Mike, a loyal MR reader, asks me:

How do you recommend approaching a book like Capital in the Twenty-First Century?  I’m a reasonably smart guy, undergrad econ, ee, mba from good schools, somewhat well read, etc., but the density, length and relative subjectivity(?) of Piketty’s topic has me hesitant.

Do I start with the reviews or another book(s), dive right in or find a discussion group (usually lucky if anyone actually reads even part it).  Maybe I approach it like the bible, one paragraph at a time over several years :)

For truly serious books, I recommend the following.  Read it once, straight through, with a minimum of fuss.  If you get truly, totally stuck on some point, which the rest of the book depends upon, find somebody to ask.  Otherwise just keep on plowing straight through.

Then write a review of the book.  Or jot down your notes, but in any case force yourself to take definite stances by putting words down on paper (or screen).

Then reread the book carefully, because now you know what you are looking for.  Revise what you wrote.

Of course only a few books a year (if that many) need to be read this way.

Starting by reading reviews of the book is fine for most people, but usually I prefer not to.  I read just enough of reviews to discern whether I wish to read the book (or watch the movie) at all.  Then I stop reading the review, as I do not wish to be contaminated by the reviewer’s perspective and I feel I usually have enough background to make sense of the book without the assistance.  I intend no slight toward reviewers, but the whole point of the reading/review process is to get some independent draws from the urn rather than a cascade of overly mutually influenced opinion.  That said, I recommend this “skip reviews” approach only to people who read a great deal very seriously.

Reading groups can be useful to either a) force you to read a book you won’t otherwise pick up, b) force you to defend your point of view on a book, or c) induct you into knowing a book really really well when currently you only know the book well.  Or, most of all, d) bond a group of people together.  All that is fine.  But I don’t see readings groups as very useful for simply “reading books.”  As Robin Hanson might say, readings groups aren’t about reading, or for that matter books.

Few people can stay interested reading one paragraph a day from a book.  One underrated virtue of fast reading is that you make enough progress to keep yourself interested and this also can improve comprehension.

Arrived in my pile

by on April 18, 2014 at 2:24 pm in Books, Uncategorized | Permalink

Nicholas Carr, The Glass Cage: Automation and Us.

David Zetland, Living with Water Scarcity.  Amazon here.

Robert E. Mutch, Buying the Vote: A History of Campaign Finance Reform.

William D. Ferguson, Collective Action & Exchange: A Game-Theoretic Approach to Contemporary Political Economy.

Jacob Soll, The Reckoning: Financial Accountability and the Rise and Fall of Nations.

That is the new and excellent book by Dan Jurafsky, due out this September, and I found it interesting throughout.  Here is just one bit:

In fact, the more Yelp reviewers mention dessert, the more they like the restaurant.  Reviewers who don’t mention a dessert give the restaurants an average review score of 3.6 (out of 5).  But reviewers who mention a dessert in their review give a higher average review score, 3.9 out of 5.  And when people do talk about dessert, the more times they mention dessert in the review, the higher the rating they give to the restaurant.

This positivity of reviews, filled with metaphors of sex and dessert, turns out to be astonishingly strong.

That is another reason not to trust customer-generated restaurant reviews.

And how exactly do Americans conceive of dessert?

Americans usually describe desserts as soft or dripping wet…US commercials emphasize tender, gooey, rich, creamy food, and associate softness and dripping sweetness with sensual hedonism and pleasure.

This association between soft, sticky things and pleasure isn’t a necessary connection.  For example, Strauss found that Korean food commercials emphasize hard, textually stimulating food, using words like wulthung pwulthung hata (solid and bumpy), coalis hata (stinging, stimulating), thok ssota (stinging), and elelhata (spicy to the extent one’s nerves are numbed).

How can you resist a book with sentences such as these?

The pasta and the almond pastry traditions merged in Sicily, resulting in foods with characteristics of both.

Here is a previous MR post on Jurafsky, including a link to his blog, and concerning “Claims about potato chips.”

Everyone reads One Hundred Years of Solitude and Love in the Time of Cholera but actually my favorites are some of the early short fiction and also News of a Kidnapping [Noticio de un Secuestro], plus the unfinished autobiography.

The NYT obituary is here.

