Arnold Kling  

Wild Hypotheses

PRINT
Union Disillusion: Journalists... The Censors of Ghost Town...

Pete Boettke wants to see Economics with Attitude.


I have often asked job candidates what the wildest hypothesis related to their research in economics and political economy that they want to pursue would be.

Here are some of my ideas that are on the edge.

1. The idea that the Fed has little influence.

2. The idea that economic growth is determined by ethics.

3. The idea that parents are in Status-seeking mode with regard to their childrens' education. Affluent parents are so strongly averse to having their children go to school with other children who are not affluent, particularly in college, leads to "segregation equilibrium," in which high-priced colleges, private schools, and neighborhoods are desired in part because they are high-priced.

4. The idea that the reason that health insurance is coming unraveled is that people don't really want health insurance.

5. The idea that in academia the insulation provided by tenure is a factor in the predominance of leftwing beliefs. Those of us outside academia understand that there is a trade-off between security and autonomy--the jobs that offer the greates security typically involve working for a boss in a relatively structured environment. Tenured professors do not appreciate this real-world trade-off. Entrepreneurship is alien to them.

6. The Great Depression may have been a major restructuring of the economy.

7. George Lakoff's central theme, in Moral Politics is correct. Conservatives do think of government as a strict-father parent, and liberals think of government as a nurturant parent. However, neither metaphor is healthy. Government should not be viewed as a parent. It should be treated as an institutional arrangement.

8. People have an irrational hatred of economic insights.


Comments and Sharing


CATEGORIES: Economic Methods



TRACKBACKS (6 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/425
The author at Economics Unbound in a related article titled A Double-Bounce on Health Insurance writes:
    I'm looking at this statement from Arnold Kling (whom I always find to be an interesting read). (I got to the statement via here and Tyler Cowen here) Kling writes: What we call health insurance also arose to meet the... [Tracked on January 10, 2006 9:15 AM]
The author at The Stalwart in a related article titled Arnold Kling's Wild Ideas writes:
    Via MR here are 8 wild ideas about economics held by Arnold Kling. The first few:1. The idea that the Fed has little influence. 2. The idea that economic growth is determined by ethics. 3. The idea that parents are [Tracked on January 10, 2006 12:37 PM]
COMMENTS (29 to date)
dearieme writes:

The idea that Economics might some day be based on controlled experiments and thereby be justified in claiming to be a Science.

quadrupole writes:

Is astrophysics a science?

spencer writes:

You should give the comment you made in passing about productivity now and in the 1930s more attention. In the 1930s recovery and currently we saw very strong productivity. Consequently, even though the recovery in gdp growth in the 1930s was strong -- real gdp surpassed the prior peak in 1937 -- employment growth was weak because of the strong productivty.

You also made a point I hear from many that it took WW II to bring employment backs. But WW II was just the new deal on steroids of massive government spending to create job and demand.
If you are saying that WW II is what ended the depression what you are really saying is that the problem with the new deal is that it just was not large enough. Or, are your making the case that WW II was just the natural product of unregulated free market capitalism?

spencer writes:

Strong productivity tends to follow investment booms. So the strong productivity in the 1930s, and now, is an inherent component of the over investment thesis explaining the great depression of the 1930s, the 1880s, Japan over the past 15 years and several other examples.

spencer writes:

You must have been influenced by the article that people don't really want health insurance.

the other day you made the statement that you would be happy to have a $10,000 deductable health policy.

My question is that just a posture, or a real revealed preference of yours. If it is a revealed preference you should also have a $10,000 or higher deductable on your homeowners policy. A $10,000 loss to your home has a smaller probability that a $10,000 medical bill.

So do you really have a $10,000 deductable on your home owners policy? If not I doubt that your really want a $10,000 deductable on your health insurance.

aaron writes:

That government can make spending decisions based on the expected increase in tax revenues projects and policy would ultimately generate.

aaron writes:

(given that tax rates remain constant)

Pavel Kohout writes:

Here's my wild hypothesis: Demographic slump in Europe has been caused by monetary policy.

