This newborn is making me want to call up Sweden and demand they give the Nobel to Nancy Folbre

Slow posting... my hands have quite literally been a little full lately

Caroline Joy Kuehn, born Thursday night after a very long but ultimately unsuccessful attempt to stay ensconced within her mommy.

John Stossel is the Daniel Tosh of the libertarian corners of the internet...

...with the principal difference being that he is not trying to be funny.

What does Sen have to do with Malthus?

A commenter questioned my association of Sen with Malthus the other day in my thinking-out-loud lecture planning, and I thought I'd elaborate a little more.

First, when I present the class with "modern Smithians" or "modern Malthusians" I like cases that don't precisely match up. Why? Because economic science is progressive and for the most part ideas persist but are changed, formalized, evolved, etc. I'm sure I could find people that think Smith or Malthus or Keynes had it EXACTLY right and that we should treat their work like scripture, but those sorts of people aren't very good representatives of economic science (and - tellingly - it's hard to find those sorts of people in the highest ranks of the science). If, instead, you have someone that takes a Smithian or Malthusian idea and then develops it, that gives the class something to talk about and think about in terms of the development of economic thought (which is, after all, what the course is about). I am very explicit about this in class discussions - that these thinkers are not exactly the same.

But there obviously has to be some continuity - so why associate Sen with Malthus? First, both were concerned with what Malthus would call "positive checks" and their impact on the poor, with population, with inequality, and with famine. So just like the endogenous fertility modelers I talked about (Oded Galor), we have a common research agenda.

But I'm not sure a common research agenda alone would be sufficient. The students actually read Malthus, they don't get the sound-bite version of Malthus, and by reading him they learn that he actually did not think that the poor were doomed to die of famine because there just wasn't enough food. Famine is one of the positive checks, but it is treated quite distinctly from the other positive checks. Malthus thinks famine is an unusual case. He notes that unlike positive checks like war or disease, people go through famine as a result of their relative ability to participate in markets. A rich person may very well die of disease (perhaps at a lower rate than the poor), but only the poor will starve to death. Famine can be ameliorated by market exchange in a way that a lot of the other positive checks can't, and therefore it is uniquely governed by the state of income distribution.

This is what we see in Sen, of course. Famines are not cases where not enough food is produced. Instead, famines are cases where not enough food can be purchased - they are a problem of distribution, not production. As a result they principally impact the lower classes.

We also talked about an interesting discussion in Malthus on why this is not widely discussed. Malthus's answer foreshadows two other modern research agendas. First, he says that nobody writes histories of the poor. People only write histories of war, politics, and the wealthy. His principle of population was likely operating for all of human history but people missed it because nobody had any interest in writing histories of the lower classes. This observation foreshadows the "social history" movement of the 1960s (which continues with force today), and of course earlier efforts at that sort of social history by Engels, etc. Malthus also argues that people have ignored the population pressures he discusses because of the difficulty of thinking in terms of real wages (remember - this is the age before price indices were easily downloadable!). He explains why nominal wages are generally downwardly rigid, and since adjustments for real wages are difficult people miss the decline in real wages. This, of course, foreshadows the burgeoning literature on real wage cyclicality in the late twentieth century.

I like this use of "modern Smithians" and "modern Malthusians" in the class. Most of the students are unfamiliar with the people I discuss, so it introduces them to important twentieth century economists. It also gives me an opportunity to make important observations on how science develops over time.

We are getting into Ricardo tomorrow (if Kate doesn't go into labor, that is). I'm probably not going to talk about any modern Ricardians on the first day (when we discuss factor prices), although I'll obviously note the proto-marginalism, or the second day on trade (except to note that this view is dominant aside from the "new trade theory", which we already discussed in the Smith class). But on the third day when we talk about Ricardo on public finance and on machinery I'm going to bring up Robert Barro as a modern Ricardian (for the public finance discussion we're going to be reading portions from his Essay on the Funding System that go over what we now call "Ricardian equivalence").

I'd be interested in hearing thoughts on any other "modern Ricardians" worth discussing in any of these classes as well.

History of Economic Ideas essay #2 options

In case anyone is interested:

*****

Assignment: Write a short essay (approximately 2,000 to 2,500 words) answering one of the following questions:

1.      When economists try to persuade other economists of the validity of their arguments they often employ “counterfactuals”. A counterfactual is a comparison case or example where all factors influencing an outcome remain the same except one factor that is of particular interest to the economist. In this sense, a counterfactual is the analog to a “control group” in an experimental setting which economists rely on because we generally don’t have access to experimental data. The differences in outcomes between the case of interest and the counterfactual can help us to infer the relationship between the factor that is not held constant between the two cases and the outcome. Thomas Malthus uses the United States as a counterfactual at two points in the readings discussed in class. Please explain in detail:

a.       Malthus’s use of the United States as a counterfactual in his essay on population. How was the United States different from Europe? How was it the same? What outcome was Malthus interested in explaining and how did he justify his arguments using the United States as a counterfactual?, and

b.      Malthus’s use of the United States as a counterfactual in his discussion of economic crises in his Principles of Political Economy. How was the United States different from Great Britain? How was it the same? What outcome was Malthus interested in explaining and how did he justify his arguments using the United States as a counterfactual?

Be sure to use quotes from Thomas Malthus in a well-written and properly cited presentation of your arguments.

