Monday, April 21, 2014

Wolfe on Liberalism

Since there has been so much talk of classical liberalism, liberalism, libertarianism, and left-liberalism lately I wanted to re-share this old EconTalk with Alan Wolfe from 2009 on liberalism. It is one of my favorite EconTalks. Wolfe is very much in agreement with my point that modern liberalism and "liberalism" in the sense of classical liberalism are one and the same, and that Kevin Frei and Dan Klein make a mistake in trying to narrow the definition of liberalism or classical liberalism on to libertarianism.

I don't agree with everything Wolfe says and anyone with an economics background would probably sympathize with me on this. First, his problem with what he calls the "hiddenness" of market solutions is misplaced I think. I agree more with Russ on this aspect of the conversation. However, I agree with his view of liberty and I think he could have gotten a lot out of talking about Amartya Sen on this point. Sen puts the claim in terms economists know and understand, and I think there is a lot less friction between the market and the capabilities approach with Sen.

Kuehn Smackdown Watch: Bastiat Edition

Brad DeLong thinks that Bastiat would be a modern liberal (I had said the other day that he likely would be a libertarian but that Smith, Jefferson, Locke, Paine, etc. were classical liberals that would very plausibly be left-liberals today).

I think he makes a good case. I've discussed many of the passages he presents to make the claim here, and I think they are important for libertarian fans of Bastiat especially to be aware of. And anyone that's followed the blog for a few years know that I think most modern invocations of the broken window are God-awful and that Bastiat's understanding of general equilibrium is far more sophisticated and closer to people like me or Krugman who make important distinctions between stocks and flows (wealth and income) in arbitrating the effects of, for example, a disaster.

I would only say this in my defense (because I still think he would be more of a libertarian, simply due to the center of gravity of his commentary): he would certainly be more of a libertarian in the vein of Hayek of the Constitution of Liberty or Law, Legislation, and Liberty than a libertarian like Bob Murphy (for example).

Kevin Frei responds

As many of you know, when the subject of a post responds I like to pull it up into a main post. Kevin Frei responded to my take on his "liberalism unrelinquished" project. Nothing is particularly new here, but it's always nice to see people respond. I have thoughts below. He writes:
"Hi Daniel, thank you for posting about this! I guess I ought to clarify a little the motivation behind this project.

Some people make the argument that modern liberalism is really consistent with the earlier liberal tradition, but I think the general consensus is that modern liberal theory is really social democratic theory, and modern "classical liberalism" is much more in line with liberalism as it was understood in the 19th century. This is an initiative about classical liberals trying to reclaim their label.

Most people don't know what a classical liberal is, so classical liberals tend to refer to themselves as libertarians. But "libertarian" has a lot of extreme connotations. Within the libertarian umbrella there is a hardcore variety (Ayn Rand, Rothbard, etc) and a more moderate classical liberal variety (the ones who win Nobel Prizes in economics). So classical liberals have always been a little uncomfortable about the libertarian label, and many of us would prefer that libertarianism is a subset of liberalism, rather than the other way around.

Words evolve all the time, of course, but there's no law of linguistics that words can't revert back. With the word "progressive" currently coming back in vogue among the Left, it seems like a ripe time for classical liberals to assert their claim to "liberal" and try to carve out a spot for themselves in the political discourse.

Freedom of contract and freedom of association were centerpieces of 19th century liberalism, and it's a stretch to rectify those values with the labor regulations and other policies associated with modern liberalism. So I do think it's fair to say that the meaning of the word changed - at least, that is what all the signers are asserting. I guess you could say we're all liberals in the very broad sense that we're not monarchists or communists, but I think the term has a little more precision than that.

Anyway, I appreciate you engaging on this issue!"
So right - it's clear that many libertarians think classical liberalism is just libertarianism and that liberal is better suited to describe this crowd and it's not suited to describe "modern liberalism". But this is precisely the point I am disputing, and not a point that I think needs to be clarified.

I don't think you need to broaden the definition of liberal at all. I think it means the exact same thing it used to mean. Over time when a philosophical tradition gains more traction there is more diversity on specific views of course. New ethical and political theories develop that add new wrinkles to the liberal landscape. But my liberal values and priorities today are no different than they were in the 18th century.

