Category Archives: Book review

Five Ways to Build a New Macroeconomics

What is taught in today’s graduate programs as macroeconomics is entirely useless for the kinds of questions we are interested in.
( J.W. Mason –  Jón Steinsson wrote up some thoughts for this panel about the current state of macroeconomics. He begins:

There is a narrative within our field that macroeconomics has lost its way. While I have some sympathy with this narrative, I think it is a better description of the field 10 years ago than of the field today. Today, macroeconomics is in the process of regaining its footing. Because of this, in my view, the state of macroeconomics is actually better than it has been for quite some time.

I can’t help but be reminded of Olivier Blanchard’s 2008 article on the state of macroeconomics, which opened with a flat assertion that “the state of macro is good.” I am not convinced today’s positive assessment is going to hold up better than that one.

Where I do agree with Jón is that empirical work in macro is in better shape than theory. But I think theory is in much worse shape than he thinks. The problem is not some particular assumptions. It is the fundamental approach.

We need to be brutally honest: What is taught in today’s graduate programs as macroeconomics is entirely useless for the kinds of questions we are interested in.

I have in front of me the macro comprehensive exam from a well-regarded mainstream economics PhD program. The comp starts with the familiar Euler equation with a representative agent maximizing their utility from consumption over an infinite future. Then we introduce various complications — instead of a single good we have a final and intermediate good, we allow firms to have some market power, we introduce random variation in the production technology or markup. The problem at each stage is to find what is the optimal path chosen by the representative household under the new set of constraints.

This is what macroeconomics education looks like in 2021. I submit that it provides no preparation whatsoever for thinking about the substantive questions we are interested in. It’s not that this or that assumption is unrealistic. It is that there is no point of contact between the world of these models and the real economies that we live in. more>

Culture Clash: A Lesson from the Theranos Case

KNOWLEDGE@WHARTON – There’s much more at stake than a potential 20-year prison term for Theranos founder Elizabeth Holmes, whose federal fraud trial opened last week. Her case has come to symbolize the perpetual conflict between big tech and health care.

“It’s a culture clash, to be sure,” Wharton health care management professor Lawton R. Burns said in an interview with Wharton Business Daily on SiriusXM.

The startup culture in Silicon Valley and beyond moves at warp speed, he said. When investors are enthusiastic about a promising new venture, the hype builds and the dollars roll in. Theranos reached a valuation of $9 billion on a bogus claim that it developed a revolutionary lab test capable of screening for a range of conditions on a single drop of blood. It was exactly the sort of cost-efficient solution that big tech is known for, so it’s little wonder that investors fell for the pitch from the charismatic Holmes, who fashioned herself after Apple visionary Steve Jobs.

But there’s almost always friction when big tech turns its eye toward health care as “virgin turf to apply all of this new, cool stuff to,” said Burns, who is co-author of the book Big Med: Megaproviders and the High Cost of Health Care in America. “The question is whether or not all this stuff is going to work and transform health care or, conversely, at the extreme, just crash and burn.” more>

Updates from ITU

Countries ramp up cybersecurity strategies
ITU – The latest Global Cybersecurity Index (GCI) from the International Telecommunication Union (ITU) shows a growing commitment around the world to tackle and reduce cybersecurity threats.

Countries are working to improve their cyber safety despite the challenges of COVID-19 and the rapid shift of everyday activities and socio-economic services into the digital sphere, the newly released 2020 index confirms.

According to GCI 2020, around half of countries globally say they have formed a national computer incident response team (CIRT), indicating an 11 per cent increase since 2018. Rapid uptake of information and communication technologies (ICTs) during the COVID-19 pandemic has put cybersecurity at the forefront. more>


How Redistribution Makes America Richer

Modeling the numbers on bottom-up and middle-out economics.
By Steve Roth – You hear a lot about bottom-up and middle-out economics these days, as antidotes to a half-century of “trickle-down” theorizing and rhetoric. You’re even hearing it, prominently, from Joe Biden.

They’re compelling ideas: put more wealth and income in the hands of millions, or hundreds of millions, and you’ll see more economic activity, more prosperity, and more widespread prosperity. To its proponents, it seems deeply intuitive or even obvious, a formula for The American Dream.

