Category Archives: books and book reviews

TANSTAAFM (M stands for market)

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So writes Yuval Noah Harari, in Sapiens.

There is simply no such thing as a market free of all political bias. The important economic resource is trust in the future, and this resource is constantly threatened by thieves and charlatans. Markets by themselves offer no protection against fraud, theft, and violence. It is the job of political systems to ensure trust by legislating sanctions against cheats and to establish and support police forces, courts, and jails which will enforce the law. When kings fail to do their jobs and regulate markets properly, it leads to loss of trust, dwindling credit and economic depression. That was the lesson taught by the Mississippi Bubble of 1719, and anyone who forgot it was reminded by the US housing bubble of 2007, and the ensuing credit crunch and recession.

There is perhaps something to be said for the notion that there is an interior optimum for trust in government. Too little, and you have weak property rights and an inability to safely make long-term investment. Too much, and government takes on too much power and creates a false impression that it can guarantee the safety of dangerous and misguided investment.

The Flynn Effect Puzzle

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From a BBC article.

Richard Lynn notes that measures of infants’ mental development increased in the UK and US at rates correlated to the increasing IQs of slightly older children. It’s difficult to see how Flynn’s theories are enough to explain this. “Are infants thinking more scientifically today?” he asks rhetorically.

Pointer from Neerav Kingsland, who writes,

For gains in IQ, I wonder whether changes in the method of harnessing energy caused IQ gains (our brains adapted to the needs of the new economy), or whether gains in IQ led to the development of new ways of harnessing energy (we got smarter and invented new ways of doing things).

My guess is that, for the transition from farming to industry, it’s the former.

Or to put it another way: humans developed the IQ we needed.

In Sapiens, Yuval Noah Hariri argues that foragers need more intelligence than farmers. Foragers need to know much more about their environment, including information about many varieties of plants. Farmers just need to know a routine for raising a staple crop.

One can argue that ordinary workers in the early stages of the industrial revolution did not need to know much, either. More recently, the skill demands of jobs have gone up, so that we may be reverting to forager-level intelligence.

But what is the mechanism by which “humans developed the IQ we needed.” For foragers, the mechanism is Darwinian. If you cannot remember which plants are edible, you die without passing on your genes. By the same token, farming is dysgenic. It allows more intellectually weak people to survive.

But does that mean that we should seek a eugenic explanation for the Flynn effect? That is, for the past hundred years, has the trend within a given country been for the proportion of children born of less-intelligent parents to decline? Researchers, including Lynn, seem to prefer nurture-based explanation.

MIT Economics and Academic Prejudice

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The MIT economics department’s dominance was fading just as I entered grad school there. David Warsh, himself a long-time chronicler of the department, reviews a book edited by E. Roy Weintraub on the golden age of economics at the Institute.

A sixth factor, advanced by Weintraub in the Transformation volume, argues that the rise of MIT stemmed from its willingness to appoint Jewish economists to senior positions, starting with Samuelson himself. Anti-Semitism was common in American universities on the eve of World War II, and while most of the best universities had one Jew or even two on their faculties of arts and sciences, to demonstrate that they were free of prejudice, none showed any willingness to appoint significant numbers until the flood of European émigrés after World War I began to open their doors. MIT was able to recruit its charter faculty – Maurice Adelmam, Max Millikan, Walt Rostow, Paul Rosenstein-Rodin, Solow, Evsey Domar and Franco Modigliani were Jews – “not only because of Samuelson’s growing renown,” writes Weintraub, “…but because the department and university were remarkably open to the hiring of Jewish faculty at a time when such hiring was just beginning to be possible at Ivy League Universities,”

Pointer from Mark Thoma. My Swarthmore College professor Bernie Saffran emphasized the anti-Semitism factor also. Bernie’s version was that Harvard’s anti-semitism made Samuelson feel that he would be better off at MIT, and once he went to MIT he went about using Jews to build a superior department to pointedly punish Harvard. It took almost three decades (roughly from the end of World War II to the late 1970s) for Harvard to come back.

