Earl Thompson

Earl Thompson was in the economics department at UCLA from 1965 until his death in 2010. He is not well-known, or at least not as well-known as he should be. His work spans a number of fields, from macroeconomics and monetary theory to growth to game theory to public choice. He had a reputation as an independent thinker. He was a member of the UCLA faculty at a time in which the department was known for its unique and independent way of using economics to think about the world. On this page, I organize his work (or attempt to) along its subject matter. Thompson's papers are provocative and his conclusions often contrast with standard economic thinking. These papers also often require careful reading. People familiar with his work, however, recognize his brilliant mind. Even if you find his arguments in any of these papers unconvincing, you will nonetheless find yourself thinking in-depth about the arguments again and again.

Monetary Theory
  • "The Theory of Money and Income Consistent with Orthodox Value Theory," in Horwich and Samuelson (eds.), Trade Stability, and Macroeconomics: Essays in Honor of Lloyd Metzler, (1974). In this paper, Thompson first begins by outlining how one could fit money into orthodox value theory, a challenge that has existed since John Hick's paper in the 1935. Given his integration of money into value theory, Thompson then discussed the macroeconomic implications of his framework. This paper is entirely written word. There is no math. For those interested in his mathematical representation of these ideas, see the following papers:
  • "Free Banking Under a Labor Standard" (as far as I know this is unpublished). This is the shortest and perhaps most dense paper written on and optimal monetary system. Thompson argues that this system would have three characteristics: (1) free banking, (2) a dollar would be defined to purchase a particular quantity of labor (e.g, one dollar buys 5 minutes of labor), (3) the dollar would be convertible into some quantity of gold. The basic idea is to have a free banking system in which the money supply is subject to a feedback mechanism (gold redemption) and the nominal wage is fixed.
Asset Bubbles
  • "The Tulipmania: Fact or Artifact?", Public Choice, Vol. 130, p. 99 - 114, (2006). This paper is one of the most important papers that Thompson ever wrote in terms of empirical evidence. Most economists are familiar with the supposed bubble in tulip bulbs in 17th century Holland. I say supposed bubble because Thompson argues that there was nothing crazy about the pricing of tulip bulbs. In fact, he argues that the reason that there was a supposed bubble was due to the fact that tulip bulbs were initially purchased based on what would be considered a futures contract. However, due to a brief legislative change, there was a period of time in which these futures contracts were converted to option contracts. He argues that this brief change can explain the fluctuations in the price of tulip bulbs.
  • "Predicting Bubbles" (with Charles Hickson), Global Business and Economics Review, Vol. 8, No. 3/4, (2006). Okay, so this is what I'm talking about when I say his papers are provocative. Thompson and Hickson argue that long-lasting bubbles are generated by the government. The paper is notable in that they predict the housing bubble in the U.S.

Institutions and Public Choice

In the 1970s, Earl Thompson started down a path of research that would continue through his career. This research represented the intertwining of institutions and public choice.
  • "Taxation and National Defense", Journal of Political Economy, Vol. 82, No. 4, p. 755 - 782, (1974). In this paper Thompson argues that the optimal tax structure for a country should be one that is structured around national defense. He presents evidence that the U.S. tax system is the approximately optimal tax system using this criteria.
  • "An Economic Basis for the `National Defense Argument' for Aiding Certain Industries," Journal of Political Economy, Vol. 87, No. 1, (1979). This paper is essentially an extension of the previous paper in that Thompson argues that many protectionist policies are optimal when considered in the context of national defense. He again shows that U.S. policy is approximately optimal in this context.
  • "On Labor's Right to Strike", Economic Inquiry, Vol. 28, p. 640 - 653, (1980). In this paper Thompson argues that under certain conditions a strike by workers will actually benefit capital owners. He argues that the right of labor to strike and the existence of strikes are often explained by the profitability of the strike to capital owners.
  • "Characteristics of Worlds with Perfect Strategic Communication", Journal of Economic Theory, Vol. 23, No. 1, p. 111 - 119, (1980). This paper as well as the one that follows are designed to discuss how institutions emerge in society. Thompson posits the idea of a hierarchical structure in society in which each group commits to a reaction function. The resulting institutions are Pareto optimal, given those reaction functions. This model pops up throughout Thompson's subsequent work to explain why we get efficient institutions (like the defense-based tax system) despite the fact that very few people would be able to articulate its purpose. The paper below is a more popular extension of this paper.
  • "A Pure Theory of Strategic Behavior and Social Institutions" (with Roger Faith), American Economic Review, Vol. 71, No. 3, p. 366 - 380, (1981).
  • Ideology and the Evolution of Vital Economic Institutions: Guilds, The Gold Standard and Modern International Cooperation. (with Charles Hickson). Kluwer Academic Publishers, 2000. This book is an attempt to summarize and extend Thompson's work on institutions, growth collapses, and globalization. The book is exploding with ideas. Some of them you will find convincing. Others you might find crazy. However, the book will make you think. You won't get these types of arguments or this type of thinking from any other economist.
  • "What Globalization is Really All About." This was a keynote address that Thompson gave at a conference. It is a short summary of Thompson's career and his perspective on globalization.

Other Work

This is far from an exhaustive account of Thompson's work. For a summary of his work, see "A tribute to Earl A. Thompson and, in his own words, a summary of his general economic and social theory" by Don Allison Jr. and Thomas Borcherding in Public Choice, (2013).