Neoclassical economics, post 2 - are public goods a socialist plot?

Stephen Williamson, in his defense of "neoclassical"/"Minnesota" economics, says some very smart and reasonable things about public goods:

[F]or a person with an urge to fix what is wrong with the world, a course in microeconomics might be quite discouraging. Mostly (and this of course depends very much on how it is taught), conventional micro is a series of exercises in how governments can screw things up...There are, however, ways out for good-deed-doers. There are externalities (positive and negative), market failures, and monopoly power. Working out how to fix the externalities, complete the markets, or regulate the monopolies requires work, though. It may be the case that one can fix the externality through a clever market mechanism - cap and trade for pollution for example. However, the government may actually be no better at supplying some item the private market fails to provide or monopoly power might actually not be so bad - it may actually promote innovation. The answers are not clear at the outset. One has to weigh alternatives, and carefully measure the costs and benefits of government intervention.

And, later:

There are government-provided goods and services, for example those associated with National Parks, that provide consumers with direct benefits. There are items like roads and bridges that make private sector production (e.g. trucking) more profitable. For some of these types of spending (e.g. government-provided goods and services are perfect substitutes for private goods and services), the multiplier can be zero. In other cases (complementarities), we can get substantial multipliers. This boils down to the issue of whether the government is more efficient than the private sector at providing particular goods and services, or particular kinds of capital inputs. We have a whole field of economics that deals with this: public economics.

Actually, this is totally great! It's exactly what I've basically been saying since I took a public economics course and realized the importance of public goods. Yes, there are things that the government is better at providing than the private sector! Yes, it is hard to figure out what these things are, and hard to get the government to do them. But that just means we have a hard job ahead of us. That doesn't mean we should give up, and say "Well, it's hard, so let's just not do it at all."

So why do you never see "neoclassical" macroeconomists talking about public goods?

I think the answer is that neoclassical economists are worried first and foremost about the threat of socialism. They worry that perfectly reasonable justifications for government intervention in the economy will be used by socialist "do-gooders" as an excuse to permanently expand government's role, with the ulterior motive of redistributing wealth.

You can see this fear in Stephen Williamson's language. How does he refer to people who want to make the economy more efficient through better public good provision? He calls them "do-gooders." Why should they be do-gooders? Maybe they are nationalists, who want their country to have a strong economy, and recognize that public goods are useful for that purpose. Maybe they are opportunists, who know that if they provide the public goods that raise people's incomes, they will be elected to power.

But no, Williamson assumes that the people who want to provide public goods are "do-gooders" - that they are motivated by a desire to increase the "equity" in our society.

Incidentally, he also thinks that this is the motivation behind Keynesian macroeconomic theories:

What does Paul Krugman want [as a Keynesian]?...What he says he wants, given the current circumstances, is for fewer people to be unemployed and more people to be employed. Why does he want that? It appears that he is concerned with equity. For him, it is criminal that some people are doing well and won't help out the unemployed, who are in dire straits.

It's clear from the preamble to Williamson's piece that he sees economics through a political lens. Having grown up in socialistic Canada, he sees a socialist around every corner, lurking in the fine print of every non-classical economic theory. The economics world is, to him, a war between those who think "equity" (wealth redistribution) is just, and those who think it is unjust. That partisan vision is shared, of course, by many economists on the other side of the political divide.

Of course, those of us who would like to see econ become more of a truly scientific discipline think this political focus is poppycock ("poppycock" is my new favorite word, btw). The job of economists is, first and foremost, to describe reality. If a government policy boosts GDP, it does, and if it doesn't it doesn't. We do not have the luxury of picking which theory we think would lead to our favorite policy prescriptions...or, rather, we shouldn't have that luxury, but too often we indulge in it anyway, and the result is that we are perceived more as lawyers than as scientists.

When will the economics profession forget about the socialism/capitalism thing, and start simply trying to predict how the economy works? I hope it's soon. I fear it's never.

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Neoclassical economics, post 1 - math and macro

Stephen Williamson has written an impassioned defense of the "neoclassical" (or "Minnesota" or "RBC") approach to macroeconomics. This provides me with an opportunity to have hours of fun procrastinating my dissertationtaking it apart.

