Archive for the ‘economics’ Category
In the past, I have argued that it is erroneous to assume that all people must go to college. Some people don’t have the academic or emotional capacity for higher education. Many don’t learn much when they do go to college. Still others spend years getting degrees as a labor market signal. Individually rational, but not efficient. College is definitely good for *some* people, but not everyone.
Now, Paul Campos, a Colorado law prof, gives a succinct economic argument against the over-investment in college. I quote at length from his discussion of legal education:
A few months ago, I wondered if it would be better for people to pay a tax bill instead of an income tax. In that scheme, the state tallies up the cost of gov’t and divides by the size of the population. Call that number your “tax bill.” You discount for poverty and surcharge for wealth.
Two points. First, Tax Historian, a commenter, thought that I was arguing that each person get an individualized bill. E.g., if I drove more, I might pay more taxes for roads. That is not what I suggested and I agree it would be impractical. Rather, my suggestion is simple. At the end of each year, the state looks at its expenditures and divides by the population size. So if the federal budget was $300,000,000,000 (33o billion) and our population was 300,000,000, then each person pays $100. The rich might pay a multiple to account for lower income people who can’t pay at all or pay the full price.
Second, I was a little surprised by the hostility in the comments. Here’s the intuition so you can see where I am coming from. Currently, most tax schemes just assume that the state vacuums up a certain chunk of your income, or transactions, or assets. If you believe that the state just owns part of you, or that you just owe a chunk of your wealth to someone else, then sales taxes or income taxes or value added taxes seem normal.
However, if you start with the assumption that government provides services that can’t be provided privately, then it doesn’t follow that the state just owns, say 30% of your income or 8% of your transactions. Instead, you should first (a) figure out what you need and then (b) force people to pay up. That’s the logic of assessments in homeowner associations, for example. Let’s put it this way with an example. How do we shop for food? (a) We just give the grocer 10% of our income and hope he give us enough food or (b) We ask the grocer how much it costs and then pay the market value. There’s a good case to be made for the second option.
In response to Kieran and Ezra’s posts, Shreeharsh Kelkar of MIT’s Program in History, Anthropology and STS wrote a lengthy post about the nature of performativity arguments. A representative clip:
To put in yet another way, the difference between constructivists and realists is over the issue of prediction, and in particular over the issue of long-term prediction. Short-term predictions are possible for both the realist and the constructivist. But long-term predictions, say, about housing prices or computer prices 50 years from now, will be more difficult for constructivists to make than realists. It is difficult only because even objective factors that determine prices can be changed by long-term cultural work; and this cultural work is impossible to predict. The more confident you are about prediction, you shift to the realism side of the spectrum. The less confident about prediction you are, will make you more of a constructivist.
And this explains, finally, some of the arguments that have been happening in the Orgtheory comment threads. Would you like your regulator to be a realist or a constructivist? Realists argue that even the existence of regulators is premised on realism; for if there were no objective factors constraining social facts (like prices) then how would one even begin to regulate something in the first place? I would disagree. I think it depends on the time-frame that the regulator is supposed to regulate. A regulator who is thinking about the future 50 years from now is simply deceiving himself or herself. For a regulator who is thinking 5 or 10 years down the line: it simply doesn’t matter whether he is a realist or a constructivist.
Check it out.
In public policy, we often make the argument that a service should be subsidized if it is important but somehow doesn’t generate enough money to be produced by the market. However, sports seems to fly in the face of that intuition. Sports is a heavily subsidized leisure activity even though it clearly has a viable market. For example, colleges subsidize sports teams, cable tv subsidizes sports channels, and cities subsidize stadiums. National governments will even subsidize large events, like the Olympics or FIFA events. And in many cases, the money is never recouped. Why?
A few possible answers:
- Sports legitimize organizations.
- The average voter is a sports nut.
- Public choice: administrators approve sports because it helps them, though not other people.
Other explanations? I am not anti-sports, but as a billion dollar industry, it seems as if sports doesn’t need any additional help. sports subsidies seem deeply misguided.
I teach a course on organizations, work and the economy for undergraduates. It is aimed at lower division students. I want to do one or two lectures on “fincialization,” the growth of jobs in finance, the shift in wealth, and so forth. Alternatively, one could teach a lecture or two on the topic of “the 1%.”
My issue is that there don’t seem to be many good essays on this topic aimed at undergraduates. I want an essay that is nuts and bolts, not a think piece. Something like a meaty Contexts piece with some strong charts and graphs on income inequality in the age of financialization.
A few days ago, Steve Levitt wrote a post on the Freakonomics blog that caught many people by surprise. On December 10, 2012, Levitt posted the following on Freakonomics:
In academia, it is seen as an honor when someone wants to reprint one of your published papers in an edited volume of collected papers. It is really an honor if someone wants to take the time to translate it into another language.
Roland Fryer and I feel so honored.
Back in 2004, Roland and I published a piece in the journal Education Next describing our research on racial test-score gaps. That paper was recently translated into ghetto English. The new version is here. It is a must-read (although very, very NSFW). Usually something gets lost in the translation, but I would say in this case it is an improvement.
If you click on the link, you see a version of their paper that uses profanity and street slang. Many readers will probably find the translation offensive, as do the commenters on the Freakonomics blog. It’s very disappointing to see such an accomplished scholar lower himself by using crass and racially charged language.
A few days ago, I asked if readers believed in school effects. The poll suggested that most orgtheory respondents do believe that schooling makes a difference. In the comments, many people asked: what counts as a school effect? joshtk76 noted that different features of schools seem to have different effects on students.
Ok, let’s sort this out. First, in the sociology and education literature on schools, there is a statistical definition of a “school effect.” It simply means that if we assign a variable for a type of school (e.g., public vs. private) or specific school (Indiana University), then there will be an effect on the dependent variable of choice (e.g., income or learning measurement). A lot of classic studies in sociology and economics then play the game of making the effects go away. For example, Coleman’s study used family background to make school effects disappear. Card and Krueger try to measure student aptitude to make college specific effects disappear. Often, school specific effects are reduced or go away entirely. The flavor of many studies are like that – add family, or cognitive ability, or whatever and school effects diminish.
