August 29, 2012

Everybody Wins

Everyone loves the Olympics. Normal human beings, through their otherworldly persistence and talent and physique, are transformed for a few weeks into a vast pantheon of gods, each lording over his or her small, specific domain. Three medals are awarded, but there is only is only one winner: the best out of billions.

That's what tournaments like the Olympics are designed to do: find the best. They do this through various designs--single elimination brackets, round robin play, point differentials. Each participant works their way towards a single goal, and after every game or match they are sorted according to strict rules for winning or losing. But regardless of the format, one winner remains. That's how tournaments are designed.

Tournaments are built to find a winner, but in terms of numbers they are much better at creating losers. And that is not even counting the "implicit losers" like you and me--and all the people around the world that don't even try to compete. Imagine if we all had to participate in the Olympics: if everyone in the world had to run the marathon, swim the 400 butterfly, and attempt to lift barbells over our head. It would be a mess.

The tournament format of the Olympics works because competing is optional. If that was you in the pool barely making it back to the wall, how excited would you be every four years?


Just like their Michael Phelpses and Dream Teams, Americans are proud of their Horatio Algers and Mark Zuckerbergs. It's great to live in a society where anyone can become rich with a bit of luck and a dabble of hard work. The word "opportunity" fills us with warm fuzzies and epic trumpets at the same time. It's so fair.

But there's a distinction that doesn't get made often enough, between anyone and everyone. Anyone can become rich, but can everyone become rich? What if you get your bit of luck and put in your dabble of hard work... but so does the other guy. What happens then? Does the wealth just split down the middle? Or does the person with the extra smidgen of luck (or the one short a few scruples) end up grabbing it all?

Sure: in a sense everyone, or mostly everyone, has become rich--relative to Americans 100 years ago or a rural farmer in India. These are absolute terms. And the bar is set rather low. In relative terms, measuring the gap between members of society, it's another story. American income is more unequal now than any time since the great depression (see this excel file); wealth is worse. Further, since the 1980s we things have been getting worse for many people even in absolute terms (see this pdf report).


The rules of our economy are far less clear than the 100m dash. We don't have to run the same direction, we are allowed to carry other people or trip them, it takes far, far longer. But the Olympic metaphor is a useful one, because it's useful to think of an economy as a system of rules that produces certain outcomes. We know this intuitively; for example, we care about how much the government levels the playing field or holds us back. Depending on how we believe certain rules work, we have different ideas about which rules should exist.

What we tend to overlook is the fact that we are all playing together, and, like a tournament, the rules of the game often dictate that our individual level of performance is irrelevant. What matters instead is how we perform relative to others. It doesn't matter if you scored 99% if everybody else got it perfect, if you broke last year's world record if everyone else breaks it more.

Sure, for some things individual performance is fine--if you are cooking your dinner for yourself, for example. But if you want to be a chef--if you want to cook for economic gain--your ability to do so is determined not solely by how good your food is but by a host of other factors as well. These factors (the number of restaurants, the number of other people competing to be chefs, the ease of opening a new restaurant) are not something you control, they are not something any other person controls directly, and they may not be something anyone even could control.

My purpose isn't to conduct a detailed analysis of the restaurant industry, however. I am arguing that our economy, like the Olympics, functions according to a set of rules. Those rules may be as immutable as the laws of physics or the amount of gold currently present on earth. They may be clearly defined but socially determined laws, like the amount of taxes you pay or the fact that you generally aren't allowed to steal things.

BUT--and this is my real point--there are also rules that we understand far less well and may not even realize exist. Causes and effects that are only dimly aware of. These rules are often complex: they depend on giant masses of people each acting in their own way. Such things are what economics tries to study--but as any economist will readily tell you, the tools and scope of economics are extremely limited.

To really understand the distinction between "every" and "any", between the Olympics and, say, a yoga retreat, we need to understand how wealth and resources move around an economic system: to "follow the money" in its weblike complexity. Does wealth spread out or concentrate? Does it flow toward or away from power? Can everybody be a winner? Or does one person's loss necessitate another's gain?

Such questions will be the subject of posts to come.

