Category: Books

Tearing Up an Economics Textbook

Robert Samuelson, the economics columnist, has written a column titled, It’s time we tear up our economics textbooks and start over. What he actually says is we should tear up Greg Mankiw’s Principles of Economics:

But as a teaching device, [Mankiw’s] “Principles of Economics” has fallen behind. There’s little analysis of the impact of the Internet and digitalization on competition and markets. I couldn’t find either Apple or Facebook in the index; Google gets a few mentions.

Likewise, little attention is paid to the 2007-2009 Great Recession, the worst business downturn since the Great Depression, which also receives scant coverage relative to its significance. (Together, the two recessions receive about three pages, from 725 to 727.)

There’s some misleading information about the Great Recession and parallel financial crisis. On Page 691, we have this: “Today, bank runs are not a major problem for the U.S. banking system or the Fed.” This would surely surprise the Fed, which poured trillions of dollars into the economy to prevent financial collapse.

Mankiw’s assertion can be defended on narrow, technical grounds. There was no run by retail depositors (people like you and me) against commercial banks. We were protected by deposit insurance. But there was a huge run — a panic — by institutional investors (pension funds, hedge funds, insurance companies, endowments) that withdrew funds from traditional banks, investment banks and the commercial paper market.

…Mankiw’s textbook needs more than a touch-up; it needs a major overhaul. It has very little history: for example, the industrialization of the 19th century. Nor is there much about the expansion of the global economy. China gets a few mentions.

The market for principles textbooks, however, is competitive and there are alternatives to Mankiw. Krugman and Wells, for example, have a lot of very interesting boxes on the world economy and historical events. Modern Principles of Economics doesn’t use boxes but we illustrate the principles of economics with historical events and, of course, we use tech companies such as Facebook and Apple to discuss network effects and coordination games. Samuelson is a bit harsh on Mankiw, however, because it’s very easy to overwhelm students with details. Like physics, economics is powerful because it explains many things with a handful of principles. It’s true that Mankiw’s book doesn’t have much history or color–his paradigmatic market is the market for ice cream–but abstraction can focus attention. The tradeoff, of course, is that it can also lead to vanilla economics. But the Mankiw text is clearly written and the micro text is especially well organized, one reason we chose a similar organization for Modern Principles.

In Modern Principles we illustrate the ideas with more interesting markets but we work with them repeatedly so students don’t become overwhelmed. Our paradigmatic market is the market for oil. We use it to teach supply and demand, cartels, and the importance of real macroeconomic shocks. Using the market for oil also lets us teach about some important events in world history such as the OPEC oil crisis and the industrialization of China.

Samuelson is correct that the financial crisis was a run on the shadow banks but he’s incorrect that this isn’t taught to students of Econ 101. Here’s Tyler on the financial crisis. He covers leverage, securitization, asymmetric information, bank runs, fire sales and the rise of the shadow banking system. Students with the right textbook are well informed about the financial crisis and the economic principles that can help us to understand, analyze and perhaps avoid future financial crises.

The Economist covers Why Are the Prices So D*mn High?

The Economist does a very nice job covering Why Are the Prices So D*mn High.

Baumol’s earliest work on the subject, written with William Bowen, was published in 1965. Analyses like that of Messrs Helland and Tabarrok nonetheless feel novel, because the implications of cost disease remain so underappreciated in policy circles. For instance, the steadily rising expense of education and health care is almost universally deplored as an economic scourge, despite being caused by something indubitably good: rapid, if unevenly spread, productivity growth. Higher prices, if driven by cost disease, need not mean reduced affordability, since they reflect greater productive capacity elsewhere in the economy. The authors use an analogy: as a person’s salary increases, the cost of doing things other than work—like gardening, for example—rises, since each hour off the job means more forgone income. But that does not mean that time spent gardening has become less affordable.

It’s an implication of the Baumol effect that everyone ends up working in a low productivity industry!

