Category Archives: books and book reviews

My review of Haskel and Westlake

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The book is Capitalism without Capital. Recall that this is the one book that made both Tyler’s and my list of books of the year. I write,

defending the use of a cost-based method to value intangible capital strikes me as based on hope rather than theory or evidence. The overall economic value of intangible investment does not necessarily equal the resource cost spent. Indeed, strong economic performance may come from particularly good investment choices being made on average, while weak economic performance may be due to misallocation of intangible investments.

2018 as a year of resistance

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Tyler Cowen predicts some themes for 2018.

Many of the biggest events of 2018 will be bound together by a common theme, namely the collision of the virtual internet with the real “flesh and blood” world. This integration is likely to steer our daily lives, our economy, and maybe even politics to an unprecedented degree.

My prediction is that a main theme of 2018 will be resistance. Not the Trump resistance, but resistance against technology that is increasingly perceived as adversarial.

Yesterday, I was woken from a sound sleep by a spam phone call on my cell phone. I would like to see the full weight of the law brought on phone spammers, including the death penalty. You think I’m kidding, but I’m not.

More realistically, I would propose that Congress pass a law saying that if the providers of land lines and cell phone service cannot reduce spam phone calls by 90 percent by the end of 2018, then the FCC should levy fines against them in the hundreds of millions of dollars. This stuff has got to stop.

I think that there is a large latent movement for resisting Facebook, Twitter, and addiction to smartphone apps of various kinds. Commenter Handle pointed recently to Paul Graham’s essay.

The world is more addictive than it was 40 years ago. And unless the forms of technological progress that produced these things are subject to different laws than technological progress in general, the world will get more addictive in the next 40 years than it did in the last 40.

That was written in 2010. I think the world has already gotten more addictive than it did in the previous 40 years. Maybe there will be a market solution. Maybe just a widespread consumer rebellion. But the issue is bound to get more and more attention.

As you know, I am bullish on self-driving cars. But look at the pushback I get from people who regard self-driving cars viscerally as a defeat for individual liberty and autonomy. The pushback suggests resistance.

Scott Galloway has become a YouTube star by sounding the alarm about the power of The Four, meaning Google, Facebook, Amazon, and Apple. The popularity of his analysis is another indicator of the sentiment of resistance.

Remember Kevin Kelly’s book, What Technology Wants. He takes the view that the force of technological evolution operates independently of our control. That would suggest that resistance is futile. But I still expect it to be a main theme for the new year.

What I’m Reading

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Matthew Walker, Why We Sleep. Too far off the topic of political economy to compete for a place on my list of best books of the year, but very strongly recommended.

Walker is highly opinionated. One of his opinions is that teenagers naturally stay up later and sleep later than children or adults. So high schools that start before 9:00 AM are causing harm. It would be interesting to see if changing the start time would be an intervention that overcomes the Null Hypothesis, including finding an effect that does not fade out after several years. Meanwhile, it’s another case for home schooling–you don’t have to make your teenager wake up prematurely to go to school.

What I am reading

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American Exceptionalism in a New Era. This is a conference volume from the Hoover Institute. John Cochrane was one of the participants in the conference, and I found about the book from his blog.

The conference was held in the fall of 2016, which means that the papers were prepared before the election, and perhaps even before it was clear that Donald Trump would be the nominee. Although there is a pattern of pessimism that runs through most of the essays, what strikes me is that the tone is less apocalyptic than what we are seeing from conservative intellectuals today. Victor Davis Hanson is one of the essayists, and although he plenty dour in his piece, he comes across to me as more sober and less strident than he does in his post-election writing.

If I am correct that conservative intellectuals are more anxious now than they were before the election, then I think that this may be justified. Whatever conservative gains might be made in the next year or two, the most important consequence could turn out to be the hardening of the hard left. For example, the WSJ has a story about the tax bill, pointing out that it has no bipartisan support, has many provisions that expire automatically, do that tax policy could be jerked in a very different direction in another few years.

I think that many conservative intellectuals believe, at least subliminally, that the Donald Trump wind will reap a very treacherous whirlwind.

Books of the year, 2017

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Tyler has given you his list. Mine, in order of quality:

Kevin Laland, Darwin’s Unfinished Symphony.

Richard Bookstaber, The End of Theory.

Jonathan Haskel and Stian Westlake, Capitalism without Capital.

Aaron Ross Powell and Grant Babcock (eds.), Arguments for Liberty.

Tim O’Reilly, What’s the Future?

Note that Tyler and I both came out with books this year. His was The Complacent Class and mine was a new edition of The Three Languages of Politics. I do not think our lists overlap at all, which is unusual. UPDATE: a commenter points out that Tyler and I both recommend Capitalism without Capital.

Are locational wage differentials also productivity differentials?

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I think that an argument about this arose in the comments on this post. Let me provide a framework for discussion.

