Pursuit of Truthiness

my gut tells me I know economics

Archive for December 2014

Escape from Capital

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The composition of this book has been for the author a long struggle of escape, and so must the reading of it be for most readers if the authors assault upon them is to be successful,a struggle of escape from habitual modes of thought and expression. The ideas which are here expressed so laboriously are extremely simple and should be obvious. The difficulty lies, not in the new ideas, but in escaping from the old ones, which ramify, for those brought up as most of us have been, into every corner of our minds. -John Maynard Keynes

The first economic model of growth came from David Ricardo. He thought that capital accumulation was they key to growth, capitalists were heroes, and landlords were villains who would eat into the profits capitalists needed to finance economic growth.

Marx made people think of capitalists as villains, but he was even more obsessed than other economists with the importance of capital for long-run economic growth; he just thought it was too important to be owned by capitalists alone. Capital was the name of his magnum opus and his constant focus.

In the 20th century, economists have discussed many other factors that determine economic growth: institutions, culture, entrepreneurship, human capital, technology. But the old obsession with physical capital has remained.

Joseph Schumpeter introduced the idea of creative destruction, the importance of innovation and entrepreneurs. But at the end of the day, he thought that communism would win out over capitalism because it would accumulate more capital and communist countries would out-grow capitalists. He loved the freedom of capitalism, but thought that communist countries forcing investment in physical capital would prosper more.

Robert Solow created a new model of economic growth, and his empirical tests of the model showed that the vast majority of differences in economic growth across countries could not be explained by differences in physical capital. Instead, we should focus on the Solow residual- the other things like technology that influence the productivity of labor. But Paul Samuelson, friend and colleague of Solow and arguably the greatest economist of the 20th century, still couldn’t shake the old focus on physical capital- his bestselling textbook kept predicting that forced capital accumulation would lead communist countries to surpass capitalist right up until the breakup of the Soviet Union.

New work continues to show the importance for growth of factors other than physical capital- Paul Romer on innovation, Acemoglu and Robinson and Douglas North on institutions, McCloskey on culture. Yet somehow, economists cannot escape from a focus on physical capital. Perhaps it is this, not modeling, that is the true Ricardian vice.

Written by James Bailey

December 9, 2014 at 1:31 pm

The Paradox of Trust

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We constantly make judgements, usually subconsciously, about how much to trust others. On average, we seem to be pretty decent at making these assessments- at first. But someone’s trustworthiness is not a fixed quantity. When someone knows that others trust them, they know that people are less likely to look for their possible misbehavior, and more likely to accept their version of events if evidence of misbehavior arises. Some people will take advantage of this trust to commit misdeeds.
The same analysis applies to professions, with the additional mechanism that people with bad intentions may seek out a place in trusted professions in order to commit their misdeeds with a reduced chance of being caught. The very fact that so many people trusted priests not to sexually assault children is what allowed it to happen so often. The very fact that most people trust police not to kill unjustifiably is what allows some to kill unjustifiably.
This seems like a bit of a paradox to me. Is it ever possible for a trusted profession to remain trustworthy for long? How? By trying as hard as possible to select for people of good character? This seems like a hard problem.
The paradox seems like a problem that others must have thought about a lot in many fields- literature, philosophy, and economics at the very least seem like they would be fruitful here. I think a game-theoretic analysis would be interesting, and may have no stable equilibrium. But nothing much comes to mind when I try to think of what others have said about this, besides “who guards the guards?”
What am I missing?

Written by James Bailey

December 5, 2014 at 12:35 am

Taxation is Death

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Disclaimer- I hope this post does not get read widely, because it is a relatively controversial take on a peripheral part of what is mainly an open-and-shut case of police abuse. People of different political persuasions seem to actually be coming together on the main issue in this case- liberals seem furious about it even beyond the race angle, major conservatives are calling it a tragedy, and when was the last time Reason magazine celebrated the US Attorney General for prosecuting someone? But many others are saying those things well, so this was what remained on my mind unsaid.

Many anarcho-capitalists want to end all taxation because “taxation is theft”. I have always had a hard time getting worked up about this- sure, taxation does seem like a type of theft, but the practical benefits of a tax system seem to outweigh this abstract flaw.

Then they note that if you try to resist the theft by not paying, you could get thrown in prison, an even more serious violation of your rights. But in practice this happens so rarely; almost everyone just pays up, and never really even thinks about taxes as coercive measures backed by physical force. It seems like the tax system more or less works, and funds the government’s worthwhile endeavors. Sure, it has flaws, but consequentialists and economists like myself usually focus on flaws like how most taxes distort the incentives to save and invest- flaws that can be fixed without scrapping the idea of taxation.

But sometimes, events make the nature of the system hard to ignore. Government taxes and regulations really are backed by force- and sometimes, given a government staffed by imperfect humans, something as well-intentioned a tax on cigarettes can lead not only to people in jail, but to someone being killed.

The idea that taxation is theft, backed by force doesn’t mean we should eliminate all taxes. But it is one of many things worth keeping in mind when you propose a tax. It is something I should have been thinking of when I last taught microeconomics and enumerated to the class the benefits of Pigouvian taxes- I even used the example of a cigarette tax.

Written by James Bailey

December 4, 2014 at 7:26 pm