Jeff’s Blog #15

Jeff’s Blog, Volume 15

I’m owning up to calling it a blog because there’s not much news in here. If only blogging weren’t dead.

1. Dynamics of the good life
Edmund Phelps’s Mass Flourishing is an ambitious attempt to place dynamism at the center of economic history, economic policy, and conceptions of the good life. Phelps is Nobel winner in economics, although not for the material discussed in this book, which became his obsession late in life (this was published in his 80s!). His historical thesis is that the period 1820-1960 was the golden age of modern capitalism because it was a time of dynamism, which he defines as the propensity for ordinary people to tinker, build businesses, and rapidly succeed and fail, creating the modern world as byproduct. His political thesis is that in the postwar period, governments inadvertently clamped down on dynamism and replaced it with corporatism, which is his unwieldy catch-all term for the welfare and regulatory state. His philosophical thesis is that dynamism is important not just because it contributes to growth but because it is the essence of the good life. He translates Aristotle’s term eudaimonia as “flourishing” rather than “happiness” and traces a lineage of vitalism through quests in early modern literature to Jefferson’s “pursuit” to Nietzsche’s sense of will fulfillment to NASA’s influence on the midcentury American imagination. I found myself most persuaded by the historical argument, intrigued and miffed by the philosophical one, and not much persuaded on the political.Joel Mokyr, a leading historian of the Industrial Revolution whose research Phelps uses selectively, has an excellent review that accords with my reaction to the book, but with greater eloquence and authority. As the Mokyr review suggests, Phelps tends to skip over well-known, well-respected areas of scholarship that either complicate his thesis or beat him to the punch. The strangest might be his discussion of Schumpeter’s Capitalism, Socialism, and Democracy (1942), the founding text of the perspective that innovation and new ideas are the essence of economic life. Phelps is committed to denying that Schumpeter really appreciated the nature of innovation, because early in his career Schumpeter held that innovation came only from science, not from businesspeople tinkering. By the way, this is where Phelps misuses Mokyr–the lesson of Mokyr’s work is that theoretical science and amateur tinkering were symbiotic during the Industrial Revolution, not that tinkering alone drove innovation. In any case, Phelps brushes off the fact that Schumpeter, influenced by Hayek, came around to this more balanced view in the famous 1942 book. The historical chapters walk through the many inventions of modern capitalism that made risk-taking possible: joint stock companies, merchant banks, limited liability, urbanization, social insurance. This is all very interesting if familiar; you might think amid so much discussion of economic institutions there would be reference to Why Nations Fail (in fairness published only a year earlier), or, amid discussion of a “culture of dynamism,” reference to Deirdre McCloskey’s work on bourgeois virtues. I did find Phelps’s strict definition of dynamism useful. He argues that “indigenous innovation” is essential, so countries that copy outside innovations and pursue catch-up growth don’t count as dynamic.

There is some reason to believe that our economy is now less dynamic than a century ago. The rate of small business creation has been declining, as shocking as that might be to those of us in Northern California. But Phelps’s arguments about post-war politics didn’t give me a strong insight into why. The big problem is that his concept of “corporatism” is too broad. It’s about regulatory capture, and interest group politics, and the welfare state, and industrial policy. Mussolini’s Italy is the original and perhaps most coherent example of corporatism–but European social democracies and the U.S. count too (at times he uses a sliding scale of corporatism, but if the U.S. is the least corporatist, why is this the right concept for addressing American dynamism?). Although Phelps is very sour on regulation, it’s important to note that he isn’t your basic Reaganite. For one, his timeline doesn’t line up with familiar story about over-regulation; his golden age was closer to the 1880s than 1980s. He also has creative, heterodox views on the relationship between finance and innovation. He wants more lending and less derivative speculation, and even thinks passive mutual fund management is bad because it inhibits active identification and funding of the best companies (see Bhide (1993) for more on this). Finally, Phelps thinks dynamism requires cultural nourishment in addition to the correct regulatory environment. To this end he dislikes a version of the American Dream articulated by both Clintons and Obama: “If you work hard and play by the rules, you’ll be rewarded.” Phelps objects the mechanical guarantee. He’d rather everyone believe that it requires special insight, vision, and good fortune to innovate and build something new.

