So. Much. Stupid. Conservative blind spots edition

Alex Tabarrok

Hey, black dudes! Its great having a big willy! Why you get so mad?! Us white guys are complimenting you!

Okay, that’s not what he said. But he did say this of Asians:

Alex Tabarrok

Hive mind is not even an insult it’s a compliment – like wisdom of the crowds. The hive mind diffuses knowledge and cooperates–it’s not all thinking alike it’s all using the best of each.

Perhaps I better back up a little and give all this a little context.

Noah Smith wrote a post saying that an academic paper  on A Garett Jones paper called “National IQ and National Productivity: The Hive Mind Across Asia“. When I hear about IQ and economic development I reach for my pistol. Noah Smith is just as sceptical. Personally, I don’t see the mechanism. As Chris Dillow says, there are models and mechanisms. You can come up with a pretty model and then become angry when the world deviates from it or you can think about how your pet theory would work its way through the real world.

I can understand a mechanism that uses slight changes in IQ to predict which “nation” will develop first. I’ll describe the one I have in my mind. There are thousands of institutional forms –  “rules of the game” – and only a few of them are compatible with economic growth and prosperity. A higher IQ gives a group 1) a wider the selection of institutional forms to choose between 2) those institutional forms will on average be more complicated 3) better institutions are more likely to be chosen 4) once successful institutions are identified a more intelligent group will be more likely to keep them.

That is an interesting model, but it doesn’t seem to bare any resemblance to the history of the world. The more accurate picture is that various interest groups fought it out in various different places until, in north western Europe a powerful merchant group came into the ascendency and won political concessions that secured their property rights. This happened to have happened after the political revolution following black death in which western European peasants won a degree of autonomy and near some coal. That combination of secure private property, freeish though expensive labour and cheap energy happened to produce sustained economic growth. Nobody planned it because they were smart. It wasn’t sustained because it was smart by the best of my knowledge either. Because Europe was the most violent place in the world, everyone had to strive towards economic growth or face political annihilation. So greed, luck and violence seem far more important to the first sustained initiation of economic growth than IQ.

Similarly, why are some nations wealthy now and some not? Well there is again a similar model where clever nations adopt good institutions and stupid ones don’t, merely out of ignorance, but that doesn’t seem to be the mechanism we observe. Very poor places had their institutions fucked up by white people – psst, that’s Africa, Latin America, China, India etc. – and it takes a long time to get it together after an occupation and negative structural shock. National IQ sounds racist, and while I concede it might have some predictive power with regard to who’s developed, it doesn’t accord with most of the other mechanisms we have for where economic growth comes from – so I’m fairly happy to dismiss it.

So it is into this milieu we jump.

Noah argues that the paper discussed, by Garett Jones, uses lots of racist tropes and should handled with care. He provides some evidence contrary to the predictions of the paper of varying degrees of convincingness. Scott Sumner, whom I respect greatly, hits back that there is a great deal of explanatory power in culture and that Noah shouldn’t throw around the word racist because it is a bad thing. The only problem is that nobody was talking about culture, they were talking about racially innate IQs, and their explanatory power with regards to economic growth. And that brings us to Alex Tabarrok’s comment, at the top of this post and left underneath Scott’s saying how a “hive mind” is a good thing.

This gets to the heart of the real problem.

For some reason, those on the left can see the context in which things happen in a way those on the right cannot. Noah isn’t too left wing, but he seems to have this special power (and attribute of the left wing hive mind, no doubt).

Because for conservatives it often seems context means nothing. I mean seriously; when, in any cultural artefact ever created, any film, novel, piece of art, daydream or utopian novel has a “hive mind” been presented in a positive light? From Zamyatin’s We, to Huxley’s Brave New World a hive mind is not presented as something good. The hive mind does not refer to the wisdom of crowds.

Lets go back to black people, because its easier to talk about racism against blacks. What has been one of the most persistent racist tropes about black people? That they are sexually promiscuous, even sexually aggressive. This is why white people going on about black guys large cocks is usually racist in content, and often racist in its implications. For a female example, the Hottentot Venus wasn’t exhibited for Londoners to gawp at just because white people were/are racist, but because they were/are racist in particular ways. The ways in which people are racist must colour the way in which we view statements.

Context matters. Asians have been stereotyped as sneaky, corrupt, uniform, “hive mind” automatons for over a  century. You still see it in most western reports of strikes and social unrest in China – shocked, shocked reporters that Chinese people are rebelling against their bosses or bureaucrats. Jamie covers Mass Gathering Incidents frequently and there is a good article length treatment of labour unrest here. Hive mind? Tell that to Foxconn. Considering a racist slur in context is not hard, it takes effort in fact to abstract away from the negative connotations of most racist slurs, yet conservatives do so all too often.