The book culture that is Norway

by on April 14, 2014 at 2:28 am in Books | Permalink

So long as a new Norwegian book passes quality control, Arts Council Norway purchases 1,000 copies of it to distribute to libraries—or 1,550 copies if it’s a children’s book. (This comes on top of the libraries’ acquisition budgets.) The purchasing scheme, I was told, keeps alive many small publishers that could not otherwise exist. American independent presses would drool at the prospect. Another effect of the scheme is that it subsidizes writers as they build a career. They make royalties on those 1,000 copies—in fact, at a better royalty rate than the contractual standard. Books are also exempted from Norway’s value-added tax.

There is more here, partly on Knausgaard, here is more TNR on Knausgaard, via Scott Sumner.

I would note that, other than Knausgaard, the merits of recent Norwegian literature are…subject to debate.

I enjoyed this book, and I recommend that you get it for your kid.  Here is one bit of many:

Good help is hard to find.  Really hard to find.  Sure, there are lots of people with the right degrees and résumés, but the kind of employee we yearn for sticks out almost immediately.

You can buy the book here.

More Matt Rognlie on Piketty

by on April 10, 2014 at 12:57 pm in Books, Economics | Permalink

From the comments:

Krugman correctly highlights the importance of the elasticity of substitution between capital and labor, but like everyone else (including, apparently, Piketty himself) he misses a subtle but absolutely crucial point.

When economists discuss this elasticity, they generally do so in the context of a gross production function (*not* net of depreciation). In this setting, the elasticity of substitution gives the relationship between the capital-output ratio K/Y and the user cost of capital, which is r+delta, the sum of the relevant real rate of return and the depreciation rate. For instance, if this elasticity is 1.5 and r+delta decreases by a factor of 2, then (moving along the demand curve) K/Y will increase by a factor of 2^(1.5) = 2.8.

Piketty, on the other hand, uses only net concepts, as they are relevant for understanding net income. When he talks about the critical importance of an elasticity of substitution greater than one, he means an elasticity of substitution in the *net* production function. This is a very different concept. In particular, this elasticity gives us the relationship between the capital-output ratio K/Y and the real rate of return r, rather than the full user cost r+delta. This elasticity is lower, by a fraction of r/(r+delta), than the relevant elasticity in the gross production function.

This is no mere quibble. For the US capital stock, the average depreciation rate is a little above delta=5%. Suppose that we take Piketty’s starting point of r=5%. Then r/(r+delta) = 1/2, and the net production function elasticities that matter to Piketty’s argument are only 1/2 of the corresponding elasticities for the gross production function!

Piketty notes in his book that Cobb-Douglas, with an elasticity of one, is the usual benchmark – and then he tries to argue that the actual elasticity is somewhat higher than this benchmark. But the benchmark elasticity of one, as generally understood, is a benchmark for the elasticity in the gross production function – translating into Piketty’s units instead, that’s only 0.5, making Piketty’s proposed >1 elasticity a much more dramatic departure from the benchmark. (Keep in mind that a Cobb-Douglas *net* production function would be a very strange choice of functional form – implying, for instance, that no matter how much capital is used, its gross marginal product is always higher than the depreciation rate. I’ve never seen anyone use it, for good reason.)

Indeed, with this point in mind, the sources cited in support of high elasticities do not necessarily support Piketty’s argument. For instance, in their closely related forthcoming QJE paper, Piketty and Zucman cite Karabarbounis and Neiman (2014) as an example of a paper with an elasticity above 1. But K&N estimate an elasticity in standard units, and their baseline estimate is 1.25! In Piketty’s units, this is just 0.625.

And this:

What does this all mean for the Piketty’s central points – that total capital income rK/Y will increase, and that r-g will grow? His model imposes a constant, exogenous net savings rate ‘s’, which brings him to the “second fundamental law of capitalism”, which is that asymptotically K/Y = s/g. The worry is that as g decreases due to demographics and (possibly) slower per capita growth, this will lead to a very large increase in K/Y. But, of course, this only means an increase in net capital income rK/Y if Piketty’s elasticity of substitution is above 1, or if equivalently the usual elasticity of substitution is above 2. This is already a very high value, and frankly one to be treated with skepticism.

Meanwhile, it is even harder to get growth in r-g, which most readers take to be Piketty’s central point. Suppose that in recent decades, r has been roughly 5% while g has been 2.5%, and suppose that g will ultimately fall to around 1%. In Piketty’s framework, this implies an increase in steady-state K/Y of 2.5. If there is an elasticity of 1 (in Piketty’s units), this implies a decrease in r from 5% to 2%, and thus a *decrease* in the gap r-g from 2.5% to 1%. The point is that with this unit demand elasticity and the exogenous net savings assumption, it is the ratio r/g rather than the difference r-g that is constant, which means that a decline in g leads to a proportionate decline in r-g. (Note that Krugman’s review is ambiguous about this distinction.)