It's not unreasonable to make a distinction between classical liberalism and liberalism generally. Classical liberalism is often associated with the view that property rights are implicit in any meaningful sense of liberty. That's certainly my view and I'm no libertarian. We might argue about some modern liberals who are liberals as much as Kevin Frei is but may start to wander away from classical liberalism in that sense. But I think they would be hard to find and hard to define. Modern liberals in the United States at least, even those well to the left of me, still have a strong respect for private property and the market economy. Is it enough respect for private property? Are property rights implicit in their understanding of liberty? For a whole lot of people that would be difficult to assess both because "enough" is tough to get a grasp on and because most people haven't thought about liberty with a sufficient degree of formality to take a position on whether property rights are implicit in a sound understanding of liberty or not. If Kevin Frei is of the "taxation is theft" internet libertarian variety (and I have no idea if he is - it's a hypothetical) then almost nobody makes the cut. But precisely why is Kevin Frei more qualified than somebody else to make the call?

Sunday, April 20, 2014

Making predictions is difficult, particularly about the future

Bob Murphy has an interesting comment on the last post:
"...But you're acting like it's totally crazy? Don't you see that there is a very real sense in which the terms conservative and liberal have come to mean almost exactly the opposite of what they did in the 1800s, at least in several key respects? If Bastiat came back today, I am not saying he would call himself an anarcho-capitalist, but I'm pretty sure he would not be a "liberal" in the way Rush Limbaugh and Rachel Maddow use the term."
So "conservative" is tricky because as society moves the goal-posts move for conservatives. But I don't think the discussion is really about conservatives so much as liberalism, left-liberals, and libertarians (I would put many conservatives under "liberalism" too but that isn't the main point here - Ryan in the comments suggests many are Straussians and that's as good a word as any for others in the conservative movement).

I am of course not claiming that libertarians don't have a claim to the word "liberal". They clearly do. They are clearly in the liberal tradition, and Bastiat - a liberal in his own time - would be a libertarian today in all likelihood and of course in the liberal tradition. I have no dispute with Bob about that.

But Adam Smith? John Locke? Thomas Jefferson? Thomas Paine? That's a whole lot trickier. I could see anyone of them being solid left-liberals if they were transported to the future. I could also see them being libertarians. Keynes remarked in his 1925 essay "Am I A Liberal?" (referencing the Liberal Party but talking a lot about ideology as well) that he would have been what he called a "Conservative Free Trader" if he were around in the 18th century (basically the Bastiat crew is what he had in mind).

But that's kind of the whole point here. Unlike Bob I would not say anything has flipped here. I would say the liberal tradition is an active and progressive intellectual community that has sub-divided over time and there are a lot of genuinely liberal ways to be a classical liberal today.

Before closing this I'd also point out that many of us have in mind economic questions and liberal political economists when we talk about liberalism. Not everyone knows economics, though. I think we need to go a little bit deeper today than seeing whether someone gets worked up about trade with China to determine whether they are liberal. That's just one issue that can easily be remedied by some remedial economics education, and deep down they may still very much be a liberal at heart even if they get some things wrong. I think economists have this tendency to look at things through an economist's eyes too strictly.

Saturday, April 19, 2014

Some libertarians are bothered by the fact that there are lots of non-libertarians in the liberal tradition

This is an... intriguing... effort. "Liberalism unrelinquished", organized by Kevin Frei and Daniel Klein.

"Political language -- and with variations this is true of all political parties, from Conservatives to Anarchists -- is designed to make lies sound truthful and murder respectable, and to give an appearance of solidity to pure wind." - Orwell, 1946

I know it can be tacky to use this essay of Orwell's to criticize people. But what else are we really to make of this? It is an effort to manipulate language to purge political opponents out of respectability (if they are not liberals presumably they have an illiberal perspective?) and to obscure the liberal tradition in order to align it with more specific political ends of the signatories. I don't think it's particularly dangerous (or that it will be effective) but it's not encouraging to see either.

Friday, April 18, 2014

An INET grant idea that I am not equipped to submit but someone should (and when they do they should include me in some kind of management/editorial role)

I've been involved recently in some discussions about whether INET has really fulfilled its mission of generating "new thinking". A major stumbling block I see here is how to think about established views and personalities. My view is that it's not the "Institute for New Economics Commentators", it's the "Institute for New Economic Thinking" and some of that new thinking might be within the context of existing paradigms, some may not. I also think it's important to remember that "new" isn't good for its own sake. INET is pursuing new thinking because we all agree there are things that are wrong with the old thinking. But that's not the same as saying all the old ideas are rubbish or that new is good for its own sake.