 

2.      David Ricardo takes formal modeling of the economy a step farther than either Adam Smith or Thomas Malthus and lays a foundation for formal economic theory that will last at least until the 1870s. A critical component of any economic model is a theory of the determination of factor prices, and therefore the distribution of national income. Please explain in detail:

a.       Ricardo’s theory of the determinants of wage rates. How is this similar to or different from the theories of Adam Smith and Thomas Malthus on the subject?

b.      Ricardo’s theory of the determinants of profits.

c.       Ricardo’s theory on the determinants of rent. The rent of landlords is the least important factor income for modern economists. We don’t even consider it in our models! Yet Ricardo’s theory of rent is considered to be one of his most important contributions. Why?

Be sure to use quotes from David Ricardo in a well-written and properly cited presentation of your arguments. Quotes from Adam Smith and Thomas Malthus are not strictly necessary but they would certainly be appropriate to include as well.

3.      We discussed on the second day of class that Thomas Jefferson was personally acquainted with many of the Physiocrats (such as Turgot), and that he shared important social biases with Adam Smith. Jefferson also read Malthus with great interest, and maintained a correspondence with Jean Baptiste Say in France. In 1804, Jefferson wrote to Say about his thoughts on Malthus’s theory of population. Please read the letter (in the Content folder on Blackboard), and write a response to Jefferson, from the perspective of Malthus (as if Say had [with Jefferson’s permission, of course] shared the contents of the letter). Please address:

a.       A basic restatement of Malthus’s theory of population.

b.      Where you think Malthus would agree with Jefferson’s analysis and where he would disagree.

c.       A discussion of the portions of the essay on population (the sixth edition is fine to cite, even though it came out after Jefferson’s letter) that are relevant to Jefferson’s arguments.

Be sure to use quotes from Thomas Jefferson and Thomas Malthus in a well-written and properly cited presentation of your arguments.

New Acquisition

From the library book sale, Terry Sanford's Storm over the States (1967).

Sanford was a liberal governor of North Carolina in the 1960s. In the book he talks about the problems with a federal takeover of spheres of responsibility that were previously occupied by the states. He makes the case for an active/reformist federalism.

Some of you may know that this is a personal interest of mine and the publication date of this book is of particular interest. My most important guidepost on an active, reformist federalism is my great grandfather, who had some of the same ambitions for Maryland when he presided over the (unsuccessful) state constitutional convention of 1967-68.

My (still developing) view of the problems of that time and the prospects for this sort of federalism is that hopes were dashed with the events of 1968 and with consolidation of the Great Society programs (which had already gone into effect a couple years before). States rights and federalism got a reactionary tinge and the reformists were all working at the federal level. Things could have played out differently, but they didn't.

Some things changed with the Clinton administration, but in relatively minor ways.

One day, when I'm less buried, I'd love to make more of this "stillborn reformist federalism of the 1960s" project. At this point, though, I probably won't get around to looking at this Sanford book until 201?. 15? 16? We'll see.

Fiscal multiplier project

Ryan Murphy has taken over a project on fiscal multipliers (here) which has a special emphasis on out of sample tests. He's looking for reactions to the summarization work so far, any examples of out of sample tests you're aware of, and also any other multiplier papers. I have a few thoughts on this:

Out of sample testing

First, the whole idea of an out of sample test is tough for the same reason that evaluating the Romer-Bernstein analysis was tough. When you go out of sample you are testing at least two things: (1.) the impact estimate of fiscal policy and (2.) the baseline behavior of the economy. If we are talking about multipliers just above one, often on relatively small fiscal packages it's very plausible that normal (or even abnormal) error in #2 will swamp #1. Certainly it's not easy to pull apart whether #1 or #2 are wrong.

Now let's say you can pull the two apart. Let's say, in your test out of sample, you can hold all the other things in the economy constant and look at the impact of fiscal policy in new data. What is that? Well of course it's just another multiplier estimate!

In that sense, we have lots of "out of sample tests" of multiplier estimates - it's just a new multiplier estimate. When we think about testing out of sample we're usually thinking about testing a whole system of equations that describes the economy. We don't usually think about testing a single parameter out of sample, which is sort of what this project is requesting.

These intuitions of mine seem to be confirmed by a quick scan of the articles they have that do test (or sort of test) out of sample. They're all DSGE models - namely, forecasting efforts using systems of equations that describe the whole economy. That you can test out of sample. But a single impact estimate? That's tough. Granted although I have an interest in macro I'm not a macro empirical guy, so I may be misunderstanding something.

What's interesting about multiplier studies

We've talked about a handful of multiplier studies on here before, although my knowledge of the literature is nothing near as comprehensive as what they have on this website. What I find interesting about multiplier studies - more interesting than this out-of-sample issue that they're tracking - are questions around identification strategies and what is held constant. The two points are often related. If exogenous variation across states or localities is used to identify the model, then the principle factor you're holding constant is monetary policy. That's a different sort of multiplier than the multiplier that Sumner refers to when he says that the multiplier is zero. Of course that introduces biases elsewhere associated with demand leakages across state lines. Papers that solve that problem often have the opposite problem - are they properly identifying stimulus at the national level, or is fiscal policy still endogenous? Without disparaging the work they've done, I would be interested in columns with headings like "identification strategy", "level of analysis", etc.

The other thing that is worth keeping track of with multiplier studies is the macroeconomic environment. Nobody thinks that multipliers are stable over time. Obviously structural parameters governing consumption behavior do not stay the same. But on top of that, the degree of crowding out is going to be a function of capacity utilization. It is not a coincidence that multipliers from things like war spending that are estimated in high-demand periods are lower than multipliers from narrative histories of exogenous taxes (which may come in high or low demand periods), which are themselves lower than multipliers estimated during the Great Depression. The good papers know this and interact the multiplier estimate with some variable indicative of the macroeconomic environment. That, of course, again raises the question of identification. Your fiscal variable better be well identified anyway, but it especially better be well identified if you are introducing those sorts of policy interactions.

