Tuesday, October 21, 2014

Anybody that likes John Papola's new video on Elysium needs to google "colonialism".

I just haven't complained about Papola for a while, that's all.


Do people really walk away from that movie thinking it's a criticism of capitalism and technology?

Sunday, October 19, 2014

New and speedier modes of transportation

"But chiefly, like his senior countrymen, the young American studies new and speedier modes of transportation. Mistrusting the cunning of his small legs, he wishes to ride on the necks and shoulders of all flesh. The small enchanter nothing can withstand - no seniority of age, no gravity of character; uncles, aunts, grandsires, grandams, fall an easy prey. He conforms to nobody, all conform to him: all caper and make mouths and babble and chirrup to him. On the strongest shoulders he rides, and pulls the hair of laurelled heads."

- Ralph Waldo Emerson, "Domestic Life"

INEQUALITY DEATH SPIRAL!!!... misses the point

I was disheartened to read Kevin Drum write this about the IGM Piketty question today:
"Piketty doesn't say that r > g has been a big driver of income inequality in recent years. He says only that he thinks it will be a big driver in the future. 
This is good clean fun as a gotcha. But liberals should understand that it also exposes one of the biggest weaknesses of Piketty's argument: r > g has been true for centuries, but the rich have not gotten steadily richer over that time. Wealth concentration has stayed roughly the same."
It's nice that it's dawning on more and more people that the IGM survey is not that consequential for Piketty, and it's nice that Drum is spreading that point. But I think he's adding to the confusion by perpetuating this idea that if r > g it means that inequality grows without bound. This narrative is part of what's driving peoples' incredulity about an inequality which (as Debraj Ray has pointed out very clearly) is a standard result that pops out of standard growth models and doesn't have any of the dire inequality death-spiral implications people impute to it.

Piketty doesn't use it to predict a death spiral either. It's one of many fundamental equations he uses to talk about the capital-income ratio and the capital income as share of total income ratio. Rather than obsess over the r > g inequality death spiral stuff, I think people need to spend a little time with this set of equations (and I think guys like Kevin Drum should take the opportunity to walk readers through it). If you made it through middle school, you can handle the math.

First, the share of income from capital of national income (α) is:

α = r*β

Where r is the rate of return on capital and β is the capital-income ratio (the ratio of the capital stock to annual income). This is straightforward, I hope. The capital-income ratio already has national income as its denominator, and the rate of return to capital times the amount of capital you have earning that return is capital income.

Next we have the equation governing β, the capital-income ratio:

β = s/g

g is the growth rate of the economy (national income), and s is the savings rate. Economies that save a lot but don't grow fast will eventually accumulate a large capital stock relative to national income. Of course this can be substituted in the first equation so that we've got both β and α written in terms of the other three variables:

α = (r*s)/g

So whatever r, g, and s are even when r > g, it's important to realize that the capital share of income is going to stabilize at some point. Piketty says this can happen in a number of ways. The classic answer in economics is that r is going to decline (Piketty refers to this as "too much capital kills the return to capital"). It's a diminishing returns story. You could imagine ways that s and g could adjust too either for endogenous reasons (in other words - there's something about the way the economy works that pushes these variables in a certain direction) or for socio-political or technological reasons. And it's likely to be in flux in the real world and across societies of course. But one thing is very clear: r > g does not tell us that capitalists' share just keeps increasing forever and ever - certainly it doesn't tell us that that's a necessity.

Part of the Piketty story is that we are in a period of convergence which is why things are changing now. The wars and the depression wiped out significant portions of the capital stock, and post-war institution subdued convergence back to these steady state values for β and α. As some of these institutions have been dismantled, convergence seems to be happening more rapidly. On top of this we know a couple things:

1. That g is falling simply as a result of the demographic transition, and since g is in the denominator of both β and α, these quantities get less stable as growth slows.

2. Wage income has been an important factor driving inequality in the late twentieth century, and as generations turn over that wage income becomes a new avenue for the fundamental equations above to kick in and begin converging again.

None of this is a death spiral story - it's more of a convergence story. Piketty suggests we might not like what we're converging too and we might want to consider institutional arrangements that might push things in a nicer direction.

Before closing I'd also emphasize a point I've made before on Piketty - the fundamental equations are really about capital income and the capital share, not wealth or income inequality directly. Capital income is a big piece of the puzzle of income inequality particularly because of what we know about the ownership of capital, but inequality is much more institutionally determined than capital dynamics.

