Category Archives: Books

Secular Stagnation Modeled

Gauti Eggertsson and Neil Mehrotra provide a formal model of secular stagnation, a theory recently revived by Larry Summers and Paul Krugman. The theory was first proposed by Alvin Hansen in the late 1930s. It’s probably not coincidence that the theory is popular again during a period in which the economic situation — deep contraction followed by a slow recovery (low growth) — is similar. I wonder if the long-term shape of the economy will also turn out to be similar to that of 1929–2001, and if the theory will simply fade out again.

The abstract,

In this paper we propose a simple overlapping generations New Keynesian model in which a permanent (or very persistent) slump is possible without any self-correcting force to full employment. The trigger for the slump is a deleveraging shock which can create an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem are a drop in population growth and an increase in income inequality. High savings, in turn, may require a permanently negative real interest rate. In contrast to earlier work on deleveraging, our model does not feature a strong self-correcting force back to full employment in the long-run, absent policy actions. Successful policy actions include, among others, a permanent increase in inflation and a permanent increase in government spending. We also establish conditions under which an income redistribution can increase demand. Policies such as committing to keep nominal interest rates low or temporary government spending, however, are less powerful than in models with temporary slumps. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession.

(H/T Mark Thoma)

Post-Introduction Reaction, Piketty Edition

I am just starting to read Thomas Piketty’s Capital in the Twenty-First Century. Last weekend, a commenter asked what led me to pick up this book. The reason I gave is simply that the author is an authority on the topic, and the book has received wide acclaim, both complimenting and critical. But, there is another reason, and the book’s introduction embodies it. To me — someone with strong free market priors —, certain statements made in the introduction are very controversial (I will excerpt some of these, below). However, the force behind Piketty’s main arguments causes me to re-think my priors, and through this force he successful “sells” these arguments as ones you need to know if you really want to understand the inequality issue. In ways, Piketty’s book reminds me of The General Theory.

Some arguments I thought libertarians will find controversial, but also often thought-provoking,

Consider first the mechanisms pushing toward convergence, that is, toward reduction and compression of inequalities. The main forces for convergence are the diffusion of knowledge and investment in training and skills… [B]ut it is fundamentally a process of the diffusion and sharing of knowledge — the public good par excellence — rather than a market mechanism.

— p. 21.

I know where Piketty is coming from: something like education is oftentimes seen as a public good. But, I’m not sure if the public good aspect is related to what Piketty has in mind here. The market process is, in large part, “built” around the diffusion and sharing of knowledge. The market makes possible a division of labor by creating institutions, such as prices, that communicate specific and localized knowledge. It is true that Piketty, in part, is referring to something more specific, like training. I can see a possible, but I think weak, externality argument in reference to general training, but I don’t see it for specific training, which the firm can better internalize. And, when we talk about training workers to use new, specific capital, the type of training that matters is specific.

Moving on,

When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grow more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels — levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies.

— p. 26.

I have three “brief” comments on the above paragraph,

  1. The most important idea Piketty introduces in this concept of the rate of return on capital, r, exceeding the rate of growth, g. Usually, when free-market economists talk about inequality, they like to make the point that, despite growing inequality, the market raises the absolute real incomes of all members of the division of labor. But, when r > g, the implication seems to be that certain capitalists — Piketty includes under capital things like machinery and financial assets — are gaining at the expense of others. This may be premature, but I wonder if one could relate this to Austrian business cycle theory and asset bubbles.
  2. But, if r exceeding g is a purely market phenomenon, then that should cause us to reconsider Rawls’ Difference Principle, where — if we shed ourselves from social position-contingent biases — we agree that growth and inequality is okay, but only if we maximize the minimum social (income) position.
  3. Piketty refers to the “meritocratic values of democracy.” What does inequality, on its own, have anything to do with meritocracy? In fact, if all agents received their marginal product, and there was still extensive inequality, this would still be a distribution of income based on merit. But, inheritance goes beyond merit — it’s arbitrary. But, it’s just as arbitrary, at least in the context of merit, to claim that inheritance should not be redistributed as it is to argue the other way. What Piketty wants is a just distribution, which is not necessarily consistent with merit.

