Best (Old) Journal Articles I Read in 2015

One of the few sad things about becoming a grad student is that I read books less and less. That means less econ and less non-econ books. Well, the non-econ group was limited before too... According to Goodreads, I only read 28 books in 2015, down from the 70's a few years ago. But most of those are textbooks or collections of articles that I read enough of to justify saying I "read" them.

Economics, at least much of modern economics, is dominated by journals and that is reflected in my reading habits. Whenever my wife asks what I did all day and I say "read and wrote" (it should be the reverse, whoops), that means articles. I still probably actually read more than I should (compared to skimming/"reading" for research).

Because of this, I can't do those fun posts about the best books I read in 2015 like other blogs or like I did last year. I need to get back to books soon... I miss books :'(

Anyways, where was I? Oh yes. Those old articles.

Well, some of the articles I read were actually good and after some feedback on Twitter I decided to do an end of the year recap of those articles. Most of them I read since June for silly-things-about-Phd-programs reasons.  I'm thankful for many of these suggestions which came from my good friends on social media. They might seem a bit eclectic, but I liked them... The one's related to my research are marked with a *, if anyone can reconstruct what I'm working on. In no particular order, (some gated)

Come to think of it. They weren't all old. I'm still read some new articles too that were a lot of fun.

So there they are. They each taught me a lot and were fun for me to read. I don't know how many other people will find them fun, but I sure did.

I can't imagine how much fun stuff I'll get to read in 2016. I love this job!

Austrians vs. Chicago School vs. Samuelsonians: *Only* a Difference of Emphasis

A long, long time ago, I had the bold idea to work through three textbooks in economics from three different perspectives: Murray Rothbard's Man, Economy, and State, George Stigler's Theory of Price, and Mas-Colell, Whiston, and Green's Microeconomic Theory, or as I separate them: Austrian, Chicago, and Samuelsonian.

Boy, was I naïve then? I also set myself the goal of trying to translate these texts into short blog posts as a way to learn. While I gave up on the blog posts (to no-one's disappointment), I kept reading each book. Almost two years later I can report that I've finished working through each book. Worked through, not necessarily understood everything...

I chose this strange task, because I had always been fascinated by different approaches to economics. What does it mean to do economics? How have different people answered that problem? All these questions are generally things grad students aren't supposed to worry themselves with.

I couldn't help it.

While my perspective can never be completely balance to judge these three books, I worked hard to give each a friendly reading. As I'll explain, reading each with a friendly eye was extremely valuable. Maybe I even understand a thing or two from each book. I definitely understand more thoroughly why different economists believe different approaches are the right way to go. I'm more sympathetic to the disagreements in presentation and style. Honest people just have disagreements on what is important.

A Few General Thoughts

This post is about  my thoughts after studying each book. If you want to read this as a comment on different "schools" of thought, go ahead, but I'm focusing on the books. However, there is an inherent problem in reading too much into this, because I'm talking about textbooks, compared to pioneering research. Deal with that as you wish.

I came into this project most sympathetic to Rothbard's approach, but left sympathetic to Stigler's. At no point was I a fan of MWG, probably because grad school forced me to study MWG, while the others were simply "for fun." There is a dryness is MWG that is hard to handle, although it was more wordy and entertaining than a lot of the references I used for first year. What does that say about graduate school?

MWG is clearly the most advanced in terms of mathematics and is only workable for grad students. There is no value in studying it before you know the math. Stigler reads like an intermediate text these days, but funnier and clearer. Man, Economy, and State is basically an intro textbook, so it's accessible. Sorry, Rothbardians. It's true. That's not an insult.

Luckily for me though, Rothbard throws in comments that an intro student would glance over, but are food for thought for an economist. Anyone who tries to disregard his book because it seems simple is missing out on lots of insights. It was definitely worth going through for me, even after reading Mises's Human Action a few times. If you're someone who is sympathetic to Austrian economists and would read with an eye to learn from it, it is worth the read. If you're going to read it just to find holes, it's not worth the investment. Finding holes is too easy if the reader doesn't appreciate the Austrian approach.

