A course in Political Economy

Brad DeLong has mused on the purpose of a course in political economy:

This is where we cash in our winning intellectual bets, tie all the threads together, and come up with running code for a rough-and-ready framework for thinking about everything that happens at the crossroads where history and politics meet economies and sociologies in a world where village elders along the Zambezi lecture the principal deputy managing director of the International Monetary Fund on the implications of the Republican convention.

I sat in on a few lectures for LSE’s graduate-level course in this stuff over the last year (I may yet take it formally as my second optional) and I have to say that I find Brad’s vision a lot more interesting. Perhaps I should be doing my PhD at Berkeley?

Volatility and the value of historical context

Greg Mankiw has a brief note (I’ll include it verbatim):

This is the VIX index, which uses options prices to measure expected stock market volatility over the next 30 days. The latest run-up is striking. It suggests that the recent bumpy ride in financial markets is likely to continue for a while.

I had never heard of the VIX Index before (yet another thing to add to the shamefully-ignorant-about pile), but I do notice that while the 2-year graph Prof. Mankiw includes makes the current turmoil look unprecedented, it’s actually nothing of the sort. Here’s the same graph over the maximum possible period:

Looking at this, the recent brouhaha is certainly serious, but is also certainly no worse (yet) than we’ve had before. The LTCM (1998) and 9/11 (2001) events are clearly discernible. Other than those two, I have no idea why volatility was so high between 1997 and 2003, or why it spiked in 1990 (something to do with the then-upcoming recession?).

Conspiracy theories and the current market turmoil

A friend pointed me to this conspiracy theory video. I’ve not watched more than 30 seconds of this particular video, but according to discussion on the RANDI forums, I understand that it splices footage directly from a number of other conspiracy theory films into one, with all the greatest hits of the anti-establishment anarchist left being given a run (christians and/or jews are evil and secretly rule the world, 9/11 was a government inside job, the entire global banking system is a sham and run by bad people, etc).

Of more interest to me is this question, put to me by my friend:

Why are more and more of these conspiracy theories coming out in video format only, with no transcriptions?

Perhaps it’s to appeal to a wider audience (i.e. more people are willing to watch a movie than read the equivalent text). Perhaps it’s because a movie can more readily achieve an intense, even emotional, impact than abstract text. Perhaps it’s just another example of market demand and supply …

The real (as in true) explanations for what goes on tend to be considerably more complex and almost infinitely more tedious than those offered by conspiracy theorists. People seem to want answers, but aren’t willing to accept that they might be anything other than simple and exciting. Maybe that’s a result of today’s media culture of soundbite-driven news and action movies, but maybe it’s just an unfortunate consequence of otherwise rational ignorance. You can’t be an expert in everything (strictly speaking, it’s too costly), so you don’t waste your time trying and instead trust the summaries given by people you take to be experts.

As an example of the demand for simplified summaries, consider the recent turmoil on the world’s credit- and stock-markets. I have spoken to several people about the happenings and most of them aren’t the least bit interested in understanding the details of what’s going on. Instead, they only want to know if (a) the world is going to end (i.e. they’re going to lose their job or their pension savings are going to collapse) or (b) if it’s all been caused by evil, money-grubbing people deliberately destabilising the world for their private profit.

By my thinking, to really understand the current turmoil (I still refuse to call it a crisis), you need to understand the basics of:

  • How bonds work
  • The difference between long-term and short-term bonds
  • The difference between government and commercial securities
  • The fact that central banks announce a target interest rate rather than fixing it by fiat
  • Reserve requirements
  • Overnight inter-bank lending
  • How banks view loans to consumers (i.e. as assets)
  • Structured finance in general
  • CDOs in particular
  • Derivatives
  • Hedging and hedge funds
  • The difference between credit markets, stock markets and foreign exchange markets and how movements in each might affect the others
  • The carry trade

And that’s before you start considering the psychology of the people involved and all the resulting work in behavioural finance. Unless you’re seriously (and usually, professionally) interested in investment, finance or economics, why would you care about all of those details? You wouldn’t … you just want to know if the world is going to end and if there’s somebody to blame.

