Oh this is more braggadocio, but what the heck. I have been invited by James Galbraith, Chair of the Board of Directors of Economists for Peace and Security to be one of their Fellows. I have accepted the invitation. They were founded in 1989 originally as Economists Against the Arms Race, with Kenneth Arrow and Lawrence Klein as their original chairs.
While I am blathering about such stuff, one of the founders and still much involved with the group is the Father of Regional Science, Walter Isard. He served on the thesis committee of my major professor, Eugene Smolensky, at Penn. The chair of that committees was the Father of Happiness Studies, Richard Easterlin. He and I have discussed our common "intellectual ancestry." So, his major prof was Simon Kuznets, whose major prof was Wesley Clair Mitchell, whose major prof was Thorstein Veblen, whom I do not mind being intellectually descended from at all. It was only quite recently that he and I sorted this out.
Wednesday, April 29, 2009
Final Sales of Domestic Products Fell Dramatically Too
Via Brad DeLong, CNBC gives us a bad news, good news story on the economy:
Brad similarly notes:
To their credit, Brad and CNBC also noted that BEA reported that real final sales of domestic product ,that is GDP less change in private inventories, fell by only 3.4 percent on an annualized basis during the first quarter. The decline during the previous quarter, however, was 6.2 percent. Pardon me – but I don’t see much of a silver lining or a bright sign.
The U.S. economy contracted at a surprisingly sharp 6.1 percent rate in the first quarter as exports and business inventories plummeted. The drop in gross domestic product, reported by the Commerce Department on Wednesday, was much steeper than the 4.9 percent annual rate expected by economists and followed a 6.3 percent decline in the fourth quarter … But the sharp drawdown in inventories is good news as it suggests that manufacturers and retailers have reduced the stock of unsold merchandise to manageable levels and could be instrumental in pulling the economy out of recession.
Brad similarly notes:
That means that production this spring will be a full 3.5% below what it was in the second quarter of last year, when it ought to be 3.0% above. The only bright sign is that so much of the decline was a fall in inventories.
To their credit, Brad and CNBC also noted that BEA reported that real final sales of domestic product ,that is GDP less change in private inventories, fell by only 3.4 percent on an annualized basis during the first quarter. The decline during the previous quarter, however, was 6.2 percent. Pardon me – but I don’t see much of a silver lining or a bright sign.
Tuesday, April 28, 2009
My Problem with Kornai
Actually, he seems like a very nice guy, a scholar in love with economics and with a mild social democratic inclination. As mentioned in a previous post, I have just (belatedly) read his memoirs, By Force of Thought. He went through a fascinating transformation in the years leading up to and following the revolution of 1956 (Hungary), and I’m sympathetic to many of his insights into economic theory and methodology. By any standard, he is a giant within the discipline.
Nevertheless, I also found that his self-examination revealed for me the source of his dogmatism during the crucial transition period of the early 1990s. Readers may recall that Kornai was one of the loudest voices for the view that there could be no middle way, that ex-communist countries had to embrace private enterprise capitalism without holding back, so that one day they might be in a position to soften the edges and introduce the elements of a more mixed economy. As one of those labeled naive by Kornai, I tried to imagine a different path.
Now I understand where he was coming from. The man had fallen out of love with Marx, his teenage crush, but he kept faith all his life with the platonic impulse in Marx—the inclination to see the world as simply the special case of essences like capitalism, socialism, or other overarching orders. Just as Marx wanted us to exit from the universe of capitalism into the alternate realm of socialism, Kornai wants us to go in the other direction. For him there could be no in-between; it is a matter of replacing one mode of production with another.
In my view, this compartmentalist perspective is one of Marx’ most pernicious creations. Before his time, only utopians imagined such ruptures; after Marx it became respectable social science. Here is not the place to dispute it, but I strongly question the premise on which this approach is based; I do not see any fundamental discontinuities between social systems. Lumpiness, yes, but that is the case within as well as between. For me, a public library is a communist institution in a capitalist world. Organize more goods into the form of libraries and you shift the balance between communism and capitalism. I see nothing to be gained from positing that a library in capitalism is a different beast from a library in some other mode of production. I’m not arguing against system-level forces, just against the view that there are just a few predetermined configurations of economic and political life, hardened against the step-by-step alteration of detailed institutions and policies. But Kornai explicitly takes the opposite stance and credits Marx for it.
It’s a shame. He threw out much of the good stuff in Marx, his many insights into production and financial systems earned from long hours at the British Museum, and kept the most questionable. But he seems like someone you would like to discuss this with over a good meal and a bottle of wine.
Nevertheless, I also found that his self-examination revealed for me the source of his dogmatism during the crucial transition period of the early 1990s. Readers may recall that Kornai was one of the loudest voices for the view that there could be no middle way, that ex-communist countries had to embrace private enterprise capitalism without holding back, so that one day they might be in a position to soften the edges and introduce the elements of a more mixed economy. As one of those labeled naive by Kornai, I tried to imagine a different path.
