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

Advice I Took To Heart

As I'm sitting here, reading Theory of Price instead of doing my problem sets, I am reminded of advise from Deirdre McCloskey (pg 489) that I took to heart-

But if a world famous economist suggest casually in conversation that you might want to read, say The General Theory of Employment, Interest and Money, I want to see you buying it that very afternoon, skipping your econometrics homework, and going back to the professor with the book thoroughly read, asking her to discuss it with you.

The great part about the blogosphere is that world famous economists are always recommending stuff to read. The hard part about the blogosphere is that world famous economists are always recommending stuff to read. Sometimes they even discuss them with dumbies like me.

Or maybe this is just my excuse for skipping my econometrics homework...

 

What I'm Reading

Beyond classwork (and MWG, Stigler, and Rothbard), I am always trying to read stuff that I want to read for its own sake. Some reading is a consumption good.

Economics

Cost and Choice by James Buchanan

I think of myself as a subjectivist and think I understand subjectivist economics. In this book, James Buchanan takes it to another level.The most important concept in economics is opportunity cost, which is a completely subjective idea in the mind of an actor. It is something we can never measure. How then can we use it in analysis? James Buchanan builds his story through the history of thought on how to apply opportunity cost to economics. It has been very interesting.

Time and Ignorance by Mario Rizzo and Gerald O'Driscoll

Somewhere between philosophy, epistemology, and economics, lies Time and Ignorance. Rizzo and O'Driscoll are trying to explain two extremely difficulty subjects in one book. Two subjects that economics does not have a good answer for. I probably won't get through this anytime soon, but it is intriguing.

Non-Economics

The Signal and the Noise by Nate Silver

A book on prediction does not seem like something for an economist who enjoys Mises and Hayek, but this book is great. It has changed my mind on so many things about prediction. We all need to make predictions all the time in life. Why not try to do it right? To say that prediction is impossible, while a good impulse, does not get me very far. Instead, this book treats prediction like a "science." Not in the sense that we can find big T truth, but in the sense of applying a systematic approach to analysis. This book has turned me into a Bayesian.

Witness by Whittaker Chambers

This is my favorite book and I "reviewed" it before. I recommend it to everyone. The second time is just as enjoyable as the first.

Stigler Chapter 3: Consumer Behavior

(Photo Courtesy of EcoNomNomNomics)

Prices provide information and incentives. But how do consumers respond to these price signals? Chapter 3 begins to answer this.

It might seem daunting  to understand consumer responses. We are unique and respond differently. However, Stigler claims

"In the response to price and income changes, consumers behave in a tolerably reliable and predictable way. The invariably obey one law as universal as any in social life; they buy less of a thing when its price rises. Their buying propensities are a stable function of prices and income..." (pg 20)

This stable relationship forms price theory.

The Price of the Goods

Prices, usually talked about as dollars or euros, are simply the exchange ratios between two goods or what consumers have to give up for the good. If a hamburger is a dollar and a drink is 50 cents, two drinks exchange for one hamburger. The money facilitates this exchange. When Stigler talks about price, he means exchange ratio between goods.

From this, we know people demand more of a good when the price falls.  Fewer other goods are required to obtain it.

However, the demand depends on other factors. It is important to explicitly hold these constant throughout the analysis. The other factors are Continue reading

Stigler Chapter 2: Prices and the Enterprise Economy

All economic systems, whether markets, socialist, tribal, even Robinson Crusoe, must do three things.

  1. Produce certain goods- As Rothbard explained, there are always multiple goods to produce, even with the same inputs. Every good that is produced means that another good was not. This is the opportunity cost.
  2. Produce goods in a certain way- There are multiple ways to produce any good. Each economic system must have a procedure for determining the method of production.
  3. Divide goods in a specific way- Once produced, they goods must be allocated to individuals.

In this chapter and throughout most of the book, Stigler addresses how an enterprise economy completes these tasks. Stigler only defines an enterprise economy as the basic essential of Western societies over the last two hundred years. The economy can also be called a market as in Mas-Colell.)

In an enterprise economy, a decentralized process-not specific people- accomplishes the three required tasks. The Theory of Price is an attempted to explain this process. Continue reading

How I Learned the Little Economics I Know

What does the coolest guy I know do in his free time? Okay, maybe not coolest I know, but definitely the coolest writer on this blog.

He reads through economics (text)books. He cannot be the only one..........