On the supply side of these nuggets of information, you have … well, you’re looking at one. Commentators, both professional (in the mainstream media) and self-appointed (in your local pub and all over the internet) are competing to convince you that they are experts in the topic at hand and having managed that, to provide you with their summarised opinions.

Suppose, however, that for some reason you can’t properly identify who is a real expert or you have some reason to distrust the experts you can identify. In that case, you’re left taking in the simplified views of non-expert subject-matter aficionados, of which a small but statistically-significant fraction are going to be conspiracy theorists. Insofar as they want to expand their customer base, conspiracy theorists (who, to be frank, are often less troubled by the truth than they are with attracting an audience) will experiment with their provision of service to best meet the demand for simple and exciting explanations. Thus, we have movies with no (tedious) transcripts.

The exponential rise of bureaucracy

Bureaucracy has been getting worse for years. Bigger, more complex, more self-referential, self-justifying, self-absorbed. More impenetrable. The language of bureaucracy has been changing as some sort of linguistic mirror of the organisation itself. It has happened in the public service at all three levels and in the private sector. It has happened in every industry. Why? My current thoughts, in three slightly overlapping points:

Point 1) The distribution of demand across skills and abilities has been changing. As we’ve moved away from agriculture, through manufacturing and towards services and office work, the need for administrative, bureaucratic tasks has increased.

Point 2) The distribution of task-related ability across the population has not changed, or at least has not changed much. There might be more people going to university, but there are limits to how much education can enhance a person’s innate ability.

Point 3) (a) A high-ability person will get more done than a low-ability person, irrespective of their coworkers.

Point 3) (b) The productivity of a person is influenced by the ability of their co-workers, so that high-ability coworkers will raise your productivity and low-ability coworkers will lower your productivity.

Point 3) (c) There is an optimal size to a team. Even if everyone is of equal ability, per-person productivity will (initially) rise with the size of the team, peak, and then start to fall.

Points 1 and 2 mean that the need for bureaucratic work is increasing, but the number of people needed to do that work is increasing faster because the ability of the marginal (new) bureaucrat is less than the average ability of the existing bureaucratic workforce. Point 3 means that the gap between these two growth rates increases as the demand for bureaucratic work increases. As an illustration, I imagine the demand for bureaucratic tasks increasing linearly, but the size of the bureaucracy (and the inner complexity of it) needed to provide this service increasing exponentially.

How do we fight this? I see three ways:

a) Try harder to shift the distribution of ability over the population. The Aust/UK governments are aware of this, but have unfortunately settled for simply lowering the bar for getting into university. A generous commentator might acknowledge that they had the best intentions at heart, but the end result is one set of numbers going up, the value of those numbers going down and the problem remaining the same. Seriously working to address the problem via this tack — if it can be done from this angle at all — could only be done over a timeframe of 20+ years.

b) Work to slow (or, ideally, reverse) the increasing demand for bureaucratic work in the first place. Cut red tape. Stop trying to watch, record, register and regulate everything. Remove overlap.

c) Decrease bureaucratic team sizes. Make them specialise. Specifically link bureaucratic teams to the end-consumers that they are nominally serving.

Orthodoxy, trade and the developmental state

I love the internet. I love what it’s becoming, what it’s capable of becoming. A few years ago, the blogosphere (I hate that word) was dominated by enthusiastic amateurs. That is, it was filled with people who, in so far as they had any speciality, had it in entirely separate fields, but were interested in the topics they wrote about. It still is, and that’s great. Public debate is always good.

But now we are seeing professional thinkers stepping into the arena. University professors are emerging from their ivory towers and using the web to debate each other in the public sphere. That is freakin’ awesome. Here’s a recent example …

Patricia Cohen, of the New York Times, wrote this piece: In Economics Departments, a Growing Will to Debate Fundamental Assumptions. In it she quoted the views of, among others, Alan Blinder (Princeton), David Card (U.C. Berkley) and Dani Rodrik (Harvard).

It elicited quite a response in the various academic blogs. Three of them that are worth checking out:

It’s that last one by Don Boudreaux that I want to focus on. In it, he criticised the views of Dani Rodrik in particular and issued Dani a challenge.

Dani Rodrik replied: What’s different about international trade?

