Frank Knight on the role of abstraction in economics as an exact science
19 Sep 2014 Leave a comment
Film review – Elysium
03 Sep 2014 Leave a comment
in constitutional political economy, development economics, economic growth, entrepreneurship, history of economic thought, law and economics, liberalism, P.T. Bauer, politics - USA, property rights, Public Choice, Rawls and Nozick, technological progress Tags: democracies, movies, rule of law, The Great Enrichment
Elysium was on TV. When I saw it on the big screen, no one told me it was a depiction of contemporary capitalism and the class war.
I read it as a contrast between third world countries lacking the rule of law and capitalist democracies.
The ships shooting up to the space station reminded me of Cubans trying to cross into the USA by boat to Florida.
Sorry, but I am just a simple country boy from the back blocks of Tasmania.
Deirdre McCloskey: inequality is an ugly word – it frightens
20 Aug 2014 Leave a comment
in applied welfare economics, development economics, growth disasters, growth miracles, history of economic thought, income redistribution, liberalism Tags: Deirdre McCloskey, poverty versus inequality, The Great Escape The Age of Enlightenment, The Great Fact
HT: deirdremccloskey via cafehayek
Deirdre McCloskey on Adam Smith
05 Aug 2014 Leave a comment
in Adam Smith, history of economic thought Tags: Deirdre McCloskey
Alfred Marshall as a pioneer of human capital theory
21 Jul 2014 4 Comments
in history of economic thought, human capital, labour economics Tags: Alfred Marshall, human capital
Marshall viewed education as an instrument capable of lifting up the poor and relocating them into the middle class. The direct benefits come from eliminating much of
that wasteful negligence which allows genius that happens to be born of lowly parentage to expend itself in lowly work
The indirect benefits of education came from character formation:
[Education] confers great indirect benefits even on the ordinary workman. It stimulates his mental activity, it fosters in him a habit of wise inquisitiveness: it makes him more intelligent, more ready, more trustworthy in his ordinary work; it raises the tone of his life in working hours and out of working hours; it is thus an important means toward the production of material wealth; at the same time that, regarded as an end in itself, it is inferior to none of those which the production of material wealth can be made to subserve.
Marshall’s primary solution to the problem of poverty is education, but he also exhorts individuals to behave responsibly, with thrift and self control.
Milton Friedman on the onset of the Great Depression from the standpoint of 1930s macroeconomics
11 Jul 2014 Leave a comment
Adam Smith as a pioneering labour economist
21 Jun 2014 Leave a comment
in Adam Smith, health and safety, history of economic thought, human capital, labour economics, labour supply, occupational choice Tags: Adam Smith, Alfred Marshall, compensating differences, george stigler, human capital, The wealth of nations, wage determination
Adam Smith anticipated much of labour economics by basing it on his principle that individuals invest resources to earn the highest possible return. All uses of a resource must yield an equal rate of return adjusted for relative riskiness for otherwise reallocation would result.
The whole of the advantages and disadvantages of the different employments of labour and stock must, in the same neighbourhood, be either perfectly equal or continually tending to equality.
If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments.
Smith used this insight on be equality of returns to explain why wage rates differed. Workers care about the whole aspects of the job, not only the cash wage payment: it is the “whole advantages and disadvantages” of the job that is equated across jobs in a competitive market, not wage alone. Smith set out criteria that determined how wages compensated or were discounted for the different characteristics of specific jobs:
- the agreeableness or disagreeableness of the employments themselves: better for more enjoyable working conditions will lead an individual to accept lower wages for their labour. Likewise, unpleasant work will have a higher wage. Wages vary with the ease or hardship, the cleanliness or dirtiness, the honourableness or dishonourableness of a job.
- The easiness and cheapness, or the difficulty and expense of learning them: jobs that are difficult or time-intensive to learn will pay more. Those who invest the time are being compensated for their additional effort with higher wages. The opportunity cost of forgoing the time-spent in training will be compensated for through higher wages. The difference between the wages of skilled labour and common labour is founded upon this principle.