This is sometime around the 1970s conservatives realised they were losing the fight for intolerance, so they changed tactics and tried to reframe the debate. They were no longer arguing in favour of racism, oh no, they were arguing against over earnest antiracism. This was politically convenient for two main reasons.  One, lots of the ground work of antiracism was carried out by those on the left. Two, it gave racists someone to vote for. Now in the UK Labour had an at best mixed record on race, especially with regard to housing policy, but during the 1980s they were much more focussed on antiracism. During the same period conservatives began to create a victim mentality where attacking antiracism became more important than attacking racism.

Alex Tabbarrok might like the idea of being part of a hive mind. And some white men might like the idea of being sexually promiscuous with a mighty, large penis. But to completely ignore over a century of casual and institutional racism is plain stupid. But it is a pattern conservatives find themselves slipping into too often: attacking antiracism more virulently than racism. This post is less than completely satisfactory, but I’ll leave it there, and pick up in the comments if necessary.

You can be a well cultured despot you know

Noah and Scott‘s argument about China’s culture is going nowhere. They’ve got bogged down talking about whether culture affects economic potential or not. Long story short, of course it does! Consider these two examples:

Chinese expats around south-east Asia seem more entrepreneurial and they sure as hell are richer than the locals in places like the Malay Peninsula and Thailand. Less fortunately, Black Africans are less trusting than other people and this is just one reason economic growth is more difficult there. Without being able to trust that someone will take your money, disappear into another room and come back with what you want there can be no Argos. And where would you be without Argos? A lot poorer. [1]

The reasons for these cultural traits are complex. I don’t know the Chinese, but Africa’s level of trust appears to still be badly effected by the long defunct institution of slavery; kidnapping was very common for 200 years or so in a way which the rest of the world hasn’t had to deal with. You can be culturally more entrepreneurial. Likewise, you can culturally more or less prone to trust strangers. Both of these have real effects for lots of things, including economics. There, cleared that one up for you.

But whether culture affects wealth given a certain set of economic institutions is irrelevant. What is important is whether culture can influence China’s institutions. China is still deep in the throws of catch up growth, entrepreneurship is of course very important, but not nearly as important as having institutions which allow for the full execution of whatever entrepreneurship occurs. As I said earlier:

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients…

Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right.

The only way China’s culture will significantly influence its long run – at least until it reaches say half of rich world income per capita) – growth prospects is by influencing its institutions. An entrepreneurial culture, or pragmatic culture, is completely unrelated to whether China adopts a growth friendly political framework over the next five to ten years. What matters is whether the politically powerful can be convinced/forced to become economic losers. Look at those guys at the top. Do you think they’re culturally inclined to agree to that?

____

[1] Not sure if that translates to my non-British readers. Argos is a shop with a tiny shop front full of catalogues and a big warehouse full of stuff. You order at the front and stuff appears a few minutes later from the back. The flippancy of my reference is of course a little ruined by this extensive footnote.

Microfoundations: a beautiful theory was killed by an ugly fact

Modern economics looks like macroeconomics. Not much is important when lots of people are out of employment apart from getting those people into employment. Getting macroeconomics right is therefore very important and this is why recently the Lucas Critique has been receiving extra attention.

Lucas argued in the 1970s that macroeconomics could offer little useful advice were it built on looking at specific experiences, during specific periods, under specific policy regimes exactly because such models would only be useful in those specific episodes. Macroeconomics in the 1970s, he argued, wasn’t able to teach us anything useful about the future, which is what matters.

Disciples of Lucas had a very big win in the 1970s when they predicted successfully that the long run payoff between inflation and employment would break down. That we were heading for previously unseen combination of high inflation and high unemployment. They won that fight, and I think have kinda coasted since. So, even conceding this success, I would like to put forward three critiques of the Lucas critique.

Firstly, and most obviously, it doesn’t seem very useful, it hasn’t helped anyone in the developed world recover quickly from the little depression. In fact, it seems to have actively caused inaction in some economists who have thrown up their hands when asked for policy advice and said “its all very complicated!” The sort of people who really wound up Keynes in the 1930s.

The most useful policy advice I’ve come across macroeconomically speaking is from Scott Sumner. The advice is very simple and is, essentially, for central banks to keep very sticky prices moving along a predictable trajectory. This means keeping nominal gross domestic product growing at a steady rate along a predictable level. Employment is subdued in countries which have not seen NGDP recoveries like the UK and US and employment is catastrophically low in countries which have seen NGDP plummet like Greece and Spain.

Not a lot of “deep parameters” were necessary to arrive at a useful policy. Imagine, policy changes in a way that might affect the usefulness of Scott’s advice, for example, allowing the widespread proliferation of competing currencies as favoured by the free banking crowd, would this mean Scott’s theory is not “policy invariant” and therefore useless? Possibly, possibly not, it doesn’t matter though because right now what he proposes would be useful. That is how theories should be evaluated.