What would we need to obtain even a tiny increase in r-g in this setting – say, of half a percentage point? We would need r to fall from 5% to only 4% while g fell from 2.5% to 1%, increasing r-g from 2.5% to 3%. But given the 2.5-fold increase in K/Y, a decline in r by a factor of only 1/5th implies an elasticity of substitution (in Piketty’s sense) of nearly 4. This implies an elasticity of substitution in the *usual* gross production function sense of nearly 8, not plausible by any stretch of the imagination.

Unless I’m missing something, the formal apparatus in Piketty’s book simply is not capable of generating the results he touts. There are two very simple issues that break it quantitatively – first, the distinction between elasticities of substitution in the gross and net production functions; and second, the fact that as g falls, an extraordinarily high elasticity of substitution is necessary to prevent r from falling along with it and actually compressing the arithmetic gap between r and g. Perhaps there are modifications to the framework that can redeem it, but as it currently stands I’m baffled.

I believe Matt is correct.  I would simply note that diminishing returns to capital — relative to other factors of production — are likely to hold in the long run.  See also these earlier MR comments by Rognlie and Harless.  And here are Piketty’s lecture notes.

Krugman’s review of Piketty

by on April 9, 2014 at 9:20 pm in Books, Economics | Permalink

You will find it here.  Excerpt:

Just about all economic models tell us that if g falls—which it has since 1970, a decline that is likely to continue due to slower growth in the working-age population and slower technological progress—r will fall too. But Piketty asserts that r will fall less than g. This doesn’t have to be true. However, if it’s sufficiently easy to replace workers with machines—if, to use the technical jargon, the elasticity of substitution between capital and labor is greater than one—slow growth, and the resulting rise in the ratio of capital to income, will indeed widen the gap between r and g. And Piketty argues that this is what the historical record shows will happen.

Krugman calls the book “awesome,” but here are his critical remarks:

I don’t think Capital in the Twenty-First Century adequately answers the most telling criticism of the executive power hypothesis: the concentration of very high incomes in finance, where performance actually can, after a fashion, be evaluated. I didn’t mention hedge fund managers idly: such people are paid based on their ability to attract clients and achieve investment returns. You can question the social value of modern finance, but the Gordon Gekkos out there are clearly good at something, and their rise can’t be attributed solely to power relations, although I guess you could argue that willingness to engage in morally dubious wheeling and dealing, like willingness to flout pay norms, is encouraged by low marginal tax rates.

My own review is still due out in about a week’s time.

For all the criticism the book has received, I liked and enjoyed it.  It illuminates a poorly understand segment of the financial world, namely high-frequency trading, and outlines some of the zero- and negative-sum games in that world.  The stories and the writing are very good, as you might expect.

It is a mistake to take the book as a balanced or accurate net assessment of HFT, but reading through the text I never saw a passage where Lewis claimed to offer that.  Maybe the real objections are to be lodged against the 60 Minutes coverage of the book (which I have not seen).

Why not read a fun book on a fun and understudied topic?  Just don’t confuse the emotional tenor of the stories with a final and well-reasoned attitude toward the phenomenon more generally.  Surely you are all able to draw that distinction.  Right?

Here is a good Noah Smith post about agnosticism and HFT.

Jürgen Osterhammel writes:

Between 1815 and 1914 at least 82 million people moved voluntarily from one country to another, at a yearly rate of 660 migrants per million of the world population.  The comparable rate between 1945 and 1980, for example, was only 215 per million.

That is from The Transformation of the World: A Global History of the Nineteenth Century.  Here is my first post on the book.

