David Henderson disappoints

Here.

The comment thread is depressing to me. Good economics and common sense thrown out the window during election season because Obama clearly couldn't have meant what he plainly said, that everything we achieve is a result of our own initiative (something he explicitly said in the speech) as well as the contributions of society, including the contributions of government.

UPDATE: OK, Charles Rice's comment, below, clearly convinces me that intonation doesn't travel well online. Let me clarify this:

The commenters in David Henderson's thread throw good economics and common sense out the window during an election season by insisting that Obama clearly didn't mean what he plainly said and instead was somehow slighting business owners. Obama plainly said that what we achieve is a result of our own initiative, as well as the contributions of society, as well as government. He clearly said this. But the commenters at Henderson's blog and the author of the article Henderson links to insist that he didn't mean what he clearly said, and they assume they can interpret what he said for us to tell us what he really meant. I think it's nonsense and I'm disappointed David was endorsing it.

Great ideas, and a response to a comment by your favorite blogger and mine

Gene Callahan has a list of the great ideas of social science here, and he solicits other ideas.

I might add:

Division of labor and its social ramifications (Smith, Durkheim, Marx)

Externalities and the impact of property rights on social organization (Pigou, ? somebody had to have said this before him)

Law of one price (Cassel, Keynes, again there have to be other earlier examples)

Double consciousness (DuBois)

Non-neutrality of money (Keynes, Hayek, there have to be earlier examples)

Social construction of reality (Berger, Luckmann)


I was also intrigued by this comment by Greg Ransom:

"The most important idea – on a par with Darwin’s directly parallel idea – is the identification of an explanatory PROBLEM in the design-like order of the rough, undersigned & non-dictated coordination of individual plans in the great market society, and the solution to this problem in the bottom-up mechanism of learning in the context of changing relative prices, negative rules of just conduct, and individual judgments of local conditions.

Until this ideas was together in one piece by F. A. Hayek economics, like biology before Darwin, was just a miscellany of components — afterwards everything makes sense"

That's funny. I would have thought that's the primary reason why Adam Smith is considered a sort of father of economic science, even though he certainly wasn't the first to write on the subject. And much as I like Hayek, Smith beat him to it by over one hundred and fifty years. Indeed, Darwin found inspiration in a lot of the classical economists. Just an important thing to keep in mind.

Mises was not bankrolled by the financial elite

Tom Woods gives a good argument here that exactly the opposite was more likely the case.

Two thoughts:

1. Very funny to see a Mises Institute guy chuckle at how crazy those LaRouchians are.

2. The fascism saving European civilization thing is a bit more pressing to me than the Rockefeller Foundation thing (hell, I've done research supported by Rockefeller Foundation money... if I was being groomed by the financial elite I apparently missed that memo).

But I do think Woods gave a good argument on the issue he was exploring. Yes, I know this is something of a backhanded compliment, although the "compliment" part is as genuine as the backhand.

My problem with the "Sumner Critique" Sumner's critique

This post of his gives me a good opportunity to share my problem with the "Sumner Critique" Sumner's critique.

First, I'm not arguing against the obvious point that money can be tight when rates are low. That's just a misunderstanding of economics to make a claim like that. Often, when someone takes issue with a market monetarist they just accuse you of thinking that. I'm not saying that.

My concern is that the "Sumner Critique" Sumner's critique meshes together policy goals with actual policies so that evaluations of whether a policy (say, "looser money") is simply being pursued is treated synonymously with whether a goal we all like (say, "NGDP back to target levels") has been achieved. Now, market monetarism could just be a central bank decision rule (if NGDP is below target, then loosen more). That's fine. But for market monetarists like Scott Sumner, who seem interested in going beyond decision rules and actually offering an analytic claim, there seems to be no way to logically make the statement "we have done the market monetarist policy rule and the goal was not achieved". Why? Because if NGDP level targets have not been reached then by definition you haven't been doing market moentarist policy.

Aside from the fact that it's just frustrating to deal with people who talk like this, it's also not helpful from a scientific perspective. The reason why people focus on the base and on short term rates is that that's what the Fed has fairly good control over. It's one thing to say that different economic conditions call for different rates and base money supplies, and to note the difference between a nominal and real rate. It's another thing entirely to say that rates and the base should be ignored and that we should focus our attention on NGDP as a measure of the policy stance, because the whole scientific question at hand is "how does monetary policy (OMOs that affect the base and short rates and maybe long rates for QE) impact NGDP in a depression?"

I don't normally take a particular Popperian attitude towards science*, but the whole problem here can be summed up as the problem of market monetarism (at least as presented by Scott Sumner) can't really be falsified.

This is not the case with Keynesianism or other theories out there to choose from. The policy goal is very distinct from the policy for Keynesians. You can do some back of the envelop calculations with the output gap, Okun's law, and the multiplier and get a policy proposal, and then you can see whether the goal is achieved or not. Of course there are all kinds of arguments left to have about the multiplier's real value, or about whether Romer and Bernstein did a good or bad job forecasting the output gap. There will still be arguments about all that. But nobody ever said anything like "NGDP level goals were not achieved and thus by definition Keynesian policies were not tried". In other words, we can get policy perscriptions wrong because of imperfect knowledge, but we don't define the policy by the achievement of the goal the way Scott Sumner and many other market monetarists seem to.

Sumner could make a case for a Sumner rule like the Taylor rule, and that can be grounded in NGDP levels just like the Taylor rule is grounded in inflation rates. That would be great. But that's very different from what he's doing.

This is the odd thing about reading Friedman too. I'll leave it to the historians of the Depression to validate Friedman's claim about the Fed stance. But there is something inherently odd about pointing to monetary aggregates as a sign that the Fed wasn't doing something right. It could be that, but it could be that your understanding of what Fed policy should be is wrong because it's not moving the broader aggregates.

*To summarize why I don't really approach things in a Popperian way: I think taxonomical and descriptive science is important and that has trouble with the whole "demarcation" attitude. I also think that adjusting theories to deal with empirical problems until we reach the point that another theory offers the better alternative is a good thing, and yet Popper explicitly calls this non-scientific. Finally, I think in an imperfect world we can make good inferences from a body of corroborations, regardless of whether they are corroborations.

Hayek pushes back against Bork

I love how Hayek pushes back against Bork here. Unfortunately I think too many modern libertarians take the Bork position rather than the Hayek position, and I mean this in two ways. First, there is a widespread view that when people don't talk like libertarians, it's because they don't appreciate liberty. Hayek pushes back against this. But even more damningly I think a lot of libertarians themselves have the sort of rationalist, Cartesian, "we must have a theory for everything" streak that Hayek is criticizing here, and trying to direct Bork towards. See Gene Callahan for critiques of that attitude.

 

And since the subject is intellectuals, it seems worth pointing out that Sowell seems to take the Bork position to me... and that is not to his credit.

More on Hayek's Neoclassicism

David Glasner has new posts here and here, specifically going over examples of Hayek's neoclassicism in his JPE article on the Ricardo Effect.

Ryan Murphy seems to differ a little, although he does allow that Hayek is a "marginalist". To me, marginalism comes pretty close to being synonmous with neoclassicism. It's certainly synonymous with a theory of maximizing behavior. I suppose you could be a marginalist but not think that equilibrium analysis (or equilibrating tendencies - as I pointed out to Jonathan very few people think we actually sit at equilibria, and those few people probably aren't the sort of people anyone should be listening to) is helpful. But I don't think there are many such people.

I found this interesting from Ryan: "Hayek largely abandoned much of the emphasis on equilibrium analysis and this is what characterizes modern Austrian economics (think Ludwig Lachmann for the “ideal type” of such economists – of course Glasner was right there in the NYU orbit [if I'm not mistaken] when this type of Austrian economics was at its peak, so I’m slightly confused). Caldwell refers to this as “Hayek’s transformation,” citing “Economics and Knowledge” as Hayek’s turning point on this."

