Tyler Cowen's Blog, page 306

*The Bet*

The author is Paul Sabin and the subtitle is Paul Ehrlich, Julian Simon, and Our Gamble over Earth’s Future.  I found this book informative, charming, and highly readable.  Here are a few excerpts:

Ehrlich later described his political development as a “natural progression.”  “I didn’t stand up one day and say ‘My God, I’m going to get everybody to stop [fuck]ing.’  It’s sort of one thing led to another.”

But Julian had a very different temperament:

…Simon also helped support himself in college with the winnings he took away from a regular poker game, often staying up until dawn during his senior year.  He did not suffer fools lightly, but his close college friends thought him a terrific companion.  Simon was curious and funny.  He was interested in a broad range of people…

And my favorite part is this (with apologies to Bryan Caplan):

“You can’t choose your relatives,” Simon later wrote.  “But one can imagine.”  His dream family consisted of a roster of famous theorists, some of them notable conservatives: “William James as my father, Hayek as my uncle, Milton Friedman as my older brother, Theodore Schultz as my thesis adviser, and David Hume as my idol.”

Recommended (who was the dream mother?).  There is a good WSJ review of the book here.

Addendum: Here is a new research paper on testing the Prebisch-Singer hypothesis about resource prices over time.

The global decline of the labor share

That is the new paper by Loukas Karabarbounis and Brent Neiman, and the abstract is this:

The stability of the labor share of income is a key foundation in macroeconomic models. We document, however, that the global labor share has signi�cantly declined since the early 1980s, with the decline occurring within the large majority of countries and industries. We show that the decrease in the relative price of investment goods, often attributed to advances in information technology and the computer age, induced fi�rms to shift away from labor and toward capital. The lower price of investment goods explains roughly half of the observed decline in the labor share, even when we allow for other mechanisms influencing factor shares such as increasing pro�fits, capital-augmenting technology growth, and the changing skill composition of the labor force. We highlight the implications of this explanation for welfare and macroeconomic dynamics.

In other words, capital-labor substitutability is very real.  The full piece is here (pdf).

My TechCrunch interview about *Average is Over*

It was done with the excellent Andrew Keen, here is part of their write-up:

…Cowen isn’t a dystopian and he doesn’t believe that smart machines are taking jobs from human beings. ‘The smartest and most successful people in the future, he believes, will manage the smart machines. And as these smart machines become more central in how we manage our education and healthcare, he says, “human psychology” – the art and science of motivation – will become increasingly valuable. This is what he calls “the next big thing.” In the future, Cowen insists, power will lie with the humans who partner with rather than own the algorithm. And in this age of the smart human/machine partnership, traditional algorithm-centric companies like Google will be old businesses – “like GM”, he predicts.

“Marketing”, Cowen writes in Average Is Over, is the “seminal sector for our future economy.” But Cowen’s intriguing definition of marketing lies in figuring out how to motivate people and to get them to feel better about themselves. Everyone in the future economy – from doctors to educators to entrepreneurs – will be coaches. But who is going to own the operating platform in the age of the smart machine? That’s the trillion-dollar question which even Tyler Cowen isn’t smart enough to answer.

You can pre-order my book on Amazon here.  On Barnes and Noble here.  On Indiebound.org here.  And from Penguin here.

Assorted links

1. Do markets care who chairs the central bank? (pdf)

2. Indian banks are possibly in trouble.

3. al Qaeda is looking for ways to counter drone attacks.

4. Urbanization and China’s unbalanced growth.

5. Perry Mehrling’s Coursera course on money and banking.

6. How lucky are chess world champions? (this research is done by an economist, by the way).

7. Why Ronald Coase was chased out of UVA.

It’s the success stories that worry me

Also known as “the economy that is Germany,” Adam Posen offers a very good analysis:

Since 2003 a falling unemployment rate has been the consequence of the creation of a large number of low-wage and part-time or flexitime jobs, without the benefits and protections afforded earlier postwar generations. Germany now has the highest proportion of low-wage workers relative to the national median income in western Europe. Average wages increased by more than inflation and productivity growth in the past year for the first time after more than a decade of stagnation.

…Germany’s productivity growth has been low compared with its peers. Growth in gross domestic product per hour worked is 25 per cent below the OECD average, whether one goes back to mid-1990s or looks at just the past decade – and whether or not one excludes the bubble years for the US and UK. With these productivity numbers, it is no wonder German business is competing only by reducing relative wages and moving production east.

There is much more here at the FT, the piece is interesting throughout, though I am skeptical of Posen’s claim they could have done much better than they did.

Quantitative Economics

Quantitative Economics is a new online text from John Stachurski and Thomas J. Sargent that looks phenomenal.

