Category: Economics

Selection, Sociality, and Systems

Recently, I have been trying to wrap my head around some of the major tenets of biology, I have enjoyed it so much that I commented to someone close to me that I was sad I chose economics for my PhD, I would have enjoyed biology with equal fervor. Nevertheless, I am in a pursuit to connect the various themes of the fields and create a stronger stance for both. We are, after all, a species of biological organisms whose very survival is dependent on our interactions. It is interesting to note the variety of systems of organization and hierarchy found throughout biology and economics; there seems to be an plethora of solutions to an infinite number of potential problems. Through learning and adaptation, we eventually get to the now. This also must mean that many systems of organization did not make it to the now, they failed to survive. What I mean to uncover in my research is the framework by which social interactions and systems evolve and persist. This is where I begin to look for the interconnections with biology.

I have come across a controversy in biology that hinges on the fitness and adaptability  of species: the debate between group and individual selection. Group selection exists when there is competition not only between individuals but between groups as well. And we know that individuals compete on a number of various levels for both resources and mates. But what about species that have high populations of sterile or non-reproducing organisms like ants or bee? Why would any one ant give up their life in order to save the lives of their fellows?

Hamilton’s theory of kin selection solved that paradox. Hamilton proposed that kin selection was an evolutionary strategy that favors the reproductive success of an organism’s relatives, potentially at the cost of the organisms own fitness or survival. It must be noted that group selection and kin selection are not the same.

Recently, there has been a resurgence in the biology literature on the efficacy of Hamilton’s theory, how these play out in the real world, and how does altruism fit into all of this. The paper that reinvigorated the dormant argument between the different types of selection was published in Nature during August 2010. In “The Evolution Of Eusociality,” Nowak, Tarnita, and Wilson argue that the previous four decades of theorizing using the kin selection theory had serious limitations and perhaps another methodology would be more useful and simpler. This caused a cascade of dissent from the biology community, and rightly so. One cannot shake a beehive and expect the residents to remain content.

The main issue seemed to be with the first half of the paper, which provided plenty points of contention for those who would adamantly disagreed with the paper, but the latter half included a well-developed mathematical framework by which their new theory could be expounded. Unfortunately, many of those who read the first half failed to check the appendix, which being a grad student is something I would forgive them for. (Who has time to check appendices?) The main point of their paper was that kin selection makes far too many simplifying assumptions and that Hamilton’s rule fails to describe a number of interactions that occur in the wild.

Seven years later, Jordana Cepelewicz writes in Quanta about the mathematical underpinnings of the growing debate. She brings in other research and further shows that the assumptions made by Hamilton’s rule fail to take into account a number of phenomena, especially when it comes to offspring:

In other words, it can be more important for an individual’s reproductive success to be consistent on average, rather than simply higher than that of others. In an uncertain environment, the bet-hedging value of helping others starts to look much more appealing as a strategy: It improves the odds that some shared genes will survive even if an individual’s own lineage dies out. Allocating some energy to helping others, even at the expense of further reproductive success, then works as an insurance policy.

There are even more variations when it comes to differences in hives, colonies, and species,

But even so, “there are a lot of subtleties within how those dominance hierarchies form and how those societies maintain stability,” said Sandra Rehan, a biologist at the University of New Hampshire. “It’s much more nuanced than just saying ‘something is social,’ or ‘something is eusocial.’”

She goes on to further claim that uncertainty is apt to breed altruism. This is equivalent to the economics concept of the Folk Theorem: when the end of a game is unknown, cooperation is sustainable. The problem with many one-shot and finite games is that cheating is a sustainable strategy in the last turn, but if someone will cheat in the last turn, why not cheat in the next to last turn and so on. Games of this kind tend to unravel, but if there is some probability of continuing the game, at say the species/multigenerational scale, then it is definitely worth cooperating at the individual level.

Goal-seeking Economics

We are on the verge of a revolution in economics, in fact, it might have already started. Many have pointed out that the current climate within the discipline is such that it cannot continue. I have linked to these discussions in previous posts, although, I have neglected to include other heterodox forms of the field such as feminist economics, humanistic economics, etc, but mostly because I don’t feel as if I know enough about them to give them proper representation. Though, even in the mainstream, economists have begun to seek new ways of their craft things outside the status quo rate of the field’s continual evolution.

