Reflections on Paul Samuelson and MIT Economics

Posted on by

I have finished my first path through the Weintraub volume. Here are my thoughts now:

1. There truly was a dramatic break between pre-war and postwar economics. Before the second World War, you could still see economics as a branch of social and political philosophy. And as philosophers, economists were worried about what they could and could not know. After the war, the discipline became dominated by modeling. Some of that was a long-term trend, and some of it came from the fact that modeling was applied to some aspects of the war effort itself.

2. Samuelson and Solow were part of a transitional generation. They were exponents of the newer modeling culture, but they still had plenty of doubts about the assumptions embedded in models.

3. The next generation of MIT economists, I would argue, was never trained to question assumptions. Once a particular equation had become customary, because a lot of papers used that equation, you just treated the equation as true. Think of the Cobb-Douglas production function, or the expectations-augmented Phillips Curve.

4. Samuelson’s self-image was that of an ideologically neutral technocrat. In the Weintraub volume, Harro Maas writes,

Technicality implied impartiality and detachment. Samuelson thus exemplifies for economics the general move of science in the postwar era to define itself as technical, a move that fit well with the teaching and research profile that MIT developed in the postwar era.

And later,

Samuelson did not consider it his task to be partisan for one particular line of economic policy, or to compromise between opposite policy positions, but to step back, or better “step aside,” and offer an analytical perspective from which to choose.

5. Of course, I would view Samuelson’s very framework as ideologically loaded. Samuelson took a “seeing like a state” approach to economics. Whether it was a social welfare function, a Keynesian multiplier, the doctrine of revealed preference, the Phillips Curve, or the production function, he focused on tools for helping policy makers control an economy. With such tools, the policy maker could know enough to direct economic activity. Samuelson was not troubled by Hayekian concerns about local knowledge.

Gary Solon on Gregory Clark

Posted on by

Solon writes,

Evidently, the results reported by Clark do not reflect a universal law of social mobility. Quite to the contrary, other studies based on group-average data, even surnames data, frequently produce intergenerational coefficient estimates much smaller than Clark’s.

If you are interested in the issues raised by Clark, read the whole thing. Solon’s interpretation of Clark’s thesis as involving errors-in-variables is similar to mine.

Regulation as a Fifth Force

Posted on by

Scott Sumner writes,

Building restrictions are increasing rental income as a share of national income. Intellectual property rights are barriers to entry that tend to create a winner-take-all situation (although other factors like network effects also play a role.) And other types of regulations (financial, human resources, etc.) are especially burdensome for small firms, and this favors the growth of inequality-intensive large firms.

Megan McArdle writes,

Homeowners in low-density neighborhoods will fight like tigers to preserve what they have. We’ve given them the legal tools to frequently win that fight — and if you try to take those tools away, they’ll fight that, too.

In the Four Forces story, gentrification is driven by the New Commanding Heights and bifurcated family patterns. Universities and hospitals replace manufacturing firms as the leading enterprises in cities. They hire marshmallow-test winners, some of whom want to live near where they work. Other marshmallow-test winners, looking to marshmallow-test-winner mates, also move into cities. These gentrifiers like restaurants and trendy shops, but otherwise they want to try to re-create suburban living, with low-density housing and easy biking.

Genghis Khan on Structural Change in Finance

Posted on by

Stanley Fischer said,

To conclude, the U.S. financial system has changed a great deal over the past several decades. One of the most important changes has been the rapid growth of the nonbank sector. Many reforms have been adopted for both banks and nonbank financial institutions. But regulation is a cat and mouse game. Regulators need to respond to existing regulatory gaps and to keep pace with further changes. We hope we will succeed in doing so. But we know that we will never be able to identify in advance all the threats to stability that are out there, and that it is therefore all the more critical to maintain and strengthen the robustness of our financial institutions, and of the financial system as a whole.

Read the whole thing. Pointer from Mark Thoma.

Both theoretical and empirical work in macroeconomics tends to ignore structural changes of this kind. On the empirical side, think of econometrics. There are three classes of factors at work in macroeconomics data. One is short-term noise, such as a cash-for-clunkers program adding to auto sales one quarter and subtracting from them the next. Another is cyclical drivers–the sorts of things that your theory suggests as causal factors in macroeconomic fluctuations. Finally, there are structural changes, such as the changes in financial markets that Fischer is talking about.

I do not think that it is possible to sift through these three factors without using judgment. Just dumping the data into your econometrics software is an exercise in garbage-in, garbage-out.

Teach Price Gouging Using Uber

Posted on by

I was talking with some young people in Boston about getting around during the severe snow. They commented that Uber’s prices would go up by a factor of 4 or more when things got really tough. But they were not angry. They were grateful that the could get transportation at all. And they understood the role that the higher prices played in helping the situation.