But curiously, you don’t find much nuts and bolts economic theory supporting that view of how economies work. There’s been lots of research on the sources and causes of wealth and income concentration. There’s been a lot of important work on the social and political effects of inequality — separate (though tightly related) issues. But unlike the steady stream of “incentive” theory from Right economists over decades, Left and heterodox economists have largely failed to ask or answer a rather basic theoretical (and empirical) question: what are the purely economic effects of highly-concentrated wealth, held by fewer people, families, and dynasties, in larger and larger fortunes?

In a new paper and model published in Real-World Economics Review, I try to tackle that question. The model takes advantage of national accountants’ wealth measures that have only been available since 2006 or 2012 (with coverage back to 1960), and measures of wealth distribution that were only published in 2019. Combined with thirty+ years of consistent survey data on consumer spending at different income levels, the paper derives a novel economic measure: velocity of wealth.

The bottom 80% group turns over its wealth in annual spending three or four times as fast as the top 20%. The arithmetic takeaway: at a given level of wealth, more broadly distributed wealth means more spending: the very stuff of economic activity, which is itself the ultimate source of wealth accumulation.

The details of the model are somewhat more complex, but it only employs five easy to understand formulas — all basically just arithmetic, and all expressed without resort to abstruse symbols; they use plain language. more>

Updates from Chicago Booth

Take a family approach to genetic testing
By Brian Wallheimer – Knowing whether you’re a genetic carrier for a disease can be invaluable. A patient who learns she’s at heightened risk for breast cancer, for example, may opt for more frequent mammograms or have a preventative mastectomy, potentially adding many happy and healthy years to her life.

The US Preventive Services Task Force currently advises that individuals who have a family history of a disease should consider genetic testing. But taking a family approach to testing, applying one patient’s results to understand the risks to other family members, could generate comparable health benefits at less cost, suggests research by Chicago Booth’s Dan Adelman and Kanix Wang.

In theory, everyone could be tested for a wide array of potential diseases. But that’s a cost-prohibitive proposition, so what’s the optimal testing system? The researchers studied the issue by simulating the testing of 5 million people for the BRCA1 and BRCA2 genes, which are associated with an increased risk of developing breast cancer. The algorithm Adelman and Wang developed can determine who needs to be tested and can rule out the possibility that some family members are at risk on the basis of others’ results.

At $750 per test, an optimal family-testing policy involving these genes alone would add nearly 300,000 quality-adjusted life years to at-risk people over their lifetimes, 3,000 more QALYs than would be added by testing all people who meet the USPSTF’s guidelines, for $500 million less. A QALY is a measure used by economists to tally the quality and quantity of a life, and one QALY equates to a year of perfect health. more>


Does it make sense to question the morality of capitalism?

Keynes warned that ‘practical men’ were often in thrall to some dead economist. In fact many leading economists have agreed on the idea of guaranteed work.
By Laura Pennacchi – The global pandemic is bringing all the issues that torment the modern world to boiling-point: job scarcity, ecological transformation, mass migration, biotechnologies, artificial intelligence and the uncontrolled development of science, education, public goods and culture. The World Economic Forum, which as early as last year at Davos announced ‘an end to profits without ethics’, now proclaims ‘better economies and societies’. The need to bring the legitimacy of capitalism into discussion, even under a strict moral purview, is being recognised on a variety of fronts.

Some scholars linger in celebration of the essay in which Milton Friedman claimed, 50 years ago, that capitalism had no social responsibility except to increase profits (‘the business of business is business’). But questions are beginning to emerge—ranging from Paul Collier’s concern about the ‘mutilated ethical foundation’ of capitalism to Joseph Stiglitz’s desire to free ‘progressivist capitalism’ from ‘market fundamentalism’. The  philosophers Nancy Fraser and Rahel Jaeggi seek to rebuild the ‘regulatory bases’ of capitalism, holding that no economic practice is neutral and therefore detached from normative evaluation and that capitalism must be seen as not simply an economic system but an ‘institutionalised social order’.

