Dani Rodrik, “Economics: Science, Craft, or Snake Oil?” — February 2, 2014

Dani Rodrik, “Economics: Science, Craft, or Snake Oil?”

This is a great piece, by the author of the exceptional [book: Globalization Paradox] (which I read years ago and never reviewed; shame on me). One of the basic themes underlying that book — and, I gather, underlying Rodrik’s [book: One Economics, Many Recipes] — is that reality is complicated, and that economics can give you diverse conclusions depending upon your assumptions. Different assumptions are appropriate for different contexts. Free trade doesn’t always, for instance, make the world a better place in the short run; there are winners and losers, and it’s not clear that the gains to the winners outweigh the losses to the losers (particularly if we attach ethical weight to a more-equal distribution of income). Only if you introduce the assumption that the winners can compensate the losers does this conclusion start to make sense.

There’s nothing wrong with assumptions; as the great John Tukey said, “Without assumptions there can be no conclusions.” If you’re going to argue that mathematics or science or economics has a poor track record in decision-making, the natural reply is, “Compared to what?” Compared to your gut, it’s not at all obvious that economics has done poorly.

Where the discipline does sin, according to Rodrik, is in telling a different story to the outside world than it does to its students. Graduate economics seminars, says Rodrik, very carefully tease out all the assumptions that make the conclusions true; what shows up in the newspapers does not (“free trade good; free markets good; industrial planning bad”).

Naturally, though, if you’re going to use economics for real-world decision-making, you need some way of testing which assumptions apply in a particular case. You need data. But doubly-blinded controlled experiments in economics are few and far between, if not outright impossible. So the discipline will always suffer from an abundance of models and a dearth of practical advice on how to use them.

Here I’m reminded of the very excellent “Deconstructing the argument for free trade”, particularly this bit:

> President Truman [allegedly] got so tired of hearing economists tell him “on the one hand…” that he wished for a one-armed economist. But frequently the best advice we can give is a menu of effects that flow from different choices. Trying to come up with a valid measure of the *net* effects is above our pay grade.

It’s a plea that economists show some humility. But since that seems to be in short supply, perhaps we need a belt-and-suspenders approach: the public, and policymakers, need to understand the limits of the discipline that they rely on.

(Rodrik link at the top via Cosma Shalizi’s Pinboard.)

Catching up on reviews — August 21, 2011

Catching up on reviews

Rather brilliant white background. Book title and author's name in gold. Vivid blue subtitle at the top right. A ball of string with the globe painted on it at the left. There's a bit of the string hanging off the ball, running off the right side of the cover.
The page is divided in two. In the top half is an ornate-looking map of the world, with some kind of navigation device laid on top, as though someone is plotting a trip. In the bottom half is a photo of palm trees. The book's title and subtitle are overlaid on the bottom half, and the author's name is in a capsule at the intersection of the two halves.
Farewell to Alms cover: a pleading hand reaching out from a black box in the middle of the cover
Pieces of string knotted intricately (and beautifully) together at the bottom-left side of the page. A green string goes up the vertical axis from there; a purple string goes out the horizontal axis; and a yellow string follows the y=x line.
Black-and-white painting (photo?) of the Iron Chancellor in his rather old age: all jowly and sunken-eyed.
Brilliant blue sky in the background, extraordinary compact city-on-a-hill in the foreground. Supposed to look like the famous painting of Babel.
The most boring imaginable cover: beige background, 'Visible Hand' in red text, 'The Managerial Revolution in American Business' in black text, and the author's name in white text. The end
Red box at the top right, containing the book's title and the author's name in white type; yellow stars circle the red box. Everything is set atop a blue field. The book cover is supposed to resemble the EU flag.
A deep rich green background. An old-time map (of the world, one supposes) is watermarked into the background. At the bottom of the page, at the center, is a black box surrounded by a broken red line. The title of the book, and its authors' names, are in the black box. At the very bottom of the box is the top of what looks like another old-time map, printed in the same shade of red as the broken line.

(Attention conservation notice: 4000+ words, spread across reviews of eight books [9th forthcoming] that I’ve neglected to review over the last four months.)

