Prologue: Open thread

[Aaron Swartz]

Hi, everyone. I'll follow Amelia's suggestion and try to kick off this
week's discussion. First, some quick notes. Amazingly, there are 30
people on this list. (Hi, everyone!) To get everyone started on the
same page, there are some useful links on the group page at
http://groups.google.com/group/bowles-l including the book's errata,
some lecture notes from a course gave on the book, and a downloadable
ebook version. Hopefully everyone's been able to use that or find a
paper copy and read the preface and prologue. The idea is to start
discussing that while people read chapter one by next Monday. But
these are just suggestions; feel free to email the list at any time.

Here's my brief summary of the prologue:

Bangladesh and Britain have seen an enormous reversal of fortune: in
1347, Bangladesh "abound[ed] in rice" while British workers ate poorly
and saw their wages fall. That changed dramatically, of course;
British workers saw their wages rise and gained political rights,
while those in Bangladesh saw powerful landlords take control. When a
legal reform gave more of the profit to the sharecroppers,
productivity increased dramatically. There seems to be a pattern:
countries rich in natural resources (minerals, fertile land,
indigenous labor), elites took control and kept workers down, lowering
their productivity. We've seen similar divergences in the former
communist countries, although the causes are less clear.

How can economics solve global poverty?

Economics has been dominated by a traditional school that believes in
perfect rationality and efficient markets. This book uses the same
kind of math and modeling, but focuses on (more realistic) cases where
not every detail can be contracted away, people are not perfectly
rational, and there's positive feedback effects (generalized
increasing returns) for many social actions (this is why even small
contributions can be enough to lift some people out of poverty).

This will help us focus more on real problems.

* * *

This made sense to me; my biggest question is about the details of the
different economic arrangements that explain the the differences in
economic growth. I read Ha-Joon Chang's _Bad Samaritans_ over the
weekend, and it makes a strong case that the biggest driver of
sustained economic growth is "import substitution industrialization
(ISI)", in which the government intervenes in the economy (thru
tariffs, subsidies, state-owned businesses, etc.) to spur the creation
of local industries that can replace some of the things the country
imports from outside. As the industry develops, it will be able to
export its creations to other countries, allowing it to employ more
workers at higher-productivity jobs. Dani Rodrik (_One Economics, Many
Recipes_) is much less clear, but talking to a friend who works in his
program, he seems to believe the same thing. (The villain here is the
IMF/World Bank/WTO, which forces countries to adopt the "Washington
consensus" that prohibits such policies.)

What's the market failure that makes government intervention work in this case?

What's the relationship behind these sort of internationally-oriented
policies and the domestic institutions Bowles seems to be talking
about?

Over the weekend I also read Peter Singer's _The Life You Can Save_,
which argues that people in rich countries are morally required to
contribute some of their income to the world's poorest people to help
lift them out of poverty. He cites programs like Oxfam and
Microfinance and Jeffrey Sachs' Millennium Villages which try to buy
resources (wells, livestock, hospitals, schools) to increase poor
people's productivity enough to
lift them out of poverty. Some of the microfinance people have found
that making loans to fund such acquisitions can actually be
profitable.

What's the market failure that prevents the for-profit sector from
purchasing these resources?

Does it make sense to pursue these kind of small-scale interventions
when institutional changes have such big effects?

And, of course, feel free to bring up any questions you have!

[Nathan Torkington]

On 17/08/2009, at 10:12 AM, Aaron Swartz wrote:
> I read Ha-Joon Chang's _Bad Samaritans_ over the
> weekend, and it makes a strong case that the biggest driver of
> sustained economic growth is "import substitution industrialization
> (ISI)", in which the government intervenes in the economy (thru
> tariffs, subsidies, state-owned businesses, etc.) to spur the creation
> of local industries that can replace some of the things the country
> imports from outside.

Side note:
My reading on this subject (I'm trying to figure out what New Zealand
should be doing to grow beyond its present grass-based economy) lead
me to Haussman and Klinger: <http://papers.ssrn.com/sol3/papers.cfm?abstract_id=939646
>. They say that industries cluster, so if you've got a mining
industry then you shouldn't intervene and expect a booming videogames
to spring out of nowhere. In NZ's case, this means moving from raw
meat and milk export to higher-value nutritional products built on
those.

> What's the market failure that makes government intervention work in
> this case?

I figure it's the initial loss and massive risk. Going from 0
companies in a space to 1 company to 5 to 10 is a long slow process,
because success comes from:
- technical knowledge (how do I fabricate this thing without the
stresses at this temperature weakening the materials and thus giving
us an inferior product?)
- market knowledge (X industry needs widget Y with features Z so
they can save M dollars every time they do N, which they do O times,
and A is a compatible trial customer, whose CEO B I met at a retreat
and is sympathetic and will tell us what we don't know)
- business experience (how to get loans from banks, how to conduct
business, when and how to hedge international finance transactions,
etc.)

