Category: Economics

The symphony orchestra and the Industrial Revolution

I heard Mozart’s 39th symphony in concert last night, and it occurred to me (once again) that I also was witnessing one of mankind’s greatest technological achievements.  Think about what went into the activity: each instrument, developed eventually to perfection and coordinated with the other instruments.  The system of tuning and the underlying principles of the music.  The acoustics of the music hall.  The sheet music on paper and the musical notation.  All of those features extremely well coordinated with the kind of compositional talent being produced in Central and Western Europe from say 1710 to 1920.  And by the mid-18th century most of the key features of this system were in place and by the early 19th century they were more or less perfected.

Sometimes I think of the Industrial Revolution as fundamentally a Cultural Revolution.  The first instantiation of this Cultural Revolution maybe was the rise of early Renaissance Art in Italy and in the Low Countries.  That too was based on a series of technological developments, including improved quality tempera paint, the development of oil painting, the resumption of bronze and marble techniques for sculpture, and the reintroduction of paper into Europe, which enabled artists’ sketches and drawings.

As with classical music, this unfolding of quality production was all based on extreme experimentation, a kind of scientific method, urbanization, and competing city-states.  There was also the rediscovery of knowledge from antiquity, and the importation or reimportation of science from China and the Arabic world, including the afore-mentioned knowledge of paper-making.

The creation of a book culture, and a culture of experimental science, could be cited as well.

Perhaps the only [sic] difference with the Industrial Revolution proper is that it came to sectors — energy, transport, and textiles — that boosted living standards immensely.  But arguably it was just another of a series of Cultural Revolutions that had their roots in late medieval times, with even classical music deriving ultimately from Franco-Flemish polyphony.  One of these Cultural Revolutions just happened to be Industrial.

Of course the earliest parts of Revolutions are often the best, as we’ve surpassed the steam engines of the 19th century but Mozart and Leonardo are still with us.

A Fine Theorem on Parag Pathak, the recent Clark winner

This award strikes me as the last remaining award, at least in the near term, from the matching/market design boom of the past 20 years. As Becker took economics out of pure market transactions and into a wider world of rational choice under constraints, the work of Al Roth and his descendants, including Parag Pathak, has greatly expanded our ability to take advantage of choice and local knowledge in situations like education and health where, for many reasons, we do not use the price mechanism. That said, there remains quite a bit to do on understanding how to get the benefits of decentralization without price – I am deeply interested in this question when it comes to innovation policy – and I don’t doubt that two decades from now, continued inquiry along these lines will have fruitfully exploited the methods and careful technique that Parag Pathak embodies.

The post is excellent throughout.

Parag Pathak wins the John Bates Clark Award

Parag Pathak, a Massachusetts Institute of Technology professor whose research suggests that school choice can lead to improved student performance, won the John Bates Clark award for contributions from a young economist.

Pathak, 37, was honored for his work on market design and education policy, the Nashville, Tennessee-based American Economic Association said Friday in a statement on its website. It said his work “blends institutional knowledge, theoretical sophistication, and careful empirical analysis to provide insights that are of immediate value to important public-policy issues.”

That is from Bloomberg.  Here is scholar.google.com.  There is lots on his home page.  Only 808 Twitter followers!  His Wikipedia page is good.  He is a protege of Al Roth, and overall this prize is a victory for the notion of market design.

The value of Facebook and other digital services

Women seem to value Facebook more than men do.

Older consumers value Facebook more.

Education and US region do not seem to be significant.

The median compensation for giving up Facebook is in the range of $40 to $50 a month, based mostly on surveys, though some people do actually have to give up Facebook.

I find it hard to believe the survey-based estimate that search engines are worth over 17k a year.

Email is worth 8.4k, and digital maps 3.6k, and video streaming at 1.1k, again all at the median and based on surveys.  Personally, I value digital maps at close to zero, mostly because I do not know how to use them.

That is all from a new NBER paper by Erik Brynjolfsson, Felix Eggers, and Avinash Gannamaneni.

Models as indexing, and the value of Google

There are many arguments for the use of models in economics, including notions of rigor and transparency, or that models can help you to see relationships you otherwise might not have expected.  I don’t wish to gainsay those, but I thought of another argument yesterday.  Models are a way of indexing your thoughts.  A model can tell you which are the core features of your argument and force you to give them names.  You then can use those names to find what others have written about your topic and your mechanisms.  In essence, you are expanding the division of labor in science more effectively by using models.

This mechanism of course requires that models are a more efficient means of indexing thoughts than pure words or propositions alone.  In this view, it is often topic names or book indexes or card catalogs that models are competing with, not verbal economics per se.

The existence of Google therefore may have lowered the relative return to models.  First, Google searches by words best of all.  Second and relatedly, if you have written only words Google will help you find the related work you need, scholar.google.com kicks in too.  In essence, there is a new and very powerful way of finding related ideas, and you need not rely on the communities that get built around particular models (though those communities largely will continue).

