Mises and prediction markets: Can markets forecast?

Here is my new paper co-authored with Dr. John Levendis, Associate Professor of Economics at Loyola University.

Abstract

Ludwig von Mises’s methodological position is unique because it combines apriorism with qualitative empirical approach. Nonetheless, Mises’s adherents and detractors continue to characterize his apriorism as rejecting forecasting. This paper argues that a prediction market is a traditional market for forward-looking information; it leverages subjective knowledge and aggregates information via the market process to effectively solve the Hayekian knowledge problem. We argue that Austrian economists should embrace prediction markets as a powerful method of forecasting rooted in human action.

The World Bank's Report on Ukraine's Economy

Here is a link. So Ukraine's economy is in 14-month recession and counting.

What is the "Rule of Law"?

Probably, I should not blog about it but I can't help it. So here is the question of the day. What is the "rule of law"?
I am looking right now at the official answer to this question. The "rule of law" is the following:
- everyone must follow the law;
- leaders must obey the law;
- government must obey the law;
- no one is above the law.
I think that it's pretty good answer. When I asked the same question couple weeks ago in Ukraine, I received the following answer: "The rule of law is the respect for the law." I wondered what was the correct Ukrainian translation of the "rule of law". A very intellectual group of Lvivians told me that the rule of law was the respect for the law (ukr. povaga do zakony).
Well, it poses a certain ethical puzzle. In Ukraine people are proud of their respect for the elderly. If you see an old man on a subway or bus, you always give him your seat. It's definitely a sign of respect. Is it the "rule of the elderly"? Definitely, not.  None obeys the elderly. Is it the same issue with the law in Ukraine? People respect it but none obeys it. If it's the case, the rule of law does not exist in Ukraine. But I've got a feeling that it's more structural problem than it seems. The current society is full of people who are more likely to respect the law rather than to obey the law. I doubt that it was always like that. I am not sure when the paradigm shift took place. The 1990s definitely aggravated the issue. Can the present society shift back towards the "rule of law"? Yes. The major change will require a social system that rewards people who follow and obey the law. The major change, however, faces the major problem. The system does not exist in Ukraine.  

Mises in Lviv

I have recently visited Lviv. If you are familiar with the work of Ludwig von Mises, you probably know that he was born there on September 29, 1881.  It was a great trip. Lviv is a great city. It is very different from the rest of Ukraine, especially the industrial Eastern region. I'll write more about it later. For now, I just want to post a link featuring the story of finding Mises's birthplace. I can proudly say that I have met these researchers.

Is Ukraine a Country of Lawyers or Engineers?

       More than twenty years ago three American economists Kevin Murphy, Andrei Shleifer, and Robert Vishny (1991) found the evidence that "countries with a higher proportion of engineering college majors grow faster; whereas countries with a higher proportion of law concentrators grow more slowly." Since then other researchers tested and confirmed their theory and findings.
Murphy, Shleifer, and Vishny argue that a country of lawyers direct talent towards rent seeking, when a country of engineers apply talent to entrepreneurship. Occupational choices depend on market institutions. Returns to ability and education determine occupational choice. Returns to scale in each sector of economy, market size, and compensation contracts also affect occupational choice. Many talented people become entrepreneurs when it is easy to do business and keep profits. Otherwise, talented people join law firms, government bureaucracy, and other rent-seeking institutions.
       Does this explanation fit the case of Ukraine? Definitely, you see very few entrepreneurs in Ukraine. What do you see most of time? Lawyers, various government officials, and corrupt businessmen. Most lawyers make big bucks in raiding private property. Government officials take and extort bribes. Successful businessmen are also corrupt ones. They are not entrepreneurs. In Ukraine a successful businessman who uses his political connections to corner the market and raid someone's business is not entrepreneur. This businessman's success is not the result of market competition. His fortune is not the result of his alertness to some change in the economy. He is successful because he applies his talent to corruption.  That's pretty much a current economic situation in Ukraine, the nation of many lawyers and very few engineers.
       

Democracy in Post-Communist Countries

Why is Belarus a dictatorship? Why is Poland a consolidated democracy? These countries have so much in common but at the same time one is the democracy and another one is the dictatorship. In my recent paper I argue that post-communist political development depends on institutional stickiness of democracy in a given country. Poland had more institutions that facilitated democratization. Belarus had more institutions that inhibited democratization.

Here is an abstract: 
Structural explanation of political development offers a finite set of factors that cause democracy to consolidate or not (Acemoglu and Robinson 2006). This approach is, however, insufficient to explain political development of post-communist countries because it ignores a role of social arrangements in democratic consolidation. The field of comparative political economy is becoming more acceptable to the idea that social institutions have significant impact on political development (Boettke et al., 2005). Using transitional experience of post-communist countries, I demonstrate that institutional stickiness of democracy depends on a combination of causal factors, including underlying political culture (Boettke et al., 2008; Pejovich, 2003).