Now, as the commenters note, there is still some ambiguity. There is stuff that is school specific that is not “school,” such as your friends at school. Luckily, the literature does give some guidance. For example, we do know that there are teacher effects. There seem some teachers who are really good at teaching. If a school has good teachers, then students will learn more. On social capital, the evidence is mixed. If you read Muow’s work on networks and jobs, the evidence is mixed, which suggests that social capital from schools doesn’t have that big of an impact.
If the evidence is so mixed, I wouldn’t put a whole lot on school effects unless there is a strong reason otherwise. For example, elite occupations (e.g. academia) seem to revolve around certain elite schools. Another example: very low SES students, the one group where we consistently find school effects. So when thinking about school effects, your presumption should be “not much, but I am willing to consider the evidence for specific groups of people.”
One of the most puzzling things about public policy is the insistence on tax rates. For example, there was constant debate over Mitt Romney’s tax rate. Did he pay more or less of annual income in taxes than the average American? Probably less, but I find the whole discussion odd because nobody has told me the “correct” tax rate. What, exactly, should Mitt Romney pay? What should anyone pay? What’s the magic number? No one told me.
The underlying point is that the federal and state governments are not funded in the same way we fund other things. Normally, we demand certain items, like food or housing, and then we are handed a bill. In contrast public services are funded mainly through income taxes. The state garners a portion of your income which goes into a pool of funds, and the legislature decides how to spend it.
I am wondering if there is a serious argument to be made for replacing the income tax with a tax bill system. In other words, the legislature decides what is to be spent for the year and Americans each get a bill for their portion of the services. The benefits of a “tax bill” system would be:
- Transparency – People would actually understand their tax obligation. “We spent $14 trillion and I owe 1/300 millionth of that.”
- Simplicity – Instead of having all kinds of differing tax rates for different types of income, you would get one bill.
- A focus on services, not guessing the “right” rate for people of various income levels (rich or poor).
- Easy to make progressive – The tax bill would be weighted by income. The very poor would have their bill marked down to zero. To compensate, wealthier citizens would have a “multiplier.” People, say, in the top 1% might have to pay for five additional people at the bottom.
- No surprises – folks who come into money or assets wouldn’t be socked with little known tax laws such as the alternative minimum tax or estate taxes
- Equality between capital and labor – currently, investments get a huge discount. That would be done away with.
- Caps on tax – In exchange for explicitly subsidizing low income people, the wealthy would have a cap on their income tax. Once you have paid your share and helped out some folks at the bottom, you are done paying your taxes for the year.
The tax bill method still has some problems. For example, to figure out your discount or multiplier, you would probably need a system for allowable deductions and gains/losses, and that would almost certainly be subject some arcane regulations. Despite that problem, the tax bill system is worth discussing because it shifts the discussion from “you owe X% of your income” to “these are the services that you consume.” I’d be interested in knowing if economists or policy wonks have ever studied such a system.
A couple of times a year, a student walks into my office with the following story:
Thanks for meeting with me, Professor Rojas. I need some graduate school advice. I’m majoring in economics [or soc] with a minor in math [or computer science]. But I’ve also taken some sociology [economics] courses as well. My issue is that I’m drawn to sociology – and I love social theory class – but I feel more pressure to do economics graduate school. What do you think?
First, I give the “don’t go to graduate school speech.” I want to make sure that they understand that graduate school is a serious choice. I try to scare them away. I also insist that they buy my book, which is the best generic advice they can get on graduate school. Then, if they still want to do it, I say the following about the econ/soc choice:
Economics and sociology are wonderful fields but they are very different. Sociology is a rich, highly diverse field. It is very eclectic and inherently interdisciplinary. Economics is, currently, a field that has many applications but a relatively narrow toolbox. The field is now a sort of engineering, where success is measured by mathematical problem solving.
There are also very different professional rewards. Sociology is intellectually flexible, but adheres to the arts and sciences model of graduate education. It will take you about 7 years and you’ll make a modest income. The upside is that sociology isn’t as bad as other arts and sciences in that you can work in sociology, political science, anthropology, business, public health, social work or education, depending on your specialty.
Economics is more like a well functioning professional program. A short time to degree, with a number of highly paid options upon graduation. If you are worried about math, don’t be. They only admit folks with strong math skills and many economics programs have “math camp.” With a few exceptions, like Chicago, weeding is rare compared to most arts and science doctoral programs. Also, once you get past the first year, you can choose a low math specialty. The fancy math is for professors aiming for top 20 programs and who compete for top journal space.
Ultimately, I tell students to choose the field where they feel they can make the best impact. If you are magnetically drawn to social theory, don’t sign up for a lifetime of welfare theorems. On the other hand, if you are on the margin, the fast time to degree and the high pay-off are hard to argue with.
If you look at the list of department chairs here at Indiana, you’ll notice that the first few were chairs of “economics and sociology.” I thought the old combined economics and sociology department at Indiana was some historical accident. That is, until I read The Emergence of Sociology from Political Economy in the United States: 1890 to 1940 by Cristobal Young. The article, published in the Journal of the History of the Behavioral Sciences, makes a few simple points:
- Economics came first and sociology was added to existing programs. Solo sociology programs, like Chicago, were in the distinct minority.
- Most sociology programs were part of economics programs until the 1920s.
- There was still much collaboration between sociology and economics until the 1940s.
- Once economic institutionalism finally faded, ties between disciplines faded.
- The separation really started when sociologists started their separate meetings.
