Category Archives: Tyler Cowen is my Favorite Blogger

Systems invite gaming

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Back in March, Zack Kanter wrote,

Amazon has opened itself up to inevitable ‘gaming’ by sellers. Another way of saying this: as soon as a system’s rules are understood, it will be gamed according to the rules that have been created.

Pointer from Tyler Cowen.

He alleges that Amazon is allowing sellers to buy or manipulate their way into top spots in Amazon’s rankings. There is much more in Kanter’s essay, but I will just focus on the issue of gaming the system.

Any system invites gaming. If you run a sales force and give bonuses based on a formula, your sales people will game the system. If you reward volume, they will make concessions on price. If you reward sales revenue this year, they will invest less in building long-term relationships. If it costs you more to service some customers than others, then unless you can figure out how to build that into the sales formula, they will sell more to the high-maintenance accounts.

Government regulations invite gaming. I have often used risk-based capital requirements for banks as an example.

Search engines invite gaming. The phrase “search engine optimization” still grates on my nerves.

All rating systems invite gaming. Don’t think that we won’t see bots writing book reviews and product reviews, if that isn’t happening already.

There are many stories and jokes about gaming under central planning. If the planners reward the number of nails manufactured, they get a lot of little nails. If they reward the weight of nails manufactured, they get one giant nail.

Systems for compensating doctors will be gamed. If you reward them for seeing many patients, then they won’t spend time on the hard cases. If you reward them for doing certain procedures, then they will do more of those procedures. If you reward them based on outcomes, they will select patients that they know will recover easily. Etc.

If you have ever wondered why your organization rolls out a new compensation system every few years, gaming is the reason. When a system is new, it usually takes employees a while to figure out how to game it. After it has been around awhile, they have become experts at getting the maximum reward for the minimum effort. So the organization revamps its compensation system to try to induce more constructive effort and less gaming.

Progress: questions and answers

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Patrick Collison and Tyler Cowen say that we need to study how to achieve faster progress. But they seem to pre-suppose the answers.

the world would benefit from an organized effort to understand how we should identify and train brilliant young people, how the most effective small groups exchange and share ideas, which incentives should exist for all sorts of participants in innovative ecosystems (including scientists, entrepreneurs, managers, and engineers), how much different organizations differ in productivity (and the drivers of those differences), how scientists should be selected and funded, and many other related issues besides.

Implicitly, they assume that progress comes when the larger society

(1) creates opportunities for its “brilliant young people” to work in small groups to generate innovative ideas; and

(2) creates mechanisms to exploit and spread those ideas

Those might be the important factors. But other factors have occurred to students of progress: the competitive environment among states, including wars; demographics that skew toward youth (see this review of The Human Tide); cultural norms for assigning status (e.g., Deirdre McCloskey’s view that cultural support for commerce and innovation created the Industrial Revolution); key political actors, for better (Licklider at DARPA) or worse (the fifteenth-century Chinese emperors who forbid ocean exploration).

I don’t have a settled view on the sources of progress. In fact, the issue just screams “causal density,” making it difficult or impossible to rule out hypotheses or to confirm others.

But my inclination is to focus on broader cultural values. The enemies of progress are fear of novelty and envy of success. My thinking is that when those enemies hold sway, progress will be slow. When those enemies are weak, progress will be rapid.

Back to Collison-Cowen’s focus on scientists, perhaps this paper by Azoulay and others, is relevant. The policy implication is that we should enforce early retirement on eminent scientists.

A Klassic

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A reader reminded me of this post, from ten years ago. An excerpt:

He sketched a pyramid, taken from his latest book, with the human mind at the bottom, beliefs in the middle, and economic behavior on top. Traditional economics only looks at the top of the pyramid. Masonomics wants to look at all of it, which means ignoring boundaries between economics and other disciplines, including sociology, political science, and psychology. I think that Tyler’s pyramid would fit well with Doug North, who in turn would credit Hayek.

I have sometimes described this in computer terms. We have hardware, consisting of our sensory apparatus and basic instincts. We have an operating system, as shaped by evolution. We have cultural apps running on top of that. And economic behavior is a subset of cultural apps.

How I practice what I do

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Tyler Cowen writes,

a number of you asked me what form my practice takes.