Sunday, October 5, 2014

Smith and Maskin at the Hayek Event

After the Kirzner talk, and after meeting a great guy with an interesting life story who I had only known online in the lobby during the coffee break, we filed back in to see Ed Phelps, Eric Maskin, and Vernon Smith speak. Except Ed Phelps was ill, which was very disappointing both because it's unfortunate he was ill and also because I had a question prepared for him. Peter Boettke read his remarks, which concerned Hayek and innovation, but my question was sufficiently specific that it didn't make sense to ask it. I was going to note that Hayek is well known to have supported many safety net programs provided that their design conformed to certain requirements for a liberal order. I was going to ask about Phelps's own proposal of low income wage subsidies (which I like as well, and which I'm writing a dissertation chapter on), and whether he thought that would conform to Hayek's requirements and how he thinks Hayek would respond to it.

After Pete delivered Phelps's remarks, Eric Maskin had an interesting discussion about mechanism design work that he thinks formalizes a lot of Hayek's insights on the uses of knowledge and the market's ability to economize on knowledge. I am not familiar with the work but the models seem to work a lot like a game theory model because you've got normal optimizing behavior but then you also have a message space (ability to send and receive certain kinds of messages) and an outcome function that translates those messages into outcomes. The work he discussed demonstrated Hayek's point that under certain conditions the market is the most efficient at using information - all non-market options required more channels for the information to move along than the market.

This is all interesting stuff, but it seemed like Arrow-Debreu for information, which is to say it didn't feel very Hayekian (or Kirznerian). Arnold Kling, in the audience, had the same thought and challenged Maskin on the point. I forgot the exact response but I believe he generally agreed that yes it's a very formal model which was different but still captured a lot of the same ideas. I was going to ask the same sort of question as Arnold but didn't get the chance (George Selgin got the last comment).

I was going to remark that I was anticipating that Maskin would have talked about mechanism design in terms of the rules of the game and (to put a more Buchananesque spin on it in honor of his recent birthday) constitutional order. With mechanism design you are asking - given the incentives and behavior of the agents, what arrangement of message spaces and rules will produce the outcome that you want. This is the same idea behind Buchanan's constitutional exercise or really any situation where you are thinking about how the rules of the game determine the outcomes (or possible set of outcomes) of the game.

I have less to say about Vernon Smith's talk. It was very nice of course and I agreed with most everything he said. He presented some interesting evidence that Hayek was skeptical of experimental testing of theoretical claims. I'm not sure how firmly Hayek held that view or if it was just a little methodological bluster, but it was still an interesting bit that he shared. Smith maintained a narrative you hear sometimes from Austrians that back in the day economists really were skeptical that markets worked. I have serious doubts when I hear these things, and I think some libertarian types tend to conflate trust in government during this period with rampant doubts about the market. Of course proving this one way or another requires a lot more than the anecdotes that are usually brought to bear.

Clarifying Kirzner before moving on to the laureates

I want to do a quick summation of what I've claimed about Kirzner to avoid confusion before sharing a few thoughts on the Nobel laureates at the talk on Thursday.

I want to make it clear that Kirzner does more work on the area of how we get to equilibrium and the role of the entrepreneur in getting to equilibrium than most mainstream economists. Brad DeLong points out in the comments that Frank Fisher is an important exception. He's talked about Fisher's work here before. This is similar to what I've said in my post on dynamics. We do talk all the time about how outside of equilibrium there are arbitrage opportunities that introduce the incentive to converge (or not) to equilibrium. Of course Fisher and Kirzner (and Brad DeLong) certainly others spend more time thinking about that than most of the rest of us. But this is quite different from the suggestions by Kirzner the other day that mainstream economists are missing something fundamental. So the message very much isn't "Kirzner is no good". The message I'm trying to get across is "Kirzner is not being fair in how he handles mainstream work". If he were to just say "I'm interested in this one problem that mainstream economists don't spend as much time on" that would be many times better than the sort of story he is currently spinning.

And I don't see what's wrong with saying that instead. It's more accurate and more humble.

Anyway, Austrians that like Kirzner tend to think that there is revolutionary potential in all this. Kirzner himself likes to say it's "radical". I think this needs to be more carefully assessed. If you strip out everything all economists agree on (but may spend somewhat less time on) from Kirzner - arbitrage behavior in disequilibrium that helps to get the system to equilibrium - what is really left of Kirzner to be "radical"? Advocates more familiar with Kirzner than me have to answer that question. My impression is not that much because none of his advocates have given me a reason to think otherwise (and they have an incentive to get me to think otherwise).

And please don't waste everyone's time with an answer about arbitrage out of equilibrium. Everyone knows that. That's pretty much the definition of "disequilibrium".

