Next top model

Why do economists all end up advocating the same positions, free trade, free markets, and all the other sorts of things that have been shown to have flaws that stunned those very economists when they were confronted with a real economy?

John Kay discusses the limitations of economic models here:

Since the 1970s economists have been engaged in a grand project. The project’s objective is that macroeconomics should have microeconomic foundations. In everyday language, that means that what we say about big policy issues – growth and inflation, boom and bust – should be grounded in the study of individual behaviour. Put like that, the project sounds obviously desirable, even essential. I confess I was long seduced by it.

Most economists would claim that the project has been a success. But the criteria are the self-referential criteria of modern academic life. The greatest compliment you can now pay an economic argument is to say it is rigorous. Today’s macroeconomic models are certainly that.

But policymakers and the public at large are, rightly, not interested in whether models are rigorous. They are interested in whether the models are useful and illuminating – and these rigorous models do not score well here.

Mark Thoma quotes Barry Eichengreen:

What got us into this mess, in other words, were not the limits of scholarly imagination. It was not the failure or inability of economists to model conflicts of interest, incentives to take excessive risk and information problems that can give rise to bubbles, panics and crises. It was not that economists failed to recognize the role of social and psychological factors in decision making or that they lacked the tools needed to draw out the implications. In fact, these observations and others had been imaginatively elaborated by contributors to the literatures on agency theory, information economics and behavioral finance. Rather, the problem was a partial and blinkered reading of that literature. The consumers of economic theory, not surprisingly, tended to pick and choose those elements of that rich literature that best supported their self-serving actions. ... It is in this light that we must understand how it was that the vast majority of the economics profession remained so blissfully silent and indeed unaware of the risk of financial disaster. ...

And from Thoma himself:

There are two uses of economic and econometric models, one is to use the models to understand how the world works, the other is to use the models to forecast. And while, of course, one of the goals of understanding the economy is to be able to predict it, it is simply not something most academic economists do (and the best models for forecasting are not necessarily the same as the best models for learning about how the economy works). Business economists do lots of prediction and forecasting, but academic economists? Not so much. We come along long after events have occurred - e.g. we're still analyzing the Great Depression to some extent - and try to use those events (as well as data from normal times) to try to understand how the economic world works, how policy can improve performance, etc.

[The preceding doesn't explain why academic economists take checks to do just the sorts of things Thoma says they can't do well - I'm sure there's a model to explain that.]

In a nutshell, here's the problem. Economists model what is most tractable to model, and a large economy with small players who can as a group be predicted is reasonably easy to model. It's not perfect; occasionally real people do crazy things like bid up the price of real estate beyond all historical precedent or reason, and as we saw, the models weren't able to cope with the implications of that.

If we look at the assumptions that undergird economic models, we have a roster of somewhat abstracted but perfectly logical ideas, each of which is imperfect if you want to describe real reality, but seem close enough. And, for the middle ground that is usually inhabited by the real world, they seem to work well enough.

Then along comes something extreme, something unprecedented, and the models fall apart - they simply weren't built to take into account things that have never before happened. That the extreme events are well within possibility is something the model builders prefer to ignore.

But there's something else, a feedback effect that is less noted. Once you have built your model, staked your professional flag on it, you're stuck with it and the vision of the world it encompasses. If you model free trade, and it demonstrates that free trade offers magical value-added effects, you then have to buy into a world in which free trade is always good, always right. (That's why even reputable economists refuse to refute a trade flack who makes profoundly misleading statements.)

And with that belief comes a series of subsequent conditioning. Any basic model of free trade only shows that there are gains to the two nations engaging in that trade. It doesn't demonstrate anything at all about the internal distribution of those gains, or some of the obnoxious utility effects. But your whole academic life now depends on free trade, so you have to ignore those things that are unpopular or inconvenient (and, if pressed, you fall back on the "my model doesn't include political effects" or some such hedge).

The real mistake is that we listen to these ivory tower dwellers, these folks who make amazing math while forgetting that it's supposed to model something the rest of us call reality. We shouldn't be amazed that the models failed us in the current crisis; we should be amazed when they tell us anything useful at all.

[For a somewhat more technical explication of models and assumptions, see this from Willem Buiter.]

Take the next step

Yglesias, a couple of weeks ago, on national identification of companies:

He [Tyler Cowen] points out that not only do Toyota and Honda manufacture cars in the United States, but these are publicly traded firms. Americans can—and do—own shares in both firms, and could own more if we wanted to. Conversely, an “American” company like Apple actually does very little production in the United States. Nestle is “Swiss” but it’s a giant multinational corporation and Switzerland is a small country so the vast majority of its operations are elsewhere.

So let's follow the logic a little further and ask ourselves why we use taxpayer money to prop up one set of multinationals at the expense of another set, and why the economic talking heads don't leap to calling that what it is...protectionism.

If we put a tariff on every foreign car of $1000, every reputable pundit would yell Smoot-Hawley (except for Congresswoman Bachmann, who would yell Hoot-Smalley) and decry this action as Hoover-style Depression-inducing.

Let us, however, give $1000 per car to an auto company that happens to house its executives in and around the Detroit area, and that's called principled support of a major American industry. I really don't get the distinction.

Update: for a somewhat economisty view of this which makes sense, see Claus Vistesen by way of Edward Hugh.

Butterflies are free...why not books?

I'm not sure what Yglesias is thinking here. It seems that he's unhappy about having to pay $33.59 (on Kindle; $95 if he wants a paper and glue copy) for a philosophy book (which Yglesias admits is "relatively obscure"):

Given that the marginal cost to Cambridge University Press of giving me a Kindle copy of the book is almost $0 it seems a bit absurd for the price to be so high. What’s more, according to the CUP website: “As a department of the University of Cambridge, its purpose is to further the University’s objective of advancing knowledge, education, learning, and research.” It seems to me that knowledge, education, learning, and research are not being advanced by seeking to extract exorbitant monopoly rents from relatively obscure philosophy books. Would not knowledge, education, learning, and research be better advanced by making such books as widely available as is practical? Obviously, in an era of physical books even a commitment to such a policy would imply a fairly high price. But electronic publishing via Kindle, it seems to me, ought to change the occasion.

We live in a world where, in principle, it ought to be viable for CUP to offer Peter Railton’s books for sale quite cheaply....That, it seems to me, would be a world in which knowledge, education, learning, and research are being advanced.

Perhaps Matt is so fixated on the Internet that he's decided everything should be free, though his own book (not even available for Kindle) sells at a discounted rate of $15.57 at Amazon. But his argument doesn't hold up at all.

First of all, let's dispense with the Kindle vs. tangible book point. I can pretty much guarantee you that 408 pages, even including printing, handling, and delivery, doesn't require a premium of $61.41. Clearly, the price comes from other considerations than just those of production costs.

Second, why does the obscurity of the book matter? Sure, Railton might sell more books if each was priced at $5, or $1, whatever the medium, but the publisher has made a decision that the right price point is $95 or $33. This exposes a common myth, that markets exist to get products to people; that's untrue, of course, markets exist to maximize profits. If CUP can make the most money selling 1 copy a year, they'll price it in just that way (I'm deliberately ignoring the odd aspects of university presses).

And that point is true regardless of the popularity or sales of the book.

Let's move on to the nub of the argument, that books should be priced in such a way as to advance "knowledge, education, learning, and research." You know, I'd love that too. I have all kinds of books that were bought for just those purposes, and I would certainly love it if all of them had been virtually given away.

