Truly, it was the greatest century

DeLong on the Greatest Completed Century So Far: 

Briefly: very very roughly, approximately, and inadequately, on average what twenty workers were needed to do in 1870 with their eyes, fingers, thighs, brains, mouths, and ears, 1 worker was able to do in 2010.

It is also true that what one worker could do in 1870 required 20 in -6000. But that 20-fold amplification was an 8000-year creep rather than a 140-year sprint: a proportional growth rate of 0.04%/year rather than 2.1%/year. And from -6000 to 1870 the overwhelming bulk of the potential benefits for humans from that twentyfold upward creep of technological knowledge had been eaten up by growing resource scarcity: the land and other natural resources available to support 1 person in -6000 had to support 400 by 1870.

By contrast, the twentyfold post-1870 technological-progress wave had to deal not with a 200- but only a 6-fold multiplication of human numbers, leaving lots to be devoted to bringing about much higher average productivity.

Productivity increases really really matter. 

If there is one single nugget of insight that I want readers of my book Slouching Towards Utopia to permanently engrave on their brains, this is it: around 1870 the rate of technological progress and thus of potential wealth creation went into much higher gear. After 1870, humanity's deployed technological capabilities and thus potential prosperity doubled every thirty-five years—and with it came economic creative destruction that reduced old economic structures to rubble and built new ones, and did it again, and again, and again, every single generation. Before 1870? From 1770-1870 humanity's globally-deployed technological prowess had a doubling time of about 150 years—not 35. From 1500-1770 it had a doubling time of 500 years. And before 1500, we are looking at a doubling time of 2000 years. The difference between our world, in which technological progress creatively destroys and revolutionizes the economy every 35 years, and the world of Agrarian-Age antiquity in which the same proportional changes in technology and economy, and thus in polity and society, take not 35 but 2000 years is, I think, a master force shaping human history.

I want to hammer home the obvious to those who don't have exponential growth magnitudes in their immediate intellectual panoply: a twentyfold amplification of human technological prowess in 140 years is a REALLY BIG F---ING DEAL. To get an equivalent proportional jump in the other direction, you have to go back from 1870 to the Bronze Age— to the year -2000 or so. We are, proportionately, as separate in technology from the railroad's Golden Spike and the first transoceanic cables as those were from the earliest chariots and the sculptor of the dancing girl of Mohenjo-Daro:

Thought experiments and taking offence

I love Brad DeLong's academic work. He's way smarter than me and, more importantly, clearly works much much harder than I do. And he tackles interesting questions. But every time I check his blog, I get an awful "Everyone in the world is evil or stupid or both except Brad and a few of his friends" vibe.

I'd not been there for a while, but switching to The Old Reader (for now) from Google Reader messed up my RSS habits. And so, there I was, looking at Brad DeLong saying that Steven Landsburg is the stupidest man alive and that "the University of Rochester has a big problem" - presumably Landsburg's continued employment there.

What was the cause? A piece at Gawker taking great offence at a thought experiment Landsburg proposed. I'll link Gawker at the end so you're not tempted to read it before reading the original Landsburg piece.

In grad school, we had a lot of fun with thought experiments of this sort. The classic one is Nozick's experience machine. Step into the machine and you'll experience a simulated life much better than the one you'd otherwise live; moreover, you'll never remember that you're actually in the machine. If you stay out of the machine, there has to be something that matters more to you than experienced utility. 

Tyler Cowen liked to ask a variant on it in our Economics & Philosophy class: World B is identical to World A, as far as you are ever able to observe, but in World B, your wife has been cheating on you for years and you never ever knew it, nor will you ever know it. The worlds are identical except for the unknown-to-you fact of your wife's infidelity. Are you worse off in World B? If so, clearly state exactly how, and make that consistent with other things you believe about utility. 

So, what was Landsburg's offensive thought experiment? Recall that the rules of thought experiment club are that you don't add in auxiliary assumptions but stick to what's stated in the thought experiment. Landsburg asked a series of three questions, then wanted to know why our answers to 1 and 2 might differ from our answer to 3. Here they are.