It is notable that open access, on-line economics writing doesn’t use models very much and is mostly content to rely on words and propositions.  There are several reasons for this, but this productivity shock to differing methods of indexing may be one factor.

Still, it is not always easy to search by words.  Many phrases — consider say “free will” — do not through search engines discriminate very well on the basis of IQ or rigor.

How big are the buyer and renter gains from SB 827?

This article considers a counterfactual thought experiment: how would California’s housing market be different today if a policy currently under consideration in the California Senate—SB 827, which would allow new residential building along public transit corridors—had been implemented six years ago? I estimate that rent would be 5.8 percent lower in San Francisco, a savings of $266 per month on the median home, and 4.2 percent lower in Los Angeles County, savings of $124 per month.

That is from Salim Furth at Mercatus, here is much more.  You will note those numbers do not include the higher output and innovation from a more efficient allocation of talent.

Here is Salim’s podcast with Matt Yglesias and Emily Hamilton.

The impact of the Dodd-Frank Act on small business

There are concerns that the Dodd-Frank Act (DFA) has impeded small business lending. By increasing the fixed regulatory compliance requirements needed to make business loans and operate a bank, the DFA disproportionately reduced the incentives for all banks to make very modest loans and reduced the viability of small banks, whose small-business share of C&I loans is generally much higher than that of larger banks. Despite an economic recovery, the small loan share of C&I loans at large banks and banks with $300 or more million in assets has fallen by 9 percentage points since the DFA was passed in 2010, with the magnitude of the decline twice as large at small banks. Controlling for cyclical effects and bank size, we find that these declines in the small loan share of C&I loans are almost all statistically attributed to the change in regulatory regime. Examining Federal Reserve survey data, we find evidence that the DFA prompted a relative tightening of bank credit standards on C&I loans to small versus large firms, consistent with the DFA inducing a decline in small business lending through loan supply effects. We also empirically model the pace of business formation, finding that it had downshifted around the time when the DFA and the Sarbanes-Oxley Act were announced. Timing patterns suggest that business formation has more recently ticked higher, coinciding with efforts to provide regulatory relief to smaller banks via modifying rules implementing the DFA. The upturn contrasts with the impact of the Sarbanes-Oxley Act, which appears to persistently restrain business formation.

That is from Michael D. Bordo and John V. Duca.

The Facebook Trials: It’s Not “Our” Data

Facebook, Google and other tech companies are accused of stealing our data or at least of using it without our permission to become extraordinarily rich. Now is the time, say the critics, to stand up and take back our data. Ours, ours, ours.

In this way of thinking, our data is like our lawnmower and Facebook is a pushy neighbor who saw that our garage door was open, took our lawnmower, made a quick buck mowing people’s lawns, and now refuses to give our lawnmower back. Take back our lawnmower!

The reality is far different.

What could be more ours than our friends? Yet I have hundreds of friends on Facebook, most of whom I don’t know well and have never met. But my Facebook friends are friends. We share common interests and, most of the time, I’m happy to see what they are thinking and doing and I’m pleased when they show interest in what I’m up to. If, before Facebook existed, I had been asked to list “my friends,” I would have had a hard time naming ten friends, let alone hundreds. My Facebook friends didn’t exist before Facebook. My Facebook friendships are not simply my data—they are a unique co-creation of myself, my friends, and, yes, Facebook.

Some of my Facebook friends are family, but even here the relationships are not simply mine but a product of myself and Facebook. My cousin who lives in Dubai, for example, is my cousin whether Facebook exists or not, but I haven’t seen him in over twenty years, have never written him a letter, have never in that time shared a phone call. Nevertheless, I can tell you about the bike accident, the broken arm, the X-ray with more than a dozen screws—I know about all of this only because of Facebook. The relationship with my cousin, therefore, isn’t simply mine, it’s a joint creation of myself, my cousin and Facebook.

Facebook hasn’t taken our data—they have created it.

Facebook and Google have made billions in profits, but it’s utterly false to think that we, the users, have not been compensated. Have you checked the price of a Facebook post or a Google search recently? More than 2 billion people use Facebook every month, none are charged. Google performs more than 3.5 billion searches every day, all for free. The total surplus created by Facebook and Google far exceeds their profits.

Moreover, it’s the prospect of profits that has led Facebook and Google to invest in the technology and tools that have created “our data.” The more difficult it is to profit from data, the less data there will be. Proposals to require data to be “portable” miss this important point. Try making your Facebook graph portable before joining Facebook.

None of this means that we should not be concerned with how data, ours, theirs, or otherwise, is used. I don’t worry too much about what Facebook and Google know about me. Mostly the tech companies want to figure out what I want to buy. Not such a bad deal even if the way that ads follow me around the world is at times a bit disconcerting. I do worry that they have not adequately enforced contractual restrictions on third-party users of our data. Ironically, it was letting non-profits use Facebook’s data that caused problems.

