Category Archives: links to my essays

Why consolidation?

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In my latest essay, More or Less Competitive?, I discuss the very important question of what accounts for the apparent consolidation within industries, with a few winners taking large market shares. I think that the role that software plays in the competitive environment is a big factor.

The strategic utilization of software becomes crucial when software is eating the world, as Marc Andreessen put it. Firms led by executives who quickly grasp the business implications of software and the Internet will win, and other firms will lose.

Read the whole thing (so far, not many people have).

Russ Roberts and me

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A podcast on Economics for the 21st century. An excerpt:

And I think–I listed, in the essay, four key research areas. And one of them is what I call Firm Interaction. And this question of how the ecosystem operates now, in these various industries, is a really important question. As is what the traditional boundaries of the firm question: what should be done inside the firm and outside the firm? I mean, I’m shocked at the breadth of Amazon. I mean, it’s incredible, the breadth of that firm. I don’t think any theory of the firm that economists–economists haven’t done much with their theories of the firm, because again it becomes an intangible issue of, you know, what should you do inside the firm and outside the firm. It all depends on intangible things, and economists don’t do well with intangible things. But, I don’t think anybody, from Coase, or Williamson, or anyone who has looked at that would have told you that something with the breadth of Amazon would have emerged.

I was referring to this essay.

Kling on Niall Ferguson’s latest

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My review of The Square and the Tower.

I think it is very difficult to show that a particular technology favors peer relationships over hierarchical relationships.

I think that many of us made this mistake when we projected the social consequences of the Internet. Because the Internet is obviously a peer-to-peer network, we assumed that it would break down hierarchies. But the social world is its own sphere, and it does not necessarily mirror the technical world. Groups that are peer-oriented can use the Internet, but so can hierarchies. Perhaps some of the social changes that have taken place in recent decades disrupt hierarchies, including changes that were facilitated by the Internet. However, it is a fallacy to insist that just because the Internet is peer-to-peer, human groups necessarily must array themselves in that fashion in order to be successful in the current technological setting.

Off Topic: fantasy baseball post

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It’s March again, and my thoughts have already turned to fantasy baseball. I think that what I wrote last year pretty much stands up. A few additional notes:

1. Usually, what you want from your top picks is low down side. This year, there is an odd case. Giancarlo Stanton, after being traded from a pitcher’s park to the homerun-friendly Yankee Stadium, could, if all goes well for him, hit 20 more home runs than anyone else. Since he is not even in the top half of the first round in most drafts, he seems to me to have some upside. I am not saying that the upside makes up for the downside risk that he gets hurt or that he fails to even lead the league in home runs, but it will be interesting to see how he pans out.

2. The other thing that strikes me this year is that there are three catchers that interest everyone–Sanchez, Posey, and Contreras–and the rest of the catchers almost all fall to garbage time. In shallow leagues, often there is very little difference in performance between middling players and players you can pick up in garbage time. So it may make sense to spend the resources to get one of the popular catchers and settle for a couple of additional garbage-time players elsewhere.

3. I believe in thinking very carefully about the players I want on my bench. That means having a good idea of the players that become available in garbage time. It also means keeping in mind that an empty roster spot has value, particularly in auction formats when it gets to garbage time. Filling out your roster early in an auction is usually wrong.

4. Your bench strategy should align with your overall strategy. Or if your overall strategy is to seek value where it arises, then your bench strategy should align with what emerges.

Ordinarily, I like having a catcher on the bench, but if you spend money or a high draft choice on one of the top three catchers, then spending a roster spot on a second catcher is less appealing. Also, the first couple of weeks of the season, your number one catcher may not miss many games, so you could wait until the season gets going to pick up your second catcher.

Suppose your bench strategy is to go for hitters with upside, typically, young hitters you hope will have a “breakout.” then you want your starting lineup to be a mix of stars and lesser players, not a lineup that is so solid that your breakout can’t break in.