I agree with the first part, and I believe I was careful to say this earlier (if not, I'm concurring now) - what's really neoclassical is Hayek's macro and "early Hayek". The hermeneutics, the neuro stuff, the emergent order stuff isn't "neoclassical". That's important to note because (1.) that's the Hayek you see from a lot of internet Austrians, and (2.) that's the Hayek that disagrees with Keynes, which is one of the big attractions of Hayek. I'm not sure I agree with Caldwell that Economics of Knowledge is the best example of the transformation, although perhaps it's a pivot point. The reason I say that is that the insights of Economics and Knowledge is as amenable to neoclassical economics as it is to non-neoclassical economics. In other words, if neoclassical macroeconomist Hayek had never made his "transformation" he still could have produced Economics and Knowledge. Indeed, if I recall at several points in the essay he stresses that older generations recognized what he was saying, that good equilibrium analysis required a cognizance of what he was saying, and that he was really just fleshing out a better dynamic equilibrium theory. Now, Caldwell is right insofar as this essay also opens the door to less neoclassical work.

I still think the case for Hayek and Austrian economics in general as neoclassical as pretty solid, unless we are specifically talking about the Lachmann stuff. I'm a little struck by the fact that Ryan says you only hear the far left saying this. I thought it was commonly accepted that Austrians were neoclassical. Anyway, I certainly don't see it as a perjorative - I'm a neoclassical. That's not to say I think non-neoclassical approaches are useless. It's just my paradigm - it's the best organizing principle we have laid out. It's certainly not the only good organizing principle or the final word on economic science.

Whoever you are, I salute you

I found this series of (fake) comments on this post. You made my morning, whoever you are (I have not had problems with my toilet, but I did have problems recently with the plumbing from the kitchen, just before it met the plumbing from the bathroom. That was about two weeks ago - the fix seems to be holding up well.

Blue AuroraAugust 30, 2012 11:03 PM
Hey Daniel,

I heard your toilet is broken. Perhaps you might want to consult Dr. Michael Emmett Brady for advice. He has some great writings on heterodox plumbing!



Jonathan F. CatalanAugust 30, 2012 11:19 PM
Daniel,

Mises would reject the notion that your constantly flushing toilet is somehow a sign of "toilet failure" because Mises rejected the idea that the water in your toilet rests between the flushings in an equilibrium-like state. Enterpreneurs will break into your house and flush the toilet because there are profit opportunities. You should read something about his evenly rotating toilet.



Peter BoettkeAugust 30, 2012 11:22 PM
Daniel,

you are young and smart but the dynamic modelling of toilets is a deep and subtle issue. Read Alchian 1990.

Lord KeynesAugust 30, 2012 11:24 PM

There is absolutly no merit in studying Hayek's Austrian theory of plumbing. As Sraffa has shown in 30s there is more than one "natural rate of flushing".

Reply

Internet AustrianAugust 30, 2012 11:30 PM

@Lord Keynes

This is bullshit. You can deduce logically from basic axioms that the problem is actually too much toilet paper issued by the Fed.
We should go back to gold instead of toilet paper out of thin air.

Slow blogging

Thanks to Evan for picking up the slack yesterday. I think blogging will probably slow down in the next couple weeks, although every time I say that it picks up again.

Working on the usual stuff - with homework now on top of the independent research. And daily life is constantly intruding too of course.

My main work lately has been trying to develop typologies of educational pathways (specifically for science and engineering majors) with some great transcript data. This sort of exploratory data analysis is relatively new to me. We're trying a variety of clustering strategies, but if anybody knows good ways of looking at pathways over time I'd be interested. I'm familiar with group based trajectory analysis and plan on trying that, and we're also going to set up some kind of Markov chain model. The problem with that is that coursetaking isn't dichotomous. You can be taking multiple courses at once. So something like a continuous Markov chain model would be great but I don't know of such a thing.

Also potentially of interest - I picked up Pure Theory of Capital from the library yesterday for the Critical Review article. It's not going to get technical enough to really differentiate between Hayek's work in detail, but I want to familiarize myself enough with it so that I don't miss anything critical.

Vaccine Fearmongering

I feel the need to go on a mini-rant based on a poster I saw at our pediatrician's yesterday, and a post today from Brian Leiter. Both of these are examples of common practices in the public health community that verge on fearmongering, and make it difficult for parents to act critically in making decisions about vaccinating their children.

I want to be clear: My children get vaccinations. I do not think that vaccines cause autism. So I am not trying to say that encouraging vaccination is in itself fearmongering, and I am not saying that parents shouldn't vaccinate their children. In most cases they should.

That said, our children are on an adjusted vaccine schedule, and we have gotten pushback about this at nearly every check-up. I've had to sign forms saying "I realize that I'm endangering my child against the doctor's recommendation," and I've received my share of glares and eye-rolls. Not because I refuse to vaccinate my children, but because I don't think there's a reason to give multiple invasive shots at every check-up during the first year of life. We put off vaccines for a year and a half, and started introducing them more slowly. We weren't worried about autism or anything life-threatening, but we were worried about needless side effects in our very young children... rashes, cold symptoms, etc. It's not as big a deal for a three year old to have these side effects the way it is for a newborn, or a six month old. And there's no reason for a newborn to get a Hep B vaccine in their first hours of life unless there is some risk of getting it from the mother, or some other environmental factor.

This sort of measured opinion never seems to register with the medical community, though. Either you follow the doctor's schedule without discussion, or you're a pot-smoking hippie/paranoid homeschooler. I get that part of this mentality is a wider-scope public health measure. Some parents may really sit down and read the literature on vaccination scheduling, but it's safer to push a standard and aggressive schedule on everyone so that a baby isn't sent home from the hospital into a dangerous situation only to contract Hep B a few weeks later. In pursuing these aggressive campaigns, though, vaccine education can reach some pretty low lows.

Take the poster from Texas Children's Hospital, for instance. It is a sobering story, but it engages in the same sort of anecdotal argumentation that is skewered in those who insist that vaccines cause autism! The poster even ends with, "Had she received a flu vaccine, Denise and Gary strongly believe that Breanne might still be alive today." [!!!!!] The problem isn't that this conclusion is unlikely... they may very well be right about their daughter. But surely Texas Children's Hospital has more to offer than anecdotes of strongly held beliefs! The only statistic on the poster mentions that 10-40% of healthy kids will contract seasonal flu each year. There is no mention of how many deaths occur each year, what percentage of those who contracted influenza actually had the influenza vaccine, what percentage of vaccinated kids contracted influenza, and what percentage of those who died from influenza were vaccinated. How is anyone supposed to be educated from this poster? As an appeal to pathos, I get it... but again, it seems to me that such appeals become hypocritical when they are condemned in others, and are of limited use when only supported by anecdote.

As for the article linked by Leiter, again, there is some good and some bad here from what I can tell. Of course it's a problem if widespread non-vaccination leads to increased mobility of disease... but I always get annoyed when advocacy of herd immunity turns into something of a mob mentality. Vaccinated students are directly "put at risk" by imperfect vaccines. Non-vaccinated students are directly "put at risk" by lacking any sort of vaccination protection whatsoever. But there's only so far that you can go in claiming that a minority of unvaccinated individuals present a risk in some direct way to the wider vaccinated community. No one gets a signed guarantee of controlled sociological factors when they go to get vaccinated, and the public health problem of herd immunity needs to be distinguished from the medical problem of immunization. 

Then there's always the situations where outbreaks happen in entirely vaccinated situations... when I was working at Wheaton College, there was a mumps outbreak among the students, with 94 undergraduates contracting the illness. All of the students who were diagnosed with mumps had been vaccinated against it. Does that mean one shouldn't get the MMR vaccine because it's useless? Of course not. Many more students would have probably contracted mumps if no one had been vaccinated. What it does mean, however, is that a mob mentality response to a threatened herd immunity needs to recognize the inherent limitations of any immunity that requires a herd situation in the first place.

