Tag Archives: economics

Is Austrian Economics Pseudo-Science?

Razib of gnxp thinks so:

The “grasped a priori” part has really bothered me. I mean, I read psychology and history, I can’t derive it a priori. Recently I was going over some issues in modern Middle Eastern history, and learned that King Hussein of Jordan had apparently asked Israel for permission to send a brigade to Syria to invade the Jewish state during the 1973 Yom Kippur War. Honestly, I really don’t know if I could ever grasp Arab psychology a priori. The more and more I read about psychology the more I think that anyone who believes that they could develop an axiomatic system of human action from insights they grasped a priori is totally retarded (mad props to Aristotle though, he worked before the cognitive revolution)…

My readings in psychology and history makes it very difficult for me to understand how anyone could adhere to a Misesian form of Austrianism with its commitment to praxeology. In short, I really think praxeology is a rotten foundation for any system of thought.

I don’t care for the personal attacks in Razib’s original post, but he raises a good question: considering how bad we are at introspection, why should we trust introspection to build an economic order?

Anyone from Chicago Boyz care to answer?

Review of "A Farewell to Alms" by Gregory Clark

Greg Clark‘s book could easily be called “In Inquiry into the Nature, Causes, and Effects of the Industrial Revolution.” But that’s a boring title, unfit for the world-altering subject matter. So instead the book’s titled A Farewell to Alms, which sounds like the title of an adventure story — which of course, it is.

A Brief Economic History of the World

A Farewell to Alms focuses on three questions: What caused the Industrial Revolution? What were the Industrial Revolution’s positive outcomes? And what were the bad effects of the Industrial Revolution? Answers to these questions follow below.

1. What caused the Industrial Revolution

Clark’s analysis is generally limited to the past 800 years, though on occasion he reaches back as far as the roman Empire. Thus, causes that preceded the Christian era are not addressed. Books such as Before the Dawn or potentially Guns, Germs, and Steel better serve to lay the deep-foundations for why some places have more advanced civilization than others.

Thus, A Farewell to Alms focuses on comparing Europe, China, and Japan. In the centuries preceding the Industrial Revolution both the European states and the Chinese empire experienced territorial growth, through the use of navies to settle distant colonies or the settling of agricultural lands by Han under the late Ming and the Qing. Technologies improvements allowed Japan to outpace Europe during this time, in spite of being confined to a few islands.

Period England Japan China
ca. 1300 5.9 million 6 million 72 million
ca. 1750 6.2 million 31 million 270 million

Table 13.1, pg 267

Clark argues that by about the time of the American Revolution, an Industrial Revolution was inevitable in all three cultures. Europe, China, and Japan were all undergoing population growth limited by starvation. This meant that there was constant downward selection, meaning that even if here was no variation in thrift, prudence, and other virtuous traits at the beginning, these traits would be selected over time. (Clark does not go into the genetics, but these traits are highly heritable).

Higher European birthrates, according to Clark, just made this process faster in the West than the East.

Using literacy rates and interest rates, Farewell argues that China and Japan were on the same path towards industry, but were a few centuries behind.

2. What good came of the industrial Revolution

The first casualty of the Industrial Revolution was the landed class. Agriculture rent as a portion of gross domestic product has plummeted throughout the west. While this started before the Industrial Revolution, and in deed may be a cause of it, return on capital and return on skills also fell in this period.

There has never been time to be a propertyless worker with minimum marketable skills than right now, at least in the industrialized world.

Similarly, Industrialization led to massive building subsidies in much of the world. India benefited, for instance, from Western technology, capital, infrastructure, telecommunications, and management in spite of having a workforce much less efficient than Europe’s. Similarly, most of the benefits of the industrial production of England at the start of the revolution went to industrialized countries — such as the Netherlands and the United States — and the customers of the factories, rather than the Industrial Magnates.

Over the long run, economic growth has been a major force for lessening inequalities in the industrialized world since the Industrial Revolution.

3. What were the bad effects of the Industrial Revolution?

Some countries have been harmed by the Industrial Revolution. Clark emphasizes here the misery of some states in sub-Saharan Africa. For them, the major consequence of the Industrial Revolution is that modern medicine low allows people to be kept alive at a lower level of subsistence than was fomerly the case. Drugs, in other words, substitute for calories.

