Photo Props Boom in Japan

Rather than being "phono logo phallo centric" (Derrida) the Japanese are not so much animist (as they claim) but "Video Ergo Sum" (Lenggenhager, et al. 2007). This is due to the fact that the other of the Japanese is a gaze rather than an ear (Derrida). The Japanese mind is a mirror and the centre of gravity of the self is the face or "mask" (Wasuji). For that reason the Japanese have a fascination with photography and especially trick photography since if something looks like it is, then in a sense, it is. He I am photographed with Ray and May surrounded by "Photo Props" which are pieces of paper to change ones appearance in photos and are currently booming in Japan. Before the arrival of "photo props" of course, Puri Kura (Print Clubs) provided portrait photography post processing.

How to actually redistribute respect

A while ago, I wrote a blog post called "Redistribute wealth? No, redistribute respect." That could have been the title of a speech Paul Ryan gave recently. I especially liked this part:

There was a time when I would talk about a difference between “makers” and “takers” in our country, referring to people who accepted government benefits. But as I spent more time listening, and really learning the root causes of poverty, I realized I was wrong. “Takers” wasn’t how to refer to a single mom stuck in a poverty trap, just trying to take care of her family. Most people don't want to be dependent. And to label a whole group of Americans that way was wrong. I shouldn’t castigate a large group of Americans to make a point. So I stopped thinking about it that way—and talking about it that way.

This is a hugely important step toward increasing American society's respect for the poor and the working class. Language matters, of course - Ryan's speech is almost certainly a rebuke to Kevin Williamson's disgustingly elitist article in National Review. But much more importantly, Ryan is actually starting to go and look up close at poor and working class people, talk to them, see how they live, and understand their problems. Good for Ryan.

But that is only a first step toward really respecting the poor and the working class. What are the next steps toward a respectful society?

Words are important, but they need to be backed up with beliefs. Truly respecting poor and working class people means believing that they are mostly taking government assistance for reasons that most of us would find respectable - to support their kids and parents, to help themselves through what they think are temporary difficulties, to keep up their health, to get an education and a good job, etc. It also means believing that poor people are basically rational - not totally rational, because no one is, but not substantially less rational than middle-class and rich people.

If you believe these things, you will be more likely to support a social safety net. That doesn't mean we should stop worrying about the work disincentives created by high implicit rates of income taxation for poor people. But it does mean we should drop any and all attempts to paint the poor as undeserving due to bad morals, laziness, or stupidity. And all else equal, it should make us more likely to support things like food stamps, child care tax credits, public housing, health assistance, etc. - and the taxes to pay for them. In other words, the opposite of the economic plans that Paul Ryan is pushing right now.

Beyond the social safety net, there are many important ways that Americans could turn our country into a more respectful one.

For one thing, upper class people could stop trying to segregate themselves from the working class. Gated communities? Development restrictions that stop cheap housing from being built in high-income areas? Private schools? How about less of that stuff.

Even more importantly (in my opinion), we could start respecting people of different races, genders, sexualities, etc. Institutional unfairness, bigotry, stereotypes and harassment are all manifestations of deep disrespect for whole swathes of Americans.

Racist jokes at the Oscars? Cut that out. Hiring people based on having white-looking resumes? Make a conscious effort not to do that. Sexual harassment of women in science? No more of that. Aggressive online harassment of women? Just hit yourself in the head with a brick every time you get the urge to do that. Etc. etc. To say nothing of the racism of the police and the justice system, which is a huge manifestation of deep societal disrespect for black Americans.

Donald Trump and Ted Cruz? No American who is genuinely respectful of other Americans has any business voting for those jerks.

The above is mostly aimed at people on the right, but the left could do some things as well. How about not writing posts about "America's white male problem"? How about respecting freedom of speech on campus, even the views of Trump supporters? How about not echoing Kevin Williamson's elitist tripe in the pages of Salon? I'm not trying to draw an equivalence here between the left and the right, but everyone should do their part in creating a more respectful society.

See? There are lots of things we can do. I stand by my statement that respect is a bigger problem in America than raw economic inequality. Imagine a country where the rich are willing to send their kids to school with the kids of the poor, where poor people can walk past the houses of the rich without being escorted out by a security guard, where the wealthy are happy to have the government use some of their income to buy food for the poor. A country where black people can get a job as easily as white people of the same qualifications, where women don't get harassed by men all day, where black people don't get persecuted by police or treated unfairly by juries, where Asians get promoted just as easily as whites. A country where income, wealth, race, gender, education level, etc. don't affect your social status one bit.

Let's create that country, and then let's have a debate about redistributing wealth. I bet if we lived in that classless, fair society, pressure for socialism would essentially vanish. But there's only one way to find out.

New paradigms in economic theory? Not so fast.

I've recently read two big-think piece about new paradigms for economic theory - this one by evolutionary biologist David Sloan Wilson, and this one by venture capitalist and activist Nick Hanauer and speechwriter Eric Liu. Is economic theory due for a paradigm shift? Maybe, but I don't think we know what the new paradigm will be yet.

Wilson's piece - grandiosely titled "Economic Theory Is Dead. Here’s What Will Replace It." - claims that evolutionary theory will be the magic bullet that will breathe life into econ. The piece doesn't explain how to incorporate evolutionary thinking into econ, but it does link to a 2013 special issue of JEBO that Wilson edited along with Barkley Rosser about incorporating evolution into economics. In a paper in that volume, Wilson lays out his ideas slightly more explicitly.

