Joseph Heath on the Roots of Conservatism

He writes,

There is of course a much-observed tension between the cultural-evolutionary and the free-market versions of conservatism, particularly since the untrammelled free market is the most effective device for destroying traditional institutions that has ever been devised by man. Most of what cultural conservatives and religious fundamentalists hate about the modern world – the rootlessness, hedonism, crass commercialism, loose sexual morality, anti-authoritarianism, and general lack of discipline – is either a direct product of the market, or is a tendency that is dramatically amplified by it. What brings the cultural and the market conservative together is the conviction that these unplanned processes are better than the alternative, which is “social engineering” in the rationalist style.

Read the whole thing. I arrived at it starting from Alex Tabarrok’s link.

Thinking about the quoted paragraph in terms of the three-axes model, I would say that there is a tension about markets in the civilization vs. barbarism axis. A conservative would view productive work as civilized, and markets encourage productive work. However, a conservative would worry that consumer tastes are barbaric, and markets work to satisfy consumer tastes.

Another way in which the market process is civilized from a conservative perspective is that businesses fail. Failure builds character because it reinforces humility. It keeps us from developing too high an opinion of ourselves as individuals or of humanity as a whole. (David Brooks’ latest book, The Road to Character, which I have started reading, seems to stress humility.) In contrast, progressives seem to see government as a tool to eliminate all forms of failure.

Yuval Levin on the Roots of Conservatism

He writes,

Conservatives tend to see the human person as an incorrigible mass of contradictions: a fallen and imperfect being created in a divine image, a creature possessed of fundamental dignity and inalienable rights but prone to excess and to sin and ever in need of self-restraint and moral formation. This elevated yet gloomy conception of man, deeply informed by the peculiar, paradoxical wisdom of the West’s great religions, sets conservatives apart from libertarians and progressives alike, and sits at the core of most conservative thinking about society and politics.

Don’t worry, he does get to civilization vs. barbarism.

A failure to initiate the next generation of children into the ways of civilization would not only delay or derail innovation but also put into question the very continuity of that civilization. This is why conservatives rarely imagine that our society is on the verge of utopia and frequently (perhaps too frequently) imagine it is on the verge of a breakdown. And it is a crucial reason why conservatives care so deeply about culture.

Another excerpt:

An enormous portion of the conservative worldview becomes clearer when we see the importance this view places on cultural continuity as a function of generational transmission—on the inescapable responsibilities human procreation imposes on each generation. An enormous portion of the progressive worldview becomes clearer when we see the degree to which it is shaped by a desire to be liberated from these obligations—and from the implications of the basic facts and character of human procreation. Many of what we loosely call the “social issues” in our politics involve debates about whether such a liberation is possible or desirable—whether the word choice can be poured like an acid over traditional social arrangements, burning all links of obligation and duty and making responsibility merely optional.

And another:

Conservatives tend not to share in the progressive confidence in technical expertise, doubting that any group of experts could ever have enough knowledge to pull off the feats of management and administration that the Left expects government to achieve.

I have not yet excerpted the parts of the essay that I like the best.

Several of the comments on the essay, many of them critical, are also worth reading. I think that these criticisms reflect the way that many on the right feel that they were “burned” by George W. Bush, who as a candidate appeared to embody many of the intentions of what Levin calls reform conservatism.

1. On domestic policy, what the Bush Administration considered to be tactical concessions turned out to be strategic defeats. No Child Left Behind is a poster child for that. This leads to a question of whether reform conservatism is feasible in practice, or whether it is doomed to founder on progressivism’s “home field advantage” in Washington.

2. Although as a candidate Mr. Bush scorned nation-building, he and other conservatives undertook a costly nation-building exercise in Iraq. Many people do not trust reform conservatives to exercise sound judgment and humility in dealing with barbarism beyond our shores.

I think that if reform conservatives want to overcome the skepticism of others on the Right, they will have to acknowledge this baggage and address these two concerns.

