Category Archives: Economic education and methods

Why Doesn’t Economics Progress?

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Don Boudreaux offers one hypothesis.

Academic journals are not the place to repeat long-ago-discovered truths. A bias, however, arises from this role of academic journals and of the need for scholars to publish in them – namely, a disproportionate amount of attention is given in academic journals to speculative ideas and to exceptions to long-ago-discovered truths. Foundational ideas and long-ago-discovered truths appear only in the background of academic journals, or whenever someone discovers (or believes that he has discovered) an exception to these.

David Henderson has his own take.

I read this as suggesting that the bias toward novelty in academic journals retards progress in economic thinking, by crowding out established truths. That may be an issue. But I have a different issue, which I will get to.

First, on the topic of trade across borders, I share with Boudreaux the presumption that once you establish that A has voluntarily bought X from B and that this was an ethical transaction, you are done. It is not relevant which side of a border B happens to live on. To come up with a relevant distinction, you will have to try some fancy intellectual footwork, and even then you are unlikely to overturn the logic of the free trader.

But for the most part, the problem in academic economics is not that truth has stood still and economists have moved away from it. On the contrary, I am struck that the economy is evolving faster than economics. Economists are still using 19th-century apparatus, such as the capital-labor distinction and marginal-cost pricing theory, in a 21st-century economy that those concepts do not fit very well. Even worse, many economists have so much confidence in their work that they are willing to advocate policy schemes based on very unreliable analytical methods. This gap between antiquated and inadequate models and the hubristic claims of economists is the issue that most disturbs me.

We are not white-coated scientists dealing with brainless inanimate objects or unintelligent lower creatures. We are not continuously cutting down on our ignorance and increasing the share of economic behavior that we understand.

We are studying phenomena that can change at a faster pace than we can acquire knowledge. We are studying humans who are embedded in institutions that are more nimble and clever than we are. In the markets where we attempt to make policy, such as health care or banking, there is usually much more knowledge embedded in the people and organizations that work in those fields than there is in our long-distance observation of them. And we are not gaining on them. They are gaining on us.

Which concepts work in economics?

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On Quora, I was asked where economics works. I changed the question to “which concepts work?” My answer was

The laws of supply and demand work. The principle of substitution works (we do not run out of resources—we substitute away from resources as they become scarce). The idea that economic growth involves creative destruction works. The idea that specialization and trade are fundamental elements of economic behavior works.

Concepts that do not work, in my opinion: aggregate demand and aggregate supply; neoclassical model of income distribution; theory of public goods–it is clearly wrong as a positive theory of how government behaves, and because it is wrong as a positive theory its normative value is also quite dubious.

I would be curious about how other economics bloggers might answer this question.

What do economists know? Tyler Cowen’s Essay Exam

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Tyler Cowen came up with this idea at lunch (I was not there) a few days ago and shared it with me by email.

Imagine giving all professional economists (and other academics) an essay test. Determine their area of expertise, and then ask them to write a twenty-page essay on one of the most basic questions in that field. So it might be “Why did China do so well?” Or “what are the determinants of economic growth?” Or “What causes business cycles?”

In the email, he added

Then we really would see who understands anything at all.

I really, really wish this sort of exercise were carried out. My thoughts:

1. If I were to do this, the topic would be “Why is health care policy a challenge in the United States?” In fact, I plan on doing the exercise. I can take key points from my book (Crisis of Abundance) and add some refinements that have occurred to me in the dozen years since it was published. For another topic on which I feel knowledgeable, the causal mechanisms of the financial crisis, I think that my views are correct with p = .4. Better than just about anyone else, but I think that my analysis of health care is more reliable, closer to p = .8 of being right.

2. To me, the most interesting thing about such essays would be to examine how an economist justifies his or her claim to knowledge. My guess is that you would not see instances in which an economist relies on a particular theoretical model or empirical study. Instead, a variety of observations and basic theoretical insights will be combined to form the economist’s view of the topic. Something like the Hill Criteria, as opposed to this One Chart, or that Clever Model.

3. There are some topics which, no matter how much you know, you cannot pin down with confidence. What caused the Industrial Revolution to take place in England when it did? What caused the Great Depression to take the course that it did? What caused the sharp drop in employment that coincided with or followed the Financial Crisis to take the course that it did? Anyone who in their 20-page essay claims to know the answer to one of these questions with p > .3 is not to be trusted.

