.
I mean, outside of those questionable companies whose only profits come from their
patent portfolios, have software companies really benefited from software patents? I
think very few on the software and development side of these companies would say
yes.
Whenever I write an anti-patent column, someone inevitably responds that patents are
there to help the little guys innovate. But, honestly, Little Developer, do you think
your one or two patents would help you if you had to go toe-to-toe with the likes of
IBM, Microsoft or Oracle? Do you want to bet that they don't have a patent in their
massive arsenal that they could use against you?
Personally, I would like to just see software patents go away. Remember, software
patents were very rare before the United States Patent and Trademark Office
liberalized the rules for software in 1996.
- 72 -
I'm not sure how the pre- and post-patent dollar amounts compare, but it sure felt
more prosperous and innovative when there were no software patents around to
muddy the development waters. New types of software were regularly created, lots of
money was made and intellectual property was effectively protected using standard
copyright laws.
I know that my desire to do away with software patents is most likely a pipe dream,
but it is clearly the fastest way to implement the level playing field that many
companies seem to want.
However, I do hope that U.S. politicians will take a look at what's happening in
Europe and see enough incentive to take concrete steps toward fixing some of the
worst patent abuses and problems—steps such as getting rid of business process
patents (goodbye, one-click) or requiring actual working programs rather than broad
ideas to patent.
I won't hold my breath, but I'm a lot more hopeful than I was a few months ago. And
now, in honor of my hero, I'm off to have a few pirogies and a bottle of Zywiec beer.
22
EU Court Rules Against Antitrust Office
Tue Feb 15, 9:46 AM ET
By RAF CASERT, Associated Press Writer
LUXEMBOURG - The European Union's highest court dismissed an appeal Tuesday
by the EU's antitrust office and confirmed the validity a merger between packaging
giants Tetra Laval and Sidel — a decision expected to limit the clout of the bloc's
trustbusters.
In ruling on the deal, which the EU antitrust office had barred before it was
overturned in court, the European Court of Justice said the EU head office had no
reason to question the decision of the appeals Court of First Instance.
In a stinging rebuke of the EU's antitrust methods at the time, the European Court of
Justice said the appeals court had "properly explained why evidence submitted in
support of the Commission's arguments was insufficient, incomplete, insignificant,
inconsistent and therefore inaccurate."
The European Commission said it would learn from the latest setback.
- 73 -
"We will study it carefully and draw any lessons that need to be learned from it in
terms of future application of the competition rules in general and the merger
regulations in particular," said EU Commission spokesman Jonathan Todd.
He added, however, that the EU head office had already changed its methods after the
first setback from the Court of First Instance but would see if more changes needed to
be made.
The EU's executive Commission blocked the merger four years ago because it argued
the deal would stifle competition in the liquid food packaging market.
Swiss carton packaging company Tetra Laval was elated the merger was finally
beyond legal doubt and challenges from the antitrust office. "It seems to us to be a
clear decision. We are of course happy that this matter, which has been ongoing since
2001, has finally come to an end," spokesman Joergen Haglind said.
The EU has reviewed many important deals in the last five years, including General
Electric Co.'s takeover of Honeywell International in 2001 and last year's antitrust
ruling against Microsoft Corp., which it ordered to pay a record fine and remove its
media player from its Windows platform.
23
Stocks Rise; Industrial, Chips Rally
Thu Feb 24, 2005, 6:00 PM ET – Yahoo – Business-Reuters
By Mark McSherry
NEW YORK (Reuters) - U.S. stocks rose on Thursday with energy companies getting
a lift from a four-month high in crude oil prices, while market talk of an imminent
broker upgrade for the semiconductor sector boosted tech shares.
Crude stayed firmly above $51 a barrel, fueling shares of oil majors ExxonMobil
Corp. (NYSE:XOM), ConocoPhillips (NYSE:COP) and ChevronTexaco Corp.
(NYSE:CVX).
The Philadelphia Stock Exchange semiconductor (^SOXX) index rose about 2.4
percent. Nasdaq was helped as the world's biggest semiconductor maker Intel Corp.
(Nasdaq:INTC) climbed 1.7 percent to $23.70 and cell phone chip-maker Qualcomm
Inc. (Nasdaq:QCOM) jumped 4 percent to $35.51.
- 74 -
Industrial stocks also gained after mining equipment maker Joy Global Inc.
(Nasdaq:JOYG) posted better-than-expected first-quarter earnings and lifted its 2005
earnings outlook.
Joy Global rose 18.4 percent to $35 and Caterpillar Inc. (NYSE:CAT) was the biggest
gainer on the blue-chip Dow, rising 3 percent to $93.16.
The Dow Jones industrial average (^DJI) closed up 75 points, or 0.70 percent, at
10,748.79. The Standard & Poor's 500 Index (^SPX) was up 9.40 points, or 0.79
percent, at 1,200.20. The technology-laced Nasdaq Composite Index (^IXIC) rose
20.45 points, or 1.01 percent, to 2,051.70.
Oil prices rose on expectations of continuing cold weather in the United States. U.S.
crude oil futures ended higher despite the latest government data showing stocks rose
last week.
Crude for April delivery traded up 22 cents at $51.39 a barrel after soaring to $52.05,
the highest level since the Nov. 1 peak of $52.50.
Some traders said markets were relieved oil prices did not go even higher. Rising oil
prices lift shares of energy companies but also raise concerns that higher energy costs
will pinch most companies' profits and curb consumer spending.
"I think you are seeing a little bit of a relief rally," said Jim Fehrenbach, head of
Nasdaq trading at Piper Jaffray, Minneapolis.
Exxon rose 2.9 percent to $61.13. ConocoPhillips edged up $2.98, or 2.8 percent, to
$110.18 and ChevronTexaco gained $1 to end at $61.16.
Fehrenbach and other investors said market rumors of an imminent broker upgrade for
semiconductor stocks helped technology shares rally.
Trading in stocks was active, with 1.51 billion shares changing hands on the New
York Stock Exchange, above last year's daily average of 1.46 billion. About 2.03
billion shares were traded on Nasdaq, above last year's 1.81 billion daily average.
Advancers outnumbered decliners by about 2-to-1 on the NYSE and by about
19-to-12 on Nasdaq.
Search engine companies Google Inc. (Nasdaq:GOOG) and Yahoo Inc.
(Nasdaq:YHOO) fell after RBC Capital Markets reduced its ratings on the companies.
Google fell 2.6 percent to $188.89 and Yahoo slipped 2 percent to $31.48.
Michael Bee, lead equity strategist for Boyd Watterson Asset Management LLC, said,
"These companies are selling at lofty valuations and from a fundamental approach
seem to be overpriced and will continue to be volatile stocks."
- 75 -
Media conglomerate Viacom Inc. (NYSE:VIAB) fell 2 percent to $35 after it posted a
huge loss on $18 billion in asset write-downs. The results before the charges exceeded
Wall Street estimates but the company offered a cautious outlook.
In after-hours trading, shares of MCI Inc. (Nasdaq:MCIP) slid 1.5 percent to $22.85
from their $23.21 close on Nasdaq after Qwest Communications International Inc.
(NYSE:Q) said it offered a revised bid for MCI. Qwest fell a penny to $4.19 on the
Inet electronic brokerage system.
Qwest, the fourth-largest U.S. local telephone company, said it would modify its $8
billion bid to buy long-distance telephone company MCI to add protection for MCI
shareholders should the price of Qwest's shares decline.
