Tuesday, April 15, 2014


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.

Wednesday, April 9, 2014

Botched economics of gender in the WSJ

Mark Perry and Andrew Biggs have a really unfortunate op-ed in the Wall Street Journal yesterday perpetuating the idea that the gender pay gap is a "myth" (I know that's the title they were probably given but the column itself makes much the same point).

Why would they claim that? Because surprise, surprise the conditional difference in means is smaller than the unconditional difference in means!

I sent this letter to the editor in. It has not been published at this point:
"Mark Perry and Andrew Biggs (April 7th, 2014, "The '77 Cents on the Dollar' Myth About Women's Pay") seem to confuse our ability to attribute the gender pay gap to various factors with the idea that the gap itself is a "myth". Far from demon...strating that the gap is "economically illogical", by highlighting the various determinants of pay disparities Perry and Biggs are actually confirming the existence of the gap and presenting evidence on where it originates.

Economists have been studying female labor market participation and performance for decades. This research does not stop at the question of pay disparities. We know, for example, that many occupations are highly segregated by gender, and that large gender disparities exist in the amount of time dedicated to household work. Young women may be nominally free to major in whatever they choose, as Perry and Biggs suggest, but these choices are heavily conditioned by earlier experiences in the home and in primary and secondary school.

All of these disparities are closely related to each other and to the pay gap, and they pose a real problem for those of us that value gender equity. Dismissing the gender pay disparity because it is deeply embedded with other disparities does not clarify the issue at all; it confuses the issue.

Daniel Kuehn
Doctoral student, American University Department of Economics
Specializing in labor economics and gender economics"
Mark Perry's next column: The black unemployment rate is a myth because if you control for unequal education, terrible treatment by the justice system, and differences in a family structure a whole lot of it seems to go away! Also must not be caused by discrimination.

If anyone is interested in studying the economics of gender and the family, you should look into American University. It was the first U.S. university to have a field specialization in gender economics, it offers courses in both gender macro and micro, and a lot of the faculty are working on these issues.

Simon Kuznets at Econlog - an agreement and a disagreement

Bryan Caplan and David Henderson have two interesting posts up (here and here, respectively) on Simon Kuznets, who was responsible for building the national accounts in the United States (along with many other important contributions).

I agree strongly with David's praise of something Kuznets pushed for in the national accounts and disagree strongly with Bryan's praise.

Let's start with David. He notes that very early on Kuznets advocated including household production in the national accounts. He was overruled at the time. This is a major oversight, given how much production occurs in the household, and the relationship between household production and market production. One guess I have as to why he was overruled at the time was that not many people were talking about household production yet and those that were were principally labor economists (it's relevant for labor supply decisions and at the time especially female labor force participation). Macroeconomists didn't really start getting interested until several decades later when RBC and other theorists were trying to explain some unusual labor market and consumption behavior over the business cycle. I review much of this in a paper that I am revising and resubmitting to the Journal of Family and Economic Issues on household production over the business cycle and its relationship to home price fluctuations.

One last point on this is that the Commerce Department is beginning to make amends. There have been working groups on the subject and people are generally positive about developing these data, perhaps in a separate module like they do for research and development. This is for the best, I think. Household production impacts macroeconomics obviously, but a lot of macroeconomics turns on income-expenditure identities and the idea of an aggregate output market. Importing non-market behavior into theories of the market is possible, but you cannot confuse exchanged output with non-exchanged output (unless you want to scrap the theories that we currently have about human exchange). So I think the BEA is well placed to measure (really, to estimate) this, and they should but I would keep it as a distinct series.

Kuznets is not to be praised, I think, for something that Bryan discusses - his advocacy of using GDP as a measure of welfare and excluding things like armaments spending that he sees as reducing welfare. There are two enormous problems with this position, both grounded in what ought to be non-controversial welfare theory.

The first and most obvious is that welfare is not a measurable quantity (unless we get some way of measuring utils - perhaps in units of dopamine? - and adding them up across individuals). This is the standard interpersonal utility comparison issue. You cannot get an aggregate welfare measure because you cannot measure welfare in a way that can be summed across a population. Even if you could (and admittedly it would be fantastic if you could), the concept has nothing to do with the national accounts and has no business in the national accounts. The national accounts measure p*q, price times quantity of goods and services. Any given p*q could be associated with a wide range of welfare levels depending on the shapes of the supply and demand curves. Sure they're related in that you get both concepts from a supply and demand model, but they are related like apples and oranges are related because they're both fruit that grows on trees. So it's not a very plausible goal to begin with, and even if it were plausible it's not something that should be mixed into the national accounts.

