Month: May 2014

Reconciling Hayek’s and Keynes Views of Recessions

by  Tyler Cowen in

There is a new NBER paper by Paul Beaudry, Dana Galizia and Franck Portier and perhaps it may apply to China:

Recessions often happen after periods of rapid accumulation of houses, consumer durables and business capital. This observation has led some economists, most notably Friedrich Hayek, to conclude that recessions mainly reflect periods of needed liquidation resulting from past over-investment. According to the main proponents of this view, government spending should not be used to mitigate such a liquidation process, as doing so would simply result in a needed adjustment being postponed. In contrast, ever since the work of Keynes, many economists have viewed recessions as periods of deficient demand that should be countered by activist fiscal policy. In this paper we reexamine the liquidation perspective of recessions in a setup where prices are flexible but where not all trades are coordinated by centralized markets. We show why and how liquidations can produce periods where the economy functions particularly inefficiently, with many socially desirable trades between individuals remaining unexploited when the economy inherits too many capital goods. In this sense, our model illustrates how liquidations can cause recessions characterized by deficient aggregate demand and accordingly suggests that Keynes’ and Hayek’s views of recessions may be much more closely linked than previously recognized. In our framework, interventions aimed at stimulating aggregate demand face the trade-off emphasized by Hayek whereby current stimulus mainly postpones the adjustment process and therefore prolongs the recessions. However, when examining this trade-off, we find that some stimulative policies may nevertheless remain desirable even if they postpone a recovery.

There is another copy here.

Should the Future Get a Vote?

by  Alex Tabarrok

Philosopher Thomas Wells argues that future citizens need the vote today:

…future generations must accept whatever we choose to bequeath them, and they have no way of informing us of their values. In this, they are even more helpless than foreigners, on whom our political decisions about pollution, trade, war and so on are similarly imposed without consent. Disenfranchised as they are, such foreigners can at least petition their own governments to tell ours off, or engage with us directly by writing articles in our newspapers about the justice of their cause. The citizens of the future lack even this recourse.

The asymmetry between past and future is more than unfair. Our ancestors are beyond harm; they cannot know if we disappoint them. Yet the political decisions we make today will do more than just determine the burdens of citizenship for our grandchildren. They also concern existential dangers such as the likelihood of pandemics and environmental collapse. Without a presence in our political system, the plight of future citizens who might suffer or gain from our present political decisions cannot be properly weighed. We need to give them a voice.

But how can we solve this problem? Wells has some very good insights:

If current citizens can’t help but be short-sighted, perhaps we should consider introducing agents who can vote in a far-seeing and impartial way. They would need to be credibly motivated to defend the basic interests of future generations as a whole, rather than certain favoured subsets, and they would require the expertise to calculate the long-term actuarial implications of government policies.

But then his solution turns laughable:

Such voters would have to be more than human. I am thinking of civic organisations, such as charitable foundations, environmentalist advocacy groups or non-partisan think tanks.

Well’s solution (give these groups votes) is so tied to his conception of what the “enlightened” future will bring that it clearly fails the far-seeing, impartiality, credibly motivated and expertise requirements that he outlines as desirable. We need not conclude, however, that Well’s plea is disingenuous or impossible but we do need a better implementation.

Robin Hanson’s government of prediction markets (“futarchy“) is a better approach. It is know well understood that relative to other institutions prediction markets draw on expertise to produce predictions that are far seeing and impartial. What is less well understood is that through a suitable choice of what is to be traded, prediction markets can be designed to be credibly motivated by a variety of goals including the interests of future generations.

To understand futarchy note that a prediction market in future GDP would be a good predictor of future GDP. Thus, if all we cared about was future GDP, a good rule would be to pass a policy if prediction markets estimate that future GDP will be higher with the policy than without the policy. Of course, we care about more than future GDP; perhaps we also care about environmental quality, risk, inequality, liberty and so forth. What Hanson’s futarchy proposes is to incorporate all these ideas into a weighted measure of welfare. Prediction markets would then be used to predict and make policy choices based on future welfare. Incorporated within the measure of welfare could be factors like environmental quality many years into the future. 

