Monthly Archives: September 2009

A Matter of Justice

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Typically excellent stuff from Tim Lee:

I think a far more effective approach [than cost-benefit analysis] is to use what is probably the most powerful weapon in American politics: our now deeply-rooted and emotional commitment to the principle of equality before the law. Over the last 50 years, American society has undergone wrenching transformations that moved us toward equality for Catholics, blacks, Jews, women, gays and lesbian, and other traditionally disfavored groups. We achieved these reforms not by emphasizing how reform would benefit straight white men, or by building complex models of how oppression depressed GDP, but by focusing on the cruelty of the status quo and appealing to America’s founding ideals. We’ve now reached the point where opponents of equality for blacks or Jews are not only in the minority, but are among the most despised people in society.

I think the same strategy needs to be employed on behalf of immigration reform. The problem with our immigration laws is not primarily that they are economically inefficient (Jim Crow wasn’t efficient either). The problem is that they deny civil rights to millions of hard-working individuals based on a factor over which they have no control: their place of birth. I’m sure Dixon and Rimmer mean well, but their narrow focus on the costs and benefits of immigration to American households not only ignores powerful arguments about justice, it actually undercuts them by accepting the premise that we’re justified in ignoring the welfare of the millions of people who are in such deep poverty that they’re willing to risk their lives for the privilege of picking our strawberries and scrubbing our toilets.

Preach it brother. Showing that increased immigration tends to benefit natives reduces resistance on the margin, which is worth doing. But, in my experience, laying out clearly the immense benefits to the immigrants is extremely powerful. It highlights the needless misery caused by the heartless status quo. Even then, it is more powerful still to illustrate clearly how the status-quo system of borders, passports, visas, and citizenships systematically violates basic human rights to free movement and association.

Here is a border patrol officer doing his job:

Border Patrol Agent shoots Illegal Alien

Unholy Trinity

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Kevin Grier’s take on our likely health care reform legislation fairly well sums up my own feelings:

I actually think we are going to get a reform that is both worse than the status quo and worse than a pure single payer system.

Kudos to our Congress!
As I understand it, insurance companies will not be able to refuse to cover some one, nor will they be able to charge high risk people a premium that reflects their risk. The price won’t be uniform, but the maximum variation will be well below what it would take to correctly price the variation in risks.
As I noted before, this will make premiums for healthy people extra high. And as the WSJ pointed out yesterday, at least on the margin, it will make healthy people want to hold off from getting any insurance until they are actually sick.
Problem solved, you say?
Ahh, but now it appears that the third leg of the trinity will be rule that it will be illegal to not have insurance!
So young healthy people will be forced to buy way overpriced (relative to their risk) insurance. Plus if said young healthy people make good money, they can look forward to paying more taxes to subsidize the purchase of said insurance by others.
Guaranteed Issue, Community Rating, Individual Mandate.  They sound so reasonable and innocuous, but they are freakin’ lethal.
I guess it shows that we care.

Music to My Ears

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Roman Frydman and Michael Goldberg at the FT’s Economist’s Forum:

Behavioural economists have uncovered much evidence that market participants do not act like conventional economists would predict “rational individuals” to act. But, instead of jettisoning the bogus standard of rationality underlying those predictions, behavioral economists have clung to it. They interpret their empirical findings to mean that many market participants are irrational, prone to emotion, or ignore economic fundamentals for other reasons. Once these individuals dominate the “rational” participants, they push asset prices away from their “true” fundamental values.

I’ve been harping on this error for years, but it has seemed to me that economists generally don’t grok what the error is. It’s good to see economists who get it.

Learning from Milton Friedman's Rhetoric

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via Mark Perry, here’s a delightful video of Milton Friedman arguing for the abolition of licensure for doctors at the Mayo Clinic. (Busting the monopolies in health care provision is the first item in my fantasy of health-care reform!)

The stark contrast between this class act and the histrionics of conservatives today got me thinking about Friedman’s rhetorical style. What’s so compelling about Friedman is his winsome combination of logic, lucidity, confidence, and geniality. He behaves as though the attention of even a hostile audience is a generous gift to be repaid with respect. And respect is paid by taking for granted the listeners’ intelligence and good will in the search for truth. He gladly accepts the burden of laying out the case for controversial propositions and addressing seriously even badly mistaken objections. He never assumes an antagonistic or combative stance, no matter how antagonistic or combative the audience may be. He is neither apologetic nor defensive about his unpopular positions. He evidently does take some small pleasure in his iconoclasm, and I think this can come across as smugness or self-satisfaction to those inclined to disagree with him. But the same wry twinkle can be received as well as a manifestation of the calm confidence that makes his intellectual independence possible and of his basic happiness as a person. His happiness, I think, was his rhetorical secret weapon. One doesn’t suspect a contented person of currying favor, seeking validation, or compensating for some unmet need. He makes it easy to believe in his good faith, and that makes him hard to dismiss.