However, the interpersonal utility comparison problem rears its head in another way. Exactly who gets to decide what is really welfare enhancing and what isn't? I think a lot of armaments funding is welfare enhancing. Why is Kuznets and Caplan's view privileged over mine? Caplan calls this proposal "impolitic wisdom". Maybe it's impolitic, maybe it's not. I don't think it's wisdom. A better term for it is "objective value theory," and that doesn't have any business in economics. Why stop at armaments? Why not guns held by private households. Sure, many privately held guns are used for recreation but a lot of them are also used for precisely the same purpose that larger armaments are used. Should we subtract out gun production? What about home security system? Should police uniforms be subtracted out of the textile industry and police cars be subtracted out of the automobile industry? I really only have a lock on my door for security reasons too - should locks be subtracted out of output? Or do we have to somehow distinguish between legitimate and illegitimate security spending - and again who gets to decide what's legitimate?

Security is just the tip of the iceberg of course. What about alcohol and tobacco? What about trans fats? What about Jersey Shore (the show, not the location)? What about the house of the guy that lives behind me. It's an eyesore and I'm glad at least that I don't have to look at it out of my front window.

You get the picture.

It's a bad idea, and it's a good thing Kuznets was overruled on that one.

Monday, March 31, 2014

Good thoughts from Nick Rowe on some old fashiony stuff


I've always had a tough time understanding a couple things. First, I've never understood the outrage at the money multiplier/endogenous money stuff. At best it's a semantic difference (this is largely true of "endogenous money" I think, where it boils down to whether the FOMC is "accommodating" banks or whether you want to think about its bond market activities as more pro-active - it's a sin of omission vs. sin of commission argument). On the money multiplier I think Nick makes the right point that the multiplier is the same no matter where the injections occur. Noting that central banks sometimes inject money (the pro-active view of the FOMC) certainly doesn't rule out the idea that "loans create deposits". Whether loans create deposits or deposits create loans depends on one thing: at which step in the Macro 101 exercise you start tuning in.

This segues nicely into the equally odd treatment of the Keynesian multiplier. This one I think is even more right-there-in-front-of-you than the money stuff. Whether you're reading it in the Keynesian original (where the chapter on the multiplier doesn't even HAVE a G and everything is talked about in terms of I!), or in modern textbooks (where neither I nor G are functions of income and enter the equations in the exact same ways). When I TAed for our big intro macro lecture and I did my review lectures I made them work through both and show that they got the same answer, so that they understood why the model works the way it does: the income/expenditure equation and the consumption function, not some magical powers of the government.

Finally, I've never understood the tendency to treat Old Keynesians like troglodytes and New Keynesians as sophisticates when it comes to the main components of the model. All of the important elements of the Old Keynesian model are in the New Keynesian model. That's why it's a called "Keynesian". What the New Keynesian model adds is some dotting of the i's and crossing of the t's: more realistic price formation, expectation formation, etc. Some things drop out, too. You're better served going to Nick's post for that.

Friday, March 28, 2014

Bob Murphy on public space exploration... not a pretty sight.

There is so much wrong with this post that I can't not respond. He doesn't grapple with the real argument put forward for public space exploration, he botches the socialist calculation debate, and he uses Firefly for evil.

The beginning is mostly factual. The Planetary Society wants high public spending on space exploration. It has Europa in its sights. I vigorously agree. Bob's position is that we should "privatize the whole enterprise".

He writes:
"Bastiat’s famous admonition to look at both the seen and the unseen applies just as much to grandiose space projects as it does to, say, sports stadiums: It’s not enough to ask, “Would humans benefit from a mission to Europa, if it were a free gift?” Rather, the question is, “Would humans benefit more from a mission to Europa, versus the best possible alternative use of the resources such a mission would require?”"
This really makes me wonder precisely what trade-off Bob thinks proponents like me are thinking of. The whole argument is that it is a beneficial use of resources relative to alternative uses. Nobody that I'm aware of has claimed that such endeavors are costless. But how do they compare to many other budget items? How does it compare to a future where space exploration is solely private? That's the question people are talking about. Instead of addressing that, we get opportunity cost explained again.

The next paragraph is really disappointing:
"All of the usual problems with socialist central planning–brilliantly explained by Ludwig von Mises and elaborated by Friedrich Hayek–kick in when it comes to space exploration. Remember, it took the brilliant and brave iconoclast Richard Feynman to get to the bottom of the space shuttle Challenger disaster. And less disastrous but more ridiculous, in 1999 NASA lost a $125 million Mars orbiter because two different teams working on the project had an English units / metric system miscommunication."
So this is not the Mises/Hayek insight on central planning at all. The claim is not that technical problems are unobtainable by public planners. Quite the contrary, it's pretty standard to highlight Soviet technical prowess. The Mises/Hayek point is that a central planner can't make the trade-offs necessary for a functioning economy because it cannot aggregate private information on scarcity, cost, and value the way the price system can. Ironically, the technical issues were in the hands of private contractors for Apollo, Challenger, and every other achievement of the space program. I don't point this out to fault private companies. I, of course, am as vigorous a supporter of private space efforts as I am of public space efforts. It's simply to point out that the tragedies Bob raises have nothing at all to do with Mises and Hayek. (Unless the argument is that a private effort wouldn't hire such problematic contractors???... but something tells me that's not where he's going with this).