In short, you need experienced people. And experience comes at a
cost: you make mistakes when you're inexperienced, failures that can
kill companies and take good people down with bad, so the government
is probably the only one willing to make this kind of long term
investment in an entire sector. VCs cherry pick companies, looking
for experienced teams, but I doubt that in the early days of an
industry there's not enough experience for a VC to feel comfortable.

In theory, though, governments have a lot of twisty allegiances to the
people who got them elected. This makes them less reliable investors
than people purely interested in making money: in theory, VCs want
exactly what the government wants--a big thriving business. However,
government may want to put industries in politically convenient
locations instead of commercially convenient locations, which adds
risk to the success of the venture.

> Does it make sense to pursue these kind of small-scale interventions
> when institutional changes have such big effects?

The idealist in me says they have to go hand-in-hand: feed the
entrepreneurial shoots, and clear the bureaucratic weeds so the shoots
can survive.

Nat

[Srikanth Thunga]

Hi All,

I think the prologue/introduction is too diverse in breadth to lead to meaningful discussions if everything is put in a single email. I think Aaron & Nathan related to different things depending on their exposures when they read the prologue/introduction. My mind went off in a totally different direction when I read the book. When I read the prologue emails, my mind was a little lost and the whole thing is getting too diverse/heavy for an introduction.

My concentration was mainly on what is economics according to this author (pg 15, 16), the structure of the book & how it is different from other books. But, this needn't be a separate thread as we are eventually going to relish those ideas later on in the chapters (hopefully)

I think by making the discussions this heavy initially will lead to confusion which in turn will lead to non participation.

Request: We can probably use the open thread for queries if someone has confusing thoughts in the prologue/intro but we should definitely go by Aarons initial suggestion to make subject lines convey the topic.

eg: Aarons email can be split into
1. Institutional Divergence leading to different outcomes leading to wealth and poverty.
2. Trade and Foreign Policies ( I think Chang has a consumption country bias where agriculture is not the mainstay? etc... & but we should discuss in a separate thread)
3. Government intervention in these policies...

With respect to Nathans email, I am not sure I have similar perspectives based on institutional design as my understanding of it is different. I am waiting for the ideas to be developed in the book before I would be able to comment/discuss on this.

Basically, I want to convey that the discussion topics have been very generic policy/economy/political discussion though they have taken a few essences from the book. Any discussion on these at this level might lead to less productive discussions.

Query: Can we keep the initial few discussions(till a logical step is reached) strictly to the chapters? There could be other discussions but probably the people capable of discussing those are not yet part of this group. I am sure we will all be capable one day of discussing but atleast I am not good enough yet to discuss the points raised by Aaron/Nathan.

What say?

I am just trying to bring clarity to discussions<as I am lost myself>. Sorry to Aaron/Nathan if I have been rude to either of you by taking examples of your emails.

Regards,
-Srikanth

[Chris Mealy]

I thought it might be helpful to go over a little of the jargon introduced in each chapter. I'm not proud, so if I get any of these wrong please share it with the group.

From the prologue:

Walrasian (p. 8, p. 15) - You know the classic supply and demand diagram? The one that looks like an X?  That's Marshallian supply and demand. It represents just one good. That's what undergrads learn in econ classes.  Walrasian supply and demand is the supply and demand for all goods in all markets simultaneously. That's what they teach in grad school. Walras's trick is to assume there is no time, all goods are sold instantly, all participants have perfect knowledge,  nobody pays any attention to what anyone else does, there's no strategic behavior, that returns aren't ever increasing, that there's no overhead, etc. This is the foundation of modern economics, and no, I'm not making this up.  This book we're reading is about what happens when you let those unrealistic assumptions go. Turns out that requires a lot of work: "Relaxing the canonical Walrasian assumptions to take account of non-contractual social interactions, adaptive other-regarding behaviors, and generalized increasing returns will require a method more empirically grounded and less deductive than the usual Walrasian approach." (p. 15). "If the exciting novelties of the Walrasian era were highly abstract theorems of surprising generality, the excitement in the coming years may come from compelling answers to such questions as are raised by the empirical puzzles concerning the wealth of nations and people ... it seems that a more problem-driven and less tool- driven approach will require yet more sophisticated tools. The mathematical demands of the theoretical framework I am proposing will be greater, not less, than that of the Walrasian paradigm." (p. 17) (Critics of mainstream economics usually complain about all the math. Bowles is going the other way.)

generalized increasing returns (p. 12) - Aaron mentioned this one already.  Diminishing returns is the assumption built into the classical view of both supply and demand.  But Bowles isn't just talking about that, he's talking about behavior in general. Think of the decision of what side of the road to drive on. If a majority picks one side, everybody is going to pick that side. Behaviors can snowball. Economists generally don't take this seriously enough.

