History

My visit to Auschwitz

by on January 28, 2015 at 7:09 am in History, Travel | Permalink

I went once, might that have been 2004?  It was after a Unesco conference in Warsaw and from a hotel room in Krakow.  I have the recollection that Auschwitz had a terrible stench, though I doubt if it actually did.  Each journey that we take has a single place and experience at its emotional center, and no trek with a stop in Auschwitz can have any emotional center other than Auschwitz itself.  The rest of that trip is more or less forgotten.

The place was full of Germans walking the halls, confused and wailing.  The Jews were more somber.

“Dear Tyler,

I read with obvious interest your post (and the paper itself) about the endogeneity of institutions. Leaving aside my issues with the IV literature, I decided to take the bait regarding Jeff Sachs’ challenge to, “Go back to 1960 and choose any measure of institutional quality you want. Then see how well it predicts cross-national growth since then.”

Ok, I will.

The Economic Freedom of the World (EFW) index was first published in the mid 1990s, and the first year of data is 1970. So I’ll have to start in 1970 instead of 1960.

Here is a regression with growth from 1970-2010 on the lhs, and EFW and GDP per capita in 1970 on the rhs.

Growth1970-2010 = -1.62 + 0.75*EFW1970 – 0.13* GDPPC1970 R^2=0.18
(2.90) (3.17)

This regression adds the change in EFW from 1970-1980 to the rhs.

Growth1970-2010 = -1.69 + 0.84*EFW1970 + 1.00*chEFW70-80 – 0.15*GDPPC1970 R^2=0.32
(3.54) (3.39) (3.86)

A one-unit higher EFW score in 1970 correlates to 0.84 percentage points in higher annual growth over the next 40 years. A one unit EFW score improvement during the first decade, 1970 to 1980, correlates to a 1.00 percentage point higher annual growth rate over the 40 years.

I don’t know if that satisfies Jeff Sachs’ challenge, but it works for me.

Looking forward, I’ve constructed a back-of-the-envelope indicator that combines each country’s EFW rating in 2000 and with its change from 2000-2010. The top 20 (combined highest level & most positive change) versus the bottom 20 (combine lowest level & most negative change) countries are:

Top 20 – Bottom 20
Hong Kong – Haiti
Romania – Cameroon
Rwanda – Senegal
Singapore – Guinea-Bissau
Bulgaria – Mali
Cyprus – Bolivia
Unit. Arab Em. – Algeria
Chile – Guyana
Mauritius – Gabon
Lithuania – Ecuador
Slovak Rep – Burundi
Albania – Cote d’Ivoire
Jordan – Chad
Switzerland – Togo
Bahamas – Congo, Rep. Of
Malta – Central Afr. Rep.
Taiwan – Argentina
Korea, South – Myanmar
Finland – Zimbabwe
Estonia – Venezuela

I’m willing to bet anyone $100 (up to 10 people) that the Top 20 group will outgrow the Bottom 20 group by at least 1 full percentage point per year (on average) over the the next 20 year period (2015-2035).

Bob”

American Sniper is one of the best anti-war movies I have seen, ever.  But it shows the sniper-assassin, and his killing, to be sexy, and to be regarded as sexy by women, while the rest of war is dull and stupid.  (Even the two enemy snipers are quite attractive and fantastic figures, and there is a deliberate parallel between the family life of the Syrian sniper and the American protagonist.  The klutziness of the non-assassin soldiers limited how many African-Americans and Hispanics they were willing to cast in those roles, as it is easiest to make white guys look crass in this way without causing offense.)  By making the attractions of war palpable, this film disturbs and confuses people and also occasions some of the worst critical reviews I have read.  It also, by understanding and then dissecting the attractions of blood lust, becomes a quite convincing anti-war movie, if you doubt this spend a few months studying The Iliad.  (By the way, Clint Eastwood, the director and producer, describes the movie as anti-war.)  The murder scenes create an almost unbearable tension, the sandstorm is a metaphor for our collective fog, and they had the stones to opt for the emotional overkill of four rather than just three tours of duty.  Iraq is presented as a hopeless wasteland with nothing of value or relevance to the United States, and at the end of the story America proves its own worst enemy.  It is not clear who ever gets over having killed and fought in a war (can anything else be so gripping?…neither family life nor sex…), even when appearances suggest a kind of normality has returned.  The generational cycle is in any case replenished.  I say A or A+, both as a movie and as a Rorschach test.