If you want to contend that Matt's point is specifically about Cambridge University Press because of the statement he found on their web site, well, that's just not enough. Presumably every publisher could list similar goals, even if profit is a little higher in the mix for a commercial publisher, but CUP has employees and a building and expenses that need to be covered, and that's not going to happen if they're just freely disseminating information.

And why would any author sign up with a publisher that told them, "You're not going to make anything from your work because we're here to advance knowledge"? (Of course, one could argue that the book isn't publishable by a mainstream publisher due to its obscurity; then why is it publishable at all?) Yglesias himself writes a blog that may advance knowledge, and he's paid for that, even though his organization could advance more knowledge if he gave them his blogging skills for free.

Win-win vs. positive-sum

I really shouldn't have to go through this again, but a panel discussion on Charlie Rose last night makes it clear that we have a long way to go. The discussion concerned free trade; unfortunately the panel was severely skewed, offering a former U.S. trade representative, two economists, and the hapless Senator Sherrod Brown (D-OH), who was the only one trying to provide any dissent from pro-free trade orthodoxy. He offered very little that was coherent, especially in light of the relentlessly sunny views expressed by Susan Schwab, Jagdish Bhagwati, and Alan Blinder.

Let me take up one point that came up a lot in the testifying by former Bush trade representative Schwab. She tried several times to conflate "positive-sum game" with "win-win," and everyone just sat there and let her get away with it. I have no doubt that Bhagwati and Blinder get the distinction, but calling her out would have undercut an argument that they fully supported.

As I went through in some detail last month, the two concepts are not at all identical. Win-win does imply positive-sum, but the opposite is most definitely not true, particularly (but not absolutely) when there are more than two parties to a transaction. It is quite possible to posit that trade is a positive-sum game, yet still find that there are winners and losers, that large numbers of people will not net any benefit.

Let me try another example. Let's say I ask Charlie Rose to give me $10, and also ask him to get 99 of his friends to give me $10. I take this $1000 and, through a magical process (oh, let's call it free trade), I turn it into $1500. I then give Charlie back $800, tell him that returns weren't guaranteed, and walk away with $700. The system as a whole is wealthier by $500 (positive-sum, oh yeah!), but we have a win-lose-lose-(98 more lose's) proposition; Charlie and all of his friends are worse off than they were before.

It is popular to try to identify these two principles as equivalent. "Positive-sum" sounds kind of wonky, while "win-win" is clear and positive and cool. But all we can absolutely say about free trade is that it's positive-sum; we cannot, using classical economics, determine the distribution of those positive returns.

To be fair, there was a little discussion of the fact that some people do lose from free trade, and Sen. Brown tried to make the point that those people are almost invariably Americans. But the rest pooh-poohed the idea that the number of losers was significant, and Blinder in particular threw out the standard canard that all we need to fix the problem is enhanced benefits, retraining, trade adjustment assistance - you know, all those programs that aren't really working all that well now.

In general, I'm for free trade. It gives me access to goods I would not otherwise have, probably at somewhat lower prices than a purely domestic market would offer me. It makes me feel good to know that we're giving the rest of the world's people the opportunity to improve themselves through some means other than direct aid.

But that doesn't mean we should use specious arguments to get there. One of the more uncomfortable moments in the discussion was when Blinder contended that it was a failure of the economics profession that it hasn't "persuaded the general public of the virtues of comparative advantage and trade across nations," as if the problems presented by free trade could be washed away with the right marketing campaign. Americans may not be as well-informed on such matters as we would like, but they can see what's happening right in front of them.

I will point out, yet again, that our systems are human constructs, made for the benefit of actual people - if they don't work right, we need to fix them so they achieve the goals of our society.

Confusing "positive-sum" with "win-win" is misleading. Lumping free trade in labor together with free trade in goods is misleading; the markets are very different, and have differing objectives. Vague hand-waving as to how we might redistribute some of the gains from free trade doesn't accomplish anything. There's a tendency to inflate the gains from trade to make the orthodox view more acceptable. And the "fair trade" people have a point, should we really allow corporations to make huge returns off of environmental and labor law arbitrage?

My basic point is that this issue is far more complicated than drawing a two-country, two-good graph and pointing to the gains (which is about as far as most economists seem to want to take it). There are real costs to real people when we allow their careers to be offshored; they are, in effect, subsidizing the people who are taking advantage of that opportunity. Maybe that's OK, but I'd sure like to see economists and politicians and businessmen have to express it in just that way, rather than shouting down the people who point it out.

A couple of follow-ups

1) Sunday, I wrote about Kevin Drum's struggles with Nassim Taleb's The Black Swan, a book that, for no particular reason, has vaulted the author into the pantheon of pundits. His unremarkable observation that "bad things happen," cloaked as it is in self-indulgent tracts of virtually unreadable prose, struck me as a very few good ideas in search of a book.

Kevin found it "odd" and "intensely annoying":

The problem is that Nassim Nicholas Taleb basically sounds like a crank. His prose has all the usual markers: everyone else is an idiot (this includes philosophers, economists, historians, journalists, and pretty much all social scientists, among others); he's the only one who truly understands the world as it is; there's a monocausal explanation for this almost universal lack of understanding in others; and there's a tiny cast of other unappreciated geniuses who do get it (Benoit Mandelbrot, Karl Popper, G.L.S. Shackle, Daniel Kahneman, etc.).

But what of the content (and Taleb certainly pushes against the idea that we can separate style from content)?:

Generally speaking, he wants to persuade us that we know less than we think and that forecasting the future is a mug's game because history is primarily governed by huge, unpredictable events that come out of nowhere (black swans). But this is sort of a banal point: scholars have been arguing about the importance of contingent events vs. broad historical trends forever, and the difficulty of predicting technological breakthroughs is well-trod ground. Worse, Taleb doesn't add much to what's already been said about it. Just the opposite, in fact. In one chapter he cherry picks some inventions here and there to help make his case, but even using his own hand-picked examples he's not very convincing. We all know that penicillin was discovered by accident, but the computer? Taleb seems to think it sprang out of nowhere, but that's sure not how I remember it. It was a big invention and a huge discontinuity, but it was hardly unpredictable and hardly an accident.

Kevin seems to be surprised that there is so little there there, but is willing to concede that he may have missed the point. I would say, Kevin, you didn't miss the point at all; the real challenge is to explain why so many others have been so influenced as to make "black swan" a hot term, and Taleb a media star.

2) As for the disappearance of the great blog Carrie's Nation, in a comment to my follow-up post, 2Truthy unfolds the speculation that she shared with Melvin Toast on her fine blog, to wit:

In a nutshell, the entity known as 'Carrie's Nation' was likely one or more professional researchers working for a firm that pulled the plug at the end of April. That explains the blogger, CC's sudden and mysterious disappearance. Job over, on to the next disparate gig, maybe with tax codes. Detroit housewife? Fine. Sure.

That may be so, and fits the facts as we know them as well as any other explanation (including 2Truthy's offer of CC's suicide as an explanation, and mine of the Obama Indian technology cabal pulling the plug and sending her off to Gitmo).

If that is so, then there is actually a kind of Turing Test insidiousness to the Carrie's Nation experience, no matter how much I might tend to agree to the purpose to which it was put. The creation of a back story, complete with blog posts containing out-the-front-door pictures of a snowy day; the personal e-mails that I exchanged with CC; the idiosyncracies that, at least, seemed grounded in quotidian life: If all of these are fictions, I am left with a peculiar feeling.