What to make of this history? A few thoughts: 1. Heterodox economists should just give up on mainstream economists and hang out with sociologists. 2. There was some sort of hybrid disciplinary action going on that got truncated in the 1940s. It probably happened on both sides. Mathematical formalism made strides in economics, while structuralism appeared in sociology at the same time. These formalizations probably created needless rifts between disciplines. It might be worth seeing if that multi-disciplinary history can be reconstructed.
Others continually on the short list include Yale University’s Robert Shiller. The father of behavioral finance — a celebrated 1981 paper by Mr. Shiller struck an early blow against efficient markets hypothesis — he also sounded warnings on both the dot-com bubble and the housing bubble.
Also mentioned in previous polls: University of Chicago Booth School of Business behaviorist Richard Thaler; Harvard macroeconomist Robert Barro; and University of Chicago econometrician Lars Hansen.
Thomson Reuters has another method of coming up with Nobel predictions, based on how often an economist’s papers are cited and how “high impact” those papers are. The Thomson Reuters picks are: MIT‘s Stephen A. Ross for his arbitrage pricing theory; Nuffield College‘s Sir Anthony B. Atkinson and Princeton University‘s Angus S. Deaton for research on incomes and outcomes; and Mr. Shiller of Yale.
But there are plenty of other economists who could get the nod. Among them: Jean Tirole, of France’s Industrial Economics Institute, who’s an expert on the workings of “two-sided markets,” where different parties participation is contingent on the participation of other parties (think Google advertisers and Google users). And Yale’s William Nordhaus, best known for his work on environmental economics.
High status economists are encouraged to comment.*
* But don’t write a dumb comment about how the economics prize isn’t a real Nobel, or how economics isn’t a science, or how people didn’t predict some economic crisis. That was really cool to say, like, ten years ago.
About two weeks ago, there was an interesting post at Econlog about the relative importance of civil rights for libertarians. The issue is that libertarians often hype other issues, like taxes, more than civil rights. Not too much discussion about discrimination, Jim Crow, and so forth. A blogger from the pro-immigration website Open Borders asked how often libertarians argued against, for example, segregation.
I think the commenters (myself included) got it right when we said “some, but not much.” In other words, from time to time, libertarian intellectuals did talk about the evils of segregation. Usually, the issue is couched in terms of the use of state power to prohibit blacks from holding property and practicing certain occupations, like the law. Sometimes it was a commentary on what was good and bad in the Black freedom movement. There is the occasional talk of opposing colonialism. But overall, it was not an overwhelming response.
The relatively weak answer to Black oppression is puzzling. Opposing Jim Crow was a no brainer from the libertarian point of view. Blacks had been slaves, which is the antithesis of personal freedom. Then, after Reconstruction, they had been subjected to humiliating and painful legal regulations in addition to extensive personal violence. While libertarians may disagree with liberals about the remedy for state violence and segregation, you would think that they would have been marching arm and arm with liberals in the 1960s.
But that didn’t happen. Black repression takes a back burner on the libertarian shopping list. But why? I think it has to do with the sociology of elite libertarians. Read the rest of this entry »
In a series of posts about real utopias (see the earlier posts by Gar Alperovitz and Jerry Davis), we’ve invited Fred Block, professor of sociology at UC-Davis, to write about his session that will take place Sunday at 10:30 at the ASA conference.
My Real Utopia proposal for this ASA meeting is on “Democratizing Finance.” It is posted at the Real Utopias website. Writing this was much more difficult than I ever imagined, and this draft still needs a lot of work. It was hard because at the current moment, getting unemployment in the U.S. down to 7% seems unimaginably difficult and unrealistic goal. It follows that major structural changes such as democratizing finance appear to be wildly utopian with no element of realism whatsoever. The other problem is that almost all the work we have in the sociology of finance is focused on what happens in one or another specific market. We have very little work that generates an overview of the financial system as a whole, but serious reform has to look at the entire structure.
My argument proceeds through the following steps:
Yesterday, Jenn posted about the findings from the SNAAP survey, which show that many arts majors do rather well. While they don’t always have careers as practicing artists, they often have arts related jobs and have satisfactory post-graduation lives. This raises a question: what is the link between college major and post-graduation life course?
My hypothesis is that the jump from college major to post-graduation life is influenced by the following factors:
- Labor market credential: Is there an industry that the major trains you for? If so, how big is that industry? What is the career trajectory of people in that industry? Note: Such majors may not give you skills, just the credential (e.g., education).
- Ability signal: Some majors are harder than others. Some majors get you a better job because the major is a signal of high IQ/cognitive ability.
- Human capital: Some majors provide concrete job skill (i.e., computer science).
- Taste: Some majors require that people have an intense taste for a subject.
- Precision: This is more ambiguous, but what I mean is that some majors require people to produce very precise outputs, which requires a very different mindset. For example, in the humanities, performing music is relatively clear cut, compared to writing an essay.
The implication of the model, controlling for other factors:
- For college majors that are credentials, we expect employment, income, and satisfaction for correlate with the financial health of the industry the major is tied to.
- The higher IQ needed for completing the major, the higher the income and lower unemployment.
- Income and employment will increase with the demand for skills that happen to provided by the major (e.g., computer science was a niche topic in the 1970s, but a money maker in 2000).
- Taste: Satisfaction with the major correlates with how much you have to love the major to pursue it.
- Majors that require precision have graduates with lower unemployment and higher incomes.
When it comes to understanding the link between major and behavior, it helps to sort through these factors. I’d say the SNAAP results definitely reflect #1. There is now a fairly healthy arts sector in America that includes schools, museums, non-profits, curators, and other venues. Even those who have no desire to be an artist, might still pursue an art major as a credential. There’s also #4. People enjoy the arts a lot.
I think the visual and performing arts are different than many other humanities and social studies majors because of #5. While it’s hard to flunk someone for writing a vague essay, you probably wouldn’t far with a similar level of musical performance or figure drawing. To be even moderately successful in a traditional arts major, you can’t fake it. That ability to actually master a skill at a level that another expert (the teacher) can recognize as progress probably carries over into the jog market.
