Utopia, you are standing in it!

A while back, I wrote a post called “what economists should learn from sociology.” Consider this a follow up post – what sociologists can learn from economists. Let’s start with substantive topics:

• Micro 101: The basic tools of microeconomics are very useful. Supply and demand, comparative advantage, marginal analysis, opportunity costs, expected utility, etc. Sure, in the real world, people aren’t perfect calculators, but they aren’t morons either. If a situation is fairly well defined, people will compare options, assess costs and benefits, and so forth.
• Game theory: Interactionism is very popular in sociology, yet interactionist theories are often ad hoc when you get down to it. Game theory is a nice way to model interactions, even if it has limitations. The other nice thing about game theory is that the basics are fairly easy to learn compared to other topics.
• A focus on outcomes: Sometimes, I feel like sociologists are a…

| Peter Klein |

From Kenneth Boulding’s review essay on Samuelson’s Foundations, published in the JPE in 1948:

[I]t is a question of acute importance for economics as to why the macroeconomics predictions of the mathematical economists have been on the whole less successful than the hunches of the mathematically unwashed. The answer seems to be that when we write, for instance, “let i, Y, and I stand, respectively, for the interest rate, income, and investment,” we stand committed to the assumption that the internal structures of these aggregates or averages are not important for the problem in hand. In fact, of course, they may be very important, and no amount of subsequent mathematical analysis of the variables can overcome the fatal defect of their heterogeneity.

More on heterogeneity in macroeconomics here.

Our evil twin, Orgs and Markets, covers the Inside Higher Ed article that discusses how some sociologists have econ envy, an article that generated a bit of chuckling. And I can’t blame them: sociologists do have econ-envy. It’s a bigger, more prestigious field that has a lot of policy influence. Peter even cited examples where economists were responsible for eliminating sociology programs (Washington, Rochester), but, to my knowledge, no economics program at a major university has ever been eliminated.

When it comes to policy, I’ll side just a little bit with economists who poo-poohed the sociologists. If it’s something like setting interest rates, or the technical issues of taxation, I think we should get our advice from people who study the topic for a living. At the same time, sociologists should really stand up for themselves. Sociology is a discipline that’s contributed a great deal to our culture, often…

| Peter Klein |

Speaking of agency theory, today’s Dilbert deals with multitasking and, as usual, gets the problem exactly right:

| Peter Klein |

Joe Morgenstern’s recent rant about the horrible year in movies included a sidebar (scroll down) about cinema classics that appeared ordinary when they came out. Casablanca, for example, was considered just another patriotic war movie, which the studios were putting out by the dozen, and a syrupy one at that.

The sidebar reminded me of Josh Gans and George Shepherd’s essay on classic social-science papers that struggled to find a publisher. Akerlof’s “Market for Lemons” was rejected by the AER, JPE, and REStat before QJE finally picked it up in 1970. Williamson’s manuscript for Markets and Hierarchies was rejected by Brookings. Robert Lucas’s 1972 paper, “Expectations and the Neutrality of Money” was rejected by the AER on the grounds that it was too mathematical. William Sharpe’s 1964 paper that introduced the capital asset pricing model was initially rejected by the Journal of Finance because, wrote the…

| Peter Klein |

As with other technologies involving network effects, the early telephone industry featured competing, geographically overlapping networks. Robert MacDougall provides a fascinating history of this period in The People’s Network: The Political Economy of the Telephone in the Gilded Age (University of Pennsylvania Press, 2013). From the book blurb:

In the decades around 1900, ordinary citizens—farmers, doctors, small-town entrepreneurs—established tens of thousands of independent telephone systems, stringing their own wires to bring this new technology to the people. Managed by opportunists and idealists alike, these small businesses were motivated not only by profit but also by the promise of open communication as a weapon against monopoly capital and for protection of regional autonomy. As the Bell empire grew, independents fought fiercely to retain control of their local networks and companies—a struggle with an emerging corporate giant that has been almost entirely forgotten.

David Hochfelder wrote a thoughtful…

Becker is more sanguine:

Often stressed is that since larger countries have bigger domestic markets, companies in larger countries can utilize economies of scale in production. The movement toward free trade agreements and globalization during the past 60 years has enormously reduced the economic advantages of having a larger domestic market to sell goods and services. Small countries can sell their goods to other countries, both large and small, almost as easily as large countries can sell in their own domestic markets…The growth in the competitiveness of small countries on the global market is in good part responsible at a deeper level for the remarkable growth in the number of countries since 1950 from a little over 100 to almost 200 countries now. And the number of independent countries is still growing.

Posner demurs:

If fundamental cultural or religious differences, submerged by forcible integration, are not present in a…

“Only a failure of imagination, the same one that leads the man on the street to suppose that everything has already been invented, leads us to believe that all of the relevant institutions have been designed and that all of the policy levers have been found.”–Paul Romer, New Goods, Old Theory, and the Welfare Costs of Trade Restrictions

Since the year it was published, a preponderance of the scholarship devoted to Nozick’s Anarchy, State, And Utopia has focused on the first two thirds of his 1974 book. The first third, devoted to justifying the minimal state, has attracted the attention of anarchists and fellow libertarians. The second third is catnip for the disciples of John Rawls–Nozick uses a sketch of the common law based on (unsupported!) assumptions to illuminate some iniquities inherent to redistributing wealth. That bit has drawn fire from all comers for years. In fact, the book is…

Josh Hendrickson discusses Milton Friedman’s famous k-percent rule on his blog, using Friedman’s rule as a vehicle for an enlightening discussion of the time-inconsistency problem so brilliantly described by Fynn Kydland and Edward Prescott in a classic paper published 36 years ago. Josh recognizes that Friedman’s rule is imperfect. At any given time, the k-percent rule is likely to involve either an excess demand for cash or an excess supply of cash, so that the economy would constantly be adjusting to a policy induced macroeconomic disturbance. Obviously a less restrictive rule would allow the monetary authorities to achieve a better outcome. But Josh has an answer to that objection.

The k-percent rule has often been derided as a sub-optimal policy. Suppose, for example, that there was an increase in money demand. Without a corresponding increase in the money supply, there would be excess money demand that even Friedman believed would…

Lately, I have been reading a paper by Roger Backhouse and David Laidler, “What Was Lost with IS-LM” (an earlier version is available here) which was part of a very interesting symposium of 11 papers on the IS-LM model published as a supplement to the 2004 volume of History of Political Economy. The main thesis of the paper is that the IS-LM model, like the General Theory of which it is a partial and imperfect distillation, aborted a number of promising developments in the rapidly developing, but still nascent, field of macroeconomics in the 1920 and 1930s, developments that just might, had they not been elbowed aside by the IS-LM model, have evolved into a more useful and relevant theory of macroeconomic fluctuations and policy than we now possess. Even though I have occasionally sparred with Scott Sumner about IS-LM – with me pushing back a bit at…