Best Book of the Year?

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Kevin Laland’s Darwin’s Unfinished Symphony is sure to make my top five and the early favorite to make number one. It got a mention from Tyler Cowen and a brief review from Robin Hanson. I would be curious to know what Jason Collins thinks of it. Laland is a person I would very much like to spend a few hours with batting ideas around.

Laland’s field is evolutionary neuroscience, or so I would guess. The book is focused on the co-evolution of brain capabilities and culture in humans. A central question is how culture came to be so advanced in humans relative to animals. To address that, one must try to understand how culture is developed, transmitted, and retained.

On page 7, Laland offers his definition of culture as

the extensive accumulation of shared, learned knowledge, and iterative improvements in technology over time.

Recall that my working definition of culture is “socially communicated thought patterns and behavioral tendencies.”

Late in the book, Laland uses dance as an example of culture.

The social structure of many communities. . .gain much of their cohesion from the group activity of dancing. Historically, dance has been a strong, binding influence on community life, a means of expressing social identity of the group, and participation allows individuals to demonstrate a belonging. . .there are as many types of dances as there are communities with distinct identities.

Of course, I like this choice of examples. I think that dance illustrates what I see as a trend in recent decades toward narrower, deeper, older.

One of the central scientific studies in the book is the social learning strategies tournament. In the tournament, each player faces an environment that changes gradually over a sequence of turns. To cope with this environment, at each turn the player can choose one of three moves. Quoting from the article,

INNOVATE, OBSERVE and EXPLOIT. INNOVATE represented asocial learning, that is individual learning stemming solely through direct interaction with the environment, for example, through trial-and-error. An INNOVATE move always returned accurate information about the payoff of a randomly selected behavior previously unknown to the agent. OBSERVE represented any form of social learning or copying through which an agent could acquire a behavior performed by another individual, whether by observation of or interaction with that individual An OBSERVE move returned noisy information about the behavior and payoff currently being demonstrated in the population by one or more other agents playing EXPLOIT. . . Finally, EXPLOIT represented the performance of a behavior from the agent’s repertoire

As long as the environment stays reasonably stable, you profit most from EXPLOIT. But as the environment changes, you can obtain higher payoffs by learning. In the simulation exercise conducted in the study, the social learning strategy OBSERVE worked much better than the asocial learning strategy INNOVATE. It seems to me that people who play OBSERVE get to free ride on others who are playing EXPLOIT and to free ride especially profitably on others who play INNOVATE.

Think of a factory worker in Ohio in 1999. If you just go to work every day expecting your job to last forever, you are playing EXPLOIT. If you decide to study the career choices and location decisions of people you think are similar to you, you are playing OBSERVE. If you decide to pick a new career and/or location based mostly on your own instincts, you are playing INNOVATE. The signals you get from playing OBSERVE are noisy. You could end up copying someone who develops computer network management skills and moves somewhere to run a data center. Or you could end up copying someone who goes on disability and gets addicted to opioids.

I think that this very simple model helps one to think about the PSST story for a recession. During boom times, people find patterns of specialization and trade that are rewarding, and they EXPLOIT them. But people may over-estimate the stability of that environment. They think that house prices will never go down. They think that manufacturing jobs are going to last. Then, as the environment changes and as those changes become manifest, a lot of people’s EXPLOIT strategies start to work out badly. They have to go into learning mode. They are used to having OBSERVE work out best, and that may still be the case from the perspective of the individual, but it means that the process of establishing new patterns of specialization and trade will take a long time. To speed up that process, from a social perspective we may need more people to play INNOVATE.

Anyway, there is a lot to the book, and I plan to write a fuller review.

What should a parent do about school?

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A commenter asks,

As a parent of two girls, age 5 and 4, and assuming the “null hypothesis” is true, how should I think about school choice for my girls?

Should I just ignore school choice altogether, and send them to the local public school without much thought? Should I look for the “best school”, as defined by what criteria? The “null hypothesis” seems to point to the former, but it would be great to hear your opinion of what the practical implications are for the “null hypothesis”.

First, let me report what we did. We live on the wrong side of the school tracks in Montgomery County. Our high school’s verbal and math SAT scores were each on average 250 points lower than those in the “better” schools. Of course, “better” simply means that they had more affluent populations. In fact, when I once asked a school board member at an election forum how he could explain this SAT differential, he said that demographics were the explanation. I wanted to follow up by asking that if demographics are everything, then why does the County spend so much money on schools.

