Category: Economics

Why do women’s clothes always button from the left, while men’s clothes always button from the right?

…This is an example in which history really seems to matter.  When buttons first appeared in the seventeenth century, they were seen only on garments of the wealthy.  At that time it was the custom for men to dress themselves and for women to be dressed by servants.  Having women’s shirts button from the left thus made things easier for the mostly right-handed servants who dressed them…

Might there be a continuing rational reason for this difference, namely that the women’s approach looks better (does it?) but is harder, thus scaring off the men?  This sounds like a question for Fashion-Incubator.

In any case that excerpt is from Robert Frank’s new The Economic Naturalist.  Here is Craig Newmark’s review of the book.  Here is Brad DeLong on the book.  Here is my previous post on the book.

Guest workers are also, paradoxically, less likely than illegal immigrants to become permanent residents.  The U.S. already has a number of smaller–and less well-designed–temporary-worker programs, and there’s no evidence that workers in those plans routinely overstay their visas.  Mexican workers, contrary to popular belief, do not, generally, intend to live their entire lives in the U.S.  Instead, as the sociologists Douglas Massey and Jorge Durand concluded after a comprehensive study of immigrant attitudes and behavior, most want to work “for short periods to generate an alternative source of household income . . . or to accumulate savings for a specific purpose,” like buying a house in Mexico.  This is harder to do as an illegal immigrant than as a guest worker, both because illegal workers are paid less and because when an illegal goes home he runs the risk of getting caught.  One remarkable study found that after border enforcement was stepped up in 1993 the chances of an illegal immigrant returning to Mexico to stay fell by a third.

Here is the full piece.  Please leave comments of high quality.  Let’s try two new norms for comments.  First, don’t say anything stronger against another commenter (or blogger) than "I don’t agree with you John."  Second, it is fine if you are commenting on a single thread more than once, but you should be adding new arguments and material, not just debating with another commenter.

Addendum: Megan Non-McArdle makes excellent points about civility.

Here is my latest column, featuring wunderkind Ben Casnocha; it has been titled "The Loose Reins on U.S. Teenagers Can Produce Trouble or Entrepreneurs."  Here is an excerpt:

The longstanding criticism of the American school system is that even
in the better schools, too many students just “get by” rather than
engage in a rigorous curriculum.  This academic leniency is bad for many
average or subpar students, but it also allows some students to
flourish.  Relatively loose family structures have similar effects;
American children are especially likely to be working on their own
projects, rather than being directed by parents and elders.

American philanthropy is also a significant and unheralded factor behind American youth entrepreneurship; many young entrepreneurs used elders as mentors or asked them for financial assistance.  Furthermore "selling to the young" is much derided by critics such as Juliet Schor or Benjamin Barber, but it has its benefits.  Sometimes advertising inspires the young to start marketing themselves, as did Ben Casnocha.

You can read more about Ben, who started his successful company at age 14 (he is now 19), in the article.  Here is Ben’s blog.  Here is the web site for Ben’s new book.  Ben will soon be attending Claremont McKenna college, I am curious to see whether or not it drives him crazy.

Our apologies a Typepad error has swallowed this post; might any of you have a copy of it to send me and/or put in the comments?  In any case the comments are excellent…in the post I recommended Mankiw’s text, the reading list on his blog, Freakonomics, Tim Harford, my own In Praise of Commercial Culture, and texts by Hal Varian and Eric Rasmusen, among other sources.  Most of all just let loose and break from your reading program to follow your inclinations and passions…

Addendum: Simon Taylor comes to the rescue, here was the original post:

I am a chemistry major interested in learning economics in my spare time.  With summer fast approaching, I’ll have more spare time to pursue the subject than I currently do.  I would like to start with the basics and pursue micro and macro up to an advanced level.  (I realize, of course, this cannot be done over the summer alone.)  I’ve never taken an economics course before, but being a science student, I can handle a mathematically intensive approach.

I am wondering if you could recommend some textbooks, journal articles, and any influential books by economists that you would encourage others to read, as well as provide some recommendations as to the order in which these things should be studied.

The best start is our blogroll and then try Mankiw’s Principles book if you need the background and don’t mind the length.  More generally, here is Greg’s recommended reading list, though I don’t like Heilbroner’s book.  I also recommend Arnold Kling’s on-line text, my own In Praise of Commercial Culture, but best of all is having an office next door to Alex, Bryan, and Robin.  For mathematical approaches, see the Ph.d. textbook by Hal Varian, Eric Rasmusen’s Games and Signalling, Milton Friedman’s old Price Theory book, and quiz yourself with micro puzzles until you drop dead.

Most of all, I don’t think people much stick to reading programmes, nor should they.  It is best is to jump off track and pursue the diversions which fascinate you.

Readers, what else do you recommend?

