Category: History

Rent seeking and the decline of the Florentine school

Economists have claimed that the invisible hand of competition is behind the historical episodes of outstanding artistic achievement, from Shakespearean theater to musical composition in Mozart’s Vienna. Competition, the argument goes, acts on producers of the arts just as it does on producers of mundane commodities. By pitting one artist against all others for the public’s purse and the critics’ praise, rivalry encourages them to supply more refined products. While often left unstated, the same argument implies that the absence of competition will be detrimental to the quality of artists’ output. We extend that insight to explain the decline of the Florentine school of painting in the Late Renaissance period. The rise of the Medici family as Florence’s ruling dynasty turned the previously competitive market for paintings into a monopsony. That development, we argue, strengthened the benefits to local painters of forming a cartel to reclaim the rents captured by the monopsonist. The result was the creation of a local painters’ guild that restricted competition, ultimately contributing to a decline in the quality and influence of Florentine painting.

That is from a new piece by Ennio E. Piano and Tanner Hardy in Public Choice.  Speculative, as they say, and declines in artistic quality are notoriously difficult to predict or to squish into standard models.  That said, the earlier model of competitive guild bidding for artists was, I think, better for quality than Medici patronage.

Via the excellent Kevin Lewis.

The glories of Irish economics

Yesterday I mentioned the underrated Irish Enlightenment (don’t forget Toland!), today I will briefly lay out how many top early economists came from Ireland.  Here is a partial list of those economists and their contributions:

1. Richard Cantillon, 1680s-1734.  Perhaps the second greatest economist of his century after Adam Smith, he developed the ideas of entrepreneurship and opportunity cost and in general embraced common sense.  Jevons called his Essay on the Nature of Commerce in General the “cradle of political economy.”  He was a major influence on Smith.

2. Edmund Burke, 1729-1797.  Burke has been underrated as an economist, see the recent book by Greg Collins on Burke’s economic thought.  Here is a short essay on Burke’s conservative case for markets.

3. Robert Torrens, 1780-1864.  A major thinker on international trade, he developed the theory of comparative advantage before Ricardo did, and was a sophisticated analyst on a broad range of questions, including terms of trade and currency policy.  He also promoted a version of the charter city idea for southern Australia, and to this day some things in Adelaide bear his name.

4. Richard Whately, 1787-1863.  Mostly an archbishop, theologian, and philosopher, his writings on economics developed the notion of “catallactics,” namely economics as the science of exchange.

3. Mountifort Longfield, 1802-1884.  A first-rate common sense economist, and arguably the first writer to clearly state the laws of supply and demand.  He also developed a marginal productivity theory for the value of labor and capital.  The first professor of political economy at Trinity College.

5. John Elliott Cairnes, 1823-1875.  An important thinker on the methodology of the social sciences, an all-around excellent economist, and his diagnosis of the economics and sociology of slavery (it ruined and infected all parts of Southern society) was spot on.  He is sometimes considered “the last of the classical economists.”

6. Isaac Butt, 1813-1879.  Best-known for his role in Irish political history and the Home Rule movement, he produced what is arguably the first coherent account of the marginal product theory of distribution and factor prices.  He also analyzed the Irish system in terms of the economics of misallocated land, and he promoted welfare state ideas.

7. Francis Ysidro Edgeworth, 1845-1926.  One of the founders and leading lights of mathematical economics, he produced an early version of the Coase Theorem, the notion that market price converges on a competitive equilibrium as the number of buyers and sellers grows, explained the importance of tangency conditions for economic equilibrium, developed the economics of progressive taxation, fleshed out the economics of monopoly pricing, and he initiated the use of offer curves for international trade theory.

And please, none of your b.s. about Anglo-Irish, Norman, Spanish, etc. — they were Irish!  I think of these individuals as continuing the earlier Irish Enlightenment of the eighteenth century.

*Super-Infinite: The Transformations of John Donne*

This new book by Katherine Rundell, now out in the UK but still pending in the United States for September, is one of the very best studies of an individual poet I ever have read.  The book’s style is so energetic and so carefully crafted as a whole, it is difficult to excerpt from.  What is striking to me is that the blurbs are from super-smart people, and they all are literally accurate (has that ever been the case?). So for instance Claire Tomalin wrote:

Katherine Rundell’s brave and detailed new biography of John Donne is just the book we need…Every page sparkles…

Simon Jenkins wrote:

Rundell has a wonderful touch, light yet profound, which perfectly suits her extraordinary subject…Unmissable.

The great Maggie O’Farrell wrote:

A wonderful, joyous piece of work…with fierce, interrogative intelligence. I just loved it.

