A moonshot to overthrow neoclassical economics

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Tyler Cowen gave me an idea. He described his personal moonshot. He wrote,

My goal is to be the economist who has most successfully used the internet as a platform to foment broad enlightenment.

He elaborates on this, creating a concise statement of his mission as a public intellectual.

So I did something similar. Please read Overthrow Neoclassical Economics: my personal moonshot. It begins,

My personal moonshot is that I wish to be a leader in overthrowing neoclassical economics.

…As I see it, neoclassical economics is characterized by two essential propositions.

1. Production is a process that employs two primary factors — labor and capital.
2. The distribution of returns to labor and capital reflects their respective contributions to the production process.
There are many economists, particularly on the left, who reject (2) in favor of theories of distribution that stress the role of political power. This criticism may have merit. But my criticism is more fundamental than that. I reject (1) as a useful description of the contemporary economy.

In neoclassical economics, individual productivity is inherent in the technology and the amount of capital per worker. In reality, it is way more complicated than that. Indeed, there are power relationships, but it is way more complicated than that. Technology and relative power are not sufficient to determine individual productivity and compensation. Everything depends on who you are teamed up with, how you are organized, the overall culture in which you are embedded, and other factors, including ongoing dynamics and expected future changes.

Jordan Peterson and other public intellectuals

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David Brooks writes,

In his videos, he analyzes classic and biblical texts, he eviscerates identity politics and political correctness and, most important, he delivers stern fatherly lectures to young men on how to be honorable, upright and self-disciplined — how to grow up and take responsibility for their own lives.

I have a few reasons for being less than fully bought into Peterson.

1. He is a spellbinding speaker but his first book, Maps of Meaning, was turgid. There is something disconcerting about the fact that his ideas seem to come across better in a format that allows for less editorial polishing. I noted this in December of 2016, when the Peterson tsunami was just forming.

2. Some of his ideas are mystical and sound really strange.

3. He gains some of his stature by attacking post-modernists who are intellectual weak, at least in the way that he presents them. For me, it is more impressive to take on stronger opponents than weaker ones.

He may now be over-rated by his fans on the right. But he is badly, badly, under-rated by smug leftists whose ability to understand opposing viewpoints pales in comparison with his.

Using the three-axes model, I put Peterson firmly in the conservative camp. He sees civilization as fragile and precious, and he is animated by the civilization vs. barbarism axis.

Rather than propose a list of public intellectuals that I think are influential, or important, or prominent, let me just list a few public intellectuals that I admire and trust, in the sense that I think that they really try to be careful to honor opposing viewpoints and try to avoid committing intellectual swindles.

–Jeffrey Friedman. Does he even count as a public intellectual? He is an intellectual, all right, but his writing is often steeped in academic jargon, and he is not a familiar figure, even to the highly-educated portion of the public. His journal, Critical Review, has pieces written by top minds, and yet his own contributions often tower over theirs.

–Steven Pinker. You can get a better education in the humanities by reading The Blank Slate than by taking any freshman humanities course at any university, I would bet.

–Tyler Cowen. Tyler has an unmatched ability to offer ideas that are surprising and original. He takes risks, sort of like an intellectual venture capitalist, if you will. Some of these start-ups don’t make it, but he picks enough winners to more than make up for the failures.

Friedman, Pinker, and Cowen all stand out for being non-tribal or even counter-tribal. They challenge and annoy their most likely allies, rather than offering a steady diet of reinforcement and comfort.

Blockchain and property rights

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Phil Gramm and Hernando de Soto write,

Fortunately there is a new technology that could make a global property-rights registration system feasible. Patrick Byrne, an e-commerce pioneer and the CEO of Overstock.com, has committed a professional staff and significant resources to modernizing the collection and maintenance of property-rights records on a global scale. Blockchain is an especially promising technology because of its record-keeping capacity, its ability to provide access to millions of users, and the fact that it can be constantly updated as property ownership changes hands.

I am not persuaded. Information technology can be used to track property rights, but that is not the problem in underdeveloped countries. The problem is to establish property rights in the first place. You can use data to identify a parcel of land. But data alone does not tell you who owns it. Ownership is a social construct.

Three axes in National Affairs

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I could not help but think “three-axes model” when I read Strangled by Identity, by Rishabh Bhandari and Thomas Hopson.

American politics features three concepts of identity, but Americans are rarely clear-eyed about how these differ and disagree. Ethnic identitarians think civic nationalists are closet racists. Civic nationalists think that ethnic identitarians are “race-baiters.” And while cosmopolitans wrongly believe themselves to be above the fray, the other two sides of this entangled triangle don’t trust them or the institutions they lead. So it is that, at the end of the day, people on each side can blame those on the other two sides for playing identity politics while nonetheless playing the game themselves.

