He next turns his sights on to a prize system for innovation. His proposed policies are well-intentioned but naïve. He proposes that the government fund sizeable prizes (to the tune of millions or billions of dollars per prize) with specific goals—not methods—in mind. This should work in theory, but the fundamental problem with this method is that it fails to discern how the government would go about setting the most economic goals and prizes. This process could become highly politicized, as anything involving billions of federal dollars tends to. However, venture capitalists and innovation firms should take note of this recommendation and implement it.

Tabarrok closes his short book by looking briefly at education—both public and post-secondary. Regarding the former, he recommends reform. Why this is preferable to privatization is unstated, but perhaps that is beyond the scope of the book. One curious thing about is argument is how he claims that there is a correlation between high school graduation rates and GDP growth. While statistical analysis bears this out, it is worth noting that there is no proven causal relationship between the two. It could be that GDP growth causes increases in the rate of High School graduation as families become wealthier, and better able to secure leisure time for their children, thus reducing teenagers’ need to work.

But I was left thirsty for two more books.

The first book would be a more technical treatment of the same material.

I repeatedly found myself wanting more technical detail. The pollution from cars has come down by 99% between 1970 and 2010. How was this done!? New nuclear reactor designs are fundamentally safer than the reactors that got into trouble at Chernobyl or Fukushima. What are these designs and why are they fundamentally safer!? Hybrid cars give you much higher mileage than ordinary cars. What are the key innovations which make this possible and how much did each of these new ideas contribute? The oil industry is doing incredible things digging deep into the sea. What are these engineering challenges and how are they being overcome?

And so on. The Quest is a good book but the The Quest for Geeks which would be a great book.

The second direction in which I was curious and unsatisfied was India. The book has roughly nothing about India. It talks a bit about about Suzlon and has some political stories about India’s views in global climate negotiations. For the rest, there is nothing about India’s energy industry. It would be great if a comparable panoramic treatment was done, focusing on India. Perhaps Girish Sant and/or Rangan Banerjee should embark on such a project. ]]> http://www.citizeneconomists.com/blogs/2011/11/04/the-quest-by-daniel-yergin-a-great-job-but-we-need-more/feed/ 0 http://www.citizeneconomists.com/blogs/2011/10/28/book-review-south-africa%e2%80%99s-war-against-capitalism-by-walter-e-williams/ http://www.citizeneconomists.com/blogs/2011/10/28/book-review-south-africa%e2%80%99s-war-against-capitalism-by-walter-e-williams/#comments Fri, 28 Oct 2011 13:55:29 +0000 Simon Grey http://www.citizeneconomists.com/blogs/?p=9548 Like A Financial Analysis of al-Qaeda in Iraq, this book is rather technical and highly academic in approach. Unsurprisingly, it is a rather boring read for the most part. Furthermore, the book isn’t particularly insightful.

There were some who apparently claimed, presumably around the time this book was written, that capitalism was responsible for . . . → Read More: Book Review: South Africa’s War Against Capitalism by Walter E. Williams]]> Like A Financial Analysis of al-Qaeda in Iraq, this book is rather technical and highly academic in approach. Unsurprisingly, it is a rather boring read for the most part. Furthermore, the book isn’t particularly insightful.

There were some who apparently claimed, presumably around the time this book was written, that capitalism was responsible for causing and perpetuating apartheid and racial division. Williams seeks to correct this misconception, and does so quite adequately by pointing out how it was government legislation that created, enabled, and perpetuated apartheid and the corresponding racism.Williams’ arguments are not unique or original, in a sense, because racial biases can, and have been, easily corrected on the free market by the “inferior” race offering lower prices for their labor. The reason this didn’t happen in South Africa was because the government forbade competition, or elsewise severely hindered it.

Williams’ book, then, is useful primarily as an academic resource. It is not easy or enjoyable to read, part of which is due to the structure of the book. For me, it only reinforced my beliefs in the general equitability of the market. I imagine that the same will be true for those who are inclined to read this. My recommendation is to only read this book if you are doing research on South Africa or apartheid.

