Category Archives: links to my essays

College women and the future of economics

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Catherine Rampell writes,

The shrinking of the middle is largely due to a recent rise in the share of women (who also represent a majority of college students) who identify as either liberal or far left. The share of female respondents, but not male respondents, who describe their political views this way was at an all-time high (41.1 percent for women, 28.9 percent for men).

Pointer from Tyler Cowen. Note that this survey is of incoming freshmen and freshwomen.

My hypothesis is that these left-leaning women (and men) use small-community intuition in arriving at their political beliefs. They want the relationship between government and citizen to be one of parent and child. They want to see communal sharing, as if we lived in luck village rather than effort village.

When I went to college, I was on the far left. Those views began to change, in part because taking an economics course shifted my paradigm from small-community intuition to thinking about a complex society in more systemic terms. I am not sure that today’s young leftists will undergo a similar transition.

1. In the systemizer-empathizer dimension, women are more likely than men to lean toward empathizer. Empathizers probably will be less likely to take an economics course, less likely to enjoy an economics course, and less likely to be affected by an economics course.

2. I think that economics courses are going to tilt left and toward empathizers. I have an essay forthcoming in which I suggest that in a few decades economics may turn into a left-wing ideological monoculture comparable to sociology today.

Arguments for Liberty

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That is the title of a new and recommended book. From my review:

Arguments would make an excellent book of supplemental readings for a course in political philosophy. Such a course could use another supplement, consisting of readings of philosophers arguing for non-libertarian ideas.

Later, I write,

After reading this book, I could not help pondering why it is that libertarianism does not hold sway among most philosophers or with the general public. My answer is that people rely on what I call small-community intuitionism.

The Cato Institute on the Future of the Free Society

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They write,

We have reached out to leading thinkers and challenged them to answer the following questions: What are the most pressing challenges that free societies face in the coming years? What is the most important reason for optimism about the free society? What is the most important but still unappreciated idea that lies just ahead? What’s the most important thing that you have learned about free societies that you wish you knew all along?

By “leading thinkers,” they mean only Tyler Cowen. Evidently not me. But here is how I would answer.

I would start with the last question. I think that the most unappreciated idea is that ideas are underappreciated. As I have said before, the social sciences disciplines that study human society are too materialistic. They try to base their explanations and interpretations on material conditions. In economics, it is the rare Joel Mokyr or Deirdre McCloskey who will recognize the significance of the mental-cultural world. Recall also my essay on cultural intelligence.

The most pressing challenges that free societies face are the David Brin challenge and Fear Of Others’ Liberty.

The David Brin challenge is that we live in a world where surveillance is increasingly feasible and arguably necessary. The challenge is to avoid a dystopia of asymmetric power, in which the state has surveillance capability but the ordinary citizen does not. Brin’s distinctive recommendation is to increase the surveillance power of the citizen, rather than make what he predicts will be a futile attempt to reduce the surveillance power of the state.

FOOL makes it possible for politicians to sell the public on policies that take away freedom. People are afraid of what will happen if other people have economic liberty, such as the liberty to decide on a mutually acceptable wage or the liberty to decide what they want in terms of health insurance or the liberty to purchase products from other countries. etc.

Historically, sometimes we overcome FOOL (as in the American founding), and sometimes FOOL overcomes us (as in American slavery and Jim Crow laws). The present day strikes me as a time when FOOL is ascending, both on the right and on the left. Roughly from 1960 through 2000, on the left there was a trend toward increased support for freedom of expression and market economies. That trend has reversed. Today, we have the leading edge of the left openly advocating for suppression of others’ speech and for socialism. To me, this means that the mental-cultural sky is darkening. That bodes ill for the future, especially for when the left returns to power. Which is bound to occur, probably sooner than most people currently expect.

A reason for optimism? In 2017??? Twenty years ago, I was optimistic that the Internet would empower individuals relative to big corporations, government, and the education establishment. I guess that the most optimistic thing I could say is that maybe it will still turn out that I was right then and that I am wrong now.

