The Game Theory Boom

I'm linking to a nice paper [Nicola Giocoli: Three Alternative (?) Stories on the Late 20th-Century Rise of Game Theory] asking about the reasons for the sudden boom in the use of Game Theory in economics in the eighties. His bottom line is Harsanyi's development of tools for thinking about games of incomplete information, so-called Bayesian games. But he also gives some importance to the following circumstance: The Chicago School completely dominated Antitrust policy in the eighties. I remember in Grad school in the late 70's the suffocating growth of Panglossian Industrial Organization thinking. This was the stuff that would look at any apparent example of restraint of trade - resale price maintenance, eg - and find that it was rational and efficient. Predatory pricing was irrational and could never happen; the only real entry barriers were put in place by the dead hand of the state. Laissez faire; laissez allez, in short. Economists dissatisfied with this picture - in particular, thinkers associated with Stanford's Graduate Schoool of Business such as Paul Milgrom and John Roberts - used Harsanyi's Bayesian techniques to provide rigorous counter-examples to the Chicago conventional wisdom: to show how predation might make sense, how non-state entry barriers - such as building excess capacity, might well succeed, and so on.

A Bumper Sticker Response to High Oil Prices—But Not Obama’s

Oil prices are very high and moving higher. In Asia and Europe there have been large protest actions, while the popular response in the US is still at the grumbling stage. This is likely to be an important issue in the US elections, and progressive candidates need clear, non-wonkish ways to frame and deal with the problem.



The strategy of choice right now seems to be “blame the speculators”, and Obama has jumped on this bandwagon. Not a good idea, in my opinion, for two reasons. First, there’s not much evidence that speculators are the cause of this price runup. Second, high oil prices—in fact, much higher oil prices—are good. They will combat climate change, slow down the environmental destruction of sensitive drilling areas and conserve a nonrenewable resource for future generations.

So what’s the alternative? The problem is not that oil is expensive, since burning it is truly costly for the human race, whether we pay the monetary price or not. The problem is that the money ends up in the hands of governments and oil companies that get rich simply because they’ve captured the resource. In economic terms, it’s the problem of rents: vast sums of money are being transferred from us, the consumers, to those who control a commodity in high demand but limited supply. And the solution is to get the money back. This is another reason why we need a cap-and-rebate plan for carbon. Put a tight cap on carbon fuels. Auction all the permits. Give the money back to the people. By drastically lowering demand we also put a lid on the price of oil at the wellhead. In other words, rather than paying lots of money to Exxon and the Saudi royal family, we pay it back to ourselves. Either way, oil will be expensive, because it has to be. But the solution is to get the money back, so we can protect our standard of living in other ways that won’t imperil the planet.

KEEPING UP WITH THE JONESES

by the Sandwichman

From the 1865 pamphlet A REDUCTION OF HOURS AN INCREASE OF WAGES by Ira Steward:

Many things can be done for self, family, and domicile which cost nothing but time and labor; but when done, are sure to suggest one or two things more, costing money. There is time after eight hours' labor to attend an evening concert, which adds a little to the expense, but much to the enjoyment of the family. The Smiths and Jones "and everybody" are going, "and who wants to be so different from everybody else." If these are trivial considerations to intelligent minds, they are the only ones which can be brought to bear upon the masses to tempt them to bid for higher wages. The great majority of men and women must "act like other folks." "What will people think?" or "What will people say?" is the most terrible question which they can be asked.



The expression "keeping up with the Jones" is commonly attributed (on the internet) to a comic strip of that name by Arthur Momand begun in 1913. But was the idea of "keeping up with the Joneses" original with Steward and his eight-hour theory?

Pass the Prozac!

So I take a tour around the economic blogosphere. What do I find: Delong pointing to Weintraub trashing Steve Marglin's new book. Tyler Cowen's and Steve Dubner's commenters (more than a few) telling me that the Greatest Thinker of Our Time is.......AYN RAND or THOMAS SOWELL. I'm not making this up. Right. Then the Greatest Cook Of Our Time is the guy who lowers the fry basket in the McDonald's down the street. Good Grief!

ENVIRONMENTALLY-FRIENDLY OFFSHORE OIL DRILLING

by the Sandwichman

There is no such thing.

Happy Bloomsday from Econospeak

This is June 16th, the day recounted in Joyce's Ulysses. I named my daughter Molly after the fictional Molly Bloom. Happy Bloomsday, Molly!

CGE Challenge Reloaded

It’s been two weeks since I put out a challenge to proponents and practitioners of computable general equilibrium (CGE) models. As you may recall (or if your short-term memory falters, reread), I pointed out that, in light of well-known issues in general equilibrium theory, and after 30 years of experience, the time had come for those who believe in CGE to step forward with performance data. Is there any evidence that predicted CGE results hold in the real world, or that CGE methods are seen as useful in the marketplace? Or is this simply a self-perpetuating enterprise, feeding off academic and government contracts in a world where results don’t matter?