August 25, 2012

Fear of Powerlessness

Fear shapes our decisions, so it also shapes the society we construct out of those decisions. In this follow-up post to What Are We Afraid Of? and Fear of Loss, I want to explore the way fears shape a social institution fundamental to modern society--the government.


Previously, in a large list of fears, I categorized a bunch of fears as "Fear of Powerlessness". They were the following:

-lack of opportunity
-not being able to choose what we want to
-feeling that we failed
-lack of self-determination
-being forced to do things we don't want to
-youth (as weakness/infantility)
-arbitrariness of other people's power

While this list is not exactly the stuff that horror movies are made of, it's certainly embedded into many political ads.

The Daily Show with Jon StewartMon - Thurs 11p / 10c
Indecision 2012 - Endless Suffrage 2012 - Rick Santorum's "Obamaville" Ad

Daily Show Full EpisodesPolitical Humor & Satire BlogThe Daily Show on Facebook
(Santorum removed the ad from youtube and this is the only version I could find)

The ad is over the top, but it doesn't exaggerate the fear that many people have of government. What's odd is that government was created in order to reduce fear. To oversimplify Hobbes, governments protect us from our brutish, nasty, short, and perhaps most of all fearful life.

But if we are now afraid of government, does that mean it's not doing its job? If we created government to help us get rid of fear, but now we are afraid of it, maybe we should just get rid of government. Or at least pull out its nasty big pointy teeth.


Let's think for a minute about fear. When you're afraid of something, where does that fear come from?

The answer to that question depends on how you are thinking about fear. In an important way, of course, fear is a wholly interal product of our minds. But most fear is also more than that, and it's the "more than that", the external roots of fear that I want to talk about here. We can also think of our fears as being realized by other people: a thief takes your wallet, your boss fires you, a policeman arrests you and takes you to jail. But while the individual view is true in a way, it disregards the fact that power--and thus the conceptual root of our fear of powerlessness, loss, and other social forms as well--comes to a great extent from groups and their power over us.

It is this power that I want to think about here. We are all ultimately only individuals, and groups represent a potential threat because they have the potential to be much more powerful than any single person. But while groups can be threatening, group membership can also act a safeguard by establishing rules and order among members. The inner dynamics of the groups we are submerged in--their hierarchies, rules, and values--create new power dynamics between individuals. This power can be an enormous benefit to inviduals collectively, but we should respect and fear power in all forms.

Beyond established groups, there are social practices or beliefs that large numbers of people engage in. These kinds of beliefs or practices can be powerful because, like a group, they can influence the way large numbers of people act (e.g. homophobia can damage lives without there being a cohesive anti-gay group). Unlike a group, however, there are no identifiable structures or even relations amongst group members. Some political theorists use the word "institutions" to talk about about both groups as well as these other social phenomena. These theorists might utter such a sentence as: "Institutional factors like rampant corruption and the power of rural landowners in government are holding back economic growth."

While there are those who speculate about its loss of influence and possible demise, and some that are in fact quite weak, national governments are nevertheless the most powerful groups in the world today. Like other institutions, governments have been created (in part) to reduce fear of powerlessness. Government is involved in safeguarding us from fears in a myriad ways: police prevent us from hurting people; property rights prevent people from taking our things; public schools provide educational opportunity; in countries with state-run healthcare, the government helps minimize your fear of bad health.

However, one of the important things government does, something that gets lost sometimes amidst our concern for individual rights, is set the rules for other groups. Governments ensure that one church congretation can't just go and kill a different congregation they disagree with, that one racial group can't discriminate against another, that corporations can't use their private security forces to disappear you if you come up with a better product. As I began to explain in the recent post about defintions of power, government tries to minimize exploitative exercise of power; given the natural imbalance of power between groups and individuals, and between different types and sizes of groups, this job of government is absolutely critical. Conservatives tend to believe that government does this job best by simply enforcing property rights, providing a justice system, and letting the market solve the rest; liberals believe government must play a more active role mediating between other types of power, both within and outside of the marketplace.