Something that must be warned against is the potential for economists to use economic theory as a means to their own ends, instead of merely a means to discover truths about the nature of humanity and economies. I would argue that economics has value in and of itself, without the addition of value placed on it by those who are consulting or use the prescriptions to further their own interests. An economy is not something that can be engineered. More so, an economy is not something that can be altered from the outside. None of us can take a metaphorical wrench and adjust the economy in seemingly knowable/predictable ways that will guarantee specific outcomes. However, many economists attempt to do just that.

While I think there is a mix of good intentions and hubris involved in the decisions of those who wish to alter the state of the economy using tools and policies, there is something to be said about what a fully engineered economic system would look like. What if we could model the economy down to the very basis points of interest rates and cash flows? One could imagine that a computer capable of doing such things might not be too far in our future, especially since quantum computing is closer than ever before. We could know exactly what is going to happen and how to change the dials and the knobs to secure specific outcomes. For many, that would be a Utopian dream. Imagine eradicating all poverty just by changing some set of parameters to complement a given set of initial conditions.

This has been considered before, over 200 years ago, but it was through the eyes of classical mechanics and not economics. Pierre Simon Laplace realized some 150 years after the invention of Newtonian Mechanics that if there was some being that could know the exact specifications of everything, the entire universe could be modeled. He stated in A Philosophical Essay on Probabilities,

“We may regard the present state of the universe as the effect of its past and the cause of its future. An intellect which at a certain moment would know all forces that set nature in motion, and all positions of all items of which nature is composed, if this intellect were also vast enough to submit these data to analysis, it would embrace in a single formula the movements of the greatest bodies of the universe and those of the tiniest atom; for such an intellect nothing would be uncertain and the future just like the past would be present before its eyes.”

This supreme intellect became known as Laplace’s Demon. The reason being the point at which everything becomes predictable then the universe becomes entirely deterministic — free will ceases to exist, we become cogs in the machine. Because this machine could crank time forwards and backwards and we would be no more than actors playing a predefined script. Quite quickly, this Utopian vision turns into an existential nightmare. Fortunately, this kind of machine or intellect was proven to impossible with the discovery of quantum mechanics ca. 1900, but there has been some talk of a “computer” that could model the universe via quantum wave functions. However, the size of the computer is probably the same size as our universe.

I have argued against the fatalist view of economics (essay to be posted later), I think there are marginal changes that can be made through the work of policy and individuals allowing us a better world. Nothing is entirely set in stone, complexity allows us to appreciate the myriad number of potential outcomes and how all of the interactions of individuals make for beautiful, interesting world. Using economics as a tool to mess with the supposed “cogs” might end up doing more harm than good, but we are able to learn from the works of others. Economics isn’t merely decision theory, it is the theory of explaining how people interact to achieve their goals at both the micro and macro scale (as far as those actually exist). So while I think economists working in the public and private spheres provide a necessary service, what is unnecessary is for economists to create versions of economics that have vested interests. If one is to remake a better version of DSGE, it shouldn’t be a means to the greater positioning of oneself, but for a greater understanding of behavior that will in turn help humanity.

 

Public Choice and the expansion of the government

Why government expands is an important point of discussion in the public choice literature. (Public choice being the application of economic tools onto the realm of political theory and practice.) This question has often been asked by economists and occasionally there is an answer that makes sense, but rarely can we account for all of government growth through the use of a singular theory.

Donald Wittman claims to provide an overarching, mono-causal theory of government expansion: it’s because the people, the voters, want government to expand. An increase in the role government is the reflection of the will of the voters and this expansion supposedly leads to the lowering of transaction costs or opportunity costs of the constituency. Bryan Caplan, Wittman’s nemesis, says that this theory is wrong since we know that voters are absolutely underinformed; he claims that it is too costly for voters to gain information and that there is relatively little benefit to having that information. The logic of collective action is in full swing.