Anyway, while I had not yet formulated the Null Hypothesis, we were not worried about the fact that the schools to which we sent our children were “bad.” They seemed to be doing all right. We took one of our daughters out of public school for high school and instead sent her to a Quaker school, but that was because we thought that she needed the less authoritarian approach that the Quaker schools offer. But her younger siblings went to public school all through high school.

I have no regrets about our choices. What I regret is what they were “taught” in college. They were fed a steady diet of moral narcissism, and I am afraid that a lot of it stuck with them.

That diet of gooey, progressive sentiment starts in K-12, and that is probably what makes me most hesitant about advising parents to stick with public schools. However, the ideological stuff isn’t really different in the better private schools–it’s not like a Quaker school is going to be a libertarian hotbed. So the only way out on that score is home schooling, and I think that requires a special set of circumstances to work.

The Source of Systemic Financial Risk

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Charles Calomiris says that it is the political system.

There are two important systemic threats to financial stability: government policies that subsidize mortgage risk, and government policies that insure bank debts (and, more generally, that subsidize bank default risk through a variety of channels, including—but not limited to—“toobig-to-fail” protection).

As you know, I have some simple solutions to the problem of subsidizing mortgage risk.

1. Do not provide government guarantees or subsidies for investor loans, meaning mortgages on non-owner-occupied homes. I have linked to a study that found that over one third of mortgage lending in 2006 went to people who were buying a house in addition to the one that they occupied.

2. Do not provide government guarantees or subsidies for loans that extract equity from homes, including second mortgages and cash-out refinances.

These simple, logical steps would have been sufficient to prevent the financial crisis of 2008. However, they would be fiercely opposed by industry trade groups, such as the Mortgage Bankers Association.

Patrick Collison and Tyler Cowen

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Tyler says a lot of things to be provocative, including arguing that it is good to say things to be provocative.

the universal basic income. It does make logical sense, especially as we get wealthier. But it, for me, was a kind of formative experience, about 2009, in response to the financial crisis. One of the better policies would have been mortgage cramdowns and write-offs for many afflicted people, and many economists agreed with this. Larry Summers pushed it.

But politically, it proved impossible. People didn’t hate all of the bailouts as much as they claimed, but they hated the idea of the person next door getting a break that they didn’t get, when they had, in their own mind, worked harder and paid all their bills.

The economists and others who thought that mortgage forgiveness was the solution had no idea of the logistical challenges involved. In the old-fashioned world where your bank or savings and loan lent you the money and held the mortgage, it would have been reasonably simple. But in the contemporary world, the investors differ from the servicers. Investors are entitled to various portions of the principal and interest that you owe, based on how securities are structured. The securities had gotten complex–recall the CDO-squared? Meanwhile, the loan servicer is responsible for collecting the payments and passing them along. Mortgage modification imposes huge administrative costs on servicers, who operate on a thin margin to being with. And it raises all sorts of issues with investors, because you end up giving them very different loss allocations than what they signed up for. I predicted back in 2008 that the government would never be able to get mortgage modification to work, and I think that prediction held up well.

Also, the mortgage modification programs were limited to owner-occupants. We now know that a lot of the bad mortgages were for non-owner-occupied houses. These were speculators. If you think that people who were paying their mortgages on time would have resented having delinquent owner-occupants bailed out, imagine how they would have felt having house-flippers bailed out.

I think we’ll actually evolve disability insurance, in some way, to become an obfuscated form of a partial universal basic income.

Commenters on this blog also have pointed out that we like to obfuscate our government charity programs, even though straight tax/transfer schemes would appear to be more efficient. Commenters here also have said things along these lines:

A United States with open borders, I think, politically, would be unworkable in less than 10 years, even though it makes economic sense. It gets back to this optimal degree of insulation. There’s a political culture here, which requires a certain common language, common set of delusion, common set of myths, common set of things we understand. This country does it pretty well, not perfectly, and I don’t think open borders is compatible with that. I think it would kill the goose laying the golden egg. So I favor much more immigration, but not unrestricted immigration.

