Month: November 2008

Outliers

The book is getting snarky reviews but if it were by an unknown, rather than by the famous Malcolm Gladwell, many people would be saying how interesting it is.  The main point, in economic language, is that human talent is heterogeneous and that the talent of a particular person must mesh with the capital structure of his or her time if major success is to result.  The book is best read as a supplement to Ludwig Lachmann’s Capital and its Structure.  The main enduring insight of both Lachmann and Gladwell is simply how much we live in a world of complementarity rather than substitutability.

Nowhere in the book does the name Dean Keith Simonton (check out the headings to these links) appear nor does the phrase "multiplicative model of human success."  A lot of the content here has already been done with more rigor and empirical support and also in readable form I might add.  Everyone should read Simonton, noting that his hypotheses fare better in the arts than in politics.

If you ask too much from Outliers it will fall apart.  It is too easy to find contingency in the world and Gladwell doesn’t begin to look for a theory of which contingencies are interesting or not.  For instance arguably Ludwig van Beethoven would not have been a great composer if:

1. An extra butterfly had died two million years ago.

2. The outcome of the Thirty Years’ War had been different.

3. The Germany of his time had not had fortepianos.

4. His parents had conceived their child one second earlier.

5. Haydn had not paved the way.

#3 and #5 seem more interesting than #1 and #4 but that’s because some contingencies just don’t help us understand the world very much.  Gladwell never gives us enough theoretical structure to see why his contingencies are the relevant ones.  Simply showing the contingencies in personal histories is not, taken alone, very enlightening.

Gladwell’s contingency stories skid out of control.  At one point it seems the main claim is that the steady accumulation of advantages is what matters, but once you ask which advantages end up "counting," the claim collapses into tautology.

There is also a "PC" undercurrent in the book of "don’t write anyone off" but if everything is so contingent on so many factors, maybe writing people off isn’t such a big deal.  It could go either way.  It depends. 

Gladwell deliberately steers us away from the contingency of genetic endowment (even for a given set of parents, which sperm got through?), but if you hold everything else fixed you can assign a very high marginal product to the genetic factor if you wish, usually up to 100 percent of a person’s outcome.  That mental exercise is verboten but somehow it is OK to hold the genetic endowment constant and vary some other historical factor and regard that as a meaningful contingency.  See the discussion of Beethoven above, especially #4 on the list.

Gladwell descends into the swamp of contingency but he is unwilling to really live in it and take it seriously or, alternatively, to find a way out. 

In reality the complementarity concept is easier to work with and also more fruitful for thinking about policy implications or for that matter the implications for management or talent training.  Success is fragile but foster competing cultures based on clusters of talent motivated by rivalry and emulation.  Don’t filter out the eccentrics or the risk takers.  That’s about where David Hume ended up but Gladwell never gets anywhere close.

It’s still a good book and a fun book.  You can order it here.

Peter Orszag for OMB?

If reports are true and Barack Obama is really going to tap widely
respected CBO Director Peter Orszag to head up the Office of Management
and Budget (it’s like the CBO, but for the White House, so it makes
sense) then I believe that would make him the highest-ranking blogger in the history of the United States of America.

Here is more.  Orszag, of course, is a very good economist.

Markets in everything: Cupzzas, a pizza baked in cupcake form

"We just really wanted to shatter the cupcake-pizza dichotomy. It’s just existed for too long."

I am a monist myself.  Here is much more information.  It is also an example of Thomas Schelling’s idea of research by accident:

"[A] lot of our ideas come from just not having the proper materials," Wilder said. "Like the pupzzas came from not being able to find the large tins."

Facts about automakers

Yermack estimates that the aggregate capital investment in GM and Ford since 1980 has led to a net reduction in capital of $465 billion…This is what I find particularly disturbing: with that $465 billion, “GM and Ford could have closed their own facilities and acquired all of the shares of Honda, Toyota, Nissan, and Volkswagen.”

Here is more.  And here are facts about GM wages.

The wisdom of Gordon Tullock, part II

The U.S. Navy said pirates commandeered a Saudi-owned supertanker
bearing more than $100 million worth of crude a few hundred miles off
the Kenyan coast, an attack that sharply increases the stakes in an
effort by governments and militaries to protect the world’s
energy-supply lines.

