Monthly Archives: February 2018

Debating Daniel Jelski

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He criticized my moonshot essay in which I attacked neoclassical economics. I appreciate that he took the time to read it and consider it seriously. But I want to reply to two of his points.

1. He writes,

My old professor in general chemistry (Norman Nachtrieb–now deceased) told us that “science is the art of successful approximation.” Ideal gas law is valid as long as intermolecular forces are assumed to be negligible. A step in an engine cycle is adiabatic as long as no appreciable heat escapes into the environment. The words “negligible” and “appreciable” are purposely left vague, and depend on how precise an answer one actually needs in the result.

I do not believe that the neoclassical model of two factors of production is a decent approximation for any purpose. In the essay, I explain why the concept of aggregate labor productivity is not a useful approximation.

The main claim of the neoclassical model is that factors of production are compensated according to their marginal productivity. We do not observe this in practice. The neoclassical model says that all “labor” is compensated identically at the rate w, and all “capital” is compensated identically at the rate r. Instead, we observe heterogenous wage rates and heterogeneous returns on various forms of investment.

The neoclassical model says that the main cause for variation in wage rates should be the amount of capital per worker. To explain the difference in wages between a construction worker in the U.S. and a construction worker in Mexico, you should be able to point to much higher capital per worker in construction in the U.S. But it turns out that very little of this “capital differential” is tangible. A lot of it reflects cultural differences in management and social norms.

Suppose that you wanted to explain why software engineers are paid more at Google than at some other firm. According to neoclassical theory, that must be because their marginal product is higher at Google. But you cannot even begin to measure “marginal product.” They are working on teams that create a joint product. So the neoclassical claim is vacuous in this case–you can neither confirm nor refute it.

2. Jelski writes,

Contrary to Mr. Kling, I think culture changes are on a generational timescale–roughly 30 years.

If this is true, it does not refute my point that cultural change is accelerating. When did cultural change start occurring at a generational timescale? Probably not before the 20th century. Go back several hundred years, and hardly any cultural change took place over the span of a generation.

Suppose we were to look at measures of economic change. I think the economy is becoming more specialized at a faster rate than before.

How many companies broke into the top 100 between 2000 and 2010, and how does that compare with the number that broke in between 1980 and 1990?

How many new occupations were created between 2000 and 2010, and how does that compare with the number created between 1980 and 1990? (note: the BLS may not have been able to track this accurately)

Take the top five occupations in 1980, and calculate the change in the percentage of the labor force engaged in those occupations in 1990. Then take the top five occupations in 2000, and calculate the percentage of the labor force engaged in those occupations in 2010. If change is accelerating, then we should see a much bigger drop in the recent period.

Eric Weinstein on economics

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I found my way to what he wrote a couple years ago.

So long as public goods make up a minority of a market economy, taxes on non-public goods can be used to pay for the exception where price and value gap. But in the modern era, things made of atoms (e.g. vinyl albums) are being replaced by things made of bits (e.g. MP3 files). While 3D printing is still immature, it vividly showcases how the plans for an object will allow us to disintermediate its manufacturer. Hence, the previous edge case of market failure should be expected to claim an increasingly dominant share of the pie.

This reminds me of my 2002 essay, asymptotically free goods.

An asymptotically free good is a good where almost of all of the cost involved consists of research and development. It differs from a natural monopoly in two ways.

1. In contrast with an amusement park or a utility, the cost of maintaining the capital for an asymptotically free good is relatively low. Once the research is complete and the idea is proven, the costs are trivial. In the absence of patent protection, there is nothing to stop a competititor from taking the idea and driving the price close to zero.

For example, once you have undertaken the research to produce a new miracle drug, the marginal and average costs of producing it are low. To take another example, once devices have been designed and protocols established for a high-speed wireless network, the cost of providing and maintaining the equipment for a network may be low relative to the number of users.

2. Asymptotically free goods are like public goods in that it is costly to exclude someone from enjoying the benefit of an asymptotically free good.

–It is costly to hook someone up to the electric grid. It is costly to keep someone off a wireless network.

–The cost of setting up and maintaining a gate at an amusement park is relatively low. The cost of policing the Internet to stop music swapping is enormous.

Later, Weinstein says,

Advertising and privacy transfer (rather than user fees) have become the business model of last resort for the Internet corporate giants.

We are not in a neoclassical world. In my essay, I conclude

Problems are being solved not by throwing capital and labor at them, but by undertaking research and development which, when completed, leads to solutions that cost relatively little in terms of traditional factors of production. . .

For those who tend to view government as an instrument of the public good whenever the free-market outcome may be flawed, asymptotically free goods provide an excuse for more government intervention. For those who tend to see government as providing an instrument by which status quo interests can impede change, asymptotically free goods are a reason for keeping government hands off.

For his part, Weinstein concludes

Capitalism and Communism which briefly resembled victor and vanquished, increasingly look more like Thelma and Louise; a tragic couple sent over the edge by forces beyond their control. What comes next is anyone’s guess and the world hangs in the balance.

