Tyler Cowen's Blog, page 552

The Secret Agreement that Revolutionized China

In our principles textbook, Modern Principles: Macroeconomics, Tyler and I illustrate the importance of property rights with the incentive effects of collective farming and the secret agreement of Xiaogang village. We write:

Farmers from 18 households in Xiaogang signed a secret life-and-death agreement ending collective farming with their thumbprints. (From Cowen and Tabarrok, Modern Principles: Macroeconomics)

The Great Leap Forward was a great leap backward – agricultural land was less productive in 1978 than it had been in 1949 when the communists took over.  In 1978, however, farmers in the village of Xiaogang held a secret meeting.  The farmers agreed to divide the communal land and assign it to individuals – each farmer had to produce a quota for the government but anything he or she produced in excess of the quota they would keep.  The agreement violated government policy and as a result the farmers also pledged that if any of them were to be killed or jailed the others would raise his or her children until the age of 18. [The actual agreement is shown at right.]

The change from collective property rights to something closer to private property rights had an immediate effect, investment, work effort and productivity increased.  "You can't be lazy when you work for your family and yourself," said one of the farmers.

Word of the secret agreement leaked out and local bureaucrats cut off Xiaogang from fertilizer, seeds and pesticides.  But amazingly, before Xiaogang could be stopped, farmers in other villages also began to abandon collective property. In Beijing, Mao Zedong was dead and a new set of rulers, seeing the productivity improvements, decided to let the experiment proceed.

For more background, NPR's Planet Money has a great story on this secret agreement including this:

"Back then, even one straw belonged to the group," says Yen Jingchang, who was a farmer in Xiaogang in 1978. "No one owned anything."

At one meeting with communist party officials, a farmer asked: "What about the teeth in my head? Do I own those?" Answer: No. Your teeth belong to the collective.

In theory, the government would take what the collective grew, and would also distribute food to each family. There was no incentive to work hard — to go out to the fields early, to put in extra effort, Yen Jingchang says.

"Work hard, don't work hard — everyone gets the same," he says. "So people don't want to work."

…Before the contract, the farmers would drag themselves out into the field only when the village whistle blew, marking the start of the work day. After the contract, the families went out before dawn.

"We all secretly competed," says Yen Jingchang. "Everyone wanted to produce more than the next person."

It was the same land, the same tools and the same people. Yet just by changing the economic rules — by saying, you get to keep some of what you grow — everything changed.

(Crossposted at SeeTheInvisibleHandResourceBank.com)

What else predicts mobility?

Jim Manzi makes some good points:

But what about all the other potential reasons, beyond what their Gini Coefficient was in 1985, for varying levels of social mobility between countries as diverse as Japan, France, and New Zealand?

The most obvious example is just the size of the countries. It's at least plausible that much bigger countries contain more variety. In fact, if you do something as simple as recreate the Great Gatsby Curve, but use the population of each country as the X-axis, you get a very strong a statistical relationship (log-linear R2 = .64). Big countries have higher IGE. Call it the Moby Dick Curve.

Alternatively, we might see that some countries tend to specialize more than others.  As a practical example, part of the reason that a country like Finland can have so much equality and social mobility versus America might be that many more of the relatively poorer farmers who trade food for Finnish mobile phones live and reproduce in other countries.  If so, then we might see that if we replace the X-axis with exports as a % of GDP, there could be another statistically significant relationship with IGE. Check (R2 = .48).

Falling (rising) incomes and personal irresponsibility, on recent Charles Murray debates

Let's turn the mike over to Alex, our Alex, the Alex, etc., the one who writes for MarginalRevolution:

The rags to riches to rags story of a poor, unemployed fellow who wins the lottery, blows the cash, and ends up just as poor and unemployed as he began is a common trope.  (Here is a classic in the genre). In a paper just published in the Review of Economics and Statistics (gated, free version here), Hankins, Hoekstra and Skiba argue that the rags to riches to rags story has a systematic component.