Again, accepting 2Truthy's theory requires me to accept that a lie lay at the heart of Carrie's Nation. I have discussed my reasons for cloaking my real identity, but I am still the person I have revealed here. My name wouldn't add anything to the discussion, but every material fact I have written is, indeed, a fact. I can't really say that I like the idea that CC may have been a corporate figment, partially because my own representation of "her" is put in question, but more because it casts doubts on anyone who adopts a nom de plume for whatever reason.

So a part of me resists the theory, even as time and logic dictate acceptance. If that's the case, then perhaps 2Truthy is the passionate alter ego of George Will (he doesn't really believe the stuff he writes, so expresses his true feelings under an alias), mcfnord the online avatar of Bill Gates - heck, maybe I better go check my driver's license to make sure I'm not some consortium of think tank-ers writing my little blog each day.

Methinks a rather limp defence

The Economist doesn't like the opinions of Peter Coy in Business Week:

PETER COY'S rant against the entire economics profession sounds a mite bitter.

This touches on one of my "favorite" points, that "bitter" is, like comparison of anything to Hitler and the Nazis, is supposed to end the conversation:

The word "bitterness" is rapidly becoming the end of all arguments. We're asked to believe, not just here but on my blog and many other places throughout BlogWorld, that an assignment of bitterness is the ultimate in argumentation. McIntyre is "bitter" about something, and should no longer offer his reasons on the topic. I'm "bitter" about something, as a (former?) commenter expressed, and so my judgment on, say, economics or politics is immediately suspect.

Anyone who's taken Intro to Logic recognizes this for the ad hominem argument it is, but the people who use it seem to find it a devastating critique. It isn't, of course, it's just a way for a weak arguer to claim, "I win. My comments come out of passion and logic, yours merely from bitterness."

Let's move on, and see what The Economist doesn't like in Coy's piece:

The rap on economists, only somewhat exaggerated, is that they are overconfident, unrealistic, and political. They claim a precision that neither their raw material nor their skill warrants. Too many assume that people behave like the mythical homo economicus, who is hyperrational and omniscient. And they take sides in quarrels that freeze the progress of research. Those few who defy the conventional wisdom are ignored.

I expect a devastating rebuttal, but I don't get it:

That's a rather sweeping conclusion of a profession that includes more than 20,000 people in a wide variety of applications. Besides, which economist ever claimed his model predicts the future precisely? When I learned economic modelling I was told it acts as a guide, sort of like a road map. If you allow for every detail, the map is intractable, so you must make some simplifying assumptions. Those assumptions introduce weaknesses into the model; it's the trade-off of tractability for usability. Well-trained economists are mindful of this and understand that an economic model simply gives you some sense of where you are going.

True as this may be, it's certainly not the impression that economists give when they appear on news shows or in front of Congress. When an economist is interviewed, does he or she answer "I don't know" to every question?

As I've pointed out before, economists are, in private, pretty realistic about the limitations of their profession. They understand that predictions exist within a probability space, and they offer their idea of the most likely outcome. But, publicly, that's not where the money is - the light of the cameras or the lure of the lucrative lecture creates a sense of certainty where none can exist. The world beats a path to the doorstep of the eminent, asks what will happen; can we really blame a human being for succumbing to the desire of all for definitude?

The worst sin is that The Economist didn't actually read all of Coy's piece, which goes on to contend that economists are necessary, but that they need to combat their own "hubris." This is pretty good advice for any "expert."

Obviously, the best thing would be for all of us to recognize that economists are not much better or worse than the sportswriters who predict the outcome of the Big Game. Of course, we want to believe that someone, somewhere, "gets" what's going on, because we sure don't. But economics isn't there yet, and The Economist doesn't provide us any reason to hope that it will get there soon. (Their "defence" comes down to, economists all disagree, so how can they be criticized for not knowing what's going to happen? What?)

By the way, I'm not completely defending Coy's piece. At the end, he anoints Nassim "The Black Swan" Taleb as "the scholar of unpredictability," and cites one of his weakest arguments: "that nature achieves robustness through a redundancy that economists would consider wasteful: two hands, two eyes, etc." Any economist who sees two eyes as redundant needs to take a basic course in biology. Coy may want to be wary of the expertise of his experts.

Ideas

I know I'm critical of Yglesias from time to time. Occasionally, in my opinion, he shorthands some items, likely in his haste to push out x number of blog posts a day. Perhaps it is true that standards for blogging should be lowered in light of its immediacy, but that's not an excuse for publishing something that's too doctrinaire, not thought out enough.

In general, though, Matt puts out some pretty good stuff, like this post (Ideas Matter). He agrees with Keynes that "the ideas of economists and political philosophers...are more powerful than is commonly understood":

I think that the questions that political philosophers have taken to debating professionally in recent decades have a limited relevance to contemporary politics. But I think a number of fairly abstract misguided ideas in ethics, political philosophy, and economics have come to have extraordinary cultural and political power in the United States and to a lesser extent elsewhere in the English speaking world, all to incredibly pernicious effect. What’s more, though most of these ideas are propounded, originally, by people whose degrees are in economics most of them are really ideas of a philosophical character.

Clearly, one reason I like this is that I have contended several times (on this blog, and many more in life - just ask my long-suffering wife) that modern economics, for all its supercomputer models and calculus equations, continues to be far closer to the field of political philosophy than its practitioners would like to admit.

Yglesias cites three examples:

1) One important set of ideas is the perverse notion that it’s wrong or inappropriate to subject people to moral criticism for making selfish decisions as long as the decisions don’t involve breaking the law.

On this, I'm not sure Yglesias goes far enough. For the last umpteen years, it has not only not been morally wrong to be selfish, it's been lauded as right, as desirable, as American. A great number of greedy people who have read only selectively from Adam Smith have convinced themselves that, in the words of Gordon Gekko, "Greed is good."

(Note: I wonder if it didn't unhinge Oliver Stone more than a bit to see the lesson he wanted to teach in the movie Wall Street be so perverted, to the extent that the above quote has been seen as a slogan, not a warning.)

There's been no end of economists backing this up, contending that unchecked greed is the basis for our wealth-producing capitalist system. We've focused so much on "growing the pie" that we missed the reality that a lot of people were getting none, while fewer and fewer had it all over their piggish faces.

2) Under guise of eschewing values, economics has adopted a philosophical value system which says that the well-being of rich people is more important than the well-being of poor people.

It may only be a coincidence that economists can do pretty well working for think tanks that are supported by rich people, or by giving lucrative lectures to audiences made up of rich people.

3) As a society we’ve become accustomed to the idea that when empirical evidence seems to contradict basic economic theory—as when the United States experienced rapid economic growth under conditions of widespread unionization and a high minimum wage—that we ought to accept the theory as true.

Belief in economic theory tends to come and go depending on the person who is paying the bills, or, at least, that person's political leanings. Furthermore, if basic economic theory conflicts with what people want to hear, that theory tends to get lost.

For example, if a wealthy country suddenly sees the expansion of a low-cost, accessible labor supply, basic economic theory suggests two things will happen: first, the number of jobs available in the wealthy country will decline; and second, the wages that the remaining jobs will pay will decline. (There is a trade-off between these two effects that depends on several factors - the slope of certain curves - but both should happen to some extent.)

That's a very ugly conclusion to try to sell to Americans (the wealthy country), that globalization, for all its wonders, has some deleterious effects on numerous categories of workers, that it represents a major redistribution of income. (That's actually pretty ironic if you think about it. The Republicans who are insisting that Obama is a socialist for raising a tax rate by a few percentage points are generally supportive of a policy that has resulted - and will result - in a massive redistribution of wealth and income.)

