Category Archives: books and book reviews

TLP watch

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Cass Sunstein writes,

We live in an era in which groups of people—on the Left, on the Right, in university departments, in religious institutions—often end up in a pitch of rage, seeing fellow members of the human species not as wrong but as enemies. Such groups may even embark on something like George Orwell’s Two Minutes Hate. When that happens, or when people go to extremes, there are many explanations. But group polarization unifies seemingly diverse phenomena. Extremism and mobbing are not so mysterious. On the contrary, they are predicable products of social interactions.

The essay goes into some of the social psychology involved. As my thinking evolves, I am putting more emphasis on what the three-axes model says about political psychology and less emphasis on what it says about ideology per se.

John Quiggin’s neoclassical economics

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Tyler Cowen writes,

John Quiggin, Economics in Two Lessons: Why Markets Work So Well, and Why They Can Fail So Badly. The third lesson, however, is government failure, and you won’t find much about that here. Still, I found this to be a well-done book rather than a polemic.

I also received a review copy of the book. No, the term “Public Choice” is nowhere to be found in the index.

It is straight neoclassical economics, which, as you know, I find frustrating.

Suppose that in baseball, every time a batter makes an out we call it “batter failure.” By that definition, Mike Trout is guilty of “batter failure” more than half the time. A really naive manager would replace Mike Trout with a pinch-hitter. But if you know anything about baseball, you know that pinch-hitting for Mike Trout is pretty unwise.

Neoclassical economics takes the naive approach. It suggests pinch-hitting for markets without making any estimate of the pinch-hitter’s propensity to fail.

My review of Tyler Cowen’s latest

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I wrote,

Much of Big Business musters arguments and evidence against the accusations critics articulate concerning the corporate sector. But to me, this is an exercise in Whack-a-Mole, where every time you knock down one canard against big business another one will pop up.

Overall, Big Business is a genuine attempt to be charitable to those who disagree and to try to nudge them to change their minds. Sadly, my sense is that most people read to reinforce their views rather than challenge them.

Philosophy and economics

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Diane Coyle writes,

Yesterday, an undergraduate emailed me to ask for book recommendations about the overlap between economics and philosophy. I recommended:

Amartya Sen The Idea of Justice
Michael Sandel What Money Can’t Buy: The Moral Limits of Markets
Agnar Sandmo Economics Evolving
and
D M Hausman and M S McPherson and D Satz Economic analysis, moral philosophy, and public policy
Then I asked Twitter, and here is the resulting, much longer, list. [snipped]

Pointer from Tyler Cowen.

I have not read any of these. I have read some on the longer list. Thinking of the most lively reads, and trying to include left, right, and center, I would recommend:

The Worldly Philosophers, by Robert Heilbroner.
Radicals for Capitalism, by Brian Doherty.
Capitalism and the Jews, by Jerry Muller.

If I were teaching an undergraduate course in philosophy and economics, I would include as articles

Hayek’s “The Pretense of Knowledge”
McCloskey’s “Why I am no longer a Positivist”
Leamer’s “Let’s take the Con out of Econometrics”
my own “How Effective is Economic Theory?”

In my view, there are two issues at the center of the overlap between economics and philosophy.

1. What methods best serve economics? In particular, what are the pros and cons of treating economics as a science?

2. How do markets fit in to the moral universe? What problems do they address? What problems do they cause?

The essays on my list deal primarily with the epistemological issue. The books on my list deal mostly with the moral issue.

A dispatch from the IDW

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Larry Cahill writes,

Imagine your response to picking up a copy of the leading scientific journal Nature and reading the headline: “The myth that evolution applies to humans.” Anyone even vaguely familiar with the advances in neuroscience over the past 15–20 years regarding sex influences on brain function might have a similar response to a recent headline in Nature: “Neurosexism: the myth that men and women have different brains” subtitled “the hunt for male and female distinctions inside the skull is a lesson in bad research practice.”

