Category Archives: Economic education and methods

Heterodox introductory economics

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Samuel Bowles and Wendy Carlin write,

The Economy takes on board the fundamental innovations of Hayek and Nash used in contemporary economics research. But concerns about climate and other market failures as well as economic instability provide reasons to doubt Hayek’s argument that governments should limit their activities to enforcing property rights and other rules that permit markets to function.

Pointer from Mark Thoma. They refer to this free textbook. I can see that I disagree with a lot of it. For example, The Economy says,

Through most of their history, humans have regarded natural resources as freely available in unlimited quantities

This seems wrong to me. Prior to the invention of agriculture, humans had to take into account the limited availability of resources. If nothing else, when hunter-gatherers exhaust a food supply in an area, they have to move or face starvation.

Instead, I would emphasize that the price-and-profit system encourages humans to use our ingenuity to reduce our dependence on scarce resources. This natural tendency toward conservation in a capitalist economy is one of the most important concepts for economists to teach. Thus, the environmental lesson in their book is nearly the opposite of mine in Specialization and Trade.

Still, there are many ways in which their textbook strikes me as a constructive improvement over the textbooks in the Samuelson tradition. I am very sympathetic to their effort to bring more heterodox views into introductory teaching.

Criminology as normative sociology

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John Paul Wright and Matt DeLisi write,

Liberal political values can shape and distort the research that criminologists do and the public positions that they take. Lee Ellis and Anthony Walsh surveyed several hundred criminologists and found that self-reported ideological perspective was strongly associated with the type of theory that the scholar most often advocated, with liberal criminologists primarily supporting theories that locate the causes of crime in social and economic deprivation. Coauthor John Wright has recently collected data showing that political ideology predicts almost perfectly the policy positions of criminologists. On issues ranging from gun control to capital punishment to three-strikes laws, liberal criminologists showed almost no variation in their beliefs. (Needless to say, they dislike guns, oppose punitive sentences, and vehemently object to the death penalty.)

Of course, it was Robert Nozick who coined the term “normative sociology” as the study of what the causes of problems ought to be.

Later, the authors write,

Reliable evidence tells us that the most effective strategies to reduce crime involve police focusing on crime hot spots, targeting active offenders for arrest, and helping to solve local problems surrounding disorder and incivility. Putting predatory, recidivistic offenders in jail or in prison remains the best way to protect the public—especially those who live in high-crime neighborhoods.

Some day, we will view incarceration as inhumane. But until we come up with an effective alternative, I fear that we will find that non-incarceration is even more inhumane.

My fear about academic economics is that it will evolve in the direction of criminology. I foresee ever-increasing social pressure within the community of academic economists to undertake research that confirms left-wing biases.

Think tanks and special interests

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Daniel Drezner writes,

New America is embroiled in a pay-for-play controversy of its own making. The New York Times reported that Slaughter had parted ways with Barry Lynn, an influential critic of the growing clout of U.S. tech companies. He ran Open Markets, an initiative “to promote greater awareness of the political and economic dangers of monopolization,” and had been scathing in his assessments of Google, a firm that had donated more than $21 million to New America’s coffers. Slaughter has disputed some of the facts in the story and issued a statement asserting that Lynn’s “refusal to adhere to New America’s standards of openness and institutional collegiality” led to the rupture. Slaughter didn’t deny, however, that she had implored Lynn in emails, “We are in the process of trying to expand our relationship with Google on some absolutely key points,” nor that she had warned Lynn to “just THINK about how you are imperiling funding for others.”

My thoughts:

1. For a long time, I thought that the New America Foundation was excessively focused on the “net neutrality” issue. Google has promoted the same definition of “net neutrality.” So if it is corrupt for New America to be aligned with Google, then New America has been corrupt for a long time. The issue with Barry Lynn is almost beside the point.

2. It does strike me as unseemly when a particular business interest provides funding for a researcher and gets research that aligns with its interests. I am bothered by the Stiglitz-Orszag work for Fannie Mae. You may recall that I accused the Brookings Institution and something called the Bipartisan Policy Center of doing the bidding of big banks.

3. It seems to me that the infamous Kochs tend to fund on the basis of ideology, which I regard as less unseemly than funding on the basis of corporate interest. Perhaps I am naive about that. Ironically, I think that their libertarian ideology, if it were to gain sway, would reduce the power of special interests by taking government out of the arenas in which special interests exert so much power.

4. I think that there are much worse forms of political heavy-handedness than funding research. The housing lobby and the teachers’ unions come to mind.

5. I do not think that there is an effective way to stop businesses from funding research that is in their interest. Economists write what they honestly believe (that includes Stiglitz, the Brookings researchers, and the New America folks). It is natural for corporations to find that research supporting their interests is credible and deserves support. Do not attribute to conspiracy what can be explained by confirmation bias.

