Category Archives: Economic education and methods

Who Wrote These paragraphs?

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What other tribe will tell the Fed how to set interest rates, or Congress when to spend money? Mainstream macro has its discontents, but the more time you spend among the people pushing the alternatives, the more you realize how much lesser of an evil the mainstream academics represent.

Check your answer.

We have no business throwing applied-math majors into an economics Ph.D. program. Both a liberal arts mora-philosophy B.A. or equivalent and two years out in the real world working at a job of some sort should be required.

We have no business offering a narrow economics B.A. at all. At the undergraduate social-science level, the right way of organizing a major curriculum is to offer some flavor of history and moral philosophy: enough history that students are not ignorant, enough sociology and anthropology that students are not morons, and enough politics and philosophy that students are not fools. (And, I would say, a double dose of economics to ensure that majors understand what is key about our civilization and do not get the incidence of everything wrong.)

…A first-rate undergraduate economic major will also spend due time on government failure and bureaucratic failure, and thus reach the very economic conclusion that there are substantial trade-offs, and we must pick our poison among inadequate and imperfect alternatives, even in institution design.

Check your answer.

Pointers from Mark Thoma. Some thoughts on why there is such a focus on math.

1. Some economists really believe that the answers can be found inside equations.

2. Some economists (I think of Robert Hall) think that mathematical ability provides a reliable signal of overall intelligence, while other indicators are all more noisy.

3. It is a stable, self-perpetuating equilibrium. Once the math guys took over, they just keep giving the best jobs to other math guys.

4. Important questions in economics tend to have messy, ambiguous answers. Therefore, economists who do a bad job at answering important economic questions, or who do not even bother asking important economic questions, can do quite well for themselves.

5. Graduate students think that a class where the professor explains equations provides tangible training, while a class where a professor poses philosophical issues does not.

Disability and Employment

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Sarah Portlock of the WSJ reports,

In 2013, just over one in six — or 17.6% — of people who were disabled had a job, down slightly from the prior year. The report tracks workforce characteristics of people with a disability, which includes hearing, sight, cognition, mobility or other impairments.

…The Labor Department report comes as new regulations require federal contractors to ask their employees if they have a disability in an effort to reduce joblessness in the community. Companies must employ a minimum of 7% disabled workers, or prove they are taking steps to hire more, or else they could face penalties or lose their government contracts.

In the first paragraph, she links to a report from the Department of Labor.

Government policies shift the supply curve of disabled workers to the left, by offering benefits for not working. The second paragraph describes a policy to shift the demand curve to the right. What would standard economic analysis predict?

Herbert Gintis on the Economics of Public Policy

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It his Amazon review of Complexity and the Art of Public Policy: Solving Society’s Problems from the Bottom Up.

First, neoclassically inspired public economics provides a very powerful and largely correct framework for analyzing when markets work well and when they fail. Second, markets are often fragile and easily destabilized unless properly regulated. Third, markets and regulating institutes are not alternatives but rather complements. Fourth, neoclassical economics cannot model state failure, and therefore overstates the latitude for government intervention in stabilizing the economy and correcting market failures. On reason for this failure is that government is subject to political forces that lead it to favor special interests rather than the general good. What Colander and Kupers tell us is that there is a second reason: the market economy is a complex, dynamic, and adaptive system more like a natural ecology than a man-made machine.

The complex economy cannot be controlled, as the planners would like, but it can be influenced by very carefully formulated and judiciously applied “rules of the game” that move market dynamics in preferred directions. In this respect, traditional planners are like the Queen of Hearts in Through the Looking Glass who cannot stand the fact that she cannot order the flowers in her garden to heed her bidding, and employs a bevy of “gardeners” to paint the flowers to her specifications. The situation is worse for an economy because there is no regulatory counterpart to painting the flowers. “The [effective] government does not impose norms, or even force individuals to self-regulate. Instead it attempts to encourage the development of an econstructure that encourages self-reliance and concern about others.” (p. 9).