It’s like seeing Democracy in Chains put up for a prestigious award.

I want to give a big plug to Quillette. It is now the must trustworthy brand in journalism.

High-impact geeks

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Tyler Cowen quotes from Clive Thompson’s new book on high-impact geeks.

The 10Xers he [Marc Andreessen] has known also tend to be “systems thinkers,” insatiably curious about every part of the technology stack, from the way currents flow in computer processors to the latency of touchscreen button presses. “It’s some combination of curiosity, drive, and the need to understand. They find it intolerable if they don’t understand some part of how the system works.”

1. I have argued before that CEOs with a coding background have an advantage. You make better decisions when you understand how software development works.

2. In 1989, when I was at Freddie Mac in charge of developing simulation models for calculating the cost of mortgage prepayment and default risk, I first taught myself option pricing and understood the importance of the entire path of interest rates over the life of a mortgage. Also, one of the first decisions concerned a programming language. We went with C, in large part because the investment bankers were working with C. But first I had to teach myself C and do some of the coding myself, to make sure that it “felt” right.

3. In 1994, when I launched my Internet business, I had an understanding of the economics and basic operation of the Internet, based on the working-paper version of Hal Varian and Jeffrey K. MacKie-Mason’s analysis and Ed Krol’s Whole Internet Catalog. I also launched it when I was very high in personal Minsky cycle, basically conceiving the first version in a single sleepless night.

4. When Netscape introduced server-side JavaScript, I learned that. I started a local “users’ group” for the Netscape server, and I found a software developer at that users’ group.

5. He was even more into understanding “every part of the technology stack” than I was. In those days, nothing was reliable. The typical Windows computer crashed several times a day. Browsers were poorly implemented. The Internet itself was not all that reliable. Server software was often unreliable. Many web sites relied on Perl scripts, which someone once aptly described as looking like comic-strip curse words, so that they were nearly impossible to modify or debug.

6. When Java was released, I took a course in it, so that I would understand it. I formed the opinion that it would be more useful on the server side than on the client side. This was fortunate, because the Netscape server was a disaster, and when the Java Web server was released as a beta product, we went with it, and it was much more stable. I continued to code, even though my net contribution was close to zero (my developer had to spend time fixing some of what I wrote). Again, I needed to have a feel for everything, so that I could understand the decisions he was making. We got the point where every page we served was assembled on the fly by pulling elements out of a database.

7. In 2008, when the financial crisis hit, I coined the phrase “suits vs. geeks divide.” I could tell that some of the central players, including executives at large financial institutions and the leading policy makers, did not understand the behavior of options that I learned about in (2). The suits did not know what they were doing. They enacted TARP, an $800 billion program, under the assumption that you could just buy up the bad mortgage securities and hold them for a while. I knew that this was not the case, and after a few months they gave up.

8. About five years ago, I tried another start-up. I wanted to do some of the coding myself this time. But I did not understand how much the software world had changed. It seems to be all about stitching together different packages. I was too much of a dinosaur.

Anyway, I hope that the book is as interesting as Tyler says it is.

My review of Raghuram Rajan’s latest book

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My review of The Crumbling Pillar says,

One can think of each of the three pillars as having an ideological base. The strongest support for the market comes from libertarian ideology. The strongest support for the state comes from progressive ideology. And I would argue that the strongest support for community comes from (socially) conservative ideology.

My overall criticism of the book is that he supports an idea of subsidiarity which I identify strongly with conservatism but without doing anything to raise the status of conservatives or lower the status of progressives. Either this is what Tyler Cowen would call a Straussian attempt to appeal to progressives or it shows how conservative thought is completely ignored by academics these days. In my review, I opted for the latter interpretation.

Please read the whole essay.