All true!  Recommended, a sure thing for the year’s best of non-fiction list.  You don’t even have to like poetry, as a history book it is first-rate as well.

That was then, this is now

On July 7 [1917], while the unsuccessful hunt for fugitive Bolsheviks continued, Prince Lvov resigned as leader of the Provisional Government.  He was replaced by Kerensky.  This had nothing to do with either the July uprising or the failed offensive.  Five days earlier, Kadet ministers had resigned in protest at a decision to allow Ukraine a degree of autonomy.

Both liberals and socialists in the reconstituted Provisional Government wanted to keep the Russian empire together.  They had accepted in March that after the war Poland, now behind German lines, would break away to become fully independent, but they were determined to hold on to the Grand Duchy of Finland, the Baltic provinces and Ukraine.  their view was that the grievances and aspirations of national minorities were purely the product of Tsarist oppression, above all the ‘russification’ programmes introduced under Nicholas II which had discourages any diversity of culture or language.  A few limited concessions to autonomy were thought to be sufficient.

…Russians in Kiev never expected the Ukrainian forces to put up much of a fight.  Deliberately ignoring the reality of Ukrainian culture and history, they had taken Ukrainian patriotism as little more than a joke.

That is from the new and excellent Anthony Beevor book, Russia: Revolution and Civil War 1917-1921.

The great stagnation and the primacy of foreign policy

One cause (and effect) of the great stagnation, as emphasized by Peter Thiel and others (including myself), is our inability to imagine a future radically different from the immediate past.  We view progress as gentrification and more nice restaurants, not fundamental transformation.

This same lack of imagination makes it difficult to understand the primacy of foreign policy in understanding the world on a day-to-day basis.  If you lack imagination, you will tend to assume that the current configurations of countries, alliances, and so on are simply going to last.

But they are not, and they never have.  And thus the primacy of foreign policy considerations.  But for many people this is difficult to grasp.

Rereading Edward Gibbon on the fall of Rome

I hadn’t looked at this work for a long time, and I was struck by how much he does not blame Christianity for the decline of the Roman Empire.  Here is one bit, closer to Ibn Khaldun than anything:

The rise of a city, which swelled into an empire, may deserve, as a singular prodigy, the reflection of a philosophic mind.  But the decline of Rome was the natural and inevitable effect of immoderate greatness.  Prosperity ripened the principle of decay; the causes of destruction multiplied with the extent of conquest; and as soon as time or accident had removed the artificial supports, the stupendous fabric yielded to the pressure of its own weight.  The story of its ruin is simple and obvious; and instead of inquiring why the Roman empire was destroyed, we should rather be surprised that it had subsisted for so long. (p.435)

Gibbon also puts forward the hypothesis that basic knowledge in agriculture and the manufactures is never lost, so the overall course of history will be progressive. (pp.442-443)

He is worried about existential risk from comets, volcanoes, and earthquakes, though despairs we cannot do much about it. (p.578)

All from the Penguin abridged edition, edited by David Womersley.

My excellent Conversation with Marc Andreessen

I’ve been wanting to do this one for some while, and Marc did not disappoint.  Here is the audio, transcript, and video.  Here is the summary:

Marc joined Tyler to discuss his ever-growing appreciation for the humanities and more, including why he didn’t go to a better school, his contrarian take on Robert Heinlein, how Tom Wolfe helped Marc understand his own archetype, who he’d choose to be in Renaissance Florence, which books he’s reread the most, Twitter as an X-ray machine on public figures, where in the past he’d most like to time-travel, his favorite tech product that no longer exists, whether Web will improve podcasting, the civilization-level changes made possible by remote work, Peter Thiel’s secret to attracting talent, which data he thinks would be most helpful for finding good founders, how he’d organize his own bookstore, the kinds of people he admires most, and why Deadwood is equal to Shakespeare.

And the opening:

COWEN: Simple question: Have you always been like this?

ANDREESSEN: [laughs] Yes. I believe that my friends would say that I have.

COWEN: Let’s go back to the junior high school Marc Andreessen. At that time, what was your favorite book and why?

ANDREESSEN: That’s a really good question. I read a lot. Probably, like a lot of people like me, it was a lot of science fiction. I’m one of the few people I know who thinks that late Robert Heinlein was better than early Robert Heinlein. That had a really big effect on me. What else? I was omnivorous at an early age.

COWEN: Why is late Robert Heinlein better?

ANDREESSEN: To me, at least to young me — see if older me would agree with this — a sense of exploration and discovery and wonder and open-endedness. For me, it was as if he got more open-minded as he got older. I remember those books, in particular, being very inspiring — the universe is a place of possibilities.