But government--a group that controls the police and military and vast resources--is always also a source of fears, and we have therefore tried to set it up in a way that minimizes those fears. As everyone who went to school in the US knows well, the US government has a system of checks and balances to prevent the state itself from being taken over and used against other people. This is supposed to help keep the state from acting out the fears of powerlessness, loss, or injury. Having written laws and rules and regulations also, in theory, may prevent the use of state power in arbitrary or biased ways.

These safeguards are meant to ensure that government helps eliminate fears without adding new ones, but they are not enough in all cases. There are good arguments against the concentration of state power, and many people in the USA (particularly conservatives) have a healthy fear of the power of the state, the extention of power of the state for its own sake, and the power of the state being used by certain groups against others. There are things that governments have not been good at doing (like efficient allocation of some resources), and there are things that governments have been too good at doing (like putting people in jail or blocking good ideas about how to reform itself). And as the most powerful group, the government's power can be used by other groups (or individuals) to leverage their own, to the detriment of the country.

But we need that power structure. Laws and police and order are immensely useful and a world without them is reasonably terrifying. So where does this leave us?

Politically aware and engaged, confronting and managing our fears. If we let certain fears dominate us as a society we will not only be unable to deal with other fears, we will be unable to deal even reasonably with the fear we have. We need to understand the many ways our fears listed above can be realized, and the complex systems we have put in place to avoid or eliminate them. I certainly think it's possible; but we need to be vigilant about not letting fear crowd out thinking.

I would leave you hear with a quote by FDR, but I don't think I even need to type it out.

August 22, 2012

Vocabulary and Communication

It can be helpful to define new ideas using new vocabulary, newly affixed meanings, or redefinition; in many ways it is essential. But this kind of thinking, while hopefully productive, may have problematic side effects. It may also lead us further down a sort of linguistic rabbit hole, where we appear to be talking nonsense to everyone else. There are some great blogs out there and some great thinkers...who are borderline incomprehensible.

This is something I would like to avoid. It's easy when you are attempting to think for yourself to create magical worlds out of words and concepts that build on each other. On one hand, this may be necessary or at least conducive to new insights. On the other hand, your ideas may end up bearing little relation to anything but themselves, being insulated from the real world solely through incomprehensibility. Such isolation also prevents the cross-pollination or spread of ideas.

To that end, I am trying to use economic jargon as little as possible and define it clearly and succintly if the concept seems necesssary. I want to avoid blank stares, and perhaps more importantly, coming to brilliant conclusions that would seem obvious if spoken in a more common parlance. If this blog ever appears to be defining and using new vocabulary unnecessarily, please complain. Help fight conceptual isolation!

August 15, 2012

Fear of Loss

This is a follow-up to the post What Are We Afraid Of, looking more specifically at how we fear loss and how we have attempted as a society to deal with that fear.


We have more stuff today, more physical things like chairs and cars and plates and shoes and paintings and houseplants and clothes, than any society before us has ever had. Why is that?

Obviously, it's because our technology is far more advanced than it's ever been. But it's also because our society is set up to help us get stuff--and help us keep it. The keeping part is more important than you might think. As much as we like getting things, we like not losing them more. We don't like losing anything.

Loss happens for any number of reasons: whenever we have something and then someone or something takes it from us. Interestingly, the "something" that we lose can be as immaterial as a hope or desire--we feel loss when the possibility of winning the game is taken from us, or when the red wagon in the shop window is sold to someone else.

There are well-established theories that explain why and how our brain resists giving things up. One of these theories is called "loss aversion" by economists, and they have devised some interesting studies to show how much more "psychologically powerful" losses are than gains. In other words, this means that people value things they already have more than things they do not have, even if the thing is exactly the same (like money). Wikipedia explains it fairly well so I won't go into more details here.

Another relevant theory in economics is simply that people value security. Security helps reduce risk of loss, which people fear. Security also changes incentives, though. If you were going to die tomorrow it would completely change what you did today. In the same way, security can change what people do with their time and money longer term: if you know you will make more money for the rest of your life if you go to college ("invest in your human capital"), you might be more likely to do so.

