My Review of Erwin Dekker

is now available. I write,

he identifies a number of tensions in their thought: the economist as detached observer versus the economist as political participant; progress versus decline; liberty versus restraint; individualism versus culture; modernity versus tradition; and what Jacob T. Levy would call rationalist versus pluralist.

The book, The Viennese Students of Civilization, is published by Cambridge University Press, about which I have several complaints.

1. After several tries, I still have not found it on their web site. Here it is on Amazon.

2. The price is terribly high, particularly for the Kindle version.

3. To add insult to injury, it appears to me that CUP did not spend a dime (or should I say a pence?) on editorial assistance. The book is filled with errors of English usage.

It is an important book, and shame on CUP for making it hard to afford and difficult to read.

What’s Wrong with Keynesian Economic Theory?

That is the title of a new book, edited by Steven Kates. It is published by Edward Elgar ($$$). I am one of the contributing authors.

My essay argues that Keynesians use two very different approaches in marketing their ideas. First, they use a simplistic approach (“spending creates jobs and jobs create spending”) to talk to politicians and the general public. Second, because among trained economists it is indefensible to ignore prices and instead talk about quantities depending on quantities, Keynesians talk in academic circles in an entirely different fashion.

I say that that fatal flaw in both approaches is aggregation–treating the economy as a GDP factory. This makes it impossible for Keynesians (or for macroeconomists in general) to think about the issue of patterns of sustainable specialization and trade. The PSST story is that some patterns of trade become unsustainable as tastes and technology change, and addressing this requires a trial-and-error process to evolve new sustainable patterns.

In terms of policy, the Keynesian assumption that all work is done in the same GDP factory suggests that government can fix a recession without knowing any specifics about the characteristics of unemployed workers. In reality, worker skills are heterogeneous, and there is no guarantee that a fiscal stimulus will be relevant to the workers who are having difficulty adjusting to new circumstances.

I reprise some of these points in Specialization and Trade, which is priced so that an entity other than a library might wish to purchase it.

Economic Data in 1946

Scott Sumner writes,

One commenter pointed out that RGDP fell by over 12% between 1945 and 1946, and that lots of women left the labor force after WWII. So does a shrinking labor force explain the disconnect between unemployment and GDP? As far as I can tell it does not, which surprised even me. But the data is patchy, so please offer suggestions as to how I could do better.

You could do better by taking the RGDP figure with a tablespoon of salt. The way that the Commerce Department adjusts nominal GDP for price changes is pretty unreliable for that period. Part of the reason is that there was so much shifting between public sector output (who knows how much of that is “real” vs. nominal?) and private sector output, and part of the reason is that as you move away from the base year (either many years ahead or many years behind) the adjustment process gets screwy. 1946 is now many, many years away from the base year that is used to calculate real GDP. I think that if you can find old publications from the Commerce Department, you will see very different patterns of real GDP for 1946, resulting from shifts in the base year from 1958 to 1975 to ….

I think that for 1946 you are safer sticking to nominal GDP numbers.

By the way, here is a piece I wrote on that period.

What I’m Reading

1. Philosopher John R. Searle’s The Making of the Social World, published in 2010. One excerpt:

How do governments, so to speak, get away with it? That is, how does the government manage to be accepted as a system of status functions superior to other status functions?. . .governmental power is a system of status functions and thus rests on collective recognition or acceptance, but the collective recognition or acceptance, though typically not itself based on violence, can continue to function only if there is a permanent threat of violence

…All political power is a matter of status functions, and for that reason all political power is deontic power.

For some reason, my brain keeps wanting to read “deontic” as “demonic.”

Anyway, I think of a status function as a social convention that assigns people or objects certain properties. I think of a deontic power as a right or obligation.

So, imagine a busy intersection. We could put up a traffic light and by general consent give it a status function to regulate traffic flow. Or we could let an individual direct traffic. For the status function to work, we need to be willing to follow the social convention of obeying the signals, either from the stoplight or from the individual.