I responded that economists usually analyze low regulation scenarios
first, as a baseline to compare with higher regulation scenarios, and
that I don’t endorse vague slogans – it is hard to tell who are the
deserving "poor" in the scenario I consider.  My explicit denials did
not much move James.

That is Robin Hanson, and I hope you are all reading his disagreement case studies.

Ponder this one on your daily walk:

The key question asked by standard monetary models used for policy analysis is, How do changes in short-term interest rates affect the economy?  All of the standard models imply that such changes in interest rates affect the economy by altering the conditional means of the macroeconomic aggregates and have no effect on the conditional variances of these aggregates.  We argue that the data on exchange rates imply nearly the opposite: the observation that exchange rates are approximately random walks implies that fluctuations in interest rates are associated with nearly one-for-one changes in conditional variances and nearly no changes in conditional means.  In this sense standard monetary models capture essentially none of what is going on in the data.  We thus argue that almost everything we say about monetary policy using these models is wrong.

Or put it this way:

We have focused on exchange rates rather than the term structure of interest rates because the implications of exchange rates are so striking.  Specifically, if exchange rates are random walks, then all of the fluctuations in interest differentials are accounted for by fluctuations in conditional variances and none by fluctuations in conditional means.  The data are so opposite of what standard models assume that even the most die-hard defenders of them should take note:  If these data are accurate, then almost everything we say about monetary policy is wrong.

That is from the May 2007 American Economic Review, here is an earlier version of the paper.  I doubt if changes in interest rate differentials are driven by risk premia of the standard sort; I would sooner cite "noise plus news," but resist the pull toward calling that a "conditional mean."  I’ll also note that calling exchange rates a "random walk" is in the "do not reject" rather than "accept" statistical category.  Both asset price moves contain lots of junk information, so we shouldn’t be totally surprised if they don’t fit together in some simple manner.  Those moves weaken the paradox presented, but don’t come close to offering a coherent account of what is going on.

1.    Roland Fryer’s plan to offer cash for learning is moving forward slowly but surely.

2.    The NetFlix prize is moving forward slowly but surely. 

3.    Greg Mankiw was almost a philosopher but decided the money was better in economics and almost a lawyer but decided the money wasn’t worth the boredom.  Clearly, Greg made good choices.

In The New York Times magazine, this Harvard economist is a strong advocate of open borders, or barring that, guest workers:

About 7 percent of
the rich world’s jobs are held by people from developing countries.  For
starters, he would like to see the poor get another 3 percent, or 16
million guest-worker jobs – 3 million in the U.S.  They would stay three
to five years, with no path to citizenship, and work in fields with
certified labor shortages.  He assumes that most receiving countries
would not allow them to bring families.  Taxpayers would be spared from
educating the migrants’ kids.  Domestic workers would gain some
protection through the certification process.

In effect, Pritchett
is proposing a Saudi Arabian plan in which an affluent society creates
a labor subcaste that is permanently excluded from its ranks…he
estimates his plan would produce annual gains of about $300 billion –
three times the benefit of removing the remaining barriers to trade.

He considers nationalism an "atavistic prejudice," but I think it is, at least for the time being, a necessary atavistic prejudice.  People will identify with some political unit or other and the current alternatives to nationalism usually are worse (my unverified theory is that Pritchett’s Mormon background plays a role in his views).  The key question is how many more people we can take in before this constraint starts to bite.

Not unrelated is this NYT article on the evolution of Larry Summers.

At least a dozen times in MR comments I’ve seen remarks describing me as an Open Borders advocate; this is in spite of having written explicitly to the contrary (here, see also here).  I do favor more immigration, including of the unskilled variety.  But truly open borders would put an unbearable strain on the cultural foundations of American liberal democracy; many of the immigrants themselves would be the biggest losers.  Maybe Megan McArdle (no, not her) had a good post saying much the same.  The more radical libertarians should take a cue from what is best in conservatism.

Why should the ascription of an open borders position prove so common?  Many of the anti-immigration arguments are correct when applied to the open borders position, so why not set up, find, or create the debate where one’s position is strongest?  When it comes to marginal changes, the results of which depend on empirical study, it is harder to be a polemic doomsayer.  An increase in unskilled immigrants — surely good for the immigrants themselves, and yes we can debate how many and from where — will not bring disaster to the United States.

(It is also worth pointing out that many of these "unskilled" workers in fact do a much better job at construction or carpentry than American-born alternatives.  If the immigrants are getting $15 or $20 an hour, the American might well receive less.)

The failure of the recent immigration bill was a partial surprise, but asset prices didn’t much move one way or the other.  Similarly, if a swarm of Latinos were going to turn southern California into a degenerating Mexifornia, real estate prices would be plunging.  The reality is that prices have fallen with the burst of the real estate bubble but have otherwise been rising throughout a period of continuing and predictable Latino immigration.  (Contra Steve Sailer, robust real estate prices do not come automatically from greater numbers and thus "rising demand"; it is easy enough for large numbers of rotten people to ruin land values if the inflow is destructive in net terms.)