Gap Inc. (NYSE:GPS) jumped nearly 5 percent after the closing bell as the company
said its preliminary fourth-quarter earnings rose, bolstered by higher sales at its
Banana Republic chain. Gap shares rose to $22.29 on Inet from their $21.28 close on
the NYSE.
Meanwhile, H&R Block Inc. (NYSE:HRB), the world's largest tax preparer, surged
6.5 percent to $50.10 on Inet from its close of $47.04 on the NYSE. The company
said on Thursday quarterly profit fell, but earnings were ahead of expectations.
In economic news, the number of new claims for U.S. jobless benefits climbed more
than expected to 312,000 last week, government data showed.
In another report, new orders for long-lasting manufactured goods fell 0.9 percent last
month as demand for autos and civilian aircraft fell, but businesses boosted orders for
capital goods, the government said.
24
GM to face tough questions at annual meeting
Automaker's share price has fallen to lowest price in over 10 years
The Associated Press
Updated: 8:09 p.m. ET June 5, 2005
DETROIT - General Motors Corp. investors have seen their shares tumble this year to
the lowest price in more than a decade as the company’s U.S. market share for vehicle
shares slumped from 27 percent to 25.4 percent.
- 76 -
They’ve also had to watch GM’s bond rating cut to “junk” status by two ratings firms
as its losses topped $1 billion in the first quarter and a sales slump for profitable
SUVs darkened the carmaker’s prospects for the remainder of the year.
What shareholders haven’t seen — or heard — is a comprehensive plan to turn around
the company’s fortunes. And that’s certainly what they hope to get Tuesday at GM’s
annual shareholder meeting in Wilmington, Del.
“Shareholders are feisty, and they own the company,” said David Cole, chairman of
the Center for Automotive Research in Ann Arbor, Mich. “They’ve got some very
tough questions.”
The normally sleepy meeting could be heated this year, especially after billionaire
investor Kirk Kerkorian shook things up by promising to increase his stake in the
world’s largest automaker. Kerkorian’s tender offer to purchase 28 million GM shares
— which would increase his stake from 4 percent to nearly 9 percent — expires
Tuesday.
So far, GM’s board has remained neutral on the proposal, but only because Kerkorian
has assured GM he doesn’t intend to acquire or influence control over the company.
But Kerkorian, who tried to take over Chrysler Corp. in the mid-1990s, isn’t known as
a passive investor.
Cole expects the meeting to produce few specifics on a potential restructuring, in part
because it will depend heavily on ongoing talks with the United Auto Workers union.
So far, the UAW has indicated it won’t reopen its contract, which expires in 2007, and
agree to pick up a larger share of soaring health care costs. Cole said some sort of deal
with the UAW that includes plant closings or other changes could be announced later
this summer.
Cole does expect GM’s board to express its confidence in Chairman and Chief
Executive Rick Wagoner, who took over day-to-day responsibility for the
automaker’s North American operations in April.
“The board has complete faith in the management team to execute a turnaround, and
this is where they will be more explicit in saying that,” he said.
Wagoner and others say the company’s turnaround will start with good products and
include better pricing and marketing strategies, aggressive cost-cutting, a pared-down
lineup of vehicles and possibly new agreements with the UAW.
“Believe me, GM has a crystal clear strategy in place to turn around our fortunes,
particularly in the U.S.,” GM vice chairman Bob Lutz wrote last month in his
FastLane blog.
- 77 -
But so far, some of the company’s programs have raised eyebrows. Analysts were
puzzled last week when GM announced it will offer employee discounts to any
consumer who buys a new GM vehicle through July 5.
“GM has had the tendency for the past several months to devise big-splash marketing
programs that ultimately prove to be less generous than expected, and thus do not
have the desired effect on consumers,” Credit Suisse First Boston analyst Chris
Ceraso said in a research note. Even if the new promotion is successful, Ceraso said,
GM could suffer from lower sales when the discount ends.
Others say GM’s management has shown it doesn’t understand the company’s
fundamental problems.
“I think they’re going to tell shareholders they’re restructuring, right-sizing and
making it competitive. But I think in reality they don’t have answers,” said Peter
Morici, an economist and professor at the University of Maryland.
Morici said GM needs to explain to shareholders what percentage of the market it can
reasonably sustain and then say how it will align its production and brands to meet
that need. GM also needs to cut its bureaucracy and its salaries, from the executive
level down to hourly workers, he said.
Morici said Kerkorian’s increased stake could force the company to consider more
drastic measures, such as selling off General Motors Acceptance Corp., its profitable
finance unit, and reorganizing the rest of the company under Chapter 11 protection.
GM’s consolidated debt as of March 31 was $291.8 billion, according to Standard &
Poor’s Ratings Services. The company had nearly $20 billion in cash at the end of the
first quarter, and GMAC had another $18.5 billion.
“With their overhead and legacy costs, it is virtually impossible for the company to
survive three to four more years,” Morici said.
25
Sources: Apple to switch to Intel chips
Snub to IBM ends stormy Silicon Valley relationship
The Associated Press
Updated: 5:55 p.m. ET June 5, 2005
- 78 -
SAN FRANCISCO - A stormy, decade-long relationship between Apple Computer
Inc. and IBM is over, according to published reports.
Apple CEO Steve Jobs is expected to announce Monday morning at the company’s
software developers conference in San Francisco that Apple will discontinue using
microprocessor chips made by IBM in favor of Intel chips, according to CNET
Networks Inc.’s News.com and The Wall Street Journal.
Officials from Apple, Intel Corp. and International Business Machines Corp. could
not be reached Sunday to confirm the report.
For years, rumors of Apple’s wish to jump to Intel have been circulating. But two
weeks ago, analysts were skeptical when The Wall Street Journal reported that Intel
and Apple were in negotiations.
One reason for the skepticism is that the move represents a significant risk for
Cupertino, Calif.-based Apple.
Switching to Intel’s x86 chips would force Apple’s programmers to rewrite its
software in order to adapt to the new processor.
Doubts about Apple's move
“I don’t know that Apple’s market share can survive another architecture shift,”
Insight 64 analyst Nathan Brookwood told News.com. “Every time they do this, they
lose more customers.”
News.com reported that Apple would begin the transition to Intel with its lower-end
computers, such as the Mac Mini, in mid-2006 and higher-end models a year later.
Apple’s break with IBM stemmed from Jobs’ wish that IBM make a larger variety of
the PowerPC processors used in Macintosh systems. IBM balked because of concerns
over the profitability of a low-volume business, News.com reported.
By wrestling away Apple’s business from IBM, Intel tightens its stranglehold on the
PC processor business. The company holds more than an 80 percent share of the
market.
Although IBM suffers a setback with the loss of Apple, the company is expected to
reap a financial windfall after signing up Microsoft, Nintendo and Sony Corp. to use
PowerPC technology in future video-game machines.
26
Fresh Ideas
- 79 -
In this hypercompetitive economy, the old rules for managing just
don't cut it. What counts now is innovative thinking—at a time when
bosses are being critiqued more than ever before
By Daniel McGinn
Newsweek
June 13 issue - There was a time when a business leader was someone straight from
Central Casting. They were the suit-clad CEOs of the alphabet-soup companies—GM,
GE, IBM, AT&T—at the pinnacle of American business. Times change. The men and
(occasionally, at least) women who now lead the biggest U.S. corporations still matter,
and size still matters as well: business will always be a game in which the score is
kept in dollars.
