Clay Shirky on Technology Projects

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Among many possible excerpts, let me pick

On a major new tech project, you can’t really understand the challenges involved until you start trying to build it. Rigid adherence to detailed advance planning amounts to a commitment by everyone involved not to learn anything useful or surprising while doing the actual work. Worse, the illusion that an advance plan can proceed according to schedule can make it harder to catch and fixed errors as early as possible, so as to limit the damage they cause. The need to prevent errors from compounding before they are fixed puts a premium on breaking a project down into small, testable chunks, with progress and plans continuously reviewed and updated. Such a working method, often described as “agile development,” is now standard in large swaths of the commercial tech industry.

The whole essay is here.

Another excerpt:

NASA didn’t figure out how to put a man on the moon in one long, early burst of brilliant planning; it did so by working in discrete, testable steps. Many of those steps were partial or total failures, which informed later work. In digital technology, such an incremental, experimental approach is called “test-driven development.” It has become standard practice in the field, but it was not used for HealthCare.gov. Tests on that site were late and desultory, and even when they revealed problems, little was changed.

Shirky’s essay is ok as far as it goes, but I think that what needs to be emphasized is that the Obama Administration was launching a business. Call it a health insurance brokerage business if you like. It is just as important to take “an incremental, experimental approach” in launching a business as it is in creating a web site. Also, when a business gets launched in the market, its failure causes little notice. For every spectacular success, there are dozens of just so-so businesses and hundreds of total failures. When the government uses its monopoly power to launch a business that everyone is “mandated” to use, this precludes the learning that takes place in markets.

The failure of Obamacare is larger than the failure of the web site. Treating it as a technical failure allows progressives to avoid facing that fact.

The Internet of Things

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Is it the Next Big Thing, or just a buzzword? Michael Mandel is one booster. Neil Gershenfeld and JP Vasseur are also optimistic. They write,

Countless futuristic “smart houses” have yet to generate much interest in living in them. But the Internet of Things succeeds to the extent that it is invisible. A refrigerator could communicate with a grocery store to reorder food, with a bathroom scale to monitor a diet, with a power utility to lower electricity consumption during peak demand, and with its manufacturer when maintenance is needed. Switches and lights in a house could adapt to how spaces are used and to the time of day. Thermostats with access to calendars, beds, and cars could plan heating and cooling based on the location of the house’s occupants. Utilities today provide power and plumbing; these new services would provide safety, comfort, and convenience.

These don’t sound like big deals to me. I could be wrong. I can imagine that if cities had a lot more sensors and id chips embedded along streets then self-driving cars might sooner become inexpensive and reliable. That would be a big deal.I can imagine that having software-defined radios in all sorts of places you could replace telecoms (some techies have been talking up that idea for 15 years or more). That would be a big deal.

James Pethokoukis talks with Erik Brynjolfsson and Andrew McAfee. Brynjolfsson says,

what matters is the value that we’re creating, not whether a particular metric moves – especially a metric like GDP, which often literally goes in the opposite direction of welfare. When things become free, that can often lead to a decrease in measured GDP, even though it leads to a big increase in welfare. Wikipedia is a perfect example of that. Or take the fact that most people now have, you know, a device that gives them turn-by-turn driving directions. It’s pretty much free with most smart phones. But a few years ago, people were paying hundreds of dollars for a GPS machine. So I think we have to be careful about overreliance on a metric that was never understood to be or shouldn’t be understood to be a welfare metric.

Their ideas for a big deal strike me as more ambitious. Brynjolffson says,

IBM’s Watson is not just a Jeopardy champion. It’s now going to med school. IBM has announced that they’re putting Watson technology up in the cloud; serve that down through the smart phones that are going to be available, as Erik says, to billions of people, honestly billions of people around the world within just a few more years. And you have the world’s best diagnostician available to the majority of the world’s human population. Again, if that’s not an impressive change for our societies, our lives, and our economies, then I’m out – I’m out of answers.

Podcast with Calomiris and Haber

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Russ Roberts did the interview live.