Matt Yglesias hopes something better might yet come than the failed and highly imperfect immigration bill.  He sees a steady trend toward greater influence for liberal Democrats and a better chance in the future.  I see this issue as a Black Swan; no matter which party holds the presidency, one focal and negative public event could set back the cause of immigration reform for twenty years.  I am sad that nothing good is likely to happen soon.

Daniel Davies thinks that it’s a point in favor of heterodox economics that neoclassical economics assumes profits are zero ("normal") while profits in the real world are not zero.  Tyler says the explanation is market power.  I think both are mostly wrong.

Take a look at the national income accounts.  Most of gross domestic income is wages, about  56%.   Proprietor’s income and corporate profits are together about 17% but most of proprietor’s income is really labor income and a good chunk of corporate profits is interest and a return to capital.  In a generous accounting true profits might be 5-10% of gross domestic income – not zero but not very large either.  Indeed, 5-10% is an amazingly low figure when one recognizes that the entire capitalist economy depends on the existence of profits. 

Is the explanation for profits monopoly power?  Not really.  Or rather, the better way of phrasing it is that most profits are a return to innovation and entrepreneurship.  Innovation and entrepreneurship typically bring some market power but disequilibrium monopoly has very different implications for policy than equilibrium monopoly. 

Here’s some intuition.  Textbook neoclassical economics says profits and losses are zero. The standard monopoly story can explain profits but not losses.  The return to entrepreneurship/dynamic economy/creative destruction story that I am telling can explain both profits and losses. 

Thus Davies is correct, profits do suggest a role for heterodox economics but it’s not the paleo-Keynesian/Marxist heterodoxy that gets the boost but the Austrian heterodoxy of Mises, Hayek and Schumpeter.

Shouldn’t CrookedTimber be the site that covers the heterodoxy?  Daniel Davies picks up the slack:

The anomaly I’m talking about is that neoclassical economics, in
both macro and micro forms, nearly invariably works on the basis of
models in which there are no profits.

Since in general, companies do earn profits, I think this is a pretty big problem.

Do read his caveats. 

I usually answer such questions by referring to the ordinary humdrum of my suburban life.  It took my three days to buy the new Paul McCartney CD, and yes I do love his solo work, or at least some of it.  And can you guess why it took me so long?  The CD is available only in Starbucks, but until today each Starbucks was situated so that my exit would have necessitated a left turn across four lanes of crowded traffic (and, most importantly, without a traffic light).  I love "Maybe I’m Amazed" as much as the next guy, but this boy just ain’t up for those sorts of indignities.

The higher the value of time, the more likely these competitive barriers will arise.  So the standard monopoly model explains much more of the economy than most market-oriented economists like to admit.  That said, I am less sold on Davies’s worry that this has nihilistic consequences for mainstream economics.  Tariffs are still usually bad; let’s not forget that behavioral imperfections plague politics as well.

The key obstacle to reforming aid is public opinion.  The constituency for aid is suspicious of growth, and the constituency for growth is suspicious of aid.

That is from Paul Collier’s very worthwhile The Bottom Billion: Why the Poorest Countries are Failing and What Can Be Done About It.

I’ve found at least one good piece on them, by Rene Stulz, in the Spring 2007 Journal of Economic Perspectives.  I learned or reaffirmed the following:

1. Hedge funds have existed since at least 1949.

2. Hedge funds exist because mutual funds do not deliver "complex investment strategies."  In part this is because mutual funds are regulated.

3. The largest mutual fund is about six times larger than the largest hedge fund.  Marketing constraints also encourage very large funds to adopt simpler and easier-to-explain strategies.

4. Investment advisors with fewer than 15 clients do not have to register with the SEC.

5. Regulations restrict the compensation of mutual fund advisors in various ways, typically requiring symmetric treatment of gains and losses (if a dollar of profit leads to a bonus, a dollar of loss must lead to a penalty).  That is why mutual fund managers are compensated in proportion to the size of their funds, not their performance.  This is not obviously efficient, and of course hedge funds pay for performance.

6. Hedge funds don’t have to disclose information to investors, other than by contractual agreement.

7. Diversification and redemption requirements make it harder for mutual funds to exploit some profit opportunities, or to hedge in particular manners.

8. The number of mutual funds that try to replicate hedge fund strategies is growing rapidly.

9. Available data on hedge fund returns are nearly worthless.

Overall I was struck by how much hedge fund activity is an artifact of regulations, and not necessarily beneficial regulations.  Deregulating some aspects of mutual funds may be an alternative to regulation of hedge funds.

Here is one version of the paper (click through to working papers), definitely recommended.  Here is Stulz’s paper on hedge fund contagion.