Sunday, September 25, 2011

A GMU Economist Gets Negative on the World (When He's Not Optimistic About It)

The Great Stagnation is one of the most confused economic books I have ever read, bar none.

When reading the book, on page after page, I simply became amazed at the sloppy thinking. In that sense, it ultimately became a page turner, the big question being would the entire book be poorly argued? The answer turned out to be, for the most part, yes.

I am simply stunned at the positive reviews this book has received. In the book, written by George Mason University Professor Tyler Cowen, Cowen argues that as far as the economy is concerned we have "eaten all the low lying fruit."  And thus his first great error.

A key concept in economics is that we do not have perfect knowledge. In other words, we do not know what we don't know. We don't know what in the future will be considered low lying fruit.

It can well be imagined that when man first learned how to control fire, that the Tyler Cowen of the day would have declared that our ancestors had "eaten all the low lying fruit." And certainly when the wheel was invented, another Cowen would have said that all the low lying fruit had been eaten. And before the dawn of agriculture, another Cowen could have easily said that our ancestors had (literally) eaten all the low lying peaches and apples. Where would the Cowens of the world ever stop their negative views on the advancement of civilization, with the invention of the steam engine, the radio, the television, the airplane, open heart surgery, the smart phone?

There is no smooth path from invention to invention, no smooth path from advancement to advancement, but it is simply absurd to declare, as Cowen does on page 7 of his book that:
We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. That's it. That is what has gone wrong.
One would think that a little bit of Friedrich Hayek would have seeped into Cowen's thinking, that there is no grand central planner that sees all. Does Cowen seriously believe he knows what every man is thinking, what designs sit on the table of some great thinker, what lab experiment is about to be launched that will perhaps change our view of the world in a profound way?

Does he seriously think that he knows there is no new Steve Jobs out there? Does he think technology will stop advancing with the smart phone?

Further, does he not understand that many advancements are made incrementally? That the automobile continues to advance since the days of the Model T?

How can this one man, Tyler Cowen, declare he knows we are at a technological plateau, apparently both with regard to small advances and great ones?

One answer Cowen has is that:
Life in broad material terms isn't so different from what it was in 1953. We still drive cars, use refrigerators and turn on the light switch, even if dimmers are more common these days.
This means, of course, that Cowen dismisses the microwave, the smartphone, color televisions, personal computers, lap tops, open heart surgery and breast implants as nothing. The absurdity of this argument is in the prices we pay for the products I have listed above. If these things didn't make a material difference in our lives, we wouldn't be spending a good portion of our waking days earning money to buy the things the all knowing Cowen dismisses as not so different from 1953.

Cowen then goes on to do a mixing of government activities with those of the private sector. He tells us, correctly, that the government trip to the moon resulted only in teflon and tang. Yet, nowhere does he point out this was a government project that no sane private sector operator would have taken on, at the time. Cowen declares that the trip to the moon wasn't like the development of the railroad or the automoblie. Well yeah, the railroad and automobile began as private sector ventures that met a consumer need.

He then tells us that one-third of college students will drop out, a marked rise since the 1960s. Again Cowen here is using a sector that is heavily dominated by the government.

But then, out of the blue, after declaring that all the low hanging fruit has been eaten. Cowen makes a 180-degree turn and writes:
The fact that we've enjoyed a number of forms of low-hanging fruit in the past-and not just one-suggests that we might be due for some more of it in some form. This makes me an optimist for the longer run.
Go figure. Then on page 22 he tells us:
If one sentence were to sum up the mechanism driving the  Great Stagnation, it is this: Recent innovations are geared to private goods than to public goods.
What the hell is he talking about here? All the innovations that he said haven't occurred since 1953? Is he implying that the only important innovations are in public goods?

Apparently so, because he goes on to say, again, that nothing has significantly changed materially for him since he was a kid. But he then goes on to say (p.41)
In most sectors of the economy, if we spend a lot more money, we usually get something that is better.
Since we are spending more on microwaves and smartphones than when Cowen was a child, this contradicts his claim that things haven't changed for the better.