But ideas matter, too. So in this installment of NEWSWEEK's series on
21st-Century Leadership, we're highlighting men and women whose influence isn't
measured by old-fashioned indicators like the number of employees they manage or
the board seats they hold. Instead, these New Thinkers are leading industries in whole
new directions. In the profiles that follow you'll meet an executive who's convincing
customers who love $4 cups of Starbucks coffee that they should also turn to the
chain to buy music. Another is proving that nowadays some of the best
advertisements won't appear on television during the Super Bowl—they'll air on your
computer screen. The most famous of these New Thinkers have already created iconic
New Economy businesses—eBay and AOL—and now they've begun innovative
second acts.
If you suspect their jobs are more fun than those of traditional big-company bosses,
you're probably correct. This has been a tough year for leaders of all stripes,
especially recently dethroned CEOs like HP's Carly Fiorina or Merck's Raymond
Gilmartin. In the United States, 441 chief executives left their jobs during the first
four months, according to Challenger, Gray & Christmas, a pace that's 88 percent
ahead of last year. The rising rate of executive turnover has led to talk of a "leadership
crisis" as boards struggle to fill what were once considered plum jobs. Doesn't
anybody want to be CEO of Boeing?
These New Thinkers are part of the first generation raised in an era in which
leadership has been taught as an academic discipline. From executive coaches to
M.B.A. courses to acres of shelves in libraries, there's nearly as much advice today on
how to improve your leadership skills as your sex life. But all this advice raises a
question: has the burgeoning be-a-better-boss industry actually produced ... better
leaders?
- 80 -
The answer is yes, to a degree. First, the increased attention on bosses' people skills
has led to less tolerance (by boards, shareholders and employees) for bad leadership
than in the past. Second, managers are proving more able to jump between industries
today, says recruiter Gerard Roche of Heidrick & Struggles, who's brought industry
outsiders in as CEOs at Home Depot and 3M in recent years. Another factor: while in
the past aspiring leaders mostly tried to emulate good managers, today there's
newfound interest in learning from managerial train wrecks, like Howell Raines at
The New York Times. And as power has flowed downward in organizations—driven
not just by benevolent bosses, but also by technology like blogs that make
organizations more transparent—the pressure on leaders to act appropriately will only
grow. "This will keep leaders more in line in the future—we're simply watching them
too closely now," says Barbara Kellerman, a Harvard professor and author of "Bad
Leadership: What It Is, How It Happens, Why It Matters."
Among younger workers, there's also more recognition that leadership isn't simply
a function of job title. When Warren Bennis, an 80-year-old professor who's been
exploring leadership with students at MIT, Harvard and USC since the 1950s, asks
today's young people to name the leaders they admire, they list people like Steve Jobs,
Oprah Winfrey and the founders of Google—rarely does a Fortune 500 boss show up
(and politicians are even rarer). People in their 20s and 30s were raised in a time of
wider options, he writes in "Geeks & Geezers," a study of generational leadership
styles. Many realize that today the best way to become a leader isn't to spend 20 years
slogging upward at a corporate behemoth—it's to strike out and start your own gig,
which you'll lead from day one.
You can make an argument that society's focus on leadership is over-blown: in truth,
no matter how ambitious we are, most of us spend more of our lives as followers than
leaders. But as business gets more complicated and workdays grow ever longer,
bosses will have little choice but to delegate more and micromanage less. In today's
world, like it or not, you may be a leader sooner than you expect.
© 2005 Newsweek, Inc.
27
A New Vision for Business Leaders
A prominent executive argues for more statesmanship from our
CEOs
By Peter G. Peterson
- 81 -
Newsweek
June 13 issue - In recent years, a number of journalists have asked me the same
daunting question: Where have all the corporate statesmen gone? Tom Friedman, The
New York Times columnist, recently referred to us as MIAs (Missing in Action).
They wonder why, for example, so few in the business community speak out about
our soaring budget deficits, our unprecedented trade and current account deficits, our
plunging savings rates, and our dysfunctional dependence on foreign capital. Other
public-policy leaders certainly have made clear their sense of urgency. Former
Federal Reserve chairman Paul Volcker recently wrote, "Altogether, the
circumstances seem to be as dangerous and intractable as any I can remember, and I
can remember a long time." Bob Rubin, former Treasury secretary, speaks of "a day
of serious reckoning."
In discussions of national policy, this threat to our economy is like an elephant in
the boudoir. You need to shut your eyes not to notice it. So the question naturally
arises: Shouldn't we business leaders try to help our nation do something about it?
And if we don't do so out of genuine civic concern, shouldn't we at least do so out of
collective self-interest? That started me thinking: Was it romantic to imagine there
ever were many corporate statesmen? How many such leaders have I known about?
My memories returned to the years just after World War II. The world was
overwhelmed by colossal challenges. At home, we were managing the transition from
a wartime society—including the demobilization of 19 million soldiers—to a peaceful,
prosperous economy. Abroad, we were trying to rebuild a shattered world economy,
devoid of rules or institutions. A tiny bipartisan band of business leaders led by Paul
Hoffman of Studebaker Corporation, Bill Benton of Benton and Bowles, and Marion
Folsom of Eastman Kodak formed the Committee for Economic Development. And
then they started to change history. Recall that the 1930s had been defined by a
depression, isolationism, and beggar-thy-neighbor trade wars. In retrospect, the list of
initiatives undertaken by this hardy band is breathtaking: the Employment Act of
1946, the Bretton Woods institutions, and the Marshall Plan.
They not only formulated the policies but took the lead in selling and implementing
them. When the Marshall Plan was announced, most Americans were weary of
foreign adventures. Only 14 percent approved. Then these business leaders went to
work and recruited other CEOs, who helped lead a massive public-education effort.
Eventually, America changed its mind. Indeed, Paul Hoffman became the first
administrator of the Marshall Plan.
In my younger CEO days, I had my own satisfying experience with private-sector
leadership. Reaganomics—with all of its fiscal excesses—had been launched. As one
looked behind the rosy assumptions, it seemed obvious that we were headed in a very
non-rosy direction. In my talks with former cabinet officials, including two former
Republican Treasury secretaries, Bill Simon and John Connally, there was unanimity
- 82 -
on this point. With three Democratic Treasury secretaries, we launched the
Bi-Partisan Budget Appeal. Several hundred CEOs joined us in a major advertising
and public-relations effort. Many observers on Capitol Hill believe that we played a
significant role in moderating or reversing policies that threatened to inundate the
federal budget with red ink.
If it was possible back then to build an effective business consensus behind
strengthening our national balance sheet, why is it proving more difficult today? It's
certainly not because the problem has gone away. Indeed, as 77 million baby boomers
begin to retire in a few years, we confront mind-numbing Social Security and
Medicare deficits. Fiscal stewardship is by no means the only major national
challenge that cries out for strong private-sector leadership. There are plenty of
others—from global warming and the unaffordable cost and lamentable inefficiency
of our health-care system to the failure of many of our public schools and the
declining interest of our college-age youth in science and engineering. (Does America
believe it can lead the world into the infotech age without the "tech"?) To explain
what has happened, I only have questions, no answers. They are my hypotheses. Has
business leadership become so hypercompetitive, so global and so focused on
corporate governance that it has no time left for anything else? Have too many of us
in business forgotten that public policy is too important to be left to the politicians?
Have recent corporate scandals left CEOs feeling so morally crippled that they feel
they lack public credibility? Do executives worry that the "gotcha" media will
defame us if we stick our heads up? Is Washington so relentlessly mean, vindictive
and polarized that we fear retribution if we occupy a lonely but sensible centrist
position? Has the anonymity of the noncitizen become the best executive policy? Did
the great big party in the 1990s, when all of us were getting fat, rich and happy, leave
CEOs caring less about standards of behavior?
