Blog reorganization

As the name of this blog suggests, it was originally created with the idea that I'd write about whatever the hell came into my head. I had in mind the sort of thing I have long been sounding off about in comments on other blogs, most of them run by economists. Nothing too serious.

Then a woman died in an Irish hospital and I found myself blogging about issues arising from Ireland's bizarre laws relating to abortion.

Abortion is a different sort of topic from Bob Murphy's notions about Keynes, or Scott Sumner's gripes about Paul Krugman. I'm uncomfortable about presenting posts on that topic under the heading Any Old Bullshit.

So I have transferred those posts (five so far) to a new blog, The Politics of Procreation. If I have anything more to say about human reproduction it will appear there.

Piketty and the Marginal Product of Capital

Like hordes of others I'm reading Capital in the 21st Century and so far I'm very impressed. But when I came to this, on page 213, I was shaken, not stirred:

Concretely, the marginal productivity of capital is defined by the value of the additional production due to one additional unit of capital. Suppose, for example, that in a certain agricultural society, a person with the equivalent of 100 euros’ worth of additional land or tools (given the prevailing price of land and tools) can increase food production by the equivalent of 5 euros per year (all other things being equal, in particular the quantity of labor utilized). We then say that the marginal productivity of capital is 5 euros for an investment of 100 euros, or 5 percent a year.

Why do economists do this sort of thing? Keynes gave the world a very useful term for the return which a capital asset offers, expressed as an interest rate. He called it the marginal efficiency of capital:

More precisely, I define the marginal efficiency of capital as being equal to that rate of discount which would make the present value of the series of annuities given by the returns expected from the capital-asset during its life just equal to its supply price. This gives us the marginal efficiencies of particular types of capital-assets. The greatest of these marginal efficiencies can then be regarded as the marginal efficiency of capital in general.

Now I think it's clear that Keynes and Piketty are using the same concept, but giving it different names. "So what" you ask; "isn't an author entitled to choose his own terminology?" Well yes, but the name Piketty chose happens to be the name usually given to something quite different. The marginal product of an input, as Wikipedia tells us "is the extra output that can be produced by using one more unit of the input ... assuming that the quantities of no other inputs to production change." (I know Wikipedia isn't always reliable, but trust me I can find plenty of better authorities to cite if I need 'em).

The reasons why this pisses me off somewhat are twofold. Students are regularly warned not to confuse the marginal product of capital (usually abbreviated MPK) with the marginal efficiency of capital (MEC). The MPK should be understood as units of additional output per unit of additional input, while the MEC is akin to an interest rate (it can be thought of as an internal rate of return). It's important to avoid confusion because the two terms often rub shoulders in a discussion.

The other reason why Piketty's choice of jargon is unfortunate is that there are plenty of hacks out there looking to diminish the impact of his work. It's a shame that he has given them an opening.

But it may be for the best. Samuelson remarked that one reason why Keynes's General Theory made such an impact was that the many obscure points give rise to a lot of arguments and, in order to participate, people first had to read the book. Piketty's writing is mostly clearer than that of Keynes, but it may be that it is precisely the few infelicities of language which will keep the conversation going.

The Grumpy John H. Cochrane succumbs to Carly Simon Syndrome

He writes:

"Paul Krugman is now reduced to making fun of my name."

Evidently he believes the term "cockroach ideas" was inspired by the first syllable of his surname. This seems unlikely. Krugman has been writing about cockroach ideas for years. Here's an early example, from March 2011:

Way back, when I spent a year in the government, an old hand told me that fighting bad ideas is like flushing cockroaches down the toilet; they just come right back. I’m having that feeling a lot lately, on at least two fronts.

