Category Archives: books and book reviews

Matt Ridley’s Latest

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It is called The Evolution of Everything. He contrasts decentralized trial-and-error evolution with top-down control in many arenas, from biology to technology to culture. My first thoughts.

1. He offers full-frontal libertarianism. On money, he cites Selgin. On education, he cites Tooley. etc. Incidentally, on culture he cites Henrich, whose book I interrupted to read Ridley’s and who does not seem to grasp the libertarian implications of his own work.

2. He cites a legal scholar with whom I was not familiar: Oliver Goodenough. Actually, I met Oliver a couple of times through a mutual friend–more than 40 years ago.

3. On the evolution of marriage, he writes that hunter-gatherer societies are mainly monogamous.

But as soon as farming came along, 10,000 years ago, powerful men were able to accumulate the resources to buy off and intimidate other men, and to attract low-status women into harems. . .If only to try to satisfy the low-status men, societies that allowed widespread polygamy tended to be very violent toward their neighbors. This was especially true of pastoral societies reliant on sheep, goats or cattle, whose wealth was mobile and showed scale economies. . .herders from Asia and Arabia not only experienced chronic violence, but kept erupting into Europe, India, China and Africa to kill men and abduct women.

…The transition to monogamy is a big theme of Christianity. . .The winners from the re-emergence of monagamy in late antiquity would have been the high-born women, who got to monopolize their husbands, and the much more numerous low-born men, who got to have sex at all.

4. On the advantage of urbanization for specialization and trade,

In America as a whole, nearly twice as many people work in grocery stores as in restaurants. In Manhattan, nearly five times as many work in restaurants

5. On the inexorable rise of economic well-being,

Stagnationism has its fans in every generation.

6. On technology, he argues strongly for context as a causal factor (“the adjacent possible”) and against individual agency (the heroic inventor). One implication:

having argued for the incremental, inevitable and collective nature of innovation, I am not a fan of patents and copyright laws. They grant too much credit and reward to individuals

7. Speaking of technology’s evolution, when he writes

The internet revolution might have happened ten years earlier if academics had not been dependent on a government network antipathetic to commercial use.

he is blowing smoke. The arrival of the commercial Internet is instead an example of context. Telecommunications pre-internet used circuit-switching networks. The Internet uses packet switching. Until relatively recently, circuit switching was much less expensive (the cross-over point was roughly the year 2000). Packet switching became economical only after sufficient iterations of Moore’s Law had taken place. In 1985, the cost of building out a mass-market Internet would have been astronomical.

Questions for Garett Jones

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After a quick reading of Hive Mind. The core issue is what he calls the paradox of IQ. That is, among individuals, the correlation between IQ and income is modest. However, among nations, the correlation between average IQ and average income is strong.

How does your high IQ raise my income? Think of four possible explanations for this paradox.

1. Statistical artifact.
2. Proximity effect–I earn more income by living close to people with high IQ’s.
3. Cultural effect–people with high IQ’s transmit good cultural traits to me.
4. Political effect–having people with high IQ in my jurisdiction leads to me enjoying better government.

Can we rule out statistical artifact? Put it this way. Suppose we chose 1000 people at random. Then we create 50 groups of them. Group 1 has the 20 lowest IQ scores. Group 2 had the next 20 lowest IQ scores, etc. Then we run a regression of group average income on group average IQ for this sample of 50 groups. My prediction is that the correlation would be much higher than you would get if you just took the original sample of 1000 and did a correlation of IQ and income. I think that this is because grouped data will filter out noise well. Perhaps the stronger correlation among national averages is just a result of using (crudely) grouped data.

Can we sort out between proximity effects, cultural effects, and political effects? Perhaps a natural experiment involving people from different cultures living moving to different jurisdictions, or people living close to one another but having different cultures?

The most parsimonious proximity effect could be capital per worker. Assume that people tend to invest close to home (Jones calls this the Feldstein-Horioka effect when it applies across countries). Then if high-IQ people invest more wisely, then I will have better capital to work with if I live close to high-IQ people. Or if high-IQ people invest more (because, as Jones points out, they are more patient), then I will have more capital to work with if I live close to high-IQ people. How well does capital per worker serve as a channel for transmitting someone else’s IQ to my income?

Another proximity effect would be strong complementarity in team production (what Jones, following Kremer, calls the O-Ring effect). If the value of my output depends on the value of others in a team, then I will be better off living close to people with high IQ’s.

What happens when you divide the U.S. into fifty states and put teach state into the database with other countries? My guess is that Mississippi will look really good on average income relative to average IQ when you compare it with Denmark. If so, is that because of high capital per worker in Mississippi? A higher trust culture? Or better overall governance than Denmark?

What I’m Reading

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Hive Mind, by Garett Jones.

As far as I can tell, he and Joseph Henrich are unaware of one another’s work. Jones emphasizes what he calls the paradox of IQ. That is, although the correlation between IQ and income is only modest for individuals, it is strong for nations. Henrich, while not discussing this observation, offers an explanation, which is that intelligence is imparted by culture.