Now I understand where he was coming from. The man had fallen out of love with Marx, his teenage crush, but he kept faith all his life with the platonic impulse in Marx—the inclination to see the world as simply the special case of essences like capitalism, socialism, or other overarching orders. Just as Marx wanted us to exit from the universe of capitalism into the alternate realm of socialism, Kornai wants us to go in the other direction. For him there could be no in-between; it is a matter of replacing one mode of production with another.
In my view, this compartmentalist perspective is one of Marx’ most pernicious creations. Before his time, only utopians imagined such ruptures; after Marx it became respectable social science. Here is not the place to dispute it, but I strongly question the premise on which this approach is based; I do not see any fundamental discontinuities between social systems. Lumpiness, yes, but that is the case within as well as between. For me, a public library is a communist institution in a capitalist world. Organize more goods into the form of libraries and you shift the balance between communism and capitalism. I see nothing to be gained from positing that a library in capitalism is a different beast from a library in some other mode of production. I’m not arguing against system-level forces, just against the view that there are just a few predetermined configurations of economic and political life, hardened against the step-by-step alteration of detailed institutions and policies. But Kornai explicitly takes the opposite stance and credits Marx for it.
It’s a shame. He threw out much of the good stuff in Marx, his many insights into production and financial systems earned from long hours at the British Museum, and kept the most questionable. But he seems like someone you would like to discuss this with over a good meal and a bottle of wine.
Monday, April 27, 2009
Lower Manhattan Residents “Sensitive” to Planes Flying Over
I had to leave my office at 10:15 this morning and stroll around Battery Park for a while. Reuters explains why:
We are sensitive? Well yea. At least it was a nice day to take a stroll.
An Air Force fighter jet and one of President Barack Obama's official planes on Monday flew low over the Statue of Liberty in an approved photo opportunity that startled some New Yorkers who have memories of the September 11 attacks. New York City officials notified some businesses but not all city agencies or the general public. People in New York remain sensitive to such incidents in lower Manhattan, site of the 2001 attacks involving hijacked airliners that destroyed the Twin Towers of the World Trade Center.
We are sensitive? Well yea. At least it was a nice day to take a stroll.
The Economics of Delusion and the Delusion of Economics
by the Sandwichman
"Mutually Assured Delusion" is a great name for it. Interesting that the paper by Roland Benabou that Peter Dorman cited only mentions climate change in passing:
UPDATE: Maybe we shouldn't be using the word "growth". It's a misleading euphemism, like "national security". When the components of "growth" are divorced from any definite relationship to human well being and conservation of the natural world, then what "grows" is primarily delusion. The more accurate title for the Sustainable Development Commission's report would then have been "Prosperity Without Delusion."
I realize economists like to have it both ways with economic growth. On the one hand, there is "nothing new" in critiques of GDP. They "know it's not perfect." On the other hand, they insist on the serviceability of the measure for estimation and goal setting purposes -- as if there is some 'essence' of utility in the measure that escapes its structural defects. There is no such essence. What grows faster than GDP itself as GDP growth becomes the target of policy is the proportion of GDP that does not contribute to or even detracts from welfare and conservation. That "it's not perfect but it's still useful" dodge fits precisely the definition of cognitive dissonance.
"Mutually Assured Delusion" is a great name for it. Interesting that the paper by Roland Benabou that Peter Dorman cited only mentions climate change in passing:
The types of enterprises that are most prone to collective delusions are thus:Benabou's work, however, offers an intriguing theoretical model to back up Tim Jackson's assertions in Prosperity Without Growth about delusional expectations for a technological fix to climate change:
(a) Those involving new technologies, products, markets or policies that combine a highly profitable upside and a potentially disastrous downside. High-powered incentives, when prevalent throughout the organization (e.g., performance bonuses affected by common market uncertainty) have a similar effect.
(b) Those in which participants have only limited exit options and, consequently, a lot riding on the soundness or folly of other’s judgements. Such dependence typically arises from irreversible or illiquid prior investments: specific human capital, professional reputation or network, company pension plan, etc. Alternatively, it could reflect the large-scale nature of the problem: state of the economy, quality of the government, global warming, etc.
Never mind that decoupling isn’t happening. Never mind that no such economy has ever existed. Never mind that all our institutions and incentive structures continually point in the opposite direction. The dilemma, once recognised, looms so dangerously over our future that we are desperate to believe in miracles. Technology will save us. Capitalism is good at technology. So let’s just keep the show on the road and hope for the best.So, that's the choice: mutually assured delusion or prosperity without growth.
We can’t entirely dismiss the potential for technological breakthroughs. In fact we already have at our disposal a range of technologies that could begin to deliver effective change. But the idea that these will emerge spontaneously by giving free reign to the competitive market is patently false.
This delusional strategy has reached its limits. We stand in urgent need of a clearer vision, more honest policy-making, something more robust in the way of a strategy with which to confront the dilemma of growth.