So does it make sense to question the morality of capitalism? Yes—indeed without it, there can no supersession of the paradigm in the direction of a much-needed new model of development. more>

How to speak in public

Public speaking can feel like an ordeal, but take a lesson from the ancients: it’s a skill you can develop like any other
By John Bowe – Whether you’re facing a large crowd, a handful of colleagues at a conference table, a job recruiter over Zoom, or trying to hold your own during a family fight, the all-too-common experience of speech anxiety can feel like a frustrating act of self-betrayal. You wish to share your knowledge, beliefs and feelings. Yet the moment you decide it’s time to communicate them, the words … don’t … seem. To Want. To Come. Out. Of. Your Mouth.

Think about our usual ways of describing the problem: ‘I’m shy.’ ‘I suffer from speech anxiety.’ ‘I just don’t know how to be myself in front of a group.’ We often act as though the problem stems from a psychological or emotional shortcoming within us. After years of watching our looser-tongued peers express their ideas and passions, it’s easy to become resentful and alienated. These negative feelings can reinforce our original reaction: There’s too much stuff inside of me that I can’t express! There’s something wrong with me.

This diagnosis would have seemed utterly baffling to the ancient Greek educators and philosophers who invented language theory in the 4th century BCE, and then taught it to virtually every student in the West for 2,000 years until a couple of centuries ago. From the ancient perspective, public speaking, like writing or, for that matter, military prowess, was considered an art form – teachable, learnable, and utterly unrelated to issues of innate character or emotional makeup. To them, the idea of expecting the average, speech-ignorant person to be reliably eloquent would be like expecting an untrained adolescent to perform like a seasoned warrior on the battlefield. Their take holds true today – it’s unrealistic to expect yourself to be competent, much less masterful, in an art form you’ve never been taught to practice.

Under the larger discipline of rhetoric (the study of persuasion in all its forms), students in antiquity spent years acquiring a strategic understanding of how to temper logic, emotions and words with poise. Speaking well depended upon learning how to analyze all sides of an argument and assaying all possible avenues of commonality with one’s audience be­fore expressing an opinion. Similar to our approach to reading and writing today, speech training was a comprehensive, critical approach to knowledge, with an additional emphasis on psy­chology and social interaction. more>

Monopoly Was Invented to Reveal the Toxic Greed of Capitalism

It was a rags-to-riches fabrication that ironically exemplified Monopoly’s implicit values.
By Kate Raworth – ‘Buy land – they aren’t making it any more,’ quipped Mark Twain. It’s a maxim that would certainly serve you well in a game of Monopoly, the bestselling board game that has taught generations of children to buy up property, stack it with hotels, and charge fellow players sky-high rents for the privilege of accidentally landing there.

The game’s little-known inventor, Elizabeth Magie, would no doubt have made herself go directly to jail if she’d lived to know just how influential today’s twisted version of her game has turned out to be. Why? Because it encourages its players to celebrate exactly the opposite values to those she intended to champion.

Born in 1866, Magie was an outspoken rebel against the norms and politics of her times. She was unmarried into her 40s, independent and proud of it, and made her point with a publicity stunt. Taking out a newspaper advertisement, she offered herself as a ‘young woman American slave’ for sale to the highest bidder. Her aim, she told shocked readers, was to highlight the subordinate position of women in society. ‘We are not machines,’ she said. ‘Girls have minds, desires, hopes and ambition.’

In addition to confronting gender politics, Magie decided to take on the capitalist system of property ownership – this time not through a publicity stunt but in the form of a board game. The inspiration began with a book that her father, the anti-monopolist politician James Magie, had handed to her. In the pages of Henry George’s classic, Progress and Poverty (1879), she encountered his conviction that ‘the equal right of all men to use the land is as clear as their equal right to breathe the air – it is a right proclaimed by the fact of their existence’.

Traveling around America in the 1870s, George had witnessed persistent destitution amid growing wealth, and he believed it was largely the inequity of land ownership that bound these two forces – poverty and progress – together. So instead of following Twain by encouraging his fellow citizens to buy land, he called on the state to tax it. On what grounds? Because much of land’s value comes not from what is built on the plot but from nature’s gift of water or minerals that might lie beneath its surface, or from the communally created value of its surroundings: nearby roads and railways; a thriving economy, a safe neighborhood; good local schools and hospitals. And he argued that the tax receipts should be invested on behalf of all.