Friday, October 3, 2014

More thoughts on Kirzner: I'm not special

Bob Murphy played to my vanity in the prior post with this comment:
"Let me step out of character for a moment and compliment you [I don't think that's all that out of character - DK]: You are a "deep" kind of guy who likes to think about what he's doing. You spend a lot of time at my blog keeping tabs on how those wacky Austro-libertarians look at the world, you read Sumner to see what mischief he's raising today, you read Boettke and Boudreaux to see how they are straw-manning people this morning... You get the point (and I'm trying to be funny), you spend a lot of time thinking through stuff. Most people--including economists--don't do that.

So where am I going with this? The fact that you asked your micro class to think about finding equilibrium doesn't mean too much. It would be like me saying, "People say Austrians don't use math, but I taught a game theory class at Hillsdale." You are not a proxy for "the mainstream" since you keep abreast of a lot of approaches and like to think through what you're doing. You sort of gave away the game when you said, "But when we moved to Slutsky equation I lost them..." (or whatever). That's just what the Austrians say: They are doing intuitive, real-world economics, while mainstream does formal math models that are confusing and pointless.
He is referring to a point I made about how in a micro class I was teaching the week prior to the Kirzner lecture I asked them why they thought agents would grope toward equilibrium, what the incentives were for doing so, etc. - and that they gave (somewhat unsophisticated of course) market process answers.

Here's the thing, while I'd like to think I'd ask that anyway I didn't make that question off of the top of my head. I was covering a class for my adviser and I used his slides, and he used the textbook company's slides. Of course I guided the discussion how I chose to guide it but all of it was in the slides. My point still stands about the value of Kirzner: he thinks more deeply about this than most other economists. But the point is I'm not special. I genuinely think economists generally acknowledge the major points of market process theory, although of course they don't focus on it the same way. Very much like - as I alluded to in the last post - Newton acknowledged the reality of gravity and if I recall corresponded with people about possible explanations, but didn't worry so much about nailing that part of the problem down when he wrote up the Principia.

I'm not special. I'm not a great economist, I'm average and adequate at what I do. I didn't go to great schools, although I have nothing to complain about regarding my education. William and Mary especially is a very high quality school but the economics department, largely because it didn't have a PhD program, wasn't a superstar program or anything. With one exception* nothing I've come across in my education has been exceptional. I've used standard textbooks, had regular professors who generally had regular backgrounds themselves. They were very good professors of course but if you go to three schools you're bound to come across several of those (I had some bad professors too).

If I went to a Harvard or a Chicago I would worry that my outlook resulted from an exceptional background in some way - that I couldn't generalize from my experience to "standard economics education". But I don't have that background and I think I can say my experience is fairly typical (minus the unusual gender and Post-Keynesian, and even history of thought stuff I'm getting at AU, of course).

I think a much better explanation is that Kirzner is discounting the mainstream too much in a way that highlights his own contributions. Clearly the mainstream doesn't focus on Kirzner's research agenda with the energy that Kirzner focuses on Kirzner's research agenda. That's obviously true. But it seems to me that's a very different claim from the sorts that Kirzner was making the other day.

* The only thing close to a "best in the field" I've come into close contact with has been my work with Burt Barnow, who is one of the top experts in the job training literature.

More thoughts on Kirzner: Incommensurability

Thomas Kuhn liked to remind his readers that Newton didn't have much to say about gravity.


That sounds odd to most people, but if you know the argument it makes more sense. What Kuhn meant was that for Newton gravity may have been very important but it was just assumed. There was no great effort expended on figuring out why it was the way it was and where it came from, etc. Although the idea of incommensurate scientific paradigms had to do with many things, this fundamental point that different paradigms sought to explain different pieces of the puzzle was an important one.


Einstein wanted to explain gravity and that was a major element of what separated Newtonian from post-Newtonian physics.


I think it's instructive to think about Kirzner's work on the market process in these terms. Economists aren't dunces. They know there is a market process operating in the world. But they're like Newton in that they don't have much to say about it. Kirzner has a lot to say about it and doesn't care very much for everything the mainstream has to say about equilibrium models, despite the fact that many reasonable people insist that you can get a lot of important mileage out of those models! It doesn't matter. Kirzner says a fundamental point is being neglected.


In prior posts I confessed skepticism about the importance of Kirzner's departure from the mainstream. However, if I'm right here that the market process is analogous to gravity it means that Kirzner is far more significant insofar as he might represent a new paradigm for thinking about the economy rather than simply a scholar interested in a side-point that most people acknowledge but don't think is worth delving into in any detail.