A Farewell to Alms is written at a level appropriate for an introductory, graduate-level seminar outside of economics. The book is denser than most, similar to The Blank Slate in its density of coverage. still, it’s not an economic ext, and the “technical appendix” doesn’t go much beyond algebra.

Also at tdaxp: Why no Industrial Counter-Revolution?

Blog Update Links

No central thread to today’s links, other than that they touch on topics previously discussed.

That’s all for now!

Christian Love, Public Goods, and Open Source

“Public goods” is the economics idea of something that benefits everyone and can’t be denied to anyone. The schoolbook example of a public good is a lighthouse, by some scary rocks in the sea. When the lighthouse is working, every captain, and not just those who helped pay for the lighthouse, enjoy the benefits of seeing in the nights. All boats become safe, and not only those ships whose owners have paid.

Another example of a public good is national defense. Everyone, common citizens, soldiers, and criminals, enjoy the military’s protection from foreign armies. Sure, the government can come after you in other ways if you don’t pay your taxes, but there is no way for the government to allow the barbarian horde to enter your home without allowing it to enter our national borders, as well.

Interesting, the Bible describes hatred as destroying public goods. In Malachi when God famously loves Jacob but hates Esau, hatred is operationalized by destroying things that all of Esau’s people would have enjoyed…

And I hated Esau, and laid his mountains and his heritage waste for the dragons of the wilderness.

Whereas Edom saith, “We are impoverished, but we will return and build the desolate places”; thus saith the LORD of hosts, “They shall build, but I will throw down; and they shall call them, The border of wickedness, and, The people against whom the LORD hath indignation for ever. “

Pretty heavy stuff.

Esau’s people lose the public good of collective security — they experience hate.

And so you don’t think this is just part of the Old Testament forgotten by the kinder, gentler Christians, Paul repeats the story in his Letter to the Romans. Yes, the same Paul who emphasized Love as the core of Christianity.

God’s providing us with a clue on the meaning of love and hate. Hatred means, among ohter things, destroying public goods. Love means, in part, building public goods. A loving, Christian government would thus build infrastructure, such as lighthouses. A loving, Christian government would thus bring security to the people with an army. But both lighthouses and armies fall short of a true love, because both involve taking things away from others in order to provide it to the public. Thus, true love by the community would involve generating public goods without the use of taxes — without police powers. “Forced love” is called rape.

A more loving public good are the open-source word processes and document formats. These are free, universally available, tools that allow professional word processing, spreadsheet calculation, and presentations. They have no marginal cost and no fixed cost. They are available to all people in all places, weather students or lawyers, Rwandans or Americans. OpenDocument is a public good. OpenSource OpenDocument is a public good. Encouragint the widespread adoption of the open source OpenDocument technology is as simple as using OpenDocument-compatible tools, such as free-as-in-speech OpenOffice and free-for-use Google Docs & Spreadsheets. Quiet evangelism, such as making your originals in ODT and sending those alongside Microsoft Word DOC files, helps.

But the government can help the people — all people — too. Recently, California became the fourth state to consider requiring that “all documents, including, but not limited to, text, spreadsheets, and presentations, produced by any state agency shall be created, exchanged, and preserved in an open extensible markup language-based, XML-based file format.” For little or no extra cost, California may liberate millions of Californians from the rentiers (ron-tyays) at Microsoft. Even better, the spread of this technology in California would have viral effects, ultimately making everyone’s information easier to make, easier to store, and easier to read.

Inside the Black Gangster Disciple Nation Crack Cocaine Gang-Corporation

In less than 24 hours I completed Freakonomics: A Rogue Economist Explains the Hidden Side of Everything. Mark Safranski already summarized Freakonomics better than I could, so my “buy this book” post will be a graphical summary of one of the chapters: Why Do Drug Dealers Still With Their Moms?

A heroic grad student named Sudhir Venkatesh worked with a crack cocaine gang — the Black Gangster Disciple Nation — for several years. After attempting to pass out a survey, which began

How do you feel about being black and poor?

(a) Very bad
(b) Bad
(c) Neither bad nor good
(d) Somewhat Good
(e) Very good

Which, besides displaying a lack of symmetry between (b) and (d), left off the correct answer ((f) Fuck you) and almost got young Sudhir killed.

Slowly, though, Sudhir gained their trust, and discovered the corporate structure of the street toughts.

