Plato-lite

Brad Delong writes by way of Plato:

Agathon: "Under appropriate conditions of perfect competition, non-increasing returns, and the absence of externalities the market's decisions about the production and allocation of goods and services attain a point on the Pareto frontier. Every point on the Pareto frontier maximizes some social welfare function."

Glaukon: "Yes, of course."

Agathon: "Therefore the market, considered as a collective mechanism for making social decisions, chooses to maximize a particular social welfare function. It is instructive to consider what that social welfare function is."

Glaukon: "I resent the tone in which you are talking down to me."

Agathon: "You do not. This part of this conversation never took place in even approximate form in the real world. It is interpolated in order to bring readers of this weblog up to speed. Since I never said my last speech to you, you could not have resented it."

Glaukon: "And I want readers of this weblog to know that I am considerably smarter and more clued-in than he is letting me appear to be."

Agathon: "Are you quite finished?"

Glaukon: "Plato at least worked harder to make his information dumps fit more gracefully into the conversation. I want a better author.

Agathon: "Are you quite finished?"

Glaukon: "Yes."

Read the whole thing!

The Black Swan

I know Nicholas Taleb's stuff is widely read and interesting, and the current crisis seems to have vindicated him but I found The Black Swan well-nigh unreadable -- not for its content, but it's style, it kept circling around its main point but never made it (at least in the first 30 pages, which is when I stopped reading).

Of course this was half a year ago. Now I wish I'd read it. But may be I should go back and give it a try.

UPDATE:
See here for another viewpoint.

UPDATE#2:
Here's an example of Taleb's murmurings that makes The Black Swan unreadable.

A kick in the balls

Jon Chait is probably the funniest political journalist writing today. If you want an example, read his column on Ari Fleischer's (the former Bush administration spokesman) WSJ column on the tax code. I'll only quote his kicker of an ending here (see the two photographs for illustration):

I'll give Fleischer the benefit of the doubt here and assume that this isn't an outright lie, but rather he couldn't read the table correctly. Let me explain it this way, Ari: Suppose that a few years ago, 37 percent of your scalp was covered with hair. Today, only 31 percent is. Would you say that your hair has increased or decreased over that time?

specters of marx

Via Brad Delong's blog:

The Five Karl Marxes:

Communist revolution is necessary and inevitable because...

The Technology Marx: ...capital is not a complement to but a substitute for labor, and so technological progress and capital accumulation that raise average labor productivity also lower the working-class wage. Hence the market system cannot and will be seen to be unable to deliver the good society we all deserve, and it will be overthrown.

The Market Extent Marx: ...businessmen continually extend the domain of captalism, and competition from poor workers in newly-incorporated peripheral regions puts a lid on the wages of labor. Hence inequality grows in the core, and triggers revolution.

The Unveiling Marx: ...previous systems of hierarchy and domination maintained control by hypnotizing the poor into believing that the rich in some sense "deserved" their high seats in the temple of civilization. Capitalism unveils all--replaces masked exploitation by naked exploitation--and without its ideological legitimation, unequal class society cannot survive.

The Ideology Marx: ...although the ruling class could appease the working class by sharing the fruits of economic growth, they will not. They are trapped by their own ideological legitimation--they really do believe that it is in some sense "unjust" for a factor of production to earn more than its marginal product. Hence social democracy will inevitably collapse before an ideologically-based right-wing assault, income inequality will rise, and the system will be overthrown.

The Solidarity Marx: ...factory work--lots of people living in cities living alongside each other working alongside each other develop a sense of their common interest and of class solidarity, hence they will be able to organize, and revolt.

Who is the real Marx? Ah, grasshopper, not until you have learned not to ask that question will you be able to snatch the pebble from my hand...

That strikes me as a nice concise of summary of all the different aspects of Marx's work.

Dear Economist

I just love the Financial Times!!

Natasha asks:

Dear Economist,

I have been going out with a school friend for nearly a year and I think he’s “the one” - but we are heading off to university at opposite ends of the country. Will the relationship survive? Is there anything I can do to keep it going?

Yours sincerely,

Natasha, Co. Durham

The economist replies:

Dear Natasha,

I understand your concern, but your future looks bright. A long-distance relationship will always put pressure on both of you, but it’s a question of how you use that to your advantage.

Economist Tyler Cowen, a professor at George Mason University, has pointed out that the Alchian-Allen theorem applies to any long-distance relationship.

The theorem, briefly, implies that Australians drink higher-quality Californian wine than Californians, and vice-versa, because it is only worth the transportation costs for the most expensive wine. Similarly, there is no point in travelling to see your boyfriend for a take-away Indian meal and an evening in front of the telly. To justify the trip’s fixed costs, you will require champagne, sparkling conversation and energetic sex. Insist on it.

Meanwhile, optimal- experimentation theory suggests that at this tender stage of life you are highly likely to meet someone even better. Socialise a lot while your boyfriend is not around.

Finally, consider your bargaining strength with potential new boyfriends with regard to, for instance, who pays for dinner. Your best alternative to a negotiated agreement with the new boyfriend is. your old boyfriend, who by your admission is an excellent catch.