I was in the audience, and I stammered out this question”

I’m trying to figure sort of what makes Canada’s banks stable, and the thing that comes to mind is charter value, that the–you only have 5 of them, and they are profitable, and so they don’t want to lose their charter, and so maybe that stabilizes things. First, I wonder if you agree with that. And secondly, if you do, what are the forces that keep that from happening in the United States? I think you mentioned the populist sentiment–people don’t want banks to be profitable. The government wanted to use banks for redistribution purposes. Should we be trying to head toward a system where banks have valuable charters and if so, how could we head that way?

I did not think that they answered the question well. When I was at Freddie Mac, the CEO, Leland Brendsel, was very clear on the fact that the company had a valuable charter that it needed to protect, and this included not taking excessive risk. That changed after I left. In part, it was a new CEO. In part, it was a political environment in which Congress was even more convinced than the private sector that there was no such thing as a loan application that you should turn down.

A lot of the banking deregulation in the 1980s and 1990s was designed to make banking more competitive. The quasi-monopoly power of “unit banks,” which Calomiris and Haber have such contempt for, was ended. But the result was to weaken the value of bank charters, which may have induced banks to take more risk. Gary Gorton made this point a few years ago.

In any event, if I had it to do over again, the question I would ask is, “What explains Switzerland?” Because a lot of their thesis is that banks emerge in order to feed government demand for borrowing to fight wars. Switzerland famously has a significant banking sector, but I don’t see it as having arisen to help finance Swiss imperialism.

FYI

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James Lindgren reports,

in 2012 a majority of Democrats (51.6%) cannot correctly answer both that the earth revolves around the Sun and that this takes a year. Republicans fare a bit better, with only 38.9% failing to get both correct.

I file this under “libertarian thought,” because to me it speaks to the issue of how romantic one should be about democratic voting.

Recessions and Structural Change

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Ryan Avent writes,

Examining patterns of polarisation in America, Nir Jaimovich and Henry Siu find that displacement of routine work is not a gradual process but occurs almost entirely during recessions. Since the mid-1980s, roughly 92% of job loss in middle-skill, routine jobs has taken place during or within a year of recessions (as dated by the National Bureau of Economic Research). This pattern is linked to the phenomenon of “jobless recoveries”, which followed the recessions of 1990-1, 2001, and 2007-9 but not earlier downturns.

Pointer from Tyler Cowen. My first thought is that this makes it hard to sort out cyclical and structural change.

Avent’s hypothesis is that low inflation raises real wages and induces labor-saving substitution.

I think that there might be a number of hypotheses to explain the phenomenon. For example, what we call a recession could just be a bunching up of the process of shedding ZMP workers. In theory, ZMP workers should be let go at a steady rate, but it could be that firms come to a common realization that it is time to face reality.

But read Avent’s post. It is obvious that he would regard the UK in recent years as supporting his hypothesis more than mine.

The Macro Wars: Inside-out vs. Outside-in

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I remember reading once that it is still not understood how the giraffe manages to pump an adequate blood supply all the way up to its head; but it is hard to imagine that anyone would therefore conclude that giraffes do not have long necks. At least not anyone who had ever been to a zoo.

—Robert M. Solow

Solow wrote those words at the height of the macro wars. I was very much on his side at the time, and this post will explain the sense in which I am still on his side.

Think of the task of macroeconomics as completing a mineshaft between the “outside” (what we observe in the world) and the “inside” (a mathematical model that is “pure” in its microfoundations). The Old Keynesians, including Solow, took an outside-in approach: let’s work from what we observe, build a crude model to handle that, and maybe eventually we can dig deeper and find the microfoundations. Start from the fact that there is a giraffe, and try to figure out how it maintains its blood supply. Do not start from a model of blood supply that precludes the existence of giraffes.

For the Old Keynesians, macroeconometric models were a tool with which to observe the world. They provided the starting point for the outside-in approach. Then Robert Lucas came along with his “critique,” which said that if you took an inside-out approach that included rational expectations, macroeconometric models would break down. The Lucas Critique launched the macro wars.

Lo and behold, macroeconometric models did break down. However, I do not think that the Lucas Critique had much to do with it. You can get more on my perspective by reading this paper and by reading my macro book.