Similarly, if you're going to read MWG and stop on page 116 because the term "social welfare function" appears without a sneer, fine. You're not going to learn. If you absolutely reject the use of mathematics in economics as a Mises Institute presenter said in a speech to students (48:00), the same thing will happen. You cut yourself off from a whole world of economists.

If you pick of Stigler and laugh at the fact that he doesn't define axioms to start from, you're missing out. Does everyone get my point? Read these books to learn from a grow, not criticize. That's my goal in general.

A Difference Of Emphasis

The rest of this post is where I am going to get in trouble...

While I went into this project expecting to see completely different approaches to economics, the books were remarkably similar. This might make sense when one remembers that each book is still within neoclassical economics, roughly Walrasian, Marshallian, and Austrian. Nothing is heterodox. However, I was surprised. I had learned economics on the internet where everyone spends their days criticizing how dumb the "other" side is.

No. Each method is valuable in its own way.

The distinction comes from each book's particular emphasis, what the authors think is important. The emphasis of MWG is on a completely closed, axiomatic system, defining every part of a model and solving for an equilibrium. For Stigler, the emphasis is on simple, intuitive models that can applied to many problems. For Rothbard, I see the emphasis on coordination of production through prices. Of course there is Rothbard's emphasis on his form of praxeology and being able logically derive economic theory. Yeah, yeah, yeah.

But this is a "peculiarity of presentation."

Speaking about various school of thought in 1933, Mises (p. 288) wrote that

these three schools of thought differ only in their mode of expressing the same fundamental idea and that they are divided more by their terminology and by peculiarities of presentation than by the substance of their teachings.

Just to see how many people I can make mad, this quote still applies to neoclassical schools of thought in 2015, as exemplified by Rothbard, MWG, and Stigler. Mises didn't believe this even by 1957. But I'll disagree with The Master.

Each book's main focus is what Hayek called the pure logic of choice. Given some axioms, derive implications about people's choices. Each books focuses on equilibrium, even though they may have different ways of dealing with disequilibrium. Each has their demand curves sloping downwards, although MWG and Stigler might allow for hypothetical "Giffen goods." Each talks about markets that work to coordinate everyone's actions.

Of course there are also some differences in the tools that people will get hung up on.

  • MWG's theorem/proof style is confusing to people who didn't study that type of math.
  • Rothbard's rejection of advanced mathematics, indifference curves, or cardinal utility might confuse many economists.
  • Stigler's hand-waving, trying to balance between rigor and applicability might turn both sides off.

Yes, if you want to read the three books only looking for the differences, there are plenty of faults in all books.

However, I consider these ancillary to the general topic. None of these should stop readers from being able to learn economics from each book. These are all still *micro* texts. They deal with individual, purposive action. The have buyers and sellers interacting in a market. They have models to capture this. They are working to understand how markets work. Again, all are within the same neoclassical tradition.

The authors change the presentation of the material, but I don't see the fundamental issues that arise from these distinctions. Certainly nothing that would make it impossible for all three groups of economists to learn from one another.

Austrians may disagree with omitting discussions about the structure of production. MWG fans might miss the formal game theory in the other two books. I'll argue that the more fruitful way to read this disagreements is not worry about it. MWG thinks game theory is one of the important topics; the other do not (and they are old). Rothbard spends 300 pages on production; the others do not. Each book has a set of priorities. Space is limited.

Now, I'm sure some people will say that I do not appreciate the importance of some of these differences. They may say that cardinal/ordinal utility is too important to just brush aside. Or math is too fundamental that anything without math isn't "real economics." Fine. Spend your days tearing down the other approach. I'm not sure that is fruitful.

If person A says that the important thing in economics is having a model derived from axioms of preferences, but person B says the important part is having an easily applicable model, how are we to decide? Certainly, it is not a matter of science. I have my thoughts on what are important things to include and what are not. However, I see that as closer to disagreements over favorite band than to substantive disagreements that would hinder learning from each other.

To all economists, this is a plea saying that "the other guy" is not as crazy as you might think. That is my main take-away from reading these books. Authors have thought through economics seriously, but happens to disagree with you. You are only hurting yourself if you don't learn from him.