All this is to say, again, not that vaccination causes autism, or that it shouldn't be done... but that the medical community shouldn't be so reactionary against pseudoscience that it ends up discouraging the development of an informed and critical citizenry through its fearmongering.

I beg to differ

Jonathan Catalan is often an astute comparative thinker on economic theories, but I disagree when he writes this:

"Ironically, Krugman makes the best case as to why not consider Hayek fully a neoclassical,

What would truly non-neoclassical economics look like? It would involve rejecting both the simplification of maximizing behavior, going for full behavioral, and rejecting the simplification of equilibrium, going for a dynamic story with no end state.

That description, except for the reference to behavioral economics, fits Hayek. Austrians stress the reality and the necessity of disequilibrium — see previous posts here, here, (these two are on Mises and disequilibrium) and here (this one is on instability as a precondition for progress) —, and while L. Mises really set the stage for the idea that the pricing process is what allows for an efficient allocation of resources, he and other Austrians were/are never maximizers. Further, while, again, Austrians probably cannot be fit into the behavioral school, they do have much in common with complexity theory."

Well of course they talk about disequilibrium, but the adjustment from one point to another is the interesting thing about any model. That doesn't quite break the gravitational pull of neoclassicism. Yes, the disequilibrium interests Hayek but the whole structure of his economics is a series of re-equilibrating mechanisms! That's equilibrium economics. It's hard to even conceive of what disequilibrium economics really implies unless we completely jettison these re-equilibrating mechanisms.

Mises might get into that, I don't know him well enough. People get together and they act. That's certainly the makings of a non-neoclassical economics. But I'm guessing he doesn't wander too far from where Hayek took that, which was very neoclassical. Anyway - I wouldn't want to stake a claim on Mises.

But Mises on action brings us to the second half of Jonathan's retort:

"while L. Mises really set the stage for the idea that the pricing process is what allows for an efficient allocation of resources, he and other Austrians were/are never maximizers."

I think we should be very careful about too closely identifying utility or profit maximization with the actual math of optimization. No, Mises does not read like Mas-Colell. But if he says that agents choose a more preferred option to a less preferred option, then Mises is a theorist of maximizing agents. Whether he does calculus on functions or not is irrelevant. Utility and production functions are modeling conveniences. As I've noted before, we all believe in ordinal preference relations. The mainstream simply says "we seem to be able to get a lot more work done if we represent ordinal preference relations with a reasonable cardinal function".

I mean it in the kindest way when I say Hayek is a neoclassical. I like neoclassical economics.

Now you may have a point when it comes to those hippy-dippy hermeneutician Austrians, not that that necessarily reflects well on them.

Krugman, Glasner, Neoclassicism, Austrian school, Agent Based Modeling, Macro Political Economy, etc.

Two posts -

David Glasners declaring that Hayek is neoclassical. I think he's right. I don't think he's only neoclassical, but he clearly did neoclassical economics.

Krugman with lots of thoughts on the value of neoclassicism, agent based modeling as an alternative, and the shortcomings of the Austrian school.

Krugman's post is interesting in that every point he raises was discussed at length in my Macro Political Economy class last night. He is more receptive to neoclassicism than my professor, and I am with Krugman on this. But he took much the same view as my professor on the Old Keynesian approach to things that was much more willing to part ways on methodological individualism. I agree with my professor and the Old Keynesians on this. Methodological individualism is really an odd obsession if you think about it - no other science works likes this. And yes, we can say this without denying the value of good microfoundations.

As far as Hayek being neoclassical, I actually spent my train ride home thinking a lot about this very question, not because I was considering the discussion in class (which didn't mention Hayek), but because I was jotting down more for my Critical Review paper. I think there is a relatively simple marginal condition that can turn a typical "mainstream" model into a model with an Austrian capital structure, and the marginal condition does not at all guarantee an Austrian style business cycle. That depends (as I've said before) on your interest rate theory. I'll probably play around with this more in the future, but it won't make it into the Critical Review paper, which is supposed to stay relatively non-technical.

Now that's a campaign ad

It's been on for a couple days, but I first saw it this morning:

"This election to me is about which candidate is more likely to return us to full employment" - Bill Clinton

I agree with Clinton that it is far more likely with Obama than Romney, but I'm concerned Obama doesn't really have what it takes. What I like about this ad is that that was the first sentence. I just like the term "full employment". We need to use it more. And I like stating bluntly that that is the policy goal right now. Now we just have to convince Washington of that.

One frustrating example of the way heterodox economics (of any type) works

I google "Paul Samuelson ergodic axiom 1969", and get a page full of results by...

...Paul Davidson, of course.

If you're scratching your head, don't worry about it. I'll get over it.

NBER paper of interest

My cost-benefit analysis professor at George Washington University, Stephanie Riegg Cellini, has a working paper out on the returns to a for-profit college education. They are positive and not significnatly different from public community colleges (although they also say there is some evidence the return is higher - I'll have to read closer what the distinction is). Regardless, it's a positive finding for for-profit schools.

Stephanie is a really sharp economist, and I strongly suggest reading anything of hers that you see. She does a lot with the economics of education - the labor returns side of it, but also school financing issues.

We also have more in common than the class at GW. She was a research assistant at the Urban Institute, and worke with many of the people in LHP that I worked with (and still work with), before she went to Berkeley. My mentor at Urban, Bob Lerman, told me when I was applying that I was one of the most prepared applicants he had seen come out of UI. "You probably have more under your belt than Stephanie", he said. I considered that very high praise - although the admissions gods apparently felt differently! Stephanie is still quite young too. She was just starting at GW when I had her, and that was only three or four years ago at this point. I imagine she's going to have a very successful career.

First day of class! And the rest of the fall (I am pretending that you care...)

And I'm looking forward to it. It's Macro Political Economy today, so a lot of political economy and post-Keynesianism. I have it with the same professor I had for history of economic thought last fall.

Before that I'm going to meet my sister downtown for lunch after her first morning of classes in Catholic University's master's in social work program. She's been working at SAIC for the last year and decided to go back to school for something she's really passionate about.

This fall will keep me busy - I've got a term paper in Gender Economics and in Econometrics instead of a final, which is great. The aim, of course, is to get them solid enough to eventually publish or include as a dissertation chapter. The plan right now is to write the gender one on the Family Medical Leave Act, and the econometrics one on the Georgia Job Creation Tax Credit (something I've been meaning to write up for a looong time now). Both empirical, although I have in mind a heavy theoretical motivation in the FMLA paper.

The rest of my time should be pretty well taken up too. We are wrapping up this engineering book (finally) with another conference at NBER. Our chapters are basically written. I need to write up the results of the petroleum engineer analysis, but that will just be a few pages in a larger chapter that's already drafted.

The Sloan Foundation work on early career scientists and engineers will keep trucking along. I'm sure we'll start to draft something for that this fall, but that's a three year project that is relatively open ended on products. I imagine most of the fall will just be working with the data.

Two things are going to be polished in the near future: an Urban Institute brief on joblessness among young black males, and my chapter in Guinevere Nell's book on the basic income guarantee. Both are written - I just need to incorporate review comments.

By the end of the semester I'll be getting more serious about two other things: finishing off the Critical Review article on Austrian business cycle theory, and an NSF grant proposal with my co-author on the engineering work (extra cash is always nice). The hope is to develop a new sort of synthetic panel dataset that will help with analyses of scientist and engineer job histories.

I guess that brings me to next semester, so I should probably end there!

Anyone else doing anything interesting this fall?