Interestingly, both Jones and Henrich make use of the correlation between test of reaction time and IQ tests. Jones says that this suggests that IQ must be an indicator, at least to some degree, of physiological differences among individuals, not just some specific test-taking ability. Henrich says that the comparable performance of chimpanzees and humans on reaction-time tests shows that superior human intelligence is probably more cultural than physiological.

Ecologists and Engineers

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Don Boudreaux writes,

When a biologist encounters in a living organism a physical or behavioral trait that is unusual or unfamiliar, and that does not contribute to survival in any way that is immediately obvious, the biologist’s professional instinct is to think hard about that trait in order to identify its likely genetic benefit to its possessor. The biologist, upon encountering such a trait, does not leap to the conclusion that he or she has encountered an instance of “nature failure.” The biologist, of course, recognizes that nature and natural selection are never perfect; sometimes living creatures are indeed saddled with traits that do indeed reduce their genes’ chances of survival. But this possibility of “nature failure” is not the competent biologist’s first go-to explanation whenever he or she cannot grasp the reason why natural selection might have created in the organism this unusual or unfamiliar trait.

In his new book, Foolproof, Greg Ip suggests that there are two types of economists: ecologists; and engineers.

An engineer thinks about how to design a machine. An ecologist thinks about how to understand and protect an evolving system.

In The Book of Arnold, I suggest that after the Second World War, the MIT economics department, fed by funding from the Department of Defense, promoted the engineering mindset. This mindset then took over the ecosystem of academic economics, which those of us with the ecological mindset struggle against.

Intellect and Politics

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Chris Dillow writes,

I would rather have second-rate politicians who know they are duffers than ones who believe they are brilliant.

Nice line. Read the whole post. Pointer from Mark Thoma.

In The Secret of Our Success, Joseph Henrich argues that individual humans are not so very intelligent on our own. Instead, it is out collective culturally-acquired knowledge that is impressive. One implication that I draw from this is that we should not be looking for some superior intellect to run our lives. Our lives are better run by drawing on our collective wisdom.

Wray on Minsky

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My review of the book says,

While L. Randall Wray also praises Minsky for his anticipation of the financial crisis of 2008, he provides a much more nuanced and complete picture of Minsky’s analytical framework than I had encountered previously. While I am not completely converted, I came away from the book with considerably more understanding of Minsky’s views and a greater respect for them.

I still consider this one of the best books of the year.

Joseph Henrich on Cultural Transmission

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The book is The Secret of Our Success, and I am only a little way into it. An excerpt:

evolutionary reasoning suggests that learners should use a wide range of cues to figure out whom to selectively pay attention to and learn from. Such cues allow them to target those people most likely to possess information that will increase the learner’s survival and reproduction. . .individuals should combine cues related to the models’ health, happiness, skill, reliability, competence, success, age, and prestige, as well as correlated cues like displays of confidence or pride. These cues should be integrated with others related to self-similarity, such as sex, temperament, or ethnicity

I think that by emphasizing how little knowledge we generate internally compared with knowledge we acquire through cultural transmission, this book could bolster libertarian/conservative views. It certainly reinforces my doubts about the ability of technocrats to “fix” society. Henrich does not do much with this, although skipping ahead to the next-to-last paragraph in the book:

Humans are bad at intentionally designing effective institutions and organizations, though I’m hoping that we get deeper insights into human nature and cultural evolution this can improve. Until then, we should take a page from cultural evolution’s playbook and design “variation and selection systems” that will allow alternative institutions or organizational forms to compete. We can dump the losers, keep the winners, and hhopefully gain some general insights during the process.

Yes, Professor Henrich, we have a term for that. We call it “the market.”

Good Turner, Bad Turner

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In Between Debt and the Devil, Adair Turner writes (p. 61),

Textbook descriptions of banks usually assume that they lend money to businesses to finance new capital investment…But in most modern banking systems most credit does not finance new capital investment. Instead, it funds the purchase of assets that already exist and above all, existing real estate.

…Different categories of credit perform different economic functions and have different consequences. Only when credit is used to finance useful new capital investment does it generate the additional income flows required to make the debt certainly sustainable. Contrary to the pre-crisis orthodoxy that the quantity of credit created and its allocation between different uses should be left to free market forces, banks left to themselves will produce too much of the wrong sort of debt.

What is good about the book is that he invites us to examine how credit is created and where it goes. As he points out, standard macro models have totally ignored this issue.

What is bad about the book is embedded in the last sentence quoted above. We are left to assume that the huge allocation of credit toward housing was the operation of “free market forces.” I do not know about other countries, but for the United States this is totally false. The government was very much involved in channeling credit, and it channeled as much as it could toward housing finance.

Still, I think that what is good about the book makes it worth reading. I plan to say more when I have finished it.

The Year I Beat Bill Gates

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Shane Greenstein writes,

Gates misinterpreted the value of the Internet’s commercial prospects. This error would take three interrelated forms in its conventional assessment:

1. Underestimating the Internet’s value to users;
2. Underestimating the myriad and clever ways entrepreneurs and established firms would employ Internet and web technologies to provide that value for users;
3. Underestimating the ability of Internet firms to support applications that substituted for Microsoft’s in ther marketplace.