If you read or listen to the whole discussion, you will find a bit that makes it sound as if I am on the faculty of George Mason. That is not the case.

When Tyler talks about the blogging world, I thought of narrower, deeper, older.

I liked the last section of the conversation, on “over-rated and under-rated,” the best.

Macroeconomics is just restin’

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The parrot is not dead, insists Ricardo Reis.

these dissertation theses are fairly representative of what modern research in macroeconomics looks like. . .

used micro data to show that it is mostly young people who adjust their consumption when monetary policy changes interest rates. Younger people are more likely to obtain a new mortgage once interest rate changes, either to buy a new home or to refinance an old one, and to spend new available funds. Her research has painstaking empirical work that focuses on the role of mortgages and their refinancing features, and a model with much heterogeneity across households…

There is more at the link. Pointer from Tyler Cowen.

Work of the sort described above sounds promising. It differs from traditional macroeconomics in a refreshing way.
Traditional macroeconomists take some very dodgy averages and call them “aggregates.” If that practice comes to be replaced by work that takes seriously the variation that underlies the averages, then we will have reason to celebrate. Unfortunately, many of the other papers Reis describes sound to me more like traditional macroeconomics.

What is wrong with the aggregation exercise? Just off the top of my head:

1. Wages and unemployment rates vary by demographic groups more than the aggregate wage and unemployment rate vary over the medium run (which is the typical period for macroeconomic analysis.

2. Inflation rates vary more across industries (health care vs. computer chips) than the average inflation rate varies over the medium run.

3. Saving rates vary more by household characteristics (including cultural background) than they vary over the medium run.

4. Much of work does not produce final output. Instead, much of the labor force has become Garett Jones workers, producing organizational capability.

5. There has been a steady increase in hard-to-measure components of the economy: the value of medical services; the value of employee benefits; the value of consumers’ surplus derived from information and communication technology; etc.

My preferred alternative to traditional macro is PSST. Traditional macroeconomists are more likely to think in terms of a single labor market. In the PSST view, unemployment is a phenomenon that results when patterns of specialization need to be reconfigured. Thinking in terms of a single labor market model is wrong-footed from the get-go.

Civil Society in a Narrower, Deeper, Older World

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A commenter writes,

the Little Platoons may not be feasible. It seems to me that the world has professionalised, with more technical, domain-specific knowledge, which is a barrier to those with moderate interest or casual observers.

The strongest institutions of civil society used to be broader and shallower. Churches were more important when more people lived in smaller communities and more people attended them. Trade unions used to be larger. Schools used to be less segregated by income class (although more segregated by race). Organizations like the League of Women Voters, the ACLU, and the NAACP were much more welcoming to Republicans. Such organizations have become narrower, deeper, and older. They are less capable than they once were of representing or mobilizing large numbers of people.

Let me suggest that civil society still exists (it is wrong to say that we are bowling alone), but that there are now many more associations, each with a narrower constituency that is more deeply committed. Think of television. “I Love Lucy” dominated the culture of the 1950s. “M*A*S*H” was pretty well embedded in the 1970s. I don’t think any program comes close today, even though people still consume a lot of TV-like media.

Recently, my wife and I were guilty of going to the Everly Set, a tribute duo playing a house concert setting. The whole concept exemplified narrower, deeper, older. It was also very enjoyable.

The commenter raises the issue of what it means for our role vis-a-vis government. As the shallower, broader institutions of civil society become weaker, this makes people more willing to defer to government expertise. Yuval Levin expresses similar concerns in The Fractured Republic, which I am confident that the commenter would enjoy reading.

I do not see the broad, shallow institutions making a comeback. I do not see how the narrower, deeper organizations can provide viable alternatives to government. Fifty years ago, Charity meant the United Way. Now, it means GoFundMe. Will the narrower, deeper model really work, or will we continue to think in terms of government as the primary distributor of charity? Yet I do not see how government can be sufficiently competent to handle the responsibilities that people are willing to cede to it. It looks as if we are stuck.

Culture, Education, and Poverty

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Amy L. Wax writes,

The hallmark of no-excuses schools is a frankly paternalistic and unapologetic commitment to acculturating low-income students to the achievement-oriented habits and norms typical of their middle-class and affluent counterparts. That project is motivated by the belief that low-income children will benefit from a stable, highly structured environment in which conventional, bourgeois behaviors are actively endorsed, expected, and demanded.