I’ve been remarkably derelict in my book-reviewing duties of late, as the long row of book covers up above will suggest. Work, and life, and going on vacation without my computer, all have gotten in the way of writing here. So let’s see what we can do to remedy that, eh?

First, I must apologize a little: it’s been weeks or months since I’ve read these books, so I’m likely going to be remembering things incorrectly. I hope I convey the essences correctly.

Clark’s, Easterly’s, and Banerjee’s/Duflo’s books need to be described as a group, I think, both because I read them in the sequence listed; and because that sequence, coincidentally, was a really good order in which to read them.

  • Gregory Clark, [book: A Farewell to Alms: A Brief Economic History of the World].

Clark’s goal is noble and grand. He’s trying to explain, first of all, that the Industrial Revolution really was an astonishing break with the rest of history up to that moment. Here’s the money chart from near the beginning of the book:

Graph of per-capita income from 1000 BC to the present. 1800's per-capita income is set to 1. By that measure, humanity's per-capita income hovered around 1 for ALL OF TIME up to 1800. At that moment, there was a sudden break, where parts of the world skyrocketed off to 12 on that scale, and others (in the developing world) remained in the Malthusian trap: doomed to increase their population whenever income increased a little bit.

Something decisive and quite extraordinary happened in 1800. Some nations took off and escaped the ‘Malthusian trap’; others didn’t. Explaining why this ‘great divergence’ (to use the phrase that Clark borrows from Pomeranz) happened is the book’s main project.

What is this ‘Malthusian trap’? It’s what happens to many families when they get a little more money: they have more kids. Those kids are supposed to work on the farm with their families. But there they run into the law of diminishing returns: each additional person trying to work the same fixed amount of land will generate less output than the previous person. The first person working a field may not have enough brawn to tend to all of it, so he’ll focus on the parts that get him the maximum return for his labor. Maybe he marries and his wife helps out; even if she’s as strong as he is, she’s unlikely to extract any more from the land than he did (if he could have extracted more, why wasn’t he already doing so?). And so forth: each additional laborer extracts less. But now there are more people to feed. So the total amount of food per capita has now gone down. The Malthusian trap is the tendency, among pre-industrial societies, to wipe out any gains from increased income by having more kids.

This leads Clark down the road that led economics to be called, centuries ago, the “dismal science”: the best thing that happened to pre-industrial societies, according to Clark, was for their population to be wiped out by the plague. This is why the world loves economists.

How did parts of the world get out of the Malthusian trap? Sheer dumb luck, according to Clark, as well as — and here’s where I found the book highly distasteful — genetics. The dumb luck part was an influx of resources from the new colonies abroad, like the United States. But that doesn’t explain all the difference, says Clark. He claims that the only available explanation is that the British, by 1800, had ruthlessly selected for the bourgeois virtues. That is, their superiority was genetic. Over the preceding hundreds of years, in Britain more than elsewhere, the wealthy had had more kids than the poor. By contrast, the wealthy everywhere else had been — and continued to be — subject to the Malthusian trap: the children of the wealthy tended to become less wealthy than their parents. In Britain around 1800, the wealthy had also inherited various behaviors that the poor had not. The wealthy, for instance, saved for a rainy day, and were ready to invest when investment opportunities arose. The poor had been selected against, and those who remained did what they needed to inherit the earth.

Clark has many, many charts to back this up. They come from obscure corners of British historical recordkeeping, and the data-analytic work he did here is certainly worthy of great respect. I imagine him spending many, many hours in the basements of old British churches, carefully turning through brittle yellow pages to determine the birth rate among, say, medieval British landowners and early-industrial-era textile-plant owners.

That said, you know that old line about the drunk guy fumbling around underneath the lamppost looking for his keys? A passerby asks him why he thinks his keys are there, and the drunk man replies that they’re not there, but that beneath the lamppost is the only place where he can see? Clark’s book is a lot like that. Only here it’s Anglophone recordkeeping rather than a lamppost, and an explanation for the Industrial Revolution rather than keys.

