I tried a couple weeks ago, but I let the weather forecasters frighten me out of it. I will be back in Boston on October 5th and 6th. Either lunch time or dinner time would work. We will discuss my latest book, Specialization and Trade. If interested, email me at arnold at-sign arnoldkling.com and let me know which time works best for you. I will try to work something out.
Category Archives: Specialization and Trade Economics Intro
Friedman and Samuelson
I think of Specialization and Trade as an attempt to redirect economics away from the path that it followed after the second World War. This recently produced the following train of thought.
Who has been the most influential economist since 1945? I am inclined to go with Paul Samuelson, and that is implicit in the book. But some people might have said Milton Friedman. In neither case, do I think that the influence on academic economists was good. [somewhat related: Tyler Cowen’s simple theory of recent intellectual history, which he apparently still propounds]
With the public, their impact differed. Friedman argued that people should admire markets and be wary of government. Samuelson said it the other way around. Those of us who agree with Friedman approve of Friedman’s influence. Those who agree with Samuelson disapprove of Friedman’s influence.
Back to academic economists. I think that both Friedman and Samuelson were guilty of promoting economic methods that involved imitating hard science (at least as they thought of science as being practiced). Instead, in my book I argue that economic analysis can yield frameworks of interpretation, but economic hypotheses are not verifiable the way that they are in chemistry or physics.
In macroeconomics, Friedman enjoyed influence starting in the 1970s, because the Solow-Samuelson Phillips Curve broke down and Friedman’s alternative view that emphasized monetary policy seemed to work better. However, my view is that both monetarism and Keynesianism are misleading as interpretive frameworks.
In fact, what started out as monetarism ultimately degenerated into deity-worship of the Fed chairman. First it was Paul Volcker, who slew the dragon of inflation. Then it was Alan Greenspan, the Maestro of the Great Moderation. Until in hindsight he became the Randian ideologue, who turned the banks loose to create a financial crisis. The crisis came on Ben Bernanke’s watch, and he is deified as the man who saved us from another Great Depression.
I think that the effect of each of those three on the economy is vastly over-rated. Instead, I think that financial markets and the economy in general simply took the course that they took, and story-tellers wrongly attribute the outcomes to the policies of the Fed at the time.
Lunch Costs
Abha Bhattarai writes in the WaPo:
An increasing number of Americans are ditching $10 sandwiches and $12 salads in favor of food from home, according to new data from the research firm NPD Group. Lunch traffic is slowing at restaurants around the country, with weekday lunch visits down 7 percent compared to a year ago, the steepest decline since the beginning of the recession, data show.
I found the article interesting, although I think you should take the statistical reporting with a grain of salt, pardon the pun.
I am not part of the dining-out culture, but I do not spend much time on food preparation.. Apart from a few fruits and vegetables, I tend to go with prepared foods from the store.
In general, I expect people to increase their consumption of food prepared by others. In a world of specialization and trade, the costliest lunch of all is the one that you spend a lot of time making yourself.
Intellectual Yet Idiot
Nassim Nicholas Taleb coins that phrase, writing
What we have been seeing worldwide, from India to the UK to the US, is the rebellion against the inner circle of no-skin-in-the-game policymaking “clerks” and journalists-insiders, that class of paternalistic semi-intellectual experts with some Ivy league, Oxford-Cambridge, or similar label-driven education who are telling the rest of us 1) what to do, 2) what to eat, 3) how to speak, 4) how to think… and 5) who to vote for.
I have had a couple of people compare my Specialization and Trade to Taleb’s work. For what it is worth, my thoughts on the similarities.
1. We both believe that highly-educated experts over-estimate what they know.
2. We both doubt the ability of “science” to understand the human world, including the economy.
3. We both think that statistical analysis as commonly practiced is unreliable.
4. We are both outsiders relative to academia at present.
I think that Taleb is a much more colorful writer. I tend to be more risk-averse, both in terms of substance and style.
Book Discussions
If any readers are willing/able to organize a group interested in Specialization and Trade, I am willing/able to travel to talk with such a group. I think about 10-20 people would be a good size. I am particularly interested in speaking to autodidacts in their 20s and 30s.
There are several topics in the book which, in hindsight, could have been developed further. One of them that I have been thinking a lot about recently is the long shadow cast by World War II on economic thinking and policy. In the book, I do mention that all of the major nations fighting the war used central planning to a considerable extent. But other points are worth noting, including:
1. In Great Britain, major industries were nationalized from the post-war period all the way up to the late 1970s, when Margaret Thatcher took over as Prime Minister.
2. In the U.S., price controls were used during the war to fight inflation, and the belief in price controls died hard. If I recall correctly, many in the Truman Administration wanted to continue controls after the war, and they were disappointed when Congress abolished them. As late as the early 1970s, the Nixon Administration attempted to go the price-control route, with disastrous results.
3. Another challenge during the war and the post-war period was the potential for labor unions in key industries, such as steel and coal, to bring the economy to its knees. In the decades following the war, Presidents had to resolve major strikes by cajoling (or even forcing) industry and labor leaders to accept settlements. Finally in the 1980s, both Thatcher (coal miners) and President Reagan (air traffic controllers) won important confrontations with striking workers. Many on the left are still bitter about this. They long for the days when unions were more of a force.
