Moral compass: no thanks

Apparently someone has been going around accusing economists of being cold-blooded amoral technocrats. Reptilian people who look at the world and see a set of equations, who throw human life into a cost-benefit analysis and crank out a dollar value. One wonders what could have given them that idea.

But...the pushback is here! Ed Glaeser, a polymathic Harvard economist of great brilliance and reknown, blogs in the New York Times to explain his discipline's moral foundations:

Today, I focus on a larger issue: the complaint that economics is a discipline without a moral core...

[There is] a deep moral tenet – a belief in the value of human freedom – at the core of our discipline.

Some economists made that belief explicit. In the 18th century, Smith wrote, “Every man is, no doubt, by nature, first and principally recommended to his own care; and as he is fitter to take care of himself than of any other person, it is fit and right that it should be so.”

In the 19th century, John Stuart Mill asserted, “The only freedom which deserves the name is that of pursuing our own good in our own way, so long as we do not attempt to deprive others of theirs, or impede their efforts to obtain it.”

In the last century, Milton Friedman offered “freedom is a rare and delicate flower” and “a society that puts equality — in the sense of equality of outcome — ahead of freedom will end up with neither equality nor freedom.”...

But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom.

So economics is all about FREEEEEEEEEEEEEEEDOM!!! Well, I guess it was invented by Scotsmen!

Glaeser goes on to say that freedom, in economics, means giving people greater choice:

Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices.

When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice.

Our opponents have every right to contend that economists are unwisely idolizing liberty, but they err by saying we sail without a moral North Star.

Unfortunately, he doesn't seem to have thought this out very completely:

Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another[.]

To quote Peter Venkman of the Ghostbusters: "Excuse me, Egon! You said crossing the streams was bad." (See bolded John Stuart Mill quote above.)

Now, this is only one of many little technical quibbles I could make with Glaeser's assertion (What about the freedom to do things you'll later regret, such as addict yourself to heroin? What about happiness? What if having more choices just makes people upset?). And let's ignore for now the fact that just about 100% of real economic policy issues involve tradeoffs between one person's choice set and another's, making the criterion of "freedom" totally ambiguous. Let's instead step back and ask the question:

Why should a science have a moral core?

Does chemistry have a moral core? Does physics? We may decide that it is morally wrong to explode nitroglycerine in someone's face, but is the scientific fact that nitroglycerine explodes morally wrong in and of itself? Which is to say, should the scientist take morality into account when investigating the properties of nitroglycerine?

(Some people say: "Yes. If you find that nitroglycerine is explosive, you should hide that fact, because if you publicize it, people will probably use nitroglycerine to do bad things." Fine. I won't argue with that (now). But should the scientist refuse to believe that nitroglycerine explodes at all, because the idea of exploding nitroglycerine is contrary to some idea of morality? I am going to just go ahead and say: "No." Hiding a discovery from weapons manufacturers is different than disbelieving it.)

And yet going beyond the facts is precisely what Glaeser's "moral compass" would have us do. Suppose psychologists find that people are less happy when they have the choice to become addicted to heroin. Should economists refuse to accept this fact? If I were an economist studying heroin addiction, I'd say: "Hey, policymakers and voters, here's the deal. If you let people do heroin, their happiness will go down, but they'll have more freedom of choice. I'll let you guys decide what to do."

Glaeser disagrees. He seems to think the economist's duty is either to A) recommend the alternative that entails more freedom of choice, or B) disbelieve the finding that allowing heroin use reduces happiness. (A) is saying that economists, as a class, have a fixed and definite role in deciding society's morality, kind of like a priesthood. (B) is saying that intellectual honesty and scientific integrity must take a back seat to a faith-based belief system.

Whichever he is saying, I highly disapprove.

Morality, as David Hume (a friend of Adam Smith's) liked to point out, is fundamentally a matter of opinion. MY personal opinion is that the role of science is to increase humanity's knowledge, and therefore our power to affect our universe. In a way, this makes my values a bit similar to Glaeser's; I want people to have the option of changing their condition. Whether that option is exercised on an individual or a collective scale is a question I think science should leave to philosophy. If we limit our set of economic theories to those that seem to recommend individual freedom of choice - if we give economics a "moral compass" - we are refusing to take an honest look at the way the world really operates. That, in my moral opinion, is bad science.