Economist Thomas Sargent made recent news after accepting a two year position at Seoul National University for $1.25m a year. We must ask – is SNU getting a good deal? As they say in economics, you gotta start with the utility function:
- University prestige: Perhaps SNU is trying to boost its global research ranking. According to wiki, it’s already a highly ranked school – and they already have a Nobel prize winner and a Fields medalist. Sargent’s hire may help a little. Is one economist enough to boost a school’s rank from 4th in Asia to, say, 2nd or 3rd? Unclear.
- Department prestige: I know the econ hierarchy enough to know that SNU isn’t considered a cutting edge place for economics, even though it may do well in comparison to other Asian schools. Sargent’s hire will definitely boost the department’s visibility. If he co-authors with some faculty or graduate students, he’ll help their careers. But long term, it’s harder to see how a 69 year old academic will build a program into an international powerhouse. But it might happen.
- Scholarly production: According to Google scholar, Sargent has produced one book and eleven articles in the last five years. The book (Robustness) has about 300 citations. The articles range from about 40 to 80 citations. Let’s say that the average article has about 60 citations over five years. The average article gets about 12 citations per year. During his two year appointment, Sargent may publish, say, four articles (about two per year) which will get 12 citations yearly. Once those four articles are published, they will get about 48 citations per year. SNU is paying about $26,000 per citation per year. This is surely an underestimate. The typical article will become less cited over time.
- University budgets: An SNU info page lists the total budget of SNU as 3,934,583 million KRW, which, I think, comes to about $3.1 billion. That’s a little bit bigger than the big state campuses in the US. If a star like Sargent can boost donations, grants, or simply prevent a budget cut of about 1% (about $3 million), then he’s a bargain.
Please feel free to comment on star faculty, or how to get Fabio’s salary in that range.
The press conference after the 2009 announcement, with a brief summary of her research.
Elinor Ostrom passed away, after a bout with pancreatic cancer. Professor Ostrom was a leader in political science. Her career was dedicated to studying how people in the real world solved the commons problem. Her book, Governing the Commons, is a key work in public choice economics. She also was an excellent citizen at IU and in the professional worlds of political science and economics. At IU, she created the Political Theory and Policy Analysis Workshop, one of the nation’s leading centers for the study of political economy. She was also APSA president and president of the public choice association. In 2009, she was awarded the Nobel memorial prize in economics. Personally, she was gracious. We interacted a few times. She was always positive and supportive of my work. She was also an advocate of young scholars and helped many in their careers. She leaves a great legacy. Read previous orgtheory posts on Ostrom here.
One of the most widely discussed research papers in higher education from the 2000s was “Estimating the Payoff to Attenting a More Selective College: An Application of Selection Observables and Unobsersvables” by Stacy Dale and Alan Krueger. The standard interpretation is that the paper shows that there is no link between college attended and future income. In other words, the specific college you go to doesn’t matter much. A number of people, including Robin Hanson and Shamus Khan, have argued that this is an incorrect reading of the paper.
So what does the paper say? First, they start with a discussion of biases in wage/education regression models. The issue is that the match between colleges and students is highly non-random. Smart students apply to competitive colleges, financial aid creates more bias, etc. So tossing in a variable for college attended can produce biased estimates in regression models.
Their solution is to find a data set where you know that people have similar academic skills and opportunities, but chose different colleges. There is such a data set, College and Beyond. It tells you where people got accepted into college and where they went. So you can compare people who got accepted into an elite school and accepted vs. people who got accepted and went to a non-elite school.
The answer is to be found in Table III on page 1507. In the models without matching, there is a correlation between school selectivity and income. This is what Robin Hanson, and others, point out. But these estimates quickly shrink when you account for matching. The OLS estimate of the effect of school selectivity on log-wages drops from .07 to about .03. Then, when you account for similar college application patterns, the effect becomes negative! In discussing these models, D&K state: “The effect of the school-average SAT score in these models is close to zero and more precisely estimated than in the matched-applicant models.” Further, on page 1511, “The coefficient (and standard error) on school average-SAT score was a robust .065 (.012) in the basic model, but fell to -.016 (.023) in the matched-applicant model and .010 (.012) in the self-revelation model.” So I say “1 point” for the standard reading of the paper and “0 points” for the critics. The correlation between school quality and income is not robust. It is clearly tied to unobserved variables.
Now, there is a lot more to the paper and much of it supports Robin, Shamus, and others. For example, D&K point out that schools can be measured in ways other than SAT scores. If you toss in dummies and then account for matching, there does appear to be some schools that affect later life income. Also, as I’ve always pointed out, D&K point out that the paper’s main finding, the non-robustness of the college SAT-income correlation, is not true for particular subsamples, like students from poor families.
What is the take home message? It’s actually simple, school effects often disappear when you account for unobserved heterogeneity, though colleges matter for some students and particular colleges may have income effects. But don’t take my word for it. This is how D&K state it in the conclusion of the paper:
These results are consistent with the conclusion of Hunt’s [1963, p. 56] seminal research: “The C student from Princeton earns more than the A student from Podunk not mainly because he has the prestige of a Princeton degree;, but merely because be is abler. The golden touch is possessed not by the Ivy League College, but by its students.”
But our results would still suggest that there is not a “one-size-fits-all” ranking of schools, in which students are always better off in terms of their expected future earnings by attending the most selective school that admits them. This sentiment was expressed clearly by Stephen R. Lewis, Jr., president of Carleton College, who responded to the U.S. News & World Report college rankings (which ranked his school sixth among liberal arts colleges) by saying, “The question should not be, what are the best eolleges? The real question should be, best for whom?”
Read the original yourself.