At the top of the pinacle where the Board of Directors, whose twenty boardmen each earned half a million dollars a year. Life was good for a Director

20-man Board of Directors, at $500,000 per annum = $10,000,000 annual expense for BGDN

Below the Board of Directors are the regional Franchisees. Operating like Sheiks, they grossed around $400,000 a year. However, with the Franchisee’s autonomy comes fiscal responsibility. Most of the franchisee’s income has to be spent on expenses, letting the franchisee net $100,000 a year.

100 Franchisees, at $100,00 per annum = $10,000,000 annual expense for BGND

The Franchise of the Black Gangster Disciple Nation studied then had three officers: An Enforcer, who shared acted like Barnett’s SysAdmin, maintaining peace from internal threats

The SysAdmin

A treasurer who, just like in Hall Governments, kept charge of the organization’s money

The Money Man

And a Runner, in charge of logistics.

Amateurs Talk Strategy, Professionals Talk Logistics

The annual salary of three officers was $8,000 per year each.

$8000 / officer / year * 3 officers / franchise * 100 franchises = $2,400,000 / year expense for BGDN

Below the officers were 500 Foot Soldiers. But like the groundtroops of the System Administrator, their job is not violence. As the local Franchisee reported:

We try to tell these shorties that they belong to a serious organization… It ain’t all about killing. They see these movies and shit, and they think it’s all about running around tearing shit up. But it’s not. You’ve got to learn to be part of an organization; you can’t be fighting all the time. It’s bad for business.

Like Barnett’s SysAdmin, the foot soldiers are mostly “private sector” — their true job is salesman. Each of the 50 Foot Soldiers earned $3,960 (yes, much less than minimum wage) every year.

$3,960 / foot soldier / year * 50 foot soldiers / franchise * 100 franchises = $19,800,000 annual expense for BGDN

Below the Foot Soldiers are 200 “rank and file.” These interns wish to rise to the level of Foot Soldier, and pay dues for the chance to one-day rise up the corporate ladder.

$25.50 / R&F / year * 200 R&F / franchise * 100 franchises = $510,000 annual revenue for BGDN

To graph annual income, for an average Director, an average Franchisee, and average Officer, an average Foot Soldier, and an average Rank & File:

Graphically, we can chart the organization structure as:

Corporate Hierarchy

Or more traditionally, looking at the organizational structure as a “flow of security”

Flow of Security

Realizing we can look at the “hierarchy” as just one type of flow, it becomes obvious we can chart the “flow of capital” as well:

Flow of Capital

Which opens questions about the political economy of crack cocaine gangs…

Suffocated by Fat Cats…

However, in Black Gangster Disciple Nation’s defense, foot soldiers do make up the single largest payroll expense for their gang

…Or Starved By Labor?

One might note that if the Black Gangster Disciple Nation is typical of corporate-style crime, John Robb’s suggestions are dangerously wrong.

Interested in learning more? Buy the book.

Update: Stephen J. Dubner, a highly respected journalist and co-author of Freakonomics, was kind enough to link to me on the Freakonomics blog

Dr. Steven D. Levitt, Professor of Economics at the University of Chicago, as well as the other co-author of Freakonomics, was kind enough to comment below.

Update: Over at John Robb, Jamie links to this critique of this gangster of Freakonomics

They do present some anecdotal evidence that the gangsters were not well paid that doesn’t depend on the notebooks, but it’s if anything even weaker. The simple fact that someone lives with his mother is not actually knockdown proof that he is strapped for cash; something like thirty per cent of young Italian men do it for the simple reason that it’s better than cooking and cleaning for yourself. I also think it’s quite naïve to assume that when the gang members (who were, we shall remember, full-time drug dealers) asked Venkatesh to try and get them a janitorial job at the university, this showed that anything, even cleaning toilets on minimum wage, was a better life than the Gangster Disciples. I am hardly the most streetwise guy around, but even I can work out a couple of other possible reasons why a full time drug dealer might want a job which allowed him to wander round a university campus more or less at will. Students buy drugs[5].