Interpreting Roland Fryer

He is the latest winner of the John Bates Clark Medal. The announcement reads, in part

Roland Fryer in a series of highly-influential studies has examined the age profile and sources of the U.S. racial achievement gap as measured by standardized test scores for children from 8 months to seventeen years old. Fryer (with Steven Levitt) has shown the black-white test score gap is quite small in the first year of life, but black children fall behind quickly thereafter (“Testing for Racial Differences in Mental Ability among Young Children,” American Economic Review 2013). The racial test score gap is largely explained by racial differences in socioeconomic status at the start of schooling (“Understanding the Black-White Test Gap in the First Two Years of School,” Review of Economics and Statistics 2004), but observable family background and school variables cannot explain most of the growth of the racial test score gap after kindergarten. Fryer’s comprehensive chapter in the Handbook of Labor Economics (2011, “Racial Inequality in the 21st Century: The Declining Significance of Discrimination”) documents that racial differences in social and economic outcomes today are greatly reduced when one accounts for educational achievement gaps. He concludes that understanding the obstacles facing minority children in K12 schools is essential to addressing racial inequality. Fryer has taken up this challenge to study the efficacy of education policies to improve the academic achievement and economic outcomes of low-income and minority children.

His research has a lot of bearing on the Null Hypothesis. Some of his papers contradict the Null Hypothesis, and some do not.

It certainly is intriguing that the racial test score gap is low in the first year of life and rapidly rises early in the school years but that “observable family background and school variables cannot explain most of the growth of the racial test score gap after kindergarten.” Some possibilities:

1. The Null Hypothesis is incorrect, but the school variables that make a difference are subtler than what we now find to be “observable.” Some of Fryer’s other studies might lend some support to this, but other of his studies would not.

2. The Null Hypothesis is correct because test scores performance is dominated by non-school environmental factors.

3. The Null Hypothesis is correct because test score performance is dominated by genetic factors. Then the problem is to explain why the gap appears at age seven (say) but not at age one. The lack of any gap at age one might be due to tests not being able to discriminate ability as well at that age as at later ages. This would give rise to a measurement error problem, one which biases differences toward zero.

Incidentally, someone pointed me to the blogger Isegoria’s link to a journal article entitled Individual Differences in Executive Functions Are Almost Entirely Genetic in Origin. The article comes from 2008, and the finding of 99 percent heritability strikes me as ridiculous. My guess is that if the same person is measured for executive function by two different investigators, the correlation will not be anywhere close to 99 percent. I hereby invoke Merle Kling’s third iron law.

Throw Peer Review Under the Bus?

From The Independent

Richard Smith, who edited the British Medical Journal for more than a decade, said there was no evidence that peer review was a good method of detecting errors and claimed that “most of what is published in journals is just plain wrong or nonsense”.

…Speaking at a Royal Society event earlier this week, he said an experiment conducted during his time at the BMJ, in which eight deliberate errors were included in a short paper sent to 300 reviewers, had exposed how easily the peer review process could fail.

Pointer from Jason Collins.

What might be better? Off the top of my head, I propose that:

1. No individual study should receive more than a page or two in a journal. Just explain the findings, interpret them, and put all of the methodological details and literature review on the author’s web page. Results from all such papers should be treated as “preliminary and unconfirmed.” Accept any study for publication, including studies with findings of “no significant effect.”

2. Longer articles should be survey articles that focus on studies that have been replicated and confirmed. The survey articles should also report on studies where attempted replication failed or the method was otherwise shown to be invalid.

3. Do not assign high status to researchers just because they get studies published. Instead, assign high status to researchers who attempt to replicate or otherwise confirm other studies and also to researchers whose work is cited favorably in survey articles.

I Wish I Knew More About the Wisconsin John Doe Investigations

David French writes,

For dozens of conservatives, the years since Scott Walker’s first election as governor of Wisconsin transformed the state — known for pro-football championships, good cheese, and a population with a reputation for being unfailingly polite — into a place where conservatives have faced early-morning raids, multi-year secretive criminal investigations, slanderous and selective leaks to sympathetic media, and intrusive electronic snooping.

That is not the way that the story has been covered elsewhere. For example, here is Wisconsin Public Radio six months ago.