Boston Review has a new article by sociologist Claude Fischer on the topic of poverty research. He covers a lot of ground in a few pages. For example, I didn’t know the following:
Critically, understand that the long-term poor are a small minority of a minority. Most of those counted as poor in a given year are poor temporarily because of setbacks such as layoffs, family break-ups, car breakdowns, or medical emergencies. (Note, too, that we are not talking about the severely physically or mentally disabled; the controversy is about the able-bodied.) Social welfare scholar Mark Rank estimates that about half of all Americans will be poor sometime between the ages of 25 and 75, and perhaps a fifth will go through both poverty and affluence. Only about 2 percent, perhaps even less, will be poor most of their lives from 25 to 60 years of age.
This by itself has an important policy implication. The lion’s share of poverty policy should be about helping people protect themselves from temporary income drops or helping people get satisfactory job/income levels after a recession.
Fischer then approaches poverty from a cultural toolkit perspective. If you are middle class, you demand things. If you are poor, you know your place and keep your head down:
In their [poor people's] worlds, staying humble is usually the best way to keep their jobs or their kids in school. Sharing what money they have rather than saving it, or risking a job to drive a friend, increases the odds that they will be helped when the inevitable crisis hits. And where there are many predators, it makes sense to be distrustful or even predatory in turn.
In other words, being middle class involves a balance of professional cooperation and conflict. Being poor is about avoiding workplace conflict and inefficient handling of personal relationships.
A question for my brothers and sisters in the economics profession: Why do very different private colleges charge roughly the same tuition? For example, a full blown elite research 1 school like the University of Chicago charges about $42k per year. Harvard charges about $39k if you add tuition and the required health fee together. An elite liberal arts college like Swarthmore charges about $40k a year. A much less well known private college like DePauw charges $38k a year. Colgate charges about $45k per year.
The big savings come from going to tiny schools (e.g. Coe charges $33k a year, or Notre Dame of California charges $24k a year). Why is the price/prestige curve flat except for tiny liberal arts colleges? If you believe the Dale/Krueger paper on college choice and income (e.g., doesn’t matter which college you go to, for the most part), then these prices merely reflect that colleges are just selling a generic job market certification that any institution can provide. Other explanations?
Guest blogging for Megan McArdle at the Atlantic, Garrett Jones summarizes a new paper in the American Economic Review showing that books sales predict business cycles:
She [Michelle Alexopoulous] found that books really do predict booms. In her paper looking at new books from 1955-1997, she found that new technical books predicted between 1/6 and 1/5 of all medium-term changes in business capital investment. Total GDP and (to a more modest extent) hours of work moved together with new tech books, usually with a lag of a couple of years.
Further, she found that a good economy didn’t predict more tech books, and a bad economy didn’t predict fewer. So reverse causation isn’t the story.
Finally, as a placebo, she checked to see whether years when lots of history books were published tended to precede economic booms. They didn’t. Alexopoulos made a good effort of kicking the tires on this hypothesis. And remember: She only looked at technical books: There are surely a lot of other new ideas in fields like management, biotech, and accounting that matter for business productivity, and they also seem to come in waves.
In other words, as people get ready to create wealth, they require new knowledge, a search indicated by book sales. Nice paper.
Our friend and guest blogger emeritus, Gabriel Rossman, has an article in the Atlantic on the subject of piracy. Gabriel uses piracy as an opportunity to talk about the strengths and weaknesses of traditional economic explanations. The key point is that people will often rely on ideas of what is “fair” versus an application of price theory.
Although the discipline of economics has many valuable things to teach us about how markets work, especially in the long-run, the subjective experience of someone bargaining does not necessarily reflect thinking through how a rational actor would apply price theory (competitive markets) or game theory (monopolistic markets) to the situation. Rather people take moralized approaches to exchange and seem to apply various relational models to exchange, which includes not only market exchange but also gift exchange, patron-client ties, and primitive communism. Moreover, even when people accept that a situation is one of market exchange it does not come naturally to think of price like modern economists think of it, as “market clearing.” Rather much as people intuitively expect physical objects to behave by Buridan’s impetus rather than Newton’s inertia, people’s intuitive notions about price can have less to do with how economics thinks of it than how Aristotle, Aquinas, and Marx thought of it, as “just price” or “fair price.”
On the Atlantic blog, former orgtheory guest blogger, Gabriel Rossman, runs through the complications in deriving the price pirates should ask for a hostage.
[M]uch like how most people who haven’t studied statistics balk at the idea that the ratio of sample size to population size is irrelevant to statistical inference, people seem to have a strong intuition that the “market price” is relevant to a bilateral monopoly even though the whole idea of a bilateral monopoly is that there is not really a market but only a series of discrete one-off transactions. In the absence of substitutability, “comparable” transactions are irrelevant as they don’t imply opportunity cost. This is the main thing I found so fascinating about the Planet Money episode, over and over again the hostage’s party balked at the pirates demands as unreasonable in being out of line with the “market price.” We only get the pirates’ story second hand, but apparently at no point did they explain to the hostage’s party that “market price” doesn’t really exist in a bilateral monopoly. (Maybe Mogadishu University needs a better econ department).
There are two ways, which are only partially incompatible, to look at why people insist that there is a market price. The simple model is to see us as making Bayesian inferences about the price the other party is willing to accept. If a pirate asks me for $10 million when I know that previous ransoms for similar hostages from similar pirates were about $1 million, I face two possibilities. It may be that I’m facing an usually greedy or unreasonable pirate and $10 million really is the price from which he will not budge. However it seems more likely that I’m dealing with a regular pirate, who like most pirates in the past will ultimately settle for about $1 million but who is just floating a high initial figure in case I’m especially bad at this. In this sense the distribution of prices for similar transactions may not be directly relevant in the sense of providing opportunities for substitution (or the credible threat to avail myself of them) but it is still relevant as information about the zone of possible agreement. This is consistent with the Planet Money story in that Filipinos are cheaper to ransom than Europeans by an order of magnitude.
I’m amazed that pirates negotiate at all. Doesn’t this diminish their control? Do kidnappers do the same thing? Given that all of my knowledge of kidnapping scenarios is based on movies, my sense is that kidnappers try to avoid negotiation as this just seems to be a tactic used by law enforcement to ferret out their position. Why wouldn’t pirates operate by the same code?