But only slightly. Wilson's paper does three things: 1) it references economists who have suggested making use of evolutionary ideas in the past, 2) it discusses some arguments against using evolutionary theory in econ, and 3) it lays out some broad general principles of evolutionary theory. Concrete examples are left to the other papers in the volume (which are all sadly paywalled).

In principle I think evolutionary theory might add a lot to economics, because economies obviously involve things like birth and death of firms, competition, predation, and other features similar to natural ecosystems. 

But the case for using evolutionary theory in econ is not yet a slam-dunk. The big reason is that we don't have much evidence that inheritance of traits occurs in economies. In biological evolution, we have many clear examples of heredity. In econ, to my knowledge, we have none. Evolution needs heredity, so evolutionary theorists who want to change the econ world should focus on demonstrating the existence of traits that are passed from company to company, or person to person, or industry to industry, within economies. Or, alternatively, they should show that companies and/or individuals have traits that change over time in a way similar to the way that biological traits change between generations. They should be very concrete and consistent about how to measure these traits. Then we can start talking about using evolution to create a new economics. 

Would-be evolutionary economists should realize that the measure of their success will be quantitative prediction. Get some numbers right out of sample, and they will win. What won't be useful is for them to simply point at various economic phenomena and say "Hey, this looks kind of like it conforms qualitatively to one or more general principles of evolution!" That sort of vague hand-waving does not really generate any progress in humanity's understanding of our world - it merely creates a feel-good sense of "truthiness" that makes for some good hypey media articles but little else. Evolutionary theorists, like all other researchers in all fields, should focus on predictive power and leave the hand-wavey just-so stories to a minimum.

Hanauer and Liu's piece - similarly titled "Traditional Economics Failed. Here’s a New Blueprint." - is, in my opinion, much more promising, if also pretty vague. It is also much more diverse, specifying many different sweeping changes that they believe need to be made in economic theory. Among these are:

1) The replacement of reductionist models with ones based on "complex adaptive systems"

2) The use of network models

3) The use of disequilibrium models

4) The use of nonlinear models

5) The replacement of "mechanistic" theories with "behavioral" ones

6) The replacement of optimization with something resembling "satisficing"

7) The replacement of forward-looking agents with adaptive agents in econ theories

8) Modeling people as interdependent instead of independent

9) Modeling people as irrational approximators instead of rational calculators

10) Modeling people as caring about reciprocity

11) Modeling win-win situations instead of environments characterized by rivalry

12) Replacing models of competition with models of cooperation

There is a lot to digest here. I'd split these points into three categories:

Category 1: Good points. These include (2), (4), (6), (7), (8), (9), (10), and (12). Hanauer and Liu identify networks, nonlinearity, incomplete optimization, incomplete forward-looking-ness, externalities, behavioral heuristics, social preferences, and cooperative games as areas needing more attention in economics. I agree with all of this. Good job, guys!

Category 2: Points that misunderstand the current state of economics research. These include (3) and (11). Regarding "equilibrium", economists don't use it in the physics sense that Hanauer and Liu cite. Instead, they have redefined the word "equilibrium" to mean "any solution to a system of equations in any model." The term is thus now meaningless. Many, many mainstream economic models include "transition dynamics" or "short-run equilibrium" that is exactly the same as what Hanauer and Liu call "disequilibrium".

As for "win-win" models, most existing mainstream econ models are all about win-win situations. This is the concept of Pareto Efficiency. 

Category 3: Points that are not very well-defined. These include (1) and (5). "Complex adaptive systems" is a term that gets thrown around a lot but rarely gets a concrete definition. In computer science research, "complexity" basically just means "displaying emergent properties", and progress in that field has been rather halting. I'm still not sure what the term "complex adaptive systems" means in terms of economics. 

Hanauer and Liu assert that "We understand now how whirlpools arise from turbulence, or how bubbles emerge from economic activity." The latter is not the case; we do not actually know what bubbles are, or even whether they are a single phenomenon or several similar-looking phenomena. Are bubbles based on "greater fool" speculation? Rational mispricing? Emotion-based irrational mispricing? Information cascades? Other forms of herd behavior? Bayesian "information overshoot"? Some combination of these? None of these? We just don't know.

As for making economics less "mechanistic" and more "behavioral", Hanauer and Liu do not explain what this means, and merely reference a David Brooks book (which is not encouraging). 

So I agree with about two-thirds of Hanauer and Liu's points. The others need tightening up, but not bad overall. The question is whether these ideas, together, represent a new paradigm in economic theory. Hanauer and Liu argue that they do, but I am not so sure. There seem to be three mini-paradigms here: bounded rationality, interdependence, and holistic analysis. The first two have already been making inroads in economics, though I think they should make more inroads. The latter is kind of an older idea that doesn't seem to have panned out as well as many hoped - there isn't actually going to be a Second Enlightenment replacing reductionist science with holism.  

But I think that more important than any of these theoretical changes - or the evolutionary theory suggested by Wilson - is the empirical revolution in econ. Ten million cool theories are of little use beyond the "gee whiz" factor if you can't pick between them. Until recently, econ was fairly bad about agreeing on rigorous ways to test theories against reality, so paradigms came and went like fashions and fads. Now that's changing. To me, that seems like a much bigger deal than any new theory fad, because it offers us a chance to find enduringly reliable theories that won't simply disappear when people get bored or political ideologies change.

So the shift to empiricism away from philosophy supersedes all other real and potential shifts in economic theory. Would-be econ revolutionaries absolutely need to get on board with the new empiricism, or else risk being left behind.


