Some Monday Links

Symposium: Washington Consensus Revisited (Journal of Economic Perspectives)

Three Days at Camp David: The Fiftieth Anniversary (The International Economy)

Friends, Romans, Countrymen (Lapham’s Quarterly)

Some Monday Links

Redefining Death (National Review)

Some medical devices don’t mean to be racist, but they are (Psyche)

Monetary Meld (IMF)

And, inspired by this NOL discussion here,

A History of My Economic Opinions (Deirdre McCloskey)

This is a long, but enrapturing piece (I am not familiar with McCloskey’s work, which was also referenced en passant in another fresh NOL post). An excerpt:

I happened in 1958 to devour in the Andrew-Carnegie financed public library of Wakefield, Massachusetts the Russian prince Pyotr Kropotkin’s Mutual Aid: A Factor of Evolution (1902) and the gullible American journalist John Reed’s Ten Days That Shook the World (1919). If I had instead come across Rose Wilder Lane’s The Discovery of Freedom (1943) or Ayn Rand’s Atlas Shrugged (1957) I suppose I would have gotten a better grasp of market pricing, earlier. Many market-loving classical liberals came to liberalism by that free-market path, and were never socialists. Yet the socialism-to-liberalism route is very common in 20th century political biographies, such as Leszek Kołakowski’s or Robert Nozick’s or, to descend a couple of notches, D. N. McCloskey’s. (The contrary route from market liberal to state socialist is vanishingly rare.)

Nightcap

  1. Nietzsche in the Frankfurt School Sid Simpson, JHIBlog
  2. The problem of prosocial lying in the economics profession George DiMartino, Duck of Minerva
  3. Drunks and democrats Vaughn Scribner, Aeon
  4. The intimacies of four continents (podcast) Disorder of Things collective

Nightcap

  1. Conflicts of interest in economic research Fabo, et. al, NBER
  2. In the dragon’s shadow Frank Beyer, Asian Review of Books
  3. 2020 is a black comedy Scott Sumner, The Money Illusion
  4. The risk of creeping Apartheid? Chris Bertram, Guardian

Brazil’s economy after the pandemic

I wrote an article on the path to economic recovery in Brazil after the pandemic. The article was published by Instituto Monte Castelo, a Brasilia-based think tank, and it is in Portuguese. Here is a summary of the key points.

Brazil’s economy is overwhelmingly interventionist, as shown by its progress (or lack thereof) in data compiled by the World Bank in its Doing Business studies, or Heritage’s Foundation Index of Economic Freedom, or the World Economic Forum’s Global Competitiveness Report. As predicted by theories of economic interventionism (more recently, Robert Higgs and Sanford Ikeda; but, classically, Ludwig von Mises), a time of crisis invites more government intervention or, remarkably at certain historical junctures, disintervention.

From a free market perspective, what can be done?

Brazil’s situation is, to a certain extent, a reflection of the global scenario. A global crisis was bound to happen, given the unrealistic inflation of asset prices in global financial markets, reflecting the artificial propping up of the major economies around the world by injections of money and credit, as well as increased public spending after 2009. COVID-19 triggered it, but it was the tip of the iceberg. Brazil suffered from capital outflows and its currency devalued sharply against the US dollar.

In terms of how the external scenario reflects on Brazil, the only thing that can be done is decrease the level of risk in Brazil’s economy, or maintain interest rates on a level that reflects the amount of risk in the economy (given that Brazil’s Central Bank has been cutting rates throughout the year). The fact that the President is fighting with his cabinet and with the other branches of the government also reflects poorly in terms of political risk.

However, there is a lot that can be done in terms of the domestic scenario. The economic crisis resulting from the pandemic also reflects, in part, a change in consumer preferences and in how things will have to be done safely to avoid contamination. This means that some businesses will not thrive as much (restaurants, for example) and that other industries will incur in much higher costs to operate more safely. This disequilibrium would have happened regardless of government-mandated restrictions, and alert entrepreneurs will spot a chance to obtain gain by creating value for their consumers and clients.

However, it’s much harder to shut down inefficient companies, fire people, and open new ones, and hire people, in a heavily interventionist economy such as Brazil’s.

Shutdowns and other government imposed restrictions, especially on the local level, are making things worse. Brazil’s case is one of a milder shutdown. The government is offering a small compensation package for the trouble, but not much compared to the “stimulus” packages in Europe and the US. This probably reflects a more sober approach by Brazil’s Central Bank. However, on the one hand small businesses struggle to get access to credit due to the red tape, so this favors large companies and will concentrate the market in the long run. There’s also an idea of propping up airline companies and other inefficient businesses. This, in my view, would be a mistake. But lobbyists will line up to get their share of the cake.

