Monthly Archives: March 2018

Road to Sociology Watch

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Regarding a code of conduct promulgated for the American Economic Association, women in economics at Berkeley write,

In order to craft an effective and appropriate Code of Conduct, the AEA must commit to a longer process that enlists and compensates a diverse group of economists to draft a robust document with a set of tangible commitments to improving conduct in our profession. We expect the group of economists crafting this document to include women, people of color, LGBTQ economists and those from a diverse set of socioeconomic, religious, national and intellectual backgrounds. These economists should be compensated financially for drafting a complete and thorough Code of Conduct that outlines concrete types of behavior that are deemed unacceptable and that institutionalizes a process through which violations can be reported and addressed.

…Professions such as sociology and law have modeled the type of robust code of conduct that a profession such as economics could adopt.

Within twenty years, economics will have all of the ideological diversity of sociology and law.

Nathan Smith

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On Facebook, he writes,

The most overrated economist in the world is Daron Acemoglu; the most underrated may be Arnold Kling. For years, I’ve been getting more and more disillusioned with economics, as the noise of pointless rent-seeking “publications” (the term is a falsehood because articles are more public on SSRN than in a subscription journal) marginalizes fresh insight, and excessive respect (to the point of sycophancy) for legacy ideas and a few academic stars prevents newer and truer ideas from capturing the heart of the discipline. I’ve been wanting to write a book that builds economics from the ground up in a new way, rethinking the basics, selecting a truer set of ideas and integrating them into a new curriculum that would do more to help people understand capitalism… but what publisher would take me seriously? And then I found that Arnold Kling has written it! This is a well written book with good explanations, but more importantly, he picks the right ideas, the ones that aren’t just gimmicks or too unrealistic fort the gap with reality to be bridged, the ones that really matter and have limitless applications and are worth understanding and reflecting on. And then he sequences them well so that they build on each other. I’d like to see this book adapted to become the standard textbook for college freshmen studying economics. If you want to understand capitalism, this is the book I’d recommend.

He is plugging Specialization and Trade. So I’ll plug his (semi-dormant) blog, called Reinventing Economics.

Models, Marx, and Mises

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Recently, I have made the case for updating economics in an essay and in this podcast with Russ Roberts. As I expected, I encountered resistance from three sources: people who think in terms of models; people who think in terms of Marxist sociology; and people who think in terms of Mises.

Somebody on twitter threw the Diamond-Dybvig model against my claim that economists do not understand modern finance. I get this a lot. People hold up that model and say, “See? We understand the financial crisis! We understand the financial crisis!”

I happen to know the paper, which shows that we can have a bank run in a mathematical model. It’s better than a model that does not allow bank runs. But apart from that, I don’t think that gives them much insight into how financial markets operate nowadays. (I actually prefer another Douglas Diamond paper, on financial intermediation as delegated monitoring.) I happen to think that one needs to understand phenomena related to housing, mortgage originations, capital regulations, mortgage-backed securities, CDO’s credit rating agencies, credit default swaps, repurchase agreements, and other components of modern reality. I say “stare at the world, not at your model,” and they say “stare at Diamond-Dybvig.” We have no common ground.

Other commenters say that everything one needs to know is in Mises. Regarding Mises, there seems to be no middle ground. His detractors under-rate him. His fans over-rate him. I don’t see him as having anticipated the issue of asymptotically free goods, just to take one example.

Finally, you get the folks who say that I am correct to stress the importance of culture in affecting economic behavior and who proceed to claim that this shows that Marxist theories of power explain everything. They don’t.

Jonathan Tepper on slow wage growth

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He writes,

Americans have the illusion of choice, but in industry after industry, a few players dominate the entire market:

  • Two corporations control 90% of the beer Americans drink.
  • When it comes to high-speed internet access, almost all markets are local monopolies; over 75 percent of households have no choice with only one provider.
  • Four airlines completely dominate airline traffic, often enjoying local monopolies or duopolies in their regional hubs. Five banks control about half of the nation’s banking assets.
  • Many states have health insurance markets where the top two insurers have 80-90% market share. For example, in Alabama one company has 84% market share and in Hawaii one has 65% market share.
  • Four players control the entire US beef market.
  • After two mergers this year, three companies will control 70 percent of the world’s pesticide market and 80 percent of the US corn-seed market.

The list of industries with dominant players is endless.

Pointer from John Mauldin. Read the whole thing. Tepper also makes the case that many local labor markets are monopsonistic, meaning that only a few employers are available.

Wither the center? post-election Italy

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Alberto Mingardi writes,

A country like Italy ought to have a moderate, responsible, free enterprise-oriented right. But it is indeed an “ought”: not, in our case, an “is” and a truly felt tradition in this country.

Michael Barone writes,

As in France, Austria, the Netherlands, and Germany, the traditional center-left party largely collapsed, with just over 20 percent of the vote

My guess is that if the U.S. had a similar electoral system, we would observe the same thing. As of now, a center-left party would do less well than a far-left party. The right would be split among libertarians (not a large bloc), Trump supporters, and traditional conservatives, with the latter possibly split into a faction that stresses social issues and a faction that stresses the economy and foreign policy.

It could be that Martin Gurri is correct, and that the new media environment helps to foster a revolt against elites. But another possibility is that the financial crisis of 2008 had an effect on the perception of elites in America not unlike the Vietnam War. That is, the “best and the brightest” looked really foolish, and they lost the trust of many people.