A second theory, purported by Robert Higgs, claims that government has grown during times of emergency and afterwards fails to shrink back down to its previous size. Higgs calls this his “ratchet-model” of government expansion. It can be seen through the lens of history: the US government rapidly expanded during the World Wars and after each of them were over, the size of the federal government shrunk somewhat but never back to the size it was before the onset of war. During each of these national “emergencies,” the government takes on extra roles and duties not previously delegated, only to refuse to relinquish them once the need for that role being filled is over. Whether the government should have occupied that set of duties in the first place is a different question. The ratchet model fails to take into account countries that have not experienced world wars or other national emergencies but have still grown nonetheless.

A third theory of government expansion has been cited by Tyler Cowen. His theory, unlike the previous two, is not mono-causal, but only relates a part of the story. Cowen claims that as technology has advanced, the cost of governing has decreased. This, in turn, has lead to an expansion of powers to places that were previously too costly to govern. Cars, highways, and air travel made far away places accessible within hours or days instead of weeks. Telephones and internet made communication instantaneous. Much of the technical innovation lowers the transaction costs of implementing policies. I am partial to this explanation of government expansion, though, it must be kept in mind that this is only a small part of the story.

Lately, I have been wondering about a more endogenous model of government expansion. Many of us who study public choice often look at the incentive structures of policy and the public realm, but sometimes we miss the forest for the trees. In a democracy, government might expand due to the opinion of the majority at the expense of the minority. Such a case has been theorized since Madison’s Federalist 51 and has been often repeated in various circles as outside threats arise. Madison says, “It is of great importance in a republic not only to guard the society against the oppression of its rulers, but to guard one part of the society against the injustice of the other part. Different interests necessarily exist in different classes of citizens. If a majority be united by a common interest, the rights of the minority will be insecure.”

I think it is improbable that a society can exist for long without having the majority take over large parts of governance without some minority bearing some cost. This is especially true when the minority can be seen as the outgroup. This has been a defining part of history. Many societies have increased the burden on the fringes and minorities of their civilization to prop up the rest or to simply keep the other group down. Medieval Europe, South Africa, Japan, China, the Aztec Empire, the United States, Ancient Greece, the Roman Empire, and the list goes on, have engaged in these kinds of actions. Not every policy action is a pareto improvement, so, someone is hurt, at least in the short run, each time a new policy comes out. What makes this viewpoint different is that entire groups pay the price instead of a small collection of individuals who have no connection other than interest.

The possibility from this kind of policy endeavor rises from the formation of large groups who can at any one time control the majority. Madison continues, “Whilst all authority in it will be derived from and dependent on the society, the society itself will be broken into so many parts, interests, and classes of citizens, that the rights of individuals, or of the minority, will be in little danger from interested combinations of the majority.” If there are not enough interests shared by enough groups and large bundles are instead monopolized under the umbrella of an uber Gruppen, we get a system that prioritizes the majority. In a duopoly, one group can claim to prioritize the wants of the minorities it supposedly represents, but given the a prior fractures among groups this will achieve little and may exacerbate the polarization and fracture of a society. This is especially true of democratic societies in which the median voter model holds true.

The Tale of Two Disciplines

Economics, as it is taught today, is split into two different disciplines. The first being economic theory, which is real science in that it attempts to explain the world as we know it. According to Einstein, theory should be a systematic description of the essential interrelations of reality. While the second being decision theory, uses mathematical or logical modes of operation to explain the end actions of individuals. In this mode of operation, the thing being studied can be via the usage of consistent axioms.

My Austrian friends have told me that the difference I am attempting to explain is that of praxeology and catallactics. The former being that study of purposeful human action and the latter being a study at how the market orders itself, how exchange happens. Robert Whately defined catallactics as the science of exchanges, which is something I am partial to. However, while these larger themes fit my prior complaints, much of the profession, including the material taught to students, does not use the heterodox methodology or terminology of Austrian economics. While I think heterodoxy is important, this leads to a different set of questions and not ones I will try to answer in this essay.

The broader point that I want to make is that the profession is split into two camps, and has been for a long time. The economic theorists have been left behind by the choice theorists. The science has lost its way in assuming that the logical nature of decision theory, which always ends in a binary variable of the choice is taken (1) or not taken (0). This is neither truly descriptive nor informative, minus what is the supposed outcome. Mind you, the outcome is only fictional until it happens in actuality. At that point, the supposed outcome and the actual may be different since each person, though they are subject to the law of demand, has a different set of constraints.