Do our stock markets so discount the future that we assume we are judged largely by
short-term results? And are CEOs saying to themselves, "If my tenure is only for four
or five years, let somebody else worry about our collective future"?
Some say we need to improve "the process." Alas, in my experience, leadership
springs not from organizations, but from inspired individuals. We desperately need
business leaders who have both convictions and the courage of those convictions.
Within the rising generation of CEOs, we desperately need more like Jeff Immelt of
GE. Jeff demonstrated long-term vision when he announced a GE initiative last month
called "Ecomagination," with the goal of doubling the sales of GE's eco-friendly
products by 2010. Jeff justified GE's new campaign by explaining that "green is
green" (good for the planet and good for our business). After learning about some of
America's more egregious corporate compensation policies, he acted boldly and
adopted many of the tough recommendations of the Conference Board Commission
on Public Trust and Private Enterprise. By so doing, Jeff reoriented GE's executive
- 83 -
incentives toward longer-term performance. And then he went a step further. He
announced that he would not sell a single share of GE stock until he retired. That is
leadership by example.
When Warren Buffett, the Nebraska business sage, speaks out, we listen. That's
leadership, too. In short, we need more corporate John McCains.
Quite simply, I am suggesting that we business executives need to answer some
pointed questions that our critics are already raising. Sure, we make large
contributions to our economic system. But don't we also reap large rewards from that
system? And, if we benefit so much from this democratic arrangement, don't we have
to make it more accountable, more functional, more durable and more fair?
Historically, "corporations" began as privileges extended by the crown to certain
individuals who, in return for the favor, were supposed to act as faithful servants and
defenders of the realm. Where is that sense of patriotic obligation today?
Patriotism means taking a stand and taking a chance on behalf of something bigger
than oneself—and not just saying, "I got mine." Patriotism is putting ourselves on the
line for those policies that we believe will help the long-term interests of our company,
our economy and our country. Can a successful business executive also be a business
patriot? I would still like to believe so.
Peterson, senior chairman and cofounder of the Blackstone Group, was secretary of
Commerce in the Nixon administration. He is chairman of the Council on Foreign
Relations and founding president of the Concord Coalition, an organization devoted
to fiscal responsibility. His most recent book is the best-selling "Running on Empty:
How the Democratic and Republican Parties Are Bankrupting Our Future and What
Americans Can Do About It."
© 2005 Newsweek, Inc.
28
The Pretence of Knowledge
Friedrich August von Hayek – Nobel Prize Lecture
December 11, 1974
- 84 -
The particular occasion of this lecture, combined with the chief practical problem
which economists have to face today, have made the choice of its topic almost
inevitable. On the one hand the still recent establishment of the Nobel Memorial Prize
in Economic Science marks a significant step in the process by which, in the opinion
of the general public, economics has been conceded some of the dignity and prestige
of the physical sciences. On the other hand, the economists are at this moment called
upon to say how to extricate the free world from the serious threat of accelerating
inflation which, it must be admitted, has been brought about by policies which the
majority of economists recommended and even urged governments to pursue. We
have indeed at the moment little cause for pride: as a profession we have made a mess
of things.
It seems to me that this failure of the economists to guide policy more successfully is
closely connected with their propensity to imitate as closely as possible the
procedures of the brilliantly successful physical sciences - an attempt which in our
field may lead to outright error. It is an approach which has come to be described as
the "scientistic" attitude - an attitude which, as I defined it some thirty years ago, "is
decidedly unscientific in the true sense of the word, since it involves a mechanical and
uncritical application of habits of thought to fields different from those in which they
have been formed."1 I want today to begin by explaining how some of the gravest
errors of recent economic policy are a direct consequence of this scientistic error.
The theory which has been guiding monetary and financial policy during the last
thirty years, and which I contend is largely the product of such a mistaken conception
of the proper scientific procedure, consists in the assertion that there exists a simple
positive correlation between total employment and the size of the aggregate demand
for goods and services; it leads to the belief that we can permanently assure full
employment by maintaining total money expenditure at an appropriate level. Among
the various theories advanced to account for extensive unemployment, this is probably
the only one in support of which strong quantitative evidence can be adduced. I
- 85 -
nevertheless regard it as fundamentally false, and to act upon it, as we now experience,
as very harmful.
This brings me to the crucial issue. Unlike the position that exists in the physical
sciences, in economics and other disciplines that deal with essentially complex
phenomena, the aspects of the events to be accounted for about which we can get
quantitative data are necessarily limited and may not include the important ones.
While in the physical sciences it is generally assumed, probably with good reason,
that any important factor which determines the observed events will itself be directly
observable and measurable, in the study of such complex phenomena as the market,
which depend on the actions of many individuals, all the circumstances which will
determine the outcome of a process, for reasons which I shall explain later, will hardly
ever be fully known or measurable. And while in the physical sciences the
investigator will be able to measure what, on the basis of a prima facie theory, he
thinks important, in the social sciences often that is treated as important which
happens to be accessible to measurement. This is sometimes carried to the point
where it is demanded that our theories must be formulated in such terms that they
refer only to measurable magnitudes.
It can hardly be denied that such a demand quite arbitrarily limits the facts which are
to be admitted as possible causes of the events which occur in the real world. This
view, which is often quite naively accepted as required by scientific procedure, has
some rather paradoxical consequences. We know: of course, with regard to the market
and similar social structures, a great many facts which we cannot measure and on
which indeed we have only some very imprecise and general information. And
because the effects of these facts in any particular instance cannot be confirmed by
quantitative evidence, they are simply disregarded by those sworn to admit only what
they regard as scientific evidence: they thereupon happily proceed on the fiction that
the factors which they can measure are the only ones that are relevant.
- 86 -
The correlation between aggregate demand and total employment, for instance, may
only be approximate, but as it is the only one on which we have quantitative data, it is
accepted as the only causal connection that counts. On this standard there may thus
well exist better "scientific" evidence for a false theory, which will be accepted
because it is more "scientific", than for a valid explanation, which is rejected because
there is no sufficient quantitative evidence for it.
Let me illustrate this by a brief sketch of what I regard as the chief actual cause of
extensive unemployment - an account which will also explain why such
unemployment cannot be lastingly cured by the inflationary policies recommended by
the now fashionable theory. This correct explanation appears to me to be the existence
of discrepancies between the distribution of demand among the different goods and
services and the allocation of labour and other resources among the production of
those outputs. We possess a fairly good "qualitative" knowledge of the forces by
which a correspondence between demand and supply in the different sectors of the
economic system is brought about, of the conditions under which it will be achieved,
and of the factors likely to prevent such an adjustment. The separate steps in the
account of this process rely on facts of everyday experience, and few who take the
trouble to follow the argument will question the validity of the factual assumptions, or
the logical correctness of the conclusions drawn from them. We have indeed good
reason to believe that unemployment indicates that the structure of relative prices and
wages has been distorted (usually by monopolistic or governmental price fixing), and
that to restore equality between the demand and the supply of labour in all sectors
changes of relative prices and some transfers of labour will be necessary.
But when we are asked for quantitative evidence for the particular structure of prices
and wages that would be required in order to assure a smooth continuous sale of the
products and services offered, we must admit that we have no such information. We
know, in other words, the general conditions in which what we call, somewhat
misleadingly, an equilibrium will establish itself: but we never know what the
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particular prices or wages are which would exist if the market were to bring about
such an equilibrium. We can merely say what the conditions are in which we can
expect the market to establish prices and wages at which demand will equal supply.
