Category: History
From the comments
Here is Brett on Piketty:
I’m surprised to see so few critiques of Piketty on the grounds that higher wealth and income inequality won’t necessarily lead to oligarchical politics and the capture of the economy by rentiers. I’m a bit skeptical myself of his interpretation of 19th century politics – at the same time we had the Belle Epoque, there was increasing working class political power in the UK (particularly with reforms in the 1830s and 1860s), the lead-up to the near-complete loss of political power in the House of Lords in 1911, the rise of income taxes in both the UK and France, greater social mobility, broader modernization and consumer culture, and so forth. You see some pushback from Larry Bartels and the like pointing to research showing policymaking following the preferences of the rich and organized, but they don’t provide much information about whether this has changed with increasing income and wealth inequality – the rich and organized interest groups may have just always had a disproportionate interest on policymaking, even during the Postwar Period.
Morgan Kelly, in his review (via John O’Brien), serves up a related point:
If Piketty’s story about slow growth leading inevitably to rising inequality and the power of the rich is true, then we expect that inequality would have risen sharply during the 19th century when growth in industrialised economies was less than 1 per cent per year. In fact the longstanding research of Peter Lindert and Jeffrey Williamson on English inequality (which Piketty, incredibly, fails to cite) finds inequality was fairly constant, albeit high, until about 1870, and then appears to have fallen somewhat until 1913.
Why do we respond to charismatic leaders?
There is a new paper by Benjamin Hermalin, with the intriguing title “At the Helm, Kirk or Spock? Why Even Wholly Rational Actors May Favor and Respond to Charismatic Leaders.” The abstract runs like this:
When a leader makes a purely emotional appeal, rational followers realize she is hiding bad news. Despite such pessimism and even though not directly influenced by emotional appeals, rational followers’ efforts are nonetheless greater when an emotional appeal is made by a more rather than less charismatic leader. Further, they tend to prefer more charismatic leaders. Although organizations can do better with more charismatic leaders, charisma is a two-edged sword: more charismatic leaders will tend to substitute charm for real action, to the organization’s detriment. This helps explain the literature’s “mixed report card” on charisma.
Here is what actually drives the argument:
As shown below, a savvy leader makes an emotional appeal when “just the facts” provide followers too little incentive and, conversely, makes a rational appeal when the facts “speak for themselves.” Followers (at least rational ones) will, of course, understand this is how she behaves. In particular, the rational ones—called “sober responders”—will form pessimistic beliefs about the productivity state upon hearing an emotional appeal. But how pessimistic depends on how charismatic the leader is. Because a more charismatic leader is more inclined to make an emotional appeal ceteris paribus, sober responders are less pessimistic about the state when a more charismatic leader makes an emotional appeal than when a less charismatic leader does [emphasis added]. So, even though not directly influenced by emotional appeals, sober (rational) responders work harder in equilibrium in response to an emotional appeal from a more charismatic leader than in response to such an appeal from a less charismatic leader.
Would this same reasoning also imply we should choose intrinsically panicky leaders, because then, if we see them panic, we would think the real underlying situation isn’t so bad after all and we are simply witnessing their innate propensity to panic? Yet no one would buy that version of the argument.
I will instead suggest that we (sometimes) follow charismatic leaders because they have high social intelligence, and most of all because other people are inclined to follow them. Some of those followers of course do not have rational expectations but rather they are touched by the charisma directly. Given that, why not follow the focal leader, even if you yourself are not touched by the charisma?
A related question is to ask how many recent world leaders are in fact charismatic. Obama and Clinton yes, but how about David Cameron? How about most Prime Ministers of Japan, Abe being a possible exception? Arguably Merkel has become charismatic through a sort of extreme, cultivated anti-charisma, but I would not cite her in favor of the theory. Any Canadian since Trudeau? Helmut Kohl?
Putin? Well, he’s not charismatic to me but now we’re getting somewhere. And what does Putin have that say Prime Ministers of Japan do not? Could it be a citizenry that gets excited relatively easily by the brutish? Come to think of it, the USA has a wee bit of excitability of its own, though more about national pride and foreign policy than anything like Putin. Hint: does your theory predict that Argentina will have charismatic leaders relative to Denmark? Yes or no?
In which business sectors are the CEOs most likely to be charismatic?
For the pointer I thank the excellent Kevin Lewis.
Addendum: Hermalin responds here.
Chinese wheat eaters vs. rice eaters (speculative)
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
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.
Nicholas Wade’s *A Troublesome Inheritance*
Overall I was disappointed by my read of this book and I write that as someone who very much has liked Wade’s NYT pieces on similar topics. I appreciated the honesty and courage of the work, but I felt Wade needed to have pushed deeper in book-length form.