Laws about property rights, backed up by state power, are very helpful for alleviating fears of loss because they provide security and stop people from taking our things. If our neighbor takes our car and will not give it back, we can go to the police and show them the title and get them to arrest our neighbor for grand theft auto. But of course, that's not what happens: what having property rights really means is that our neighbor will not even try to take our car, because he knows what could happen if he did. And that fact may help us decide to buy a car in the first place--if our neighbor can just drive it away, and all we could do was chase after him flailing our arms, why would we save up for a car at all?

Property rights are great at alleviating our fear of loss, because they help align incentives between people for everyone's benefit. If somebody has something shiny that you want, and you know that if you try to take it from him he will get mad and call the police, what can you do? You can offer him something that he wants. With no property rights, the invisible hand can't function, because it's too easy to resort to non-market action (aka stealing or taking without fair compensation). Property rights have helped get us all the stuff we have today, because they help limit our fear of loss, and instead of taking things we have to trade.

So, it's good that we have property rights. In fact, it's such a good idea that we sometimes forget it's an idea at all. We forget that both the legal infrastructure and the idea of ownership itself are social constructs, that they only exist because everyone believes in them and acts as though they exist. And people are barely even fooled--try leaving your bike unlocked in front of your house overnight. No matter how well you label it (THIS IS MINE! NOT YOURS!), it will likely be gone in the morning. In other words, there is no physical law of the universe that makes something yours and something else someone else's: ownership is something granted by the law and the power of the state, which in turn comes from the consent of the people.

Despite their benefits, we can carry the idea of property rights too far. Do you remember when you were a kid and you had a fight with your brother or sister or friend and drew a line on the ground to show whose side of the room was was whose? How about all the times your parents made you share your toys? At the time, as a 4-year-old, property rights might have seemed like a great idea to you. As adults they seem a bit... exaggerated. We can see that there are more important things.

One of those things is fairness. Property rights are often unfair. And as whiney as that sounds, capitalism does create winners and losers--even the most conservative libertarian will readily admit that. We can debate about what is "fair" and what is not. But there is no reason fair has to mean everything: we as a society have chosen to define private property and thus we as a society, even as an adamantly capitalist society, have the ability to put bounds on how much property a single person can have.

Certain bounds may not be pragmatic, obviously. But if we're thinking about the idea of property pragmatically then I have made my point, that the concept of private property is a means, not an end in itself. It can motivate us to be productive and to trade with others, but we should also be careful not to cling to the idea of ownership for its own sake. There are things it doesn't make sense for a person to own, like roads and schools and money that is sitting in a bank doing nothing while people are starving.

Loss is a powerful fear and we have set up a powerful system to deal with it. We should not be ruled by that fear and we should not forget that the system was set up for a purpose.

August 12, 2012

Big Question: What Are We Afraid Of

This is a companion post to several other posts I'm working on. I want to try and construct kind of inventory of what we want and don't want in a society in order to build a narrative that makes sense to everyone. Yes, everyone. In order to do that we must have some common ground to stand on. Or in this case, ground we don't want to stand on.


Fear serves a purpose. It can help us make decisions by serving as a shortcut through statistical or rational analysis. But it also makes us defensive and mean, and it limits us by cutting off that rationality. Many psychologists (such as Jonathan Haidt) would argue further that it and other emotions can drive our rationality as well.

Because of all this, fear is a potent political factor--it is a tool used by political actors, but it is also a constitutive element of how we understand the world and in many ways independent of anyone's conscious action. Fear was a main theme of one of the original works of modern political science. If we are to escape the terrible clutches of rhetoric (see what I did there?) and our unconsciousness and engage in meaning political or economic debate we need to understand our fears. I have two goals in doing this: helping avoiding (solely) fear-based decisions, and helping us understand what we actually are, and should be, afraid of.

To start with, I brainstormed a list of fears and then grouped them into overarching types. Some of these fears are more influential or more universal than others; they are not in any order other than the categorization.