Our need for preference negation following the landmark paper, De gustibus non est disputandum, removes the source of variations via preferences from the field.  Stigler and Becker “show” that preferences do not matter. This has been a source of contention for many since, because surely any two given people will not act similarly in similar situations. If you remove what makes humanity, well, human, then what are we studying? Even more so, the current replication crisis in many fields shows that many studies are woefully underpowered or cannot be replicated. Why? What actions undertaken by a few people at a given time and place may not be the same actions undertaken by others in a similar experiment, albeit a different time and place. Economics is more complicated than choice theory.

Even when choice theory scales up into the macroeconomy, it cannot capture the complexity and vast amount of information necessary to be processed. The greatest tragedy of choice theory is that aggregates all of the actions taken by the individuals within the model. If you’ve ever seen the summation of utility curves, then you’re well aware of what I am talking about. Choice theorists don’t know how these utility measures came into being, they’ve assumed them into the model, nor can choice theorists tell you the magnitude of the utility. Not only that, but they assume that the summation works simply because preferences will cancel out. In a zero-sum world, there may be truth to that statement, but the world isn’t zero-sum, especially with the advent of zero-marginal cost technologies.

Janos Kornai said, “The ‘transplantation’ of the models of decision theory cannot, however, serve as a substitute for a scientific theory describing reality.” Choice theory won’t save the field, but it may keep us above water for a time. There is so much more to be explored, both the whys and the hows, but especially the patterns of entanglement.

Thus we are left with a void in economics, one that if filled would describe the reality of our world without reducing its inhabitants to a homo economicus.

Trash: Who’s to blame?

This essay is a response to NPR’s recent throughline podcast “The Litter Myth.”

The real question they want to ask is who is to blame, who is morally culpable for trash? At the same time, the cast of the podcast is engaging in the logic of collective action in that it’s costly for them to make any small impact, so they want to throw the cost of doing so on to corporations. Humans have been making refuse since time immemorial. Landfills and garbage pick-up have been a thing at least since Rome. Trash and refuse has been a huge problem in cities since then, especially since people often refuse to carry their trash out to the a known location; it was unsanitary conditions like these that contributed to the magnitude of the black death. Furthermore, the history of cities provides a context in which we know that humans often shirk in cleaning up after themselves: the logic of collective action. It’s nonsense to assume that trash started in the mid-20th century along with the rise of corporations. What is true is that modern recycling methods were started around that same time period. Everyone is individually responsible for their actions regarding the environment. A better argument for them might have been that since corporations produce more trash relative to consumers, the corporations should take the lion’s share in costs dealing with waste management. I know that back home, companies have to pay for their waste at a higher rate (per ton) than their residential counterparts. I imagine that’s true elsewhere.

The whole thing with the Keep America Beautiful campaign sounded like a “damned if you, damned if you don’t” statement. There might be a bootleggers and Baptists argument for the creation of KAB, but they don’t provide any evidence and charge ahead with hindsight bias. What is true is that KAB was very successful and was an important component in the environmental movement. (Though, their use of the noble savage trope was definitely racist and the whitewashed campaigns would be considered wrong by today’s standards.) This whole section seems to suggest that government regulation would have been the way out of the environmental struggles of that era, however, I must remind you that prior to the EPA, the USDA monitored pesticide use and Rachel Carson’s Silent Spring will give you a peak at just how costly that regulatory framework was on the environment.

Something I didn’t understand is the whole thing on consumables: if the corporations make things disposable, then people will buy more of them. 1) The backdrop of this argument is the use of non-refillable beer bottles in Vermont. Does making a bottle non-refillable encourage consumers to buy more from the company? 2) This statement implies that supply creates its own demand, which we know it doesn’t (What is the demand of t-shirts boasting a Super Bowl victory of the team who actually lost? Zero, yet many of these are pre-printed prior to the game.) Some things, like disposable plates and cups, do require people throw them away at each use, but it is still up to the end user to properly dispose of the product.