And don't think that this doesn't happen in practice. Many of the same economists who espouse a belief in individual freedom of choice are biased against theories that imply a need for collective decision-making. They routinely refuse to believe in the existence of public goods, demand fluctuations, and other phenomena that imply a role for government. Behavioral economic theories, which assert that people are sometimes irrational, are routinely pooh-poohed by "conservative" economists, regardless of the mountain of laboratory evidence in those models' favor.

In short, the widespread belief that economists should act both as scientists and as priests has made them less effective as scientists.

Because when you get right down to it, demanding that economics value individual freedom of choice is denying economists themselves the most basic intellectual freedom: the freedom to doubt. This was famously expressed by the incomparable Richard Feynman:

Our freedom to doubt was born out of a struggle against authority in the early days of science. It was a very deep and strong struggle: permit us to question -- to doubt -- to not be sure. I think that it is important that we do not forget this struggle and thus perhaps lose what we have gained. Herein lies a responsibility to society...

This is not a new idea; this is the idea of the age of reason. This is the philosophy that guided the men who made the democracy that we live under. The idea that no one really knew how to run a government led to the idea that we should arrange a system by which new ideas could be developed, tried out, and tossed out if necessary, with more new ideas brought in -- a trial-and-error system...If we want to solve a problem that we have never solved before, we must leave the door to the unknown ajar...

Our responsibility is to...learn what we can, improve the solutions, and pass them on. It is our responsibility to leave the people of the future a free hand. In the impetuous youth of humanity, we can make grave errors that can stunt our growth for a long time. This we will do if we say we have the answers now, so young and ignorant as we are. If we suppress all discussion, all criticism, proclaiming "This is the answer, my friends; man is saved!" we will doom humanity for a long time to the chains of authority, confined to the limits of our present imagination. It has been done so many times before.

I look at Glaeser's "moral compass," and I hear: "This is the answer, my friends; man is saved!" And I look at my discipline and see a lot of good, honest, doubting scientists struggling uphill against an ossified and institutionalized canon of moral beliefs. And, coincidentally, I see a public that has largely scorned us, mainly because our theories of the macroeconomy have turned out to be useless.

Can we fix those theories while adhering to Glaeser's (implied) dictum that only individual decision-making should be regarded as efficient? Or to put it more crassly: Can we do good science while forcing ourselves to assume that the sun moves around the Earth?


Update: Summoning Feynman to help you is not always a good idea, as this web comic demonstrates...

reade more... Résuméabuiyad

Better Day

I made it through the terrible Lexapro withdrawals! It was so horrible yesterday but today was better since I actually got some work done. I didn't get all of my work done but I got bill paying work done so that at least is good.

I don't have much to post tonight except for feeling much better. I will post again soon! :)

reade more... Résuméabuiyad

Lexapro Withdrawals

I am having a terrible day! I am currently on Lexapro, Abilify and Klonopin for depression, Bipolar and anxiety. The pharmacy must have shorted me on the Lexapro because I ran out a few days early and am experiencing some withdrawal symptoms from it. I am feeling terrible. Jittery, restless and just plain terrible. I am smoking too much because my body feels like it needs something and I keep reaching for the cigarettes. It is not helping. I am having trouble concentrating on work. Thank God I work from home or else I would be going even more crazy.

I looked up Lexapro withdrawal symptoms on Google and found out that is what is wrong with me. I am having all of the symptoms. This is terrible. I have to write some articles today and do some titling for Demand Studios. I have managed to get one article done. One! And it is already 3:30 in the afternoon. I haven't even tried to title because when I woke up I decided to do some writing first. A lot of good that has done me. I don't know what to do to ease these symptoms. I guess I have to go through them because I have to work. I cannot lay down on the couch and not work since we need the money. Argh! I guess I will just have to get through it somehow.

reade more... Résuméabuiyad

Globalization, unemployment, and inequality

Nancy Folbre makes the claim that globalization has worsened unemployment and inequality:

Why has the economic recovery left workers behind?...

Many journalists argue that globalization is partly to blame for historically low rates of job creation over the last year. Companies in the United States are simply less reliant on American workers – and American consumers – than they once were. Maybe they just don’t need us any more...

Few economists like this argument...