The Jefferson Bible on NPR

I heard a great discussion of the Jefferson Bible on NPR yesterday (third one down) by Mitch Horowitz, the editor of a new edition of the book. I always thought about the Jefferson Bible the way a lot of people do, I think: semi-closeted deist Thomas Jefferson, frustrated with the clerics, cut the things out of the New Testament that he didn't like. Horowitz presents a very different view of a Jefferson that does not think of himself as a deist at all, and most importantly as someone engaged in a constructive rather than a destructive project - rescuing the Gospels from additions that others had made. It's a subtle difference that some people may consider no difference at all, but the interview is worth listening to.

Surfonomics

A great article in the Washington Post on the use of cost-benefit analysis to prevent development around good surfing waves.

We've talked on here recently about the problems with CBA - but they are important to use to structure your arguments sensibly, make clear where the benefits are and where the costs are, and they are good for highlighting what assumptions your claims really turn on (this is particularly clear in climate studies, for example). I especially liked this quote:

“Those of us who really love the ocean have an instinct when we see beautiful places like this to think that they’re priceless and to think that the commodification of nature, and putting price tags on everything, is the root cause of nature’s destruction. . . . I think that’s actually counterproductive,” Jason Scorse, director of the Center for the Blue Economy, said in a TEDx talk in April. Scorse is the author of the book “What Environmentalists Need to Know About Economics” (2010). “When nature is undervalued, we make bad decisions.”

This is wonderful

Someone sent this to Kate the other day. The guy has a blog here.

Neil Armstrong and the Whig Conceit

Razib Khan has a great post up on Armstrong's death which I'm just goint to repost in its entirety after directing you to him:

"It has been 40 years since he last human being set foot on the moon. I was not alive when this occurred. The Whig views history as a progression. When we recall the past we remember, perhaps pity, a less developed age.

Overall I disagree with declinists who simplistically portray our age as one of silver, that perhaps we live in the modern Western equivalent of late antique Rome. Certainly there is greatness all around us. And one can argue that the “space race” was driven not by ennobling sentiments, but rather the raw competition between the United States and Soviet Union. Be as that may be, could we soon look back to the 1960s as the ultimate high point in the spirit of the West? Perhaps we do live in a fallen age in a sense, unable to rouse ourselves and recapture past glories, and even surpass them. The Hellenistic Greeks were a civilized people, who were more advanced than their Classical predecessors in particular details of science and engineering. Yet most scholars would suggest that there was something derivative and unoriginal when compared to the ferment of Athens’ golden century.

I wonder. Did Neil Armstrong ever consider when he set foot on the moon that humanity would not return for the last four decades of his life?"

It's a sobering thought, and certainly one that every space enthusiast has flirted with on some level. But Razib expands the fear to civilizational proportions. However, I would add a couple points of optimism. I think we are sort of back on the right track. Efforts on the space station could probably have been better spent on Mars, and we really don't need to hop around the moon anymore (although with new evidence on the water content perhaps that's not fair). What we need it people on Mars, and the cooperation with the private sector and the continuous (and improving) robotic presence on Mars is a good place to start. I'm not a Whig history type, but I do believe in progress. I guess that makes me a Whig historian without the hagiography and teleology? Or maybe a short-run anti-Whig and a long-run Whig? Anyway, let's just say I'm optimistic and we need to keep working at it.

I think part of the reason for my optimism is the fact that I work on economics, and the awe-inspiring relentlessness of economic growth in a market society. As Robert Lucas said "once you start thinking about economic growth, it's hard to think about anything else." It's probably the one thing that could push me to dive back into a Whig history attitude. I think we will fulfill the dreams that people had, but it's a question of timing. Will we have a permanent presence on Mars in 20 years or 100? Will we have a human settlement in 100 or 500? That I don't know. And there's always a chance of a catastrophe that will send us into the Dark Ages. I think nuclear war is off the table for the most part (although use of nuclear weapons by terrorists certainly isn't). Climate change is the obvious candidate. Needless to say in the face of a catastrophe, commitment of resources to progress will be more difficult.

But I think we should be optimistic. There are a lot of places where Whiggism clearly doesn't apply, but in science, technology, and the economy it is very, very hard not to be optimistic.

My turn in the price discrimination sequence!!!

I've always been a big fan of Sam Adams beers. Boston Lager is one of the best on the market, and what's so great about them is that you don't lose quality in their more creative flavors (a lot of good beers get weird when they try to branch out). I'm not alone, of course. And because Sam Adams is heavily seasonal in its rotation, anyone that likes them gets excited when a seasonal flavor gets rereleased.

Why am I talking about this?

Because good examples of price discrimination are hard to find and I've always liked the example offered by Sam Adams' seasonal beers.

Airline tickets are the most common example of price discrimination. This works because tickets are sold over time. Business travel is often done with much shorter notice and business travel demand for tickets is more inelastic. Vacationers have less elastic demand but they also plan farther ahead. There is a great price discrimination opportunity here: charge more for the same flight as the flight date approaches.

Price discrimination for Sam Adams (and presumably other seasonal brewers, but this is one I've really noticed) similarly take advantage of sales over time.

When Octoberfest is rereleased there are a lot of enthusiastic buyers ready to shell out $19 for a case. Part of me doesn't blame them - it's a tasty beer. But I can wait. I don't have to get it the first week it's in the stores... plus I've notice something: a week or so later it's $18 for a case. Then a week later its $17 for a case, etc., etc.

Not sure why, but I was more eager this season. It can get down to $13 I noticed for the summer. I grabbed one this morning at $15. Still a lot better than drinking at bars.

Anyway, I for one think the airline ticket example is overused - we need more price discrimination examples!

Catalan on income identities

Jonathan Catalan does an excellent job dispatching a simplistic take on the national income identity.

In response to his government spending post at Mises.org (which actually I disagreed with), he was asked the question: "As we have studied, Y=C+I+G+(X-M). The author did not really address the fundamental question of how, at times of low private consumption and investment, national income can be boosted without government expenditure."

This is an identity, of course. Jonathan could have just answered "well you could make policy such that C and I increased and G doesn't change". I don't think that would have satisfied his questioner, but it would have made sense.

The components of the national income equation have their own behavioral laws and G doesn't just influence Y additively - it impacts everything else as well.

I think Jonathan is often wrong about how the components behave and interact. We both have a simplistic view of how they behave and interact (how could we not?) but we disagree on the primary determinants and interactions of interest. That's how we get different answers.

But one thing no one should do is just assume that the summation of the aggregates is the end of the story.

More details on post-WWII boom

David Henderson looks at the export statistics and determines they were not a major factor. And of course, trade only grew slowly in the post-war period until later in the century. I have a few scattered thoughts, not driving at anything in particular:

1. I'm curious how the Marshall Plan is classified in the NIPA tables. It was a lot of loans so I'm not sure if that's done differently or if it's in government spending or what. Presumably it's not in the export statistics because I think the annual flow in 1948 was bigger than that. You see a lot of early Keynesians - I think Leon Keyserling, for example - talking about the Marshall Plan as the quintessential Keynesian policy. It rebuilds Europe and makes use of American industrial capacity: Economic Consequences of the Peace meets The General Theory.

2. Contemporary trade and expected future trade are not the same thing, of course. We just liberated Europe and established Bretton Woods, which everybody had high hopes for. The real surge was in private investment, and even though we weren't exporting much at the time the surge in private investment was a response to expected future demand. That is mostly consumption and investment demand, of coruse - but also expected future exports.

3. I used his new post as an opportunity to review his Mercatus Center paper, and I still have questions about the discussion of saving rates. We are in a growth period which means we are in a virtuous cycle analogous to the paradox of thrift. It seems reasonable that plans to release pent up demand have such a positive effet on income that income booms and people end up saving more than they expected to over a particular time horizon. It's the same as the paradox of thrift where everyone plans on saving, income contracts, and they end up saving less than they wanted to. I don't know if this is determinate at all but it seems like if we're discussing macro trends it's worth thinking beyond the headline savings rate.