Suppose that we observe that zip code X has higher average wages for waiters than zip code Y. Can we infer that waiters in X are more productive than waiters in Y? Can we infer that removing barriers to mobility so that waiters can move more easily from Y to X will raise real GDP?

I think that we need to know more about why waiters are paid more in X.

a. It could be that, working with a given level of capital, the same waiter can serve more customers per hour in X than in Y. Maybe restaurants in zip code X are better managed. Or maybe restaurants in zip code Y do not get enough customers.

b. It could be that the cost of living is higher in X than in Y. Waiters serve the same number of customers per hour in each, but if you raised wages in Y all the waiters would move there to get a higher real income. There has to be a wage differential to compensate for the cost of living differential.

If (a) is true, then removing mobility barriers would raise real GDP in the restaurant industry. But if (b) is true, then removing mobility barriers would not raise real GDP in the restaurant industry.

Suppose that the mobility barrier is a housing market restriction in X. Then getting rid of the housing restriction might raise social welfare by making the housing market function more efficiently. But there is no additional benefit from waiter productivity. What would happen if you got rid of the housing market restriction is that the wages of restaurant workers in X and Y would equalize. As waiters move from Y to X, the wage differential would go away. The new wage would be somewhere between the old wage in X and the old wage in Y.

Note that in case (b), restaurants might use more capital in X than in Y, because the cost of labor is higher (because the cost of living is higher). That would enable waiters in X to serve more customers per hour than in Y, but this is not a pure productivity differential. If you remove the mobility restriction, then eventually the capital intensity of restaurants in X and Y will be equalized.

What if the main difference between zip code X and zip code Y is that quality of life is better in zip code X? In that case, other things equal, cash wages ought to be lower in zip code X. Of course, other things are unlikely to be equal. Housing supply is probably not perfectly elastic, so some of the quality-of-life differential should be eaten up by housing costs. And of course, quality of life means different things to people with different tastes, and that accounts for some (much?) of location choice.

If I might try to coin a phrase of opprobrium, I believe that economists who equate locational wage differentials to productivity differentials are guilty of casual neoclassicism. They should be required to read James Buchanan’s Cost and Choice and take an exam afterward.

My own review of Eliezer Yudkowsky

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My review of Inadequate Equilibria.

The most significant episodes in my career have been when I stood for heterodox beliefs. For that reason, Yudkowsky’s book raised issues that matter to me, even though I did not always find Inadequate Equilibria to be clear or convincing.

This essay proceeds as follows. I will articulate Yudkowsky’s two major themes in two ways, first using jargon from calculus and statistics, then using plain English. Next, I will tell some stories from my own life that relate to these themes.

Because this is an important topic for me, I recommend reading my entire essay.

Scott Alexander on Eliezer Yudkowsky

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Scott writes,

Everyone hates Facebook. It records all your private data, it screws with the order of your timeline, it works to be as addictive and time-wasting as possible. So why don’t we just stop using Facebook? More to the point, why doesn’t some entrepreneur create a much better social network which doesn’t do any of those things, and then we all switch to her site, and she becomes really rich, and we’re all happy?

The obvious answer: all our friends are on Facebook. We want to be where our friends are. None of us expect our friends to leave, so we all stay. Even if every single one of our friends hated Facebook, none of us would have common knowledge that we would all leave at once; it’s hard to organize a mass exodus.

This is Scott’s example of what Yudkowsky calls in his new book Inadequate Equilibria. Another excerpt from Scott’s review:

The Inside View is when you weigh the evidence around something, and go with whatever side’s evidence seems most compelling. The Outside View is when you notice that you feel like you’re right, but most people in the same situation as you are wrong. So you reject your intuitive feelings of rightness and assume you are probably wrong too.

…Eliezer warns that overuse of the Outside View can prevent you from having any kind of meaningful opinion at all.

My thoughts:

1. By the time this post goes up, I will have finished the book (recall that I typically schedule posts two or more days in advance). When I finish it, I am likely to write a long review.

2. The book is worth your time and your money.

3. I believe that Yudkowsky describes a real problem. Rather than call it “inadequate equilibria,” I would use a term popular in mathematical economics, “local optimum.” A group can find itself at a local optimum that is not the global optimum. It remains stuck at the local optimum because it resists going downhill to eventually go uphill.

Yudkowsky is focused on what I would call an intellectual local optimum. That is, it is possible for people to be stuck in a set of beliefs (leading to actions) that are difficult to discard but far from the global optimum. This is the way David Colander and Roland Kupers describe the state of economic thinking in their book Complexity Economics, which I described as

highly ambitious, always stimulating, and often frustrating.

I expect to say the same thing about Inadequate Equilibria. It is even more frustrating.