If few economists like this argument, it's not clear why. The opening of the Chinese and Indian markets meant that a huge mass of labor was dumped on the world market, without much capital to go along with it. Scarcity creates value; a relative abundance of labor and a relative scarcity of capital means that wages should fall while profits rise. This is exactly what has happened, so I'm not sure why people are surprised.

This creates inequality, since rich people own more capital than poor people. If there are frictions in the labor market ("sticky nominal wages," for example, which means that it's hard to cut headline wages), this translates to unemployment. The "new global elite" that Chrystia Freeland and others write about are just people who are benefiting from the increased return to capital caused by globalization.

Of course, eventually the capital-labor imbalance should right itself, as China and India build up enough capital per worker that our workers become valuable again. This is, in fact, happening; Chinese and Indian wages are rising rapidly. Of course, China is slowing this process by pumping capital back into the U.S. by buying our Treasury bonds (which they do because that keeps their currency cheap and allows them to maintain steady export growth). But eventually, globalization will run its course and we'll see a resurgence in wages and a fall in profit margins.

Unfortunately, in the meantime, our nation's economy as a whole suffers, because it becomes harder to pay for public services like infrastructure and education. In an age when only a few citizens (capital owners) have money to spare, it's hard to get them to pay for stuff that benefits everyone, as Nancy Folbre points out:

During the 25 years after World War II, the interests of American investors and workers were closely, though not perfectly, aligned. Productivity increases were passed on in the form of higher wages that, in turn, fueled increasing demand for domestically produced goods and services.

Businesses willingly paid taxes to support public programs designed to improve the education, health and security of the labor force on which they relied.

The price of the disruption caused by globalization, she argues, is "increased social conflict, intensified economic inequality and weakened democracy." I find it hard to disagree. And unfortunately, I see little we can do about it, other than to try to rebalance global capital flows by pressuring China to revalue their currency. Even if we succeed at that, though, the basic dynamic will remain the same. Inequality is here to stay for quite some time.

reade more... Résuméabuiyad

Dregs of the Earth

Someday, the robots will replace mankind. But have they already started to replace the less talented among us? Tyler Cowen thinks so. He hypothesizes that one main reason for our high unemployment rate is that many low-skilled people now have "zero marginal product" as workers - that they have become as useless to our economy as squirrels or pigeons:

Keep in mind, we have had a recovery in output, but not in employment. That means a smaller number of laborers are working, but we are producing as much as before...If I ran a business, fired ten people, and output didn't go down, might I start by asking whether those people produced anything useful?...

There is another striking fact about the recession, namely that unemployment is quite low for highly educated workers but about sixteen percent for the less educated workers with no high school degree...This is consistent with the zero marginal product hypothesis...

Before I say anything about this, I'll let two very experienced economists take the argument apart from a technical standpoint. First, Paul Krugman:

[I]f one factor of production has a zero marginal product, other factors must have very high marginal products, and hence be in great demand. So where are these factors? Is it capital? Then why so much overcapacity in almost every line of business? is it labor with particular skills, or in particular locations? As Mike Konczal points out, basically everyone’s unemployment rate has doubled, no matter their education level or location.

Now, Arnold Kling:

Let us talk about the marginal product of worker i in occupation j. In most cases, this is indeed zero. My marginal product would be zero in fishing, medicine, and many other fields. In a complex economy, if you were to randomly assign workers to jobs, ZMP would be the norm, not the exception. The more complex the economy, the more carefully workers must be assigned in order to avoid ZMP...

[Also,] when a manufacturer has excess inventory, production workers have effectively ZMP. But for the economy as a whole, that is consistent with an aggregate demand story [instead of Cowen's hypothesis]...

The upshot: many conditions in the economy can make it look as if workers are useless, when they really aren't. The mere fact that output has recovered while employment has lagged is not sufficient to conclude that some humans have become obsolete.

But I wonder whether Cowen is really interested in these alternate explanations. In his post, he himself comes up with an alternate story to explain his observations, and then summarily dismisses it. Read carefully:

Garett Jones suggests that many unemployed workers are potentially productive, but that businesses do not, at this moment, want to invest in future productive improvements. The workers only appear to have zero marginal product, because their marginal product lies in future returns not current returns. I see this hypothesis as part of the picture, although I am not sure it explains why current unemployment is so much higher among the unskilled. Is unskilled labor the fundamental capability-builder for the future? I'm not so sure.