The authors link records of lottery winners to bankruptcy records. The use of the lottery is a great randomization device, although obviously it restricts the sample to people who play the lottery.

The central finding is this: people who win large amounts are just as likely to end up bankrupt as people who win small amounts…

Here is more, hat tip goes to Slocum.

Addendum: Floccina writes in the comments: "Former professional athletes are also an interesting case."  Are the economic variables really driving the dysfunctional social norms, or vice versa, or most likely quite a bit of both?

*The Start-Up of You*

That is the new book by Ben Casnocha and Reid Hoffman and the subtitle is Adapt to the Future, Invest in Yourself, and Transform Your Career.  if you are starting a career, it is an excellent book for thinking through the practical issues you will face in branding yourself in what is becoming a more volatile and very different labor market.  The book's home page is here.

Dostoyevsky

Ken writes:

I was scouring your blog for Fyodor Dostoevsky and was surprised to see no mentions. I was just wondering your thoughts on him. Currently reading the Brothers Karamazov and it's fantastic.

Brothers Karamazov spent seven or so years as my favorite book, starting in high school.  I'm not suggesting it is juvenile, only that I find it hard to go back and enjoy things at lower levels than I did before (I also don't like to eat in still-good but declining restaurants).  I no longer find Notes from Underground interesting, as I regard its questions as a dead end.  I'd sooner reread Pascal.  I never got through The Idiot or Demons in the first place.  About two years ago I read House of the Dead and liked it, though it felt like a respite from the more typical conception of Dostoyevsky.

How much can you like Dostoyevsky anyway?  My sense is that he is probably underrated as a pure writer (much of it comes across as garbage in English translation, but perhaps is quite biting or comic or interestingly manic), and overrated as a source of the "novel of ideas."

If you enter "Dostoyevsky" into the search function of Twitter, you don't come up with much interesting these days.

Assorted links

1. Is there a procedural way to get to looser zoning regulations?

2. Does the Henrietta Lacks book make a lot of sense?

3. Why are poor parents worse (are they?)

4. How illegal are driverless cars?, make sure you carry a copy of this article to show the cop who pulls you over.

5. Good news from European repo markets, but here Greek pharma bonds.

Whence comes this sudden wave of economic determinism?

All of a sudden it is pulled out of the closest as a weapon against Charles Murray, such as by Paul Krugman (and here and here), Rortybomb, David Frum, and others.  Bryan Caplan brings some sanity to the debate:

I'm baffled by people who blame declining marriage rates on poverty.  Why?  Because being single is more expensive than being married.  Picture two singles living separately.  If they marry, they sharply cut their total housing costs.  They cut the total cost of furniture, appliances, fuel, and health insurance.  Even groceries get cheaper: think CostCo.

These savings are especially blatant when your income is low.  Even the official poverty line acknowledges them.  The Poverty Threshold for a household with one adult is $11,139; the Poverty Threshold for a household with two adults is $14,218.  When two individuals at the poverty line maintain separate households, they're effectively spending 2*$11,139-$14,218=$8,060 a year to stay single.

But wait, there's more.  Marriage doesn't just cut expenses.  It raises couples' income.  In the NLSY, married men earn about 40% more than comparable single men; married women earn about 10% less than comparable single women.  From a couples' point of view, that's a big net bonus.  And much of this bonus seems to be causal.

More plausibly it is the rise in female income (among other factors, including the rise of birth control, read more here) which is behind the decline in marriage, but that doesn't fit with traditional mood affiliation, which finds the rise in female income to be good (which it is), and the decline in marriage to be — neither good nor bad per se but not exactly worth celebrating.  If you can blame capitalism and wage stagnation for the decline of the family among lower earners, so much the better for ideology but as a sociological proposition that is a very weak hypothesis (do you see convincing links to real sociological evidence, showing this to be the dominant factor? No) and as Caplan shows it doesn't fit with the economics either.

Remind me again, how is wage stagnation supposed to explain the pronounced decline in religiosity, among lower earners, as shown by Murray?  It's well-known that a secular outlook is a normal good, and that on average poorer countries are more religious than wealthier countries.

