Dear literati, please finish Middlemarch

"She was by way of being terrified of him - he was so fearfully clever, and the first night when she had sat by him, and he talked about George Eliot, she had been really frightened, for she had left the third volume of Middlemarch in the train and she never knew what happened in the end...."
-- Virginia Woolf, To The Lighthouse

"Middlemarch/Still lying triumphantly closed..."
-- Don Paterson imagines his deathbed

Linkage

Dammit.

A financier recalls his time at Lehman. Funny and scathing: '... the part of Wall Street that I worked in was simply transferring wealth from the less sophisticated investors... to the more sophisticated.... Of course, the traders had all sorts of excuses and jargon to deal with this truth. “Oh no,” they would say, “We are important providers of liquidity that create stable financial markets. We’re a crucial part of a system. And besides, if we don’t do it, someone else will.” These are the lies that people tell themselves so that they can buy larger homes.'

A common reaction by those introduced to the Public Choice perspective is: what's the point of ever giving policy advice if you assume all politicians are rogues? Acemoglu and Robinson suggest, however, that politics must be factored into policy advice.

Meritocracy, the experience. Also, postmodernism the experience, and drugs, the experience.

¡Steve Bong salutes Lady Thatcher!

Social science statistics: of muscle cars and macro-level statistics.

AMC Rebel 1970, a typical American muscle car

Trying to think through another worry about social science practice, and in particular how we do macro-level empirics - comparing countries, polities or regions. Warning: I strongly suspect that this will mostly prove that I should read more Barbara Geddes. (And who shouldn't?)

Suppose you were a Chrysler executive in 1970, and were evaluating the potential threat from Japanese cars.

Here is an approach you could take. Divide cars into American-made and Japanese-made. Examine the average performance of each. Find that American cars are superior to Japanese cars. Go to sleep contentedly. Inferior cars will never take over our market.

First generation Toyota Corolla, 1966

This approach is obviously flawed. "American cars" and "Japanese cars" are not natural kinds, like "killer whale" and "grey whale". They refer to the deliberate creations of human intelligence. The average Japanese car of the 1960s was not a useful predictor for the average Japanese car of the 1970s. The best car would probably have been a more useful predictor, because Japanese car industry executives were capable of learning.

Now consider how political scientists evaluate the relative performance of democracies and authoritarian regimes. (Or parliamentary versus presidential regimes, or whatever else.) Assume away all the problems of causal identification, unobserved heterogeneity and so on. Even beside all of this: they are basically taking the same approach as above. They look at the average performance of democracies versus dictatorships in the past. To get a big sample, they might go quite far back - to 1950, or even beyond to the 19th century.

But political regimes are also the products of human learning and intelligence. "Democracy" and "dictatorship" are not natural kinds either. They are systems put in place and altered by people. For example, British democracy of 2013 -- with its legal checks on the executive, its relationship to the EU, its devolved governments in the nations, and its quangos and bureaucrats -- is quite different from British democracy in the 1970s -- with its corporatist structure, industrial policy and so forth. Bluntly, both democratic and non-democratic regimes learn, and are constantly rebuilding themselves over time.

For this reason, average past democratic or authoritarian performance may well not be the quantity of interest. Democrats (dictators) should worry about the best, most successful authoritarian (democratic) regimes. Data from the 1950s are likely to have limited relevance.

Toyota Corolla 2011

What's the counter-Thatchual?

The world needs more Margaret Thatcher policy punditry and by God I will provide it!

My colleague Tom Scotto asked a simple question, that I think has not got enough attention in many of the very thoughtful comments from economists and others: "What's the counterfactual?"

In other words: although it is interesting to consider whether

• it was a mistake not to start a Norwegian-style sovereign wealth fund for North Sea oil,
• the monetarist policy of the early 1980s made the recession unnecessarily hard,
• supply-side changes weakened the unions and modernized our economy, or
• her European policy was foresighted, or counter-productive,

a more fundamental question is: what would have happened if Margaret Thatcher had not won power?

There are two natural ways to cut this. If Thatcher had not won power in 1979, then Callaghan would have stayed on. Or, you could look at 1983, where a random shock (named Galtieri) kept her in power. I'm too young to remember this stuff, but I'll make some guesses.

Surely the result in 1979 is easy to call. Callaghan was a failure; he would have continued to be a failure. Evidence from the 1979 Labour manifesto shows that these guys planned to continue down the failed path of the 'seventies.

Now we set ourselves the task of bringing inflation down to 5 per cent in three years. It is an ambitious target. We need the assistance of everyone. 

three-way talks between ministers, management and unions to consider the best way forward for our country's economy...