So far, I am loving Piketty’s book. The above are two paragraphs out of 35 pages worth of introduction. Imagine how provocative, engaging, and puzzling the rest of Capital is.

What I’m Reading

I have the good fortune to be able to attend one of this year’s Liberty Fund symposia, here in San Diego. I attended last year’s, as well, which was on the political thought of Hayek and Keynes. This year’s covers Nozick’s Anarchy, State, and Utopia. So, I am reading that, and there is another book I’d like to read by the end of the month: Rawls’ A Theory of Justice. Somewhere I will have to find the time to read Pinker’s The Better Angels of our Nature, but that is a long-term project. For the next month and a half, or so, economics will have to take a back seat to political science.

Please share what you are currently reading, or what you are planning to read.

New Introductory Econometrics Textbook

My undergrad econometrics professor, Tia Hilmer, and Michael Hilmer have recently come out with the first edition of their new textbook: Practical Econometrics. I used an unpublished version of the book in her class, as well as Jeffrey Wooldridge’s Introductory Econometrics. I think Wooldridge’s book is great, but Hilmer and Hilmer, in my opinion, manage to make the content more engaging and easier to understand. I don’t just mean that it makes it easier for the student to grasp the material; it makes it easier for the student to have a deeper understanding of the basics than they would otherwise.

One great advantage to Wooldridge’s textbook is that it’s great for both an undergraduate and a graduate level econometrics course. But, for undergrads, I much prefer Practical Econometrics. In fact, I still use it as a reference, mostly because the points are made very easy to “get.” I never had Michael Hilmer as a professor — I never took his economics of sports course —, but Tia Hilmer was one of the best teachers I had at San Diego State. The book reflects her teaching abilities: the ability to communicate complicated ideas to students in a way that makes the material intuitive.

If you teach an undergrad econometrics course, you should consider using Practical Econometrics. If you’re interested in teaching yourself econometrics, use Practical Econometrics.

“100 Best Economics Books”

I shared this list on Facebook a few days ago. I commented that this isn’t what my list would look like. There is a “left” bent to the list, but, of course, you’d see the opposite bias in mine.

Disagreements:

  1. Including Marx’s Das Kapital is okay, although it’s on the margin and it would be one of the first magna opera that I’d take off the list. Nevertheless, it was influential in shaping economics — not just Marxian theory, but motivating, in part, the subjectivist revolution of the late 19th century.
  2. Joseph Stiglitz is a great economist who contributed greatly to the science. Still, I don’t think I’d include any of his books in a “100 best” list. His books are entertaining, to be sure. But, they tend to be light on the science and heavy on the bias (see, for example, my review of The Price of Inequality). The best of Stiglitz is found in his academic papers. Most of his books are meant for non-expert audiences.
  3. This is going to be controversial, but I’m not sure if I’d include Hayek on the list. Hayek has been one of my greatest influences, but it’s hard to think of an economics book of his that deserves to be on the list, but has been widely read. The Pure Theory of Capital, for instance, should easily make the list, except that only a handful of people have actually read it. The Road to Serfdom is not an economics book and shouldn’t be on the list. The only economics book that could make the list is Prices and Production.
  4. Books 13–23, 25, 27–30, 32–37, 40–41,…, and many more are either books meant for non-expert audiences, or are “dime a dozen” books that deal with topics that the list’s author probably associates with. I have a feeling that 40–50 percent of the books shouldn’t even be in a “top 1,000″ list.
  5. Steve Keen should not be on the list. Debunking Economics is an entertaining book; in retrospect, the opportunity cost of reading it was probably too high, although it’s a sunk cost now. Keen’s book, in any case, has done nothing to contribute to the science. I’m surprised the list doesn’t include Piero Sraffa’s Production of Commodities By Means of Commodities, which is certainly a book that could probably make it to a “100 best” list.

