<p>The Transformation of Public Economics Research: 1970-2000The Transformation of <br/>Public Economics Research: 1970-2000<br/>Martin Feldstein (1)</p><br/><br/><p>The nature and content of research and teaching in public economics have changed <br/>enormously during the past three decades. The field is more theoretically <br/>rigorous, more empirical, more focused on real policy issues, and more concerned <br/>with government spending as well as with taxation. For me, it has been an <br/>exciting time to be a public finance economist and to contribute to this <br/>intellectual transformation. <br/>Theoretical Beginnings <br/>When I began studying public finance as a graduate student in England in the <br/>early 1960s, the bible of the field was Richard Musgrave's The Theory of Public <br/>Finance (1959). Unlike earlier books by authors like Pigou (1947) which were <br/>characterized by prose unencumbered by diagrams and algebra, most of the <br/>Musgrave volume looked like a standard price theory book with graphs and algebra <br/>showing the partial equilibrium effects of taxes on prices and quantities and <br/>the associated effects on deadweight losses. The Musgrave book was about the <br/>core issues of incidence and efficiency and the positive effects on the actions <br/>of buyers and sellers without the detailed descriptions of tax rules or <br/>administrative issues that characterized many earlier public finance books. <br/>Although this text opened up a new era in public finance, its limited <br/>mathematics meant that it was weak in dealing with multiproduct problems and in <br/>analyzing general equilibrium effects. The general absence of references to <br/>econometric research reflected the state of the field at the time. Similarly, <br/>although Musgrave discussed general principles of government spending, his <br/>classic text did not deal with the specific areas of government spending that <br/>would become the subject of much of public economics in the past three decades.<br/>Arnold Harberger's work on the incidence of the corporate income tax (Harberger, <br/>1962) demonstrated the power and importance of simple general equilibrium <br/>models. By extending models originally developed to study international trade <br/>issues, Harberger showed how elasticities of substitution in production and <br/>consumption, factor intensities in production, and consumer preferences all <br/>combined to determine the incidence of the corporate tax on labor and capital <br/>and on consumers with different preferences. Gone were the earlier vague <br/>statements about backward shifting and forward shifting. Although the new <br/>general equilibrium models did not give unambiguous answers about corporate tax <br/>incidence, we learned the reason for the ambiguity and how various factors like <br/>capital mobility would affect incidence.<br/>In two further studies, Harberger (1964, 1966) showed how the traditional <br/>welfare loss triangle could be extended to multiple taxes on different products <br/>and to evaluating the deadweight loss of the corporate income tax. Although <br/>multiproduct deadweight loss calculations had been developed earlier by Irving <br/>Fisher (1937),and John Hicks (1939), it was Harberger who showed their direct <br/>application to excise taxes. Corlett and Hague (1953) made a seminal <br/>contribution to the theory of the efficient design of multiproduct excise taxes <br/>when some products are non-taxable or are taxed at an arbitrary rate. With these <br/>ideas well established, the growing mathematical literacy of the economics <br/>profession led to a rediscovery of the Frank Ramsey's (1927) theory of optimal <br/>excise taxes. Diamond and Mirlees (1971) modernized Ramsey's analysis, showed <br/>the optimality of maintaining production efficiency, and derived the conditions <br/>that generalized the traditional inverse elasticity rules for optimal taxation. <br/>At about the same time, Mirlees (1971) also developed a formal model of the <br/>optimal labor income tax in which the optimal degree of progressivity depends on <br/>the government's distributional preferences and on the responsiveness of <br/>individuals to the tax schedule. The research provided a formal structure for <br/>guiding a benevolent government through the process in which the government <br/>optimizes the schedule of income tax rates knowing that the taxpayers will <br/>respond by maximizing their own utility subject to the schedule of tax rates. <br/>Although the analysis failed to provide any significant general results, it <br/>clarified the nature of the optimization problem and provided a framework for <br/>deriving results in models with more explicit parametric restrictions. <br/>A further generalization of the original Diamond-Mirlees analysis dealt with <br/>designing the optimal combination of income and excise taxes. In the end, that <br/>research showed that the optimal tax rules depend on such unobservable <br/>properties of the utility function as the separability between leisure and the <br/>components of consumption as well as on the higher derivatives of utility as a <br/>function of income.<br/>These theoretical developments led to other studies of tax incidence in general <br/>equilibrium models (including the important early work on computable general <br/>equilibrium analysis by John Shoven and John Whalley ), to extensions of the <br/>Diamond-Mirlees optimal tax analysis to include expenditure issues, to new work <br/>on the incidence of taxes on corporate source income by David Bradford, Mervyn <br/>King, and others, and to my own research on the efficiency effect of taxes on <br/>capital income. <br/>These developments in the theory of public finance in the 1960s and 1970s were <br/>important in two ways. First, they clarified enormously the profession's <br/>thinking about a number of important public finance questions. Although they did <br/>not give unambiguous answers, they showed the errors of some earlier views and <br/>provided substantial analytic insights. Second, they attracted an outstanding <br/>generation of graduate students to the field of public economics. Most of them <br/>did not go on to do theoretical research but the improved theoretical <br/>foundations in public finance and the new standard of theoretical rigor <br/>contributed to their empirical work.<br/>Empirical Research<br/>The development of empirical work in public economics has, more than anything <br/>else, distinguished the research of the past 30 years from all that had gone <br/>before. The late 1960s and early 1970s saw for the first time the availability <br/>of high speed computers, reliable econometric software, and large <br/>machine-readable data sets. These developments, plus the addition of <br/>sophisticated econometric techniques to the standard tool kit of graduate <br/>students, were all key to the empirical revolution in public economics.