Seriousness is always related to roles, or abstractions. We are likely to be more serious with police officers when we find them uniformed and performing their mandated roles than when we find them in the process of changing into their uniforms. Seriousness always has to do with an established script, an ordering of affairs completed somewhere outside the range of our influence. We are playful when we engage others at the level of choice, when there is no telling in advance where our relationship with them will come out—when, in fact, no one has an outcome to be imposed on the relationship, apart from the decision to continue it.

To be playful is not to be trivial or frivolous, or to act as though nothing of consequence will happen. On the contrary, when we are playful with each other we relate as free persons, and the relationship is open to surprise; everything that happens is of consequence. It is, in fact, seriousness that closes itself to consequence, for seriousness is a dread of the unpredictable outcome of open possibility. To be serious is to press for a specified conclusion. To be playful is to allow for possibility whatever the cost to oneself.

The book is obviously not about game theory, and it lives up to its subtitle, “A Vision of Life as Play and Possibility.”

It is a book that I wish were more widely read, not merely because I enjoyed it, but because it would enable for me a new mode of discourse. In the short time since I read the book, I have found myself on numerous occasions wanting to say, “So-and-so is playing a finite game,” and be understood. When Tyler invites Krugman to come out and play, and Paul responds with “This is not a game,” Paul is playing a finite game. When Mike Elk trashes bloggers in general and Matt Yglesias in particular, Elk is playing a finite game.

I read the book as pro-blogging, even though it was written before the invention of blogging, and pro-anarchism (of a certain kind), even though I doubt Carse has read the anarchism literature. More broadly, it promotes bottom-up processes not on Hayekian or consequentialist grounds, but on the grounds of meaning and personal satisfaction.

I recommend the book to people who are highly Open (and to a lesser extent non-Conscientious) on the Big Five personality model.

Brynjolfsson and McAfee are not wrong, but I think a better picture emerges if we attempt to reconcile their argument with Cowen’s rather than viewing them as contradictory. As Tyler argues, we have not had the kind of growth we might have expected 40 years ago if we had extrapolated based on the prior 40 years. See this chart on total factor productivity by David Beckworth. I think McJolfsson’s view and Cowen’s view are complementary if viewed from a sufficiently “big picture” perspective; the slowdown in TFP and the speedup in SBTC are, after all, decades-long trends.

Here’s my model. First we need to differentiate between two kinds of innovation and think about their effects. The first kind of innovation is geared toward brute maximization of production. It is typically centralized and makes use of economies of scale. Examples might include an assembly line factory or a big, coal-fired power plant. Because these innovations tend to be centralized, they introduce points of control. The capital is typically fixed and therefore easy to tax and regulate. It’s well known in the development literature that it’s really hard for governments to control rural peasants who live off the grid. Once they move to the cities and plug into centralized services, it is easier to require them to send their children to school, for instance. Because these innovations introduce points of control, I will call them technologies of control.

On the other hand, not all innovations are about brute maximization of production. Some are about producing things that we already know how to produce in ways that have ancillary benefits. An important ancillary benefit is evading control. Examples of these innovations include 3D printers and solar power. The evasion of control that is possible with 3D printers is the subject of Cory Doctorow’s short story Printcrime. And portable solar power cells can make people harder to control by supplying electricity without the need to register an address, have a bank account, stay put, and so on. These are obvious examples, but control can be evaded through more subtle innovations as well. I will call innovations that circumvent points of control that can be used by governments or monopolies to exploit, tax, or regulate technologies of resistance.

Now, postulate some background rate of innovation. How many resources will be devoted to technologies of control and how many to technologies or resistance? The answer is that it depends on how invasive the state (or other monopolies) are. When the state is invasive, at the margin the incentive is to find ways to circumvent the points of control; a greater proportion of resources will go into technologies of resistance. When the state is non-invasive, at the margin the incentive is a purer maximization of production; a greater proportion of resources will go into technologies of control, which results in higher growth.

What determines how invasive the state will be? Call me a cynic, but I think it correlates strongly with the availability of points of control. When factors of production are fixed, when demand for government supplied public goods is inelastic, when there are lots of points of control, the government will exercise more control. When the opposite is true, when there are few points of control, the government is unable to act invasively.