Moving Forward

I am constantly looking for common ground for research. I want to use insights from all of these and will keep reading in each traditions, particularly their approach to the core theory through textbooks. It helps me understand the hidden assumptions in each framework and clarifies these ideas in my teaching. I'm working through Kirzner's Market Theory and the Price System, Becker's Economic Theory, and Krep's Microeconomic Foundations. Wish me luck! And tear me apart in the comments 🙂

I LOVE BOOKS- My Favorite Books From 2014

Seeing other people's lists of their favorite books of the year, like Ryan Decker's, inspired me to read a few more books and add A LOT to my "To Read" pile. Perhaps my list of the best books I read in 2014 will inspire others.

Economics Books for Everybody

I fell in love with economics through books written for non-economists, like Thomas Sowell's Basic Economics. Even during my academic work, I try to continue reading economics books that highlight the beauty of economic reasoning in the world around us. Here are two books to help you see the world as an economist:

  • The New World of Economics by Richard McKenzie and Gordon Tullock- Long before Freakonomics, and even before Steven Landsburg's fantastic An Armchair EconomistThe New World of Economics showed the wonder of economics. If you're first economics class was deathly boring, this little book could have spiced it up. Published in 1975, this book still enthralled me with vivid insights about the world. Even economists who think they know supply and demand analysis could benefit from a (re)reading of this classic. With whole sections on sex, it's not some boring textbook.
  • An Economist Gets Lunch: New Rules for Everyday Foodies by Tyler Cowen- I love food. One of the highlights of the past few years has been my discovery of better food. Tyler Cowen largely influenced me through his older book, Discover Your Inner Economist. If you're interested in learning about food, which you should be, and are interested in how an economist looks at the problem, which you definitely should be, pick up An Economist Gets Lunch immediately. You'll start finding cheaper and better food without much effort. I certainly have.

Economics Books for Economists

This list is geared toward economists. It is more technical, although all the books would be accessible for someone with an interest in economics. Continue reading

Anarchy Unbound, Economics Unbound

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It takes something special for an author to claim the book isn't arguing much and then spend 200+ pages not arguing much. My guess is the author is understating the size of his case.

Such is the case with Pete Leeson's Anarchy Unbound. His simple thesis is that "anarchy works better than you think. (1)"  That is about as low of a bar as an academic can set. Leeson himself acknowledges that this is an extremely simple task, especially for an academic work that includes 10 essays. While I'm at Mercatus at the moment for an Austrian economics conference, I find it fitting to write-up my thoughts on the book.

Even though Leeson claims he is not making a radical argument, many people will see this as a radical book. As soon as a book has the word "anarchy" in the title eyes are going to roll.

I experienced this reaction first-hand. The confused looks I got when I read this book around campus or up at the lake cabin was evidence of people's gut reaction to word, just the word. As with all words, it can be used to dismiss another's argument out of hand (such as that is socialist or that would be anarchy) or it can be used as a descriptive tool. That is how I want to use words.

To be used properly as a tool for helping conversation, Leeson and readers must first come to agreement on what the word means, or at least what it will mean in this book.

Leeson takes a fairly academic definition of anarchy, not the popular definition. Anarchy is not a state of chaos, as most people use the word. Instead, anarchy simply means no government.  That's all. Anytime a government is not around to enforce contracts, protect citizens, whatever it is that governments do, Leeson calls that anarchy.

But this definition really begs the question. Now readers are left wondering, what is government? That's harder to pin down. Leeson wrestles with it a little, but leaves it open. I bet some authors have spent a whole book on this question. Anarchy Unbound is about moving beyond that argument.

Leeson's defines government somewhere between Potter Stewart's definition of porn, "I'll know it when I see it", and Weber's classic definition of government as a territorial monopoly on violence. For this review, that is a good enough definition. You know it when you see it. If you want a more complete explanation, check out the first chapter. He is slightly more nuanced.

Without government, what are we left with? What structure remains when there is not a monopoly on force. Leeson argues that other rules arise to fill the void left when government is absent.

This allows Leeson to distinguish government and governance. Government is only one form of governance. Throughout the book Leeson works to show readers forms of governance that emerge without government. He applies rational-choice theory to understand this topic.

Rational people, through following incentives, develop forms of governance to improve their lives. As always in economics, actors do so because it is in their interest to. They expect life to be better with a form of governance than without one.