Jonathan Chait on Ayn Rand

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Jonathan Chait’s review essay taking off from two new books about Ayn Rand, one of the most interesting and influential intellectual figures of 20th century, somehow manages to take the form of an extended defense of the redistribution of income and wealth. The bizarro-Rumpelstiltskin of the welfare state, Chait could spin gold into a defense of the redistribution of income and wealth, and he probably has! The problem with his Rand essay is that he spins away with only haphazard reference to Rand’s work or thought. The root of the problem, I think, is twofold. First, Chait doesn’t much care to know about Ayn Rand’s work or thought, but wanted to pen a good Tea Party-pooping Ayn Rand slapdown anyway. Second, he lazily confuses a certain syndrome of anti-redistributive thinking common among Glenn Beck aficionados, in which some Randian themes certainly do appear, with Rand’s own thought.

The meat of Chait’s essay is devoted to beating up the false idea that levels of income and wealth roughly correspond to levels of effort, productivity, or some other exercise of virtue. This line of thinking eventually leads Chait into an examination of the overall progressivity of the American tax system. (Less progressive than you might think!) But what does this have to do with Ayn Rand?

Chait writes:

[T]he Randian inversion of the Marxist worldview … rests upon a series of propositions that can be falsified by data.

Let us begin with the premise that wealth represents a sign of personal virtue–thrift, hard work, and the rest–and poverty the lack thereof.

He then proceeds to beat up on some Republicans.

As Chait points out, Rand plumped for Wilkie in 1940, but she was no Republican. More to the point, Rand did not think income and wealth represents a sign of virtue — of hard work, productivity, or anything else. Being an intelligent person, she thought that who got how much of what depended on the complex interplay of culture and the structure of the political economy. She did think that those who through effort or industry improve others’ lives ought to see the value of their work acknowledged and rewarded in some form or other. But no one would infer from Rand’s novels and nonfiction that the United States looks, or in her day looked, anything like her ideal.

Rand was a radical critic of what she saw as our debased culture and “mixed economy.” In her biting words, a mixed economy is

a mixture of capitalism and statism, of freedom and controls. A mixed economy is a country in the process of disintegration, a civil war of pressure-groups looting and devouring one another.

Hey! That’s us! Massive political bailouts to banks and auto manufacturers and seething political strife over the expansion of redistributive “entitlements” are precisely the kinds of things Rand had in mind.

Let’s take a moment to think of the many ways worldly success and moral merit come apart in Rand’s immensely influential fiction. In The Fountainhead, Peter Keating traces the trajectory of the sell-out. He achieves professional success through slavish conformity to banal popular taste. He is the archetype of Rand’s despised “second-hander.” Rand’s point is not that pathetic second-handers with desperate cravings for external validation do not work their way into the top income decile. Her point is that they do! But they don’t really deserve it. If there’s cosmic justice, it’s in the fact that successful second-handers are miserable because they know they don’t deserve it. Rand’s condemnation of Keating is also a not-very-subtle condemnation of popular taste, which she generally judges execrable. Whatever else it might be, The Fountainhead is a searing critique of getting ahead by giving the people what they want. From a quick read of Rand’s lesser doorstop, one might suspect that, exceptional cases aside, the distributions of both income and social esteem bear a strong relationship to skill at peddling popular bullshit.

Rand emphasizes that in a world of second-handers, a great single-minded artist might die broke and mostly forgotten. That’s the sub-plot of Henry Cameron in The Fountainhead. And if not for the intervention of the surprising philosophical and oratorical talents suddenly summoned by the book’s taciturn hero at his bombing trial (one man’s terrorism is another man’s unflinching aesthetic vision!), Howard Roark would have gotten a good harsh dose of criminal justice and ended up rotting in jail, like notable theory-driven bombers Ted Kazcynski and Timothy McVeigh, instead of skating like Bill Ayers. That Roark ends up surveying the world that has become his oyster from his uncompromising skyscraper with his uncompromising gal is a triumph of hopeful narrative malfeasance over the bitter penniless ruin that is otherwise depicted as the great man’s predictable lot.

