Computers win the race

Tyler Cowen writes,

the human now adds absolutely nothing to man-machine chess-playing teams.

I am pretty sure I predicted this. I certainly would have if anyone asked. Whenever you get to the point where a computer is close to human capability at something, you should bet on the computer becoming much better at it within a few years. Humans only get better slowly, and computers get better rapidly.

Imagine that you were running at pretty close to top speed, and there is some other creature that is currently chasing you. If that creature is gaining on you rapidly, then you aren’t going to stay ahead of that creature, are you? And after the creature catches up with you, if it keeps going you are not going to be able to keep up, are you?

By the way, that is why I take a bullish view of self-driving cars. Maybe we will make the physical and regulatory environment for self-driving cars as unfriendly as possible. Otherwise, I think they will take over. People will come to see driving as a waste of time. They will come to see having a car that is idle most of the day as a wasteful expense.

Posted in business economics, Tyler Cowen is my Favorite Blogger | 5 Comments

Heterodox economics: my latest

1. David Wright invited me to a podcast, which is here. I got off to a slow start, so I recommend skipping ahead to about minute 6, maybe even to minute 8, where Wright brings up the book Capitalism without Capital.

2. After being stimulated by Wright’s questions, I wrote an essay on the social construction of value. Titled The Value of Nothing, it begins

If he were alive today, Oscar Wilde would say that a cynic is a man who knows the price of Bitcoin. You cannot drink a Bitcoin. You cannot plant crops on Bitcoin. Its intrinsic value is nothing.

Read the whole thing. I think of it as a deep essay about the fact that value is not intrinsic.

Posted in business economics, Economic education and methods, links to my essays | 1 Comment

Russ Roberts on middle-class income stagnation

Using an animated format, he starts to delve into the statistics. It is aimed at people without formal education in economics, but it struck me that some of the points that it makes might be best appreciated by a trained economist. Kind of like a children’s book with jokes mixed in that only adults can get. I imagine that if this had been available when I was teaching high school economics, then I would have used it.

Recall that Russ conceived and scripted the famous Keynes-Hayek rap videos.

Posted in income distribution-wealth-poverty, Introductory Economics | 5 Comments

Russ Roberts on social control of sexual conduct

Noting that Matt Lauer could be fired but Al Franken and John Conyers could not, he writes,

There’s an irony here. The government, which imposes regulations and other restrictions in a top-down way across the whole economy, has a strange degree of autonomy. The constraints on government tend to come from the bottom up, with limited effectiveness. The control is spread out over time and the process of competition among political parties is more like a cartel than a competitive market. The constraints on the private sector actors are top-down. The board of directors fires the CEO at will. There is much more command-and-control at NBC than there is in the oversight of Congress.

Read the whole essay. Russ does not offer any definitive answers on this topic du jour. I try very hard to resist du jour topics, but I may end up writing on this one.

Posted in culture, Libertarian Thought | 16 Comments

Wage differentials vs. productivity differentials, continued

Tyler Cowen asks,

Aren’t the waiters more productive *because they are serving wealthier customers*?

Gosh, that throws an even bigger monkey wrench into the whole deal.

Let me switch examples. Suppose that Jeff Bezos can either rely on Uber or else keep a personal driver on call. Suppose that the personal driver gets a higher wage than an Uber driver, just because Bezos can afford to pay a higher wage. Then if Bezos switches from Uber to the personal driver, measured GDP goes up, but our intuition is that productivity has not changed.

From a neoclassical viewpoint, my example is a swindle. In a neoclassical model, a wage is determined in a competitive equilibrium, not by Bezos being able to “afford to pay a higher wage.” What should happen in my example is that drivers compete with one another to become Bezos’ personal driver, until the wage gets driven down to the Uber wage.

Back to Tyler’s example. Would waiters earn higher wages in zip codes with wealthy customers than in zip codes with middle-income customers? From a neoclassical perspective, the answer should be no. If wages are higher in wealthy zip codes, then waiters should compete to work in those zip codes until the differential disappears.

My guess is that this is not how it works. Instead, my guess is that waiters compete on quality, and the wealthier customers get the higher-quality waiters. In some sense, the wage differential does reflect a productivity differential. But it is a productivity differential that is inherent to the individual. There is no opportunity for zip-code arbitrage.

That is, if you moved a waiter from the moderate-income zip code to the wealthy zip code, you would not be raising productivity overall. You would be bringing a low-quality waiter into a zip code where the expectation is for high-quality waiters.

I worry that Tyler may have a different answer in mind. And I worry whenever I engage in casual neoclassicism.

Earlier this week, I had dinner in Newport News, Virginia. Our waitress took the orders for are party of 9, including special instructions, without writing anything down. She was one of the highest-quality waitresses I have ever observed. But she was not working in a wealthy zip code. If she moved to New York or Los Angeles, my guess is that she could get paid a lot more. But taking into account the cost of living, she is likely just as well off in Newport News.

Posted in Economic education and methods, labor market, Tyler Cowen is my Favorite Blogger | 13 Comments

Books of the year, 2017

Tyler has given you his list. Mine, in order of quality:

Kevin Laland, Darwin’s Unfinished Symphony.

Richard Bookstaber, The End of Theory.

Jonathan Haskel and Stian Westlake, Capitalism without Capital.