Michael Mauboussin on Luck

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A commenter recommended him, and I watched this video.

Some interesting points:

1. As skill in an activity becomes more refined, differences in skill at the high levels tend to narrow. As a result, luck starts to play a relatively larger role. In some sense, it took more luck for George Brett to hit .380 than it did for Ted Williams to hit .400. The standard deviation among major league hitters was higher in Williams’ day, so that when batting averages are scaled by standard deviation, Brett’s best year has a higher Z score than Williams’. The AP statistics text that I use has a problem in which the student calculates this. Mauboussin also refers to this example.

2. He says that luck is difficult to define, but a key element is that it is reasonable to say that the outcome could have been different. He opens the talk by telling a story of how he interviewed for his first job out of college and noticed that highest level executive with whom he interviewed had a trash can with a logo of the Washington Redskins. Because he praised the trash can, the high level executive eventually overrode all the other interviewers and gave Mauboussin the job. I have a similar story about getting into Swarthmore College, which I have told here before. A local alumnus interviewed me, and I guessed that he was the father of a guy I had seen wrestle for the state championship. I talked about that match, and when I came to Swarthmore the Dean of Admissions said that the wrestling coach, Gomer Davies, was looking forward to having me on the team. Having no aptitude for wrestling myself, I never went near Coach Davies.

3. He says that extraordinary success comes neither from pure skill or pure luck. You need a high skill level to compete. But beyond that it takes luck to have extraordinary success. Bill Gates had the skill to do well in technology, but his extraordinary success required luck. If you do not know the story of how Microsoft was awarded the role of providing the operating system for the IBM PC in the early 1980s, then you can get an abbreviated version by listening to the Q&A at the end of the talk.

4. He says that when you are the less skilled player, you need to try to complicate the game. Try a trick play, for example. I would add that you should look for short games. The longer the game goes on, the more likely it is that the other player’s skill advantage will win out. Think of a board game (or a business competition) that consists of many moves. Suppose that on each move, the player with more skill has a 51 percent chance of doing better than the less-skilled player, and conversely the less-skilled player has a 49 percent chance of making a better move. In a short game, the lesser-skilled player might win. But if the game goes on for hundreds of moves, the chances of the lesser-skilled player dwindle. I first wrote about this twenty years ago. I still love that essay.

5. He says that our brain has an “interpreter” that is determined to tell causal stories, even if it has to make them up. There are some famous split-brain experiments that demonstrate this. The interpreter prefers explanations that make something appear inevitable, rather than lucky.

I would illustrate this with the financial crisis of 2008. Although economists did not anticipate the crisis beforehand, they explain it now as if it were inevitable. I just finished Days of Slaughter, Susan Gates’ insider’s account of the fall of Freddie Mac, and it reminds me of the role played by bad luck, in particular the unfortunate choice made by Freddie Mac’s Board to install as CEO in 2003 one Richard Syron, who combined an absence of experience in mortgage lending with an arrogant unconcern for that lack of experience. Another CEO might have charted a different course for Freddie Mac, and for the entire housing market.

Another illustration is the election of Donald Trump. It was very much a random event, but everyone’s interpreter strains to see it otherwise.

6. During the Q&A, he considers the issue of whether popular opinion is right or wrong. When does the wisdom of crowds become the madness of crowds? He says that a necessary condition for wisdom of crowds is diversity of opinion. The crowd is most at risk of going wrong when there is what he calls a “diversity breakdown,” and everyone is thinking alike.

My Review of Tyler Cowen’s Complacent Class

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I conclude,

there is an important category of people who are dissatisfied with the status quo and at the same time are averse to risk and to change. It is an interesting pathology, but I think it is misleading to term it complacency.

A few more thoughts.

1. There is a lot to the book. You should read it. Even though it is getting a lot of coverage, don’t just assume that you can pick up its contents by osmosis. But prepare to disagree with him at times.