Cowen also discusses the internet in the book and tells us that (p. 47)
...the new low-hanging fruit is in our minds and not so much in the revenue-generating sector of the economy.
He seems to bemoan the little revenue generation from the internet, "relative to how much it shapes our lives." But so what? This is the like being sorry that water doesn't generate more revenue "relative to how much it shapes our lives."  Where does it say that how important something is to us has to cost a lot? This is simply the paradox of value. The paradox exists because it appears there is contradiction, say, between water which is on the whole more useful, in terms of survival, than diamonds, though diamonds command a higher price in the market.

The paradox is solved via the theory of marginal utility, which is based on the subjective theory of value, which says that the price at which an object trades in the market is determined neither by how much labor was exerted in its production, as in the labor theory of value, nor on how useful it is on a whole (total utility). Rather, its price is determined by its marginal utility.

Apparently, Cowen doesn't get this at some level. (It should be noted that Cowen writes at a blog named, Marginal Revolution). As for his charge that there is little revenue from the internet, Silicon Valley is currently booming because of the many potential opportunities in the internet sector.

But Cowen insists that there is not much employment in the internet sector and thus suggests bizarrely that some of the current unemployment problem is the result of this (p 51):
This is one of the reasons we have been seeing a "jobless recovery"
He, thus, apparently doesn't think wage markets clear and thinks that there are causes of unemployment beyond  minimum wage laws and unemployment payments, like the development of the internet!

The book is full of what I have outlined above, misunderstanding about facts, misunderstanding of basic economics and contradictions. Almost any point I have argued above in pointing out errors in the book could be argued from another direction that Cowen didn't mean such, since he often takes the opposite position only pages away (and sometimes he uses words in an odd manner, e. g. at points "private goods" seem to mean to him goods that the rich buy and "public goods" are middle class goods, wrap your head around that peculiar word use)

The only position he doesn't take is that the current economic crisis was caused by the Federal Reserve, though he blames just about everything else:
We thought we were richer than we thought...We were all, more or less, overconfident

Regulators should have done more to limit risk taking
Overconfidence can never fuel a boom if  a central bank isn't there supporting it with money, and regulators may be able to redirect the flow of money, but if the Fed is printing it, the money will enter the economy somewhere. Thus, in Cowen's very pedestrian explanations of the crisis, he does a terrible thing in not identifying the Federal Reserve as the key culprit of the crisis.

And so, start to finish, The Great Stagnation is a terrible book, filled with confusion, contradiction and a strong dose of slippery wording that gives Cowen the ability to argue any point from any position, in the future, based on this absurd book.

13 comments:

  1. "He, thus, apparently doesn't think wage markets clear and thinks that there are causes of unemployment beyond minimum wage laws and unemployment payments."

    What about employer taxes, anti-discrimination laws, licensing, Obamacare, other compensation mandates, and so on????

    ...Kidding, you probably mean those as well...

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  2. @RW: Have you copied this post under the book's reviews at Amazon? We don't want the unenlightened to get the wrong idea about Mr. Cowen... I can already see the Regressives and other modern Luddites using this book as "libertarian" support for an ever expansionary role of the federal imperial government.

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  3. @mickeyhobart

    The things you list would lower wages but not cause unemployment.

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  4. Wow, I guessed I overestimated Cowen's intellectual ability.

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  5. There is nothing novel about Cowen's interpretation of the history of technological development. It's a pretty linear process. And the combination of that linear process with population explosion is what has created the temporary non-linear expansion of caloric manipulation and consumption per individual that we call 'prosperity'.

    Farming, which was the previous great technological leap and led to calculation techniques including writing and numbers, was a great advantage for those who invented it. Until the different villages ran into the limitation of land, and invented governments to manage conflict over the scarcity of it.

    There *is* a smooth path to technological development - it's fractal - in that there are many failed attempts, and it can only be seen in retrospect, but in retrospect all technological development is pretty sensible. There have been some number of initial efforts to quantify the process, and it's roughly a matter of population. THere are 'destroyers' of innovation - chinese bureaucracy, the decline of greece, 13th century islam, the triple mysticism of zoroastrianism, hinduism, buddhism, as well as declines in population, or shortages of money that inhibit the ability of people to take risks.

    We *have* come near to fully exploiting the conversion of forms of energy, and that we have come near to fully exploiting computing technology, and that those are the two technologies, the application of which determine our relative prosperity. All the rest are variations on those themes.

