Category: History

Which changes in economic policy are actually going to happen?

That is the topic of my latest Bloomberg column, here is one excerpt:

A second pattern from U.S. history is that the federal government generally likes to hand out benefits perceived as “free.” This dates at least as far back as the establishment of Social Security in the Great Depression, when the initial benefit recipients weren’t paying taxes into the system.

I therefore expect federal government action on subsidized child care, preschool programs and paid family leave, all financed by increases in budget deficits rather than higher taxes. Such policies would hand out goodies to millions of families, and appeal to women in particular.

Again, ask the basic questions. Is there “pro-family” rhetoric emanating from both left and right? Yes, whether it is the socialist proposals from Matt Bruenig or paid family leave bills introduced by congressional Republicans. Can you imagine members from both parties claiming these issues as their own? Yes. Is there the possibility of free goodies being handed out? Again, yes, as the national debt held by the public is now over $16 trillion.

I consider also tech regulation, trade issues, immigration, Medicare for All, and the Green New Deal, with only the first of those likely to see big changes.

Toward a theory of random, concentrated breakthroughs

I don’t (yet?) agree with what is to follow, but it is a model of the world I have been trying to flesh out, if only for the sake of curiosity.  Here are the main premises:

1. For a big breakthrough in some area to come, many different favorable inputs had to come together.  So the Florentine Renaissance required the discovery of the right artistic materials at the right time (e.g., good tempera, then oil paint), prosperity in Florence, guilds and nobles interested in competing for status with artistic commissions, relative freedom of expression, and so on.

2. To some extent, but not completely, the arrival of those varied inputs is random.  Big breakthroughs are thus hard to predict and also hard to control.

3. A breakthrough in one area increases the likelihood that further breakthroughs will come in closely related areas.  So if the coming together of the symphony orchestra leads to the work of Mozart and Haydn, that in turn becomes an inspiration and eases the path for later breakthroughs in music, not just Mahler but also The Beatles, compared to say how much it might ease future breakthroughs for painting.

4. Some breakthroughs are very very good for economic growth, such as the Industrial Revolution.  But most breakthroughs do not in any direct way boost gdp very much.  The Axial age led to the creation of significant religions and intellectual traditions, but the (complex) effects on gdp are mostly lagged and were certainly hard to see at the time.

5. Even if Robert Gordon is right that we will never have a new period of material progress comparable to the early 20th century for improving living standards, the next breakthrough eras still might be very important.

6. One possibility is that the next breakthrough will be some form of brain engineering.  People might be much happier and better adjusted, but arguably that could lower measured gdp by boosting “household production” in lieu of market activity.  At the very least, gdp figures may not reflect the value of those gains.

7. Another candidate for the next breakthrough would be institutional changes that make ongoing international peace much more likely.  That would have some positive effects on gdp in the short run, but its major effects would be in the much longer run, namely the prevention of a very destructive war.

8. Judged by the standards of the last breakthrough, the current/next breakthrough is typically hard to see and understand.  It almost always feels like we are failing at progress.

9. When a breakthrough comes, you need to ride it for all it is worth.  Arguably you also should embrace the excesses of that breakthrough, not seek to limit them.  It is perhaps your only real chance to mine that mother lode of inspiration.  So let us hope that Baroque music was “overproduced” in the early to mid 18th century, because after that production opportunities go away.  For that reason, “overuse” of the internet and social media today may not be such a bad thing.  It is our primary way of exploring all of the potential of that cultural mode, and that mode will at some point be tamed and neutered, just as Baroque music composition is now dormant.

10. Progress in (many forms of) science may be more like progress in Baroque music composition than we comfortably like to think.  But I hope not.

*IBM: The Rise and Fall and Reinvention of a Global Icon*

That is the new and excellent and I am tempted to label definitive book by James W. Cortada.  The author worked at IBM for thirty-eight years, a reasonable qualification to attempt such a tome.  Here is one excerpt:

It is difficult to exaggerate the importance of the Social Security win to the evolution of IBM.  That one piece of business, along with its effects on other agencies and businesses, wiped out the Great Depression for IBM.  That transaction handed IBM a potential market of 20,000 other companies that would need to process social security data.  When the books were closed on IBM’s business in 1937, revenue had increased by 48 percent of 1935’s, and by the end of 1939, by 81 percent of 1935’s.

And then for the 1960s:

IBM’s System 360 was one of the most important products introduced by a U.S. corporation in the twentieth century, and it nearly broke IBM.  A short list of the most transformative products of the past century would include it…

On April 7, 1964, IBM introduced a combination of six components, dozens of items of peripheral equipment, such as tape drives, disk drives, printers, and control units, among others; and a promise to provide the software necessary to make everything work together — a mindboggling total of 150 products…manuals describing all the machines, components, software, and their installations and operation filled more than 50 linear feet of bookshelves.