Yglesias concludes:

Ultimately I do think that these big ideas matter as well. They’re enormously important in terms of setting the terms of political debate, in terms of influence what’s considered “possible” and what kinds of people have standing to have their views taken seriously. Building a better world ultimately requires getting people to understand that both the empirical and philosophical underpinnings of America’s free market society are much weaker than is generally understood. That doesn’t mean these questions will ever be debated by politicians at a live town hall. But it does mean trying to press a better understanding of these issues on the mass elite who set the tone for much of American political life.

We might hope for that, but I'm skeptical. Not that our mass elite is blind to the things that matter. George Will, for example, has nailed down America's biggest problem: the wearing of blue jeans.

(W)age discrimination revisited

I may have understated the problem last Saturday when I contended that age discrimination can be explained, at least in part, by expectations about the future:

If a company takes a chance and hires the older person for $40K, there is the real possibility that another company might come along two months later and decide to pay that person something closer to their previous salary. Then the company is out time and money, plus having their technology exposed to someone who's gone. It's a lot easier just to hire someone who's happy to get the $40K to begin with.

I still believe that's a real mechanism, but The New York Times has quite the sobering article:

But unemployed baby boomers, many of whom believed they were still in the prime of their careers, are confronting the grim reality that they face some of the steepest odds of any job seekers in this dismal market. Workers ages 45 and over form a disproportionate share of the hard-luck recession category, the long-term unemployed — those who have been out of work for six months or longer, according to the Bureau of Labor Statistics....Even when they finally land jobs, they typically experience a much steeper drop in earnings than their younger counterparts.

The piece also cites the fairly well-known study in which a professor sent out resumes that differed only in age. Younger workers were 40% more likely to be called for an interview.

There's a real disconnect here among various trends:

• We're going to "reform" Social Security at some point by delaying payouts (we've already done that to some extent) under the theory that people are living longer and, therefore, can work longer.
• An inability to effect meaningful monetary policy has created the necessity of less-effective fiscal policy, which is justified by one and all as filling the need of getting the un- and underemployed back to work, soaking up all that unused capacity.
• Workers over 45 are finding it hard to stay employed or get reemployed - and they're only about halfway through their working lives.

These simply don't fit together, in that we have an experienced population that is going to be asked to work longer at jobs that don't exist for them. There will likely be people who contend that this is a good thing, that workers will have to plan their lives better, not count on 40 years of earnings and Social Security.

I'm not qualified to talk about whether this will eventually be better in the sociological sense. What I do know is that the large number of folks who worked under the old assumptions are going to be in a lot of trouble as the world changes, and we as a society ought to figure out how we're going to look after Grandma and Grandpa when their security guard jobs are still not enough to keep them from eating cat food.

(W)age discrimination

There's been a lot of talk lately about age discrimination, especially in technical fields. It's been occurring to many of us that our experience and wisdom is being ignored in favor of the perceived advantages of youth, their "fresh outlook" and their "eagerness." For those of us in the knowledge fields who don't think enthusiasm trumps knowledge, that kind of statement is profoundly ignorant and insulting. While some people over 40 do become ossified in their thinking, stuck in a morass of 20-year-old knowledge, most I have known retain their interest and aptitude for solving problems by whatever means necessary. They are adept at learning new things, and the base of knowledge they already have makes that learning far easier than for someone, no matter how great their enthusiasm, who does not have that base.

None of what I've written so far is anything new, and other observers of this phenomenon have hit upon the idea of cost. Why pay an older person $80K, when you can get two young people for the same amount of money who will work incredible hours (no families yet) and bring cutting-edge ideas from their education?

That the older person may have the experience to know what does and doesn't work, allowing him or her to cut through the noise and solve the problem in less than half the time, doesn't occur to those who prefer to look, not at efficiency, but at cost per employee.

But there's another factor, and, that is, older people have been beaten down by the job market. Many of them would be perfectly happy to get to do what they want and love, even if the pay were considerably less than they received during the good times. Yet many still languish, working, if at all, in jobs that offer less challenge than they can handle, or worse working conditions than would be ideal. So why are they not snapped up?

[Note: I am not unaware of the argument that says employers prefer younger people because they have longer potential tenure. I just think it's wrong. I know of no statistics to back me up, but I'm guessing that it's at least as likely for a 55-year-old to still be with a company after 10 years as it is for a 25-year-old.]

It's easy to look at age discrimination as the answer, and de facto that's what we have, but I think the mechanism is a bit different from, "we don't like having old people around." Here's my analogy.

Let's say you engaged in an auction, but the rules were different. You would have to pay something every time you made a bid. Of course, this would change your behavior, perhaps to the point where the auction couldn't take place at all. If the payment was at all significant, you wouldn't make any trial bids early in the process, you'd wait until you were pretty much sure of winning...which you would never be.

This is analogous to what happens in the hiring process. If a company takes a chance and hires the older person for $40K, there is the real possibility that another company might come along two months later and decide to pay that person something closer to their previous salary. Then the company is out time and money, plus having their technology exposed to someone who's gone. It's a lot easier just to hire someone who's happy to get the $40K to begin with.

In this way we see the exclusion of people who have ever made more money than the current prevailing wage, creating a class of formerly successful people who now have far less chance of being employed. As a result, there is a tendency on the part of these people to downplay their experience (once again, I have no proof that this is happening, the "puffing down" of resumes, but I'd be very surprised if it isn't).

Economics doesn't do a good job of capturing this, given its propensity to believe that people move effortlessly up and down the wage scale. But this is a real problem, in that companies are deprived of utilizing the talents of the experienced, and the employees themselves who are prevented from working in their field.

Of course, companies could prevent this problem through the well-understood mechanism of contract law, but they really don't want to limit themselves in this way, no matter what the gains might be. It's hard to see the current model as the best way forward.

More math

Last Sunday I wrote a short piece on three concepts from mathematics that are frequently misunderstood, but have a great effect on our understanding of current events and what people are saying and writing about them. For the record, those are: so-called exponential growth, curve fitting, and nonlinearity.

It's occurred to me that I left one important math misunderstanding out, so I'll swing back and put in here. That concept is one from game theory, the idea of zero-sum vs. positive-sum vs. negative-sum games. These are words that are thrown around a lot, and, as invariably occurs when amateurs pick up the terms of a specialized field, they are abused a lot as well.

In short, the nature of the sum (zero, positive, negative) comes from the inherent nature of the game being played, and refers to the total resources of the players. (It's important to stress that the word "game" here has a specialized meaning, not restricted to fun activities, but to any human endeavor that has an uncertain outcome.)

Casino games are negative-sum games, at least for the players, because they never return as much to the players as the players put in. Two important points here: 1) Obviously, if one counts the casino as a player in the game, the money stays the same - it must be a zero-sum game - but it is customary to exclude the rule-setter as a player; and 2) The game is the whole system between player and casino, so it is not a refutation to point out that some players do walk away ahead.

Private poker games are, generally, zero-sum games. Each of five people walk in with $100, and, at the end of the evening, $500 walks out the door; we just don't know ahead of time in whose hands it will be. It is not impossible, but fairly unlikely, that everyone will leave with exactly what they came in with. That's why we don't see poker as a productive activity, even though in the usual case one or two people do walk away richer.

Now let's take the poker game, but add the idea that some wealthy person has decided to subsidize the action, say by throwing an extra dollar into each pot. If the players engage in 100 hands during the evening, the total they will walk away with will be $600. We have just defined a positive-sum game, one in which, theoretically, every player could come away better off (even if this doesn't ever actually happen).

