Posts Tagged ‘growth’

in praise of messiness

Saturday, October 8th, 2016

Undercover Economist Tim Harford explains why highly performing office workers tend to be messy pilers rather than neat filers.

Filers like to establish a formal organisational structure for their paper documents. Pilers, by contrast, let pieces of paper build up around their desks or, as we have now learnt to say, implement an LRU-cache.

To most of us, it may seem obvious that piling is dysfunctional while filing is the act of a serious professional. Yet when researchers from the office design company Herman Miller looked at high-performing office workers, they found that they tended to be pilers. They let documents accumulate on their desks, used their physical presence as a reminder to do work, and relied on subtle cues — physical alignment, dog-ears, or a stray Post-it note — to orient themselves. ….

[Benjamin] Franklin was a messy fellow his entire life, despite 60 years of trying to reform himself, and remained convinced that if only he could learn to tidy up, he would become a more successful and productive person. But any outsider can see that it is absurd to think such a rich life could have been yet further enriched by assiduous use of a filing cabinet. Franklin was deluding himself.

Tim Harford, “There’s magic in mess: why you should embrace a disorderly desk“, Financial Times Magazine, 8 October 2016 (metered paywall).

There is much more in the full article, which is based on Tim Harford’s latest book, Messy: The Power of Disorder to Transform Our Lives (Riverhead/Little, Brown, 2016).

You can also hear Mr Harford discuss this topic with Cariff Garcia in an FT business and economics podcast:

Tim Harford joined me to discuss his latest book, Messy: The Power of Disorder to Transform Our Lives. This was a deeply engaging and fun conversation. Messy is the best longform manifestation yet of Tim’s knack for revealing counterintuitive truths, using social science and original interviews to find the underlying sense in our lives that we often fail to see — and thus fail to appreciate. ….

[F]or the text-only crowd, click below to open a PDF transcript of our chat.

Cardiff Garcia, “Alphachat: Tim Harford on the unheralded virtue of messiness“, FT Alphaville, 8 October 2016 (unmetered access for all FT blogs and podcasts – free registration required).

Alphachat is also available on Acast, iTunes and Stitcher.

Bourgeois Dignity

Sunday, July 31st, 2016

An unusual feature of Deirdre McCloskey’s book, Bourgeois Dignity, is the chapter headings which provide a concise summary of the argument of the book. Few books have impressed me so much.

The volume contains 450 pages of text, so each chapter is roughly 10 pages long. In addition there are 42 pages of endnotes, 41 pages of references and a useful 37-page index.

You can read the entire first chapter (pp. 1-9) here. Below is the complete table of contents.

1   The Modern World Was an Economic Tide, But Did Not Have Economic Causes.
2   Liberal Ideas Caused the Innovation
3   And a New Rhetoric Protected the Ideas.   
4   Many Other Plausible Stories Don’t Work Very Well.   
5   The Correct Story Praises “Capitalism.”   
6   Modern Growth Was a Factor of at Least Sixteen.    
7   Increasing Scope, Not Pot-of-Pleasure “Happiness,” Is What Mattered,   
8   And the Poor Won.    
9   Creative Destruction Can Be Justified Therefore on Utilitarian Grounds.   
10   British Economists Did Not Recognize the Tide,   
11   But the Figures Tell.   
12   Britain’s (and Europe’s) Lead Was an Episode,    
13   And Followers Could Leap over Stages.    
14   The Tide Didn’t Happen because of Thrift;    
15   Capital Fundamentalism Is Wrong.    
16   A Rise of Greed or of a Protestant Ethic Didn’t Happen;
17   “Endless” Accumulation Does Not Typify the Modern World.   
18   Nor Was the Cause Original Accumulation or a Sin of Expropriation.   
19   Nor Was It Accumulation of Human Capital, Until Lately.    
20   Transport or Other Domestic Reshufflings Didn’t Cause It,   
21   Nor Geography, nor Natural Resources;   
22   Not Even Coal.    
23   Foreign Trade Was Not the Cause, Though World Prices Were a Context,   
24   And the Logic of Trade-as-an-Engine Is Dubious,   
25   And Even the Dynamic Effects of Trade Were Small.    
26   The Effects on Europe of the Slave Trade and British Imperialism Were Smaller Still,
27   And Other Exploitations, External or Internal, Were Equally Profitless to Ordinary Europeans.   
28   It Was Not the Sheer Quickening of Commerce    
29   Nor the Struggle over the Spoils.   
30   Eugenic Materialism Doesn’t Work;
31   Neo-Darwinism Doesn’t Compute;    
32   And Inheritance Fades.
33   Institutions Cannot Be Viewed Merely as Incentive-Providing Constraints,   
34   And So the Better Institutions, Such as Those Alleged for 1689, Don’t Explain,
35   And Anyway the Entire Absence of Property Is Not Relevant to the Place or Period   
36   And the Chronology of Property and Incentives Has Been Mismeasured,    
37   And So the Routine of Max U Doesn’t Work.
38   The Cause Was Not Science,   
39   But Bourgeois Dignity and Liberty Entwined with the Enlightenment.   
40   It Was Not Allocation:   
41   It Was Words.   
42   Dignity and Liberty for Ordinary People, in Short, Were the Greatest Externalities,
43   And the Model Can Be Formalized.   
44   Opposing the Bourgeoisie Hurts the Poor,    
45   And the Bourgeois Era Warrants Therefore Not Political or Environmental Pessimism   
46   But an Amiable, if Guarded, Optimism.   

