New President Of American Economics Association Challenges Orthodoxy

A new book by the new head of the AEA attacks the dominant assumption of academic orthodoxy.  That is, the idea that human beings are rational optimizers.  That assumption, which is the underpinning of the rational expectations school of economics, that is centered at the University of Chicago, is being challenged by an academic from Chicago's Booth School of Business.  His research has shown that human decision making is far from rational.  Rational expectation theorists attempt to escape from this problem by using the concept of "bounded rationality".  Their models assume a typical agent who attempts to be as rational as possible.  Economists cling to this assumption because it enables the use of mathematical models which distinguish economics from other social sciences.  That is, it is more like physics than other social sciences.  In other words, he accuses the economics profession of "scientism".  That is, a pretense of being scientific by mimicking the surface characteristics of the physical sciences.  It also excludes ethical considerations and morality from its analyses by assuming that economics is a positive science which has no interest in making normative judgements.

The book is also critical of the use of cost-benefit analysis by business professionals and many economists.  For example, if we can measure the cost of reducing carbon emissions in dollars, and we can measure the benefits that are derived from the reduction of carbon emissions, we can make a rational decision about whether or not we should undertake a reduction in carbon emissions.  The root of cost-benefit analysis is in utilitarian philosophies which are not commonly used by modern philosophers.  Its not possible to calculate the utility of avoiding species extinction and other benefits that might be derived from reducing carbon emissions.

Why the Equity Versus Efficiency Focus Should Shift in Economics

Larry Summers gave a speech at Brookings in honor of the 40th anniversary of a book by Arthur Okun on the tradeoffs between efficiency and equity.  In that period it was assumed that the distribution of income was relatively constant.  Therefore, the profession focused primarily on increasing efficiency because everyone would benefit from productivity growth.  The benefits from productivity are not being shared today so our focus should be on a more equitable distribution of income.

Summers points to a signal statistic which shows how things have changes since 1979.  If the distribution of income today were the same as it was in 1979, the bottom 80% of the income distribution would have 25% more income than it has today.  The top 1% would have half as much of total income than it has today.  The gains from efficiency and productivity have not been equally shared.  Summers then shifts his attention to policy issues which are tilted in the direction of greater equity versus efficiency.

 Tax policy over the last 40 years has been directed towards an increase in efficiency.  Summers argues that it ought to be directed towards redistribution.  We should also be less concerned with reducing to cost of capital and more concerned about increasing taxes on capital.

The financial sector, and the corporate system to which it is connected, has also increased it share of income substantially.  The financial system has also been a source of economic instability.  We need more regulation, which may decrease efficiency, in pursuit of equity and greater stability.

Dani Rodrik On The Transatlantic Trade and Investment Plan

There has been a lot of debate about the proposed Transpacific trade plan.  Dani Rodrik shifts his attention to the proposed Transatlantic trade plan.  In particular, he reviews two analyses of the purported economic impacts from the trade plan.  He believes that the real issue is the investor-state dispute resolution which turns the resolution of disputes over to a third party.  However, he chose to analyze two studies which reach different conclusions about the economic impact from the trade plan.  The studies reach different conclusions about the impact but that is less important than his explanation of the assumptions used in each model, and the limited importance of the types of gains which were used as the dependent variables over the long term.  One would not want to base one's decision about the trade plan based upon the conclusions from the models which were used to describe the long range results by 2027.  They might just as well tried to predict the weather in 2027.

Summary Of IMF Conference On Rethinking Macro Policy

The IMF invited central bankers and some of the best economists in the world to its conference.  Oliver Blanchard did an excellent job of summarizing the issues that were raised and he offered his opinions on some of the responses he received.  There is as much confusion as there are solutions to the issues that discussed.  Monetary policy is clearly at a cross roads.  Fiscal policy is even in worse shape.  There is more concern about reducing public debt than there is about increasing budget deficits to stimulate growth.

Technological Advances And The Social Contract

This panel discussion raised some very interesting questions about our technological future and its implications.  One of the advancements is in machine learning.  Machine learning is growing at an exponential rate.  This raises a question about the time frame in which machine intelligence will be superior to human intelligence in more applications than we can currently imagine.  Things that we used to believe were uniquely human, such as the ability to recognize and identify complex images, can now be done better by computers.  As computational resources increase in power, the range of activities for which we require human resources will diminish.  An expert in the field of machine learning explains why this is not science fiction.  Another expert looks at our job classification system which shows that 80% of the labor force is employed in relatively low skill jobs.  A lot of these jobs will be replaced by smart machines.  Unfortunately, some of fastest growing industries are not labor intensive.  A very small segment of our workforce today, and tomorrow, will be employed in occupations which require a STEM education (Science, Technology, Engineering and Math).  Many of our politicians advocate programs to train more students in STEM.  A liberal arts education may be a better solution because it enables people to be more flexible and adaptive. 

The social question that arises from these discussions is that the age of labor scarcity is ending.  Our incomes have been based upon labor scarcity.  The first impact has been on low skill jobs, but many high skill jobs will also be replaced by smarter machines.  How will we manage a society in which we do not need a fully employed labor force working 40 hour per weeks?

The economist on the panel took a historical look at this problem and may have been a bit shaken by the rebuttals that he faced.  New technologies have always substituted for, or complemented, human labor. The majority of the workforce in much of our history was employed in agriculture.  Only 2% of the labor force in the US is employed in agriculture.  The farmers moved to the cities and took jobs in manufacturing.  Now they are moving into the services economy which employs the bulk of our labor force.  Unfortunately, many of the higher paying jobs in the services industry will also face a threat from increasingly smarter machines.  How would you prepare your five year old child for the future is the unanswered question.

My take away from this panel discussion is that the changes in technology are happening much faster than I had imagined, and that the time frame for order of magnitude transitions will be much shorter than many anticipate.  Most of us have been preoccupied with the very real problems that are apparent today.  That includes most of our  politicians.  We will need a superior government to deal with the issues that were raised in this discussion.  Its not encouraging to witness the backwards looking politicians that we observe running for high office in the US.  Many are following rather than leading the electorate.

What If The Governor Of Kansas Became The President Of The US?

The governor of Kansas has implemented policies that are being advocated by Republican candidates competing for the GOP presidential nomination.  Those policies have been terrible for Kansas.  For example, some schools are closing week earlier because they have run out of money.  Moreover, the state budget is in deficit because of tax cuts which were supposed to increase tax revenues by expanding the Kansas economy.  If we want the rest of the US to look like Kansas we only need to elect a Republican as our next president.

Made In The World Products And Multiregional Trade Agreements

Production by multinational corporations makes extensive use of cross national supply chains.  For example, Apple's smart phones are assembled in China using parts that are produced in a number of countries outside of China. The Apple smartphone is a classic example of a "made in the world" product. If the US imposed tariffs on smartphones imported from China, that would decrease the profit on Apple smartphones in the US.  Consequently, multinational corporations have an incentive to lobby for preferential tariffs on their products which are made elsewhere and imported into the US.  According to this article,  made in the world production is one of the reasons for multi-regional trade agreements like the Trans Pacific Partnership.  It argues that made in the world production limited the use of tariffs and other restrictions on imports during the recent recession.