Here's the thing. While everyone might come out better off, it's more likely that one person will walk away with $600, the other four all losing $100. Telling the latter four that it's a positive-sum game doesn't really do anything for them at all, they still lost all their money. In fact, they may even resent this game more, because there was an extra $100 up for grabs and they got none of it.

I'll give just one example of the way this is used in political and economic discussion, but there are others. Very often, someone will support free trade by saying, usually pretty smugly in an attempt to forestall further discussion, that free trade is a positive-sum game. The clear inference we're to draw is that everyone will be better off. But that's not what "positive-sum" means at all, it only means there will be more wealth in the system than there otherwise would have been - that's all.

It's the old question of growing the pie vs. splitting the pie, which is more of a political issue than an economic one. Free trade, for all of its pie-growing capabilities, is not "good" if it brings unacceptable distributional effects. Whichever you come down on that issue, it is clearly more complicated than citing "positive-sum" and sitting back, convinced the discussion is over. We need to be smarter than that.

New economics blog

Robert N. Stavins is a professor of Business and Government at Harvard, and he started a blog in February called "An Economic View of the Environment." Since I don't know too much about this subject, I'm going to follow it for a while and see what I can learn.

Stavins got off to an interesting start with a series of posts about myths concerning the way economists think (Mark Thoma pointed to these, which is where I found out about it). He cites four such myths:

1. Economists believe that the market solves all problems (discussed here)
2. Economists always recommend simple market solutions for market problems (here)
3. When non-market solutions are considered, economists use only market prices to evaluate them
4. Economic analyses are concerned only with efficiency rather than distribution (the last two here)

And as I'm reading these, and thinking that only in a fantasy world are these things myths, Stavins anticipates my feeling:

I want to acknowledge that my profession bears some responsibility for the existence of such misunderstandings about economics. Like our colleagues in the other social and natural sciences, academic economists focus their greatest energies on communicating to their peers within their own discipline. Greater effort can certainly be given by economists to improving communication across disciplinary boundaries. And that is one of my key goals in this blog in the weeks and months ahead.

This is good, but not sufficient. These myths apply to all economists, not just those studying the environment, and the communication needs to get out of the ivory tower. Because, whether non-experts are perpetuating these myths for personal reasons, or economists themselves are misrepresenting their work to fit a political orthodoxy, the reality must be exposed.

Of course, the reality is that economics has few definite answers, and that makes a lot of people uncomfortable. Nevertheless, if the profession is to maintain any credibility, it needs to be a lot more realistic about what we can expect from it.

The magic multiplier

I've written several times lately about what I call the magic multiplier, the oft-mentioned figure that will turn the government spending of the various stimulus packages into great positive effects on our GDP.  The more responsible economists point out that this measurement of the results of fiscal policy applies only when there is slack capacity in the economy, that is, when people and plants are idle.  They could all be working, except, for some reason, they are not, so government as the employer of last resort puts them to work.

I have been somewhat dismissive of this multiplier, which has been pegged at about 1.40.  In other words, every dollar of government spending will translate into an injection of $1.40 into our economy.  Having done some economic modeling myself, I'm pretty aware of its limitations; it's a field that's still in infancy, no matter how powerful the computers we throw at it.

Since studies of fiscal stimulus rely on previous conditions similar to the ones in which we find ourselves now, and our situation now is widely acknowledged to be one-of-a-kind, unprecedented as to its causes and effects, it's difficult to see how even the best model can be more than indicative.  The results aren't treated that way, of course, not when there's a political point to be made.  So it's now pretty much taken as common wisdom that the money we throw around the economy will be returned to us with a nice bonus thrown in.

There are many reasons, if we can pull our eyes away from the equations for a moment, to suspect that the multiplier may be overstated.  Even if the models were perfect in capturing what happened in the past (that is, they could predict the already-known "future of the past"), conditions are radically different than they have been before.  Do they take into account the possibility that, as an example, GM could invest some of their bailout money, $1,000,000,000, in Brazil?  [H/t to the Job Destruction Newsletter.]

Do people really believe that the new energy economy is going to be confined to this country?  Or all the new development in health care technology?  Or will we see leakage to the increasingly aggressive offshoring companies (see Carrie's Nation for some thoughts on this)?

All that said, I still guardedly believe we have to move ahead with our current path.  I just want us to temper our expectations, take 1.40 with a grain of salt, and remain vigilant as to what we're actually spending our money on.  We can all react with horror to the likes of "Buy American" provisions, but it really isn't all that surprising that people want some protection for their trillions of dollars.

I try not to get too technical in this blog; I have some training in economics, and could draw the occasional graph or put a few equations here.  But there are people who do that sort of thing better, the likes of Brad DeLong and Mark Thoma, so I leave the heavy lifting to them.

However, if you want to get a little heavier into the development of these multipliers, there's an excellent item by Mark Thoma from about a month ago ("The Great Multiplier Debate").  In it, he presents a lengthy excerpt from Menzie Chinn on the three basic models used to develop these multipliers.

Thoma then gives us five excellent paragraphs on why these models are flawed.  Essentially, current economic practice focuses on growth and monetary policy:

Nobody, or hardly anybody, was asking questions about the use of fiscal policy to stabilize the economy. Hence very few models were built to look at this issue.

No one has thought for some time that fiscal policy, that is, government spending, was ever going to be the tool by which we "fixed" the economy:

Thus, the need for stabilization policy, fiscal policy in particular, was believed to be greatly diminished. The fact that fiscal policy might be needed in a deep recession because monetary policy would be rendered ineffective was discounted and ignored because the the belief was that a deep recession couldn't occur, the economy was too robust and flexible for that.

Monetary policy could handle any problem that arose, so cutting edge economists simply didn't develop tools for discussing our current situation.  The only models we have to explore the now are fairly old-fashioned, and subject to the distortions of unrealistic assumptions:

The next approaches to macro modeling and estimation, the micro-founded models and the VAR models, came into being as the fiscal policy question was falling by the wayside (most VAR models do not even include government spending and taxes). Thus, as you may have noticed, there isn't much in the way of evidence from these models that we can rely upon (and that's not even considering the fact that we have very little data from recessionary episodes to inform us on these issues). The models will be built - I guarantee you they are being built presently - but for now we have what we have.

As is all so typical, the more you know about economics, the less you rely on it for simple answers.  There's a lot of insight in the field, but predicting, especially in a new kind of environment, just isn't there, and we need to understand that, and level our expectations accordingly.

Red Oak's Five Things

In an earlier post, I followed a fascinating comment thread to a post of Citizen Carrie's that went through some of the current immigration issues. As the discussion wended its way along, with a hapless anonymous poster who brought very little game being taken to the hole by Carrie and Red Oak, Oak made an excellent point about certain types of arguers:

Description: He "knows" five things, those five things constitute the entire universe of things to be known (outside of the things he needs to know for his own profession, one hopes), he will repeat, all at once or in rotating order, those five things in response to anything you write, and while an occasional new factoid may penetrate, such that the List of Five becomes the List of Six or Seven, no new information is capable of modifying or transforming the original opinion.

If this attitude were confined just to bloggers or commenters, there would be very little to say about it. The wonderful world of Web 2.0 have brought some positives, but it's also given a forum to people who would normally only have the bartender to listen.

But there are serious professionals with major credentials who have the same attitude. It's fairly clear that large segments of our lawmakers are concerned only with adhering to either: strict party orthodoxy, or self-aggrandizement in preparation for the next election. (Oh, wait, I said serious professionals.)

