Book Reviews

Meltdown

Posted by Peter on August 28, 2009
Posted in: Book Reviews, Economics, U.S. Politics. Tagged: , , , .

Book review: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods Jr.

This book describes the Austrian business cycle theory (ABCT) in a more readable form than it’s usually presented. Its basic idea that malinvestment creates business cycles, and that central bank manipulation of interest rates can cause malinvestment, is correct. But when Woods tries to argue that only errors by a government can cause business cycles, his ideological blinders become obvious. He’s mostly right when he complains about government mistakes, and mostly wrong when he denies the existence of other problems.

He asks why businesses made a “cluster of errors” that added up to a big problem rather than independent errors which mostly canceled each other out. The only answer he can find is misleading signals sent by the Fed’s manipulation of interest rates. He doesn’t explain why businessmen fail to learn from the frequent and widely publicized patterns of those Fed actions. It’s unclear why groupthink needs a strong cause, but one obvious possibility that Woods ignores is that most people saw a persistent trend of rising housing prices, and didn’t remember large drops in housing prices over a region as large as the U.S.

He shows no understanding of the problems associated with sticky wages which are a key part of the better arguments for Keynesian approaches.

He wants to credit ABCT with having predicted this downturn. If you try to figure out when was the last time it didn’t predict a downturn (the early 1920s?), this seems less impressive than, say, Robert Shiller’s track record for predicting when bubbles burst.

His somewhat selective use of historical evidence carefully avoids anything that might present a picture more complex than government being the sole villain. He describes enough U.S. economic expansions to present a clear case that credit expansion contributed to the ensuing bust, and usually points to a government activity which one can imagine caused excessive credit expansion. But he’s unusually vague about the causes of the expansion that led to the panic of 1857. Could that be because he wants to overlook the role that new gold mining in California played in that inflationary cycle?

He mostly denies that free market approaches have been tested for long enough to see whether we would avoid business cycles under a true free market. He points to a few downturns when he says the government followed a wise laissez faire policy, and compares the shortness of those downturns with a few longer downturns where the government made some attempts to solve the downturns. When doing this, he avoids mention of the downturns where massive government actions were followed by mild recessions. Any complete survey comparing the extent of government action with the ensuing economic conditions would provide a much murkier picture of the relative contributions of government and market error than Woods is willing to allow.

The most interesting claim that I hadn’t previously heard is that a large decrease in the money supply in 1839-1843 coincided with healthy GNP growth, which, if true, is hard to explain without assuming Keynesian and monetarist theories explain a relatively small fraction of business cycle problems. My attempts to check this yielded a report at http://www.measuringworth.org/usgdp/ saying GDP in 2005 dollars rose from $31.37 in 1839 to $34.84 in 1843, but GDP per capita in 2005 dollars dropped from $1884 in 1839 to $1869 in 1843. Declining GDP per capita doesn’t sound very prosperous to me (although it’s a mild enough decline to provide little support for Keynesians/monetarists).

He tries to blame the “mistakes” of credit rating agencies on an SEC-created cartel of rating agencies. That “cartel” does have some special privileges, but he doesn’t say what stops bloggers from expressing opinions on bond risks and developing reputations that lead to investors using those opinions in addition to the “cartel”‘s ratings (Freerisk is a project which is planning a sophisticated alternative). I say that anyone who understands markets would expect the yield on the bonds to provide as good an estimate of risk as any alternative. Credit rating agencies must be performing some other function in order to thrive. An obvious function is to mislead bosses and/or regulators who don’t understand markets into thinking that the people making investment decisions are making choices that are safer than they actually are. It appears that the agencies performed that function well, and helped many people avoid being fired for poor choices.

His discussion of whether WWII spending cured the Great Depression points out that mainstream theories falsely predicted a return to depression in 1946. But it’s unclear whether all versions of Keynesianism make that mistake, and it’s unclear how ABCT could predict the U.S. would be much more prosperous in 1946 than at the start of the war.
Here’s an alternative explanation that lies in between those theories: wages were being kept too high for supply and demand to balance through 1941. Inflation and changes in government policy toward wage levels during WW2 eliminated the causes of that imbalance.