The first point I want to address is Williamson's defense of the way math is used in macroeconomics:

There seems to be a view among some people that interest in Minnesota macro is all about the aesthetics of mathematics. I certainly think that a functional equation is an object of beauty. I also think that the average North American has a bad attitude toward mathematics. Indeed, some people seem quite proud, rather than ashamed, of the fact that they don't know it. Mathematics is a language that, in some circumstances, is simply an efficient tool for getting the job done. I could be like Adam Smith, and write it in words, or I could be like Bob Lucas and write down an economic model and analyze it using some mathematics. I can walk 8 miles from the University to the Fed (and maybe get lost on the way), or I can get there on the train.\

I agree that Americans tend to be math-phobic (though this seems to be common to all rich countries; I've encountered a lot of it in Japan, which once was known for its math prowess). Math is a useful thing to be able to do.

This does not mean that we should always do it. Some things are easy to understand with scientific thinking, but hard to model with math. As an example, take Louis Pasteur's discovery that germs cause disease. Explaining infection in the language of math would have been an impossible task in 1862 (even now, with supercomputers solving partial differential equations using algorithms written by hordes of biophysics PhDs, we've barely begun to get results with this approach), but understanding the basic principle of infection was easily possible given the science of Pasteur's day.

Neoclassical/Minnesota macro people would have us believe that formal mathematical models are the best language to describe the economy, because math is the most precise descriptor of the natural world. But precision and accuracy are two very different things; the amount of math needed to accurately describe a system as huge and complex as an economy is far beyond what Minnesota macroeconomists can do, and the data they have to work with is far patchier than what Pasteur knew about the human body in 1862.

And so the neoclassical people resort to making the models that their math permits them to make - simplistic silly models with easy math that describe little and predict absolutely nothing. Yet this approach survives and dominates, because A) the sneering of the Minnesota people lowers the reputation of any macroeconomist who refuses to speak in pure math, and B) Republican types are willing to shell out big bucks to economists who produce simplistic silly models (i.e. models too simple for government to have a useful role).

I am not suggesting that economists give up math as an analytical tool. Indeed, economists should get a lot better at math, and diversify their mathematical toolkits. But we should recognize that an economy is a very complex system - possibly as complex as a human body - and that we should therefore rely on naturalistic observation first and foremost. Only once we understand a few things about how the economy works, from watching how it works and from poking around in it, should we whip out the math and start making formal predictive models. And to be honest, I don't think macro is there yet. Williamson is putting the cart before the horse.

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Adobe Developer Connection revamped

Adobe Developer Connection (ADC) website is now live on Day Communiqué 5.

For additional details on the ADC launch, see the informative blog by Adobe's Craig Goodman.

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Rise of the machine-owners

In recent years, more and more credence has been given to the scary notion of "skill-biased technological change" - the idea that technology is no longer usable by everyone, and so is causing an increase in inequality. Basically, the theory says that thinking machines have begun to replace some of us, but not yet all of us; those who own the thinking machines (capitalists) and those who are smart enough to operate them (tech workers) will get more and more of what our automated society produces. I'm not convinced this theory describes our current world, but it certainly seems like it could happen sometime, as computers get smarter but human capabilities don't improve. What do we do if 70% or 80% of humanity becomes no more employable than dogs?

Matt Yglesias suggests that the rich people make the poor people their pets:

One way to think about the skill-biased technological change issue that I think is useful is to construct for yourself an exaggerated hypothetical in which SBTC is definitely driving a big increase in inequality...what would be the correct policy response? I say—higher taxes to finance more and better public services, the exact same thing that’s the correct policy response to the actual world.

Note that he's not exactly saying that rich people should give their wealth to the poor. He's saying that rich people should give their wealth to an organization that provides services for the poor. In Yglesias' ideal world, not only will the poor depend on the (willing or forced) largesse of the rich for their daily bread, but they won't get to decide how to spend that bread; instead, they will live in a playground that is crafted and shaped for them by others, receiving their livelihood indirectly in the form of "public services."