So let's talk about economists, and let's talk about the subject of the original Carrie post: immigration policy. Economists "know" a few things: free trade is always good, the labor market is just like any other, an increase in supply (with constant demand) leads to lower prices (I could probably find two more to bring us to five, but these will suffice).

Where do those three things lead us? First of all, globalization is an unalloyed good. To believe that requires us to take a two-nation, two-good model that everyone accepts and extend it to a couple of hundred countries, multinational entities, government, and citizens with differing priorities and needs, but, no matter, the conclusion still applies.

Therefore, since labor is just like any other good, it makes sense to move it overseas or to bring lower-priced workers to this country. Either way, this action increases the labor supply.

So, since the supply of labor has increased, and, presumably, demand is roughly constant, the price of labor must go down, whether it's for manufacturing that has moved to Shenzhen or computer programming being done by H-1Bs in Phoenix.

Now is where we run into a pretty big problem. It's going to be very hard to make up for the loss of a career by saving a few bucks on a sweater, and most people can see that pretty clearly. But free trade is always good. Paradox!! (And we're leaving out the part where economists are actually embedded in the world of politics, so they can't admit that there will be losses to major parts of our population through their policies.)

This is just one example how clinging to Five (or Three) Things leads one astray. At some point, to make sense of it all, an honest economist would have to question the basic assumptions. But too few of them are willing to do that, so everything that impinges on free trade in goods, services, or jobs is labelled with the dirty word, "protectionism." The clear result, that letting the market have its way will make quite a few people substantally poorer, disproportionate shares of them on the "wealthy" side of the trade, is impossible to fathom, so the "experts" just elide over it, or attack those who ask questions about it.

We can conclude that Anonymous may well not just be some random shouter on the Web, he or she may be a respected, tenured economist at a major university.

Myopia

In one of those odd juxtapositions that occurs all too rarely, I just looked at my My Yahoo page. In the Top Stories from Reuters section, two of the three stories were:

1. New bank bailout could cost up to $2 trillion: report
2. Policymakers sound alarm over protectionism

The first tells us that the Obama administration is discussing ways that we can pump up U.S. banks. TARP hasn't worked at all, so now we may have to use public money to buy common shares or convertible bonds or whatever the economic team comes up with.

The second talks about the concerns of leaders who are currently attending the World Economic Forum in Switzerland. World trade is slowing down, so these august people are worried that countries will enact measures to "protect their non-competitive production facilities." India's trade minister hinted that India may be forced to impose such measures if other countries start first.

Do we see the link here? We're going to spend trillions on banks that happen to have their headquarters in New York or San Francisco, even though they are perfectly willing to tout their "global reach." More obviously, we are helping out one set of automakers who sell cars in this country and have proven to be inefficient in preference to another set, based solely on where their ultimate corporate headquarters is situated (and companies from the first set aren't spending our money in this country, as GM is gearing up facilities in Brazil - h/t to Job Destruction Newsletter).

In fairness, the second Reuters article does mention the new "Buy American" program, passed by the US House "requiring public works projects funded by an $825 billion stimulus package to use only U.S.-made iron and steel." Other steel manufacturers around the world are upset by this. And the Egyptian Trade Minister is concerned about bailouts, though this is almost a throwaway at the end of the article.

Look, I'm not a doctrinaire on the subject of free trade. I understand the theory better than most, so I see why economists are in love with the efficiency gains we get from it.

But free trade is not an unalloyed good to every single person in both of the countries doing the trading, and it is not wrong to recognize that. Yet we have economists all across the spectrum saying we need to stimulate this, and goose that, and spend massive amounts of public funds that we don't have on "getting the economy going."

It is intellectual bankruptcy to ignore that every bailout, every loan guarantee, every small step in the direction of nationalization, is protectionism, pure and simple. It may be necessary in these times, it may not be, but the same folks who will tell you that nothing should get in the way of free trade, ever, are now glossing over that in the rush to prop up every crummy American company (many of which would lay off every American worker in a heartbeat if it would save them a few bucks).

I wish, fervently wish, that someone would come clean and admit that, eminent economists that they are, they're throwing out all the rules, changing their world view. But that would create massive cognitive dissonance; it's a lot easier just to pretend that domestic stimulus is not the same thing as rank protectionism.

Magic multipliers

We've heard a lot about the multiplier effect, the extent to which whatever stimulus we come up with will magnify and synergize and spread through the economy. These numbers are becoming entrenched in the rush to spend government money, and any kind of pushback is jumped on as suspect.

And that's good, because there's a lot of nonsense going around. Kevin Drum has just written a post about Robert Barro, writing in the Wall Street Journal, who claims that the multiplier is less than 1.0 (that is, that government spending has a dampening effect on GDP)...and uses the example of World War II as his proof.

As Drum correctly points out, this is nonsense masquerading as analysis. Since the stimulus is supposed to raise employment to get spending going, and pretty much everyone was employed during the war, the current situation cannot be compared to what was going on in the '40s.

That doesn't mean there aren't problems with the models, however. As I wrote in a comment on Drum's piece:

Yes, it's true we can't compare the current situation to WWII, and any analysis that does is horribly flawed.

By the same token, it's hard to compare any past situation to now, as conditions are quite different than they have been before (it's false to assume that the only dichotomy is wartime vs. peacetime).

Any multiplier calculation that depends on money running through employment has to take into account that the U.S. labor economy is no longer closed, that some part of the stimulus may well go to cranking up the Chinese factories and the Indian call centers. That may well end up positive for the U.S., in the very long run, but it is not as direct a link as it was before. That makes these magic multiplier formulas far less accurate, based as they are on very different conditions, than they might be otherwise, and should lead to some degree of caution in establishing policy.

Let's remember that economics models failed to predict the magnitude or timing of our current difficulties. I am not going to invalidate everything that comes out of economics as a result, but I do think all such conclusions need to be taken with a huge chunk of salt.

Today is not yesterday, and those who wish to assert that it is are going to be wrong.

Fundamentalism - Part 1

This post has nothing to do with religious fundamentalism; for a solid discussion of that, see Chapter 2 of Andrew Sullivan's book, The Conservative Soul (2006). When I read that, I said, Aha, I know people like that, and that's exactly how they got there.

No, I'm writing about fundamentalism in general, a mode of thought that comes out of an inability to grasp some piece of the world as it is. The fundamentalist substitutes ritual and cant for thinking and conscience. In religion, the Bible or the Koran or the Pope is seen as inerrant, as the source of all wisdom, and the end of all wisdom.

But fundamentalism is a larger phenomenon, and affects a far greater number of us than we would suspect. We now hear about market fundamentalism, in which commentators sneer at those who believed that the free market could solve all problems, ignoring that those very commentators were on the same band wagon when the Dow was going higher and higher. For those of us who understood economics well enough to grasp the limitations of the markets and the "science" that describes those markets pretty well, it was laughable...except, as it has turned out, it's not funny at all.

And now we see, since market fundamentalism has let us down, a move to intervention fundamentalism, the idea that government money, spread liberally, will fix our problems. That this retreat to Keynesianism is every bit as much an experiment as was the freeing of our markets to do as they will is not mentioned, and won't be until it fails to produce the magical results.

Free trade has been another article of faith, one that is assumed, based on rather simplistic modeling, to represent a win-win-win-...(extend to as many parties as are involved). We have now discovered that certain groups don't benefit by free trade, especially in the nation that is a priori in the lead (that is, the U.S.). Even though we have all paid to establish the conditions that allow the resource-owners to gain from free trade, those gains are not shared, and any suggestion that they should be is greeting with horror.