The story is clearly private investment, though. I am still befuddled about how anyone thinks this is some kind of death knell for Keynesianism. Isn't the behavior of private investment the centerpiece of the whole Keynesian story? This seems like a clearer case than 1920-21. With 1920-21 I have to say "ya, this doesn't look like a downturn that Keynes spent much time talking about so it's not use testing a theory with a circumstance that it doesn't apply to - it doesn't contradict Keynesianism per se because I don't think Keynesians would make the claims about government spending that you expect they'd make". In short, 1920-21 does not look like a  Keynesian bust. But to me, the late 1940s look very Keynesian to me (which is, of course, very different from saying that Keynesianism is the only thing that has a chance of explaining it).

Remember: family size is endogenous

This is a great post from Jared Bernstein on income inequality that I wish you'd hear more. He writes:

"This sounds, and is, a bit weedy/wonky, but it’s a point that needs to be taken more seriously among economists, journalists, and policy makers who focus on trends in family income: it’s not necessarily correct to adjust incomes for family size, because family size is endogenous to economic conditions."

You would think this would also be of interest to people who talk about inequality a lot - like Don Boudreaux and Steve Horwitz - who also (I assume) agree with Bryan Caplan's enthusiasm for children and population growth.

When the earning potential of a family declines the size of that family is going to decline too, in response to the reduced earning potential. That endogenous response is going to understate shifts in earning potential if you adjust for family size, because families are accommodating to their income stream.

You don't just have to imagine the poorest families to see this, although it's a group we often focus on. Kate and I probably would have had kids three years ago or so if I didn't have plans to go for a PhD. We're not going to wait until I'm all the way out, but we definitely didn't want a toddler around when our income stream took a temporary nosedive*.

I've adjsted family income for family size in analyses before, but it was typically because I wanted to control for the resources of a given family. Even that, of course, has endogeneity problems but since neither family size nor family income was an outcome I was interested in it wasn't quite as big of a deal. But if you're looking at trends over time this could be very important.

* - in my earlier post on ability to pay, a lot of people talked about poor people accessing credit. Kate and I aren't even poor - what do you think the bank would say if I just went up to them and asked for a loan because we're having a kid and we really just need to make up the tens of thousands of dollars I lost by leaving the Urban Institute. I don't think I'd get it. They'll give me a loan for an actual underlying asset, like my house, but not for that. Credit rationing and credit constraints are real, and I was surprised how many people just appealed to accessing credit markets in the comment section of that post.

I can haz math help?

I feel a little silly making an appeal like this, but I'm stumped.

I'm trying to solve an equation for a variable. The equation has a bunch of stuff in it that makes it look messy, but they're really just parameters and can be easily subsumed so that the basic form of the equation is:

aX + bX^1+c + d = 0, where 0 < c < 1, and the reciprocal of c is not necessarily an integer either.

Mathematica protests to me that it is not up to the task of solving this.

I've poked around and there are a couple work-arounds - usually involving some substitution - for solving a non-integer polynomials but (as far as I can tell - because I'm having trouble applying them to this problem) they all only really seem to work if the non-integer polynomial is less than one and this is definitely more than one.

Anyone know how to solve this (or a program that would be better at it than Mathematica)? If you've got such a program handy, a general solution to the equation above would work fine.

Thanks in advance - if this ever sees the light of day you will certainly be acknowledged, if you like. Something like "My dumb ass made it through a bunch of the math and was kicked over the finish line by X".

I am hoping that this is easy enough that someone will be able to answer but tough enough that I don't have to feel dumb for asking.

A brief thought on critics of aggregation

I've been reading a lot of post-Keynesian material for my Macro Political Economy class (starting Monday), and like any heterodox school the readings have a lot of discussion of history of thought and institutional history. One of the old debates was over aggregation.

One of the striking things is that the fights that post-Keynesians were involved in about this several decades ago (and perhaps that Austrians at that time were involved in too?) were largely over the technical questions around aggregation: can you aggregate meaningfully?

After reading a lot of this, I can't help but feeling like the modern critics of aggregation are a lot more superficial in the more literal sense of the word "superficial" that they're just worried that you miss important sub-aggregate processes when you aggregate that have a story to tell.

I can haz vocabulary?

 

Beckworth's new book

Here. Looks very interesting.

But that blog post title is like nails on a chalkboard. I hate that phrase. Whenever I hear "the book X does not want you to read", I know that X probably could care less whether you read it or not. Anyone important enough to write such a title about is probably too important to care what your reading habits are.

It sure sounds good though, doesn't it!

Autor and Roberts on disability insurance

Russ Roberts discusses the large increase in disability insurance rolls here, after having an EconTalk with David Autor, who has several recent papers on it.

I've been interested in this issue since taking my labor econ sequence at GW with Donald Parsons, who was one of the economists to draw attention to the impact of the program on labor supply in the early 1980s.

The impact on labor supply - especially for black male populations - is pretty clear, but what do we do about it? As far as I know the only major policy move since the 1980s has been to tighten up the program. So government largesse doesn't seem to be driving the increased use trends that Russ is observing.

Unfortunately, I expect disability insurance is just a release-valve for problems that have nothing to do with welfare and that start in the labor market. Low labor market opportunities discourage workers. Those workers still need to support themselves. AFDC/TANF is a possibility for women with children but disability is the outlet for men.

So yes, we could continue to tighten the screws on disability insurance - but that risks hurting the people that actually need it and dumping a lot of labor on a market that isn't employing it. A better response, I think, would be to get more serious about sub-national full employment policy. We as a country hadn't really talked in terms of full employment before the Great Recession, and for obvious reasons. But even though the country as a whole has been doing fine, there are sections of the countr that have been mired in a depresion of their own for decades now.

In other words, the causality might run from labor demand to labor supply, to disability insurance.

A comic that offers the opportunity to clarify why pragmatists aren't relativists

(comic from this website)

You often here pragmatists or pragmatist fellow travelers like Thomas Kuhn treated like relativists.

It's nonsense. And for some reason saying "no, I am not a relativist" for literally decades on end just isn't good enough (apparently they're self-hating relativists?). The framing of the third panel does a good job at separating two points - one where relativist postmodernists and pragmatists agree, and one where they disagree.

The boss concludes "...so you see, there is no right and wrong just an infinite number of equally valid 'stories'."

This isn't worded carefully to handle the traffic I'm about to burden it with, but you can think of pragmatists and relativists agreeing with the point "there is no right and wrong". Although pragmatists would probably say something like "if there is a right or wrong we have no sure access to whether we've hit on it or not". That's just a fallibilist claim that's not unique to relativists or pragmatists. But it is what pragmatists emphasize and it's what gets them called relativists. But it's not the only thing that pragmatists emphasize.

They also emphasize (and disagree with relativists on) the point that there is "just an infinite number of equally valid 'stories'." Now that is not true. These stories may be detached from reality, but they are not all equally valid. If you want to use the phrase "pragmatist theory of truth" (Rorty didn't like that, but we all know what it's referring to), that is precisely the approach to what is considered a "valid story" and what isn't. These stories are not equally valid. If you think that's what's being said then congratulations: you've missed the distinguishing feature of pragmatism.

I don't know if it's right to say that all post-modernists are relativists. I strongly suspect it's not true. Lot's of pragmatists consider themselves post-modernists, after all, and post-modernism is such a big tent it just seems very unlikely.

But if you're railing against leftists in the university it's probably convenient to pretend that they are all relativists and that the only way to avoid relativism is to avoid anything that smacks of post-modernism.

A thought on the drought (with applications to climate change)

If you wanted to know how a changing climate millions of years ago affected plants, you would ask a paleobotanist.

If you wanted to know how a changing climate millions of years ago affected animals' ability to survive you would ask a paleontologist that understood how animals deal with it.