This post is another criticism of extreme economic models of human behavior, where people act selfishly and only respond to rewards and punishments. You may think that this is a bizarre model, but it’s the default model in a lot of economic analyses. For example, when analyzing voting, the economic prediction is that no one should vote because the probability of influencing an election is very small.
The response, I’ve always thought, is that extreme rational actors represent a specific personality type. Sure, some people will think only about rewards and punishments, or you can set up an experiment where people act selfishly, but others will think of social norms and reciprocity. This isn’t to say that people are massive altruists. Rather, the social world makes a lot more sense if we assume that some big chunk of the human population is filled with modest cooperators who are not strictly selfish. If you accept that, all these “puzzles” about free riders and moral hazard make sense.
Here’s a very simple and profound example: survey prepayment. If you run a survey, you can not pay, pay before and wait for the survey to come back (“prepayment”) or pay after you get the survey (“postpayment”). The extreme rational actor models predicts that prepayment would be a horrible idea. People have the money and no personal connection to the surveyor. There is no way to get the money if they don’t do the survey. We simply trust people to do the survey. This is a great real world example of where selfishness should be the dominant strategy. Prepayment should suppress survey response rates.
What does the public opinion literature show? The complete opposite – giving away money and trusting people results in higher survey response rates than non-payment and post-payment. I was surprised to discover this, as it goes back to studies in the 1970s and it is still reported in the literature as of 2011. And it works with populations as varied as doctors, managers, and teachers, as well as random samples. Prepayment also boosts responses in panel as well as cross sectional studies. There are exceptions. For example, college students don’t do well with prepayment.
What’s the lesson here? I think it’s simple. Human beings have a baseline level of moderate cooperation. This can be triggered in a variety of ways, such as being nice to them. It’s probably evolved, as group life would be hard if we didn’t have some generalized reciprocity going on, at least with other group members. The selfish actor, while easy to model, is really misleading.
Over at Evil Twin, Nicolai Foss gently chides Bloom and Van Reenen for publishing a paper in the AER proceedings called “New Approaches to Surveying Organizations.” The issue is the validity of survey data versus other types of data:
As a rule register data are not available that can be used to address numerous interesting issues in organizational economics, labor economics, productivity research and so on. Scholars working on these issues have to resort to those softy surveys and interviews that have been the workhorses of business school faculty for decades. This is a new recognition in economics. Case in point: A recent paper by Nicholas Bloom and John Van Reenen, “New approaches to surveying organizations.” There is absolutely nothing, I submit, in this short, well-written paper that would surprise virtually any empirically oriented business school professor (i.e., virtually all bschool professors) to whom this would not be anything “new” at all, but rather old hat.
This is not a critique of Profs. Bloom and Van Reenen at all (on the contrary, it is excellent that they educate their economist colleagues in this way). It is just striking and a little bit amusing, however, that we have had to wait until 2010 until empirical approaches that have been mainstream in management research for decades reach the pages of the American Economic Review.
I agree. In the comments, Bloom argues that he didn’t find any papers addressing these issues. This is odd, a lot of the suggestions for surveys make sense and many are well discussed in the literature on surveying individuals. For example, did they consult Dillman’s works? There are also handbooks discussing surveying organizations. There’s a huge industry of people who study survey bias.
A few additional comments: I have heard multiple economists express survey skepticism. The correct response is that reliability of survey responses varies and some questions are better than others. For example, people seem to be pretty good at reporting health, while they outright lie about attending church. Surveys by themselves aren’t good or bad, but individual questions can be high quality or low quality. Also, a lot of our most important data is from self-reports – like the Census, CPS, HRS, etc. I don’t see people ditching the Census.
Second, the real problem in survey research in organizations isn’t bias. It’s response rate. There’s all kinds of tricks to boost response rates for people, but getting people to respond at work (or about work) is really, really hard. And it’s miserable for longitudinal work. If Bloom and Van Reenen can produce a solution to low response rates from orgs, I’ll be really impressed.
O&M’s Nicolai Foss delivering a lecture on Austrian Capital Theory. And, here’s O&M’s Peter Klein discussing their joint book “Organizing Entrepreneurial Judgment.”
Finally, we arrive at the end of the book forum on David Graber’s Debt. Here, I’ll summarize the last section and then wrap up with a few comments and critiques.
1. Debt has a few main goals. First, it is an attack on the theory that money is a necessary economic institution. Second, Debt tries to persuade us that money actually embodies violent forms of domination and is used to create servitude.The third section provides nothing less than a world history, with money and currency as its focus.
Before I get to a few of the empirical claims, it is worth noting that Debt’s last chapter is nothing less than audacious. It is ambitious for someone to argue that the world’s majors institutions – states, religions – are made possible by currency. One might say this is a monetized history of the world.
Ok, so let’s get the bottom line. Graeber’s big claim is that world history, as it played out in Europe and Asia, can be viewed in three phases. An early phase occurs when currency is invented to manage large temples. This currency is then expropriated by states, used, and expanded for war fare. That leads to empires. The second phase is when this system of currency-minting and empire building comes to an end. The system collapses, old systems of debt and currency are wiped away. Then we get to modernity. Where currency comes back, states create massive systems of debt to finance development and make sure that people can get locked into the system of debt.
2. So, is world history just the story of debt slavery? I think a lot of sociologists might agree, given the popularity of Tilly’s argument that state making, taxes, and war go hand in hand. Also, I think that Graeber is likely correct that coinage was the social technology that made empire building possible, and even necessary for early European and Asian empires to continue growing.
There are other parts of the story that don’t add up for me. For example, Graeber argues that the Middle Ages weren’t as bad as one might imagine. Slavery was abolished and there was a general skepticism toward debt. True enough, but the European Middle Ages had other forms of domination and repression as well. The Middle Ages have positive traits, but I don’t think I’d imagine it as a mass liberation from the debt systems of antiquity.