Arnold Kling has a good quasi-Austrian alternative here and here.

Depression Economics

Posted by Peter on August 26, 2009
Posted in: Book Reviews, Economics, U.S. Politics. Tagged: .

Book review: The Return of Depression Economics and the Crisis of 2008 by Paul Krugman.

Large parts of this book accurately describe some processes which contribute to financial crises, but he fails to describe enough of what happened in crises such as in 2008 to reach sensible policy advice.

He presents a simple example of a baby-sitting co-op that experienced a recession via a Keynesian liquidity trap, and he is right to believe that is part of what causes recessions, but he doesn’t have much of an argument that other causes are unimportant.

His neglect of malinvestment problems contributes to his delusion that central banks reach limits to their power in crises where interest rates approach zero. The presence or absence of deflation seems to provide a fairly good estimate of whether liquidity trap type problems exist. If you recognize that malinvestments are part of the problem that caused crises such as that of 2008, the natural conclusion is that the Fed solved most of the liquidity trap type problem within a few months of noticing the severity of the downturn. There is ample reason to suspect that the economy is suffering from a misallocation of resources, such as workers who developed skills as construction workers when perfect foresight would have told them to develop skill in careers where demand is expanding (nurses?). Nobody knows how to instantly convert those workers into appropriate careers, so we shouldn’t expect a quick fix to the problems associated with that malinvestment. It appears possible for he Fed to make that malinvestment have been successful investment by dropping enough dollars from helicopters to create an inflation rate that will make home buying attractive again. Krugman’s suggested fiscal stimulus looks almost as poor a solution as that to anyone who sees malinvestment as the main remaining problem.

His claim that central bank policy is ineffective is misleading because he pretends that controlling interest rates is all that central banks do to “stimulate” the economy. If instead you focus on changes in the money supply (which central banks can sometimes cause with little effect on interest rates), you’ll see they have plenty of power to inflate.

He dismisses the problem of sticky wages as if it were minor or inevitable. But if you understand the role that plays in unemployment, and analyze Singapore’s policy of automatically altering payroll taxes to stabilize jobs, you should see that’s more cost-effective than the fiscal stimulus Krugman wants.

I’m not satisfied with his phrasing of lack of “effective demand” being caused by people “trying to accumulate cash”. If we apply standard financial terminology to changes the value of a currency (e.g. saying that there’s a speculative bubble driving up the value of the currency, or that there’s a short squeeze – highly leveraged firms have what amounts to a big short position in dollars), then it seems more natural to use the intuitions we’ve developed for the stock market to fluctuations in currency values.

He doesn’t adequately explain why most economists don’t want a global currency. He says labor mobility within the area that standardizes on a currency is important for it to work well. I’m unconvinced that much mobility is needed for a global currency to work better than the mediocre alternatives, but even if it is, I’d expect economists to advocate a combination of a global currency and reducing the barriers to mobility. How much of economists dislike for a global currency is due to real harm from regional fluctuations and how much is it due to politicians rewarding people like Krugman for biasing their arguments in ways that empower the politicians? Or do they not give it much thought because they’ve decided it’s politically infeasible even if desirable?

His description of the shadow banking system clarifies quite well how regulatory efforts to avoid crises failed. His solution of regulating like a bank anything that acts like a bank would work well if implemented by an altruistic government. But his “simple rule” is too vague for his intent to survive in a system where politicians want to bend the rules to help their friends.

Create Your Own Economy (?)

Posted by Peter on August 21, 2009
Posted in: Book Reviews, The Flynn Effect, The Human Mind. Tagged: , , .

Book review: Create Your Own Economy: The Path to Prosperity in a Disordered World by Tyler Cowen.

This somewhat misleadingly titled book is mainly about the benefits of neurodiversity and how changing technology is changing our styles of thought, and how we ought to improve our styles of thought.