But later on, by the 1970s:

With ten layers of management, each with staffs, it was probably inevitable that bureaucracy would grow.

The research and background context is amazing and the book is readable throughout.  You can pre-order here.

*Big Business: A Love Letter to an American Anti-Hero*

I am very excited about my next book, due out April 9:

I view this work as an antidote to many of the less than stellar arguments circulating today.  It looks like this:

Table of contents

1. A new pro-business manifesto

2. Are businesses more fraudulent than the rest of us?

3. Are CEOs paid too much?

4. Is work fun?

5. How monopolistic is American big business?

6. Are the big tech companies evil?

7. What is Wall Street good for, anyway?

8. Crony capitalism: How much does big business control the American government?

9. If business is so good, why is it disliked?

Here is part of the Amazon description:

An against-the-grain polemic on American capitalism from New York Times bestselling author Tyler Cowen.

We love to hate the 800-pound gorilla. Walmart and Amazon destroy communities and small businesses. Facebook turns us into addicts while putting our personal data at risk. From skeptical politicians like Bernie Sanders who, at a 2016 presidential campaign rally said, “If a bank is too big to fail, it is too big to exist,” to millennials, only 42 percent of whom support capitalism, belief in big business is at an all-time low. But are big companies inherently evil? If business is so bad, why does it remain so integral to the basic functioning of America? Economist and bestselling author Tyler Cowen says our biggest problem is that we don’t love business enough.

In Big Business, Cowen puts forth an impassioned defense of corporations and their essential role in a balanced, productive, and progressive society. He dismantles common misconceptions and untangles conflicting intuitions.

You can pre-order here on Amazon.  Here at Barnes & Noble.  Here at Books a Million.  Here at Itunes.  Here at IndieBound.  From PlayGoogle.  From Kobo.

Here is the publisher’s home page.  Definitely recommended…and if you are a regular MR reader, no more than five to ten percent of this book has already appeared on this blog.

Liu Cixin on American vs. Chinese science fiction

Presently — faced with the immaturity of Chinese sci-fi — everyone in our sci-fi community is envious of the adult sci-fi readership in the US, and see it as a sign of maturity in sci-fi literature. But one must know that senility comes after maturity, and death comes after senility. The prosperity of US sci-fi is largely a result of the prosperity of its movie and TV industries, and these sci-fi movies and TV shows are but a stylistic extension of the “golden age” (sci-fi). Contemporary sci-fi literature itself in US is already deep in twilight — full of works applying complex techniques to express dense metaphors, completely devoid of the youthful energy of the “golden age” (sci-fi); and many magnum opuses in recent years already have an air of death about them. Americans under 25 these days basically don’t read sci-fi; I don’t see what’s to be envied about that.

And this:

But to look at it in another way, sci-fi literature is by its very nature immature — because it shows humanity in its childhood, filled with curiosity and fear for the vast and profound universe, as well as the urge to explore it. In the face of such a universe, human science and philosophy are very immature, and sci-fi is the only literary form available to express our scientific and philosophical immaturities; so it’s no surprise that sci-fi is filled with immaturity. When human science is developed to the furthest extent and everything in the universe is discovered down to its minutia, that will be the day sci-fi dies.

Here is the entire Reddit thread, via Benjamin Lyons.

*VC: An American History*, by Tom Nicholas

An excellent and original economic history of venture capital, with lots of new material, brought together in a convenient and readable form.  Here is one excerpt:

…nineteenth century whaling can be compared to modern venture capital in at least three respects.  First, whaling was the archetypical skewed-distribution business, sustained by highly lucrative but low-probability payoff events.  Voyages often lasted several years and and covered geographic areas in the search for elusive whale pod.  The long-tailed distribution of profits held the same allure for funders of whaling voyages as it does for a venture capital industry reliant on extreme returns from a very small subset of investments.  Although other industries across history, such as gold exploration and oil wildcatting, have been characterized by long-tail outcomes, no industry gets quite as close as whaling does to matching the organization and distribution of returns associated with the VC sector.

The book also covers VC in the Industrial Revolution, to what extent Mellon and Morgan can be thought of as venture capitalists, the institutionalization of venture capital in the 1950s, how the limited partnership structure came to VC, the roles of Intel and Genentech, Sequoia Capital, and the growth of a true Silicon Valley ecosystem.

How about this?:

During the 1970s, San Jose State University was graduating more scientists and engineers than Stanford or Berkeley, while local community colleges within the California system provided crucial access to technical training programs.

Recommended to anyone with an interest in the topic, you can pre-order here.

Small teams vs. large teams in science

Here we analyse more than 65 million papers, patents and software products that span the period 1954–2014, and demonstrate that across this period smaller teams have tended to disrupt science and technology with new ideas and opportunities, whereas larger teams have tended to develop existing ones.