UPDATE: Maybe we shouldn't be using the word "growth". It's a misleading euphemism, like "national security". When the components of "growth" are divorced from any definite relationship to human well being and conservation of the natural world, then what "grows" is primarily delusion. The more accurate title for the Sustainable Development Commission's report would then have been "Prosperity Without Delusion."
I realize economists like to have it both ways with economic growth. On the one hand, there is "nothing new" in critiques of GDP. They "know it's not perfect." On the other hand, they insist on the serviceability of the measure for estimation and goal setting purposes -- as if there is some 'essence' of utility in the measure that escapes its structural defects. There is no such essence. What grows faster than GDP itself as GDP growth becomes the target of policy is the proportion of GDP that does not contribute to or even detracts from welfare and conservation. That "it's not perfect but it's still useful" dodge fits precisely the definition of cognitive dissonance.
Sunday, April 26, 2009
The Tax Debate: Is High Income Due to Effort or Luck?
With hat tip to Mark Thoma, Robert Frank offers us this:
The role that this observation plays in the debate over how progressive the tax system should be was explained by Hal Varian:
Contrary to what many parents tell their children, talent and hard work are neither necessary nor sufficient for economic success. It helps to be talented and hard-working, of course, yet some people enjoy spectacular success despite having neither attribute. (Lip-synching members of boy bands? Money managers who bet clients’ retirement savings on subprime-mortgage-backed securities?) Far more numerous are talented people who work very hard, only to achieve modest earnings. There are hundreds of them for every skilled, perseverant person who strikes it rich — disparities that often stem from random events.
The role that this observation plays in the debate over how progressive the tax system should be was explained by Hal Varian:
In the simplest version of the Mirrlees model, taxpayers differ only in their ability: how much they can produce with a given amount of effort. One striking result of this model is that those at the very top of the income scale should face low marginal rates. This result emerges from a detailed mathematical analysis, but the intuition is not hard to explain. Let us assume, for the sake of argument, that Bill Gates made $1 billion in 2000, an amount larger than any other American taxpayer. Suppose further that despite the best efforts of his accountants, he ended up paying 40 cents of the last dollar he earned to the Internal Revenue Service. Consider the following thought experiment: drop the marginal tax rate from 40 percent to zero for all incomes above a billion dollars. The I.R.S. won't lose any revenue from this reduction, since no one has an income larger than $1 billion. And who knows -- the lower marginal rate might encourage Mr. Gates to work a little harder in 2001, producing new products that would make him, and the rest of us, better off. Of course, the fact that it pays to reduce the marginal tax rate for billionaires doesn't say much about what tax rates should be like for mere millionaires, a point that has been emphasized by Professor Mirrlees himself and confirmed by subsequent researchers, like Peter Diamond of the Massachusetts Institute of Technology and Emmanuel Saez of Harvard. But the intuitive argument presented above is pretty compelling: if income depends only on ability, those at the very top of the income-ability distribution should face low marginal tax rates. But perhaps this model is too simple. One might well argue that Mr. Gates, as productive as he is, doesn't owe his success entirely to ability: there was a lot of luck involved, too. And, if truth be told, that's probably true even for mere millionaires. So let's consider a different model: one in which differences in income are a result only of luck and have nothing to do with ability. In this case, the optimal income tax may well involve taxing billionaires at very high marginal rates. True, aspiring billionaires won't work quite as hard, since the after-tax reward from hitting $1 billion has been reduced. But the chances of becoming a billionaire are pretty low anyway, so taxing billionaires at a high rate won't really discourage much effort by those hoping to become one. Thus a model where luck is the driving force tends to yield a more progressive optimal tax than a model where ability is the driving force. This is about as far as theory can take us, but it highlights the critical question: How much income results from ability and how much from luck?
A Different Housing Crisis
Here is a hint of a different dimension of the crisis -- not a main cause, but something that could be significant.
When we would drive through West Virginia back in the late 50s & early 60s, I was struck by the unemployed coal miners sitting on their porches. Their houses were quite nice, but nobody wanted to buy them because the economy was dead.
Later, my brother moved to Youngstown, Ohio after then steel mills had shut down. I remember when he called me bemoaning that a tornado missed his home by only a few hundred yards. At the time, arson was the most important industry in the town.
Theoretically, we might expect that many people would respond to unemployment by searching for better opportunities. But the steelworkers in Youngstown and the coal miners in West Virginia would take such a large capital loss in selling their homes if they chose to relocate.
Later, I read an article that seemed to validate my intuition.
Andrew Oswald's proposed that home ownership was the most reasonable explanation for differences in unemployment rates between countries. The scatter graph has a very impressive fit.
Oswald, Andrew J. 1999. "The Housing Market and Europe's Unemployment: A Non-Technical Paper."
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/homesnt.pdf
A new census report found that the rate at which people change their residences has declined. Perhaps someone will investigate the interaction between the downturn in mobility and the effect on the pace of recovery.
http://www.census.gov/Press-Release/www/releases/archives/mobility_of_the_population/013609.html
Here is the New York Times' take on the subject.