 

You might also ask Ray Romano:

 

 

If you want to know how humans will act in the face of a drought (or climate change), you need to ask both climate scientists and the scientists who spend their time studying human behavior - the primatologists specializing in homo sapiens (you know - social scientists - preferably economists).

Some ABCT blogging

I have dropped the ball on this one, but that doesn't mean you have to. There are several ABCT links up lately:

1. Gene on whether Keynes has a business cycle theory.

2. Jonathan discusses more of his view that the difference is really between the multiplier and the Ricardo effect. I need to read this one more closely in the near future.

3. Gene discusses how to get empirical on Keynes and Hayek. I agree with Gene that the sort of empirics he is describing here demonstrate the empirical adequacy of both theories. I am not sure if this is enough. One thing I always come back to is "what would these ABCT studies see if Keynes was right about the causes of recessions, but he also modeled a time structure of capital that was negligible as a determinant of recessions"? I think you'd see much of what the ABCT empirical literature shows. That's the problem. I don't really know of an ABCT empirical study that is able to arbitrate between them.

4. Read Steve Horwitz for what he says on ABCT, not for what he says on Keynes. I have only skimmed it so far, but if you want the Keynesian take, read Wren-Lewis on the same blog. I have plenty of discussions of the problems with Steve's jigsaw puzzle take on Keynes here. Brad DeLong posted a few things around that time agreeing with me, so don't think I'm some kind of lone ranger making things up to criticize Steve on.

Klein on Marglin, and different emphases

Peter Klein had an interesting recent post on a new paper on the value of bosses, and he invoked Stephen Marglin. I was fascinated by the different emphasis that people have when talking about a guy like Marglin. Klein writes: "Do bosses matter? Stephen Marglin famously argued that management doesn’t affect productivity, just the share of output appropriated by managers. (I’ll take David Landes instead, thank you very much.) Despite a huge management literature on bosses, economists have not quite known how to answer the question. Ed Lazear, Kathryn Shaw (ironically, a former boss of mine), and Christopher Stanton have an interesting new take on this using detailed microdata, showing substantial effects of supervisor on worker productivity"

My U.S. economic history professor last semester was a fan of Marglin, but I had his work framed somewhat differently. I think we got the point that bosses try to appropriate output, but that was not hte emphasis that we were taught at all. We were taught that Marglin (and Charles Babbage before him) presented what the professor called an "economic theory of the division of labor" as opposed to the more common "engineering theory of the division of labor". Ironically, Smith and others - the economists - maintained an engineering theory of the division of labor, while Charles Babbage (an engineer) had an economic theory. Smith thought that there were actual production efficiencies in the division of labor, and he listed many such advantages in detail.

Babbage, and then Marglin, instead said that the division of labor was actually a managerial recognition of differences in skill. Dividing and sub-dividing tasks and jobs and organizing them hierarchically (aka "management", for Marglin) could be thought of as a form of price discrimination in the labor market.

I think it's pretty reasonable to accept that the organization of the workplace has a mix of both of these, and I think anyone who has worked in a large office recognizes both in practice.

That comes to about the same place as Klein's interpretation of Marglin. He was a radical, after all. But I found the different emphases interesting. When I hear "Stephen Marglin" I think "economic theory of the division of labor and the emergence of personnel management". The phrase "managers appropriating output from workers" does not immediately come to mind, although I suppose that's equally legitimate.

Radical economists are not always right, but they often have important insights that are glossed over by non-radical economists. One of the nice things about being taught by people with radical sympathies is that you learn those things. The same logic applies to the Austrians, really - you wouldn't go to Paul Krugman to learn about Austrians, would you? You probably shouldn't even go to Tyler Cowen. Same principle applies.

This facebook campaign post does not bode well for budgeting or anything involving numbers in a Romney administration...

95% of the solution is framing the problem right. The other 5% is what we invented computers for.

The bar for historians that deal with economic history at Harvard is apparently very low

I haven't really waded into this Niall Ferguson thing at all, but this is just incredible.

How disconnected from the issues of the current crisis do you have to be to make a mistake like that?

This is why we think Krugman is the modern Bastiat

Bryan Caplan says that Yglesias channels Bastiat, and lists three things in particular that Yglesias does:

"What does it mean to "channel Bastiat"?  There are three key components:

1. Ridiculing simplistic economic misconceptions.

2. Lamenting the popularity of these misconceptions.

3. Blaming bad economic policies on the popularity of these misconceptions."

Yep. Exactly. That's more or less what was going through our heads when we said that about Krugman. The reason why so many people got bent out of shape over it was because they were the ones promoting the economic misconceptions that Krugman was ridiculing.

I'm sure the protectionists of 19th century France didn't think Bastiat was all that hot too.

To their credit, most of Krugman's critics aren't protectionists. That doesn't mean they aren't behind some dangerous economic misconceptions that Krugman is trying to combat.

This is Bartleby

Surowiecki on high skill immigration

Here. I always wonder what:

1. Low skill immigrants think when they're basically told that they're less valuable to our country than high skill immigrants, and

2. High skill immigrant economists think when they are told that we need to provide favorable treatment to a certain type of labor relative to another type of labor.

If the evidence suggests more immigrants would be good, then by all means - increase the number of immigrants. But I don't see why this "privilege the high skill immigrants" mantra convinces people.

The fact that it's often paired with really bad claims about shortages of scientists and engineers doesn't endear me to the argument either, of course.

Brad DeLong confuses me

1. Gene Callahan links to an article about Aiken

2. Gene Callahan lauds the post for sensibly trying to figure out the position of each side.

3. Gene Callahan seems to find the following statements by the author about Aiken perfectly acceptable and true:
    a. the author's statement that Aiken has an "aggressive ignorance of biology",
    b. the author's statement that that Aiken is promoting "pseudo-science" which "compounds the error" of his other claims,
    c. that Aiken was "telling a fairy tale",
    d. speculation that "Aiken may be too dim to understand the implications of his policies"
    e. that Aiken was "defining rape down", and finally
    f. that what Aiken said was "simply unconscionable".

4. Brad DeLong says Gene Callahan was defending Niall Ferguson.


For those of you who live under a rock (or simply maintained a modest level of productivity yesterday), Niall Ferguson is a discredited British cheerleader for an American empire that we Americans don't want. Todd Aiken, on the other hand, is an asshole representative from Missouri.

If Brad DeLong said that Gene Callahan was defending Aiken, I would question DeLong's reading comprehension.

But this is so bad I'm starting to question my reading comprehension skills.

Brad, I don't know if this is a "DeLong Smackdown" or a "Department of Huh?".  I'll let you decide.

Another round of externality talk...

...Ryan was concerned I belabore the basic externality point, but this paragraph from Jonathan shows why (it's an interesting post - he talks about bundling and externalities, out of personal experience - I just want to pick this one nit):

"The same principle applies to roads, as well. Imagine a world without government-built infrastructure. There is no major paved artery that leads to a Costco in a suburb of San Diego. Costco has the option of building such a road, but they know that should the road be built it would also connect their clients to other businesses — which may or may not be competitors. Not building the road means facing a loss: the opportunity cost of an increase in clientele traffic. So, while Costco may not internalize all the benefits of building the road, they may still end up in a better position building it anyways.

The real world is one of disequilibrium and non-optimality, which is why the “economics 101″ public goods argument is not a very good one. As such, there is less of a reason as ever to expect that the market will under provide such goods as roads. There is also plenty of real world evidence of private roads, including large networks of free roads (agricultural roads, including paved highways, in Spain are privately funded, free, and extensive)."

The underlined portions are why I thought it was important to highlight that "underprovide" and "not provide" are two very different things. It's out there and it's natural for a lot of people to talk like this, Ryan. These things happen on the margin. Take a hundred different Costcos with slightly different local infrastructure endowments and costs structures, and on the margin there will be less investment in private roads if they can't internalize all the benefits.