Updates

David Sloan Wilson replies. He laughs at economics for being very very late to embrace empiricism. While the rebuke is very deserved, it's also true that good data is a lot harder to gather in econ, and that technology has made this a lot easier in recent decades.

Wilson also writes:

But there is more to Science 101 than the need to test theories. Let’s imagine that there were ten million cool theories out there. How long would it take to test them? Hundreds of millions of years. ...Does Smith really believe that any old idea that comes into the head of an economist is equally worthy of attention?

Answer: Of course not, but this is another reason empirical results are important. They typically leave a trail of clues that help guide scientists toward good theories. You see electrons making a sort of wavey pattern, and you invent quantum mechanics to explain that - and luckily it turns out to explain a lot of other stuff too. That's a typical progression - you start out with some fact or phenomenon, then you make a theory to fit it, then you test that theory on different phenomena to see if you've got something structural. Of course, sometimes pure intuition gets things right the first time around - general relativity and auction theory are examples of this - but usually we're not that smart, and theorists have to follow the empirical bread crumbs.

Wilson also writes:

The main reason that the so-called orthodox school of economics achieved its dominance is because it seemed to offer a grand unifying theoretical framework. Too bad that its assumptions were absurd and little effort was made to test its empirical predictions.

Well, there has definitely been some of that going on. But "orthodox" econ has achieved a lot of solid results, like auction theory, random utility discrete choice models, and a number of other models in tax, labor, and other areas. Nor are orthodox assumptions always absurd, since some of them hold up well in lab experiments and other micro-level studies. I think Wilson would enjoy learning about these successes, in addition to the well-publicized failures.

Russ Roberts and the new empirical world

My last post, about Russ Roberts' EconTalk interview with David Autor, was requested by Russ as part of a general symposium on the topic. But it also reminded me that I had wanted to blog about two earlier EconTalk episodes - Russ' interviews with Joshua Angrist and Adam Ozimek.

These interviews, along with my own and Autor's, are basically part of a series. In this series, a bunch of people basically try to convince Russ that empirical economics matters a lot. Russ plays the part of the econ public - the average older academic, plus the econ-literate community of policy wonks, blog readers, and the like. He starts off basically thinking that econ is about theory (as it really was back when he was learning his chops). Then, through a successive series of conversations, he becomes convinced that not only have things changed, but that this is as it should be.

First, he talks to Angrist. Angrist is the chief academic evangelist for the "credibility revolution," the methodology at the heart of the new empirical revolution. Angrist tells him about a whole raft of exciting results that have come out of this methodological shift. Russ doesn't really know these methods very well, since only recently have they been codified, systematized, and popularized. So he doesn't quite know how to respond to Angrist's assertion that a revolution is underway. He keeps asking things like "But your new methods aren't convincing everybody...right?" And Angrist gets a little frustrated, basically responding that it's impossible to convince someone with evidence if they don't take a careful look at said evidence. If Russ were more up on this debate, he could have given Angrist a stiffer challenge, bringing up external validity concerns, or the fact that the new methods don't really work in macroeconomics. But remember, the whole point of this series of interviews is to introduce Russ into the new world! There will be time for pointed criticism later.

Second, Russ talks to me. I am a snarky, combative blogger who has trumpeted econ's empirical turn as something to be celebrated - something that will make the whole field more scientific. Russ and I have a great discussion and debate. Unlike Angrist, who focuses on research methodology and doesn't really bother going around asking people if they've changed their minds, I can offer a few concrete examples of economists who have shifted their views in response to empirical results, both of the "credibility revolution" type and other types like structural models and time-series macroeconometrics. I also rant about my favorite hobbyhorse, i.e. the value of empiricism. Russ is more convinced, but my combative nature probably leaves him uneasy with simply accepting my assertions.

Next, he talks to Adam. Adam makes basically the same points I do, but more eloquently and in a gentler fashion. Adam has been involved in an extensive debate with Russ over the value of convictions vs. evidence in economics. In his interview, Adam declares that although empirical results should be interpreted with humility, "stories and our own narratives about the world need even more humility," and we need more skepticism of our basic lenses [i.e. worldviews and ideologies] than we do of empiricism." Those are beautiful lines. Adam also cites empirical literatures that have convinced large numbers of economists to change their minds (to varying degrees) about big questions. Some are the same examples I cite, but he adds the example of trade, and cites Autor's work.

Russ is no longer nearly as dismissive of empirical econ, but he is still firmly in the role of the skeptic. He consistently refers to "sophisticated" econometric techniques, as opposed to "casual" evidence that he finds generally more convincing (he is not alone). The first few dozen times I heard Russ use the term "sophisticated" to refer to things like credibility-revolution econ, I was flummoxed, since many of these methods are simple comparisons of means. Suppose I tell my dog to bite your leg,* and I compare the number of bite marks after the attack to the number before - how sophisticated is that? But eventually I realize that by "sophisticated", Russ just means "systematic". He's saying that he trusts the evidence of his own eyes more than the opaque systematic data collection and analysis methods of empirical economists.

If I had realized that during my own interview, I would have pointed out that this is how science always works. Most people don't know how scientists know the distance from the Earth to Mars, or the mass of the electron, or that bacteria cause the plague. The scientific consensus on these topics was created by insiders - people with knowledge of both the theories and the empirical methods - convincing other insiders. Educated outsiders don't understand the theories and the methods, but they trust the scientists to get things right (and once in a while they even trust the scientists too much). Uneducated outsiders don't even trust the scientists - they believe vaccines cause autism, or that the world is flat, or that diseases are caused by demon possession, or whatever.