Two Days, One Night has some of the worst economics I have seen in a movie, ever.  It would be brilliant as a kind of Randian (or for that matter Keynesian) meta-critique of the screwed up nature of Belgian labor markets and social norms, and most of all a critique of the inability of the Belgian intelligentsia to understand this, except it is not.  It is meant as a straight-up plea for sympathy for the victim and as such it fails miserably, even though as a movie it embodies reasonably good production values.  Everything in the workplace of this solar power company is zero-sum across the workers and we never see why.  The protagonist campaigns to get her job back, but never asks or even considers how she might improve her productivity or attitude, asking only on the basis of need.  (And she is turned down only on the basis of need.)  At one point her employer states the zero marginal product hypothesis quite precisely, something like “when you took time off, we saw that sixteen people could do the work of seventeen.”  She never asks if there might be some other way she could contribute — but she does need the money — nor does the notion of a better job match somewhere else rear its head.  The depictions of financial hardship confuse wealth and income, basic survival and discretionary spending.  The rave reviews this movie has received represent yet another Rorschach test and one which virtually every commentator seems to have failed.

In Defense of the Company Town

by on January 27, 2015 at 7:25 am in Economics, History | Permalink

In my EconTalk with Russ Roberts on proprietary cities I only mentioned company towns in passing. Even the great Milton Friedman got company towns wrong, however, so it’s worthwhile spending a little time to dispel some myths.

Take company stores. Why did mining companies often own the town store? The standard answer: to squeeze every nickel from the workers so they would “owe their soul to the company store.” But that lyrical argument makes no sense and the truth is actually closer to the opposite.

The mining towns were isolated geographically but they weren’t isolated from the national labor market. The number of workers in these towns moved up and down in response to the price of coal and the workers often traveled long-distances to work in the mines, sometimes from other states or other countries. The company towns were isolated not because the workers couldn’t get out but because few people wanted to live where coal was abundant. As a result, workers had to be enticed to travel to and to live in these towns. Oil rigs are similarly isolated today and once on board the workers have nowhere to go but the company restaurant, the company theater and the company gym but that hardly means that the workers are exploited.

Since the mine workers weren’t isolated from the national labor market they had to be paid wages consistent with wages elsewhere and indeed on an hourly basis wages in mining were higher than in manufacturing (not surprising since these jobs were riskier). Moreover, workers weren’t dumb and so–just like workers today–they would consider the price of housing and the price of goods in these towns so see how far their wages would take them. All of this suggests that workers would not be fooled by high wages and really high prices at the company store that nullified those wages. And indeed, prices at company stores were not especially high and were similar to prices at independent stores in similar locations.

It was possible to find examples of a good at a particular company store which had a markedly higher price than at a particular independent store but this was cherry picking, (I am reminded of the exam question about two rival supermarkets both of which advertise “the average consumer at our store would pay 20% more if they shopped at our competitor.” The question asks how it can be possible that both stores are telling the truth.) Comparing identical baskets, prices at company stores were not higher than at similar independent stores.

I said that the traditional story actually gets things backward. We can see how by asking why the companies owned the stores. First, independent stores had to bear a lot of risk because they would be selling in a local economy that was dependent on a single mine. That risk was better born by the mining firm itself because it knew more about coal and fluctuations in the price of coal, its own plans, the time the mine would be expected to be open and so forth. Thus, it was cheaper for the mines to own the stores than for independents to own the stores.

Second, if an independent store did open they would have a monopoly and would want to charge a monopoly price but–and this is key–the higher the price charged by the independent store the higher the wages the coal mine would have to pay to compensate the workers. Thus monopoly independents would be bad for the workers but they would also be bad for the owners of the mine. If the mine owned the store, however, they would have a greater incentive than the independent store to lower prices because that meant they could save on wages. Overall, both workers and mine owners would be better off with company stores (A classic example of the double marginalization problem).

Similar arguments apply to company owned housing. On the one hand, this did mean that during a lengthy strike the firm could evict the workers from their housing. On the other hand, would you want to buy a house in an isolated town dependent on a single industry? Would you want to own a major asset that was likely to fall in price at the same time that you were likely to lose your job? Probably not. Rental housing meant that workers had the freedom to leave town easily when better work opportunities were available elsewhere – i.e., it meant that the workers were less isolated from the national labor market than they would be if they owned their homes and were tied down to a single place and a single employer. Moreover, the fact that the housing was company owned meant lower prices than if the housing was owned by an independent monopoly developer, the most relevant alternative (again because of the double marginalization problem).

The bottom line is that far from being an example of the abuse of monopoly power, the company town was an effort to constrain monopoly power.

References: The best source for an accurate view of the company towns in the mining industry is Price Fishback’s Soft Coal, Hard Choices: The Economic Welfare of Bituminous Coal Miners, 1890-1930. The book is based on a series of papers (JSTOR).

The company towns built by the mines weren’t especially pretty but some of the other company towns, especially those which employed high-skilled workers, were professionally designed by the leading architects of the day and they came with parks, playgrounds, retail areas, public transportation, churches and a variety of services. In essence, these company towns were doing what Google does today, competing for workers with amenities. Margaret Crawford’s book, Building the Workingman’s Paradise, is an interesting history showing how company towns pioneered a number of architectural and planning innovations that later found there way into many post World War II home developments.

