Monday, December 13, 2010

Assault of Thoughts - 12/13/2010

"Words ought to be a little wild, for they are the assault of thoughts on the unthinking" - JMK

- Krugman comments on a post by David Andolfatto on the worker flows (hiring, firing, etc.) that we would expect to see in a recession. Krugman writes: "Andolfatto correctly points out that different stories about the fall in employment have different implications about hiring and firing. If you believe that we’ve suffered an overall fall in demand, you’d expect to see hiring plunge and firing rise; it’s ambiguous what should happen to overall job separations, because you’d also expect fewer people to quit, given the lack of available jobs... Hiring plunged; job separations also mostly fell, but that was due to a fall in quits rather than layoffs, which rose during the worst of the crisis, then returned to normal levels. In all such exercises, you’re looking for the “signature” associated with one or another story; and the signature here is clearly the one you’d expect with a general fall of demand. Keynes roolz." This note from Andolfatto first caught my attention because these gross flows are what I'm interested in doing work on. I think Krugman was right to criticize Andolfatto's initial focus on changes in labor force status (unemployed to employed, unemployed to out of the labor force, etc.) and focus instead on hiring, separations, quits, etc. Krugman was probably also right to demonstrate that a simple restructuring argument would not be sufficient to introduce a simultaneous fall in hiring and rise in separations. But Krugman is wrong to conclude from all this that Keynes was right. Krugman is a theorist, not an empiricist, and he often makes the mistake on his blog of confusing corroboration with proof. Reduced hiring during a recession is the dominant feature of all gross worker flow data that any theorist has to explain. It's like volatile investment and realtively smooth consumption over the business cycle. Almost every business cycle theory explains these facts because they would be immediately rejected if they didn't. Some, like the readjustment story, can't explain the hiring data on its own - so it's often paired with other points or explanations. This does corroborate Keynes, but Krugman doesn't prove anything by it.

- Nick Rowe has a great post up in an ongoing dialog with Brad DeLong that should be a clarion call for Keynesians blaring: "Keynesianism is liquidity preference theory: don't forget that". Rowe's post does a great job distinguishing Keynes on money from monetary disequilibrium theories. I think it's fair to say that most modern macroeconomists are monetary disequilibrium theorists of some variety. Some people may not realize this, but Malthus won that debate pretty handily - so handily that many question if Say ever really disagreed with him. Keynesians add liquidity preference to the mix, which raises the question: are we observing an increase in the demand for money or an increase in the demand for liquidity? To make piece or common cause with monetary disequilibrium theorists, we often treat these as if they're synonymous - but they're not, and they can imply different solutions. Rowe presents the differences and alternatives with a very clear analogy.

- Finally, Brad DeLong reproduces one of my favorite letters by Thomas Jefferson to James Madison while Jefferson is in France. The letter is on the causes and consequences of inequality in France. I had read Jefferson's letter discussing how the earth belongs to the living a long time ago, but reading this letter really drove home for me the connection between Jefferson and Paine on the centrality of time and the legal fiction of property rights in their political philosophy. I discuss this here, and elsewhere as well. Jefferson, I think, was the most brilliant mind of the founding era - no spunky young constitutionalist or sagacious old womanizer comes close in my opinion. He placed an extremely high premium on liberty - and rightly so - but I fear we've dumbed down his intellectual legacy.

8 comments:

  1. Daniel,-

    Returning to our discussion, because your legal ethics is still not wholly clear for me, let's do it a different way.

    What criteria should a government intervention satisfy, in order to be justified in your worldview?

    I suggest you may explain it on the example of public education.

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  2. Perhaps you need to clarify what criteria you think government intervention should satisfy and why you think these things are inappropriate - it may make it easier to explain my point. I'm not sure if you disagree with me or don't understand me. If its the latter, then elaborating your justifications might help me make the point better.

    Education is rife with externalities. I know you think that's bringing a technical economic term to political philosophy and trying to leverage a lot out of it - but when I say "externality" all it really means is "a case where the public benefit is not best served by individual action". "Externalities" are just a much more precise and less wishy-washy way of thinking about it. In education, children are dependent on their parents to make educational decisions for them until its largely too late. The benefits of that education are internalized from that parents calculations in proportion to how sympathetic they are with the child. Children may very well not receive the human capital investments they would have made had they been thirty years old, with a time-traveling machine, and able to go back and make the investment for their childhood selves.

    This introduces another problem - again the problem of time. We can think about the whole problem of time in political philosophy as being an externality where benefits and costs to future generations and even our future selves are externalized by virtue of the unidirectionality of time. Again - important investments especially are underinvested in.