In other words, they will be pets.

Why do humans keep pets? Because the pets are cute, lovable, companionable, etc., which is just another way of saying because we like them. We pay pets to live in a world that we prepare and create for them, simply because it makes us feel good to do so. Yglesias' solution to skill-biased technological change is to do the same for obsolete human beings.

This sounds nightmarish. But in fact there is no easy solution to the problem of SBTC, as the most obvious alternative - simply ban the technology that makes humans obsolete - is utterly unworkable in practice. What are we to do, then? Will the rise of thinking-machines inevitably force us to choose between "pet-owner socialism" and "ditch-digger socialism"?

It is my opinion that the only acceptable, workable long-term solution to the SBTC problem is to use society's resources to focus on inventing technologies that augment human capabilities - things like intelligence enhancement and cyborg modification for human-machine interface. Furthermore, we should use the government to redistribute not wealth, but inborn capability (much as we try to do now with public education), making sure that things like heightened intelligence and human-machine interface are available equally to even the poorest citizens. In other words, we must battle skill-biased technology by creating and disseminating skill-boosting technology.

I know that sounds really weird, but isn't that better than having a society that's divided between those who own and operate thinking-machines, and those who live as pets for the former? Someday, this will be the choice we face.

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Econ 101

Paul Krugman:

[T]he [Obama administration's] new [infrastructure] initiative is a chance for me to air one of my pet peeves: the stupidity of the claim, which you hear all the time — and you’ll hear again now — that it’s always better to provide stimulus in the form of tax cuts, because individuals know better than the government what to do with their money.

Why is this claim stupid? Because Econ 101 tells us that there are some things the government must provide, namely public goods whose benefits can’t be internalized by the market.

So suppose we’re going to put $50 billion of resources that would otherwise be idle to work. Is it better to use them to produce public goods like improved roads, or private goods like more consumer durables? That’s not at all obvious — and anyone who tells you that basic economics settles the question, that is says that devoting more resources to production of private goods is better, doesn’t understand Econ 101.

And there’s a pretty good argument to be made that we are, in fact, starved for public goods in this country, so that it would actually be a good idea to shift some resources to public goods production even if we were at full employment; in that case, we should definitely give priority to public goods when trying to put unemployed resources to work.

Yes.

Also see Ryan Avent and Mark Thoma.

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O look, ecommonists r smrt!

Thomas Sargent, a famous economist, is one of the main pioneers and proponents of Dynamic Stochastic General Equilibrium models - the kind of models that pretty much all macroeconomists use these days (to see how one of these works, watch this). These models have been criticized a lot recently (see here, here, and here for my own criticisms). But Sargent is a believer, and he's speaking up to defend the modeling approach he helped invent:

Rolnick: ...Examples of...criticisms are that modern macroeconomics makes too much use of sophisticated mathematics to model people and markets; that it incorrectly relies on the assumption that asset markets are efficient in the sense that asset prices aggregate information of all individuals; that the faith in good outcomes always emerging from competitive markets is misplaced; that the assumption of “rational expectations” is wrongheaded because it attributes too much knowledge and forecasting ability to people; that the modern macro mainstay “real business cycle model” is deficient because it ignores so many frictions and imperfections and is useless as a guide to policy for dealing with financial crises; that modern macroeconomics has either assumed away or shortchanged the analysis of unemployment; that the recent financial crisis took modern macro by surprise; and that macroeconomics should be based less on formal decision theory and more on the findings of “behavioral economics.” Shouldn’t these be taken seriously?

Sargent: Sorry, Art, but aside from the foolish and intellectually lazy remark about mathematics, all of the criticisms that you have listed reflect either woeful ignorance or intentional disregard for what much of modern macroeconomics is about and what it has accomplished. That said, it is true that modern macroeconomics uses mathematics and statistics to understand behavior in situations where there is uncertainty about how the future will unfold from the past. But a rule of thumb is that the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn [to] use some math. That’s life.

Here we see Sargent employ the "Well, you're just a dummy" defense against critics who say there's too much math in macro. Sadly, the interviewer pretty much sets him up for this cheap shot, by caricaturing the DSGE critics. Rolnick pretends that DSGE's critics' main problem is with the use of math, rather than which kinds of math and how that math is used. Thus, Sargent gets a free pass.