2. I wrote the review in a hurry. I can imagine re-reading the book and writing a different review.

3. I am still not happy with Tyler’s use of the term “complacency.” I can think of three senses of the word that are floating around in the book.

a. Complacency is “a general sense of satisfaction with the status quo.”

b. Complacency is a desire to avoid risk and resist change.

c. Complacency is a belief that the current social order is stable, that we will not suffer from a sharp increase in violence or a major breakdown of norms and institutions that maintain order.

Tyler explicitly writes (a), but I don’t think he really means it. The first three-quarters of the book are about (b), amassing evidence that modern Americans suffer from (b) much more than our forefathers. The last quarter of the book is about (c) and why Tyler believes it is wrong. He wants to claim that a big reason that (c) is wrong is that (b) has become so prevalent. Think of a Minsky model of social change: stability leads to instability.

Web Site Revamp

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It will not affect this blog, but I am trying to better organize my overall web site. One step is to try to create a biographical page. One relevant bit, from a section on the evolution of my political beliefs:

Trying to rid humanity of all traces of tribalism is as futile a hope for the libertarian as it is for the Communist. So I end up somewhere between libertarianism and conservatism. Like a conservative, I believe that existing social institutions should not be casually tossed aside. Like a libertarian, I would like to see the state be much less ambitious.

Tribalism trips up all of us. Our new President said at his inauguration, “When you open your heart to patriotism, there is no room for prejudice.” He proceeded to say “buy American, hire American,” which I think should be described as prejudice.

The tribalism of the left is equally insidious.

Taking Macroeconomics Backward Through Regression

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Olivier Blanchard recently wrote that there ought to be two classes of macroeconomic models.

Theory models, aimed at clarifying theoretical issues within a general equilibrium setting. Models in this class should build on a core analytical frame and have a tight theoretical structure. They should be used to think, for example, about the effects of higher required capital ratios for banks, or the effects of public debt management, or the effects of particular forms of unconventional monetary policy. The core frame should be one that is widely accepted as a starting point and that can accommodate additional distortions. In short, it should facilitate the debate among macro theorists.

Policy models, aimed at analyzing actual macroeconomic policy issues. Models in this class should fit the main characteristics of the data, including dynamics, and allow for policy analysis and counterfactuals. They should be used to think, for example, about the quantitative effects of a slowdown in China on the United States, or the effects of a US fiscal expansion on emerging markets.

In response, Simon Wren-Lewis rejoiced,

Ever since I started blogging I have written posts … to try and convince fellow macroeconomists that Structural Econometric Models (SEMs), with their ad hoc blend of theory and data fitting, were not some old fashioned dinosaur, but a perfectly viable way to do macroeconomics and macroeconomic policy.

Pointers from Mark Thoma.

For why Blanchard and Wren-Lewis are wrong, see my essay Macroeconometrics: the Science of Hubris. If the profession follows their advice, macroeconomics will be regressing in every sense of the word.

Notes from the 2017 Edge Question

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Folks were asked to name a scientific concept that deserves to be better known.

Lisa Randall nominates “effective theory.”

an effective theory tells us precisely its limitations—the conditions and values of parameters for which the theory breaks down. The laws of the effective theory succeed until we reach its limitations when these assumptions are no longer true or our measurements or requirements become increasingly precise.

Matthew D. Lieberman nominates naive realism.

If I am seeing reality for what it is and you see it differently, then one of us has a broken reality detector and I know mine isn’t broken. If you can’t see reality as it is, or worse yet, can see it but refuse to acknowledge it, then you must be crazy, stupid, biased, lazy or deceitful.

In the absence of a thorough appreciation for how our brain ensures that we will end up as naïve realists, we can’t help but see complex social events differently from one another, with each of us denigrating the other for failing to see what is so obviously true.

Matthew O. Jackson nominates homophily.

New parents learn from talking with other new parents, and help take care of each other’s children. People of the same religion share beliefs, customs, holidays, and norms of behavior. By the very nature of any workplace, you will spend most of your day interacting with people in the same profession and often in the same sub-field.