But we can never produce statistical information which would show how much the
prevailing prices and wages deviate from those which would secure a continuous sale
of the current supply of labour. Though this account of the causes of unemployment is
an empirical theory, in the sense that it might be proved false, e.g. if, with a constant
money supply, a general increase of wages did not lead to unemployment, it is
certainly not the kind of theory which we could use to obtain specific numerical
predictions concerning the rates of wages, or the distribution of labour, to be
expected.
Why should we, however, in economics, have to plead ignorance of the sort of facts
on which, in the case of a physical theory, a scientist would certainly be expected to
give precise information? It is probably not surprising that those impressed by the
example of the physical sciences should find this position very unsatisfactory and
should insist on the standards of proof which they find there. The reason for this state
of affairs is the fact, to which I have already briefly referred, that the social sciences,
like much of biology but unlike most fields of the physical sciences, have to deal with
structures of essential complexity, i.e. with structures whose characteristic properties
can be exhibited only by models made up of relatively large numbers of variables.
Competition, for instance, is a process which will produce certain results only if it
proceeds among a fairly large number of acting persons.
In some fields, particularly where problems of a similar kind arise in the physical
sciences, the difficulties can be overcome by using, instead of specific information
about the individual elements, data about the relative frequency, or the probability, of
the occurrence of the various distinctive properties of the elements. But this is true
only where we have to deal with what has been called by Dr. Warren Weaver
(formerly of the Rockefeller Foundation), with a distinction which ought to be much
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more widely understood, "phenomena of unorganized complexity," in contrast to
those "phenomena of organized complexity" with which we have to deal in the social
sciences.2 Organized complexity here means that the character of the structures
showing it depends not only on the properties of the individual elements of which
they are composed, and the relative frequency with which they occur, but also on the
manner in which the individual elements are connected with each other. In the
explanation of the working of such structures we can for this reason not replace the
information about the individual elements by statistical information, but require full
information about each element if from our theory we are to derive specific
predictions about individual events. Without such specific information about the
individual elements we shall be confined to what on another occasion I have called
mere pattern predictions - predictions of some of the general attributes of the
structures that will form themselves, but not containing specific statements about the
individual elements of which the structures will be made up.3
This is particularly true of our theories accounting for the determination of the
systems of relative prices and wages that will form themselves on a wellfunctioning
market. Into the determination of these prices and wages there will enter the effects of
particular information possessed by every one of the participants in the market
process - a sum of facts which in their totality cannot be known to the scientific
observer, or to any other single brain. It is indeed the source of the superiority of the
market order, and the reason why, when it is not suppressed by the powers of
government, it regularly displaces other types of order, that in the resulting allocation
of resources more of the knowledge of particular facts will be utilized which exists
only dispersed among uncounted persons, than any one person can possess. But
because we, the observing scientists, can thus never know all the determinants of such
an order, and in consequence also cannot know at which particular structure of prices
and wages demand would everywhere equal supply, we also cannot measure the
deviations from that order; nor can we statistically test our theory that it is the
deviations from that "equilibrium" system of prices and wages which make it
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impossible to sell some of the products and services at the prices at which they are
offered.
Before I continue with my immediate concern, the effects of all this on the
employment policies currently pursued, allow me to define more specifically the
inherent limitations of our numerical knowledge which are so often overlooked. I
want to do this to avoid giving the impression that I generally reject the mathematical
method in economics. I regard it in fact as the great advantage of the mathematical
technique that it allows us to describe, by means of algebraic equations, the general
character of a pattern even where we are ignorant of the numerical values which will
determine its particular manifestation. We could scarcely have achieved that
comprehensive picture of the mutual interdependencies of the different events in a
market without this algebraic technique. It has led to the illusion, however, that we
can use this technique for the determination and prediction of the numerical values of
those magnitudes; and this has led to a vain search for quantitative or numerical
constants. This happened in spite of the fact that the modern founders of mathematical
economics had no such illusions. It is true that their systems of equations describing
the pattern of a market equilibrium are so framed that if we were able to fill in all the
blanks of the abstract formulae, i.e. if we knew all the parameters of these equations,
we could calculate the prices and quantities of all commodities and services sold. But,
as Vilfredo Pareto, one of the founders of this theory, clearly stated, its purpose
cannot be "to arrive at a numerical calculation of prices", because, as he said, it would
be "absurd" to assume that we could ascertain all the data.4 Indeed, the chief point
was already seen by those remarkable anticipators of modern economics, the Spanish
schoolmen of the sixteenth century, who emphasized that what they called pretium
mathematicum, the mathematical price, depended on so many particular
circumstances that it could never be known to man but was known only to God.5 I
sometimes wish that our mathematical economists would take this to heart. I must
confess that I still doubt whether their search for measurable magnitudes has made
significant contributions to our theoretical understanding of economic phenomena - as
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distinct from their value as a description of particular situations. Nor am I prepared to
accept the excuse that this branch of research is still very young: Sir William Petty,
the founder of econometrics, was after all a somewhat senior colleague of Sir Isaac
Newton in the Royal Society!
There may be few instances in which the superstition that only measurable
magnitudes can be important has done positive harm in the economic field: but the
present inflation and employment problems are a very serious one. Its effect has been
that what is probably the true cause of extensive unemployment has been disregarded
by the scientistically minded majority of economists, because its operation could not
be confirmed by directly observable relations between measurable magnitudes, and
that an almost exclusive concentration on quantitatively measurable surface
phenomena has produced a policy which has made matters worse.
It has, of course, to be readily admitted that the kind of theory which I regard as the
true explanation of unemployment is a theory of somewhat limited content because it
allows us to make only very general predictions of the kind of events which we must
expect in a given situation. But the effects on policy of the more ambitious
constructions have not been very fortunate and I confess that I prefer true but
imperfect knowledge, even if it leaves much indetermined and unpredictable, to a
pretence of exact knowledge that is likely to be false. The credit which the apparent
conformity with recognized scientific standards can gain for seemingly simple but
false theories may, as the present instance shows, have grave consequences.
In fact, in the case discussed, the very measures which the dominant
"macro-economic" theory has recommended as a remedy for unemployment, namely
the increase of aggregate demand, have become a cause of a very extensive
misallocation of resources which is likely to make later large-scale unemployment
inevitable. The continuous injection of additional amounts of money at points of the
economic system where it creates a temporary demand which must cease when the
increase of the quantity of money stops or slows down, together with the expectation
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of a continuing rise of prices, draws labour and other resources into employments
which can last only so long as the increase of the quantity of money continues at the
same rate - or perhaps even only so long as it continues to accelerate at a given rate.
What this policy has produced is not so much a level of employment that could not
have been brought about in other ways, as a distribution of employment which cannot
be indefinitely maintained and which after some time can be maintained only by a rate
of inflation which would rapidly lead to a disorganisation of all economic activity.
The fact is that by a mistaken theoretical view we have been led into a precarious
position in which we cannot prevent substantial unemployment from re-appearing; not
because, as this view is sometimes misrepresented, this unemployment is deliberately
brought about as a means to combat inflation, but because it is now bound to occur as
a deeply regrettable but inescapable consequence of the mistaken policies of the past
as soon as inflation ceases to accelerate.
I must, however, now leave these problems of immediate practical importance which I
have introduced chiefly as an illustration of the momentous consequences that may
follow from errors concerning abstract problems of the philosophy of science. There
is as much reason to be apprehensive about the long run dangers created in a much
wider field by the uncritical acceptance of assertions which have the appearance of
being scientific as there is with regard to the problems I have just discussed. What I
mainly wanted to bring out by the topical illustration is that certainly in my field, but I
believe also generally in the sciences of man, what looks superficially like the most
scientific procedure is often the most unscientific, and, beyond this, that in these fields
there are definite limits to what we can expect science to achieve. This means that to
entrust to science - or to deliberate control according to scientific principles - more
than scientific method can achieve may have deplorable effects. The progress of the
natural sciences in modern times has of course so much exceeded all expectations that
any suggestion that there may be some limits to it is bound to arouse suspicion.