Perhaps one could discuss this phenomenon in class. And then ask why the young people did not complain about “price gouging.” Why is it that if a store were to raise prices on snow shovels during a snowstorm that would be price gouging, but Uber’s approach was not price gouging? Why would someone be inclined to favor a regulation to prevent the store from raising the price of shovels during a snow storm?

I suspect that the intuition is that the store’s supply of shovels is presumed fixed, but Uber’s supply of drivers goes up as prices rise. Since the higher price creates a supply response, people can see it playing a constructive role. But with the store and the snow shovels, all you see are higher profits.

Of course, there are two other benefits to higher prices for snow shovels. First, it discourages people who do not really need shovels from hoarding them (if you already have one shovel, you would not go out and buy a second one at a high price). Second, in the long run it encourages stores to keep extra shovels in stock. Knowing that they can make a good return from having a large inventory of shovels in case of a snow storm, the stores will be willing to hold larger inventories than if their profits are constrained.

The Ideological Cesspool that is Academia

Posted on by

1. Kimberly Strassel writes,

Apparently the only kind of thought not allowed is that which might “undermine,” according to UnKochMyCampus, “environmental protection, worker’s rights, health care expansion, and quality public education.” Stopping such research is the mission of this organization, which is spearheaded by Greenpeace, Forecast the Facts (a green outfit focused on climate change), and the American Federation of Teachers.

2. Read Tyler Cowen’s post on Elizabeth Anderson, a chaired professor of philosophy invited to give a prestigious lecture at Princeton.

I won’t summarize her views, but I will pull out one sentence to indicate her stance: “Here most of us are, toiling under the authority of communist dictators, and we don’t see the reality for what it is.” These communist dictators are, in her account, private business firms. That description may be deliberately hyperbolic, but nonetheless it reflects her attitude that capitalist companies exercise a kind of unaccountable, non-democratic power over the lives of their workers, in a manner which she thinks is deserving of moral outrage.

I cannot view this charitably. The way it looks to me, if you are on one side of the ideological divide, you are harassed and hounded. If you are on the other side, someone whose ideas are ignorant and ridiculous is considered an eminent scholar.

I am not saying that no one should listen to Elizabeth Anderson or that she should not have a forum in which to speak. Exposure to a broad range of viewpoints is a good thing. I just wish that there were a little boy who would stand up and say that the empress has not the slightest bit of clothing until she can explain the concepts of exit and voice, and explain the different ways in which they empower individuals.

But as far as I can tell, broad exposure to ideas is not what our leading colleges and universities are providing these days. Let me provide a perspective on this, and on “critical thinking.”

Critical thinking is not challenging views that are disliked. Anyone can find fault with those with whom you disagree. It is questioning the views of people with whom you agree that constitutes critical thinking. Above all, it means questioning your own views.

Many people are familiar with Rene Descartes’ phrase, “I think, therefore I am.” Few people know the context. Descartes’ is meditating about what he can know with certainty. He asks, what if all of my sensory perceptions are simply tricks played on me by an evil demon? Then maybe everything I believe that I know about the world around me could be wrong. But I cannot be wrong about my belief that I am thinking. At least one entity in the world certainly exists, namely, the person doing this thinking.

The ability to question large chunks of your own belief system is for me the essence of a well-trained mind. When we share things that other people say and write on the Internet, chances are they are things that we agree with. How often do you share things that raise reasonable doubts about your beliefs? If you do that as often as once a month, you are doing well.

If the future truly belongs to those who can think critically, then today’s college faculty may be left behind.

Online Self-Education: The Bigger, Closer Library

Posted on by

When I was in college, I sometimes went to the library just to browse and learn. I might pick a book or journal off the shelf, read something, see a reference to something else, go read that, and so on.

From that sort of self-education perspective, the Internet is like that college library, only bigger and closer. I don’t have to go to the library–I just turn on my laptop or tablet. The contents are not confined by shelf space or budget. As an aside, there is multimedia (YouTube). Also, much more frequent updating.

One downside of the bigger, closer library is that it has many distractions. In college, the only competition for my attention was the sports section of the newspaper and the occasional girl I wanted to chat up. To play a game or get entertainment I had to go somewhere else. Now, the distractions are right in the library.

The bigger, closer library has to be an enormous boon to what Tyler Cowen calls infovores, particularly those for whom a traditional library was out of reach.

The question I have is how school as we know it relates to the bigger, closer library. Possibilities:

1. They are complements. You use the bigger, closer library more efficiently because of what takes place in school.

2. They are substitutes. Time you spend in school courses is wasted–you would be better off spending time in the bigger, closer library. But when you are distracted in the bigger, closer library, you would have been better off in school.