Subsidiary to this, is my confusion as to what would qualify as policy invariant, “deep parameters.” All aspects of the modern economy are unnatural to an extent; the whole edifice is upheld by the state. I’m not sure what a theory which ignored everything apart from “deep parameters” would like like, but I suspect Hobbes got closest and that wasn’t very close; I remain suspicious of what this approach has to teach us about day to day macroeconomics.

Lastly, Noah and Nick‘s posts defending Lucas’s insistence on microfounding models were very, very fact light. In fact, neither cited anything that suggested the Lucas critique had been empirically verified. This led me to find out whether there was any evidence to support the Lucas critique. It turns out In 1995 “an extensive search of the literature reveals virtually no evidence demonstrating the empirical applicability of the Lucas Critique.” [pdf] A cursory search of more recent literature hasn’t thrown up anything which says “look, proof!” to me. I’d say the last four or five years reveal a similar dearth of useful policy advice.

In summary, the most major problem of microfounding macro models is that it doesn’t seem to have helped us produce anything useful for macroeconomics. Modernmacro has cost me a lot of money in forgone earnings. It has produced some nifty statistical techniques and I’m a big fan of nifty statistical techniques, but they aren’t very useful at putting my friends and I to work.

Why China Might Fail

I found Scott‘s post very confusing, for many of the same reasons discussed here by Noah. [1] Scott says:

China boosters like Robert Fogel claim that China will soon grow to be twice as rich as France the EU.  Others pundits claim it will get stuck in the middle income trap.  Both the boosters and pessimists are wrong.  Like Japan, like Britain, like France, indeed like almost all developed countries, it will grow to be about 75% as rich as the US, and then level off.  It won’t get there unless it does lots more reforms.  But the Chinese are extremely pragmatic, so they will do lots more reforms.

China is currently a very poor country, so the Chinese model has nothing to teach the West.  If we want to learn from the Chinese culture, learn from Singapore(or Hong Kong), which is how idealistic Chinese technocrats would prefer to manage an economy; indeed it’s how China itself would be managed if selfish rent-seeking special interest groups didn’t get in the way.  But they do get in the way—hence China won’t ever be as rich as Singapore; it will join the ranks of Japan, Korea, Taiwan, and the other moderately successful East Asian countries.

First of all, what I agree with in the post. China is poor and has for the last 40 years not been run by bloodthirsty foreigners or a psychotic madman. Growth from the abject poverty that was 1970s China is inevitable under those conditions. What is clear from Scott’s post is that China’s growth has very little to teach the wealthy West other than “don’t let genocidal maniacs into government” something we learned the hard way a little while ago.

Scott seems to think that China has got its act together and that it isn’t in anybody’s interest to derail its development. Things will be better for everyone when China is like Singapore and therefore we shouldn’t worry that China’s growth will decline disastrously or go into reverse. Technocrats are good! Just like the technocrats in the Fed…oh never mind.

Although I kinda agree that China looks like it has a good culture, strong infrastructure and abundant human resources, so did Argentina 100 years ago, and look what happened to them. What matters are institutions, Argentina’s stank and so do China’s. I am curious that Scott seems so keen to give a clean bill of health to China’s crony-capitalist economy and dictatorial, judicially-repressed polity.

I think he is being naive. Elites rarely do the right thing because they are oh so wise, they do the right thing if they are forced to.

Think about China this way: Whether its Township and Village Enterprises or Foreign Direct Investment into Free Economic Zones, a significant proportion of the growth which China has enjoyed has been controlled by the Chinese Communist Party. Not control as centrally planning, but control as the ability to cut of freedom of action of each. This ability to cut off these developments has kept party chiefs on the same side as China’s bourgeoisie.

It becomes difficult to keep control of growth when you hit middle-income – the low hanging fruit has been picked. One reason Michael Pettis is so worried about Chinese is that consumption repression has always been at the heart of the Chinese growth model. This has been fine for capitalists operating export orientated firms or contractors building infrastructure or real estate, but again places great power in the hands of China’s elites. To reverse this would require a massive transfer of wealth and power from political control to private control. I think Scott underestimates how much the Chinese Communist Party fears the consequences of this.

You can see this in the security apparatus of the Chinese State and its repression of free speech and its tight grip on the internet. they know that as their population gets wealthier they are going to demand more freedoms and more political representation; likewise they are going to demand more economic freedom and more social mobility, something which by definition must damage the interests of the current ruling elite. Powerful magnates will arise to  challenge the power, wealth and status of the current Chinese elite.

No amount of “pragmatism” will make a self-interested elite step aside, the pragmatic thing to do is to expropriate assets and imprison your enemies: to shut down economic activity you’re not involved and to erect barricade between the population and your clients.

