You can find them here. I recommend Kirzner’s talk. Also the Q&A, not so much for the softball questions but for the all-star cast. There is also Q&A at the end of the “Vernon Smith’s presentation” video, including my question to Eric Maskin, which I asked at about 40:45.
Category Archives: Economic education and methods
Russ Roberts and Nick Gillespie
Their conversation centers around Roberts’ new book on Adam Smith. My favorite segment is the last 15 minutes, but all of it is interesting to listen to.
Economists Heart Uber
The IGM forum asks its elite economists to react to the assertion that,
Letting car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements, but without restrictions on prices or routes, raises consumer welfare.
Of those who respond, 2/3 “strongly agree” and the remainder “agree.”
Let me suggest the next poll question: “Letting unlicensed medical providers compete with doctors and other licensed practitioners on equal footing regarding genuine safety requirements, but without restrictions on prices or services, raises consumer welfare.”
Or, more puckishly: “Letting unaccredited professors compete with Ph.D’s on equal footing using tests devised and graded by the same third party, but without restrictions on prices or services, raises consumer welfare.”
I wanted to title this post “economists heart markets,” but I fear that is not always true.
Again, I schedule posts in advance, so others have already mentioned this poll, but more favorably.
Notes from a Hayek Tribute
I refer to yesterday’s event, held at Mercatus.
1. Google has made me stupid. I know where Mercatus is, but the address on the invitation was different, and I went with the address, and with Google Maps, and got off at the wrong subway stop (along with at least two other would-be attendees).
2. Everyone who was everyone was there.
3. The main speaker was Israel Kirzner. He spoke really well. I took his main point to be that the causality ran fromm Hayek’s 1974 Nobel Prize to the interest in his insights rather than the other way around. Those insights include the knowledge problem, the implications of subjectivism, and the importance of the open-ended world in which we live, as opposed to the closed world of general equilibrium theory. Instead, the Nobel folks focused on Hayek’s macro work. Hayek’s speech at the Nobel might be considered an attempt to shift the focus to his other insights. Whether it was that speech (which Pete Boettke later pointed out was not accepted for publication by Economica and thus was not published until almost two decades later) or something else, a rebirth of interest in Austrian economics can be traced to that period.
4. Among the all-stars in the audience asking questions was Russ Roberts, who admitted that although he had moved far in the Austrian direction he still liked old-fashioned supply-and-demand. Kirzner was sympathetic, saying that it is much easier to teach new students supply-and-demand than to teach the insights of Hayek. (Note that Russ has made a remarkably good attempt to teach Hayek in his didactic novel, The Price of Everything.)
5. The afternoon was to feature three Nobel Laureates, but one of them, Edmund Phelps, was sick, and so Boettke read Phelps’ remarks. The other Nobelists were Vernon Smith and Eric Maskin, and I disagreed with both of them.
6. Smith said that the financial crisis was caused by principal-agent problems in mortgage securitization. He suggested that loan originators should not be paid up front, but they should instead be paid over time, as the mortgage is paid off. That is an approach for reducing principal-agent problems, but in my view there are better approaches–the stream of payments over time is a complex financial asset that few originators would be equipped to manage.
One alternative, of course, is to go back to the old originate-to-hold model, in which the loan originator is an employee of the bank, and the bank is in a position to reward or punish originators based on how well they adhere to standards. But more important, I do not believe that principal-agent problems were at the heart of the crisis. Originators were contractually obligated to deliver loans that met the guidelines of investors. Loans that did not meet those guidelines can be considered fraud, and there was plenty of that going on. But the real problem is that investors were, for the most part, getting the loans that they were asking for. The geniuses on Wall Street, and at Freddie and Fannie, believed that they could make money on loans with no down payment, shaky credit history, and so on, because–so the thinking went–if they bought enough of them, the risk would be diversified, particularly since everyone knew that house prices only go down in some places, never in lots of places at once.
Anyway, I’ve made the point about cognitive failure, as opposed to moral failure, at length.
7. Maskin said that mathematical proofs in mechanism design demonstrated formally Hayek’s point that markets make efficient use of information. During the Q&A, I asked if it was possible to reconcile the methodology of those proofs, which involve closed-end models, with the larger point stressed by Kirzner that the world is open-ended, including new technology that has not yet been discovered. Maskin answered, in effect, that all you have to do is extend the Arrow-Debreu state-space to include all possible technological discoveries, and the proofs carry over. I was not satisfied with that answer. Some possibilities:
a) He is correct, and I am too prejudiced against formal modeling.
b) I asked the question poorly, and had I been more articulate he would have given a different answer.
c) He just does not “get” the point about open-ended economics and that it eludes formal treatment.
Among those I spoke with afterward–and obviously there would be selection bias at work–the unanimous opinion was (c). This raises the intriguing possibility that mainstream economics and Austrian thinking are still a long way from reconciliation. In effect, Maskin is no further along the road to understanding Hayek than is a freshman to whom Kirzner would only teach supply-and-demand.
Perhaps Hayekian economics is a bundle of insights that are deceptively simple. Some people think that they get them, but, like Maskin, they are still stuck in the mainstream paradigm.
Russ and I are examples of mainstream economists who drifted toward a Hayekian view. I cannot think of economists who have drifted in the other direction. To me, this suggests that there is something difficult to grasp about Hayekian economics, or the Austrian viewpoint more generally, and that training in mainstream economics does not necessarily ease that difficulty.