Brad DeLong (U.C. Berkley) was watching and gave his opinion: Don Boudreaux vs. Dani Rodrik on Industrial Policy: I Call This One for Don–I Think It’s a Knockout

Dani Rodrik then updated his original post with a rebuff to Brad DeLong.

Brad DeLong stepped up with a more lengthy post: DeLong Smackdown Watch: Dani Rodrik Strikes Back

Career advice from a comic-strip author

Scott Adams has an interesting entry up with some career advice. It’s worth reading the entire thing, but here’s the crux of his offering:

If you want an average successful life, it doesn’t take much planning. Just stay out of trouble, go to school, and apply for jobs you might like. But if you want something extraordinary, you have two paths:

1. Become the best at one specific thing.
2. Become very good (top 25%) at two or more things.

The first strategy is difficult to the point of near impossibility. Few people will ever play in the NBA or make a platinum album. I don’t recommend anyone even try.

The second strategy is fairly easy. Everyone has at least a few areas in which they could be in the top 25% with some effort. In my case, I can draw better than most people, but I’m hardly an artist. And I’m not any funnier than the average standup comedian who never makes it big, but I’m funnier than most people. The magic is that few people can draw well and write jokes. It’s the combination of the two that makes what I do so rare. And when you add in my business background, suddenly I had a topic that few cartoonists could hope to understand without living it.

The comments are, especially given the nature of his audience, tediously focused on claiming some combination of computer proficiency and communication skill. I’m happy to maintain that the pairing is stereotypically rare (after all, it’s how I’ve paid for myself for the last decade or so), but it’s also common enough to be pretty ordinary. It certainly isn’t something extraordinary, let alone unique.

Ultimately, Scott Adams and the script supervisor that he mentions are so interesting because they are genuinely unique (or nearly so). These are the people I’d want to invite to a dinner party, though hopefully without Mr. Adams’ sycophantic followers tagging along.

Trade liberalisation, wage inequality and cross-occupation skill imbalances

In case anyone is interested, I’ve uploaded a copy of my extended essay for my Development and Growth class (that’s EC428) here.  In case anybody cares, I got a 70 for it (if you’ve never studied in the UK and think that 70 is a pretty ordinary grade, well … it’s different here (economics is at the bottom)).

In hindsight, there are quite a few areas that could use some improvement and if I get a good enough grade on it, I may try to expand it in an attempt to get something published.

The abstract:

This paper proposes a model that, focusing on the imperfect transfer of skill across occupations, is able to explain trade or investment liberalisation-induced increases in inequality independently of technological change or capital flows. It identifies imbalances in skill across occupations as a potential source of rent-seeking behaviour and predicts that when this occurs, firms may choose to employ highly trained individuals to fill roles with both high and low education requirements.

Update 12 October 2007:
Tweaked the link to point to a PDF rather than a word document.

Heuristics in academic economics

Andrew Leigh gives a heads-up on an upcoming conference at the ANU on ‘Tricks of the Argumentative Trade’. Shamelessly repeating Andrew’s quote:

‘Philosophical Heuristics’
Alan Hajek (Philosophy, RSSS, CASS, ANU)
Chess players typically benefit from mastering various heuristics: ‘castle early’, ‘avoid isolated pawns’, and so on. Indeed, most complex tasks have their own sets of heuristics. Doing philosophy well can be a very complex task; are there associated heuristics? I find the grandmasters of philosophy repeatedly using certain techniques, many of which can be easily learned and applied.

‘Argumentative Tricks in Politics and Journalism’
Morag Fraser (The Age)
Politicians and journalists use many argumentative and rhetorical techniques, some of their own devising, others thrust upon them. This talk will survey a field of examples from the media and politics – from the ways and means of factual communication to ‘spin’ – and take an occasional detour through historical precedents and prescriptions.

This is fascinating stuff and it syncs very well with some advice I got from a friend who is a recent economics post-doc: that theoretical economists seem to focus on truly mastering a few key models and then applying them to each topic that they come across. One of the key benefits is that by really knowing these models well, the theoreticians will already know how to prove all of the major propositions, which allows them to generate new papers very rapidly. My friend opined that the biggest names seemed to focus on just 4 or 5 different models, while the smaller names either didn’t focus on any particular model, or focused on just one or two.