Note, however, that even this assumes that we know what people in the future will care about. Here then is the final meta-twist. We can also incorporate into our measure of welfare predictions of how future generations will define welfare. We could, for example, choose a rule such that we will pass policies that increase future environmental quality unless a prediction market in future definitions of welfare suggests that future generations will change their welfare standards. It sounds complicated but then so is the problem.

In short, more than any other form of government, futarchy is based on far seeing, impartial, expertise driven and credibly motivated predictions of future welfare and it is flexible enough to allow for a wide definition of welfare including taking into account the interests of future generations.

Hat tip: Carl Close.

Shanghai notes

by  Tyler Cowen in

Very good dumplings and noodle soups can be had on the streets in small restaurants for a dollar or two.  When you look further afield I can recommend Yi Long Court, a very fine Cantonese restaurant in the Peninsula Hotel.  Lost Heaven is a very good Yunnanese restaurant, get the Ti dishes, I enjoyed both branches of this place.  For Shanghai dishes, go to Jesse.

The more developed parts of Shanghai feel much more like the United States than any part of Beijing does, yet many traditional neighborhoods remain and there is plenty of good architecture from the early 20th century.  If not for the air pollution, this would be one of the best cities in the world.  It’s not that cheap, though, once you get past food and taxis.

The long, tree-lined alleys of Chinese neighborhoods have led to a superior reconceptualization of the outdoor shopping mall.

There are policemen who seem to be there to teach drivers how to back into spots using parallel parking.

For eleven years I’ve been writing about “Markets in Everything,” but here in Shanghai I transacted in one of those markets for the first time.  I went to “More Than Toilet,” a cafe/restaurant with a toilets theme.   Your chair is designed to look like a potty, and I was served my watermelon juice in a model of a urinal, with an elaborate straw, $6 for the experience.  (Who knows what I will try next?)  The food that was passing by looked horrible, like Chinese Denny’s on steroids.  I had blogged the original Taiwan branch of the place some time ago.

The luxury malls do not seem to have benches to sit down on and check your email.  But since hardly anyone is shopping in most of those malls, perhaps that doesn’t matter very much.

Chinese wheat eaters vs. rice eaters (speculative)

by  Tyler Cowen in

Angela Meng reports:

Researchers have found that people from rice-growing southern China are more interdependent and holistic thinkers, while those from the wheat-growing north are more independent and analytical.

The researchers call it “rice theory”, and they believe the psychological differences of southern and northern Chinese stem from their ancestors’ subsistence techniques – rice farming needs co-operation and planning; wheat farming requires less co-operation between neighbours.

…The last experiment assessed the nepotism, or group loyalty, of the participants. Students were given hypothetical scenarios and asked how they would treat friends and strangers in reaction to helpful or harmful actions. A defining characteristic of holistic culture is that people draw sharp contrasts between friend and stranger.

“The data suggests that legacies of farming are continuing to affect people,” Thomas Talhelm, of the University of Virginia and lead author of the research, said. “It has resulted in two distinct cultural psychologies that mirror the differences between East Asia and the West.”

Talhelm and his team concluded that the co-operative nature of rice-growing has cultivated a culture of interdependence, while wheat-growing has cultivated independence.

“I think the rice theory provides some insight to why the rice-growing regions of East Asia are less individualistic than the Western world or northern China, even with their wealth and modernisation,” Talhelm said.

Here is Talhelm’s home page.  Research summaries are here (interesting).  Links to his research are here, and the wheat paper is here.

For the pointer I thank the excellent Mark Thorson.