In Atlas Shrugged, Rand doesn’t much conceal her disgust at James Taggart, the immensely wealthy heir to a railroad fortune who tries to consolidate the position of his inherited company through political pull. In Rand’s taxonomy of villains, he is a “looter.” Rand’s point is not that looters don’t get ahead. Her point is they do. And it works because actually productive people are either too dumb or guilty to grasp that moralizing political rhetoric is as often as not a bullshit front for corporatist political predation. From a quick read of Atlas Shrugged, one might expect that the distribution of income and social esteem in a “mixed economy” bears a strong relationship to membership in pressure groups, and the quality of their lobbyists and PR flaks.

The mostly tragic world of Atlas Shrugged is one in which the truly creative and productive are rewarded with unending resentment and exploitation while politically-connected corporations pay Washington insiders to rig the mechanisms of redistributive democratic politics to reel in and lock down unearned gains. Rand thought the world we actually live in is dangerously close to the one she depicted.

Rand does not valorize the wealthy. She valorizes the uncompromising integrity of creative visionaries and the productivity of inventors, innovators and entrepreneurs. But there is little to assure the reader that the virtues she extols really pay. Rand’s view of the world was actually pretty bleak, pretty Russian. Her best novel, We the Living, is best precisely because she had yet to philosophically suppress her tragic instincts. One of the least plausible and certainly the saddest aspects of Rand’s thought is what she called the “benevolent universe premise” — a kind of as-if attitudinal stance of positivity meant to ensure “the inability to believe in the power or the triumph of evil.” She goes on:

No matter what corruption one observes in one’s immediate background, one is unable to accept it as normal, permanent or metaphysically right. One feels: “This injustice (or terror or falsehood or frustration or pain or agony) is the exception in life, not the rule.” One feels certain that somewhere on earth—even if not anywhere in one’s surroundings or within one’s reach—a proper, human way of life is possible to human beings, and justice matters.

“One feels…” This is Rand’s leap of faith, her animal spirit, her will to believe. She needed her silly, contrived happy endings — and she thought we needed them — to maintain the will to do the right thing, to fight for justice, despite every indication that it’s a bad bet. Rand thought we need to feel that effort and virtue will be rewarded, or else we will, rationally enough, stop supplying effort and virtue. And then we’ll all be good and truly screwed. Make of this what you will, but it is very far from the vulgar Calvinism that sees a person’s level of success as an indicator of their merit.

Now, I’m more than willing to snicker right along with Chait at ridiculously puffed-up computer engineers who threaten to “Go Galt” at the first hint of an impending tax hike while blithely enjoying the wage subsidy of the United State’s super-stingy H1-B visa cap. But he’s really just careless in conflating the views of Ayn Rand’s confused fans with Ayn Rand’s own. I’m delighted there are two important new books that take Rand seriously as a woman, writer, and thinker. It’s too bad that Chait uses their publication as an occasion to once again take a brave stand for the redistributive state.

New at Cato Unbound: Scott Sumner on the Monetary Flubs that Caused the Crash

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This month’s edition of Cato Unbound on “The Monetary Lessons of the Not-So-Great Depression” kicks off with a probing, provocative essay by headliner Scott Sumner, “The Real Problem Was Nominal.” He says things like this:

We cannot hope to understand what happened late last year without first recognizing that the proximate cause of the crash was not a financial crisis, but rather a steep decline in nominal spending. Like any other fall in aggregate demand, this represented a failure of monetary policy. Severe demand-side recessions are almost never the result of special interest politics — the losses are too great and too widespread — but instead represent an intellectual failure by well-meaning public servants and the academic economists who advise them.

And this:

The real problem was not a “real” problem at all. It was a nominal problem, and the severe intensification of the debt crisis was a symptom of an ordinary Humean nominal shock. Furthermore, monetary policy was not “easy” but rather was highly contractionary in the only sense that matters, that is, relative to the stance expected to hit the Fed’s implicit nominal targets.

On deck we’ve got James Hamilton, George Selgin, and Jeff Hummel.

Causes of the Crisis

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Critical Review has started a new blog “Causes of the Crisis” featuring contributors to the journal’s stellar issue on the topic. The papers in CRs special issue add up to the best and most comprehensive autopsy of the financial collapse available anywhere. The blog looks terrific too. Some excerpts…

David Colander:

Using models within economics or within any other social science, is especially treacherous. That’s because social science involves a higher degree of complexity than the natural sciences. The reason why social science is so complex is that the basic unit in social science, which economists call agents, are strategic, whereas the basic unit of the natural sciences are not. Economics can be thought of the physics with strategic atoms, who keep trying to foil any efforts to understand them and bring them under control. Strategic agents complicate modeling enormously; they make it impossible to have a perfect model since they increase the number of calculations one would have to make in order to solve the model beyond the calculations the fastest computer one can hypothesize could process in a finite amount of time.

