Category Archives: links to my essays

Road to Sociology watch

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Dylan Matthews writes that tomorrow belongs to Raj Chetty.

Chetty has made his name as an empirical economist, working with a small army of colleagues and research assistants to try to get real-world findings with relevance to major political questions. And he’s focused on the roots and consequences of economic and racial inequality. He used huge amounts of IRS tax data to map inequality of opportunity in the US down to the neighborhood, and to show that black boys in particular enjoy less upward mobility than white boys.

Ec 1152 is an introduction to that kind of economics.

Pointer from Tyler Cowen.

I have been saying for quite a while that economics is on the road to sociology. I first made that case two years ago.

Economists will need to see economic decisions as embedded in cultural circumstances. In order to understand economic phenomena, we will have to pay attention to the role of beliefs and social norms.

. . .There is a very real possibility that over the next 20 years academic economics will congeal into a discipline, like sociology today, which is definitively shaped by an ideologically driven point of view.

I have mixed feelings about seeing the new approach to economic education. The pluses, which were alluded to in my essay, include:

1. Recognition of the importance of cultural factors.

2. Getting away from thinking in terms of optimization problems.

3. In empirical work, recognizing the problems created by what Edward Leamer called specification searches.

The minuses include:

1. Traditional economics emphasizes that outcomes do not come from intentions. The supply-and-demand model is not one in which one individual or group controls the outcome. Students are thought to think in systemic terms, rather than personal terms. That is useful (a) because it provides valuable insights into the economy and (b) because it is good for people to practice thinking in abstract, systemic terms rather than only in concrete terms. I think that not giving students the systemic perspective is a loss.

2. The research can be, and often is, oriented toward filling in the oppressor-oppressed framework. That is the ideological trap that concerned me in my essay. We also need to be able to step outside of the oppressor-oppressed framework and examine it critically, and I fear that this examination will not take place.

3. The newer research methods are not without their own weaknesses. They are subject to replication failures and narrow applicability. Data can be of questionable validity. Interpretations of results can be misleading.

I think that economic education can arrive at something better than neoclassical economics. But the road to sociology may not be the way to get there.

Alice Rivlin, 1931-2019

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Timothy Taylor has a helpful obituary. Brookings has a useful intellectual bio.

She was the first director of the Congressional Budget Office. She was a straight shooter and highly competent, and that is how the CBO is regarded to this day. The reputation of the CBO is, if anything, too good. See my essay, The Congressional Budget Office and the Demand for Pseudoscience.

She had various connections in the economics profession, most notably with some very nice economists at Swarthmore, Penn, and elsewhere. One of her friends was Bernie Saffran, the center-right professor at Swarthmore who was my mentor.* Her second husband, Sidney Winter, a highly-regarded academic economist, was also a Swarthmore alum (but more than a decade before Bernie came to teach at Swarthmore).

*It says something that Swarthmore College, of all places, had a center-right econ professor 5 decades ago. Rather unlikely to happen today.

Her daughter, Cathy, went to Swarthmore, and Cathy married a classmate and friend of mine. Both she and her husband are extremely nice.

In fact, one of the shocks that hit me when I went to MIT for graduate school in 1976 was finding economists who were not so nice. Some were downright nasty. Most were highly egotistical. Alice Rivlin and her colleagues were free of those traits.

Through the connection between Alice and Bernie, I got a job as a research assistant at CBO in June 1975, not long after it opened. It was a very rich experience for me. You can read about that in my macro memoir.

She had to overcome adversities of various sorts. Being a female grad student in the mid-1950s. Having a voice that would go uncontrollably from a near-falsetto high pitch to a near-bass low pitch. Having a first husband (Lew) who seemingly went off the rails in late middle age. They were divorced in 1977, and two decades later he was accused of financial fraud.

At Brookings, she was one of the economists involved in the project known as “setting national priorities.” Unfortunately, that project has been discontinued. Back in 2015, I tried unsuccessfully to obtain a grant to undertake a project that was a conscious imitation of that old Brookings project.

Alice Rivlin’s family and friends should be proud of her work and also proud of her as a decent human being.

My review of Tyler Cowen’s latest

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I wrote,

Much of Big Business musters arguments and evidence against the accusations critics articulate concerning the corporate sector. But to me, this is an exercise in Whack-a-Mole, where every time you knock down one canard against big business another one will pop up.

Overall, Big Business is a genuine attempt to be charitable to those who disagree and to try to nudge them to change their minds. Sadly, my sense is that most people read to reinforce their views rather than challenge them.

Philosophy and economics

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Diane Coyle writes,

Yesterday, an undergraduate emailed me to ask for book recommendations about the overlap between economics and philosophy. I recommended:

Amartya Sen The Idea of Justice
Michael Sandel What Money Can’t Buy: The Moral Limits of Markets
Agnar Sandmo Economics Evolving
and
D M Hausman and M S McPherson and D Satz Economic analysis, moral philosophy, and public policy
Then I asked Twitter, and here is the resulting, much longer, list. [snipped]

Pointer from Tyler Cowen.

I have not read any of these. I have read some on the longer list. Thinking of the most lively reads, and trying to include left, right, and center, I would recommend:

The Worldly Philosophers, by Robert Heilbroner.
Radicals for Capitalism, by Brian Doherty.
Capitalism and the Jews, by Jerry Muller.