-losing things we feel entitled to
-loss of hope
-losing authenticity
-losing morality or values

-lack of opportunity
-not being able to choose what we want to
-feeling that we failed
-lack of self-determination
-being forced to do things we don't want to
-arbitrariness of other people's power

-not knowing what we want
-lack of identity
-missed opportunity
-lack of morality or values

-not having enough to eat
-bad health

-being alone
-be excluded
-being worse off than other people
-being judged
-not being included
-losing people we love
-not being loved
-other people's anger
-found out if we do something bad/punishment
-fear for other people's welfare (and avoidance of all fears)

Did I miss anything important?

Although fear is ultimately just an emotion inside your head, it does reflect external circumstances. Most of these fears depend on both our own choices and perceptions and the choices and perceptions of other people: humiliation is something that others create but it is also something that we allow ourselves to feel; other people can take things from us but they cannot make us fear or regret the loss.

Beyond other people, fears are also created by circumstance. We may feel boredom or stagnation not because of our internal state or because of other people, but because we are trapped alone with one palm tree on a cliched desert island.

It makes sense then that fear is so closely tied to politics and political economy, because there are many fears we can only face together, through cooperation or at some least organization. We need politics and other social structures (including markets) overcome our fears on a large scale--our fears of other people and of circumstance. By having a public police force, we reduce our fear of being robbed; by having a public fire department, we reduce our fear of our house burning down.

While all types of fear play a role in contemporary political rhetoric, fears of loss and fear of powerlessness are often central. Their importance is a product of technology--government can control our bodies better than our minds--and it is a product of several millenia we've had to theorize and experience what government should be about. Government has evolved complex limits on its own power and restrictions on power usage between individuals; concurrently we have developed intricate systems of property rights and ownership to deal with our fear of loss. The way we view these structures and how they create or dispel our fears is fundamental to our political views and what vision we have for our economic system.

Future posts will examine fear loss and powerlessness in more detail.

August 5, 2012

Big Questions: Definitions of Power

I am attempting to do a series of posts entitled "Big Questions", in which I ask questions I see as fundamental to economics and political economy. I intend to revisit these posts repeatedly, revising and refining ideas, if not to settle the issues then at least to continue to develop a fuller understanding.


What is power and how does it work in our society?

The simple definition of power is the ability to make someone do what you want instead of what they want. Coming from International Relations theory, there is also the idea of "soft power", which is the ability to make someone (or another country) want the same thing you do.

To clarify the hard/soft power disctintion: if you threaten somebody with a gun, they might agree to hop on one leg all day, but they would probably stop if you didn't have the gun. Offering them lots of money might have the same effect; those are forms of hard power. Soft power involves changing their goals and motivations to something outside of your own actions. If you convince someone they will become fit and beautiful and rich by hopping on one leg all day, they might jump regardless your firearms.

Within our society we have countless ways of concentrating power. Physical violence and the threat of physical violence is the most obvious form of power, and we have concentrated it to a large degree in local and national governments, in the police and military. Political power is another obvious concentration: we give control of laws and spending, and/or control of executive bureaucracies with the power to tax and monopolies on violence, to certain people as decided by electoral systems.

Economic power, the power to purchase resources, products, services or labor, is somewhat more complicated. Because money can pay for all kinds of different things, and therefore has a funny relationship with time, it is too simplistic to say that money correlates with economic power. Rather, we need to factor in the future and the predicted future ability to acquire money. This is what is happening with the loans or with the stock market--with particular drama with IPOs.

There are other forms of power as well. The concept of soft power provides a hint, that not all power is coercive. Certainly most economic power is not coercive. Can we break down types of power to gain a better understanding of it?

Power can be coercive or it can be mutual. It can be exploitative or it can be beneficial to any number (from zero to infinity) of the parties involved. The exercise of power can also be equalizing, neutral or distancing in the way it affects future power relationships.

To explain:

Coercive versus mutual: The clearest example of power may be the upraised fist or the barrel of a gun. Violent force is often used in the bluntest of manners to coerce someone into doing something against their will: allowing someone to take their wallet, or relinquishing control of Texas. Clearly, this power is coercive.