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. vii-ix.

 

low interest rates

Sunday, July 31st, 2016

Nominal interest rates on secure debt, such as long-term government bonds, are now very low, even zero or negative in some countries. Economists prefer to look at real interest rates (nominal rates less inflation), which are more informative. After all, nominal rates might be very high, but if inflation is even higher, the return is negative for those who purchase bonds.

Cuban-American economist Carmen Reinhart looks at real interest rates in advanced economies over time, and finds that bouts of negative real rates have been common for more than a century. What is novel is deflation (falling prices), which requires negative nominal rates to produce the negative real rates central banks seek in order to stimulate growth.

[The chart below] shows that the 2010-2016 period is not the first episode of widespread negative real returns on bonds. The periods around World War I and World War II are routinely overlooked in discussions that focus on deregulation of capital markets since the 1980s. As in the past, during and after financial crises and wars, central banks increasingly resort to a form of “taxation” that helps liquidate the huge public- and private-debt overhang and eases the burden of servicing that debt.

Such policies, known as financial repression, usually involve a strong connection between the government, the central bank, and the financial sector. Today, this means consistent negative real interest rates – equivalent to an opaque tax on bondholders and on savers more generally.

So if a prolonged period of low and often negative real interest rates is not unprecedented, where is the novelty? More often than not, negative real rates were accompanied by higher inflation (as during the wars and the 1970s) than what we observe today in the advanced economies. Even when average inflation was modest (as in the 1950s and 1960s), it was still more volatile.

In the 1930s, in the midst of economic depression and sharp deflation, US Treasury bills sometimes traded at negative yields (and real returns were still positive). In today’s low-inflation or outright deflationary environment, central banks may need negative policy rates (this is the novelty part) to produce negative real rates. In the eurozone and Japan, taxing banks that hold reserves (negative-interest-rate policy) will also encourage more bank lending, and thus stimulate growth.

Carmen Reinhart, “What’s New About Today’s Low Interest Rates?“, Project Syndicate, 28 July 2016.

There is much more in the full column. Carmen M. Reinhart (née Castellanos, 1955) is on the faculty of the Harvard Kennedy School. She co-authored (with Kenneth Rogoff) This Time is Different: Eight Centuries of Financial Folly, published by Princeton University Press in 2009.

advanced economies with negative long-term interest rates

perverse effects of education

Sunday, July 31st, 2016

I have completed McCloskey’s remarkable book, and will continue to post short excerpts that caught my attention. Here is the first of several to follow.

Each of the book’s short chapters made me think, and some made me wish that I had written the words, or at least something similar. This excerpt is from chapter 43, the only chapter of the book that contains a formal model of economic growth. As McCloskey explains, on p. 411, “The ‘mathematics’ is merely a metaphorical language that economists understand, and which allows me to chat with them … without excessive confusion.”

[The effect of education] can be and often has been perverse, corrupting good bourgeois boys by educating them to believe that the bourgeoisie have no dignity at all, or corrupting good bourgeois girls to become state bureaucrats devoted to believing that bourgeois liberty is to be stamped out. Marx took a PhD degree in philosophy at Jena in 1841. The leader of the Shining Path Marxists in Peru was a professor of philosophy. A high percentage of the officers in Hitler’s SS had advanced degrees in the humanities. German engineers built the gas chambers. Excellent computer engineers enforce the Chinese censorship of the Internet.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), p. 417.

I encourage you to visit Professor McCloskey’s web page, where you can download many of her diverse writings (though not this book!).

liberal policies and economic growth

Friday, July 29th, 2016

For your enjoyment, here are more excerpts from Bourgeois Dignity.

Dignity and liberty still work. …. Shenzhen in mainland China, a suburb of Hong Kong, went from being a small fishing village to an eight-million-soul metropolis in two decades. it didn’t happen without some nasty rent-seeking by party officials and their friends, true. But out of such creative destruction are average incomes raised, to the benefit eventually of the poorest. Such a shift required a shift in rhetoric: stop jailing millionaires and start admiring them; stop overregulating markets and start letting people make deals, corrupt or not.