As you can see, there is a system of feedback. But the countervailing forces need not push outcomes to a stationary equilibrium. As we all know, time-to-build can result in cycles. Since technologies take time to change direction and develop, and since politics is slow to adapt, we should expect a non-stationary equilibrium. I think this is consistent with the broad facts. A hundred years ago, at least as it concerns white males living in the US, the government was relatively non-invasive. As a result, they developed centralized technologies that created a lot of growth, technologies of control. As new points of control were introduced, the government became more invasive. The modern state was born. At some point, innovation gradually increased toward technologies of resistance. The low-hanging fruit from the prior era eventually petered out, and sometime around 1974 we began to see lower TFP growth. As technologies of resistance improve relative to technologies of control, I can’t say exactly what will happen. A lot depends on whether government becomes gradually less invasive as points of control disappear or whether it continues to overreach; if the latter, we could observe some kind of interesting political turmoil.

So far, I’ve been pretty general about technologies of resistance, but I want to tie it back into McJolfsson’s story about rapid skill-biased technical change. The key point is that labor is extremely regulated; firms that use labor are subject to intense government control. In part this is because policies that give labor a “bigger piece of the pie” are popular with voters, and in part it is because labor can complain and enforce its rights in a way that machines cannot. If you own a business and you are subject to intense government control, you are going to invest resources in circumventing the points of control. In our economy, that means getting rid of lots of labor as cheaply as possible, which means skill-biased technical change. As Arnold Kling has said, “if a job can be defined, it can be automated or outsourced.” But it’s because there is so much control exercised in the labor market that the incentive to automate and outsource is so high.

On the other side of the labor market, I wonder if post-materialism is not also part of an attempt to evade control. A lot of talented people are scaling back their labor efforts, and while surely not all of this is due to taxes and regulations, some of it may be. And other innovations which seem truly new, such as the development of autonomous vehicles, are the result of control of which we may not even be aware; for instance, how profitable would it be to develop autonomous vehicles if Pareto-improving trade with immigrant drivers were not made impossible by immigration and labor restrictions?

The Internet has been somewhat insulated from the kind of political control that I am claiming leads to the cycle of control and resistance. As a consequence, I think we observe an epicycle there. Internet technologies can be centralized at the company level or standardized at the protocol level. Email is an example of a technology that is standardized at the protocol level, and it was developed in the early days of the Internet, when market power was a serious concern. Today, there are so many competitors in the online messaging field that market power is not a real problem. Consequently, we observe services like Facebook and Twitter, which are centralized and can provide “higher production” by reducing spam, for instance. If Facebook and Twitter ever abuse their market power too much, that is when distributed, protocol-based substitutes such as Diaspora and Status.net will take over. And when the government starts exerting more control over the Internet, we’ll observe the adoption of new technologies to circumvent that control, such as encryption and mesh networking.

In a strange way, this theory is a partial vindication of Ayn Rand; the only problem is that she was too literal. The productive people do not go on strike when they are over-controlled. Instead, they innovate around the points of control. They go on strike at the margin. And it doesn’t take a big, dramatic exit. A little bit cumulatively over decades is sufficient to both be noticeable in the data and to reduce the amount of control that can be exercised.

At the risk of being accused of now-more-than-everism, I’ll point out that the problems associated with a greater focus on technologies of resistance and with skill-biased technical change could be much ameliorated by a government that dramatically reduced its control over its citizens. Stick to supplying public goods and providing a small safety net. It won’t fix everything overnight—technology has momentum—but it will make things better than it otherwise would be. However, I think there is little chance of this happening. It requires out-of-equilibrium political play. Instead, if my theory is correct, we will find out what happens when large, invasive governments overextend and are forced to shrink.

I’m writing this post on Austrian macro because the Austrian school seems to be both en vogue with and poorly understood by Tea Party types. For that matter, it is poorly understood by critics of the Tea Party. I’ll be the first to admit that I am not the most qualified person in the world to write this post. I am not an Austrian or a macroeconomist. Lots of people, including some GMU first-years who are taking the macro prelim this weekend, could do a better job than I will do. Maybe they can comment and refine the post that way. Let’s get started:

What’s right with Austrian macro?

The starting point for modern macroeconomics is what is known as dynamic stochastic general equilibrium (DSGE) models. These models vary depending on the point that the theorist is trying to make, but in the broadest class of them, there is in fact very little economics even going on. Say we start with Long and Plosser’s classic RBC model. How many goods are there in Long and Plosser? One (plus leisure). How many people are there in Long and Plosser? One! How much trade is there in Long and Plosser? Zero. Now, if what you mean by economics is intertemporal optimization in the face of random shocks, then Long and Plosser is an economic model. But as Hayek argues, “This, however, is emphatically not the economic problem which society faces.” DSGE models are poorly suited to evaluating changes in an economy with arbitrarily diverse agents with arbitrarily diverse preferences and arbitrarily diverse information sets. This critique of DSGE-style macro is part of the core of Austrian theory.