Especially all those will resist such an insight who have hoped that our increasing
power of prediction and control, generally regarded as the characteristic result of
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scientific advance, applied to the processes of society, would soon enable us to mould
society entirely to our liking. It is indeed true that, in contrast to the exhilaration
which the discoveries of the physical sciences tend to produce, the insights which we
gain from the study of society more often have a dampening effect on our aspirations;
and it is perhaps not surprising that the more impetuous younger members of our
profession are not always prepared to accept this. Yet the confidence in the unlimited
power of science is only too often based on a false belief that the scientific method
consists in the application of a ready-made technique, or in imitating the form rather
than the substance of scientific procedure, as if one needed only to follow some
cooking recipes to solve all social problems. It sometimes almost seems as if the
techniques of science were more easily learnt than the thinking that shows us what the
problems are and how to approach them.
The conflict between what in its present mood the public expects science to achieve in
satisfaction of popular hopes and what is really in its power is a serious matter
because, even if the true scientists should all recognize the limitations of what they
can do in the field of human affairs, so long as the public expects more there will
always be some who will pretend, and perhaps honestly believe, that they can do more
to meet popular demands than is really in their power. It is often difficult enough for
the expert, and certainly in many instances impossible for the layman, to distinguish
between legitimate and illegitimate claims advanced in the name of science. The
enormous publicity recently given by the media to a report pronouncing in the name
of science on The Limits to Growth, and the silence of the same media about the
devastating criticism this report has received from the competent experts6, must make
one feel somewhat apprehensive about the use to which the prestige of science can be
put. But it is by no means only in the field of economics that far-reaching claims are
made on behalf of a more scientific direction of all human activities and the
desirability of replacing spontaneous processes by "conscious human control". If I am
not mistaken, psychology, psychiatry and some branches of sociology, not to speak
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about the so-called philosophy of history, are even more affected by what I have
called the scientistic prejudice, and by specious claims of what science can achieve.7
If we are to safeguard the reputation of science, and to prevent the arrogation of
knowledge based on a superficial similarity of procedure with that of the physical
sciences, much effort will have to be directed toward debunking such arrogations,
some of which have by now become the vested interests of established university
departments. We cannot be grateful enough to such modern philosophers of science as
Sir Karl Popper for giving us a test by which we can distinguish between what we
may accept as scientific and what not - a test which I am sure some doctrines now
widely accepted as scientific would not pass. There are some special problems,
however, in connection with those essentially complex phenomena of which social
structures are so important an instance, which make me wish to restate in conclusion
in more general terms the reasons why in these fields not only are there only absolute
obstacles to the prediction of specific events, but why to act as if we possessed
scientific knowledge enabling us to transcend them may itself become a serious
obstacle to the advance of the human intellect.
The chief point we must remember is that the great and rapid advance of the physical
sciences took place in fields where it proved that explanation and prediction could be
based on laws which accounted for the observed phenomena as functions of
comparatively few variables - either particular facts or relative frequencies of events.
This may even be the ultimate reason why we single out these realms as "physical" in
contrast to those more highly organized structures which I have here called essentially
complex phenomena. There is no reason why the position must be the same in the
latter as in the former fields. The difficulties which we encounter in the latter are not,
as one might at first suspect, difficulties about formulating theories for the
explanation of the observed events - although they cause also special difficulties about
testing proposed explanations and therefore about eliminating bad theories. They are
due to the chief problem which arises when we apply our theories to any particular
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situation in the real world. A theory of essentially complex phenomena must refer to a
large number of particular facts; and to derive a prediction from it, or to test it, we
have to ascertain all these particular facts. Once we succeeded in this there should be
no particular difficulty about deriving testable predictions - with the help of modern
computers it should be easy enough to insert these data into the appropriate blanks of
the theoretical formulae and to derive a prediction. The real difficulty, to the solution
of which science has little to contribute, and which is sometimes indeed insoluble,
consists in the ascertainment of the particular facts.
A simple example will show the nature of this difficulty. Consider some ball game
played by a few people of approximately equal skill. If we knew a few particular facts
in addition to our general knowledge of the ability of the individual players, such as
their state of attention, their perceptions and the state of their hearts, lungs, muscles
etc. at each moment of the game, we could probably predict the outcome. Indeed, if
we were familiar both with the game and the teams we should probably have a fairly
shrewd idea on what the outcome will depend. But we shall of course not be able to
ascertain those facts and in consequence the result of the game will be outside the
range of the scientifically predictable, however well we may know what effects
particular events would have on the result of the game. This does not mean that we
can make no predictions at all about the course of such a game. If we know the rules
of the different games we shall, in watching one, very soon know which game is
being played and what kinds of actions we can expect and what kind not. But our
capacity to predict will be confined to such general characteristics of the events to be
expected and not include the capacity of predicting particular individual events.
This corresponds to what I have called earlier the mere pattern predictions to which
we are increasingly confined as we penetrate from the realm in which relatively
simple laws prevail into the range of phenomena where organized complexity rules.
As we advance we find more and more frequently that we can in fact ascertain only
some but not all the particular circumstances which determine the outcome of a given
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process; and in consequence we are able to predict only some but not all the
properties of the result we have to expect. Often all that we shall be able to predict
will be some abstract characteristic of the pattern that will appear - relations between
kinds of elements about which individually we know very little. Yet, as I am anxious
to repeat, we will still achieve predictions which can be falsified and which therefore
are of empirical significance.
Of course, compared with the precise predictions we have learnt to expect in the
physical sciences, this sort of mere pattern predictions is a second best with which one
does not like to have to be content. Yet the danger of which I want to warn is
precisely the belief that in order to have a claim to be accepted as scientific it is
necessary to achieve more. This way lies charlatanism and worse. To act on the belief
that we possess the knowledge and the power which enable us to shape the processes
of society entirely to our liking, knowledge which in fact we do not possess, is likely
to make us do much harm. In the physical sciences there may be little objection to
trying to do the impossible; one might even feel that one ought not to discourage the
over-confident because their experiments may after all produce some new insights.
But in the social field the erroneous belief that the exercise of some power would
have beneficial consequences is likely to lead to a new power to coerce other men
being conferred on some authority. Even if such power is not in itself bad, its exercise
is likely to impede the functioning of those spontaneous ordering forces by which,
without understanding them, man is in fact so largely assisted in the pursuit of his
aims. We are only beginning to understand on how subtle a communication system
the functioning of an advanced industrial society is based - a communications system
which we call the market and which turns out to be a more efficient mechanism for
digesting dispersed information than any that man has deliberately designed.
If man is not to do more harm than good in his efforts to improve the social order, he
will have to learn that in this, as in all other fields where essential complexity of an
organized kind prevails, he cannot acquire the full knowledge which would make
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mastery of the events possible. He will therefore have to use what knowledge he can
achieve, not to shape the results as the craftsman shapes his handiwork, but rather to
cultivate a growth by providing the appropriate environment, in the manner in which
the gardener does this for his plants. There is danger in the exuberant feeling of ever
growing power which the advance of the physical sciences has engendered and which
tempts man to try, "dizzy with success", to use a characteristic phrase of early
communism, to subject not only our natural but also our human environment to the
control of a human will. The recognition of the insuperable limits to his knowledge
ought indeed to teach the student of society a lesson of humility which should guard
him against becoming an accomplice in men's fatal striving to control society - a
striving which makes him not only a tyrant over his fellows, but which may well
make him the destroyer of a civilization which no brain has designed but which has
grown from the free efforts of millions of individuals.