In addition to its thunderous presence on EconoSpeak, my challenge was mirrored in several other venues. Thanks to the magic of Google, I was able to monitor the comments posted around the blogosphere, and here is what I got: nada. Oh, I read several lame arguments that it is in the nature or purpose of CGE that real-world performance data are impossible to come by or that they wouldn’t matter anyway, but no one had even a shred of evidence to offer.

So here we go again, and I will be more explicit. Unless anyone can demonstrate otherwise, I suggest that CGE is an academic bubble whose intellectual value is grossly inflated, and which will crash to earth once the idea dawns that conjectures are no substitute for results. Those who currently buy this sort of analysis, not to mention those who make the career decision to invest years in learning its technical arcana, are throwing away their time and money. There’s no there there. Show me why I’m wrong.

More Trade Nonsense from the New York Times

There is a lot I could jump on in Roger Lowenstein’s witless diatribe in today’s New York Times Sunday Magazine, but let’s keep it simple. Lowenstein, claiming to paraphrase Gary Hufbauer of the Peterson Institute (who should either sue for libelous misrepresentation or go into a different line of work), writes: “Thanks to the cheap dollar, U.S. exports are booming; trade is now the economy’s strong suit.” Now read that last clause again: “trade is now the economy’s strong suit.” Um, no. Have I mentioned that we have numbers on that?

News From the Disaster Front

Some of you may have seen the news about the huge California wildfires. One of the biggest started just outside of Chico, but has been moving up toward Paradise, about 10 miles away. 5000 homes are at risk and much of the city has been evacuated. It is also very close to the junior college. As of this morning, the fire is only 10% contained. The expected shift in the winds will blow the fire up the canyons causing enormous damage. Part of the problem is the inadequate rainfall we have had. Maybe we could make a trade with the midwest.



35 miles an hour winds kept much of the smoke away until this morning. Visibility is now very bad. I do not know how many pack-of-cigarettes-equivalents I am getting from breathing the air.

On Sunday morning, I will be on my NAFTA tour, giving a talk in Mexico City and then attending the History of Economic Society meetings in Toronto.

Defending Jason Furman on Social Security

An article in the LA Times accuses newly appointed economic policy director for Obama, Jason Furman, of having supported privatizing social security. There are a number of issues on which most progressive economists would differ with Furman, but this claim that he supported privatizing social security is simply an outright lie as pointed out on both brad delong and ecnomists view. Instead, he was one of the firmest and most effective critics of the Bush plan to gut social security.

One place he did that was from a perch as a co-blogger on the predecessor to this blog, the much-missed Maxspeak, formerly run by Max Sawicky. During the period of the battle over the Bush attack on social security, Dean Baker was also a co-blogger there, and it was command central for those opposing the Bush plan (with people like Bruce Webb and I also making a lot of noise there). It was from Maxspeak as transmitted through Brad Delong to Paul Krugman, the NY Times, and then the broader media that the most effective anti-Bush-plan arguments were promulgated, transmitted, and then brought to bear. Whatever one thinks of his views on Wal-Mart and other matters, Jason Furman played an important role in this successful effort to preserve social security as it is.

Johnson and Gramm and the Selectively Howling Monkeys of the Media

Obama is taking flack for his appointment of Jim Johnson, former head of FNMA and recipient of a loan from Countrywide, to vet VP candidates. Fine, this is a mistake. The media howl, especially the cable news.

But where was the howling several weeks back when it emerged that the egregious Phil Gramm was formulating McCain's policy proposal for handling the sub-prime mess - the one that would do nothing for home-owners- while still working as a lobbyist for USB, whose portfolio is full of sub-prime junk.

Just sayin'.

FOR THE RECORD

by the Sandwichman

There is strong circumstantial evidence for my contention that the shorter work time fallacy meme in economics textbooks was dictated by the propaganda bureau of the National Association of Manufacturers. I will be detailing that documentation in a future post or posts. Meanwhile, I've discovered that "most of NAM's pre-1935 records were destroyed" before the Association's archives were sent to the Hagley Museum and Library where they now reside.

How... "inconvenient".

Is the US Becoming a Marshall-Lerner Renegade?

It is a commonplace of international economics that virtually all economies obey the Marshall-Lerner conditions, which must be met if a change in the exchange rate is to have the “proper” effect on net exports. It’s just possible, however, that this no longer applies to the US. When the dollar falls, US exports rise and non-oil imports fall by enough to otherwise satisfy M-L. But much of the rise in oil prices, as experienced in the US, is also attributable to the decline of the dollar, and our demand for brown goo is (so far) highly inelastic. As reported in Brad Setser’s invaluable blog, this explains why the US trade deficit increased in April despite deteriorating domestic demand. So: has the US left the predictable world of M-L? It depends. How much of the price spike in petroleum is traceable to the fading dollar? How do we parcel out the role of declining domestic demand from that of dollar depreciation on the trade balance? I’m too involved in other things to figure this out, so I place it in your laps, estimable readers.

Japan's De-deindustrialization?

BusinessWeek published an intriguing article about Japanese automakers boosting domestic investment to expand production in Japan, even though the Japanese market is declining. The Japanese plants will have a competitive edge because they are more flexible and have fewer defects. German companies are also ramping up Japanese production, presumably for similar reasons.