Farnsworth McCrankypants just hates the idea that someone, somewhere might be looking at pornography. It’s not that he thinks porn causes bad behavior; it’s just the idea of other people’s viewing habits that causes him deep psychic distress. Ought Farnsworth’s preferences be weighed in the balance when we make public policy? In other words, is the psychic harm to Farnsworth an argument for discouraging pornography through, say, taxation or regulation?

That's scenario 1. Most economists just ignore that psychic harm - the world's essentially impossible to evaluate when we add this kind of thing in. Further, Farnsworth could pay other people not to watch pornography if he really cared about it that much. But we could assume that away to stick within the proper confines of the thought experiment: say transactions costs prevent it. Is pyschic harm of this sort admissible in the utilitarian calculus? Here's scenario 2:

Granola McMustardseed just hates the idea that someone, somewhere might be altering the natural state of a wilderness area. It’s not that Granola ever plans to visit that area or to derive any other direct benefits from it; it’s just the idea of wilderness desecration that causes her deep psychic distress. Ought Granola’s preferences be weighed in the balance when we make public policy? In other words, is the psychic harm to Granola an argument for discouraging, say, oil drilling in Alaska, either through taxes or regulation?

Actually, policy does weigh Granola's concerns. It's counted as existence value over and above option value or use value. Sound analyses don't put much weight on it, but it does sometimes count. If I get existence value from thinking heroic Randian thoughts about oil derricks and man's mastery of nature, that gets ignored in the cost-benefit analysis for some reason. But, again, all these kinds of pyschic distress are treated pretty dismissively in economics. And now the third and controversial question:

Let’s suppose that you, or I, or someone we love, or someone we care about from afar, is raped while unconscious in a way that causes no direct physical harm — no injury, no pregnancy, no disease transmission. (Note: The Steubenville rape victim, according to all the accounts I’ve read, was not even aware that she’d been sexually assaulted until she learned about it from the Internet some days later.) Despite the lack of physical damage, we are shocked, appalled and horrified at the thought of being treated in this way, and suffer deep trauma as a result. Ought the law discourage such acts of rape? Should they be illegal?

If we take this as a parallel thought experiment, the only trauma here allowable is the psychic distress, which we otherwise typically ignore.

It is a hard question and so a good one. All our intuitions tell us to condemn the third scenario while dismissing the psychic harms in the first two. But if we stick within the confines of the thought experiment, it's hard to distinguish the cases. We can say the psychic harm is worse in the third case, and it would be in the real world, but it's not hard to have a thought experiment Granola McMustardseed who gets more psychic harm from oil drilling than from being in Scenario 3. Or a Scenario 3 victim who never learns that it happened - a case pretty close to Cowen's World A vs World B.

I don't have any great answer other than that when we step away from the thought experiment and into the real world, a rule allowing Scenario 3 that imposes psychic harm no greater than that imposed in Scenarios 1 & 2 would also necessarily allow much much greater harm because we cannot set rules only allowing Scenario 3. But that's a cop-out, because even if we could do it in the real world, I'd still want it banned - in the same way that I think I'm worse off in Cowen's World B and that I wouldn't want to step into Nozick's machine. My maximand isn't just experienced utility.

Meanwhile, Gawker turns it into a story about how Landsburg thinks rape is OK and DeLong signs onto their interpretation. The contrast between the quality of comments at Landsburg's post and DeLong's is interesting too... Landsburg's commenters wrestle with a difficult thought experiment; DeLong's want Landsburg fired.

Why oh why can't we have a better press corps?

(with apologies to Brad DeLong).

Eric has covered off last week's budget well, so I had thought of writing a parody of the reaction of different interest groups, in the spirit of Fred Dagg's farmers' lament about the lack of a black-singlet subsidy or a gorse retention scheme in one of Muldoon's budgets. But this sort of response is already self-parody, so what is the point?

So instead I am going to put in a plea for better media coverage of future budgets. Here are some suggestions:

1. Don't publish any press releases from interest groups; instead, interview the spokespeople and ask each one two questions: First, "please comment on those parts of the budget that did not relate to your sector"; and second, if you had to put the same total resources into your sector as in this budget, how would you have allocated it differently?".
2. Don't publish any press releases from opposition parties; instead, interview the leaders or finance spokespeople and ask each one, "please state the areas in which you would have spent less money".
3. In a one-marshmellow-now, two-marshmellows-later exercise, promise to give twice as much coverage to anyone whose response is "I haven't had time to fully digest the information yet, let me get back to you tomorrow with a more considered response".
4. Simply refuse to quote any statement with the words "bold", "imaginative" or "Titanic" in it. (To be fair, on the last of these, I didn't see a deckchairs cliché this year, but it will be back.)

