Monthly Archives: May 2015

Link Parade: 5.29.15

This is a very old and thoroughly discredited idea, one that dates back to Karl Marx and to the anti-capitalists who preceded him. It is a facet of the belief that free markets are irrational, and that if reason could be imposed on markets — which is to say, if reason could be imposed on free human beings — then enlightened planners could ensure that resources are directed toward their best use. This line of thinking historically has led to concentration camps, gulags, firing squads, purges, and the like, for a few reasons: The first is that free markets are not irrational; they are a reflection of what people actually value at a particular time relative to the other things that they might also value.

People who read Thaler’s list might well just shrug and say, “there isn’t anything here that any good used car salesman doesn’t know.” That’s the point: It’s obvious to anyone who pays any attention at all to himself or his fellow human beings that we are not maximizers, or optimizers, or logical, or even all that sensible. In the early 1970s, when Thaler was a student, his professors didn’t argue that human beings were perfectly rational. They argued that human irrationality didn’t matter, for the purpose of economic theory, because it wasn’t systematic. It could be treated as self-cancelling noise.

  • I’d be a spokesman for the 3M/MT if asked.

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Adam Smith and his Inflated Reputation

Adam Smith is widely regarded as the progenitor of all economics–the singularity, the common ancestor of all economists, the beginning.

This is wrong.

Turgot, Cantillon, mercantilism, scholasticism, and Aristotle predate Smith among many other economic ideas and people who wrote about economics. All are featured in part one of Rothbard’s history of economic thought, aptly titled Economic Thought before Adam Smith, where you find this gem of a quote:

Adam Smith is a mystery in a puzzle wrapped in an enigma. The mystery is the enourmous and unprecedented gap between Smith’s exalted reputation and the reality of his dubious contribution to economic thought.

And in Wages and Capital, you can almost hear F.W. Taussig sigh when he says,

During the first half of the present century […] it was the custom to treat all earlier contributions to economic thought as of little account, and to begin the history of the subject with the Wealth of Nations.

He goes on to delineate Smith’s versus others’ contributions in a kinder way than Rothbard:

On some subjects, and notably on those which most attracted the attention of his contemporaries, Adam Smith gained much and directly from his predecessors. The mercantile ideas, in their cruder forms, had been refuted by a long series of writers, by North and Hume among the English, by Boisguillebert, Cantillon, and the whole line of the Physiocrats. The functions of money in domestic and in international trade had been fully and adequately discussed by these writers ; and much had also been done toward clearing up the subject of money by writers who, like Locke and Steuart, were still befogged on international commerce and the balance of trade. On credit, paper money, and banking there had been active discussion since the close of the seventeenth century, when banks began to exercise their functions on a considerable scale, and paper-money experiments came to be tried in almost every form. Adam Smith was abundantly familiar with the literature of his subject, and accepted without hesitation what had been accomplished by his predecessors. The famous attack on the mercantile sys- tem bears, indeed, the unmistakable marks of his vigorous and independent mind, in the reasoning as to the limitation of industry by capital, and in the general discussion of foreign trade. But the ground had been prepared for it by a long line of writers; and the upper tier of the educated public was prepared to accept ‘his views at once.

The subjects of production and distribution show Adam Smith, not perhaps at his best, but at his freshest. Here he broke new ground. On the division of labor and its causes and effects, the functions of capital, the partition of income into wages, profits, and rent, the causes determining the amount of each form of remuneration, on all these topics he started economic thought on new lines, and on lines that have been substantially followed since his time. The very novelty of his investigation made it inevitable that his results here should be more crude than on the subjects which had been worked over by two or three generations of previous thinkers ; a defect which, rightly considered, makes the debt of science to him so much the greater.

Even on these subjects, it would be a mistake to consider Adam Smith as an unaided pioneer. The division of labor, and its consequences in bringing exchange and necessitating a medium of exchange, had been noted by a long series of writers, from ancient times to modern. Further, some stimulus to his thought on capital doubtless came from the general reaction against the treatment of interest and money by the mercantile writers. The older and cruder notions as to the importance of an abundance of specie had been effectually exploded before he began. As these exaggerations in regard to the importance of plentiful specie crumbled away, it was inevitable that other ideas connected with them should be overhauled and reshaped. The function of money having become clear, interest could no longer be explained as affected simply by the abundance or scarcity of money. The better understanding of the medium of exchange, again, directed attention to the nature and qualities of the commodities whose barter was seen to be facilitated. All this paved the way to the consideration of real capital, and the real machinery of production. In such indirect ways Adam Smith probably got a stimulus to his speculations on capital and interest, and so, by a natural progression, on capital and wages.