As others were charged and convicted in what eventually became known as “John Doe One,” Democrats increasingly tried to make sure Gov. Scott Walker was politically wounded, partly because the probe grew to include people who were helping Republican election efforts in 2010 while working for Milwaukee County.

The heat on the governor grew again over the past 12 months, after news of “John Doe 2” came out. That second investigation looked into alleged illegal campaign coordination in 2011 and 2012 between Walker, other Republicans and the conservative group Wisconsin Club for Growth.

Obviously, French’s account is meant to arouse libertarian ire. However, there is nothing in the WPR account that would suggest anything other than a legitimate, successful probe into political corruption.

Are there any progressives willing to believe French’s version? Are there any conservatives or libertarians willing to believe WPR’s version?

Ken Rogoff on the State of the Economy

He writes,

The steady decline of real interest rates is certainly a puzzle, but there are a host of factors. First, we do not actually observe the true economic real interest rate; that would require a utility-based price index that is extremely difficult to construct in a world of rapid change in both the kinds of goods we consume and the way we consume them. My guess is that the true real interest rate is higher, and perhaps this bias is larger than usual. Correspondingly, true economic inflation is probably considerably lower than even the low measured values that central banks are struggling to raise.

Read the whole thing. It is part of an interesting symposium on secular stagnation. Pointer from Mark Thoma.

Rogoff also supports the hypothesis of financial crowding out.

Whether by accident or design, banking and financial market regulation has hugely favoured low-risk borrowers (governments and cash-heavy corporates), knocking out other potential borrowers who might have competed up rates. Many of those who can borrow face higher collateral requirements. The elevated credit surface is partly due to inherent riskiness and slow growth in the post-Crisis economy, but policy has also played a large role. Many governments, particularly in Europe, have rammed down the throats of pension funds, banks, and insurance companies. Financial repression of this type not only effectively taxes middle-income savers and pensioners (who receive low rates of return on their savings) but also potential borrowers (especially middle-class consumers and small businesses), which these institutions might have financed to a greater extent if they were not required to be so overweight in government debt.

The Wartime Economy

The first and second world wars were characterized by entire societies being mobilized for war. In order to out-fight one another, countries had to out-produce one another. During both wars, England attempted to blockade Germany using surface ships, and Germany attempted a counter-blockade using submarines. During World War II, the location of oil, rubber, and tin helped determine strategy. In the decades following World War II, the Defense Department budgets remained high in order to deal with the Korean War and the Cold War, leading President Eisenhower to issue his famous warning about a military-industrial complex.

Wartime economies involved central planning, as governments sought to control production and allocation to serve military needs. I argue that trade is the central economic activity. But in a wartime economy trade takes a back seat to planning, production and allocation.

I believe that the wartime economy had influence long after wars ended.

1. In the 1930s, intellectuals looked back fondly to the economic mobilization of the first World War. Many of the first New Deal planning bureaus, most notably the NRA, were modeled on wartime agencies. Roosevelt’s team used the metaphor or war, and the phrase “moral equivalent of war” came into use. (Decades later, President Carter famously declared that higher oil prices required a response that was the moral equivalent of war.) In contrast to the free market’s aimless satisfaction of base consumer desires, the wartime economy was considered more rational and purposeful.

2. The story told in MIT and the Transformation of American Economics shows the influence of the wartime economy. The MIT economics department was funded lavishly by the Defense Department, as MIT’s research agenda was useful in planning, production, and allocation.

One of the mathematical tools that became popular in postwar economics, linear programming, is designed to help the central planner solve a resource allocation problem. The classic textbook on linear programming, written in the late 1950s by Dorfman, Samuelson, and Solow, was only just beginning to fade from use in the late 1970s when I was in graduate school.

I believe that the research methods and textbooks that came out of this MIT-centered transformation were too heavily influenced by the wartime economy. Economists worked very hard to develop tools for “seeing like a state.” They lost track of the way that an economy does not have to resemble a wartime economy.

1. The patterns of specialization and trade can emerge, without being centrally planned.

2. The economy does not maximize an objective function. If anything, it maximizes subjective functions. Value depends on what is in the consumer’s head, and this information is not accessible to the central planner.

