Category Archives: books and book reviews

The Great Depression as a Coordination Failure

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In Fear Itself, Ira Katznelson shows how many intellectuals yearned for a planned economy, but without the ugly police-state repression of Fascist Italy or Communist Russia. As you know, I sense that Katznelson himself seems to still yearn for government oversight of the economy. In fact, Katznelson quote explicitly expresses disappointment that planning was superceded by what he called the “fiscal policy” approach (meaning Keynesian economics). Of course, I think that central planning is not the answer.

Katznelson disparages the Keynesians (and the monetarists) who came up with the aggregate-demand theory of the Depression. He clearly prefers the pre-Keynesian theory that the Depression was a breakdown of the capitalist system.

Here’s the thing. I agree with Katznelson.

The PSST story would look at the Depression as a coordination failure. The market price system, which is supposed to serve as a decentralized planning apparatus, screwed up. Old patterns of specialization and trade became unsustainable, and for a long time the market could not figure out new, sustainable ones.

The modern macroeconomic view is that the Depression was caused by a shortfall in aggregate demand, as opposed to a breakdown of the capitalist system. Instead, I prefer the pre-Keynesian diagnosis, although I do not believe that government officials could have done better by taking over more of the planning. To the extent that they attempted central planning through the NRA and various other New Deal initiatives, the results were certainly not good.

Hormones and Financial Intermediation

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A recent post reminded me that Jason Collins really liked The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust, by John Coates. Coates looks at how hormones are activated in traders. My guess is that I will get as much from Jason’s review as I would from the book. Jason writes,

In a bull market, testosterone surges through the population of traders. Each takes larger and larger risks, pushing markets to new highs and triggering further cascades of testosterone. Irrational exuberance has a chemical base.

Read the whole review. I would like to see the link between an individual short-term hormonal response and broad, long-term market trends established.

I do believe that there are cycles of financial intermediation. Remember how I think of financial intermediation. Households and businesses want to hold riskless, short-term assets while issuing risky, long-term liabilities. Financial intermediaries accommodate this by doing the opposite. When there is too little financial intermediation, opportunities to take reasonable risks are foregone. When there is too much financial intermediation, there is excessive risk-taking.

To a first approximation, I am not sure that simple trading of financial assets should boost testosterone on net, because financial trading is not positive sum. It’s not like “you want meat and I want shoes, so I’ll trade you meat for shoes.” Financial trading is closer to zero sum, which is why when you win you get high. The guy who sold you that stock that went up 5 points right after you bought it probably feels badly. So why should a bull market make more people feel high? Perhaps because as share prices increase, net financial intermediation is going up overall. That is, there are more short-term, low-risk liabilities being backed by more long-term, high-risk assets. Maybe that increased financial intermediation is accompanied by and reinforced by a hormonal response. Perhaps that is plausible, but it seems to me to require more of a stretch and, above all, more of a story of how markets react in the aggregate, or how System 2 and System 1 interact over long periods of time and across an entire array of market individuals and institutional relationships.

Jason Collins on Colander and Kupers

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He writes,

Overall, Complexity and the Art of Public Policy is a good book. However, the last third of the book did not convince me that complexity theory arms us with many new policy tools. A complexity frame punches holes in many of our methods of analysis and the policy options we put on the table using standard economic frameworks. But the very nature of complex systems makes it a challenge to propose options that we can claim with any confidence to have positive effect. Roland and Kupers have ventured into that area – which I am grateful for. I was glad to read a complexity book with an attempt to give some policy relevance without yet another description of the El Farol Bar problem. But the particular examples they provided leave me of the view that the strongest contribution of complexity theory will be to tell us when our standard economic policy tools will work, and when they won’t. That’s no small accomplishment, but in a world where we need to “do something”, it’s not an easy sell.

I called it the best book of 2014, and I think hardly anyone agrees with me. However, I found myself often frustrated by its flaws, and Collins shares my frustration. I strongly recommend reading Collins’ entire piece. I agree with every sentence in it.

Ira Katznelson is this respected?

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I just finished Fear Itself, his book on the Roosevelt-Truman years. My final reaction was, “Well written, interesting perspective, looks at political economy with about as much sophistication as Occupy Wall Street.” I looked him up to see if he had any connection to the Occupy movement, figuring he might be the sort of fringe professor who would get into it.

Boy, was I off. He is a major force in the academic world. Past President of the American Political Science Association. Current head of the Social Science Research Council. Fear Itself was recently awarded the Bancroft Prize.

I keep forgetting that it is people whose views of political economy resemble mine who are on the fringe in academia.