Furthermore, in the Austrian view, capital is heterogeneous and multi-specific. If you invest in a pet store, and then decide you want to convert it to a massage parlor, that is costly and time-consuming. This opens the door to malinvestment. In many RBC and New Keynesian models, capital is homogeneous, meaning that it is costless to switch from one investment into another. Kydland and Prescott explicitly assume time-to-build, but this is not the only friction in real-world investment.

According to the Austrians, production functions for the multi-specific capital are discovered over time. In virtually all RBC and New Keynesian models, production functions, the way of transforming the single type of capital into the good or (rarely) goods are specified in advance and do not change. Austrians emphasize competition as a discovery procedure. Entrepreneurs are constantly trying to find new ways to turn existing capital stocks into goods that consumers may want. This discovery procedure is obviously sensitive to policy shocks.

What is wrong with Austrian macro?

The biggest problem with the Austrian school is a legacy of the fact that much (not all!) of the theory was developed before the rational expectations revolution. Even if you think rational expectations is bogus, the fact is that many Austrian models do not explicitly state what is driving expectations. If the monetary authority inflates, everyone is tricked. This is clearly problematic. A better Austrian theory in my opinion would evolve along the lines of the Lucas islands model. I have written before that I think our current situation is one of severe model uncertainty. Some people think money is tight and others think money is loose. If that is the case, then even if people have, say, Bayesian expectations, many of them will be tricked, resulting in monetary distortions.

The other major weakness in Austrian business cycle theory is that it focuses way too much on one particular distortion, monetary policy. Now, the Austrians have an answer to this; they argue that money is one half of every single transaction in the economy, so if money is distorted, then that is a big problem. I don’t think this is true. First, monetary distortions will cause primarily intertemporal distortions. This may be problematic, but as I wrote above, one of the biggest strengths of the Austrian model is that it takes seriously the heterogeneity of goods, capital, and preferences. Focusing primarily on intertemporal investment gives away that huge gain. Austrians should be more open to examining other distortions, such as the subsidization of fixed-value financial claims (FDIC insurance, favoring debt versus equity) and industrial policy. I think Arnold Kling is onto something with his emphasis on Patterns of Sustainable Specialization and Trade.

What is misunderstood about Austrian macro?

The Austrian mantle has been claimed by the Tea Party, but very few Tea Partiers are familiar with modern Austrian scholarship. Michelle Bachmann famously takes Mises with her to the beach, but there is a great deal of Austrian theory that is post-Mises. In particular, most of the modern Austrians I have talked to are not goldbugs. They understand that the most important characteristic of money is not its store-of-value property. In general they favor rules versus discretion in monetary policy, but those rules are ones that non-Austrians can easily get behind. For instance, George Selgin writes, “Scott Sumner’s general views on macroeconomics are so much in harmony with my own that, in commenting on the present essay, I’m hard pressed to steer clear of the Scylla of fulsomeness without being drawn into a Charybdis of pettifoggery.” Furthermore, to the extent that Austrians like gold as currency, they like it because they believe it would “win” in a free-market competition against fiat currency, not because gold is special per se. A simple test would be to get rid of capital gains taxes on gold and other assets and see what wins.

Modern Austrians view policies like NGDP targeting as coming straight out of Hayek, who wrote about the importance of preventing a “secondary deflation.” Consequently, the mainstream accusation that Austrians favor no policy in the face of a financial crisis is misguided. The correct policy, according to many Austrians, is to adopt the most non-distortionary monetary policy there is, which is to keep nominal spending at the expected level. Letting spending collapse is itself a distortionary policy.

The Tea Party is populist, but it seems to be populist for the sake of populism. Austrian theory, on the other hand, is anti-elitist because it believes that neither elites nor anyone else can successfully “manage” the economy. There is consequently a certain populist interpretation of Austrianism; but the theory is not so much about giving the masses what they want as about letting a decentralized process take place. This is the main reason I am skeptical about the political adoption of Austrianism. It is being used as a rhetorical tool in a cultural dispute, not as a way of understanding the nature of the economic problems we face.

I should be clear that I’m not indifferent to the outcome on any given policy matter. I am a pretty radical libertarian; I have clear policy views. Nevertheless, over the past few years I have cultivated a serene detachment from day-to-day politics. I don’t vote, and I don’t worry. Here are five reasons why.

The importance of politics is overrated

I was persuaded of this point by Steve Davies, who gives a fascinating lecture on non-political perspectives on history (one version of the lecture is on YouTube, highly recommended). Most of the history that you learn in high school is political history, a history of power: kings, presidents, wars, revolutions, and so on. But taking a commercial or economic perspective on history can show you how much politics has been oversold. Davies shows that, for instance, the invention of mass production, the shipping container, the birth control pill, and the Internet have been arguably more important over the last century than any presidential election.