- The constancy or inconstancy of employment: workers who face only partial or inconsistent employment throughout the course of the year, such as seasonal workers of agriculture, must be paid more for their labour. Their wages carry them not only during times of employment, but also during times of unemployment.
- The small or great trust which must be reposed in those who exercise them: individuals who have high levels of responsibility in their jobs will be compensated with higher wages.
- The probability or improbability of success: this is an entrepreneurial element in wages. Employment where the chance of success is high will be paid lower than those who take more risks. If individuals were not compensated for risk, there would lack an incentive to seek employment that may not be successful.
The supply and demand for labour in different industries determines relative wages and the relative numbers of employees in different occupations. Individuals are willing to make a trade-off between less desirable occupations and increased income. Smith spoke of how these five circumstances listed above lead to considerable inequalities in the wages and profits.
George Stigler thought that the second greatest triumph of Adam Smith in his Wealth of Nations was his famous list of cost factors that generate apparent but not real differences in rates of wages and profits because of training, hardships, unemployment, risk and trust. This list was quoted almost verbatim by his successors down to this day and is the direct ancestor of both Alfred Marshall’s famous chapters on wages and of the modern theory of human capital.
Gary Becker and George Stigler on continuity in economic thinking
17 Jun 2014 Leave a comment
in Gary Becker, George Stigler, history of economic thought Tags: methodology of economics
this recession had got a lot worse, we would have seen two major changes: much more government intervention in the economy, and a lot more concentration in economics in trying to understand what went wrong.
Assuming I’m right and, fundamentally, the recession is over—a severe recession but maybe not much greater than the 1981 recession, or those in the nineteen-seventies—I think you are not going to see a huge increase in the role of government in the economy.…
Economists will be struggling to understand how this crisis happened and what you can do to head another one off in the future, but it will be nothing like the revolution in the role of government and in thinking that dominated the economics profession for decades after the Great Depression.
If the problems of economic life changed frequently and radically, and lacked a large measure of continuity in their essential nature, there could not be a science of economics.
An essential element of a science is the cumulative growth of knowledge, and that cumulative character could not arise if each generation of economists faced fundamentally new problems calling for entirely new methods of analysis…
[Economics] will continuously be confronted with new circumstances which call for more than a routine application of standard knowledge. Thus the energy crisis of the nineteen-seventies has provided much employment to economists, but it has not called for important changes in economic science…
The responsiveness of economics to environmental problems will naturally be more complete and more prompt, the more urgent the problems of the day. The response will also be more complete, the less developed the relevant body of economic analysis.
The responsiveness of macroeconomics to contemporary events is notorious. Keynes’s conquest in the nineteen-thirties was due to the fact that the neoclassical theory could not account for the persistent unemployment of that decade. A generation later, persistent inflation even with less than full employment was equally decisive in ending Keynes’s supremacy. If and when macroeconomics produces a good theory of the business cycle, its responsiveness to environmental changes will diminish sharply
Ronald Coase on blackboard economics
16 Jun 2014 Leave a comment
in history of economic thought, industrial organisation, law and economics, Ronald Coase Tags: blackboard economics, methodology of economics
This neglect of other aspects of the system has been made easier by another feature of modern economic theory – the growing abstraction of the analysis, which does not seem to call for a detailed knowledge of the actual economic system or, at any rate, has managed to proceed without it.
Holmstrom and Tirole, writing on The Theory of the Firm in the recently published Handbook of Industrial Organization, conclude at the end of their article of 63 pages that "the evidence/theory ratio… is currently very low in this field". Peltzman has written a scathing review of the Handbook in which he points out how much of the discussion in it is theory without any empirical basis.
What is studied is a system which lives in the minds of economists but not on earth.
I have called the result "blackboard economics". The firm and the market appear by name but they lack any substance. The firm in mainstream economic theory has often been described as a "black box". And so it is.