That is from a new Nature paper by Lingfei Wu, Dashun Wang, and James A. Evans.  Here is the NYT write-up by Benedict Carey.

My Conversation with Jordan Peterson

Here is the transcript and audio, here is the summary:

Jordan Peterson joins Tyler to discuss collecting Soviet propaganda, why he’s so drawn to Jung, what the Exodus story can teach us about current events, his marriage and fame, what the Intellectual Dark Web gets wrong, immigration in America and Canada, his tendency towards depression, Tinder’s revolutionary nature, the lessons from The Lord of the Rings and Harry Potter, fixing universities, the skills needed to become a good educator, and much more.

Here is one bit:

COWEN: Your peers in the Intellectual Dark Web — the best of them — what is it they’re wrong about?

PETERSON: Oh, they’re wrong about all sorts of things. But at least they’re wrong in all sorts of interesting ways. I think Sam Harris, for example — I don’t think that he understands. I don’t think that he’s given sufficient credence to the role that religious thinking plays in human cognition.

I think that’s a huge mistake for someone who’s an evolutionary biologist because human religious thinking is a human universal. It’s built into our biology. It’s there for a reason. Although Sam is an evolutionary biologist, at least in principle, with regards to his thinking, he’s an Enlightenment rationalist when it comes to discussing the biology of religion, and that’s not acceptable.

It’s the wrong time frame. You don’t criticize religious thinking over a time frame of 200 years. You think about religious thinking over a time frame of 50,000 years, but probably over a far greater time span than that.

COWEN: So if that’s what Sam Harris doesn’t get —

PETERSON: Yeah.

COWEN: If we turn to senior management of large American companies, as a class of people — and I know it’s hard to generalize — but what do you see them as just not getting?

PETERSON: I would caution them not to underestimate the danger of their human resources departments.

Much more than just the usual, including a long segment at the end on Jordan’s plans for higher education, here is one bit from that:

Universities give people a chance to contend with the great thought of the past — that would be the educational element. To find mentors, to become disciplined, to work towards a single goal. And almost none of that has to do with content provision. Because you might think, how do you duplicate a university online? Well, you take lectures and you put them online, and you deliver multiple-choice questions. It’s like, yeah, but that’s one-fiftieth of what a university is doing.

So we’ve just scrapped that idea, and what we’re trying to do instead is to figure out, how can you teach people to write in a manner that’s scalable? That’s a big problem because teaching people to write is very, very difficult, and it’s very labor intensive and expensive. So that’s one problem we’d really like to crack. How can you teach people to speak? And can you do that in a scalable manner as well?

Definitely recommended, even if you feel you’ve already heard or read a lot of Jordan Peterson.

Women in Economics: Elinor Ostrom

Our first episode in the Women in Economics series is an introduction to Elinor Ostrom, the first woman to have won the Nobel Prize in Economics. Elinor Ostrom and Vincent Ostrom have long been a part of the intellectual foundations of “Masonomics”. Both the Ostroms were past presidents of the Public Choice Society, for example, as were Jim Buchanan, Gordon Tullock and Vernon Smith. The Mason Economics department was thrilled when Ostrom won the Nobel as there has been and continues to be fruitful interaction between public choice, experimental economics and institutional analysis.

At the Women in Economics website you can also find Ostrom’s Nobel Prize address, more on the tragedy of the commons, and other resources.

Especially valuable for in-depth research are Vlad Tarko’s biography of Elinor Ostrom and Paul Dragos Aligica and Peter Boettke’s introduction to The Bloomington School.

Sovereign Bonds since Waterloo — better than you had thought

This paper studies external sovereign bonds as an asset class. We compile a new database of 220,000 monthly prices of foreign-currency government bonds traded in London and New York between 1815 (the Battle of Waterloo) and 2016, covering 91 countries. Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds. The observed returns are hard to reconcile with canonical theoretical models and with the degree of credit risk in this market, as measured by historical default and recovery rates. Based on our archive of more than 300 sovereign debt restructurings since 1815, we show that full repudiation is rare; the median haircut is below 50%.

That is from Josefin Meyer, Carmen M. Reinhart, and Christoph Trebesch in a new NBER working paper.

What should I ask Emily R. Wilson?

I will be doing a Conversation with her, no associated public event.  She is the translator of a splendid and highly readable Homer’s Odyssey, which I named as the very best book of the year for last year.  She is also a professor at the University of Pennsylvania, a classicist, a Seneca scholar, and an all-around very smart person.  Here is her Wikipedia page.

So what should I ask her?

Women in Economics

Tyler and I are very pleased to announce a new series at MRU, Women in Economics.

Women in Economics highlights the groundbreaking and inspiring work of female economists – not only to recognize the important work they’ve done but to also share their inspirational journeys.