<br/>The new data for public finance research included the first public availability <br/>of the Current Population Survey, the Federal Reserve's Survey of Consumer <br/>Finances, and the Internal Revenue Service public use sample of 100,000 tax <br/>returns that became the basic data input for what is now the NBER Taxsim model. <br/>For someone like me, recently trained in econometric methods, the newly <br/>available data provided an exciting opportunity to do a kind of empirical public <br/>finance that had not been done before and to confront some of the key questions <br/>of public finance in a new and serious empirical way.<br/>An important early subject of empirical research was the study of the effects of <br/>taxes on labor supply, or, more accurately, on labor force participation and <br/>hours. These studies benefitted also from new econometric techniques for dealing <br/>with limited dependent variables and with self-selection bias in estimating <br/>behavior from a subset of the population. The results showed important effects <br/>of taxes on the participation and hours of women. But the apparent lack of <br/>response by men was a warning that an accurate characterization of labor supply <br/>must be a much broader measure that includes things like effort, location, <br/>acquisition of human capital, and choice of occupation. <br/>More generally, what matters for evaluating the deadweight loss of the <br/>distortions induced by labor income taxes is not the change in labor supply <br/>alone (even broadly defined) but the change in the individual's taxable income, <br/>including the effect on the form of compensation (i.e., on the choice of fringe <br/>benefits and working conditions instead of cash) and on the deductions taken by <br/>individuals who itemize their tax returns (Feldstein, 1999). Fortunately, unlike <br/>the impossibility of studying broadly defined labor supply, it is possible to <br/>estimate the effect of changes in marginal tax rates on taxable income using <br/>panels of tax data that include repeated observations on the same individuals <br/>or, under some conditions, using pooled cross sections of data.<br/>Econometric tax research on the effect of interest income taxes on household <br/>saving is difficult because neither the tax return panels nor other panel files <br/>give adequate data on saving. Time series data on saving indicates that taxes <br/>that reduce the net return on saving do depress saving but these results are <br/>subject to a variety of estimation problems. Much more solid evidence on the <br/>effects of tax policies on saving have been derived in studies of the effects of <br/>IRA and 401-k plans. Although controversy continues, the evidence appears to <br/>support the conclusion that these saving incentives do significantly increase <br/>overall saving. <br/>A series of legislative changes in the tax treatment of capital gains provided <br/>the basis for several studies of the effect of the capital gains tax rate on the <br/>selling of corporate stock and the realization of capital gains. Related studies <br/>analyzed how tax rates affect the way households allocate their wealth among <br/>different types of financial assets. Although results differ among the <br/>individual studies, the overall implication is that households do respond to <br/>differences in tax rates and to changes in tax rules.<br/>Closely related to these studies of the effect of taxes on financial investment <br/>are the studies of the effects of marginal tax rates on home ownership. Because <br/>mortgage interest payments are deductible in calculating taxable income while <br/>the imputed value of housing services is not included in taxable income, <br/>individuals with high marginal tax rates have a strong incentive to own a home <br/>and to increase their investment in owner-occupied housing when tax rates rise. <br/>Several econometric studies confirm that both inferences are correct, estimate <br/>the magnitude of the distortion, and calculate the resulting efficiency losses. <br/>Other empirical studies of the effects of taxation deal with such things as <br/>charitable giving and the demand for health insurance. There is, in short, no <br/>aspect of household tax-related behavior that has not been studied. But with new <br/>tax policies and improved data sets, there will be new opportunities in the <br/>future to improve and refine our empirical knowledge in a wide range of areas.<br/>In addition to these empirical studies, there have also been analytic studies of <br/>taxation that sharpened our understanding of the effect of taxes on risk taking <br/>by individuals, of how taxes affect the financial policy of corporations, and of <br/>the implications of analyzing tax issues in the context of a growing economy. <br/>Government Spending<br/>A second major aspect of the transformation of research in public finance since <br/>the 1960s has been to broaden the subject to include government spending as well <br/>as taxation. This shift in focus was no doubt stimulated by the enormous <br/>expansion of government spending. In the United States, non-defense spending of <br/>the federal government rose from less than 10 percent of GDP in 1965 to more <br/>than 15 percent in 2000, reflecting a wide array of new programs ranging from <br/>pre-school education to health care for the aged. Economists responded to the <br/>challenge of studying these new programs. The field of public finance was thus <br/>transformed from the study of the taxes used to finance basic government <br/>services to the field of public economics that looked also at the effect of <br/>government spending on a wide range of programs.<br/>Much of the growth of government spending has been for social insurance programs <br/>and the research in public economics has matched that emphasis. Social Security <br/>pensions, unemployment insurance, workers' compensation, and the <br/>Medicare/Medicaid programs of health care for the aged and the poor raised new <br/>theoretical as well as empirical issues that became a major focus for research.