Much of the rest of the post makes an excellent case for private space efforts. The only problem is that by failing to engage the externality argument for public space exploration at all Bob presents a false choice. I have yet to come across a single advocate of a public space effort that wouldn't agree with this from Bob:
"There are plenty of commercial applications of modest space exploration efforts, including obvious things like placing satellites into orbit but also more exotic possibilities such as space tourism and mining asteroids. Pure profit-and-loss calculations from retail sales don’t have to be the sole driver, either; the X Prize showed the potential for spurring innovation with a relatively modest amount of donated money."
But that's not the point. Or at least it's not the point that Bob is trying to make here, which is that there's a problem with public space exploration. Let's review - first he reminds us we need to think of opportunity costs which I think everyone agrees on and is definitely not a case against public space programs. Second, he botches the socialist calculation debate which even if accurately rendered is not an argument against a public space program. Third, he makes some good points about valuable private efforts, which is not an argument against a public space program.

So what is the argument?
"In conclusion, my guess is that The Planetary Society’s suggestion that citizens of the United States should effectively spend (in their role as current and future taxpayers) $1.5 billion per year on planetary research is absurd".
His "guess".

Look, that's fair enough. This is not a case where we have hard data to make these assessments. Everyone is making judgments based on a sense they have about the human future and I'm no different. But let's not pretend that opportunity cost, the feasibility of socialism, or the benefits of private exploration have a thing to do with the argument here. We all have this foundation. The question is, is there a reason to think private investment is not optimal. If so, then we can accept the logic of Bastiat, Mises, Hayek, and the X prize and still support a public program. If not, then Bob's position holds completely independent of Bastiat, Mises, Hayek, and the X prize.

Finally, there's the Firefly thing. It lingers in the background of the post, but let's be clear about one thing. The Independents were a loose federation of self-governed planets that resisted tyranny. They were not anarcho-capitalists like Bob. They were federalist liberals like me. And Joss Whedon is no Robert Heinlein (although Heinlein is all over the map relative to the view of him that most libertarians have).

Wednesday, March 26, 2014

Caroline is six months old today

That is all.

Tuesday, March 25, 2014

Norman Borlaug always makes me appreciate the work of Thomas Malthus

It would have been Norman Borlaug's 100th birthday today. When I think about Borlaug it always makes me appreciate the work of Malthus. A lot of people find that odd, but I think it's because of the low quality of critiques of Malthus floating around.

What's frustrating about critiques of Malthus is that Malthus openly admits that the subsistence constraint is differentially binding because agriculture is differentially productive. He does have the famous base case model with arithmetic growth of food and geometric growth of population. And that's gripping for people, and the specification may be all wrong. But it served the useful purpose of being an equilibrium model (and an equilibrium model used by the rest of the classical economists, I should add). It also served the purpose of succinctly demolishing Condorcet and the utopians. Malthus insisted that you could not depend on the perfectibility of man. Man is an animal and the study of man needs to be tethered to that fact. We social scientists are studying a particularly goofy, creative, and eccentric primate that occupies a particular ecosystem, and those facts will govern the science of man. Moreover, when Malthus applies his model he talks about variations in preventative checks, positive checks, and agricultural productivity across different societies. I have not read much in his Principles of Political Economy outside of the stuff on general gluts, but I would be surprised if he denied technological progress there. So he is very clear that these parameters vary and change, but the fundamental point - and the point of having the rigidly parameterize arithmetic/geometric model - is that generally speaking man is constrained by the resources that sustain him.

Norman Borlaug matters precisely because Malthus was right on this point. If Malthus was wrong, Borlaug would not deserve his Nobel.

Accepting Malthus as one of the great political economists should really not be that hard. If you're willing to think in terms of early 18th century equivalents (i.e. - changing around what is the output and what is the input exactly), if you're willing to take logs, and if you squint a little, Malthus's model is basically the Solow model. Same sort of structure and same sort of equilibrium with the same sort of conclusion. Solow gets some abuse, sure, but nothing like the stupid sort of critiques that Malthus gets. Could you imagine someone offering "Solow is wrong because there's technological development" as a serious critique?

If you want to take the unified growth theory route and just label periods where subsistence constraints are binding as "Malthusian" and when they're not as "non-Malthusian" it makes perfect sense why you would use those sorts of labels. But don't try to pass off that labeling schema as history of economic thought.

What do we fault Solow for? Well we wish he endogenized a few things, chiefly technological growth. But even without that work, Mankiw, Romer, and Weil show that you can get a lot of mileage out of the Solow model. And of course "better" models cannibalize the Solow model for spare parts. The same could certainly be said for Malthus. It would be nice if he had more on technological growth. But don't confuse that case of "more research required" with the case that the model is useless or doesn't illustrate an important point. Anyway, my point here is that when Solow gets critiqued it makes for a quite edifying read. Not so with critiques of Malthus.