I also worry about big brother’s use of big data. Sooner or later, what Facebook and Google know, the government will know. That alone is good reason to think carefully about how much information we allow the tech companies to know and to store. But let’s get over the idea that it’s “our data.” Not only isn’t it our data, it never was.

Why is eurozone growth slowing down?

According to the Fulcrum activity nowcasts, which identified the surge in growth very early last year, the eurozone was still growing at a rate of 3.5 per cent late in 2017. Each of the largest economies in the bloc was doing well: Germany 4 per cent, France 3 per cent, Italy 2 per cent and Spain 3.5 per cent. Economic forecasters and the central bank had become confident that this strong recovery phase would persist throughout 2018. But that has not happened so far.

The latest nowcast results for the eurozone suggest that activity growth has dropped to only 1.2 per cent in early April, with each of the major economies experiencing a sharp decline in growth. Even Germany, which was relatively immune from previous European downturns has recorded a very sharp dip, with growth now down to only around 1 per cent.

That is from Gavyn Davies at the FT.

Those new service sector jobs

In North America the modern undertaker’s job is increasingly one of event-planning, says Sherri Tovell, an undertaker in Windsor, Canada. Among the requirements at her recent funerals have been a tiki hut, margaritas, karaoke and pizza delivery. Some people want to hire an officiant to lead a “life celebration”, others to shoot ashes into the skies with fireworks. Old-fashioned undertakers are hard put to find their place in such antics. Another trend—known as “direct cremation”—has no role for them at all.

Besides having to offer more diverse services, the trade also faces increased competition in its products. Its roots are in carpentry. “You’d buy an expensive casket and the funeral would be included in the price,” remembers Dan Isard, a funeral consultant in Phoenix, Arizona. The unwritten agreement was that the dead would be treated with dignity and that families would not ask if there was an alternative to the $1,000 or $2,000 coffin, or whether embalming was really needed. The business has something in common with prostitution, reflects Dominic Akyel of the University of Cologne. It is legal (as prostitution is in some places) but taboo, “and certainly not to be discussed or haggled over”.

The undertaker used to be able to rely on a steady stream of customers who asked few questions and of whom he (and it was usually a he) would ask few in return. Protestant or Catholic? Open coffin or closed? And, in some parts of the world, burial or cremation? A new generation of customers, though, no longer unthinkingly hands over its dead to the nearest funeral director. They are looking elsewhere, be it to a new breed of undertaker, to hotel chains that “do” funerals, or—for their coffin or urn—to Amazon or Walmart.

Here is more from The Economist, interesting throughout

Thwarted markets in everything

Stephen A. Schwarzman, the Wall Street billionaire, was prepared to cut a $25 million check to the high school he attended here in the 1960s, to help it pay for a huge renovation project.

He wanted only a few things in return.

For starters, the public school should be renamed in his honor. A portrait of him should be displayed prominently in the building. Spaces at the school should be named for his twin brothers. He should have the right to review the project’s contractors and to sign off on a new school logo.

The school district’s officials accepted the deal.

So it was that this Philadelphia bedroom community of 55,000, not normally a hotbed of civic unrest, exploded into a populist fury.

That is from Kate Kelly at the NYT.

*Tyranny Comes Home: The Domestic Fate of U.S. Militarism*

That is the new book by Christopher J. Coyne and Abigail R. Hall:

 

Their main point is that social tactics used in interventions abroad tend to come back and haunt us at home.  I am not nearly as non-interventionist in foreign policy questions as they are, but still I wish their perspective would receive a much broader hearing.  You can buy the book here.  Here is the book’s home page.  Here is a video related to the book.

The Peltzman Model of Regulation and the Facebook Hearings

If you want understand the Facebook hearings it’s useful to think not about privacy or  technology but about what politicians want. In the Peltzman model of regulation, politicians use regulation to tradeoff profits (wanted by firms) and lower prices (wanted by constituents) to maximize what politicians want, reelection. The key is that there are diminishing returns to politicians in both profits and lower prices. Consider a competitive industry. A competitive industry doesn’t do much for politicians so they might want to regulate the industry to raise prices and increase firm profits. The now-profitable firms will reward the hand that feeds them with campaign funds and by diverting some of the industry’s profits to subsidize a politician’s most important constituents. Consumers will be upset by the higher price but if the price isn’t raised too much above competitive levels the net gain to the politician will be positive.

Now consider an unregulated monopoly. A profit-maximized monopolist doesn’t do much for politicians. Politicians will regulate the monopolist to lower prices and to encourage the monopolist to divert some of its profits to subsidize a politician’s most important constituents. Monopolists will be upset by the lower price but if the price isn’t lowered too much below monopoly levels the net gain to the politician will be positive. (Moreover, a monopolist won’t object too much to reducing prices a little since they can do that without a big loss–the top of the profit hill is flat).

