With Caleb Brown. It provides a good sample of various strands of thought in the book.
Category Archives: Specialization and Trade Economics Intro
Today’s Elites
In a widely-read column, Ross Douthat disparages them.
But Tyler Cowen asks, compared to what?
A couple thoughts.
1. A hundred years ago, elites gave us World War I; fifty years ago, they gave us the Vietnam War.
2. As the economy becomes more specialized, there are going to be more aspects of it with which elites are unfamiliar. Someone in the elite fifty years ago had a decent probability of having grown up on a farm. And a high probability of having done physical labor or worked on a car–changing a tire if nothing else. Consequently, even if today’s elites are better educated and have broader experience than their predecessors, the gaps in what they know may be larger.
A Commenter and I Think Along Similar Lines
Not enough talk about elite hypocrisy; Elite professions like finance or law have a [boat]load of regulatory protectionism but even economists don’t really like to talk about that; but when non-elites want protectionism for their trades they are racists and economically ignorant and what not
One of my fantasies is of a classroom in which a tenured economics professor at an accredited institution of higher learning says, “We must have free trade,” and a few students leap out of their chairs and shout, “You first!”
We are all natural-born hypocrites when it comes to competition. My new book helps to explain why. As producers, we specialize in a few tasks. As consumers, we enjoy products that come from millions of tasks. So if competition emerges in a small set of tasks, it has only a small effect on us–unless it happens to be in the set of tasks that we do to earn a living. Then we get very upset, and make up reasons for that competition to be dangerous and unfair.
The other night, we had several friends over for dessert. All of them were licensed professionals. I can imagine that the social workers would be appalled if suddenly they faced competition from unlicensed social workers. I can imagine that the attorney would be appalled if suddenly he faced competition from uncredentialed lawyers. And so on. So is it surprising that British blue collar workers are appalled at facing competition from a rapid influx of Poles and Hungarians?
Those of us with a lot of educational credentials are happy to speak up for free trade and free movement of people, and I believe that we are right to do so. But it would be better if we were to say, “Me first” when it comes to encouraging competition.
A Commenter’s Suggestion
May I humbly/respectfully suggest, Arnold, that you consider replacing your economics-is-not-a-science meme with an economics-is-like-applied-science (i.e. engineering and medicine) one.
Reading a draft of Jeffrey Friedman’s next book, I gather that this was John Dewey’s notion. Just as doctors often “treat empirically” (by trial and error), policy science can improve by trial and error.
The parallels with medicine are interesting. Just as it seems to be the case that a lot of health care spending goes to medical treatments with high costs and low benefits, it is the case that a lot of government programs and regulations have high costs and low benefits.
I reject Dewey’s model as a description of actual policy practice. Policy makers almost never design proper trials, and they almost never correct errors. Pretty much every anti-poverty program that has been tried since the 1960s is still around, regardless of how (or whether) it was evaluated.
In my latest book, I argue that the profit system does a much better job of trial-and-error learning. The incentives to learn are much stronger. If you make enough mistakes, you lose money and go out of business. Also, upstart companies are much more willing to attempt a radical innovation than are established organizations, whether those established organizations are corporations or government agencies.
Also, I believe that social phenomena are more complex than the problems that engineers encounter. That is why I see mathematics in economics as pretentious. More than that, it can be harmful, as it focuses economists on building models that are so simple that they are deceptive rather than helpful.
All that said, I prefer that economists present themselves as doctors than as scientists, as long as they make it clear that they have not discovered the cures for the diseases with which they are presented.
Yuval Levin praises my book
Actually, he praises two of them.
His 2013 book The Three Languages of Politics is a great example of that. The book sheds a bright light on our political life by arguing that progressives, conservatives, and libertarians tend to see political questions as arrayed along three distinct axes: Progressive think about politics along the oppressor/oppressed axis; conservatives think in terms of the civilization/barbarism axis; and libertarians think in terms of the freedom/coercion axis. . .Try that insight on for a minute as a lens through which to look around at our politics and you’ll find that an awful lot of our debates make much more sense.
Kling’s latest book, out this week and available practically for free on Amazon, is to my mind his greatest contribution yet. Specialization and Trade: A Re-introduction to Economics, is as ambitious as its subtitle suggests. Kling argues that our understanding of the fundamental character and purpose of the discipline of economics has been distorted by the form that the professionalization of the discipline has taken.
Those are just excerpts. More kind words at the link.
You can now read my latest book!
This link goes to the Kindle version, which will set you back $4 (or is it free?), plus your time. Paperback version will be available soon.
As of this moment, the Amazon site calls me the “editor” of the book rather than the author. That will be corrected eventually.