Economists have long assumed that humans are, fundamentally, rational creatures.  Even von Mises assumed as such, although it should be noted that his usage of “rational” was tautological, and based solely on economic actor’s behavior (instead of, say, the economic actor’s stated goal) and bound by the limits of human knowledge.  Basically, Mises argued that one’s “true” desires were shown by one’s behavior, and that all humans pursued the most efficient course of action to attain the desired ends.

However, mainstream economists generally tend to define “rationality” as one’s tendency to act in one’s best long-term interest.  Whether this definition accounts for the constraints of humanity (i.e. imperfect knowledge, the constraint of time, etc.) varies by economist.  At any rate, the assumption is that humans have a tendency and desire to act in their long-term best interest, and, furthermore, derive only (or mostly) direct utility from consumption.

These assumptions are wholly fallacious, and contradict observable reality, which creates quite a problem for economists who try to make detailed policy prescriptions, since doing so generally requires the ability to correctly predict micro-level behavior.  Obviously, economists have largely been unable to do so, in part because they bought into the myth of the average person, and in part because the average person does not resemble an actual human as much as it resembles a watered-down version of what economists think an ideal human being would look like.

Thus, much of what has been written about theoretical human behavior from an economist’s standpoint has been largely irrelevant and useless to those who live in reality because economists desire a reality that does not exist.  One example of this is what’s known as the Ultimatum Game.  The game is played by taking two people, giving one of them a sum of money, and telling him to split it however he chooses with the other player.  If the other player accepts, they split the money accordingly and go on their merry way.  If, however, the other player declines the offer, neither player gets anything and they go on their unmerry way.  Theory dictates that the most rational course of action is for Player A to offer Player B one penny and for Player B to accept, with the idea being that one penny is better than nothing.

But when put into practice, as Thaler details quite extensively in his book, the offer is rarely a penny.  It is usually substantially more than that (close to 50% in many cases).

It turns out that humans are more complex than economists would lead you to believe.  Many humans, it appears, have more than a direct pecuniary interest in monetary offers.  This shouldn’t be surprising, since humans are social creatures with a rather common need to show off.  Non-economists tend to recognize this, and therefore make a point of making an offer that is not perceived as insulting.  If an offer were too low, the recipient would decline it because the recipient would perceive the value of the money to be lower than the value of the social communication that declining the offer would bring (i.e. the recipient would find it more useful to say he’s insulted than to accept the money).  This is, without a doubt, an economic judgment.  Yet it is one that economists seem incapable of accounting for because it makes no sense to them.

But, without becoming too dryly analytical, humans are not hardwired to think solely in terms of direct utility.  Products can serve multiple functions; some direct, some indirect.  Polo shirts, for example, have a direct function of keeping one’s upper body shielded from the elements.  But certain polo shirts, such as those made by, say, Ralph Lauren, have an indirect function as a status symbol.  And there are people in this world, apparently, who find the added, indirect value to be worth the cost.  Economists have failed to account for this sort of thinking, and have thus neglected to consider the full range of value that decisions can provide, which is why there is such a divergence between reality and theory when it comes to things like Ultimatum Game.

The rest of the book, or at least the parts I read, seemed to bear this sort of thing out as well.  Why is there such a difference between reality and theory in economics?  The answer is, for the most part, quite simple:  Economic theory doesn’t actually account for the behavior of real people.

Thaler, in making this decidedly simple point, feels compelled to dress it up in fancy mathematics.  There is, of course, nothing inherently wrong with doing this, but it does make for a very dry read.  Also, it seems to be a very complicated way of stating the obvious.

However, this degree of precision and insight makes the Winner’s Curse a necessary read for any aspiring economist.  Economics, as a method of study, is not particularly useful if one neither knows nor corrects for the fundamental mistaken assumptions upon which the intellectual edifice is built.  Economics does have plenty to offer, as a method of analysis, but it is only useful if its axioms are realistic.  The Winner’s Curse, then, is useful because it questions the basics of theory.  Not only that, it provides the answers as well.