What is it that I do, that I am practicing for? I think of my goal as writing essays and books that will stand the test of time. For example, when I wrote Crisis of Abundance, I thought it likely that its analysis of the challenges with U.S. health care policy would still be valid a decade later. It has now been more than a decade, and the book still holds up. With regard to Tyler’s points:

1. I don’t write every day. I try to take one day off a week from the computer. I approach my electronic devices with a fair amount of paranoia–they are out to distract me. Long walks or bike rides take me out of the world of the devices and allow me to think. But otherwise, I do write every day. My blog posts serve one of two purposes. First is note-taking. When I am trying to remember an idea somebody promulgated, I often can find it by searching back through my blog posts. Second is putting out trial balloons for ideas.

2. I don’t think I write so much about views that are diametrically opposed to mine. But I do write about pieces with which I quibble.

3. I also do serious reading very day.

4. I think about the answers that I gave to questions I was not expecting, whether the answers were good or bad. But I don’t have so many speaking opportunities.

5. Other than thinking about firms as cultures, I don’t think I’ve tried as much cultural code-cracking as Tyler.

6. I don’t listen to complex music, but maybe Israeli dancing serves a similar purpose. Each year, the repertoire gets larger and more complicated, so it may also forestall mental laziness.

7. Relative to Tyler, I have fewer in-person intellectual discussions. But I find comments on my blog posts helpful, particularly for my trial balloons. I can tell when something has been widely misinterpreted and needs better articulation or should be discarded.

8. Asking “what did I learn today?” seems like an interesting habit to try to follow.

9. Relative to Tyler, I have fewer intellectual friends. I count that as a weakness, but I don’t do anything about it.

10. I also avoid television, drugs, and alcohol.

11. The closest thing I have to “conversations with Tyler” is my monthly column for Liberty Fund, which is almost always a book review.

12. I used to teach, but only high school students.

I will add the following:

13. I schedule my blog posts in advance. You can gauge that by noting the date on Tyler’s post. My goal is to avoid reacting immediately to anything. This keeps me out of a lot ephemeral outrage events.

14. I don’t read Twitter. I count on Tyler to link to anything really interesting on Twitter. And even when he does recommend tweets, I rarely find them worth blogging about.

15. When I have a talk to give, I take many long walks and practice the talk as I walk. Boiling an entire book down to a 10-20 minute talk is a useful exercise.

Right-wing regimes and exit

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Tyler Cowen writes,

Perhaps the more “right-wing” regimes tolerate different sorts of income inequality. Cuba and the USSR had plenty of inequality, but the main earners, in terms of living standards, are restricted to people within the state apparatus. That means a lot of the talent will want to leave. Many fascist regimes, however, are quite willing to cultivate multi-millionaires and then try to co-opt them into supporting the state. Since you can still earn a lot in the private sector, exit restrictions are less needed.

What would be other hypotheses?

The goal is to explain why right-wing authoritarian regimes allow people to leave, but Communist regimes don’t.

The term “right-wing authoritarian” is poorly chosen. It should be called “natural state” (North, Weingast, and Wallace) or “gangster government.” The goal is to remain in power and extract benefits from being in power. The ruler distributes privileges to those who might otherwise threaten the ruler. As a leader, you do not want to drive people away, but if people are unhappy, you would rather they leave than stick around and cause trouble.

Communist regimes do not operate on the basis of distributing privileges to others. Instead, they seek control through totalitarian methods. Their rule is based on intimidation and creating a climate of fear. But if people know that they can leave freely, why should they fear you? They can foment dissent and, if you turn up the heat, they just emigrate. You can’t really run an effective totalitarian state if you allow people to leave. You need to make sure that dissenters suffer, to set a clear example for other potential dissenters.

Tyler Cowen interviews Russ Roberts

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You’ve probably already checked it out. I’ll toss in a few comments.

COWEN: If government spending had to be increased by, say, 20 percent, what would you spend the money on?

My first thought would have been “helicopter drop.” As I see it, government corrupts everything it spends on, so just drop the money from a helicopter (the Universal Basic Income comes close to that).

But on the UBI itself, Roberts says

what really make our hearts sing: pride, dignity, respect. They’re cliches, but they’re not in our model. So we say, “Well, yeah, they’re working in the background.” Or “We’re just holding them constant.” Or “They’re not important for the question I’m looking at.” Then we get to something like universal basic income, where we say, “Okay, we’re worried — because of, say, autonomous vehicles or artificial intelligence — that people aren’t going to be able to find work, but that’s okay. We’ll just give them a check.”