Given where he ends up — that white people in Britain c. 1800 had been bred to be the perfect bourgeois — it’s hard for me to escape the conclusion that the data didn’t lead him there. I’m pretty sure that’s where he wanted to end up.

A book like this is never a pure historical exercise, because it leads inevitably to the question: when some countries escape from the Malthusian trap in the modern era and others don’t, why is that? What did Japan do? What did the Soviet Union do? Korea? Hong Kong? China? How about countries that haven’t done so well — Nigeria, say, or Kenya or Haiti. I’ll say up front that I’ve not engaged with the data on these countries in the way that Clark has with Britain’s. But these are not trivial counterexamples. If the “they inherited bourgeois instincts from their parents’ good genes” story doesn’t hold for them, then it’s not much of a story. At that point it becomes a story that worked for one small island at one point in history but doesn’t hold up for most of the interesting cases.

So at best, I’m willing to put [book: A Farewell to Alms] on the “lots of people have lots of stories about how the world works” pile.

  • William Easterly, [book: The Elusive Quest for Growth: Economists’ Adventures and Misadventures in the Tropics].

Easterly’s scope is more narrow: why has aid to poor countries done so little good? His big theme is that people respond to incentives, and that most aid creates exactly the wrong incentives. In the era right after World War II, rich countries thought that poor countries needed infusions of capital to get past the Malthusian trap: they get the capital, they build factories, and then they leave behind their pasts as centers of extractive industry. The amount of capital they received in aid was proportional to just how poor they were: the poorer you are, the more aid you receive. This gives poor countries no incentive to get out of their poverty traps: the wealthier they get, the less aid they get. The results were predictable.

The next story, according to Easterly, was that education was the thing: if only people could get educated, they’d dig their way out of their slough and all will be well. That also turned out not to be true.

Well, so what’s the issue? What’s actually holding poor countries back? Again Easterly returns to incentives, this time in a different form. Suppose you’re in a society weakened by official corruption: in order to get anything done, you need to bribe someone. Any one person who tries to buck the system by not paying bribes will be defeated, and the system will continue as it was. Or on the other, more hopeful side, consider a country having trouble attracting investment. It gets a little investment, which funds something like a new factory; now there are a few people in the poor country who know about how to run factories. Their knowledge spreads to those around them, and now there’s the potential for still more investment. Negative social structures lead to vicious cycles; positive developments lead to virtuous ones. There exist poverty traps, in other words. The existence of such traps is the fundamental problem. Easterly is extremely skeptical about the ability of (even well-run) foreign aid to fix the problem.

One thing he doesn’t discuss, though I’m sure it’s occurred to him, is the possibility that the best thing wealthy countries could do for poor ones is allow more immigration from poor countries. As Ed Glaeser says, the point should be not to help poor places, but rather help poor people. If people believe it’s in their best interests to move to the United States, that might be the very best thing we could do for them. Though there’s an exit and voice problem that we might cause, in that case: the most motivated, most intelligent people in a country might choose to leave; those people are the very ones who stand the best chance of helping the poor country out of its morass.

  • Abhijit V. Banerjee and Esther Duflo, [book: Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty].

This was a breath of fresh air after the previous two books. Recall that the first book in the triumvirate was about how certain nations might be genetically predisposed to remain poor for all time; the second was about how foreign aid doesn’t work because nations are stuck in poverty traps. Banerjee and Duflo instead get right down in the muck and ask what, specifically, works and what doesn’t to make individual people’s lives — not the life of a whole country, necessarily; just the lives of individual people — better. With the realization that no one person can make a government less corrupt or make the incentives for investment any stronger, how do we improve the lives of poor people? [book: Poor Economics] is a long collection of results that the authors have accumulated over decades of working on the ground in many foreign countries. This is work for which Duflo recently won the prestigious John Bates Clark medal in economics. How much should we charge for anti-malarial nets around beds, for instance? Does giving such nets away for free make people use them less (because the nets’ costlessness makes them seem valueless)? How, specifically, can we get people to use such nets more? How can we encourage people to use condoms? How do we improve individual schools in individual countries? The answers are unlikely to be one-size-fits-all: what works in India may well not work in Brazil.