Graeber tries to make everything is debt related. In the last chapter, he tries to tie every problem to debt. For example, he rightly notes that college debt is now extreme. But is that really due to the sorts of processes of state building and debt issuing that Graeber talks about? I agree with Graber’s ethical point – college debt is a form of peonage, but I disagree with the explanation. I’m more likely to note that college financing varies greatly and the extreme peonage we see today is not endemic. I’m more likely to ascribe it to certain recent public policies than the system of exploitation described by Graber.
3. What should we take away from Debt? A few lessons. First, we should be highly skeptical of functionalist explanations of economic institutions. Generalized reciprocity is the “natural” state of economic interaction, other institutions are deviations. Second, and Graeber is not unique in this, debt is sticky and exploitative. Third, debt makes possible wars and other nasty state behavior. Even if we were to argue over specific cases, or even the overall thrust of the book, there remains a lot of value.
Two related questions:
1. What is the standard citation that addresses the difficulty in identifying when business cycles begin or end?
2. Is there a literature that describes when people think there are in a recession/recovery? For example, does public opinion follow technical definitions of how economists measure the health of the economy?
Bonus: Before we had Federal statistics on employment, did average people sit around and say “we’re in a recession?”
There’s a nice feature about Scott Stern who studies the behavior of scientists. There’s a quote from guest blogger emeritus Pierre Azoulay, as well, who knows Stern:
“There is already a whole cohort of us for whom Scott was an essential part of our graduate educations,” says Pierre Azoulay, an associate professor at Sloan, who as an MIT doctoral student had Stern as one of his advisers.
The write up has some nice summaries of Stern’s research, in which he examines the trade offs that scientists make, such as taking a pay cut in private firm jobs in exchange for more control over how the science is spread.
The one thing that left me scratching my head are quotes like this: “From this research, Stern synthesized an insight that remains with him today. “Scientists don’t only care about money,” he says. “They care about discovery, and control. Those are just first-order facts about the scientific enterprise.”
The Stern quote hits on a theme that has been old hat in the social analysis of science since the day of Merton, if not earlier. Why are economists constantly surprised by these findings? Isn’t variance in human motivation the plausible prior hypothesis? Don’t economists believe in differences in personality and socialization? Isn’t the real question the degree to which specific activities are governed by financial considerations, not treating non-financial considerations as anomalies?
Matt Yglesias has a short article at Slate about STEM (science, technology, engineering, and math). The article is called “Do STEM Faculties Want Undergraduates to Study STEM fields?” Yglesias focuses on different funding structures and TA’s. I’d focus on faculty funding formulas. Faculty and graduate student funding in the sciences relies heavily on external income sources. In the social science and humanities, funding is mainly internal. Deans allocate FTEs (faculty lines) and graduate program class sizes (# of PhD students) based on a combination of merit and, more importantly, enrollments. Thus, you have an incentive to created bloated undergraduate majors, which leads to more grad students. It’s not the other way around – large grad students do not lead to more majors.
The incentives do not encourage strong teaching in the sciences. While people don’t intentionally teach bad, they do in practice because there is no reason to do otherwise. Consider the typical experience of a freshman in a big science department:
- They are a decent student in an American high school.
- They are thrown into a large lecture class with little supervision, except maybe the once a week lab or discussion section.
- The TA’s have no teaching experience. They often have bad language skills.
- Grading is often punitive – curves are often used. Students can still get crummy grades even if they learn a fair amount of material.
Adding insult to injury, a lot of fields, like physics, have poor job prospects, especially for people with only a BA. Furthermore, graduate schools in law and medicine don’t give you credit for a low GPA just because it was in a hard major. STEM is a raw deal for marginal students. Why bother with this insanely hard major that is badly taught and will punish you with low grades? Switch to a different field, get decent grades, and have a real career.
I often think about the difference between the economic and sociological approaches to markets. If I were to summarize it, I’d say that contemporary economics views a market as a social domain where actors are achieving some sort of goal and everything else is treated as parameter in some sort of optimization problem. In contrast, sociologists are more interested in how people collectively define markets as social domains. Not incompatible, but these perspectives lead to different questions.
There’s a recent article by Dobrev and Gotsopoulos called “Legitimacy Vacuum, Structural Imprinting, and the First-Mover Disadvantage” in the AMJ that nicely illustrates my point about the sociological approach to markets. Using auto industry data, the authors show that first movers have a lower survival rate. As I’ve argued in the past, the ecological theory of markets makes a distinct prediction than standard IO approaches. In standard IO, first movers have a huge advantage. They have no competition. In ecological theories, first movers are bringing a product that consumers may not understand. Think about the first home computer (not the Apple) or the first social networking site (not Facebook or even Friendster). There’s a lot of learning. Consumers learn about new products, sellers learn to make a version people can afford and use. That’s why first movers don’t do well and it’s a sociological insight.
In the last installment of this book forum, I argued that Debt could be read as an attack on the functionalist view of money, which in turn, I think, is an indirect argument on the current state of economics. In this installment, I’ll delve into the middle section of the book, which can be read as another critique of contemporary economic history and theory.
The crux of Debt is a historical review of the origins of money and credit. The big empirical claim is that barter does not exist in most societies, so money can’t be seen as a naturally evolved institution that solves the problem of barter. The next claim that Graeber makes in the middle of Debt is that there is a very important difference between monetized economies and what he called “human economies,” and that very bad things happen when the two mix. Money is the catalyst for these bad things.
Let’s move on the key distinction in the middle of the book. Graeber views “human economies” as social institutions where people (and objects) are unique and strongly embedded in a web of social relations. Even when money is used, it’s more as a symbol of an obligation or relationship that can’t be payed. It’s not a literal exchange. In contrast, commercial economies are based on using money to exchange impersonal goods that are interchangeable.
