Posts tagged economics

Posted 1 week ago

I think that economics is singled out for opprobrium because of the way that it challenges the intention heuristic. The intention heuristic says that if the intentions of an act are selfless and well-meaning, then the act is good. If the intentions are self-interested, then it is not good.

The intention heuristic is what generates the veneration of non-profits. One can readily suppose that the intentions of a non-profit are better than those of a for-profit institution. Accordingly, it seems morally superior to work at a non-profit. However, once one drops the intention heuristic, the case for non-profits becomes much weaker.

I think that the ability to think beyond the intention heuristic is very important in social and political philosophy. However, there are many people who are heavily invested in the intention heuristic, and it is my hypothesis that such people are anxious to discredit economics.

Arnold Kling on why economics seems morally corrupt.

In other words, economists seem morally corrupt because they recognize that “bad” things (profit motive) can lead to good outcomes (consumer goods).  This goes against the grain the of “common sense” morality.

Posted 3 weeks ago

270 Years of Consumer Prices

Reddit user Integralds gathered data concerning consumer prices over the course of American history - dating back to around 1745.  He used three measures of consumer prices to put together how prices have moved:

  1. Data from 1745-1889 comes from the Warren-Pearson data set published in the 1910s.  It is a commodities index (so not a perfect market basket like CPI is calculated today) which consists of 25% non-food agricultural products, 25% food, 25% housing/lighting/textiles/ and 25% other consumer products.
  2. Data from 1860-1935 comes from the NBER’s Macro History database.  It consists of 20% non-food agricultural products, 45% other consumer products and the last 25% is (in /u/Integralds own words) “stuff that frankly shouldn’t be in a consumer price index at all.”
  3. From 1913 onward, he uses the regular CPI from the Bureau of Labor Statistics. 

Integralds normalized all three of the CPI measures and made 100 in 1914, or the start of the Federal Reserve.  While he stated that he wouldn’t use them as a continuous, consistent time series, however the data falls together nicely despite the differences in CPI measurements.

My personal takeaway is how horribly volatile prices were in the pre-World War II period, especially the gold standard era.  While the huge spikes in consumer prices - the two biggest ones being the Revolutionary War and the Civil War - were times where the gold standard was suspended to finance wars, the gold standard (and in 1785-1834 we had a de facto silver standard) itself was very volatile - reaching close to 15% inflation or deflation during some periods.

However, in the post-War period, there was still pretty heavy price movement.  But, this all ended in 1984 with Volcker at the helm of the Federal Reserve and the Great Moderation.

We can clearly see in the data that the gold standard does not produce stable prices, despite the claims of many gold-standard advocates and free-bankers.  The Federal Reserve - while having a rocky start between 1913 and the Great Inflation - still outperformed the gold standard as far as increases in inflation went.  The Great Inflation during the 70s was the only time that we saw inflation comparable to the gold standard, and the Great Depression is where we saw deflation comparable to the gold standard.  The first part was because, as Friedman notes, high interest rates are indications of loose monetary policy, not tight monetary policy.  The second part was because, as Friedman notes, the money supply shrank due to the Fed not doing its job.

The Great Moderation demonstrates that we understand inflation, and can produce stable prices relative to the gold-standard.  No 20 year period can compare to the Great Moderation as far as stability of prices go. 

Posted 1 month ago
How dangerous are monopolies and oligopolies? How much can they reap in excessive profits? Several kinds of evidence suggest that monopolies and small-number oligopolies have limited power to earn much more than competitive rates of return on capital. A large number of studies have compared the rate of return on investment with the degree to which industries are concentrated (measured by share of the industry sales made by, say, the four largest firms). The relationship between profitability and concentration is almost invariably loose: less than 25 percent of the variation in profit rates across industries can be attributed to concentration.
A more specific illustration of the effect the number of rivals has on price can be found in Reuben Kessel’s study of the underwriting of state and local government bonds. Syndicates of investment bankers bid for the right to sell an issue of bonds by, say, the state of California. The successful bidder might bid 98.5 (or $985 for a $1,000 bond) and, in turn, seek to sell the issue to investors at 100 ($1,000 for a $1,000 bond). In this case the underwriter “spread” would be 1.5 (or $15 per $1,000 bond).
In a study of thousands of bond issues, after correcting for size and safety and other characteristics of each issue, Kessel found the pattern of underwriter spreads to be as shown in Table 2.
For twenty or more bidders—which is, effectively, perfect competition—the spread was ten dollars. Merely increasing the number of bidders from one to two was sufficient to halve the excess spread over what it would be at the ten-dollar competitive level. Thus, even a small number of rivals may bring prices down close to the competitive level. Kessel’s results, more than any other single study, convinced me that competition is a tough weed, not a delicate flower.
George J. Stigler, Monopoly

(Source: neoliberalstatist)

Posted 1 month ago
Why is education a club good? Isn't it a private good that has some externalities?
Anonymous asked

The concept of a public good is routed in the ideas of excludability and rivalry.