Economists generally view prejudice by a firm as unsustainable, because that firm will lose out to competitors. The lesson I take from the Harvard-MIT story is that in academia prejudice can persist for a while, with long-term detrimental effects. Consider that as you read stories about prejudice against conservatives.

Read Warsh’s entire article, which covers much more ground.

UPDATE: For more on the economics of discrimination, check out the links on David Henderson’s post.

Harari on Money

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He writes,

Money. . .involved the creation of a new inter-subjective reality that exists solely in people’s shared imaginations.

money is the most universal and efficient system of mutual trust ever devised.

This is from his book Sapiens that I am currently reading.

I like to say that money is a consensual hallucination, using the phrase the William Gibson coined to describe cyberspace, a term that he also coined.

I want to push back against the materialist idea of money, in which its value is determined by the “quantity of money” in relation to other goods. Think of money as a protocol for exchanging goods, the way that TCP/IP is the basic Internet protocol for exchanging information between computers. The concept of a three percent increase in the supply of TCP/IP is nonsense.

What about the Fed? Think of the Fed as a big player in the repo market. It is a peer of Goldman Sachs.

What about hyperinflation? Think of that as the government needing to pay for its deficit spending through an enormous counterfeit operation, one that ultimately undermines the trust in money and wrecks the protocol for exchanging goods.

What I’m Reading

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Sapiens: A Brief History of Humankind, by Yuval Noah Harari. I think I mentioned this the other day. Harari argues that in prehistorical times humans were responsible for the extinction of many large species. I was reminded of this today when Tyler Cowen pointed to a piece on the relatively recent extinction of woolly mammoths on a large island. The story says,

Archaeological evidence suggests that humans reached Wrangel Island at roughly the same time the last mammoths vanished, but there’s no evidence yet to indicate that they ever hunted the mammoths. The more likely answer is climate change, which as a side effect might well have made it easier for humans to reach the island to serve as witnesses to the mammoths’ final days.

Harari points out that humans do not have to hunt creatures in order to cause their extinction. For example, humans could disrupt food sources.

I am only part way through the book. My ultimate evaluation may not be favorable.

The new Robert Putnam Book

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I got it as soon as it was released and finished it in a few hours.

I like his top third/bottom third way to approach inequality. Of the four forces, he emphasizes what I have been calling demographic disparity and what he calls, more descriptively, bifurcated family patterns; he mentions, using different terms, factor-price equalization and Moore’s Law, but does little with them. Nothing on the New Commanding Heights.

He is inexcusably shabby toward Charles Murray. He does not say he owes a debt to Murray. He does not summarize Coming Apart. He just gives it one brief, dismissive footnote.

Putnam plays very fast and loose with correlation and causality. At one point, he even admits this.

He never once mentions genetics as a factor in inequality. This biases the analysis much more in favor of policy remedies than is reasonable.

Overall, I came away with some new data points, but no new insights, and some anger and frustration with the flaws.

Some of the data and some of the analysis goes against his lefty readers’ biases, although he makes it easy for them to stumble over these truths, pick themselves up, and move on as if nothing happened. (Churchill’s phrase)

Sentences I Might Have Written

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from Megan McArdle:

1950s health care isn’t expensive; this same regimen would be a bargain at today’s prices. What’s expensive is things that didn’t exist in 1950. You can say that “health care” has gotten more expensive—or you can say that the declining cost of other things has allowed us to pour a lot more resources into exciting new health products that give us both longer and healthier lives.

In Crisis of Abundance, I wrote,

The American middle class can still afford the wonderful health care that was available in 1975–easily. . .as a thought experiment, a return to 1975 health care standards would completely resolve what is commonly described as America’s health care crisis.

You know, that book was written 10 years ago (it came out in 2006), and at the time I said it would have a shelf life of ten years, meaning that I thought that it would still accurately describe the issues for another decade. In fact, it is looking like it will be valid for another ten years. I would say that the majority of popular books on politics and economics expire much more quickly.