What is a firm? an organizational culture

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I just received a review copy of Tyler Cowen’s latest, Big Business, which will be released in a week. As is my habit, I started reading it from the outside in, and I quickly landed on the appendix, in which he writes

in lieu of the Coase and Williamson transactions-cost appraoch, I typically view a corporation in terms of the following properties:

  1. It is a collection of assets, assembled at favorable purchase prices (or at least the prices were favorable for the case of successful corporations.
  2. It is a nexus of external and internal reputation and norms.
  3. It is a carrier of contractual and legal responsibility.

My inclination is to elaborate on (2). I might describe a firm as an organizational culture.

I think we need to distinguish among types of firms. The local restaurant run by a family of recent immigrants is not the same as Microsoft.

I want to ignore most types of firms, including the restaurant, and instead focus on young, ambitious firms and mature, established enterprises.

I would describe a young, ambitious firm (or a “promising business” in Amar Bhide’s terminology) as an organizational culture embodied in its top management layer. To be successful, the members of this team must:

  • generate good ideas and discard bad ones
  • have the skills, experience, and drive to execute on ideas
  • work well together
  • manage the transition to a mature, established enterprise

In a mature enterprise, the organizational culture permeates the entire firm. A set of rules, systems, processes, habits, and institutional knowledge is deeply ingrained in every layer of the organization. One of the things that struck me about Minerva, the innovative college, is the terminology that I called “Minerva-speak.” This sort of firm-specific terminology can contribute to a shared organizational culture.

When Tyler points out that bureaucracy is both good and bad, I interpret that in terms of the tension between organizational culture and individual initiative. I picture Minerva in those terms. Its culture is more clearly defined than that of a typical college, but ultimately that could feel stifling to some faculty and students.

Recall that one of my rules for work and financial life is:

When you have little left to learn on a job, it is time to move on.

A lot of what you learn when you work at a firm is its organizational culture. Moving within a firm means you learn new subject matter, but you are largely staying within the same culture. The psychologically more challenging move to a different organization gives you an opportunity to experience a different culture, sort of like spending time abroad.

Large, established enterprises are in one sense easy for a CEO to run and in another sense very difficult to run. With a deeply-ingrained organizational culture, an enterprise can operate on auto-pilot in a stable business environment. In a changing environment, which seems to be more prevalent nowadays, the CEO has to know when and how to discard cultural baggage. Changing the culture of a large organization is risky and wrenching. In a large corporate merger, cultural integration is both challenging and very important.

Perhaps the biggest challenge faced by top management in a large organization is to know what the organization needs to learn and to unlearn as its environment changes. I can think of many examples where the environment changed quickly and a large enterprise unlearned too slowly. Or maybe the value of its legacy rules, systems, processes, habits, and knowledge was decimated by the new environment, and there was not much that top management could do about it.

But I can think of at least one example where a new top management layer insisted that the organization unlearn its approach and the outcome was tragic. That was when Freddie Mac’s board brought in Richard Syron as CEO. Syron and his executive team discarded the organizational knowledge about credit risk, which included a reluctance to deal in “low-doc” mortgages. Under Syron, Freddie Mac dove into the “low-doc” business, with results that were disastrous, both for the company and for the country.

The West was lucky to win

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I have been delving into J.S. Sharman’s Empires of the Weak, which argues that the story we tell of the triumph of the West as inevitable is quite misleading. In general, he questions the assumption that competition will automatically strengthen states through the processes of learning and selection.

Victory and loss in war are a result of complex and varying combinations of factors, many of the most important of which, like leadership and morale, are intangible. (p. 20)

We tend in hindsight to see correctness in what the winner did and mistakes in what the loser did. We also tend to narrow the list of critical factors. In fact, we may very well be emphasizing the wrong factors, we may misclassify some decisions as correct when they were mistakes and vice-versa, etc.

I think that this is true in business as well.

On the issue of selection, Sharman argues that there is not enough extinction among states for selection to operate effectively. I suppose that because firms go out of business much more frequently than states disappear, one can have some hope that the process of selection leads more reliably to improvement in the case of firms than in the case of states.