Other suggestions are welcome. And while we are at it, could someone please ask Phil Goff why, if a fall in unemployment following a small increase in the minimum wage during a boom period is post hoc ergo propter hoc evidence that a large increase during a recession would not reduce empolyment, why he isn't promising to raise the minimum wage to $20?

The other DeLong quibble

I know Brad DeLong outranks me by... ok, I'm starting to think about problems when dividing by zero. But when I teach micro theory, I draw a really sharp line between market failures (defined relative to the first welfare theorem) and things that folks might just not like about market outcomes. So if we think it's not fair that the result of markets is that some people are poor, that doesn't get to count as a market failure. It's a failure to achieve certain distributional outcomes that may be viewed as desirable by some; it can be a failure to maximize particular social welfare functions other than the default one implied by efficiency. But it's no more a market failure than that Eric isn't a billionaire (as much as Eric would like to be one). If we care about "some people might be poor" and want to solve that, that's when we bring in the second welfare theorem and suggest that we try to fix that problem with redistribution, if it's a problem. But it's not a market failure; it's just a (potentially) undesirable outcome of markets. If we're on the contract curve, it can't be a market failure. And "some people are poor" doesn't push us off the contract curve; the on-diagonal corners of the Edgeworth box are just as Pareto efficient as every other point on the curve.

What's the first problem that DeLong points to in his second big lesson for Econ 1 students?

First, the market will go wrong if the wealth distribution is wrong. The market judges value by willingness to pay, and the rich are much more willing to pay them the poor, and those without wealth or income have no willingness to pay at all. If your wealth and income are zero, then the market literally does not care whether you live or die--it is of no interest to it at all.

Well, it might go wrong relative to Brad's SWF that worries a lot about poor people. But what makes Brad's "not wrong" point on the contract curve any better than mine?* You have to point to something outside of economics to make the case for one point over another, barring the point that emerges as outcome of voluntary trade from folks' initial endowments so long as those endowments are also the result of prior voluntary trade. That point on the contract curve gets slight privilege as moves away from there in the real world will encounter leaky bucket problems if we can't run the transfers of endowments without incentive effects.

I'm not saying that we shouldn't care about the poor, or that there might not be good reasons for wanting redistribution to get to a different point on the contract curve (of a likely somewhat smaller Edgeworth Box). But I'd not say that markets have "gone wrong" if we wind up at some point on the contract curve that isn't my favorite one.

*For my favorite point on the Edgeworth Box, draw it as follows. In the bottom left hand corner, write "Eric". In the top right hand corner write "Everyone Else". Label the horizontal and vertical axes as being two composite commodities that Eric views as goods: horizontal can be "All the good things that begin with the letter B", vertical can be "All the good things that do not begin with the letter B". Draw a contract curve stretching from bottom left to top right. Draw some indifference curves too, if you like, noting what the labeling of the axes implies about the shapes of the curves. Write in a nice title for the box too. Then, put a great big dot on the top right hand corner that says "Markets haven't gone wrong". For all other points on the contract curve, write "Markets went kinda wrong". Put a small dot somewhere close to the bottom left hand corner, on the contract curve, labeled "Brad thinks markets went right (but they didn't). For all points off the contract curve, write "Markets went really wrong - Pareto inferior solutions".

Principles

Brad DeLong posts on what Econ 1 students should remember from the course.

First most important: markets are the best way of dealing with scarcity.

This simple institutional arrangement has a huge number of advantages as societal mechanism for planning and coordinating the production and distribution of scarce, rival, excludable commodities.

It solves the problem of production--what commodities we should try to make more of. Individuals look forward into the future and recognize that others will be willing to pay them high prices for commodities they greatly desire. That gives individuals an incentive to figure out how to make more of those scarce, rival, excludable commodities that are scarcest.