Roberts, Sam. 2009. "Slump Creates Lack of Mobility for Americans." New York Times (23 April): p. A 1.
http://www.nytimes.com/2009/04/23/us/23census.html?_r=1
"Stranded by the nationwide slump in housing and jobs, fewer Americans are moving, the Census Bureau said Wednesday. The bureau found that the number of people who changed residences declined to 35.2 million from March 2007 to March 2008, the lowest number since 1962, when the nation had 120 million fewer people."
"Experts said the lack of mobility was of concern on two fronts. It suggests that Americans were unable or unwilling to follow any job opportunities that may have existed around the country, as they have in the past. And the lack of movement itself, they said, could have an impact on the economy, reducing the economic activity generated by moves."
"Joseph S. Tracy, research director of the Federal Reserve Bank of New York, said the lack of mobility meant less income for movers and the people they employ and less spending on renovation and on durable goods like appliances. But, Dr. Tracy said, the most troubling prospect is that people were no longer able to relocate for work. "The thing that would be of deeper concern is if job-related moves are getting suppressed and workers are not getting re-sorted to the jobs that best use their skills," he said. "As the labor market started to improve, if mobility stays low, you can worry about the allocation of workers"."
"The American Moving and Storage Association said the number of people changing residences had been dropping for four years and fell 17.7 percent from 2007 to 2008. The first quarter of 2009 is likely to be even worse, the trade group said. "We saw a standstill in new home construction, so there was no domino effect from people moving," John Bisney, a spokesman, said. "People are a little nervous about getting a mortgage. And the recession is so broad-based it's not as if you can pull up stakes and move to a part of the country that's growing." Jed Smith, a research director for the National Association of Realtors, said that on average it took a homeowner 10.5 months to sell a house in 2008 compared with 8.9 months in 2007."
"In its report Wednesday, the Census Bureau said that Americans' mobility rate, which has been declining for decades, fell to 11.9 percent in 2008, down from 13.2 percent the year before and setting a post-World War II record low. Moves between states dropped the most, to half the rate recorded at the beginning of this decade."
When we would drive through West Virginia back in the late 50s & early 60s, I was struck by the unemployed coal miners sitting on their porches. Their houses were quite nice, but nobody wanted to buy them because the economy was dead.
Later, my brother moved to Youngstown, Ohio after then steel mills had shut down. I remember when he called me bemoaning that a tornado missed his home by only a few hundred yards. At the time, arson was the most important industry in the town.
Theoretically, we might expect that many people would respond to unemployment by searching for better opportunities. But the steelworkers in Youngstown and the coal miners in West Virginia would take such a large capital loss in selling their homes if they chose to relocate.
Later, I read an article that seemed to validate my intuition.
Andrew Oswald's proposed that home ownership was the most reasonable explanation for differences in unemployment rates between countries. The scatter graph has a very impressive fit.
Oswald, Andrew J. 1999. "The Housing Market and Europe's Unemployment: A Non-Technical Paper."
http://www2.warwick.ac.uk/fac/soc/economics/staff/faculty/oswald/homesnt.pdf
A new census report found that the rate at which people change their residences has declined. Perhaps someone will investigate the interaction between the downturn in mobility and the effect on the pace of recovery.
http://www.census.gov/Press-Release/www/releases/archives/mobility_of_the_population/013609.html
Here is the New York Times' take on the subject.
Roberts, Sam. 2009. "Slump Creates Lack of Mobility for Americans." New York Times (23 April): p. A 1.
http://www.nytimes.com/2009/04/23/us/23census.html?_r=1
"Stranded by the nationwide slump in housing and jobs, fewer Americans are moving, the Census Bureau said Wednesday. The bureau found that the number of people who changed residences declined to 35.2 million from March 2007 to March 2008, the lowest number since 1962, when the nation had 120 million fewer people."
"Experts said the lack of mobility was of concern on two fronts. It suggests that Americans were unable or unwilling to follow any job opportunities that may have existed around the country, as they have in the past. And the lack of movement itself, they said, could have an impact on the economy, reducing the economic activity generated by moves."
"Joseph S. Tracy, research director of the Federal Reserve Bank of New York, said the lack of mobility meant less income for movers and the people they employ and less spending on renovation and on durable goods like appliances. But, Dr. Tracy said, the most troubling prospect is that people were no longer able to relocate for work. "The thing that would be of deeper concern is if job-related moves are getting suppressed and workers are not getting re-sorted to the jobs that best use their skills," he said. "As the labor market started to improve, if mobility stays low, you can worry about the allocation of workers"."
"The American Moving and Storage Association said the number of people changing residences had been dropping for four years and fell 17.7 percent from 2007 to 2008. The first quarter of 2009 is likely to be even worse, the trade group said. "We saw a standstill in new home construction, so there was no domino effect from people moving," John Bisney, a spokesman, said. "People are a little nervous about getting a mortgage. And the recession is so broad-based it's not as if you can pull up stakes and move to a part of the country that's growing." Jed Smith, a research director for the National Association of Realtors, said that on average it took a homeowner 10.5 months to sell a house in 2008 compared with 8.9 months in 2007."