U.S. Navy officials said the hijacking was unprecedented for its
distance from shore and the size of its target — a ship about the
length of a U.S. aircraft carrier. The attack appears also to be the
first significant disruption of crude shipments in the region by
pirates.

Here is the story.  Here is Peter Leeson’s paper on pirates.  I don’t yet see it on Amazon, but stay tuned for Peter’s forthcoming book The Invisible Hook

I thank Brad Williams for the pointer.

Addendum: From another article:

The pirates’ profits are set to reach a record $50 million in 2008,
Somali officials say. Shipping firms are usually prepared to pay,
because the sums are still low compared with the value of the ships.

Investment in the Great Depression

Brad DeLong shows a graph of how Gross Private Domestic Investment rises during the New Deal, except for the contractionary 1937-8 downturn.  The pattern is striking.

A loyal MR reader emails me a citation to Robert Higgs’s book, which on Google (pp.6-7) claims that net investment was negative over the 1930-35 period.  There is talk of a "capital consumption allowance" and that allowance accounts for the difference between the gross and the net terms.  Only in 1941 did net investment exceed its 1929 level.  Here’s a chart which seems consistent with these claims and which shows the difference between the net and the gross series for investment.  The waves are very similar but at different absolute levels.

Can any readers explain what is going on  In this time period, using this data, is net or gross investment a better indicator of recovery and economic conditions?  Is the pro-New Deal claim that making net investment "less negative" (but still negative) counts as a success or rather that the gross investment series is what matters? 

When I look at this data series — whether gross or net — I see a few monetary policy actions (initial reflation, breaking the old link to gold, increasing reserve requirements in 1936) as the dominant explanatory variables. 

The Obama transition: science and the arts

President-elect Barack Obama continues to name members of his transition team.
Among the latest announcements are that the National Science Foundation
agency review will be led by Jim Kohlenberger – who was senior domestic
policy adviser to Vice President Al Gore, where he focused on science
and technology – and Henry M. Rivera, a lawyer. For the arts and
humanities transition team, Obama has selected Bill Ivey, director of
the Curb Center for Art, Enterprise, and Public Policy at Vanderbilt
University and former chairman of the National Endowment for the Arts;
Anne Luzzatto, who served in the Clinton administration as a special
assistant to the president and who has more recently been vice
president for meetings and outreach at the Council on Foreign
Relations; and Clement Price, the Board of Governors Distinguished
Service Professor of History and director of the Institute on
Ethnicity, Culture, and the Modern Experience at Rutgers University at
Newark.

Here is the link.  Those names are not huge surprises and of course you will again see the imprint from the Clinton administration.

Fighting the liquidity trap

If you don’t like public spending you could do it this way: Give every voter a federal debit card. And put the money in their accounts. Tell them if they don’t spend it this month, the government will take it back.

Some people will try to cheat and find ways to save the money, but probably not many.

Some people will use the money to pay down their credit cards. That’s good. The less they pay in interest each month the more they can spend.

That’s J Thomas from the MR comments and you can think of it as Silvio Gesell plus some modern technology.  I’m not recommending this policy, just noting that in terms of stimulating aggregate demand it both vanquish a liquidity trap and it would outperform government spending or what I call "raising taxes in the future."

Meta-list of the “best of” books of the year

Not all the "best of" book lists are out, but I can issue a preliminary report, with possible updates to follow.  This year opinion about best books seems unusually diverse.  Not so many books have been intellectually central to the market.  I have seen the following titles pop up repeatedly on "best of" lists:

Roberto Bolaño, 2666.  Duh.  After four hundred pages of reading, I see it as less perfect than The Savage Detectives but it has greater world-historic reach and even some sprawl.  A clear first choice in almost any year.

Julian Barnes, Nothing to be Frightened Of.  I like some of Barnes’s work, most of all Flaubert’s Parrot, but I am embarrassed that such a shallow book would receive any favorable notice at all.

The Forever War, Dexter Filkins.  The quality of the journalism is high but for me it was insufficiently conceptual so I put it down after fifty pages or so.

The Story of Edgar Sawtelle: A Novel, By David Wroblewski.  I liked the 150 or so pages I read but just didn’t have the time or the love to finish it.  It reminds me of Stephen King’s better work.

I’ve drawn from the lists you will find here, among others.