3. Costs cannot be measured objectively by adding up the prices of inputs. All costs are opportunity costs, and opportunity costs are subjective.

4. Trade is a technology If you think in terms of a production function, new patterns of trade shift the production function.

Look at it and Think About it

That is John Cochrane’s advice on the unit root issue.

A unit root means a random walk component. A random walk will eventually pass any upper and lower limit. Look at it [the unemployment rate]. That’s as stationary a series as you’re going to find in economics. (“Look at it” and “think about it” are the Cochrane unit root tests.)

Yes, unemployment like other stationary ratios in macro (consumption/GDP, hours/day, etc.) have important and frequently overlooked low-frequency movements. But they are far from random walks, and they like unemployment have a very large transitory component at business cycle frequencies. When unemployment is above 8%, it is a good bet that it will decline over the next 5 years.

AIG in Hindsight

That is the title of a new NBER working paper by Robert McDonald and Anna Paulson (ungated versions). They conclude,

Much of the discussion about the crisis has focused on liquidity versus solvency. The two cannot always be disentangled, but an examination of the performance of AIG’s underlying real estate securities indicates that AIG’s problems were not purely about liquidity. The assets represented in both Maiden Lane vehicles have experienced write-downs that disprove the claim that they are money-good. While it may seem obvious with the benefit of hindsight that not all of these securities would make their scheduled interest and principal payments in every state of the world, the belief that they could not suffer solvency problems and that any price decline would be temporary and due to illiquidity was an important factor in their creation and purchase.

My random comments:

1. This is valuable work. I am really glad to see a retrospective audit of this important bailout.

2. I view the conclusion as saying that this truly was a bailout. The Fed was not acting as a hedge fund of last resort, buying temporarily undervalued assets that otherwise were just fine.

3. This also throws Gary Gorton under the bus. Gorton said that AIG’s problems were collateral calls, meaning illiquidity rather than insolvency. Note that Gorton is not included in the list of references, at least in the ungated version. Note also that the authors write that AIG’s problems were both liquidity and solvency.

4. Bob McDonald and I shared an apartment our first year as MIT grad students. He has written a treatise on derivatives.

Trade as a Technology

A while back, I threatened to put together an introduction to economics that runs counter to the “seeing like a state” tradition in textbooks that Paul Samuelson started. I call this “teaching emergent economics,” and as my thoughts develop I will post them in this category. Here are thoughts on trade as a technology.

1. David Friedman in his textbook, The Economics of Everyday Life, pointed out that we can grow automobiles in Iowa by growing grain, putting it on ships to Japan, and having the ships come back with automobiles.

2. In theory, we do not need to produce anything in order to have an interesting economy. Suppose that several of us receive regular endowments of different goods. Trading among ourselves can produce gains.

3. In an actual economy, we engage in production. However, we engage in production primarily for exchange. Centuries ago, a farmer produced for subsistence. But in the past two hundred years, in advanced countries farmers have produced for exchange.

4. In fact, production for exchange is so important that GDP only measures production for exchange. It counts goods and services that trade at market prices, not the value of home cooking.

5. The fixed-proportions concept of production is very misleading. It is particularly misleading as a way of describing an entire economy. When people think in terms of fixed proportions of resources needed to produce goods, they imagine running out of resources. Instead, as some resources become scarce and their prices rise, substitution emerges. People make different consumption choices. Producers come up with different recipes for producing goods and services.

6. Even without fixed proportions, a production function can be a misleading concept. If you have two economies with identical production capabilities, one economy can be much better off than the other. If the first economy takes optimal advantage of trading opportunities and the second economy does not, then the first economy will be better off. It will appear that the first country has greater “total factor productivity,” although its advantage has nothing to do with production per se.

7. If an entrepreneur invents a new product or a new production process, that necessarily creates a new trading opportunity. If an entrepreneur invents a new trading opportunity (think of eBay), that is equivalent to inventing a new production process.

8. Thus, we can think of entrepreneurs in terms of how they affect trading opportunities. They alter trading patterns in response to price changes that in turn signal surpluses and scarcities. And they test new trading opportunities, sometimes in the form of new products or production processes.