"In its report Wednesday, the Census Bureau said that Americans' mobility rate, which has been declining for decades, fell to 11.9 percent in 2008, down from 13.2 percent the year before and setting a post-World War II record low. Moves between states dropped the most, to half the rate recorded at the beginning of this decade."
Saturday, April 25, 2009
Cognitive Dissonance and Groupthink
No sooner do I rail against the avoidance of cognitive dissonance theory by behavioral economists than a major paper employing CD in new and powerful ways appears: "Groupthink: Collective Delusions in Organizations and Markets" by Roland Benabou. This paper places CD in a social context, where a club good is being produced, and individual effort depends on estimations of the future, but there is also utility or disutility from the state of expectation (influenced by information). Individuals “choose” to accept or reject new information (or combine the two in mixed strategy form), as in most formalizations of CD. The result is a social process that exhibits less or more CD at the individual level. Here is the abstract:
I develop a model of (individually rational) collective reality denial in groups, organizations and markets. Whether participants’ tendencies toward wishful thinking reinforce or dampen each other is shown to hinge on a simple and novel mechanism. When an agent can expect to benefit from other’s delusions, this makes him more of a realist; when he is more likely to suffer losses from them this pushes him toward denial, which becomes contagious. This general “Mutually Assured Delusion” principle can give rise to multiple social cognitions of reality, irrespective of any strategic payoff interactions or private signals. It also implies that in hierarchical organizations realism or denial will trickle down, causing subordinates to take their mindsets and beliefs from the leaders. Contagious “exuberance” can also seize asset markets, leading to evidence-resistant investment frenzies and subsequent deep crashes. In addition to collective illusions of control, the model accounts for the mirror case of fatalism and collective resignation. The welfare analysis differentiates valuable group morale from harmful groupthink and identifies a fundamental tension in organizations’ attitudes toward free speech and dissent.
Jewish Economists
I just finished reading Janos Kornai’s memoirs (By Force of Thought). I’ll have more to say about it later, but first I want to mention my surprise at finding out that Kornai is yet another Jewish economist. A disproportionate number of economists appear to be Jews. The precise number is undetermined, but I’ll bet if we had a complete data set, we could reject the religion-neutral null at a really low p-value.
This calls out for an explanation. I think we can ignore antisemitic stupidities about Jews and money or conspiracies to control the world’s wealth. There isn’t an obvious political angle either, since Jewish or half-Jewish economists come in all stripes, from Hayek and Friedman to at least two of the contributors to this blog and, of course, Marx himself.
My approach to this is to think about the other fields in which Jews are or have been overrepresented. This appears to include theoretical physics, mathematics and depth psychology, and, in the non-academic universe, top-level chess. On the other hand, one does not see this tilt in natural history, chemistry or experimental psychology. (I could be completely wrong about these estimates; I have no actual data, only a few scattered bits of knowledge.) A valid explanation should apply to all of these, shouldn’t it?
Here is a hypothesis: the fields in which Jews are concentrated tend to be those that look for hidden patterns, as opposed to those which are mainly concerned with describing the visible world more clearly. The reason has to do with the difference between Christian and Jewish cosmology.
The Christian perspective is that the worlds of god and man were bridged initially by Jesus and have remained in communication since then, via either the intermediation of a church or direct introspection by believers. It is enough, according to this perspective, to simply observe, study and follow the path. In particular, nature is said to be an open book, revealing god’s wisdom to all who pay attention.
The Jewish view is nearly the opposite. God issues clear instructions, but the logic that underpins them is beyond understanding. The essential problem is that there is no bridge between the infinite mind of god and the frail, context-bound mind of human beings. We are commanded to comprehend, but comprehension is beyond us. So we read and reread the sacred texts, looking for hidden clues that can bring us a little closer to a knowledge that will ever remain beyond reach. Nature, like the sacred text, is in code, an endless puzzle.
Of course, both Christians and Jews have been extensively secularized, but perhaps this is the point. A deep cultural orientation remains, even as minds turn to worldly problems. Habits of decoding linger on with Jews, who then go into the decoding professions like economics and chess. (A note to non-chessplayers: a professional in this game is someone who is hooked on the question, “What is really happening in this position?”—and has become good at answering it.)
I first glimpsed the outlines of this argument when I read Ricardo’s unpublished essay on “Absolute and Exchangeable Value”. This is a cultural text as much as an economic one, an obsessive peeling away of layers that stands worlds apart from the contented common sense of Adam Smith. And this urge to dig deeper can also be found in Kornai, especially as he documents his thought process during his crucial formative years. The goal remains to discover the true meaning of events, obscured beneath the veil of appearances.
This heightened Jewish presence in the “deep-pattern” fields is transitory. It begins only with the widespread secular assimilation of Jews into mainstream European culture in the nineteenth century, and it is gradually fading away as ancient cultural legacies dissolve, and as disciplines and professions become globalized, increasingly populated by people from countries beyond the Christian/Jewish dichotomy.