Or suppose your bench strategy is to go for a lot of pitchers, figuring that pitchers are volatile and you will sort out who is having a good year as the season progresses. Honestly, I have a hard time seeing the difference between starting pitchers that are ranked around twentieth best and those that you can pick up in garbage time. One reason to go for quantity rather than quality in pitchers is that you might want to bench pitchers when they visit Yankee Stadium or Colorado or go up against the Astros, Dodgers, or Cubs.

My health care essay: condensed version

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The Myths Surrounding Health Care Policy. A random excerpt:

But in practice, it is not so easy for statisticians and economists to over-ride the judgment of doctors. As anyone who has ever tried to set up a bonus system for salespeople can tell you, all compensation systems can be “gamed.” It is easy for doctors to change how they report what they do, without having much effect on their actual decisions. In fact, this was what happened in the largest experiment with “pay for quality” to date, which was conducted in the UK.

My essay on why economics does not progress

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In Economists Wake Up: It’s the 21st Century, I write,

Along the Akerselva River in Oslo Norway, the buildings of the industrial era have been re-purposed or replaced. The same is true in Pittsburgh, Pennsylvania or Birmingham, England. But economists still inhabit the world of the 19th century, in which hordes of interchangeable workers in stark factories toil in the service of the owners of capital.

Read the whole thing, along with today’s other blog post.

Debating Daniel Jelski

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He criticized my moonshot essay in which I attacked neoclassical economics. I appreciate that he took the time to read it and consider it seriously. But I want to reply to two of his points.

1. He writes,

My old professor in general chemistry (Norman Nachtrieb–now deceased) told us that “science is the art of successful approximation.” Ideal gas law is valid as long as intermolecular forces are assumed to be negligible. A step in an engine cycle is adiabatic as long as no appreciable heat escapes into the environment. The words “negligible” and “appreciable” are purposely left vague, and depend on how precise an answer one actually needs in the result.

I do not believe that the neoclassical model of two factors of production is a decent approximation for any purpose. In the essay, I explain why the concept of aggregate labor productivity is not a useful approximation.

The main claim of the neoclassical model is that factors of production are compensated according to their marginal productivity. We do not observe this in practice. The neoclassical model says that all “labor” is compensated identically at the rate w, and all “capital” is compensated identically at the rate r. Instead, we observe heterogenous wage rates and heterogeneous returns on various forms of investment.

The neoclassical model says that the main cause for variation in wage rates should be the amount of capital per worker. To explain the difference in wages between a construction worker in the U.S. and a construction worker in Mexico, you should be able to point to much higher capital per worker in construction in the U.S. But it turns out that very little of this “capital differential” is tangible. A lot of it reflects cultural differences in management and social norms.

Suppose that you wanted to explain why software engineers are paid more at Google than at some other firm. According to neoclassical theory, that must be because their marginal product is higher at Google. But you cannot even begin to measure “marginal product.” They are working on teams that create a joint product. So the neoclassical claim is vacuous in this case–you can neither confirm nor refute it.

2. Jelski writes,

Contrary to Mr. Kling, I think culture changes are on a generational timescale–roughly 30 years.

If this is true, it does not refute my point that cultural change is accelerating. When did cultural change start occurring at a generational timescale? Probably not before the 20th century. Go back several hundred years, and hardly any cultural change took place over the span of a generation.

Suppose we were to look at measures of economic change. I think the economy is becoming more specialized at a faster rate than before.

How many companies broke into the top 100 between 2000 and 2010, and how does that compare with the number that broke in between 1980 and 1990?

How many new occupations were created between 2000 and 2010, and how does that compare with the number created between 1980 and 1990? (note: the BLS may not have been able to track this accurately)

Take the top five occupations in 1980, and calculate the change in the percentage of the labor force engaged in those occupations in 1990. Then take the top five occupations in 2000, and calculate the percentage of the labor force engaged in those occupations in 2010. If change is accelerating, then we should see a much bigger drop in the recent period.