The New Keynesians took up Lucas’ challenge by adopting an inside-out approach. Stan Fischer’s course at MIT was 100 percent inside-out theory, and I viscerally hated it. At the start of one class, I stood up, proclaiming loudly and sarcastically to Fischer and my fellow students how much I enjoyed the topic of “monetary growth models,” which was the particularly pointless mathematical, er, self-abuse that he was teaching us that week.

I chose Solow as my dissertation adviser, and I wrote an outside-in thesis, working backwards from what we observe to a theory of price rigidity. Not having a thesis that focused on rational expectations and not having Fischer plugging for me were career-altering. I was doomed to failure if I tried academia, and so I wound up on a different track. I don’t think I was the one who lost out on that deal.

So if you are trying to follow the methodological discussions among Mark Thoma, Paul Krugman, Noah Smith, and others, you will find me still on the side of the Old Keynesians. I still despise inside-out macro, and I still prefer the outside-in approach.

What has happened to me since I left MIT is that I no longer think that macroeconometric models provide a valid lens into observing the real world, and I no longer think that Keynesianism is the One True Way. The real world is still out there, and I still think it should be our starting point for digging the mineshaft. I still respect the Old Keynesian approach of starting with observations about the world rather than starting at the bottom of the mine with a “pure” model. However, I am willing to entertain theories that differ considerably from the Old Keynesian one. Hence, PSST, which you can also read more about in my essays/papers.

Diane Coyle on GDP and Consumer Surplus

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I just received a review copy of her new book. I’ve enjoyed her work in the past, and I am optimistic about this one.

Given my recent interest, I looked in the index for “consumer surplus.” There is one entry, which leads to a discussion of consumer surplus in the context of the Internet, where we know that there is a lot of free (non-material) stuff available.

My point is that even without the Internet, there is a lot of consumer surplus. Think about anesthetic for surgery, antibiotics for infections, indoor plumbing, heating and air conditioning, automobile driving, washing machines, electric lighting, and so on.

Show Me the Model

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Mark Thoma writes,

There is no grand, unifying theoretical structure in economics. We do not have one model that rules them all. Instead, what we have are models that are good at answering some questions – the ones they were built to answer – and not so good at answering others…

But the New Keynesian model has its limits. It was built to capture “ordinary” business cycles driven by pricesluggishness of the sort that can be captured by the Calvo model model of price rigidity. The standard versions of this model do not explain how financial collapse of the type we just witnessed come about, hence they have little to say about what to do about them (which makes me suspicious of the results touted by people using multipliers derived from DSGE models based upon ordinary price rigidities). For these types of disturbances, we need some other type of model, but it is not clear what model is needed. There is no generally accepted model of financial catastrophe that captures the variety of financial market failures we have seen in the past.

I think that Mark is closer to being on track than are some folks like this fellow or this fellow. A model is not all-or-nothing, right-or-wrong. A model is like a pair of binoculars. It helps you see some things more clearly, at the expense of not seeing other things at all. If you do not have that understanding of the modeling process, then you are missing what I see as a fundamental methodological truth.

Some more comments:

1. In my estimate, the real-world usefulness of New Keynesian and DSGE models is close to zero. Even if it is a bit more positive than that, there is no way to justify the intensity with which those models were pursued. And as much as Paul Krugman wants to blame Minnesota, I keep coming back to the fact that it was Stan Fischer who turned out the grad students who captured probably 75 percent of the available top-tier academic macro posts available for a period of about 15 years, effectively over-running the entire ecosystem. To suggest instead that the profession caved into bullying from Prescott or Sargent or Lucas is to create a false narrative, offering what amounts to an intellectual bailout for MIT. Read my recent macro book to try to get a better sense of the history.

2. Mark Thoma may be optimistic in suggesting that there is a “right model” to use in every situation. It may be that there are important macroeconomic episodes that are beyond the scope of any model to truly capture.