6. Should you always trust government-funded research more than private-funded research? Suppose that the topic is the Fed’s conduct during the financial crisis. Suppose that the research is funded by the Fed.

7. It is often the case that there is research that supports either side of an issue. The problem is not so much that special interests are able to fund “their” side. The problem is when the other side cannot get funding at all, or cannot get its results disseminated and discussed. That would be a harder problem to spot. It is one thing to identify a source of funding. It is another thing to identify a source of non-funding.

Greg Ip Praises Economics

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He writes,

By stripping the emotions from pressing problems, economists can often illuminate the most practical ways to tackle them—but only if ordinary people and their representatives are prepared to listen.

There is a gulf between small-scale society and large-scale society. Use the Dunbar number as a breaking point, so small scale means less than 150 people and large scale means more than that. At small scale, coordination problems can be solved by intuition and mutual recognition. You do not need markets or centralized command. But at small scale you cannot have much specialization, and you cannot provide complex goods and services.

At large scale, the coordination problem becomes much more complex. Economists pay attention to this, and that makes them wiser than non-economists who do not.

But many economists are far too oriented toward the possibilities of centralized command (government regulation) as a coordinating mechanism. And they are too smug about what they can accomplish using math and statistics.

For my perspective on the topic of Ip’s essay, see How Effective is Economic Theory?

Is the economy illegible?

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In the model of the economy as a GDP factory, the most fundamental equation is the production function, Y = f(K,L).

This says that total output (Y) is determined by the total amount of capital (K) and the total amount of labor (L).

Let me stipulate that the economy is legible to the extent that this model can be applied usefully to explain economic developments. I want to point out that the economy, while never as legible as economists might have thought, is rapidly becoming less legible.

For example, the analysis of changes in the trend in productivity requires extremely fine legibility. You start with the measure of Y/L, which is problematic, because you have to add together disparate goods and services to get Y. You have to aggregate all sorts of different specialized workers to get L. Next, to get a trend in productivity, you have to compare Y/L between two periods relatively far apart, say 1986 and 2016. The difference between what you are aggregating then and now is staggering.

Once you look at differences across decades, adjusting for price changes becomes important but impossible. For example, Bret Swanson says that the computing power in his iPhone would have cost $12 million in 1991. If for the purpose of comparing Y/L today to Y/L in 1991 you valued every iPhone at $12 million, you would report an enormous increase in real GDP and hence in productivity.

Finally, to get the change in the productivity trend, you have to attach meaning to the difference of the difference, e.g., the difference between the change in Y/L from 1986 to 2001 and the change in Y/L from 2001 to 2016. That is asking the data to be correct to an additional decimal point.

Here are some other indicators of the decline in legibility:

1. The increasing disconnect between stock prices and earnings. I have made the point about Amazon. In fact, Amazon typifies the decreasing legibility of corporations. Commenters who gave me pushback on Amazon said that they do not think it will end up primarily as a retailer. To me, all the top tech companies have vague business models, particularly if you look ahead several years, and particularly if you compare them with the old industrial giants. Bethlehem made steel. GM made cars. What does FaceGoogle make? Space for ads? Do you think that will still be their primary business five years from now? If so, do you like their prospects? Folks like Ben Thompson seem to think that the business models of all the major tech companies necessarily must evolve radically, which to me makes their future earnings harder to predict.

2. The increasing disconnect between corporate earnings growth and GDP growth. Some of this is due to the fact that a lot of important U.S. corporations are multinationals, so that their earnings are not just a function of what goes on in the U.S. [corrected]

3. The increasing disparities in individual earnings. I bet if you looked at the ratio of the pay of a college president to that of a cafeteria worker today and compared it to that ratio in 1980, it would blow your mind.

4. The increasing disparities in cost of living. I bet if you looked at the ratio of the cost of living in San Francisco to the cost of living in Peoria and compared it to that ratio in 1980, it would blow your mind.

5. Increasing disparities in tastes. The usefulness of a single price index, such as the Consumer Price Index or the GDP deflator, to describe inflation depends on the validity of the assumption of a representative consumer. I don’t see that today. One family shops for groceries at Walmart, and another shops at Whole Foods. One household puts discretionary income into private school for the children, and another puts it into home entertainment.

Still, economists want to treat the economy as if it were legible.

–They tell you that we are in a productivity slump, and we need to explain it and figure out how to solve it. I think that the numbers are not reliable enough to say.

–They tell you that inflation is below target, and central banks are puzzled about how to respond. I think that we see such large changes in relative prices that the very concept of “overall inflation” loses meaning and monetary policy becomes irrelevant until the central banks get into an orgy of money-printing.

–They tell you that “the” real interest rate is low, but what happens if you take health care and education out of the inflation numbers? I mean, if as an entrepreneur you could respond to the scarcity of schools and hospitals (as indicated by rising prices) by borrowing money to launch a new one, then that low real interest rate would mean something. But you can’t do that. Meanwhile, if you’re borrowing to finance a new firm in the solar power business, where prices are going down every year, maybe that interest rate does not look so low.