Nuclear science, event studies, and the other side of Armen Alchian

by  Tyler Cowen in

I had not known of this:

At RAND in 1954, Armen A. Alchian conducted the world’s first event study to infer the fissile fuel material used in the manufacturing of the newly-developed hydrogen bomb. Successfully identifying lithium as the fissile fuel using only publicly available financial data, the paper was seen as a threat to national security and was immediately confiscated and destroyed. The bomb’s construction being secret at the time but having since been partially declassified, the nuclear tests of the early 1950s provide an opportunity to observe market efficiency through the dissemination of private information as it becomes public. I replicate Alchian’s event study of capital market reactions to the Operation Castle series of nuclear detonations in the Marshall Islands, beginning with the Bravo shot on March 1, 1954 at Bikini Atoll which remains the largest nuclear detonation in US history, confirming Alchian’s results. The Operation Castle tests pioneered the use of lithium deuteride dry fuel which paved the way for the development of high yield nuclear weapons deliverable by aircraft. I find significant upward movement in the price of Lithium Corp. relative to the other corporations and to DJIA in March 1954; within three weeks of Castle Bravo the stock was up 48% before settling down to a monthly return of 28% despite secrecy, scientific uncertainty, and public confusion surrounding the test; the company saw a return of 461% for the year.

That is from a new paper by Joseph Michael Newhard, via the excellent Kevin Lewis.  There is an ungated copy of the paper here.

Vegetable Eggs

by  Alex Tabarrok in

Technology Review: Hampton Creek’s CEO, Josh Tetrick, wants to do to the $60 billion egg industry what Apple did to the CD business. “If we were starting from scratch, would we get eggs from birds crammed into cages so small they can’t flap their wings, shitting all over each other, eating antibiotic-laden soy and corn to get them to lay 283 eggs per year?” asks the strapping former West Virginia University linebacker. While an egg farm uses large amounts of water and burns 39 calories of energy for every calorie of food produced, Tetrick says he can make plant-based versions on a fraction of the water and only two calories of energy per calorie of food — free of cholesterol, saturated fat, allergens, avian flu, and cruelty to animals. For half the price of an egg.

At present, Hampton Creek is focusing on finding vegetable proteins than can substitute for eggs in cakes, salad dressings, mayo and so forth rather than replacing the over-easy at the diner. As with in-vitro meat, however, vegetable eggs pursued for economic reasons will end up greatly supporting the 21st movement for vegetarianism.

How Winning the Fields Medal Affects Scientific Output

by  Tyler Cowen in

That is the subtitle of a new paper (pdf) by and George J. Borjas and Kirk B. Doran, the abstract is this:

Knowledge generation is key to economic growth, and scientific prizes are designed to encourage it. But how does winning a prestigious prize affect future output? We compare the productivity of Fields medalists (winners of the top mathematics prize) to that of similarly brilliant contenders. The two groups have similar publication rates until the award year, after which the winners’ productivity declines. The medalists begin to “play the field,” studying unfamiliar topics at the expense of writing papers. It appears that tournaments can have large post-prize effects on the effort allocation of knowledge producers.

For the pointer I thank Sarah Brodsky.

*A Nation in Pain*

by  Tyler Cowen in

The author is Judy Foreman and the subtitle of this excellent book is Healing our Biggest Health Problem.  Here is one excerpt:

In those not-so-old days when Jeffrey was born, as a preemie, many doctors mistakenly believed that babies’ nervous systems were too immature to process pain and that, therefore, babies didn’t feel pain at all.  Or, doctors rationalized, if babies did somehow feel pain, it was no big deal because they probably wouldn’t remember it.  Besides, since nobody knew for sure how dangerous anesthesia drugs might be in tiny babies, doctors figured that if surgery was necessary to save a child’s life, they’d better operate anyway — and comfort themselves with the hope that the child wouldn’t feel pain.  As one scientific paper from those days intoned, “Pediatric patients seldom need medication for relief of pain.  They tolerate discomfort well,”

That’s preposterous, obviously.  But doctors had to have these self-protective beliefs for their own emotional survival, says Neil Schechter, a pediatric pain physician at Children’s Hospital in Boston. “Doctors were not sure how to do anesthesia in babies.  In response, they had to believe  that the babies couldn’t feel pain.  They were too scared of the anesthetics.”