<br/>Social insurance programs were attractive research subjects not only because <br/>they are the largest part of government spending but also because they have many <br/>analytic similarities to taxation. The analyses of public spending programs <br/>study not only the extent to which they achieve their stated purposes but also <br/>the incidence and excess burden of each program. The design of social insurance <br/>programs involves tradeoffs between protection and distortion that are analogous <br/>to the tradeoffs between distribution and efficiency considerations in taxation. </p><br/><p>The Social Security program of benefits to retirees, dependents and the disabled <br/>is the largest form of government spending. Empirical studies have shown that <br/>Social Security reduces saving and induces early retirement in the United States <br/>and other countries. In addition to these studies of the behavioral effects of <br/>Social Security, there have been a variety of empirical studies of the general <br/>equilibrium effects of Social Security and Social Security reform, including the <br/>effects of shifting from the current pay-as-you-go system to systems that rely <br/>in whole or in part on investment-based accounts. Separately, analytic studies <br/>have examined the optimal design of social security retirement and disability <br/>programs. <br/>Studies of other social insurance programs, including disability insurance and <br/>worker's compensation, also estimated behavioral effects, analyzing the <br/>distortions to incentives and the efficacy of the programs in providing the <br/>protection for which they are intended. <br/>Government health care programs are important fiscally as well as socially. Even <br/>in the United States, the government accounts for nearly half of total health <br/>care spending and exceeds six percent of GDP. The large volume of microeconomic <br/>data about the cost and provision of health care services also encouraged the <br/>growth of research in this area. The introduction of changes in the state level <br/>Medicaid program at different times in different states provided a source of <br/>identification for studying different aspects of this significant program.<br/>While early work on the economics of education focused on measuring and <br/>explaining the returns to human capital accumulation, the public finance <br/>research on education has looked at issues like the effect of alternative local <br/>tax and grant rules on the level and distribution of local government education <br/>spending. Important also have been the Tiebout-inspired analyses of the effects <br/>of competition in education on various educational outcomes. The government's <br/>increased role in providing scholarships for higher education has also induced <br/>public finance economists to study the impact of such spending on college <br/>enrollment and graduation as well as on household saving.<br/>Other government programs ranging from child care to the criminal justice system <br/>have been the subject of public finance studies that compare the cost of <br/>achieving program goals to the full cost of the taxes needed to finance that <br/>spending, including the deadweight loss associated with that tax revenue. <br/>Macroeconomic Issues<br/>Although Keynesian fiscal policy was a major focus of Richard Musgrave's The <br/>Theory of Public Finance, by the 1970s the analysis of stabilization policies <br/>had largely shifted to the field of macroeconomics where the emphasis was much <br/>more on monetary policy than on variations in fiscal stimulus through changes in <br/>budget deficits and surpluses. Public finance research nevertheless contributed <br/>to the debate by studying how tax rules like the investment tax credit and <br/>depreciation allowances could be used to stimulate business investment in a <br/>counter-cyclical way.<br/>The major social insurance programs also lie on the border between <br/>macroeconomics and public finance. Unemployment insurance raises the level of <br/>unemployment and contributes to its cyclical volatility. Public finance <br/>researchers have crossed the border into macroeconomics and labor economics to <br/>study the effect of unemployment insurance on the level and character of <br/>unemployment and to analyze ways in which unemployment insurance can be improved <br/>to reduce the inefficient labor market distortions without decreasing protection <br/>against the hardships of unemployment. Social Security pensions can also have an <br/>important macroeconomic effect by changing the rate of capital accumulation and <br/>therefore the rate of economic growth. <br/>The high inflation rate in the late 1970s inspired research on how the <br/>interaction of inflation and tax rules affects the level and distribution of <br/>saving and investment. This research showed that the neutrality of money and <br/>money growth in theoretical macroeconomic models does not hold in actual <br/>economies that tax nominal capital income. The analysis also led to calculations <br/>showing that the substantial deadweight loss of even moderate rates of <br/>inflation. <br/>Fiscal Federalism<br/>The complex federal structure of the U.S. government assigns important <br/>decision-making authority to state and local governments. Those state and local <br/>governments are now responsible for spending an amount equal to more than 60 <br/>percent of the spending by the federal government. An important area of public <br/>economics research has been the analysis of how those governments choose their <br/>tax and spending policies, how those choices are affected by the policies of <br/>higher levels of government (including block grants and matching grants), and <br/>how the resulting inter-area differences in taxes and spending affect the <br/>behavior of the private sector and the outcomes of government programs. Although <br/>such work has dealt primarily with the United States, it is likely to become <br/>more important as the European Union evolves toward a more federal fiscal <br/>structure. <br/>Looking Ahead<br/>The past three decades have been an enormously productive period for the field <br/>of public economics with important advances in theoretical analysis and <br/>empirical knowledge. The central role of the government in the economy and the <br/>associated high marginal tax rates mean that the problems of taxing and spending <br/>will continue to provide challenging opportunities for research in public <br/>economics. If those studies are to be useful in improving public policy, they <br/>must continue to speak to the real problems of the economy and must combine <br/>appropriate analytic models with sound empirical research. <br/>Cambridge, MA <br/>September 2001<br/>References<br/>Atkinson, A.B. and J.E. Stiglitz (1980), Lectures on Public Economics, <br/>McGraw-Hill, New York.<br/>Bradford, D.F. (1981), "The Incidence and Allocation Effects of a Tax on <br/>Corporation Distributions, Journal of Public Economics, XV, 1-22.<br/>Corlett, W.J. and D.C. Hague (1953), "Complementarity and the excess burden of <br/>taxation", Review of Economic Studies, 21, 21-30.<br/>Dixit, A.K. and J.J. Munk (1977), "Welfare effects of tax and price changes: a <br/>correction", Journal of Public Economics, 8, 103-107.<br/>Feldstein, M. (1978), "The Welfare Cost of Capital Income Taxation,"Journal of <br/>Political Economy, 86, <br/>Feldstein, M. (1999), "Tax Avoidance and the Deadweight Loss of the Income Tax, <br/>Review of Economics and Statistics, November 1999, 81(4), 674-680.<br/>Fisher, I. (1937), "Income in theory and income taxation practice", <br/>Econometrica, 5, 1-55.<br/>Harberger, A.C. (1962), "The incidence of the corporation income tax", Journal <br/>of Political Economy, 70, 215-250.<br/>Harberger, A.C. (1964), "Taxation, resource allocation, and welfare" in The Role <br/>of Direct and Indirect Taxes in the Federal Revenue System, J. Due (ed.), <br/>Princeton University Press, Princeton, New Jersey.