It solves the problem of economizing--of how to get people to economize on their own consumption and not hog too great a share of society's total resources for themselves. Because they have to pay the owners the prices the owners ask, their eyes may be bigger than their stomachs but their wallets generally will not be.

It solves the problem of distribution--of determining who is going to get to use newly-produced commodities. The owner has an incentive to choose the person willing to pay the highest price--and the person willing to pay the highest price is, in some sense, the person who values it the most, to whom it is scarcest.

Moreover, it solves the problem of coordination: As long as market prices are free to move to equalize quantities supplied and demanded, there does not need to be any huge centralized computer bureaucracy keeping track of everything and making sure that plans add up. The market will coordinate itself.

And it solves the problem of information: In a market economy with commodities with owners, decision-making is pushed out to the periphery of society where people already know what is going on. You don't need any huge centralized computer bureaucracy collecting and processing information--and where people do discover that there are things that they don't know but need to learn, why knowledge of something and that somebody else would like to learn it is also a commodity and those who know those two facts are its owners.

It is hard to imagine a simpler institutional framework--owners and prices--that could solve those five problems so very well.

All good. I start worrying when we get to DeLong's second most important thing to remember

What is the second most important thing for you come one student remember? It is how stringent the requirements for any form of "market efficiency" are: how many ways a market economy can go wrong and go badly wrong. I count seven ways that market economies can and do go badly wrong:

...

Whenever the system falls into any one of these seven arenas of psychological, behavioral, or institutional myopia and market failure, the market will go wrong. A good government will put its thumb on the scale in order to offset all of these seven forms of market failure. A great government will have foresight and take care to structure political-economic institutions to make these seven arenas of myopia and market failure as small as possible.

I've a few minor quibbles. I'll leave those for later. Here are the two big problems.

First, DeLong missed the third lesson - the necessary correlate of the second. Governments screw up too. Maybe he wanted us to take it as read for folks who read his blog through the Bush administration.

Second, even if a market "goes wrong", we're still only evaluating things relative to a blackboard ideal of perfect markets. So long as we know that that's what we're doing, fine. But lots of folks will leave Principles level econ with the lesson that any kind of market failure effectively means "anything goes".

Those two together mean that we really have to emphasize comparative institutional analysis. Otherwise we fall too quickly into the Nirvana Fallacy. As Kling put it:

At the University of Chicago, economists lean to the right of the economics profession. They are known for saying, in effect, "Markets work well. Use the market."

At MIT and other bastions of mainstream economics, most economists are to the left of center but to the right of the academic community as a whole. These economists are known for saying, in effect, "Markets fail. Use government."

Masonomics says, "Markets fail. Use markets."

Somewhere along the way, mainstream economics became hung up on the concept of a perfect market and an optimal allocation of resources. The conditions necessary for a perfect market are absurdly demanding. Everything in the economy must be transparent. Managers must have perfect information about worker productivity and consumers must have perfect information about product quality. There can be nothing that gives an advantage to a firm with a large market share. There cannot be any benefits or costs of any market activity that spill over beyond that market.

The argument between Chicago and MIT seems to be over whether perfect markets are a "good approximation" or a "bad approximation" to reality. Masonomics goes along with the MIT view that perfect markets are a bad approximation to reality. But we do not look to government as a "solution" to imperfect markets.

Masonomics sees market failure as a motivation for entrepreneurship. As an example of market failure, let us use a classic case described by a Nobel Laureate, which is that the seller of a used car knows more about the condition of the car than the buyer. Masonomics predicts that entrepreneurs will try to address this problem. In fact, there are a number of entrepreneurial solutions. Buyers can obtain vehicle history reports. Sellers can offer warranties. Firms such as Carmax undertake professional inspections and stake their reputation on the quality of the cars that they sell.

Masonomics worries much more about government failure than market failure. Governments do not face competitive pressure. They are immune from the "creative destruction" of entrepreneurial innovation. In the market, ineffective firms go out of business. In government, ineffective programs develop powerful constituent groups with a stake in their perpetuation.

Sure, without market failures, things could work better. But it's not like everything falls apart as soon as one of the conditions for the first welfare theorem breaks. We don't live in a vacuum, but 9.8 meters per second squared remains a useful approximation. And besides, we'd all suffocate in a vacuum.