4. I am curious about how these essays would differ by age cohort. My guess is that a lot of economists under 40 would write essays on very narrow topics. My guess is that a lot of economists over 60 would write essays that I think are baloney sandwich, particularly if they concern macroeconomics.

Eric Weinstein on economics

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I found my way to what he wrote a couple years ago.

So long as public goods make up a minority of a market economy, taxes on non-public goods can be used to pay for the exception where price and value gap. But in the modern era, things made of atoms (e.g. vinyl albums) are being replaced by things made of bits (e.g. MP3 files). While 3D printing is still immature, it vividly showcases how the plans for an object will allow us to disintermediate its manufacturer. Hence, the previous edge case of market failure should be expected to claim an increasingly dominant share of the pie.

This reminds me of my 2002 essay, asymptotically free goods.

An asymptotically free good is a good where almost of all of the cost involved consists of research and development. It differs from a natural monopoly in two ways.

1. In contrast with an amusement park or a utility, the cost of maintaining the capital for an asymptotically free good is relatively low. Once the research is complete and the idea is proven, the costs are trivial. In the absence of patent protection, there is nothing to stop a competititor from taking the idea and driving the price close to zero.

For example, once you have undertaken the research to produce a new miracle drug, the marginal and average costs of producing it are low. To take another example, once devices have been designed and protocols established for a high-speed wireless network, the cost of providing and maintaining the equipment for a network may be low relative to the number of users.

2. Asymptotically free goods are like public goods in that it is costly to exclude someone from enjoying the benefit of an asymptotically free good.

–It is costly to hook someone up to the electric grid. It is costly to keep someone off a wireless network.

–The cost of setting up and maintaining a gate at an amusement park is relatively low. The cost of policing the Internet to stop music swapping is enormous.

Later, Weinstein says,

Advertising and privacy transfer (rather than user fees) have become the business model of last resort for the Internet corporate giants.

We are not in a neoclassical world. In my essay, I conclude

Problems are being solved not by throwing capital and labor at them, but by undertaking research and development which, when completed, leads to solutions that cost relatively little in terms of traditional factors of production. . .

For those who tend to view government as an instrument of the public good whenever the free-market outcome may be flawed, asymptotically free goods provide an excuse for more government intervention. For those who tend to see government as providing an instrument by which status quo interests can impede change, asymptotically free goods are a reason for keeping government hands off.

For his part, Weinstein concludes

Capitalism and Communism which briefly resembled victor and vanquished, increasingly look more like Thelma and Louise; a tragic couple sent over the edge by forces beyond their control. What comes next is anyone’s guess and the world hangs in the balance.

The AEA code of conduct draft

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It reads in part,

The AEA encourages the “perfect freedom of economic discussion.” This goal requires considering each idea on its own merits and an environment where all can freely participate. Economists have a professional obligation to conduct civil and respectful dialogue in all venues including seminars, conferences, and social media. This obligation applies even when participating anonymously.

My thoughts:

1. Although it is called a “code,” the draft reads to me more like a statement of principles.

2. I was under the impression that this draft was developed in response to a scandal concerning the way women economists were treated on a particular discussion board. I was afraid it would be loaded with rhetoric along the oppressor-oppressed axis. But the only paragraph dealing with this issue is quite innocuous.

The AEA seeks to create a professional environment with equal opportunity and equal treatment for all economists, regardless of age, gender, race, ethnicity, national origin, religion, sexual orientation, disability, health condition, marital status, parental status, genetic information, professional status, or personal connections.

3. As I read the draft, the most prominent an egregious violations of the code of conduct take place in a regular column in the New York Times. I am not the only one who feels this way.

Dave Rubin and the Weinstein Brothers

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They talk for almost three hours, and you have to hang with it until the end to hear my three-axes model invoked by Eric Weinstein. His point is that libertarians will not be helpful if they (we?) deny that sometimes the other points of view are legitimate.

I met Eric at Foo camp, and I was hoping to get together with him a couple of weeks ago, but I had a snafu that messed up my travel. Until about a week ago, I had never connected him with Bret Weinstein, the professor who was at the center of the Evergreen State College controversy last May.