…. You can still hear people … [declare] confidently that the market of course needs to be closely regulated, or that trade needs to be fair, or that immigration must be restricted, or that jobs are to be created by governmental programs, or that businesspeople routinely cheat, or that markets are chaotic, or that the more complex an economy is, the more it needs government regulation, or that banking or financial speculation is robbery, or that governmental bureaucracies are always fair and efficient.  …. Such antibourgeois people … do not believe the bourgeois axiom that a deal between two free adults has a strong presumption in its favor ….

This seems to be extremely libertarian, but five pages later, McCloskey explains that she is very much a classical liberal (a follower of Adam Smith, John Stuart Mill and others):

Liberty, I say again for the enlightenment of my libertarian colleagues, does not by itself suffice. The political scientist James Otteson asserts … “Those countries that respect private property and efficiently administer justice prosper, and those that do not do not. It is as simple as that.” Not quite, I would argue …. Prudence is not enough. We need to assent to bourgeois virtues.

Two chapters later McCloskey affirms this even more clearly:

[We should not celebrate] “greed is good,” which I argued at length in [my book] The Bourgeois Virtues is a childish and unethical rhetoric, however popular it has been on Wall Street and in the Department of Economics.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 397, 402, 446.

science and economic growth

Thursday, July 28th, 2016

Like imperialism and trade, science was more a result of economic growth than a cause.

All this remains to be shown …. But understand the main point here: even today … a great deal of economic growth in a country has little or nothing to do with science. The spread of economic growth to places like Brazil or Russia or India or China uses some science-based technologies, such as cell phones, but uses also a great many merely technology-based technologies free of much input from science …. And the international spread of growth has intensively used the social “technology” of bourgeois dignity and liberty.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 360-361.

Surprised? (I was.) Not convinced? Before rejecting McCloskey’s thesis read all ten pages of chapter 38 (“The cause was not science”), pp.355-365 or, better yet, read the entire book.

thoughts on economic models

Sunday, July 10th, 2016

A typical, very simple economic model is a demand curve, Dx = f(Px). It states that, other things equal, an increase in the price of x will result in a decrease in demand for x. I other things are not equal, the assumptions of the model do not hold. Suppose, writes blogger Arnold Kling, that x stands for tuition charged by a school, and we observe that demand went up rather than down when tuition increased. What may have happened is that scholarships became more generous, so the full tuition – net of student aid – fell. Other things did not remain equal.

Most economic models contain more variables. Consider the aggregate production function X = f(K,L). The quantity of output is a function of the quantity of physical capital plus the quantity of labour.

[This model] is used to predict that differences in output per worker will be proportionate to differences in capital per worker. When this fails, there are many possible reasons: workers may differ in their human capital; physical capital may not be measured or aggregated correctly; output may not be measured or aggregated correctly; institutional differences may matter. etc.

In fact, the primary use of the aggregate production function model is to examine its failure, which is called “the residual.” Economists place an interpretation on this residual, calling it “total factor productivity.” They interpret the rate of change in this residual over time as “productivity growth.” They interpret the change in the rate of change in this residual as “change in the trend rate of productivity growth.”

Arnold Kling, “Thoughts on the use of Models in Economics“, askblog, 9 July 2016.

Arnold’s explanation of how economists use models is useful, but I think he is too easy on model-building. It is very difficult – probably impossible – to measure output, labour and capital without using prices. This is necessary, because if prices are used, the model becomes close to a tautology. The value of the quantity demanded, for example, is always equal to the value of the quantity supplied (plus or minus abnormal profits or losses). Similarly, the value of output is equal to the cost of the rental of machines plus the wages of labour (adjusted for any abnormal profit or loss).

Think how difficult it is to measure (without prices!) the heterogeneous output of a factory, or the hours of equivalently productive workers. Physical capital is even more difficult to measure. Without prices or interest rates, what is the unit of measure. Kilos of capital? Number of shovels, hammers or machines?

Economic models are helpful, but only as toy models, useful for understanding, but not predicting, how a real economy functions.

See here for past posts on production functions.

imperialism and growth

Saturday, July 9th, 2016

I am continuing to read Deirdre McCloskey’s delightful book. Each page contains material to think about. Professor McCloskey is not kind to anyone she feels has misinterpreted economic history. Here is a brief example.

True, people thought that mercantilist aggression was good for them. …. It is the rhetoric of business-school deans and big-thinking journalists. But it is not sound, then or now, whatever people believe.

An instructive example of the unsound connection of aggression to economic success is the military historian Correlli Barnett’ brilliant old book of 1972, The Collapse of British Power, an influence for example on the Thatcher administration in Britain. …. [Barnett] mixes rank in the league table of power with economic success, and assumes … that what people thought at the time was an important connection among trade, empire, military might, and domestic prosperity was in fact the case. Thus Barnett:

in the eighteenth century the English ruling classes … saw foreign policy in terms of concrete interest: markets, national resources, colonial real estate, naval bases, profits. …. They saw national power as the essential foundation of national independence; commercial wealth as a means to power; and war as among the means to all three. They accepted it as natural and inevitable that nations should be engaged in a ceaseless struggle for survival, prosperity and predominance.