Two new immigration pubs

It was very nice to see the new issue of Regulation magazine out today, because I have an article in there on high skill immigration (nothing you haven't heard from me before).

I also haven't mentioned on the blog yet that I had a featured article at EconLib this month on immigration - both high skill immigration and why people shouldn't be bothered so much by undocumented immigration.

It's a good thing Regulation came out because I found out the other article was rejected this morning (again, with great comments to move forward on). This is just how it works I guess. I've had pretty good success but that's a sign I wasn't pushing hard enough. The first rejection I knew was a reach. The second one I thought was a lot safer, but no matter. Time to clean them up and try again.

Rejection never felt so good...

...at a long-shot journal. What's funny is that I'm walking away from this feeling so good (maybe I'll feel crumbier tomorrow). The reviewers seemed to genuinely like my paper, and enthusiastically discussed things I ought to expand on. They wanted me to clean up some areas I honestly probably knew should have been cleaned up. But they liked the approach.

Revision and submission elsewhere is definitely doable.

I've got another paper out right now that I think has a much higher likelihood of being accepted - that would make me feel a lot better.

The three "modern Malthusians" I am thinking I'll talk about briefly tomorrow...

...any thoughts?

Amartya Sen - famines as a consequence of social structure rather than absolute underproduction of food (which is Malthus's view too - that was the origin of my last post. He considers the other checks so effective that he says that famines only emerge as a result of inequality and the lower classes living so close to the subsistence line and makes the point that famines rarely affect the upper classes when they do happen - so it's not that there is not enough food per se but the nature of the class structure. It's not exactly Sen's explanation but it's along the same lines).

Oded Galor - endogenous fertility models.

Casey Mulligan - incentive effects of welfare payments.

The idea, for those of you that haven't read what I'm trying to do with this class before, is to try to get them to understand connections between old and modern research agendas and the continuity and evolution of economic thought. We talk a lot about what's the same and what's different in these arguments and the older ones, particularly focusing on the impact of theoretical changes over time (for example, how does the introduction of marginalism make "modern Smithians" different from Smith himself).

They've never encountered most of these modern economists before (based on polling of the class I do when I bring them up), so it's also a nice way to familiarize them with the lay of the land.

So far we've talked very briefly about Stiglitz, Stigler, and Coase, and more extensively about Krugman, Romer, Arrow, and Vernon Smith. These three will get brief treatment (probably ten minutes in total) at the end of the class tomorrow.

I may drop Mulligan - I'm not sure. He's kind of a stand-in because everyone thinks welfare has behavioral responses. He's just a great example of that work. But I think it's nice to show the diversity of economists and perspectives that represent the Malthusian research agenda today.

I feel like the contrast between Malthus and Sen on famines is a little contrived...

...what I don't know is where that originates - I've only found other people make the sharp contrasts. I've read a little of what Sen has to say about Malthus, but only on preventative checks and not on famine.

Poor Malthus.

The economist's utility function

U = [(realism)^a]*[(predictive)^b]*[(explanatory)^c]*[(parsimony)^d]

For most economists there may be some idiosyncratic preferences here and there (Krugman seems to like parsimony, empiricists like explanatory power, people close to forecasting communities like predictive power, and those invested in pedagogical issues like parsimony), but there's no big winner that trumps the rest:

a =?= b =?= c =?= d

Hard core praxeologist types:

a >> b, c, d

Other Austrians:

a > b, c, d

The crude Friedman version/crude Popperians:

b >> a, c, d

Vaguely positivist types:

b, c > a, d

There are very real trade-offs between all four of these arguments in our utility function, whether you want to admit it or not.

Scott Sumner and Paul Krugman: I'd change one line

Great post from Scott here.

I'd change just one single line. He ends with "That’s how slight our differences are today." I'd have put that "That's how slight our differences have been through the whole Great Recession".

Quote of the day, courtesy of Bob Murphy

It's an excellent quote from an older edition of probably my favorite macro textbook. The catch is, he thinks I disagree with it which means something in our conversation has gone terribly awry:

"[T]he purpose of a model is not to be realistic. After all, we already possess a model that is completely realistic—the world itself. The problem with that “model” is that it is too complicated to understand. A model’s purpose is to provide insights about particular features of the world. If a simplifying assumption causes a model to give incorrect answers to the questions it is being used to address, then that lack of realism may be a defect. . . . If the simplification does not cause the model to provide incorrect answers to the questions it is being used to address, however, then the lack of realism is a virtue: by isolating the effect of interest more clearly, the simplification makes it easier to understand."

--David Romer, Advanced Macroeconomics (New York: McGraw-Hill, 1996), pp. 11–12.

Models are never perfectly realistic. I don't think I've ever suggested that perfect realism is necessary or even good, so I should hope Bob doesn't think that's my standard. But realism of assumptions matters so I will never say something like "all that matters is whether your predictions are accurate". It's not all that matters. One can plausibly sacrifice predictive power for realistic assumptions just as one can plausibly sacrifice realism in assumptions for predictive power.

The scientist's utility function is quite well behaved. When we are looking for assumption realism/empirical validity bundles, our utility functions are concave and we have diminishing marginal rates of substitution between the two. The real world and the critiques of our peers present us with the constraints that we're optimizing against.

Another class blog post that may interest readers of this blog

[We had our "modern Smithians" class today where they broke out into groups to discuss Krugman, Arrow, Smith, and Romer before coming back together for a class discussion.]