For instance the discussion of intelligence and its evolution should have been drenched in the Flynn Effect. It wasn’t. The first few chapters didn’t cut to the chase quickly enough.
Wade makes a big mistake arguing that “race” is a coherent concept. Surely that is a semantic issue which cannot move his case forward much, but can hurt it if he fails to establish his claims.
There is much I admire about Greg Clark’s (previous) book, but Wade doesn’t seem to realize Clark has hardly any evidence in support of his “genetic origins of capitalism” thesis.
The word “Denisovan” didn’t appear nearly enough.
We are told that Ashkenazim Jews may have sacrificed visual and spatial skills for other forms of (superior?) intelligence, but what about all the great Soviet Jewish chess players and mathematicians? And did the shtetl really have so many more centuries of capitalistic training to offer than did say Istanbul? I’m not suggesting anyone is required to answer these questions, but once you start playing the generalization game — especially on this particular topic — one ought to spend a lot of time picking up or at least recognizing all these loose ends and indeed there are many of them.
Had Kindle not tracked the percentage so accurately, I would have been surprised when the book ended.
Ross Douthat offers some remarks and links to a few other reviews. VerBruggen had a good take on the book. Arnold Kling is reading it too. Here is Andrew Gelman’s review.
Overall reading this book didn’t budge my priors, which I suppose means…it did in fact budge my priors.
The Piketty Bubble?
Piketty’s Capital is not very clear on how to distinguish greater physical capital from higher asset prices. For the most part, Piketty discusses capital as something that builds up over time through savings. The increase in physical capital then generates large returns to rentiers and those returns increases the capital share of income. When it comes to measuring capital, however, this has to be done in money terms which means that we need the price of capital. But the price of capital can vary significantly; as a result, Piketty’s capital stock can vary significantly even without changes in physical capital or savings. When capital increases because of changes in its price, however, the implications are quite different from a physical increase in capital.
Consider an asset that pays a dividend D forever; at interest rate r the asset is worth P=D/r. As r falls, the price of the asset rises. An asset that pays $100 forever is worth $1000 at an interest rate of 10% (.1) but $2000 at an interest rate of 5%. Piketty measures a higher P as more capital but notice that P is high only because r is low. You can’t, therefore, multiply P by some fixed r and conclude that rents have increased. Indeed, in this case rents, the dividend, haven’t increased at all. For the most part, Piketty simply ignores this issue (at least in the book) by arguing that changes in the price of capital wash out over long time periods but that does not appear to be the case in his data.
According to four French economists, Piketty’s measure of the capital stock is greatly influenced by the Europe-US housing bubble that preceded the financial crisis (Tyler earlier pointed to the French version of this paper, this is the English version). Since Piketty’s theory is based on rents from physical capital, the authors suggest that measures of housing capital based on prices should be corrected using the rent to price ratio. In other words, if the rentiers aren’t getting more rents then their capital hasn’t really increased. When measured in this way, the authors find little to no increase in the capital stock in either France or the United States.
Addendum: Do note that the debate here is not about income inequality but rather the source of income inequality and the implications for the future that Piketty draws from a (possibly not) rising capital stock.
Economic Revolution: Song China & England
There is a new and lengthy paper (pdf) by Ronald A. Edwards on this topic. It starts quite slow, becomes much more interesting, and even incorporates numerous Japanese sources. It is worthwhile if read selectively, and with some knowledge of the relevant historical background. It deals with the key question of why there wasn’t an industrial revolution in Song China, in the 10th century A.D. and afterwards. Or was there? Here is the abstract:
I claim that China during the Song Dynasty (960 – 1279 AD) (Song China hereafter) experienced the onset of an Economic Revolution, preceding England’s by nearly a millennium. The concept of Economic Revolution is defined to include two types – one Premodern (non-science based) with a low growth rate of per capita product and one Modern (science-based) with a high growth rate of per capita product. It is argued that the Song China vs. England comparison is more relevant than other comparisons with England. Using both the Song China and England episodes, I introduce a new definition of the “onset of an Economic Revolution” that identifies preliminary social changes. I call this the Embryonic Stage and contend that it causes firm formation, household changes and an increase in the pace of technological innovation. I argue the Embryonic Stage more clearly identifies and dates the onset of an Economic Revolution. This has important implications for causal theories.
For the pointer I thank Daniel Houser.