Scott says that he cannot see a stable China with a middle-income coast and a poor interior. You can be rich and surrounded by poverty, look at North America! Just look at it! Its been rich and surrounded by poverty for centuries. China still operates a hukuo system of local registration which until very recently prevented anyone from moving anywhere without official say so. You think the Chinese can’t stymie growth by reintroducing the hukuo system of internal border control? Urban Chinese still seem pretty dismissive of “farmers” judging even by the international lot I meet at LSE.

We’re back to my new favourite book to think with: Why Nations Fail. Until now, Chinese elites have not been threatened by creative destruction they have been able to harness it to embellish their own power, wealth and status. The true test of Chinese growth will come when China’s central planning runs out of steam and urban elites and rural poor separate from the CCP begin to erode its power, then we will see whether elites will be forced to do what is right. The point isn’t to describe how China will fail, I’m not sure it will, but only to highlight that there are powerful pragmatic reasons for those in power to want China to fail.

_____

[1] I will not that Noah has still not commented on my rebuttal of his bullish post on the potential for Chinese industrial espionage. Noah should note that I argue Scott is wrong for the same reasons I argue he is wrong. They both slightly misidentify how the drivers of long run growth operate.

Its not “innovate or steal” its “innovate or repress”

Who hasn’t, I ask, been tempted to compare modern political economy to computer games? Its fun, but wrong, like most fun things, come to think of it…

Anyway, before I’m sidetracked, Noah Smith asks “Why should China innovate when it can just steal?” Good question. Its one that highlights how vital industrial espionage and intellectual property theft have been for every newly industrialised country since Germans started engraving “Made in Sheffield” on their Hamburg steel. “Stealing” technology to help drag people out of intense suffering is pretty much a Good Thing in my opinion.

What Noah doesn’t note is that successful countries always and everywhere begin innovating themselves – there is no choice between innovation and spying. None.

There are important reasons China cannot continue to steal technology forever. The first is technical. Technologies do not exist as comfortable chunks of something which are easy to steal, very often the successful operation of a technology requires tacit knowledge by those using it. You can get Ford to build you a factory, as the Soviet Union did, but without the knowledge of Ford’s workers your factory will be significantly less productive. Newer technologies require more tacit knowledge – because nobody has been able to codify and simplify it yet – and hence you cannot steal your way to prosperity, only to a certain ratio.

More fundamentally, Noah has got the trade-off completely wrong, exemplified in his penultimate [1] paragraph.

Anyone who is rooting for China’s economy should not be so worried by the innovation limitations discussed in articles like this one, unless they also believe that China’s demonstrated capacity for forced tech transfer and espionage are also diminishing.

Woah there!

A lack of innovation is not a policy choice with good consequences if you consider innovation to be natural. Let me clarify. Although many polities have repressed innovation, and despite technical progress being slow through most of human history this has been the result of political structures which have worked to either punish potential innovators or to expropriate successful ones. Even given this history of repression people have still sought to improve technology, especially where they have been allowed to keep some of the spoils from doing so. Eric Jones is very good on this – look to the efflorescence  of Song China or the slow acceleration of growth after the Glorious Revolution.

To shift resources from innovation to spying requires a repression of innovation akin to the suppression of the printing press in the Ottoman empire, or Elizabeth I’s successful attempt to stamp out Lee’s stocking weaving innovation in the British textile industry (!). You cannot make that trade-off as costlessly as Noah imagines.

In fact, I would argue that there is no trade-off between spying and innovation at all: spying is a military expense and innovation is a political expense. You pay spies out of taxes or corporate profits, you pay for innovations by suffering the economic and political losers of creative destruction. They operate at completely different margins.

China’s primary challenge is not to choose between innovation and spying, because that is not a choice. The Chinese needs to decide whether they want to deal with the political and economic instability but dynamism of creative destruction or not – if they do they can have a little more espionage and a little more innovation, if not then they’ll have little of either. If this decision is left to their elites only, then China will likely fail, if left to the people there is a decent chance China will continue to prosper.

This is in part the basis for Michael Pettis and Free Exchange‘s bet on whether China will achieve even 3% growth in the coming decade. Can China shift from a centralisedish investment boom to diffuse growth through innovation? States either embrace creative destruction or seek to repress it. Both innovation and spying are sources of creative destruction but only successful states with inclusive political and economic institutions can successfully cope creative destruction.

______

[1] I hope you’ll be as interested as I was to learn that penultimate refers to the song prior to the ultimate (i.e. last) song in an opera. Neat huh?

UPDATE: I realise now, having woken up a little that my first paragraph stands alone a little. Noah refered to “a game called Master of Orion II” which inspired, or was used as a hook, for his post. I meant to refer to it but didn’t. That sort of sloppy writing is probably one reason I wasn’t shortlisted for the Orwell Prize by central party lickspittle my pal Hopi Sen.

UPDATE II: Repetition of “a little” above would annoy me in someone else’s writing.