Gintis’ Amazon review essays, such as this one, are often outstanding. For the pointer to the book, I thank Tyler Cowen.

Who Says These Are Public Goods?

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By paying for public goods like education and health care, governments can improve efficiency as well as welfare.

That is from John Micklethwait and Adrian Wooldridge, writing in The Fourth Revolution. I have just started to read it, based on Tyler Cowen’s recommendation.

If one of my high school students wrote the quoted sentence, it would receive a bad grade. The standard economic definition of public goods is that they are neither excludable nor rivalrous. That means that once the good is produced, it is hard to stop anyone from enjoying it, and one person’s enjoyment does not interfere with someone else’s enjoyment. National defense and pubic public safety are classic examples. Sanitary conditions in a city would qualify.

However, education and health care do not qualify as public goods under the standard definition. If it chooses to, a school or hospital can exclude non-paying customers from obtaining its services. And your use of a teacher’s or a doctor’s time can reduce my ability to use that person’s time.

Another characteristic of public goods is that the social benefits exceed the private benefits. One can make a case that vaccinations have that property. In theory, driver education would have that property also. However, for the most part, the benefit I receive from your education and health care is extremely low, particularly relative to the benefit that you receive from those goods.

In my opinion, casually making the case that government should pay for health care and education by asserting that these are public goods sounds to me like what Tyler would call “mood affiliation,” not sound reasoning. I hope that his endorsement of the book does not turn out to be mood affiliation.

Who Says Markets Work Perfectly?

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David Henderson writes,

I know of no Econ 101 course or its equivalent that talks just about “a world where free markets work perfectly and government intervention is always bad.” Zero, none, nada.

I can confirm that the AP economics curriculum, which is based on freshman economics, does not contain either the phrase or the implication that markets work perfectly and government intervention is always bad. On the contrary, it includes a major section on market failure and on government’s (presumably perfectly executed) role in correcting it.

When I see the phrase “markets work perfectly,” I know that I am going to see a straw-man argument against conservative economists. I know of no instance in which someone who is berated for believing that markets work perfectly has actually claimed to hold that belief. Zero, none, nada.

If you want to pass an ideological Turing test, then drop the phrase “markets work perfectly” from your vocabulary. What conservative economists do believe is that government has a propensity to fail that often exceeds the propensity of markets to fail.

Robert Murphy, Capital, and the Cambridge Controversy

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He writes,

If a firm hires a specific capital good for a unit of time, the payment is the rental price of the capital good. For example, suppose that a warehouse pays $100,000 per year to an independent company that maintains fleets of forklifts. These annual payments are clearly due to the “marginal product” of the forklifts; the warehouse can sell more of its own services to its customers when it has use of the forklifts.

However, these technological facts tell us nothing about the rate of interest enjoyed by the owners of the forklifts. In order to determine that, we would have to know the market price of the forklifts. For example, if the forklifts that the independent company rents out to the warehouse could be sold on the open market for $1 million, then their owners would enjoy a 10-percent return each year on their invested capital. But if the forklifts could be sold for $2 million, then the $100,000 payments—due to the “marginal product” of the forklifts—would correspond to only a 5-percent interest rate. As this simple example illustrates, knowledge of the marginal product of capital, per se, does not allow us to pin down the rate of interest.

I am not sure what to take as exogenous and what to take as endogenous. My inclination would be to treat the interest rate and the marginal product of forklifts as exogenous and the market price of forklifts as endogenous. That is because I was brought up by the folks who lost the Cambridge controversy but went ahead writing down neoclassical production functions, anyway. While Murphy comes from yet another tradition, I doubt that he has the same agenda as, say, Jamie Galbraith.