Two Surefire Solutions to Inequality
Here is a surefire solution to inequality–Increase fertility among the rich. If the rich had more children, capital would grow more slowly across the generations and perhaps not at all. If r=4 and g=2 then capital doubles as a share of the economy in 35 years (using the rule of 70). That figure is actually too low as it assumes that the wealthy save all of their capital income but let’s stick with 35 years and call that a generation. Wealth per rich person, however, only doubles if every wealthy family has just 2 children. If every wealthy family has 4 children, wealth per person doesn’t increase and so inequality does not increase even when r>g. If the wealthy consume about 20% of their capital income (still a very high savings rate) and have just 3 children then again we have approximate balance and no increase in inequality over the generations. With a more reasonable figure on r-g or with more children, wealth per person actually declines.
Thus, Piketty’s “patrimonial capital” contains its own internal contradiction. The more patrimony the less capital.
So how can we increase fertility among the rich? Mormon fertility is higher than average so capital inequality could decline if more rich people will be or become Mormons. Had we elected a President Romney (5 children and some 22 grandchildren! Or is it 23? Romney has lost count), perhaps that would have encouraged greater fertility among the rich.
It’s an evolutionary puzzle why the rich don’t have more children as the costs to them are low and at very high levels of wealth there is no quantity-quality tradeoff. Perhaps this is a temporary response to the shock of birth control. If so, the effect of the shock is likely to fade over time as evolution works its logic.
In Selfish Reasons to Have More Kids Bryan Caplan notes that we overestimate the effect of parental investment on children and we underestimate the pleasures of grandchildren, in both cases choosing too few children. The rich should read Bryan’s book.
In these calculations I have assumed that primogeniture won’t make a comeback, that seems solid. Assortative mating, however, will slow wealth dispersion. I have also assumed that savings and fertility are independent which is unlikely to be the case. Becker and Barro (1988) suggest that more children will increase savings but less than proportionally so the logic continues to hold. Note also that this works both ways, wealthy people with fewer children will save less. Bill Gates has three children but has already given away a substantial fraction of his fortune and he has pledged to give away much more. Even parental altruism has its limits and Bill Gates has decided that on the margin he would rather give money to poor children in Africa than to his own children. Bill Gates’s shadow will not eat our future.
So what is the second surefire method to reduce capital inequality? Reduce fertility among the rich! If the rich as a class have fewer than 2 children then it follows inexorably that their time is numbered, albeit without first creating a small number of very rich people.
The logic of r-g turns out to be highly dependent on savings behavior, fertility decisions and the nature of altruistic bequests.
19th century inequality and the arts
Here is a well-written piece by Epicurean Dealmaker (ED) on the arts and economic inequality. Another response is here from Salon, also see the pieces that ED links to, such as Henry Farrell (and more here and Matt here). Unfortunately, ED cannot get beyond his preferred framing of the problem in terms of inequality and inequality alone. He has “inequality on the brain.”
Here is the nub of the critique:
Cowen takes a detour to praise the cultural dynamism and productivity of 19th Century France, which he claims results from the substantial socioeconomic inequality of the period. This is a pivot too far.
ED fails to note that:
1. Much of the artistic creativity of the 19th century stemmed from its wealth creation, not from its inequality per se. He specifies a setting where a robber baron stole from a working man, and supposes I am defending the theft by arguing it brought us some good art. That is an imaginary creation of ED. The very passage from me he cites refers to the virtues of wealth but does not refer to inequality.
2. For much of the latter three-quarters of the 19th century, consumption inequality appears to have declined. Oops.
3. Many of his intemperate statements about the history of art are wrong or doubtful or exaggerated and have been answered or at least contested, including in the five books I have written on the economics of the arts, including In Praise of Commercial Culture.
4. Let’s not talk about “the arts.” Reproducible and non-reproducible art forms will respond very differently to income inequality, as Alex and I argued in the SEJ. Cooking is yet another story, if we are going to call that art.
5. Piketty himself neglects the “wealth can generate additional TFP” possibility, and that remains a significant hole in his argument.
Overall this ED post is a good example of how easily and quickly one can go awry by an obsession with framing everything in terms of inequality. It also shows the drawbacks of a relative unfamiliarity with the basic literature, including for that matter the recent book by Piketty.
Further Gary Becker links
Russ Roberts on Gary Becker. And Steve Levitt on Gary Becker. And Heckman’s 181 pp. of notes on Becker (correct link here), many superb photos, large font and lots of space, I had not known Jacob Viner called Becker his best student ever, or how much Solow and Becker were rivals. And Justin Wolfers on Becker.
All are excellent and fascinating pieces.
A simple Bayesian updating on Ukraine
Putin didn’t carve off the eastern parts of the country, although he could have. I now infer he wishes to take the whole thing. There are sometimes reasons why you do not wish to stop and take the free lunch and create a focal line, namely that it can constrain you for the future. I don’t mean that Putin will conquer Ukraine by military force, but rather bit by bit he will harass the current government into losing legitimacy, until a strongly pro-Russian, pro-Putin government is running that country. By hook or by crook.