4. Because the wartime economies were centrally planned, a lot of economic research involved developing tools for such planning. Prior to the war, the idea of representing an entire economy using mathematical symbols and equations to represent inputs and outputs was adapted from the Soviet Union by Wassily Leontief, who was awarded the Nobel Prize in 1973. After the war, MIT economists, notably Robert Solow (who had studied with Leontief at Harvard), thought that Leontief’s model of production was both too detailed and too rigid. They worked on solutions to the problem of optimizing output that involved linear programming, resulting in an important textbook on programming techniques by Joseph Dorfman (Harvard), Paul Samuelson, and Solow.
5. Also, the MIT economists developed and elaborated on the concept of an aggregate production function. This eliminates the detail by aggregating “capital” and “labor” inputs and treating the economy as a GDP factory. This generated an extensive, but now largely forgotten, literature, including the so-called Cambridge Capital Controversy.
6. The advantage of the aggregate production function is that there are mathematically tractable ways to represent substitution between capital and labor. The Constant Elasticity of Substitution production function, which includes Cobb-Douglas as a special case, was another topic that filled the journals of the early 1960s with now-forgotten articles. I recall that in the early 1970s one of my undergraduate professors, Bernie Saffran, pointed out to us that econometricians trying to estimate the CES production function were trying to tease second and third derivatives out of data where you could be lucky merely to find that the first derivative had the correct sign.
Economies are Embedded in Cultures
Peter Richerson, et al, write,
Economic competition is an important and typically peaceful form of CGS.
CGS is “cultural group selection.” Pointer from Joseph Henrich in comments on a Tyler Cowen post.
In my view, cultural group selection fits well with Austrian economics but poorly with Chicago economics. Hayek and others pay attention to cultural norms, while Chicago economics is more purely individualistic. See Erwin Dekker’s book.
For example, if you take the Chicago view that focuses on atomistic optimization by individuals, then racial discrimination seems to be unlikely in a market economy. Someone who is willing to hire blacks seems likely to out-compete someone who only hires whites.
However, suppose that you have a group norm in which refusing to hire blacks is considered cooperation and hiring blacks is considered defection. Also, suppose that groups that are more effective at rewarding cooperators and punishing defectors tend to be more successful. In that case, racial discrimination could persist because of cultural group selection.
The theory of cultural group selection can create discomfort if you like to believe that social outcomes are purely deterministic. Instead, with group selection a wider range of outcomes becomes possible, with the potential for norms and practices to survive that seem arbitrary or even counter-productive. While one might object that this makes the theory messy, I think it is realistic.
I believe that one of the important limitations of what in Specialization and Trade I disparage as MIT economics is that it ignores cultural context. Instead, I believe that the fact that economies are embedded in cultures is very important.
Modernity is a Package, Continued
Malavika Nair and G.P. Manish write,
In recent years, many thousands of so-called “untouchables,” or Dalits, members of the lowest group in the Indian caste order, have risen out of poverty to become wealthy business owners, some even millionaires.
By taking advantage of the greater economic opportunity brought about by market reforms, these Dalit entrepreneurs provide us with an important example of the power of markets, not just to bring about economic emancipation, but to fight deeply entrenched social discrimination.
In Specialization and Trade, I argue that most pre-modern specialization was similar to the Indian caste system, in that you were born into your occupation. Part of modernity is getting to choose your occupation, and markets are an essential component of that.
Feel free to return to the book’s web site to peruse and comment on the reviews. One review, by Herbert Gintis, disturbed me. He is entitled to claim that what is right in the book is not original and what is original is not right. However, I found his tone to be snotty and uncharitable, which lowers my estimate of him considerably.
Formalize This
Which formalization would you argue adequately considers specialization and trade? An Edgeworth box?
This is a good question, because mainstream economists cannot “see” anything that is not in a formal model.
My answer in this case is a definite “No.” The Edgeworth box is an example of two-by-two economic modeling. Other examples include the Ricardian model of comparative advantage and the Heckscher-Olin-Samuelson model of international trade.
The most important aspect of specialization and trade is that we specialize in just a few tasks but we enjoy the products of millions of tasks. This fact was noticed by Adam Smith, but it has not been “formalized” in any useful way that I can think of. So the formal modelers are like drunks who have their preferred lamp posts, but the watch that need to look for is somewhere else.
Six Breakthrough Ideas in Economics (?)
In the opinion of The Economist, they are:
1. Akerlof’s Market for Lemons
2. Minsky’s Financial Cycle
3. The Stolper-Samuelson Theorem (Wikipedia explanation).
4. The Keynesian multiplier
5. The Nash equilibrium
6. The Mundell-Fleming trilemma (Wikipedia explanation).
Pointer from Greg Mankiw.
In Specialization and Trade, I discuss many of these ideas.
I mention (1) as an example of economists finding a theoretical market failure for which markets have found solutions. Used cars are sold with guarantees, or with information provided by third parties, or by reputable dealers.
I endorse something like (2), although I offer a different mechanism for the financial cycle. Minsky describes it in terms of the risk proclivities of capitalists. I describe it in terms of the trust that people place in financial intermediaries.
I do not discuss (3) specifically, but I do say that the “two-by-two” model of international trade is an example of economic modeling that is more misleading than insightful. In any case, of all of the Heckscher-Ohlin-Samuelson results, I would have picked factor-price equalization over Stolper-Samuelson.
I explain why (4) is a terrible idea.
I do not mention (5) by name, but I do describe the maintenance of cultural norms from a game-theoretic perspective.
I do not discuss (6), but I argue against monetarism, and thus I implicitly discount the trilemma.
A Longer Podcast on My Latest Book
With Trevor Burrus and Aaron Ross Powell.
It is wide-ranging, and I hope you get a lot out of it. It only gives a taste of what is in the book.