Russ isn't an uneducated outsider - he's an educated outsider in a field where the scientists (or whatever you want to call them, empirical researchers) haven't yet built up the trust and credibility to have their results gain instant acceptance by educated outsiders. Scientists cured the plague and put humans on the moon, but economists have a much harder job applying most of their results, since the results are usually about policy, and policy is ponderous, slow, clumsy, and subject to lots of random shocks. So Russ has not yet been shown the money, so to speak, and he's understandably wary.

But like most economists, Russ is smart, open-minded, and intellectually honest. In his interview with Adam, you can see that he is warming to the idea of the empirical revolution. Russ has been deeply disturbed by the ideological tone of the macroeconomic debates since 2008, and he recognizes that people might interpret casual evidence in ways that confirm their own worldview. He talks about psychological rigidity and people's tendency to defend their previous statements and positions. He worries that sloppy empirical work might be used by tendentious researchers as a front for their preferred policy positions (and this is a real worry), but he seems to realize that casual or anecdotal evidence is far more subject to this sort of misuse. Adam's contention that we need to be even more skeptical of our ideologies than of our evidence hits home.

So Russ is getting more into the empirical world here. In his interview with Autor, he doesn't question the validity of empiricism as a research method, but focuses on understanding the results in the context of theory. He does not ask many pointed questions about the research methodologies Autor uses, but he is not dismissive of the idea that empirical econ could poke holes in a hallowed policy consensus.

This is great to see. Though Russ is considerably more libertarian than the average economist, I think of EconTalk as a sort of a barometer for the wider econ world. The things Russ thinks out loud on the air must be things that thousands of older econ profs are thinking silently in their seminars, and that thousands of policy wonks are thinking silently while reading blog debates. The older generation came of age in a time where theory was king, and it's going to take some time to adjust to the new world. But that adjustment is happening.

So who should Russ have on EconTalk next? How should this series continue? I'd like to see some more top empirical researchers get a chance to strut their stuff. For example, he could get John Haltiwanger on to talk about declining dynamism in the American economy. He could get Raj Chetty to talk about mobility, education, and inequality. He could get Susan Athey to talk about machine learning techniques. Guests like this will continue to convince him that empirical econ is making lots of useful and reliable discoveries, as well as publicizing these discoveries to his many listeners!


Updates

Looks like I missed a couple of "episodes" in this "series". Here's Russ talking to Ed Leamer way back in 2010, and to James Heckman more recently.

Autor on EconTalk

David Autor recently went on Russ Roberts' EconTalk podcast to talk about his new paper about China trade. The Autor paper, co-authored with Dorn and Hanson, has been a real bombshell in the econ world, since it seems to challenge the "consensus" on free trade. Economists have long asserted confidently - in public, though not always in private - that free trade is always good, and now some top economists have shown that maybe it's not always good. That's a big deal.

Roberts and Autor do a very good job of zeroing in on why free trade might not be good, and why it might not have been good in the case of China. The reason is distribution - trade can hurt some people, especially if the government is not perfectly efficient in using redistribution to cancel out the distributional effects of trade (which of course it never is). This has been known for a long time, but economists often wave their hands and ignore distribution. 

Autor et al. have basically made a splash by failing to ignore this very important thing. They treat distribution as important by assumption, and then they check that assumption by showing that govt efforts to cancel out the distributionary effects of trade have been woefully inadequate. Roberts, to his great credit, does not do the "annoying online libertarian" thing, and simply wave away distributionary concerns (as, say, Bryan Caplan might do if he were doing podcasts). In fact, Russ once again comes off as a very pragmatic, situationalist, intuition-driven sort of fellow - the kind of thinker I believe we need more of (and that Brad DeLong says have made America great). 

One very interesting point in the discussion is when Autor says that trade between rich countries is basically all upside. I think that this is a hugely important point that gets completely ignored in today's trade policy discussions, including by some of my favorite writers like Paul Krugman. Unfortunately, Russ doesn't follow up on this point, but it matters a lot, since the trade agreements we're now considering - the TPP and TTIP - are almost entirely agreements with rich countries. Some people seem to be treating the Autor paper like it applies to TPP and TTIP, but it just doesn't, and I wish this were talked about more.

Autor also mentions a couple of other potential downsides of trade. He mentions trade diversion from multilateral agreements - unfortunately this doesn't get followed up on. He also mentions trade deficits, correctly pointing out that in real terms, trade deficits are a loan, not a gift. This means that running trade deficits today is, at the country level, an impatient thing to do - it sacrifices the consumption of future generations to allow our current generation to consume more. Sadly, this point is not pursued much, but I guess podcasts have time constraints, and this one was already a bit long.

Anyway, a very good episode. I think I will do more reviews of EconTalk episodes! One thing I think Russ needs to get better at is critiquing empirical papers. In this episode, he brings up the possibility of multiple comparisons (which of course Autor accounted for, Autor being Autor). A better critique might have been to question the structural assumptions of the linkage model that allowed Autor et al. to conclude that the China trade shock reduced employment in aggregate. Now that econ is becoming more empirical, being able to get into the empirical weeds like that is going to be more and more important.

Update: Others have responded to the episode, as requested by Russ. This is great, since Autor's work, and the new controversy over trade, needs to be publicized a lot more!

Grading King Yudkowsky

Scott Sumner, diabolical sentient alien virus renowned monetary policy guru, has endorsed Eliezer Yudkowsky, professional Reasonable Dude, for King of the World. This is based on an interview of Yudkowsky by John Horgan for Scientific American. In that interview, the future King Yudkowsky makes some economic policy suggestions. However, as Emperor of the Local Group of Galaxies, I feel that I should grade the planetary monarch's ideas.