The path to economic recovery in Brazil will necessarily have to involve local and federal deregulation, cutting lots of red tape, and major tax reforms. Labor laws have been made more flexible a few years ago, and the current administration managed to pass a massive pension reform that will reconfigure some of the public debt. However, this is not enough. Deeper reforms to cut public spending on a more permanent basis will have to be proposed, and the federal government will have to work harder to signal institutional and political stability and predictability.

The challenge is that the current administration can’t get reelected in 2022 with very little to show in terms of the economy, and the effects of the reforms proposed above will only become clearer in the long term. The temptation is to do just what the US seems to be doing – anti-trade nationalism to punish a foreign scapegoat, or the abstract scapegoat of ‘globalism’, appease some of the cronies with monetary and fiscal populism, red herrings making the population and the media focus on culture wars, etc. But this temptation is to be expected according to the economic theory of interventionism. Whether it will be overcome, only time can tell.

Nightcap

  1. Alesina was one of the most creative economists of his time Guido Tabellini, Il Foglio
  2. Alberto Alesina. A free-spirited economist Papaioannou & Stantcheva, VOXEU
  3. Nation-Building, Nationalism, and Wars” Alesina, Reich, & Riboni, NBER
  4. The case against Mars Byron Williston, Boston Review

In Defence of Economics Imperialism

Under the guise of the end of “Neoliberalism”, economics is losing its grip. Troubles had begun with the 2008 financial crisis. As people had once lost their faith in the Gold Standard, by 2008 the consensus upon the self-regulation of the markets slept away. Even some of the most notorious free-marketeers -like Alan Greenspan- became renegade from their lifelong beliefs.

The COVID-19 crisis seems to complete that process. However, it is not a process of the end of Neoliberalism, but of the end of what Gary Becker called the “economic way of thinking” -and this is truly bad news. The end of the imperialism of economics is, in some way, the end of rationality and universalism in political thinking.

The demise of economics in politics, in fact, had begun just some months before the 2007-2008 Crisis: when Tony Blair stepped down from Downing Street. Or even before: when George W. Bush, trying to avoid losing his re-election as his father had done in 1992, crushed the superavit inherited from Bill Clinton’s administration and created twin deficits. But Bush’s misfortunes were at least generated by an ill-understanding of economics. We are in danger of the near future being ruled by a not-understanding of economics at all. That is why we should not renounce the use of the economic way of thinking.

The key is not to leave the task only to the economists. Philosophers, lawyers, sociologists, historians, and all sorts of social scientists should get involved. Milton Friedman was the scapegoat of the Left, but the 1980’s and 1990’s came after decades of works of thinkers of all nationalities and sorts, like Karl Popper, Robert Nozick, Friedrich Hayek, Bruno Leoni, Max Weber, Raymond Aron, T. S. Ashton, Gary Becker, Robert Mundell, James M. Buchanan, Gordon Tullock, Anthony Downs and many more.

Nightcap

  1. Comparing economics and epidemiology? Tyler Cowen, MR
  2. Um, we still need a back-to-work plan John Cochrane, Grumpy Economist
  3. Israel, Arab citizens, and coronavirus Afif Abu Much, Al-Monitor
  4. How about just 10% less democracy? Adam Wakeling, Quillette

Nightcap

  1. The inverted anthropologist Arnold Kling, askblog
  2. Dishonesty is a core nationalist value Scott Sumner, EconLog
  3. What does the superhero craze say about our own times? Iwan Rhys Morus, Aeon
  4. The ant queen is not actually a central planner.” Rick Weber, NOL

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.

 

Nightcap

  1. Why the early German socialists opposed the world’s first modern welfare state Adam Sacks, Jacobin
  2. Russia’s twin Soviet nostalgias Anna Nemtsova, Atlantic
  3. Is our economists learning? Ryan Cooper, American Prospect
  4. An excellent history of China in Ghana Joseph Hammond, Diplomat

Nightcap

  1. One summer in America Eliot Weinberger, London Review of Books
  2. Death in prison, a short list Ken White, the Atlantic
  3. The tyranny of the economists Robin Kaiser-Schatzlein, New Republic
  4. Elites and the economy Donald Schneider, National Affairs

Nightcap

  1. Inside the liberal elite’s mountain retreat Linda Kinstler, 1843
  2. How to reform the Economics PhD Tyler Cowen, Marginal Revolution
  3. Populism’s prophet C Gavin Collins, Quillette
  4. The Cherokee want their spot in Congress Nick Martin, New Republic

Not all GDP measurement errors are greater than zero!