Banerjee’s and Duflo’s main innovation is their method for answering these questions: the randomized controlled trial. I would have thought that this was already a standard tool within the international-aid community, but apparently it’s not. RCTs are the gold standard of experimental work within science, and now Banerjee and Duflo are bringing them to international aid. Their catalog of RCT results, in [book: Poor Economics], is tremendously interesting and vibrantly written. Highly recommended.

  • Martin W. Lewis and Kären E. Wigen, [book: The Myth of Continents: A Critique of Metageography].

You may have noticed that there’s no real reason why Europe ought to be called a continent. As a landmass, there’s virtually nothing to distinguish it from Asia. You can walk from Africa to Europe. For that matter, what about the artificial North America/South America divide? If we’re dividing up the world on the basis of geography (as opposed to culture, language, etc.), there ought to be one thing called “Eurafricasia” and another called “America.”

We might, however, decide that cultural divisions are legitimate ways to cut up the world. Fine, then, so where does European culture end and Asian culture begin? Greece has always straddled the boundary. Turkey wants to be part of the European Union, but it’s more Ottoman than Western European. The dividing line between Eastern Europe and western Asia is essentially arbitrary.

Spend enough time reviewing all the exceptions and mis-categorizations, and you come to realize just how senseless a lot of these divisions are. Spend enough time with Lewis and Wigen, and you realize that not only are the distinctions arbitrary; they also change over time depending upon ideological and political need.

I’ve heard this sort of approach described as “deconstruction”: the demonstration that any system of categorization is essentially arbitrary. The authors don’t intend to be nihilist; they would just like a better way of dividing up the world that reflects natural divisions rather than ideological priors. They’re rather more successful dismantling the old system than replacing it with a new one, but the book is mostly intended to get the discussion going: how should we teach geography so that students don’t believe, for instance, that there’s a concept called “Africa,” when North Africa and sub-Saharan Africa have, historically, had very little contact? One profitable way of dividing up the world would be by historical lineage and cultural connection; if we did it this way, then North America would be connected with Western Europe, and Muslim countries the world over (North Africa, the “Middle East” [a very new concept], Indonesia, …) would count as a single unit.

The book is terribly fascinating, eye-opening, and educational, if a bit too academic. Even the title: bless their hearts, someone should have told the authors that if they wanted to at least double their sales, they could have dispensed with a word like “metageography” and replaced it with something that gets the idea across more clearly. “Geographic categories,” maybe. Better yet, how about “mental maps”?

Still, it’s definitely worth a read. I hope their project succeeds.

  • Alfred D. Chandler, Jr., [book: The Visible Hand: The Managerial Revolution in American Business].

This book is canonical by now. It’s an explanation of how U.S. business evolved from the start of the Republic until the final evolution into Big Business. To radically condense the book, the story goes like this: when the country was founded, the idea of a “corporation” as we think of it today didn’t exist. If people wanted to build a bridge, they chartered a partnership, built the bridge, and disbanded the partnership. Then the railroads came. (I’ve only realized in the last year or so that railroads changed everything.) Suddenly coordination on a large scale was necessary: if you want to connect your tracks to my tracks, we need to make awfully sure that your trains and my trains don’t occupy the same spot of track at the same time. This required coordination on a national scale. It required precisely constructed timetables. It required staffs that mastered the finer points of scheduling, spare parts, repairs, and so forth. It required a vast quantity of capital that couldn’t be assembled by the old partnership method; access to the great New York City capital markets was indispensable.

As [book: Nature’s Metropolis] laid out so brilliantly, the railroad allowed an unprecedented degree of centralization. Rather than buying meat from your local butcher, cows were now slaughtered, eviscerated, and prepared for sale in Chicago, then packed on ice-filled trains and shipped east. Great factories were assembled for the slaughter and shipment of meat. Likewise for oats and wheat.