The only true solution to cost disease is an economy-wide productivity slowdown—and one may be in the offing. Technological progress pushes employment into the sectors most resistant to productivity growth. Eventually, nearly everyone may have jobs that are valued for their inefficiency: as concert musicians, or artisanal cheesemakers, or members of the household staff of the very rich. If there is no high-productivity sector to lure such workers away, then the problem does not arise.

Misunderstanding the Baumol effect can lead to a cure worse than the “disease”:

These possibilities reveal the real threat from Baumol’s disease: not that work will flow toward less-productive industries, which is inevitable, but that gains from rising productivity are unevenly shared. When firms in highly productive industries crave highly credentialed workers, it is the pay of similar workers elsewhere in the economy—of doctors, say—that rises in response. That worsens inequality, as low-income workers must still pay higher prices for essential services like health care. Even so, the productivity growth that drives cost disease could make everyone better off. But governments often do too little to tax the winners and compensate the losers. And politicians who do not understand the Baumol effect sometimes cap spending on education and health. Unsurprisingly, since they misunderstand the diagnosis, the treatment they prescribe makes the ailment worse.

My only complaint is that the excellent reviewer has not followed our lead and called it the Baumol effect–cost disease is a misleading name!

Addendum: Other posts in this series.

*Talking to Strangers*, the new Malcolm Gladwell book

Definitely recommended, talking to strangers is one of the most important things you do and it can even save your life.  This book is the very best entry point for thinking about this topic.  Here is a summary excerpt:

We have strategies for dealing with strangers that are deeply flawed, but they are also socially necessary.  We need the criminal justice system and the hiring process and the selection of babysitters to be human.  But the requirement of humanity means that we have to tolerate an enormous amount of error.  That is the paradox of talking to strangers.  We need to talk to them.  But we’re terrible at it — and, as we’ll see in the next two chapters, we’re not always honest with each other about just how terrible at it we are.

One recurring theme is just how bad we are at spotting liars.  On another note, I found this interesting:

…the heavy drinkers of today drink far more than the heavy drinkers of 50 years ago.  “When you talk to students [today] about four drinks or five drinks, they just sort of go, “Pft, that’s just getting started,'” the alcohol researcher Kim Fromme says.  She says that the heavy binge drinking category now routinely includes people who have had twenty drinks in a sitting.  Blackouts, once rare, have become common.  Aaron White recently surveyed more than 700 students at Duke University.  Of the drinkers in the group, over half had suffered a blackout at some point in their lives, 40 percent had had a blackout in the previous year, and almost one in ten had had a blackout in the previous two weeks.

And:

Poets die young.  That is not just a cliche.  The life expectancy of poets, as a group, trails playwrights, novelists, and non-fiction writers by a considerable margin.  They have higher rates of “emotional disorders” than actors, musicians, composers, and novelists.  And of every occupational category, they have far and away the highest suicide rates — as much as five times higher than the general population.

It also turns out that the immediate availability of particular methods of suicide significantly raises the suicide rate; it is not the case that an individual is committed to suicide regardless of the means available at hand.

Returning to the theme of talking with strangers, one approach I recommend is to apply a much higher degree of arbitrary specificity, when relating facts and details, than you would with someone you know.

In any case, self-recommending, this book shows that Malcolm Gladwell remains on an upward trajectory.  You can pre-order it here.

China Bible fact of the day

The parent company of the two largest Bible publishers in the United States has warned the Trump administration that proposed tariffs on China would amount to a “Bible tax.”

Trump’s proposed tariffs on $300 billion in Chinese-made products would affect books and other printed materials, according to Bloomberg. That includes Bibles, which are overwhelmingly printed in China because of the specialized technology and skills they require to produce…

More than half of the 100 million Bibles printed every year have been printed in China since the 1980s, he said. Of those, 20 million are sold or given away in the United States.

That’s because of the specialized printing requirements for a complex book such as the Bible, which requires thin paper that cannot be fed into standard printing equipment, leather covers, stitched binding, color pages and special inserts such as maps.

Here is the full Washington Post story.

*One Giant Leap*

The author is Charles Fishman, and the subtitle is The Impossible Mission That Flew us to the Moon.  Here is one excerpt:

It [NASA’s Mission Control] was the first real-time computing facility IBM had ever installed.

