The Ambrosini Critique

This is funny. In my news reader, this item, titled “Demand Curves are Downward Sloping“, showed up just before this item, titled “As price goes up, so does demand“.

See, in economics there’s always two hands…

I in no way endorse copyright infringement, but I heard Scholastic (the publishers) are sending take down notices to every web site that mentions the fact the book can be downloaded on bittorrent. Apparently, someone video tapped themselves flipping the pages and posted the torrent on pirate bay. Who would want to “read” the book this way? Hardback is clumsy enough.

Again, do not download that file! Wait, like everyone else, for those dead trees to make it to the stores. I’ve already pre-ordered the book.

This back and forth between Brad Delong and Dani Rodrik makes me think economists are ill equipped to talk about the second best world in which we live.

Dani says that bad constitutions prevent the necessary flows of factors (labor and capital) to make free trade policy effective in getting us to the first best world (where market outcomes are efficient and we dance naked in the streets singing songs of praise to Milton Friedman):

The two situations are alike only in the limiting (and counterfactual) case where government-imposed tariffs are the only transaction costs blocking economic exchange across international borders. In reality, national borders demarcate political and legal jurisdictions, which means that there remain plenty of transaction costs which block economic convergence. Capital flows are hindered by sovereign risk and the absence of international regulation and lender-of-last resort functions, which create the kind of syndromes that I often discuss in this blog. Labor mobility is severely restricted. And differences in regulatory regimes impose severe transaction costs (estimated by Jim Anderson and Eric van Wincoop to be of the order of 40% in tariff equivalents) on international trade. In the presence of these transaction costs, free trade in goods (in the sense of zero import tariffs) is in general incapable of achieving rapid economic growth and economic convergence in poorer nations of the world. If you do not believe this, just ask the Mexicans.

Within this U.S., economic convergence is achieved because there is a common constitution, a federal judiciary, nation-wide financial regulation, and free flow of labor.

Rodrik concludes we’re stuck in a second best world where it makes sense to have restrictions on trade, via “industrial policy” (read: government control of the markets) in the developing countries.

Delong responds by quoting Lant Pritchett “there is nothing as catastrophic as state-led development led by an anti-developmental state” and adds:

Any argument to commit a government to an active protectionist industrial policy must be accompanied by arguments about why the government will be capable and effective in this role when it has not been capable and effective in its primary roles of establishing property rights, providing tolerable administration of justice, building infrastructure, and providing education.

Rodrik counters:

Brad DeLong does not express my views accurately… In the absence of these [free flow of factors], trade liberalization does not get you there. You are in a second-best world and you need to think appropriately. The idea that developing countries cannot employ industrial policy in such a world to good effect is downright silly…. Here is a thought experiment: does anyone really believe that China would have grown as fast as it did if it had removed all its tariffs and trade restrictions in 1978, instead of liberalizing strategically and sequentially–first in agriculture, than in industry, then on the export side, and only later in the 1990s on the import liberalization side? There are many reasons why the Chinese strategy worked, but one of them is that it protected employment while industrial capabilities were being built up.

Finally, Delong responds with a nice, long post about the immediate post-Mao economic policy of China. He describes the second best policies China put into place to jump start its amazing, so far, track record of economic growth.

Its important to point out that Delong isn’t conceding the point. He’s merely pointing out China is the exception that proves the rule. “Any argument to commit a government to an active protectionist industrial policy must be accompanied by arguments about why the government will be capable and effective in this role.” Delong has Deng Xiaoping as the hero that saved China from disastrous Mao era policy and made the Chinese government a credible force for development thus justifying its second best policies.

I think my Professor Woo would disagree (pdf). 72% of the work force was employed in unsubsidized agriculture when Deng instituted market reforms. These reforms, creating a non-state non-agricultural sector, unleashed normal economic development as peasants streamed into these new and profitable industries. Any pain from those reforms was masked by great increases in productivity.

Woo argues that growth occurred in China despite gradual reforms. Gradualism wasn’t a series of second-best policies, but it was a result of the political reality in China. Gradual reform was the compromise between old statists and the people that recognized communism wasn’t working. Perhaps growth, and the structural transition inherit in it, would have come faster with faster reforms.

Plus, with only 19% of the population in subsidized industries, there was no credible threat of “riots and revolution as the now-unemployed urban manufacturing workers overthrew the government.” The only credible political force was the millions of peasants (and their pitchforks). The Soviet Union, with 93% of its population in subsidized heavy industry, was a different story.

Deng may be a hero, but its not because he orchestrated some great path of reform. Rather, he had the “courage” to take the pebble out of the dam holding China’s economy back; holding the peasants in the countryside*.

China isn’t an example of a credible pro-development government being entrusted with an “industrial policy” filled with second best policies. It, like Japan’s recovery after world war 2, is an example of the power of millions of people freed to do their business as they see fit in an economy running much below its potential.

*Ok, with TVEs peasants didn’t really leave the countryside. But if you can’t bring the peasant to the city, bring the industry to the peasant, I always say.

There’s a good editorial in the Washington Post written by a real live African:

Why do the media frequently refer to African countries as having been “granted independence from their colonial masters,” as opposed to having fought and shed blood for their freedom? Why do Angelina Jolie and Bono receive overwhelming attention for their work in Africa while Nwankwo Kanu or Dikembe Mutombo, Africans both, are hardly ever mentioned? How is it that a former mid-level U.S. diplomat receives more attention for his cowboy antics in Sudan than do the numerous African Union countries that have sent food and troops and spent countless hours trying to negotiate a settlement among all parties in that crisis?

