Instituting a Development

During this summer, and perhaps later on, a few colleagues and I working on another blog to help expand our thoughts on the topics of institutions and development.

My first post deals with the rationality of individuals when faced with group wants.

You see, groups don’t make decisions, individuals do. In some sense, there is no such thing as collective action, but merely as an aggregate of the multitude of individual actions made by it members. Even then, there are multitudes of actions that happen outside the the control of said group, and these can also be taken into account as affecting the structure and perseverance of the group because of the transfer of information amongst individuals. Back to our point: Group actions must be individually rational. This is important, if the actions are not individually rational, many actions that are considered undesirable (from the group’s point of view) are more likely to occur.

The link can be found here.

Gathering my thoughts 6/4/19

Early this morning, I had a chance to sit down with my (unofficial) dissertation advisor to talk about research going into my final six credits of coursework. I hope to propose next spring, having written the first two-thirds of my dissertation between now and the end of the fall semester. High hopes? Maybe, but I’ve found that I do well with deadlines and short-term goals.

In this discussion, we brought about a number of books I am intent on reading this fall and why they made it into my reading list. They are separated into two groups and are listed as follows:

Socio-Ecological Economics:

Evolutionary Economics:

Each of these revolves around specific interests within my thoughts on social systems. Ideas evolve much like genes do; though, ideas find iterations through time and interactions, unlike genes which require propagation through technology. I have written before on the necessity of trans-disciplinary work on social systems; it’s become more of a buzzword, but in practice much can be accomplished. At some point, I will share my notes with you on each of these books; not in their complete form but an abridged version.

Many interesting ideas abounded throughout our conversation; so many that I wish I could have recorded it, but observations are equivalent to interactions and that may have changed the course of our conversation. The first of which is that we should read works not to duplicate them, but as to alter or inform our way of thinking; another acceptable outlet is to apply what and how someone else tackled a problem and using that method, go about solving other problems in a similar light. After reading a new work, one has to ask themselves, “Has this work rearranged the furniture in my head, removed some furniture while replacing it with new items, or a mixture of both?” In my life, there have been a few books that have severely altered my train of thought and how I perceived the world, while many others have given me only a nuanced view of something very specific. In economics, Karl Menger’s Principles was a building block of my thoughts thereafter.

In some ways, new knowledge is frightening, it threatens our previously held world views and in place of those is something unknown. One can find examples of this throughout time, it’s not limited to the actions of the church during the Middle Ages and Renaissance. Modern societies are often faced with new information that threatens their identities. Even the movements that cause societies to tremble face new information that they want to dismiss or refuse to pursue. Revisions of history are often rejected for a variety of reasons; confirmation bias is a powerful thing.

The next things to came up were about agent-based modeling and social sciences. Many of those in the social sciences aim for the creation of a better society, but this is in some ways anathema to doing pure science. It is most likely impossible to separate the subjective person from the objective analysis in social sciences. We have to perceive our data through the lens of theories and our understandings. In almost all cases, data even in its raw form must have gone through at least one filter before a researcher looks at it. The first of which is what data is seen as valuable enough to collect.

This lens of social science is one that causes many researchers to see themselves outside the system they are observing and many theses are built on the want to solve certain problems or issues. First of all, every person is already inside the system; we cannot take ourselves out. It is wishful thinking to assume away our place inside the very systems which we observe. ABM scientists are perhaps the worst at trying to step outside since much of the time they are outside of their models looking in. What would the modeler do if she were in one of the systems she has created? Second, many problems in social systems are unsolvable. What is possible is the observation of both phenomena and patterns; there exists no one solution since every iteration of a system produces a multitude of them. I am not a fan of formal equilibrium theory outside the classroom. (I am picking up Janos Kornai’s Anti-Equilibrium from the library today; his intuition on economic systems is fascinating.)

The final thing is that I have to narrow down my topics for my dissertation. There are far too many things to learn and not enough time learn them all. This is going to be quite an adventure.

Complex Adaptive Systems: Primer 1/N

Over the past year, I have dedicated a large portion of my research to the study of complex systems. This started out as me being bored in an econometrics course and reading random Wikipedia pages during class without any specific goal in mind.

Protip 1: If you’re finding yourself bored in class and are desperate for an escape, use class time to teach yourself about things that interest you; this is a classic case of using opportunity costs wisely.

Protip 2: Diversify your portfolio; sometimes the best ideas come from reading things unrelated to your research interests.