During the year I saw many favorable reviews for Alexsandar Hemon’s The Lazarus Project (I liked it) and Amitav Ghosh’s Sea of Poppies (I haven’t read it yet), though neither seems to be popping up on so many "best of" lists.  Perhaps Robin Hanson would view such lists as signaling rather than a honest statement of preferences.

Can one be a liquidity trap denialist?

Let’s say the central bank targets the (eventual) rate of price
inflation and not the price level itself.  Then even a one-shot burst
of helicopter-drop money induces more consumer spending rather than more money demand.  It was Meyer
Burstein who best explained Patinkin’s "real balance
effect" in terms of weakly dominant game-theoretic strategies.  If you
wait to spend
your money, later prices will be higher, if only with some probability
(thus it matters that the central bank commits to a preferred rate of
forward-looking inflation, rather than restoring the previous price
level; the latter would mean deflationary expectations and
possibly take away the real balance effect).  Nothing in the
Patinkin/Burstein logic requires any particular degree of optimism
about economic conditions.  In fact very pessimistic consumers may be
the most likely to scramble after goods now, again putting the real
balance effect into play and pushing up prices.  Nor is a strongly positive nominal interest rate required for the real balance effect.  Don’t be fooled by
representative agent models which draw a single flat horizontal line
for the return to holding money curve; this is about game theory.

The greater a hoard of cash you are holding, the more likely that
the spending behavior of other consumers will inflict a negative
pecuniary externality on each consumer and thus again the more likely a
real balance effect, following a helicopter drop of money.  Of course with
interdependent strategies there are usually multiple equilibria.  You
can get a "liquidity trap equilibrium" by postulating an adjustment
cost to portfolio decisions, combined with just the right kind of a
trigger strategy equilibrium (everyone holds her new money cautiously, but poised to strike with quick new spending, if need be).  In that sense I am not a pure liquidity trap
denialist although I think such an equilibrium is unlikely.

Here are my previous posts on the liquidity trap.

The wisdom of Bruce Bartlett

I think it would be a terrible mistake to simply write a check to the
auto industry without demanding major, major restructuring of its labor
contracts. Without that the money will simply go down a rat hole and
the automakers will just be back again in a year or two asking for more
money. Obama has a strong hand to play here and I hope he uses his
leverage. With bankruptcy as the only alternative to federal aid, he
can drive a very hard bargain with the auto workers. If he caves and
just writes a blank check, everyone will know he can be rolled and he
will pay a heavy political price for it. If Obama shows toughness on
this issue, I think it will pay enormous dividends for him down the
road.

Via Brad DeLong, Bruce is now blogging.  And if you want some provocation, here is Kevin Drum on the idea of a GM bailout. And Felix Salmon has some interesting ideas.

Claims about Africa

The conversation confirmed an opinion that has crystallised over the
past few years: if, as a westerner, you are going to visit Africa, the
earlier in your life you do it, the better. By the time you are in your
twenties, your head is so stuffed with preconceived opinions, mostly of
the ethically self-flagellating variety, you can barely see, let alone
interpret, what is going on outside you.

Here is the link, courtesy of www.bookforum.com.  I am interested in the claim that there is an optimal time in one’s life to travel.  Many people do not get to travel much until their children leave the house.  But when are the cognitive returns to travel the highest?  I believe one must first know some theory before travelling — perhaps even some false theory — otherwise the travel does not come as a sufficient shock.  In other words, the more you read and ponder social reality, the lower is your optimal cognitive age for travel.

Where has all the income gone?

  • The U.S. Census Bureau reports that median household
    income stagnated from 1976 to 2006, growing by only 18 percent. In
    contrast, data from the Bureau of Economic Analysis indicate that
    income per person was up 80 percent.

  • Three data issues adversely impact reported median household income gains: the choice of price index, a change in the mix of household types and the measure of income used.

  • After adjusting the Census data for these three issues, inflation-adjusted median household income for most household types is seen to have increased by 44 percent to 62 percent from 1976 to 2006.

That’s from Terry Fitzgerald at the Minneapolis Fed.  I am not sure if he is asserting that his alternatives measures are just that — alternative measures — or if they are the true and correct measures in the sense of being better than the alternatives.  In any case this is the latest look at a long-contentious issue.  I thank Don Boudreaux for the pointer.