In reviewing historical accounts of servitude, slavery, and other forms of domination, Graeber describes how people in human economies become dominated when the come into contact with commercial economies. Essentially what happens is that people participate in spiraling debt traps, which often end up with people pawning themselves and their families in order to seek status, or to pay off “debts” created through violence. Money is what allows people to willingly subjugate themselves to others. Graeber describes this in detail for the Atlantic slave trade and suggests that a similar processes occur in other regions where symbolic debt economies mix up with monetized economies (e.g., Southeast Asian hill people contacting monetized Asian kingdoms).
As you can imagine, Graber (p. 210) makes a striking claim at the end of this section of the book where he claims that modern life is essentially willful subjugation based on a hidden system of violence:
Formal slavery has been eliminated, but (as anyone who works from nine to five can testify) the idea that you can alienate your liberty, at least temporarily, endures. In fact, it determines what most of us have to do for most of our waking hours, except, usually, on weekends. The violence has been largely pushed out of sight. But this is largely because we’re no longer able to imagine what a world based on social arrangements that did not require the continual threat of tasers and surveillance cameras would even look like.
If one were to accept Graeber’s thesis, then one must abandon the view that money is a functional requirement of the economy. Instead, it is a system of illusions that mask the violence that converted pre-modern people into docile modern subjects. Norbert Elias minus the salad fork, but with a credit card, if you will.
After the New Year: societies and debt cycles.
From a recent Slate article: According to recent Census data analysis, 48% of the American population lives near or below the poverty line.
Based on some new designations the Census Bureau created to better reflect the distribution of poverty in the US, the AP explains that 97.3 million Americans are “low income,” which means earning at or just over the poverty line. Added to the 49.1 million Americans living in poverty, that’s 146.4 million, or about 48 percent, of the U.S. population. The new account of poverty in the U.S. considers medical, taxes and transportation costs.
Once can argue around the margins, but the overall picture is clear. It’s not just income differences that have changed, buying power has stagnated as well.
I often teach the graduate course that introduces students to major themes of macro-sociology. I start off with rational choice theory, which, as you can imagine, triggers teeth grinding rage. I then ask students: “If people aren’t following their preferences, then what are they doing?” Answer: silence.
Of course, there are good answers to this question. Most economists, especially behavioral economists, would probably argue for a model that is close to rational choice, but includes biases. Sociologists often take this a step further and argue that people respond to social conventions, follow norms, heuristics, or employ cultural tool kits. The difference between the textbook rational choice model and what many sociologists believe lies not in the maximizing part of the model but in how individuals construct the options and judge alternatives.
I bring up this pedagogical example because contemporary economics is built on a number of simple assumptions that appear obvious and incontrovertible but can actually be successfully critiqued. The surface plausibility of standard economics is hard to argue with by novices, which is why first year graduate students often get stumped by the question I asked.
One important difference between economists and other social scientists lies in their willingness to entertain serious alternatives to the rational choice model. Psychologists are so used to thinking about different models of decision making that they find the insistence on the rational choice model a bit puzzling.
The problem, however, is that for many routine social science questions, it is hard to articulate a simple alternative model that is easy to understand and can easily be the foundation for normal science. The rational choice model has handful of simple axioms, it’s easy to formalize, and easy to tweak.
So what does this have to do with David Graber’s book on this history of debt? Aside from being a radical criticism of debt, Graeber offers one of the few successful attacks on academic economic theory. He doesn’t attack the rational choice model directly. Rather, he, in my view, attacks one of the core ideas of economics that is tied to the rational choice model.
When you read the nitty gritty of economics, you often see the following jump. You start with a description of the rational choice axioms: people have options, rank them, and act upon them in a consistent way. The jump is this: money is the natural way that you should figure out what people prefer. Money is the natural expression of needs and the money economy is the natural resolution of the economic problem of distributing goods. Without money, you’d need to barter to pursue your own personal goals and that’s very inefficient.
The first chunk of Graeber’s book is a anthropological account of barter. Where does it exist? Is it actually true that the money economy represents a solution to the problem of barter? Graeber claims that barter is actually exceedingly rare. According to him, barter makes little sense at all. Why pile up on specialized goods and wait for other people to pile up on what you want and then trade? That’s bizarre.
Instead, what happens in most non-monetized cultures is that people engage in generalized exchange. If you need X, Fred will give you X, but you (or someone else in the group) has to help Fred sometime later. Thus, most groups engage in a debt economy, not a direct trade (barter) economy. Of course, there are some exceptions, such as trade between hostile groups or prisoners from Western societies. But overall, Graeber claims that the overwhelming theme in economic ethnography is that barter simply doesn’t exist.
The conclusion? Adam Smith was wrong to say that people have a natural tendency to “truck and barter.” Why? It’s a strange, unintuitive form of economic exchange. Therefore, money is not the natural solution to barter, since barter, for the most part, does not exist.
According to Graeber, the anthropology literature, composed of observations of dozens and dozens of societies, undermines the link between self-interest and modern capitalist institutions. Classical economists, as well as their contemporaries, have made a deep error in assuming that a Western economic practice is the natural functional solution to economic issues that arise in all societies. I myself have even promoted this argument in my undergraduate class on economic sociology.
We’ll discuss the next step in Graber’s argument next week, but for now, I’ll conclude on the implications of Graeber’s attack on the barter-money link. If direct exchange of goods (barter) is not the embodiment of rational action, then what is? The answer, I think, is generlized exchange. A true believer in economics text books would correctly point out that generalized exchange can be described in terms of utility functions. Fair enough, but that’s not the point.
The real deep point is that monetary exchange, credit markets, and a whole host of other modern financial institutions are in no way natural. Furthermore, there’s actually an alternative to price theory, which uses money as it’s main variable (e.g., “clearing price”). The anthropologist’s version economics would start with indirect exchange as the main variable, which has a better claim to universality than prices, and then describe all institutions as recorders and shufflers of debt.