Actually, the best news comes from the horse’s mouth. Why get Bono’s opinion when you can get updates on Iraq from Iraqis or Afghanistan from Afghanis?

Are there any good African blogs?

(h/t Instapundit)

…here. YouNotSneaky is taking Max Sawicky to task. The insults are fun and they make the economics go down easier:

Okay, lemme explain slowly the concept of Pareto Efficiency here because folks is confused.

Suppose there’s a total of 100$ in the economy and two people, Meriadoc and Pippin. If all of that 100 bucks is in some way fully divided between the two, then regardless of who gets what, the outcome is said to be Pareto Efficient. Not fair. Not just. Just efficient. But suppose that only 80$ gets divided between Meriadoc and Pippin with, say, Mary getting 79$ and Pip getting 1$. The other 20$ just lies there on the sidewalk rotting. Then we have inefficiency. We could pick up the 20$ and give it to Pip, or give it to Mary or split it up between them two. Even if we give it all to Mary, so that now he’s got 99$ and Pip only 1$, assuming Pip and Mary don’t care about relative status, only more money, then we can all agree that (Mary=99, Pip=1) is “better” or, more precisely, “more efficient”, then (Mary=79, Pip=1). (If they do care about status or whatever, you can reformulate the problem in equivalent terms)

Of course we may care about income distribution, inequality and all those other things. But that comes later. The PO criteria just says, if there’s 20$ laying on the side, for goodness sake, pick it up and give it to someone, anyone. And that’s the attractive property that a “usual” S&D equilibrium has – no 20$ left lying around rotting.

Maybe. I’m not convinced.

UPDATE: While fighting another battle with Borjas, Rodrik defends theory: “However, empirical work in trade does remain much more strongly grounded in theory compared to labor, which on balance should be a good thing.”

If you think “the switch from a self-sustaining organic economy to a mineral resource depleting inorganic economy was central to the British Industrial Revolution” then you’re wrong. The Industrial Revolution resulted in an increased demand for energy; it wasn’t caused by the availability of energy via some great technological advances in coal extraction.

So Prof. Clark argues, coal is not the reason Britain industrialized first. (That’s the fire-walled-even-though-the-research-was-supported-by-public-funds link and here’s the unlocked version. Also, check out Clark’s fancy new website.):

Productivity growth in English coal mining in the Industrial Revolution era was extremely modest even under upper bound assumptions on productivity gains. The enormous expansion of coal output owes to factors external to the industry: increased demands for coal from greater populations and higher incomes, increased demands following on improvements in iron smelting technology, reduced taxation of coal used for domestic purposes in cities like London, and declining real transport costs… English coal reserves, known and exploited since medieval times, simply found a much larger market in Industrial Revolution England.

I wonder if this historical lesson has any relevance today? Where today do we see demand driving changes in the supply of energy? Hmmm…

… in a real comment thread. Only authenticity from this blog…

Check out this Crooked Timber thread. The post itself is so-so, but the comments starting here are pretty good.

Slocum writes:

The idea that only flinty-eyed capitalists try to deny or delay treatment and that this never happen with government funded health systems is ridiculous.

and abb1, a regular commentator at CT, replies:

In the for-profit case only financial considerations apply. In the government case financial aspect is one among many.

My take is that “financial considerations apply” (in the first order, which I think is what the abbster is talking about) only when corporations are myopic. Pissing off customers isn’t a great business strategy, especially if the corporation wants to keep its customers. In fact,

[p]eople in the U.S. are probably much more satisfied with our health care system than Moore’s overly pessimistic portray of overwhelming dissatisfaction. For example, 88% of Americans say their own health care coverage is excellent or good, and 89% are satisfied with the quality of care they receive (see chart above). If about American 250 million people are insured, that means that there are about 225 million people in the U.S. who are satisfied with their coverage and medical care – and this overwhelming majority of satisfied American never made it into the movie.

It’s true that Americans express lower levels of satisfaction when asked about “health care in the country as a whole,” and 80% are dissatisfied with health care costs and 54% are dissatisfied with the “quality of health care.” In other words, according to Reason, “Insured Americans are overwhelmingly (89%) satisfied with their own care, while broadly concerned about rising costs of prescription drugs and critical of the care others receive.”

Here’s that Reason article and if you read the Carpe Diem post you’ll find he has an interesting prescription for curing American health care. I won’t ruin the surprise but it has to do with the artelCay of octorDays.

In this edition of Quote Mining! TM we have two quotes from Supreme Court opinions on Race:

Distinctions by race are so evil, so arbitrary and invidious that a state bound to defend the equal protection of the laws must not invoke them in any public sphere.

The way to stop discrimination on the basis of race is to stop discriminating on the basis of race.

50 point question: Does the second quote follow logically from the first?

100 point follow-up quetion: Doesn’t it also follow that even well intended school programs that use race to determine enrollments are illegal?

Special bonus question: Wasn’t the Supreme Court’s decision in Parents Involved in Community Schools v Seattle School District No. 1 a no-brainer?

Thanks for playing. You can collect your parting gifts in the comments section.

(h/t Carpe Diem and The Debate Link)

UPDATE: Oops, the first quote is from a brief for the Brown v. Board of Education case not the court’s opinion. The brief was written by Thurgood Marshall, future Supreme Court Justice. Details, details…

UPDATE 2: Here’s something I wrote 4 years ago about race:

The question remains of how to remove the structural racism. The answer is not obvious but it is obvious that you can’t create color blind institutions by color conscious policy. The policy would be a constant reminder of the thing its trying to erase.

Here’s a great discussion of the immigrants/natives substitutes/compliments issue.