One is the crowding out issue. I keep encountering both the same old misunderstanding of Ricardian equivalence, and people citing evidence from periods when the economy was nowhere near the zero lower bound. The latter was, perhaps, excusable when the idea of a liquidity trap was still new; but folks, we’ve been at the ZLB for two and a half years now:

The other is the whole “the Social Security trust fund doesn’t exist” thing. I’ll just repeat what I said back when Bush was trying to push through privatization:

Social Security is a government program supported by a dedicated tax, like highway maintenance. Now you can say that assigning a particular tax to a particular program is merely a fiction, but in fact such assignments have both legal and political force. If Ronald Reagan had said, back in the 1980s, “Let’s increase a regressive tax that falls mainly on the working class, while cutting taxes that fall mainly on much richer people,” he would have faced a political firestorm. But because the increase in the regressive payroll tax was recommended by the Greenspan Commission to support Social Security, it was politically in a different box – you might even call it a lockbox – from Reagan’s tax cuts.

Ronald Cruise O’Dworkin

I’m by no means the go-to guy if you want to explore “the influence of the altogether neglected Samuel von Pooped on the totally forgotten Herman von Supine”, but from time to time I’m struck by how deeply some not-especially-famous writers impress their ideas, and even their prose, on others. Thanks to a fairly harmless bit of snidery by Scott Sumner, I was reminded of this passage from Conor Cruise O’Brien’s introduction to a 1968 edition of Burke’s Reflections on the Revolution in France:

That those who advocate or approve the contemporary counter-revolution should interest themselves in the Reflections requires no demonstration. But why should those who oppose the contemporary counter-revolution, and the neo-conservatism which is among its more overt intellectual expressions, be invited to read this first modern counter-revolutionary manifesto?

The fact that such a question is certain to be asked is in itself indicative of a peculiar, and apparently deep-rooted, weakness in left-wing thinking. The intelligent rightist does not ask to be given reasons why he should read Marx and the Marxists. He reads them because they are important, and because they are on the other side. He learns from them and sometimes is warned by them....

The intellectual left on the other hand – though with some notable exceptions – has a strong tendency to neglect its adversaries and to dismiss even their most influential writings, unread, with a sneer. This is associated, I believe, with another pronounced tendency on the left: that which runs to misunderstanding and underestimating the forces opposed to it.

It seems that the right-wing enthusiasm for opposition research has flagged a little since O’Brien wrote those words. Ronald W. Dworkin, Senior Fellow at the Hudson Institute (not to be confused with legal philosopher Ronald M. Dworkin) warns his fellow conservatives against slipping into the idle habits of the left:

I believe in capitalism. Many of this journal’s readers do, too. Then why am I writing as if we can learn something from Marx?

The fact that such a question is certain to be asked is in itself indicative of weakness typically more rooted in left-wing thinking. The intelligent conservative does not ask to be given reasons why he should read Marx and the Marxists. He reads them because they are important, and because they are on the other side. He learns from them and is sometimes warned by them. The intelligent conservative makes use of Marxist insights, but for his own purposes. He learns from his adversaries about the strengths and weakness of his own position — and of theirs.

The leftist, on the other hand — though with some notable exceptions — has a strong tendency to neglect his adversaries and to dismiss even their most influential writings. Although conservatives should and do read Marx and Foucault, leftists often think they have nothing to learn from Tocqueville and Burke. Indeed, they often greet these writers with a sneer, which is why they consistently misunderstand and underestimate the forces opposed to them.

This kind of thing makes me wonder whether I shouldn’t strive for a more active role as a public intellectual. As the name of my blog indicates, I really don’t think I have any startling new insights to offer the world. Still, I have reasonably well-stocked bookshelves, internet access, and a ticket to the UCD Library. I’m confident that I could knock together a few articles on, say, the American Civil War, with style and content closely resembling Shelby Foote. Or I could offer insights into paleontology reminiscent of Stephen Jay Gould, with wonderfully apt metaphors drawn from baseball. The fact that I have never been to a baseball game, and wouldn’t know a cynodont from a triceratops anus, doesn’t seem to present any particular obstacle. The possibilities are endless. I could rework Russell or recycle Ryle. Should I offer my services to the Hudson Institute? My rates are decidedly reasonable.

(The title of this post borrows from the TLS reviewer who described O’Brien’s really excellent book, The Great Melody, as a biography of Conor Cruise O’Burke.)