<br/>Harberger, A.C. (1966), "Efficiency Effects of Taxes on Income from Capital," in <br/>M. Krzyaniak, ed. Effects of Corporate Income Taxes, Wayne State University <br/>Press, Detroit.<br/>Hicks, J.R. (1939), Value and Capital, Oxford University Press, London.<br/>King, M.A. (1977), Public Policy and the Corporation, Chapman and Hall, London.<br/>Mirrlees, J.A. (1971), "An exploration in the theory of optimum income <br/>taxation", Review of Economic Studies, 38, 175-208.<br/>Musgrave, R.A. (1959), The Theory of Public Finance, McGraw-Hill, New York.<br/>Pigou, A.C. (1947), A Study in Public Finance, (3rd edn.), Macmillan, London.<br/>Ramsey, F.P. (1927), "A contribution to the theory of taxation", Economic <br/>Journal, 37, 47-61.<br/>Shoven, J.B. and J. Whalley (1972), "A general equilibrium calculation of the <br/>effects of differential taxation income from capital in the U.S.", Journal of <br/>Public Economics, 1, 281-321. </p><br/><br/><p>1. Professor of Economics, Harvard University and President of the National <br/>Bureau of Economic Research. This essay, written for the 30th Anniversary of the <br/>Journal of Public Economics, focuses on research that has been described in the <br/>English language and therefore primarily on work done in the United States and <br/>Britain. The Journal played an important role in the transformation described <br/>here. I am grateful for the opportunity to serve as a Co-Editor of the Journal <br/>from 1972 through 1986, as an associate editor from 1987 through 1997, and as an <br/>an Advisory Editor since that time. </p>

<p>America's capital markets</p><p>No longer can America take for granted its global superiority as a market for capital. Regulatory reform might let it keep up with the pack<br/><br/>DAVID CHAVERN has been looking at a photograph of hirsute twenty-somethings and fretting. The snap, from the late 1970s, shows a mop-topped Bill Gates and colleagues at what would become the world's biggest software company. Mr Chavern, a capital-markets expert at the US Chamber of Commerce, is concerned that America may no longer be very good at nurturing nascent Microsofts. "You can't help wondering about the hairy people you'll never hear of," he muses.<br/><br/>He is not alone. There has been much hand-wringing over the state of America's capital markets and their ability to help businesses grow. The main worry is that despite being big, they are no longer competitive compared with the leading financial centres of Europe and Asia. This month Michael Bloomberg, New York's mayor, and Charles Schumer, a senator, showed their concern in an article dramatically titled: "To save New York, learn from London." But some think it is already too late for Wall Street. "The days of financial hegemony are over," says one senior American official gloomily.<br/><br/>As arrogance gives way to angst, America is exploring what to do. The Chamber of Commerce has held a series of "town hall meetings" and will publish a report next spring. New York has hired consultants from McKinsey to develop a new strategy. But the initiative attracting most attention is the Committee on Capital Markets Regulation （CCMR）. This group of bankers, bosses, academics and investors, headed by Hal Scott, a Harvard Law School professor, is due to release its first set of recommendations on November 30th. These are likely to include scrapping or revising various regulations seen to be holding back American business.<br/><br/>Although the government insists it is not involved, the treasury secretary, Hank Paulson－a former head of Goldman Sachs－has offered encouragement. This week he said that the 2002 Sarbanes-Oxley act, which toughened up corporate regulation following Enron's collapse, is "being implemented in a way that may be...introducing new risks to our economy", and forcing companies to spend more on accountants than research.<br/><br/>This might seem an odd time for such anxiety. After all, America's firms and banks, many of them world-class, are making record profits; Wall Street bonuses could be almost a third higher than last year's payout, itself a record; the Dow Jones Industrial Average recently hit a new high; the merger of two Chicago exchanges has cemented that city's dominance in derivatives-trading, while the New York Stock Exchange and Nasdaq are trying to buy their European rivals （see article）.<br/><br/>At the right price<br/><br/>Are the fears misplaced? As capital becomes more mobile, investors worry less about where their trades take place, so long as the price is right. America's big investment banks can win business wherever in the world deals are made. And budding Microsofts can always list abroad if their local market cannot provide the financial support they need.<br/><br/>Yet it is not quite as simple as that. Although capital flows more easily, there are additional costs in raising money overseas. And successful financial markets create a "cluster" effect of businesses servicing them. Hence it is in America's interest to encourage a vibrant domestic capital market. And if it raises its game, other centres will have to do the same, which would benefit companies everywhere.<br/><br/>The advocates of reform see plenty of scope for improvement. The problem is not only Sarbanes-Oxley, they argue. Aggressive investigations by Eliot Spitzer forced the financial industry into settlements that curbed innovation as well as sharp practice. Federal regulators, desperate to keep up with the New York attorney-general （and now governor-elect）, ran amok. Class-action lawyers have been allowed to wield too much power, and shareholders too little.<br/><br/>Whatever the causes, the numbers bear out America's slippage. It is still well ahead of Europe in hedge-fund and mutual-fund assets, securitisation, syndicated loans, and turnover in equities and exchange-traded derivatives. In all but one of these, however, the gap narrowed in 2005. Europe's corporate-debt market overtook America's last year （see chart 1）, although America still leads in high-yield “junk” bonds, a distinction less dubious than it once was.<br/><br/>The loudest sucking sound has been in the market for initial public offerings, a crucial barometer of financial wellbeing. America's share （measured by proceeds） has collapsed since the late 1990s （see chart 2）. Five years ago the New York Stock Exchange dwarfed London and Hong Kong. This year it is being beaten by both.<br/><br/>Luigi Zingales, an economist who sits on the CCMR, says the figures suggest something fundamental has changed. He thinks the best guide to the competitiveness of America's markets is the behaviour of overseas firms that choose to list their shares at home and abroad. Even after stripping out factors that might skew the result, America's share of these "cross-listings" has fallen substantially in the past five years. Yet of the growing number of firms which are no longer cross-listing in America, more than 90% still choose to market their shares to investors in the United States under a rule known as 144A. This gives them access to the American market, but without the full registration and compliance costs.