That is my main take-away from the event.
Economics Nobel Suggestions
From Science Watch. Thanks to Greg Mankiw for the pointer. Their ideas:
1. Aghion and Howitt for Schumpeterian growth theory. I appreciated Howitt’s comment on one of my PSST papers, so I would be happy if this came true. I suspect it won’t.
2. Baumol and Kirzner on entrepreneurialism. I have been predicting Baumol for a long time. He has a phenomenon named for him (Baumol’s cost disease), which is a good sign. In the past, I have remarked on Bill James’ distinction between top peak performers (Koufax) vs. consistent high performance (Don Sutton). I have observed that economics Nobels tend to reward peak performances rather than more consistent high performance. Baumol, notwithstanding cost disease, may not have the one big idea. I recently took another look at “contestable markets,” which at the time looked like it could be his big idea, and I can see why it failed to take off. It is hard for me to think of markets in which potential entry is an important factor. Baumol’s later work, on what he called “the free market innovation machine,” seems more on target, but less novel.
As for Kirzner, at the risk of committing Austro-blasphemy, I have to say that I don’t get what makes him such a big deal. His idea of entrepreneurs always struck me as somewhat enervated–the entrepreneur as arbitrageur rather than as a creative force.
3. Mark Granovetter. An interesting suggestion. I hope people are replicating his “weak ties” research and finding that it holds up.
If this were a horserace, I would place my bet on the field, i.e., on someone other than those listed above.
On Science and Policy
Because people don’t understand that science is built on experimentation, they don’t understand that studies in fields like psychology almost never prove anything, since only replicated experiment proves something and, humans being a very diverse lot, it is very hard to replicate any psychological experiment. This is how you get articles with headlines saying “Study Proves X” one day and “Study Proves the Opposite of X” the next day, each illustrated with stock photography of someone in a lab coat. That gets a lot of people to think that “science” isn’t all that it’s cracked up to be, since so many studies seem to contradict each other.
This is how you get people asserting that “science” commands this or that public policy decision, even though with very few exceptions, almost none of the policy options we as a polity have have been tested through experiment (or can be).
I agree with this. I think it applies to macroeconomics and also to climate “science.”
Note that the origins of the progressive movement were based on the exact opposite view, which is that public policy could and should be based on something called social science.
Read the whole thing, so that you can reach these sentences:
the reason it took us so long to invent it and the reason we still haven’t quite understood what it is 500 years later is it is very hard to be scientific. Not because science is “expensive” but because it requires a fundamental epistemic humility, and humility is the hardest thing to wring out of the bombastic animals we are.
Mark Thoma on the State of Macro
The problem with macroeconomics is not that it has become overly mathematical – it is not the tools and techniques we use to answer questions. The problem is the sociology within the economics profession that prevents some questions from being asked.
But I see these as the same problem. The sociology of the profession essentially forced anyone who wanted to have an academic career to engage in mindless mathematical self-abuse. If the sociology of the profession had been better, very different sorts of articles would have been published in journals, very different sorts of economists would have earned tenure at major universities, and very different sorts of techniques would have prevailed. And don’t just blame Lucas. Fischer is every bit as much of a villain.
What We Know About Health Care Waste Isn’t True?
geographic variation in health spending does not provide a useful way to examine the inefficiencies of our health system. States where Medicare spending is high are very different in multiple dimensions from states where Medicare spending is low, and thus it is difficult to isolate the effects of differences in health spending intensity from the effects of the differences in the underlying state characteristics. I show, for example, that previous findings about the relationships between health spending, the share of physicians who are general practitioners, and quality, are likely the result of omitted factors rather than the result of causal relationships
Russ Roberts often asks whether any empirical work in economics changes one’s mind. I would say that the Dartmouth studies changed my mind about health care spending in the U.S., convincing me that much of it is “wasted” (I prefer “spent on procedures with high costs and low benefits”). However, there have always been those who doubted the validity of those studies, and this appears to be a particularly strong critique.
On the other hand, see Austin Frakt’s overview of the literature.
Why Published Results Can be Unreliable
Mark Peplow reports on research by Neil Malhotra, who tracked research projects to compare those that were published with those that were not.
Of all the null studies, just 20% had appeared in a journal, and 65% had not even been written up. By contrast, roughly 60% of studies with strong results had been published. Many of the researchers contacted by Malhotra’s team said that they had not written up their null results because they thought that journals would not publish them, or that the findings were neither interesting nor important enough to warrant any further effort.
Pointer from Mark Thoma.
This is not shocking news. Can anyone find Malhotra’s paper?
An Issue on Which to Demur
It’s actually the poor and lower middle classes whose wealth — such as it is –lies fallow in no-interest bank accounts (or wealth-eroding cash if they have no bank account at all). It’s not the rich, but middle-class retirees that try to eke out a living on low-yield interest rates.
He is arguing against Paul Krugman, who claimed that low interest rates hurt the rich, who otherwise enjoy clipping bond coupons.
I think it would be wise for economists to refrain from making claims about broad classes of people gaining or losing from low interest rates. Interest rates are an endogenous variable. At best, you can talk about who benefits from whatever exogenous event created low interest rates. Even then, general equilibrium analysis of that sort is rather difficult.
Maybe you want to talk about who benefits from the Fed’s policies. That is a proper question. In my view, the only clear beneficiaries are shareholders and managers of large banks.