Each monastery had its own estates, and all the people farming on these estates paid taxes in money and goods.  One of the main tasks of the stewards was to increase this income; for instance, by lending grain back to the peasants at high interest rates, or selling goods at market.  Before the destruction of the monasteries in the 1960s, they owned as much as half of Tibet’s farmland.

The description however is referring to the 15th century.  Another interesting part of the book concerns how, during Tibet’s “Golden Age,” the Tibetans tried to impose their language and culture on the neighboring regions of China, and with some success.

That is all from Sam Van Schaik, Tibet: A History.

Jinfeng Luo and Yi Wen from the St. Louis Fed have a new working paper (pdf), “Institutions Do Not Rule: Reassessing the Driving Forces of Economic Development”:

We use cross-country data and instrumental variables widely used in the literature to show that (i) institutions (such as property rights and the rule of law) do not explain industrialization and (ii) agrarian countries and industrial countries have entirely different determinants for income levels.

In particular, geography, rather than institutions, explains the income differences among agrarian countries, while institutions appear to matter only for income variations in industrial economies.  Moreover, we find it is the stage of economic development (or the absence/presence of industrialization) that explains a country’s quality of institutions rather than vice versa.

The finding that institutions do not explain industrialization but are instead explained by industrialization lends support to the well-received view among prominent economic historians — that institutional changes in 17th and 18th century England did not cause the Industrial Revolution.

I am reminded of a puzzle which I think was first posed by Jeff Sachs.  Go back to 1960 and choose any measure of institutional quality you want.  Then see how well it predicts cross-national growth since then.  And that is doing the exercise knowing how the answer comes out!

This is just published in the Journal of Development Economics, from Chris Bidner and Mukesh Eswaran, and the title is “A Gender-Based Theory of the Origin of the Caste System of India”:

We propose a theory of the origins of India’s caste system by explicitly recognizing the productivity of women in complementing their husbands’ occupation-specific skill. The theory explains the core features of the caste system: its hereditary and hierarchical nature, and its insistence on endogamy (marriage only within castes). Endogamy is embraced by a group to minimize an externality that arises when group members marry outsiders. We demonstrate why the caste system embodies gender asymmetries in punishments for violations of endogamy and tolerates hypergamy (marrying up) more than hypogamy (marrying down). Our model also speaks to other aspects of caste, such as commensality restrictions and arranged/child marriages. We suggest that India’s caste system is so unique because the Brahmins sought to preserve and orally transmit the Hindu scriptures for over a millennium with no script. We show that economic considerations were of utmost importance in the emergence of the caste system.

There are ungated versions of the paper here.  Here are earlier MR posts on the Indian caste system.  I think I am not enough of a rational choice theorist to believe in any explanation of this sort, still it is sometimes better to try and fail than never to try at all…

The pointer to this paper is from Michael Clemens.

Arrived in my pile

by on January 22, 2015 at 1:17 pm in Books, History, Philosophy | Permalink

Ian Morris, Foragers, Farmers, and Fossil Fuels: How Human Values Evolve.

A Tanner Lecture, with comments by Richard Seaford, Jonathan D. Spence, Christine Korsgaard, and Margaret Atwood, and edited by Stephen Macedo.  Due out March 22.

Equine markets in everything

by on January 19, 2015 at 1:38 am in Books, Economics, History | Permalink

Circa the late nineteenth century, in urban America:

Even the wastes of horses were commodified.  The collection of urban manure had old, even ancient roots.  Again, the process is most easily documented in New York City.  Before 1878, individuals roamed the street and picked up manure.  In that year the Common Council supposedly sold an exclusive license to a William Hitchcock, who sold the street sweepings to farmers for fertilizer.  Street sweepings varied in quality and were worth more if from an asphalt street than if from a gravel street or a dirty alley.  They were always worth less than stable manure, a purer product.  The older pattern of individuals collecting street manure for urban gardens never fully went away, and as late as the first half of the twentieth century neighborhood children in the Italian American neighborhood of East Harlem did a thriving business collecting horse manure from the streets for backyard gardens in the area.

That is from Clay McShane and Joel A. Tarr, The Horse in the City: Living Machines in the Nineteenth Century, an excellent book from 2007.  I am sorry it took me so long to discover this work.  It has wonderful sentences such as:

Stables rarely make it into the histories of the built environment, although they constituted a substantial part of that environment.

How can you go wrong with that?  There is good economics on every page of this book.

Good sentences from Nick Rowe

by on January 19, 2015 at 12:10 am in Economics, History | Permalink

The right won the economics debate; left and right are just haggling over details.