Except that, as we see today, free trade and its close friend globalization can have some pretty troubling effects, and now the most ardent free traders are arguing for the rank protectionism of bailouts and guaranteed loans and public purchases of stock - but only for multinational companies that have their primary headquarters in the United States. The speed of this switch should be creating head-spinning cognitive dissonance, but that would require an economist to say that he was wrong all along, and that rarely happens.

In Part 2, I'll talk about one more form of fundamentalism - technical fundamentalism.

What is domestic, anyway?

In all the talk about the bailout (loan, helping hand, whatever) of the Big 3 automakers, the thing we hear, over and over, is that it's necessary to preserve the domestic auto industry. We need to keep that market alive.

But what is "domestic" in this case? If we look from the demand side, there is little chance that we will see numerous Americans going overseas for their auto needs. Occasionally, you hear of someone getting a sports car from Italy, but that is not a big segment of the market. So Americans will pretty much buy cars here in America, if they're buying any at all.

So we must be talking about the supply side. But I can go down to my garage, look inside my older car, the one produced by an American auto company, and find stickers with maple leafs on it - the car was built in Canada. At the same time, Hondas and Toyotas and so forth are being built in this country, presumably the parts are coming from this country, all the extra people who are employed as a result of this business come from this country.

All car makers are hurting right now because the demand side is down. Whether due to a lack of money, or a lack of available credit, folks just aren't purchasing as many automobiles as they were before. None of the proposals on the table help with any of that, it will have to wait until the economy turns around, which may be a while.

No, the packages help three specific car manufacturers, not by magically improving demand for their vehicles, but by propping them up until conditions improve, at which point they will sell cars again (even though they were losing market share before). But, you say, the "car czar" will assist the Big 3 in restructuring so they can make the cars that people want (or should want; lower gas prices are knocking some of those verities around).

My head hurts. The only thing that will help the industry as a whole is to get demand up, and that won't happen while people believe the economy is inching toward the grave. But we don't have a way to fix that, and, if we did, we would have to specify that people buy cars from the domestic automakers, who are not much more domestic than Toyota USA. So we're going to prop up the supply side for some time, but only for those companies that identify themselves as domestic, that don't have funny names.

And the restructuring that we are supporting will cost Americans their jobs, their careers; others will likely lose big chunks of promised pensions and health benefits. I guess I could make a little chart of pros and cons here, but it's probably not necessary. Suffice it to say that the domestic aspect of the auto industry extends pretty much only to the corporate offices. We'll be sustaining the existence of the executives while they are given carte blanche to "do what's needed," even if that means getting rid of every American worker (other than themselves).

Some action may be necessary, I don't know, but I think we're embarking on dangerous territory here when we favor one multinational corporation over another on the flimsy ground that one is domestic, the other foreign. It strikes me as a form of protectionism that saves the wrong people to little good end, and a lot of the economists who are arguing most fervently for help for the Big 3 don't seem to see that. The same people who would howl if we imposed tariffs of any sort are blithely going along with what is, in essence, the equivalent.

Review - The Black Swan

Some years ago, I was asked to review a paper for a mathematics journal. I agreed. The paper concerned geometry, in particular geometric constructions. For those of you who don't remember those, that subfield of geometry concerns the variety of things you can do with an unlabeled straightedge and compass. (The Wikipedia article is OK, probably more useful for the links it provides.) I don't know if this is even taught any more; if you learned it, you may remember finding the midpoint of a given line segment. This was a fairly important branch of math at one time, and still generates some interest from so-called mathematical cranks, people who believe they can do the impossible, or have "discovered" a simple way to do something hard.

[By the way, this is a major flaw in the Tom Friedman idea that we'll discover the next big thing in energy by providing incentives to garage projects. Someone will have to sift through all the energy crank-submitted ideas, and we'll be paying tax money to folks who are doing the equivalent of squaring the circle; in other words, impossible things.]

At any rate, this paper used then-nascent geometry software to slap circles and arcs and lines all over a plane, then calculate various angles that were produced. Then the author back-engineered this to create a "method" for constructing a, for example, 89.23° angle. He ended up with quite a few of these in which one could perform 36 steps to get this angle (or other angles close to significant ones like 60°, 45°, or 30°).

I don't know if I've made clear what was happening here, but, in essence, this author was putting large numbers of points on a plane, then using the software to take those points in sets of three and finding the angles that were formed. He then looked through the numbers that were generated and found those that were pseudo-significant.

If this had been an article for a mathematical Rube Goldberg competition, in which we go through a whole lot of steps to accomplish something useless, perhaps a light-hearted look at the world of geometric construction, it might have been good for a quick feature. But it was useless; there is no use for an 89.23° angle, and one is bound to find such things if enough points are generated (if you have 500 points, there will be more than 20,000,000 angles among these points - you'll find pretty much any measure you want).

If this article had been written in such a light-hearted way, or if it had been clearly intended for the April issue, or if it was being used to make a point about the lack of significance of results that come out of mass quantities of data (not to pick on Chris Anderson again), any one of those reasons might have made it acceptable.

But none of those was true. Instead, the article was written so as to make it clear that the author seriously believed his results were important, that he had in effect invented a new branch of mathematics, one in which cherry-picking almost-significant results somehow had the potential to revolutionize the field. Keep in mind he was showing nothing generally new; there was no theory behind any of this, nothing which said, "hey, want a 15° angle, here's how you might find one." It was mathematical crankery of the first degree.

---

The term "black swan" (meaning an event that is completely unpredictable, but has giant effects) has rapidly become almost ubiquitous, especially in light of the "unforeseeable" meltdown in the housing market, the financial market, the consumer market, and so on. The term comes (most recently) from Nassim Nicholas Taleb's bestseller, The Black Swan: The Impact of the Highly Improbable (2007).

Taleb, a successful Wall Street trader, uses the black swan as a metaphor to spin a theory (I'm sorry, he doesn't like theories, call it a conjecture) of, well, almost anything. Until people from the West went to Australia, they thought a black swan was impossible; their existence then became an exemplar of what some might call a paradigm shift, something that changes one's framework for reality. Taleb believes the black swan metaphor is central to our existence, that large-impact, unpredictable events have an effect that cannot be foreseen but that swamps any of the things that we believe important. 9/11 was a black swan in that we didn't see it coming, but it changed everything. As a result, our models of reality are useless, because a black swan will eventually happen.

And we're off for 300 pages of trips to Extremistan and Mediocristan, the saga of Yevgenia Nikolayevna Krasnova, severe criticism of Gauss and pretty much everyone else. If you plow through this work, you'll find out why everything you know is wrong, why every expert in almost every field is incorrect, why forecasts are useless, why economics is a waste of time. And a great deal of what Taleb writes is dead on the mark; much of this book is quite accurate in talking about the limitations of our knowledge.

So why did The Black Swan remind me so much of the story I recounted above? Because the tone of this book and that article are exactly the same. Taleb earnestly believes two things: 1) his "black swan" idea is new and revolutionary and significant; and 2) he is pretty much the smartest guy in the world for having discerned it.

This book carries an almost religious devotion to the temple of Taleb, the sense that we are fortunate that he has spent years poring over old tomes and selecting reality out of all the nonsense that has gone before, and been willing to share it with us. Oh, he didn't come up with this all on his own; he has his mentors, his Montaigne, his Popper, and, especially, his Mandlebrot. But it is Taleb who will rock the world, oh yes he will.

