Category Archives: Economic education and methods

Capitalists cannot calculate, either

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My latest essay.

But in the real world, the market cannot possibly make the sort of reliable calculations that economists expect from it. Market outcomes are highly contingent on strategies, beliefs, and past choices that are somewhat arbitrary. The market is not as well informed as we would like to believe, which in turn makes policymaking more problematic than we would like to think. Actual markets miscalculate an awful lot.

This is another in my heterodox essays. It is likely to go unnoticed by the back-scratching back-stabbingcabal, but I urge you to read the whole thing.

The null hypothesis for policy

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Scott Alexander writes,

the same argument that disproves the importance of photolithography disproves the importance of anything else.

His post gives a number of examples where progress follows a straight line. This is sometimes used as an argument that no individual policy (or invention, as in the case of photolithography) matters. Alexander wonders whether we are deceiving ourselves into believing the null hypothesis for policy.

I think that in the case of inventions it can be difficult to discern an effect at the point in time when the invention occurs. The process of developing complementary inventions, adapting to the new technology, and achieving widespread adoption takes time. See the work of economic historian Paul David. As a result, even in a world of discrete innovations, the overall path of progress is smooth.

In the case of policy, I think that one must also allow for time lags. For example, changes in labor market incentives may not have large effects in the short run, but over time the culture can be affected.

But in general, I think that if one fails to see any historical break point in an outcome following the adoption of a policy, that justifies a presumption that the policy did not better. I would suggest more careful analysis if that is possible. A clever researcher may be able to find a “natural experiment” that has more power against the null hypothesis. For example, Tyler Cowen posted about a study that found that a carbon tax had little effect on carbon dioxide emissions by comparing across regions. In principle, that study provides more persuasive evidence that the null hypothesis holds for the carbon tax.

Newer versions of the marshmallow test

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James Andreoni and others write,

We find that time preferences evolve significantly as children age, with younger children displaying more impatience than older children. This is in line with related work that finds a similar association with age (Bettinger and Slonim, 2007; Angerer et al., 2015; Deckers et al., 2015; Sutter et al., 2015). We also find a strong association with race: black children are significantly more impatient than white or Hispanic children, even while controlling for socio-economic status, cognitive skills and executive function skills.

. . .We do not observe a correlation between preferences of parents and their children. We might have expected such a correlation due to genetics or social learning.

. . .The fact that our early interventions, which were quite broad, did not lead to durable changes in time preferences suggests that such preferences may be difficult to change with education programs for 3-5 year-olds.

. . .the experiment was conducted one-on-one with a trained experimenter and each decision was accompanied by physical containers holding the number of rewards that would be earned by the child for each alternative. The rewards were always candies

Thanks to a reader for forwarding the paper to me.

The rewards were candies, with more offered if the child would wait a day. Frankly, my inclination is to be skeptical of the whole study. You are telling me that interventions do not matter, parental inclinations do not matter, but race matters? I can come up with a clever story to explain such an outcome (perhaps the children of different races reacted differently to the race of the “trained experimenter”), but I would put most of my chips on “results fail to replicate.”

William Easterly feeds the trolls

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Easterly writes,

Naidu, Rodrik, and Zucman may have trouble finding debate partners who will defend ideological, fundamentalist, fetishist neoliberalism. As a personal favor to the authors, whom I like and respect, I will volunteer to be at least a neoliberal—I hope to be excused from the other labels.

If the publication had asked me to engage with Naidu, Rodrik, and Zucman, I would have insisted that first they rewrite their essay to take out all of the boo-words and straw-man accusations. To tolerate below-the-belt intellectual punches because you “like and respect” the perpetrators is to commit a version of the ad hominem fallacy.

Or to boil it down: Don’t feed the trolls.

McCloskey on teaching economics

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She (then he) wrote,

I think economics, like philosophy, cannot be taught to nineteen-year olds. . .comes directly from a socialized economy (called a family), and has no feel on his pulse for those tragedies of adult life that economists call scarcity and choice.

Thanks to a commenter for reminding me about the article, which I recall reading a few years ago.

I am not as pessimistic as that. But this may be an instance where the demand side of the market is actually in control. That is, students feel like they are learning something when they can define and use economic jargon and diagrams. Deeper, more philosophical points, like the way that economic growth resembles evolution, or the challenge of achieving cooperation in large-scale society, don’t sell as well to a 19-year-old market.

Squelching talent

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Tyler Cowen said

Harvard and MIT are in fact remarkably good at finding, evaluating and attracting top talent. It is stunning how good they are at this, and we should not begrudge them that,” he said.

But what if the top economics graduate schools squelch the talent that they find, shunting it into mediocrity? What if all of these talented folks were instead given a wider perspective on problems and more encouragement to pursue knowledge through means other than mathematical models and stylized statistical analysis?