This calls out for an explanation. I think we can ignore antisemitic stupidities about Jews and money or conspiracies to control the world’s wealth. There isn’t an obvious political angle either, since Jewish or half-Jewish economists come in all stripes, from Hayek and Friedman to at least two of the contributors to this blog and, of course, Marx himself.
My approach to this is to think about the other fields in which Jews are or have been overrepresented. This appears to include theoretical physics, mathematics and depth psychology, and, in the non-academic universe, top-level chess. On the other hand, one does not see this tilt in natural history, chemistry or experimental psychology. (I could be completely wrong about these estimates; I have no actual data, only a few scattered bits of knowledge.) A valid explanation should apply to all of these, shouldn’t it?
Here is a hypothesis: the fields in which Jews are concentrated tend to be those that look for hidden patterns, as opposed to those which are mainly concerned with describing the visible world more clearly. The reason has to do with the difference between Christian and Jewish cosmology.
The Christian perspective is that the worlds of god and man were bridged initially by Jesus and have remained in communication since then, via either the intermediation of a church or direct introspection by believers. It is enough, according to this perspective, to simply observe, study and follow the path. In particular, nature is said to be an open book, revealing god’s wisdom to all who pay attention.
The Jewish view is nearly the opposite. God issues clear instructions, but the logic that underpins them is beyond understanding. The essential problem is that there is no bridge between the infinite mind of god and the frail, context-bound mind of human beings. We are commanded to comprehend, but comprehension is beyond us. So we read and reread the sacred texts, looking for hidden clues that can bring us a little closer to a knowledge that will ever remain beyond reach. Nature, like the sacred text, is in code, an endless puzzle.
Of course, both Christians and Jews have been extensively secularized, but perhaps this is the point. A deep cultural orientation remains, even as minds turn to worldly problems. Habits of decoding linger on with Jews, who then go into the decoding professions like economics and chess. (A note to non-chessplayers: a professional in this game is someone who is hooked on the question, “What is really happening in this position?”—and has become good at answering it.)
I first glimpsed the outlines of this argument when I read Ricardo’s unpublished essay on “Absolute and Exchangeable Value”. This is a cultural text as much as an economic one, an obsessive peeling away of layers that stands worlds apart from the contented common sense of Adam Smith. And this urge to dig deeper can also be found in Kornai, especially as he documents his thought process during his crucial formative years. The goal remains to discover the true meaning of events, obscured beneath the veil of appearances.
This heightened Jewish presence in the “deep-pattern” fields is transitory. It begins only with the widespread secular assimilation of Jews into mainstream European culture in the nineteenth century, and it is gradually fading away as ancient cultural legacies dissolve, and as disciplines and professions become globalized, increasingly populated by people from countries beyond the Christian/Jewish dichotomy.
Friday, April 24, 2009
On the Foundations of Mathematical Economics
So, here I am doing something way off the usual track here of political economy and all that. In effect, this is a followup on a post I did about a year and a half ago about the centennial of the birth of my mathematician father (1907-1989). So, I have just written a paper with the same title as this post, available at my website, http://cob.jmu.edu/rosserjb (scroll down to the bottom). It comments on a paper written by Kumaraswamy Vela Velupillai that is entitled, "Taming the Uncomputable, Reconstructing the Nonconstructive and Deciding the Undecidable in Mathematical Economics," (yeah, I know, sigh... ). In the opening section of that paper he cites work of my late father in connection with this hairy topic, and says nice things about his work, noting it as homage for his centennial (yes, the paper has been floating around for awhile).
So, there is a special issue of the journal, New Mathematics and Natural Computation coming out to honor Professor Velupillai, and he and the editor of the special issue requested of me that I write a commentary on this specific paper of his, which will be the lead article of the issue, and that I also comment on my father's work in connection with all this. I had never before in my life written professionally about either my father's life or his work, and in the end I was way overdue with this. However, I did finish it finally, and for those of you more interested in what I have to say about my somewhat controversial late father, that is largely in the section prior to the Conclusions, with most of the personal observations in the footnotes. The paper will be the final one in this forthcoming special issue.
So, there is a special issue of the journal, New Mathematics and Natural Computation coming out to honor Professor Velupillai, and he and the editor of the special issue requested of me that I write a commentary on this specific paper of his, which will be the lead article of the issue, and that I also comment on my father's work in connection with all this. I had never before in my life written professionally about either my father's life or his work, and in the end I was way overdue with this. However, I did finish it finally, and for those of you more interested in what I have to say about my somewhat controversial late father, that is largely in the section prior to the Conclusions, with most of the personal observations in the footnotes. The paper will be the final one in this forthcoming special issue.
An Infinite Loop
Barack Obama tells us we should not investigate American intelligence agents or their overlings who are responsible for torturing hundreds of suspects in their custody. We have to forget about the past, he says, to concentrate our attention on the future. That might be a convincing argument if Obama were going all out for an ambitious program to remake our economy and our relationship to the rest of the world. But the future is on hold because the number one job today is bailing out the financial system, so we can preserve the money moguls who juiced our economy in the past.