Here is part of the Amazon summary:

Out of 238 million American adults, 100 million live in chronic pain. And yet the press has paid more attention to the abuses of pain medications than the astoundingly widespread condition they are intended to treat. Ethically, the failure to manage pain better is tantamount to torture. When chronic pain is inadequately treated, it undermines the body and mind. Indeed, the risk of suicide for people in chronic pain is twice that of other people. Far more than just a symptom, writes author Judy Foreman, chronic pain can be a disease in its own right — the biggest health problem facing America today.

This book will make my best of the year list.

Korean markets in everything, prison meditation edition

by  Tyler Cowen in

In the middle of nowhere on the outskirts of Hongcheon, 58 miles northeast of Seoul, Kwon Yong-seok runs “Prison Inside Me,” a stress-reduction center with a penal theme. A meditation building, auditorium and management center sit on a 2-acre piece of land.

It is like this:

In June last year, the construction of the prison-like spiritual house was completed. It took a year and cost Mr. Kwon and his wife Roh Ji-hyang, head of a theater company, 2 billion won, or $19 million. Parts of the cost were covered by donations and loans from friends and relatives. Mr. Kwon says the goal of the facility, which has 28 solitary confinement cells, isn’t to make a profit.

On top of private meditation sessions, paying guests are helped to reflect on their lives and learn how to free themselves from what Mr. Kwon calls the “inner prison,” through meditation, spiritual classes and “healing” plays in a group session in the auditorium. A two-night stay costs 150,000 won or about $146.

But it may not succeed:

So far, it hasn’t been as easy for the couple to run the place as they had envisioned. They had to cut the length of stays to as little as two days because people aren’t willing to, or simply can’t, take time off. Also the facility had to make another big concession to modernity—allowing guests to check their smartphones at least once a day.

The full story is here, and for the pointer I thank Ben Smeal.

The growth of on-line tests in assessment (average is over)

by  Tyler Cowen in

This continues to be a growing trend:

T-Mobile asks job applicants to take this [problem-solving, for a customer] test before inviting them for an interview because the company has found powerful correlations between the online assessments and success on the job. High scorers tend to resolve customer calls about 25 seconds faster than those who receive low scores. That means they can handle one more call a day and about 250 more a year.

More generally:

Companies are using these tests to evaluate skills and personalities for job openings at every rung of the career ladder, from bank teller to C-suite executive. They are not merely on-screen versions of decades-old paper employment tests. They are built on the power of big data: Creators have harnessed a massive trove of results to help companies pinpoint the kind of worker who might thrive in a particular job.

The legion of tests is only growing:

Some tests evaluate a specific skill, such as how quickly and accurately someone can make change from an onscreen cash register or program software in the Java coding language. Many tests incorporate simulations of scenarios one might encounter on the job. Marriott International, for example, shows housekeeping applicants a photo of a landscaped area at one of its hotels and asks candidates to determine what’s wrong with it. (Perhaps a gardening tool was not put away properly). In one of CEB’s tests for a supervisory role, applicants might have to demonstrate how they would talk to an employee who was coming in late and missing important meetings.

We are entering a new “meritocracy,” at least for people who test well, especially on-line:

Providers say the tests hold the promise of leveling the playing field for job applicants by removing the chance of bias that comes with a traditional résumé screening. The tests can’t distinguish, for example, if a candidate didn’t attend a top-tier college, is currently unemployed or is a woman or minority.

“In many cases, algorithms can trump instinct on staffing,” said John Boudreau, a professor in the business school at the University of Southern California, adding that decades of research have found that tests can serve as reliable barometers of certain personality traits, such as conscientiousness.

The full story, by Sarah Halzack, is here.