And:

…the Apollo flight computer was the first anywhere to have responsibility for human lives.

That computer had 73 kilobytes of memory and had 0.000002 percent of the computing capacity of an iPhone.  And don’t forget this:

At least while you were headed outbound, you’d have plenty of fuel to correct things.  Coming home from the Moon is a lot less forgiving.  The heat of reentry, the splashdown targeting into the ocean, and the g-forces piling up on the spaceship and the astronauts inside combine to create a very thin slice of air you need to slide your spaceship into.  The command module had just 1 degree of latitude on reentry.  Too shallow an angle, and your space capsule skips off the top of the atmosphere like a flat stone — out into space and a wide orbit around the Earth, from which there was no rescue.  Too steep a cut into the atmosphere, and the speed, heat, and g-forces would combine to incinerate your space capsule.  And unlike on the way out, on the way back there are no go-arounds.

Definitely recommended, gripping from start to finish.  Overall the best history of how the space revolution and the computer revolution were interconnected.

What I’ve been reading

1. Graeme D. Ruxton, Nature’s Giants: The Biology and Evolution of the World’s Largest Lifeforms.  Picture books are underrated!  They are like a better version of Wikipedia, and with glossy paper at that.

2. Neil Irwin, How to Win in a Winner-Take-All World: The Definitive Guide to Adapting and Succeeding in High-Performance Careers, is another excellent book by Neil Irwin, and it is both subtler and broader than the title alone would indicate.

3. Matthew Sadler and Natasha Regan, Game Changer: AlphaZero’s Groundbreaking Chess Strategies and the Promise of AI.  Everything you wanted to know about AlphaZero and already have been asking, lots of games and illustrations but also lots of plain text.  Definitely recommended, if you care that is.  AlphaZero, by the way, never plays 1. e4, mostly because it sees 1…e5 in response as giving Black nearly equal chances.

4. John Brockman, editor, The Last Unknowns: Deep, Elegant, Profound UNANSWERED QUESTIONS About the Universe, the Mind, the Future of Civilization, and the Meaning of Life.  My nominated question was: “How far are we from wishing to return to the technologies of the year 1900?”  NB: you get only the questions, not the answers.

Leah A. Plunkett, Sharenthood: Why We Should Think Before We Talk About Our Kids Online, high time there has been a book with this message, and this is it.

Fiona MacCarthy, Gropius: The Man Who Built the Bauhaus also has plenty of interesting information about Alma Mahler, beyond what is in the Tom Lehrer song.

Chris Sagers, United States v. Apple: Competition in America, is a useful look at the antitrust case over eBook pricing, though the actual book does not start until p.79 or so.

*The Great Successor*

The author is Ana Fifield, and the subtitle is The Divinely Perfect Destiny of Brilliant Comrade Kim Jong Un.  I’ve never read a book that has so much actual information about Kim, most of all about his early time in Switzerland.  Or how about this?:

Kim Jong Un’s efforts to clamp down on illegal drugs did not work.

At the time he left North Korea, Mr. Kang estimated that about 80 percent of the adults in Hoeryong were using ice [meth], consuming almost two pounds of the highly potent drug every single day…

For many North Koreans, taking meth became an essential part of daily life, a way ot ease the grinding boredom and deprivations of their existence.  For that reason, drugs can never be eradicated, he said.

Men are not allowed to have long hair, the concentration camps are reputed to be worse than those of the Nazis, and there is a detailed account of the rise of the “new rich” class in Pyongyang.  Plastic surgery has arrived as well.

Definitely recommended, the book also serves up the inside story on the Dennis Rodman visit to North Korea.  By the way, Kim hates the showiness of the Harlem Globetrotters.