There are two things interesting about coercive violent power, however. First, it is far more often passive than active. The phrases "exercise" or "use" of power are misleading: you rarely have to shoot a gun to use the power it gives you. Second, note that even though violent power is coercive, it is still changing what people want. It just does a very bad job of it. A person threatened by a gun wants to jump on one foot, because they see the alternative as being shot. But as soon as a better alternative emerges--the swift removal of the gun from your hand by means of a roundhouse kick, say--the desire to hop dissipates.

The scenario gets more complicated with other forms of power. Is the power of money coercive? Money is a different way to get people to change their minds, but we already said that money is a form of hard power because changing someone's will with money is contingent on your actions. The difference between money and violent force is that there is is no threat. Economic exchange is, in theory, optional to both parties and therefore only happens on mutual terms. Political power and violent force are, in theory, outlawed from economic transactions, and that makes it harder to make people change their mind. Nobody is doing something against their will, and there is therefore no coercion.

If economic power was unfettered by state political and force power, it would presumably be far less mutual. The ways in which we see economic power corrupt the state in our current system either would not exist (because the apparatus of power would not be there for the economic power to co-opt or corrupt) or economic power would either openly employ means that are illegal now or take state power for their own. Imagine a company town, with rules specified by the company, that you cannot legally leave.

In thinking about mutually-exercised economic power bounded by the state, however, I find it easy to lose sight of power altogether. If every transaction is mutual, how does someone have more power than another person?

Remember that hard power is the ability to make someone's actions contingent on your own actions. It's not that having money equals having power. A dollar is not a quantified unit of power. Its exchange does not represent some exchange of power. Rather, the power here is in the ability to shape the terms of the deal: power is the ability to shape the circumstances and change people's minds. A market system may eliminate certain types of transactions--someone might never sell their dignity, for example--by bounding the possible terms of a deal--they might trade their dignity for their life or the life of a loved one. But a bounded system of economic exchange does not totally equalize the ability of each participant to to set the terms of the deal.

Exploitative versus beneficial: Another metric we can examine power along is exploitative versus beneficial. While the coercive/mutual axis is based entirely on the immediate attitude of the various parties toward a situation, the exploitative/mutual axis is based on the parties' benefit. Benefit is a tricky concept, however, because it can be short or long term, and it can be defined as an infinite number of things, because it is subjective.

For example, I could force you at gunpoint to give me your ice cream cone. This is an exploitative use of the power the possession of the gun has given me. But what about if I force you to give me your ice cream and eat a head of broccoli instead. This might be against your will, but it may benefit you in the long run. That's fairly straightforward. But what if you and I both sign an agreement yesterday that, if you tried to eat ice cream today, I would take it from you at gunpoint and make you eat broccoli instead? I use this example not to support paternalism but simply to make the case that the idea of benefit is less straightforward than it may seem.

Soft power is by definition beneficial, at least to the extent that a person has a complete understanding of their self-interest. The same could be said of mutually exercised hard power. Coercive power, however, is the opposite: it can be said to be beneficial only to the extent that a person does not have a full understanding of their self interest. There are plenty of examples where this is the case: the tragedy of the commons, for example. Parental power is also useful and important because children do not know what's best for them.

Equalizing vs neutral vs distancing: I have not developed this thought too deeply, but I will add it here nevertheless because it strikes me as potentially useful in understanding wealth distribution and equality issues.

If we can compare amounts of power held in a situation, which in itself is not a small assumption, we may be able to distinguish how some abstract sum of power is transferred. That is: how does an interaction change the balance of power? We can easily imagine a mutual transaction that both parties view as in their benefit. We can also also easily picture a powerful person exploiting a less powerful person. Because of the multifaceted and situational nature of power, however, we can also imagine situations where the less powerful gain at the expense of the more powerful: such as a poor man picking a rich man's wallet. The poor man is able to exploit the rich person's lack of awareness or attention.

Even mutually beneficial transactions economic transactions bounded by state power need not be neutral. Indeed our economic system is set up to distance economic actors by rewarding those that are successful (and by extension, in a zero-sum system, punishing those that are not): we grant state protection to inventors of new products so that they might gain economic power as a reward for their creation. Market power may be bounded but it is by no means free of other forms of power--just look at food prices in an airport.

