Goodbye Rudy

In 2008 I found myself at SJSU study economics as an undergrad. That was the big turning point that landed me on this blog.

A lot of people insist that was a fantastically interesting time to study economics, what with the global financial sector crumbling and society at large humbly learning a lesson in allowing markets to discipline irresponsible risk taking. (Right? Isn’t that what happened?). But for me, what was fascinating was the intellectual framework that allowed you to dig into the root causes. The SJSU econ department was a fantastic place for me to start building up that framework.

Fall 2008 was professor Rudy Gonzalez’s last semester before retirement and my second semester in that program. I took advantage. Rather than four discrete classes (Law & Econ, History of Economic Thought, Labor Econ, and Public Choice) I essentially had a 12 credit class in Economics broadly understood. It was the most intellectually fruitful semester in my economics career.

Rudy was the sort of freewheeling professor I try to be. He set a tone. In Rudy’s classes I learned the most in the gaps between the stuff for the exam. My classmates and I came out of his classes debating concepts and engaging with ideas. This was the semester I wrote my best joke: The Physiocrats. I learned a lot from studying for those exams, but the best stuff was in the digressions.

I think my students hate it when I digress. They’ve been trained by a lifetime of standardized tests and the empty promise that ambition is as simple as uncritically ticking off the right boxes: take these classes in this order, get a degree, then get a job (whatever that means). There’s a lot of lip service to the importance of education, but now education is a commodity. Bricks to be stacked mechanically.

In Rudy’s class, education was a process of enlightenment. Knowledge wasn’t an assembly of bricks, but a garden–different bits of knowledge growing and complementing one another, fertilized with jokes and stories.

It was in his class I decided I wanted to be an economics professor. He also gave me a copy of the paper that convinced me of anarchism. I’m still trying to share a taste of the excitement I got in his class with my students. It’s an uphill battle, but I’m glad I’ve had the chance to fight ignorance with economics and humor.

Goodbye Rudy. You will be missed.

Computational Economics is the Right Perspective

Here’s a vastly oversimplified picture of mainstream economics: We pick some phenomenon, assume all the context into the background, then build a model that isolates only the variables specifically relevant to that phenomenon.

Once you’ve simplified the problem that way, you can usually build a formal mathematical model, make a few more (hopefully) reasonable enough assumptions, and make some strong ceteris paribus claims about your chosen phenomena.

That’s a reasonable enough approach, but it doesn’t shed much light on big picture issues. I’m interested in root causes, and this “reduce things to their component parts” approach doesn’t give enough of a big picture to find those roots.

How do we broaden our perspective? One approach is to return to the more “literary” approach of the pre-Samuelson days. A bit of philosophy of science has me convinced that the primary flaw of such an approach is rhetorical. Written and mathematical arguments leave some assumptions in the background, but the latter is more convincing to a generation of economists trained to be distrustful of natural language (and too trusting of algebra).

As a pluralist, I think we should use as many approaches as we can. Different schools of thoughts allow you to build different imaginary worlds in your mind. But the computational approach isn’t getting enough play. I’d go so far as saying agent based modeling is the right form of mathematics for social science.

What does this mean? In a nutshell, it means modelling processes, simulating those processes, and seeing how interactions between different agents leads to different sorts of outcomes.

A common trope among Emergent Order folks is how ants are individually stupid but collectively brilliant. Neoclassical economics runs into the opposite problem: individually brilliant individuals who get trapped in Prisoners’ Dilemmas.

Computational economics starts with models that are more like ants than homo economicus. Agents are essentially bundles of heuristics/strategies in an out-of-equilibrium world. But these competing (and cooperating) strategies can interact in interesting ways. Each agent is a part of all the other agents’ environment, so the mix of strategies is a function of the success of the strategies which is a function of the mix of strategies in the environment.

In essence, computational economics starts from what the mainline economists have long recognized: human society is a complex, interwoven, recursive process. The world is, essentially, a sort of meta computer with a complex web of programs interacting and evolving. We don’t need to assume in any sort deus ex machina (that’s a bit of an overstatement, but we haven’t got time to explore it this week), we just need replicating entities that can change over time.