    We do know at least two forms of computing technology available to us. The first is in nacent stage - quantum computing, the second is purely theoretical and is yet unnamed, but uses geometric data structures to avoid the necessity of Godel-limited computation, but people are working on it. They are the two known hopes for the Singularity.


    I also think you are wrong in interpreting Hayek. His point is that we cannot continue to develop knowledge without naturally evolved rules - a constitution and property rights. He's right. But he says nothing about RATES of technological development. You're inventing that.

    Unfortunately, as knowledge expands, so does it's complexity. It's not that there isn't a rough fractal mathematics to the development of knowledge. There is. We just haven't worked on it enough to know it as more than a few rules of thumb. But the rules of thumb are at least as precise as the rule of thumb that states we must have property, money, time and numbers to perform economic calculation of any kind.

    One thing is sure: the rest of the world has 'downloaded" our "killer-apps" and adopted our technologies, so the relative advantage - similar to the spread of farming - has been eliminated, and as such there will be a 'moderation' of relative advantage.

    Furthermore, the size of the tax base determines the ability to conduct war. The ability to conduct war determines control of trade routes and control of trade routes determines the laws used and the currency used, for the resolution of disputes.

    Wealth, trade routes, language and currency determine the rate of technological development. WHy? Because this circumstance grants the greatest number of people access to status seeking by market or intellectual rather than political or military means.

    Men do not always invent for money. In fact, they rarely do. they invent for status seeking or fulfillment. Money is just a perk they get for success. Wealth is a lottery. So is invention. Lots of people have to play in order for anyone to win.

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  6. @Curt Doolittle

    Your knowledge of Hayek's thinking is so limited that it actually proves beyond a doubt that knowledge is indeed dispersed unevenly, because you are missing a good chunk of Hayek's thinking.

    You errors are so many that about the only thing I can do is advise others to read Hayek in detail, which is something you haven't done, or, if you have, you missed a whole lot of what Hayek said.

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  7. @RW You surprised me! I'm a bit shocked that you'd say politically imposed costs on the hiring process and on employers for hiring such as the payroll tax, especially the employer side, and barriers to entry such as licensing, and so on, don't contribute to unemployment.

    Peter Schiff (the recent video before some committee I think) and Walter Block (A Primer on Jobs and the Jobless) seem to say such things. You think they are wrong? [sincere question]

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  8. @mickeyhobart

    Ihe payroll tax would lower the wage paid, but not create unemployment. Licensing may prevent someone from getting a specific type job, but this doesn't mean they are going to be unemployed.

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  9. Cowen's "Age of the Infovore" was also very weak, aside from perhaps a half dozen interesting points (most of which were about autism). Generally, it was way too long and a meandering thing. Not sure why everyone made a fuss about it. Being quirky and obscure and being clever are not the same thing. That's why I don't read MR.

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  10. Robert Wenzel,

    Please correct me if I'm wrong.

    The minimum wage makes it illegal to hire a person who can perform services valued below the legal limit. This person still has the option to try to learn a different service that is valued above the limit. If this person chooses, or is unable, to learn a new skill then he will be unemployed.

    Government licensing makes it illegal to hire a person that does not possess a license. This person still has the option to try to learn a different service that does not require a license. If this person chooses, or is unable, to learn this new skill then he will be unemployed.

    Employer taxes lower the wage portion of total compensation offered to a potential employee. If this wage is lower than what the potential employee is willing to accept then they will be unemployed. This person still has the option to learn a new skill that offers a wage that he will accept. If this individual chooses, or is unable, to learn this new skill then he will remain unemployed.

    As far as I can tell each case is an example of involuntary unemployment because the government has prevented an exchange from taking place that would have occurred under purely free-market conditions.

    Please correct me if you disagree.

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  11. Not ony is Curt Doolittle's understanding of Hayek confused, so is his understanding of history and the development of technology.

    He is apparently a believer in the Whig, or progressive, theory of history which claims that the development of ideas and theories is constantly improving over time. Each new theory is better than the one before because it is built on the previous one. Newer is better.

    This is contrast to the Kuhnian theory of the history of thought. Kuhn showed that once a central theme has grabbed hold of the scientific community it is taken for granted as a given. Nobody ever goes back and tests the central paradigm. If they do they are deemed heretics.