The Crimean War, which it lost, and resistance to its great-power pretensions at the Congress of Berlin in 1878, drove the Tsarist Empire to look farther eastward.  Siberia acquired a new luster in official propaganda and the national imagination, and a major scientific effort was made to “appropriate” it.  Great tasks seemed to lie ahead for this redeployment of national forces.  The conviction that Russia was expanding into Asia as a representative of Western civilization — an idea that had originated in the first half of the century — was now turned in an anti-Western direction by currents inside the country.  Theorists of Pan-Slavism or Eurasianism sought to create a new national of imperial identity and to convert Russia’s geographical position as a bridge between Europe and Asia into a spiritual advantage.  The Pan-Slavists, unlike the milder, Romantically introverted Slavophiles of the previous generation, did not shrink from a more aggressive foreign policy and the associated risks of tension with Western European powers.  That was one tendency.  But after the 1860s, after the Crimean War, also witnessed the strengthening of the “Westernizers,” who made some gains in their efforts to make Russia a “normal” and, by the standards of the day, successful European country.  Reforms introduced by Alexander II seemed to restore this link with “the civilized world.” But the ambiguity between the “search for Europe” and the “flight from Europe” was never dissolved.

That is from the just-published The Transformation of the World: A Global History of the Nineteenth Century.  Here is my previous post on the book.

Here is Bryan Caplan “You Don’t Know the Best Way to Deal with Russia.”  Here is a short piece on how much sympathy some Germans have for the Russians.

*The Transformation of the World*

by on March 31, 2014 at 9:35 am in Books, Economics | Permalink

The author is Jürgen Osterhammel and the subtitle is A Global History of the Nineteenth Century.  The book’s home page is here.  Piketty’s tome is French and this one is…um…German.  Very German.  Translated from the German.  Imagine a 1165 pp. German Braudel-like take on the importance of the 19th century and here you go.

I was expecting a review copy but I saw a bookstore which put it out prematurely and so I spent $40 to give you all advance notice and read it sooner myself.  That is an endorsement of sorts, but also a confession of my own weak discipline.

So far I am on p.44 and I plan to continue.  I learned for instance that:

In continental Europe, Norway was the first country to have a free press (from 1814); Belgium and Switzerland joined it around 1830, and Sweden, Denmark, and the Netherlands by 1848.

My final verdict is not yet in, but I suppose the bottom line is that I expect to have a final verdict.

Flash Boys: A Wall Street Revolt.

This was mentioned by Jason Kottke on Twitter.

What I’ve been reading

by on March 30, 2014 at 3:27 am in Books, Economics | Permalink

The new Simon Schama book on the history of the Jews did not grab my attention, nor did the new short (derivative) novel by David Grossman.  Possibly the latter is better in the original Hebrew, given how much poetry it contains.  The new Siri Hustved book also didn’t thrill me.

The Rough Guide to Economics, by Andrew Mell and Oliver Walker, is another attempt to thread the needle between popular econ book and text.  I would have wished for a more dramatic and intuitive treatment of a) core microeconomic reasoning in the old Chicago/UCLA style, and b) a far greater and more central place for the truly dramatic importance of economic growth in boosting human welfare.

John Drury, The Life and Poetry of George Herbert is a beautiful treasure and it will make my best books of the year list.  Here is Herbert’s best poem.

Mai Jia’s Decoded: A Novel was a bestseller in China, and so far I am finding it compelling, and most other readers seem to agree.

Arrived in my pile are:

Cass Sunstein, Conspiracy Theories and Other Dangerous Ideas.

Romain D. Huret, American Tax Resisters.

Peter H. Schuck, Why Goverment Fails So Often, And How It Can Do Better.

Matt Grossman, Artists of the Possible: Governing Networks and American Policy Change Since 1945.  And a related blog post Do policymakers ignore voter agendas and priorities?, by Matt.

That is the new book by Robert D. Kaplan, and the subtitle is The South China Sea and the End of a Stable Pacific.  Since this is possibly the most important topic in the world right now, you should read this book.  Here is one interesting excerpt of many:

According to Yale professor of management and political science Paul Bracken, China isn’t so much building a conventional navy as an “anti-navy” navy, designed to push U.S. sea and air forces away from the East Asian coastline.  Chinese drones putting lasers on U.S. warships, sonar pings from Chinese submarines, the noisy activation of Chinese smart mines, and so on are all designed to signal to American warships that Beijing knows about their movements and the United States risks a crisis if such warships get closer to Chinese waters.  Because “relations with China are too important to jeopardize with a military confrontation,” this anti-access strategy has a significant political effect on Washington.  “The strategic impact of China’s agility is not so much to tilt the military balance in its direction and away from the United States.  Rather,” bracken goes on, “it introduces new risks into the American decision-making calculus.”

Some chapters of this book are deeper and better thought out than others, but still it is definitely worth reading.