Much of the arguments have been framed in terms of replacing one family of ideas with another. Generally this consists of left heterodox people saying "mainstream" economics should be replaced with left heterodox economics and right heterodox economics people saying that it should be replaced with right heterodox economics. An alternative view is that each theoretical tradition is hitting on something (not necessarily of equal value of course) and each - insofar as it is really scientific - is a progressive intellectual endeavor. This view would imply that "new thinking" after the crisis should come from changes within theoretical traditions, and not exclusively from between them. This brings me to the idea.

I think it would be useful to fund a volume essentially of literature reviews across the various theoretical traditions that INET has some association with. This would be quite pluralistic. The volume would evolve across at least two workshops. Here's how it would work:

Stage 1: Well regarded people in each theoretical tradition would write a literature review of the major insights of their respective traditions, but only using material published in 2008 or earlier. Instructions on this point will be very strict - the editor of the project will ensure that all citations after 2008 are struck from the papers, even post-2008 treatments of pre-2008 work and ideas.

Stage 2: A workshop on the pre-crisis consensus in each of these theoretical traditions to get people broadly familiar with a wide spectrum of work and also of course to hammer things out and make sure nothing is missing.

Stage 3: After the first workshop another author is tasked with writing a literature review of work done since 2009, each comprising of two main sections (1.) work done continuing in the consensus view, and (2.) "new thinking". The emphasis here is on justification of each section. Is continuing in the consensus view warranted or not? Does the new thinking give us reason to reassess the tradition? What work still needs to be done post-2009, and what are the obstacles to getting it done? Citation instructions must of course be less strict here, but the author will be encouraged to principally cite to the pre-2008 literature review so that we are working with a coherent narrative.

Stage 4: A second workshop where this is considered and the author of the post-2009 chapter is challenged on his or her justifications.

At all of these stages, discussion of which tradition is better will be kept to a minimum and only mentioned in the interest of providing context. That is not so much because anyone thinks all traditions are equal, but because it's not the point of the exercise. The point of the exercise is in effect to police cases of shoring up old ideas or trying to gain undue market share for old ideas that is posing as "new thinking" and to highlight where new thinking is really going on and what the verdict is.

Plenty of people are doing the inter-tradition infighting and the justification of old ideas. This is intended to do something different.

Tuesday, April 15, 2014

HAPPY BAAAABY!!!!


The possibility of economic calculation under capitalism

I picked up several books at the local AAUW's book sale last Friday, including Lange and Taylor's "On the Economic Theory of Socialism".  I was flipping through it and found a great passage on economic calculation. I think Lange understands a point that is a stumbling block for many people grappling with "mainstream" economic models. If you get frustrated by the beginning, please note the frequent and deliberate use of scare quotes and hold on until the end:
"The only 'equations' which would have to be 'solved' [under socialism] would be those of the consumers and the managers of production. These are exactly the same 'equations' which are 'solved' in the present economic system and the persons who do the 'solving' are the same also. Consumers 'solve' them by spending their income so as to get out of it the maximum total utility; and the managers of production 'solve' them by finding the combination of factors that minimizes average cost and the scale of output that equalizes marginal cost and the price of the product. They 'solve' them by a method of trial and error, making (or imagining) small variations at the margin, as Marshall used to say, and watching what effect those variations have either on the total utility or on the cost of production. And only a few of them have been graduated in higher mathematics. Professor Hayek and Professor Robbins themselves 'solve' at least hundreds of equations daily, for instance, in buying a newspaper or in deciding to take a meal in a restaurant, and presumably they do not use determinants or Jacobians for that purpose." (page 88).
The title of this post is meant to highlight that I find more to agree with with Lange on capitalism here than I have to agree with him about socialism, but I've conveniently cut off the quote before he got into socialism.

This is an issue I posed to my students in my history of economic thought class when we went over Walras, Jevons, and Menger (and it is perhaps easiest to see with Jevons and Menger precisely because they are not presenting the problem so formally as Walras). Do you need to know and use calculus to make decisions for the theory of the marginalists to be useful? If not, why not?

