A Life of Experimental Economics, Volume II : The Next Fifty Years

This sequel to __A Life of Experimental Economics, Volume I,__ continues the intimate history of Vernon Smith’s personal and professional maturation after a dozen years at Purdue. The scene now shifts to twenty-six transformative years at the University of Arizona, then to George Mason University, and his recognition by the Nobel Prize Committee in 2002. The book ends with his most recent decade at Chapman University. At Arizona Vernon and his students studied asset trading markets and learned how wrong it had been to suppose that price bubbles could not occur where markets were full-information transparent. Their work in computerization of the lab facilitated very complex supply and demand experiments in natural gas pipeline, communication and electricity markets that paved the way for implementing, through decentralized market processes, the liberalization of industries traditionally believed to be “natural” monopolies. The “Smart Computer Assisted Market” was born. Smith’s move to George Mason University greatly facilitated government and industry work in tandem with various public and private entities, whereas his relocation to Chapman University coincided with the Great Recession, whose similarity with the Depression was evident in his research. There he integrated two fundamental kinds of markets with laboratory experiments: Consumer non-durables, the supply and demand for which was stable in the lab and in the economy, and durable assets whose bubble tendencies made them unstable in the lab as well as in the economy—witness the great housing-mortgage market bubble run-up of 1997-2007. This book’s conversational style and emphasis on the backstory of published research accomplishments allows readers an exclusive peak into how and why economists pursue their work. It’s a must-read for those interested in experimental economics, the housing crisis, and economic history. Preface 6 Acknowledgements 8 Praise for A Life of Experimental Economics, Volume II 10 Contents 15 List of Figures 17 Part III East, Southwest, East Again 19 13 Yankee Land 20 14 West with the Night 34 15 Arizona and E-Commerce in the Laboratory 62 Some Early Intellectual History 65 16 My Friends Were Finally Right 103 17 Wives, Daughters, and Sons 132 Part IV Rethinking Recessions, Markets, Adam Smith and Religion 158 18 Home Again: Chapman University 159 19 Economic Collapse 2007–2008: Would 1929 Be Reborn in Anemic Growth? 165 Proposition 1: Severe Economic Recessions Have Their Origin in Household and Bank Balance Sheet Crises 167 Proposition 2: Standard Economic Models Do Not Contain Balance Sheets 168 Proposition 3: The Great Recession—A Balance Sheet Crisis 169 Proposition 4: The Depression—A Balance Sheet Crisis? 171 Proposition 5: Policy Experts, Economists, Consumers, and Businesses Were Blindsided by the Great Recession 172 Proposition 6: Bernanke’s 14 Months of “Liquidity Enhancement”—A Test of the Friedman-Schwartz Hypothesis that Liquidity Expansion Can Prevent Depression-Like Episodes? 175 Proposition 7: Monetary Policy Is Ineffective in a Balance Sheet Crisis 177 Proposition 8: When Monetary Policy Is an Ineffective Economic Stimulant, So Is Government Deficit Spending, and for the Same Reason 177 Proposition 9: Housing Expenditures Are a Leading Indicator of Most Economic Recessions; in Only the Depression and Great Recession Was the End of the Recession Not Accompanied by a Housing Recovery; Instead, We Remained Stuck in Low Growth 178 Proposition 10: Stock Market Crashes Do Not Impact Household and Bank Balance Sheets the Way Housing-Mortgage Market Crashes Do; Consequently, Loss in Stock Market Value Is Not a Good Indicator of Potential Damage to the Economy from Losses in Housing Val 180 Proposition 11: Bankruptcy Facilitates Recovery from Negative Equity Balance Sheet Recessions; Artificial Avoidance of Bankruptcy Delays Recovery: The Primary Mechanism of Recovery Involves the Repair and Rebooting of Damaged Balance Sheets from New Sourc 183 Proposition 12: Rules That Focus on Incentive Compatibility Alone Carry the Realistic Hope That Stability Can Replace the Historical Instability That Has Been the Hallmark of Housing-Mortgage Markets 186 In Summary 188 20 Markets: The Good, the Volatile and the Sometimes Ugly 192 21 Reconnecting Modern Economics with Its Classical Origins: Discovering Adam Smith 201 22 Faith and the Compatibility of Science and Religion 228 Author Index 246 Subject Index 251 This sequel to A Life of Experimental Economics, Volume I, continues the intimate history of Vernon Smith's personal and professional maturation after a dozen years at Purdue. The scene now shifts to twenty-six transformative years at the University of Arizona, then to George Mason University, and his recognition by the Nobel Prize Committee in 2002. The book ends with his most recent decade at Chapman University. At Arizona Vernon and his students studied asset trading markets and learned how wrong it had been to suppose that price bubbles could not occur where markets were full-information transparent. Their work in computerization of the lab facilitated very complex supply and demand experiments in natural gas pipeline, communication and electricity markets that paved the way for implementing, through decentralized market processes, the liberalization of industries traditionally believed to be "natural" monopolies. The "Smart Computer Assisted Market" was born. Smith's move to George Mason University greatly facilitated government and industry work in tandem with various public and private entities, whereas his relocation to Chapman University coincided with the Great Recession, whose similarity with the Depression was evident in his research. There he integrated two fundamental kinds of markets with laboratory experiments: Consumer non-durables, the supply and demand for which was stable in the lab and in the economy, and durable assets whose bubble tendencies made them unstable in the lab as well as in the economy--witness the great housing-mortgage market bubble run-up of 1997-2007. This book's conversational style and emphasis on the backstory of research accomplishments allows readers an exclusive peak into how and why economists pursue their work. It's a must-read for those interested in experimental economics, the housing crisis, and economic history.-- Provided by publisher Volume 1. This book describes the author's early life, combining elements of biography, history, economics and philosophy to show how crucial incidents early in his life provided the necessary framework for his research into experimental economics. It goes from his family roots on the railroads and oil fields of Middle America to his early life on a farm in Depression-wracked Kansas. A mediocre student in high school, he attended Friends University, on Wichita's west side, where an intense study of mathematics, physics, chemistry, and astronomy enabled him to pass the examinations to enter Caltech and study under luminary scientists like Linus Pauling. Eventually Smith discovered economics and pursued graduate study in the field at University of Kansas and Harvard. This volume ends with his Camelot years at Purdue, where he began his famous work in experimental economics, nurturing his research into an unlikely new field of economics Front Matter ....Pages i-xx Front Matter ....Pages 1-1 Yankee Land (Vernon L. Smith)....Pages 3-16 West with the Night (Vernon L. Smith)....Pages 17-44 Arizona and E-Commerce in the Laboratory (Vernon L. Smith)....Pages 45-85 My Friends Were Finally Right (Vernon L. Smith)....Pages 87-115 Wives, Daughters, and Sons (Vernon L. Smith)....Pages 117-142 Front Matter ....Pages 143-143 Home Again: Chapman University (Vernon L. Smith)....Pages 145-150 Economic Collapse 2007–2008: Would 1929 Be Reborn in Anemic Growth? (Vernon L. Smith)....Pages 151-177 Markets: The Good, the Volatile and the Sometimes Ugly (Vernon L. Smith)....Pages 179-187 Reconnecting Modern Economics with Its Classical Origins: Discovering Adam Smith (Vernon L. Smith)....Pages 189-215 Faith and the Compatibility of Science and Religion (Vernon L. Smith)....Pages 217-234 Back Matter ....Pages 235-243 This book provides an intimate history of Nobel Laureate Vernon Smith's early life, combining elements of biography, history, economics and philosophy to show how crucial incidents early in his life provided the necessary framework for his research into experimental economics.