Industrial democracy - giving working men and women a voice in the decisions which affect their jobs - is an idea whose time has come...

Labour will strengthen the Price Commission, giving it greater powers to initiate investigations and reduce prices ....

We reaffirm the policy that we have pursued that wherever we give direct aid to a company out of public funds, we shall reserve the right to take a proportionate share of the ownership of the company....

1983 on the face of it seems just as easy. Labour ran under a manifesto which has been called "the longest suicide note in history", including withdrawal from the EEC, unilateral nuclear disarmament, renationalisation....

But then Labour was not the only game in town. What if the SDP/Liberal alliance had won? Might we then have had a moderate, responsible centre-Left government, making some necessary reforms but without engendering the division and bitterness that Thatcher left?

I doubt it. My feeling is that politics like those of Schroeder, Blair, even Lula were only possible after Thatcher. The centre-Left had to swallow the bitter pill of accepting (some) New Right ideas. Even the 1983 SDP counterfactual would have been something like France at the same period (or now): half-hearted acceptance that you cannot actually get more Left-wing; but no real reforms.

In any case, the main point is: Thatcherism is best evaluated against real alternatives that might have come about, rather than against the analyst's ideal policy.

Encounter with English identity

I was standing out in Camden after an evening in the World's End pub with a couple of old friends, one of whom is Anglo-Indian. A pint-sized chap started trying to interrupt us, presumably so as to give us his hard luck story. Think of Camden at 11pm on Friday night and you will get the picture. We ignored him, he kept on, we rolled our eyes and kept ignoring him.

He must have got angry. He kind of crept up behind my friend and hissed: "At least I'm English." Pause. "Are you?"

We looked at each other and tsked. I turned around and gave him a hard stare, and the little Gollum shrunk back and slunk off into the night.

On the bright side

I guess it is easy to be hysterical about the Maggie Thatcher grave-dancing. Yup, definitely is. Perhaps the numbers provide some perspective. Total sales of Ding-Dong, The Witch Is Dead, according to the official charts, are about 20,000. So, total resources dedicated must be, what, £40,000... probably about what Grantham spends every week on cappucinos. Proof that whatever your politics, nastiness and meanness remain unpopular.

I have downloaded a copy of Duke Dumont's Need U (100%), last week's Number 1. I am convinced that this splendid piece of music will give me numberless hours of unadulterated listening pleasure. I hope you will do the same. (iTunes, Amazon.)

Update: yeah, good for you Ken.

Linkage

Why not more tech startups in Europe?
Death of someone who arguably had a greater impact on human welfare than Margaret Thatcher.
Tyler Cowen offers a speculative interpretation of the European crisis: long-run structural changes are being "time-compressed" by the shock.
Paul Krugman is the blogger of the GFC, confidently slapping down critics on the right. Is Jeffrey Sachs emerging as a worthy opponent?
Thatcher and pop music. (Next: Thatcher and 8 bit computer games. There is a thesis.)
If you missed it the first time... then you won't understand any of it now.

"Speculating on bitcoin is just the latest in a string of online ventures for the Winkelvosses since their involvement with Facebook. They have become venture capitalists and poured investment into a shopping website called Hukkster and an online community for money managers, SumZero."
Hukkster, SumZero... are the Winkelvoss twins actually performance artists? 

Linkage

More about the super-rich buying in London. It may not be that easy to feel sympathy for the "British buyers" who can only afford a paltry $2.25 million for their London houses.
What should the economic objectives of immigration policy be? An interesting debate over at Jonathan Portes' blog.
What Olivier Blanchard, Chief Economist at the IMF, thinks about economics and the crisis.
An interesting firestorm about "psychic harm", started by this article. This relates to the question of how we should deal with nasty preferences (e.g. racism).
Some very funny rude reviews by Roger Ebert.

Poem

I guess it seems as a good day as any to read Tony Harrison's poem V.

A Thatcher round-up

Andrew Sullivan: Thatcher, liberator.
Joe Weisenthal: she was "freakishly" right about the Euro.
Paul Krugman: did Thatcher turn Britain around? (I think the phrase "I don't want to do a slash-and-burn here" counts as a small victory.)
Mark Harrison was a convert.
Nick Crafts crunches the data. (But it ends in 2007... as he mentions, some stuff has happened since then.)
Tim Bale on politics: "no thinking Conservative can be blind to the downsides...".
The BBC obituary does one excellent thing: it quotes the "no such thing as society" speech in full, putting the line in its proper and much-forgotten context.
... aaaand a useful pie chart about the Twitter reaction.

The media and the internet

After the phone hacking scandal and the Leveson enquiry, the mass media, like almost every other institution in Britain, are in deserved disgrace.