And this brings us to Phelps’s philosophical vision, one which I found both exciting and incomplete. He is attracted to a pragmatist conception, which emphasizes gaining practical knowledge, learning to solve problems, and developing one’s capabilities (see Voltaire, Dewey, Rawls, Sen). But he finds this insufficiently exciting, lacking dynamism, and so turns to the vitalist conception I mentioned above. Throughout the book he speaks of “modern culture” as one inspired by the vitalist ethic–in contrast to “traditional culture” which values home, family, tradition, and loyalty. This dichotomy leads to his strangest view: that people who do not participate in the dynamic parts of the economy are actively choosing traditional culture, and therefore do not deserve social transfers created by taxing dynamism. It would be unjust to “siphon some of the rewards of the least advantaged of the economy to those who exit from the economy for another life, as if the latter were disadvantaged collaborators. They are not disadvantaged, just different.” Those classified as “different” include caregivers, non-profit employees, the clergy, and stay-at-home parents. No doubt this strikes you as wrong. The basic flaw, I think, is his false separation of the modern and traditional spheres. Community and tradition are more compatible with dynamism than he thinks. Risk-taking is possible in the context of education, social support, and nurturing. Moreover these values are certainly compatible with pragmatism, a conception of the good life I find more attractive in the first place.

2. Sit under your own vine and fig tree
For a more compelling vision of the good life and critique of how modernity inhibits it, I heartily recommend Wendell Berry’s The Unsettling of America: Culture and AgricultureOn one level this is an indictment of agribusiness and a paean to small family farming which helped launch some of the trends in small, local food production that we know and love. I don’t know very much about those topics but learned some from Berry’s introduction. What I could really appreciate was Berry’s wisdom on work, ownership, and progress. “The disease of the modern character is specialization:” the disintegration and scattering of the various elements of character: workmanship, care, conscience, responsibility. The specialist is competent to produce nothing but money (see Marx and Tonnies here; Durkheim for a slightly more optimistic view on what he calls “organic solidarity”). And community wholeness is impossible without personal wholeness. I find Berry’s diagnosis of specialization and its consequence genius. He says “We have made it our overriding ambition to escape work, and as a consequence have debased work until it is fit to escape from.” Specialization helps debase work, and, I would add, makes work fit for automation by breaking it into component parts. This got me thinking about generalist work as a possible antidote for the threat of automation. Generalist work can be rediscovered in preventative health work, in teaching and counseling, and in nurturing land and community (a good tweet: Sean McElwee: “the problem isn’t that we’re running out of work, it’s that we’re running out of “jobs” considered valuable by capitalists. different things”).

Berry also has important things to say about place and home. “As many as possible should share in the ownership of the land and thus be bound to it by economic interest, by the investment of love and work, by family loyalty, by memory and tradition” (this would have been a good framework for my discussion of American Indian land rights last week). He says the history of our time has been the movement of the center of consciousness away from the home: “When people do not live where they work, they do not feel the effects of what they do.” Once, the governing human metaphor was pastoral: the point of life is to nurture the land. The modern metaphor is the machine: “All of Creation is raw material to be transformed into a manufactured Paradise.” And while more powerful technologies require more advanced skills of moral restraint to be used properly, the demands of immediate use tend to overwhelm all else. Berry’s discussion of “housewifery” was so surprising and thought-provoking that I couldn’t decide whether it was as regressive as it seemed at first blush; he says running a home was once a complex and noble discipline, rife with pragmatist problem-solving and flourishing, but has been reduced (by the postwar era, that is) to the monotony of purchasing (the regressive part is just the notion that only women should be responsible for this work, which itself was less of a division on traditional farms). Berry supports some of these ideas with loving exegeses of The Odyssey, Confucius, and Andean multi-altitude agriculture. My roster of intellectual heroes now includes two Kentuckians committed to liberty, democratic anti-authoritarianism, and the virtue of smallness: Louis Brandeis and Wendell Berry.

