My review is here. It begins,
Large societies are held together by the soft glue of social norms and by the hard nails of government law enforcement. In Anarchy Unbound, Peter Leeson argues that we tend to underestimate the holding power of social norms and to overestimate the benefits of government.
I refer to yesterday’s event, held at Mercatus.
1. Google has made me stupid. I know where Mercatus is, but the address on the invitation was different, and I went with the address, and with Google Maps, and got off at the wrong subway stop (along with at least two other would-be attendees).
2. Everyone who was everyone was there.
3. The main speaker was Israel Kirzner. He spoke really well. I took his main point to be that the causality ran fromm Hayek’s 1974 Nobel Prize to the interest in his insights rather than the other way around. Those insights include the knowledge problem, the implications of subjectivism, and the importance of the open-ended world in which we live, as opposed to the closed world of general equilibrium theory. Instead, the Nobel folks focused on Hayek’s macro work. Hayek’s speech at the Nobel might be considered an attempt to shift the focus to his other insights. Whether it was that speech (which Pete Boettke later pointed out was not accepted for publication by Economica and thus was not published until almost two decades later) or something else, a rebirth of interest in Austrian economics can be traced to that period.
4. Among the all-stars in the audience asking questions was Russ Roberts, who admitted that although he had moved far in the Austrian direction he still liked old-fashioned supply-and-demand. Kirzner was sympathetic, saying that it is much easier to teach new students supply-and-demand than to teach the insights of Hayek. (Note that Russ has made a remarkably good attempt to teach Hayek in his didactic novel, The Price of Everything.)
5. The afternoon was to feature three Nobel Laureates, but one of them, Edmund Phelps, was sick, and so Boettke read Phelps’ remarks. The other Nobelists were Vernon Smith and Eric Maskin, and I disagreed with both of them.
6. Smith said that the financial crisis was caused by principal-agent problems in mortgage securitization. He suggested that loan originators should not be paid up front, but they should instead be paid over time, as the mortgage is paid off. That is an approach for reducing principal-agent problems, but in my view there are better approaches–the stream of payments over time is a complex financial asset that few originators would be equipped to manage.
One alternative, of course, is to go back to the old originate-to-hold model, in which the loan originator is an employee of the bank, and the bank is in a position to reward or punish originators based on how well they adhere to standards. But more important, I do not believe that principal-agent problems were at the heart of the crisis. Originators were contractually obligated to deliver loans that met the guidelines of investors. Loans that did not meet those guidelines can be considered fraud, and there was plenty of that going on. But the real problem is that investors were, for the most part, getting the loans that they were asking for. The geniuses on Wall Street, and at Freddie and Fannie, believed that they could make money on loans with no down payment, shaky credit history, and so on, because–so the thinking went–if they bought enough of them, the risk would be diversified, particularly since everyone knew that house prices only go down in some places, never in lots of places at once.
Anyway, I’ve made the point about cognitive failure, as opposed to moral failure, at length.
7. Maskin said that mathematical proofs in mechanism design demonstrated formally Hayek’s point that markets make efficient use of information. During the Q&A, I asked if it was possible to reconcile the methodology of those proofs, which involve closed-end models, with the larger point stressed by Kirzner that the world is open-ended, including new technology that has not yet been discovered. Maskin answered, in effect, that all you have to do is extend the Arrow-Debreu state-space to include all possible technological discoveries, and the proofs carry over. I was not satisfied with that answer. Some possibilities:
a) He is correct, and I am too prejudiced against formal modeling.
b) I asked the question poorly, and had I been more articulate he would have given a different answer.
c) He just does not “get” the point about open-ended economics and that it eludes formal treatment.
Among those I spoke with afterward–and obviously there would be selection bias at work–the unanimous opinion was (c). This raises the intriguing possibility that mainstream economics and Austrian thinking are still a long way from reconciliation. In effect, Maskin is no further along the road to understanding Hayek than is a freshman to whom Kirzner would only teach supply-and-demand.
Perhaps Hayekian economics is a bundle of insights that are deceptively simple. Some people think that they get them, but, like Maskin, they are still stuck in the mainstream paradigm.
Russ and I are examples of mainstream economists who drifted toward a Hayekian view. I cannot think of economists who have drifted in the other direction. To me, this suggests that there is something difficult to grasp about Hayekian economics, or the Austrian viewpoint more generally, and that training in mainstream economics does not necessarily ease that difficulty.
That is my main take-away from the event.
the business environment of biotechnology, which Thiel and I agree is a very promising field for future economic growth, may be different from that of software. In software, companies like Microsoft and Facebook grew to dominance in large part because consumers find an advantage in using the same software as other consumers — this is the network effect. This in turn creates an opportunity for venture capitalists to back the rapid expansion of a firm that is unprofitable for a few years and then wildly profitable a few years later, once the network effect has been captured. It is not necessarily the case that biotechnology will exhibit network effects in which profits are created by rapidly expanding on an early lead.