[...]

This recognition that the economy is complex is not a new discovery. Earlier economists, such as John Stuart Mill, recognized the economy’s complexity and were very modest in their claims about the usefulness of their models. They carefully presented their models as aids to a broader informed common sense. They built this modesty into their policy advice and told policy makers that the most we can expect from models is half-truths. To make sure that they did not claim too much for their scientific models, they divided the field of economics into two branches—one a scientific branch, which worked on formal models, and the other political economy, which was the branch of economics that addressed policy. Political economy was seen as an art which did not have the backing of science, but instead relied on the insights from models developed in the scientific branch supplemented by educated common sense to guide policy prescriptions.

In the early 1900s that two-part division broke down, and economists became a bit less modest in their claims for models, and more aggressive in their application of models directly to policy questions. The two branches were merged, and the result was a tragedy for both the science of economics and for the applied policy branch of economics.

Vernon Smith:

Hayek made a similar charge [to Krugman's in his long NYT piece] in his Nobel Lecture of December 11, 1974, The Pretence of Knowledge:

… the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.

Although Hayek saw the problem as stemming from an inappropriate ”scientistic” attitude, he explicitly wanted “…to avoid giving the impression that I generally reject the mathematical method in economics.” Rather, his main message was that

If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible…The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.

Economic scientists have precious little understanding of this rule governed complex order, and how to keep it on its demonstrated long term path of growth and human betterment without suffering too irreparably from the kind of unpredictable reverses that we are now mired in. Less pretence and a commitment to learn from the new data being generated as I write, will be both humbling and informative, after the inevitable human political impulse to blame one’s long standing political adversaries has run its course.

I look forward to posts from the other contributors.

For a 9/10 America

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Watching and reading the various 9/11 remembrances this year, I get the sense that a lot of Americans are ready to move on but are hesitant for fear of seeming either callous or negligently complacent about the country’s security. But it’s past time to move on.

The enormity of the 9/11 mass murders will always stay with those of us old enough to remember. Terrorist acts are perhaps by definition political, in some broad sense of ‘political’. So the terrible events of 9/11 have always been politicized. But 9/11 has been politicized in another way. The United States’ government reacted to to 9/11 and that reaction has been, to my mind, an enormous disaster. Yet those responsible for this disaster have been successful in hiding behind the shock of the crumbling towers, as if support for their dangerous and deadly policies is inexorably implied by feeling deeply the full weight of 9/11′s tragedy. Those most insistent that we “never forget” 9/11 are those who need our continuing collective complicity in the erosion of our civil liberties, in the weakening of the rule of law, in the unjustified invasion of unrelated foreign countries and the murder of their people, in the policy of state-sanctioned torture. The difficulty many Americans have in separating remembrance of an act of terror from an endorsement of the war on terror may turn out be George W. Bush’s great legacy.

The United States was a better place on September 10th, 2001. We should not forget what happened the next day. Nor should we forget the wrongs the United States has subsequently done. That September 10th is long gone. But there will always be another one. Whether we will live in a 9/10 or a 9/11 world is a choice we have, and it is a choice we continue to make.

Queerly Canadian

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My short “Dispatch” item on traveling to Ottawa to become suddenly always Canadian appears in the new issue of The Atlantic, which is now available online and at fine news stands everywhere. A snippet:

After dining with other lost Canadians the evening before I became a citizen, I found myself walking the not-so-mean streets of Ottawa alone an hour before midnight. So I wandered into the Royal Oak, an English pub on Bank Street. I persuaded some game locals, Austin and Rachelle, to share a toast and snap my picture in front of the Maple Leaf hanging behind the bar. Midnight! To gain a citizenship in one magical moment, without exertion or will, is to experience as an adult the national baptism that comes with birth. I felt exhilarated, if a bit of a fraud. Austin and Rachelle were exceedingly kind to me. We exchanged cell-phone numbers. We agreed to connect on Facebook. We all understood that I am a thoroughgoing American, qualifying as Canadian through a weird technicality. But they were happy for me, happy to have me. Because they’re Canadians, I suppose.

Standing Up for GDP

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Joseph Stiglitz is right. GDP per capita is an inadequate measure of a country’s prevailing standard of living for many reasons. If you want one number, something like median real consumption would be better. But I’m willing to stand up for GDP per capita as a rough and ready indicator of well-being within the bounds of nation states. Why?

First, as an indicator of well-being, it doesn’t get much intuitively wrong. That is, GDP per capita tends to correlate positively with most of the things most of us think are constituents or side effects of well-being and negatively or not at all with most of the things most of us think are corrosive to well-being. (I go through some of this data around p. 29 of my happiness paper [pdf].)