This is not to say that individuals cannot do tremendous damage by political means. R.J. Rummel estimates that 262 million people were killed in the 20th century by their own governments, and of course governments have killed millions of foreigners as well. This is a good reason to be anti-government. But I’m not persuaded a priori that any of the candidates I named is likely to be significantly less destructive than the others. And I’m optimistic about our ability to flourish through commercial innovation no matter who you guys elect in 2012.

The Good vs. Evil story about politics is not true

As Tyler Cowen says, be suspicious of stories. It’s tempting to think about contemporary politics as a story of good guys versus bad guys. Whether the dichotomy is political parties or cosmopolitan versus provincial, people like the good versus evil story because we are biologically programmed to respond to it. Politicians have an obvious incentive to say that they are one of the good guys and their opponents are bad guys.

But who are the good guys in American politics? I look around and I see lots of people wanting to impose their values on others. Even many libertarians, who nominally say that they don’t want to impose their values on others, seem to want to impose libertarianism on the public through electoral victories. That is no way to treat unwilling minorities. It’s not that politicians are especially evil, either, though I do think that politics attracts a certain megalomania. Mostly, politicians of all stripes are ordinary, flawed, misguided people.

Recognize that a) stress kills and b) you can’t make a difference

It would be one thing to get worked up over politics if by doing so, you could affect political outcomes. But the odds of casting the decisive vote in any election of consequence are vanishingly small. It would be more probable to get struck by lightning on two consecutive days. And there are so many voices in political discourse that you’re nearly as unlikely to make a difference there, even if you are a respected blogger.

Even though few of us can make a political difference, many of us get worked up over politics. This is damaging to our physical and mental health. I worry that one particularly apoplectic econblogger, a talented economist, will literally die suddenly of a stroke. We’re much better off if we can recognize that for better or for worse, we have very little control over what happens politically, and there’s no reason to get stressed out about it.

Politicians often can’t act on their preferences

If there is any issue that motivated the 2008 presidential election, it was George Bush. Obama ran on a platform of “change,” and I believe that he was sincere. Nevertheless, we are still in Iraq and there is still a prison at Guantanamo, at which military tribunals will be held. Furthermore, Obama has opened up a new front in Libya. “I have decided to repeat George Bush’s mistakes,” mocks Ryan Young.

Events can be simultaneously absurd and inevitable. The fact is that Obama faces all kinds of political and institutional constraints in the execution of his role as president. There are not as many degrees of freedom as it may at first appear. Adam emphasizes the discretion that presidents have, and undoubtedly they do have some. But if Obama can’t even close Guantanamo, something that I believe he really wants to do, then the presidency probably matters less than people think.

The logic of reoptimization

One useful way of thinking about politicians is that they want to tinker with prices. They raise the price of some goods by taxes, regulation, or outright bans, and lower the relative price of other goods through subsidies, i.e., raising the price of everything else. Different politicians want to tinker with prices in different ways, and many of them want to undo many of the tinkerings of their predecessors.

If a politician wants to raise the price of something that I consume and lower the price of something I don’t consume, that makes me immediately worse off. But once I reoptimize for the new set of prices, I may be only slightly worse off, or perhaps even better off than before. I can consume more of the thing of which I used to consume less. For this reason, even bad politicians may be less harmful than they at first appear.

Worst case scenario, I’ll reoptimize to another country. Probably such a move would make me worse off (or else I would do it now), but it still places a real limit on how much the president is likely to harm me. I am probably more elastic in this respect than most Americans, but nevertheless if the worst possible outcome is that you move abroad, something that many people do voluntarily every year, it’s not that hard to relax about politics.

I invite you all to join me in serene detachment from politics. You will worry less and have more time to spend on other pursuits. What do you have to lose?

The term “liquidity trap” comes from Keynes. He described it as a theoretical possibility under which monetary policy would be ineffective; it would be unable to stimulate an economy in recession. Consequently, fiscal policy would be needed. To my knowledge, Keynes was not claiming that the economy ever has been in a liquidity trap; it’s simply a possibility that occurs under very specific conditions. Those conditions define “liquidity trap,” but there is disagreement over when they hold.

What is at stake here is the status of fiscal policy. If the economy sometimes experiences liquidity traps, then that is perhaps a good reason to keep fiscal policy in our toolbelt. If the economy never experiences a liquidity trap, then monetary policy strictly dominates fiscal policy: it is faster, less wasteful, and does not increase sovereign debt. It’s sometimes hard to say whether advocates and detractors of fiscal policy take those sides because of their position on liquidity traps or vice versa.