It also matches my (extremely) limited exploration of economic literature. I’m currently avoiding study for my Development and Growth exam and sometimes it seems like one of the professors whose papers we regularly study only ever looks at a topic through a principal-agent model. We’ve had moral hazard put forward as explaining credit rationing, the success of microfinance, agricultural organisation, the maintenance of social networks, the optimal organisation for the provision of public goods in general, problems in health care, problems in education, and, and …

If, by some chance, any academic economists out there happen to read this: Do you see this in your readings? Do individual researchers (or more generally, specific universities) seem to always spit out the same model in different topics?

Aggregate demand for the spiritual (updated)

Adam (sans-blog, but when he bothers, he writes at the South Sea Republic) pointed me to this article at The Guardian. All we need to know comes from the opening sentence:

After a break of 16 centuries, Greek pagans are worshipping the ancient gods again – despite furious opposition from the Orthodox church.

Is there a link between the rise of modern-day paganism, astrology, homoeopathic medicine etc. and the hardening of mainstream religions? If so, does one cause the other, or are they both caused by a third factor?

I wonder if it might be possible to develop some sort of measure of a country’s aggregate demand for the spiritual. You might do it by adding up all the money spent on them (including donations to religious bodies) and then adding in the value of the time spent attending religious services and festivals. I guess you could derive the latter by looking at attendance numbers, knowing something about the average duration of services and making an estimate of the value of leisure-time.

If it was feasible, you’d be able to infer answers to several questions:

The proportional break-down of the “spending” might give a truer estimate of the distribution of religious belief in society than census data … in essence, we would be looking at revealed preference rather than stated preference.

If aggregate demand for the spiritual were changing over time, that might indicate a demographic shift (from immigration, say) or — and this would be more interesting — it might provide a measure of movements in dissatisfaction with life in general. For example, a trend of decreasing demand might indicate that people are becoming more satisfied with life, or at least that they are able to find what they want in the temporal world without needing to turn to the spiritual.

*sigh* So little time, so many pointless things to waste my time thinking about.

Update 1:

Adam read this and interpreted it as my suggesting that as people become richer, they become less religious. Rereading it, I guess that’s a fair interpretation, but it’s not what I meant at all. My current suspicion is that, on the whole, demand for the spiritual has remained remarkably constant over the years. With absolutely no figures to back it up, I reckon that aggregate demand in Australia reached a low-point in the early ’80s, increased steadily and has largely stabilised since the turn of the century. I think that the aggregate demand now is much closer to historical trend levels and that the early ’80s represented a temporary low point. I also think that the reversion-to-the-mean that we’ve seen over the last 30 years has not come from a return to 1950s-style religion, but from a general embrace of smaller aspects of spirtuality coupled with nostalgic, idealised views of the distant past and an increasing distrust of authority and “the system”. The diversity that ensued has therefore seen the rise (or perhaps more accurately, the return) of stuff like paganism and astrology, coupled with attempts to merge these small-scale, anti-establishment religious views with pop science in the form of stuff like “What the bleep do we know?” and so forth.

I’ve heard this latter stuff described as “quasi-religious” and to some extent, I agree. To the extent that they’re not codified, formalised or doctrinal, they’re only quasi-religious; but on the whole, I think that it still represents the same underlying desire for the spiritual that existed in the 1950s, simply expressed in a different form. So in that sense, there’s nothing “quasi” about it … it’s just “religious.”

Assuming that I’m correct in my gut-feel for the figures (which is why I’d love to find some proper figures instead of randomly waving my hands in the air), all of this just raises the questions of a) why is the demand there in general? and b1) why did it drop in the early ’80s? or b2) why, after dropping in the early ’80s, has it come back?

Paul Wolfowitz and the World Bank

I think that Wolfowitz was a tainted choice to head the World Bank from the get-go; an architect of the Iraq war was never going to be a popular choice among Europeans. To some extent, I see a parallel between the US choosing Paul Wolfowitz to lead the World Bank and John Howard choosing Peter Hollingworth to be Governor-General of Australia. Both were seen as placing an ideological choice into a role that is, in theory, meant to be above ideology. In both cases, ideological opponents complained loudly, but could do nothing until a moral slight could be held against the appointee.