Moreover, alternative rankings such as the UN’s Human Development Index, which accounts for things like health and education, correlate so closely with rankings of per capita GDP, it’s pretty clear that income levels are doing most of the work. As Justin Wolfers put it:

For all the work that goes into the Human Development Index, it just doesn’t tell you much that you wouldn’t learn from simple comparisons of G.D.P. per capita.

And don’t forget that the link between GDP per capita and self-reported happiness is positive and strong! Here’s a reminder of what the relationship looks like this:

As you can see, the doubling in GDP per capita from $1000 to $2000 has about the same effect on average self-reported life satisfaction as the doubling from $16,00 to $32,00. It was this finding that led Daniel Kahneman last year to say:

The implied conclusion, that citizens of different countries do not adapt to their level of prosperity, flies against everything we thought we knew ten years ago.  We have been wrong and now we know it.  I suppose this means that there is a science of well-being, even if we are not doing it very well.

But I think the most neglected argument in favor of GDP per capita as a measure of well-being is its neutrality. Here’s how I put it in my happiness paper:

Many people seem to think that a government’s emphasis on measurements like GDP indicate a kind of collective affirmation of materialist goals, encouraging a narrowly materialist attitude at war with more exalted values. But this is simply a mistake. The very function of money is to serve as a neutral medium of exchange. It is a shape-shifting embodiment of almost any value. The same $100 can be spent on a prostitute or donated to an HIV/AIDS clinic. The relative value neutrality of money is precisely why the measurement of per-capita wealth is well suited to pluralistic liberal societies; it doesn’t beg many questions about competing concep- tions of the good life. Money can’t be converted into  anything that someone might value, but it is of the nature of money to be convertible into a phenomenally broad range of values. Societies with high levels of average income and wealth are societies in which people have more resources at their disposal to achieve their aims, no matter what those aims might be, which is why it should be no surprise that, other things equal, people with more money are more satisfied. By measuring GDP, household wealth, and the like, government is not affirming one set of values over others. It is, in fact, embodying an ideal of liberal neutrality by measuring something that is valuable in varying degrees to all of us.

Because of their neutrality, economic measures are excellent inputs to public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values. There are lots of candidates for alternative indicators or progress and well-being, but most are transparently motivated by ideological antagonism to the kinds of policies known successfully to promote income growth. These are obviously not very well-suited for use in public deliberation in pluralistic societies containing a great deal of disagreement about ultimate values.

The demand for alternatives to GDP resides predominantly in certain quarters of the environmental movement. It’s easy to see why. Many environmentalists demand policies that, if implemented, would show up as unmitigated damage in economic measures like GDP per capita. I think it’s difficult to overstate how huge an impediment this is to much of the environmental movement — especially since these measures do track the elements of well-being pretty well.

Some enviromentalists, like Thomas L. Friedman and Van Jones, go the congruence route and jump into the business of retailing fantasies about pro-growth green central planning. But this kind of “and a pony!” no tradeoffs stuff is a pretty hard sell. Anybody really serious about saving the world from the peril of a more livable Canada is going to have to argue for policies that will indeed gut-punch world income growth. That argument is a lot easier to make if you can first persuade governments and journalists to shelve standard economic measures and replace them with new figures that make a virtue of green-tinted impoverishment. It’s hard to fail when you’ve redefined success.

That’s why I’m ready to hold onto my wallet when luminaries of the left like Stiglitz say they’re eagerly awaiting the September 14th publication of a report by Nikolas Sarkozy’s Commission on the Measurement of Economic Performance and Social Progress. But it probably won’t be that bad.

Here’s my predication. Good ol’ GDP per capita will be found (perhaps rather annoyingly to this congress of authors) to do better as a measure of social progress than one might have thought, for reasons similar to those detailed above. Chief among the problems with GDP-like measures will be that they fail to capture the value of environmental sustainability. Also, the value of economic equality. But not the value of economic liberty. That GDP fails to capture the value of, say, policies that reduce the probability of a future in which tens of millions die due to a massive flu pandemic, or due the availability of portable nuclear weapons, will go unmentioned. Less severe but equally indeterminate environmental threats will get many pages.

Surprise me Commission on the Measurement of Economic Performance and Social Progress!

Thomas Friedman's New Math of Democracy

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Thomas Friedman’s New York Times column today would be astonishing in its incoherence if only Friedman hadn’t long ago sapped us of our ability to be astonished by his incoherence. Like many capital-’d’ Democrats, Friedman has soured on democracy for failing to deliver on his policy wish list.