What US companies are following a similar strategy rather than adopting a race-to-be-bottom approach?

Rowley, Ian. 2008. "Facing an Auto Slump, Japan Lifts Capacity: Carmakers Are Expanding at Home, Where Nimble, High-Tech Plants Offer More Flexibility." Business Week (29 May): p. 64.

http://www.businessweek.com/print/magazine/content/08_23/b4087064205041.htm

"In the midst of a dramatic earnings slump, Toyota, Nissan, and Honda are ramping up production fast. Not in the U.S., their most profitable market, but back in Japan, where domestic auto sales just hit a 25-year low. Every major Japanese automaker is building plants at home or adding capacity to existing ones. A Toyota subsidiary is constructing a 120,000-car plant in Miyagi, north of Tokyo. It's Toyota's first such plant in Japan since 1993. Nissan, which not so long ago was slashing production in the country, is expanding capacity by 22% at its Kyushu factory. Honda is spending $1.5 billion on a new factory and engine plant in Saitama, just outside Tokyo. "The time has come for our Japan operations to once again take the initiative," Honda President Takeo Fukui told reporters on May 21."

"Why all the outlays? After all, Japan's carmakers have long had a policy of opening plants in overseas markets to avoid import duties and to hedge against currency gyrations. Japan remains an expensive place to make cars, with wages 10 times higher than in China. A shrinking population is causing labor shortages. The yen's recent 15% surge against the dollar makes Japan-made cars even pricier. Throw in contracting domestic sales, and the moves seem to defy business logic."

"One explanation is the flexibility that the investment brings. Japan's high-tech plants excel at switching production from one model to another. That's especially useful when auto demand is sinking or flat in mature markets but surging in the Middle East, Russia, China, and India. Nissan's Kyushu plant, for example, exports to 160 markets and produces eight different models on a single production line."

"Anxiety over quality is another factor in the increase of production back home. In recent years, Toyota has had to issue numerous recalls, while Nissan's Canton (Miss.) plant became notorious for its defects during a production speedup. Executives are loath to admit that one plant is better than another, but Japanese makers' domestic factories score higher on quality than equivalent plants overseas."

"Japanese engineers and workers, while more expensive than their counterparts in developing markets, are still a good deal. One reason is that Japan's wage levels, after barely rising in a decade, are not as high as they once were relative to other developed countries. According to consultant AlixPartners, Japanese industrial workers in 2006 made around $22 an hour, just two-thirds the level in Germany. Moreover, it's still rare in Japan for workers to switch from one automaker to another, so a well-trained, seasoned workforce is a given. "It's not so expensive in Japan, and when you consider the quality, motivation, and diligence with which people work, the value-for-money is unbeatable," says Markus Schädlich, president of Karmann Japan. In December, Karmann, a German company that makes convertibles under contract for Audi, Mercedes, and Nissan, will begin production at a factory in Japan."

"The notion of mother plants, which test new technologies that later filter out to plants worldwide, remains strong. Fukui predicts Honda's Saitama plant will set an example for its plants globally. Labor productivity is expected to be 20% higher than in existing plants, thanks to greater automation and advances in welding and painting. Honda aims to cut the amount of energy used to produce each car by more than 30%. Honda and its Japanese rivals are not abandoning their plan to make cars around the world. But they are strengthening Japan's role as the essential benchmark."

LIFE, melancholy and the American Way

by the Sandwichman

In "The Gospel of Consumption," Jeffrey Kaplan channels the Sandwichman, arguing that if we want to save the earth we can start by sharing the work and the wealth. Kaplan borrows liberally from Ben Hunnicutt's books (Kellogg's Six Hour Day and Work Without End: Abandoning Shorter Hours for the Right to Work) and about the triumph of consumer culture over working less and also features a discussion of the anti-New Deal "American Way" publicity campaign conducted by the National Association of Manufacturers.



Co-incidentally, in my own research on the NAM, I kept stumbling across an article by John Tagg, titled "Melancholy Realism: Walker Evans's Resistance to Meaning". This morning I discovered that I had access to an online version of the article.

Tagg frames his discussion of the NAM American Way campaign with a discussion of the famous LIFE magazine photo by Margaret Bourke-White showing a breadline of African-American flood refugees in front of one of the 60,000 American Way billboards, this one proclaiming the "world's highest standard of living." Later in the article, he goes on to contrast Bourke-White's rhetorical clarity with the melancholic "unreadability" of Walker Evans's photography. In the process, Tagg touches on several of the images that are dear to the Sandwichman's thought.

One of those image in particular binds Kaplan's discussion of the Gospel of Consumption much tighter to the shorter work time movement. It is a leaflet promoting the American Way billboards, which included one proudly proclaiming "World's Shortest Working Hours!" This from an organization that cranked out a steady stream of literature denouncing the "disastrous effects" and "real problem" of the "dangerous fallacy" of shorter working time.



I guess it just goes to show, there's no way like the American Way!