For “Ethnic identitarians” read progressives, interpreting their opponents along the oppressor-oppressed axis. For “Civic nationalists” read conservatives, interpreting their opponents along the civilization-barbarism axis. For “cosmopolitans” read libertarians, interpreting their opponents along the liberty-coercion axis.

In the very same issue of National Affairs, there is Civility and Rebarbarization by Arthur Milikh. Citing essays published under a pseudonym in 1763 by the man who became the second President of the United States, Milikh writes,

According to Adams, the human passions — in particular anger and the desire for revenge, which especially characterize man in the barbaric state — must be ordered, moderated, and channeled so as to form human beings capable of civilized self-government and rule by laws. These passions, however, are ultimately ineradicable, which means that a permanent transformation into a state of civility is not possible. Indeed, entertaining such hopes is dangerous. Rebarbarization always remains a human possibility. Should it occur, nations may find it impossible to re-civilize major portions of their inherited order. Adams’s purpose is to educate his readers on both the origins and fragility of the constitutional liberty that we enjoy.

The entire essay is eloquent along these lines. My guess is that if a survey were taken, conservatives would check the box “strongly agree.” But it will not be so well received by progressives or libertarians. This is a case in which speaking in a single language means that only your tribe will understand what you say.

Efficiently allocating talent

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Tyler Cowen writes,

Good at finding the best talent:

1. Highly paid professional sports (those who care can play them in high school)

2. Finance and management consulting (lots of people from top schools consider these careers, and we get enough, even if non-elites are somewhat “locked out”)

3. Nerdy tech stuff (so many people are exposed to this at a young age and can be autodidactic)

…Bad at finding the best talent:

4. Education and teaching and religious leaders

5. Humanities scholars

6. Journalists

I wrote relevant essays on this topic twenty years ago. In From Allocating Capital to Allocating Talent, I wrote,

The optimum size for a firm may depend on how it solves the talent allocation problem. If senior executives can allocate talent wisely over a wide set of problems, then the firm can be large. If senior executives only can allocate talent wisely over a narrow set of problems, then the firm will need to be small.

That is one little nugget in an essay that contained insights that people are getting credit for “discovering” even now.

Another essay was Effective Tournaments.

The tournament for choosing CEO’s of large, established corporations probably is less effective than the academic tournament. It appears to me that idiosyncratic personal connections, timing, and luck play a big role in determining who gets to be a major CEO. By idiosyncratic personal connections, I mean relationships, such as country-club memberships, that do not affect the ability of the CEO to run the business profitably. Relationships with customers or suppliers are pertinent, rather than idiosyncratic.

I probably would not stick with that view today. I have since become more skeptical about the academic world. With increased specialization, each sub-field is controlled by a relatively narrow cadre of professors. This makes academics less of an open tournament than it was fifty years ago. I think that academic success today tends to have a much higher component of conformity and a corresponding lower component of skill.

Also, the CEO tournament is enhanced by the fact that there is churn among major companies. Fifty years ago, Jeff Bezos could never have become CEO of a major company. He still could never have become CEO of Wal-Mart, but he did the equivalent by growing Amazon. These companies that come from nowhere to turning into giants really strengthen the CEO tournament. It is a phenomenon that you do not see in Europe, and so my guess is that the CEO tournament is much less effective there.

I really like this sentence from that essay:

To be effective, a tournament must behave like an experiment with repeatable results.

If you ran the talent-selection experiment multiple times, would the same people rise to the top? In professional sports, I am inclined to think “yes.” In finance and management consulting, I am not so sure. In entrepreneurship, I am inclined to say “yes.” I know there is a lot of luck involved, but there are many, many decisions to be made, and the more decisions that are involved, the more opportunity there is for skill to triumph over luck. I made that sort of argument in another classic essay, The economics of Pop-Tarts.

I don’t know how to use my model to deal with all of the occupations listed in Tyler’s post. For example, I don’t think of the fields of teaching and education as tournaments.

How does one define the term “network”?

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I ask this question because I have started to work through a review copy of Niall Ferguson’s The Square and the Tower. So far, it is an attempt to reinterpret history as a contest between networks and hierarchies. So naturally, I want to see the two terms defined. And they are not. It is amazing how often that happens. Somebody writes a book about culture and does not bother to carefully define culture. Am I the only one who finds that deeply annoying?

Ferguson defines a hierarchy as a network with particular characteristics. A hierarchy is heavy on top-down connections and light on horizontal or bottom-up connections. I am being terse. He is more explicit. But since he never defines the term network, calling a hierarchy a particular type of network still leaves hierarchy undefined.

When I type “network” into Google, it gives me the movie with the famous line “I’m mad as hell and I’m not going to take it any more.” Maybe Google knows how peeved I am when a book never defines the terms that are its main focus.