The AEA code of conduct draft

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It reads in part,

The AEA encourages the “perfect freedom of economic discussion.” This goal requires considering each idea on its own merits and an environment where all can freely participate. Economists have a professional obligation to conduct civil and respectful dialogue in all venues including seminars, conferences, and social media. This obligation applies even when participating anonymously.

My thoughts:

1. Although it is called a “code,” the draft reads to me more like a statement of principles.

2. I was under the impression that this draft was developed in response to a scandal concerning the way women economists were treated on a particular discussion board. I was afraid it would be loaded with rhetoric along the oppressor-oppressed axis. But the only paragraph dealing with this issue is quite innocuous.

The AEA seeks to create a professional environment with equal opportunity and equal treatment for all economists, regardless of age, gender, race, ethnicity, national origin, religion, sexual orientation, disability, health condition, marital status, parental status, genetic information, professional status, or personal connections.

3. As I read the draft, the most prominent an egregious violations of the code of conduct take place in a regular column in the New York Times. I am not the only one who feels this way.

Colin Woodard on the 2016 election

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He writes,

Much of the action, as history would predict, was in the Midlands, the great swing region of U.S. politics and the only one that was the least bit competitive in 2016. This region—communitarian-minded but wary of top-down government action—voted for the Democratic candidate for the third election in a row, but by a greatly reduced margin that proved catastrophic for Clinton. Whereas Obama’s margin of victory in the Midlands was 11 points in 2008 and six in 2012, Clinton won by just 0.4 percent — in effect a tie, and a doomsday result in three traditional Electoral College swing states…

Trump significantly improved on Romney and McCain’s results in Yankeedom, losing by eight points rather than 16 or 19, respectively, a swing equal to that in the Midlands. Significantly, this shift was overwhelmingly concentrated in rural areas that traditionally vote for the more community-minded candidate.

…Overall, rural Yankee counties went for Trump by more than 18 points, after having voted for Obama in 2008.

Recall my previous post on Woodard. I wrote,

Woodard sees a centuries-long struggle for power between the nation he calls Yankeedom (New England) and the two nations that he calls Tidewater and Deep South. His antipathy toward the latter shows through, especially in the final chapters of the book.

He is no fan of President Trump, either. Note that Yankeedom actually includes the northern parts of several Midwestern states, and that is where Mr. Trump’s gains in Yankeedom helped swing states into his column.

You should read Woodard’s post to look at the maps and his tables.

When I compare Woodard to David Hackett-Fischer’s classic, Albion’s Seed, Woodard makes several modifications. Woodard’s Far West, Left Coast, El Norte, and New Nederland were not part of the English migration of the 1600s and 1700s. Woodard splits Tidewater from Deep South, where Hackett-Fischer did not. Woodland sees the Midlands as incorporating a number of non-English ethnic groups, mainly from Germany and other parts of Northern Europe, who had values similar to the Quakers that Hackett-Fischer placed at the heart of the original region.

Woodard predicts that rural Yankeedom and the Midlands will come back to the Democratic fold in the mid-term House election.

Dave Rubin and the Weinstein Brothers

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They talk for almost three hours, and you have to hang with it until the end to hear my three-axes model invoked by Eric Weinstein. His point is that libertarians will not be helpful if they (we?) deny that sometimes the other points of view are legitimate.

I met Eric at Foo camp, and I was hoping to get together with him a couple of weeks ago, but I had a snafu that messed up my travel. Until about a week ago, I had never connected him with Bret Weinstein, the professor who was at the center of the Evergreen State College controversy last May.

One of the interesting points that Eric makes early in the video is that in the United States we went from having 8 percent of the population pursue education beyond high school prior to World War II to close to 50 percent by 1970. That growth spurt created some major distortions in higher education. One can infer what those distortions included:

1. Some dilution of student quality. We have to be careful here, because prior to 1950, colleges were more selective on social class than academic ability. So what probably happened is that quality went up at the top schools. Where the dilution of quality was felt was more likely the mediocre institutions that expanded rapidly, notably mid-tier and lower-tier state schools.

2. A sort of phase change in the demand for new faculty toward the end of the 1970s. Until then, the demand for Ph.D’s soared. The system kept producing Ph.D’s as if demand would continue to rise at this unsustainable rate. By the 1980s, the attempt to maintain high demand for Ph.D’s starts to become dysfunctional, with universities creating pseudo-disciplines and superfluous administrative positions.

A lot of the discussion concerns the issue of orthodoxy vs. dissent. Recall that I wrote about Eliezer Yudkowski’s case that one should doubt oneself when defying orthodoxy. Eric Weinsten offers a different perspective on this. He says that the way to tell a cult from a group that pursues truth is that the cult will not tolerate any dissent. What is odd about our current environment is that it is the mainstream in many fields that is behaving like a cult, and it is a small group outside the mainstream that is open-minded.