Still, help is readily available and the recent book entitled “Endgame: The End of the Debt SuperCycle and How It Changes Everything” by John Mauldin and Jonathan Tepper is a fine example of how to make a complicated topic easy to understand without compromising on detail.

The Endgame essentially reads as a blueprint of the global economy and her financial system. It provides a detailed and rich analysis on the financial crisis, what led up to it and what is likely to follow. In its core, it is built on the simple premise that taking on debt today will impact on your ability to maneuvre financially tomorrow. However, once you transfer this idea to the level of sovereign states and their interaction through an immensely complicated set of feedback loops and interconnected processes most analysts and economists fall short of an adequate explanation.

Enter Jonathan Tepper and John Mauldin.

With a concise style of writing and a sharp sight for taking the argument straight to the core, the authors lay bare the global financial system and its reckless production of excess debt. The book provides a clear and crisp analysis of what must be done and what is likely to happen if adequate action is not taken.

I would highlight in particular the chapters on individual countries which excellently convey the idea that all economies now face choices which range from difficult to disasterous. Here, it is easy to file the book under the heading of eternal pain and damnation. But it never transcends into a spiral of doom and gloom which means that it emerges as an extremely well balanced account of the current state of the global economy and the challenges that lie ahead.

Personally, I have long held that the main unspoken and untold macroeconomic consequence as a result of the crisis is how the next decade invariably will see a number of more or less spectacular and costly sovereign defaults in the OECD. What matters is how we deal with these and which choices the individual countries make. If the right choices are made, we will have less defaults rather than many but I don’t think we can avoid them altogether.

Within this framework, the Endgame provides an indispensable guide to the macroeconomic landscape going forward.

–

Full Disclosure: I know and work together with Jonathan Tepper but I have no financial interest in the book whatsoever so I can safely recommend it as a strong, nay necessary buy on Amazon.

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Well, I’m not sure Deidre, perhaps there is a link between international trade, specialization and scale economies – but you may have discussed that possibility somewhere else in the book when I wasn’t paying attention. In any case, I agree with you that innovation must have been a lot more important than scale economies.

I was a little more concerned that I didn’t see any recognition of the possibility, as discussed in Eric Jones’ recent book (reviewed here), that clustering of manufacturing in the north of England – as a result of trade and specialization within England – provided an economic environment conducive to subsequent innovations. Perhaps middle class enrichment resulting from trade and specialization could also help to explain why the bourgeois revaluation occurred when and where it did. (The bourgeois revaluation is the greater approval of the middle classes – and of innovation and markets – that began to occur in thought and talk in Holland and England three centuries ago.)

My main concern, Deidre, is that in attempting to clear the field prior to sowing a new crop of ideas (or the old ideas you want to propagate anew) you may be inadvertently slashing and burning some other ideas that are worth preserving. This applies, in particular, to the relationship between institutional change and economic performance as discussed by Douglass North (‘Institutions, Institutional Change and Economic Performance’, 1990). I agree with you that North could not have been correct in attributing the industrial revolution to more secure property rights following the Glorious Revolution. There is, however, more to institutional change than more secure property rights. I reject your attempt to dismiss appeals to institutional change as ‘still another attempt to reduce one of the greatest surprises in human history to a materialist routine’ and to claim that changes in institutions did not have much to do with the industrial revolution (p. 354).

In fact, evidence that you cite in your book seems to conflict with your claim that changes in institutions – the rules of the game – had little to do with the industrial revolution. You acknowledge that ‘the norms of antibourgeois aristocrats and clerics did discourage innovation’ (p. 267). You also suggest: ‘Had the Ottoman or the Qing empires or the Japanese Shogunate admired trade and innovation sufficiently to overcome their worries about the maintenance of state power – encouraging innovation and having a go rather than crushing it – then they, not the Europeans, would have come first’ (p. 371). You note that in France and Spain in the 18th century a nobleman caught engaging in commerce could be stripped on his rank’ (p. 387) and that in France it was necessary to apply to the state for permission to open a factory (p. 395).