Thursday, April 23, 2009
Chrysler, Solved
OK, call me a genius, but I think I’ve figured it out. Here’s the situation: there is a small, but nevertheless quite large, car company called Chrysler. Their revenues can’t possibly keep pace with their operating costs and their contractual obligations to retirees and bondholders. They face imminent bankruptcy. This would be costly for many parties, so the government has been trying to find a way to avoid it. The UAW has agreed to substantial concessions, but the bondholders are holding out. Even though Chrysler’s debt is trading at 15 cents on the dollar, the bondholders are demanding 4+ times this. Unless an agreement with them can be hammered out, Chrysler is headed for the junkyard.
So who are these bondholders? Financial institutions primarily, most of whom are recipients of direct or indirect bailout support from the taxpayer. This suggests a solution: give the bondholders all they want, 100% if need be. Then deduct that money from the bailouts in some way that roughly distributes the cost across these same firms, and give it to Chrysler. You want shell games? We can do shell games.
Yes we can.
So who are these bondholders? Financial institutions primarily, most of whom are recipients of direct or indirect bailout support from the taxpayer. This suggests a solution: give the bondholders all they want, 100% if need be. Then deduct that money from the bailouts in some way that roughly distributes the cost across these same firms, and give it to Chrysler. You want shell games? We can do shell games.
Yes we can.
The Paternalistic Bias of Behavioral Economics
I find I’ve been waking up each morning with the outline of an essay in my head. Each time it’s a different topic, but the routine is the same: I stare groggily at the alarm clock as one part of my mind proposes objections and the other answers them by drawing out finer distinctions. This is terrible for my sleep, and it hasn’t led to anything productive because there is no way to write a new, worked-out essay each day. I’ll use this blog as a place to file these ideas away.
Today’s subject is what behavioral economists study, what they don’t study, and what this tells us about their underlying prejudices. And, as I realized at 6 am, this all goes back to the exchange between Walter Lippman and John Dewey in the 1920s, although I may not get to that here.
The domain of behavioral economics is the failure of individuals to process information according to the dictates of rational goal achievement, the idealized maximization routines one learns in microeconomics. The list is long and includes such issues as probability bias, accounting bias, availability bias, hyperbolic discounting, loss aversion (status quo bias), etc. All of these cognitive traits have been documented beyond dispute by psychologists, and there is now a vast literature demonstrating that they have nontrivial effects on economic decision-making.
But those familiar with psychological research will know that the behavioral insights gleaned by economists are not exhaustive. In particular, it is interesting that one of the biggest research fields in psychology, cognitive dissonance, has barely made a dent in the BE agenda.
The basic idea of CD is that people experience discomfort from holding two contradictory thoughts at once. The main application has to do with the reception of information that violates an individual’s self-conception: if you have chosen to do something, and this choice plays even a modest role in how you think about yourself, you will have a tendency to ignore or reject information that goes against it. The vernacular version of this is “denial”, which we see every day in real life.
I first became aware of the importance of CD in my studies of occupational safety and health. Of all the psychological impediments to rational thinking about work and health, surely denial is the most significant. There was a flurry of interest among economists in this topic following the publication of “The Economic Consequences of Cognitive Dissonance” by Akerlof and Dickens in 1982; I presented a much simpler but also sharper model in my book Markets and Mortality (1996). Researchers in health behavior took note; they had long had CD on their minds and were predisposed to see it in economic dress.
But read the current literature on BE and you will be hard-pressed to find any mention of CD at all. There is no end to studies of defective information processing, but the initial acceptance of information doesn’t make the cut. We have nuanced policy advice in books like Nudge, but the much larger questions posed by CD are off the table. Am I mistaken in thinking that denial, the refusal to acknowledge information that calls into question our economic behavior, is central to the disconnect between environmental knowledge and anemic or nonexistent policy?
So how to explain this? To put it bluntly, I sense bad faith. The topics researched by BE all have this in common: they point to traits that are likely to disappear with enough exposure to decision theory. We don’t succumb to loss aversion, probability bias or these other flaws. This means we can come up with clever schemes to fix them. But CD is another kettle of fish altogether; there is no reason to suppose that the experts (us) are any less likely to be subject to denial than the lay folk (them). In other words, I think behavioral economists find the paternalistic stance of their discipline congenial; there is less interest in pursuing questions that apply equally to their own judgment.
Ah, but what has this to do with Lippman and Dewey? That will have to wait.
Today’s subject is what behavioral economists study, what they don’t study, and what this tells us about their underlying prejudices. And, as I realized at 6 am, this all goes back to the exchange between Walter Lippman and John Dewey in the 1920s, although I may not get to that here.
The domain of behavioral economics is the failure of individuals to process information according to the dictates of rational goal achievement, the idealized maximization routines one learns in microeconomics. The list is long and includes such issues as probability bias, accounting bias, availability bias, hyperbolic discounting, loss aversion (status quo bias), etc. All of these cognitive traits have been documented beyond dispute by psychologists, and there is now a vast literature demonstrating that they have nontrivial effects on economic decision-making.