Four forces watch: In addition to the New Commanding Heights, McArdle’s essay also touches on the Demographic Divide.

while the college educated class seems to have found a new equilibrium of stable and happy later marriages, marriage is collapsing among the majority who do not have a college degree, leaving millions of children in unstable family situations where fathers are often absent from the home, and their attention and financial resources are divided between multiple children with multiple women.

Other sentences are reminiscent of The Reality of the Real Wage. There, I recycled a bit from my book.

My guess is that if you could find a health insurance policy today that only covered diagnostic procedures and treatments that were available in 1958, the cost of that policy would not be much higher than it was then. Much of the additional spending goes for MRIs and other advanced medical equipment, as well as for health care professionals with more extensive specialization and training than what was available 50 years ago.

I recommend McArdle’s entire essay. Brink Lindsey adds more statistics, such as

In 2011, 87 percent of kids who had at least one parent with a college degree were living with both their parents. For the children of high school dropouts and high school grads, the corresponding figures were 53 and 47 percent, respectively.

Finally, on this same topic, a reviewer (Francis Fukuyama) of an about-to-be-released Robert Putnam book writes,

One of the most sobering graphs in Our Kids shows that while the proportion of young children from college-educated backgrounds living in single-parent families has declined to well under 10 per cent, the number has risen steadily for the working class and now stands at close to 70 per cent.

Pointer from Tyler Cowen.

Piketty and Mort Sahl

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Timothy Taylor quotes from a recent journal article by Piketty, and then summarizes,

In case you didn’t catch all that, Piketty is noting that r>g is not useful for discussing income inequality, and does not necessarily lead to wealth inequality, and that the future of wealth inequality is highly uncertain. Instead, Piketty argues in JEP that when the difference between r and g is relatively large, it will tend to exaggerate the effect of other changes that make wealth more unequal. As he writes: “To summarize: the effect of r − g on inequality follows from its dynamic cumulative effects in wealth accumulation models with random shocks, and the quantitative magnitude of this impact seems to be sufficiently large to account for very important variations in wealth inequality.”

It was the humorist Mort Sahl who would say, “I am prepared not only to retract anything I said but to deny under oath that I ever said it.”

What I’m Reading

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A Critique of Democracy, by Michael Anissimov, and Democracy: The God that Failed, by Hans-Hermann Hoppe. Anissimov claims that Hoppe’s analysis can be used to justify a preference for monarchy over democracy. Anissimov writes,

The proposal for private rather than public government, at its core, is extremely simple: for something to be properly valued and taken care of it [sic], it must be owned. That includes government. If we want a government that is properly taken care of for the long term, it must be owned by someone. That means no democracy. Does this mean we’re sacrificing our “freedom”? No, because I don’t define freedom as being able to cast one meaningless vote among millions in an election.

I have no problem with belittling the value of the voice option. But it is not obvious to me that monarchy would work well.

First, there is the succession problem. As a citizen, I value continuity. A succession crisis, particularly one that turns violent, is going to create bad discontinuity. My reading of history is that monarchies tend to have succession crises.

Second, there is the problem of retaining the exit option. Just as I tend to place little value on voice, I place a high value on exit. Hoppe writes,

States will always try to enlarge their exploitation and tax base. In doing so, however, they will come into conflict with other, competing states.

I am more inclined to think that democracies will tend not vote to go to war purely to engage in expansion, whereas there is nothing to stop a monarch from doing so.

A bit later, Hoppe writes,

A small government has many close competitors, and if it taxes and regulates its own subjects visibly
more than its competitors, it is bound to suffer from the emigration of labor and capital and a corresponding loss of future tax revenue.

I believe that a monarch has a very strong incentive to try to close off the exit option. Our democracy may very well do this by making you forfeit some of your wealth if you give up citizenship. But still, I think that democracies will tend to be looser about allowing their citizens to leave.