This is very extraordinary given that most resources in a modern economic system are employed within firms, with how these resources are used dependent on administrative decisions and not directly on the operation of a market.
Consequently, the efficiency of the economic system depends to a very considerable extent on how these organisations conduct their affairs, particularly, of course, the modern corporation.
Even more surprising, given their interest in the pricing system, is the neglect of the market or more specifically the institutional arrangements which govern the process of exchange.
As these institutional arrangements determine to a large extent what is produced, what we have is a very incomplete theory.
Four years before his Nobel lecture, Coase was more specific:
Marginal cost pricing is a policy is largely without merit.
How then can one explain the widespread support that it has enjoyed in the economics profession?
I believe it is the result of economists using an approach which I have termed “blackboard economics.”
The policy under consideration is one which is implemented on the blackboard. All the information needed is assumed to be available and the teacher plays all the parts. He fixes prices, imposes taxes, and distributes subsidies (on the blackboard) to promote the general welfare.
But there is no counterpart to the teacher within the real economic system. There is no one who is entrusted with the task that is performed on the black- board.
In the back of the teacher’s mind (and sometimes in the front of it) there is, no doubt, the thought that in the real world the government would fill the role he plays. But there is no single entity within the government which regulates economic activity in detail, carefully adjusting what is done in one place to accord with what is done elsewhere.
Coase argued that marginal cost pricing is not only inefficient, but even inferior to average cost pricing due to:
(i) the fact that under marginal cost pricing, consumers are not forced to pay the full costs of the goods they purchase, leading to potentially inefficient consumption choices;
(ii) the lack of information necessary for the government to determine whether consumers would be willing to pay an amount sufficient to cover the total cost of the goods produced, and costly nature of attempts to make such estimates; and
(iii) the fact that the governmental subsidy necessary to ensure firm survival under a marginal cost pricing scheme will likely be financed through distortionary taxes, thereby creating or exacerbating a distortion in one market at the same time that it corrects a distortion in another.
Some on the Left believe the @MontPelerinSoc is the ringmaster of a vast neo-liberal conspiracy
15 Jun 2014 Leave a comment
in history of economic thought, Public Choice Tags: conspiracy theories, FA Hayek, Milton Friedman, Mont Pelerin Society, neoliberalism, vast right-wing conspiracy
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Few had even heard of the Mont Pelerin Society until the late 1990s and the internet age. The ringmaster of the neoliberal conspiracy still has a very ordinary looking webpage.
Lead conspirator Hayek was so little known at his death in 1992 that finding extensive obituaries of him in newspapers is hard. Some may be behind pay walls. Of those that were found, they weren’t very long and forgot to mention Hayek as the leader of a global cabal that rule the waves :
When Keynesian thought prevailed and his reputation went into eclipse, Mr. Hayek turned to philosophy and psychology, which he first taught at the University of Chicago, where he wrote what many consider to be a second masterpiece, “The Constitution of Liberty “.
His son’s obituaries in 2006 were longer and more fulsome than his father’s mostly on the back of who his now famous father were:
Lawrence Hayek escaped from the formidable shadow of his father, the great economist-philosopher, Professor F. A. Hayek, into high-level medical research within the NHS, only to spend much of his final decade responding to the worldwide interest in the scholar many regard — along with Milton Friedman — as the father of Thatcherism.
Hayek, the Mont Pelerin Society’s and neoliberal conspiracy’s alleged linchpin wasn’t even able to get a job in the University of Chicago economics department. Along with Mises, their salaries were paid by a private foundation. Neither could get paid university appointments in the United States. Hayek was Keynes’s principal critic in the 1930s, and upon Keynes’s death in 1946, the most famous economist in the world at that time.
Despite being a colony of the vast neo-liberal conspiracy, mentioning Milton Friedman’s name in the 1980s at job interviews in Canberra would have been extremely career limiting. Not much better in the early 1990s.
- Back in the 1980s, the much less radical Milton Friedman was just graduating from being ‘a wild man in the wings’ to just a suspicious character in policy circles.