And what does this theory come down to? Essentially, the real world is too complex to be boiled down to the simplistic models that so often are used to describe it. We teach probability through casino games, then assume that the world fits those same rules - and it cannot. We can't take everything into account, so we try to create narratives that we can handle, but those narratives are incapable of modeling reality. Linear extrapolations are inherently unrealistic. And, then, always lurking in the background, is the BLACK SWAN - even if our model was perfect, in will fly the swan to upset everything.

It's difficult for me to know what to say about this. If you've read this blog for any length of time, you know that it is based on this very kind of thinking (and I claim no singularity in that, unlike Taleb). I've had any number of posts as to why economics is not a science, something that Taleb elevates to divine revelation (though he certainly seems to have a special irritation with the Nobel Prize). I've written about how the assumptions of future employment that will "naturally" result from spending on energy are based on nothing.

Again, I cite myself not to put me on the "special insight" platform on which Taleb puts himself, but because I know my arguments the best. There are others who offer counterintuitive ideas, who understand the limitations of conventional thinking, but most of us are not quite as irksome as Taleb about it (at least, I hope not).

I guess my overall impression of this book is that it contains some good ideas, but badly needed a strong-handed editor. The self-indulgence of Taleb's writing does nothing to enhance his points. There is, maybe, a 130-page book here, one without the self-aggrandizement and the pointless autobiographical side trips. (It is also the kind of book that fills me with despair that so many people find it significant, because the limits of knowledge should not be so revelatory; that there are people in high positions who are learning something from this is profoundly depressing.)

An editor might also have ironed out some of the things that are wrong or poorly-explained. How does Taleb's Extremistan produce Black Swans - it would seem that cause and effect are reversed here? The computer, the Internet, and the laser were certainly not unplanned or unexpected, though some of the effects of each were unforeseen - such is the way of all significant inventions. Microsoft's market share domination of Apple is not the result of luck, at least not to the extent that Taleb implies.

The most disappointing aspect of The Black Swan is the set of conclusions, because they are non-conclusions. Taleb says that, instead of using imperfect models to predict the future, which is impossible, we should move to empiricism. What he means, of course, is intuition - we should try things and see what works instead of reasoning from principles. This only applies to some fields, however, but we can't really know which fields are which. If this sounds incoherent, it is (Taleb apparently had some problems with a medical diagnosis, which is unfortunate, but it's a big leap to the idea that we should go with intuition). Empiricism always sounds great until we realize that there are many more NOTs in the universe, many more blind alleys than through streets.

I don't want to take the flyleaf as an important input, but it does state that, "He offers surprisingly simple tricks for dealing with black swans and benefiting from them." Taleb does nothing of the sort. He offers an investment strategy (invest 85% of your money in perfectly safe instruments, put the other 15% into wildly risky inifinite-upside Black Swan things) that is completely unhelpful (it might be possible if you're playing with a whole lot of OPM - Other People's Money - as he presumably was).

What Taleb is doing here is trying to overturn the basis on which people do things, wanting us to cast aside all those inaccurate models based on logic. But there's nothing here to replace that thinking, we're just supposed to wander around, experiencing life, and, I guess, hoping for the best.

It comes down to something simple but unstated: Taleb's success itself is a Black Swan, the result of chance. He was lucky to hit it big enough on investments to finance his self-styled epistemological research, then lucky enough again to find someone to publish a book with no editing and have it become a best-seller. He proves his own theory, which is useful, but it's unlikely any reader will learn anything that will help their own lives.

"Will" he say something stupid?

In a way, I feel sorry for George Will. So bound is he to the conservative line that he will forever be frustrated. If we would just try the pure-conservative line for once, something we only approached during the tenure of the great Ronald Reagan, everything would be fine. Alas, there's always something getting in the way of that purity, and so we'll never know the joys that would come from complete laissez-faire.

George has some rather large blind spots, and I've written about that before. He insists that economic crises are simply a matter of psychology, and he's down with Phil Gramm as to how we're a nation of whiners. What's worse is, his knowledge of economics is scant, with only ideology to fall back on. So it was with an element of joy (and not just from me, I gather) to see him getting slapped down by Paul Krugman on yesterday's This Week. It's not that I don't see room for disagreement on the causes and the progress of the Great Depression - in fact, I continue to be amazed at how much disagreement there is - but George's extremely simplistic view comes out of a playbook, not out of actual study or thought.

But where George really stepped in it, at least for me, was when he expressed outrage at auto company retirees being given health benefits before they are eligible for Medicare. He couldn't believe that people should get this when the companies are struggling.

George is wrong in at least two ways, and it requires a suspension of disbelief that he doesn't know either (of course, orthodoxy requires him to take umbrage at this, and we're back in the days of Reagan's fictitious "welfare queens"). First, George's bow tie wouldn't last three minutes in an auto plant. Despite advances in automation, this work is hard and demanding, with an unending load, quotas that have to be met. It's harder work than George could possibly know, even if he thinks he knows physical labor after his summer detasseling corn (actually, I made that last bit up, I doubt he's even done that, but there are a lot of self-proclaimed experts based on a small taste of something). George may think these retirees are enjoying the second house, the motorboat, and maybe there are some of those. But there are a lot more who wake up every morning hoping not to hurt, at least not too much. George Will may never have to retire, but, if he does, it's sailing and a couple of sets of tennis and mai tais at the club.

Second, does George have any idea how many of these workers were "asked" to take early retirement, with the deal being their high salaries get wiped off the books in return for benefits and pension sweeteners? Of course he doesn't. These are items that were promised to these men and women, freely agreed to by the management of these bastions of American power, and now the companies want to avoid having to live up to those agreements. And there's George Will to carry their water, to try to get the American people to feel his outrage that a corporation might actually have to live up to its promises.

I could go on, I could mention the ways in which these workers made different decisions in their lives because those kinds of benefits were pledged to them, and now they face having curtailed their opportunites "for the good of the company" with nothing to show for it. But I don't need to, George Will is just plain wrong here, and I don't need any more reasons to conclude that.

Depression

Here's something that I probably could start to work out with some research, and maybe I'll do some of that, but I'm growing a tad weary of the tacit assumption (regular readers may notice that I often question tacit assumptions, rarely the non-tacit ones) that we are not going into another Great Depression. It's something you read at the beginning of pretty much every article, op-ed, and blog post concerning the economy, like this from a Robert Reich post of 11/9:

This is not the Great Depression of the 1930s, but nor is it turning out to be merely a bad recession of the kind we've experienced periodically over the last half century. Call it a Mini Depression. The employment report last Friday shows job losses accelerating, along with the number of Americans working part time who'd rather be and need to be working full time. Retail sales have fallen off a cliff. Stock prices continue to drop. General Motors is on the brink of bankruptcy. The rate of home foreclosures is mounting.

Hmm. That sounds kind of bad. But we can be reassured that it isn't the Great Depression, right?

But when did the Great Depression become the Great Depression? It certainly wasn't immediately after the stock market crash of 1929, because the GD (I'm tired of typing it) didn't "officially" start until 1931. At what point did the bloggers of 1931 know that we were in a GD?

I think the assumption is that we understand better how to deal with an economic downturn, though it disturbs me that we still have at least three schools of thought as to why the GD was so great (as expressed by Brad DeLong here). If, however, the lessons we learned were not quite correct, or, what seems more likely, the current situation is far different from that of 1931, then we run the risk of solving the wrong problems.

I certainly hope that the worst case is the so-called Mini Depression, that our policies and structures and intelligence will be enough to avoid anything Great, but I fear that it's way too early to close the books on the possibility of Great-ness. Of course we won't see 25% unemployment again, the experts say, but do they really know?