Watching both the health care and climate/energy debates in Congress, it is hard not to draw the following conclusion: There is only one thing worse than one-party autocracy, and that is one-party democracy, which is what we have in America today.

Why does Friedman say the United States has one-party democracy? Because the Republican Party is effectively opposing the Democratic Party’s agenda! Not even kidding. Get this:

The fact is, on both the energy/climate legislation and health care legislation, only the Democrats are really playing. With a few notable exceptions, the Republican Party is standing, arms folded and saying “no.” Many of them just want President Obama to fail. Such a waste. Mr. Obama is not a socialist; he’s a centrist. But if he’s forced to depend entirely on his own party to pass legislation, he will be whipsawed by its different factions.

Only the Democrats are really playing! You might think that would mean they can do whatever they darn well please. But no! The Democrats can’t do anything! Because the other party‘s opposition is so effective! So it’s exactly as if there’s just one party: nothing gets done!

My hunch is that the Times’ editors see Friedman aiming the gun at his foot, but watching a man stupid enough to actually pull the trigger is so fun they hate to intervene. That or they’re trying to explode the myth of American meritocracy.

So where were we? Oh, yes: one-party democracy is aggravating because sometimes one party can’t do what it wants because the other party gets in the way. Sooo frustrating!!! Why have democracy at all when all you end up with is a single party stymied by the other one! And so it is that Friedman comes to wax romantic about communist central planning:

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power.

Nikita Kruschev, the enlightened leader of a now-defunct one-party autocracy, was also committed to overtaking the United States in technology and so much more. “We will bury you” is how he put it. At the time, more than a few left-leaning American opinionmakers suspected he was right. After all, how can inefficiently squabbling democracies possibly keep pace with undivided regimes wholly devoted to scientifically centrally planning their way into the brighter, better future? And that, children, is why we speak Russian today.

[Cross-posted from Cato@Liberty]

Flaws and Frictions

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I was pretty impressed with much of Krugman’s NYT Magazine magnum opus. Macro is a mess. Now, this isn’t what Krugman was saying, but I think his account of the disagreements on fundamental questions exposes macro as a proto-science at best.

Economics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system. If the profession is to redeem itself, it will have to reconcile itself to a less alluring vision — that of a market economy that has many virtues but that is also shot through with flaws and frictions. The good news is that we don’t have to start from scratch. Even during the heyday of perfect-market economics, there was a lot of work done on the ways in which the real economy deviated from the theoretical ideal. What’s probably going to happen now — in fact, it’s already happening — is that flaws-and-frictions economics will move from the periphery of economic analysis to its center.

There’s already a fairly well developed example of the kind of economics I have in mind: the school of thought known as behavioral finance.

One might have thought Krugman was going to do something like acknowledge the immensely important point, associated with economists such as Ronald Coase and Douglass North, that market institutions in which “frictions” or transactions costs are relatively low are the exception rather than the rule. Markets are not only not frictionless, frictions generally keep markets from getting off the ground at all. When frictions are managed sufficiently to get markets up and going, that’s because they are embodied in a complexly interlocking set of institutions and organizations which make this possible. A scientific economics might seek to explain how it is that embodied markets achieve otherwise impossible feats of social coordination.

The “flaw” part of “flaws and frictions” is a little loaded. It’s an annoying habit of economists to hold on to homo economicus as a standard for rationality even after they have conceded that homo economicus is a more or less useless over-idealization. That we don’t live up the standard of more or less useless over-idealizations obviously does not imply that we are somehow defective. Be that as it may, one might have thought the recognition that a useless over-idealization of rationality does not apply to us might lead one toward a more sophisticated idea of the way minds and markets work together. There are, for example, the profound Hayekian points that individuals are computationally bounded, that expertise is local, that markets enable coordination by conveying otherwise inaccessible information, that epistemic and practical norms are both cause and effect of institutional structure, etc. Maybe we could look at experimental work, such as Vernon Smith’s, that explores how real people operate in different kinds of market structures.

It’s not like Hayek, Coase, North, and Smith don’t have Nobel prizes! But Krugman ignores the best of existing “flaws and frictions” economics and jumps straight to “behavioral finance,” which I’m fairly sure is the same old shit Krugman is complaining about — elegant models of counterfactual worlds — with ad hoc emendations to improve fit with the history the actual world.

Krugman should go further, but he won’t. He should say that beginning without “flaws and frictions” — assuming at the start unbounded perfectly rational agents and zero transactions costs — has all the virtues of theft over honest labor. An economics based on those assumption is ipso facto unscientific. The same goes for ad hoc variations on these assumptions. What sciences do is explain. (Sorry Milton.) And scientific explanation is largely a matter of detailing the causal mechanisms underpinning observed regularities.