    This has been true of economics for the last 200 years since Adam Smith's The Wealth of Nations.

    It may also prove to be true that the case is the same for physics and cosmology. Gravity theory has reached its limits and is going nowhere. Scientists all around the world are wasting countless resources on assumptions that could very well be wrong. Electric Universe theory provides a much more reasonable explanation for the things that Gravity theorists can not explain.

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  12. Not sure your criticism of my knowledge of Hayek is supported. You could have said HOW, but you didn't. It is entirely possible that I misinterpreted your criticism based upon the limited content in your article, but it's very unlikely that I haven't digested Hayek. I think it's more likely that you're using temporal macro reasoning and missing my point about the rate of growth, because you're missing Cowen's point that technological change produces low hanging fruit followed by greater challenges. and if policy reflects that, it creates fragility ... And I think it's partly because you're simply discounting the use of parable for engaging the broader audience.

    Cowen's argument has merit. You're talking past him, and I suspect selectively reading the work. And from your arguments above, you're treating consumption as the only 'good', rather than the various forms of capitalization that must occur in order to perpetuate an economy, and a polity over the long run.

    If you're assuming that the chaos of consumer demand can perpetuate an economy and a polity then you simply have too little a grasp of history. Cowen is pointing out that we're increasing fragility in the polity.

    If you're assuming that satisfying niche demands with consumer goods is sufficient to propel a future economy, in the same way that we developed the past century then there isn't a lot of historical evidence that this is true. iF you're saying that knowledge is currently doubling every six months at the rate it doubled from zero to 1800 or so, then that's true. But that doesn't discount the problem of energy conversion. if you're saying that the unevenness of distribution of knowledge creates opportunity this is true, but only if Cowen is wrong that it creates only opportunity for 'easy' things.

    Your closing bit about the fed is correct. But that isnt' the point he's trying to get across to the audience.

    A polity makes an economy, no the other way around, and maintaining the polity is as important as maintaining the economy. Our polity is very fragile and we no longer have the vast west, and the ability to immigrate other europeans - which did not fracture the polity, nor do we have the advantage of the postwar era, nor do we hold exclusive advantage over the rest of the world. China is doing to us, what we did to europe in the 1870's.

    In biology the debate between Gould and Dawkins was largely over punctuated equilibria (Gould) or linear evolution (Dawkins). It's Cowen's similar argument here (as well as Fukuyama's somewhat more optimistic view). I'm not sure it's not also Nial Ferguson's underlying caution. It's certainly Hayek's caution. It's explicitly Taleb's caution. Yet It is the antithesis of the progressive view of human development.

    The book is about political economy. Understand it in that context.

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  13. @Zach Bush
    Please try to explain how you got that from what I said? I am absolutely not a supporter of constant change. The point I'm making is that Cowen is making a political point, not an abstract one. That we're creating fragility.

    Read Mandelbrot's recent works. Read Gould vs Dawkins. Anything by Popper. Obviously Kuhn is right. Which only reinforces Cowen's point. So, you're not making sense.

    However, the time scale matters. Like most arguments over complex outcomes, the determination of time scale - periodicity - determines the utility of any proposition. You're operating on a short time scale. I don't follow you closely so I can't comment on robert's broader reasoning like I can with Krugman, Smith, De Long and Thoma. So I don't know what biases he's working with.

    Noise and signal are different things at different periods.

    And, at scale, population size matters, and tend to smooth and explain a great deal of technical development. Technological regressions are often caused by plagues or war. Technical resistance comes from challenges to disruptive status signaling. (13th/14th century islam. The medieval church.) It also comes from a failure of institutional calculation technology keeping up with the complexity of the economy. (Chinese bureaucracy changing to rely upon morality rather than pragmatics, and current western accounting methods which perpetuate information laundering.)

    I'm not on the other side of the fence quys. I"m saying that you're criticism is weak, and unfounded, and I suspect that it's because you want Tyler to make the points you want him to, rather than those he has selected.

    Not that I'm immune from appropriating an argument for my own purposes... thats just part and parcel of the public debate. But I don't think you're doing it on purpose. ;)

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