    Aside from that there's the simple point that a free society with a republican form of government needs to be educated to use that republican form of government effectively (again, this is Jefferson). Education is as much a prerequisite for a republic as campaigns and ballot boxes. None of this, of course, implies that people be required to attend state schools. Private schools are fine. But it does imply the provision of state schooling.

    I'm going to be in meetings a lot of today and so won't be able to respond - but you might want to flesh out your opposition a little.

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  3. also, feel free to search the blog on "education". This is just off the top of my head - you may find more thought-out justifications elsewhere.

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  4. =I know you think that's bringing a technical economic term to political philosophy and trying to leverage a lot out of it - but when I say "externality" all it really means is "a case where the public benefit is not best served by individual action".=

    Well, this helps to clarify matters.

    Now I see that the heart of our disagreement lies in the question of whether there is any such thing as public benefit, unless by it you mean a sum of individual benefits.

    Even if you mean the latter, it is impossible to make interpersonal comparisons of utility. Thus, it is impossible to figure out the public benefit of anything even in this sense. As it is impossible to calculate the true loss of utility caused by taxes needed to finance the provision of positive externalities.

    And while it is impossible to say whether public subsidization of externalities will increase utility, it is quite possible to predict that the logic of government will lead to abuse and great expansion of powers that will eventually put the government on the verge of bankruptcy.

    This has happened with the overexpanded Roman Empire and the US and Europe seem to be on the same sorry road.

    Therefore, from the rule consequentialism logic the idea of the government subsidizing positive externalities does not stand.

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  5. As for the point with parents, I agree that the family form of child upbringing is not optimal.

    But for me government subsidized and regulated education is far worse than failure by some parents to adequately educate their children.

    Again the logic of government predicts that the government will use the public education system as a tool of propaganda and rewarding the special interests - in this case the teachers.

    This is not to mention the fact that in case with education government interference necessarily leads to homogenization and dehumanization of methods and outrageous quality of the final product.

    Government does not know how to educate children and probably does not care. It cares only about formalized results.

    Even non-libertarian specialists in education have started to question the very principles on which the system of public education is based.

    http://www.youtube.com/watch?v=zDZFcDGpL4U

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  6. "Even if you mean the latter, it is impossible to make interpersonal comparisons of utility. Thus, it is impossible to figure out the public benefit of anything even in this sense. As it is impossible to calculate the true loss of utility caused by taxes needed to finance the provision of positive externalities."

    First, I'm not necessarily arguing a strict utilitarianism. If someone is capable of deriving more enjoyment out of life in general than someone else, I'm not sure they enjoy any special priveleges or consideration as a result. Therefore, its not entirely clear to me why interpersonal comparison is necessary.

    I've also never claimed its possible to actually calculate any of this - its clearly not. We are dealing with two impossibilities: a market that in certain circumstances is biased towards sub-optimality which it is impossible for the market itself to correct, and a state for which it is impossible to exactly calculate that solution but which is not constrained to the sub-optimality that the market is.

    "And while it is impossible to say whether public subsidization of externalities will increase utility, it is quite possible to predict that the logic of government will lead to abuse and great expansion of powers that will eventually put the government on the verge of bankruptcy.

    Could you explain why you think so? I think each of these are possibilities, neither are certainties, and this is precisely why we design constitutional structures to make the former more likely and the latter less likely. I don't see any particular reason to believe that the latter is more likely than the former if the right constitutional structures are in place. There's clearly a risk if they aren't.

    Therefore, from the rule consequentialism logic the idea of the government subsidizing positive externalities does not stand.

    I'm sorry Daniil, but you haven't made this case at all.

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  7. On education -
    Certainly we've seen empirically that it tends to defend the special interests of teachers. I'm less convinced of the propaganda point, at least for the U.S. (although clearly its a risk to watch out for).

    But despite the catering to certain special interests, its not clear to me why the benefits to children are outweighed by this at all. In a market situation a large portion of children would be considerably undereducated. This is a very easy conclusion to come to given what we know about the market process. Have teachers unions introduced problems? Unquestionably. I'm not sure why you're acting as if that's the only real effect of public education. You seem to be assuming away all the benefits and counting only the costs. Its not very convincing to do that. That's not how decisions should be weighed.

    I'm listening to the video now and enjoying it a great deal...
    ...I'm halfway through and I'm still not clear on what the public/private connection is. He's saying great stuff - but not about what we're discussing.

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  8. Ya - just finished the video.

    If you can tell me why this is an indictment of public education and not formal education in general (public and private), I'm all ears.

    Let me put it this way - everything he criticized has been a part of both public and private education. Everything he suggested could be incorporated into both public and private education. Don't get me wrong - I liked the video a lot (and will probably repost it), but I don't think it does anything to question the public provision of education.

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