Paul Krugman, Kenneth Arrow, and Vernon Smith are all Nobel laureates. Paul Romer is not but it would not surprise me at all if he earned a Nobel at some point. Part of the reason for working with these economists today was that they are the top of the field and they provide the best that modern economics has to offer, so it's a good set of economic thinkers to try to relate back to older theory.

This post requires a little effort on your part, but as usual I'm interested in quality not quantity. Take a look at the list of Nobel laureates (here: http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/) and read a little about the research that the prize has been awarded for. Identify a laureate that worked with some of the same themes or ideas that interested Adam Smith. How are they similar, and how are they different?

This can be broad of course. For example, Smith was interested in the order that emerged in an unplanned market economy. We learned today that Kenneth Arrow and Vernon Smith were also interested in how this order occurred. Did any other laureates look into this problem and how did they approach it?

The 2013 prize will be awarded on Monday, October 14th. Take a look at who won and try to familiarize yourself with their theories. We will definitely discuss the winner(s) for part of the class on Tuesday the 15th.

Bob responds on economics and the scientific method

Here.

Recall my concern a couple days ago that there are so many people who seem to accept the seen/unseen counter-factual argument just fine but will only give vague criticisms of actual empirical practice to deal with the problem (this is especially notable when you cite some empirical evidence but raise hackles about other empirical evidence).

I want to make two quick points about Bob's response:

1. If you're just talking about thinking carefully about something, that's fine - but that's philosophy, not science. There's no need for Bob to mock people for thinking that empiricism might have something to do with science. There's nothing childish about that idea at all. The step-by-step formula of the scientific method you learned as a kid is a little childish and ignores the iterative nature and the feedback inherent in real scientific work, sure. But if you're talking about taking empiricism out of the equation, you're talking about social philosophy. Just say that and stop the name calling.

2. Bob is quite sloppy here about assuming that (1.) politicians are on board with economists and (2.) that economists even think policy can work miracles in the first place. When we have a financial crisis, I think the best anyone hopes is that the Fed can ameliorate it anyway - not make everything perfect. As far as I know, at least. But even if you do think policymakers are miracle workers, only an an-cap could think that policymakers now are actually listening to economists.

Smith, human nature, and modeling assumptions

I keep a blog for the history of thought class to help assess class participation. I try to have a post up for every lecture. The one I just put up this morning might be interesting for readers here to muse on and respond to.

"Smith makes a lot of assumptions about human nature. He says that we have a natural propensity to truck, barter, and exchange, that we are naturally self-interested, and that we are naturally fairly equal in abilities. We learned yesterday that he also thinks humans have a natural preference for the country and for agriculture.  

Although his model is non-technical, these are still modeling assumptions. How do these assumptions compare to the assumptions about economic agents today? Why are they different (in other words, what's different about the way our models work that leads us to keep some of Smith's assumptions and drop others)?"

Thoughts?

The first three, put together, give us a lot of Adam Smith. The fourth assumption is more relevant for his growth theory in Book III and some of his commentary on policy. That's not as relevant for our models, but what's interesting to me is that we've dropped several of the first three assumptions too, but we've managed to get similar outcomes by adding others.

There's a difference between an economy with equilibrium tendencies and an economy with full employment tendencies. It's the difference between an emergent order and a Panglossian order. It's also about assuming a coincidence between what we as individuals in a much bigger system value and what the system tends toward which seems to me to be a little naive and atypical of natural systems we usually encounter.

With the baby coming any week now, the reaccumulation of our stock has begun

Adam Smith on wages and profits

Don Boudreaux had a really odd post up recently criticizing Wal-Mart workers (and sympathizers) for agitating for higher wages. Now if this were a case of the $15 minimum wage that Washington D.C. was considering recently (that would result in Wal-Mart not opening in the city), I could have some sympathy. I don't think a $15 minimum wage makes any sense, particularly when it's clearly having a negative labor demand impact like that. And as you all know I have some criticisms of the minimum wage generally.

But that wasn't the issue in this protest - this was a protest of Wal-Marts wage levels independent of any legislative action (indeed, it spanned 15 cities so it was obviously much more than just the D.C. minimum wage issues).

It's very bizarre and illiberal, I think, to browbeat low-income workers simply for wanting to enjoy some of the surplus they produce above their reservation wage the way Don did. Not everyone is a marginal worker. I'm not even an especially pro-union guy, but I'm not going to write a letter to the editor and get mad about someone else's pay negotiations.

So I commented on the post with this quote from Adam Smith:

"Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."

Don responded with a common misperception that I thought I'd address. He wrote:

"Daniel: You do realize, I trust, that Smith was there complaining about the monopoly privileges granted by government to domestic suppliers - privileges justified by mercantilist principles."

This is actually not true. This comes from chapter 9 of Wealth of Nations, in the section of the book where he's talking about factor income and price theory. This is in Book I - you don't get the discussion of the problems with mercantilist privileges until Book IV. So what is Smith complaining about?