<br/><br/>Domestic firms are also fleeing the glare of public markets. According to Dealogic, more of corporate America was taken out of public ownership by private-equity firms （spending $178 billion） in the first ten months of this year than in the previous five years combined. Some cite Sarbanes-Oxley and other post-Enron costs as a reason, although, to be fair, private-equity is booming in the rest of the world, too.<br/><br/>Wall Street's rivals are fighting harder for business. London is now the world leader in the trading of foreign-exchange and over-the-counter （off-exchange） derivatives. It is seen as the natural home for firms from emerging markets: big Russian companies prefer to list there. Goldman Sachs is beefing up its London office, adding functions that it currently has only in New York. Hong Kong has benefited from the emergence of China and become an intra-Asian centre for capital-raising as well as trading. There is also fierce competition to lead regional financial markets, especially with a flashy bid from Dubai to dominate the Middle East and its oil money.<br/><br/>Open outcry<br/><br/>Technological innovation has made it easier for capital and those that need it to go where the best deals are available. As Messrs Bloomberg and Schumer see it, this has upset the "almost exquisite balance between regulation and entrepreneurial vigour" that helped America thrive in the last quarter of the 20th century. But Wall Street's moneymen must take some of the blame: they were slower to embrace electronic trading than those in London.<br/><br/>Problems were compounded with tougher immigration controls after the 2001 terrorist attacks. With work visas harder to obtain, it can be extremely difficult for the managers of a global firm to gather in New York or Chicago at short notice. Meeting in London is much easier.<br/><br/>Aside from the visa question, which is hard to sort because it bumps up against security issues, there are four fundamental problems underlying America's declining competitiveness:<br/><br/>· Section 404. This is the most contentious part of Sarbanes-Oxley. It requires an annual "internal control report", which must be certified by auditors and personally signed off by two executives. It has concentrated minds, but raised costs considerably. Some say this is because it is being implemented too zealously.<br/><br/>Auditing expenses ballooned soon after the law was introduced. These have since fallen, but can still top several million dollars a year for a firm with a market capitalisation of $1 billion.<br/><br/>Because many of the costs of compliance are fixed, big companies find them easier to swallow. Some small firms cite this as a reason for listing on London's AIM market for young stocks; 50 American firms have done so, most of them since 2004. Hundreds of others are said to be considering it. Another spur has been the decline in coverage of smaller stocks since banks were forced by Mr Spitzer to tighten up their research procedures.<br/><br/>But Sarbanes-Oxley is not just about costs. In theory, a higher standard of corporate-governance should result in a higher valuation, since listing in a well-regulated market shows a commitment from a company that it will not abuse investors. If this premium is high enough, it will offset the costs of compliance. One study, conducted post-Sarbanes-Oxley, found that the premium placed on the value of an emerging-market firm listing in New York can reach 37%; preliminary research suggests the value of a London listing is not as high. Mr Zingales's calculations suggest that the New York premium outweighs costs for companies with a market value of more than $230m.<br/><br/>For the most part, reformers insist they are not out to gut Sarbanes-Oxley, but to make it more "risk-based". This means keeping the goals largely the same but giving firms and their auditors more leeway in achieving them. That battle may already be won: the Securities and Exchange Commission （SEC）, America's chief market-regulator, and the Public Company Accounting Oversight Board, which was created by Sarbanes-Oxley, have both announced reviews of Section 404, hinting strongly that the burden will be eased, especially for smaller firms. On November 16th Christopher Cox, the SEC's chairman, promised "significant changes" in coming weeks.<br/><br/>A more radical recommendation, unlikely to be among the changes, would be to limit prosecutions to individuals rather than companies. This would avoid a repeat of the Arthur Andersen debacle, in which the accounting firm was driven out of business after being convicted of obstructing justice in the Enron case, only for the ruling to be overturned last year by the Supreme Court.<br/><br/>Some believe a wide-ranging rethink is needed on accounting standards. America continues to believe that its accounting rules are better than internationally accepted standards, even though studies suggest there is not a lot to choose between them. Foreign firms would be keener to list their shares in New York if they did not have to reconcile their accounts.<br/><br/>· Litigation. Many businessmen regard America's legal system, with its punitive jail terms and class-action lotteries, even less favourably than they view Sarbanes-Oxley. "For foreign companies we're a jungle," says a senior regulator. Asian firms, for instance, are still reluctant to risk being sued three years after China Life, an insurer, listed in New York and within days fell victim to a shareholder lawsuit. Most firms involved in mergers in America have to factor possible legal troubles into the costs of the deal, says Dick Langan of Nixon Peabody, a law firm.<br/><br/>Infographics<br/><br/>By some measures, the worst may have passed－though nobody is betting on it. The tide of post-Enron cases is ebbing. Cornerstone Research reckons there will be some 120 class-action filings this year, down from 179 last year （see chart 3）. Aggressive law firms have also come under scrutiny. However, damages have continued to rise, from $1.1 billion in 1999 to $3.5 billion last year （excluding the $6 billion-plus WorldCom settlement）.<br/><br/>Doesn't this merely show the legal system is doing its job in a country in which big rewards mean big incentives to cheat? Sensitive to such doubts－and painfully aware of the large political contributions of trial lawyers, predominantly to the resurgent Democrats－those pushing for change are, for now, eschewing a radical approach. The boldest suggestion is that damages should be agreed through arbitration, rather than awarded by juries.<br/><br/>·Shareholder rights. America may be the land of the free float, but its shareholders lack certain basic rights. For instance, they have only a limited say in electing company boards, unlike investors in Britain, and they have to contend with staggered boards （where only a fraction of the directors stands for re-election in a given year, making it impossible for a majority of shareholders to sack the board in one go）. Add to that a proliferation of poison-pill takeover defences and the fact that it is boards, not shareholders, who vote on executive pay （again, unlike Britain）.