endogenous and exogenous (p. 12) - exogenous variables are just given to you. They're the assumptions you start with. Endogenous things are the things the exogenous variable explain. It's the solution that your equation spits out.

stationary (p. 9, p. 12) - stationary is a statistical term.  The idea is that your answer, the average, the unemployment rate, etc, doesn't move around.  You take your statistical sample or your economic variables or whatever, and it gives you the same single answer every time.  The point Bowles is making here is that even when people drop the rigid Walrasian assumptions they still often use models that lead to one answer, which may not be realistic. Sometimes people wind up driving on the left, sometimes on the right.

evolutionary irrelevant equilibria (p. 16) - I think what Bowles is saying here is that human nature puts limits on where people's preferences and behaviors wind up, and using our knowledge of what those bounds are will help us understand economic systems. I don't think he's talking about nature vs. nuture. I'm guessing he's talking not assuming things economists often assume, like that people live forever and have perfect foresight.

I hope this helps! It helped me, so I'm going to keep doing it anyway.

-- Chris

[Elizabeth Stark]

Hi all,

Excited to be a part of this group, and to contribute to the discussion!

First, as to the more procedural side of things, I'm up for discussion on a variety of subjects, but given the variety of levels of familiarity with the topic matter, it might be best to relate whatever discussions we may be having back to the book, at least at first.

Second, I must say I'm really enjoying Bowles' approach these issues so far, particularly his focus on real world problems. He clearly and succinctly points out one of the huge issues with the way economics has evolved as a discipline: the completely insane assumptions made by many in the field (the fiction of the rational actor for one), such that the predicted outcomes have very little relation to reality, if at all. I also really like how while he advocates for the importance of institutions, he acknowledges that they are only one part of a successful development strategy, and not the sole answer.

One thing I find frustrating in other economic literature is broad conclusions along the lines of "well, Korea did it this way, so it must work in other places, too!" I like how Bowles, even when listing examples to back up his arguments, also acknowledges some exceptions and anomalies (e.g. p. 6). I've often been an advocate for more culturally aware approaches to development, and I could see strains of this in his analysis. And in considering development from a postcolonial perspective, in/decreasing generalized returns do make a huge difference.

In reading that at the turn of the 18th century, Barbados and Cuba had a 50% higher per capita income than the colonies that were to become the US, I couldn't help but wonder what the level of wealth disparity was. Were many of the residents better off, or were there a few very rich overloads that reaped virtually all of the rewards? (I'll have to check the Sokoloff and Engerman paper for answers.) But one issue that I think is worth raising is despite per capita GDP numbers, income distribution and wealth disparity still very much matter. Interestingly, Bowles does not make mention of the Gini coefficient in the book, one of the main measurements of income distribution, and although I may be getting ahead of myself here, I've started to wonder why. And I'm sure we can spend ages debating the merits of the use of per capita GDP as an indicator of wealth if we so desire. ;)

Looking forward to your thoughts.

Best,

Elizabeth

[Benj. Mako Hill]

Thanks everyone for your comments so far! I'm already finding this a
very useful way of exploring a book that I started a while ago and
didn't finish. This looks like a great group!

As someone approaching this from the organizational and economic
sociology end of things, I was most taken by the very conciliatory
overtures that Bowles seems to be making toward other disciplines in the
social and behavioral sciences --- sociology and psychology, of course,
but also ecology and biology.

"Economics" is a confusing term in that it refers both to a phenomena
but has also come to refer to a discipline --- essentially, a set of
methods based around formal mathematical modeling. Bowles alludes to
this when he describes Smith, Mill and Marx as *nondisciplinary*. Bowles
is frustrated with the cost of this disciplinary focus in economics,
and so am I!

In general, I'm excited by efforts to bring together different social
science disciplines but am realistic about the fact that it rarely ends
up as particularly satisfactory to the parties being synthesized. There
is a sense in which these efforts can acts as a form of land-grabbing
--- especially since economics is the dominant player in the field.

Bowles language of, "confirming and extending earlier work by other
social scientists," sounds wonderful. But even with the best intentions,
these efforts often end up reinventing well established fields or taking
over "turf" claimed by another discipline. This turf-warring is
divisive and unproductive at best (see the ASR article on the subject by
Zuckerman 2004 for one argument against it in sociology).

That said, interdisciplinary synthesis building on established knowledge
and methods from multiple methods and literatures is the best kind of
social science. I'm optimistic and looking forward to the rest of the
book!

Regards,
Mako

--
Benjamin Mako Hill
ma...@atdot.cc
http://mako.cc/

Creativity can be a social contribution, but only in so far
as society is free to use the results. --GNU Manifesto