Scott Sumner on the Great Depression

His book will be out soon, and no doubt it will break into my earlier list. Meanwhile, he has posted a really useful flowchart summary.

My own views.

All recession are adjustment problems. The Great Depression’s adjustment problems included:

1. Massive reconfiguration of agriculture because of tractors, trucking, and refrigeration. This displaced farm laborers.

2. Massive reconfiguration of manufacturing, as the small electric motor changed many production processes. As Amy Sue Bix points out, as of 1920 there were still men rolling cigars and making light bulbs by blowing glass. Machines could to those jobs better.

3. Sudden changes in asset prices, as a land bubble burst in the late 1920s and a stock market bubble burst in 1929.

4. The rise of fascism/socialism in Europe and a fear of something similar here–regime uncertainty, to use Robert Higgs’ term.

5. Counterproductive New Deal initiatives, such as destroying pigs and organizing industry into cartels (the NRA).

6. Loss of trust in financial intermediaries.

7. Increase in international protectionism.

Books of the Year

The top five of these seem to have come in a burst, over the last six weeks or so.

1. Hive Mind: How Your Nation’s IQ Matters So Much More than Your Own, by Garett Jones. Two factors stand out. One is that Jones is very good at anticipating the views of those who would disagree with him and offering gentle, persuasive arguments. The other is that this is a topic that deserves more discussion, but it is a “third rail” in academia that Jones is one of the few willing to touch.

2. Why Minsky Matters, by L. Randall Wray. Some people may be put off by seeing Minsky held up as the predictor of the financial crisis of 2008, which took place long after his death. But I think Minsky’s views are a a healthy antidote to the view that crises can be prevented through regulation. And I thought that this book gave genuine insight into Minsky’s thinking that was new to me.

3. The Evolution of Everything, by Matt Ridley. The theme is that decentralized evolution beats top-down control. I think that this is the book that I will recommend to a young person who shows an interest or inclination toward libertarianism. I think it is a better introduction to libertarianism than anything that is explicitly labeled as such. However, my guess is that people without libertarian sympathies will find it pugnacious and off-putting. For addressing those with different points of view, Ridley could learn much from Jones.

4. The Secret of Our Success, by Joseph Henrich. Henrich argues for evolution, particularly in the realm of culture, as passionately as Ridley, but he fails to make the connection with markets and hence with libertarian thought. When someone told me that they enjoyed Daniel Kahneman’s Thinking Fast and Slow, I recommended this book to him. Henrich, like Kahneman, popularizes some interesting research, and it has grand overarching theme. In some ways, the research Henrich summarizes is more compelling, because it includes anthropological studies in addition to the psychological experiments that sometimes leave me feeling swindled.

5. Foolproof, by Greg Ip. The theme is the unintended consequences of regulation as people and businesses adapt. Ip’s critique of top-down regulation is too gentle for my taste. However, for someone coming from a mainstream perspective, a gentle nudge probably works better than Ridley’s hard hammer.


MIT and the Transformation of American Economics, edited by E. Roy Weintraub. I’m cheating, in that this came out late in 2014, and it emerged from an even earlier conference. But this book, more than any other, pushed me to write what I call the Book of Arnold. I was particularly provoked by reading of the role of wartime thinking and defense department funding in getting the MIT program started.

Choice, by Robert Murphy. Makes Mises more accessible than he ever was to me previously. Unless you are capable of digesting Mises yourself (and perhaps even if you are), this is a vital work.

The End of Doom, by Ronald Bailey. A broad, fact-based critique of environmental doom-mongering.

The Essential Hayek, by Donald Boudreaux. Does for Hayek what Murphy does for Mises.

Our Kids, by Robert Putnam. Like Charles Murray in Coming Apart, Putnam explores what he calls “bifurcated family patterns.” From a left-ish ideological perspective, of course.

Matt Ridley’s Latest

It is called The Evolution of Everything. He contrasts decentralized trial-and-error evolution with top-down control in many arenas, from biology to technology to culture. My first thoughts.

1. He offers full-frontal libertarianism. On money, he cites Selgin. On education, he cites Tooley. etc. Incidentally, on culture he cites Henrich, whose book I interrupted to read Ridley’s and who does not seem to grasp the libertarian implications of his own work.

2. He cites a legal scholar with whom I was not familiar: Oliver Goodenough. Actually, I met Oliver a couple of times through a mutual friend–more than 40 years ago.