<br/><br/>· Regulation. There are three main areas of concern: how financial supervisors interact with the private sector; how they arrive at their decisions; and the fragmented nature of the rules. At the centre of all three sits the SEC. Once accused of being too slow to act, these days its perceived problem is hyperactivity, caused by what a senior regulator caustically calls the "Spitzerisation" of the agency.<br/><br/>This tough-guy approach is not entirely misplaced. The SEC has unparalleled numbers of retail investors to protect and it does not want to be outflanked by aggressive state prosecutors. But in striving to be tough, it may be losing sight of the need for markets to be efficient as well as clean.<br/><br/>Among the SEC's most vocal critics is Harvey Pitt, a former chairman. Most of its employees, he said recently, see it as an enforcement agency with regulatory powers, rather than the other way round. This shows up in salaries: the pay of its enforcement lawyers has shot up relative to other departments; by one estimate, over 700 of them now earn more than their chairman.<br/><br/>Part of the problem, says Peter Wallison of the American Enterprise Institute, is that the hard line sometimes takes on a life of its own. When wrongdoing is suspected or alleged, for instance, the SEC will open a so-called "matter under inquiry". If this is not actively terminated within 60 days, it automatically becomes an informal investigation. Sometimes, says Mr Wallison, investigations open, and the companies involved suffer negative publicity, simply because nobody bothered to close the file.<br/><br/>Blowing a bigger bonus<br/><br/>Some would like to see the SEC become more like Britain's super-regulator, the Financial Services Authority. The FSA has won plaudits for an approach based more on principles than hard rules. It prefers to nudge rather than bully. Moreover, it is widely considered to be better at analysing the potential costs and benefits of proposed regulatory changes. That may be because it employs a higher proportion of economists to lawyers.<br/><br/>The SEC, however, operates in a regulatory regime that is much more fragmented than in Europe. The number of federal and state bodies scrutinising a particular bit of the financial markets in America can lead to duplication and then to turf wars.<br/><br/>Rick Ketchum, head of regulation at the New York Stock Exchange, （and a former president of Nasdaq） says America's various regulatory bodies are now better at working with each other. But in some cases, he thinks, they might want to merge. A merger of the SEC and the Commodity Futures Trading Commission, for instance, would provide one agency to regulate the cash and derivatives markets, where boundaries are already becoming blurred.<br/><br/>All eyes on Capitol Hill<br/><br/>Whether these concerns are acted upon will depend largely, as ever, on politicians in Washington, DC. The Democrats, who retook control of Congress in the recent elections, are less likely to want to loosen financial-market laws than Republicans, and slightly more inclined to toughen up hedge-fund regulation.<br/><br/>That said, leading Democrats portray Sarbanes-Oxley as the other party's doing （even though it was a bipartisan bill） and may be prepared to see it tweaked. Barney Frank, a Democrat in line to run the House Financial Services Committee in the new Congress, has said he does not want to rewrite the law but would be willing to see regulatory agencies adjust their rules so that it is not applied so stringently. The CCMR also favours this milder type of non-legislative reform, because it would not require congressional approval.<br/><br/>But reformers must be careful not to appear to be pushing changes through the back door. Even before the CCMR's report is out, it has been denounced by some on the left as a self-interested attempt by big business and its Republican supporters to claw back lost ground now that the big post-Enron trials are largely over. Some in Washington refer to it as “the 7% committee”－a reference to the underwriting fees charged on Wall Street. Mr Scott, the committee's leader, denies any such bias.<br/><br/>Even if the angst is overdone, the competitive threat to America is real－as the Big Apple's hoarier financiers know only too well. They still sigh when recalling restrictions introduced in the 1960s that drove lenders and borrowers to London, where the Eurobond market promptly took off. The American government loosened the rules a decade later, but by then it was too late and London ran off with the business. This time they hope it will be different</p>

<strong>Francis Ysidro Edgeworth<br/></strong>(1845.2.8-1926.2.13)<br/><br/><strong>Edgeworth, F. Y (1845.2.8-1926.2.13) </strong><br/><br/>Birthplace Edgeworthstown, Company, Longford, Ireland. <br/><br/>Posts Held Lect. Logic, Tooke Prof. Econ. Science and Stats., King's Coll. London, 1880-89, 1890-1; Drummond Prof. Polit. Econ., Fellow All Souls Coll. Oxford, 1891-1922. <br/>Degree BA Univ. Oxford, 1869. <br/><br/>Offices and Honours Fellow, BA; Vice-Pre., Royal Economic Society; Pres., Royal Statistical Society; Pres., Econ. Section, British Association for the Advancement of Science, 1889, 1922; Ed., Economic Journal , 1891-1926. <br/>Career His earliest writings are concerned with the application of mathematics to social science questions and in Mathematical Psychics he worked out practical aspects of utilitarian ethics in mathematical form. The insights on exchange equilibrium, welfare economics and the theory of barter are still valuable. His chief output was in article form on topics such as taxation, monopoly, index numbers and value of money. His exposition was obscure and his personality was retiring, with the result that his ideas are continually being rediscovered by those who arrive at them in their own way. Though his work was never drawn together into a comprehensive scheme, he is still valued for his various precedents in mathematical economics and statistics. His ideas on the `contract curve' and the `core' of an exchange economy have recently attracted considerable attention. His editorship of the Economic Journal was of major value to the British economic community. <br/>Secondary Literature J. M. Keynes, `Frances Ysidro Edgeworth: 1845-1926' in Essays in Biography (Macmillan, 1933, 1972); C. Hildreth, `Edgeworth, Francis Ysidro', International Encyclopedia of the Social Sciences , D. L. Sills (ed.) (Macmillan and Free Press, 1968), vol. 4; J. Creedy, `F. Y. Edgeworth', in Pioneers of Modern Economics in Britain , eds. D. P. O'Brien and J. R. Presley (Macmillan, 1981). [Mark Blaug, Great Economists Before Keynes: An Introduction to the Lives and Works of One Hundread Great Economists of the Past , Brighton: Wheatsheaf, 1986.] <br/><br/><a href="http://www.cpm.ll.ehime-u.ac.jp/AkamacHomePage/Akamac_E-text_Links/Edgeworth.html" target="_blank"><font color="#0000ff">http://www.cpm.ll.ehime-u.ac.jp/AkamacHomePage/Akamac_E-text_Links/Edgeworth.html</font></a>