Carl Menger Essay Contest

The Society for the Development of Austrian Economics, in collaboration with the Foundation for Economic Education and the Charles Koch Foundation, is pleased to announce the fourth annual Carl Menger Essay Contest.

The purpose of the contest is to recognize and encourage undergraduate scholarship in the Austrian tradition and the broadly catallactic approach to social science which it represents, an approach common also to the Scottish Enlightenment of Smith and Hume, the French Liberal School of Say and Bastiat, the Virginia School of Buchanan and Tullock, the UCLA price theory of Alchian and Demsetz, and the Bloomington School of Vincent and Elinor Ostrom, among others. We invite essays that explore, advance, challenge, or apply the ideas of these and related schools of thought.

The catallactic approach emphasizes exchange and the rules in which exchange takes place. James Buchanan articulates this approach in his famous article, “What Should Economists Do?” (Southern Economic Journal, Vol. 30 (1964), No. 3). Peter Boettke’s Living Economics describes the catallactic approach as the “mainline of economics.”

Read more: http://www.fee.org/publications/page/carl-menger-essay-contest#ixzz2WsBfFk00

Beyonce and Economics

Teaching and learning economics is a lot of fun.  You can teach and learn principles of economics by referring to pop music. And I've got two words for you: "to the left."

The Other Chelsea

Here is a great documentary about Ukraine, Donetsk region, soccer and its fans, coal miners, and a rising star of the Party of Regions. Comments are welcome. The movie has English subtitles.

Understanding Economic Development

Here is a great article by Professor Bob Higgs about the ten rules for understanding economic development. Rules 8 and 9 are very critical for economic development of Ukraine.
In general, I find it amazing that we tend to share a weird belief that politicians are somehow impartial or selfless.

American Energy Company AES Leaves Ukraine

Couple days ago I talked to my friend who is investment banker in Kyiv. He simply told me that foreign companies were leaving the domestic financial sector. My friend said: "Foreigners are running. Foreign capital is flying from Ukraine." Apparently, foreign companies are leaving not only banking industry but also energy sector. What causes a negative change in foreign investor's confidence? It's extremely high regime uncertainty.

According to the Yahoo! Finance news The AES Corporation (AES) has an agreement with VS Energy International to sell two of its power distribution businesses in Ukraine. The transaction is expected to close by mid 2013.The company will sell its 89.12% and 84.56% equity interest in AES Kyivoblenergo and AES Rivneoblenergo, respectively. AES Kyivoblenergo provides services to 881,000 customers in the Kiev region and AES Rivneoblenergo serves 412,000 customers in the Rivne region. Here is the rest of this story.

The AES holding power had $18 bln in revenues last year. Its net income, however, was negative, -$1.3 bln. Probably, the AES is just getting rid of bad equity. But what is VS Energy International?

Billionaires

We admire them. We envy them. And we hate them. Billionaires. People who made billions of dollars. They are everywhere from Hong Kong to Ukraine. Hong Kong has the highest number of billionaires per million of people. Nigeria has the lowest. In Ukraine and Serbia it is the same. But what is a relationship between the cross-country concentration of billionaires and economic development?

A very cool paper "Billionaires" by GMU Professor Peter Leeson and Tino Sanandaji from the University of Chicago and the Research Institute of Industrial Economics (Sweden) answers this very important question. Professor Leeson and Dr. Sanandaji write: 

"The results of our empirical analysis are simple but striking. First, self-employed entrepreneurs are associated with poverty, not wealth. In contrast, billionaires are associated with wealth rather than poverty.
Second, the institutions consistent with self-employed entrepreneurs differ markedly from
the ones consistent with billionaires. Where well-protected private property rights and supporting, market-enhancing institutions ‡flourish, so do billionaires. But self-employed entrepreneurs don'’t. Where private property rights are weakly protected and interventionist institutions ‡flourish, so do self-employed entrepreneurs. But billionaires don’'t.

Finally, only the institutions that we find are consistent with billionaires are also consistent with the institutions that underlie economic prosperity. The institutions that we find are consistent with self-employed entrepreneurs are the ones associated with comparative economic poverty."

So what does it mean for Ukraine? Since Ukraine is in the bottom of the list, Ukraine must have more poverty than prosperity. Then Ukraine lacks well-protected private property rights and supporting market-enhancing institutions. Ukraine, however, must have a large number of interventionist institutions. Thus, Ukraine must have more self-employed entrepreneurs than billionaires! Can you disagree with something at all? I can't.