In economics, for a good to be non-rivalrous, the consumption of the good must not inhibit the ability for others to consume said good.  

For a good to be non-excludable, you must be unable to stop someone from consuming said good.

So, given these two attributes of goods, you get four outcomes.  Wikipedia has a table to illustrate the four types of goods:

image

Note: there are grey areas as far as exludability and rivalry goes.  Some things are quasi-rivalrous.  Some things are quasi-excludable.  

Why is education a club good?  Well, it is excludable.  I can physically prevent someone from coming to a class.  I can prevent them from paying for school.  It is non-rivalrous because one person in a class does not prevent another from being in that class as well.  It is technically quasi-rivalrous, only because rooms can become congested, but probably aren’t ever so congested.

Does education have externalities?  Yes!  K-12 education has huge positive externalities.  However, did the concept of positive externalities come up in how to define club vs. public good?  No.  This is because they are fundamentally different concepts.

Production with positive externalities means that someone is benefiting without paying for it.  Social Marginal Benefit and Social Marginal Cost are not equalized, and the market underprovides.  Therefore, you could subsidize production so that SMB and SMC are equalized.

A private good with positive externalities may warrant subsidy.  Education (that is, human capital formation)?  Yes.  The delicious smell of fresh baked bread wafting from a bakery?  Probably not.

To argue that education needs to be subsidized because it is a public good is wrong by definition.  There is no argument to be made that club goods need to be subsidized or run by the government.  

Posted 2 months ago

Socialism Leads to Moral Decay: The (True) Legacy of Two Really Existing Economic Systems

Economists from Duke University and the Ludwig Maximilian University of Munich ran an experiment using East and West Germans to test whether or not socialism  had effects on morality.  Here is the abstract:

By running an experiment among Germans collecting their passports or ID cards in the citizen centers of Berlin, we find that individuals with an East German family background cheat significantly more on an abstract task than those with a West German family background. The longer individuals were exposed to socialism, the more likely they were to cheat on our task. While it was recently argued that markets decay morals (Falk and Szech, 2013), we provide evidence that other political and economic regimes such as socialism might have an even more detrimental effect on individuals’ behavior.

The most interesting thing about this is that it is a natural experiment!  The authors were able to take Berliners who were separated into East or West Germany for different times of their lives (in other words, some were born earlier than others in East Germany, as well as West Germany).  Everything else is held constant - language, culture, traditions, etc.  The only difference between the two groups was whether or not they lived under socialism, or capitalism.

The economists founds, using an abstract dice game, that East Germans who were exposed to socialism were more likely to cheat than West Germans who had been exposed to capitalism.

Now, before people start engaging in No True Scotsmans and saying that “East Germany wasn’t really socialist” or even some libertarians saying “well West Germany was technically a social market economy”, the authors cite Harold Demsetz who stated that we can’t compare real institutions to theoretical ones.  Thankfully, however, most people think of West Germany as capitalist, and most people think of East Germany as socialist - and unfortunately for those who don’t like what certain definitions mean, definitions are very much arbitrary and decided upon by the majority, not the minority.

Posted 2 months ago

Scott Sumner doesn't have a definition for Aggregate Demand - and neither do other macroeconomists

Awhile ago I debated with utilitymaximiser (now ordnungsokonomik) about the concept of aggregate demand.  I said it was coherent, and there was no good explanation of what it was, why there was an inverse relationship with the price level, and that it should pretty much be ignored.

Scott Sumner is now admitting that he doesn’t have a definition for aggregate demand:

What does “aggregate demand” mean?