His perspective on these subjects usually reflects a unique way of ordering his thoughts about the world. Few things he says seem particularly profound, but he persistently provides new ways to frame our understanding of the human mind that will sometimes yield better insights than conventional ways of looking at these subjects. Even if you think you know a good deal about autism, he’ll illuminate some problems with your stereotypes of autistics.

Even though it is marketed as an economics book, it only has about one page about financial matters, but that page is an eloquent summary of two factors that are important causes of our recent problems.

He’s an extreme example of an infovore who processes more information than most people can imagine. E.g. “Usually a blog will fail if the blogger doesn’t post … at least every weekday.” His idea of failure must be quite different from mine, as I more often stop reading a blog because it has too many posts than because it goes a few weeks without a post.

One interesting tidbit hints that healthcare costs might be high because telling patients their treatment was expensive may enhance the placebo effect, much like charging more for a given bottle of wine makes it taste better.

The book’s footnotes aren’t as specific as I would like, and sometimes leave me wondering whether he’s engaging in wild speculation or reporting careful research. His conjecture that “self-aware autistics are especially likely to be cosmopolitans in their thinking” sounds like something that results partly from the selection biases that come from knowing more autistics who like economics than autistics who hate economics. I wish he’d indicated whether he found a way to avoid that bias.

More on the Flynn Effect

Posted by Peter on August 2, 2009
Posted in: Book Reviews, The Flynn Effect, The Human Mind. Tagged: .

This review by Cosma Shalizi of James Flynn’s book What Is Intelligence? provides some interesting criticisms of Flynn (while agreeing with much of what Flynn says).

Shalizi’s most important argument is that Flynn and others who attach a good deal of importance to g haven’t made much of an argument that it measures a single phenomenon.

After a century of IQ testing, there is still no theory which says which questions belongs on an intelligence test, just correlational analyses and tradition.

Flynn and others have good arguments that whatever g measures is important. But Shalizi leaves me with the impression that the only way to decide whether it’s a single phenomenon is to compare its usefulness to models which describe multiple flavors of intelligence. So far those attempts that I’ve looked at seem underwhelming. Maybe that means trying to break down intelligence into components which deserve separate measures isn’t fruitful, but it might also mean that the people who might do a good job of it have been scared away by the political controversies over IQ.

HT Kenny Easwaran.

The Law Market

Posted by Peter on July 21, 2009
Posted in: Book Reviews, Economics, Freedom, U.S. Politics. Tagged: , , , .

Book review: The Law Market by Erin A. O’Hara and Larry E. Ribstein.

This book describes why it has become easier for parties to a contract to choose which legal system will be applied to their contract, both in terms of the political forces that enabled choice and why it’s good that choice is possible.

The political forces include the ability of some parties to physically leave a jurisdiction if they have inadequate choices about what law will be applied to them. Often enough those parties are employers that legislators want to remain in their jurisdiction.

The benefits include simple things like predictability of contract interpretation when the contract covers things that involve physical locations associated with multiple jurisdictions where there otherwise would be no reliable way to predict which court would assert jurisdiction over disputes. They also include less direct effects of providing incentives for legal systems to improve so as to attract more customers.

The book mostly deals with contracts between corporations, and is much more tentative about advocating choice of law for individuals.

The book provides examples showing that as with most markets, competition for law produces better law. But is also mentions more questionable results, such as competition for most effective tax shelters or the easiest terms for divorce (for divorce, the book suggests those who want divorce to be hard should try to arrange contracts that allocate assets in a way that discourages divorce; it would be harder for easy-divorce states to justify ignoring those contracts). There’s also a risk that the competition will sometimes benefit lawyers rather than their clients, as clients often rely on lawyers to decide which legal system to use without having a practical way to check who benefits from some of those choices.

The book is often dull reading because it often describes case law to explain quirks of current law that will be of interest to few non-lawyers.

One part that disappointed me was the assumption that the choice of jurisdiction should dictate the physical location in which plaintiffs must argue their case (the travel costs can make some lawsuits unpractical to a consumer suing a company if the company decides the location at which a suit is argued). Why are we trapped in a set of rules that requires travel to a possibly distant court when we have technology that provides reasonable remote communications?