One of the interesting points that Eric makes early in the video is that in the United States we went from having 8 percent of the population pursue education beyond high school prior to World War II to close to 50 percent by 1970. That growth spurt created some major distortions in higher education. One can infer what those distortions included:

1. Some dilution of student quality. We have to be careful here, because prior to 1950, colleges were more selective on social class than academic ability. So what probably happened is that quality went up at the top schools. Where the dilution of quality was felt was more likely the mediocre institutions that expanded rapidly, notably mid-tier and lower-tier state schools.

2. A sort of phase change in the demand for new faculty toward the end of the 1970s. Until then, the demand for Ph.D’s soared. The system kept producing Ph.D’s as if demand would continue to rise at this unsustainable rate. By the 1980s, the attempt to maintain high demand for Ph.D’s starts to become dysfunctional, with universities creating pseudo-disciplines and superfluous administrative positions.

A lot of the discussion concerns the issue of orthodoxy vs. dissent. Recall that I wrote about Eliezer Yudkowski’s case that one should doubt oneself when defying orthodoxy. Eric Weinsten offers a different perspective on this. He says that the way to tell a cult from a group that pursues truth is that the cult will not tolerate any dissent. What is odd about our current environment is that it is the mainstream in many fields that is behaving like a cult, and it is a small group outside the mainstream that is open-minded.

In Specialization and Trade, I include the quote attributed to Andre Gide: trust those who seek the truth; doubt those who find it. By that standard, it is the mainstream that cannot be trusted. For example, both Eric and Bret argue there are rational reasons to fear anthropogenic climate change. But the mainstream climate scientists are acting in ways that make themselves untrustworthy to anyone alert to cult behavior.

The discussants take the view that journalism, academia, and major political parties are so cult-like at present that the future of humanity is in doubt. Our world is fragile, due to a combination of technological dangers and mainstream institutions that are insular and complacent.

The participants talk about a “Game B” that somehow enables institutional improvement. It all sounds a bit conspiratorial. Nassim Taleb would be an example of a Game B sort of intellectual. Is Jordan Peterson part of Game B? Perhaps. Is Donald Trump part of Game B? No, but his victory in part reflects the dysfunctionality and corruption of mainstream institutions.

Whether the current political environment redounds to the benefit of Game B is highly uncertain. Eric’s fear is that things could get really ugly for the Game B types. If you read my moonshot essay, you know which side I am on as an economist.

New Russ Roberts video on income distribution statistics

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Here is part 2 of his series.

The video tries to make clear the flaws in comparing the income of the median household in, say, 1970, with that of the median household today. In very important respects, they are not the same household, so that the question that you think you are answering is not the question that you are really answering.

Russ is trying to teach people to think for themselves about economic questions and data. That is absolutely admirable. I worry that most people would just prefer to use the credentials heuristic, which means that they will accept whatever interpretation of data comes from someone whose credentials they respect. The respected person might not be a careful economist. It might not even be an economist at all–it could be a journalist with very weak analytical skills who happens to get hold of some data.

Or worse, some people might use a confirmation-bias heuristic. If the interpretation of the data confirms the your bias, then you go with that interpretation. Otherwise, you tune it out.

Uninformative Regression

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Pierre Lemieux writes,

simple regression analysis confirms the absence of statistical correlation between country size and economic freedom.

Simple regression analysis is not a good choice with skewed data, such as the population size of different countries. What the regression algorithm does in this case is just compare the freedom index values of China and India with the average of all other countries. That is not very informative.

If you want to see a more careful analysis, which does show that smaller countries tend to be better run, see the essay that I wrote on The recipe for good government.

My essay on the CBO for the Yale Law and Policy Review

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I write,

The demand for pseudoscience leads to unwise policy choices. Although the CBO is nonpartisan, the presentation of its model results serves to focus attention on scenarios that are favorable to intervention and to deficit spending. But the policy discussion does not include scenarios in which intervention fails to accomplish intended results or where economic shocks make a large government debt problematic. This Essay recommends ways for Congress to redirect the CBO, resulting in analysis and reporting that would provide better support for public policy.

This is one of my favorite essays, because I believe it is both original and correct.

There is a sort of Murphy’s Law at work in the way that policy makers use the CBO. They pay attention to its “scoring” when it is least appropriate to do so, and they ignore the CBO when it is most appropriate to pay attention, namely its analysis showing that the long-term budget outlook is not sustainable.

It should be very clear that I blame the press and policy makers for how they mis-use the CBO. I do not blame the CBO itself.