3. Schooling is not about learning. It is about socialization. Schools are in the process of shifting their focus to socialization, with the responsibility for learning shifting to the student and to the bigger, closer library.

On point (1), think of learning as requiring motivation, feedback, and content. The library has the content, but you have to be motivated to use it and you need feedback to know whether you are using it well. Perhaps right now the classroom provides better motivation and feedback.

However, I expect within a few years to see feedback systems on phones and tablets that are at least competitive with the feedback process that occurs in a classroom. At that point, the only contribution that classroom time can make is to help with motivation–teachers motivating students and students motivating one another.

Keen vs. Krugman

Posted on by

The controversy flared three years ago. The issue is whether banks are special because they can create deposits “out of thin air.” The formative exposure that I had to this issue–and I would bet that the same goes for Krugman–is James Tobin’s Widow’s Cruse paper.

I am now reading a draft of a book that talks about this issue. The author argues vehemently that those of us aligned with Tobin or other mainstream economists fail to appreciate what makes banks special.

I could argue either side of this issue. As you know, I like to say that the nonfinancial sector wants to have a balance sheet with long-term risky liabilities (newly-planted fruit trees) and short-term risk-free assets (money). The financial sector accommodates this by doing the reverse.

The kicker is that financial institutions are owned by people, also. When a bank finances a fruit orchard, what it does is carve the returns of the fruit orchard into two tranches: a debt tranche (deposits at the bank) and an equity tranche (shares of the bank). This carve-up adds value in part because the debt tranche because its relative price is relatively stable and transparent.

First, let me argue against what I see to be the position taken by the author of the draft book that I am reading. He comes across to me to be claiming that banks break the identity between saving and investment. I would express what it seems to me to be saying as something like

S + L = I

where S is saving, I is investment, and L is the banks creating loans at the stroke of a pen. I am not buying that at all. Banks may be able to create loans and deposit balances at the stroke of a pen, but they cannot create real goods at a stroke of a pen.

Banks can do things that indirectly stimulate the production of real goods. But the chain of events has to be something like

1. Banks loosen lending
2. Businesses invest more
3. Saving goes up (not necessarily the rate of saving, but total saving)

The Keynesian explanation for (3) would be that income has gone up. My explanation might be more along the lines that banks have made the risk of the fruit orchard, as perceived by savers, go down. The banks may do this through better diversification of fruit investments, by obtaining and exploiting information that enables them to avoid bad fruit trees, or just by public-relations moves that encourage depositors to be trusting, perhaps too much so. As a result, people are happier about using fruit trees to enhance future consumption opportunities, so that saving and investment go up.

Now let me take the other side. A lot of economic activity in a modern economy depends on credit. Business investment, housing investment, and some consumer spending are dependent on credit. In a mainstream AS-AD macro, a contraction in the supply of credit is going to reduce spending and economic activity. Or, from a PSST perspective, a credit contraction will disrupt those patterns of specialization and trade that require credit to operate.

So, I am willing to go along with the author in attaching importance to credit conditions. However, I am not willing to go so far as to attach special significance to the particular mechanism by which banks create credit.

Conservatarian Dilemmas 3: Israel

Posted on by

This is my third and final post prompted by the dialogue between Nick Gillespie and Charles C.W. Cooke. The issue is foreign policy, and although they did not discuss Israel, I think that it is about that country that conservatives and libertarians get most confrontational–and uncharitable–with one another.

Conservatives want a strong national defense, and some libertarians (seemingly including Gillespie) are ok with that. However, conservatives often want to intervene in this barbarous world, and libertarians are against intervention.

One libertarian argument against interventionism is that the U.S. government that is our agent to perform such intervention is the same flawed, bumbling entity whose intervention in domestic affairs we fear. Cooke concedes that point. However, he does not regard it as a decisive argument against any and all intervention.

There are more than a few libertarians whose vehemence against Israel makes it difficult for me to picture them joining a conservatarian coalition. The most charitable interpretation that I can come up with for the libertarian antipathy toward Israel is the following:

American libertarians are anti-interventionist. Israel is a country that wants America to intervene in ways to protect its interests. America has sometimes (often?) done so. Without Israel there would be less American intervention, and because of that Israel deserves to be singled out for opprobrium.

The conservative view might be the following:

Israel’s and America’s interests generally align. Along the civilization vs. barbarism axis, Israel is far more civilized than its enemies. American intervention is constructive and appropriate.

Some libertarians and progressives blame Israel for the costly, counter-productive attempt to force democracy on Iraq. I think it is unfair to hold Israel responsible. While some Israelis, notably Natan Sharansky, indeed were keen on spreading democracy, his views were much more popular in the U.S. than in Israel. Faith in democracy as a solution to the problems in the Middle East is as American as apple pie. If anything, President Obama took that faith even farther than President Bush.