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Chipotle vs. Moe’s: The Magnolia Street Burrito Showdown

Two goods are substitutes when the price of one increases and demand for the other increases. This phenomenon unfolds every week for me–the two goods being  burritos from Moe’s and Chipotle.

Every Monday, Moe’s offers a great deal on their burritos, conveniently called the “Moe Monday” deal. All burritos, from the Jr. Joey Bag of Donuts to the colossal Homewrecker, are $5.75, no matter the meat. This deal is hard to beat and hard to pass up.

Chipotle has no such deal.

And so, every week, substitution effects inexorably infiltrate my preferences, increasing my demand for Moe’s on Mondays–only on Mondays.

This is a bigger deal than it sounds, because I was for a long time a strict Chipotle apostle and evangelizer. Classmates wouldn’t even bother asking me where I wanted to go to lunch, in the same way you wouldn’t ask somebody wearing a clerical collar where they go to church, or invite somebody wearing a yarmulka over for a pork butt BBQ.

Over time, though, and because of the Moe Monday deal, Moe’s has grown on me. It’s a tex-mexistential crisis.

Let’s weigh the pros and cons for both.

  • Chipotle’s guacamole is the best–no exaggeration. It’s the best guacamole I’ve ever had. Moe’s’ guacamole was just a green paste, but they’ve redone their recipe. It’s not the best, but it is good. Chipotle wins the guacamole game.
  • Moe’s includes chips and a great salsa bar with their meals. The Who is Kaiser? and tomatillo salsas are my favorite. The Pineapple Cucumber salsa is surprisingly good, too, when they have it. Chipotle’s chips are an extra charge (on top of their already more expensive menu) and are just sitting behind the register in brown bags at room temperature. Moe’s is the chips and salsa champion.
  • Chipotle’s grilled veggies are fresh and flavorful. Moe’s’ veggies are less so, and sit in watery juices so they’re on the soggy side. I declare Chipotle’s veggies victorious.
  • As mentioned before, the Moe Monday deal is fantastic. At Chipotle, you have to work hard to keep your lunch bill under $10. It often means making trade-offs like no meat in exchange for the guacamole, or no guacamole in exchange for the chips or a drink, etc. Moe’s wins the price prize.
  • Chipotle raised the bar for the quality of their ingredients, and Moe’s has conformed to the new standard. Both have responsibly raised, hormone-free, and antibiotic-free meats (or do their best to have them). The steak comes from grass-fed cows (!). The guacamole is made fresh at both locations. I’d say Chipotle has higher quality ingredients when all are considered, but Moe’s is catching up. Chipotle is the narrow innards winner. Say that five times fast.

In conclusion, I have no conclusion. If it’s Monday and you’re hankering for a burrito, give Moe’s a try. On other days, Chipotle may be the better choice.

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Link Parade: 5.22.15

I just read On Writing Well by William Zinsser a few days before he died last week. The book was great, but I especially appreciated his treatment of political speech and writing. Politicians take circuitous, winding routes to say what they want to say, and rely on a lot of platitudes. FEE acknowledged his passing and his remarks on F.A. Hayek’s writing.

Kansas has started charging fees for cash withdrawals of $25 or more for welfare recipients. Not really a part of what is now being called the “War on Cash” (since it is through welfare–if we are going to have public welfare, it should be in-kind), but we can still point to it as an example of the government discouraging the use of cash to have more oversight on people’s purchases and the use of their money.

Great posts on the Mises blog this week, including David Gordon on knowing the great thinkers in the history of economic thought, Ryan McMaken on the beepocalypse and the Fed’s performance on the Amazon bestseller listCarmen Dorobăț on the UK’s response to “negative inflation” (speaking of political language), and (obviously as a “best-of” type post) Rothbard on Adam Smith.

Adam Smith (1723-90) is a mystery in a puzzle wrapped in an enigma. The mystery is the enormous and unprecedented gap between Smith’s exalted reputation and the reality of his dubious contribution to economic thought.

