Awesome people


Alex Tabarrok posts this speech Nobel Laureate Thomas Sargent gave at Berkeley’s 2007 graduation:

I remember how happy I felt when I graduated from Berkeley many years ago. But I thought the graduation speeches were long. I will economize on words.

Economics is organized common sense. Here is a short list of valuable lessons that our beautiful subject teaches.

1. Many things that are desirable are not feasible.

2. Individuals and communities face trade-offs.

3. Other people have more information about their abilities, their efforts, and their preferences than you do.

4. Everyone responds to incentives, including people you want to help. That is why social safety nets don’t always end up working as intended.

5. There are tradeoffs between equality and efficiency.

6. In an equilibrium of a game or an economy, people are satisfied with their choices. That is why it is difficult for well meaning outsiders to change things for better or worse.

7. In the future, you too will respond to incentives. That is why there are some promises that you’d like to make but can’t. No one will believe those promises because they know that later it will not be in your interest to deliver. The lesson here is this: before you make a promise, think about whether you will want to keep it if and when your circumstances change. This is how you earn a reputation.

8. Governments and voters respond to incentives too. That is why governments sometimes default on loans and other promises that they have made.

9. It is feasible for one generation to shift costs to subsequent ones. That is what national government debts and the U.S. social security system do (but not the social security system of Singapore).

10. When a government spends, its citizens eventually pay, either today or tomorrow, either through explicit taxes or implicit ones like inflation.

11. Most people want other people to pay for public goods and government transfers (especially transfers to themselves).

12. Because market prices aggregate traders’ information, it is difficult to forecast stock prices and interest rates and exchange rates

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Thomas Piketty’s Capital in the 21st Century was finally released in English last Monday. It’s been hailed by many as one of those once-in-a-decade game changing books. Needless to say, I am very excited to read it. I’ve only read through the first fifty pages but the basic arguments are clear and already fascinating.

A narrative of economic development prominent today is that inequality is efficient (to an extent) and decreasing. Simon Kuznets observed in the middle of the twentieth century that in developed countries income inequality was decreasing and incomes were converging. He made it clear that this was only a correlation and he gave no declaration that this was inevitable or sustainable. Nonetheless, incomes were converging and many took this to be the beauty of capitalism: inequality may exist for a while but in the end we’re all better off.

In fact, convergence happened a century before. As the Industrial Revolution steadily expanded in the early 19th century, the vast majority of workers saw stagnant or falling wages next to exploding incomes of capital-owning individuals. David Ricardo and Karl Marx separately predicted different doomsday scenarios of a massive scarcity of land causing an unhealthy concentration of wealth and spiraling returns to capital causing a global revolution, respectively. Of course, neither apocalypse happened. In the last third of the 19th century, low-income individuals saw their wages rise, even if it occurred with massively increasing inequality.

Inequality increased in the roaring 20s until the Great Depression and World War II. From the time of these events until the early 1970s, income inequality decreased in most developed countries. The prevailing wisdom was that high inequality was followed by converging incomes in the natural progression of economic development.

What Piketty aims to drive home is that this convergence was the exception, not the rule. The Great Depression and Second World War caused the fortunes of the capitalists to implode. In fact, the financial crisis of late initially decreased inequality mostly because the rich had more to lose. After World War II, he argues, American policy was set up to reward broadly distributed growth instead of growth aimed at rewarding capitalists. Then, Reagan and Thatcher won and it was reversed. I should note here that Piketty is French, has been a member of the Socialist Party, and by virtue of being an inequality economist comes with certain biases. His points are largely data-driven but do need to be placed in the context of his background.

The fundamental identity he proposes in the book is that when r > g capitalism will breed unsustainable inequality. r is the rate of return on capital and g is economic growth. When the return to capital is bigger than the rate of economic growth, wealth accumulates in a concentrated set of hands. When an economy is slow-growing, past accumulated wealth has growing importance. Inequality is thus bound to increase and continue to do so. Developed economies have slowed since 1973 and r is becoming greater than g, in the eyes of Piketty. Further, g includes population growth and this has been close to zero in many countries. As he promises to show in later chapters, this identity need not be necessary. Policy can help change this to prevent a revolution or massive conflicts Ricardo and Marx once predicted.

I find the premises presented so far to be interesting for a number of reasons. One is that Piketty admits this divergence is not the result of any market failures. Rather, he finds the more perfect the capital market the more inequality a country will have. Second, I have always assumed a convergence of incomes in economic progress or, at the very least, figured that increasing inequality can be forgiven as long as everyone is better off in absolute terms. If this is not the natural path of capitalism, we are all in for a surprise of hurt. And third, a few writers have posited that we are in a Second Machine Age much like the first industrial revolution, where wages may stagnate now but eventually they will rise. Whereas the first industrial revolution replaced brawn with machines, now we are replacing brains. The gains from this may be realized by the masses eventually, but there could be a very rough transition period. I hope to see how Piketty addresses this and how fatalistic he sees a spiraling inequality.