My own feelings about Israel are similar to those expressed by George Gilder in The Israel Test, which I wrote about a couple years ago. Gilder sees hostility to Israel as reflecting a dislike for dynamism and entrepreneurial success. Progressives can seem nostalgic for the socialist poverty that Israelis shared before the liberalizations that took place over the past 30 years or so.

For some American Christian conservatives, support for Israel has a religious basis that is off-putting to more secular people (and to many Jews). Otherwise, I think that American support for Israel among conservatives is based more on Israel’s circumstances than on its diplomacy or lobbying. If there were as many medieval fanatics surrounding Singapore or Switzerland, my guess is that the conservatives who see America as the Indispensable Nation would want us to be heavily involved in those areas as well.

Another possible argument for leaning against Israel is that one should do so in order to counter Jewish political pressure. However, my sense is that most Jews feel a stronger affinity to the cause of progressivism than to Israel’s government, particularly with a conservative at its head.

Yes, there are American Jews who advocate for the U.S. to pursue hawkish policies in the Middle East, but they are far outnumbered by other American Jews who loathe the hawks. My guess is that if Binyamin Netanyahu wanted to get into a popularity contest in America with Barack Obama, he would do better if American Jews were excluded from taking part in the poll.

Finally, I have to say that I have concluded that this is a topic on which people have a hard time disagreeing with one another charitably. If you (or I) want to voice an opinion on Israel in order to vent, then fine. But you (or I) should not expect that someone’s mind is going to change as a result. Instead, expect an uncharitable response.

While I expressed some of my views on Israel, they are beside the main point, and feel free to ignore them. The main point in this post is simply the observation that Israel profoundly divides conservatives from a significant group of libertarians. If you disagree with that, or you think that the divide is caused by something I have not mentioned, then by all means weigh in.

Conservatarian Dilemmas 2: Social Issues

Posted on by

This is the second of three posts inspired in part by the dialogue between Nick Gillespie and Charles C.W. Cooke. The social issues that I have in mind are drugs, abortion, and gay marriage. Some thoughts.

From the civilization-barbarism perspective, one may oppose legalizing marijuana, abortion, and gay marriage to the extent that one believes that civilization depends on, or at least is enhanced by, restrictions against these. However, that is not Cooke’s conservatarian position. He instead favors allowing different communities to adopt different policies. My thoughts:

1. From the freedom-coercion perspective, I see Cooke as trying to argue for a (local) “freedom to coerce.” As a general rule, this is problematic. In fact, the controversy over Indiana’s religious freedom law (or “religious freedom” law, to those who oppose it) may be an illustration of the difficulties with this approach.

During the battle over civil rights, Barry Goldwater applied federalism to argue for states’ rights to impose Jim Crow laws. Milton Friedman argued that businesses should be allowed to engage in discrimination. Today, most Americans believe that Federal coercion to prevent racial discrimination is a good thing, and Cooke supports this consensus.

2. Some conservatives try to appeal to libertarians by arguing that progressive social policies are coercive. For example, a businessman who opposes abortion can be forced to pay for health insurance that in turn pays for abortions of employees. The libertarian counter is that the wrong involved here is not that the businessman is forced to pay for abortions but that he is forced to pay for health insurance.

3. Another conservative line is that without traditional family values, people will become degenerate and thus dependent on the government, leading to bigger government. Call this the David Brooks argument. My own view, as readers of this blog (particularly the posts under the category “Four forces watch”) know, is that bifurcated family patterns are unlikely to be altered by government action.

4. The elephant in the room here is religion and voters who are motivated by it. Just the other day, I saw a full-page ad in the Washington Post using biblical imagery to argue against legalization of gay marriage. There is a long tradition of conservative politicians (and, for that matter, progressive politicians) who are not themselves committed to religious beliefs wanting to appeal to voters who are.

5. Should a baker who is opposed to gay marriage have the right to refuse to sell a wedding cake to a gay couple? I think that the most appropriate libertarian answer is to say that the baker should have such a right. But it seems to me that if you open the door to a right to discriminate, then racists can use that door. On the other hand, if you say that government should be able to force a baker to do business with an unwanted customer, does that mean that government also should be able to force a customer to do business with an unwanted baker?

My preferred society would be one in which (a) there is sufficient market competition so that if you are discriminated against by x you can easily obtain what you want somewhere else. The government has to get involved only if discrimination is pervasive; and (b) religious values are enforced within religious organizations only. If you violate the beliefs of your religion, you can be excommunicated by that religion, but otherwise you should not suffer.

I do not think that this solves the conservatarian dilemma on social issues, but it’s my best shot.