To take one example, even when plundering ships on the open sea, privateers had an incentive to not destroy their potential loot. If I'm going to steal your ice-cream cone, I really don't want to hit the cone into the ground in the process. That would be a loss for everyone. It is in my interest for you to hand over the ice-cream cone without violence.

Privateers faced with this incentive developed a system of governance to reduce these deadweight losses. Ransom and parole developed as a form of "Coasean contract." Leeson explains:

After overwhelming a merchantman, such a privateer offered its victims the following bargain: for a price it would allow the merchant vessel, its cargo, and its crewmembers their freedom. If the price was right, this arrangement was mutually beneficial. Provided the price agreed on in the plunder contract was higher than what the privateer expected to earn if it plundered its victim traditionally and thus had to incur the costs discussed earlier, it was happy to enter such a contract. (76)

Leeson shows that even in the worse of scenarios (people who live off of stealing), some rules developed to reduce costs. Governance does do something. It is not all violence like we imagine the Hobbesian jungle.

Again, it's straightforward economic reasoning. Rational people don't like chaos. It is expensive to deal with chaos. These rational actors develop forms of governance even when academic economists with their narrow framework don't believe they will. They make anarchy work better than you think. QED. Well not quite. Leeson has more of an argument to make. Continue reading

Entrepreneur and the Firm from an Austrian Perspective

Girl Scouts (the firm) allow entrepreneurship from within. This girl was aware enough to camp outside of a marijuana dispensary.

Firm theory is an awkward field for economists. Firms are inextricably linked to markets but utterly unlike markets. Economists believe they are excellent at explaining how people react to incentives in markets. Economists are not as comfortable analyzing command structures. Firms represent an odd middle ground.

This is why firm structure is a relatively understudied field for economists. Economists can design the most complex auction system that satisfies X,Y,Z. Great, but when is the last time you participated in an auction? That is not to say auctions and auction theory is not important, but for the average person, firms are a huge part of their lives. One would think firms would be much more important to economists. Unfortunately, they are not.

For many economists, the firm is a black box. Inputs go in (duh, its in the name) and outputs come out. Markets take over from there. Anything more explicit than that is beyond the scope of economics and belongs in the realm of management or business theory. You know, that soft gushy stuff, not the hard science of economics. Continue reading

Stigler Chapter 4: The Theory of Utility Part 2

Stigler spends a long time developing utility theory. He claims that abstract utility with its questionable foundation is a useful tool, because of its predictive power. Though the foundations are not great, the results justify it. Stigler spends the rest of chapter four showing off the power of utility theory.

Consumer Behavior

In order to test the predictive power, we obviously need to make some predictions from our model of utility maximization. Stigler sticks to mostly graphical predictions that involve reaching the highest indifference curve that is still within the consumer's budget. The graphs allow economists to do comparative statics. If one aspect changes, how does that affect the consumer's bundle?

One type of change is variations of income. On a graph, this corresponds to a shift of the budget, illustrated below. Normally, when people are richer they consumer more of a good, hence normal goods. Other times, when a consumer is richer, he consumes less of this good. The classic examples are ramen and potatoes. As college graduates start making money, ramen consumption declines. These are inferior goods.

While not a formal prediction, the outline of utility theory's predictive power is starting to form. This model of normal and inferior goods suggests which types of goods will increase with wealth. Inferior goods convey the idea of "buying because it is cheap." This is simply a definition, but it clarifies the thinking. Continue reading

Stigler Chapter 4: The Theory of Utility Part 1

In similar fashion to Mas-Colell, Stigler is creating a dual theory. One side is producer theory, which describes behavior under the goal of profit maximization. The other side is consumer theory, which describes behavior under the goal of utility maximization.

Utils

Profit maximization has a clear meaning, at least from an accountant. Utility maximization is more complex. What the heck is a util? "The answer- that a util is a unit of utility- itself has zero utility" (Page 43) Why would someone maximize it? Utils, and utility theory, is an attempted to reduce enjoyment/pleasure/happiness/utility down to one value. More utils means the person is happier.

Utility theory came into economics in the 19th century through psychological explanations. Starting with their godfather, Jeremy Bentham, these theorists saw human behavior as a product of increasing pleasure and decreasing pain. The net of this would be a person's utils. This psychological theory reaches its pinnacle with the work of Francis Edgeworth's Mathematical Psychics. (While this might be the best book title ever, most economists only remember Edgeworth for his famous box.)