His view of profits is a little unusual to the modern reader because he subscribed to the wage fund doctrine. He didn't think of "capital" in the same way we do today - capital included both "circulating" and "fixed" capital (this goes back to the Physiocrats although Adam Smith developed the idea much more carefully). Fixed capital is basically what we think of today as capital. Circulating capital is the stock advanced to workers to pay their wages while they worked. So according to Smith, capitalists expected not just a return on their fixed capital but the entire wage bill as well - the circulating capital. Think of the modern budget constraint facing the firm:

BC: wL + rK

The Smithian budget constraint (forgetting rent for a second), was:

Smithian BC: wL + rwL + rK = (1+r)wL + rK

Where the capitalist earned r(wL+rK)

Now Smith didn't have a marginal productivity theory of factor income - instead the division between wages and profits was determined by bargaining (and a few other rules), which was influenced by market power as well as how desperate workers and capitalists were. Of course capitalists had more market power (there were fewer of them) and they could outlast workers in negotiations, which gave them the upper hand completely independent of any kind of government privileges. Smith notes in an earlier chapter from the passage quoted above that this is why everyone is aware of (and complains about the fact that) workers organize to get higher wages, but nobody pays attention to the capitalist's efforts to do the opposite. The capitalists can just wait them out, and because of his wages fund view, the capitalists are earning a higher return than even we consider appropriate today.

In chapter 9 (where the quote is from), he raises another concern about profits that is quite relevant to Austrians who think in terms of the structure of production, actually. Smith notes that when production is (what we would call today) vertically disintegrated - when it's carried out by a number of different firms, profit grows in a compounded way because all of the stock bought from an earlier production stage is bought with more capital laid out by the capitalist. They expect to earn profit on that capital, which is assessed on top of earlier profits earned on both fixed and circulating capital. This is not the case for a worker's wages. So as the division of labor proceeds, a capitalist's income growth is compounded. And this bothered Smith because it only exacerbates the social inequities he raised earlier.

Now Don is right that Smith also thinks that capitalists will bend public legislation to their purposes. This is true. But it's not true that that's the foundation of his concern about capitalists. Even if we take that out of the picture, assume no abuse of the political process, Smith still has a lot of concerns about capitalists even in the case of a normally functioning market.

More importantly in the context of Don's original post, he is highly suspicious of people who balk at workers arguing for higher wages but never seem to complain about capitalists earning higher profits.

You're going to need to give us more than that - the "intellectual bankruptcy" of mainstream macro

Russ Roberts and Bob Murphy are not fans at all of mainstream macro - specifically empirical macro that estimates stimulus impacts. Both are calling it "intellectually bankrupt". There are two reasons I can think of for this:

1. They reject endogeneity and simultaneity problems - they don't think they are important at all in economics, or

2. They think endogeneity and simultaneity are important problems to think of in empirical economics and they just don't think we do a good job addressing the problems.

The first one seems highly unlikely to me. Russ likes to talk a lot about Bastiat (and presumably Bob shares his admiration), and Bastiat was deeply concerned with these issues. That's the whole point of the seen and the unseen, after all. In that sense Bastiat very much has the sensibilities of a modern, mainstream macroeconomist. It also seems unlikely because despite my differences with both Russ and Bob, I don't think either of them are dummies - and you honestly don't need that much economic sense to agree that these are critical problems for economics.

So I assume it's the second issue - they don't like how economists deal with endogeneity and simultaneity.

The trouble is, if this is the problem then they really need to give their readers more before they start throwing around terms like "intellectually bankrupt" (particularly given how they tend to pout when others make accusations like that). What fault do Russ and Bob find in the way these estimates are generated? I have no idea.

This bothers me a lot because although I'm not really an empirical macroeconomist, I am principally an empirical economist. Everything I've ever written on economic history, history of thought, Keynes, Hayek, etc. I've written for free. What I do for a living and a career is empirical economics and I spend a lot of time worrying about precisely these problems that Bastiat raised - how to parse out the seen and the unseen in a non-experimental setting.

We've talked about multiplier estimates here (although again - it's not my expertise). I've come out strongly against estimates that use cross-state and cross-county variation, for example. Some "windfall revenue" studies are nice, but they still have demand leakage issues. I've also come out against war spending estimates because we're not dealing with depressed situations in many cases, and because war spending is not exogenous.

We've talked on this blog about the pros and cons of different minimum wage studies too.

We've talked on this blog about why I am skeptical of most instrumental variable papers.

We've talked on this blog about where you need to be careful using propensity score matching.

We've talked on this blog about why I love natural experiments and regression discontinuity designs.

We've even talked a little on this blog about the pitfalls of random assignment if there are general equilibrium effects.

So if I express skepticism about some kind of empirical finding I hope at least I've expressed why or that my history of blogging could give you a clue about why I'm skeptical.

But with Russ and Bob, I come up empty. They like Bastiat so they have to agree with me that counterfactuals and endogeneity are important. They obviously don't like the methods to deal with it. But what I don't understand is why they don't like it - what the issues are - why Russ is happy to cite Ramey or Barro and Redlick or Selgin, Lastrapes, and White favorably but calls a Krugman claim "intellectually bankrupt" when the estimates he cites are struggling with the same goddamn empirical head-scratchers that Ramey/Barro/Redlick are.

I think I have a right to expect a little more detail on what the concern is with these estimates for a couple reasons:

1. Russ went to Chicago and Bob went to NYU (ranked second and tenth respectively). I am currently attending American University (ranked 205th). Despite some peoples' complaints about these rankings, they fall out how they do for a reason. If I can provide detailed justifications for my thumbs ups and thumbs downs on empirical economics, they certainly should be up to the task.

2. Ramey, Barro, Redlick, Selgin, Lastrapes, and White all come down with conclusions that Russ likes. Feel free to name others that Russ has linked to favorably on Café Hayek and whom he has not called "intellectually bankrupt" for using modern empirical methods too. I can't recall a single case - in the years following the blog - that Russ has praised an empirical analysis that goes against his political views. This is troubling. It does not mean he is biased, but it is an AWFULLY good reason to expect more details on what he does and doesn't like about the analyses.