So, Cowen starts with the assumption that unskilled labor is not a "capacity-builder for the future", and thus he concludes that...unskilled labor has become useless. This sounds a lot like assuming the conclusion, doesn't it?

Actually, this "zero marginal product hypothesis" is simply a more extreme version of an argument many economists make. The theory of "skill-biased technological change," for instance, holds that inequality is due to new technologies that complement the abilities of high-skilled (read: smart) people, but make the skills of the low-skilled (read: dumb) people unnecessary. In the field of education economics, stagnant college attendance in the face of an increasing college wage premium is often taken as evidence that the people not going to college are simply too dumb to do so (rather than, say, that spaces in colleges are in essentially fixed supply).

These theories all fit into a single basic paradigm: poor and unemployed people are poor or unemployed because of a lack of natural talent, ability, or character. Losers lose because winners are better. Economists who believe this look at the lower classes and see not room for vast improvements, but just a bunch of people doing the best they can, which happens to be not much. This ability-based worldview is so deep-rooted that Tyler Cowen can employ the aforementioned circular logic without even thinking twice.

I just can't buy it. The economy is far too complex to be described as the sum of individuals' actions; we are not simply 6 billion one-person companies each producing widgets in our backyard smelters. If workers' wages always equaled the amount they produced, then thousands of investment bankers would be earning negative wages for the economic destruction wreaked by the promulgation of mortgage-backed CDOs; the fact that those bankers earned billions of dollars then and similar billions of dollars now suggests that something is very wrong. It also suggests that many of the people now languishing in unemployment represent wasted potential - that their unemployment is due to a failure of big complex institutions and mechanisms rather than to their IQs.

Update: Alex Tabarrok, Tyler Cowen's co-blogger, weighs in against Cowen's "Zero Marginal Product Hypothesis":

The ZMP hypothesis is too close to a rejection of comparative advantage for my tastes. The term ZMP also suggests that the problem is the productivity of the unemployed when the actual problem is with the economy more generally (a version of the fundamental attribution error).

To see the latter point note that even within the categories of workers with the highest unemployment rates (say males without a high school degree) usually a large majority of these workers are employed. Within the same category are the unemployed so different from the employed? I don't think so.

Tabarrok For The Win.

From the Wikipedia article on the "fundamental attribution error":

In social psychology, the fundamental attribution error (also known as correspondence bias or attribution effect) describes the tendency to over-value dispositional or personality-based explanations for the observed behaviors of others while under-valuing situational explanations for those behaviors...

As a simple example, if Alice saw Bob trip over a rock and fall, Alice might consider Bob to be clumsy or careless (dispositional). If Alice later tripped over the same rock herself, she would be more likely to blame the placement of the rock (situational).

Tabarrok is quite right. And I would go farther: the "fundamental attribution error" is at the core not just of Cowen's view of unemployment, but of the entire worldview of many "right-leaning" economists.

reade more... Résuméabuiyad

Getting ready for the next American century

Snarky, contrarian pundits have been doing their best of late to come up with reasons why China's rise (and America's accompanying decline) is not as soon as everyone seems to think, or is not inevitable, or is not such a bad thing in any case. Gideon Rachman does an excellent job of taking down these silly folks in a piece in Foreign Policy. Some excerpts:

Americans can be forgiven if they greet talk of a new challenge from China as just another case of the boy who cried wolf. But a frequently overlooked fact about that fable is that the boy was eventually proved right. The wolf did arrive -- and China is the wolf...

The Soviet Union collapsed because its economic system was highly inefficient...China, by contrast, has proved its economic prowess on the global stage...This is no Soviet-style economic basket case.

Japan, of course, also experienced many years of rapid economic growth and is still an export powerhouse. But [t]he Japanese population is less than half that of the United States, which means that the average Japanese person would have to be more than twice as rich as the average American before Japan's economy surpassed America's. That was never going to happen. By contrast, China's population is more than four times that of the United States. The famous projection by Goldman Sachs that China's economy will be bigger than that of the United States by 2027 was made before the 2008 economic crash. At the current pace, China could be No. 1 well before then...