Where are (books that should be on the list, but aren’t):

  1. Eugene von Böhm-Bawerk, Capital and Interest;
  2. Carl Menger, Principles of Economics;
  3. Instead of Eichengreen’s Globalizing Capital, I would have included Golden Fetters;
  4. Milton Friedman and Anna J. Schwartz, A Monetary History of the United States;
  5. Fogel and Engerman, Time on a Cross;
  6. Israel Kirzner, Competition and Entrepreneurship;
  7. Lawrence Klein, The Keynesian Revolution;
  8. Oliver Williamson, The Economic Institutions of Capitalism;
  9. James Buchanan, The Calculus of Consent;
  10. Ludwig von Mises, Human Action;
  11. Ostrom, Governing the Commons;
  12. Card and Krueger, Myth and Measurement (because it represents a change in how economists began to think about the minimum wage).

Those are books that I have in front of me, all of which would come before ~75 percent of the books listed on listmuse. Other books that come to mind: apart from Sraffa’s book, I don’t know Post Keynesian literature well enough to suggest something from that pool. I think the listmuse list has a few Post Keynesian books that I agree would be in a top 100. Also, other books that should make the list: Arrow’s Social Choice and Individual Values; Frank Knight, Risk, Uncertainty, and Profit; von Neumann and Morgenstern, Theory of Games; Douglass North, Structure and Change;… more than I can list. (Would Michael Woodford’s Interest and Prices make it, given how influential he has been during the past decade or so?)

Ironically, as important as these books were in their day, nowadays some wonder whether they’re worth reading at all. I think that, for the most part, they are, although I wouldn’t necessarily say that’s because you’ll learn more from them than from a modern textbook (although, you will learn things textbooks don’t teach). But, who are the economists moderns are turning to today? Keynes, Minsky, Hawtrey, Hayek,… That seems to be reason enough to explore some of their books.

Book Recommendations, 2013

What follows are some books that I’ve read this year and I thought worth recommending.

1. Bruce Caldwell, Hayek’s Challenge: An Intellectual Biography of F.A. Hayek (Chicago: University of Chicago Press, 2003).

I enjoyed this book, in large part because, while I’ve read plenty of Hayek, there’s still a lot of Hayek I have yet to touch. Caldwell gives an excellent overview of much of this work, and develops a common theme: how Hayek viewed economic science and human fallibility. The book, if I remember correctly, does not deeply discuss Hayek’s contributions to economic science, but what it does talk about is incredibly fascinating. Besides, there are a lot of insights that will influence you see economic science, at least if you’re not already intimately familiar with Hayek’s work outside of business cycle theory.

2. Jörg Guido Hülsmann, Mises: The Last Knight of Liberalism (Auburn: Mises Institute, 2007).

This is another biography of a major Austrian economist, but it’s not similar to Caldwell’s book. It’s a more comprehensive biography that focuses, for the most part, on Mises’ life. It also discusses Mises’ contributions to economics, methodology, political science, et cetera — it’s also ca. three times the length of Caldwell’s book. I think the book is less on the mark when it treads outside the immediate area of Mises, but it’s nevertheless a great contribution to history of thought. Obviously, if you don’t care much about Mises, the book may not be much of value to you. But, if you are interested in Mises, his work, and his life then this is a five star, out of five, book.

3. Ronald Coase, The Firm, the Market, and the Law (Chicago: University of Chicago Press, 1988).

I’m a big fan of Ronald Coase. Before reading this book — a collection of his major academic papers — I had read his “The Nature of the Firm” and “The Problem of Social Cost.” This book gave me an opportunity to re-read those two essays, as well as some of his other work. Coase is an incredible thinker. His research are in areas where, I think, there are increasing returns to research. But, his ideas are so subtle that many people missed them beforehand, and it was Ronald Coase who finally sparked interest in them. The main example are transaction costs, which permeate his writings, and which have influenced a large research program (not just on the firm and on the economics of law, but also on institutions, economic growth, et cetera). This book is definitely a must read for any young economist.

4. Daniel Kahneman, Thinking, Fast and Slow (New York: Farrar, Straus, and Giroux, 2011).

Unlike most of the books listed here, this is an economics book (although, Kahneman has contributed to economics, and many of these contributions are discussed in the book). This is a work in psychology, and it deals with how the human brain thinks. Are we rational, in the sense that we think through the details in every decision we make? No, we’re lazy, and for most decision-making we rely on heuristics that allow us to make quick decisions, which can be right many times, but also wrong on other occasions. We also suffer from various biases, are bad at statistics, and are mostly unaware of just how off the mark we can often be. Many have their reservations about “behavioral economics,” but I invite you to read the book (if you haven’t already). It is definitely one of the most interesting books (top three) I’ve read this year.