…Homophily lies at the root of many social and economic problems, and understanding it can help us better address the many issues that societies around the globe face, from inequality and immobility, to political polarization.

Dylan Evans nominates need for closure.

However great our desire for an answer may be, we must make sure that our desire for truth is even greater, with the result that we prefer to remain in a state of uncertainty rather than filling in the gaps in our knowledge with something we have made up.

Gary Klein nominates decentering.

Decentering is not about empathy—intuiting how others might be feeling. Rather, it is about intuiting what others are thinking. It is about imagining what is going through another person’s mind. It is about getting inside someone else’s head.

…Being able to take someone else’s perspective lets people disagree without escalating into conflicts.

Adam Waytz nominates the illusion of explanatory depth.

If you asked one hundred people on the street if they understand how a refrigerator works, most would respond, yes, they do. But ask them to then produce a detailed, step-by-step explanation of how exactly a refrigerator works and you would likely hear silence or stammering. This powerful but inaccurate feeling of knowing is what Leonid Rozenblit and Frank Keil in 2002 termed, the illusion of explanatory depth (IOED), stating, “Most people feel they understand the world with far greater detail, coherence, and depth than they really do.”

Cristine H. Legare nominates Cumulative Culture.

Cumulative culture requires the high fidelity transmission of two qualitatively different abilities—instrumental skills (e.g., how to keep warm during winter) and social conventions (e.g., how to perform a ceremonial dance). Children acquire these skills through high fidelity imitation and behavioral conformity. These abilities afford the rapid acquisition of behavior more complex than could ever otherwise be learned exclusively through individual discovery or trial-and-error learning.

If someone had asked me, I would have proposed something similar: cultural intelligence.

Eric R. Weinstein gives us Russell Conjugation.

the human mind is constantly looking ahead well beyond what is true or false to ask “What is the social consequence of accepting the facts as they are?” While this line of thinking is obviously self-serving, we are descended from social creatures who could not safely form opinions around pure facts so much as around how those facts are presented to us by those we ape, trust or fear. Thus, as listeners and readers our minds generally mirror the emotional state of the source, while in our roles as authoritative narrators presenting the facts, we maintain an arsenal of language to subliminally instruct our listeners and readers on how we expect them to color their perceptions.

Sarah Demers nominates blind analysis.

The idea is to fully establish procedures for a measurement before we look at the data so we can’t be swayed by intermediate results. They require rigorous tests along the way to convince ourselves that the procedures we develop are robust and that we understand our equipment and techniques. We can’t “unsee” the data once we’ve taken a look.

John Tooby nominates coalitional instincts.

These programs enable us and induce us to form, maintain, join, support, recognize, defend, defect from, factionalize, exploit, resist, subordinate, distrust, dislike, oppose, and attack coalitions. Coalitions are sets of individuals interpreted by their members and/or by others as sharing a common abstract identity

…to earn membership in a group you must send signals that clearly indicate that you differentially support it compared to rival groups. Hence, optimal weighting of beliefs and communications in the individual mind will make it feel good to think and express content conforming to and flattering to one’s group’s shared beliefs, and feel good attacking and misrepresenting rival groups.

Reframing Financial Regulation

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That is a new compendium from Mercatus. I wrote one of the essays, on risk-based capital.

The way I see it, the main purpose of central banking and financial regulation is to try to allocate credit to uses favored by political leaders. These leaders want credit to be cheap and available for government borrowing and for residential mortgages. So we should not be surprised that risk-based capital requirements are used to reward banks that put money into those assets.

In the essay, I explain why risk-based capital regulation has not served the intended purpose of reducing financial risk.

My Review of Mokyr

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I write,

A fundamental issue in all of the disciplines that study human society, including economics, is the relative role of material conditions versus human agency as causal forces. Many writers focus on material conditions. … Those of us on the other side of that debate, including Mokyr, assign more credit to intangible factors, notably ideas and culture.