But there are problems with the ways DSGE theorists use math. Let me point out a couple of these.


Problem 1: DSGE math is unwieldy as heck. The math used by macroeconomists has a reputation for being really hard. In a way, it is, but not in the way that, say, the proof of Fermat's Last Theorem is hard. Take it from me: DSGE math is stuff that most physics undergrads could understand with little difficulty. It is not string theory. It is about as "elegant" as Thomas Sargent's haircut. What DSGE math is, is extremely tedious to use. To calculate the predictions of even the simplest DSGE models requires computing power that wasn't even commonly available until the 1990s.

This is bad because it biases DSGE analysis toward oversimplification. The only DSGE models that can be (relatively) easily computed are the simplest ones - the ones that assume government is useless, that businesspeople and consumers always make the right decisions, that everyone has full information, that all contracts are enforceable, that prices are fully flexible, and that the entire economy is composed of just one aggregate "representative agent". Of course, such a simple model can't predict anything useful. But just try to add realistic stuff - heterogeneous agents, imperfect information, learning processes, incomplete contract enforcement, etc. etc. - and you'll quickly find yourself bogged down for literally years in computer modeling hell while your colleagues pump out simple models that explain nothing but appear to contain math just as "hard" as yours.

(And of course, the simple, quickly computable models just happen to be the models that assume that government has no role in the economy, that businessmen are all-wise, and that the economy runs perfectly with no interference. Surely this fact did not escape the notice of the eminent economists who insist that we use DSGE math for every model...)


Problem 2: DSGE math is often irrelevant to DSGE models. Read a DSGE paper, and you'll read a couple pages of assumptions (stated in as stiffly formal and obtuse a manner as possible), and then about 30 pages of technical details. Much of those 30 pages is a tiny variant on the same undergrad-level math used in every other DSGE model, but you end up reading it anyway looking for the one line that's different. Then you read how the researcher computed the damn thing (or, rather, how his Scandinavian co-author computed it), and you trust he did it right, and you look at the results and you realize - Hey! We could predict it would look like this just from reading that one page of assumptions! All those pages of unwieldy formalistic math served little purpose other than to distract you from the unrealistic silliness of the assumptions (and maybe to make the field of macro opaque to outsiders who might try to inject some common sense into the discussion).

(Now, after reading all this, don't you want to take a look at a DSGE paper and see what I mean? I know you do! Check out "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy", by Larry Christiano, Martin Eichenbaum, and Charles Evans.)


Taken together, these problems make it hard to make complex, realistic DSGE models, but easy to cover up the preposterousness of simple, unrealistic DSGE models. As one would expect, this means that the world of modern macro is populated with a bazillion models, one of which can be picked to explain any given phenomenon. In short, we have cargo cult science.

And in fact, Thomas Sargent seems pretty happy with this!!

Sargent: I like to think about two polar models of bank crises and what government lender-of-last-resort and deposit insurance do to arrest them or promote them...I call them polar models because in the Diamond-Dybvig and Bryant model, deposit insurance is purely a good thing, while in the Kareken and Wallace model, it is purely bad. These differences occur because of what the two models include and what they omit...Both models leave something out...an important theme of research for macroeconomics...has been about how to strike a good balance.

So instead of insisting that one model explain different phenomena, Sargent et. al. take two contradictory models, each of which explains only one phenomenon, and then use judgment and intuition to patch them together into a policy recommendation. That's like if an engineer said "Well, this physics theory predicts this laser will be red, and this other theory says it'll be blue, so I'm gonna go ahead and say it's gonna be...um...green!"

And economists wonder why nobody trusts them.

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Once again, America destroys Amurka

Reihan Salam's take on the recent Beck/Palin rally in D.C.:

Palin, like Beck, was talking about a spiritual restoration, a return to time-tested virtues that had been celebrated by the more homogeneous America of the past, in which non-traditional families were stigmatized and relatively rare, church attendance was far more common, and the dominance of Anglo-Protestant culture was unquestioned.