I think your true position may be that bourgeois dignity and institutions (economic freedom) are both important in explaining the industrial revolution. This comes through fairly clearly when you write: ‘By adopting the respect for deal-making and innovation and the liberty to carry out the deals that Amsterdam and London pioneered around 1700, the modern world was born’ (p. 397). In such passages you seem to be offering an encompassing theory incorporating both bourgeois dignity and institutional change.

So far so good. I can understand that ideology (an amalgam of perceptions and values) influences the climate of opinion toward commerce and innovation which in turn influences both informal institutions (conventions and codes of behaviour) and formal institutions (regulations, laws, constitutions) which may or may not provide a climate conducive to innovation. Is that all there is to understand?

Perhaps not. The missing element is a sense of personal identity. As you say: ‘In truth, the agent wants to act because she attributes meaning to her life … She is a human with an identity, not a Max U calculating machine like grass or bacteria or rats’ (p. 307).

That gets me thinking again about identity economics – the idea of George Akerlof and Rachel Kranton that people gain utility when their actions conform to the norms and ideals of their identity (which I first discussed here). Even a person with great potential to be innovative might find that difficult if the norms and ideals of their identity dictated that any attempt to innovate would be futile. If we start thinking in terms of identity economics, however, we might have to question the sub-title of your book – perhaps economics can explain the modern world after all.

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The reservation I have about the review of the literature by Bergh and Henrekson is somewhat technical – so some readers may prefer to skip this paragraph. My reservation concerns the authors’ enthusiasm for Bayesian Averaging of Classical Estimates (BACE), a technique used to deal with possible sensitivity of parameter estimates to the inclusion of different control variables in regression models. A recent paper by Antonio Ciccone and Marek Jarocinski suggests that margins of error in international income estimates are too large for such agnostic growth empirics to be reliable. In any case, in my view the economic reasoning that tells us that the economic costs of taxation rise approximately in proportion to the square of the tax rate provides a more powerful case against big government than the results of cross-country econometric studies. (The authors appear to attribute this insight to the Swedish economist, Jonas Agell (p.17), although it should more appropriately be attributed to much earlier work by Arnold Harberger, or possibly even to Alfred Marshall.)

It is well known that the economic cost of high tax rates arises in part from the substitution of leisure for income. Some would argue that this is beneficial because many people obtain more happiness from spending time with family and friends than from working. One reason why the argument is spurious is because it may be rational for individuals to sacrifice some current happiness to provide their children with a better education, fund early retirement or pursue any number of other objectives that are important to them.

Another reason why the argument is spurious is that what economists talk about as a choice between income and leisure is often actually a choice between time spent on paid work and time spent on unpaid household chores. It is doubtful whether people obtain much more pleasure from housework, weeding the garden and childcare than from working for pay. Bergh and Henrekson make the good point that high rates of labour taxation provide an incentive for consumers to produce such services themselves in the home rather than to work longer hours in order to purchase them in the market place. The authors suggest that this explains why hours of unpaid work are substantially greater in Sweden than in the US and hours of paid work are correspondingly lower in Sweden than the US.

The authors also provide a graph comparing average hours worked per person in Sweden and the US over the period 1956 to 2003. It shows that average hours worked in Sweden were substantially lower than in the US during the 1950s, when Sweden’s tax rates were much lower, the situation has been reversed in recent decades.

Over the last couple of centuries the ancestors of the vast majority of people in high-income countries have managed to obtain the benefits of participation in a market economy – the benefits of exchange and specialization on the basis of comparative advantage, resulting in much higher living standards and providing greater opportunities for skill development and incentives for further innovation. High taxes associated with big government provide the opposite incentives – encouraging people to shun the market and to produce services for themselves. Self-sufficiency is not without its attractions, but I doubt whether many people would freely choose the poverty experienced by their ancestors, even if that was the only way they could ensure a supply of fresh, organically-grown vegetables.

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