Krugman is among those who think that the world does experience liquidity traps, that we are in one now, and that we need more fiscal policy. Why does he think this? Arnold Kling does some of the forensic work and uncovers an old and a recent statement from Krugman on liquidity traps. Arnold says they are inconsistent, but I think they are perfectly consistent. The old statement:

My view … is that the liquidity trap is real: no matter how much the Fed increases the monetary base, it has no effect, because it just substitutes one zero-interest asset for another.

The new statement:

The economy is in a liquidity trap when even a zero nominal interest rate isn’t enough to restore full employment. That’s it.

What Paul is saying is that the economy is in a liquidity trap when the nominal interest rate on short-term Treasuries is zero. When the Fed tries to expand the money supply by buying up short-term Treasuries, it is swapping cash for Treasuries. Normally, cash and Treasuries have different properties: cash has a nominal interest rate of zero and Treasuries bear some positive nominal interest rate. However, when Treasuries bear an interest rate of zero, they are basically the same as cash. They are backed by the US Government and they don’t carry interest. Why should swapping one asset for an identical asset make any real difference in the world? On this narrow point, Krugman is clearly correct: it wouldn’t make a difference at all.

Krugman is wrong, however, that this constitutes a liquidity trap, either in the sense that Keynes meant it or in the looser sense that monetary policy is ineffective, because swapping cash for short-term Treasuries is not the only (or even necessarily the best) way to conduct monetary policy. First of all, it is important to recognize that there is not just one nominal interest rate. There is an infinity of nominal interest rates. If the interest rate on short-term Treasuries is zero, the Fed can swap cash for longer-term Treasuries. It could in theory buy private bonds, or stock, or mortgage-backed securities, or even non-financial assets. In any of these cases, the Fed is increasing the amount of money in circulation, and it is removing less liquid assets. This is expansionary except in extraordinary circumstances I’ll discuss below.

Incidentally, the Fed can also conduct monetary policy by other means. It can simply print money and distribute it, the infamous “helicopter drop.” It can buy foreign currency. It can lower the interest rate or raise the penalty on excess reserves that banks hold at the Fed. It can promise to inflate more in the future. All of these actions are expansionary, again except perhaps in extraordinary circumstances.

What are the extraordinary circumstances in which all monetary policy is ineffective? Keynes got it right. Monetary policy is ineffective when people want to hoard whatever cash they can get their hands on. In technical terms, the demand for money is infinitely elastic. The point is that increasing liquidity in the system (buying illiquid assets with liquid assets, say) does not translate into more spending because people soak up whatever liquidity there is.

When is demand for money infinitely elastic? Basically never. This is what Tyler is saying in his most recent post on liquidity traps. In Tyler’s terminology, there are multiple margins on which people express preferences for liquidity. There is the money-bonds margin, and in fact, there are multiple money-bonds margins. When the nominal interest rate on short-term Treasuries is zero, that is one margin on which people are expressing a preference for liquidity. But as I argued above, there are other bonds, and people are generally willing to sacrifice liquidity for a non-zero rate of return. There is also the money-goods margin. People are generally willing to sacrifice liquidity for stuff. That is, if you give them money, they spend some of it. But since Keynes is all about aggregate spending, you can see how it would be the case that if people infinitely preferred liquidity to goods (they were unwilling to spend even if you gave them more money), then it would be desirable to have the government to engage in direct spending (fiscal policy) to boost aggregate demand.

So why does Krugman fixate on only one interest rate, on only one particular money-bonds margin? I think that it’s just a lack of imagination about what monetary policy consists of. Traditionally, monetary policy in the US has consisted primarily of open market operations on short-term US Treasuries. But there is nothing special about this particular kind of monetary expansion. If Krugman wants to call it a liquidity trap when the nominal interest rate on short-term Treasuries is zero, he needs to abandon the conclusion that fiscal policy is called for in a liquidity trap. I prefer to retain Keynes’s original meaning and conclusions by defining a liquidity trap as an infinitely elastic demand for money.

1. Suppose monetary policy is conducted so that all nominal shocks are perfectly offset. Zero percent of net shocks, shocks adjusted for changes in the quantity of money, are nominal; 100% of net shocks are real. Therefore as monetary policy improves it is the policy conclusions of the RBC literature, not the New Keynesian literature, that are relevant.