And why am I asking this question after using the phrase about 1000 times over the past 5 years in this blog?  Shouldn’t I have found out before I started using the term?  Perhaps I was too embarrassed to admit my ignorance.  But now that the esteemed macroeconomistChris Househas admitted a similar uncertainty, I’m less embarrassed:

…  I admit that I don’t have a particularly clear definition of what we really mean by “aggregate demand.”  I think often this is meant to capture changes in consumer sentiment, fluctuations in government demand for goods and services or other incentives to purchase market goods – incentives which would include tax subsidies, monetary stimulus, … etc.

But Sumner has a definition of what AD should mean:

I do have a very clear idea as to what I think the profession should mean by AD—nominal GDP. And I’ve seen the AD curve drawn as a rectangular hyperbola in a few textbooks (although the number is gradually diminishing.  But it’s clear that most people don’t agree with me.  So what do they think AD is?

A rectangular hyperbola looks like this:

Note: this is for a regular demand curve, not an aggregate demand curve, but it looks the same.

This post gets even better!

On some occasions people discuss AD as if it’s a real concept.  Changes in the real quantity of goods and services purchased by consumers, investors, governments, and (in net terms) foreigners.  But that can’t be AD, as it would imply that all changes in RGDP were caused by shifts in AD.  After all, all purchases are also sales, so the total aggregate quantity supplied equals the total aggregate quantity demanded

In the textbooks AD is a downward sloping line in P/Y space, which is not generally assumed to be unit elastic.  That means when AS shifts, NGDP may also change.  But why does NGDP change? What is held constant along a given AD curve?  Presumably a given AD curve is supposed to be holding constant things like monetary and fiscal policy, animal spirits, consumer sentiment, etc.

But that raises another question; what is monetary policy?  If the profession is not too clear about AD, they are completely mixed up about monetary policy.  Indeed even elite macroeconomists have such wildly varying definitions of monetary policy that in any given monetary situation (such as the early 1930s—with ultra-low interest rates and lots of QE), one set of respected macroeconomists will claim policy is ultra-tight (Friedman, Bernanke, Mishkin, etc) while another (even larger) set of economists will claim policy is ultra-accommodative (because interest rates were really low and there was lots of QE.)  So it doesn’t much help to say we are holding monetary policy constant along an AD curve, as no one seems to have a clue as to what the term ‘monetary policy’ actually means.

So it would seem the issues with AD aren’t just about “what it is” but also “what affects it” - not to mention the fact that macroeconomists don’t have a lot of consensus on the nature of monetary policy.

PS.  I looked at Wikipedia, but it was no help.

Sumner goes on to savage the Wiki entry for AD.

Sumner has two other posts about aggregate demand, one concerning IS/LM and the other breaking apart the logic of aggregate demand.

Thankfully, I am not the only person who generally agrees with the idea of “demand side” problems concerning recessions, as well as the effect of money on nominal spending but also has issues with aggregate demand.  As a friend of mine commented on how AD is taught at our university, many people teach it as “demand, but jumbo.”

In the article concerning IS/LM, Sumner writes out a model for AD/AS:

Here’s a simpler model.  AD is a hyperbola (a given level of NGDP).  This model does not assume NGDP targeting, just as the current AD model does not assume money supply targeting.  Changes in NGDP are caused by monetary policy.  The P/Y split for changes in NGDP is determined by the slopes of the SRAS and LRAS curves.  The LRAS curve is vertical.  Interest rates?  Yeah, they fluctuate a lot.

I quite like this - it gives a fairly conventional view of “demand side” fluctuations without the really bad Y=C+I+G+NX and somehow saying that slopes downward because of Pigou Effects (when even Paul Krugman argues that Pigou Effects don’t exist in real life).

Posted 2 months ago

The intellectual cesspool of the inflation truthers

Very nice debunking of ShadowStats.  I think the best argument is citing Okun’s Law.

Posted 2 months ago

laliberty:

"Janet Yellen … constantly lectures us on Keynesian verities as if they were the equivalent of Newton’s Law or the Pythagorean Theorem. In fact, they constitute self-serving dogma of modern vintage that is marshaled to justify what is at bottom an economic absurdity. Namely, that through the primitive act of banging the securities “buy” key over and over and thereby massively expanding its balance sheet, the Fed can cause real wealth—-embodying the sweat of labor, the consumption of capital and the fruits of enterprise—-to magically expand beyond what the free market would generate on its own steam.

There is an implicit assumption here that markets have no frictions that prevent them from clearing, and that the market can clear (quickly) and move back to where actual GDP = potential GDP without any kind of intervention.