Human Enhancement

Posted by Peter on July 10, 2009
Posted in: Book Reviews, Health, Humor, Science and Technology. Tagged: , , , , .

Book review: Human Enhancement, edited by Julian Savulescu and Nick Bostrom.

This book starts out with relatively uninteresting articles and only the last quarter of so of it is worth reading.

Because I agree with most of the arguments for enhancement, I skipped some of the pro-enhancement arguments and tried to read the anti-enhancement arguments carefully. They mostly boil down to the claim that people’s preference for natural things is sufficient to justify broad prohibitions on enhancing human bodies and human nature. That isn’t enough of an argument to deserve as much discussion as it gets.

A few of the concerns discussed by advocates of enhancement are worth more thought. The question of whether unenhanced humans would retain political equality and rights enables us to imagine dystopian results of enhancement. Daniel Walker provides a partly correct analysis of conditions under which enhanced beings ought to paternalistically restrict the choices and political power of the unenhanced. But he’s overly complacent about assuming the paternalists will have the interests of the unenhanced at heart. The biggest problem with paternalism to date is that it’s done by people who are less thoughtful about the interests of the people they’re controlling than they are about finding ways to serve their own self-interest. It is possible that enhanced beings will be perfect altruists, but it is far from being a natural consequence of enhancement.

The final chapter points out the risks of being overconfident of our ability to improve on nature. They describe questions we should ask about why evolution would have produced a result that is different from what we want. One example that they give suggests they remain overconfident – they repeat a standard claim about the human appendix being a result of evolution getting stuck in a local optimum. Recent evidence suggests that the appendix performs a valuable function in recovery from diarrhea (still a major cause of death in places) and harm from appendicitis seems rare outside of industrialized nations (maybe due to differences in dietary fiber?).

The most new and provocative ideas in the book have little to do with the medical enhancements that the title evokes. Robin Hanson’s call for mechanisms to make people more truthful probably won’t gather much support, as people are clever about finding objections to any specific method that would be effective. Still, asking the question the way he does may encourage some people to think more clearly about their goals.

Nick Bostrom and Anders Sandberg describe an interesting (original?) hypothesis about why placebos (sometimes) work. It involves signaling that there is relatively little need to conserve the body’s resources for fighting future injuries and diseases. Could this understanding lead to insights about how to more directly and reliably trigger this effect? More effective placebos have been proposed as jokes. Why is it so unusual to ask about serious research into this subject?

Greatness

Posted by Peter on June 23, 2009
Posted in: Book Reviews, Politics, The Human Mind. Tagged: , , .

Book review: Greatness: Who Makes History and Why by Dean Keith Simonton.

This broad and mediocre survey of psychology of people who stand out in history probably contains a fair number of good ideas, but it’s hard to separate them from the many ideas that are questionable guesses. He’s inconsistent about distinguishing his guesses from claims backed by good evidence.

One of the clearest examples is his assertion that childhood adversity builds character. He presents evidence that eminent figures were unusually likely to have had a parent die early, and describes this as the “most impressive proof” of his claim. He ignores the possibility those people come from families with a pattern of taking sufficiently unusual risks to explain that evidence.

In other places, he makes mistakes which seemed reasonable when the book was published, such as “Mendelian laws of inheritance are blind to whether an individual is first-born or later-born” (parental age has a measurable effect on mutation rates).

He avoids some of the worst mistakes that a psychology of history could make, such as trying to psychoanalyze individuals without having enough information about them.

He mentions some approaches to analyzing presidential addresses and corporate letters to stockholders, which have some potential to be used in predicting whether leaders have the appropriate personality for their jobs. I wonder what would happen if many voters/stockholders demanded that leaders pass tests of this nature (I’m assuming the tests can be scored objectively, but that may be shaky assumption). I’m confident that we’d get leaders with rhetoric that passes those tests. Would that simply mean the leaders change their rhetoric, or would it be hard enough to maintain a mismatch between rhetoric and thought patterns that we’d get leaders with better thought patterns?