Furthermore, even if we take the numbers in the notebooks as reliable, we are faced with the observable fact that crack dealers (even street soldiers) have expensive tastes and hobbies. Even leaving aside the question of trainers and jewelery (on which I have no hard data about ownership to argue against Levitt), it is an undeniable fact that even the most junior members of the Gangster Disciples were able to engage in the hobby of pistol shooting, a popular but expensive middle-class pastime which I would consider to normally be beyond the means of a burger-flipper at McDonalds. The non-salary compensation of JT’s street dealers might be really quite high; access to guns, free admission to nightclubs, favorable deals on stolen goods and clothing, regular social events with local rappers, it all adds up and compares really quite well to the fast food trade, and as far as I can see the informal healthcare plan was also quite generous compared to most mainstream employers in that it covered family members and had substantial death-in-service benefits which would have been worth quite a lot in a neighborhood that was not exactly Hampstead even for non-gang members. I find the seeming absence of any analysis of the non-salary component of compensation quite strange, particularly since the underlying work was done working with a sociologist who would at least have some analytical framework which one might use to measure the value of the benefit to the gang member of being in a gang and thus having some degree of status in a community where status mattered.

Read the whole thing

Interested in the graphics used in this post? Inkscape, OpenClipart, OpenOffice Draw, and Paint.Net are all free — as in speech!

Economist for a Flat Tax (Augmented Capitalist Flat Taxers)

Simpler Taxes,” The Economist, 14 April 2005, http://www.economist.com/printedition/displayStory.cfm?story_id=3861190&fsrc=RSS.

The Economist is a Market Liberal (what Forbush would call Augmented Capitalist) pro-gay-marriage, pro-prostitution, pro-Drug pro-War, pro-Clinton (twice), pro Bush (in ’00), pro-Kerry (in 04) British newspaper… which makes its agitation for a flag tax all the better

So much for the two main objections. What then are the advantages of being very simple-minded when it comes to tax? Simplicity of course is a boon in its own right. The costs merely of administering a conventionally clotted tax system are outrageous. Estimates for the United States, whose tax regime, despite the best efforts of Congress, is by no means the world’s most burdensome, put the costs of compliance, administration and enforcement between 10% and 20% of revenue collected. (That sum, by the way, is equivalent to between one-quarter and one-half of the government’s budget deficit.)

Though it is impossible to be precise, that direct burden is almost certainly as nothing compared with the broader economic costs caused by the government’s interfering so pervasively in the allocation of resources. A pathological optimist, or somebody nostalgic for Soviet central planning, might argue that the whole point of the myriad breaks, deductions, allowances, concessions, reliefs and assorted other tax expenditures that clog rich countries’ tax systems—requiring total revenues to be gathered from a narrower base of taxpayers at correspondingly higher and more distorting rates—is to improve economic efficiency. The whole idea, you see, is to allocate resources more intelligently. Yes, well. Take a look at the current United States tax code, or just at one session of Congress’s worth of tax-gifts to favourite constituencies, and try to keep a straight face while saying that.

Once tax codes have degenerated to the extent they have in most rich countries, laden with so many breaks and exceptions that they retain nothing of their original shape, even the pretence of any interior logic can be dispensed with. No tax break is too narrow, too squalid, too funny, to be excluded on those grounds: everybody is at it, so why not join in? At the other extreme, the simpler the system, the more such manoeuvres offend, and the easier it is to retain the simplicity.

In Britain, election notwithstanding, tax simplification is nowhere on the agenda: why not? George Bush has at least appointed a commission to look into tax reform. But its terms of reference are so narrow that it could not suggest a flat tax even if it wanted to. This is a great pity. A flat tax would not eliminate the need for spending control; it would not deal with the impending financial distress of Social Security and Medicare; it would not even settle the arguments about the so-called consumption tax (since in principle a flat tax could take as its base either all income, or income net of savings, in which case it would act as a consumption tax). There are things it cannot do and questions it does not answer. But the gains from a radical simplification of the tax system would be very great. The possibility should not be excluded at the outset.

Marginal Propensity to Invest in China

(S-I)+(G-T)=(X-M),” by Steve Antler, EconoPundit, 2 April 2005, http://www.econopundit.com/archive/2005_04_01_econopundit_archive.html#111244542924074849 (from The Glittering Eye).

I blogged before on the New York Times’ faulty economic coverage of China. Thankfully I’m not alone. While Wortall fisks the paper’s trade balance claims, EconoPundit discovers a startling figure

What I can add to the discussion is this: whatever meager data that do exist say the marginal propensity to save in the Peoples Republic of China is a massive 0.6 — meaning our treasuries and other assets have roughly the same sigificance to them as new sofas and kitchen appliances have to us.