Dave Rubin and the Weinstein Brothers

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They talk for almost three hours, and you have to hang with it until the end to hear my three-axes model invoked by Eric Weinstein. His point is that libertarians will not be helpful if they (we?) deny that sometimes the other points of view are legitimate.

I met Eric at Foo camp, and I was hoping to get together with him a couple of weeks ago, but I had a snafu that messed up my travel. Until about a week ago, I had never connected him with Bret Weinstein, the professor who was at the center of the Evergreen State College controversy last May.

One of the interesting points that Eric makes early in the video is that in the United States we went from having 8 percent of the population pursue education beyond high school prior to World War II to close to 50 percent by 1970. That growth spurt created some major distortions in higher education. One can infer what those distortions included:

1. Some dilution of student quality. We have to be careful here, because prior to 1950, colleges were more selective on social class than academic ability. So what probably happened is that quality went up at the top schools. Where the dilution of quality was felt was more likely the mediocre institutions that expanded rapidly, notably mid-tier and lower-tier state schools.

2. A sort of phase change in the demand for new faculty toward the end of the 1970s. Until then, the demand for Ph.D’s soared. The system kept producing Ph.D’s as if demand would continue to rise at this unsustainable rate. By the 1980s, the attempt to maintain high demand for Ph.D’s starts to become dysfunctional, with universities creating pseudo-disciplines and superfluous administrative positions.

A lot of the discussion concerns the issue of orthodoxy vs. dissent. Recall that I wrote about Eliezer Yudkowski’s case that one should doubt oneself when defying orthodoxy. Eric Weinsten offers a different perspective on this. He says that the way to tell a cult from a group that pursues truth is that the cult will not tolerate any dissent. What is odd about our current environment is that it is the mainstream in many fields that is behaving like a cult, and it is a small group outside the mainstream that is open-minded.

In Specialization and Trade, I include the quote attributed to Andre Gide: trust those who seek the truth; doubt those who find it. By that standard, it is the mainstream that cannot be trusted. For example, both Eric and Bret argue there are rational reasons to fear anthropogenic climate change. But the mainstream climate scientists are acting in ways that make themselves untrustworthy to anyone alert to cult behavior.

The discussants take the view that journalism, academia, and major political parties are so cult-like at present that the future of humanity is in doubt. Our world is fragile, due to a combination of technological dangers and mainstream institutions that are insular and complacent.

The participants talk about a “Game B” that somehow enables institutional improvement. It all sounds a bit conspiratorial. Nassim Taleb would be an example of a Game B sort of intellectual. Is Jordan Peterson part of Game B? Perhaps. Is Donald Trump part of Game B? No, but his victory in part reflects the dysfunctionality and corruption of mainstream institutions.

Whether the current political environment redounds to the benefit of Game B is highly uncertain. Eric’s fear is that things could get really ugly for the Game B types. If you read my moonshot essay, you know which side I am on as an economist.

From Albion’s Seed to Colin Woodard

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My latest essay covers David Hackett-Fischer, Walter Russell Mead, and Colin Woodard.

Fischer shows that each of these four cultures had a different concept of liberty. For the Puritans, it was “ordered freedom,” which meant the rule of law, but laws could reflect strict community standards and hence become “an instrument of savage persecution.” For the cavaliers, it was “hegemonic freedom,” which meant that individual rights were clearly articulated and strongly protected, but these rights varied by social class, so that they “permitted and even required the growth of race slavery.” For the Quakers, it was “reciprocal freedom,” which meant equality of all under the law, but theirs was “a sectarian impulse which could be sustained only by withdrawal from the world.” In the backcountry, it was “natural freedom,” which meant resistance to foreign influences (including government) but “sometimes dissolved into cultural anarchy.” The Constitution and the Bill of Rights can be viewed as a delicate compromise that attempted to incorporate these disparate notions.