It's certainly worth a thought.


So if the mainstream is Newton, Kirzner is Einstein, and the market process is gravity that bodes really well for the modern Austrian school, right?


Maybe. Maybe not.


The first problem is that you need more for a paradigm shift than just focusing on something that other people don't focus on. It needs to be something which, when attention is turned to it, you are able to explain paradoxes that the existing paradigm struggles with. Does market process work fit the bill? Ehhh... I'm not so sure. Nothing obvious springs to mind. Certainly none of the things that really puzzle mainstream economists seem to be suddenly solved by market process theory. I'm happy to hear candidates in the comments, but let's be very specific please. Of course the market process undergird all market activity but grandiose talk like that doesn't answer how it address specific scientific puzzles.


The second problem, of course, is that assigning the mainstream to Newton and Kirzner to Einstein is not the only option available. Kuhn talks about how Descartes and others with a mechanical theory of gravity offered (like Einstein but unlike Newton) an explanation of gravity rather than just responding to the problem with hand-waving. And we all know what happened to the Cartesian theory of gravity: nothing.


So is Kirzner a Descartes (or worse, a post-Newtonian Cartesian!) or is he an Einstein?

More thoughts on Israel Kirzner: Dynamics

A couple days ago Pete Boettke shared speculation from Thomson Reuters that Kirzner could win the Nobel this year along with Baumol. I have no thoughts on that - I don't know his work well enough to assess its merits. But that post and yesterday's events got me thinking more about Kirzner than I typically do, and one thing that I've been puzzling over (but didn't have well formulated enough to ask him yesterday afternoon) was what Kirzner would think of "dynamic equilibrium" and really the transition dynamics of that sort of model.


As I noted before, Kirzner's concerned with out-of-equilibrium behavior and if there is convergence to an equilibrium how that behavior gets us there. Contrary to Kirzner's own assertions this is not something that the mainstream is unconcerned with. One answer to this question that has been particularly amenable to modeling is the idea of transition dynamics and dynamic equilibrium. As far as Kirzner's reservations about equilibrium economics go it's something of a misnomer. On the stable arm nothing is stationary, people often aren't satisfied and they aren't finished doing things. But they are acting rationally, and when we identify dynamic equilibrium we are talking about a sequence of rational decisions that lead to a more stable equilibrium. The rapidity of convergence depends on various conditions.


Kirzner is very skeptical of the mainstream theoretical apparatus so I doubt he would think much of the point. But I do wonder what people who see things a little differently but who still appreciate what Kirzner has to say think about how transition dynamics in these models relate to his thinking about the market process. What are agents doing and thinking in dynamic equilibrium that's similar to what they're doing and thinking for Kirzner, etc.


As a side note, Vernon Smith made a vague reference to my line of thinking here in his speech (after Kirzner's). He started by talking about how he's been right a lot in his career, but he's also been wrong a lot and how he doesn't know much about the long-term future of things but he does know the next step and if he takes a series of good next steps he gets along pretty well (he broadened this point to people in general who get along pretty well in the world).


Too me this sounded in a very rough way like Smith was solving a Bellman equation. In this approach to dynamic programming you just worry about being optimal at every point in time. The future is nicely tucked away in the value function and you come to that when the future comes around. You don't waste time or energy worrying about planning and optimizing a long stream of decisions.

Forty Years After the Hayek Nobel: Thoughts on Israel Kirzner

Yesterday I attended an event at George Mason University celebrating the fortieth anniversary of Hayek's Nobel Prize. There were two sessions open without invitation - a keynote by Israel Kirzner and a panel discussion with Eric Maskin, Vernon Smith, and Ed Phelps. I was very much looking forward to hearing Phelps but unfortunately he was ill and his remarks were read. I'll talk about my thoughts on the Kirzner session in this post, and the laureates' session in another.

Israel Kirzner, professor at NYU, was described by Peter Boettke in his introductory remarks as the leading light of the modern Austrian school. Kirzner's work focuses on "the market process" (essentially how agents get to equilibrium - or at least how they get to wherever they're getting to) and the role of entrepreneurship in the market process. Kirzner is very much in that line of Austrians where, if you tell him you're a subjectivist he'd trump that by insisting that he (and not you) is a radical subjectivist. Indeed, "radical" came up several times in his talk, primarily to describe the advances made by Hayek and Mises in the 1937 to 1945 period. Kirzner presented what he called a revisionist history of thought to explain the lack of appreciation of Austrian economics between the late 1930s and the 1970s and the reason for the Austrian revival in the 1970s.