As for my disagreements with Katznelson, I barely know where to start. He acknowledges the consensus that Roosevelt’s National Recovery Act was a failure, but he has no idea why. He seems to think that it would have worked had it been better executed.

The view of most economists is that the last thing the American economy needed in the Depression was government-organized industry cartels, which is what the NRA was all about. In Randall Parker’s book interviewing economists on the Great Depression, even James Tobin said that Roosevelt was “lucky” that the Supreme Court invalidated the NRA. Of course, Tobin is a Keynesian, and Keynes is too far to the right for Katznelson, who is very sorry that “fiscal policy” took the place of “planning” as the main tool of government for managing the economy.

I found the book valuable. Actually better than any of the flawed books of 2014 (it was published in 2013). I plan to write a longer review, which will focus on Katznelson’s analysis of the politics of the period.

But right now I am sitting here dumbfounded that someone can attain such lofty professional status and be so clearly ignorant of Public Choice theory or the Knowledge Problem.

One possibility is that everyone is intellectually isolated nowadays. Everybody stays within their own bubble. But I doubt that. Conservatives and libertarians did not ignore Rawls. They did not ignore Piketty.

Instead, I think this reflects the ease with which someone on the left can obtain high status in academia, and the corresponding difficulty for those on the right. If you’re on the right, you have to demonstrate awareness of important left-wing academic ideas, or you will be will be widely denounced as an ignoramus. But the converse is not true. I would bet that I am the first person to dare to suggest that Katznelson suffers from ignorance.

Why Did the South Not Converge?

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From Ira Katzelson’s Fear Itself,

For even as industrialization was proceeding elsewhere, the South remained overwhelmingly rural and poor, with depleted land, a lquasi-feudal tenure system based on debt and fear, and many bankruptcies and foreclosures. The New Deal thus was a boon for a hardscrabble region that faced many barriers to economic development. These included a poorly educated and low-skilled white and black population, inferior roads, the outmigration of ambitious workers, a shortage of local investment capital, fewer native mineral resources than other regions, and a paucity of industrial research facilities. The South also experienced high freight rates, high tariffs, low commodity prices, and patterns of ownership that placed the control of financial, mining, manufacturing, transportation, and communications corporations mainly in the hands of northeastern capitalists, a pattern many southern commentators thought to be colonial in nature.

Some thoughts:

1. In my book with Nick Schulz, we emphasize that countries differ mostly in terms of intangible wealth. We focus on institutions (think of North Korea vs. South Korea). The main institutional difference that the South had was its Jim Crow laws. Were they enough to keep the region improverished?

2. Remember that there are many ways for regions to converge within the U.S. People can move to where incomes are higher. Capital can move to take advantage of cheaper labor. Why did these mechanisms not work? Again, race may have played a factor. Until after the second World War, the poorest part of the southern population, namely poor African Americans, was discouraged from moving north, because racism also existed in the north. By the same token, a large part of the southern labor supply that might otherwise have attracted northern capitalists to build factories was African American, and it would have been hard to find whites willing to work with blacks doing similar jobs or under black supervisors.

3. Divergence remains a feature of the American economy. Both within and across metropolitan areas, there are large income differences. Again, this poses the questioh of why there is not more movement of people to high-income locales and/or more movement of firms to low-wage areas.

4. Katzelson’s point is that politicians of the south actively sought redistribution, and this factored into their support for New Deal legislation.

5. Bryan Caplan offers a theory of coincidental advantages that may or may not be a convincing explanation for lack of convergence.

American Politics in the 1930s

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Carl Eric Scott reviews some books on the period, including Fear Itself by Ira Katznelson.

Katznelson shows us that there were German Nazi efforts in the 1930s to find and cultivate political allies in the American South, i.e., ones willing to emphasize the similarity of their racial ideology to that of Hitler, and that these efforts came away entirely empty-handed. Perhaps with the offense bred by a recognition of an unwelcome similarity, the Democratic South found Nazi Germany utterly repugnant. This had something to do with greater felt kinship to Britain in the Southern states, and to stronger military traditions and hopes for federal military bases, but it goes well beyond those factors. For whatever reasons, it seems the world might owe the survival of Britain in 1940 and then the defeat of Nazi Germany (42-45) to the South. To that South.

A Conflict of Rhetoric

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Lawrence Mitchell writes,

A very significant component of success – one that may even be more determinative than hard work – is luck. This is true, even if the advantaged have worked hard to maximize the benefits of that luck. By luck, I mostly mean circumstances of birth and natural talents and abilities (which might well include the propensity to work hard).