If I were teaching an undergraduate course in philosophy and economics, I would include as articles

Hayek’s “The Pretense of Knowledge”
McCloskey’s “Why I am no longer a Positivist”
Leamer’s “Let’s take the Con out of Econometrics”
my own “How Effective is Economic Theory?”

In my view, there are two issues at the center of the overlap between economics and philosophy.

1. What methods best serve economics? In particular, what are the pros and cons of treating economics as a science?

2. How do markets fit in to the moral universe? What problems do they address? What problems do they cause?

The essays on my list deal primarily with the epistemological issue. The books on my list deal mostly with the moral issue.

Preston McAfee on big firms

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He says,

The thing that shocked me the most was how inefficient large firms can be. Sure, there is government waste, but it is commensurate with size and clarity of mission. In one sense, I already knew that large firms could be inefficient — the failure of Kodak and Blockbuster are examples — but it is another thing to live through it.

I have a much deeper appreciation that slow optimization is a better model of human behavior than full optimization, and indeed, I’ve often used evolutionary models rather than optimization models in my work. People do respond to incentives, and they respond faster to stronger incentives, but along the way there are lots of mistakes and bad choices and hysteresis.

I like to say that anyone who is scared of a giant firm has never worked for one. Learning that lesson is one of the reasons that economics programs should require internships in business. Having experience in business would lead you to be less committed to theories of optimization and more likely to regard the market as what I call The Great Miscalculator. That latter essay is a powerful indictment of the entire paradigm policy analysis that permeates academic economics.

Country size and quality of government

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A commenter asks,

Is there a nation with a population of say, 30 million people or more that has an appreciably smaller government than the US and could be held up as an example that smaller government works for a modern country with a large population?

There is a low likelihood that any nation with a large population (I might use a figure closer to 75 million as the cut-off) will be well governed, whether the government is large or small. My essay on recipe for good government pointed out that two variables can help explain the level of economic freedom in a country: ethnic composition and size (with size being a negative factor). If you are trying to explain some other desirable characteristic, such as the Human Development Index, those same two variables will matter. In the essay, I wrote,

Relative to this peer group of high-population countries, the United States is still the best governed, if we use the index of economic freedom. Perhaps we should be grateful that our government is not worse than it is.

If you want the best government, move to a small country (5 to 10 million people) with an ethnic composition that according to Lynn and Vanhanen will have a national average IQ in the mid-90s or higher. Even if you are looking for economic freedom, some of the Scandinavian “socialist” countries fit that model. So do Hong Kong and Singapore, of course.

Getting to Denmark?

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A commenter wrote,

In Denmark you get your free day care so you can become a 2 income family, double income outs you very quickly into the top marginal tax rate of around 60%. Average income tax rates are 45% there, plus a non deductible 25% VAT, plus a 45% top marginal rate for capital gains in case you were trying to save for retirement, plus a 1-3% land tax.

Are these taxes creating ‘equality’? Nope, Denmark has a widening gap in wealth and income, they have started from a very narrow distribution, but have steadily worked to hollow out the middle class. It makes no sense to earn in the middle of their income distribution, you either need to drop into the range where you receive net benefits or jump way into the top of the income range to afford what amounts to top rates of 70-80%.

I have suggested that in the U.S. we have done this also. A household below the median income pays payroll taxes, sales taxes, and possibly property taxes. It loses benefits at a steep rate, and when you factor that in it faces a high tax rate. This impedes upward mobility, as I argued in my essay on the Universal Basic Income.

Jonah Goldberg takes my side

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He writes,

For years, conservatives have quoted my late friend Andrew Breitbart’s pithy rephrasing of a very old idea: “Politics is downstream of culture.” The odd thing is that, almost overnight, many of the same conservatives now argue as if industrial and trade policy is upstream of culture.

I wrote,

Many observers emphasize economic threats posed by trade and automation. But I believe that the divide is mostly cultural.

Let me repeat something else I wrote in that essay.

In fact, I think it would be good for the Republican Party for a leading figure with a conservative agenda and a moderate tone to compete with President Trump for the nomination in 2020. The goal would not be to take Mr. Trump down but to set an example for a different Republican Party. This might give hope to those of us who wish for a political future that is less viciously tribal.

Behavioral meta-economics

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From my essay on Pascal Boyer’s Minds Make Societies.

Concerning economic inequality, Boyer writes,

… the economy or society as a whole is construed as a gigantic collective action, to which everyone contributes in one way or other, and from which they may receive rewards.
… humans do not generally believe that any individual’s contribution could possibly be hundreds or thousands of times greater than anyone else’s.

This reinforces the instinct that economic inequality must be derived from power rather than from merit.

You might call this behavioral meta-economics. Like behavioral economics, it looks at human inclinations to commit errors. But what I mean by behavioral meta-economics examines human inclinations to commit errors in assessing markets and large-scale society.

The challenge that economics teachers face is helping their students to understand and overcome behavioral meta-economics. Although he did not use that term, I think Scott Sumner’s post expressing doubts about the value of teaching behavioral economics is derived from a view that teaching behavioral economics might be counterproductive in getting students to overcome their behavioral meta-economics.