Well if you do then surely marginalism is not useful, because even those of us proficient in calculus don't use it in the vast majority of our decision making. My view is that you don't need calculus and marginalism is nevertheless very useful for modeling human decision making (and "modeling" here is the key). In the end, all the constrained optimization framework says is "keep doing X until doing more X makes you worse off". It requires very little behaviorally. The greatest burden imposed by marginalism is not in the area of behavior, it's in assumptions about the structure of preferences. We usually impose a few rules here. I've argued elsewhere that they are not very burdensome and fine as an approximation in the absence of anything better. Furthermore, there's no indication that loosening these assumptions qualitatively changes the results. Its only apparent effect is to make the math harder.

As Lange points out, we don't care about the math in everyday life. The purpose of the math is to generate models to study.

Friday, April 11, 2014

My very strong impression on the public perceptions of the gender pay gap is that...

The population that thinks there is no discrimination against women in the labor market [UPDATE:] is not a major factor is far bigger than the share that thinks the raw pay gap is entirely due to discrimination.

I think this differential widens when you talk to a broadly defined set of informed commenters (people with degrees in economics, that read a lot, etc.). In other words I think there are a whole lot more Steve Horwitz's and Mark Perry's that are willing to say discrimination is not a major factor and they are sure about that than there are informed feminists walking around saying the raw differential is all discrimination.

If you have a different impression, then please don't tell me I've "missed the point", understand that we have different senses of the discourse from each other and that you appear to "miss the point" from my perspective, except for the fact that I recognize we have different impressions on this.

UPDATE: A commenter on Bob Murphy's blog wrote this recently in defense of what I contend are extremely misleading claims about the wage gap:

"In casual conversation, it’s much easier to say to someone “the male/female wage gap is a myth” than it is to say “well technically that’s true but if you control for hours worked, marital status, and age, the gap vanishes to a statistically insignificant and trivial amount.”

This is precisely what I mean when I say that this is a problem in how people like Steve Horwitz are framing it. If you think that what matters in assessing gender disparities is the conditional difference in means in a straight wage equation you are really missing the point,

Strong and Weak Forms of Gender Pay Gap Skepticism - and why both have problems

I have gotten some feedback on my last post on the gender pay gap, and I want to clarify a few things. First, as is often the case, there is disagreement on what we're even talking about. Critics assert for one thing that invocation of the gender pay gap is usually of the form "the entire 23% gap is discrimination by employers". Rarely is any evidence offered that this is what most people claim, and it's not my experience that most people claim this. Several outspoken left feminists I know that I often disagree with on things suggested they agreed with my post and don't think that the entire gap is employer discrimination. You can of course dig up a politician saying this every once in a while, but I think we all agree that politicians do not make good economists and are rarely nuanced. That is hardly proof that the view is commonplace (would you like me to assign everything that comes out of Ron Paul's mouth to libertarians?). So we appear to disagree on that in many cases.

There's also disagreement on what the skeptics are claiming, and of course you run across stronger and weaker claims. I was responding to an especially strong claim (Perry and Biggs). Some have pointed out to me a weaker (and I think more defensible) skeptical claim from Steve Horwitz. I think both have important problems, but it's worth separating the two to explore those problems. So let's flesh this out a little:
Strong claim: The conditional difference in means is the amount of discrimination between men and women in pay and therefore there is little discrimination because women choose different occupations, majors, etc.

Weak claim: The conditional difference in means is the amount of discrimination between men and women in pay and therefore there is little discrimination but there might be other social problems we don't like driving the differences in occupations, majors, etc.
Both claims have been associated with the idea that the pay gap is a "myth" (Steve uses precisely that language in his video) so in that sense they are making the same over-arching claim, just interpreting it a little differently.

The strong claim was addressed in the last post, and not many people seem willing to defend that claim, instead defending the weak claim and insisting I've misunderstood something. Well I didn't misunderstand Steve - I wrote up and sent in the response to Perry and Biggs even before Steve's post went up and of course it wasn't even a reaction to him.

So what are the issues with Steve's post? One is analytic and one is more of a framing concern I have.