Such a view, to my mind, provides an end run around rationality assumptions that can explain the brilliance of entrepreneurship (without making heroes out of the merely lucky) as well as the folly unearthed by Behavioralist economics (without the smugness). We’ve always known it. It’s all just evolution. But the methodology hasn’t made its way into the main stream of economics. If there are any undergrads reading this on their way to a PhD program, let me know in the comments so I can point you in some interesting directions!

Be Our Guest: "The U.S. Economy: A Fading Illusion?"

This essay, by longtime NOL reader and CPA Jack Curtis, is the first essay of 2020’s “Be Our Guest” feature. Here is a snippet:

This widespread financial vulnerability seems a natural result of government policies that minimize interest rates and support monetary inflation as the Federal Reserve and other central banks have continued to do in recent decades. There is little incentive to save money when it offers no significant return and its value is inflated away. Governments that cling to such policies are imposing dependence upon their citizens, forcing them in essence to live hand to mouth, deprived of the ability to provide for their own futures.

Jack paints a pretty gloom picture of the U.S. economy. Does this square with what economists have been telling us about the state of the world? Please, read the whole essay, and if you have been thinking about writing for the public in 2020, give us a holler. We’d be happy to put your thoughts up for the whole world to read.

Sunday Poetry: Gender Equality where it matters? The Scandinavian Unexceptionalism

Deja-Vu! Social Democrats once again bring up the topic of “Democratic Socialism” to cure all of the evils of the world. Once again, the Scandinavian countries (Sweden, Finnland, Denmark and Norway) are used as an example of how “a third way Socialism” can work. Although I still would consider myself young, I have already lost all of my stamina to engage in the same debates all over again until they pop up again a few months after.

So, instead of pointing out the fallacy in labelling the Scandinavian countries moderately socialist (Nima Sanandaji, for example, does an excellent job in doing so), I want to look at one aspect in particular: The myth of peak emancipation of woman in the labour market in these countries. So apologies for neglecting Poetry once again for the sake of interesting information. Have a look at the following graphic and the remarks by Sanandaji:

“Some boards in Nordic nations are actively engaged in how the companies they represent are run. Others have a more supervisory nature, meeting a few times a year to oversee the work of the management. The select few individuals who occupy board positions – many of whom reach this position after careers in politics, academia and other non-business sectors – have prestigious jobs. They are, however, not representative of those taking the main decisions in the business sector. The important decisions are instead taken by executives and directors. Typically individuals only reach a high managerial position in the private sector after having worked for a long time in that sector or successfully started or expanded a firm as an entrepreneur. The share of women to reach executive and director positions is the best proxy for women’s success in the business world. Eurostat has gathered data for the share of women among ‘directors and chief executives’ in various European countries between 2008 and 2010. The data show that Nordic nations all have low levels of women at the top of businesses. In Denmark and Sweden, only one out of ten directors and chief executives in the business world are women. Finland and the UK fare slightly better. Those Central and Eastern European countries for which data exist have much higher representation.

sanandaji.png

[…]

A key explanation lies in the nature of the welfare state. In Scandinavia, female-dominated sectors such as health care and education are mainly run by the public sector.
A study from the Nordic Innovation Centre (2007: 12–13) concludes: Nearly 50 per cent of all women employees in Denmark are employed in the public sector. Compared to the male counterpart where just above 15 per cent are employed in the public sector. This difference alone can explain some of the gender gap with respect to entrepreneurship. The same story is prevalent in Sweden. The lack of competition reduces long-term productivity growth and overall levels of pay in the female-dominated public sector. It also combines with union wage-setting to create a situation where individual hard work is not rewarded significantly: wages are flat and wage rises follow seniority, according to labour union contracts, rather than individual achievement. Women in Scandinavia can, of course, become managers within the public sector, but the opportunities for individual career paths, and certainly for entrepreneurship, are typically more limited compared within the private sector.

If you are interested in the whole book, it is completely available online for free.

I wish you all a pleasant Sunday.

A Lesson in Inventing Your Own Statistics

Nothing makes me happier than pointing out when someone is wrong.

I admit, that’s a pretty sad life. And for some unfathomable reason that doesn’t endear me to the person who uttered the incorrect statement – which it really should as I’m correcting some mistaken belief of theirs, assisting them on the path to truth.