Now the economic problem facing modern man was not what it had been since the dawn of time; rather than a problem of limited supply trying to feed too many mouths, it was a problem of too much supply and not enough demand. Markets had to be created. The whole concept of breakfast cereal came about as a way to create demand for the output of the great grain-processing factories. Marketing became essential.

Now who would do the marketing? Specialized marketing firms didn’t have the same incentives as the grain manufacturers; they didn’t have the fire in the belly to get cereal out the door. So corporations took marketing in-house. In this way the makers of primary commodities moved closer to the consumer. At the same time, their factories’ need for constant production required a steady supply of raw ingredients. Companies moved to control the flow of goods, all the way from crops to customers, in order to keep production running smoothly.

And this is where we are today: in a world of massive, vertically integrated corporations — the Procter & Gambles, the Dow Chemicals, the General Millses — that control the flow of goods from field to mouth. Chandler documents this evolution grippingly, if at times in excessive detail. But that’s fine: his book is the first and last word on the evolution of American business, and it will remain a monument as long as people still care about that subject.

  • Diane Coyle, [book: The Economics of Enough: How to Run the Economy As If The Future Matters].

Oh how I hated this book. The margins are filled with my yelling at the author. Please don’t buy it.

There are a number of unconnected ideas in this book. We’re in a “weightless economy,” she says, where we increasingly are buying electronic goods or things like movie tickets that don’t correspond to any tangible thing. This premise is not demonstrated; it’s just asserted. There are entire pages (I’m thinking of pp. 197-198 in particular — probably my least favorite two pages in a nonfiction book ever) given over to anecdata, which is the closest she gets to coherently arguing anything.

Sorry, I’m getting off track. It’s going to be hard for me to calmly lay out the structure of the book without reliving the pain of reading it. So anyway, we’re in a weightless economy now. It’s been revolutionized by information technologies. This is asserted rather than argued. (A good case could be made, by a better author, that shipping containers were the real revolution.) The new world of information technology allows for longer supply chains (paths from component parts to the ultimate consumer). This is asserted rather than argued. (She would need to argue that supply chains are longer than they used to be, and that they’re longer because of information technologies. She does neither.) These longer supply chains mean that we need to trust everyone more. This is plausible but not argued.

Meanwhile, we have some big long-term economic problems. We have commitments to retirees that we’re unlikely, she says, to meet. Why this might be so is unclear, and she doesn’t argue it: the United States is very wealthy, and our tax burden is low. Eliminating the cap on Social Security payroll taxes would entirely close the funding gap.

I think that’s what gets me the most about this book: the depth of her analysis is no greater than that of a blog, but instead I had to slog through a book-length padded-out argument that doesn’t even make sense. She spends entire pages dishing out anecdata that don’t even begin to constitute an argument.

The argument that does make sense is that we have long-term problems like global warming, and that these require global institutions to coordinate responses to them. That could make sense: maybe nations will be unwilling to lower their CO2 emissions unless other nations do, too; and since every nation feels the same way, no nation moves to reduce its emissions. This needn’t necessarily be the case: maybe a world of lower CO2 emissions will be a world where we shift our resources into new technologies, new industries, new lifestyles that make the world better for everybody. Maybe a country that moves first into inventing these new industries will get an important leg up on every other nation. This isn’t a possibility that Coyle covers.

She’s compelled to turn everything into a Big Problem. Social Security couldn’t possibly be made solvent by eliminating the cap on income subject to the payroll tax; if it could be, her book would be very short indeed. All of [book: The Economics of Enough] is like that: someone who thinks like an engineer, with an eye to actually solving problems (like Esther Duflo, above) wouldn’t write a book like this.

The final irony on all of this is that I have absolutely no idea what “The Economics of Enough” means after reading this book. Does it mean “the era when we need to stop economic growth to keep our lifestyle sustainable”? No, it pretty manifestly does not mean that; Coyle establishes early on that increased wealth does make people happier, and that we’d be, if nothing else, politically in the wrong to demand of developing countries that they not experience the prosperity that the West has long enjoyed. I have no idea what we’re supposed to have “Enough” of.