3. The other reasons they give are really bad. Stop complaining about how mainstream economists are copying physicists. Physicists don't use these methods. Economists INVENTED several of these methods after all. And if they did use them, who cares? In what universe is the unique usage of a method by one group of scientists anything like a standard for judging the validity of the method?

On behalf of all of us who actually do and care about empirical economics, I just think we deserve a little more than this.

Something fishy here... John Lott on part time jobs

Greg Mankiw points us to John Lott, who suggests that 96% of new jobs this year are part-time.

OOOOBBBBAAAAAMMMAAAAACCCCCAAAAAARRRRREEEE!!!!!!!

::shakes fist::

I don't have time to delve into this too deeply right now, but one thing immediately jumps out at me - he is comparing January to August numbers.

You know January. It's that month that starts a couple days after Christmas and the holiday shopping season. You may also be familiar with August. It's that month before all the kiddies go back to school.

Something tells me we should wait until January 2014 and do a year-on-year comparison instead of subtracting the nadir of part time employment from its zenith and comparing it to total employment figures that likely are just poking along.

These do not appear to be new hire figures. That was my second thought - since there is higher turnover in part time jobs you don't want to compare new hire statistics either (net job creation would be OK).

How much you wanna bet Casey Mulligan picks this one up?

UPDATE, 11:08 am: One thing I do notice is that they are seasonally adjusted. Does anyone know how seasonal adjustment works for things like part time employment? Is all seasonality in all series completely cleaned out or does it clean out some kind of aggregate seasonality (in which case we'd still expect quite a bit of fluctuation in specific labor markets - this ought to be nailed down.

The wage-fund doctrine kind of reminds me of market monetarism. Is that crazy?

First short essay assignment

The second option, I think, is somewhat easier but that can of course be accounted for in grading.

Assignment: Write a short essay (approximately 2,500 words or five pages) answering one of the following questions:

1.      Economic science is cumulative. Economists modify and formalize the work of earlier economists. Adam Smith, as an early economic thinker, has naturally been taken up and elaborated on by many authors. Choose one of the “Modern Smithians” discussed in class (Paul Krugman, Vernon Smith, Kenneth Arrow, Paul Romer, or Joseph Stiglitz/Andrew Weiss) and write about:

a.       The methodological or stylistic similarities and/or differences between your chosen author and Adam Smith, and

b.      The substantive similarities and/or differences between your chosen author and Adam Smith.

Be sure to use quotes from Adam Smith and from your chosen author in a well-written and properly cited presentation of your arguments.

 

2.      Adam Smith begins the Wealth of Nations with a detailed analysis of the division of labor. The division of labor is one of the most important common threads running through his economic thought. Explain Smith’s perspective on

a.       The relationship between the division of labor and trade (either domestic or international trade),

b.      The relationship between the division of labor and economic growth, and

c.       The role that the division of labor plays in producing a unified Smithian theory of trade and economic growth. That is to say, how does the division of labor account for the interrelationship between trade and growth for Adam Smith.

Be sure to use quotes from Adam Smith in a well-written and properly cited presentation of your arguments.

 

Quote of the day

"I don't know if I have what it takes to be a good economist, but I do know that without Coase my chances would be smaller. Many of you are probably smarter than me, but I still think he can do the same for you."

- Jonathan Catalan

That's about as good a tribute to an economist you can come up with.

Models of the world vs. understandings of the world

OK, apparently I have more frustration from yesterday bottled up than I thought.

In the last post I discussed that it's important to keep in mind that textbooks and intellectual histories are two very different things.

Here I want to stress that models of the world and understandings of the world are also two very different things and you're going to get tripped up if you forget that.

I may have a model where I have a nice social welfare function generated from perhaps unreasonably smooth utility functions, maybe just incorporating risk - maybe not even incorporating risk! - where I assume that all the agents are excellent at calculus.

I don't think through this model because it necessarily matches my vision of the real world in all it's particulars. Instead, I think through this model because it offers me a way to work through the most important ideas while pushing the less important ideas (for this application at least - they may be very important elsewhere) into the background. We all do this all the time. The benefit of doing it with math is at least I'm being upfront about what I'm assuming!

So it would be a waste of your time to try to tell me, for example, that not everyone knows calculus (or even has all the data to apply calculus to). I know that. If you get worked up about this, you are confusing:

1. Making an assumption in the model, and
2. Making an assumption about the real world

If you think I'm doing #2 then you are misunderstanding the whole exercise and how economic science is done.

Even if you understand I am doing #1, we might still have a fruitful debate over whether I should do #1. Maybe the departure from reality is sufficiently great that only nonsense comes out of the model - no insights worth working with. We can argue about that. I might say that although people don't actually do calculus when making decisions, we can probably agree they're trying to figure out the best option for them, and they are probably saying something in their head like "I'm going to keep doing this until the cost to me of doing it again is higher than the benefit of doing it again". That's not a very big assumption on my part, after all. And that's a pretty fair account of all that I'm importing into the model by using calculus.

So I'd maintain it's still a nice little model to help me think about the world and keep all the forces I'm juggling in some semblance of order so that my puny little brain that evolved on the savannah can get some take-away insight from the exercise.

A final note - this is not Friedman's methodology. I am not saying that any assumptions are OK as long as they produce an outcome that matches reality. What I am saying is that imperfect representations of reality (calculus optimization vs. humans seeking out the best option), by making the problem easier to work with, can generate more insights than the imperfection costs.