And here is another bit, one which is in danger of falling down the memory hole:

We easily forget how daft the 1970’s really were, and some ideas were much worse than pet rocks. (Marxism was by far the worst, of course, and had a lot of support amongst university intellectuals, though not much in economics departments.) When inflation was too high, and we wanted to bring inflation down, many (most?) macroeconomists advocated direct controls on prices and wages. And governments in Canada, the US, the UK (there must have been more) actually implemented direct controls on prices and wages to bring inflation down. Milton Friedman actually had to argue against price and wage controls and against the prevailing wisdom that inflation was caused by monopoly power, monopoly unions, a grab-bag of sociological factors, and had nothing to do with monetary policy.

Imagine if I argued today: “Inflation is dangerously low. In order to increase inflation, governments should pass a law saying that all firms must raise all prices and wages by a minimum of 2% a year, unless they apply for and get special permission from the Prices and Incomes Board to raise them by less.” What are the chances my policy proposal would be accepted?

Friedman had a mountain to move, and he moved it. And because he already moved it, we simply cannot have a Friedman today.

There is more here, mostly on Milton Friedman.

a public outcry has arisen over a town council plan to house refugees in a building that once served as a Nazi command post at the Buchenwald concentration camp.

Schwerte, a community of 50,000 south of Dortmund, has decided to move 21 refugees into the camp’s only remaining building on the outskirts of the town.

The move comes, town officials say, because all the refugee housing in the town’s jurisdiction is already filled with 200 asylum seekers, and the town doesn’t have the money to purchase temporary structures. According to the town council’s spokeswoman, “The solution is a practical one.”

The full story is here, via the excellent Mark Thorson.

They have a new NBER working paper on this topic, here is one key part of the abstract:

Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13.

They also consider, and cannot reject, the possibility that the output declines of recent times were due to additional negative variables, such as credit crunches, rather than higher values for the fiscal multiplier.

I predict this paper will be ignored rather than responded to.  For a while now it has been the practice to criticize “austerity” rather than to disaggregate the policies, or describe them with greater specificity, even though that is easy to do.  And it is incorrect to describe this paper as defending austerity, rather I read it as being anti-tax hike, and suggesting that “austerity” is not a very useful concept.

There is an ungated version of the paper here.

What a strange pattern to find in a book.  The first 264 pp. are good enough but not exceptional and at times boring through being overly familiar.  The last two chapters I found to be a brilliant treatment of recent Japanese politics through the lens of public choice models, probably the best since Karel von Wolferen’s The Enigma of Japanese Power.

Have you wondered what distinguishes the regime of one Japanese prime minister from another?  Which are the different interest groups for and against the consumption tax hike and why?  What accounts for the initial failure and then later resurgence of Abe?  What role does Okinawa play in broader Japanese politics?  Which kinds of regular struggles are played out between the elected officials and the bureaucrats?  What does a sentence like this mean?: “The people around Abe wanted, finally, to stamp out forever the ghost of Tanaka Kakuei.”

How many other books rise to “superb” status but only through their last two chapters?

Here is a review of the book from The Economist, positive but not along the lines I offer above.  Here is a Literary Saloon review.  Here is an FT review by the excellent David Piling.

You can order the book here.  It came out in December 2014 but will make my best books of 2015 list for sure.  For the initial pointer to this book I wish to thank Jim Olds.

That is a new (early 2014) and excellent book by Elaine Scarry, the subtitle is Choosing Between Democracy and Doom.  Here is one good sentence:

…the British government arranged a secure fallout shelter for 200 leading officials, it neglected to include the queen in its plans…

Here is a more thematic sentence:

The impossibility of “governing” nuclear weapons emerges across many pages of this book.

Recommended, and consistent with my long held view that the production of nuclear weapons represented one of the most fundamental revisions of the U.S. Constitution.  The discussion of nuclear submarines, and how hard it can be to send them revised orders, is both fascinating and scary.

From a 1991 essay, “What purposes can “international terrorism” serve?”:

…I want to offer another conjecture on why international terrorism is so rare…whereas individual acts of terrorism may be easily within the capabilities of quite ordinary individuals , a sustained campaign on any scale may require more people and more organization than could be viable in most target countries.  And there may be some negative feedback from the low success rate to the low attempt rate: Resourceful individuals, people with brains or people with money, may find terrorism so unpromising that they do not choose to contribute effort or money.  And any organization that is secret and dangerous risks both defection and infiltration; a group of people large enough to carry on a sustained campaign, perhaps simultaneously in different target areas, may simply be too vulnerable in defection and infiltration.  Even seeking financial help risks being informed on.

That is one of the essays in the book Violence, Terrorism, and Justice, edited by R.G. Frey and Christopher W. Morris.  By the way, Schelling cites the campaign of Palestinian radicals against Palestinian moderates as one of the examples of a successful terrorist plan.