But after Mrs Thatcher's death, I feel a bit sorry for them: desperately building a dyke of Quotes From Important People to hold back a storm of decentralized, internet-enabled, direct democratic spite.

Good experimental designs

Habyarimana, Humphreys, Posner and Weinstein wrote a great article with the title “Why Does EthnicDiversity Undermine Public Goods Provision?” which they turned into a great book Coethnicity. The research they report was a set of experiments in a slum of Kampala in Uganda.

The standard way experimentalists investigate public goods – say, schooling or sanitation – is with, guess what, a public goods game. A public goods game goes like this: there are four of you, and you each have, say, £10. You can each put some or all of your money into a common pot. Money in the pot is multiplied by 1.5 and then shared out equally. Selfish people wouldn't put money in the pot, but if everyone does so, then you all do better. This is a bare bones representation of a public good.  Why do experimenters use this paradigm? Well, it's obvious. We're interested in public goods, and a public goods game is like a miniature public good.

One of the surprising things about HHPW's design is this. They get their subjects to play dictator games (where one person chooses how much to give to another), games where they have to find another person in the slum, and experiments where they must work with other subjects to solve a puzzle. But they never actually implement a public goods game. Instead, they use a set of simple experiments, not in the context of public goods, to investigate specific psychological and social mechanisms that might lead to underprovision of public goods. For example, are people more altruistic to their coethnics? The Dictator Game will tell us. Or, do people find it easier to communicate with coethnics? Try the puzzle-solving activity.

I think this makes HHPW an example of good experimental research design. They have thought hard about the link between experiment and explanandum. Not that public goods games cannot be useful, but we should not just reach in our designs for things that “look like” or “represent” what we are investigating. Instead, the link must always be based in theory.

Very simple thoughts about the politics of crisis

I am not nearly good enough at macroeconomics (and probably not clever enough) to understand the economic crisis itself. Here is how I think about the politics of it.

The world contains a huge variety of human interactions. One simple way to classify them is: some are games of decreasing returns and some are games of increasing returns. Suppose many people can do more or less of something -- say, withdraw more or less money from a bank, or spend more or less time looking for work. In a game of decreasing returns, when other people do more of it, you will gain by doing less. In a game of increasing returns, when others do more, you will gain by doing more too.

Most ordinary economic activities are of decreasing returns. If many other people go into cheesemaking, the price of cheese will go down and you might wish to choose a different career. If Turkey is this year's cool holiday destination, then it's going to be expensive -- why not try Greece? Decreasing returns are self-equilibriating, like one of those toy men you can't push over. There is only one equilibrium, and this makes life cognitively easy. For example, prices will naturally guide you to optimal decisions, and prices will change only a little bit when underlying conditions change.

But there are some activities which are naturally of increasing returns. Starting a revolution, or fighting in a battle, is easier if everyone else is trying to do it simultaneously. If others take their money out of the bank, then you should beat them to it before the bank goes bust. Life in increasing returns land is hard, because there are multiple equilibria. If everyone else is doing it (whatever "it" is), so should you; if not, not. Getting it right takes not just individual effort, but also the ability to coordinate and communicate with your fellow players. That is especially important when one of the equilibria, such as a bank run, is definitely bad.

My explanation of increasing and decreasing returns. Equilibria are yellow blobs. Art is not my strong point.

It is, and should be, a great goal of economic policy to keep us in decreasing returns world as much as possible. But sometimes -- especially given modern banking, but also because intergroup conflict is a perennial possibility -- we will find ourselves in the other, scarier world. Being in that world, as I said, puts a premium on the ability to coordinate -- that is, to work together: to trust our leaders, and to find our fellow players predictable.

In decreasing returns world, nationality and culture don't matter; simpler mechanisms substitute for them. In increasing returns world, nations matter, because they are the central ways humans have of organizing themselves to act collectively. Culture matters because it is the medium by which we can share and harmonize our expectations with others. When we move into this world, suddenly it matters whether we are Germans, Greeks... or Europeans. That is why the dream of a borderless market, without a society behind it, is a utopia.

Linkage

How life sentences work in the UK.
Researchers can now read minds.
A shout out for my colleague Dan Berger's new AER publication. CIA interventions to install friendly dictators were followed by large increases in American exports to that country. (Older ungated version.)
Bedtime stories for macroeconomists. Here is one reason why social science might be hard: people  have Strong Opinions about economics and politics, in a way they do not about, for instance, Higgs bosons or rabbit reproduction.

Linkage

The Thomas Friedman op-ed generator. 
Mr Friedman is much mocked by the internet people, perhaps unfairly. I read his book on the Middle East, from way back, when he was a reporter there, and it was very well-informed and interesting.