Jonathan Haidt, the n-word, and capitalism

Posted on by

He writes,

there are two basic master narratives about capitalism that have been circulating in the West since the time of Adam Smith. One story is that capitalism (and business more generally) is exploitation, so we need a strong government to keep the greed and amorality of capitalists in check. The other story is that capitalism is liberation. People were mostly serfs and peasants until capitalism came along and freed people to keep the fruits of their own labor, so we need to keep government’s role to a minimum, given how prone it is to capture, corruption, and inefficiency.

Pointer from Tyler Cowen. Remember, the word “narrative” has been declared “out” for 2015 by the Washington Post arbiters of taste.

Still, I think that Haidt is onto something. In terms of the three-axis model, the exploitation story fits the oppressor-oppressed axis favored by progressives, and the liberation model fits the freedom-coercion axis favored by libertarians.

This leaves out the conservative axis of civilization-barbarism, and I think that conservativism is somewhat ambivalent on the issue of markets. Conservatives praise markets for rewarding the virtues of effort, patience, self-reliance. But conservatives dislike markets for undermining cultural traditions, putting the vulgar on par with the sublime, and lacking moral direction. Consider Charles Murray in Coming Apart (which I am re-reading):

For Benjamin Franklin, this meant that “only a virtuous people are capable of freedom. As nations become more corrupt and vicious, they have more need of masters.”

It is a short leap for some conservatives to believe that markets unguided by conservative leadership take a nation on a path that makes it “more corrupt and more vicious.”

Narrative is the New Baloney Sandwich

Posted on by

Brad DeLong writes,

When it became clear in late 2008 that the orgy of deregulation coupled with global imbalances was confronting the global economy with a shock at least as dangerous as the Great Crash that had initiated the Great Depression. . .

Pointer from Mark Thoma.

Noting that on this year’s Washington Post list, “narrative” is in the “out” column, to be replaced this year by “facts,” I resolve in 2015 to use the phrase “I call Narrative” where I would have said “I call Baloney Sandwich.”

The phrase “orgy of deregulation” is a much-used narrative/baloney sandwich. Others have used it. Interestingly, in the version of the essay that appears on Project Syndicate, DeLong does not use it.

1. The facts are that one can just as easily blame the financial crash on an attempted tightening of regulation. That is, in the process of trying to rein in bank risk-taking by adopting risk-based capital regulations, regulators gave preference to highly-rated mortgage-backed securities, which in turn led to the manufacturing of such securities out of sub-prime loans.

2. The global imbalances that many of us thought were a bigger risk factor than the housing bubble did not in fact blow up the way that we thought that they would. The housing bubble blew up instead.

3. I call narrative whenever someone talks about the causes of the financial crisis without making any reference to looser mortgage lendings standards and/or without mentioning that government policies were hostile not to those institutions who dropped rigorous lending standards but to those who attempted to maintain them.

Tyler Cowen vs. the Club Model

Posted on by

He writes,

In the old days one heard speculation about bundling a great number of newspapers and blogs into a single-price access model, but in retrospect this probably never had much financial potential, for reasons which by now should be clear. What would an “all-you-can-eat buffet for economists” mean? And who if anyone would benefit from it?

What such a buffet would mean would be that by paying one amount per month you could read as much as you want from the NYT, WSJ, existing blogs, plus all of the new economics blogs that would emerge because bloggers would now be directly compensated by getting a share of the subscription money, perhaps in proportion to the number of views of their posts or some other metric. The beneficiaries would be readers who would read more NYT and WSJ articles if there were no paywall and readers of the new blogs that emerge.

And the biggest beneficiaries of all will be people who save time not having to click on the “close” window on all those unwanted pop-up ads!!!! Because with a bundled subscription, we can finally have content without advertising. The current newspaper model is headed toward the opposite.

This “club” might not be the most viable model. I once thought it would be, but over time I have become convinced that the patronage model will win out. That is, in the end, the NYT will be a money-losing enterprise, but some wealthy patron or patrons will be happy to keep it going. Similarly, those bloggers who want money will have to find patrons to support them. Whether content is better under a patronage model or under a club model is not clear.

The Paradox of Education

Posted on by

Joel Kotkin writes,

Generally speaking, those areas that have the heaviest concentration of educated people generally do better than those who don’t.

He looks at statistics across different sections of California.

Sort of randomly, the other morning I went to Zillow and looked up house prices in three places. On Faris Avenue, which is a block over from my childhood residence in suburban St. Louis (my own street was all multifamily dwellings, but I wanted to price a single-family home), there is a 1440 square foot house for sale for $37,900.

I know someone who lives in a more affluent suburb in St. Louis. A 2428 square foot house on their street, Eversdale Court, sold almost two years ago for $417,000. Thus, it is less than twice the size of the house on Faris avenue, but it is worth more than 10 times as much.