Perhaps, as Jonathan Haidt teaches us, my endeavour is a hopeless one as approaching truth is forever clouded by confirmation bias. Polarization runs rampant and scientific disciplines are scarred by replication crises and publication bias.

I don’t take issue with any of those points: reduce my ambitions to “a little less wrong” and what follows still holds.

A few days after the Riksbank had upped its interest rate to 0% last month, Daniel Lacalle, a Spanish economist, author and fund manager – and whose musings are usually quite insightful – decided to vent his (questionable) objections to central banks and negative interest rates (NIRP) in a very strange way:

  1. Deliver a bunch of vague one-liners about monetary policy and unsustainable capital markets.
  2. Make shit up about Sweden and Swedish capital markets.

Obviously, I don’t mind too much the rhetoric of those who vehemently oppose central banks, but I do mind people pulling numbers out of their behinds and just inventing things about the world that clearly are not true.

So let’s do some fact-checking.

It’s apparently really bad for governments to have public debt – and negative interest rates allegedly work like crack-cocaine for politicians in their endless desire for more and more and more underfunded expenditures. Spend away, minister!

Except that many (non-crisis) countries such as Sweden aren’t borrowing. In fact, Sweden’s debt-to-GDP ratio is at its lowest point since 2012 and has been dropping like a stone since about the time that the Riksbank first lowered its policy rate to below 0%. In fact, as the Riksbank sits on over 35% of the outstanding government debt, there’s been quite a scramble among commercial banks to meet their capital requirements; there aren’t enough bonds to go around. The big macro debate in Sweden right now is over how much more the government ought to spend given that the debt is so small.

My favorite part is when Lacalle starts inventing numbers to support his case. Strangely enough, he’s arguing that NIRP fuels an unsustainable boom such that increasing share prices and property prices (things that most of us individually tend to think are good or at least harmless) are, in Lacalle’s mind, actually evidence of how bad life is.

Ye, I too hate it when my retirement fund or house go up in value.

  1. Sweden’s “Real estate price index has increased 50 percent (from 160 points to 240).”

The official statistics agency, Statistics Sweden, reports a +17 increase in broad real estate indices since early 2015, but they only include data until late-2018. The index is also on a completely different level, suggesting that Lacalle used some other source. 

Using numbers from Ekonomifakta we find house price increases of 9% and 19% across various regions from Q1 2015 (when the Riksbank NIRP policy began) to Q3 2019. Again, wrong index numbers so couldn’t have been Lacalle’s source.

But maybe house prices have increased some in the last few months such that Lacalle’s 50% number is correct? No, they’ve been flat, reports the realtor industry organization Svensk Mäklarstatistik.

Searching high and low for a Swedish house price index that conforms to Lacalle’s peculiar range (160 to 240), I finally found a promising one at Trading Economics:

Trading econ Sweden House Price Index.png

Interestingly enough, Lacalle seems to have misread the chart; the index value for Feb 2015 is around 190 – not 160 – producing a much more reasonable +26% increase over the last five years. Even that, as we’ve seen with the more reputable sources above, might be tad exaggerated.

2. Sweden’s stock market is up “more than 20%”

Next up: the stock market – always a grateful subject for unsubstantiated rants.

“more than 20%” is cheating as technically anything above “20%” would work. Curiously enough, no index for the Swedish stock market shows those numbers between Feb 18, 2015, and today:

  • OMXS30, a commonly quoted index that does not include dividends, is up 8% since then.
  • Using indices that do account for (reinvested) dividends, OMXSPI shows 27.5% gain since NIRP was introduced;
  • OMXS30GI shows a 30.5% gain;
  • and OMXSCAPGI reports a 52% return.

Then again, if gradually increasing stock markets are a bad thing, then why didn’t Lacalle go with the highest, most inflated number he could find?

3. “Average residential index” is apparently up 27%

Not a statistics I’m familiar with, but I refer the reader to (1) above for sources on property prices.

4. “nonreplicable assets have risen between 30 and 70 percent”

First: that’s quite a range, Sir.
Second: ye, I’ve never heard that term before (let alone something to measure it) – and neither, it seems, has Google. I suspect Lacalle invented some more numbers to complement his already fake-y statistics. 