I wanted to throw together my list of the best ways to learn basic economics, generally microeconomics. Professors who have been teaching the subject for years have great insight, but I can add a "students" voice. Economics is fun and with the right book, everything changes. You don't have to be like me or the guys above.

I have not worked entirely through every listed book, but I have read all through the *'s. Those which I have no finished, I read enough to grasp the style and level. None of these were for class, just a nerd by himself. Most of my comments are therefore mostly about self-learning. Continue reading

Rothbard Chapter 1: Fundamentals of Human Action

Another in my "series"(see part 1 and part 2), here is an introduction to Austrian economics through Rothbard's Man, Economy, and State (MES). Rothbard (in the pink glasses above) avoids the distinction between micro and macro, but I will call MES micro.

As with Mas-Colell with microeconomics and Stigler with price theory, the first chapter lays out the framework for praxeology. In many ways, Rothbard is a foil. A foil is not an opposite. Instead, Rothbard asks different questions. He is an eel to keep me critical.

Praxeology

(Note: Throughout I use "actor" for consistency. See the bottom of my About page.)

Published in 1962, he begins his analysis with the assumption that the reader will just follow and develop an understand of what praxeology and economics is. MES is laid out like other treatises on the early 20th century, such as Wicksteed (1910), Taussig (1911), and Fetter (1915) and new readers would not question the method. Either way, Rothbard assumes the reader will follow and does not start out with a long explanation of epistemology, heuristics, etc, like Mises in Human Action

However, in 2013, Rothbard´s economics (henceforth just economics) is so unfamiliar to most other economists that I will start with a simple explanation. Praxeology and its subdivision economics use logical deduction, similar to Euclidiean geometry. For praxeology, there is one axiom, the action axiom. Some of the steps are not "realistic", but the deduction is valid. Throughout the analysis, Rothbard adds some empirical claims. Rothbard presumes that people will accept these claims, such as leisure is a consumption good.

Just as Mas-Colell starts with the axioms of "completeness" and "transitivity", Rothbard starts with "action." If these axioms, whether from Rothbard or Mas-Colell, are not true, then the rest of the analysis does not follow. The former claims that the axiom if "self-evident", while the latter assumes the axioms. Mas-Colell uses "proofs", immitating the mathematicians, and Rothbard uses "logical deduction." For both authors, economics only explains the implications of the axioms. (For more, see the Appendix to chapter 1 of MES, Rothbard´s AER article on the topic, or this ungated article.)

As with all of my summaries, I am going to accept the author's method as true when possible.

Continue reading

Stigler Chapter 1: Introduction to Economic Analysis

As elaborated in a earlier post, I am working through Mas-Colell to learn Samuelsonian microeconomics. As a foil, I am also studying price theory and praxeology through George Stigler's Theory of Price and Murray Rothbard's Man, Economy, and State, respectively. Through this, I hope to develop a more complete understanding of "microeconomics" than any book alone.

Introduction to Economic Analysis

The logic elaborated by Stigler is easier for beginning economists and laymen. It is accessible from page one. Following Lionel Robbins, Stigler's focuses on resource allocation1 and- you guessed it- the "determination of prices." Stigler needs a theory of the consumer and producer to carry this out, called "price theory." Most economists today would call it micro.

For Stigler, price theory makes statistical claims about the real world. He uses an example of searching for a car to show the power and simplicity of price theory. Economists theorize that a car buyer will keep searching for a better deal until the buyer believes the additional cost of searching outweighs the potential benefit of a lower price. This common sense argument is then translated into economics jargon as

To maximize his utility, the buyer searches for additional prices until the expected savings from the purchase equals the cost of visiting one more dealer.  Then he stops searching and buys from the dealer who quotes the lowest price he has encountered. (pg 2)

This example theory must be tested in two ways, logically and empirically. First, consider if the proposition is not true. That means the person will keep looking even when the anticipated gain is smaller than the assured lost of time and energy. While people may do this from time to time, consistent wasteful action cannot last. The theory is logically sound.

For the noneconomists, maximizing utility requires a lot of assumptions that are not necessarily true. Logic is not enough. It must also be valid. Price theory requires empirical evidence. Fortunately, The quote above leads to testable hypotheses. People should search longer on goods with diverse prices across sellers. This is a testable hypothesis and when tested, generally it has been proven right. People spend more time shopping for homes or cars than eggs. This is why economists assume rationality. People tend to act rationally and because of that price theory is a powerful tool for predicting behavior.

Continue reading