Blogging will be light for a while, as we adjust to being grandparents.
I have no idea why WordPress insists on turning us upside down.
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.
DSGE Models Are Not Micro-founded
Mark Thoma quotes George Evans,
First, because it is a carefully developed, micro-founded model incorporating price frictions, the NK model makes it possible to incorporate in a disciplined way the various additional sectors, distortions, adjustment costs, and parametric detail found in many NK/DSGE models.
No! There is no specialization and trade in these models. You can call such a model “micro-founded” all you want. It isn’t. These empty modeling exercises do not deserve to be called micro-founded. They do not even deserve to be called economics.
The Null Hypothesis and Charter Schools
Will Dobbie and Roland G. Fryar write,
In this paper, we estimate the impact of charter schools on early-life labor market outcomes using administrative data from Texas. We find that, at the mean, charter schools have no impact on test scores and a negative impact on earnings. No Excuses charter schools increase test scores and four-year college enrollment, but have a small and statistically insignificant impact on earnings, while regular charter schools decrease test scores, four-year college enrollment, and earnings. Using school-level estimates, we find that charter schools that decrease test scores also tend to decrease earnings, while charter schools that increase test scores have no discernible impact on earnings.
The authors seem to think that their findings are precise and require some logical explanation. My guess is that their findings are random variations around the null hypothesis.
Is This Socialism?
Markets, therefore, have a big place in socialism – not least because, as Adam Smith said, they are a means whereby people provide for others without caring. (The best counter-argument to this I’ve seen comes from Matthijs Krul).
This principle has another implication. Socialism should be achieved by evolution, by creating stepping stones – small institutional tweaks that create the potential for bigger ones. For example, small acts of empowering people – such as worker directors or patients’ groups – might create a demand for greater power.
Pointer from Mark Thoma. What Dillow appears to want strikes me as a form of capitalism that is tweaked to make competition less intense among low-skilled workers and more intense among employers. I can heartily endorse the thrust of what he is proposing as much better than what we have currently.
The Future of Mainstream Macro?
According to Olivier Blanchard,
I suspect that even DSGE modelers will agree that current DSGE models are flawed. But DSGE models can fulfill an important need in macroeconomics, that of offering a core structure around which to build and organize discussions. To do that, however, they have to build more on the rest of macroeconomics and agree to share the scene with other types of general equilibrium models.
Pointer from Mark Thoma.
Actually, he does not even mention what I believe is the main flaw with this approach to macroeconomics. As I point out in Specialization and Trade, that flaw is the failure to include specialization at all. Instead, there is one type of worker producing one type of good. This is obviously unwise once you consider it, but once you consider it you are no longer a respectable macroeconomist.
What I’m Reading
A review copy of Erwin Dekker’s The Viennese Students of Civilization. He places Mises and Hayek in the intellectual circles of Vienna between the two world wars, as they watch a once-great civilization collapse. Capitalism and democracy simply could not take root in that part of Europe. I will have more to say about the book once I have finished.
Meanwhile, support for capitalism and democracy among young people in the U.S. is not exactly robust. Timothy Taylor reports,
In both the US and in Europe, young adults have become less likely to say that it is “essential” to live in a democracy.
It is, as Winston Churchill said, the second worst form of government.
More Lifted from the Comments
The way costs serve as a filter is by constricting supply. Those cities are well past the cost level that would trigger supply. So, a unit that would cost $300,000 is already worth $1 million. To build it, you basically have to negotiate your way through a series of fees and kickbacks so that local governments and interest groups claim the $700,000 difference. It’s like third world governance with a functional bureaucracy. You don’t necessarily bribe anyone, but the parks department gets $100,000 per unit because your building throws a shadow somewhere for 30 minutes, and that money funds a healthy pension.
“third world governance with a functional bureaucracy” describes a very effective kleptrocratic system.
Lifted from the Comments
Handle’s take on rights and consequentialism.
One Hayekian / meta-consequentialist justification for rigid, ‘deontological’-like rights is that without them there is no good way for individuals to plan while trusting in the long-term, reliable predictability of a set of basic rules that governs the way the state and ones compatriots will treat them, and this lack of confidence reduces incentives to engage in socially beneficial activity and increases inefficient expenditures of resources on hedging, security, evasion, and rent-seeking.
What appears to be a local, short term utilitarian transfer can also be at odds with the best way we have learned from experience of how to enable and incentivize long-term growth and human flourishing, given the intractable philosophical and practical complexity of making these kinds of welfare calculations and forecasts.
And the only way to make people really believe that these rules are stable enough and will be honored and maintained despite short term political temptations is to successfully propagate a belief that these rights are near-sacred and somehow transcend the domain of what is normally up for debate and reform.
Unfortunately the political incentive to attack such sacred principles in a democracy is irresistible, and so long as influential and prestigious elites are permitted the freedom to publicly critique those principles and lower their status, then the slide toward increasing state interference is inevitable.
Gary Johnson and a Liberal Tension
But if we allow for discrimination — if we pass a law that allows for discrimination on the basis of religion — literally, we’re gonna open up a can of worms when it come stop discrimination of all forms, starting with Muslims … who knows. You’re narrowly looking at a situation where if you broaden that, I just tell you — on the basis of religious freedom, being able to discriminate — something that is currently not allowed — discrimination will exist in places we never dreamed of.
If I understand him correctly, he would be ok with prosecuting a wedding cake-baker who refused to bake a cake for a gay wedding.
I am reminded of Jacob Levy’s thesis that rationalism and pluralism are in tension with one another. A pluralist would say that the cake-baker has a right to discriminate. The rationalist would say otherwise. For more on Levy’s thesis, see this discussion forum, listen to this podcast, or read his (very expensive) book.
I am currently reading Robert Nisbet’s The Quest for Community (for an obvious reason). Nisbet saw individualism and statism as going together, part of the process of “liberating” people from the oppression of traditional communal institutions. What Levy calls rationalist liberalism is consistent with that. Nisbet did not view this “liberation” as such a wonderful thing.