To borrow a line from Roger Ebert, [book: The Economics of Enough] should be cut into free ukelele picks for the poor.

  • Jonathan Steinberg, [book: Bismarck: A Life].

This is a very good personal portrait of the Iron Chancellor — the man responsible for uniting Germany. This is the man famous for his theory of [foreign: realpolitik]: an amoral foreign policy that seeks what’s best for his nation, paying no heed to scruples along the way.

As Steinberg tells it, Bismarck succeeded because he always had the ear of the king; when he lost his royal sponsor, upon the ascension of Wilhelm II to the throne of the German Empire, he lost his job. Steinberg makes much of Bismarck’s relations with his own mother and father, and how those relations led quite directly to his father-son-style relations with the various German kings. Bismarck continually threatened to resign, and when he did he would be overtaken with endless physical ailments. Steinberg spends rather more time on Bismarck’s psychology than I would have preferred.

The book I want to read, I think, would actually start before Bismarck and end after. It would start with Europe after Napoléon has been decisively defeated and exiled to St. Helena, as the continent strove to rebuild a new political order on the shattered remnants of the old; this era, up to Bismarck and thereabouts, is covered quite brilliantly, and in exactly the style I want, in Henry Kissinger’s Ph.D. thesis, [book: A World Restored]. The book I’m envisioning would situate Bismarck within his post-Napoleonic century and follow post-unification Germany all the way to World War I and possibly World War II. I’m looking for a portrait of modern Germany, I guess.

Steinberg does situate Bismarck within a larger context, but that context is the Junker landowning class into which Bismarck was born. He has less to say about the detailed politics and foreign relations among German states in the wake of Napoleon, as the major European states sought to create a true conservative balance of powers. Steinberg is more interested in Bismarck the man, with his stress-induced facial neuralgias and frequent taking of healing waters.

It’s hard to leave this book with positive feelings toward Bismarck. He was clearly a vain, easily wounded, egomaniacal man, but nonetheless a world-historically brilliant one. Steinberg makes me want to read more about him and about the country he created, but Steinberg’s own book is not the final word.

(For what it’s worth, Henry Kissinger himself, who surely knows more about Germany and [foreign: realpolitik] than I do, calls Steinberg’s book “the best study of its subject in the English language.”)

P.S. (September 5, 2011): Looks like the book I want is Iron Kingdom: The Rise and Downfall of Prussia, 1600-1947

  • John McCormick, [book: Understanding the European Union: A Concise Introduction].

Having read this, I feel like I understand in broad outline the way that the EU works. I understand why EU regulation seems to cover such tiny details: in order to lower transaction costs between nations, bring greater unity, and not unfairly disadvantage any one country, the Union must regulate in great detail. I understand that the EU is engaging in valiant efforts to bring the poorer countries up to the standards of the wealthiest countries. The ultimate goal of all of this is, or was, to prevent war between nations from tearing Europe apart, as it did twice in the 20th century. Treat every European nation (whatever “Europe” means — this book and [book: The Myth of Continents] cover some of the same ground) as part of the same family, and prevent one nation from coveting another’s wealth, and maybe you prevent war. Maybe. I also understand from this book that European regulators have had a very hard time explaining to their countries what the EU does. I still don’t get the precise boundaries of the institutions, though McCormick did his best.

This was basically the first promising book I found through one Google search or another, so that I could understand what exactly is going on right now in Europe. Various countries are bailing out various other countries, and various bloggers have been writing that European monetary policy is “one size fits none”: it’s not even the right fit for the German economy. I had to assume that when Europe went on the single currency, its planners knew that something like this could happen. I hoped that McCormick could explain how Europeans envisioned a crisis resolving itself.

Unfortunately I didn’t really get an explanation of that topic — which is unfortunate, because that must be what most Americans want to know about Europe right now. The book came out in 1999 and was updated in 2002, so it was far away from the current day’s crisis. Time to look for another book that explains the origins of the current European mess.

  • Dani Rodrik, [book: The Globalization Paradox: Democracy and the Future of the World Economy].

[Will add this soon.]