Paging James Bennett and Michael Lotus

Ola Ollson and Christopher Paik write,

We outline an agricultural origins-model of cultural divergence where we claim that the advent of farming in a core region was characterized by collectivist values and eventually triggered the out-migration of individualistic farmers towards more and more peripheral areas. This migration pattern caused the initial cultural divergence, which remained persistent over generations. The key mechanism is demonstrated in an extended Malthusian growth model that explicitly models cultural dynamics and a migration choice for individualistic farmers. Using detailed data on the date of adoption of Neolithic agriculture among Western regions and countries, the empirical findings show that the regions which adopted agriculture early also value obedience more and feel less in control of their lives. They have also had very little experience of democracy during the last century. The findings add to the literature by suggesting the possibility of extremely long lasting norms and beliefs infuencing today’s socioeconomic outcomes.

Pointer from Tyler Cowen.

Normal is an Economist’s Illusion

Tyler Cowen writes,

Once unsustainable economic structures begin to fail, it takes a significant improvement to make them viable again. Yet because of the difficulty of making major changes under our current political alignment, most new government policies today are no more than changes at the margin. Perhaps the most basic problem is that it is difficult to be sure when a reset is underway, and it is harder yet to raise public alarm about changes that seem to be gradual and slow.

If you have not done so already, read the whole thing.

On China, he writes,

Today’s China is sui generis. The country has grown so quickly that every decade or so there is a very new China. And so we cannot easily look to the past as a guide. In economic terms, China seven years ago is equally removed from China today as the United States about thirty-five years ago is removed from the United States today

I do not know China, but I imagine that this is an understatement.

Normal is over, and it has been over for a long time, particularly if you think of “normal” as workers being temporarily laid off and then getting re-hired to those same jobs when things are back to “normal.” It’s been at least 35 years since we have seen workers recalled from layoffs in any significant numbers.

Going further, I would suggest that the whole idea of “normal growth” is probably an attempt to impose an orderly pattern on processes that are not truly orderly. Economists do this all the time. They “seasonally adjust” data. They “de-trend” data. They draw lines connecting peaks in GDP and thus conjure “potential GDP” and “trend productivity growth” and make up stories about these artificial constructs.

Some of the elements of what Tyler calls an economic “reset” have been playing out for decades. The decline of manufacturing employment as a share of total employment began over 50 years ago. I continue to suggest keeping an eye on four forces, all of which were in place long before the financial crisis of 2008: the New Commanding Heights; bifurcated marriage patterns; factor-price equalization; and Moore’s Law.

What if Inflation is Lower than Reported?

Martin Feldstein makes the case. John Cochrane draws out one implication.

It would mean that we really have 0% nominal interest rates, 1.5% deflation rather than 1.5% inflation; +1.5% real rates rather than -1.5% real rates.

I find it much more satisfying to believe that the real interest rate is positive than to buy into secular (demand) stagnation. But some caveats:

1. Tyler Cowen’s third law.

2. I think that talking about “the” rate of inflation is difficult when relative prices are changing by much more than the average of all prices. Prices in the New Commanding Heights sectors of education and health care still seem to be rising faster than other prices. Products that incorporate computer chips still seem to be getting better and/or cheaper. Housing costs are going up in some locations, not in others. Etc.

Acemoglu and others on Network Macro

Noah Smith offers praise.

thanks to the hard work and insight of Acemoglu and others, the old dream of a network model of the economy is a little closer to reality. Someday we may draw maps of economic linkages the way we now draw circuit diagrams, and use supercomputers to simulate economic disturbances as they make their way through the web.

The paper is by Daron Acemoglu, Ufuk Akcigit, and William Kerr. Tyler Cowen was at the conference where the paper was presented, and he blogged some random comments.

My thoughts:

1. Because input-output tables do not incorporate prices or substitution, it is easy to get Keynesian multipliers out of them. To the extent that there is substitution and price adjustment, multipliers should vanish. The authors claim to find large multipliers, which suggests that that they have found some validity to the no-substitution, no-price-mechanism approach, at least in the context of their analysis.

2. While this is not treating the economy as a GDP factory, it is only slightly better. What they call demand shocks might be described as, respectively, a competing-with-Chinese-imports factory and a government purchases factory.

3. The task of coming up with new patterns of sustainable specialization and trade, which I think of as one of the central issues in the PSST story, is not captured in the input-output framework.

Brad DeLong on the Public Sector vs. the Private Sector

He writes,

Now we know that as bad as market failures can be, government failures can be worse. We badly need new effective institutional forms. But the decreasing salience of “Smithian” commodities in the twenty-first century means that rational governance would expect the private-market sphere to shrink relative to the public.

Pointer from Tyler Cowen.

I think of Brad DeLong as a Jekyll-Hyde character. The bad Brad DeLong snarks and snarls. The good Brad DeLong is insightful. This post is the good Brad DeLong. Read the whole thing. I am only commenting on part of it now. I would like to comment more on his discussion of the risk premium, but I think I need to see a longer, less hurried version of it.

In the quoted passage, his point is that as the share of the economy that produces stuff decreases and the share that provides health care, education, and information increases, we will see more informational asymmetries and externalities. This might mean that we need an expansion of existing government. However, when I think of “new institutional forms,” I think of the organizations of civil society and entrepreneurs.

Recall that Tyler and Alex see informational asymmetry being conquered by the Internet and entrepreneurs who make use of it. Recall also my comments on reputation systems as regulators.

Recall also my catch-phrase: Markets fail. Use markets.

Kling’s Three Laws

First, Tyler Cowen writes.

Cowen’s First Law: There is something wrong with everything (by which I mean there are few decisive or knockdown articles or arguments, and furthermore until you have found the major flaws in an argument, you do not understand it).