Successive U.S. presidents, from the first Bush to Obama, have explicitly welcomed China's rise...But whatever they say in formal speeches, America's leaders are clearly beginning to have their doubts, and rightly so. It is a central tenet of modern economics that trade is mutually beneficial for both partners, a win-win rather than a zero-sum. But that implies the rules of the game aren't rigged. Speaking before the 2010 World Economic Forum, Larry Summers, then Obama's chief economic advisor, remarked pointedly that the normal rules about the mutual benefits of trade do not necessarily apply when one trading partner is practicing mercantilist or protectionist policies. The U.S. government clearly thinks that China's undervaluation of its currency is a form of protectionism that has led to global economic imbalances and job losses in the United States. Leading economists, such as New York Times columnist Paul Krugman and the Peterson Institute's C. Fred Bergsten, have taken a similar line, arguing that tariffs or other retaliatory measures would be a legitimate response. So much for the win-win world...

In fact, rivalry between a rising China and a weakened America is now apparent across a whole range of issues, from territorial disputes in Asia to human rights. It is mercifully unlikely that the United States and China would ever actually go to war, but that is because both sides have nuclear weapons, not because globalization has magically dissolved their differences.

So, even if they never become as rich per person as we are, China is about to displace the United States as the most powerful country on the planet. This is generally a bad thing for us, especially considering the predatory mercantilism and geopolitical aggressiveness that are accompanying China's rise.

So, the question now becomes: What do we do about this? On the economic front, I agree with Krugman and Bergsten that tariffs are an appropriate tool for discouraging Chinese mercantilism. Pushing them to revalue their currency may bring some of our jobs back, as well as reducing future financial bubbles, but it won't check China's rise or make them less aggressive. For that, we need to deal with the geopolitical threat with geopolitical means. That means forming alliances.

Alliances are the key to national power. Germany and Japan lost World War 2 because Britain and the U.S. managed to ally with the Soviet Union and China; the USSR was stymied in the Cold War in part by the U.S.' alliance with Japan and Germany, as well as (later) China. China is easily big enough to beat the U.S. in any conceivable kind of one-on-one confrontation; hence, we must follow the lessons of history and build a gang that is capable of overcoming China should they make aggressive moves.

Who will be in that gang? The key alliance must be with India, which is the only country with a population to match China's. Japan is another obvious one, given China's antipathy toward and proximity to that country. Smaller Asian countries threatened by China or its proxies - Vietnam, South Korea, Indonesia, and the Philippines - can be important members of the emerging coalition as well. Then there's Russia, which also has reason to fear China's proximity and might, but is always somewhat of a geopolitical wild card; instead of persuading Russia to join us in a China-containing coalition, our best hope is to persuade Russia to adopt a policy of cagey neutrality (thus making China nervous).

These alliances should be cemented by free-trade agreements. If given a choice between sourcing manufactured products from our chief rival vs. one of our allies, we should choose the ally; thus, we should use free trade agreements to bias our foreign investment toward India, Indonesia, Vietnam, etc. and away from China. In addition, creating multilateral free-trade areas between rich allies like Japan and Korea and poor allies like India and Vietnam will form the core of a Pacific alliance that is largely independent of the U.S. - something that we want to promote in any case.

In addition to alliances, the U.S. should be building up its own power. In the short term, that means rebuilding our infrastructure, reforming our educational system, fixing our dysfunctional Senate, controlling health care costs, and raising taxes. In the longer term, it means one and only one thing: immigration. The ability to add population by assimilation of foreigners, coupled with America's large endowments of land and resources, is America's ace in the hole. We can comfortably fit more people on our land than China can on its own; in the long run, this means that we will be more powerful than China or any other country. We should take advantage of our nation's riches and abundant space to bring over immigrants from every corner of the globe, boosting our population and keeping our fertility rates at the safe "replacement" level. What's more, we should focus on bringing over highly skilled and intelligent immigrants, assuring that the U.S. remains the world's research and development center even as manufacturing supply chains move to more densely-populated Asia.

In order to remain a superpower, therefore, the U.S. needs to be a multiracial nation with a multilateral foreign policy. The Tea Partiers' drive to exclude foreigners, and the neoconservatives' (now largely failed) attempt to have America go it alone, are anathema to our long-term national power. These self-defeating conservative impulses must be resisted.

In any case, the American Century is over, and the Chinese Half-Century has begun. Given the facts of population and resources, there is nothing we can do to stop China's rise, but there is plenty we can do to make sure that, if nations are still around by then, the 22nd Century belongs to America.

reade more... Résuméabuiyad