This website contains a sequence of lectures on economic modeling, focusing on the use of programming and computers for both problem solving and building intuition. The primary programming language used in the lecture series is Python, a general purpose, open source programming language with excellent scientific libraries.

…At this stage, the level of the lectures varies from advanced undergraduate to graduate, although we intend to add more elementary applications in the near future. The lectures are suitable for courses in quantitative methods and computational techniques, and also for self study and independent study groups. To aid self study, all exercises have solutions. Our solutions are not the last word on each exercise — instead they provide one approach that demonstrates good coding practices

If you work through the majority of the course and do the exercises, you will learn

how to analyze a number of fundamental economic problems, from job search and neighborhood selection to optimal fiscal policy
the core of the Python programming language, including the main scientific libraries
good programming style
how to work with modern software development tools such as debuggers and version control
a number of mathematical topics central to economic modeling, such as


dynamic programming
finite and continuous Markov chains
filtering and state space models
Fourier transforms and spectral analysis

I recommend you take the advanced undergraduate bit with a grain of salt.

Hat tip: Nathan Palmer.

The Autor, Dorn, and Hanson paper on trade and technology

Several other bloggers already have covered this important paper, but there remain underexplored details.  Overall the main result is that trade has had more of a negative impact on employment than we used to think.  I won’t attempt a summary, but here are a few further results of note:

1. In the Providence, Rhode Island area the trade exposure to China for 2000-2007 went up by $3,490 per worker.  For New Orleans the same increase was only $490 per worker.

2. Technology gains and mechanization in a region do not predict employment declines, but they do predict polarization of wage returns.  (I do think that automation will create problems for labor markets, but I think that issue is more about our future.  It also was true, for a while, in our more distant past, as outlined by David Ricardo.)

3. The negative employment effects of technology on manufacturing jobs peaked in the 1980s, and since have declined.  The negative employment effects of technology on service sector jobs have been rising.  On net the effect on employment across all sectors has stayed roughly constant over the last few decades.

4. Women and older workers are those most likely to lose their jobs because of technology.

5. The employment effects of exposure of a region to Chinese imports are significant.  A good deal of this effect works through the labor force participation rate rather than through measured unemployment per se.  This by the way is one indication that the labor force participation rate does contain relevant information about the health of the labor market.

6. The authors classify jobs into the categories of abstract, routine, and manual, and suggest that routine jobs are most vulnerable to automation.  Maybe, but I would not take this for granted.  Better software in a car can forestall mechanical problems, and thus replace the manual labor of the automobile mechanic, even if we cannot imagine how a robot could itself do the car repair work.

Assorted links

1. Robin Hanson on automation and wealth.

2. Currency substitution models as they curse India, and what India should do.  And problems with Indian land reform.

3. Will Big Data bring more price discrimination?  And Diane Coyle on starfish, economics, and Average is Over.

4. Are bicycles better than cash? (pdf)

5. China’s dilemma concerning interest rates and financial repression.

6. Short, nostalgic autobiography of Scott Sumner, who also loves Knausgaard.

Herbert Simon on stagnation and automation

In his review of a prescient work called The Shape of Automation (1966), by Herbert Simon, a manifold genius who would go on to win the Nobel Prize in Economics, Heilbroner scoffed at Simon’s notion that the average family income would reach $28,000 (in 1966 dollars) after the turn of the century: “He has no doubt that these families will have plenty of use for their entire income. . . .  But why stop there? On his assumptions of a three percent annual growth rate, average family incomes will be $56,000 by the year 2025; $112,000 by 2045; and $224,000 a century from today. Is it beyond human nature to think that at this point (or a great deal sooner), a ceiling will have been imposed on demand—if not by edict, then tacitly? To my mind, it is hard not to picture such a ceiling unless the economy is to become a collective vomitorium.”

Simon responded drily that he had “great respect for the ability of human beings—given a little advance warning—to think up reasonable ways” of spending that kind of money, and to do so “without vomiting.” He was right about that, of course, even though he was wrong about the particular numbers. Nobody at the time foresaw the coming stagnation of middle-class incomes. His estimate of the average family income in 2006 translates into more than $200,000 in current dollars.

That is from an excellent piece by Daniel Akst on what we can learn from the automation crises of the 1960s.

Coase and Spectrum Auctions

The Coase theorem was first presented by Coase in his 1959 work on the FCC and allocating radio spectrum (jstor). Radio stations interfered with one another (i.e. externalities). Yet Coase argued that with well-defined property rights, spectrum could be allocated in a market just like other goods. In this talk from our MRUniversity course, Economics of the Media, I discuss spectrum allocation, Coase’s triumph at the Chicago dinner and the much longer time to acceptance and application in the real world of the FCC and spectrum auctions.