Next, suppose that we recognize that the individual wears a uniform and a badge, and we recognize that the individual is permitted to impose fines on people who do not obey. These are stronger deontic powers, and they will deter drivers from trying to cheat the system. We can think of that move as a metaphor for government by consent (although the consent may not be explicit or universal).

As of this writing, I have yet to finish the book. By the time this post goes up, I may have finished a first read, but the book will require some re-reading. It seems to me that Searle is likely to turn out to be on my side of a disagreement with Michael Huemer.

2. Ryan Avent’s new book (not yet out) The Wealth of Humans. I attended a discussion of the book the other night. As the conversation jumped around, I found myself frequently thinking, “Show me the model.” That is out of character for me, because I have spent a lot of the last few years criticizing economists’ use of formal models. But as people tried to speculate about capital accumulation, wealth distribution, and productivity differentials, I found that I could not follow what was being said. I needed to think in terms of supply and demand curves crossing, income adding up to output, and output equal to labor input times output-per-worker. It was hard to get that in a purely verbal discussion, particularly when people were speaking extemporaneously.

James Tobin’s Presidential Address

Robert Waldmann brings it up. Tobin delivered it in 1971, and it was published in 1972.

Pointer from Mark Thoma.

As I remember it, Tobin suggested thinking of an economy with two industries and wages rigid downwards. Suppose that demand shifts away from industry X to industry Y. Because wages do not fall in industry X, you get unemployment there. Because wages do rise in industry Y, the overall rate of inflation goes up. Note, however, that with more inflation, the real wage in X falls, which means less unemployment there than otherwise.

This simple story gives you an explanation for both stagflation and the Phillips Curve. The point that Waldmann is making is that macroeconomists did not need to take the detour that they took in the 1970s. They could have stayed on the path that Tobin laid out for them. My thoughts:

1. It is amazing how much better you can do if you break up the GDP factory into two industries. I think you can do even better with more disaggregation, but the modeling would be much hairier.

2. I agree that macro would have done better to follow this path. However, macro still would not be very good. The problem of too many plausible causal factors chasing too little data is insurmountable. See my science of hubris paper, as well as the recent Paul Romer screed.

3. The sociology-of-economists question of how macro remained (and continues to be) stuck for so long is quite interesting. See Daniel Drezner’s piece (for which I also thank Thoma). As you know, my explanation is that Stan Fischer became the Genghis Khan of macro.

Paul Romer, Macroeconomics, and Trouble

Romer writes,

In the last three decades, the methods and conclusions of macroeconomics have deteriorated to the point that much of the work in this area no longer qualifies as scientific research. The treatment of identification in macroeconomic models is no more credible than in the first generation large Keynesian models, and is worse because it is far more opaque. On simple questions of fact, such as whether the Fed can influence the real fed funds rate, the answers verge on the absurd. . .The larger concern is that macroeconomic pseudoscience is undermining the norms of science throughout economics. If so, all of the policy domains that economics touches could lose the accumulation of useful knowledge that characteristic of true science, the greatest human invention.

Pointer from Mark Thoma. I am on board with the above passage, but soon Romer writes

To appreciate how far backwards our conclusions have gone, consider this observation, from a paper published in 2010, by a leading macroeconomist:

… although in the interest of disclosure, I must admit that I am myself less than totally convinced of the importance of money outside the case of large inflations.

Romer could be talking about me, except for the “leading macroeconomist” part.

Anyway, he goes on to argue that the disinflation that took place in the early 1980s is evidence that monetary policy matters. My comments.

1. I agree that for those (few) of us who doubt the importance of monetary policy, the “Volcker disinflation” represents the most difficult data point.

2. Still, Romer appears to me to distort things. He calculates a rise in the real interest rate of 5 percent. But I believe that a lot of that comes from inflation falling–not just the Fed raising nominal rates.

3. Long-term interest rates rose dramatically as well. Arguably, the “Volcker disinflation” should be called the “bond-market vigilante disinflation.”

4. In general, although much of Romer’s critique focuses on the identification problem and the challenge of teasing out causality, it is impossible for him (or anyone) to demonstrate that changes in the money supply are exogenous rather than endogenous.