This puts you in a sound negotiating position - unless, of course, the boy is maintaining a long-distance relationship of his own.

milton friedman

From Brad DeLong's obituary for Milton Friedman (who died yesterday):

Gen. William Westmoreland, testifying before President Nixon's Commission on an All-Volunteer [Military] Force, denounced the idea of phasing out the draft and putting only volunteers in uniform, saying that he did not want to command "an army of mercenaries." Friedman, a member of the 15-person commission, interrupted him. "General," Friedman asked, "would you rather command an army of slaves?" Westmoreland got angry: "I don't like to hear our patriotic draftees referred to as slaves." And Friedman got rolling: "I don't like to hear our patriotic volunteers referred to as mercenaries." And he did not stop: " If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general. We are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher." As George Shultz liked to say: "Everybody loves to argue with Milton, particularly when he isn't there."

Via Indian Economy Blog, two reports that Friedman wrote on India are here and here. The first is a memorandum to the Government of India recommending certain policies, the latter -- particularly prescient -- is Friedman's critique of India's Planning model. He makes, for me, two interesting points. The first is that Planning, especially the Soviet model that India followed, could only have worked in an authoritiarian top-down society, like Russia's or China's, not in a democracy-with-private-property like India. More than that:

Though Indian economic planning is cut to the Russian pattern, it operates in a different economic and political structure. Agricultural land is almost entirely privately owned and operated; so are most trading and industrial enterprises. However, the government does own and operate many important industrial undertakings in a wide variety of fields-from railroads and air transport to steel mils, coal mines, fertilizer factories, machine tool plants, and retail establishments; Parliament has explicitly adopted “the socialist pattern of society” as the objective of economic and social policy; a long list of industries have been explicitly reserved to
the “public sector” for future development, and the successive plans have allocated to public sector investment a wholly disproportionate part of total investment - in the third five-year plan, 60 percent although the public sector accounts at present for not much more that a tenth of total income generated. In addition, the government exercises important controls over the private sector: no substantial enterprise can be established without an “industrial” license from the government, existing firms must get government allocations of foreign exchange and also of domestic products in the public sector; and so on in endless variety.

The difference between India and Russia in political structure is at the moment even sharper that in economic structure. The British left parliamentary democracy and respect for civil rights as a very real heritage to India. Though I very much fear that this heritage is being undermined and weakened, as of the moment it is still very strong indeed. There is tolerance of wide range of opinion, free discussion, open opposition by organized political parties, and judicial protection of individual civil rights-except for recent emergency actions under the Defence of India Act. The kind of centralized economic planning India has adopted can enable a strong authoritarian government to extract a high fraction of the aggregate output the people for governmental purposes - Russia is a prime current example and China, though we know much less about her, may be another; Egypt under the Pharaohs is a more ancient example. This is one way, and I believe almost the only way, in which such a system can foster economic growth-if the resources extracted are indeed used for productive capital investment rather than for arms or governments. But this advantage- if advantage it be - of centralized economic planning, India is not able to obtain precisely because of the difference between its economic and political structure and those of Russia or China.

And then, he hits on what exactly makes a strong state (without any checks and balances) dangerous: the contrast between what he calls (tweaking John Kenneth Galbraith's phrase) public affluence and private squalor.

Whether because of the adoption of the Russian model of economic planning or for other reasons. Russia and India have one feature in common that strongly impresses the casual visitor. In both, if I may pervert a phrase made famous by our present Ambassador to India, there is a striking contrast between public affluence and private squalor. In both countries, whenever one sees a magnificent structure, newly built or well maintained, the odds are heavy that it is governmental. If some activity is luxuriously financed and well provided for, the odds are that is governmentally sponsored. The city in India which showed the most striking improvement since my earlier visit was New Delhi, with impressive new governmental buildings, residence and luxury hotels. I should add that although the public affluence is not notably different in the two countries, the private squalor is much worse in India than in Russia.

This strikes me as true even today, as high-rises and shopping malls in Indian metropolises co-exist side by side with slums and all the combined miseries on this earth. Friedman's critique of India's "mixed" economic model makes a lot of sense, but I'm not sure that we had any alternative in those days after Independence. I interpret his point as one of efficiency: even as the State in India grew and grew and reached monstrous proportions (emplyoying, I believe, more than 50% of the working population), no effort was expended in making it more efficient. Regulation can work, and developing societies need regulation in order that they not make the same mistakes that today's industrialized economies made when they were in the throes of the industrial revolution and unfettered capitalism. But regulation also needs efficient institutions (and an efficient Government) in order to make it work and in order that it can encourage economic growth, which is what any free society needs.

I'll go on and quote Friedman's last sentence, almost eerily prescient, and without fifty years of hindsight:

It will, I fear, take a major political or economic crisis to produce a substantial change in the course on which India is no set in economic policy, and I am not at all optimistic that such a crisis if it occurs, will produce a shift toward greater freedom rather than toward greater authoritarianism.

There was indeed a major economic crisis and it did provoke change (reversal is a better word) in economic policy, but I'm happy to say that so far at least, we seem to have come out of it fine. What happens ahead is, of course, no one really knows.