In a fit of professorial arrogance, Bernanke even had the gall to call this the helicopter money process. His contention was that the rubes on main street would happily scoop up the falling bills and coins and soon “spend” the economy into a fit of expansion.

Well yeah.  People have a certain amount of money they’d like to hold on hand, and the money they don’t want, they spend.  Think of that money as a hot potato.

In other words, according to Bernanke the essential ingredient in economic life is money demand, which is a gift of the state’s central banking branch, rather than production, savings, innovation and enterprise, which arise on the free market in consequences of millions of workers and businesses pursuing their own ends.

Yeah, money demand is pretty important.  And given that money is non-neutral in the short-run, printing money boosts consumption.

Indeed, under Keynesian dogma the latter can be taken for granted; the supply of labor, enterprise and output is automatic and endless until an ethereal quantity called potential GDP is fully realized.

This guy already has a model of potential GDP in the background of his argument.  See above when he mentions real wealth expanding beyond what the free-market would provide.

To achieve the latter requires that the state dispense exactly the right level of money demand so that the rubes on main street will not stubbornly remain poorer than they need be.

If markets don’t clear, there may be a welfare increase to using government intervention to bring the economy back to it’s trend.

This unhappy estate happens, of course, owing to their inexorable propensity to withhold the production and enterprise of which they are capable (i.e. keep plants idle and labor unemployed).

Wait, what?  The concept of markets not clearing and there being frictions is that there are unused resources lying about.  If there were no market frictions, then resources would be utilized by the market and actual GDP = potential GDP.

Stated differently, under Yellen’s primitive bathtub economics there is no possibility of inflation unless the central bank mistakenly over-dispenses money demand to the point where actual GDP and the job count overflows potential GDP and the full-employment of labor.

You can have inflation without actual GDP = potential GDP.  We’ve had inflation, albeit it not a whole lot, with the economy not being at potential GDP.

Needless to say, we can trust the experts in the Eccles Building to stay on the safe side of this potential GDP divide—-an invisible boundary which can only be seen and calibrated by economics PhDs.

Once upon a time the world knew better. The pre-Keynesian rule was that when central banks hit the “buy” key they always and everywhere create monetary inflation.

Only a hard-line fiscal theorist of the price level thinks that increasing the money supply doesn’t cause inflation.

Ordinarily that resulted in the inflation of credit, which, in turn, caused prices to rise—whether of commodities, services, wages, real estate or financial assets like stocks and bonds.

Congrats - MV=PY.

[And] the problem with monetary inflation—a process that has taken the Fed’s balance sheet from $200 billion when Greenspan took office to nearly $4.4 trillion today—is that its deformations, distortions and malinvestments are cumulative.

Austrians are still chugging along with the malinvestment story.  The market is able to change about heterogenous capital based on taste and technology shocks, but apparently when heterogenous capital is built up thanks to the Fed, the market just flops and flounders while trying to change it about.

Worse still, owing to the “recency bias” of players in the Fed’s financial casino, increasingly outlandish pricing errors are taken for granted.

What does this mean?

They are viewed as part of the bubble landscape, rather than as a screaming indictment of the monetary inflations’ insidious results.

What does this even mean?

David Stockman, "California Housing and the Bubble at Hand"

Posted 2 months ago

paleolibertarian:

http://www.againstcronycapitalism.org/2014/07/this-is-why-you-feel-poorer-chart/

"Prices aren’t determined by supply and demand, they’re determined by the Fed."

Your understanding of macro and micro is shit.

Posted 2 months ago

There’s a saying about alternative medicine:

What do you call alternative medicine that works?  Medicine.

The same applies for heterodox economics.  What do you call heterodox economics that has empirical evidence supporting its claims? Economics.

Take, for instance, Pete Leeson.  He’s an Austrian anarcho-capitalist but in the top 8% of economists in the world.  He’s been published in the Journal of Political Economy and the Journal of Law and Economics as well as theJournal of Economic Perspectives.  Why is that?  It’s because, despite Leeson not being part of the mainstream, his ideas are included in the mainstream because they are quite good.

The thing about mainstream economics is that it isn’t some exclusive club.  It certainly isn’t only for “neoclassical” economists.  Instead, it’s a hivemind of ideas that are accepted if there is empirical evidence to back up the claims.  It may take time for ideas to integrate into the hivemind - which is both good and bad - but nonetheless mainstream economics morphs into something new as fresh ideas enter the collective consciousness of economics.