3. On the evolution of marriage, he writes that hunter-gatherer societies are mainly monogamous.

But as soon as farming came along, 10,000 years ago, powerful men were able to accumulate the resources to buy off and intimidate other men, and to attract low-status women into harems. . .If only to try to satisfy the low-status men, societies that allowed widespread polygamy tended to be very violent toward their neighbors. This was especially true of pastoral societies reliant on sheep, goats or cattle, whose wealth was mobile and showed scale economies. . .herders from Asia and Arabia not only experienced chronic violence, but kept erupting into Europe, India, China and Africa to kill men and abduct women.

…The transition to monogamy is a big theme of Christianity. . .The winners from the re-emergence of monagamy in late antiquity would have been the high-born women, who got to monopolize their husbands, and the much more numerous low-born men, who got to have sex at all.

4. On the advantage of urbanization for specialization and trade,

In America as a whole, nearly twice as many people work in grocery stores as in restaurants. In Manhattan, nearly five times as many work in restaurants

5. On the inexorable rise of economic well-being,

Stagnationism has its fans in every generation.

6. On technology, he argues strongly for context as a causal factor (“the adjacent possible”) and against individual agency (the heroic inventor). One implication:

having argued for the incremental, inevitable and collective nature of innovation, I am not a fan of patents and copyright laws. They grant too much credit and reward to individuals

7. Speaking of technology’s evolution, when he writes

The internet revolution might have happened ten years earlier if academics had not been dependent on a government network antipathetic to commercial use.

he is blowing smoke. The arrival of the commercial Internet is instead an example of context. Telecommunications pre-internet used circuit-switching networks. The Internet uses packet switching. Until relatively recently, circuit switching was much less expensive (the cross-over point was roughly the year 2000). Packet switching became economical only after sufficient iterations of Moore’s Law had taken place. In 1985, the cost of building out a mass-market Internet would have been astronomical.

Questions for Garett Jones

After a quick reading of Hive Mind. The core issue is what he calls the paradox of IQ. That is, among individuals, the correlation between IQ and income is modest. However, among nations, the correlation between average IQ and average income is strong.

How does your high IQ raise my income? Think of four possible explanations for this paradox.

1. Statistical artifact.
2. Proximity effect–I earn more income by living close to people with high IQ’s.
3. Cultural effect–people with high IQ’s transmit good cultural traits to me.
4. Political effect–having people with high IQ in my jurisdiction leads to me enjoying better government.

Can we rule out statistical artifact? Put it this way. Suppose we chose 1000 people at random. Then we create 50 groups of them. Group 1 has the 20 lowest IQ scores. Group 2 had the next 20 lowest IQ scores, etc. Then we run a regression of group average income on group average IQ for this sample of 50 groups. My prediction is that the correlation would be much higher than you would get if you just took the original sample of 1000 and did a correlation of IQ and income. I think that this is because grouped data will filter out noise well. Perhaps the stronger correlation among national averages is just a result of using (crudely) grouped data.

Can we sort out between proximity effects, cultural effects, and political effects? Perhaps a natural experiment involving people from different cultures living moving to different jurisdictions, or people living close to one another but having different cultures?

The most parsimonious proximity effect could be capital per worker. Assume that people tend to invest close to home (Jones calls this the Feldstein-Horioka effect when it applies across countries). Then if high-IQ people invest more wisely, then I will have better capital to work with if I live close to high-IQ people. Or if high-IQ people invest more (because, as Jones points out, they are more patient), then I will have more capital to work with if I live close to high-IQ people. How well does capital per worker serve as a channel for transmitting someone else’s IQ to my income?

Another proximity effect would be strong complementarity in team production (what Jones, following Kremer, calls the O-Ring effect). If the value of my output depends on the value of others in a team, then I will be better off living close to people with high IQ’s.

What happens when you divide the U.S. into fifty states and put teach state into the database with other countries? My guess is that Mississippi will look really good on average income relative to average IQ when you compare it with Denmark. If so, is that because of high capital per worker in Mississippi? A higher trust culture? Or better overall governance than Denmark?

What I’m Reading

Hive Mind, by Garett Jones.

As far as I can tell, he and Joseph Henrich are unaware of one another’s work. Jones emphasizes what he calls the paradox of IQ. That is, although the correlation between IQ and income is only modest for individuals, it is strong for nations. Henrich, while not discussing this observation, offers an explanation, which is that intelligence is imparted by culture.

Interestingly, both Jones and Henrich make use of the correlation between test of reaction time and IQ tests. Jones says that this suggests that IQ must be an indicator, at least to some degree, of physiological differences among individuals, not just some specific test-taking ability. Henrich says that the comparable performance of chimpanzees and humans on reaction-time tests shows that superior human intelligence is probably more cultural than physiological.