2. Empirically, I agree with Krugman and others contra pure RBC theory that money appears to be non-neutral. But why is money non-neutral? Saltwater macro offers answers to this question that are frankly absurd. Menu cost arguments rely on a fallacy of composition. Even if all businesses face costs of changing prices, unless they synchronize their price changes, there is no reason to believe that the price level as a whole is sticky; see Caplin and Spulber. If the nominal price level is not sticky, there is no reason to believe that real stickiness—efficiency wages and so on—can be the source of monetary non-neutrality. Freshwater macro has advanced the much more plausible idea that money is non-neutral because of legal restrictions on financial intermediation. Under laissez-faire, money would be neutral, and RBC would be correct.

3. Critics of RBC argue that it is hard to find shocks to real factors such as technology, particularly negative shocks, to account for recessions. However, they overlook shocks to credit, which is—wait for it—a real not a nominal factor.

4. Critics of RBC ridicule the theory by saying that according to freshwater economists, the Great Depression was the Great Vacation. But their own theory is no less ridiculous. According to saltwater economists, unemployment of over 20 percent persisted for almost a decade because people were too stubborn to accept wage cuts. Sorry, not plausible.

5. RBC makes strong assumptions, but it should be appreciated for what it is, which is an attempt to do macro as pure economics without post hoc additions to make the theory fit with measurement (which is, after all, imperfect). In contrast, other approaches exhibit a tendency toward, to coin a phrase, Macro of the Gaps. The models don’t always make this clear, but a lot of the features that do the work in saltwater theory are residuals. I am not aware, for instance, of a serious effort to give a theoretical account of the value of the fiscal multiplier. Instead, the fiscal multiplier is whatever regressions say it is. I am not against empirical work, but how convenient that regressions set the multiplier to whatever level is necessary to make the theory work. In fairness, some RBC papers empirically calibrate models, but there is more honesty about the fact that they are calibrating, not independently estimating results.

6. As Tyler used to say in Macro I, 98 percent or more of business cycles in human history were indisputably real business cycles. There was no central bank and no fiscal authority in caveman days. “My theory explains 98 percent of business cycles” seems like pretty good justification to me.

As I said before, I’m not an RBC theorist, but not everything has to be about petty tribalism. RBC is both scientific and worth studying.

However, I faced resistance when I said I favored such a system for violent offenses as well. Karl (or whoever) Adam said it would lead to mob justice in cases where the amount of restitution was too large to be repaid. In most customary, private legal systems, violators who cannot or do not comply with court-imposed demands for restitution lose the protection of the legal system.

As I read the literature, there is reason to suppose that private systems of law handle violent offenses relatively efficiently. Anderson and Hill argue that the American Wild West, on and beyond the fringes of government control, was not actually that wild. Bruce Benson documents the gradual transformation of customary Anglo-Saxon law to modern state-based law, which at each step seems to have been motivated by rent-seeking considerations, not by a desire to improve the efficiency of violent crime-fighting. Leeson explores the adjudication of violent offenses along the sixteenth-century Anglo-Scottish borderlands, effectively a war zone; this was not a pleasant place and time to live, but the system of adjudication was more orderly than might be supposed. Modern-day Somalia is under customary law, and while it doesn’t do a good job of protecting outsiders against pirates, it protects Somalis from other Somalis well enough that the Somali economy is outperforming that of its neighbors in many regards. Again, not where I’d like to live, but let’s not suppose that a public legal system would turn Somalia into Northern Virginia overnight either.

Nevertheless, the literature on private legal protection against violence leaves something to be desired. There are many more papers on how private legal systems such as the Lex Mercatoria arose to enforce contracts, even with heterogeneous agents in one-shot trades. At least that is the literature I am more familiar with (see, for instance, this survey by Powell and Stringham). To some extent this is because states have more thoroughly coopted control of the prosecution of violent offenses than that of non-violent offenses, and therefore there are fewer examples. But I’m interested to know if there are other papers I’m missing specifically on how violent offenses are handled in private courts, preferably as recently as possible (I know also about the systems of Medieval Iceland and Ireland).

But while it would be great if the literature on private enforcement against violent offenses were more plentiful, I doubt that the objection most people have to such a system is at root about efficiency or orderliness. Rather, the enforcement of violent offenses frequently involves penalties that we prefer to impose at arm’s length. A serial killer has so many victims and owes so much restitution that the legal system won’t protect him even after all of his assets have been seized to make partial restitution for his crimes. As a result, he’d likely be killed for his crimes under a private legal system. In a public legal system in much of the world he’d be killed as well, but the difference is that we’ve invented an entity called the public executioner to act as a moral veil between the public and its actions.

This reminds me of something that Tyler wrote in October:

Any social system must, at some stage of interactions, impose some morally unacceptable penalties.  If you are very hungry, and you shoplift food, they still might prosecute you.  If you don’t pay your taxes, and resist wage garnishes, they might put you in jail.  If you resist arrest, they might, at some point in the chain of events, shoot you while trying to escape.  Somewhere along the line there is a doctor who can treat your rare disease except he doesn’t feel like working so much, and so he lets you die or suffer; you can find both private and public sector examples here.