Are athletes really getting better, faster, stronger?
A new TED talk by David Epstein says “not as much as you might think.”
From the transcript, here is one interesting excerpt:
…consider that Usain Bolt started by propelling himself out of blocks down a specially fabricated carpet designed to allow him to travel as fast as humanly possible. Jesse Owens, on the other hand, ran on cinders, the ash from burnt wood, and that soft surface stole far more energy from his legs as he ran. Rather than blocks, Jesse Owens had a gardening trowel that he had to use to dig holes in the cinders to start from.Biomechanical analysis of the speed of Owens’ joints shows that had been running on the same surface as Bolt, he wouldn’t have been 14 feet behind, he would have been within one stride.
This is interesting too:
In the early half of the 20th century, physical education instructors and coaches had the idea that the average body type was the best for all athletic endeavors: medium height, medium weight, no matter the sport.And this showed in athletes’ bodies. In the 1920s, the average elite high-jumper and average elite shot-putter were the same exact size. But as that idea started to fade away, as sports scientists and coaches realized that rather than the average body type, you want highly specialized bodies that fit into certain athletic niches, a form of artificial selection took place, a self-sorting for bodies that fit certain sports, and athletes’ bodies became more different from one another. Today, rather than the same size as the average elite high jumper, the average elite shot-putter is two and a half inches taller and 130 pounds heavier. And this happened throughout the sports world.
There is this contrast:
… if you know an American man between the ages of 20 and 40 who is at least seven feet tall, there’s a 17 percent chance he’s in the NBA right now…in sports where diminutive stature is an advantage, the small athletes got smaller. The average elite female gymnast shrunk from 5’3″ to 4’9″ on average over the last 30 years, all the better for their power-to-weight ratio and for spinning in the air.
I cannot say I am convinced, if only because I don’t recall too many NBA players from my boyhood looking like Charles Oakley. You can suggest that example more than fits the author’s hypothesis, but then I wonder which view he is arguing against. If you hold enough other things equal, of course performance has to be equal too.
For the pointer I thank Mitch Berkson.
Some neglected Gary Becker open access pieces
Summarizing Becker’s contributions is like trying to summarize economics and it is not really possible. I believe he has the best “30th best” paper of any economist, living or dead.
Here are a few Becker articles which are not even his best known work:
1. “Irrational Behavior and Economic Theory.” Can the theorems of economics survive the assumption of irrational behavior? (hint: yes)
2. “Altruism, Egoism, and Genetic Fitness: Economics and Sociobiology.” The title says it all, from 1976.
3. “A Note on Restaurant Pricing and Other Examples of Social Influence on Price.” Why don’t successful restaurants just raise the prices for Saturday night seatings?
4. “The Quantity and Quality of Life and the Evolution of World Inequality” (with Philipson and Soares). The causes and importance of converging lifespans.
5. “Competition and Democracy.” From 1958, but most people still ignore this basic point about why government very often does not improve on market outcomes.
6. “The Challenge of Immigration: A Radical Solution.” Auction off the right to enter this country.
*Ancient Religions, Modern Politics*
That is the new Princeton University Press book by Michael Cook and the subtitle is The Islamic Case in Comparative Perspective. It is a very good comparative look at why Islam has evolved to have a special influence on politics, relative to the other major religions:
…Muslim solidarity has not displaced nationalism, but it has established itself as an alternative to it. It has done remarkably well in shifting the moral terms of trade in favor of Islam as a political identity and against the various nationalisms of the Muslim world, thereby putting them on the defensive…These qualitative observations find some support from a survey of 2005 that asked Muslims in six mainly Muslim countries whether they saw themselves as citizens of their countries first or as Muslims first, In all but Lebanon more respondents identified primarily as Muslims than as national citizens…
The findings of a survey carried out in 2006 shed an interesting light on this. In Pakistan 87 percent of Muslims identified as Muslims first, rather than citizens of their country; in India only 10 percent of Hindus identified in this way.
I found this book consistently interesting. The book’s home page is here.
Deer nationalism and status quo bias
The Iron Curtain fell 25 years ago, but it seems that nobody told the deer.
A new study has found that a quarter of a century on, red deer on the border between the Czech Republic and old West Germany still do not cross the divide.
After tracking 300 deer, researchers said the animals are intent on maintaining the old boundaries.
One of the scientists involved told the BBC the deer are not ideological, “they are just very conservative in their habits.”
During the Cold War, electric fences made the Czech-German boundary impossible to pass.