Robert Murphy on people complaining about 88 cent gallons of water. I actually use these for coffee in the morning. Makes a much fresher tasting coffee than water from the tap.

Having a bad week? At least you (probably) didn’t lose $15,000,000,000.

 

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Thou Shalt Not Overcomplicate Things

Justin Fox has a short piece at Bloomberg View that asks “What’s Wrong With ‘Mathiness’ in Economics?

He begins by characterizing (caricaturizing?) the pre-math economics profession as confused and garrulous philosophers:

Once upon a time economists made their arguments in long, discursive, often contradictory books…

Thankfully, Paul Samuelson brought math to the field like Moses brought the Ten Commandments down from Mount Sinai to the lost and wayward Israelites.

In the 1940s Paul Samuelson of the Massachusetts Institute of Technology brought enlightenment, in the form of elegant mathematical treatments of the major concepts in economics.

[…]

Samuelson’s approach gave the discipline a, well, discipline that it had previously lacked, and enabled economics to make great leaps in coherence and rigor.

But, just a few words later, Fox admits that

It also made the field incomprehensible to laypeople, but that turned out to be more a feature than a bug. Economists were seen as possessing unique scientific knowledge, and came to play increasingly prominent roles in public life in the U.S. and elsewhere.

Although I disagree with his first characterization of the pre-math economics and his regard for Samuelson’s influence, this last bit is where I want to parley with Fox.

The incomprehensibility of the math to the laypeople is the primary piece of evidence in the indictment against the current “mathiness” of economics. Economics is the study of those regular, ordinary laypeople making choices. Ordinary people make choices all the time, and so describing the nature or logic of their choices should be intuitive to them.

This does not mean that everybody automatically knows all of the deep and varied conclusions of economics just by making choices. It means that any explanation of how choice and interaction with other people making choices (like in markets) should be digestible without an advanced degree in another field like math or statistics. Choice and market interaction are so mundane and ubiquitous, explaining how they work should be simple, right?

I use this example frequently but it fits in well here: When you walk down the grocery store aisles, are you taking derivatives of utility functions? Or are you weighing your preference for each good against others and the money you are prepared to spend at the register?

Which of these two explanations for how people make choices would serve as a better foundation for the science that purports to study individuals making choices?

Fox doesn’t really answer the question posed in the title of his article: “What’s wrong with ‘mathiness’ in economics?” He just comments on Romer’s beef with the way mathematical models are overused and abused by even Nobel-winning economists. Fox quotes Romer:

Presenting a model is like doing a card trick. Everybody knows that there will be some sleight of hand. There is no intent to deceive because no one takes it seriously. Perhaps our norms will soon be like those in professional magic; it will be impolite, perhaps even an ethical breach, to reveal how someone’s trick works.

And I say no more magic. Drop the smoke, the mirrors, the rabbits, and their hats. Let’s drop the pretense–it is, after all, a violation of the Ninth Commandment.

You shall not bear false witness against your neighbor. (Exodus 20:16 ESV)

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The Broken Window Fallacy, Broken Down

Published on Medium.

It’s a longer piece, but with pretty pictures and some humor sprinkled in.

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Defining economics

Today’s the first day of class for the Summer I term at Auburn, so I get to introduce and define economics for a fresh crop of students.

Economics is the study of individuals making choices. Since humans are the focal point, economics fits in the social science category, along with psychology, political science, sociology, and other fields. Economics differs from the others by asserting the primacy of the individual and asking “what sort of things pertain to all choices by anybody, not just certain types of people in certain situations?” The short answer is scarcity. The fact that the things that make us happy and help us survive don’t exist in superabundance is why we have economics. Every choice ever made by anybody was caused by scarcity. No scarcity, no choices, no economics.

“Selecting something over something else” implies a means-end causal connection. Our ends are our desires, or our wants. Means are anything that help us satisfy our ends. We can also call means “goods”. So, we select something over something else in order to satisfy an end by using a good.

The means at your disposal and the ends they satisfy exist in an array, a list, or a ranking. Said another way, satisfaction or happiness in the economic sense is ordinal, not cardinal. Our preferences are also invisible to others and reside only in our own singular mind, so they are subjective, too. Preferences are ordinal and subjective.

Preferences give way to opportunities to exchange and therefore prices, production, the division of labor, and supply and demand, all of which make up the body of thought we know as economics.

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