Who would say, “Oh, that’s a good idea. That’s a good substitute for a feeling of pride and agency and responsibility and dignity that a job well done provides”? We’d say, “Well, that’s absurd.” Yet, people on the left and the right have adopted the economist’s view that says there’s a function that translates stuff into well-being. I think that’s just grotesque. Where we’re talking about things I’ve changed on, that’d be a big one.

Here is Russ being profound:

I would say that’s true of marriage and religion. Any one day, you might sometimes think it’s a hard deal. Most days, it’s good or great, and then, more importantly, over a longer period of time, it’s deeply satisfying. I think in today’s world, those two institutions are struggling because for whatever reason, people are more interested in today.

I would say that I found high school teaching like that. On any one day, I might hate it. But over a longer period of time, it was satisfying.

The whole interview was fun to read through.

The decline of labor’s share

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Germán Gutiérrez and Sophie Pitony write,

non-housing labor shares have remained broadly stable since 1970 for all advanced economies but the US. This is our main result. . . housing explains all of the decline in European total economy labor shares. The US NFC labor share is largely unaffected by housing or self-employment, so it still exhibits a sharp decline particularly after 2000

Owen Zidar and others write,

Private business profit falls by three-quarters after owner retirement or premature death. Classifying three-quarters of private business profit as human capital income, we find that most top earners are working rich: they derive most of their income from human capital, not physical or financial capital. The human capital income of private business owners exceeds top wage income and top public equity income. Growth in private business profit is explained by both rising productivity and a rising share of value added accruing to owners.

Pointers from Tyler Cowen and David Henderson, respectively.

The attempt to divide all income between labor and capital is a fool’s errand. As I put it,

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

Intangible factors matter more and more in today’s economy. You can choose to label the income that is derived from intangible factors “capital income,” in which case the “labor share” of income is declining. Or you can try to “correct” this by justifying labeling some of the intangible income as “labor” income. But what you really should be doing is abandoning the project of trying to view a modern economy through the lens of an aggregate production function f(K,L). It’s a really popular pastime, but it’s a crock.

Three opinions about monetary policy

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1. Tyler Cowen cites a paper by three economists which argues that the lower bound for the interest rate does not matter. Cowen comments, “this evidence is the (current) final word, and I hope it will be heeded as such.”

2. Mark Thoma links to an article by Blanchard and Summers saying that the most important new development in macroeconomics is the significance of the lower bound for the interest rate.

3. My own view is that the lower bound is not significant, but that is because the impact of monetary policy is over-rated even above the lower bound. As an aside, I disapprove when macroeconomists talk of “the” interest rate, as if there were only one. Or, equivalently, when they use the term “interest rates” to imply that if you know one, you know them all.

My view is that the central bank is just another bank. It can no more hit an inflation target than Citibank can. If the government wants to really print money sufficiently to get people to notice, it has to use something like Modern Ponzi Theory.

I know that mine is an outlier view. Everyone else pays great heed to the Fed. If I am correct, then some day what everyone else claims to “know” about the importance of the central bank will eventually be understood to belong in the same category as astrology or 18th-century medical theory.

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.

Fair market test for American universities?

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Tyler Cowen writes,

American higher education does pass a massive market test at the global level — foreign students really do wish to come and study here.

If you just look at the Anglosphere, it’s not clear to me that we are winning a market test. The foreign students are not flocking here from Australia, Canada, and the UK. As for the Asians who are flocking here, I would ask whether they strongly prefer U.S. universities to universities in Australia and Canada, and if so, why. Two seconds of Googling yields this, for example:

A boom in international student numbers in South Australia and the impending merger of two Adelaide universities convinced James Hines to abandon plans for a hotel on a prime city site and instead turn it into one of the world’s tallest student accommodation towers.

And if it turns out that the U.S. does relatively better at drawing Asian students, some reasons could include:

1. A student visa is a relatively easy way to get an extended stay in America, if that is what you want.

2. If you can then get a job here, you can get a green card and stay even longer.

3. Although you might get fine instruction at McGill or Adelaide, you can pick up American culture more readily at Mason.