A thought on textbook Pigou and real Pigou: or, textbooks are NOT works of intellectual history

In the Coase discussions yesterday, someone brought up the point that all the richness of Pigou - all the public choice etc. - is lost in the textbooks. The guy I was talking to argued that because mainstream textbooks' Pigou is very different from the real Pigou, he is entirely in the right in criticizing this Pigou as fallacious.

This, I think, is a very problematic viewpoint.

Textbooks introduce ideas to students.

Textbooks are not repositories of the history of thought.

You don't find Pigou in the index of a micro textbook, and turn to the page to get an intellectual history of Pigou. You find Pigou in the index to get the page numbers of the selected ideas an economic student should know that are unique enough to Pigou that they are filed under "Pigou" in the index. If you want an intellectual history with all the richness that Pigou has to offer, you go to a history of thought journal.

Grab your nearest economics textbook and turn to the bibliography. Look at how many sources you have cited. If all the intricacies of their perspective were included in the textbook it would have to run to thousands and thousands of pages. It's an absurd standard.

One reaction to this is to criticize mainstream economists that use textbooks to teach students for having a superficial view of Pigou, of Smith, of Coase, or of whoever else. This is not a reaction that pays dividends in my opinion. Even the works of intellectual history that this reaction inspires are disappointing in a lot of ways because they spend too much time targeting textbooks as if those textbooks were ever intended to be intellectual histories.

A second reaction is to know that economics teachers have a limited amount of time in which to communicate important ideas to students. Given these constraints, the best option is to sometimes spend a page teaching the slimmed down discussion of Pigovian taxes, and then indexing Pigou's name, before moving on to Coase, then Lindahl, then maybe discounting future costs, and then moving on to the next chapter.

An intellectual historian interested in Coase, or Pigou, or Lindahl should quite obviously not be reaching for a micro textbook as a source, an inspiration, or a sparring partner.

Why the (Stiglerian version of the) naive Coase theorem?

David Henderson has a nice tribute to Coase in the Wall Street Journal. His treatment of the more naïve versions of Coase is very clear and I feel like it makes the point I was making the other day - that the Stigler version isn't really wrong (it's actually a corollary of the version Coase was interested in), it's just not the interesting case, and certainly not the realistic case. David writes:

"George Stigler, who won the 1982 Nobel Prize in economics, thought the exciting part of Coase's insight was what happened when transactions costs were zero. Stigler labeled that insight the "Coase Theorem." If transactions costs were zero, no government intervention was needed.

Deirdre McCloskey, an economist at the University of Illinois at Chicago Circle, thought the no-transactions-cost insight was trivial. The interesting part, according to Ms. McCloskey, is what happens when reality intrudes in the form of positive transactions costs. Then it matters how courts assign liability. If, in the above example, a court gave a rancher the right but the rancher valued the steer at less than the damages to the farmer's crop, transactions costs could prevent the efficient solution from emerging.

Coase himself rejected both the Stigler view (that zero transactions costs are the important case) and the Pigou view, both of which he derisively called "blackboard economics."

But I find the last part, where Pigou comes back into the discussion, a little odd. That made me turn over why Stigler might have presented the version of Coase that he did. One possible reason, it seems to me, is that, the high transaction cost world where liability matters and bargaining may be problematic is to a large extent a Pigovian world, and Stigler obviously knew that Coase was trying to add to - if not completely overthrow Pigou.

When you get Pigou on externalities the goal is to internalize the externalities. The very definition of the problem offers the first solution to internalizing the externality: rearrange property rights. The whole problem is that I don't have rights associated with the third party harm I'm experiencing, so clearly if I had rights the situation would be different. Pigou adds that there are public policies that can approximate this solution in circumstances where assigning property rights isn't feasible.

What Coase really adds that's interesting is the possibility of bargaining and the conditions for the feasibility of bargaining (reasonably low transaction costs). The high transaction cost world (let's just say infinite transaction cost world for the sake of argument) is the Pigou world. We have property rights solutions (or, what's equivalent, liability) and some public policy solutions. The real expansion of our vision from Coase had to do with the world where transaction costs are sufficiently low that private arrangements are possible.

Although it's not really what Coase thought was most important, it doesn't seem all that surprising that Stigler chose to focus on this side of the discussion. Although that was not Coase's interest that's where a lot of the new insights came in (and as transaction costs increased of course we only gradually scale back the real world viability of those insights). Coase also has implications for trying to influence transaction costs themselves, of course.

This still leaves open the point I was hitting on a lot yesterday about normative assessments. We may have strong ethical reactions about who has standing (no one invokes Coase, for example, to argue that a rape victim should consider paying off her rapist before the law gets involved - the transaction costs are low, after all, so a bargain could be struck).

Why is this still so contentions?

There are three broad answers to externalities I mentioned above (I am assuming that most economists reject quantity restrictions because of insurmountable knowledge problems):

(1.) reassignment of property rights,
(2.) taxes/subsidies, and
(3.) bargaining between parties

A couple factors help us determine which is best. First, of course, is how easy it is to reassign property rights. Transaction costs also matter. Whether or not we consider the problem legitimately reciprocal matters. Public choice issues matter (you can think of these as political transaction costs).

I think of (and I think most economists think) that in 1920 when Pigou published his book we were working with answers (1.) and (2.). That is the Pigovian world. Coase adds (3.) so the full picture we have now has all three. I get the impression from wading through posts and comments that there are many libertarians out there who think that the Pigovian world is just number 2 and that we didn't have numbers 1 or 3 until Coase.

If you actually think that, of course, it's much more understandable why you might have big fights between Stigler and McCloskey.

I think McCloskey is certainly right in addressing what Coase thought. I think Stigler has a point in his description of how the landscape of economic science changed after Coase.