The main point of the book is that you need to keep in mind the overwhelming complexity of specialization in a modern economy. Non-economists miss it when they use simple intuition. And academic economists tend to miss it when they build their “models,” particularly of the GDP factory.
Any reader of this blog will be able to follow the book. But what I really want is for everyone who is about to start graduate school in economics to read this book. I want to say to such students, “Don’t get too suckered in by what your professors are going to be showing you about how to do economics. Don’t let them lead you to forget about specialization and trade.”
Preview of My New Book
From the May-June issue of Cato Policy Report (I did not write the preview, or even read it before it came out, but it provides a good foretaste).
while Kling’s primary audience is other scholars of economics, his writing also provides a first-rate introduction to economic ideas that are easily accessible by students with little or no previous training in economics.
Think of this as the book that every first-year economics graduate student should read (but won’t).
Here is a provocative sentence:
Kling argues that post-World War II economists have mistakenly placed the concepts of scarcity and choice at the center of economic thought.
While scarcity and choice are certainly important concepts in economics, I have two problems with making them central.
1. Scarcity and choice are concepts that focus on a fixed pie. Yet economic growth and the enlargement of the pie are what matter most.
2. Scarcity and choice are taught using “2×2” economics. That is, a choice between 2 activities, hiding the fact that there are millions of specialized tasks in the economy.
These two problems are related. The growth of the pie is the effect of specialization that is vast and mind-boggling in its complexity.
Also, consider where macroeconomics fits in. Your choices are:
1. Treat macro as something that departs from and even contradicts micro. This is the way things worked in the 1960s, and it is where most of the profession seems headed again today.
2. Do macro as general equilibrium theory. This was the attempt to integrate micro and macro in the 1980s, an attempt that strikes me (and others) as having failed.
3. Think of both micro and macro in terms of patterns of specialization and trade. In macro, the focus is on the process of old patterns becoming unsustainable and the process of finding new patterns that are sustainable.
The book makes the case for (3). Along the way, as the preview points out, it takes a hard swipe at MIT-influenced economics for being mistakenly mechanistic in its approach to both micro and macro.
Eliminate the Middleman
In a Russ Roberts podcast, Marina Krokovsky says,
I mean, if we really stop to think about what we do and the role that we play in our own social network, we are all middlemen.
Listen to the whole thing. By the way, there is a nice profile of Russ Roberts at a site called priceonomics. Recommended
Some pundits predicted that the Internet would eliminate middlemen, instead linking producers and consumers directly. I think that this is a misleading way to think about things.
In The Book of Arnold (which will appear this fall I hope), I point out that very few people engage in producing goods and services directly for consumers. Patterns of specialization and trade are highly complex, and nearly all of us are involved in intermediate and support roles.
What we mean by eliminating the middleman is a re-arrangement of the patterns of specialization and trade. When a pattern of specialization and trade involving physical books becomes less sustainable, Borders Books goes out of business. Other processes for connecting authors with consumers use different patterns of specialization and trade.
I think that what ought to be eliminated is the concept of “middleman.” I do not believe that it is a useful concept. It is misguided to think of economic activity as “production,” “consumption,” and “other.” (Note, however, that standard economic textbooks do nothing to discourage this way of thinking.) Instead, it is better to think in terms of the Austrian concept of roundabout production, the Smithian concept of division of labor, and the Schumpeterian concept of creative destruction. Put those together, and you have PSST.
Mike Munger on Specialization
Admittedly, it was a significant intellectual achievement to show that the weaker trading partner benefits from trade, even if the stronger partner is better at everything. But those fixed differences have largely disappeared in many markets. The question of what should be produced, and where, is now answered by dynamic processes of market signals and price movements, driven by human ingenuity and creativity. The cost savings resulting from successfully dividing labor and automating production processes dwarf the considerations that made comparative advantage a useful concept in economics.
Read the whole thing. In The Book of Arnold, I express a similar disappointment with Ricardian comparative advantage, because it is always taught as the “two by two” case, which hides the complexity of specialization in the real economy.
Ricardo Hausmann on Specialization and Trade
a market economy encourages specialization: We become very good in a narrow set of skills or products, and exchange them for millions of other things we have no clue how to do or make. As a consequence, we end up doing remarkably few things and buying everything else from others.
Pointer from Mark Thoma.
The Book of Arnold starts this way. Hausmann’s main point is that industries that compete in world markets tend to progress more rapidly than local industries.
One thought I have is that national retail chains have forced retail to become more competitive. The resistance of some countries, such as Japan, to competition in retail have held back their economies.
Another thought I have is that there is much resistance to competition in the U.S. in health care and education.