Since then, my knowledge and understanding of complex systems have come into fruition to something greater and will probably form the basis of my dissertation. Without further ado, let’s start our journey into complexity:

Systems are considered complex if they meet the following criteria:

  1.  The system is composed of interacting agents.
  2.  The system exhibits emergent properties.

The second criterion is of utmost importance. If you think of a system of gears (the gears being interacting agents), like a manual transmission, there is nothing unexpected that can happen. In my Toyota Matrix, I go through the same procedure every time I find myself stopped at a stop sign: 1) Disengage clutch, 2) Shift into first, 3) Let out clutch until I can feel the friction point, 4) Engage accelerator gently, 5) When car begins moving, remove my foot from the clutch. If I have done everything correctly, I will be on my way towards my destination. If I don’t, the engine will die and I will have to start again. This is a binary outcome. The transmission only allows for these two outcomes; even though, my transmission allows for eight different parameters: six gears, reverse, and neutral. No other outcome or pattern can emerge from this set of parameter and inputs (throttle and clutch engagement); the gears cannot create new combinations of movement, nor can they decide to go in any new direction. The transmission is closed system. It is not complex because of the inability for it to create new modes or patterns of interaction between the agents comprising the system.

This is a far cry from social systems which allow for pattern formation and new types of interactions. Patterns in our systems exist everywhere: The American system of government is pattern formed through over 200 hundred years of social interactions piled on top of the initial foray in 1776. This and all other forms of governance did not exist prior to the system, but are instead outcomes of the system. Importantly, forms of governance, from that of the family to corporations to governments to international organizations are the result of the interactions of individuals. Every so often, we create new modes of interacting: language, Morse code, Bell’s telephone, radio signals, television, cellphones, internet, email, texting, social media, Snap Chat, etc.

Talking about social systems allows us to introduce an additional criterion:

3. The agents can change based on prior and current conditions/parameters endogenous to the system; at this point the system can be classified as a complex adaptive system.

Think of how individuals and groups adapt to changing conditions in a social system. In the 1980s, laws were passed requiring that only certified electricians be allowed to work on electrical wiring in residential/commercial properties. This subsequently increased the cost of hiring an electrician; in response, homeowners were more likely to work on their own residential electrical systems. This was the first adaptation. The 1980s saw a rise in residential electrocutions as under-qualified individuals attempted to repair their homes. A second adaptation would have been one of homeowners realizing the dangers and then preferring to hire qualified electricians instead of risking injury. This is just one slice of adaptations; it doesn’t capture all the schools who expanded their electrician programs, those who lost work because they lacked the new qualifications, and etc.

Interactions breed consequences (not necessarily a negative term) and adaptations.

 

In a carbon constrained world, why increase the rate of carbon production?

Since the realization that carbon deposits in the atmosphere could cause global temperatures to rise, there has been increasing conversations on humanity’s role in causing this rise in temperature. We call this the Anthropocene Era, or the span of time in which the activity of humans has and continues to fundamentally alter the state of the world. (For the sake of this conversation, we’re going to assume that the anthropogenic climate change is incontrovertible.) The potential outcomes from this have ranged from mild warming of the global climate to the end of life on earth as we know it. I would wager that there is a fat tail of predictions that map the most disastrous outcomes. Many of these predict existential events.

Warning, normative statement: If there is a significant probability any one of these predictions coming true, humanity should coordinate to prevent this from happening.

One possible solution is by removing the human factor entirely. If there are no humans, there can be no anthropogenic climate change. This is also an existential event; therefore, I will ignore the potentiality of this being doable. I should note that many movements that proclaim a retrogression to primitive human civilizations are equivalent to the removal of humanity. How? No one ever states how far back we must go to not affect the world. Even going back a few centuries of economic evolution requires the elimination of billions of lives. Who decides who gets to live? How this is any better than allowing for future climate catastrophes to take their toll on humanity. This moral implications of this philosophy make it unacceptable.

Solution number two involves in doing nothing, or perhaps increasing our carbon production, which would end in any number of mild to existential level events.

Solution three involves using the resourcefulness of humanity to produce outcomes which are less severe than those being predicted. Even if the probabilities are currently set. moving one percentage point towards a more positive outcome is worth it. Should we do whatever is necessary to avoid the worse outcomes? I can’t answer that. What we shouldn’t do is make things worse. Specifically, if we’re looking to reduce carbon production, using fossil fuels in place of gaps in renewables or nuclear power is anathema to this goal.

Data to come later.

Finding the Max/Min: Modern Monetary Theory Part 1

Tonight, I finally decided to read an article explaining the details of Modern Monetary Theory. (It’s 4AM when I’m writing this and I’ve nothing better to do on a Friday morning.) The article’s summary purported MMT as a school of economic thought.

To be honest, it is not entirely a school of thought. It lacks the expansive nature of claiming that role. MMT is more of a classroom than a school; its proponents have taken a small slice of a very large pie and have tried to derive various insights from their perspectives. Let’s look at some of them:

  1. In a world of fiat money, there is no limit to the amount of money that can be printed.
  2. Because of the relative insignificance of inflation, fiat economies can print/borrow enough money to take on massive capital-intensive projects.
  3. In fiat economies, there exists a natural interest rate of zero (because money can be printed pay off any interest as it accumulates).
  4. Deficits don’t matter.
  5. Fiscal policy > greater than monetary policy; though, monetary policy can be used to great effect in ensuring the success of fiscal policies.
  6. The government should provide everyone with a job guarantee.
  7. The banks, the loaning of funds, and actions of a variety of other industries should be subject to central planning.