I ended up following a non-academic path after graduate school. From a status-within-the-profession perspective, this was a loss. From an intellectual growth perspective, it was a win.

What I write does not make it into the American Economic Review. So much the worse for economists who rely on the AER.

Klassic: Masonomics

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In 2007, I wrote,

Masonomics says, “Markets fail. Use markets.”

. . .The argument between Chicago and MIT seems to be over whether perfect markets are a “good approximation” or a “bad approximation” to reality. Masonomics goes along with the MIT view that perfect markets are a bad approximation to reality. But we do not look to government as a “solution” to imperfect markets.

Two years later, I wrote,

Tyler argued that politics is about determining what sorts of groups have high status in a society. I think this can relate to the idea that people are motivated to feel good about themselves and to believe that others think highly of them. Think of political identity as like religious identity or musical identity. Tyler pointed out that it’s pretty easy to predict what music will be on the iPod of an upper middle class sophomore girl at Brown will like certain music, and it is pretty easy to predict the musical tastes of a 25-year-old male gas station mechanic in Grand Rapids, Michigan, and those are quite different. You might not get as high an R-square predicting political affiliations, but you could still do pretty well.

I am thinking that at the margin this blog may be better if I include more posts that point readers to older essays of mine. Hence the Klassic.

I answer two questions

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At the blog of Joseph Gray, an aspiring young economist.

My first thought is Fischer Black. You absolutely must read Perry Mehrling’s biography of him. If nothing else, you get a sense of what the 1970s felt like, both in the culture at large and in the economics profession.

More at the link. You might also check out the questions that he asked other economists, and their answers.

Defense economics

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Question from a reader:

I was wondering if you could comment on the fact that you’ll never see papers or courses in defense economics, but there’s no lack of academic interest in other areas of gov’t involvement such as healthcare, education, agriculture, finance, etc.?

1. It is possible that fifty years ago you would have not made this observation. RAND was a defense contractor, and I believe so were some lesser-known economics outfits. Dorfman, Samuelson and Solow, which was still a major textbook when I was in graduate school, is arguably motivated by military resource allocation problems. And of course Schelling’s Nobel relates to the defense problem posed by nuclear weapons.

2. Then you have the Vietnam War, and from then on anything defense-related has a negative stigma. Still, arguably a lot of work on principal-agent problems in contracting has applications for procurement.

3. In recent years, the most talked-about defense problem is terrorism. There has been a bit of work on economic connections to terrorism, including who becomes a terrorist. But there does not seem to be much for economists to say, apart from noting the obvious discrepancy between the cost of anti-terrorism measures and the actual incidence of terrorism.

4. Research follows money. If the Federal departments that oversee health care, education, and so on are handing out more grants than DOD for economic analysis, then there you are.

5. It may be more difficult to have credibility without domain experience. The fact that Jonathan Gruber and David Cutler are not health insurance executives or doctors did not keep Congress from turning Gruber loose to redesign health insurance or trying to implement Cutler’s ideas for telling doctors how to practice medicine. But on defense, Congress probably would rather defer to a general or an admiral than to an economist.

6. An economist in the field of defense may need to work with classified information to be useful. This could limit opportunities for publication.

7. My guess is that a the career path for a defense-focused economist is less likely to involve an academic position writing papers for the same journals as other economists. Instead, it is more likely to involve employment at a defense contractor or in government. Research is more likely to flow up through a hierarchy than out through economics journals. One’s reputation is more likely to depend on how one is received by bureaucratic superiors than by academic peers.

Economics, History, and Contingency

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Tyler Cowen writes,

Economists, in contrast, work more with general models than with concrete historical situations, and those models emphasize underlying structural forces. Economies have fairly set populations, birth rates, natural resources, capital stocks, savings rates, trading partners, and so on. So to an economist, the final outcomes are closer to necessary than contingent.

1. Tyler claims that historians are much bigger on contingency. Well, maybe in comparison with economists. But there are plenty of historians who look for underlying structural causes. Ask to explain why the North won the Civil War, and my bet is that a historian will have more to say than just “one darn thing after another.” Closer to the topic of Tyler’s essay, the question of whether a political leader makes his movement or a movement makes its leader is vigorously contested among historians.

2. But Tyler is right to characterize economists as working with deterministic models. I have an essay in the works that argues that this is so much the worse for economists. The short version of the essay is that the real world has characteristics that invalidate the deterministic models, and instead outcomes are much more contingent.

I believe that there is a sense in which economics is history. Economic outcomes are affected not just by the configuration of households and firms but by the path that got us here. Unfortunately the typical economic model operates purely in the present, or even outside of time altogether. The economist acts like a man who comes from Mars and thinks he can predict what firms and households will do tomorrow based on what he can observe today, without having to ask anything about what was going on yesterday.

But the short version cannot do justice to the topic. There’s a reason to spell it out in a essay.