COWEN: What’s the seminal television show for your intellectual development in, say, junior high school?

ANDREESSEN: Oh, junior high school — it’s hard to beat Knight Rider.

COWEN: Why Knight Rider?

ANDREESSEN: There was a wave of these near science fiction shows in the late ’70s, early ’80s that coincided with . . . Some of it was the aftermath of Star Wars, but it was the arrival of the personal computer and the arrival of computer technology in the lives of ordinary people for the first time. There was a massive wave of anxiety, but there was also a tremendous sense of possibility.

Recommended, excellent throughout.

Against Historic Preservation II

 In Manhattan, once famed for its ever-evolving skyline, an astonishing 27 percent of the borough’s lots now fall under the purview of the landmarks commission.

That’s from Jacob Andinder’s What Historic Preservation Is Doing to American Cities in the Atlantic. It’s a pretty good history of the movement for historic preservation focusing (of course) on some of the racist motivations and effects. But it has little to say about what to do about the consequent difficulties of building anything new. Similarly, here’s Binyamin Applebaum in the NYTimes correctly decrying the fact that historic preservation laws mean you can’t put solar panels on the rooftops of many homes in Washington, DC. Applebaum suggests a tiered approach.

I am more radical. All historical preservation laws should be repealed.

It’s one thing to require safety permits but no construction project should require a historic preservation permit. Here are three reasons:

First, it’s often the case that buildings of little historical worth are preserved by rules and regulations that are used as a pretext to slow competitors, maintain monopoly rents, and keep neighborhoods in a kind of aesthetic stasis that benefits a small number of people at the expense of many others.

Second, a confident nation builds so that future people may look back and marvel at their ancestor’s ingenuity and aesthetic vision. A nation in decline looks to the past in a vain attempt to “preserve” what was once great. Preservation is what you do to dead butterflies.

Ironically, if today’s rules for historical preservation had been in place in the past the buildings that some now want to preserve would never have been built at all. The opportunity cost of preservation is future greatness.

Third, repealing historic preservation laws does not mean ending historic preservation. There is a very simple way that truly great buildings can be preserved–they can be bought or their preservation rights paid for. The problem with historic preservation laws is not the goal but the methods. Historic preservation laws attempt to foist the cost of preservation on those who want to build (very much including builders of infrastructure such as the government). Attempting to foist costs on others, however, almost inevitably leads to a system full of lawyers, lobbying and rent seeking–and that leads to high transaction costs and delay. Richard Epstein advocated a compensation system for takings because takings violate ethics and constitutional law. But perhaps an even bigger virtue of a compensation system is that it’s quick. A building worth preserving is worth paying to preserve. A compensation system unites builders and those who want to preserve and thus allows for quick decisions about what will be preserved and what will not.

Facts about chickens

Although previous studies have made claims for an early origin of chickens, our results suggest that unambiguous chickens were not present until ∼1650 to 1250 BCE in central Thailand. A correlation between early chickens and the first appearance of rice and millet cultivation suggests that the production and storage of these cereals may have acted as a magnet, thus initiating the chicken domestication process.

Here is the full paper, via Anecdotal.

Factory Built Housing

Government concerns about great disparities in housing conditions, what are often called housing crises, date to at least the 1920s. These great disparities are, of course, still with us 100 years later. In this essay, we argue there will be no progress ending these great disparities until the residential construction industry adopts technology that other industries began adopting more than 100 years ago – factory production methods. There have been attempts to introduce these methods in residential construction for the last century, but they are always blocked and sabotaged by monopolies in the traditional construction sector, that is, the sector producing homes outside, on-site, using “stick-built” methods. Monopolies in traditional construction sabotage many types of factory-built homes. In this essay, we focus on the sabotage of particular types of such homes, what we call small-modular homes. These homes can be produced and sold at very-low prices, so that the sabotage of these homes has disproportionately hurt the low-income. The sabotage is the primary reason for the existence of, and perpetuation of, U.S. housing crises.

[Small-modular homes]…are blocked from most areas of the country – it’s simply illegal for a household to purchase such a home and place it on land owned by the household. In areas where they are “allowed,” they are often zoned for areas like manufacturing districts and dumps. Even then, regulations mean higher production costs for these homes in factories. They also mean the homes are financed as automobiles (with personal loans, or chattell loans) and not real estate loans. It’s clear why these homes are a threat to those constructing stick-built homes, especially in the lower-priced home market, and why monopolies in traditional construction have invested so heavily in blocking these small-modular homes. The homes are of high-quality, built to a strict national building code. They are manufactured at a cost per square foot that is one-third to one-half less than the cost per square foot to construct homes with traditional methods.