After 15 months of separation, Carson and I will finally be meeting up in his current living quarters in Bordeaux, France in what can only be described as the most anticipated meeting of intellect since the Constitutional Convention. I am hoping that this vacation and the discussions that will surely ensue will renew my interest in American politics and economics, an interest that has slowly gone from very enthusiastic to very apathetic over the last six months. I also hope those damn strikes in France don’t get in my way.

I’ve been reading Deirdre McCloskey’s The Bourgeois Virtues which, among other things, argues that the free market is virtuous and the capitalist middle class needs to to stop apologizing for its success. Somewhat related to these ideas is this video with Tyler Cowen of Marginal Revolution fame, who answers questions about the morality of the market, the greed of bankers, and the wonderfulness of globalization.

Occasionally, I become deluded enough to forget the side of some Republicans that is homophobic, racist, creationist, and generally backwards-thinking. I forget how repulsed I am by this behavior and occasionally consider myself a Republican. At least in theory, the Republican Party supports limited government, federalism, and economic liberty. But sometimes I need to be reminded why I should never call myself a Republican.

At CPAC (Conservative Political Action Conference) this year, Alexander McCobin, head of Students for Liberty and generally cool guy, said in the context of gay rights:

…students today recognize that freedom does not come in pieces.  Freedom is a single thing that applies to the social as well as the economic realms and should be defended at all times.

Subtle boos – by what I hope is becoming a quickly decreasing demographic in the conservative movement – were overshadowed by cheers and applause. Then Ryan Sorba, author of a book called The Born Gay Hoax said

I’d like to condemn CPAC for bringing GOPride [sic] to this event. Civil rights are grounded in natural rights. Natural rights are grounded in human nature. Human nature is a rational substance in relationship to the intelligible end of the reproductive act of reproduction. Do you understand that?

Thankfully, Sorba was met with loud jeering. It made me happy to see that the conservative movement was, at least in this one instance, full of fewer homophobic supporters than true liberty defenders. The world (and the Republican party, if they feel like winning some elections) needs more Alexander McCobin’s and fewer Ryan Sorba’s.

I also think that this instance represents an interesting demographic shift between generations. Ryan Sorba doesn’t look that old, so I wouldn’t say that he’s a completely different generation than mine (aka around college age). But as I’ve briefly blogged about before, gay rights seems to be an issue that young people in general are much more supportive of than their parents.

Watch McCobin’s speech and Sorba’s weak-sauce reply:

  • Arianna Huffington: Is current high unemployment Obama’s Katrina?
  • Gary Becker on China’s decisions regarding its currency.
  • Youtube: The future of the Republican Party (hopefully not, for everyone’s sake).
  • Steve Chapman: Chicago politicians’ hypocrisy on guns.
  • David Rogers: War should be ‘Pay as You Fight’.
  • Paul Krugman: Stop worrying about the deficit.
  • Ian Ayres: California’s Tuition hikes might not be so bad after all.

F.A. Hayek, along with other thinkers and building on the works of other philosophers, put forth the idea of spontaneous order.

Spontaneous order, in a short description: order coming out of seeming chaos that is the result of action and not planning. One example I was once told of is that of a campus. Whereas the location of the buildings and pathways is the result of human planning, those pseudo-paths that form on the grass from people individually walking the path of least distance is the result of human action. Another example is language. Spanglish never had a chance because, as much as a bunch of people wanted to design a language, language is the spontaneous generation of people acting over time. A more familiar, closer example is that of Adam Smith’s Invisible Hand.

An example of a path spawned from human action and not human design.

Spontaneous order is used by some to argue that freer markets are a better way of allocating resources than any central planner could ever dream of. When governments try to disrupt the spontaneous order of society, they risk making things worse. Pouring salt on the wounds, governments try meticulously to solve the problems of disrupting spontaneous order by, you guessed it, disrupting the spontaneous order even more.

I came across a great example the other day of an entity trying to realign spontaneous order after disrupting it. It was in the movie Back to the Future. In it, Marty McFly goes back in time and accidentally makes his mother fall in love with him. This screws up the properties of time and Marty slowly becomes “unborn”. He needs to undo this and get his parents back together. Think of the “Butterfly Effect” here.

Like governments, Marty got in the way of how things were “supposed to happen”. Although most people don’t agree with how things are “supposed” to happen, Hayek would say that the best spontaneous order is the one that happens based on voluntary exchange of individuals in a system with legal equality. Unlike governments, Marty was able to correct the spontaneous order (only to be followed by a myriad of challenges, laughs, and excellent actions scenes in the second and third parts of the trilogy).

Governments, it seems, tend to do the opposite. Austrian economists would argue that all of the world’s ills (ok, maybe not all of them) come from the government disrupting spontaneous order through manipulation of the money supply. But I’ll give a more relevant example: minimum wage. Assume, for just a second, that my thoughts on minimum wage are correct: it creates a surplus of workers instead of its intended consequence of just raising the wage of workers. To combat this unemployment, the government raises welfare benefits which, as any cross-country comparison shows, creates a higher level of the natural rate of unemployment.

Maybe there were too many assumptions necessary for that example to be convincing. But I think you can probably think of an instance where government’s “cure” is worse than the disease – the disease it happened to have created. Plus, I figured it was about time for a more lighthearted post.

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