In the last section of the podcast, there’s a line that says something to the extent “imagine if that candy wrapper didn’t exist in the first place.” I think that’s a great idea to ponder, but one must consider the alternatives. Prior to plastic or foil wrapping, paper and cardboard were used, which are fine until you consider the food safety aspects. I’m not sure paper alone is good choice for the current supply chains. I have seen biodegradable wrappers recently and maybe that’s the way of the future, but we have to look at the costs and constraints of the now. Entrepreneurial discovery will pave the way for innovations.

What happens in this podcast is a mix of the logic of collective action and some cognitive dissonance to smooth over the rough edges of the arguments. They claim that corporations should hold the blame, while according to the corporations, it’s up to the end consumer. In reality, it is everyone’s responsibility to make sure that we properly dispose of our trash. Because once the producer or consumer purchases a product, they have assumed the property rights of that product. It is up to them to use, disuse, or transfer that good. The cleanliness of the environment is a public good, the producers of this show are looking for a way to free ride and remove their moral culpability from situation. It’s easy to blame something that is already disliked by your listeners, it’s far more difficult to find the middle path and accept responsibility for your own actions while still holding others accountable to theirs.

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.

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.

 

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.

 

More thoughts on “The Economy of Cities”

Jacobs’ main thesis is that cities experience growth through import replacement: the economies of the cities begin producing the products that they are currently importing from other economies. One of her examples was that Tokyo started manufacturing bicycles once they became technologically able (the costs became sufficiently low) to produce them in the city rather than importing the bicycles from abroad. What this entails is the internalizing of economic activity– a city may seek to be self-sustaining, and this seeking causes economic growth. But this comes at a significant cost: the city, and its contents, must always be in constant adaptation and change. In fact, Jacobs remarks, “The primary economic conflict, I think, is between people whose interests are with already well-established economic activities, and those whose interests are with the emergence of new economic activities.”

I do not think that this is merely an anti-rent seeking argument. Surely, there is some of that implicit in the statement; people who want to maintain the status quo may want to stifle further innovation and may do so by seeking legal and political tools to prevent others from infringing upon their profit opportunities. These interests may attempt to exert control over who may enter the markets via certain qualifying measures, certifications, and fee structures; some may go as far as attempting to set up a government-licensed monopoly. Jacobs’ argument speaks to something far more devastating to economic evolution: not in my backyard.

It’s not only the resistance of change from those who own the methods of production but the resistance from those who would benefit from future economic evolution.  She states, “Conformity and monotony, even when they are embellished with a froth of novelty, are not attributes of developing and economically vigorous cities. They are attributes of stagnant settlements.” Economic evolution must advance the interests and benefit the lives of the average person– an argument I heard earlier this week said the same thing of climate change regulation. Import replacement, as Jacobs describes it, is a process of entrepreneurial discovery and division of labor within a city. These processes are part of a larger Schumpeterian system of creative destruction: new economic activities evolve to replace older activities. These stand to increase the wealth of both the city and its inhabitants.

Who carries the costs of these import replacements? There are immediate costs of undergoing change; this is where the NIMBYs can strike with the most damage. By refusing to change or limit the amount of growth, those with interest in older economic activities can prevent the evolution of new ones before they even get started. There is a cost in saying yes to development, but remember, there is no cause of poverty — that is the base condition — there is a cause to prosperity, which a key to which is the change of economic activity. There may be short-run costs to those exporters of goods from the which the city previously consumed, but these will be made back in the long-run by more and better technologies being produced in the city. These technologies then get imported to other cities and rural areas. The long walk of progress determines that growth is not simply for some, but all can prosper in the long-run. Recent trends in poverty reduction are proof to this. The reason that so much food can be grow with so little labor involved originates in work and innovation done in urban areas, not with the farms themselves. As I noted in an earlier post, urban and rural economies must work in a cycle for both to survive. (This will probably be true until someone figures out to grow enough food in urban  areas; vertical farms aren’t enough to feed an entire city. A lot of this is due to the limited selection of foods that can be grown in a vertical farm.)

Jacobs has a wonderful bit on discrimination in cities and how it is inefficient for unequal governance to be operation. Prior to gender/race equality, an economy is losing out on a large portion of labor, creativity, and human capital. Engaging in such discriminatory behavior only allows for more stagnation, sooner.

Side note for future thought: If contracts are unable to be performed, then there will be inefficiencies. Think apple trees and bees– Where is the Coasean bargain?