Tuesday, January 01, 2013

Some Classic Economics Articles

Here are some of my favorite economic articles.  You might enjoy them.

Bruce Yandle on Bootleggers and Baptists. I think this is a really deep theory, in that it applies not simply to economic regulation, but almost all political divisions. That is, contra Marx, the Hegelian dialectic is not between those in power and those not, the rich and the poor, but rather, each side in any revolution contains some of both. There simply aren't enough rich to beat 'the poor', and these classes are very heterogeneous, each with various divisions (I remember how the Mexicans and Central Americans used to fight when I lived near MacArthur Park in Los Angeles). Think Emperor Claudius, the Praetorian Guard and the mob, vs the Senators and patricians after the assassination of Caligula, with high-minded rhetoric about Rome leading the PR battle. Henry Manne's Parable of the Parking Lots is a good example of these coalitions applied to economic regulation.

Frederick Bastiat on The Seen and Unseen.
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Most stimulus and redistribution is simply the seen, so shame on economists for generally supporting these boondoggles, usually as a Keynesian pretext for their less defensible, but still understandable, egalitarian ends (the theme of my book The Missing Risk Premium is that this is precisely our dominant instinct, envy over greed).

Mark Skousen on Samuelson's Economics Textbook. This book really reflected conventional Macroeconomic wisdom for 50 years, and its tendencies are worth examining. Samuelson highlights the uselessness of Tetlock's Hedgehog and Fox dichotomy, because 1) Samuelson was clearly both, and 2) Tetlock described himself as both. Who isn't both?

R.A. Radford on the Economics of a P.O.W. camp.  Notice the politics of economics even in these situations.  Hyman Minsky used to tell me markets are good at distributing goods that already exist, like care packages in a POW camp, but not investment, which being subject to Keynesian uncertainty, is too irrational. He ceded the Radford anecdote, yet dismissed its generality.

Tullock and Buchanan on the Calculus of Consent, why collectives choose policies that are suboptimal. Markets can be suboptimal, but giving power to a regulatory body has even greater problems. That is, it's simply not correct to assume a regulator will implement the optimal policy, or anything close to it.


Unanimous said...

Eric, the theoretical performance of markets when driven by greed is often used to justify the desirability of dominance of markets. That is, greed dominated markets are thought to produce "optimal" outcomes.

If envy dominates, then where is the justification for the desirability of market dominance? Do markets dominated by envy produce "optimal" outcomes? In the case of investment markets it seems not, and you have gone far in showing that.

The question applies not just to envy, but to any motivating factor that is not the "utility" assumed by much of economics. There are a number of potential motivating factors that work in a relative manner between market participants (such as desire to be in the in crowd, fear of being in a unique situation, comfort in choosing a product that has a reputation), and I wouldn't be too surprised if modeling markets based on any of them lead to similar types of predicted market outcomes. That is, if such modeling leads to predictions.

My reading of many "Keynesians" and other kindred economists, is that markets in the real world aren't optimal (possibly due to envy dominating greed), that non-bell shaped income and wealth distributions are evidence of that, and that "fiddling" with markets is necessary to compensate for that lack of optimality. This is to move towards a better overall wealth outcome and not just to equalise wealth, or not even in some cases to equalise wealth at all.

By the way, I think you need a more precise term for your envy, similar to the way economics uses utility instead of greed. Maybe "relative utility". Possibly you have such a term in your book. Perhaps I should read it.

Patrick Sullivan said...

My favorite econ article is so short it doesn't even need a link to it;

A man and his wife owned a very special goose. Every day the goose would lay a golden egg, which made the couple very rich.

"Just think," said the man's wife, "If we could have all the golden eggs that are inside the goose, we could be richer much faster."

"You're right," said her husband, "We wouldn't have to wait for the goose to lay her egg every day."

So, the couple killed the goose and cut her open, only to find that she was just like every other goose. She had no golden eggs inside of her at all, and they had no more golden eggs.

Anonymous said...

I would add Buchanan and Young "Globalization and the Two Logics of Trade" and Alyn Young's 1928 classic "Increasing Returns and Economic Progress"
Had macro followed the Smithean logic of division of labor and specialization and ever-increasing sectoral division, rather than the dead-end of neoclassical aggregation, it would have been a fruitful progressive agenda. I believe your Batesian model would fit in as part of such a Smithean conception.

Priya Shah said...

Great post and very helpful articles..thanks and keep posting!!

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