That awkward moment when 14 people "like" the post where Pete Boettke endorses Deirdre McCloskey's assertion that only 12 people understand the Coase Theorem

Three quick thoughts on the "nobody understands the Coase Theorem" meme

1. I hear "nobody understands the Coase theorem" way more often than I hear that a Coasean world is one with zero transaction costs (in fact I can't remember when I've heard that one, although I'm sure I have somewhere along the line). That has to say something for the validity of the first statement.

2. The naïve Coase theorem and the actual Coase theorem seem like corollaries to me. So all you're really saying is that Coase thought the latter was more interesting. That seems to deflate the meme considerably.

3. I only ever seem to hear the meme from people who like to expound upon misunderstood traditions in economics. That also seems like it says something about the validity of the meme.

How not to honor Coase's legacy...

...by acting like anyone that still talks like a Pigovian is too dense or statist to really appreciate Coase. I've already seen a little of it. I'm sure we'll see a lot more. Coase starts the second section of The Problem of Social Cost thus:

"The traditional approach has tended to obscure the nature of the choice that has to be made. The question is commonly thought of as one in which A inflicts harm on B and what has to be decided is: how should we restrain A? But this is wrong. We are dealing with a problem of a reciprocal nature. To avoid the harm to B would inflict harm on A. The real question that has to be decided is: should A be allowed to harm B or should B be allowed to harm A?"

It's true. This is an important question. But in practice most people talk about Pigou because they have thought about that question and answered it or because the parties have resolved it themselves but we think that the resolution came about under duress.

And I promise you, that doesn't mean you need to explain Coase to us.

I told my students on the first day that economics is progressive and although sometimes adversarial (say, Friedman vs. Coase in a seminar room) it is not factional (there is no great Pigou vs. Coase war - ignore people who act like there is).

Ronald Coase has passed away

Very sad news.

I got into reading a lot of Coase for my senior thesis as an undergrad, which was on the impact of trade flows on vertical disintegration of domestic industries. Throughout college I was very interested in the New Trade Theory/increasing returns/division of labor stuff. So I came at Coase (and Williamson) a little backwards actually. Coase is of course one of the dominant ways of thinking about the firm in economics, but since I had spent my sophomore and junior year interested in stuff from Krugman, Romer, Adam Smith, Young, etc. (along more obscure people who wrote about those issues like Brian Arthur and Xaiokai Yang) I started reading Coase more in my senior year when I wrote the thesis as an alternative perspective on industry structure.

That's probably part of the reason why my academic and professional career hasn't taken a very standard path. I just poked around in what interested me, which sometimes meant getting things backasswards. But for a student like that, that just enjoyed exploring the literature, of course Coase was a treasure when I found him. I don't think I've come across anyone who wouldn't agree.

We've been talking recently about economath, and the difference between the medium (math vs. literary) and clear, powerful economic reasoning - that you can use either medium to communicate good economics. Well Coase is the perfect example of someone appreciated by both math and literary partisans for doing just that.

My fall semester

As you've probably noticed, posts have already started slowing down and that's only going to continue. This will be an interesting fall. I'm taking a "full" course load, but the classes should be more laid back than in earlier semesters. The dissertation seminar will just be to prepare my dissertation proposal for later this year and learn the rules and regs. My labor class is going to be a seminar format, so just a lot of digging into papers and discussing them. That's a lot of work, but it's the sort of work that I personally take to much more easily than problem sets. Finally, the infometrics seminar is one that I'm looking forward to. I'll have to keep up with the readings because it's essentially an econometrics course with no problem sets (some labs). It's the one class I'll write a paper in, which maybe I'll talk about later in the semester (we have to write a grant proposal for the labor class).

Then of course I'm teaching history of economic thought. The first two days have gone well I think. A handful of kids are very interested in the subject. The rest maybe less so, but that's OK - there's always a distribution. It is a decent size class considering that I'm going to be grading essays without a TA.

Otherwise, more Sloan Foundation work all Fall (hopefully moving away a little bit from the immigration stuff, but I'm not the final decision maker on that point), finishing up a chapter on unemployment for another edited volume by Guinevere Nell, pulling together a draft on student visas and the transition to work for foreign students for the APPAM conference in November. I've got a couple other projects on the back burner that can take up any free time after all that.

Oh, and I should be meeting this little lady soon:

This was from last Monday. She is due the 21st. Time management is my big concern this fall. It's all doable, but with my priorities being baby as number one, my teaching as number two, that may leave precious little time left to juggle my own classes and the Sloan foundation work - both of which are pretty essential to do right.

I've got two short immigration pubs coming out very soon - I'll post on them as they come.

Bob Murphy on Formalism in Economics

Here.

Best post I've read so far on the issue. I've cited Krugman's here as well because I think he highlights what I think is most valuable about math in economics, but what I like about Bob's is that he quite explicitly separates two things that I think a lot of people (for example, perhaps Bryan Caplan and Pete Boettke) have been conflating: non-mathematical economics and "economic intuition" or what Bob calls "basic economics".

A lot of the discussion has treated this as a choice between high-falutin math on the one hand and good intuitive "thinking like an economist" economics on the other hand. As I pointed out, this is a category error. Math is a language for communicating an idea, and "thinking like an economist" or "basic economics" or whatever you want to call it is the substance of what you're communicating. Nobody wants to abandon the economic way of thinking. The question is, how do you write that up, and does mathematical or literary economics enable or obscure good economics.

The best answer, it seems to me, is that it depends and that literary economics can obscure good economics as readily as math can. Bob gives nice examples of both cases posing problems.