1. "Scientism and the Study of Society", Economica, vol. IX, no. 35, August 1942,
reprinted in The Counter-Revolution of Science, Glencoe, Ill., 1952, p. 15 of this
reprint.
2. Warren Weaver, "A Quarter Century in the Natural Sciences", The Rockefeller
Foundation Annual Report 1958, chapter I, "Science and Complexity".
3. See my essay "The Theory of Complex Phenomena" in The Critical Approach to
Science and Philosophy. Essays in Honor of K.R. Popper, ed. M. Bunge, New York
1964, and reprinted (with additions) in my Studies in Philosophy, Politics and
Economics, London and Chicago 1967.
4. V. Pareto, Manuel d'économie politique, 2nd. ed., Paris 1927, pp. 223-4.
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5. See, e.g., Luis Molina, De iustitia et iure, Cologne 1596-1600, tom. II, disp. 347,
no. 3, and particularly Johannes de Lugo, Disputationum de iustitia et iure tomus
secundus, Lyon 1642, disp. 26, sect. 4, no. 40.
6. See The Limits to Growth: A Report of the Club of Rome's Project on the
Predicament of Mankind, New York 1972; for a systematic examination of this by a
competent economist cf. Wilfred Beckerman, In Defence of Economic Growth,
London 1974, and, for a list of earlier criticisms by experts, Gottfried Haberler,
Economic Growth and Stability, Los Angeles 1974, who rightly calls their effect
"devastating".
7. I have given some illustrations of these tendencies in other fields in my inaugural
lecture as Visiting Professor at the University of Salzburg, Die Irrtümer des
Konstruktivismus und die Grundlagen legitimer Kritik gesellschaftlicher Gebilde,
Munich 1970, now reissued for the Walter Eucken Institute, at Freiburg i.Brg. by
J.C.B. Mohr, Tübingen 1975.
29
Letter of Credit
A document issued by a bank or other financial institution to a prospective borrower,
for an agreed amount and for a definite or indefinite period. It allows the borrower to
draw bills of exchange on the institution up to that amount – the bills will be accepted
automatically. The purpose for which the money is required is stated initially and the
bills drawn must conform to this. Letters of credit are also used in foreign trade. The
buyer arranges with his bank to open a credit in the country of the seller,who may
then obtain payment by presentation of the relevant documents when these have been
accepted and returned by the buyer. Letter of Credit,unlike bills of exchange,are not
negotiable,but being cashable at a known bank,are immediately acceptable to the
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seller in the exporting country. A confirmed letter of credit is one that has been
recognized by the paying bank. Letter of credit may be irrevocable or
revocable,depending on whether or not they can be cancelled at any time.
Bill of Exchange
An order in writing addressed by one person to another and signed by the person
giving it,requiring the person to whom it is addressed to pay,on demand or at a fixed
date,a specified sum of money. The bill is made out by the signatory ( drawer) always
with the consent of the person to whom it is addresses,who signs or accepts it ; and
mainly in relation to the sale of goods or produce. Bills are negotiable in the money
market,so enabling drawers to obtain their money at once. Generally used
interchangeably with the word "Draft"; this is an unconditional order written from
one person (the drawer) to another person (the drawee) directing the drawee to pay a
certain sum at a fixed or future determinable date, to the order of the party who is to
receive payment (the payee).
Foreign Bank Collections
The handling by banks, upon instructions received from the seller, of documents for
delivery to the buyer, against either payment or acceptance of a draft by the buyer.
Factoring
A business activity in which a company takes over responsibility for collecting the
debts of another. Typically,the client debits all its sales to the factor and receives
immediate payment from it less a charge of about 2% to 3% and interest for the period
of trade credit given to the customer. There are a number of different types of
factoring;the simplest is invoice discounting. In its most elaborate form the factor
maintains the company’s sales ledger and other accounting functions,and does not
seek recourse to its client if unable to obtain payment from that client’s customers
(non-recourse factoring). The customer need not know that a factor is being used.
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Recourse
The rights of a holder in due course of a negotiable instrument to force prior endorsers
to meet their legal obligations to pay on the instrument if it is dishonored by the
maker or acceptor.
With Recourse: A phrase used on an instrument or endorsement to indicate that the
drawer or endorser is liable to subsequent holders or the institution that has financed
the instrument, if the instrument is not honored when due.
30
INCOTERMS
Incoterms are a uniform set of international rules, promulgated by the International
Chamber of Commerce in Paris, for the interpretation of the terms most commonly
used in international contracts for the sale of goods. Incoterms define the obligations
of buyer and seller at every stage of an international sale of goods transaction. The
Incoterms were first issued in 1953; they were last revised effective January 1, 2000.
Incoterms 2000 are internationally accepted commercial terms defining the
respective roles of the buyer and seller in the arrangement of transportation and other
responsibilities and clarify when the ownership of the merchandise takes place. They
are used in conjunction with a sales agreement or other method of transacting the sale.
Incoterms 2000 is copyrighted by the International Chamber of Commerce,
Paris, France. It is available in the United States from ICC Publishing, Inc., 156 Fifth
Avenue, New York, NY 10010.
EXW - Ex Works -- Title and risk pass to buyer including payment of all
transportation and insurance cost from the seller's door. Used for any mode of
transportation.
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FCA - Free Carrier -- Title and risk pass to buyer including transportation and
insurance cost when the seller delivers goods cleared for export to the carrier.Seller is
obligated to load the goods on the Buyer's collecting vehicle; it is the Buyer's
obligation to recieve the Seller's arriving vehicle unloaded.
FAS - Free Alongside Ship --Title and risk pass to buyer including payment of all
transportation and insurance cost once delivered alongside ship by the seller. Used for
sea or inland waterway transportation. The export clearance obligation rests with the
seller.
FOB - Free On Board -- Title and risk pass to buyer including payment of all
transportation and insurance cost once delivered on board the ship by the
seller. Used for sea or inland waterway transportation.
CFR - Cost and Freight -- Title, risk and insurance cost pass to buyer when delivered
on board the ship by seller who pays the transportation cost to the destination port.
Used for sea or inland waterway transportation.
CIF - Cost, Insurance and Freight -- Title and risk pass to buyer when
delivered on board the ship by seller who pays transportation and insurance cost to
destination port. Used for sea or inland waterway transportation.
CPT - Carriage Paid To -- Title, risk and insurance cost pass to buyer when delivered
to carrier by seller who pays transportation cost to destination. Used for any mode of
transportation.
CIP - Carriage and Insurance Paid To --Title and risk pass to buyer when
delivered to carrier by seller who pays transportation and insurance cost to destination.
Used for any mode of transportation.
DAF - Delivered at Frontier -- Title, risk and responsibility for import
clearance pass to buyer when delivered to named border point by seller. Used for any
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mode of transportation.
DES - Delivered Ex Ship -- Title, risk, responsibility for vessel discharge and import
clearance pass to buyer when seller delivers goods on board the ship to destination
port. Used for sea or inland waterway transportation.
DEQ - Delivered Ex Quay (Duty Paid) -- Title and risk pass to buyer when
delivered on board the ship at the destination point by the seller who delivers goods
on dock at destination point cleared for import. Used for sea or inland waterway
transportation.