        <br/><br/><strong>Francis Ysidro Edgeworth, 1845-1926.</strong>
        <br/><br/>Francis Beaufort Edgeworth was a restless philosophy student at Cambridge on his way to Germany when he decided to elope with a teenage Catalonian refugee he met on the steps of the British Museum.　One of the outcomes of their marriage was Ysidro Francis Edgeworth (the name order was reversed later), who was destined to become one of the most brilliant and eccentric economists of the 19th Century. <br/><br/>Edgeworth was born in 1845 in Edgeworthstown, County Longford, Ireland into a large, well-connected and eccentric Anglo-Irish landowning family.　The famous novelist Maria Edgeworth, of Castle Rackrent fame, was his (elderly) aunt.　Although Edgeworth was the fifth son of a sixth son, all the other heirs eventually died, leaving him to inherit Edgeworthstown in 1911.　A lifelong bachelor (for a brief period, he hopelessly attempted to court Beatrice Potter), the Edgeworth line died out with him. <br/><br/>Edgeworth was educated at Edgeworthstown by tutors until 1862, when he went on to study languages and the classics at Trinity College, Dublin.　He proceeded in 1867 to Oxford (initially at Exeter, then Magdalen and then, finally, from 1868, Balliol College).　He graduated in 1869 with a First in Literae Humaniores, but his degree was only awarded in 1873.　 <br/><br/>Around 1870, Edgeworth moved to Hempstead, in the environs of London.　Very little is known about the next decade of his life. Edgeworth subsisted on private income. He must certainly have studied law, for in 1877, he was called to the bar by the Inner Temple.　 It is also presumed that he learnt mathematics and statistics on his own.　It is likely that his interest in this topic was "inherited" from his father's friend, William Rowan Hamilton, from his Oxford tutor, Benjamin Jowett, and from his close friendship with his Hempstead neighbor, William Stanley Jevons. <br/><br/>In his first book, New and Old Methods of Ethics (1877), Edgeworth combined his interests, applying mathematics -- notably the calculus of variations and the method of Lagrangian multipliers -- to problems of utilitarian philosophy.　His main concern, following up on Sidgwick, was "exact utilitarianism", defined loosely as the optimal allocation of resources that maximized happiness of a society.　He argued that ultimately it falls upon the "capacity for pleasure" of people in a society.　He recognized that, under uncertainty,　"equal capacity" ought to be assumed.　However, he then went on to argue that certain classes of people "obviously" have a greater capacity for pleasure than others (e.g. men more than women), and thus some amount of inequality is justifiable on utilitarian principles. He struck a Darwinist note when, in an attempt to sound optimistic, he argued that "capacities" would evolve over time in a manner that the egalitarian solution would become justifiable in the future.　He resurrected his argument, and gave it a more frighteningly eugenicist tinge, in his 1879 paper. <br/><br/>Although qualified as a barrister, Edgeworth did not practice law but rather fell into the academic underground of Victorian Britain for the next decade.　Edgeworth lectured on a wide variety of topics (Greek, English theatre, logic, moral sciences, etc.) in a wide variety of settings, from Bedford College for Women in London to Wren's private training school for Indian civil servants.　The pay was miserable and prestige non-existent.　A hopelessly impractical and deferential man, his applications for more permanent and lucrative positions at established academic institutions met with heartbreakingly little success.　 <br/><br/>He was giving evening lectures on logic at King's College, London when he published his most famous and original book, Mathematical Psychics (1881).　 In it, he criticized Jevons's theory of barter exchange, showing that under a system of "recontracting" there will be, in fact, many solutions, an "indeterminacy of contract". Edgeworth's "range of final settlements" was later resurrected by Martin Shubik (1959) as the game-theoretic concept of "the core". Edgeworth also articulated what eventually became known as "Edgeworth's conjecture", namely that as the number of agents in an economy　increase, the degree of indeterminacy is reduced.　He argued that in the limit case of an infinite number of agents ("perfect competition"), contract becomes fully determinate and identical to the "equilibrium" of economists.　This proposition generated an enormous amount of interest during the 1960s and 1970s.　However, as situations of　"perfect competition" are not likely to be met in any society, Edgeworth had argued that the only way of resolving this indeterminacy of contract would be to appeal to the utilitarian principle of maximizing the sum of the utilities of traders over the range of final settlements.　Incidentally, it was in this 1881 book that Edgeworth introduced into economics the generalized utility function, U(x, y, z, ...), and drew the first "indifference curve". <br/><br/>Edgeworth's seminal work was given lukewarm reviews by W. Stanley Jevons (1881) and Alfred Marshall (1881).　 Edgeworth attempted to reach out again to economists and others by restating his theory in a series of journal publications (e.g. 1884, 1889, 1891).　Marshall appropriated Edgeworth's result in his own Principles (1890) textbook, but his distortion of the idea led to a brief controversial exchange of notes in the Giornale degli Economisti in 1891.　Alas, it all to no avail. Marshall had successfully swept the entire matter under the rug, where it was to stay for much of the next eighty years. <br/><br/>Edgeworth's interests were changing anyway.　From 1883 onwards, Edgeworth began making his monumental contributions to probability theory and statistics. In his 1885 book Metretike, Edgeworth presented the application and interpretation of significance tests for the comparisions of means.　In a series of 1892 papers, Edgeworth examined methods of estimating correlation coefficients.　Among his many results was "Edgeworth's Theorem" giving the correlation coefficients of the multi-dimensional normal distribution.　For his efforts,　he was elected President of Section F of the British Association for the Advancement of Science in 1889 and later served as president of the Royal Statistical Society (1912 to 1914).　 <br/><br/>In 1888, on the strength of testimonials from friends and luminaries such as Jevons and Marshall, Edgeworth finally attained his first professional appointment, to the Tooke Chair in Economic Sciences and Statistics and King's College, London.　But that was only a stepping stone. In 1891, he was elected Drummond Professor and Fellow of All-Soul's College in Oxford, a much-craved position he would hold until retirement.　 <br/><br/>In 1891, he was also appointed the first editor of The Economic Journal, the main organ of the fledgling British Economic Association (what later became the Royal Economic Society).　This was a task he performed with remarkable diligence until 1911, when the post was assumed by John Maynard Keynes.　Edgeworth returned as joint editor in 1919, when Keynes had gotten too busy with other activities.　Edgeworth continued actively in this role until his death in 1926.　 <br/><br/>His interest in economic theory picked up again around this time.　In 1894, he published a survey of international trade theory in a series of articles in the Economic Journal.　 In it, he pioneered the use of offer curves and community indifference curves to illustrate its main propositions, including the "optimum tariff".　In that same year, he engaged Eugen von B鰄m-Bawerk in a brief controversy over the opportunity cost doctrine.　 <br/><br/>In 1897, he published a lengthy survey of taxation.　 It was here that he articulated his famous "taxation paradox", i.e. that taxation of a good may actually result in a decrease in price.　His paradox was disbelieved by contemporaries, "a slip of Mr Edgeworth", as E.R.A. Seligman put it.　However, many years later, Harold Hotelling (1932) rigorously proved that Edgeworth had been correct.　Edgeworth also set the utilitarian foundations for highly progressive taxation, arguing that the optimal distribution of taxes should be such that "the marginal disutility incurred by each taxpayer should be the same" (Edgeworth, 1897).　 <br/><br/>It was also in 1897 when Edgeworth produced his Giornale article on monopoly pricing, where he criticized Cournot's exact solution to the duopoly problem with quantity adjustments as well as Bertrand's "instantly competitive" result in a duopoly model with price adjustment.　Instead, Edgeworth showed how price competition between two firms with capacity constraints and/or rising marginal cost curves resulted in indeterminacy.　For a modern statement of the "Bertrand-Edgeworth" duopoly model, see Levitan and Shubik (1972). <br/><br/>As a critic of the marginal productivity theory, Edgeworth's articles (1904, 1911) helped refine the Neoclassical theory of distribution on a sounder basis.　During the First World War, Edgeworth became particularly interested in questions of war finance.　His work in this, although highly original, were a bit too theoretical and did not achieve the practical influence he had hoped. <br/><br/>Finally, as editor of the Economic Journal, Edgeworth often took upon himself the role of reviewing new books in economics.　He produced a prodigious amount of reviews, some of which have became classics on their own. <br/><br/>Edgeworth's contributions to economics were stunning in their originality and depth.　But he was notoriously poor at expressing his ideas in a way that was understandable to most of his contemporaries.　Trained in languages and the classics, he habitually wrote (and spoke!) in long, intricate and erudite sentences, sprinkling them with numerous obscure classical and literary references.　He was in the habit of inventing words　(e.g. brachistopone = the "curve of minimal work") without bothering to define them clearly for readers who could not spot the Greek roots.　 <br/><br/>If his prose was taxing to read, his use of mathematics was even more negligent of his readers' abilities.　Having taught himself mathematics, Edgeworth must have assumed everyone else had done so as well. He did not bother to provide preliminary explanations of the techniques he was using.　Without warning, Edgeworth would glide breathlessly back and forth from his impenetrable prose to no less impenetrable mathematical notation and analysis.　 <br/><br/>A final point about his personality may be worth mentioning.　Many have accused Edgeworth of being excessively "deferential" to authority.　He certainly had many "heroes" upon whom he heaped high praise, such as Sidgwick, Jevons and Galton.　But he was also quick to wrap his words in velvet when handling opponents such as J. S. Nicholson, Charles Bastable, E.R.A. Seligman and Alfred Marshall.　 <br/><br/>However, this "deferential" aspect of his character may be due to the simple fact that Edgeworth was not a fighter by nature.　Perhaps the painful decades of professional insecurity contributed to this fear.　 Although he was involved in several critical controversies (as was inevitable for such an original thinker), he would usually withdraw at the first sign of resistance or petulance on the part of his intellectual opponent.　His exit would usually be accompanied with a shower of flattery in the hope of avoiding any ill-feeling.　And many of his opponents were remarkably vicious.　Alfred Marshall, for instance, was a notoriously dirty scrapper and was not averse to intimidation in order to win a debate.　If Edgeworth "exhalted [Marshall] to Achilles" (as Schumpeter (1954: p.831) described it), it might be partly because he wanted to avoid incurring his wrath.　 <br/><br/>Nevertheless, at Oxford and the Royal Economic Society, Edgeworth was largely regarded as "Marshall's man" and, indeed, he often solicited Marshall's opinion on many of his decisions.　Whatever his motivations, it is true Edgeworth's professional activities contributed directly to the ascendancy of　the Marshallian Neoclassical hegemony and the decline of alternative approaches in Britain around the turn of the century.　He blocked Oxford appointments to "undesirable"　heterodox scholars such as John A. Hobson.　For the Economic Journal, Edgeworth seemed to adopt the editorial policy of rejecting papers which strayed from Marshallian Neoclassicism in their analytical approach or threatened to strike up debates on method that might be uncomfortable to the Marshallian orthodoxy.　The work of Lausanne School economists, like Barone, were routinely rejected, as were those of the English Historical school.　 In his own work and book reviews, Edgeworth defended the Marshallian position against the more radical Neoclassicals of the day. <br/><br/>Edgeworth himself never established a following and his work had little impact in Britain, with the possible exceptions of Arthur Bowley and W.E. Johnson.　Across the water, Edgeworth's work was respected by Irving Fisher, Knut Wicksell and Vilfredo Pareto, but most of his leads were not followed.　 <br/><br/>However, as the 20th Century progressed, Edgeworth's stock grew as Marshall's faded.　In the 1930s, some of his contributions were picked up by Paretians such as Harold Hotelling, John Hicks and Abba Lerner.　The 1960s and 1970s were characterized by the flowering of an "Edgeworthian" school, led by Martin Shubik, Herbert Scarf, G閞ard Debreu, Robert Aumann, Werner Hildenbrand and other mathematical economists. <br/><br/><a href="http://cepa.newschool.edu/het/profiles/edgew.htm" target="_blank"><font color="#0000ff">http://cepa.newschool.edu/het/profiles/edgew.htm</font></a>
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