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Dani Rodrik:

[E]ntrepreneurship in a developing country consists of discovering the underlying cost structure–what can and cannot be produced profitably.  Initial investors in a new line of economic activity face a great amount of uncertainty, since foreign technology always needs some local adaptation.  Plus, their cost discovery soon becomes public knowledge–everyone can observe whether their projects are successful or not–so the social value they generate exceeds their private costs.  If they succeed, much of the gains are socialized through entry and emulation, whereas if they fail, they bear the full costs.

I find this fairly compelling. Of course this sort of argument has to compete with public choicy arguments that governments are bad at picking winners and that such policies will create more opportunities for rent seeking.

I think Dr. Rodrik has more arguments for industrial policy in this paper (which I have not read yet).

The Atlantic has a very interesting piece on discussing what experimental economics has to say about bubbles (via Knowledge Problem). Exactly what I wanted! I would like to see more popularization of experimental economics, especially with regards to what experimental economics has to say about bubbles.

Many people have suggested more economic regulation to ensure that this sort of crisis does not reoccur, and I find it totally plausible that regulation could improve outcomes by discouraging or limiting bubbles. However, without understanding the mechanism by which bubbles form, it is unlikely that we will stumble across regulation which actually does so, because the space of possible economic regulations is huge.

Much of this understanding will come from experimental economics (p=.7), because the formation of bubbles require non-rational behavior from at least some market participants, and it does not seem obvious exactly what sort of irrationality leads to bubbles and how it does so.

Politicians and rightish political commentators frequently claim that importing oil from countries which don’t like the USA is bad for American national security. I had never given this claim much thought, and now after thinking about it, I have realized I don’t understand it.

If oil is basically fungible, then as long as they sell it to someone it will affect the USA very minimally. If Saudi Arabia starts refusing to sell oil to the USA, but still sells it to Australia, then whoever was selling to Australia before that can turn around and sell it to us.

Now surely oil isn’t totally fungible, transportation costs are surely somewhat important, so the cost of oil would surely go up a bit. But danger is surely less than the danger people normally imply from importing oil from countries which don’t like the USA.

Now the fact that we import oil at all, from any country, could be a bigger problem. But in this case, importing food and the like is a similar concern and seems basically intractable.

What am I missing?