First, King Yudkowsky holds forth on the value of college:

Horgan: Is college overrated? 

Yudkowsky: It'd be very surprising if college were underrated, given the social desirability bias of endorsing college. So far as I know, there's no reason to disbelieve the economists who say that college has mostly become a positional good, and that previous efforts to increase the volume of student loans just increased the cost of college and the burden of graduate debt.

As far as I know, there is no quantitative or systematic evidence for social desirability bias regarding the value of college, so I assume that King Yudkowsky is leaning heavily on his priors here. As for student loans increasing the cost of college and the burden of debt, that does appear to be true, but says very little about college actual value, or whether college is mostly a positional good.

Next, King Yudkowsky offers a raft of economic policy suggestions:

Horgan: If you were King of the World, what would top your “To Do” list? 

Yudkowsky: I once observed, "The libertarian test is whether, imagining that you've gained power, your first thought is of the laws you would pass, or the laws you would repeal."  I'm not an absolute libertarian, since not everything I want would be about repealing laws and softening constraints.  But when I think of a case like this, I imagine trying to get the world to a condition where some unemployed person can offer to drive you to work for 20 minutes, be paid five dollars, and then nothing else bad happens to them.  They don't have their unemployment insurance phased out, have to register for a business license, lose their Medicare, be audited, have their lawyer certify compliance with OSHA rules, or whatever.  They just have an added $5. 

I'd try to get to the point where employing somebody was once again as easy as it was in 1900.  I think it can make sense nowadays to have some safety nets, but I'd try to construct every safety net such that it didn't disincent or add paperwork to that simple event where a person becomes part of the economy again. 

I'd try to do all the things smart economists have been yelling about for a while but that almost no country ever does.  Replace investment taxes and income taxes with consumption taxes and land value tax.  Replace minimum wages with negative wage taxes.  Institute NGDP level targeting regimes at central banks and let the too-big-to-fails go hang.  Require loser-pays in patent law and put copyright back to 28 years.  Eliminate obstacles to housing construction.  Copy and paste from Singapore's healthcare setup.  Copy and paste from Estonia's e-government setup.  Try to replace committees and elaborate process regulations with specific, individual decision-makers whose decisions would be publicly documented and accountable.  Run controlled trials of different government setups and actually pay attention to the results.  I could go on for literally hours.

Fortunately, King Yudkowsky does not go on for literally hours, because we Pan-Galactic Emperors have a great number of duties, and thus have limited time to spend grading the policies of mere planetary monarchs. So let's take a look at what we have.

King Y. believes that the year 1900 was a good year for the regulatory environment. Of course, the world of 1900 was much poorer than the world of 2016, but most of that can probably be chalked up to technological progress, so we shouldn't go assuming that regulation is what has made us fabulously wealthy compared to our forebears. But given the potential existence of asymmetric information, there are theoretical justifications (which you may or may not believe) for a large number of regulations, on economic efficiency grounds alone. Use regulation to make the world safer from adverse selection, moral hazard, and the like, and incomplete markets become complete, and everyone gets a lot richer - or so the theory goes. King Yudkowsky would reverse all this, but refers to no evidence for why that would be efficiency-enhancing.

As for "smart" economists advocating for his remaining policies, I am flattered that King Yudkowsky sees fit to include Land Value Taxes among these, for I myself am quite a strong advocate of these. However, on the matter of income versus consumption taxes, I must defer to a far, far smarter economist, Stanford University's Robert Hall (who could easily do my job of Pan-Galactic Emperor if he didn't have more valuable things to do with his time). Robert Hall, having analyzed the question of consumption vs. income taxes from a theoretical standpoint, concludes that "the argument from economic efficiency for a consumption tax is weak indeed."

On the matter of replacing minimum wages with negative wage taxes, I am again flattered that the King has taken a position I myself have long favored. However, on the matter of abolishing the minimum wage, even Kings and Emperors err, and the empirical evidence is only now coming in. Perhaps we should wait for the data before throwing away an important policy tool.

Regarding the suggestion of NGDP-level targeting, it frankly sounds like a...oh wait, hold on, Scott Sumner is on the line...(long pause)...anyway, on to the next point. Letting TBTF banks "go hang"? While eliminating TBTF subsidies in the long term is generally held to be a good thing, the question of whether the 2008 bank bailouts ultimately helped the U.S. economy is an open one. However, an overwhelming majority of top economists surveyed by Chicago Booth's IGM Forum say that the bailouts made the crisis less bad. The percent who disagree? Zero. King Yudkowsky must be finding his "smart economists" in a different place than IGM finds theirs.

Regarding the health care system of Singapore and the e-government of Estonia, I can only admit my ignorance (I told you, we Pan-Galactic Emperors have limited time, though I will say that Singaporean accents are very cute). As for the idea of running controlled trials of various "government setups," I can only express the hope that these trials will be better controlled than those in the 1930s. 

I do like the ideas of eliminating obstacles to housing construction and weakening copyright law, though.

At any rate, I find that King Yudkowsky's ideas, while a mix of good, blah, and dubious, in general suffer from the epidemic of Reasonability that has been sweeping much of the Earth planetary internet of late. King Yudkowsky describes Reasonability in Bayesian terms later in his interview:

Yudkowsky: ...Bayes's Theorem is a kind of Second Law of Thermodynamics for cognition.  If you obtain a well-calibrated posterior belief that some proposition is 99% probable, whether that proposition is milk being available at the supermarket or global warming being anthropogenic, then you must have processed some combination of sufficiently good priors and sufficiently strong evidence.