Trends in Living Standards

Brendan Walsh has an interesting post on the Irish Economy blog. I don't have anything much to add, but since he provides a link to the relevant Eurostat table I thought it would be interesting to start the graphs he presents in 1995 rather than 1999 and compare Ireland with somewhat different countries. This is the result:

Basically it's just another illustration of how the property bubble, which didn't really appear until 2002 or thereabouts, screwed up the development of a very promissing economy.

Cruise ships are getting to be quite a common sight in Dublin. The Cunard Queen Elizabeth is the most impressive I've seen.

UPDATE: While I'm sure the Queen Elizabeth is quite luxurious, here's how the 0.1% visits Dublin:

If you've got it baby, flaunt it! God knows the economy needs the boost.

The Krugman Alternative

Not a plot proposal for a convoluted film involving leaps onto moving vehicles, but a sketch of the background to the “debate” inspired by Paul Krugman’s post on taxing job creators. There is a tension between two claims which conservatives are wont to make about the rewards which go to producers. One of these claims was presented in its most explicit form by the economist John Bates Clark:

Firms operate in a region of their production functions where diminishing marginal returns cause each worker added to a work force to raise total output by a smaller amount than did the previous worker. The employer will hire more workers as long as the last one hired contributes at least as much to total revenue as the cost of employing that worker. Because every worker is the marginal worker, and because the last worker hired adds to the employer's gross income an amount equalling the wage rate in a competitive labor market, all workers are paid the values of their marginal products.

If we consider this simply as a statement about the implications of profit maximization it is irrefutable. To protect it from nitpicking it can be framed in rigorous mathematical form. But for Clarke and many conservatives it has a moral implication: capitalism is just, even if the justice it dishes out is a bit rough at times. The rewards received by workers are a fair reflection of their contribution to the production process. Unlike the mathematics, the morality can certainly be disputed, as Mark Thoma notes:

There have been many, many objections to the normative conclusions drawn by Clark from his marginal product theory. To name a few, it requires perfect competition, it rewards factors, not individuals (owning capital and land gives the owners income, but the income is for the contribution of the factors, not for the contributions of individuals receiving the income), there is no meaningful way to separate the contributions of factors to total product (when crops grow, was it the hoe used to weed the plot of land, or the person operating it?)

If John Bates Clark represents one strand of conservative thought, another, which is especially prevalent in America, is the entrepreneur-worship of Ayn Rand. The creators of businesses have a value to society which far exceeds the rewards they reap. Without them the looters and moochers who make up the mass of the population would be living in squalor:

Do you ever wonder after dealing with all that is going on with the economy and the upcoming election if it's getting to be time to "go John Galt." For those of you who have never read Ayn Rand's Atlas Shrugged, the basic theme is that John Galt and his allies take actions that include withdrawing their talents, 'stopping the motor of the world', and leading the 'strikers' (those who refuse to be exploited) against the 'looters' (the exploiters, backed by the government).

One-percenters of the world unite! I’m not the first to notice that the Randian world view owes a lot to Karl Marx. It’s a story of exploitation, with a creative elite taking the place of the proletariat as the victims. And so we come full circle. John Bates Clark used his theory to undermine Marxism. The workforce is not exploited, it gets the marginal product of labour and the capitalists get the marginal product of capital. Countless conservatives have endorsed this argument. Paul Krugman, tongue firmly in cheek, deploys the same argument against the Randroids. The magic of the market ensures that Galtian superheroes, too, receive their marginal product. “You got a problem with that?” (This appears to be the state motto of New Jersey.)

To date, no conservative blogger has shown much enthusiasm for Krugman’s deployment of Clark’s anti-Marxist weaponry against the Tea Party. For me, the interesting thing is seeing how they avoid getting caught on the horns of this dilemma: should they abandon Clark or Rand? There are various moves they can make, some of which could lead to an interesting debate, but it’s a bit sad that several of them have opted for the silliest response I can imagine: “Paul Krugman simply doesn’t understand the subtleties of that marginal productivity stuff!” No cigar, guys. If this was about bank clearing-systems or option-pricing theory you might be right, but an international trade theorist who doesn’t know this material is about as plausible as a chef who can’t brown onions. You don't score any points by interpreting "marginal reduction" to mean "shipping half of our best-educated people to Somalia."