In Specialization and Trade, I include the quote attributed to Andre Gide: trust those who seek the truth; doubt those who find it. By that standard, it is the mainstream that cannot be trusted. For example, both Eric and Bret argue there are rational reasons to fear anthropogenic climate change. But the mainstream climate scientists are acting in ways that make themselves untrustworthy to anyone alert to cult behavior.

The discussants take the view that journalism, academia, and major political parties are so cult-like at present that the future of humanity is in doubt. Our world is fragile, due to a combination of technological dangers and mainstream institutions that are insular and complacent.

The participants talk about a “Game B” that somehow enables institutional improvement. It all sounds a bit conspiratorial. Nassim Taleb would be an example of a Game B sort of intellectual. Is Jordan Peterson part of Game B? Perhaps. Is Donald Trump part of Game B? No, but his victory in part reflects the dysfunctionality and corruption of mainstream institutions.

Whether the current political environment redounds to the benefit of Game B is highly uncertain. Eric’s fear is that things could get really ugly for the Game B types. If you read my moonshot essay, you know which side I am on as an economist.

Learning on the job is not just a perk

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A commenter wrote,

[going to professional conferences] strikes me as a combination of empty credentialism and galavanting. There’s a reason medical conferences are held in exotic vacation spots (and it sure isn’t that those places offer the most effective learning conditions). And most K12 teachers are required to work toward and, eventually, earn masters degrees. But there’s no evidence this improves teaching performance (Arnold’s ‘null hypothesis’ definitely applies). It does, however, provide a pretext for ‘step increases’ in salaries.

I agree. In most cases, these conferences are simply perks. If you as an employer want me to learn, give me a challenging assignment. Going to a conference is not a challenging assignment.

The commenter continues,

The notion that every career should be characterized by a never-ending process of growth, learning, and personal fulfillment strikes me as one of those ideas that falls into the category of ‘social desirability bias’. It’s a ‘nice’ thing to believe. Although there’s a potential dark side, too — as with romance novels, it may tend to make people unhappy as their own lives and careers fail to measure up to the unrealistic ideal.

I am not thinking of growth as a perk. I think it is closer to a necessity. I think that there is a positive correlation (not perfect, to be sure) between jobs that are mundane and jobs that are at risk.

Handle hypothesis watch

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His hypothesis is that winner cities increasingly dominate. Marc Muro and Jacob Whitin write,

growth across communities now tracks exactly with their size. The nation’s bigger communities — powered by well-educated millennial workers and the agglomeration trends brought by digital technology — are now growing notably faster and accounting for more and more of the nation’s growth than before, even as small metros wane and most of the rural hinterland slides into deep decline. In short, fully half of all of the country’s employment growth took place in just 20 metropolitan areas, home to about one-third of Americans, led by the usual suspects of New York, Boston, the Bay Area, Seattle, and Washington, D.C., along with such fast-growing Sun Belt hubs as Dallas, Atlanta, Miami, and Orlando.

From Albion’s Seed to Colin Woodard

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My latest essay covers David Hackett-Fischer, Walter Russell Mead, and Colin Woodard.

Fischer shows that each of these four cultures had a different concept of liberty. For the Puritans, it was “ordered freedom,” which meant the rule of law, but laws could reflect strict community standards and hence become “an instrument of savage persecution.” For the cavaliers, it was “hegemonic freedom,” which meant that individual rights were clearly articulated and strongly protected, but these rights varied by social class, so that they “permitted and even required the growth of race slavery.” For the Quakers, it was “reciprocal freedom,” which meant equality of all under the law, but theirs was “a sectarian impulse which could be sustained only by withdrawal from the world.” In the backcountry, it was “natural freedom,” which meant resistance to foreign influences (including government) but “sometimes dissolved into cultural anarchy.” The Constitution and the Bill of Rights can be viewed as a delicate compromise that attempted to incorporate these disparate notions.

Gabriel Rossman on Niall Ferguson’s latest book

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Rossman writes,

to this sociologist’s ear, conflating social networks, civic organizations, and social movements is confusing and imprecise. Some forms of human action are shaped by the structure of personal relationships. Others are shaped by affiliation with voluntary associations from which we derive identity and meaning. Both are important alternatives to hierarchy, but they work in different ways and so should be kept distinct.

The Square and the Tower probably will turn out to be an important book for its major claim that order requires hierarchy. But I am confirmed in my belief that Ferguson’s failure to commit to a precise definition of the term “network” detracts from the work.

Bezos-care?

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Ben Thompson writes,

Amazon could not only open up its standard interface to other large employers, but small-and-medium sized businesses, and even individuals; in this way the Amazon Health Marketplace could aggregate by far the most demand for healthcare.

To me, that sounds like a giant Obamacare exchange without the Obama regulations. A Bezos-care exchange if you will.

Read the whole post. A major point that Thompson makes is that it takes time to disrupt an industry, particularly one that is embedded deeply into a regulatory structure.