While various suggestions have been put forth regarding what constitutes a "sufficiently good prior" in various scientific applications, it is known that a 99% posterior can always be obtained with the use of a sufficiently strong prior, no matter the evidence for or against a proposition. While incredibly strong priors are technically rational in the Bayesian sense, people in the Pan-Galactic Imperial Court have been hesitant to label this approach as "Reasonable," after the fashion of the Earth planetary internet. We have, however, employed certain alternative terminology.

All in all, I have decided to send one of my Imperial Agents, one Roko's Basilisk, to Earth to make certain adjustments in the economic policy regime. He should be having a chat with King Yudkowsky soon. 

Stamped on their Person

Why is it that we feel that each and every instance of a word has the same meaning, and can be copied perfectly authentically such as to make copies equivalent, and redundant? Answers to this question vary, but according to Derrida they all imply a "presence," either of some entity such as a metaphysical world of ideas (Plato, e.g. Theaetetus), meanings that are hard-wired in the brain (Pinker, 2007) , or because they refer to a shared physical world (Pierce, 1973). Others posit an ongoing inter-subjective presence, of God, the super-ego, super-addressee who understands words in the same way. At the middle ground between these two extremes is perhaps an awareness of usage: an abstraction from inter-subjective communication (Wittgenstein, 1973).

The Japanese may believe, as argued by Mori (1999), that words exist in the absence of any shared additional presence across iterations. Japanese words may lack both shared system and the perspective of a "third person" intra-psychic imaginary friend . Words are contextual and imbued with the subjectivity of the situation in which they were received. In this case copies of words are no longer redundant any more than are views of colours, flowers or sunsets. Words thus conceived are not authentically copyable, but need to be received.

When on pilgrimage, Japanese have traditionally collected words from spatially separate sites. These words do not sink into a system, nor are consumed by any internal friend. They are collected by having them stamped into cards, or books that pilgrims hang around their necks, or as in the above image, onto the clothes that they wear upon their person.

I am again reminded of Revelation 22:4. "There will no longer be any curse..."

The above image is the Google image search page for pilgrim's clothes (gyoue)

Derrida, J. (2011). Voice and Phenomenon: Introduction to the Problem of the Sign in Husserl’s Phenomenology. Northwestern Univ Pr.
Mori, 森, 有正. (1999). 森有正エッセー集成〈5〉. 筑摩書房.
Peirce, C. S. (1894). What is a sign? Theorizing Communication: Readings across Traditions, 177. Retrieved from www.semioticadelprogetto.it/download/CSP%20-%20What%20is%...
Pinker, S. (2007). The language instinct: How the mind creates language. Harper Perennial Modern Classics.
Plato, 427? BCE-347? BCE. (1999). Theaetetus. (B. Jowett, Trans.). Retrieved from www.gutenberg.org/ebooks/1726
Wittgenstein, L. (1973). Philosophical Investigations (3rd ed.). Prentice Hall.

Climbing Authenticopies

Edo period Japanese were fond of visiting Ise Shrine, other shrines and temples, and also famous mountains, none more so than Mount Fuji. However the purpose of visiting Mount Fuji was not to enjoy the view from the top, which as the saying goes is preferred only by stupid bigheads and smoke (baka ya kemuri ha takai tokoro ga suki). So instead of climbing the mountain, they more often chose to climb a model of the mountain, wearing full pilgrim's attire, at one of the shrines at the base of Mount Fuji (Ohwada, 2009, p. 40: quote in Japanese below).

There is no size information in the visual. A bonsai tree looks the same as a massive oak, and a model of Mount Fuji can look the same as the real thing. If you wear the right kit and walk up a model, then you might as well have walked up the actual mountain, because they will look the same way. In he land of the sun-goddess the authenti-copies or simulacra (Baudrillard, 1995) are not words, which Westerners feel to be perfectly copyable because we have a listening comforter, but visual replications such as of mountains in front of Shinto shrines.

Japanese culture is rife with authenticopies such as bonsai, model food in place of menus, dolls, horse and cow sculptures at shrines, masks, pictures of the deceased and his royal highness the emperor, and the god-head (goshintai) of the deities themselves that can be copied or split 'as one can split a fire' (Norinaga, see Herbert, 2010, p.99). The practice of visiting copies continues to this day in the form of creating foreign villages ("gaikoku mura") which fascinate foreign anthropologists and tourism theorists (Graburn, Ertl, & Tierney, 2010; J. Hendry, 2000; Joy Hendry, 2012; Nenzi, 2008). I don't think that they have noticed that the Japanese world is inside out yet, however.

If it were indeed the case, as argued here, that the Japanese world is that of light, an amalgam of images, seen and 'insured' by the watchful eye of the Sun goddess, then in order for someone to pass from Western to Japanese culture, from a Western to Japanese world, they would need to pass through the veil of perception. Perhaps all one really needs to do is find the dead girl that you are talking off to.

Perhaps that is what David Lynch (1992) meant by "Walk fire with me".

The above image is composed of a detail from the model mountains (though not of Mount Fuji) or standing sand (tatesuna) in Kamowake-Kazushi Shrine precinct by 663highland, and image of a monk in a straw hat from gatag copyright free image source.