This theory fell apart over time. Stigler claims economics has abandoned this simple calculus and

The simple measure of utility, the comparisons of utilities derived by different people, the use of interpersonal utility comparisons to support public policy proposals- all were gradually abandoned in part or in whole. What was retained was the concept of what we may term a rational consumer. Pg 43 Continue reading

Mas-Colell Chapter 5: Production

For readers who accept and enjoy Mas-Colell's treatment of consumer theory (the first pillar of his teaching method), producer theory (the second pillar) is smooth sailing. The concepts are parallel to consumer theory, but with less concern mess along the way with budgets and turning ordinal preferences into cardinal utility functions.

Production

For Mas-Colell, production is a black box. Some inputs enter the firm and some outputs leave the firm. Put another way, firms buy some goods and sell others. The netput of this process is the production vector 1. Most economists do not care how rubber turns into a tire or seed into corn. All of that occurs within the black box, the firm.

Of course, at anytime, firms need specific inputs to produce specific outputs. Any plans that are possible make up the production set. Just like the consumption bundle in consumer theory, production sets have some specific assumptions. The two key assumptions, which are not always obvious but key, are "No Free Lunch" and "Free Disposal"1.

While these have specific mathematical explanations, they have intuitive interpretations. No free lunch means that it requires inputs to get outputs. Nothing is free. This is obvious, but sometimes forgot. Free disposal means that firms can get rid of inputs at no cost. While this is more controversial, it basically allows us to rule out "too much stuff." We can always get rid of the stuff we do not use.

Firms look to choose the best possible production vector out of all the possibilities. This is just like consumer theory, except the firm's constraint is technology and not its budget.

The easiest example involves multiple inputs and one output, resembling Rothbard's first explanation of production as a combining of at least two goods into another good. Using this framework, economists discuss a marginal rate of technical substitution (MRTS). This is the analog of the consumer's marginal rate of substitution. The MRTS is the rate that the firm can trade between two goods and keep output constant. A farmer could produce the same amount of corner with less acreage and more fertilizer.

The right combination of inputs will dictate the best production vector or schedule given the technology. Again, this mirrors consumer theory, where a consumer tries to pick the best combination of goods to maximize his utility within his budget.

Profit Maximization

The natural next question is "what is the right production schedule?" Words like right or best are hard to work with. Instead, economists try to be slightly more specific. Continue reading

Two Ways to Paint, or Teach Economics

Going through MWG, Stigler's Theory of Price, and Rothbard's Man, Economy, and State, at the same time has brought out many similarities and differences between them about what it means to do economics. More clearly, my process has highlight the differences in teaching economics.

I sound like a broken record, but Rothbard's process seems fundamentally distinct from either MWG or Stigler, even if his results are not very different early in the books. While reading chapter 3 in Rothbard, I developed an image of two painters that helps me think about it.

Sarah Solis Carvalho (Painting)

Sarah Solis Carvalho (Painting) (Photo credit: Center for Jewish History, NYC)

Continue reading

Well Put My Friend

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On page 63 of Knowledge and Decisions, one of my all-time favorites, Thomas Sowell reminds readers how expensive knowledge is. Particularly, one of the favorite business relationship for people to complain about, the farmer and the dreaded "speculator", is actually less costly for everyone than the alternative-

The fact that costs differ vastly with respect to individual knowledge and preferences creates an opportunity for people who specialize in bearing particular kinds of risks. A farmer may have considerable knowledge of how to grow a particular crop, but little knowledge of the economic data or complex principles which cause the prospective price that he can expect for his harvest to vary by large amounts as of planting time. Someone else who has specialized in studying the economic facts and principles may have a much narrower range of expectations of future prices for that crop, even if he could not actually grow the crop himself if his life depended on it. Either individual could directly acquire the knowledge that the other possesses by investing the time needed for both the theoretical understanding and the practical experience to apply it. A less costly alternative may be to transact with one another on the basis of their existing knowledge.

Sowell is giving social scientists insight and giving everyday people advice. Look for those who know more than you about a topic and trade (knowledge) with them.

 

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