Though, it isn’t technically false, the error in the first proposition is obvious enough that it warrants very little consideration and it comes in the form of the equation of exchange: MV=Py. In other words, a change in the amount of nominal money M will also cause an equivalent change in the price level P. (This is an oversimplification, but Michael Darby’s text provides a great overview if you’re interested.)  In other words, the more money printed equals a proportionate rise in prices. A central bank with a fiat currency can print as many notes as there are resources to make them, but this comes at the not so insignificant cost of the decreasing value of those notes. This is called inflation, and unless you haven’t seen anything about Venezuela in the past year, you know it is very much a real phenomena. MMT doesn’t completely decry the validity of inflation, but they do some hand waving through a Keynesian full-employment argument and assume away any bad effects as long as this full-employment is maintained. 

The most egregious conflict of their ideology manifests itself in this statement: “MMTers believe that the natural rate of interest in a world of fiat money is zero and that pegging it higher is a giveaway to the investor class.” This poses a serious issue with their earlier premise that we should spend money now on programs we see fit without any regards to future generations.

Harking back to my first year of grad school macro, Bohm-Bawerk provided three reasons for the existence of a positive interest rate:

  1. Time preference — the perspective undervaluation of future wants
  2. Dated endowment mix — the anticipation of higher income in the future
  3. Intertemporal transformation opportunities — the technical superiority of present goods over future goods

MMT treats the creation of money as higher income; which is a workaround to Bohm-Bawerk’s second criterion. Is printing money the equivalent of income? Maybe for a short time, but eventually the creditors begin to notice the devaluation of the currency (relative to all other currencies) and will demand that the indebted country pay back in a given exchange rate. They may be somewhat correct in thinking deficits don’t matter in the moment, but they would definitely matter if all the creditors demand repayment at once (this would be worsened in the event of massive inflation.

By wanting to use the resources now without regards to any interest rate, MMTers effectively take from the future and remove significant transaction costs by doing so. I often worry about extraction economies, like those of the colonial era, in which countries extracted resources without regard to the livelihoods and needs of the contemporary generations. MMT allows for this, except the effected generations are those in the future. One might argue that they have good intentions by doing so, but good intentions aren’t enough. Furthermore, where would the wont of spending end? If you’re incentivized to spend future resources now with no recourse, why not spend all of it?

I’ll leave you with that to ponder until next time.

Not your father’s macroeconomics

The decision of the Fed not to raise interest rates raises some immediate doubts about the future of the economy; though, I question the validity of these doubts. Has the Fed been at the helm of the economy in a meaningful way over the past few years? I would argue that at most it has been a standard-bearer that the economy has looked up to since the Great Depression, but for a long time, there has been a disconnect between the actions of the economy and Fed policy. Just looking at the immediate trends: unemployment is low at less than 4% and interest rates are still near-zero when compared to historical averages. Is there an issue with this? Not really, unless you take stock in the Phillips Curve — the same curve taught today in many intermediate macro courses, but has been thoroughly debunked since the beginning of stagflation in the 1970s.

So what does this mean? Justin Wolfers sums it up nicely:

Fine tuning the economy is over… Controlling for u and r in face on inflation fails muster; the rudders connected to this helm aren’t as large or as sensitive as previous thought.

The discipline of economics is changing for the better. Two years ago, David Wilson Sloane claimed that economics as we know it is dead The stories economics uses to explain the world are extremely useful, but in all their explanatory power, they are merely fictions that simplify the world into understandable pieces. (I don’t mean to understate their importance, only to state that economics can go further. For all it’s simplifying, economics during the past century has had truly brilliant insights.) Macroeconomics is currently at sort of crossroads, one that will help define the discipline for generations to come. The useful fictions can be maintained, but their explanatory power can be made to be more robust through the integration of economic thought with the processes and knowledge of other sciences towards a common goal of creating a more humane science. Beinhocker et al. sum it all up in a recent response to their neoclassical counterparts, “We believe that in order for economics to progress it needs to fully embrace a transdisciplinary approach and modernize a number of its key concepts.” The authors of that essay come from a wide variety of backgrounds and believe that their combined insights allow for more perfect version of the truth. Given the exponential nature of combinatorial interactions, I am sympathetic to this claim.

They posit that economics can do three things to increase its explanatory power:

  1. Most of us admit to the downfall of homo economicus, we should bring in insights from the fields of neuroscience, psychology, etc. to advance the understanding of homo sapien.
  2. Heterogeneity goes mostly unexplored in neoclassical because most things are generalized to help simplify things. Complexity thrives in a heterogenous space; people are not homogenous.
  3. We need to look at the economy from the systems level. (I’m most in tune with with this action.)

In an aside to all of this by Dani Rodrick, he claims that we must take up FDR’s credo of nothing less than “bold, persistent experimentation” in order to advance the field. I couldn’t agree more.

You might find yourself asking, “Where will macroeconomics take us next?” That’s not the question we should be asking. The better question is: Where will we take macroeconomics?

One final thought, Noah Smith is right, the Fed is our scapegoat no matter what happens.