1. The analytic problem

I think what I haven't highlighted as much on here (although I have on Facebook) is the issue of the joint determination of wages and every other decision men and women make associated with the labor market. You can't simply control for occupation and major and call it a day because people select into occupations and majors based on expected wages, and that selection process influences the observed wage distribution. If any of you are familiar with it, this is the basic point of the Roy model, and it has a variety of applications in labor economics. It is also analogous to the Lucas Critique and the need for some understanding and identification of the structural model in macroeconomics. A stripped down set-up to this joint determination problem is:

w0 = b0 + b1X + e | F = 0
w1 = a0 + a1X + u | F = 1
F = 1 if z0X + z1(w1hat-w0hat) + v > 0

The first two equations are wage equations. w0 is the wage in a male-dominated occupation and w1 is the wage in a female-dominated occupation. F is a dummy variable for employment in a female-dominated occupation, so the third equation is an occupational choice model. X are a set of characteristics of the worker and each equation has an error term. The important thing to notice here is that occupational choice is a function of the relative gains of entering a given field for an individual.

The short point here that anyone who's gone through an econometrics class should get right away is that occupational choice is endogenous in the wage regression. Controlling for it also controls away part of the wage differential. Think about how this plays out. Let's say there is a big gender differential in w0, the wage in male-dominated occupations. Men can expect to earn a lot more in these occupations than similarly qualified women. What would you expect to see, given equation 3? First, you'd expect to see only the women best suited to those occupations entering those occupations because they are the only women for whom w0 > w1. The corollary here is that the less qualified women for that sort of job will not enter that job. And the opposite is true of men. Men have an advantage in those fields so less qualified men will enter it because their w0 > w1 calculation is rigged. We can control for observed differences, but of course there are a lot of unobserved (to the econometrician - many of these are likely observed by the employer) differences and talents that will make a difference in pushing high ability women into male jobs and attract low ability men into those jobs. What you'd get out of a regression, though, is women that seem to be doing really well (because they're high ability) and a weakening or even elimination of the underlying wage discrimination.

This is not some crazy leftist invention to focus on discrimination, by the way. It's just Ricardo.

What should we do? We should:

1. Model selection explicitly, or
2. Take the naïve regressions as a first-cut sense of what forces matter in driving the disparity.

One thing you definitely, definitely don't want to do is decide that discrimination doesn't matter because the unexplained variation in a wage regression is small. Selection models are harder to explain to the public and it's more of an undertaking than an OLS, so I don't think that needs to be done every single time. We needn't throw out the baby with the bathwater here. But work along these lines should be done, and I imagine it is, to inform us about how at the very least occupational choice and wages are jointly determined.

You can expand the above to the joint determination of anything else that people tend to throw into kitchen sink wage regressions, but occupations and occupational segregation is a big one.

2. The framing problem

So the other problem I have with Steve's post is not so much that anything is wrong per se, but that I don't like how he's framed it. As I understand it Steve uses "discrimination" to refer to discrimination in the salary determination and "sexism" to refer to everything else. With these definitions in hand he starts off his video by telling people (like Perry and Biggs did) that the pay gap is an economic "myth", and that "it's 'mostly' not discrimination". I just think this muddies the waters. It focuses on a very narrow claim about pay determination and then uses it to make what sounds to most people like a very broad claim. It's an improvement on Perry and Biggs for sure in that it highlights other problems that they attribute to choice and preference. But it still follows the unexplained variation equals discrimination and explained variation equals something else (maybe sexism, but not employer discrimination) formula and I think both are wrong.

Discrimination is both potentially bigger and potentially smaller than this sort of formula suggests. It's potentially bigger for the reasons that I stated above - all of this is jointly determined so wage discrimination is absorbed into the other variables on the right hand side. It may also be smaller than the unexplained variation. There is a natural variability in talents, after all. There are natural variabilities in preferences. We don't know from the regression how much of that residual is discrimination and how much isn't. The only way to really get at it is what's called an "audit study", where you send out two otherwise identical resumes and see what happens. Now there are criticisms of these sorts of studies too (see several articles in the Spring 1998 JEP), but it's probably the best we've got. This is more of a treatment effect approach rather than the structural approach I described above.

So how do I like to talk about this if I don't like Steve's approach?

I generally don't talk about "discrimination" much. You'll see in the work I've done on this for the Urban Institute (usually with respect to race rather than gender), I usually use the word "disparity". This is very common, and people do it for the reasons I've raised here. Discrimination is a very strong claim and it's hard to pin down exactly what and where it is. People also tend to think only in terms of overt discrimination, and if you understand that structural discrimination is important you want to shy away from pointing to a coefficient or residual and calling it "discrimination", because many of the natural disparities that emerge are of concern too and you don't want to rule that out.