That’s from James Schmitz’s paper for the Minneapolis Fed, Solving the Housing Crisis will Require Fighting Monopolies in Construction.

Amazingly, a majority of the houses produced in the early 1970s were factory-built before these types of houses were driven out of the market. Capps at Bloomberg notes:

Manufactured homes briefly dominated the U.S. housing market during the 1960s. By 1972, these homes — not just mobile homes but small-scale modular houses — accounted for some 60% of all new single-family homes produced nationwide, according to census data. That number has diminished so much that the role of factories in building affordable housing has gone all but forgotten.

The Biden administration wants to put America’s house factories — those used to be a thing, really — back to work. A new housing plan by the White House offers a set of actions designed to close the nation’s massive affordability gap.

As Schmitz discusses at length in another paper, part of the reason economists have ignored the destruction of factory built housing is that economists came to think of the danger of monopoly as solely involving price (or, to put it the other way as Austrians do, they thought of the virtue of competition as only involving price.). In fact, monopolies reduce productivity and they use the political process to sabotage other firms. Competition isn’t just about price but about increased productivity and creative destruction.

P.S. I am in the process of building a factory-built house. The factory part was by far the easiest and most efficient part of the process.

Rubin and Koyama on the Industrial Revolution

From Dylan Matthews:

The big question is what drove this transformation. Historians, economists, and anthropologists have proposed a long list of explanations for why human life suddenly changed starting in 18th-century England, from geographic effects to forms of government to intellectual property rules to fluctuations in average wages.

For a long time, there was no one book that could explain, compare, and evaluate these theories for non-experts. That’s changed: How the World Became Rich, by Chapman University’s Jared Rubin and George Mason University’s Mark Koyama, provides a comprehensive look at what, exactly, changed when sustained economic growth began, what factors help explain its beginning, and which theories do the best job of making sense of the new stage of life that humans have been experiencing for a couple brief centuries.

Here is the full coverage with interview.  And you can order the book here from Amazon.  I haven’t read it yet, but this is surely self-recommending…

Moving From Opportunity: The High Cost of Restrictions on Land Use

ImagePeople are more productive in cities. As a result, people move to cities to earn higher wages but some of their productivity and wages is eaten up by land prices. How much? In a new paper Philip G. Hoxie, Daniel Shoag, and Stan Veuger show that net wages (that is wages after housing costs) used to increase in cities for all workers but since around 2000 net wages actually fall when low-wage workers move to cities. The key figure is at right.

As I wrote earlier, it used to be that poor people moved to rich places. A janitor in New York, for example, used to earn more than a janitor in Alabama even after adjusting for housing costs. As a result, janitors moved from Alabama to New York, in the process raising their standard of living and reducing income inequality. Today, however, after taking into account housing costs, janitors in New York earn less than janitors in Alabama. As a result, poor people no longer move to rich places. Indeed, there is now a slight trend for poor people to move to poor places because even though wages are lower in poor places, housing prices are lower yet.

Ideally, we want labor and other resources to move from low productivity places to high productivity places–this dynamic reallocation of resources is one of the causes of rising productivity. But for low-skill workers the opposite is happening – housing prices are driving them from high productivity places to low productivity places. Furthermore, when low-skill workers end up in low-productivity places, wages are lower so there are fewer reasons to be employed and there aren’t high-wage jobs in the area so the incentives to increase human capital are dulled. The process of poverty becomes self-reinforcing.

Why has housing become so expensive in high-productivity places? It is true that there are geographic constraints (Manhattan isn’t getting any bigger) but zoning and other land use restrictions including historical and environmental “protection” are reducing the amount of land available for housing and how much building can be done on a given piece of land. As a result, in places with lots of restrictions on land use, increased demand for housing shows up mostly in house prices rather than in house quantities.

Moreover, as I also argued earlier, even though the net wage is still positive for college-educated workers a signficant share of the returns to education are actually going to land owners!  Enrico Moretti (2013) estimates that 25% of the increase in the college wage premium between 1980 and 2000 was absorbed by higher housing costs. Moreover, since the big increases in housing costs have come after 2000, it’s very likely that an even larger share of the college wage premium today is being eaten by housing. High housing costs don’t simply redistribute wealth from workers to landowners. High housing costs reduce the return to education, reducing the incentive to invest in education. Thus higher housing costs have reduced human capital and the number of skilled workers with potentially significant effects on growth.