- If you name dropped Hayek in the 1980s and 1990s, any sign of name recognition would have indicated that you were been interviewed by educated people.
How times has changed. The reasons are well summarised by Bruce Caldwell:
But how important were [members of the Mont Pèlerin Society] in the emerging global consensus that began in the 1980s in favour of trade liberalization and privatization?
Were not, for example, the dismal performance of Keynesian demand management policies in the United States, Britain, and elsewhere in the 1970s; the heavy-handed actions of the trade unions in Britain during the “Winter of Discontent”; the sclerotic performance of countries like India who had embraced a modified version of the planning model for their own; and, of course, the patent economic and political failures of the East Bloc, far more important in turning the tide, however briefly, towards globalization?
Was not George Stigler (himself a founding member of the Society) right in his comment about economists that “our influence appears to be powerful only when we support policies ripe for adoption” (Stigler 1987, p. 11)?
see Daniel Stedman Jones (2012). Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics and P. Mirowski and D. Plehwe, eds. (2009), The Road from Mont Pelerin: The Making of the Neoliberal Thought Collective for the handbook on the cabal leading the vast right-wing conspiracy. For example,
The Road from Mont Pèlerin presents the key debates and conflicts that occurred among neoliberal scholars and their political and corporate allies regarding trade unions, development economics, antitrust policies, and the influence of philanthropy. The book captures the depth and complexity of the neoliberal “thought collective” while examining the numerous ways that neoliberal discourse has come to shape the global economy.
Masters of the Universe traces the ascendancy of neoliberalism from the academy of interwar Europe to supremacy under Reagan and Thatcher and in the decades since. Daniel Stedman Jones argues that there was nothing inevitable about the victory of free-market politics. Far from being the story of the simple triumph of right-wing ideas, the neoliberal breakthrough was contingent on the economic crises of the 1970s and the acceptance of the need for new policies by the political left.
The great enrichment – Deirdre McCloskey’s 2013 John Bonython lecture on ABC Radio
06 Jun 2014 1 Comment
in development economics, economic history, growth miracles, history of economic thought Tags: Deirdre McCloskey, The Great Enrichment, The Great Escape, The Great Fact, The Industrial Revolution
Capitalism has raised living standards worldwide by a thousand fold. Societies that respect innovation and entrepreneurship can expect more of the same.
In the space of just a couple of hundred years real incomes and living standards have risen dramatically. From peasantry to prosperity – how did it happen ?
According to McCloskey in her 2013 John Bonython lecture presented by the Centre for Independent Studies, it was ideological change, rather than saving or exploitation, that created this prosperous modern world.
McCloskey proclaims “it’s OK to be in business” and asks those critical of capitalism to re-think their opposition.
Business and enterprise, she suggests, is altruistic, cooperative and the best way to lift living standards in developing and emerging economies.
In a marvellous speech in India on the origins of economic freedom (and its subsequent fruits), Deirdre McCloskey aptly crystallizes the deeper implications of her work on bourgeois virtues and bourgeois dignity:
The leading Bollywood films changed their heroes from the 1950s to the 1980s from bureaucrats to businesspeople, and their villains from factory owners to policemen, in parallel with a similar shift in the ratio of praise for market-tested improvement and supply in the editorial pages of The Times of India…
Did the change from hatred to admiration of market-tested improvement and supply make possible the Singh Reforms after 1991?
Without some change in ideology Singh would not in a democracy have been able to liberalize the Indian economy…
…After 1991 and Singh much of the culture didn’t change, and probably won’t change much in future.
Economic growth does not need to make people European.
Unlike the British, Indians in 2030 will probably still give offerings to Lakshmi and the son of Gauri, as they did in 1947 and 1991.
Unlike the Germans, they will still play cricket, rather well.
So it’s not deep “culture.” It’s sociology, rhetoric, ethics, how people talk about each other.
Utopia, you are standing in it! 
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