Rather than “loaning” us money, in other words. they’re buying exactly what they want.

Two more thoughts

  1. Obviously, a secret to China’s economic miracle is that they keep buying future consumption. More than half of Chinese income goes towards investments. Even with low returns on those investments, that money compounds. Rapid growth in China’s wealth can be expected as long as this continues.
  2. With all this money piling up in China, the effects of capital liberalization are going to be awesome. This can be thought about four ways

    • Capital flight out of China
    • America, et al, diverting capital from China
    • China Buying Up American Assets and Capital

These aren’t good or bad except as to how they modify economic growth. But the changes will be scary for some in every country. While we work against protectionists in every country we must have sympathy for them. It is going to be a wild ride.

Overinvestment in China?

Investment Bubble Builds New China,” by Joseph Kahn, New York Times, 23 March 2005, http://www.nytimes.com/2005/03/23/business/worldbusiness/23invest.html (from Dawn’s Early Light).

Bill Rice, whose blog I added to tdaxp’s blogroll today, had earlier pointed on this article from the New York Times

But to an extent that is alarming some Chinese and Western economists, such investment itself is a main driver of China’s economy, which grew at a 9.5 percent pace last year. The investment binge, like any bubble, could produce unneeded factories and underused highways and power plants, weakening the country’s already shaky financial system.

So far, so good. China may be making foolish decisions, such as superhighways to nowhere or worthless airbases which don’t do anyone any good. Kahn’s piece also reports the obvious, that increasing the amount of available capital decreases the marginal utility of capital

Mr. Xu said the economic payoff from these huge investments had fallen sharply. He estimates that 15 years ago, China generated 50 cents of growth for each dollar it invested in fixed assets – roads, subways, and steel mills and the like. That return has fallen to about 20 cents for each dollar invested, he says.

I don’t know if he’s speaking in real or nominal money, but a 20% return is fantastic for investors. But it points to an economy starved of capital. Imagine if financing a dam on a credit card was a wise decision. That’s an economy that needs more money, now. But then..

Senior Chinese officials and most private economists agree that investment rates cannot remain at such levels without setting off high inflation, unneeded capacity and fresh piles of bad bank loans. The question is how much investment must come down and whether the reduction will cause a slump in the broad economy.

Too Much, or Too Little, Capital?

Nyt collapses into pop-Keynesianism. Among other criticisms…

  1. If new public-sector investment achieves anywhere near a 20% return, it shows a dramatic undercapitalization of the Middle Kingdom.
  2. Investment now reduces marginal costs later. Heavy investment should reduce future prices considerably (as goods can get to market cheaper, etc.).
  3. Bad bank loans have much more to do with a crooked banking system than capitalization. Crooked banks will get into trouble because they make stupid decisions, not because of the size of investmnets. Bank failures can happen in investment climates good and bad.

Eventually, the article almost finds its way back

They said China would have to limit investment to the high 30’s as a percentage of the gross domestic product to avoid widespread waste. Yet doing so would probably cause the overall growth rate to dive to perhaps half its current level. “At the heart of the imbalances in the Chinese economy,” they wrote, “is an unsustainable investment boom that has been in the making for at least four years and that will probably take at least several years to undo.”

Ah ha! So now the real problem is misdirected investment. That probably has a lot to do with one-party dictatorship and Nigeria-scale corruption. The solution is transparency and the rule of law, not starving China of investment.

And again, when arguing that investment has been misdirected from people into roads

Jiang Jihong, an official of the Communications Bureau of the Guangxi government, said local officials took the environment into consideration and adjusted the route to minimize the geological impact. But she said the highway was vital for the area’s overall development.

Yet some experts say that China’s poor inland provinces may need good schools and affordable health care more than elevated expressways.

Regardless, if there was too much capital in China the solution is obvious… allow the Chinese to invest internationally. Let capital flow from where there is more to less. This would also weaken the Renminbi, which would make Chinese products cheaper relative to other goods, which would make China more profitable for investment, which would cause capital to flow back into China…. In other words, adopt rational economic policies. Don’t complain about overinvestment.

An aggrevating article. Obviously written by someone interested in economist who understands big words, but without the knowledge or training to comprehend the situation. Disappointing.