With that as background, the Facebook hearings are easily understood. Facebook is a very profitable monopoly that doesn’t benefit politicians very much. Although consumers aren’t upset by high prices (since Facebook is free), they can be made to be upset about loss of privacy or other such scandal. That’s enough to threaten regulation. The regulatory outcome will be that Facebook diverts some of its profits to campaign funds and to subsidize important political constituents.

Who will be subsidized? Be sure to watch the key players as there is plenty to go around and the money has only begun to flow but aside from campaign funds look for rules, especially in the political sphere, that will raise the costs of advertising to challengers relative to incumbents. Incumbents love incumbency advantage. Also watch out for a deal where the government limits profit regulation in return for greater government access to Facebook data including by the NSA, ICE, local and even foreign police. Keep in mind that politicians don’t really want privacy–remember that in 2016 Congress also held hearings on privacy and technology. Only those hearings were about how technology companies kept their user data too private.

The value of a statistical human life under Stalin

We examine the value of a statistical life (VSL) in interwar Soviet Union. Our approach requires to address the preferences of Stalin. We model these on the basis of the policy of statistical repression, which was an integral part of the Great Terror. We use regional variation in the victims generated by this policy to structurally estimate the value that Stalin would have been willing to accept for a reduction in citizens’ fatality risk. Our estimate of this value is $43,151, roughly 6% of the VSL estimate in 1940’s US and 29% of the VSL estimate in modern India.

That is from a new paper by Paul Castañeda Dower, Andrei Markevich, and Shlomo Weber.  For the pointer I thank the excellent Kevin Lewis.

Is Economic Research Biased by Partisanship?

The Washington Monthly, a magazine of ideas from the liberal-left, has a profile of me and my paper with Nathan Goldschlag, Is regulation to blame for the decline in American entrepreneurship? The profile ups the “libertarian says regulation not responsible for bad thing!” angle. My earlier paper, finding that more guns leads to more suicides, was also given the “even a libertarian says” angle. In both cases, I was treated fairly and well and since I wrote the papers to be read, I am happy for the publicity. But I am uncomfortable with these takes.

After all, I am not surprised that my research is not biased by partisanship. Why should other people be? Should I not be insulted? Moreover, I don’t think that I am special in this regard. I think that most academic research in economics is not biased by partisanship. Thus, while it’s nice to receive plaudits on twitter for honesty and bravery, they are undeserved. This is normal. Normal for me and normal for other economists. The public perception to the contrary likely comes from two failures–a failure to distinguish partisan commentary from academic research and a failure to consider that ideology influences topic more than findings.

Economic commentary in the media often does come from political partisans but that is a completely different role than publishing peer-reviewed research. Papers published in mainstream economics journals have passed a high bar and are much less likely to be infused with partisan bias–this is true even when the research leads to a blog post or op-ed that may be of partisan interest.

An economist’s ideology probably does influence the topics they choose to research. I’ve written on bounty hunters, privateers, and the private provision of public goods, topics surely influenced by my interest in how markets solve problems usually thought solvable only by governments. Choice of topic, however, does not necessarily determine the outcome. In the aforementioned three cases, my research can be read as broadly supportive of private solutions. The topics of dynamism and regulation, firearms and suicides, and private cities in India were probably also influenced by ideology but in these cases the research can be read as somewhat less supportive of private solutions.1 Let the chips fall where they may. I’ve learnt something in both sets of cases. My academic ideology, “a demand to know the truth,” trumps any narrow political ideology.

There’s another problem with praising a “libertarian”, or any researcher with strong beliefs, for honesty when their research conclusions don’t fit narrow priors. It puts their research that does fit narrow priors under a cloud. But only people with strong beliefs are put to this test. No one gets suspicious when a moderate democrat produces lots of research that fits moderate democrat priors. Why not? Do you assume reality is moderate?

I also wonder whether the people lauding me for my honest research–for which I thank them–will draw the correct conclusion. Namely, they should now be more receptive to my work on bounty hunters, privateers, and the private provision of public goods. Fingers crossed.

Let me conclude on a lighter note. There are many reasons why regulation could be costly outside of its effects on dynamism. Thus, for my friends who think that I have gone all-squishy, n.b.:

Not that Tabarrok himself has become a booster for regulation. He doesn’t think much of government’s ability to spark innovation through setting standards; the first thing he did when he last bought a new shower head, he said, was remove its federally mandated flow restrictor.

Read the whole thing.

Addendum 1: I have also written many papers like Would the Borda Count have Avoided the Civil War? and Patent Theory versus Patent Law where the topic was driven out of some non-ideological interest or simply because I had an idea. Publish or perish!