Bryan Caplan is an optimist. He thinks that economists do many errors in estimating GDP (overall well-being). He is right in the sense that we are missing many dimensions of welfare improvements in the last half-century (see here, here and here). These errors in measurements lead us to hold incorrectly pessimistic views (such as those of Robert Gordon). However, Prof. Caplan seems to argue (I may be wrong) that all measurements problems and errors are greater than zero. In other words, they all cut in favor of omitting things. There are no reasons to believe this. Many measurement problems with GDP  data cut the other way – in favor of adding too much (so that the true figures are lower than the reported ones).

Here are two errors of importance (which are in no way exhaustive): household output and adjustments for household size.

Household Output

From the 1910s to the 1940s, married women began to enter moderately the workforce. This trickle became a deluge thereafter. National GDP statistics are really good at capturing the extra output they were hired to produce. However, national GDP statistics cannot net out the production that was foregone: household output.

A married woman in 1940 did produce something: child-rearing, house chores, cooking, allowing the husband to specialize in his work. That output had a value. Once offered the chance to work, married women thought the utility generated from producing “home outputs” was inferior to the utility generated from “market work”. However, the output that is measured is only related to market work. Women entered the labor force and everything they produced was considered a net addition to GDP. In reality, any economist worth his salt is aware that the true improvement in well-being is equal to the increased market output minus the forsaken house output. Thus, in a transition from a “male-labor force” to a “mixed labor force”, you are bound to overestimate output increases.

How big of an issue is this? Well, consider this paper from 1996 in Feminist Economics. In that paper, Barnet Wagman and Nancy Folbre calculate output in both the “household” and “market” sectors. They find that even very small changes in the relative size of these sectors alter growth rates by substantial margins. Another example, which I discussed in this blog post based on articles in the Review of Income and Wealth, is that when you make the adjustment over four decades of available Canadian data, you can find that one quarter of the increase in living standards is eliminated by the proper netting out of the value of non-market output. These are sizable measurement errors that cut in the opposite direction as the one hypothesized by prof. Caplan (and in favor of people like prof. Gordon).

Household Size

Changes in household sizes also create overestimation problems. Larger households have more economies of scale to exploit than smaller households so that an income of $10,000 per capita in a household of six members is superior in purchasing power than an income of $10,000 per capita in a single-person household. If, over time, you move from large households to small households, you will overestimate economic growth. In an article in the Scottish Journal of Political Economy, I showed that making adjustments for household sizes over time yields important changes in growth rates between 1890 and 2000. Notice, in the table below, that GDP per adult equivalent (i.e. GDP per capita adjusted for household size) is massively different than GDP per capita. Indeed, the adjusted growth rates are reduced by close to two-fifths of their original values over the 1945-2000 period and by a third over the 1890 to 2000 period. This is a massive overestimation of actual improvements in well-being.

HouseholdAdjust

A large overestimation

If you assemble these two factors together, I hazard a guess that growth rates would be roughly halved (there is some overlap between the two so that we cannot simply sum them up as errors to correct for – hence my “guess”). This is not negligible. True, there are things that we are not counting as Prof. Caplan notes. We ought to find a way to account for them. However, if they simply wash out the overestimation, the sum of errors may equal zero. If so, those who are pessimistic about the future (and recent past) of economic growth have a pretty sound case. Thus, I find myself unable to share Prof. Caplan’s optimism.

Is minimalism immoral?

I came across a simple but important question on Quora: Is it wrong to aspire to be a minimalist? Doesn’t this negatively affect the country’s GDP?

I see two big lessons here: 1) wise use of metrics requires wisdom… i.e. appropriate interpretation and critical thinking. 2) Maximization is just one version of one part of the whole story. (There are also important questions to ask about what we can expect from others, but I’ll leave that for the comments.)

Readers of NOL should be familiar with the notion that GDP is only an imperfect proxy for well being. But not everyone is so we have to repeat ourselves. There’s what we’re after, and there’s what we can measure, and the two are not the same. GDP is a really clever way to aggregate total production in an economy, but production is only valuable to the extent we’re producing the things that actually improve people’s lives. It’s easy for busy people to confuse a proxy measure for the latent variable we actually care about, so we need someone whispering in the emperor’s ear “the metric is not the mission.

Economics is easier to describe using the simplifying assumption that people want more stuff. It’s easy to forget that people also want more leisure (and so less work). This is a subtle reappearance of the seen and unseen. We can see when someone gets a cool new car and we can’t see when someone has a fun evening with friends and family. We have to check our bias towards trying to get more stuff and remember that reducing work is another feature of human flourishing.