His other two laws are at the link.

Below are Kling’s three laws, but note that they come from Merle Kling, my late father, who taught political science at Washington University in the 1950s and 1960s. He called them the three iron laws of social science.

1. Sometimes it’s this way, and sometimes it’s that way.

2. The data are insufficient.

3. The methodology is flawed.

I do not claim to have three laws, although I think I could endorse both Tyler Cowen’s and Merle Kling’s. I am willing to stick up for the Null Hypothesis, although it is a hypothesis and not a law.

Relate this to Tobin’s q

Justin Fox reported,

>Ocean Tomo calculates intangible assets simply “by subtracting the tangible book value from the market capitalization of a given company or index,” so the rise in intangibles since the 1970s is in part just a reflection of rising stock market valuations. But that’s not all it is: the cyclically adjusted price-earnings ratio on the Standard & Poor’s 500 Index has risen about 2 1/2 times since 1975, while the intangibles increase has been almost fivefold.

Tobin’s q is the ratio of the stock price to the replacement cost of capital. I am tempted to write:

q = P/K = (P/E)(E/K), where P is the stock price, E is earnings, and K is capital.

As Fox points out, a fair amount of the rise in q since the late 1970s comes from a higher P/E ratio. But I gather that if you think of K as tangible capital, then E/K also has soared.

Fox’s piece was mentioned in Scott Sumner’s discussion of what I called the fifth force. But Robin Hanson got me to take a look.

I would note that intangibles in the economy include not just firm-specific intangibles but also general intangibles that lead to better patterns of specialization and trade. Institutional improvements in India and China, as well as lower transportation and communication costs, come to mind.

Tyler Cowen has much more, including a hypothesis that accounting issues are involved.

Another Thiel Theme: Short Globalization

In his conversation with Tyler Cowen, this theme was not as pervasive as contrarianism, but I found it more interesting and more provocative. Thiel’s view is that globalization has peaked. Therefore, companies and cities that are tied closely to globalization will decline relative to companies and cities that are less outward looking. So Texas will do better than Virginia, because Texas is focused on its own domestic production, while Virginia’s strength (I would say this only about Northern Virginia, by the way) is its military and diplomatic connections overseas.

Think about the notion “globalization has peaked” from a PSST perspective. Economic activity consists of patterns of sustainable specialization and trade. Globalization means that new patterns are being created across countries more rapidly than within countries. What would drive that differential, and what would slow it down?

Think of the benefit of a new pattern coming from comparative advantage and specialization. The cost is the fixed cost of setting up the pattern. Compared with setting up a local pattern, setting up an international pattern will tend to have higher fixed cost but with a larger subsequent benefit.

One possibility is that the cost of setting international patterns fell as China and India allowed their economic institutions to conform more readily to U.S. standards. However, over time, as China and India climb their way into the middle class, international comparative advantage is being reduced. There was an infamous paper by Samuelson that envisioned such a scenario. (It was perhaps his last academic publication, and it was not well received, because he seemed to disparage free trade.)

Another possibility is that the “low-hanging fruit” of reasonably low fixed cost international setups has been picked. Manufacturing and call centers can be moved offshore at moderate cost. With the New Commanding Heights industries of education and health care, it is much more difficult.

Another possibility is that globalization has not peaked.

One Peter Thiel Theme: Nonconformity

Tyler Cowen links to his conversation with Peter Thiel. I listened to the YouTube version.

If there is one constant theme, it is Thiel’s support for nonconformity or contrarianism. If you start a business, try to make it so original that it is a monopoly. If you want to start a non-profit, make it for an unpopular cause. Try to value substance over status, meaning you worry about being true to yourself, not about obtaining broad approval and support. The independent truth-seeking scientist is the opposite of the popular truth-bending politician.

Still, he wants contrarians, not misanthropes. Contrarians who can work in teams. I would add, and I imagine he would agree, that contrarians need to be particularly selective about who they team up with.

Online Self-Education: The Bigger, Closer Library

When I was in college, I sometimes went to the library just to browse and learn. I might pick a book or journal off the shelf, read something, see a reference to something else, go read that, and so on.

From that sort of self-education perspective, the Internet is like that college library, only bigger and closer. I don’t have to go to the library–I just turn on my laptop or tablet. The contents are not confined by shelf space or budget. As an aside, there is multimedia (YouTube). Also, much more frequent updating.

One downside of the bigger, closer library is that it has many distractions. In college, the only competition for my attention was the sports section of the newspaper and the occasional girl I wanted to chat up. To play a game or get entertainment I had to go somewhere else. Now, the distractions are right in the library.

The bigger, closer library has to be an enormous boon to what Tyler Cowen calls infovores, particularly those for whom a traditional library was out of reach.

The question I have is how school as we know it relates to the bigger, closer library. Possibilities:

1. They are complements. You use the bigger, closer library more efficiently because of what takes place in school.

2. They are substitutes. Time you spend in school courses is wasted–you would be better off spending time in the bigger, closer library. But when you are distracted in the bigger, closer library, you would have been better off in school.

3. Schooling is not about learning. It is about socialization. Schools are in the process of shifting their focus to socialization, with the responsibility for learning shifting to the student and to the bigger, closer library.

On point (1), think of learning as requiring motivation, feedback, and content. The library has the content, but you have to be motivated to use it and you need feedback to know whether you are using it well. Perhaps right now the classroom provides better motivation and feedback.

However, I expect within a few years to see feedback systems on phones and tablets that are at least competitive with the feedback process that occurs in a classroom. At that point, the only contribution that classroom time can make is to help with motivation–teachers motivating students and students motivating one another.