One challenge is that we use the term network very promiscuously. We speak of road networks, computer networks, social networks, and so on. Maybe a definition is elusive because the term means different things in these different contexts.

Anyway, let me try to give a definition of a network, and see how you like it:

A network is a set of channels (or conduits) through which resources can flow according to particular protocols between nodes (or endpoints).

With a network of roads, the resources that flow are vehicles and their contents. The protocols usually allow for bidirectional flow.

With the Internet, the resources that flow are digital messages. The protocols include the Internet Protocols.

With real-life social networks, the “resources” are knowledge about someone based on personal acquaintanceship. The “protocols” are customs about how much we know about friends, family, and co-workers in our immediate circle. Yes, I’m stretching here.

When we talk about a political or economic contest between a network and a hierarchy, what are the resources that flow? Maybe the resources are “instructions” and “information.” They flow vertically in a hierarchy, and more horizontally in a non-hierarchy.

I have one more quibble about Ferguson. That is, the metaphor of a tower (managed centrally) and a square (emergent) strikes me as similar to the metaphor of the Cathedral and the Bazaar, found in a famous essay by Eric Raymond. I looked in the index, and there is a citation of Raymond’s essay, but Ferguson never remarks on the similarity of the metaphor!

By the way, I am probably going to like Ferguson’s book very much by the time I finish it.

What I’m Reading

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Instincts of the Herd in Peace and War, by Wilfred Trotter. Someone who attended a discussion of The Three Languages of Politics recommended it to me. Has anyone else read it? It is sociology from 100 years ago. One of Trotter’s ideas is that there is a conflict between independent rational behavior and conformity with cultural norms. It seems relevant to The Case Against Education. In fact, it pertains to Bryan Caplan on many levels. It also anticipates Garrett Jones’ Hive Mind, right down to the bee metaphor.

If your curiosity gets the better of you, be prepared for a very strange read. The past is a different country, as L.P. Hartley wrote.

Morris Fiorina’s book

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It is called Unstable Majorities. He claims that the public is not as polarized as political elites. When one party wins in an electoral cycle, it tends to over-reach, leading to backlash from the public. Hence the unstable majorities.

The odd thing about the current situation is that I think it is the losers of the election who are over-reaching. Instead of positioning themselves as providing a centrist balance, the Democrats are positioning themselves as the #Resistance, denying the legitimacy of the last election and not moderating their views in any way. We’ll see how that works out for them.

Pushback on my four rules

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Note: some folks liked the original article. MarketWatch reproduced it. David Henderson liked it and added comments.

One commenter writes,

“When you have little left to learn on your job, it is time to move on.”

Doesn’t that risk sentencing yourself to eventually being hit by the ‘Peter Principle’? And doesn’t society need people who are actually good at their current job rather than always trying to learn the next one?

I always thought that the ‘Peter Principle’ was part of the genre of flattering the unhappy employee who is convinced that he or she would thrive with a better boss (or thinks that he or she deserves to be the boss). FastCompany Magazine is a leading practitioner of the genre that boosts the hero/martyr self-image of the mid-level employee.

If the Peter Principle were really true, then management strategy consists of setting people up to fail. I don’t buy that. What good managers do is set you up to learn, but not to fail.

Another commenter writes,

there are positions you want dedicated experienced people that aren’t looking for something new. . . two of the three big Business failures I have experience is because our business worked to eliminate these experienced workers. Businesses need the high flyers but also need a high degree of agreeableness to work well.

In my essay, I say that after you learn your job you should train a successor. If an organization lets you go without training your successor, then institutional knowledge gets lost. So of course that is bad strategy.

But if the only way to retain institutional knowledge is to keep people doing the same job for many years, I think that the organization has a problem. That sounds to me like an organization that is not going to get any fresh ideas, and that means no growth in productivity. There are very few companies that can afford to do without productivity growth.

In any case, my rules are not suggestions for businesses. They are suggestions for you as an employee, regardless of what is in the best interest of the business. If you care about career advancement and personal growth, then you should not let your employer leave you in a position that is no longer challenging.

Ben Thompson on Amazon

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He writes,

To be both horizontal and vertical is incredibly difficult: horizontal companies often betray their economic model by trying to differentiate their vertical offerings; vertical companies lose their differentiation by trying to reach everyone. That, though, gives a hint as to how Amazon is building out its juggernaut: economic models — that is, the constraint on horizontal companies going vertical — can be overcome if the priority is not short-term profit maximization.

Read the whole post, which is too deep to summarize. I agree with his discussion of fixed cost and marginal cost. I am not as convinced as he is that Amazon’s investments will pay off. Sometimes a fixed investment is a scalable reduction in marginal cost, and sometimes it is a railroad to nowhere.

Years from now, of course, hindsight will be perfect. At that point, it will seem obvious whether Amazon has been correct all along or throwing away investors’ money.