This is why I hate the phrase "public good". I'll get on Ryan Murphy's good side now by saying that I hate the phrase "public good" because it's such an essentialist way of looking at goods and services. Instead we need to think in terms of profit and loss. What profits can be captured? That's what influences decision making.

*****

Jonathan gave a real world example of economics - chicken at Costco. I thought of one yesterday too.

My neighbor, whose house is pretty run down, recently got a brand new roof and is currently in the process not just of repainting but replacing all the siding. It looks a lot nicer than it used to. This is good for me, of course - it keeps property values up.

Which made me think, if we wanted to internalize all the benefits maybe I should cut him a check. It's an obvious positive externality.

Which suggests something else: curb appeal type improvements are probably underinvested in. And it suggests a project for anyone who wants to build a neighborhood's wealth: subsidize curb appeal improvements. Nothing inside the house at all - just exterior improvements. Presumably the gains from interior improvements can be more easily internalized.

I know of at least one example of exactly this approach, which I've always thought would be neat to write a paper on. Does anyone know the example I'm thinking of?

Two NBER WPs that caught my eye

Naidu has written some good stuff on Southern labor markets in the past, and the second one is of interest because of a new approach I'm taking to my Sloan/dissertation work around major choice based on uncertainty about occupational returns.

*****

When the Levee Breaks: Black Migration and Economic Development in the American South

Richard Hornbeck, Suresh Naidu

NBER Working Paper No. 18296
Issued in August 2012
NBER Program(s):   DAE   EFG

In the American South, post-bellum economic stagnation has been partially attributed to white landowners' access to low-wage black labor; indeed, Southern economic convergence from 1940 to 1970 was associated with substantial black out-migration. This paper examines the impact of the Great Mississippi Flood of 1927 on agricultural development. Flooded counties experienced an immediate and persistent out-migration of black population. Over time, landowners in flooded counties dramatically mechanized and modernized agricultural production relative to landowners in nearby similar non-flooded counties. Landowners resisted black out-migration, however, benefiting from the status quo system of labor-intensive agricultural production.

*****

Risk and Returns to Education

Jeffrey Brown, Chichun Fang, Francisco Gomes

NBER Working Paper No. 18300
Issued in August 2012
NBER Program(s):   AP   ED   LS   PE

We analyze the returns to education in a life-cycle framework that incorporates risk preferences, earnings volatility (including unemployment), and a progressive income tax and social insurance system. We show that such a framework significantly reduces the measured gains from education relative to simple present-value calculations, although the gains remain significant. For example, for a range of preference parameters, we find that individuals should be willing to pay 300 to 500 (200 to 250) thousand dollars to obtain a college (high school) degree in order to benefit from the 32 to 42 percent (20 to 38 percent) increase in annual certainty-equivalent consumption. We also explore how the measured value of education varies with preference parameters, by gender, and across time. In contrast to findings in the education wage-premia literature, which focuses on present values and which we replicate in our data, our model indicates that the gains from college education were flat in the 1980s and actually decreased significantly in 1991-2007 period. On the other hand, the gains to a high school education have increased quite dramatically over time. We also show that both high school and college education help to decrease the gender gap in life-time earnings, contrary again to the conclusion from wage premia calculations.

One last time with Ryan...

btw - I respond here and not on his blog both out of vanity and because his blog has been eating my comments for weeks now.

He writes: "That isn’t what I was getting at. Kuehn is importing in several background assumptions which explains his objection, but not why Boudreax or I am wrong. “Efficiency” can mean more than one thing. The two weaker assumptions  are Pareto or Kaldor-Hicks efficiency. Price theory will tell us people will bargain to those standards of efficiency unless weird things are going on. Most economists in the room will use those (especially the latter) as a standard of efficiency, with distributional effects purely secondary. If you don’t use those criteria as a standard of efficiency and want to use a social welfare function, that is fine, but you need to say upfront which one you are using because no one has any idea what you’re talking about. If Boudreaux wants to say that this is optimal because it is wealth maximizing, that’s a perfectly defensible statement. It is a statement that would be made by many mainstream economists. If this issue is all about distributional effects, what was the point of the entire original post? The fact that Boudreaux doesn’t use the same social welfare function as Kuehn somehow means he doesn’t understand the concept of an externality?"

Somehow I am not being clear.

First, there are two posts - a post where I criticized a statement by Don and a post where I criticized the concept of optimality that economists have. It's the second one that really made Ryan howl, because apparently criticizing the concept of optimality is hard to distinguish from nationalizing stuff willy nilly.

In the second post I was quite clear: the concepts of efficiency that economists use are nice in their own way, but we should all be very wary of attributing any more general sense of optimality to them. So when Ryan says "you need to say upfront which one you are using because no one has any idea what you’re talking about", what I'm talking about quite clearly is that there are problems with interpreting something like Pareto or Kaldor-Hicks efficiency as "optimal". I don't know how I could be clearer Ryan. The whole post was a variation on the theme of "When Daniel Kuehn stops to think about it he really questions how optimal these efficiency criteria are". How much more upfront do you want me to be?

Now I wasn't acusing Boudreaux of being problematic because he didn't agree with me on that. I wasn't even critiquing the concept of optimality in the first post, after all!! Don's argument was that if government didn't do it, the private sector would. My response is just that that's a bad argument against public roads and Don was mistakenly acting like it was a good argument against public roads.

*****

He asks: "But if this is THE externality argument you wanted to make, why did you wait until now to make it?". I've been talking about externalities since the first post. Network externalities are the externality you usually think of when it comes to infrastructure, right? I didn't think you needed clarification.

*****

He also writes, after I spell it out for him: "Okay. So this isn’t about weird Austrian-Public Choice-libertarian people off in their own little world. This is a rejection of mainstream economics." Right. This is not a conspiracy. I am not out to get Austrians/libertarians. And since I never mentioned Austrians/libertarians in the post in question you probably shouldn't assume they have anything to do with it, particularly when I'm talking about pretty mainstream stuff like "willingness and ability to pay" and "optimality".

Don made a bad argument, but that's not on the rest of the Austrians/libertarians.

*****

He concludes: " Please either specify the social welfare function you would like to use or the precise alternative methodology and standard of optimality that wouldn’t run into such problems."

When I have the answer I'll post it.

My ignorance of this point is what I was trying to get at when I wrote "I don't think there is an easy answer here." After all my musings. The CBA approach gives the false impression of clarity. Things are a lot more contested than that.

Ryan Murphy is being slippery and non-sensical...

...but he's starting to get more lucid.

First, for the slippery part: he accused me of putting forward an argument that cost-benefit analysis to justify my view of things and that could justify nationalizing everything. That, my dear readers, is not a true statement. All I presented was hesitations about making claims about optimality that are always lurking in the background for me, and that don't lead me to any answer.

Then he changes course and just accuses me of saying things that make traditional cost-benefit analysis useless. This is a little strong, but closer to lucid. And I'm also already on record with that opinion. Between problems with ability to pay (why should marginal productivity in the labor market ration welfare?) and intersubjective utility comparisons, cost-benefit analysis is rather dicey. I wouldn't say it's useless. It's a good option in the absence of other good options that at the very least helps us organize our thoughts about it. But everyone should question the extent to which it can really nail down optimality, even as an approximation.

The solutions to the ability to pay problem are redistribtutional in nature, but that ultimately is going to distort all the factor markets where people earn income.

My concern with Don was:

1. He seemed to go down the road of juxtaposing government and the market, as if both don't provide goods with external benefits.

2. He made a really weak statement that assumed that juxtaposition and deserved to be pointed out as a really weak statement.

The rest of the second link, from Ryan, provides more details on the economic arguments for public roads.