3. If there is a “right model” for what I call the Financial Crisis Aftermath episode, then I think it will have to include a role for malinvestment. Not so much malinvestment because of the Fed’s misbehavior in 2004 (sorry, John Taylor), and even not so much malinvestment in housing. In the financial sector, I suspect that a lot of the malinvestment reflected poor judgment on the part of both private-sector executives and regulators. In the nonfinancial sector, I suspect that the malinvestment included poor choices on the part of people in terms of skill acquisition (a lot of college degrees in psychology and “____ studies” majors) and a lot of malinvestment on the part of firms that took too long to recognize that the Internet was blowing apart their business models.

4. The PSST story emphasizes the lengthy, trial-and-error process involved in finding new patterns of sustainable specialization and trade. It tends to defy the entire “model” genre, because modeling tends to involve solving for equilibrium, rather than describing what may be a laborious process of groping within a state of disequilibrium.

Austerity

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Chris Edwards dissects it.

Transfers are the largest and fastest-growing activity. Since 2000, transfers have grown at an annual average rate of 6.7 percent, which compares to purchases at 6.0 percent, compensation at 5.5 percent, and aid to the states at 5.0 percent. Total federal spending grew at 5.5 percent during this period, while the consumer price index grew at just 2.4 percent.

PSST Questions from a Reader

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First,

Suppose that for some reason, the marginal value of many former employees in sector A has gone down nearly to zero. My contention is that whenever this happens, the marginal cost of sector A’s products should be plummeting…The spiffy new technology can only dislocate traditional production if it is so productive that it can outbid firms with access to this cheap labor. Maybe this will happen, but either way we should be seeing a huge decline in marginal cost.

I have a somewhat different perspective on zero marginal product. Remember that nowadays very few workers produce widgets. As Garrett Jones pointed out, they produce organizational capital. In the sense of the neoclassical production function, they are always ZMP. The decision to retain them or unload them depends on management’s assessment of the future value of organizational capital.

Suppose we take the example from Ben Stiller’s mediocre remake of the Walter Mitty story, in which Walter’s job is threatened because the print magazine he works for is looking obsolete. It’s not the case that if you could just bring down the marginal cost of producing copies of the print magazine, everything would be fine. The magazine has a dim future, regardless. To make matters worse for Walter, his skill set involves working with negatives from old-fashioned film cameras.

Second,

we don’t see huge relative price declines in the sectors that are losing workers due to some structural change. The auto industry, one of the very most cyclical industries in terms of output and employment, shows virtually no cyclical pattern in relative prices

The pre-1990 business cycles generally involved accumulation of excess inventories of autos and other durable goods. In hindsight, these seem like timing errors on the part of businesses. An inventory recession is not a permanent disturbance to patterns of sustainable specialization and trade. When the excess inventory has been worked off, you can recall the men on the production line.

The secular change to the auto industry in Detroit and elsewhere in the Midwest, due to more automation and stiff competition from overseas as well as from the South, is quite different from an inventory correction. In theory, the effect could be gradual, with Detroit shedding a few workers each year. In practice, the adjustment tends to be “lumpy,” with an entire plan shutting its doors forever, then a few years of little change, then another plant shutting down forever, etc.

the postwar experience is even more problematic for PSST. Including the prewar arms buildup, at the end of the war in 1945 the economy had just spent 4 to 5 years on an extreme military-oriented path, a vastly distorted pattern of production and consumption. Before that, there was the Great Depression, not exactly a normal time either. The transition to a relatively normal postwar economy following 1945, therefore, was an extraordinary adjustment

I agree, except that I want to be clear that I do not think of it as a transition back to a normal economy by pre-war standards. 1949 was very different from 1929. The agricultural work force has plummeted. The proportion of the work force with only an 8th-grade education has shrunk. The urban factory worker is giving way to the suburban sales clerk.

In my view, the key to the transition was the uprooting that took place during the War. After you have been shipped all over the country (or all over the world) and met all sorts of people from other backgrounds, you are not as committed to returning to that obsolete farm or declining small town or stagnating city. You are much more willing and able to move to where the opportunities are. My guess is that we had a particularly mobile society in the late 1940s, and this contributed to the surprisingly rapid establishment of patterns of sustainable specialization and trade.

But I agree that one of the more interesting questions of economic history is how the U.S. economy managed to undertake the transition to peace time so quickly and smoothly.