Ecologists and Engineers

Don Boudreaux writes,

When a biologist encounters in a living organism a physical or behavioral trait that is unusual or unfamiliar, and that does not contribute to survival in any way that is immediately obvious, the biologist’s professional instinct is to think hard about that trait in order to identify its likely genetic benefit to its possessor. The biologist, upon encountering such a trait, does not leap to the conclusion that he or she has encountered an instance of “nature failure.” The biologist, of course, recognizes that nature and natural selection are never perfect; sometimes living creatures are indeed saddled with traits that do indeed reduce their genes’ chances of survival. But this possibility of “nature failure” is not the competent biologist’s first go-to explanation whenever he or she cannot grasp the reason why natural selection might have created in the organism this unusual or unfamiliar trait.

In his new book, Foolproof, Greg Ip suggests that there are two types of economists: ecologists; and engineers.

An engineer thinks about how to design a machine. An ecologist thinks about how to understand and protect an evolving system.

In The Book of Arnold, I suggest that after the Second World War, the MIT economics department, fed by funding from the Department of Defense, promoted the engineering mindset. This mindset then took over the ecosystem of academic economics, which those of us with the ecological mindset struggle against.

Intellect and Politics

Chris Dillow writes,

I would rather have second-rate politicians who know they are duffers than ones who believe they are brilliant.

Nice line. Read the whole post. Pointer from Mark Thoma.

In The Secret of Our Success, Joseph Henrich argues that individual humans are not so very intelligent on our own. Instead, it is out collective culturally-acquired knowledge that is impressive. One implication that I draw from this is that we should not be looking for some superior intellect to run our lives. Our lives are better run by drawing on our collective wisdom.

Wray on Minsky

My review of the book says,

While L. Randall Wray also praises Minsky for his anticipation of the financial crisis of 2008, he provides a much more nuanced and complete picture of Minsky’s analytical framework than I had encountered previously. While I am not completely converted, I came away from the book with considerably more understanding of Minsky’s views and a greater respect for them.

I still consider this one of the best books of the year.

Joseph Henrich on Cultural Transmission

The book is The Secret of Our Success, and I am only a little way into it. An excerpt:

evolutionary reasoning suggests that learners should use a wide range of cues to figure out whom to selectively pay attention to and learn from. Such cues allow them to target those people most likely to possess information that will increase the learner’s survival and reproduction. . .individuals should combine cues related to the models’ health, happiness, skill, reliability, competence, success, age, and prestige, as well as correlated cues like displays of confidence or pride. These cues should be integrated with others related to self-similarity, such as sex, temperament, or ethnicity

I think that by emphasizing how little knowledge we generate internally compared with knowledge we acquire through cultural transmission, this book could bolster libertarian/conservative views. It certainly reinforces my doubts about the ability of technocrats to “fix” society. Henrich does not do much with this, although skipping ahead to the next-to-last paragraph in the book:

Humans are bad at intentionally designing effective institutions and organizations, though I’m hoping that we get deeper insights into human nature and cultural evolution this can improve. Until then, we should take a page from cultural evolution’s playbook and design “variation and selection systems” that will allow alternative institutions or organizational forms to compete. We can dump the losers, keep the winners, and hhopefully gain some general insights during the process.

Yes, Professor Henrich, we have a term for that. We call it “the market.”

Good Turner, Bad Turner

In Between Debt and the Devil, Adair Turner writes (p. 61),

Textbook descriptions of banks usually assume that they lend money to businesses to finance new capital investment…But in most modern banking systems most credit does not finance new capital investment. Instead, it funds the purchase of assets that already exist and above all, existing real estate.

…Different categories of credit perform different economic functions and have different consequences. Only when credit is used to finance useful new capital investment does it generate the additional income flows required to make the debt certainly sustainable. Contrary to the pre-crisis orthodoxy that the quantity of credit created and its allocation between different uses should be left to free market forces, banks left to themselves will produce too much of the wrong sort of debt.

What is good about the book is that he invites us to examine how credit is created and where it goes. As he points out, standard macro models have totally ignored this issue.

What is bad about the book is embedded in the last sentence quoted above. We are left to assume that the huge allocation of credit toward housing was the operation of “free market forces.” I do not know about other countries, but for the United States this is totally false. The government was very much involved in channeling credit, and it channeled as much as it could toward housing finance.

Still, I think that what is good about the book makes it worth reading. I plan to say more when I have finished it.