…Courtesy is expected, and street language and profanity are strictly forbidden, as are fighting, loud talk, boisterous behavior, harsh teasing, and ridicule of other students, both in and out of the classroom. Students are expected to obey teachers and administrators, make eye contact, be punctual, participate in classroom discussions and school activities, work steadily, and study hard.

My thoughts:

1. Fifty years ago, all schools met most of these standards.

2. They also had gym and active recess every day, which I believe is one reason that attention deficit disorder was less prevalent in those days.

3. The null hypothesis may yet hold. She writes,

Evidence for academic improvement comes almost exclusively from scores on statewide tests, which assess relatively basic skills that many no-excuses schools target with intensive drilling. Most score gains are relatively modest and are subject to fade-out with time. Overall, the data is spotty and limited by small samples and short time frames.

4. She also discusses an approach to encouraging better behavior of low-income students by forcibly integrating them with affluent students. She points out a number of problems with this approach.

5. She cites Montgomery County, Maryland, as an example of a school district where income integration has had some success. But this comes from a handful of poor students brought in from outside the county, and Wax points out that the parents who chose to go to the trouble to participate probably were not a random sample of poor parents. Meanwhile, I can say that a resident of Montgomery County that there are large income disparities across high schools, and there are enormous disparities in test scores that go along with that. The overall percentage of students on free and reduced meals is more than one-third, which is too high for an income-integration strategy to work.

Pete Boettke on Economic Methods

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He is saying (at this year’s APEE conference),

From a Buchanan perspective, basic economics can be conveyed in 8 points.
1. Economics is a “science” but not like the physical sciences. Economics is a “philosophical” science and the strictures against scientism offered by Frank Knight and F. A. Hayek should be heeded.

2. Economics is about choice and processes of adjustment, not states of rest. Equilibrium models are only useful when we recognize their limits.

3. Economics is about exchange, not about maximizing. Exchange activity and arbitrage should be the central focus of economic analysis.

4. Economics is about individual actors, not collective entities. Only individuals choose.

5. Economics is about a game played within rules.

6. Economics cannot be studied properly outside of politics. The choices among different rules of the game cannot be ignored.

7. The most important function of economics as a discipline is its didactic role in explaining the principle of spontaneous order.

8. Economic is elementary.

As you know, I prefer not to use the term “science” at all. Instead of “philosophical science,” I would call economics one of the disciplines that studies human behavior.

Also, although “only individuals choose,” people are embedded in culture. Human behavior is influenced by ideas, which come from other humans.

These are minor quibbles. I think that points (2), (3), and (7) are particularly important. But I doubt that we will see much of what Boettke wants in college economic teaching in the next decade. Instead, I predict that academic economics will move very far to the left. That is what I conclude in my forthcoming essay on economic methods.

Biggs’ BIG for Social Security

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Andrew Biggs writes,

Under the plan, Social Security would guarantee that all retirees, regardless of work history or earnings, are lifted out of poverty in old age. Thus, while Social Security currently offers no minimum benefit, a strong minimum benefit would be established at the poverty threshold. Over time, however, the maximumUnder the plan, Social Security would guarantee that all retirees, regardless of work history or earnings, are lifted out of poverty in old age. Thus, while Social Security currently offers no minimum benefit, a strong minimum benefit would be established at the poverty threshold. Over time, however, the maximum Social Security benefit would be reduced so that eventually all retirees would receive essentially the same monthly benefit. Social Security benefit would be reduced so that eventually all retirees would receive essentially the same monthly benefit.

Much of the essay tries to debunk some myths about saving for retirement. Some people, myself included, have bought into “facts” that show that Americans do not save. But Biggs writes,

But recent Census Bureau research that relied on IRS administrative data, which counts IRA and 401(k) withdrawals in whatever form they are made, found that from 1984 to 2007 the percentage of new retirees receiving private retirement-plan benefits doubled and median benefit payouts more than doubled. (This study focused on retired women, but it looked at total household incomes and included male spouses, if present.) Thanks to rising private retirement benefits, real total incomes for the median retiree household rose by 58%. In the CPS, which undercounts private retirement benefits, total household incomes rose by only 21%.