Why do the disadvantaged tolerate this situation? The American myth of self-reliance. No matter the vagaries of fortune, we consistently find that Americans at all levels believe in some variant of the Horatio Alger myth – the classic American rags to riches success story – despite strong empirical evidence that belies it.

Pointer from Mark Thoma.

On the other hand, James Otteson writes,

Human beings are capable of being worthy to be free. Human beings become noble, and, I would even suggest, beautiful, by the vigorous use of their faculties and they become dignified when their lives are their own…

This conception of moral agency allows one to be one’s own person, and to stand, or fall, on one’s own individual initiative, without having to beg for personal favors, without having to grovel at the knees of a king or flatter a lord or satisfy the pleasure of the Regulatory Czar. It grants people the freedom to go where their own abilities and initiative–not someone else’s mercy or condescension–can take them. Yet with that freedom comes responsibility for one’s actions. If you succeed, then you reap the benefits–and no one begrudges you your success because it means you have done well both for yourself and for others. If you fail, however, then you may pay the cost and (one hopes) learn from the experience.

…Contrary to widespread opinion, failure is not something that public policy should attempt to eliminate…failure, and experiencing the consequences attendant on having made decisions that led to failure, is an indispensible [sic] part of moral agency.

Those quotes are from Otteson’s recent book, The End of Socialism.

My sense is that these two authors talk past one another. Otteson’s rhetoric emphasizes personal decisions as the determinant of individual success. For Mitchell, it is the opposite–even a “propensity to work hard” is a matter of luck.

I find myself unwilling to accept either extreme. I am inclined to think that Otteson makes the scope of individual moral agency seem too large, and Mitchell makes that scope seem too small. However, I have yet to finish Otteson’s book or to start Mitchell’s.

Coincidentally, Charles Murray writes,

deeper personal qualities account for what we call political polarization, but that one specific dimension—our respective attitudes toward personal responsibility—accounts for a huge proportion of the polarization all by itself.

Read the whole piece.

James Otteson on Socialism

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In a Russ Roberts podcast, Otteson says,

So, who is making the relevant economic decisions? Is it a third party, a person, group, agency who is making it on behalf of others? That’s what I’m calling the impulse toward centralism. Or, is it principally individuals or communities, localized communities, themselves? That’s what I’m calling decentralized decision making. And that is a spectrum.

This ties in to what I call the FOOL theor, meaning Fear of Others’ Liberty. Chances are, few people want to cede their own decision-making to a third party. But many of us think that others’ decisions are bad for them or for society as a whole, and we want a third party to make those decisions instead.

Incidentally, I have started reading Otteson’s book.

My Review of Peter Wallison’s Forthcoming Book

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is here.

Wallison’s thesis is that policymakers in Washington underestimated the significance of the surge in nontraditional mortgages. What is perhaps even more deplorable is the way that these mortgages continue to be downplayed in the mainstream narratives of the crisis and in the policy responses that followed.

Meanwhile, CNN Money reports on programs that offer 3 percent down payments.

The new loans will only be doled out to those who buy private mortgage insurance, have a credit score of at least 620 and offer complete documentation of their income, assets and job status. And, to further mitigate risk, the agencies will require borrowers to receive home ownership counseling.

Once again, the government is pushing home borrowership, setting households up to fail and making the housing market more speculative. Of course, when the stuff hits the fan, the government officials involved will blame lenders, not themselves.

What I’m Reading

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Vintage Bill James.

Given an option to do so, all men prefer to reject information. We start out in life bombarded by a confusing, unfathomable deluge of signals, and we continue until our deaths to huddle under that deluge, never learning to make sense of more than a tiny fraction of it. We get in an elevator and we punch a button and the elevator starts making a noise, and we have no idea in the world of why it makes that noise or how it lifts us up into the air, and so we learn in time to pay no attention to it.

As we prefer to reject any information that complicates our understanding of the world, we especially prefer to reject information about things that happen outside of our own view. If you simply decide that [data that you lack the energy to process] are meaningless, then you don’t have to worry about trying to figure out what they mean. The world is that much simpler.

Bill James is, of course, a famous baseball quant. He was not really the first–I would give that honor to Earnshaw Cook. But James was a dogged empiricist, always questioning and refining his own methods. Instead of manipulating data to support his opinion, he manipulated data in order to arrive at reliable answers. In that respect, I think he sets a great example for economists, which too few emulate.

But the reason I am reading vintage James is because the man could write. There are now many baseball quants, and some of them may have even more baseball-statistics knowledge than James, but they are not worth reading for pleasure.

The quoted passage is from the Bill James Baseball Abstract for 1985.