But those familiar with psychological research will know that the behavioral insights gleaned by economists are not exhaustive. In particular, it is interesting that one of the biggest research fields in psychology, cognitive dissonance, has barely made a dent in the BE agenda.
The basic idea of CD is that people experience discomfort from holding two contradictory thoughts at once. The main application has to do with the reception of information that violates an individual’s self-conception: if you have chosen to do something, and this choice plays even a modest role in how you think about yourself, you will have a tendency to ignore or reject information that goes against it. The vernacular version of this is “denial”, which we see every day in real life.
I first became aware of the importance of CD in my studies of occupational safety and health. Of all the psychological impediments to rational thinking about work and health, surely denial is the most significant. There was a flurry of interest among economists in this topic following the publication of “The Economic Consequences of Cognitive Dissonance” by Akerlof and Dickens in 1982; I presented a much simpler but also sharper model in my book Markets and Mortality (1996). Researchers in health behavior took note; they had long had CD on their minds and were predisposed to see it in economic dress.
But read the current literature on BE and you will be hard-pressed to find any mention of CD at all. There is no end to studies of defective information processing, but the initial acceptance of information doesn’t make the cut. We have nuanced policy advice in books like Nudge, but the much larger questions posed by CD are off the table. Am I mistaken in thinking that denial, the refusal to acknowledge information that calls into question our economic behavior, is central to the disconnect between environmental knowledge and anemic or nonexistent policy?
So how to explain this? To put it bluntly, I sense bad faith. The topics researched by BE all have this in common: they point to traits that are likely to disappear with enough exposure to decision theory. We don’t succumb to loss aversion, probability bias or these other flaws. This means we can come up with clever schemes to fix them. But CD is another kettle of fish altogether; there is no reason to suppose that the experts (us) are any less likely to be subject to denial than the lay folk (them). In other words, I think behavioral economists find the paternalistic stance of their discipline congenial; there is less interest in pursuing questions that apply equally to their own judgment.
Ah, but what has this to do with Lippman and Dewey? That will have to wait.
Wednesday, April 22, 2009
Cheney Turns To HooverEconomics
A couple of months ago, I suggested that Dick Cheney actually got something right – see We’re All Keynesians Now. Maybe I spoke too soon:
This kind of flip-flop might land the former Vice President a position at the National Review assisting Lawrence Kudlow write copy on economic matters!
President Barack Obama's expansion of the federal government into the financial sector is likely to have "devastating" effects in the long term, former Vice President Dick Cheney said in his latest salvo directed at the new White House administration. In an interview on Fox News — portions of which aired Tuesday night — the former vice president said he is "very concerned" about where the Obama administration is taking the country economically. "I worry very much that we're in a situation now where there doesn't appear to be any limitation whatsoever in terms of the spending commitments that this administration wants to make," he said. "Vast expansion in terms of the deficit, but it also says a lot about what they intend for the role of government in this society."
This kind of flip-flop might land the former Vice President a position at the National Review assisting Lawrence Kudlow write copy on economic matters!
Monday, April 20, 2009
Ideological Discrimination in Economics?
Sometime ago I remember reading a study that indicated the way that publications from Chicago trained economists clustered in the Journal of Political Economy and those from Harvard, in the Quarterly Journal of Economics. (Maybe someone recalls the reference.)
I recently came upon an article about the respective hiring patterns of departments of economics, comparative literature, of mathematics. A similar type of clustering occurs in economics, but far more modestly in mathematics, where presumably ideology would not play much of a role.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1347002
Economists commonly describe the ideological clustering is a division between freshwater and saltwater economists -- because the conservative departments tend to be in the interior and the more liberal along the East and West coasts.
The author does not attribute the clustering to ideological influences, but one might suspect a reluctance of Chicago to dilute its ideological purity with an excessive influx of people who do Harvard or MIT style economics. Admittedly, the difference between these schools is much more modest than it has been in the past.
If one can accept the possibility of mutual discrimination on account of relatively modest intellectual differences, might one be forgiven for suspecting the long-denied discrimination against radical economists?
I recently came upon an article about the respective hiring patterns of departments of economics, comparative literature, of mathematics. A similar type of clustering occurs in economics, but far more modestly in mathematics, where presumably ideology would not play much of a role.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1347002
Economists commonly describe the ideological clustering is a division between freshwater and saltwater economists -- because the conservative departments tend to be in the interior and the more liberal along the East and West coasts.
The author does not attribute the clustering to ideological influences, but one might suspect a reluctance of Chicago to dilute its ideological purity with an excessive influx of people who do Harvard or MIT style economics. Admittedly, the difference between these schools is much more modest than it has been in the past.
If one can accept the possibility of mutual discrimination on account of relatively modest intellectual differences, might one be forgiven for suspecting the long-denied discrimination against radical economists?
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