Social systems proceed by (usually) covering up the brutalities upon which they are based. The doctor doesn’t let you get to his door and then turn you away, rather his home address is hard to find.  The government handcuffs you so they don’t have to shoot you trying to escape.  And so on.

Those of us who believe that publicly-enforced criminal law leads to numerous injustices need to acknowledge the strength of the public system. It lets ordinary citizens feel like they are not the ones doing the enforcing. It enables a kind of self-deception that a private system does not automatically provide.

Is this a feature or a bug? On one hand, the world might be a gentler place if we were not able to self-deceive about the brutalities that we impose on each other. On the other hand, if the failure of private systems to supply this self-deception means that we are stuck with the many deficiencies of the public system (e.g., police discretion, which leads to corruption, rape of prostitutes, and victimization of the poor), then it’s imperative that we either try a) to discover ways for private law to provide self-deception or b) to unmask the brutality of the public system.

There is a severe conceptual problem that plagues any measure of inflation. It seems easy enough to measure the change in price of a basket of goods, but real-life consumers do not buy the same basket of goods from year to year. Entirely new goods get introduced, and even goods that seem nominally the same tend to improve in quality. These both introduce biases.

Suppose you’re starting with a basket of goods that contains x and y. Then new good z gets introduced. You don’t have the period-ago price of z, so you might continue for a period assuming that consumers are just buying x and y. You add z to the bundle in the following period when you can make a price comparison for z. This is going to cause CPI to overstate inflation, because in the period where z was available on the market but not included in the basket, consumers had greater choice with a given amount of money than the index suggests.

Now suppose you’re starting over, again with a basket of goods that contains x and y. Instead of adding a good z, assume that in some period x and y are replaced on the market by x’ and y’, which are improved versions of x and y. Consumers buy x’ and y’ in roughly the same quantities that they bought x and y, respectively. Since x and y are no longer on the market, there is no price comparison that can be made across periods. One way around this is to assume naïvely that x’ = x and y’ = y. Once again this is going to cause CPI to overstate inflation, because a given amount of money can buy more quality than the index suggests.

Tyler claims that the first problem is more severe in practice than the second. I am not so sure. One reason that we can never be sure is that statisticians at the BLS attempt to correct for both kinds of problems. This is a confounding factor that takes simple intuition out of the picture. How can we know whether net of statistical correction one problem is worse than the other?

But even assuming naïvely that the statistical corrections are equally effective or ineffective, it’s not obvious that the first problem is the most severe. In the periods when truly new goods first get introduced, they typically do not make up a large fraction of the real-world consumption bundle. This is an inherent limit on how much damage they can do to the index. In contrast, secular improvements in goods tend to affect the whole bundle. There is much bigger scope for damage to the index from quality improvements than from the introduction of new goods.

Tyler has been advancing the differential CPI bias argument to amplify, not make, his core argument, but if he has it backwards, that CPI bias has been worse in the post-1973 period than in the pre-1973 period, then his whole stagnation hypothesis crumbles. I’d like to see more discussion of his CPI intuition.

Update: Bryan has more.

All of the numbers in play are fundamentally non-economic. Whether we’re talking about growth in measured productivity or median family income, all of the numbers used are calculated by taking some P and multiplying it by some Q. These are modes of accounting, not of doing economic analysis.

What we really want is something that captures changes in total surplus (or utility) per capita: indifference analysis. A basic question that can start off the discussion is the one I asked on Twitter yesterday:

What multiple of your lifetime income would someone have to offer to get you to agree to have been born 20 years earlier?

If you take the 20th root of that multiple and subtract one, you have an estimate of the annual growth rate of your personal economy. If you don’t have a fancy calculator handy, Wolfram Alpha is your friend.

My sense is that Tyler’s multiple is embarrassingly high (it is, after all, the Age of the Infovore). Mine is high too.

If Tyler wants to defend the stagnation hypothesis against this line of reasoning, he has two choices. First, he can say that the multiple would be even higher for earlier 20-year periods. I doubt that he would say this for himself.

Second, he can claim (correctly) that he is not the typical person. The masses are not infovores. But granting that this is the case, it’s difficult to imagine what sort of improvements could be made, even in theory, that would elicit for them the kind of welfare explosion experienced by infovores in recent decades. What do non-infovores want?