In Bethesda, a 45-minute bike ride from where I live now, there is a new condominium building called The Darcy with prices that range from the mid $600 K to $3 million. The smallest floor plan has 835 square feet.

Just to put this in perspective, for the price of an 835 square foot condo in Bethesda, you could buy close to 4000 square feet of home on Eversdale Court and about 20,000 square feet of homes on Faris Avenue (which would just about get you the whole street). I think this tells you everything you need to know about economic disparities. And if you use house prices as your indicator of disparities, my guess is that you will find plenty of correlation with educational attainment rates.

But the paradox is that if you think of education as fairy dust, and you try to sprinkle it on to the residents of Faris avenue, you could sprinkle like crazy without moving their economic status very much. The Null Hypothesis, which says that educational interventions have almost no discernible long-term effects in a replicable controlled-experiment setting, is a pretty safe bet.

As you probably know, Bryan Caplan’s explanation for the paradox is that education is all signaling. My hypothesis, which is not too much different, is that formal education is a cultural norm for the affluent.

In Bryan’s story, the educational credentials play a causal role, because if you don’t get the credentials, you send an adverse signal. In my story, educational credentials are not a cause. They are a symptom of your future affluence, which is caused by the personality traits you inherited from your affluent parents. So when we observe clusters of well-educated young people in particular geographic areas, what we are observing are clusters of children of affluent adults.

Chris Dillow on Complexity Economics

Posted on by

No, it’s not another review of Colander and Kupers (but I wonder what he would think of it). He writes,

One feature of complexity economics is that recessions can be caused not merely by shocks but rather by interactions between companies. Tens of thousands of firms fail every year. Mostly, these failures don’t have macroeconomic significance. But sometimes – as with the Fukushima nuclear power plant or Lehman Brothers – they do. Why the difference? A big part of the answer lies in networks. If a firm is a hub in a tight network, its collapse will cause a fall in output elsewhere. If, however, the network is loose, this will not happen; the loss of the firm is not so critical. Daron Acemoglu has formalized this in an important paper, and there are some good surveys of network economics in the latest JEP.

Read the whole thing. Pointer from Mark Thoma. My thoughts:

1. From a PSST perspective, the importance of a highly-connected firm makes sense. The more connected a firm is, the more patterns of specialization and trade depend on that firm. Also, this may help to explain why shocks in the economy do not average out. A shock that suddenly destroys a highly-connected firm is not going to simultaneously create an equal a highly-connected firm somewhere else. My guess is that dense networks of connection are both difficult to create and difficult to destroy, but they can be destroyed more rapidly than they can be created.

2. Note that complexity economics attracts some attention from heterodox economists on both the left and the right.

3. Dillow thinks that complexity economics deserves more attention. I agree that one reason it tends to be overlooked is that it does not provide the clarity of prediction and tidyness of results that is sought by mainstream economists.

4. Mainstream economists and complexity economists would agree that the world is complex and that models are simplifications. Mainstream economists emphasize the virtues of simple models, while heterodox economists emphasize the vices.

Hormones and Financial Intermediation

Posted on by

A recent post reminded me that Jason Collins really liked The Hour Between Dog and Wolf: Risk Taking, Gut Feelings and the Biology of Boom and Bust, by John Coates. Coates looks at how hormones are activated in traders. My guess is that I will get as much from Jason’s review as I would from the book. Jason writes,

In a bull market, testosterone surges through the population of traders. Each takes larger and larger risks, pushing markets to new highs and triggering further cascades of testosterone. Irrational exuberance has a chemical base.

Read the whole review. I would like to see the link between an individual short-term hormonal response and broad, long-term market trends established.

I do believe that there are cycles of financial intermediation. Remember how I think of financial intermediation. Households and businesses want to hold riskless, short-term assets while issuing risky, long-term liabilities. Financial intermediaries accommodate this by doing the opposite. When there is too little financial intermediation, opportunities to take reasonable risks are foregone. When there is too much financial intermediation, there is excessive risk-taking.

To a first approximation, I am not sure that simple trading of financial assets should boost testosterone on net, because financial trading is not positive sum. It’s not like “you want meat and I want shoes, so I’ll trade you meat for shoes.” Financial trading is closer to zero sum, which is why when you win you get high. The guy who sold you that stock that went up 5 points right after you bought it probably feels badly. So why should a bull market make more people feel high? Perhaps because as share prices increase, net financial intermediation is going up overall. That is, there are more short-term, low-risk liabilities being backed by more long-term, high-risk assets. Maybe that increased financial intermediation is accompanied by and reinforced by a hormonal response. Perhaps that is plausible, but it seems to me to require more of a stretch and, above all, more of a story of how markets react in the aggregate, or how System 2 and System 1 interact over long periods of time and across an entire array of market individuals and institutional relationships.

Who is an Influential Economist?