“Freshwater” economics is not a science. It is a sometimes illuminating exercise in modeling counterfactual worlds. Insofar as “saltwater” economics recognizes that the need for a better account of human psychology and transactions costs in embodied institutions, it is better. But, so far, it isn’t. So far, “behavioral” macro is mere aspiration. It’s not something anyone is actually doing in a systematic way.

Maybe the most important conclusion I drew from Krugman’s piece is the politics of the freshwater/saltwater divide is complete nonsense. To seriously acknowledge “flaws and frictions” is to acknowledge that some institutions create friction while others reduce it; that some institutions enhance the salience of certain “flaws” while others work around them; etc. Having recently read a bunch of “Keynes was right” pieces, it seems pretty clear that lots of left-leaning economists are mistaking flawlessness and frictionlessness as necessary premises in the argument for limited government intervention in market institutions. But the upshot of flaws and frictions could very well be that we shouldn’t expect very much from government intervention. It seems pretty clear to me that Keynes’ characterization of the role of not-exactly-rational “animal spirits” in recessions is a very small part of an adequate general account of the way the quirks of human psychology tend to scale up to the macro level. The inference from flaws and frictions to Keynesian technocracy tends to be embarrassingly hasty.

The fact is, macro isn’t close to resembling a real science. (“The economy,” nationalistically construed, isn’t even close to resembling a subject of scientific investigation!) But we can’t count on elite economists to admit it, since their claim to authority on matters of public policy stands or falls with their claim to scientific expertise.

The Tragic Flute

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I found this little thought experiment, inserted by a Forbes editor into an interview with Amartya Sen, pretty peculiar.

[Note: In the book, Sen describes a problem of divergent views on justice in which you have one flute and three children who want it. One child wants the flute because she knows how to play it, the second one wants it because he is poor and doesn't have toys, and the third one says she made the flute, so she should get it. Who do you give it to?]

This is no knock against Sen, since there’s probably more context in the book. But this is not really such a puzzling question, is it? The correct answer is: It all depends on how “you” ended up with the flute!

Is the flute yours because you provided the materials (which were yours) and paid the kid who made it? If so, you can give it to anyone you want, or you can keep it. It’s yours! Did you steal it from the kid who made it? Then you should give it to the kid who made it. It’s hers! You’ve got no right to redistribute her flute.

Anyway, I find this thought experiment, and the not uncommon practice of assuming away the relevance of property rights when considering questions of distributive justice, confusing. A settled scheme of property rights is the main solution to the problem of distributive justice. As Hume said:

No one can doubt, that the convention for the distinction of property, and for the stability of possession, is of all circumstances the most necessary to the establishment of human society, and that after the agreement for the fixing and observing of this rule, there remains little or nothing to be done towards settling a perfect harmony and concord.

Of course, ingrained intuitions about equality, reciprocity, need, desert etc. will tend to shape this most necessary convention as it develops over time. One of the things we already know before coming to questions about who should get a flute is that things like flutes don’t grow on trees. Somebody has to make them. And the production of valuable goods, like flutes, tends to take place within a stable scheme of property. It’s sort of silly to drop that context and ask who “you” should give the flute to. If the conditions under which flutes are produced is in already place, then the answer about who should get it is likely already settled.

Anyway, Sen’s point no doubt was just that if you’re trying to do the best you can in giving away your rightful possessions, considerations of desert (e.g., both “I made it” and “I can best use it”), need, and fairness (e.g., “I don’t have ANY toys!”) are definitely relevant, but it’s not clear how to weigh them against one another.

What I’d add is that because the relative importance of considerations such as desert, equality, need, reciprocity, etc. tends to be indeterminate in the abstract, we need a system of property to peacefully settle particular distributional questions. Stable property conventions will tend to have evolved over time in a way that has taken the various elements of justice into account. If they didn’t, they’d likely lead to conflict and wouldn’t be stable. But we shouldn’t be surprised that the aggregate pattern of holdings that emerges from cooperation and exchange according to a just scheme of property rights will fail to resemble a counterfactual pattern determined solely by considerations of desert, or of equality, or of need.