[UPDATE: I did indeed finish the book. I am glad that it stimulated me to think about the topic and to write an essay. But I think that you will find my essay on the topic will be more concise and more helpful than the book itself. I expect to have the essay up later this week on Medium.]

Disaggregating the economy: clusters ten years later

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A dozen years after coming out with The Clustering of America, Michael Weiss published The Clustered World, in 2000. This incorporated census data from 1990, which moved the analysis 10 years forward, but still leaves it well out of date as of 2017.

There was a movement to outlying locales that Weiss described as “repopulating rural America,” which struck me as a questionable description. I wonder if instead it represented metro areas spreading out into “edge cities.”

There was a rise in the Hispanic population, and Weiss claimed that this population was showing signs of wanting to stick together, rather than to assimilate into the rest of the country. He also saw an increase in isolation of the African-American population, which is the opposite of what one would have extrapolated based on prior trends toward integration.

Weiss used a survey of journalists to find that they lived predominantly in a few clusters toward the upper end of the income and status scale. It was already clear to him that they would have difficulty relating to people in middle-class and poor clusters.

Writing in 2000 and looking ahead, Weiss foresaw a continued increase in growth in far suburbs. Also, he made the straightforward projection that the Baby Boom generation would be headed toward a lifestyle characterized by retirement. With aging in general, he expected to see new clusters emerging with the age 55-75 bloc, as well as a cluster of people over 85 and ensconced in assisted living facilities.

He thought that there would be a distinctive Asian cluster, but my impression is that this has not developed. If I am correct about that, then the explanation is pretty simple. The “Asian” category is too broad, encompassing mainland Chinese, Taiwanese, Japanese, Koreans, Vietnamese, Indians, Pakistanis, and so on. These disparate nationalities do not all naturally congregate with one another. Instead, one is likely to find them dissolved into the rest of the U.S. population.

I would be curious to see what clusters would show up today. I assume that Charles Murray’s Coming Apart story means that we would see clusters that differ dramatically by marital status. We would see households with two married adults in relatively large numbers in affluent zip codes, and we would see single parents prevalent in poor zip codes.

I speculate that we would see a decline in the share of employment in the for-profit sector and an increase in employment in non-profits. This is based in part on the growth of the New Commanding Heights of education and health care. Also, I am guessing that the super-rich are inclined to fund non-profits, so that the size of that sector goes up as more wealth accrues to the super-rich. I do not know how significant a trend this is, or how well it can be measured.

I speculate that we would see an increase in the urban-rural divide. That is, compare average incomes in zip codes where most households are within, say, 25 miles of a major city (one of the top 20, say) with zip codes where most households are more than 50 miles from a major city.

I speculate that differences in average levels of education across zip codes now are even more predictive of income differences than they were twenty years ago.

I speculate that we would see little progress in integration of African-Americans and Hispanics. They would continue to appear in their own distinctive clusters more often than mixed in with clusters of non-Hispanic whites.

Revive this research

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I just finished re-reading The Clustering of America, by Michael J. Weiss. It is a narrative description of forty different socioeconomic clusters, derived primarily from census data, mixed with some market information. It was published in 1988.

1. Somebody should keep this project going. Weiss published an updated version in 2000, which I will read next. But there would be much to be gained by providing a narrative that describes socioeconomic clusters based on the most recent data available (2010 if you take the most recent census, but my guess is that you could get reasonable estimates for 2015). It would be valuable to look at the cluster evolution over time.

2. The company with the data, Claritas, still exists. Elsewhere, of course, there is much more data, at companies like Google and Amazon. I suppose it is easier for those firms to merge census data in with their own proprietary data than it is for someone outside of those firms to start with the Claritas data and attempt to acquire and integrate the information from the web giants.

3. Weiss offered a brief section, called “clusters of the future.” One of them, which he called Gentrification Chic, seems spot on. Other predictions are not as easy to defend.

Stanford University reports that twenty occupations will account for 35 percent of the new jobs in the ’80s, but only two of them, elementary-school teaching and accounting, require college degrees. The AFL-CIO predicts that by 1990 the nation will be home to 500,000 “surplus college graduates” with outmoded skills. The end of the decade may bring about a cluster for the postindustrial age: New-Collar Condos. In city condo and townhouse developments, singles and couples will work in service-industry professions, as paralegals, computer programmers and medical assistants.

Before you snort at the prediction of “surplus college graduates,” consider why that prediction appears to be wrong. Yes, if you compare incomes of people with college degrees with those lacking a college degree, the gap is wide and has gotten wider. However, (a) it may nonetheless be true that a lot of college graduates are doing jobs that use skills not acquired in college; (b) some of the “college premium” represents returns to signaling or licensing requirements; (c) the ordinary BA has not done so well in the market. Graduate degrees and STEM undergraduate degrees account for much of the college premium.

Weiss does not appear to have obtained an advanced degree. However, The Clustering of America is a classic work of social science.