UPDATE: My apologies. I was in a hurry to get to campus this morning so I recommended Ryan's list of economic arguments for public transportation without reading it in its entirety. I implied that it was more lucid than his comments on the blog here, which accused me of arguing for nationalizing everything. He is actually still spouting that nonsense farther down in the post. I apologize for missing that initially. He writes: "[quoting me:] “It’s very plausible that there are lots of people of lower means out there whose benefits would exceed the toll but who really couldn’t pay it five days a week to get to their job, particularly if it means maintaining a car on top of it.” No, it’s not plausible, Daniel. Price theory tells us that is implausible by definition – have you learned price theory?" Yes, I have. Thanks. But we make up these things called "utility functions" and we rescale them monotonically at whim to avoid these tough questions. What Ryan could say reasonably here is that price theory tells us that given certain budget constraints an agent is going to choose a bundle of goods that maximizes their utility by consuming to the point where the ratio of the marginal benefits of those goods is equal to the ratio of the prices of those goods. What price theory does not tell us is that the benefit or utility enjoyed by a low income person is always going to be less than or equal to someone of greater means. So no, price theory doesn't tell us what Ryan is suggesting it tells us here. That's the whole problem of interpersonal utility comparisons and of taking the budget constraint as some kind of natural limit. The budget constraint is just the output of some other market. He continues: "If you are concerned about disproportionate effects on the poor, you increase transfers to the poor when doing this. If you are worried about them blowing that money, you give them transportation vouchers." Right. I didn't specifically mention vouchers in the post, but I brought this up. He goes on: "To go from that to NATIONALIZE is ridiculous." I agree. That's why I didn't go there. Why does Ryan keep repeating this? Unless you just mean public provision is nationalization. But that seems like a misuse of the word "nationalization".

So there is a little more nonsensicality in Ryan's post. But he also neglects one of the most important externality arguments for infrastructure: network externalities and agglomeration. He mentions rural households as well as who I'm trying to defend, and that's actually not what I had in mind at all. I was thinking of more of urban ghettoization.

This usually doesn't happen with Ryan - it usually happens with less thoughtful libertarians than him. How can I write a post that isn't anti-private-provision of infrastructure at all and have him come out of it thinking I'm promoting nationalization???

What I'm promoting is skepticism when people use CBA or neoclassical micro type pronouncements of optimality for a firm conclusion. These things are much better at explaining behavior and the emergence of social order out of diverse and conflicting goals than they are at telling us what is "optimal".

Austrian Labor Economics

You don't see a lot of it, but there is some out there. Peter Boettke and Will Luther try to pull the insights from the literature together in a paper titled "Labor Economics from an Austrian Perspective". It looks like it is more specifically focused on jobless recoveries, which are unfortunately making a habit of rearing their ugly heads in the last couple downturns.

I have not read it yet, but am looking at it now. Let me know what you think if you get a chance to.

Positive externalities

Brad DeLong's microblog is the best thing that ever happened to Facts and Other Stubborn Things.

That's all.

When I think about market efficiency, what really concerns me is the wedge between willingness to pay and ability to pay

So let's say all roads are private. This is fine. Road use is allocated by tolls, and the marginal cost of building and maintaining a road can be set equal to the marginal willingness to pay for the use of that road. Congestion pricing even becomes more feasible with lots of private tolls. All wonderful stuff.

But is it?

This is only optimal if we wave our hands when we get to the topic of ability to pay. It's very plausible that there are lots of people of lower means out there whose benefits would exceed the toll but who really couldn't pay it five days a week to get to their job, particularly if it means maintaining a car on top of it. It's plausible that their welfare gains from having a car and using it on a toll road would be considerably higher than someone of more substantial means, so that the only constraint is ability to pay.

Remedying that with substantial redistribution introduces its own problems, because then you're just putting your thumb on the scale of another market. That's no good, but at the same time it's not clear why optimality in a goods market (like the market for toll road use) should be conditional on optimality in the labor market. Why should toll road users have their welfare constrained by ability to pay? Why shouldn't employers have their profits constrained by ability to pay?

I don't think there is an easy answer here.

But I'm certainly reluctant to privilege entirely private toll roads, even if we could internalize all the externalities (which is probably unlikely since there are network externalities involved in infrastructure) as being "optimal" relative to a good deal of open access public roads as long as there's this big wedge between willingness to pay and ability to pay. In some markets, obviously, the wedge is bigger than in other markets.

Nothing makes Don Boudreaux reason poorly like talking about government

So I hope everyone here has had introductory econ under their belts and knows that an externality doesn't mean that a market won't provide any of a good - it only means that given a particular definition of "optimal" a market won't provide the "optimal" amount of a good.

Why, then, do we get arguments like this from a professor of economics:

"If government failed to build highways to connect, say, Atlanta to Pittsburgh, private firms almost certainly would. (It’s easy to collect tolls from drivers who use highways.) And likewise for nearly any other pair of cities in America. So in what way is any actual, government-built highway necessary for any private entrepreneur’s economic success? None — if (as is likely) private enterprise would have done what government instead did by crowding out private efforts."

Private provision of infrastructure says nothing about the value of public provision, for the reasons I stated above.

But what in the world are we supposed to make of this?

Can I look at a private road (or a private just-about-anything-else) and say "if private firms failed to build highways to connect, say, Atlanta to Pittsburgh, the government almost certainly would. And likewise for nearly any other pair of cities in America. So in what way is any actual, firm-built highway necessary for any private entrepreneur's economic success?"

What an unhelpful way of talking about and thinking about infrastructure.

A narrative that just doesn't fit

The narrative that the Confederate flag is flown as a symbol of racism and a sign of racial tension, that is.

Brad DeLong links to a good post* at The Atlantic about a sort of social equilibrium that is emerging around the flag, and its complex history. I've long protested the idea that Southerners who display the flag are somehow expressing racial animosity, treason, or anything other than a recognition of regional identity/heritage. People who claim otherwise generally don't have much personal experience with Southerners or with instances when the flag is displayed. I've seen it displayed in a wide cross-section of cases, and while there are obviously white supremacists out there who use it too (next to the cross and the American flag, btw), the preponderance of cases have exactly zero to do with that and are used by people with no racial animosity to express.

That having been said, the flag obviously means different things to different people (the fact that it's used by white supremacists is a clear example of that!). Most importantly, it is understandably viewed by the black community as a symbol of slavery or segregation.

So that puts us in a conundrum. How do you deal with a symbol that means such dramatically different things to different people?

The best solution, in my mind, is not to display it in public venues that are supposed to represent everyone, but to allow its display privately for those who wish. That's the equilibrium that the article describes, and it's the right one. Do you think it's a travesty that your statehouse doesn't display the flag? Too bad. You have no reasonable expectation that it should particularly given the other people that the statehouse is supposed to represent.

Now, of course because to a lot of people the flag has nothing to do with racial animosity (I personally don't look at it and see it as a hateful symbol), people can use it themselves. But even here, you have to be aware of the fact that different people interpret the symbol differently. My next door neighbor and my neighbor directly across the street are black. There's no way in hell I'd display the Confederate flag in my front lawn even if I had the inclination to. Why? Because different people interpret the symbol differently and I know my neighbors would not view it as benignly even if they knew I viewed it benignly. So even private usage isn't entirely private and people should be aware of this.

Ultimately I view the article in a positive light. We're reaching a social equilibrium that isn't obsessed with racial animosity, that is starting to recognize diverse views of the flag, and that is starting to act accordingly.

I have one piece of Confederate flag memorabilia, on a pin that used to belong to my mom when she was a waitress in a bar in Blacksburg, Virginia.


*One thing the article gets wrong is it's reference to "Massive Resistance" as something that segregationists generally did starting in the forties. This isn't true. Massive Resistance was a policy specific to Virginia, and it was initiated in the 1950s by Harry Byrd (the same Byrd that David Henderson points out was not a fan of Keynesianism) in response to the Brown ruling. Massive Resistance was the decision to shut down a school system in Virginia that had the audacity to integrate despite Richmond's resistance.