But as most of those who attended Beck’s rally understand in their bones, that world is gone. And President Obama, for all his efforts to expand the reach of the federal government, has had very little to do with this deep transformation. Rather, the country has long since been transformed by powerful demographic and economic forces that very much threaten what we might call Glenn Beck’s America.

Instead of accepting or embracing this transformation, a large and growing number of white Americans are, knowingly or otherwise, taking a page from minority protest movements of the past by asserting themselves and demanding recognition from political and cultural elites...

[I]t seems more plausible that Fox News is following its audience rather than leading it — that this anger and alienation has existed for years, and has only now found a decidedly unconventional tribune in the form of Glenn Beck.

I basically agree with this take. There's a bunch of white people out there who see their culture melting away, replaced with modernity and a mishmash of immigrant cultures. These traditionalist whites feel embattled, endangered, under threat, and as a result they're angry and afraid.

But here's the key: they don't know who or what is responsible for the death of their culture. Is it immigration? Is it secularism? Is it sex in movies and rap songs? Is it the first black president? Is it socialism? At various times, these have all been the targets of right-wing rural/suburban white ire, but none of them by itself represents a villain powerful enough to explain the rapidity with which the old white culture - call it "Amurka" - has been eroded. And so the right keeps switching its villains and switching its prophets; Glenn Beck has eclipsed Bill O'Reilly and Rush Limbaugh and Pat Robertson, but there will be another scare and another scaremonger.

Now here's the crucial thing to understand: the right has been going crazy like this for a hundred years. In the 20s, there was Charles Coughlin. In the 50s there was the John Birch society. Has the rural/sururban white lifestyle really been under dire threat for that long?

I think the answer to this question also contains the secret of the identity of the real villain who is destroying Amurka. The dark lord behind the erosion of traditional culture is none other than the American Constitution.

The Constitution was written in order to make America a very special kind of nation. It defends freedom of speech, which ensures that new ideas and new cultural memes will be able to spread as far as the media can take them. It protects freedom of religion, and explicitly forbids any religion from gaining special status in the law. It guarantees due process, which prevents local communities from persecuting residents who stand out. It ensures birthright citizenship, which ensures that America's ethnic mix will never stop changing. And, most importantly, it enshrines majority rule, which means that traditional culture will always find itself overwhelmed by the sheer numbers of the variegated rabble that wants something new. In combination, the Constitution's protections of speech, religion, due process, immigration, and majority rule ensure that the nation's entrenched culture will be smashed again and again and again.

If we look to history, we find that this is not the first Tea Party moment. As far back as the 1800s, the Know-Nothing Party was persecuting German and Irish immigrants, but the Germans and the Irish stayed and redefined the mainstream. Then Germans, Irish, and British Americans teamed up to fight the wave of Eastern Europeans at the turn of the 20th century, and again they lost. At the same time, Christian conservative hysteria failed to make Prohibition stick, failed to suppress the teaching of evolution, failed to suppress the First Wave of feminism, and failed to convince America that Roosevelt's New Deal was a socialist takeover. Amurka - the Amurka of the 20s - died, only to be reborn as a new Amurka when hippies and commies threatened in the 50s, etc. etc.

The point is that America, the nation defined by the values enshrined in the Constitution, is death to the kind of blood-and-soil-and-religion-and-community culture that has grown entrenched in most of the other nations of planet Earth. Glenn Beck's followers are merely failing to protect the kind of society that Japanese and French and Kenyan people have largely succeeded in protecting. That doesn't stop the Amurkans from trying, of course, but as long as conservatives fail to overhaul the Constitution (as they are clamoring to do), they are destined to lose. Amurka will fall...and in thirty or fifty years it'll be reincarnated, as Mexican-Americans join hands with whites to fight the new wave of Indian immigrants (or whoever), and rail against whatever moral and religious degeneracy and dangerous socialism threatens their "traditional" way of life.

The danger, of course, is if conservatives someday do find some way to slay their nemesis - a military coup, or a repeal of one or more Constitutional amendments. If Amurka finally rises up and strikes down America, all bets are off.

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