I'm struck by how many people are offering negative comment on the new Murray book who have not read it, or who do not appear to have read it.  I found it to be a much less controversial book than the commentary makes it seem, and actually I had stopped thinking about it, except for all the negative reviews I see it getting.  It is unpopular because it disrupts current moral narratives about economic and social decline, as much on the right as on the left I might add, not because it is relying on dubious facts.  It is simply redescribing inequality through a somewhat different lens.  There's much less at stake here than meets the eye.

Maybe I should not even be responding, but then again I am a determinist and does not Karl Smith have a good forecasting record to date?

*An Economist gets Lunch*

I am pleased that Publisher's Weekly has offered a starred review to my forthcoming book:

Enlightened consumerism, not ideology, is the surest path to tasty and responsible dining, argues this yummy gastronomic treatise. Economist and restaurant critic Cowen (The Great Stagnation) takes readers along as he eats, shops, and cooks in a diversity of spicy settings, including a Nicaraguan tamale stand, the greens aisle at the Great Wall supermarket chain, backwoods barbeque pits, and his own kitchen, where he wrestles with Mexican cuisine. He focuses on how the interplay between creative suppliers and demanding customers produces good, cheap food, an approach that yields offbeat insights into, for example, why the menu item that sounds the least appetizing usually tastes great and why you should never eat in a place filled with beautiful people having a great time (that restaurant's specialty, he reasons, is the scene, not the food). Cowen also offers a telling contrarian critique of high-minded food orthodoxies that extols agribusiness, debunks the environmental benefits of locavorism, and toasts genetically modified organisms. Cowen writes like your favorite wised-up food maven, folding encyclopedic knowledge and piquant food porn—"the pork was a little chewy but flavorful, and the achiote sauce gave it a tanginess"—into a breezy, conversational style; the result is mouth-watering food for thought.

You can pre-order the book on Amazon here.  For Barnes & Noble here.  For Indiebound.org here.

The Three Laws of Future Employment

Writing at New Geography Daniel Jelski offers a critique of (some of) Launching the Innovation Renaissance. We are in basic agreement about the laws of future employment:

Law #1: People will get jobs doing things that computers can't do. Law #2: A global market place will result in lower pay and fewer opportunities for many careers. (But also in cheaper and better products and a higher standard of living for American consumers.) Law #3: Professional people will more likely be freelancers and less likely to have a steady job.

[But]…Laws #1 & 2 predict that there will likely be fewer STEM jobs in the future – they are both easily computerized and tradable. People will always be employed in STEM disciplines, many of them highly paid, but they'll be paid for smarts rather than education. The disciplines will be much more competitive, with older and less talented workers left on the sidelines. Tom Friedman and Alex Tabarrok, reflecting conventional wisdom,  are mistaken in maintaining that increasing STEM education is a key to future economic competitiveness.

Jelski instead recommends English lit and psychology, at least if you are young and hot!  The logic–computers don't write well and people don't want to have sex with or be counseled by computers (yet!),–seems strong but wage rates and unemployment levels don't support the argument. Jelski is correct about demand but forgets to take into account supply. Thus, the way to go is to be a hot engineer who can write well and get along with other people. (Jelski also forgets that my argument for STEM was in large part about the spillover effects).

I am in strong agreement with Jelski, however, that education is only the first step to success. Education is a tool; to truly succeed one must have skills developed with grit and applied with passion.

China facts of the day

Office rents in Beijing have soared over the past two years, making it more expensive to lease prime work space in China's capital than in New York, according to an industry survey.

A boom in demand and limited supply of high-quality space catapulted Beijing to fifth place in a list of the world's priciest office locations that was compiled by Cushman & Wakefield, a commercial property services firm.

Hong Kong retained the top spot, followed by London, Tokyo and Moscow. New York was sixth, just behind Beijing.

Prime office rents in Beijing's central business district rose 75 per cent last year, the fastest globally, and up from a 48 per cent increase in 2010, according to the survey.

Here is a bit more.