3. Home is where the deployment of credit is
Matt Stoller argues that home isn’t just the centerpiece of human identity and dignity, but the linchpin in the American social contract–a contract that recent housing policy and the foreclosure crisis have eroded. In this 2012 paper “The Housing Crash and the End of American Citizenship,” Stoller traces American housing policy through the 20th century. In the postwar era, personal savings, mortgage lending, the banking system, and Federal Reserve management were tightly linked: “Americans put their savings into regulated savings institutions, which made mortgage and commercial loans. This allowed the Federal Reserve to have a remarkable degree of control over lending and borrowing in the economy, or the “transmission belt” from finance to the real economy.” Housing was a “non-controversial fulcrum for credit deployment,” in contrast to the present where there is little bipartisan consensus on how to spend money. He says the first major change to this social contract came in the Reagan era, which brought stagnant wages yet higher credit availability. “The fundamental change in the banking system was that control of credit creation passed from public to private entities.” Mortgage financing relied on securitization and nonbank originators. Stoller’s story of the housing market collapse is that the Reagan model of credit growth substituting for wage growth collapsed under its own weight. He has harsh words for the Obama administration for not putting a strong mortgage modification program (to save underwater borrowers) into the stimulus package. The HAMP program was a step in this direction, but it gave banks discretion on which mortgages to accommodate and only ended up helping a small share of underwater borrowers (here was David Dayen, the expert on this stuff, criticizing HAMP back in the day). Stoller’s policy suggestions are the revival of the New Deal-era HOLC program to write down housing debt to manageable levels and changing bankruptcy laws to empower judges to write down mortgages on primary residences. But Stoller was mostly pessimistic, shouting that the social contract had broken before most of us were aware of such a possibility. He said the new contract would likely be a more authoritarian model. All in all, I have concluded since the election that Matt Stoller is one of the people I should have been listening to for years (remember this essay too).

4. The word ergodicity really isn’t necessary to explain this
Nassim Taleb is reliably one of the most frustrating intellectuals I’m aware of. He is unjustifiably pompous, claims other people’s ideas as his own, and is uncharitable with his critics and peers. But he does have some brilliant ideas, and so I find myself unable to ignore him entirely. Take the most recent example, this essay on inequality and Piketty. I’ll start with the good stuff. Taleb contrasts static and dynamic inequality. Dynamic inequality accounts for a person’s movement across the income distribution over the life cycle. Persistent dynamic inequality–what Taleb sees as truly unjust–would have the rich remain rich, and the poor remain poor. Instead, “The way to make society more equal is by forcing (through skin in the game) the rich to be subjected to the risk of exiting from the one percent.” He cites evidence from Hirschl and Frank that this appears to be the current state of things: 12% of Americans find themselves in the top 1% of incomes for at least a single year, and 56% spend at least a year in the top 10%. I think this is an important distinction and we should all contemplate it, but I don’t find these numbers as devastating to the conventional wisdom on inequality as Taleb does. Most importantly, we already know wealth inequality is much larger and more persistent than income inequality (see Piketty & Zucman 2013, 2014). Second, we shouldn’t be surprised that people have major outlier years in the positive or negative direction. Finally, now that we’re thinking about the trends of income changes over the lifetime, the next question should be whether there is inequality in those trajectories themselves.

Where Taleb gets out of hand is lambasting Piketty and “the Mandarin class.” Piketty’s theory about increasing returns to capital in relation to labor can’t be “wrong,” as Taleb states without justification, insofar as it was a ream of data, not a theory (although it can be (a) disproportionately related to the housing stock and (b) unlikely to persist, as Matt Rognlie has argued). But Taleb’s main issue is that Piketty’s methods were flawed. Taleb’s point, which he has detailed in two papers, is that surveys of top incomes tend to be upwardly biased because of sampling error in the long tail. Taleb has proposed a better sampling procedure to account for this. The main thing to notice here is that there isn’t anything to notice here; this is the routine process of people proposing slightly better methods, not some earthshaking invalidation of Piketty’s findings. Indeed, Piketty happily cites Taleb’s method in a subsequent paper. The irony is that this methodological critique doesn’t even apply to Piketty’s main data source: the critique is about survey sampling, while Piketty uses administrative tax data where possible. Certainly nothing justifies Taleb’s rant about how Piketty, Krugman, and the whole economics profession are ignoring his smoking gun, even though it was “about as ironclad a piece of work one can have in science.” I think a crucial side of intellectual work is learning what you can from anyone, being charitable to opponents, and recognizing that even the geniuses stand on the shoulders of giants. Taleb seems to have no appreciation for this. Keep this in mind when he mentions other people’s ideas in Black Swan and Fooled by Randomness.

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