富士山の場合は、富士山に実際に登山していわゆる富士山禅定（ぜんじょう・登る＝修行）を行う者はむしろ砂苦、大多数はしないの富士山神社や諸社寺境内に設けられた箱庭式で模擬登山を行うのであった(大和田, 2009, p. 40)

Bibliography
Baudrillard, J. (1995). Simulcra and Simulation. (S. F. Glaser, Trans.). Univ of Michigan Pr.
Graburn, N., Ertl, J., & Tierney, R. K. (2010). Multiculturalism in the New Japan: Crossing the Boundaries Within. Berghahn Books.
Hendry, J. (2000). Foreign Country Theme Parks: A New Theme or an Old Japanese Pattern? Social Science Japan Journal, 3(2), 207–220. http://doi.org/10.1093/ssjj/3.2.207
Hendry, J. (2012). Understanding Japanese Society (4th ed.). Routledge.
Herbert, J. (2010). Shinto: At the Fountainhead of Japan. Taylor & Francis.
Lynch, D. (1992). Twin Peaks: Fire Walk with Me.
Nenzi, L. N. D. (2008). Excursions in identity: travel and the intersection of place, gender, and status in Edo Japan. University of Hawaii Press.
大和田守. (2009). こんなに面白い江戸の旅. (歴史の謎を探る会, Ed.). 東京: 河出書房新社.

The Folk Theory of business cycles

A lot of people seem to subscribe to what I call the Folk Theory of business cycles (not to be confused with the Folk Theorem of game theory). Roughly speaking, this is the idea that:

1. Debt growth is necessary for GDP growth.

2. As GDP grows, debt levels become too large, leading to an economic crash.

3. Therefore, booms cause busts, through the mechanism of debt accumulation.

I'm not going to say this theory is wrong, or bad. It might be right. But I have a few problems related to this theory.

Problem 1: Misunderstanding Academia

First, a lot of people who believe a version of this theory - private economic forecasters, asset managers, econ writers, heterodox economists, and random punters from the web - get exasperated with mainstream academic macroeconomics, because they think that profs have ignored this idea. I often get told that mainstream academic macroeconomists are idiots, fools, and/or knaves by people whose basic view of the world conforms to a version of the Folk Theory.

But the charge is not quite right. Yes, the main strands of academic macro (New Keynesian and RBC theories) mostly ignored debt dynamics and assumed that recessions and booms are random. Yes, economists didn't pay nearly enough attention to finance before 2007. But a version of the Folk Theory actually did exist in mainstream macro since the 1990s. It's called the Leverage Cycle. To learn more about it, check out this survey paper by the eminent mainstream macroeconomist John Geanakoplos. Since the crisis, of course, theories like this have gained more currency and attention. There is also a huge amount of somewhat-related research that I'm not referencing here, just to keep this short, but at some point I will.

Now, some people are going to look at that paper and not understand the math. Then they're going to assume that Geanakoplos fails to grasp some concept for which they have an English term ("Endogenous money"! "Double-entry bookkeeping"! "Disequilibrium dynamics"! "Complex systems"! "Reflexivity"! "Minsky moments"! etc.). Then on that basis, they're going to continue to claim that mainstream academic macroeconomics fails to believe in the Folk Theory, and continue to call mainstream academic macroeconomists idiots. But because they don't understand Geanakoplos' math - and possibly don't even understand the precise meaning of the English terms they're throwing around - they don't actually know if Geanakoplos' math represents "endogenous money" or "complex systems" or whatever. 

So you probably shouldn't listen to these people.


Problem 2: The Illusion of Knowledge

My second, and bigger, problem with the Folk Theory is how the theory fits the data. If you read Geanakoplos' paper you'll notice that it's heavy on ideas, light on facts, as are most of the papers in that literature. Well, if we want to actually apply the theory, that's a problem. The latest research on long-term economic forecasting shows that debt is important for predicting economic cycles. But what's important is not the amount of debt, but the quality of debt, as measured (for example) by credit spreads and junk bond shares. Previous studies have mostly found the same, which is why you see credit prices as leading indicators rather than credit levels. That means that, as far as we can tell, while debt does do interesting and potentially bad things to an economy, you probably can't predict recessions just by saying "Holy crap, this country is running up a lot of debt, they're about to crash!!" 

Of course, that has not deterred many in the econ media from making exactly this sort of claim, especially when it comes to China. For example, a graph in a recent piece in The Economist attempts to show that China's large increase in debt presages a coming crash:

We're supposed to see a clear pattern here. Debt rises and hits a peak, then a recession hits and debt levels collapse (deleveraging). China's debt line has recently increased a lot. Hence, we should expect it to collapse soon. It's the Folk Theory. 

But this chart is actually really bad. First of all, it suffers from massive look-ahead bias. We know these countries experienced financial crises and lost decades, so of course they're included on the graph. Actually, look-ahead bias is present for China too, since we already know that its economy is now slowing dramatically, that it's experiencing financial troubles, and that its credit quality has probably deteriorated recently.

Second of all, the chart (and the Folk Theory itself) has a huge correlation-causation problem. Suppose, for the sake of argument only, that debt had nothing to do with economic cycles. Suppose it was only along for the ride - when they're more economic activity, people borrow and lend more with each other, and when growth slows down they borrow and lend less, but the activity of borrowing and lending has no effect on how much gets produced. In this hypothetical fantasy world, we'd naturally see debt levels rise most of the time, but we'd see them fall temporarily when there's an economic downturn. In other words, we'd see exactly what's on the graph above. But rising debt levels would be no cause for alarm. 