I should note that Edmund Phelps, in Mass Flourishing, argues that progress is driven not by big individual breakthroughs but instead by cumulative entrepreneurial progress.
UPDATE: Peter Lawler also writes about Thiel. A sample:
What, today, would be “the largest endeavor over which you can have definite mastery”? This would be the startup. For the libertarian Thiel, the startup has replaced the country as the object of the highest human ambition. And that’s the foundation of the future that comes from being ruled by the intelligent designers who are Silicon Valley founders.
There seems to me to be a close alignment of Ryan’s block-grant approach with the many instances in which the authors of the Hamilton Project volume propose flexible, low-cost, small-scale, locally administered programs, rather than large-scale, federally administered universal solutions. In addition, I was struck by the way that both Ryan and the Hamilton Project focus on rigorous evaluation of results as well as the need for further experimentation.
I do not expect to see a bipartisan reform of anti-poverty programs any time soon. If it were up to policy experts, yes. But politically, improving anti-poverty efforts takes a back seat to offering goodies to the middle class and to the clout of people with a stake in the existing programs.
Wade writes as if institutional and cultural change ought to be achievable swiftly, and when that fails we have no choice but to fall back on genetics. My own view is that the processes of institutional and cultural change are certainly poorly understood, and not necessarily rapid.
That is part of a much longer essay.
The economically turbulent 2000s have redrawn America’s geography of poverty in more ways than one. After two downturns and subsequent recoveries that failed to reach down the economic ladder, the number of people living below the federal poverty line ($23,492 for a family of four in 2012) remains stubbornly stuck at record levels. Today, more of those residents live in suburbs than in big cities or rural communities, a significant shift compared to 2000, when the urban poor still outnumbered suburban residents living in poverty.
I got to this by reading an article linked to by Tyler Cowen.
You may recall the Haiku I wrote based on my road trip:
Gentrification
Bike-friendly beyond all sense
Poor people moved…to where?
Basically, I explain the phenomenon as follows.
1. Spending shifts from goods to education and health care (long-term trend. See Kling-Schulz, The New Commanding Heights)
2. Inner cities become impoverished, as manufacturing relocates and urban blight drives out the middle class.
3. The biggest urban employers become universities and hospitals. As they expand their presence in cities, they employ a lot of educated professionals. This leads to gentrification.
4. The urban poor get pushed out to the suburbs.
It seems to me that a lot of economic trends can be explained by the New Commanding Heights story.
About a book by sociologist Duncan Watts, I write,
Watts’ book can be regarded as an extended argument in favor of what I might term Epistemological Skepticism about Social Phenomena, or ESSP. Those of us with ESSP believe that we should be skeptical about how much we can know with certainty in the fields known as the social sciences. We may learn things that are true for a majority of cases under specific circumstances. But we are less likely to find perfectly reliable, broadly applicable laws comparable to those found by physicists.
Something that is very clear, is that “de-regulation” is a term empty of explanatory power. All successful six have liberalised financial markets–Australia and New Zealand, for example, were leaders in financial “de-regulation”. If someone starts trying to blame the Global Financial Crisis (GFC) on “de-regulation”, you can stop reading, they have nothing useful to say.
Pointer from Scott Sumner.
The deregulation story amounts to saying that we know that regulation can prevent a crisis, but a crisis occurred, therefore there must have been deregulation. In fact, the risk-based capital rules that I have suggested helped cause the crisis were at the time they were enacted viewed as regulatory tightening, to correct flaws in the regime that existed at the time of the S&L crisis. The deregulation that did take place was intended to reduce bank profits by making the industry more competitive, not to increase profits or risk-taking.
Lorenzo’s post mostly beats a drum that I have been beating, which is that government tends to get worse as scale increases. He writes,
It is generally just harder to stick it to folks (either by what you do or what you don’t do) in a way that doesn’t get noticed in smaller jurisdictions. (Unless jurisdictions are so small they fly under the media radar but are big enough to be semi-anonymous–urban local government in Oz has a bit of a problem there.)
The dysfunctional and regressive nature of policy in housing reflects the political configuration in Washington. For several decades, policies combined the efforts of social engineers clumsily seeking to expand home ownership with well-heeled interest groups skillfully lobbying for profits. The social engineers put taxpayer subsidies up for grabs, and the interest groups do the grabbing.
The deeper point is that things are getting cheaper and cheaper, and people — services provided with their expertise — are getting more and more expensive.
He points to an NYT chart showing plummeting prices for goods and soaring prices for education, health care, and child care.
My view is that a lot of spending on these services is discretionary (not all of it, of course). I think this makes any broad statement about “the” real wage incorrect. See my essay on that topic.