Intangible factors and research methods

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A commenter writes,

How do you square this:
“…Nick Schulz and I tried to point out how much you miss when you ignore the intangibles in economics.”

with this:

“If you define self-interest broadly enough, then the statement “people pursue their self-interest” becomes irrefutable. And if you cannot refute it, then it is just an empty tautology.”

In other words, I am claiming that intangible factors matter (I think primarily of institutions, social norms, and innovations). But when someone wants to include intangible factors in self-interest (think of ideology or a desire to help others) then I think it degrades the notion of self-interest into an empty tautology.

Someone who broadens the definition of self-interest to include intangible interests is making a concession to reality. But in order to make useful statements about the world, you have to get specific about how intangible interests enter. For example, you could, as commenter Handle sagely suggests, talk about the desire for raising status within one’s reference group as a motivating factor, and this could help to make useful predictions about behavior.

But the statement that “people act in their self-interest,” without being more specific, does not help make any predictions. And when I see the words “self-interest,” I think that the logical way to make it meaningful is to associate it with economic gain.

Thoughts on Sociology

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1. What we call social science ought to be called the study of human conflict and cooperation.

2. Sociology ought to be the study of human conflict and cooperation in the larger society, in the realm of informal authority, its sources and uses. Social norms and hierarchies are important components of informal authority.

3. When we study human conflict and cooperation in close personal relationships, we are mostly in the realm of psychology.

4. When we study human conflict and cooperation in the larger society in the realm of specialization and trade, we are mostly in the realm of economics.

5. When we study human conflict and cooperation in the larger society in the realm of formal authority, we are mostly in the realm of political science.

I use the phrase “mostly in the realm” because I doubt that any of the four disciplines can be totally isolated from the others.

6. When we study human conflict and cooperation in a specific time and place, we are mostly in the realm of anthropology. Anthropologists might study the psychology, economics, politics, and sociology of the unit under observation.

7. A business manager needs to handle conflict and cooperation within a firm, which also requires all four basic disciplines. There are aspects of political science (think of corporate governance). Business strategy deals with specialization and trade. Understanding “office politics” requires knowledge of psychology. And managers have to understand the informal sources and uses of authority within the firm, also known as “corporate culture.”

8. Informal authority is complex because there are many intangible factors involved. Sociologists do a disservice when they try to reduce their discipline to the study of tangible factors, such as race, gender, or Marx’s dichotomy of labor and capital.

I also believe that economists and political scientists are guilty of shying away from intangible factors. In Invisible Wealth (first appeared as From Poverty to Prosperity, Nick Schulz and I tried to point out how much you miss when you ignore the intangibles in economics.

9. One can do sociological analysis of particular groups within society. One can do sociological analyis of economists. Or of sociologists. The book I am reading about Pierre Bourdieu has him doing exactly the latter.

10. One of Bourdieu’s themes is that people who are discontented with their social status are prone to make trouble.

11. Without using the term “status-income disconnect,” he suggests that a source of discontent for those in academia is that their economic capital does not match their cultural capital.

What I’m Reading

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Culture and Power: The Sociology of Pierre Bourdieu, by David Swartz. An excerpt:

Bourdieu in fact speaks of three different types of field strategies: conservation, succession, and subversion. Conservation strategies tend to be pursued by those who hold dominant positions and enjoy seniority in the field. Strategies of succession are attempts to gain access to dominant positions in a field and are generally pursued by new entrants. Finally, strategies of subversion are pursued by those who expect to gain little from the dominant groups. These strategies take the form of a more or less radical rupture with the dominant group by challenging its legitimacy to define the standards of the field.

For Austrian economists, Pete Boettke likes a succession strategy. I prefer a subversion strategy.

Yes, but can it help you predict?

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From acommenter:

I’d ask why self-interest needs to be manifested in overtly economic terms.

If you define self-interest broadly enough, then the statement “people pursue their self-interest” becomes irrefutable. And if you cannot refute it, then it is just an empty tautology.

I would much prefer to work with refutable claims than with empty tautologies.

So I continue to treat public choice theory as saying that people pursue economic gain in the political process. With that definition, public choice theory is often wrong, but at least it can be usefully right.

Clark Medal trends

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Concerning the John Bates Clark award, Beatrice Cherrier and Andrej Svorenčík write,

From the citations of the medalists from the late 2000s onward, one get the impression that all economics has indeed become applied

Pointer from Tyler Cowen.

I agree with the authors’ view of the trends. In my essay, I pointed out that in the 1970s, what I refer to as the “peak math” era, the Clark medalists had published heavily in the most mathematical journals of the time, Econometrica and the Journal of Economic Theory. The more recent winners appear very little in those journals.