Tl;dr – don’t just make shit up, kids. Do look into your claims before you mindless utter them. You may be entitled to your own opinion (actually not really), but you can’t just believe whatever you want, making shit up along the way.

There is no Bloomberg for medicine

When I began working in medical research, I was shocked to find that no one in the medical industry has actually collected and compared all of the clinical outcomes data that has been published. With Big Data in Healthcare as such a major initiative, it was incomprehensible to me that the highest-value data–the data that is directly used to clear therapies, recommend them to the medical community, and assess their efficacy–were being managed in the following way:

  1. Physician completes study, and then spends up to a year writing it up and submitting it,
  2. Journal sits on the study for months, then publishes (in some cases), but without ensuring that it matches similar studies in the data it reports.
  3. Oh, by the way, the journal does not make the data available in a structured format!
  4. Then, if you want to see how that one study compares to related studies, you have to either find a recent, comprehensive, on-point meta-analysis (which is a very low chance in my experience), or comb the literature and extract the data by hand.
  5. That’s it.

This strikes me as mismanagement of data that are relevant to lifechanging healthcare decisions. Effectively, no one in the medical field has anything like what the financial industry has had for decades–the Bloomberg terminal, which presents comprehensive information on an updatable basis by pulling data from centralized repositories. If we can do it for stocks, we can do it for medical studies, and in fact that is what I am trying to do. I recently wrote an article on the topic for the Minneapolis-St Paul Business Journal, calling for the medical community to support a centralized, constantly-updated, data-centric platform to enable not only physicians but also insurers, policymakers, and even patients examine the actual scientific consensus, and the data that support it, in a single interface.

Read the full article at https://www.bizjournals.com/twincities/news/2019/12/27/there-is-no-bloomberg-for-medicine.html!

Sunday Poetry: Rüstow vs. Mises

One of the bests books I’ve read this year was Serge Audier’s & Jurgen Reinhoudt’s relatively unknown (unfortunately!) translation of the protocols of the Walter-Lippmann-Colloquium. The NOUS-Network organized a wonderful seminar in which we thoroughly discussed the book and the emergence of Neoliberalism. For the preparation of this weekend’s Hayek-Kreis seminar, I reread the book and stood once again in awe of the magnificence of the discussion during the Colloquium.

By the way: If you are an undergraduate, graduate, or PhD scholar, please consider joining the NOUS-Network for Constitutional Economics and Social Philosophy as a Young Affiliate! NOUS is an information platform and a community for interdisciplinary research. The network links all academic fields relevant for thinking about social order and liberty. It spans philosophy, politics, economics and fosters scholarly research, contact and exchange.

In the following excerpt, it becomes clear, that the participant’s opinion on the psychological and sociological causes of the decline of Liberalism differed significantly. Mr Rüstow eloquently captures the standpoints of the two opposing groups (not without bias to be fair) and even cheekily disses Ludwig von Mises.

“Mr Rüstow: ‘All things considered, it is undeniable that here, in our circle, two different points of view are represented. One group does not find anything essential to criticize or to change in traditional liberalism, such as it was and such as it is, apart from, naturally, the adjustments and the current developments that are self-evident.

In their view, the responsibility for all the misfortune falls exclusively on the opposite side, on those who, out of stupidity or out of malice, or through a mixture of both, cannot or do not want to discern and observe the salutary truths of liberalism. 

We, on the other hand, we seek the responsibility for the decline of liberalism in liberalism itself; and, therefore, we seek the solution in a fundamental renewal of liberalism. In order to justify in a positive manner this second point of view, I have to refer to what I have said and, especially, to the excellent arguments of Mr Lippmann.

Here, I would only like to draw attention to the fact that if the unwavering representatives of old liberalism were right, the practical prospects [for liberalism] would be almost hopeless. Because it does not really seem that old liberalism has gained in persuasive and in seductive force or that the arguments, no matter how shrewd they may be, of these representatives have the least possibility of bringing about a conversion movement within the realm of Bolshevism, Fascism, or of National Socialism. If they did not listen to Moses and the prophets—Adam Smith and Ricardo—how will they believe Mr. von Mises?'”

As always, I wish you all pleasant Sunday.