Why He Didn’t Call You Back

Posted by Peter on June 15, 2009
Posted in: Book Reviews. Tagged: , .

Book review: Why He Didn’t Call You Back: 1,000 Guys Reveal What They Really Thought About You After Your Date by Rachel Greenwald.
This book is designed for women who want to debug their dates with men, and some of the book is specific to that goal. But a majority of the book is gender independent, and a fair amount of it describes how misunderstandings can arise in a wide range of interactions between people who don’t know each other well.
The book isn’t very profound, but it is based on fairly careful research that ought to be done more often than it has been. I was surprised at how much I enjoyed reading it and how quickly I finished it.
I’m not convinced I learned a lot from it. The problems that appear to best describe my interactions with people are the ones that I find relatively hard to change.
I suspect she overestimates her ability to get accurate reasons from the men, but I don’t have much reason to think the men who are misleading her are men who her clients could have better connected with.

Historical Dynamics

Posted by Peter on May 20, 2009
Posted in: Book Reviews. Tagged: , .

Book review: Historical Dynamics: Why States Rise and Fall by Peter Turchin.

Turchin uses the tools and perspective of population biology to model some important aspects of the growth and collapse of empires. The relatively dry and mathematical style of the book makes it slow reading, but it leaves less ambiguity than most books about history. He has no obvious political biases – it often seems that his main bias is a preference for the tools of biologists over the tools of historians.

One important aspect of his approach is that it models the dynamics of a feature that is roughly described by terms such as solidarity, trust, and cooperation. He convinced me that he has described some of the influences that cause that feature to increase and decrease (the section title “Frontiers as incubators of group solidarity” says a good deal about his model).

Some aspects of the book left me wondering whether his eccentric worldview added anything to my understanding of history, but occasionally he comes up with ideas that have implications that are clearly new to me, such as his suggestion that monogamy can help an empire continue it’s expansion for a longer time.

He makes some serious attempts to test his models against the available data. It’s hard to tell whether enough data is available to adequately test such ambitious claims.

The biggest limitation of the book is that he assumes Malthusian conditions. While it is likely that some of his analysis applies to the industrial world, he thinks it’s premature to ask how much of it applies today. That means it ought to be of interest mainly to historians for now.

Economics of Piracy

Posted by Peter on May 5, 2009
Posted in: Book Reviews, Economics. Tagged: , .

Book review: The Invisible Hook: The Hidden Economics of Pirates by Peter Leeson.

This is an interesting history of early eighteenth century pirates with an economist’s insights into what influenced them to have institutions such as democracy and to be in many ways pleasanter to serve on than commercial or military ships of the same time.

He has a fairly open bias toward portraying pirates favorably. I sometimes wondered whether there’s enough evidence to support his sometimes surprising conclusions. He makes plausible claims to be getting his historical information from the relevant experts, but without careful checking I can’t tell whether he has slanted his story to make it more entertaining.

He describes some good reasons why “workers’ democracy” doesn’t work as well in modern corporations as it did on pirate ships. But he is too willing to accept the observed absence of corporate democracy as evidence of its inefficiency. I can easily imagine that managers grab more power than is good for the company, and that principal-agent problems let them get away with it (pirates’ relations with the law made it easier for them to remedy this via mutiny). Also, he overstates the claim that “workers don’t have the finances required” for worker ownership of corporations. There are plenty of companies with low enough capital requirements for this to be unimportant. The big difference I see between modern corporations and pirate ships is that pirates had strong reasons to stick together until their venture got enough loot for them to all retire at once and divide the results. Employees in modern corporations want much more flexibility in when they leave the company, which creates complications for workers’ democracy or for the employee who wants to leave however it is handled.

One analysis whose absence disappointed me was whether the long-term benefits to joining a pirate ship were better than those of commercial or military ships. What fraction of pirates retired wealthy? How many of them were fooled by a temporary shortage of law enforcement into adopting a career with an abnormally high death rate once governments increased law enforcement?

He occasionally digresses into standard economics rants that have no relevance to pirates, such as the two pages on lobbyist rent-seeking.