Our first major video on Elinor Ostrom will be released on February 12 followed by videos on Janet Yellen (featuring Christina Romer and Ben Bernanke), Anna Schwartz (featuring Claudia Goldin), Joan Robinson and more. We also have some more informal “mini-testimonials” discussing the work of some major contemporary economists who have been inspirational. In the video below I discuss the work of Petra Moser. (I should have cleaned my office.)

Tyler and I also want to take a moment to thank the fantastic team at MRU for a huge amount of creativity, inspiration and hard work in putting this series together. Lots of thanks and appreciation to Roman Hardgrave, Alexandra Tooley, Mary Clare Peate, Brandon Davis, Justin Dile, Lindsay Moss and William Nava. You too can join the team!

More here.

Why is capital so often flowing out of emerging economies?

Sam asks me:

I was struck by something that Peter Thiel has talked a bit about in recent months, namely that capital is flowing ‘uphill’ from China to the U.S., which is not what the neoclassical model would predict. I’ve read a few of the general objections to this “Lucas Paradox” (e.g. differences in human capital, credit risks etc.), but would love to know what your take on this phenomenon is.

I would cite a few factors:

1. China is a high-savings country with high political risk.  In general savings don’t have that many safe outlets, noting the third largest government debt market in the world is that of Italy.  So of course much of this money flows into the United States.  And China is hardly the only high-savings emerging economy.

2. China makes it costly or impossible for many kinds of American firms and individuals to invest directly in China, this now being a familiar story.  The Chinese stock market also is limited and unrepresentative of the Chinese economy as a whole.

3. American capital will not flow to Russia the way British capital once sopped up opportunities in Argentina and elsewhere in the late 19th and early 20th centuries.  The end of gunboat diplomacy is one but not the only reason for this.

4. State-owned industry is a bigger factor today than in earlier times.  For instance, if Aramco is privatized, plenty of private Western capital will invest in the company.  But so far it is not.

5. Savings rates are often especially high during times of rapid income growth, because preferences have not yet caught up with income (an underrated mechanism, which perhaps someday will get its own blog post).  Emerging economies in much earlier times did not have such rapid growth, and therefore they did not have comparable huge savings surpluses to dispose of.

6. The United States has issued a lot of debt, whereas the earlier Great Britain ran a balanced budget at least intertemporally.

7. America has accumulated enough wealth so that flows of household savings can be relatively low.  Plus we are irresponsible — so good at marketing and spending! — and thus we do not save enough either.

8. If you counted holdings of American dollars, as a reserve currency, as “America exporting its rule of law,” the flow of funds would look less strange.

Which other reasons?

Columbus Lowered World Temperature

European germs killed 90% of the population of the Americas in the century after 1492 causing millions of hectacres of farm land to revert to forest which increased the uptake of carbon and reduced the planetary temperature. That is the upshot of a new paper that joins together previous estimates of population decline, farm land and carbon sequestration to push the onset of the Anthropocene to before the industrial revolution.

Earth system impacts of the European arrival and Great Dying in the Americas after 1492.

Abstract: Human impacts prior to the Industrial Revolution are not well constrained. We investigate whether the decline in global atmospheric CO2 concentration by 7–10 ppm in the late 1500s and early 1600s which globally lowered surface air temperatures by 0.15C, were generated by natural forcing or were a result of the large-scale depopulation of the Americas after European arrival, subsequent land use change and secondary succession. We quantitatively review the evidence for (i) the pre-Columbian population size, (ii) their per capita land use, (iii) the post-1492 population loss, (iv) the resulting carbon uptake of the abandoned anthropogenic landscapes, and then compare these to potential natural drivers of global carbon declines of 7–10 ppm. From 119 published regional population estimates we calculate a pre-1492 CE population of 60.5 million (interquartile range, IQR 44.8–78.2 million), utilizing 1.04 ha land per capita (IQR 0.98–1.11). European epidemics removed 90% (IQR 87–92%) of the indigenous population over the next century. This resulted in secondary succession of 55.8 Mha (IQR 39.0–78.4 Mha) of abandoned land, sequestering 7.4 Pg C (IQR 4.9–10.8 Pg C), equivalent to a decline in atmospheric CO2 of 3.5 ppm (IQR 2.3–5.1 ppm CO2). Accounting for carbon cycle feedbacks plus LUC outside the Americas gives a total 5 ppm CO2 additional uptake into the land surface in the 1500s compared to the 1400s, 47–67% of the atmospheric CO2 decline. Furthermore, we show that the global carbon budget of the 1500s cannot be balanced until large-scale vegetation regeneration in the Americas is included. The Great Dying of the Indigenous Peoples of the Americas resulted in a human-driven global impact on the Earth System in the two centuries prior to the Industrial Revolution.