This is from How the Internet Became Commercial, Greenstein’s new book. I started my business on the Internet in April of 1994. Gates did not become a believer in the Internet until a year later.

Greenstein offers a well-judged analysis of the business strategy and Internet governance issues during the first decade of the Internet’s commercialization, starting in 1994. However, I think that there is still plenty of room for someone to write another book on this historical episode. I would like to see a book that makes the dynamics more vivid.

In the introduction, Greenstein sketches a few timelines on which he lists events. I am not clear whether he chooses the events for their significance or to try and help the reader understand the order in which certain developments occurred. In any case, his choices are mostly very different from what mine would have been.

I actually would include several timelines:

–the release date and processing speed of Intel’s chips. Another would show

–the amount of hard disk storage on a top-selling personal computer each year.

–the speed of the most commonly used Internet connection each year. I remember when 28.8 Kilobytes per second was an upgrade.

–the number of people with Web access each year. When I started my business, unbeknownst to me that figure was less than a million. I had read, correctly, that there were 20 million Internet users in the U.S., and I very naively figured that this was approximately the number of people with Web access. The Web did not become a mass-market phenomenon until the fall of 1995, when AOL began offering Web access and Microsoft released Windows 95.

–the total number of web sites and the top five web sites in terms of traffic each year.

–well-hyped businesses that failed, such as MecklerWeb, Web TV, and PointCast Network.

–buzzwords that no longer have meaning, such as portal and push technology.

–creation of important software and protocols, such as JavaScript, Java, Flash, MP3, JPEG, and Linux.

–appearance of iconic web sites, such as Yahoo, Amazon and Google

–fading of once-iconic web sites, such as AltaVista, the NCSA home page, and the Netscape home page.

–Internet IPOs, by year

My point is that the environment evolved very rapidly. Your business strategy could not be based on what was there at the time. It had to be based on a guess about what was coming.

I describe my business experience in those days as a sequence of miscalculations, because I got so many things wrong. But I made some fundamentally good guesses about what was coming, and that was sufficient.

Proper Critiques of Economics

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Noah Smith writes,

some econ literatures are still crammed with mutually contradictory models for which the scope conditions are neither known nor specified. And the stock of existing theories is still enormous. In some areas, especially in macro, economists really do have theories that make almost any prediction, with no real way to choose between them except priors and politics. And many economists still have very little problem using modeling assumptions that have already been taken to the data with discouraging results.

Pointer from Mark Thoma. In his post, Smith tries to “score” various criticisms of economists. His post made me want to recycle a quote from Herbert Stein:

1. Economists do not know very much.

2. Other people, including politicians who make economic policy, know even less about economics than economists do.

[typo corrected]
Non-economists are responsible for many of the critiques of economists to which Smith gives a low score.

I have come to believe that economics is epistemologically difficult. That is, it is difficult to answer the question, “How do you know that?” Non-economists do not have much insight into this issue. Unfortunately, many economists lack insight as well.

The appeal of the mathematical approach is that it provides rigorous connections between assumptions and conclusions. The weakness of the mathematical approach is that it places tremendous pressure on one’s choice of assumptions. And, as Smith has pointed out, these choices are more arbitrary than they are in the hard sciences.

Economists can almost never directly test their assumptions. Milton Friedman famously suggested not worrying about direct testing. Instead, he proposed the indirect approach of testing predictions. In practice, however, this does not work, or at least it does not work cleanly.

One problem is that you can have two interpretive frameworks that both “predict” one observed phenomenon yet have different predictions about other phenomena about which we do not have precise observations. Consider the vast array of candidate explanations for the financial crisis, with widely varying implications about how one might try to prevent a recurrence.

Another problem is that when an anomalous observation appears to confound an interpretive framework, this fails to result in a decisive rejection of that framework. Instead, the framework is tweaked in order to accommodate the observation. So, when the huge fiscal contraction in the United States at the end of World War II did not lead to another Great Depression, the explanation might be “pent-up consumer demand.” When the inflation rate failed to obey the Phillips Curve in the 1970s, the explanation might be “supply shocks” and/or “higher expectations of inflation.”

If assumptions cannot be tested directly, and Friedman’s proposal to test predictions does not work, how will assumptions be chosen? The answer, all too often, is a combination of mathematical tractability and faddism. Economists will jump all over a model because it is fun to play with, regardless of how silly or irrelevant the set of assumptions may be. The overlapping-generations model of money would be a prime example.

My main concerns with mainstream economics include:

1. A bias toward “engineers” rather than “ecologists.” That distinction comes from Greg Ip’s new book, Foolproof. The engineer is like Adam Smith’s man of system, who ignores evolution, both as a factor that may permit markets to over come their own failures and as a factor that may cause government “solutions” to become obsolete.

2. A bias toward simplifying the phenomenon of specialization. Macroeconomists live in a world with one producer and one consumer (the “representative agent.”) Microeconomists live in a 2x2x2 world, with two factors of production, two goods, and two producers. They miss important differences between those worlds and the real world of millions of tasks being performed to lead to a final product.