Let’s back up, though, and try to think of a general equilibrium model. (Nick Rowe does something similar, with diagrams.) Continue reading →

Me on Greg Clark’s Latest

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I write,

his findings argue against the need to create strong incentives to succeed. If some people are genetically oriented toward success, then they do not need lower tax rates to spur them on. Such people would be expected to succeed regardless. The ideal society implicit in Clark’s view is one in which the role of government is to ameliorate, rather than attempt to fix, the unequal distribution of incomes.

The book I am reviewing is The Son also Rises, in which Clark argues that social status is highly heritable everywhere in spite of many differences in institutional rules. I spend a lot of the review talking about the statistical basis for Clark’s work.

The World is Complicated

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Tyler Cowen quotes Aaron Hedlund:

The flaw with both of these models, of course, is that they are representative household models where there is no inequality.

Fair point, but I do not see this as a fatal flaw in trying to adapt the Solow growth model to a theory of inequality. Suppose you have two types of representative households–workers and capitalists. The capitalists do all the saving.

The real trick, which is just as tricky in a model with one type of representative household, is to get the capital/worker ratio to rise without the return on capital falling. At most, that can happen for a while–not indefinitely.

Rothbard and Krugman

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Jason Brennan trolls,

Yes, libertarians, Paul Krugman is a better economist than Murray Rothbard.

My comments.

1. I agree with Brennan that Krugman’s scholarly work is more important than Rothbard’s.

2. On matters of economic analysis, I have serious disagreements with both. Krugman on the liquidity trap. Rothbard on banking.

3. I think that a point of similarity is that both Rothbard and Krugman attract devoted fanatical followers who are unable to appraise their hero objectively and instead are sentimentally loyal. I am not sure, but I think that may be what Tyler Cowen means when he uses the phrase “mood affiliation.”

4. I think that at his worst (and he is often at his worst), Krugman reaches intellectual lows in terms of straw-man arguments and asymmetric insight (the claim that you understand your adversary’s motives better than the adversary understands himself) that I suspect are lower than Rothbard’s intellectual lows. Perhaps I am being charitable to Rothbard, because I have almost no first-hand acquaintance with his work.

Krugman explains his approach here.

Politics and policy are overwhelmingly dominated by what I call the Very Serious People — people who insist that deficits are our most pressing problem, that high unemployment must be a matter of inadequate skills, that low marginal tax rates on the rich are essential for growth. Behind the conventional wisdom of the VSPs lies a vast mass of power and prejudice.

Pointer from Tyler Cowen. Read the whole thing. I see this as pretty much standard Krugman. He takes the least charitable view of those who disagree with him, and he makes that the core of his argument. I think that this approach mostly inflicts damage, not so much on his enemies as on his friends. I think it brings down both their cognitive ability and their emotional intelligence.

Ryan Decker on Piketty

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He concludes,

ultimately this is a chart book, with plenty of economic data but very little economics.

Pointer from Tyler Cowen. And lest you think that the quoted sentence is a compliment, earlier in the post Decker writes,

By referencing only charts (if even that) for many of his claims, he is feeding the sloppy and destructive “this one chart proves…!” fad that has spread in the blogosphere; a chart is never sufficient to make causal claims or demonstrate optimal policy. In this sense, Piketty does his readers a disservice. He should have asked them to think harder instead of just gazing at graphs.

Many economists, including Jamie Galbraith, Robert Solow, Brad DeLong, Matt Rognlie, and myself, automatically credit Piketty with having a neoclassical production function in the background, with some strong and and unconventional assumptions built in. Decker questions whether Piketty is using a model at all.

After reading Decker’s post, I searched Piketty’s book using Google booksearch for the phrase “production function.” It appears only 9 times, without much in the way of accompanying equations. So maybe Decker is right, although it is still possible that Piketty has some math in his back pocket that he can pull out for us.

I am a critic of the use of math in economics, and that includes a lot of macroeconomics as well as the production function. But at a deeper level, what I am against is making sweeping statements about phenomena that are too complex to be amenable to sweeping statements. Making sweeping statements that are backed up by mathematical equations is bad. Making sweeping statements that are not backed up by math is worse.