Powerful people may exploit weaker people, weaker people may exploit powerful people due to situational changes in power, and even mutually beneficial transactions may result in changes in relative power. We can distinguish these as equalizing or distancing based on whether they increase or decrease power disparities.


Where does this leave us in terms of power and economics? If we are going to understand economics in the real world, which we must do for policy purposes, then we need to understand how state power creates, circumscribes, and shapes economic power, and how economic power functions internally and influences the state in return. We need to understand how these types of power ebb and flow and interact over time, and we must begin to examine how our institutions shape power distributions.

We do this all the time without being aware of the larger implications. Look at education: our government pays for everyone's education because we believe that everyone is entitled to an (basic) education. Especially on the federal level, this results in a transfer of wealth from net taxpayers to net tax (and social service) recipients. This is a use of state power and it has important effects on the distribution of economic power (an educated person has much more economic power in a labor market than an uneducated person), but we rarely think of it as such because it is so widely accepted and rationalized.

The point of this post is that these kinds of power transfers and influences are everywhere in society, whether we notice them or not. Hopefully the above defintions will give us a bit of conceptual vocabulary when exploring these power interactions.

August 3, 2012

Skill mismatch?

Right now, US corporations are sitting on lots of savings and not hiring, or only hiring very slowly. There are several explanations that have been floating around:
  • Businesses are afraid to hire workers because they are worried about future economic uncertainty (probably due to possible government intervention)
  • Businesses are unable to find workers that have the skills they need
  • There is not enough demand in the economy
Each of these explanations of the problem promts a different solution, and unsurprisingly one tends to see people on different sides of the political spectrum arguing for explanations that match their political tendencies.

One thing very few people are doing is blaming the companies themselves. Economists typically view firms as black boxes that respond to profit-maximizing incentives (like payroll taxes) and shouldn't be seen as individually responsible for macro problems like unemployment. Conservatives are unlikely to fault corporate behavior since they are seen as the good guys. Even leftists and progressives view corporate behavior more as a product of the capitalist system or poor regulation, respectively.

...which is why I found this interview (via the excellent Ask A Manager blog) with a Wharton business school professor interesting: it opens the black box and looks at issues of corporate management practices and culture that impact hiring decisions. Definitely worth reading.

A snippet:
What’s really happening is [employers are] just not able to hire, but you don’t know why that is, right? And the skills-gap story is their diagnosis. It’s basically saying there’s nobody out there, when in fact, it turns out it’s typically the case that employers’ requirements are crazy; they’re not paying enough, or their applicant screening is so rigid that nobody gets through.
A short rant: economics and political economy are tools to answer questions. They make assumptions and simplifications in the hope of reducing incoherent complexity to something coherent. This is great, but in the attempt to establish quantitative rigor, to prove something with numbers, all too often the actual causal chain is glossed over. People don't stop to ask what the micro-level interactions and relationships are that actually create the data at either end of the relationship.

I am not trying to be critical of any particular economist or economic technique. Rather, I am trying to point out that the methods used by economics tend to encourage this kind of glossing-over of minutae. Big data is great at showing trends and connections but each data point is only a snapshot of reality, and a highly-simplified snapshot at that. It is important to do as much as we can, using other methods of inquiry, if we are to puzzle out what is really going on between the data points--when our shutter is closed.

Big data can also be revealing of minutae, but you have to know what minutae to look at--and how to measure them. Rereading part of the interview, the professor is using data to show that simplistic explanations are wrong. But he only knows what data to look at because he's aware of the internal dynamics of firms; he has a firm grasp of the entire causal chain, and does not assume away half of the links.

August 1, 2012


I am starting a blog about economics.

What a great idea! This is exactly what the world needs!

Hold the sarcasm for a minute. At least read the manifesto I wrote up.

Oh god, a "manifesto". What's next, Karl?

I made a nice page on why I'm starting a blog about economics, specifically.

With a lead-off quote from Keynes. I'm so totally inspired now.

Well, I'm also curating a decent collection of other econ blogs.

I'm also falling asleep already.


Maybe this whole enterprise will actually be worth our time.