Taste-makers in the press have not been kind to Vietnam War architects Robert McNamara, McGeorge Bundy, and Dean Rusk. But for policy makers involved in the financial crisis, the outcome has been different. Henry Paulsen, Timothy Geithner, and especially Ben Bernanke are often described by journalists in heroic terms, and they have vigorously patted themselves on the back in their memoirs. Barney Frank and Chris Dodd etched their names in history as the co-author of post-crisis banking legislation, blotting out their prior role as bosom buddies of Freddie Mac, Fannie Mae, and Countrywide Funding when those firms were running up dangerous risks.

The public may have a better intuitive sense of the policy elite’s role in all this. For the center not to wither, it has to earn the trust of the people.

Dean Baker and Arnold Kling

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We both went to Swarthmore College. Maybe that explains why we are on the same page on what to do about Freddie and Fannie, namely nothing. He writes,

In the years immediately following the financial crisis, there were few people who would have bet that, in 2018, the GSEs would still be in a conservatorship in which they are effectively publicly owned companies. Nonetheless, inertia has proven to be a powerful force. In this case, I would argue that it has been a force for good in the housing market. The current system is one that minimizes the problem of moral hazard in housing finance, which was so important in the run-up in prices in the housing bubble years. It also is the most efficient mechanism for financing mortgages, as it requires fewer resources to be wasted on housing finance.

I disagree about getting rid of mortgage-backed securities. I approve of risk being transferred to the private sector.

Go back to what I wrote in November.

the current system works about as well as one could hope. With the backing of the Federal government, agencies like Freddie Mac and Fannie Mae can keep the market supplied with adequate capital to provide 30-year fixed-rate mortgages. At the same time, by using securitization and credit risk transfers, the agencies off-load the greatest proportion of risk to private entities.

Of course, if you gave us carte blanche to change the system, Baker and I would go in very different directions.

Russ Roberts and me

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A podcast on Economics for the 21st century. An excerpt:

And I think–I listed, in the essay, four key research areas. And one of them is what I call Firm Interaction. And this question of how the ecosystem operates now, in these various industries, is a really important question. As is what the traditional boundaries of the firm question: what should be done inside the firm and outside the firm? I mean, I’m shocked at the breadth of Amazon. I mean, it’s incredible, the breadth of that firm. I don’t think any theory of the firm that economists–economists haven’t done much with their theories of the firm, because again it becomes an intangible issue of, you know, what should you do inside the firm and outside the firm. It all depends on intangible things, and economists don’t do well with intangible things. But, I don’t think anybody, from Coase, or Williamson, or anyone who has looked at that would have told you that something with the breadth of Amazon would have emerged.

I was referring to this essay.

The authoritarian moment

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David Brooks writes,

progressives are getting better and more aggressive at silencing dissenting behavior. All sorts of formerly legitimate opinions have now been deemed beyond the pale on elite campuses. Speakers have been disinvited and careers destroyed. The boundaries are being redrawn across society.

There seems to be a bit of a trend. Putin is getting more authoritarian. Erdogan is getting more authoritarian. Xi Xinping is getting more authoritarian.

I know I’m not saying anything original here. But I wonder what it will take to turn things around.

Trump and TLP

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Handle points out that the emergence of Donald Trump has scrambled the model of the Three Languages of Politics. For example,

Even since Trump started his campaign, it seems to me that the progressives have been using “civilization vs. barbarism” rhetoric all the time. Not just the “breakdown in civility,” but also complaining about “chaos” and the potential collapse of the “international order” that was based on American strength guided by a progressive vision and set of values.

My thoughts:

1. I do think that Trump created a new axis, of Bobo vs. anti-Bobo.

2. I think that progressives want to throw everything possible at Trump at see what sticks. But they have certainly not given up on the oppressor-oppressed frame. They still make the “white nationalist” charge.

3. As Jeffrey Friedman pointed out long ago, libertarians go back and forth between arguing for liberty as a value in itself and arguing for it as instrumental to social improvement, particularly economic prosperity and growth. I don’t think we are seeing anything new from libertarians. They argue differently depending on the issue, putting more emphasis on liberty as a value in discussing free speech and putting more emphasis on economic consequences when arguing for free trade.

4. Libertarians have got to be feeling pretty badly these days. I cannot imagine anyone talking about a “libertarian moment” without being laughed out of the room. In Europe, it looks more like a “fascist moment” nowadays. In the U.S., referring to Google, Facebook, et al, Joel Kotkin writes,

Whether one sits on the progressive left or the political right, this growing hegemony presents a clear and present danger. It is increasingly clear that the oligarchs have forgotten that Americans are more than a collection of data-bases to be exploited. People, whatever their ideology, generally want to maintain a modicum of privacy, and choose their way of life.

And of course, everyone’s idea of fighting the corporate hegemony involves enhancing the hegemony of bureaucrats in Washington.

Subjective well-being

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Angus Deaton writes,

The measure I use is an evaluative measure of well-being that asks people to report, on an eleven-point scale, from 0 to 10, how their life is going. The question is originally due to Cantril (1965), and is asked in exactly the same way of all individuals sampled by Gallup in their World Poll. The question is “Please imagine a ladder, with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally stand at this time?” There is no mention of happiness, so the ladder is explicitly not a hedonic measure that enquires into momentary mood or feelings. Rather it asks people to assess how their life is going “at this time,” an answer to which requires cognitive effort by the respondent, and which is a more considered assessment of well-being than trying to weight together or average the host of emotions and feelings that make up the evanescent texture of everyday life. In the surveys I use here, the Cantril ladder question is immediately followed by a question identical to the ladder question but with the last sentence replace by, “Just your best guess, on which step do you think you will stand in the future, say about five years from now?” I shall use this question too.

I think that as intangible goods and services become increasingly important, economists are going to have to resort to subjective measures. This means that, like Deaton, we will have to think carefully about how we take those measurements.