Wednesday, January 8, 2020

Good Economics for Hard Times II

The next chapter, "Likes, Wants, and Needs," covers a wide range of research regarding human behavior. Part of it reflects the behavioral economics of Daniel Kahneman, Amos Tversky and Richard Thaler, and there is also a section on how social environments affect individual behavior. From my point of view, the latter is the most interesting part of the book so far, perhaps because I was not aware that this kind of research existed in economics. To sum it up in my preferred language, it is about the negative aspects of group selection in a eusocial species, i.e. ours. Rather than discussing this as a biologically inborn human characteristic, the authors simply look at conflicts that arise from people's tendency to behave in a tribal manner. In the contemporary context, this has resulted in political polarization in the U.S. and other parts of the world. There are also examples from the caste system in India. Populism in the U.S. is now based mainly on group identity, thus, politicians are able to gain support by proposing anti-immigration policies. The underlying ideas espoused by people like Trump don't hold up well to scrutiny and resemble propaganda more than fact. For example, "Nearly half of the residents in states with almost no immigrants – like Wyoming, Alabama, West Virginia, Kentucky, and Arkansas – believe immigrants represent a threat to American culture and values." The authors discuss Students for Fair Admission v. Harvard. There used to be discrimination against Jews at Harvard because they were too smart, and now there is discrimination against Asians. It is difficult for Harvard to defend its admissions practices because they seem to contain racist elements and, in the case of Asians who have good academic qualifications but are lacking in personality, Harvard believes they can be rejected. This may look bad from a politically correct standpoint, but I think Harvard has a point, since in their case they want graduates who will be the major leaders in the future, not simply good students, and this makes the definition of merit more complex than plain academic skills. Banerjee and Duflo also cite an interesting study in which Indian cricket players were divided into different teams. Some teams were composed of uniform castes and some were composed of mixed castes. The results indicated that those who played on mixed teams were more likely to befriend players from other castes. The lesson is that diversity need not be seen primarily as tool for rectifying social injustice, and that it may be more useful as a way of defusing class or group prejudices, with the goal of creating a more coherent and stable society. The more people from different groups mix, the less antagonistic they become toward each other. For similar reasons, I prefer to live in socioeconomically mixed neighborhoods, if only because homogeneous neighborhoods are more likely to produce a pernicious form of social identity.

The following chapter, "The End of Growth," is also quite interesting. It covers economic thought at an abstract level regarding the conditions that allow nations to achieve economic growth and reviews the ideas of optimists and pessimists among leading economists regarding the prospects for future growth. The main idea is that productivity increases cause economic growth. This usually occurs best under conditions in which a large, poor labor force is given access to new capital investments. According to Robert Solow, a pessimist, productivity growth gradually slows in wealthy countries and never recovers, whereas Paul Romer, an optimist, thinks that innovation can maintain high growth indefinitely. The economic growth of various countries is examined. The pattern in recent decades has been for some undeveloped regions to develop and become rich quickly. Usually this occurs when there are the right ingredients in place. Europe had tremendous economic growth after World War II, as did Japan a little later. The same phenomenon is occurring in China and other developing countries now. India is a problematic country for economists, since most of them would predict much more economic growth there than has occurred so far. Economic growth may not always be desirable, but the cumulative effect of it globally does seem to have been to reduce poverty worldwide. What I really admire about Banerjee and Duflo is their willingness to deflate myths. They are the first economists I've heard say that there is no proven way to sustain high economic growth indefinitely, and that the countries that have experienced it have done so in an erratic manner such that it is unpredictable. They specifically deny the validity of the Republican mantra regarding tax cuts for the rich: there is no evidence that they produce measurable economic growth. They also note that Mark Zuckerberg of Facebook is making a completely unsubstantiated claim when he says that the Internet will provide future economic growth: there is no evidence supporting that claim either. In my view, Facebook and other social media are simply substitutes for the traditional social contact that has been lost in wealthy countries. Even though I am a stockholder in Facebook, and it has been my best investment by far, I don't think that it is of any real value, and people would be better off if they found real friends. Needless to say, I don't have a Facebook account. I think that the main problem of economics is that the phenomena are too complex for people to understand. To put that in context, I would say that it is far more difficult than theoretical physics, and this explains why economics has never been a reliable tool except in highly circumscribed circumstances.

I am nearing the end of the book and should have one more post. The next chapter does, after all, seem to cover climate change.

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