DDU - Delivered Duty Unpaid -- Title, risk and responsibility of import clearance
pass to buyer when seller delivers goods to named destination point. Used for any
mode of transportation. Buyer is obligated for import clearance. DDU - Delivered
Duty Unpaid -- Seller fulfills his obligation when goods have been made available at
teh named place in the country of importation
DDP - Delivered Duty Paid -- Title and risk pass to buyer when seller delivers goods
to named destination point cleared for import. Used for any mode of transportation.
Note: EXW, CPT, CIP, DAF, DDU and DDP are commonly used for any mode of
transportation. FAS, FOB, CFR, CIF, DES, and DEQ are used for sea and
inland waterway.
31
PURCHASE CONTRACT
The Sellers: DELING TRADE BV
Address: P. O. Box 100, 3750 GC Bunsten, Holland
The Buyers: DALIAN WEIDA TRADING CO., LTD.
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Address: No. 1 Beijing Road, Dalian Development Zone, Dalian, China
Contract No.: CH/99/66.908
Date: Aug. 20, 1999
This contract is made by and between the Buyers and the Sellers, whereby the Buyers
agree to buy and the Sellers agree to sell the under-mentioned commodity according
to the terms and conditions stipulated below:
COMMODITY AND SPECIFICATIONS:
Demineralized Whey Powder
Unit price: USD940.00/MT CIF Dalian
Quantity: 119MT
Total amount: USD111,860.00
COUNTRY OF ORIGIN: Finland
PACKING: 25kg in 4-ply paper sacks with inner polyethylene liner and big bags.
TIME OF SHIPMENT: No later than Sept. 30, 1999
PORT OF SHIPMENT: European Main Port
PORT OF DESTINATION: Dalian, China
INSURANCE: To be covered by the seller for 110% of invoice value covering All
Risks and War Risks as per I.C.C.
PAYMENT: To be effected by irrevocable letter of credit available by draft(s) at 90
days after B/L date sight for 100% of invoice value drawn by the Sellers.
INSPECTION: Inspection result of CCIB at destination should be final.
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The Sellers:
DELING TRADE BV
The Buyers:
DALIAN WEIDA TRADING CO., LTD.
SALES CONTRACT
Contract No.:
Signed at:
Date:
The Buyers:
The Sellers:
The Buyers agree to buy and the Sellers agree to sell the following goods on terms
and conditions as set forth below:
1. Name of Commodity, Specifications and Packing:
2. Quantity:
3. Unit Price:
4. Total Value:
(Shipment Quantity % more or less allowed）
5. Time of Shipment:
6. Port of loading:
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7. Port of Destination:
8. Insurance: To be covered by the___for 110% of the invoice value against_______.
9. Terms of Payment:
By confirmed, irrevocable, transferable and divisible letter of credit in favour of
_____ payable at sight with TT reimbursement clause/ ___ days/sight/date allowing
partial shipment and transshipment. The covering Letter of Credit must reach the
Sellers before _____ and is to remain valid in _____ China until the 15th day after
the aforesaid time of shipment, failing which the Sellers reserve the right to cancel
this Sales Contract without further notice and to claim from the Buyers for losses
resulting therefrom.
10. Inspection:
The Inspection Certificate of Quality / Quantity / Weight / Packing / Sanitation
issued by_______of China shall be regarded as evidence of the Sellers’ delivery.
11. Shipping Marks:
OTHER TERMS:
1. Discrepancy:
In case of quality discrepancy, claim should be lodged by the Buyers within 30
days after the arrival of the goods at the port of destination, while for quantity
discrepancy, claim should be lodged by the Buyers within 15 days after the arrival
of the goods at the port of destination. In all cases, claims must be accompanied by
Survey Reports of Recognized Public Surveyors agreed to by the Sellers. Should
the responsibility of the subject under claim be found to rest on the part of the
Sellers, the Sellers shall, within 20 days after receipt of the claim, send their reply
to the Buyers together with suggestion for settlement.
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2. The covering Letter of Credit shall stipulate the Sellers option of shipping the
indicated percentage more or less than the quantity hereby contracted and be
negotiated for the amount covering the value of quantity actually shipped. (The
Buyers are requested to establish the L/C in amount with the indicated percentage
over the total value of the order as per this Sales Contract.)
3. The contents of the covering Letter of Credit shall be in strict conformity with the
stipulations of the Sales Contract. In case of any variation there of necessitating
amendment of the L/C, the Buyers shall bear the expenses for effecting the
amendment. The Sellers shall not be held responsible for possible delay of
shipment resulting from awaiting the amendment of the L/C and reserve the right to
claim from the Buyers for the losses resulting therefrom.
4. Except in cases where the insurance is covered by the Buyers as arranged,
insurance is to be covered by the Sellers with a Chinese insurance company. If
insurance for additional amount and /or for other insurance terms is required by
the Buyers, prior notice to this effect must reach the Sellers before shipment and is
subject to the Sellers agreement, and the extra insurance premium shall be for the
Buyers account.
5. The Sellers shall not be held responsible if they fail, owing to Force Majeure cause
or causes, to make delivery within the time stipulated in this Sales Contract or
cannot deliver the goods. However, the Sellers shall inform immediately the Buyers
by cable. The Sellers shall deliver to the Buyers by registered letter, if it is
requested by the Buyers, a certificate issued by the China Council for the
Promotion of International Trade or by any competent authorities, attesting the
existence of the said cause or causes. The Buyers’ failure to obtain the relative
Import Licence is not to be treated as Force Majeure.
6. Arbitration:
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All disputes arising in connection with this Sales Contract or the execution thereof
shall be settled by way of amicable negotiation. In case no settlement can be
reached, the case at issue shall then be submitted for arbitration to the China
International Economic and Trade Arbitration Commission in accordance with the
provisions of the said Commission. The award by the said Commission shall be
deemed as final and binding upon both parties.
7. Supplementary Condition(s):
(Should the articles stipulated in this Contract be in conflict with the following
supplementary condition(s), the supplementary condition(s) should be taken as
valid and binding.)
Sellers:
Buyers:
AGREEMENT OF CONSIGNMENT
This Agreement is entered into between ABC Co. (hereinafter referred to as the
Consignor), having its registered office at _______, Shanghai, China and XYZ CO.
(hereinafter referred to as the Consignee), having its registered office at_______, on
the following terms and conditions:
1. The Consignor shall from time to time ship ______________ (commodity) to the
consignee on Consignment basis at the prevailing international market prices on
CIF terms. The interval between each shipment shall be approximately ninety days.
2. The Consignee must try to sell the consignments at the best possible prices after
obtaining the approval of the Consignor as to price, terms, etc.
3. Each shipment by ship at the initial stage will not exceed U.S.D.________ and the
outstanding liabilities on the Consignee shall be in the vicinity of not more than
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U.S.D. _______ only.
4. The Consignor shall at no time be responsible for any bad debts arising out of
credit sales to any _______ buyers. Making payments to the Consignor shall at all
times be the sole responsibility of the Consignee.
5. The Consignee shall accept the Bills of Exchange drawn by the Consignor on him
at 90 days'sight with interest payable at ________ % per annum.
6. The Consignee shall collect the shipping documents including B/L from the
Consignor's bank against Trust Receipt duly signed by the Consignee.
7. The Consignor shall absorb insurance premium and warehousing charges up to the
date of delivery to customers.
8. The consignor shall observe the regulations of the government of _________.
9. This Agreement is written in English, in two originals；each Party retains one copy.
As a token of acceptance, both parties have set their respective hands on this ______
day of May, 19______ with understanding and knowledge of the contents stated
hereinabove.
ABC Co: _____________
XYZ Co: ____________
(signature)
(signature)
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