Update: Also, I like what Sen says at the end of the interview:

The idea of perfect justice drives to a mistaken route. If you believe that any judgment has to be examined through public agreement, reasoned agreement, it’s my submission that

a) We won’t have agreement on the nature of a perfectly just society. But very likely, we will have agreement, reasoned agreement, on a variety of arrangements, outcomes, social states which are unjust and should be removed.

b) Secondly, even if we succeeded in identifying a perfectly just society on which everybody agrees, that’s not what we are debating about. No one expects we can have a perfectly just society in the foreseeable future. Our policies don’t depend on it. So why waste your time on a question which is probably unanswerable and certainly redundant.

The Gender Politics of Mad Men

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Micha Ghertner takes me to task for saying that a lot of guys enjoy Mad Men because they like to glimpse the world when men were men who had hot secretaries and bars in their offices. Micha says:

I don’t know what Will was thinking of when he wrote this. Maybe he just hasn’t watched enough episodes yet? The overall point he is trying to make is a fine one, but Mad Men displays exactly the opposite of what he is trying to express.

What I see when I watch Mad Men is a bunch of privileged dominant white males – and their trophy wives – who are absolutely miserable, partly ( largely?) because they can see their privilege and dominance cracking under the weight of inexorable social change.

That’s why Peggy seems to creep everyone out except Don, who is too busy trying to juggle all of the various lies he has made to his wife, kids, coworkers, mistresses, and clients to care that Peggy is breaking the glass ceiling, getting impregnated out of wedlock, and doing all of the things a woman of her station in life shouldn’t be doing. Don sees himself reflected in Peggy, as a rule breaker and successful social status climber who has to navigate a new, false identity.

No one is truly happy in the show, and we the audience, with the advantage of 50 years of hindsight, know that things are only going to get worse for those characters desperately trying to clutch onto some romanticized, illusory past.

Notice the title sequence of a businessman falling from the top of a skyscraper, eliciting a sense of vertigo? It’s not that subtle Will, and you were an art major!

I think everything Micha says is right on. I like to watch Mad Men for the menswear and a sense of the superiority of my postmodern egalitarian consumption partnership. But that’s not inconsistent with the idea that lots of guys who like the show don’t get the point of it and like to imagine how sweet it would be to have women take care of all the annoying details of life and smoke at work.

Like Micha, I see Mad Men as a show about status and status anxiety in an age of cultural ferment. Let’s talk about it! In this week’s episode [SPOILERS, if my stupid tendency toward abstraction can actually spoil anything] I particularly enjoyed the contrast between Peggy and Joan.

Joan is omnicompetent, authoritative, and in full control of her abundant femininity. She has fully mastered the arts of mid-century haute bourgeois womanhood and she knows it. Yet her clear clerical, sexual, social, and domestic excellence cannot guarantee her a status among women–a status among wives–equal to her own sense of her worth. Her status, in the end, is a function of her husband’s. And she does not seem to second-guess that this should be so. She gambled and lost with Sterling and is now confronting the suspicion that her fiance is not really good enough for her. And she is getting on in years. Despite her flawless performance of womanhood, her ambitions may end up stymied by the flaws in her men.

Peggy is equally talented and ambitious. But in stark contrast to Joan’s knowing, cultivated breed-standard womanly completeness, she is a naive, raw, curious puppy of a female. She is anxious and awkward about how she stacks up in the world of women and she is anxious and awkward about how she stacks up in the world of men. But she is toughly confident in how she stacks up as a creative worker. The new willingness of the world to reward her for what she does rather than for what she is grants her a power to independently realize her ambitions unavailable to perfect, normatively realized women.

As I see it, Mad Men is centered on Peggy, not Don. The very possibility of Peggy’s success is the engine of dramatic conflict. It threatens to devalue the relative status both of the professional men with whom she directly competes and of their wives with whom she doesn’t compete so much as humiliate by rejecting the grounds of their social and self-esteem. She is not yet in a position to really much threaten anyone, but the broader movement of liberation she represents will seem to many as little more than a violent, unfair, ad hoc emendation to the rules of the game they shaped their lives around.

Don is comfortable with Peggy, for now, because he sees these rules as little more than a fixed creative constraint, like the form of a sonnet. Don knows everyone is a manufactured thing, a product, advertising him- or herself in some market niche or other. (Don cannot believe Sterling is happy rather than performing happiness, which he finds unbecomingly “foolish.”) The fact that Don is a self-conscious and thus superlative performer explains both his outward success and his sense that it is empty. But what if self-construction does not necessarily mean living a lie? What if something like authenticity is compatible with success? In the end, Peggy may threaten Don more than she threatens the hierarchies of the trads by proving the possibility of successful integrity–by creating a persona, however awkward, that is both outwardly successful and inwardly satisfying.

Anyway, I’m totally overinterpreting. But that’s how I’m guessing things might shape up. Also, menswear!