Kirzner's proposition is that after the debate with Keynes Hayek and Mises both turned their attention to other matters and the result was a "radical" advance in our understanding of the market process through Hayek's work on knowledge and Mises's work on socialist calculation and Human Action. Allegedly the mainstream did not appreciate how radical these contributions were and so they missed the boat until forty years later Hayek got the Nobel (for other work), the mainstream refocused their attention on the Austrians, and economists like Kirzner, Lachmann, O'Driscoll, Rizzo, and others were ready to demonstrate what the fruitful advances of 1937-1945 really had to offer. The lull and revival was therefore not all that surprising, and it mainly rested on the failures of the mainstream rather than the failures of the Austrians (a rather attractive narrative for an Austrian of course!).

I don't entirely buy this revisionist history, but what I do like about it is that it refocuses us on the work on knowledge, subjectivism, and economic calculation. I suspect the lull in interest in the Austrian school had far more to do with the failure of Austrian macroeconomics than the failure of the mainstream to appreciate this other work, but I like the opportunity to put the 1937-1945 work center stage nonetheless.

What bothers me about the revisionist account is that it relies too heavily on an implausible story about how mainstream economics is full of dunces. Kirzner argues that mainstream economists are preoccupied with equilibrium models where genuine competition and discovery doesn't really go on and most importantly nobody talks about how you get to equilibrium. There is a germ of truth to this insofar as mainstream economists don't spend a large share of their time on this problem (Kirzner does), but the idea that the market process is lost on them strikes me as misleading at best and borderline libelous at worst. I had to laugh to myself when Kirzner went through these points because just a week ago when I was covering an intro micro class for my adviser we were talking about market equilibrium and optimal decision making, and I posed precisely this question to them - what do agents do when they're not at an equilibrium that gets them to equilibrium? The students had a much easier time providing sound answers to that question than when I threw the Slutsky decomposition at them later in the discussion, and the answers more or less conformed to what Kirzner presents. What's more I think every economist has these market process stories in mind when they think about why getting to equilibrium (even if it's a constantly moving target) is reasonable.

I've made this point about Kirzner before (and it's worth saying at this point that I haven't read a lot of him so if someone that has has thoughts to add, please do), and often people think I'm denigrating the guy. I don't think my point should be thought of in this way. It's quite clear that Kirzner has thought about the market process in more depth and in different ways than other economists. He definitely deserves credit for that. What I challenge is the idea that these fundamental points are lost on the profession, or that the profession has gone down the wrong path by working with models that include a lot of equilibria. It should also be clear that I'm challenging the idea that any of this is really all that "radical".

So far I have a disagreement in the emphases of Kirzner. But I also had a problem with many of his actual claims. One astonishing thing he said was that it is a disequilibrium situation when one agent subjectively values the production of a good at $50 while another subjectively values the use of that good at $100. The entrepreneur, in pursuit of profit, takes advantage of this "arbitrage" opportunity, but an equilibrium perspective misses this entire dynamic that's at the heart of the market process. This is nonsense (although it's possible he didn't explain it as clearly as he wanted to). Even if we imagine a market in stable, boring ol' equilibrium there are going to exist agents that differentially value goods in this way. We call the difference between those values and the market price "surplus", and there's nothing at all outlandish about this point. When Kirzner calls this a "disequilibrium" he is confusing values with prices. Values never have to be brought into equilibrium with each other. A price establishes an equilibrium of behavior in the context of widely varying valuations that are likely to continue to be widely varying. The only sense in which we can talk about values being brought into equilibrium is in the case of the marginal good sold, but even that isn't really bringing values into (out of) equilibrium (disequilibrium), it's simply a byproduct of the marginal behavior of rational actors. So this was just an abuse of concepts.

Another thing I actively disliked about the talk was the idea that the mainstream relies on perfect competition, fully informed homogenous agents, and zero profits. We teach freshman some very dumb models that look like this, but for Kirzner to indict the mainstream of the profession along these lines is not becoming of a guy that's supposed to be the modern leader of the Austrian school. This is the stuff of internet Austrians.

Kirzner is clearly a very intelligent man, and he was an interesting speaker. I think he's thought more deeply about the market process and the economic function of entrepreneurs than most anyone. If I had the time to work through his writing, I'm sure I'd find a lot of value along these lines. But I think his vision of his own research program is deeply problematic and too easily discounts how interesting and intelligent his fellow economists are.

Friday, September 26, 2014

It's Caroline Joy Kuehn's first birthday today!

Hard to believe it's been a year.