Monthly Archives: April 2015

Genghis Khan on Structural Change in Finance

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Stanley Fischer said,

To conclude, the U.S. financial system has changed a great deal over the past several decades. One of the most important changes has been the rapid growth of the nonbank sector. Many reforms have been adopted for both banks and nonbank financial institutions. But regulation is a cat and mouse game. Regulators need to respond to existing regulatory gaps and to keep pace with further changes. We hope we will succeed in doing so. But we know that we will never be able to identify in advance all the threats to stability that are out there, and that it is therefore all the more critical to maintain and strengthen the robustness of our financial institutions, and of the financial system as a whole.

Read the whole thing. Pointer from Mark Thoma.

Both theoretical and empirical work in macroeconomics tends to ignore structural changes of this kind. On the empirical side, think of econometrics. There are three classes of factors at work in macroeconomics data. One is short-term noise, such as a cash-for-clunkers program adding to auto sales one quarter and subtracting from them the next. Another is cyclical drivers–the sorts of things that your theory suggests as causal factors in macroeconomic fluctuations. Finally, there are structural changes, such as the changes in financial markets that Fischer is talking about.

I do not think that it is possible to sift through these three factors without using judgment. Just dumping the data into your econometrics software is an exercise in garbage-in, garbage-out.

Teach Price Gouging Using Uber

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I was talking with some young people in Boston about getting around during the severe snow. They commented that Uber’s prices would go up by a factor of 4 or more when things got really tough. But they were not angry. They were grateful that the could get transportation at all. And they understood the role that the higher prices played in helping the situation.

Perhaps one could discuss this phenomenon in class. And then ask why the young people did not complain about “price gouging.” Why is it that if a store were to raise prices on snow shovels during a snowstorm that would be price gouging, but Uber’s approach was not price gouging? Why would someone be inclined to favor a regulation to prevent the store from raising the price of shovels during a snow storm?

I suspect that the intuition is that the store’s supply of shovels is presumed fixed, but Uber’s supply of drivers goes up as prices rise. Since the higher price creates a supply response, people can see it playing a constructive role. But with the store and the snow shovels, all you see are higher profits.

Of course, there are two other benefits to higher prices for snow shovels. First, it discourages people who do not really need shovels from hoarding them (if you already have one shovel, you would not go out and buy a second one at a high price). Second, in the long run it encourages stores to keep extra shovels in stock. Knowing that they can make a good return from having a large inventory of shovels in case of a snow storm, the stores will be willing to hold larger inventories than if their profits are constrained.

The Ideological Cesspool that is Academia

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1. Kimberly Strassel writes,

Apparently the only kind of thought not allowed is that which might “undermine,” according to UnKochMyCampus, “environmental protection, worker’s rights, health care expansion, and quality public education.” Stopping such research is the mission of this organization, which is spearheaded by Greenpeace, Forecast the Facts (a green outfit focused on climate change), and the American Federation of Teachers.

2. Read Tyler Cowen’s post on Elizabeth Anderson, a chaired professor of philosophy invited to give a prestigious lecture at Princeton.

I won’t summarize her views, but I will pull out one sentence to indicate her stance: “Here most of us are, toiling under the authority of communist dictators, and we don’t see the reality for what it is.” These communist dictators are, in her account, private business firms. That description may be deliberately hyperbolic, but nonetheless it reflects her attitude that capitalist companies exercise a kind of unaccountable, non-democratic power over the lives of their workers, in a manner which she thinks is deserving of moral outrage.

I cannot view this charitably. The way it looks to me, if you are on one side of the ideological divide, you are harassed and hounded. If you are on the other side, someone whose ideas are ignorant and ridiculous is considered an eminent scholar.

I am not saying that no one should listen to Elizabeth Anderson or that she should not have a forum in which to speak. Exposure to a broad range of viewpoints is a good thing. I just wish that there were a little boy who would stand up and say that the empress has not the slightest bit of clothing until she can explain the concepts of exit and voice, and explain the different ways in which they empower individuals.

But as far as I can tell, broad exposure to ideas is not what our leading colleges and universities are providing these days. Let me provide a perspective on this, and on “critical thinking.”

Critical thinking is not challenging views that are disliked. Anyone can find fault with those with whom you disagree. It is questioning the views of people with whom you agree that constitutes critical thinking. Above all, it means questioning your own views.

Many people are familiar with Rene Descartes’ phrase, “I think, therefore I am.” Few people know the context. Descartes’ is meditating about what he can know with certainty. He asks, what if all of my sensory perceptions are simply tricks played on me by an evil demon? Then maybe everything I believe that I know about the world around me could be wrong. But I cannot be wrong about my belief that I am thinking. At least one entity in the world certainly exists, namely, the person doing this thinking.

The ability to question large chunks of your own belief system is for me the essence of a well-trained mind. When we share things that other people say and write on the Internet, chances are they are things that we agree with. How often do you share things that raise reasonable doubts about your beliefs? If you do that as often as once a month, you are doing well.

If the future truly belongs to those who can think critically, then today’s college faculty may be left behind.