Posted on by

Tyler Cowen writes,

Let me just note that for all the talk of wonk this, data that, and Generalized Method of Moments this that and the other, every now and then the best algorithm is simply Asking Tyler Cowen.

I certainly disagree with quantitative rankings that are based on mentions in social media, a methodology that picks up controversy and obsession with Fed officials.

Let me define influence as “effect on young minds.” I think that Paul Samuelson still has the most influence. Most economic textbooks are descendants of his. Milton Friedman has great influence. Most free-market rhetoric is derivative of his.

Living economists?

Steve Levitt. Not my cup of tea, but I have encountered a number of young women who are ardent admirers, which is something I cannot say about any other economist.

Daniel Kahneman. I know many economists and non-economists who have read Thinking Fast and Slow. Not just bought it because it was famous and stopped reading after a few pages, but got through the whole book.

Paul Krugman, for better or worse. If you look in the blogosphere and op-edsphere at the ratio of uncharitable to charitable treatment of those who disagree, then you have a measure of the ratio of his influence relative to mine.

Stan Fischer, for better or worse. The Genghis Khan of macroeconomics, as I put it.

Tyler Cowen. Where would the economics blogosphere be without him?

A Nice Rant

Posted on by

Kevin Williamson writes,

the Left’s fundamental intellectual defect — at least in the critique of those liberals who are now obliged to call ourselves “conservatives” — is that it seeks to establish something very much like the arbitrary princely powers that Smith and Hayek warned against, and that Washington fought against. The Left believes that this power can be made benevolent not by the strengthening of democracy — that is not precisely right — but rather by making ever-greater portions of society subject to arbitrary princely powers when those powers enjoy the endorsement of a plebiscite, as though handing over Augustus’s powers to the tribune of the plebs would constrain the imperial tendency.

I try to resist posts of the form “Hurray for my team, boo for their team.” But I am making an exception for Williamson’s piece.

Economic Outlook for the New Year

Posted on by

Justin Wolfers writes,

Typically, an oil price decline is like a tax cut, leaving more money in consumers’ pockets to spend elsewhere. That should spur growth. But since the shale boom, the United States is not only a leading oil consumer but also a leading producer. So lower oil prices also spell smaller revenue for some of our energy companies. And our producers have particularly high costs, so further investment in them may become unprofitable if prices fall too far.

Pointer from Tyler Cowen, who offers some possible scenarios, nearly all of them pessimistic. I’ll try to be more optimistic in general, but from a PSST perspective, the oil price decline might be a small net loss for the U.S. That is, the disruption to the economies in the oil-boom states may more than offset any improvements elsewhere.

Some optimistic possibilities:

1. The geopolitical outlook may brighten. Lower oil prices constrain the influence of Venezuela, Russia, and Iran.

2. Islamic militancy might decline rapidly. Some stories suggest that the proportion of Muslims becoming turned off by the militants is rising.

3. There may be a growing realization in the United States that medical services paid for with other people’s money are prohibitively expensive. See Megan McArdle’s post-mortem on single-payer health care in Vermont.

4. As of now, I would say that virtual reality headgear is in the pre-early-adopter phase. By the end of the year, it may be in the early-adopter phase, poised for spectacular growth over the next decade.

5. The attention paid to Piketty will taper off, and we will see a better crop of nonfiction books.

6. I also predict that President Obama will recover his popularity among Democrats. They will find that, as in 2008, the prospect of Hillary Clinton will enhance the appeal of Barack Obama.

Brad DeLong Starts a Labor Market Chartfight

Posted on by

He writes,

If the US economy were operating at its productive potential, the share of 25 to 54-year-olds who are employed ought to be what it was at the start of 2000. Back then there were few visible pressures leading to rising inflation in the economy.

Does anybody disagree with that?

Read the whole thing. Pointer from Mark Thoma.

When Bill James was writing his annual Baseball Abstract, you could say that his main goal was to focus attention away from meaningless baseball statistics and toward better metrics. In that spirit, I think that looking at prime-age employment-population ratios, broken down by gender, is a valuable approach. That is what Brad has done with this chart. However, I want to offer a different way of looking at it (and this way could be helpful or it could e misleading).

As I read his chart, between 2000 and 2006, the employment-population rates for males and females each dropped by about 2 percentage points. Most recently, they were 5 percentage points and 4.5 percentage points below 2000 levels. So, one way to look at the chart is that if you drew a trend line from 2000 to 2006, and then extended that trend line to 2014, the line would hit pretty close to the current numbers.

I do not mean to dispute in any way DeLong’s larger point, which is that the Fed is nuts to be more worried about inflation than labor market slack at the moment. But as you know, I don’t much care what the Fed worries about or does not worry about. I am inclined to see structural forces at work in the data, and the “trend line trick” is sufficient to fit the data to my priors.