That’s right. That’s what they thought. But they were wrong–even in the dismal year for the British economy of 1972–to lament British economic “decline.” He attributed the “decline” to softness of mind and softness of will, arising especially from a new evangelical Christianity:

The abolition of the slave trade in 1807 as a result of a campaign led by William Wilberforce and of slavery itself in the British Empire in 1833 were the earliest of the great social achievements of British evangelicalism. …. As a consequence of this spiritual revolution English policy ceased to be founded solely on the expedient and opportunistic pursuit of English interests. ….

Barnett’s analysis sounds quite plausible, and it sounded even more so in the realpolitik days of 1972. Certainly British politics, at home and abroad, became in the nineteenth century more ethically driven, right down to coming to the aid of the French in 1914, against expediency, and then making a welfare state …. /but Britain, despite its lamentable descent into namby-pamby soft-heartedness, to be cured in the glorious war of conquest against the Argentinians, has remained one of the richest economies on earth, and has shared in the modern engine of innovation, which it started.

[…]

Britain’s overseas trade [and colonies], in short, can’t explain Britain’s peculiarity. Lining up national conquest with national trade is an old claim, though Adam Smith and many economists since him have wisely contradicted it (without persuading many politicians or journalists.) National conquest, though, doesn’t explain early British industrialization, and certainly not the continuation on the way to the [growth] factor of sixteen.

Deirdre N. McCloskey, Bourgeois Dignity: Why Economics Can’t Explain the Modern World (University of Chicago Press, 2010), pp. 215-216, 225.

More snippets from McCloskey will follow. I have added a “McCloskey” tag so that you can easily find them.

China’s economic growth prospects

Thursday, September 3rd, 2015

FT columnist Martin Wolf is very optimistic regarding China’s long-run prospects.

The important economic fact about China is its past achievements. Gross domestic product (at purchasing power parity) has risen from 3 per cent of US levels to some 25 per cent. GDP is an imperfect measure of the standard of living. But this transformation is no statistical artefact. It is visible on the ground.

The only “large”(bigger than city state) economies, without valuable natural resources, to achieve something like this since the second world war are Japan, Taiwan, South Korea and Vietnam. Yet, relative to US levels, China’s GDP per head is where South Korea’s was in the mid-1980s. South Korea’s real GDP per head has since nearly quadrupled in real terms, to reach almost 70 per cent of US levels. If China became as rich as Korea, its economy would be bigger than those of the US and Europe combined.

Martin Wolf, “China risks an economic discontinuity“, Financial Times, 2 September 2015 (metered paywall).

Short-run prospects are less rosy, since China’s fast growth rates will probably revert to the global mean. Chinese policymakers, writes Martin, “need to re-engineer a slowing economy without crashing”.

Moreover, the challenge is not only, or even mainly, technical. A big question is whether a market-driven economy is compatible with the growing concentration of political power.

development goals and development strategies

Tuesday, September 1st, 2015

Following the Millennium Summit of the United Nations in 2000, all UN member states and many international organizations pledged to contribute to achievement of eight Millennium Development Goals (MDGs) within 15 years. Much remains to be done, so activists, lobbyists and government officials believe that a new set of goals is needed.

This month, UN member states are expected to adopt Sustainable Development Goals (SDGs), to guide global development from 2015 to 2030. The number of goals has expanded from 8 MDGs to 17 SDGs, and the SDGs are more complex, with 169 targets and 304 indicators.

But, are global, quantitative goals necessary to plan economic development? Two economists from the The New School for Social Research argue that they are not at all helpful, because development is a national process in which strategies are usually more important than specific targets.

Ban Ki-Moon, the United Nations’ Secretary General, recently claimed that the “… MDGs [Millennium Development Goals] helped to lift more than one billion people out of extreme poverty”.

Unfortunately, there is little justification for this statement. ….

If there must be development goals — which is far from obvious — then global quantitative targets should be de-emphasized or in some cases done away with altogether. Specific targets such as the reduction or elimination of diseases or of poverty may retain their attractiveness but others will not.

Global goals should be advanced through national plans that might not involve quantitative targets but that would specify strategies. …. Such an approach would open more room for experimentation with innovative development strategies, and create a richer global public conversation on what development is, whom it should serve, how and why.

Sanjay G. Reddy and Ingrid Kvangraven, “Does the world really need development goals?“, Beyond Brics, Financial Times blog, 28 August 2015 (unmetered access with free registration).

Sanjay G. Reddy is associate professor and Ingrid Kvangraven is a PhD student in the economics department of The New School for Social Research, New York City.