*The Great Cauldron: A History of Southeastern Europe*, by Marie-Janine Calic

This book is perhaps the best general overview of its chosen subject area.  One part I enjoyed were the discussions of how much the Balkans once had numerous transport hubs for Europe, Belgrade being one but not the only example:

Thessaloniki was among the cities that experienced an economic boom.  The city was home to the third most important port in the Ottoman Empire.  Between 1880 and 1912, the volume of goods traded in Thessaloniki doubled from one to two million tons.  There were railway connections to Vienna and Istanbul.  new local factories produced flannel, woolen, and cotton products, as well as cigarettes.  Important exports included leather, silkworms, raw materials for textiles, and especially tobacco, the production of which took off around the turn of the century.  Thirty-eight of fifty large companies in the city were owned by Jewish families…The majority of these families specialized in the import-export business.

And:

Between 1850 and 1913, the value of exports from Serbia increased by a factor of five, and from Romania by a factor of fourteen.

You can order the book here.  I think about the Balkans a great deal (and enjoy visiting there), if only because they are one simple alternate scenario for what the rest of world history will look like.

That was then, this is now

From Mrs. Bird, wife of Senator Bird, from Harriet Beecher Stowe’s Uncle Tom’s Cabin:

“Well; but it is true that they have been passing a law forbidding people to give meat and drink to those poor colored folk that come along?  I heard they were talking of some such law, but I didn’t think any Christian legislature would pass it!”

And today’s version?: “An activist faced 20 years in prison for helping migrants. But jurors wouldn’t convict him.”  The activist was giving them food and water, but that law against that of course is on the books, as it was in Harriet Beecher Stowe’s time for aiding fugitive slaves.  Later in the chapter (vol.I, chapter IX) Mrs. Bird continues:

“It’s a shameful, wicked, abominable law, and I’ll break it, for one, the first time I get a chance; and I hope I shall have a chance, I do!  Things have gotten to a pretty pass, if a woman can’t give a warm supper and a bed to poor, starving creatures, just because they are slaves, and have been abused and oppressed all their lives, poor things!

…Now, John, I don’t know anything about politics, but I can read my Bible; and there I see that I must feed the hungry, clothe the naked, and comfort the desolate; and that Bible I mean to follow.”

Here is a discussion of the religious issues behind current “aiding the immigrant” cases.

Neglected Open Questions in the Economics of Artificial Intelligence

That is my essay in the new NBER volume The Economics of Artificial Intelligence: An Agenda, edited by Ajay Agrawal, Joshua Gans, and Avi Goldfarb.  Here is one excerpt from my piece:

These distribution effects [from more powerful AI] may be less egalitarian if hardware rather than software is the constraint for the next generation of AI.  Hardware is more likely to exhibit constant or rising costs, and that makes it more difficult for suppliers to charge lower prices to poorer buyers [price discrimination].  You might think it is obvious that future productivity gains will come in the software area — and maybe so — but the very best smart phones, such as IPhones, also embody significant innovations in the areas of materials.  A truly potent AI device might require portable hardware at significant cost.  At this point we don’t know, but it would be unwise to assume that future innovations will be software-intensive to the same extent that recent innovations have been.

You can buy the book here, it has many notable contributors and other essays of interest.

The new Ben Horowitz management book

What You Do Is Who You Are: How to Create Your Own Business Culture.  It is the best book on business culture in recent memory, here is one bit:

When Tom Coughlin coached the New York Giants, from 2004 to 2015, the media went crazy over a shocking rule he set: “If you are on time, you are late.”  He started every meeting five minutes early and fined players one thousand dollars if they were late.  I mean on time…”Players ought to be there on time, period,” he said.  “If they’re on time, they’re on time.  Meetings start five minutes early.”

And:

Two lessons for leaders jump out from Senghor’s experience:

  1. Your own perspective on the culture is not that relevant.  Your view or your executive team’s view of your culture is rarely what your employees experience.

You can pre-order the book here, due out in October.

Laying of cable for the transatlantic telegraph is an underrated achievement

To provide storage space for the huge coils of wire, three great tanks were carved into the heart of the ship.  The drums, sheaves, and dynamometers of the laying mechanism, occupied a large part of the stem decking, and one funnel with its associated boilers had been removed to give additional storage space.  When the ship sailed from the Medway on June 24, 1865, she carried seven thousand tons of cable, eight thousand tons of coal, and provisions for five hundred men.  Since this was before the days of refrigeration, she also became a seagoing farm.  Her passenger list included one cow, a dozen oxen, twenty pigs, one hundred twenty sheep. and a whole poultry-yard of fowl.

