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Recommended Reading - Economics


Space: The Final Frontier The Economy of the early Roman Empire
Identity and the Economics of Organizations

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Space: The Final Frontier by Paul Krugman ,  Journal of Economic Perspectives Spring 1998

This is one of the areas for which Paul Krugman won this year’s Nobel prize. What explains the emergence of large regional concentrations of economic activity? The concentration of production seems to be  self-reinforcing. Firms choose to produce in regions with good access to markets  but access to markets tends to be good in regions in which many firms choose to produce. Both the size of the export base and the share of income spent locally are likely to be increasing functions of the size of the regional economy. So if a regional economy for whatever reason reaches a sufficiently large scale, it could take off in a cumulative process of growth. For example, the large market might make it profitable to produce locally goods that had previously been imported from other regions. This would increase the multiplier on the region's export base, leading to a further expansion of income, which would lead to still more local production, and so on. The key  assumption is that there are important economies of scale enforcing the geographic concentration of some activities. The new interest in space may be regarded as the fourth wave of the increasing returns/imperfect competition revolution that has swept through economics over the past two decades. First came the New Industrial Organization, which created  models of imperfect competition. Then the New Trade Theory used that toolbox to build models of international trade in the presence of increasing returns. The New Growth Theory, which followed, did much the same for economic growth. After 1990 we saw  the emergence of the New Economic Geography, which tries to explain the spatial structure of the economy using models in which there are increasing returns and imperfect competition.

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The Economy of the early Roman Empire by Peter Temin, Journal of Economic Perspectives, Winter 2006

In this article, noted historian, Peter Temin points out that ancient Rome enjoyed high standards of living. The early Roman Empire, followed the Roman Republic in 27 BCE with the development under Augustus of a monarchy known as the Principate. The early Roman Empire was followed in turn by the late Roman Empire that began around 200 CE, following  political and economic instability. There is  evidence from the late Republic and early Empire of widespread economic prosperity and possibly economic growth. The standard of living in ancient Rome was similar to that of early modern period of seventeenth- and eighteenth century Europe, an extraordinary achievement for any economy in the ancient world. Ancient Rome managed to achieve this high standard of living thanks to  moderately stable political conditions and well functioning markets for goods, labor and capital, which allowed specialization and efficiency.

 There are several misconceptions about slavery in ancient Rome. Chemin provides deep insights here. Since this part of the paper is the most interesting, a more detailed account is in order. Frequent manumission—that is, freeing of slaves—was a distinguishing feature of Roman slavery. Slaves in the early Roman Empire could anticipate freedom if they worked hard and demonstrated skill or accumulated a peculium, money “owned” by slaves, with which to purchase freedom. About 10 percent of slaves in the early Roman Empire were freed every five years starting at age 25. Anthropologists distinguish between “open” slavery, in which slaves can be freed and accepted fully into general society, and “closed” slavery, in which slaves are a separate group, not accepted into general society and not allowed to marry among the general population when freed. Roman slavery conformed to the open model. Freed men were granted Roman citizenship; their children could be town councilors, and their grandchildren could be knights. Freed slaves retained the names of their former owners and could be identified as members of their owners’ family, providing former slaves with a reputation that helped them to operate in the economy. A productive freed man also increased the reputation and income of his former owner and his family. Freed men could marry other Roman citizens. Children and grandchildren of freedmen were accepted fully into Roman society. The combination of frequent manumission and open slavery created incentives for slaves to work hard and hasten the day when they would be free workers. Slavery in fact was the most common formal, legally enforceable long-term labor contract in the early Roman Empire. Roman slaves worked in all kinds of activities. A slave might even hold a managerial job. Ancient slave owners often encouraged slaves to be educated to perform responsible economic roles, since education increased the value of slave labor to the owner. Some ambitious poor people in the early Roman Empire even sold themselves into slavery as a long-term employment contract that offered a greater chance of advancement than the life of the free poor. Ex-slaves were better placed to make a success of themselves in the urban economy than the free born poor:  Upon manumission, many of the ex-slaves started with skills and a business. Roman slavery in some ways resembled the processes of apprenticeship and indenture in early modern Europe, which reveals the integration of Roman slavery into the overall labor market.

Well functioning markets promoted a modest rate of economic growth that resulted in the prosperity of the early Roman Empire, which was not to be equaled in the West for almost two millennia thereafter.

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Identity and the Economics of Organizations by George A. Akerlof and Rachel E. Kranton, Journal of Economic Perspectives—Winter 2005

In this paper, nobel prize winner George Ackerlof, well known for his Theory of lemons and Rachel Kranton  present a principal-agent model that incorporates the notion of identity. Employees may have identities that lead them to behave more or less in concert with the goals of their organizations. With such an identity, workers are willing to put in high effort . Identity is an important supplement to monetary compensation. Monetary incentives remain a blunt instrument. First, compensation schemes can be based only on variables (such as output or profits) that are observable to management. But such variables are most often imperfect indicators of individual effort, as when—for example—output derives from workers' collective efforts in a team . Moreover, many monetary incentive schemes create opportunities for workers to game the system. For example, most jobs involve multiple tasks. In this case, workers will have incentive to overperform on the tasks that are well rewarded and to underperform on the tasks that are poorly rewarded. Tournaments, where pay depends upon relative performance, reduce the  need for information, but create another problem because workers may try  to sabotage one another. So to function well, an organization  should not rely solely on monetary compensation schemes. The ability of organizations to place workers into jobs with which they identify and the creation of such identities are central to what makes organizations work.

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