Aaron Ross Powell and Grant Babcock (eds.), Arguments for Liberty.

Tim O’Reilly, What’s the Future?

Note that Tyler and I both came out with books this year. His was The Complacent Class and mine was a new edition of The Three Languages of Politics. I do not think our lists overlap at all, which is unusual. UPDATE: a commenter points out that Tyler and I both recommend Capitalism without Capital.

Posted in books and book reviews, Tyler Cowen is my Favorite Blogger | 3 Comments

Are locational wage differentials also productivity differentials?

I think that an argument about this arose in the comments on this post. Let me provide a framework for discussion.

Suppose that we observe that zip code X has higher average wages for waiters than zip code Y. Can we infer that waiters in X are more productive than waiters in Y? Can we infer that removing barriers to mobility so that waiters can move more easily from Y to X will raise real GDP?

I think that we need to know more about why waiters are paid more in X.

a. It could be that, working with a given level of capital, the same waiter can serve more customers per hour in X than in Y. Maybe restaurants in zip code X are better managed. Or maybe restaurants in zip code Y do not get enough customers.

b. It could be that the cost of living is higher in X than in Y. Waiters serve the same number of customers per hour in each, but if you raised wages in Y all the waiters would move there to get a higher real income. There has to be a wage differential to compensate for the cost of living differential.

If (a) is true, then removing mobility barriers would raise real GDP in the restaurant industry. But if (b) is true, then removing mobility barriers would not raise real GDP in the restaurant industry.

Suppose that the mobility barrier is a housing market restriction in X. Then getting rid of the housing restriction might raise social welfare by making the housing market function more efficiently. But there is no additional benefit from waiter productivity. What would happen if you got rid of the housing market restriction is that the wages of restaurant workers in X and Y would equalize. As waiters move from Y to X, the wage differential would go away. The new wage would be somewhere between the old wage in X and the old wage in Y.

Note that in case (b), restaurants might use more capital in X than in Y, because the cost of labor is higher (because the cost of living is higher). That would enable waiters in X to serve more customers per hour than in Y, but this is not a pure productivity differential. If you remove the mobility restriction, then eventually the capital intensity of restaurants in X and Y will be equalized.

What if the main difference between zip code X and zip code Y is that quality of life is better in zip code X? In that case, other things equal, cash wages ought to be lower in zip code X. Of course, other things are unlikely to be equal. Housing supply is probably not perfectly elastic, so some of the quality-of-life differential should be eaten up by housing costs. And of course, quality of life means different things to people with different tastes, and that accounts for some (much?) of location choice.

If I might try to coin a phrase of opprobrium, I believe that economists who equate locational wage differentials to productivity differentials are guilty of casual neoclassicism. They should be required to read James Buchanan’s Cost and Choice and take an exam afterward.

Posted in books and book reviews, disaggregating the economy, Economic education and methods, labor market | 22 Comments

My own review of Eliezer Yudkowsky

My review of Inadequate Equilibria.

The most significant episodes in my career have been when I stood for heterodox beliefs. For that reason, Yudkowsky’s book raised issues that matter to me, even though I did not always find Inadequate Equilibria to be clear or convincing.

This essay proceeds as follows. I will articulate Yudkowsky’s two major themes in two ways, first using jargon from calculus and statistics, then using plain English. Next, I will tell some stories from my own life that relate to these themes.

Because this is an important topic for me, I recommend reading my entire essay.

Posted in books and book reviews, links to my essays | 3 Comments

The importance of appreciating complexity

Here is another new essay of mine, called The Simplicity Assumption.

The opposite of the Simplicity Assumption would be a complexity diagram. Imagine a diagram with a social problem, such as the obesity epidemic or the financial crisis of 2008, at the center. Then list all of the plausible factors that could have contributed to this problem, and put those on the diagram, with arrows pointing to the central problem. Next, draw arrows that reflect likely feedback loops among these various causal factors. Finally, draw arrows that reflect likely feedback loops from the central problem to some of these causal factors. For a complex problem, this diagram will look rather messy, like a badly tangled ball of kite string; you cannot be sure that tugging on one part of the knotted mess will make things better or worse.

Economists do not work with complexity diagrams. Such diagrams are not conducive to creating tractable models. Not having a tractable model is not conducive to publishing a paper. Not publishing papers is not conducive to having a successful career.

Read the whole thing.

Posted in Economic education and methods | 5 Comments

Too much discipline on the left, too little on the right

Check out my latest essay on Medium, Restoring Political Health, Left and Right.

People with a temperament that is high on openness and low on conscientiousness are inclined toward the left and tend to be curious, tolerant, and willing to explore the world with a commitment to intellectual honesty. People with a temperament that is low on openness and high on conscientiousness are inclined toward the right and tend to emphasize standards of decency, restraint, and good behavior. As shorthand, I will refer to these as the left and the right, respectively. We are plagued today by an authoritarian left and a badly-behaved right. Restoring health will require work on both sides.

The opening of the essay owes something to Jordan Peterson’s observations about psychology and politics (e.g., here or in his conversation with Jonathan Haidt), as well as to his use of metaphor. But the substance of the essay represents issues that have long concerned me. A dozen years ago, I had the insights that were the seeds of The Three Languages of Politics in an essay that I called Folk Beliefs Have Consequences.

Posted in links to my essays, Politics | 24 Comments