5. Peter T. Leeson, The Invisible Hook (Princeton: Princeton University Press, 2009), and Douglas W. Allen, The Institutional Revolution (Chicago: University of Chicago Press, 2012).

I put these two books together, because while they’re not entirely the same, they are very similar. Both look at pre-modern institutions. Leeson’s The Invisible Hook discusses pirates, specifically the various institutions that came to define the piracy of that age: democracy on their ships, why they carried pirate flags, their treatment of captives, et cetera. Allen takes the same route, but as a means of explaining a different set of institutions: those of pre-modern England (the aristocracy, the Royal Navy, the army, et cetera). I review The Institutional Revolution here. Both books are incredibly entertaining. They’re also on a subject that I think isn’t explored often enough: the application of institutional theory to economic history.

6. James Buchanan and Gordon Tullock, The Calculus of Consent (Indianapolis: Liberty Fund, ).

My cousin, an economics major at San Diego State, asked me, about two weeks ago, if he could borrow a book of mine. I recommended and gave him Buchanan and Tullock’s The Calculus of Consent. I don’t know who I’ve mentioned more on this blog over the past year: Coase or Buchanan. To say that The Calculus of Consent has influenced my way of thinking is an understatement. In fact, the final nail in the coffin of my advocacy of anarcho-capitalism was this very book. The book deals with the various costs that political institutions have to minimize, and how these develop to provide Pareto optimal improvements by decreasing the costs of and the costs to decision-making. Buchanan’s and Tullock’s book has also influenced my views on how political institutions can act as supplements to those of the market in resource allocation.

7. Israel Kirzner, Competition and Entrepreneurship (Indianapolis: Liberty Fund, 2013 [1973]).

The most common answer to “how do markets coordinate” are prices. Basic allocational models show this logic. Agents allocate their budget in accordance with market prices, and optimal resource allocation requires optimal pricing. Kirzner’s story is a bit different. For Kirzner, the coordinator is the entrepreneur, since it’s only by entrepreneurial action that we can gradually come to learn what the optimal allocations are. Thus, he makes a distinction between the “Robbinsian maximizing” of the pure logic of choice and entrepreneurship. From this perspective, broader Austrian price theory stands in contrast to what you learn in a microeconomics course. What matters is entrepreneurship, and profit and loss (the ex post, rather than ex ante, role of prices) act as disciplining mechanisms for this process of discovery. This is another must read for any young economist.

8. Lincoln Paine, The Sea and Civilization (New York: Alfred A. Knopf, 2013).

This is not an economics book, and I actually just read it recently. It’s a history book that focuses on maritime history. While I’m not as interested in the military history it covers, it does provide a great deal of coverage on commercial maritime history. I think a book that deals specifically with pre-modern commercial maritime history (or applied economics) would be even more interesting, but in lieu of something like that I recommend Paine’s The Sea and Civilization. If nothing else, it’s very entertaining to read.

9. Gerald P. O’Driscroll and Mario J. Rizzo, The Economics of Time and Ignorance (London: Routledge, 1996 [1985]).

This book is well known and is already widely recommended. While I want to avoid talking the book down, I don’t think it was up to the standards that were set by how the book was described to me. But, we have to consider the fact that a lot of the themes discussed by the authors are still vibrantly discussed in the current Austrian community. It is still a very good book, and I recommend it to anybody interested in Austrian economics. Some of the more unique topic it covers are the concept of pattern coordination, competition and discovery (related to Kirzner’s book), uncertainty, and it offers a theory of monopoly. This is a book that I will definately find myself re-reading either in this next year or the one after that. It’s packed with a lot of information, and it covers the Austrian research program up to 1985 (the book was also re-published in 1996).

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What are some books I wished I would have gotten to? R.W. Clower (ed.), Monetary Theory; Israel Kirzner, Essays on Capital and Interest;  Fred Foldvary, Public Goods and Private Communities; Oliver Williamson, The Economic Institutions of Capitalism; Donald Wittman, The Myth of Democratic Failure;…and dozens of others.