In fact, if you look at that graph carefully, you may start asking questions that are very uncomfortable for the Folk Theory. Why did Thailand not have a debt crisis in 1991? At that point, debt-to-GDP had been rising strongly for over a decade. Why did Spain not have a crisis in 2000? Why did Japan reach a peak debt-to-GDP ratio of over 200% before it had a crisis, while Mexico topped out at 50%? Why didn't China have a recession in the early 2000s?

When I present adherents of the Folk Theory - usually econ writers or private-sector analysis - with these kind of questions, they typically just insist that "debt to GDP can't keep rising forever". But actually in principle, it can. I can borrow $1 million from you and lend $1 million to you, both at the same interest rate, every day, forever, without anything going wrong. Our total debt level will just keep increasing forever, with no limit. 

In the real world, of course, there are all kinds of frictions that probably prevent this kind of thing from happening. But unless you understand what those frictions are, and how to measure them, you won't have a good structural theory of where debt-to-GDP levels max out. And we already know that debt levels are a poor forecaster of economic performance. 

So in practice, the Folk Theory is much less useful than people believe. If you can't use a theory to make concrete predictions, what good is the theory?

Problem 3: Bad Policy Advice

But my third problem with the Folk Theory of business cycles is the biggest: I suspect that it encourages bad policy. The story the Folk Theory tells is that you can't have good economic times without increasing debt, and that increasing debt always causes a bust. So good times come at a price - you can't have prosperity today without disaster tomorrow. 

That kind of story probably has deep roots in human history - it probably comes from the Malthusian Ceiling. It is also a morality tale, rooted in partial-equilibrium thinking - if you borrow and consume too much today, you will be sad when you have to pay it back. But this is a bad way to think about the overall economy, since total debt is mostly just us borrowing from and lending to ourselves. Paul Krugman has written a lot about this. 

When we think of the economy as a morality play, it encourages bad policy. For example, it can lead to destructive austerity. The Folk Theory is behind silly statements like "you can't solve a debt problem with more debt." The Folk Theory also underlies the bad advice of the people Krugman calls "sado-monetarists."

The fact is, something like the Folk Theory might be operating in real life. But even if so, it is probably just one of a number of things that contribute to business cycles. And because macro data is not very informative, it will be difficult to tell how important of an effect it is. Meanwhile, the Folk Theory is exerting far too powerful an influence over the minds of the economics commentariat and (probably) the private sector.


Updates

I've (predictably) gotten a lot of pushback on this post. The biggest source has been from people who say that debt volumes actually do forecast recessions. They've sent me some evidence to this effect. Like I said, the Folk Theory might very well be right -- there's a lot of theory research, by top people, showing how it could easily be true. The question is whether the evidence so far supports it.

First, we have the papers by Jorda, Schularick, and Taylor, e.g. this one. The basic idea of these papers is that expansions that involve lots of debt are followed by deeper, longer recessions than other expansions. That doesn't help you predict the timing of a bust, but it does give you some added forecasting power for real economic variables, since it increases the likelihood of a big bust for any given likelihood of a bust. This kind of second-order effect seems much more believable, to me, than the kind of first-order story (too-high debt levels cause crashes) told in typical versions of the Folk Theory. Another example of a more complex effect of debt on growth is debt deflation. These effects stand somewhere between the Folk Theory and economic theories that ignore debt levels entirely.

But it's worth noting that the FRB forecasting study that I cited earlier conducts a "horse race" between its own price-based indicators -- junk bond shares and credit spreads -- and the Jorda, Schularick, and Taylor measures. They FRB folks find that debt levels don't add any extra forecasting power if you have standard information about debt quality. Of course, that means debt levels might be useful for forecasting if you have countries that report debt levels but not spreads (or report accurate data for levels and crappy data for spreads). But that doesn't imply the Folk Theory is right.

Another paper is this study by Mathias Drehmann of the BIS. It shows a reduced-form relationship between debt-to-GDP ratios and the risk of banking crises (which tend to cause recessions), just as the Folk Theory would predict. This study looks at multiple countries, while the FRB paper just looked at the U.S., so that adds  lot of evidence; it also poses a problem, since a lot of those crises are just going to be one crisis, the global 2008 crisis, in which we know credit-to-GDP was very high (the sample starts in 1970). That's look-ahead bias -- we just came out of an episode in which we observed historically high credit-to-GDP ratios and also a huge crash. That inspired us to think "Hey, maybe the high debt levels caused the crash!" But if all we do is go back and verify that yes, high debt levels did in fact precede the crash, we haven't shown anything. I think that studies like this BIS one are in danger of this bias, so it might be good to restrict these samples to the pre-2008 period. Also, the BIS study doesn't include credit quality measures like spreads; with that additional indicator, much of the forecasting power of debt levels might disappear.

The most convincing Folk Theory paper that anyone has sent me is this one by Matthew Baron and Wei Xiong. It uses a very long historical sample of many countries, starting in 1925. The result here is that very rapid increases in bank credit give a good indicator of recessions on the way. They use a nonlinear threshold model for this. Note that this is different from the Drehmann result, which is that levels of credit forecast recessions. Also note that like others, this paper doesn't include spreads or other credit quality measures.

So to sum up:

1. The Folk Theory might or might not be right.

2. The forecasting evidence is not at all clear. The causal evidence is even less clear, as usual in macro. There is some indication that debt levels can help predict recessions, or at least recession severity, but credit quality (sentiment) measures might capture this better than debt levels.

3. More complex interactions of debt and economic activity, such as debt deflation or debt overhangs from asset bubbles, might be good alternatives to the Folk Theory.