Overall, I agree with Romer that the methodological challenges in empirical macro are daunting–I would say overwhelming. For my take, see Macroeconometrics: The Science of Hubris.

I am just quibbling over the one instance which he argues demonstrates an empirical truth.

My Early Prediction of I-Phone’s Latest Innovation

When I saw this story,

Now it’s headsets: spending on wireless headsets overtook wired ones last year, says Steven LeBoeuf, founder of Valencell, a developer of biometric sensor technology for wearable devices.

I was reminded that back in 2001 I wrote,

I can imagine a world in which everyone spends several hours a day wearing a headset. There will be a software industry devoted to building applications for the headset platform, which consists of earphones, a microphone, and something that I call a “tuner.”

It is an amusing essay to read–wrong in many respects, but actually quite prescient in others.

Reviewing a Cold-War Era Book

I review The Quest for Community, by Robert Nisbet.

Nisbet warned that weakening of ties of work, family, and religion would give people a sense that they have lost control of their destinies, producing this sort of alienation. It seems to me that the support in this year’s Presidential primaries for the socialist politics of Bernie Sanders and the caudillo politics of Donald Trump, which shocked many observers, would not have surprised Nisbet. Nor would the recent work of Robert Putnam or Charles Murray on cultural decay.

Trump Explanation to Flatter the Left

Arlie Russell Hochschild writes,

You are patiently standing in the middle of a long line stretching toward the horizon, where the American Dream awaits. But as you wait, you see people cutting in line ahead of you. Many of these line-cutters are black—beneficiaries of affirmative action or welfare. Some are career-driven women pushing into jobs they never had before. Then you see immigrants, Mexicans, Somalis, the Syrian refugees yet to come. As you wait in this unmoving line, you’re being asked to feel sorry for them all. You have a good heart. But who is deciding who you should feel compassion for? Then you see President Barack Hussein Obama waving the line-cutters forward. He’s on their side. In fact, isn’t he a line-cutter too? How did this fatherless black guy pay for Harvard? As you wait your turn, Obama is using the money in your pocket to help the line-cutters. He and his liberal backers have removed the shame from taking. The government has become an instrument for redistributing your money to the undeserving. It’s not your government anymore; it’s theirs.

Pointer indirectly from Tyler Cowen.

She sees this as a narrative that explains Trump. Perhaps she is correct. But it is suspiciously self-serving to the sociologist-author who is proud to be more properly attuned to the oppression of minorities) and uncharitable to the Trump supporters.

I am not the first person to notice that many economists came up with books after the financial crisis of 2008 that purported to show how the crisis confirmed their worldview. Yet none of these economists predicted the crisis. For example, Joseph Stiglitz will gladly tell you that the crisis confirmed his worldview, even though he notoriously co-authored a paper which concluded that Freddie Mac and Fannie Mae were completely sound.

So with the unexpected emergence of Donald Trump, I get very suspicious of “explanations” that flatter the author and members of the author’s intended audience.

Instead, I again recommend the Martin Gurri explanation, which he wrote before Trump became a candidate.

Does War Improve Cooperation?

I review Peter Turchin’s book from 2005. My final paragraph:

For libertarians, these are crucial questions. In order for markets to function well, they must be embedded in cultures that promote pro-social behavior and are conducive to trust. If the absence of external conflict weakens the bonds that prevent internal conflict, then the libertarian goal of peaceful cooperation in all domains will prove elusive.

Coincidentally, the Journal of Economic Perspectives that just came out has an article on this topic by Michal Bauer, Christopher Blattman, Julie Chytilová, Joseph Henrich, Edward Miguel, and Tamar Mitts. They conclude,

Most of the papers in this emerging literature agree on one central matter: that the data strongly reject the common view that communities and people exposed to war violence will inevitably be deprived of social capital, collective action, and trust. Across the 16 studies from economics, anthropology, political science, and psychology, the average effect on a summary index of cooperation is positive and statistically significant, if moderate in magnitude.