Determined to prove the merit of George’s proposal, Magie invented and in 1904 patented what she called the Landlord’s Game. more>

Keep science irrational

By Michael Strevens – Modern science has a whole lot going for it that Ancient Greek or Chinese science did not: advanced technologies for observation and measurement, fast and efficient communication, and well-funded and dedicated institutions for research. It also has, many thinkers have supposed, a superior (if not always flawlessly implemented) ideology, manifested in a concern for objectivity, openness to criticism, and a preference for regimented techniques for discovery, such as randomized, controlled experimentation. I want to add one more item to that list, the innovation that made modern science truly scientific: a certain, highly strategic irrationality.

‘Experiment is the sole judge of scientific “truth”,’ declared the physicist Richard Feynman in 1963. ‘All I’m concerned with is that the theory should predict the results of measurements,’ said Stephen Hawking in 1994. And dipping back a little further in time, we find the 19th-century polymath John Herschel expressing the same thought: ‘To experience we refer, as the only ground of all physical enquiry.’ These are not just personal opinions or propaganda; the principle that only empirical evidence carries weight in scientific argument is widely enforced across the scientific disciplines by scholarly journals, the principal organs of scientific communication. Indeed, it is widely agreed, both in thought and in practice, that science’s exclusive focus on empirical evidence is its greatest strength.

et there is more than a whiff of dogmatism about this exclusivity. Feynman, Hawking, Herschel all insist on it: ‘the sole judge’; ‘all I’m concerned with’; ‘the only ground’. Are they, perhaps, protesting too much? What about other considerations widely considered relevant to assessing scientific hypotheses: theoretical elegance, unity, or even philosophical coherence? Except insofar as such qualities make themselves useful in the prediction and explanation of observable phenomena, they are ruled out of scientific debate, declared unpublishable. It is that unpublishability, that censorship, that makes scientific argument unreasonably narrow. It is what constitutes the irrationality of modern science – and yet also what accounts for its unprecedented success. more>

Why Free Market Ideology is a Double Lie

The free market, it appears, is not about freedom. It’s about power.
By Blair Fix – As social animals, humans live and die by the success of our groups. This raises a dilemma. What’s best for the group is often not what’s best for individuals within the group. If you’re surrounded by a group of trusting individuals, it’s best for you to lie and cheat. You’ll increase your relative fitness. And in evolutionary terms, that’s what matters.

Given that selfish behavior is often advantageous, why aren’t more of us liars and cheaters? One reason, paradoxically, is that we lie to ourselves. We tell ourselves that what’s best for groups is also what’s best for individuals within the group. I’ll call this the noble prosocial lie.

Propagating this noble lie, I believe, is one of the principle roles of ideologies. A good ideology convinces individuals that selfless behavior is in their self interest. This promotes prosocial behavior, making groups more cohesive. And since cohesive groups tend to beat out incohesive groups, the noble lie tends to spread.

Given the benefits of equating altruism with self interest, you’d think that all ideologies would do it. Yet some do the opposite. They promote selfish behavior as good for the group. I’ll call this the Machiavellian lie.

Now here’s the paradox. The Machiavellian lie should be caustic to social cohesion. So you’d expect that group selection would kill it off. But for one Machiavellian lie, that’s not what happened. Instead of dying out, this lie has thrived. In fact, it’s become the dominant ideology of our time. What is it?

The belief in the free market.

Free-market ideology claims that to help society, we must help ourselves. If we all act selfishly, the thinking goes, the invisible hand will make everyone better off. So here we have an ideology that promotes selfishness in the name of group benefit. It’s a Machiavellian lie that should be caustic to social cohesion. And yet free-market thinking has beat out many other ideologies. How can this be?

Here’s what I think is happening. Free-market ideology, I propose, is a double lie.

First, it’s a lie in the sense that its central claim is false. Acting selfishly does not maximize group well being. Modern evolutionary theory makes this clear. Second, and more subtly, free-market thinking is a lie in the sense that it does not lead to greater freedom and autonomy. Quite the opposite. The evidence suggests that free-market thinking actually leads to greater obedience and subordination. The spread of free-market thinking goes hand in hand with the growth of hierarchy.

So the free market, it appears, is not about freedom. It’s about power. Free market thinking is successful, I argue, because it uses the language of freedom to cloak the accumulation of power. more>