The fact is that in wealthy Western countries we’ve hit pretty severe margins of diminishing utility in terms of what we can offer non-infovores, at least those who have not recently come upon some hardship. You can say bigger houses and more leisure, but all I hear, with only slight exaggeration, is “more Muzak and potatoes.”

Tyler makes many good points, but once you accept that for many people (infovores) welfare is surging and for most others (non-infovores) it has comparatively nowhere to go, then it’s hard to call that exactly stagnation. Indeed, you could argue that we have already won the future.

The first hint that there is much more to Tyler’s meaning than shows up on the page comes before the book even begins, in the dedication. The book is dedicated to Peter Thiel, a known anarchist sympathizer. Thiel is well-known as the billionaire co-founder of PayPal and early Facebook investor. But he is also the chief patron of the Seasteading Institute, which aims to avoid government rule by colonizing the surface of the ocean. Thiel is someone who understands that getting out from under the boot of government is necessary for the continued flourishing of mankind. Perhaps this is what Cowen has in mind when he writes on location 447 that Thiel is “an acute observer of our modern economy.”

Cowen’s ostensible thesis is that “the American economy has enjoyed lots of low-hanging fruit since at least the seventeenth century, whether it be free land, lots of immigrant labor, or powerful new technologies” (63). That low-hanging fruit is now gone and we have to brace ourselves for lower growth for a time. But at the same time, he seems to be offering the reader an alternative. “Recent and current innovation is more geared to private goods than to public goods” (225). How can we change this? What is the new low-hanging fruit?

Cowen offers the answer in chapter 2, the occult thesis of which is that collectivism is a cancer on the modern economy. On multiple occasions, Tyler protests that he is not trying to make an anti-government point. “The proper role of government is beyond the scope of this discussion” (266). In all his denials, Cowen is trying to draw the intelligent reader’s attention to the fact that the government is the problem. He shows how valuing government contributions to GDP at cost is problematic. There is no market test faced by government expenditures. Similarly healthcare and educational expenses are shielded from the market test by government subsidies and regulations. This is the new low-hanging fruit. If we can eliminate the coercive sectors of the economy, those that are shielded from the market test, we can pave the way for growth for the next generation or more.

Chapter 3 is an invitation for us to join Tyler in Techno-Utopia, a place where consumer and producer surplus is massive. For the simple reader, the thesis of Chapter 3 is that the internet is great, but it cannot save us from our problems because we are overburdened with debt and need revenue-generation in order to make ends meet. The esoteric meaning, though, is clear: the parts of the economy—the internet and our interiority—that are most free from government intervention are awesome. We can expand these sectors, and indeed liberate others, but it will require repudiating the debt and the status quo.

Chapter 4 laments the broken political system. Both sides want to undertake policies that immediately increase real incomes at the expense of future growth. Republicans want tax cuts without spending cuts and Democrats want more redistribution. What about the “honest middle?” Cowen uses this phrase three times in the book. It’s a clear attempt to flatter the unenlightened reader, who likely identifies with this group. At one point, Tyler even calls it the “sane, honest middle.” The subtext, however, is that the middle is neither sane nor honest. The middle wants both tax cuts and more redistribution. It’s clear that Cowen despises this group. These are the ZMP workers he keeps talking about, and not the good kind, either. The point is that working within the system is futile. “It is hard to win elections in the United States by announcing that the low-hanging fruit is gone, that real incomes will grow only slowly for some time, and that we cannot keep borrowing at our current pace” (578). Translation: the current political system is useless. Smash it.

From chapter 5, we can glean that Cowen expects the coming anarchist revolution to be sudden. The plain meaning of the text talks about how we as a society were too optimistic, took too many risks, were too leveraged, and this caused a sudden financial crisis. In the same way, we won’t recognize the new order until it is upon us. The metaphor here is Bernie Madoff standing in for the government. “For years, Madoff had been a well-respected figure in the investment community. Madoff’s fraud was possible only because so many people trusted him. The more people trusted him, the easier it was for Madoff to gain the trust of yet others” (746). This process is inherently fragile. When people realize that the emperor has no clothes, it is already too late to save the current system.

In the conclusion, Cowen warns us to “be ready for when more low-hanging fruit arrives”  (860). “New technologies can upset old balances of power” (870). “There will be big and unexpected bumps along the way, and many people will look back to the current era with a gloss of nostalgia” (871). This is both a stirring call to revolution and a warning to the faithful that it won’t be easy. Be prepared both for the change ahead and to resist those who would attempt to stop it.

It’s clear that in this book Tyler Cowen has reverted to his roots as a radical anarchist theorist and agitator. This is the Tyler from before Cowen (1992) peeking out his head and letting the rest of us know that he’s still here. Waiting for the right time.