That is 1865 we are talking about here, remarkably early (in my view) for laying a cable across the bottom of the entire Atlantic.

The passage is from Arthur C. Clarke’s excellent How the World Was One: Beyond the Global Village.

*The Case for Space*

The author is Robert Zubrin and the subtitle is How the Revolution in Spaceflight Opens Up a Future of Limitless Possibility.  I found this book fun, ambitious, and informative, even if I was not entirely convinced.  Zubrin thinks big and bold in an exciting way, here is one bit:

Exploring Mars requires no miraculous new technologies, no orbiting spaceports, and no gigantic interplanetary space cruisers.  We can establish our first small outpost on Mars within a decade.

There is not much talk of the stress space (or for that matter life on Mars) might place on the human body.  Zubrin talks of Mars tours of four or six years or more.

Yet my biggest difference with Zubrin is this: I think of space and planetary exploration as presenting many surprising and difficult problems, ones which cannot be foreseen and fixed in advance by stocking a spacecraft with “just the right materials.”  There are many sentences like this:

Mobile microwave units will be used to extract water from Mars’s abundant permafrost, supporting such agriculture and making possible the manufacture of large amounts of brick and concrete…

But when the problem of missing parts arises, or perhaps missing links between systems, you can’t run to the local hardware store.  Try this one too:

Extracting the He3 from the atmospheres of the giant planets will be difficult, but not impossible.  What is required is a winged transatmospheric vehicle that can use a planet’s atmosphere for propellant, heating it in a nuclear reactor to produce thrust.

My other worry is that if we do not find it profitable to inhabit rural Nevada, Mars might stay empty as well.  Zubrin does make a detailed economic case for the value of space, though to my eye much of it falls on satellites.  Asteroids have valuable minerals, such as uranium, and that might spur mining operations, powered by nuclear fusion.  But is that really the cheapest way to get more uranium, in any case I suspect its price and value would fall rapidly with quantity.

Zubrin puts forward the interesting hypothesis that life in space will encourage a great deal of political freedom:

Historically, the easiest people for a tyrant to oppress are nominally self-sufficient rural peasants, because none of them are individually essential…In a space colony, nearly everyone will be individually essential, and therefore powerful, and all will be capable of being dangerous to those in authority.

Hard to verify, but worth a ponder.

Under another scenario, arks full of large, smart salamanders, genetically programmed to build incubators by instinct, will settle the galaxy at “a speed exceeding 20 percent the speed of light.”

There are many interesting ancillary points, such as using the length of the growing season to estimate global warming, or how pp.284-285 offer an ambitious take on the spin-off benefits from the space program so far, or pp.294-295 on exactly why taking out an asteroid with bombs is so hard.

With plenty of caveats of course, but recommended, the author of this one is never coasting.

What should I ask Hollis Robbins?

I will be doing a Conversations with Tyler with her, no associated public event.  Here is part of her Wikipedia page:

Robbins is a noted expert in the field of nineteenth-century African American literature and recently co-edited with Henry Louis Gates, Jr. an anthology of African American women’s writing. Robbins’ work focuses primarily on nineteenth and early twentieth century black print culture; she is affiliated with the Black Press Research Collective and serves as an advisor to the Black Periodical Literature Project at the W.E.B. Du Bois Institute at Harvard University

…Previously, Robbins edited several other books with Henry Louis Gates, Jr., including The Annotated Uncle Tom’s Cabin (2006) and In Search of Hannah Crafts: Essays on The Bondwoman’s Narrative (2003). She also co-edited The Works of William Wells Brown (2006) with Paula Garrett and an edition of Frances E.W. Harper’s 1892 novel Iola Leroy.

In addition to now being Dean at Sonoma State University, she also has written on film music, the history of post offices, the gold rush, higher education, African-American sonnets, and numerous other topics.  So what should I ask her?