Why: An expansive monetary policy has had only limited impact on tradable goods, since the price growth has been limited by international competition. However, prices of real estate - not included in most prices indices - have been lifted by a rapid money supply growth. Hence, home prices has grown beyond affordability of most young couples, hereby having a strong negative impact on fertility.

This effect has been especially pronounced in the former Communist countries during the 1990's: fast money supply growth, high interest rates, no mortgages, all of this caused birth rate to plummet.

eric writes:

Utility functions are all relative to one's peer group.

Roger M writes:

How about research that deflation is good? It leads to a saving, as opposed to a debt, society.

quadrupole writes:

spenser:

The question of deductible is one of costs vs benefits. I seriously doubt that Arnold wants a $10,000 health insurance deductible in vacuo. More likely he wants a $10,000 health insurance deductible because it reduces his costs sufficiently to make it worthwhile to self insure that $10,000. For a home insurance policy, I suspect the cost reduction is smaller than the opportunity cost on self-insuring with the $10,000. I suspect the cost difference here is precisely because the first $10k of home owners damage is much less likely than the first $10k of health care needed.

Randy writes:

That the breakdown should be between activities that create wealth and those that redistribute wealth - as opposed to the current breakdown between the private and public sector. The government is very often a free market player, to the extent that it participates in value for value transactions. Why do I think this matters? Because it allows us to define the free market as consisting of those economic activities which create wealth. It allows us to see that a free market exists in even the most despotic nations. It is there, creating 100% of the wealth, in even the worst environments.

I have found (and still find) Lakoff’s metaphor and cognitive work interesting (Point #7 in the post). But pretty much beginning with Moral Politics, I’ve been frustrated by the broad conclusions he makes based on no more information than his own stringing together of anecdotes. Where is the testability? What is the evidence? We are apparently suppose to accept his conclusions based upon no more than the seeming coherence of the stories he tells, but there are many stories that sound good in the hands of a competent storyteller.

Still, the fundamental idea, that our conceptual frameworks shape our understanding of the world and how we act within it, is interesting, controversial (what about supply and demand?), and likely true. Some of this ground is explored by behavioral economics, but clearly there is more room to explore. These conceptual frameworks are more important when contemplating abstract entities, like the “government” or the “role of a citizen,” and less important in more practical arenas like supermarkets and the “role of a consumer.”

However, the more interesting questions for economists are about how individuals think of markets and that abstraction, "the economy." What conceptual frameworks do we use to understand what markets do? Where do these frameworks come from, how do they grow? What framework should people use to understand markets? What problems arise from indequate conceptions of markets, and how can the problems best be addressed?

Robert Speirs writes:

I liked the article about ethics and prosperity. The Wealth of Nations posits a link between average IQ and prosperity. Doesn't this suggest that higher-IQ men are better, more ethical men? Smart is good. The counterexample of China (high-IQ, not so prosperous until lately) is being eliminated as we speak. Perhaps the link only comes into play after a certain level, when survival is no longer absolutely dog-eat-dog and ethics can be afforded.

Randy writes:

Second entry; The idea that even the most progressive taxes do considerable regressive damage before they reach the point of being truly progressive. Taxes aren't paid in dollars. They are paid in the form of a reduced standard of living.

Jim Glass writes:
The idea that in academia the insulation provided by tenure is a factor in the predominance of leftwing beliefs.

Sure -- but there's nothing wild about that hypothesis, except to a tenured academic.

Jim Glass writes:
"People have an irrational hatred of economic insights."

Much more ignorant than irrational, I'd think. And both the ignorance and the hostility seem quite rational from various points of view.

E.g., behavioral psychology is showing that an urge to "redistributive 'fairness'" seems to be hard-wired into us via evolution, even when it conflicts with modern societal economic advancement -- perhaps the true root of all sorts of fervently believed ideas and political-economic policies, from highly progressive income taxes and high taxes on capital and wealth to various kinds of socialism (national health care?) to the sort of socialism that eliminates wealth gaps by leveling everyone downward into communist poverty. Yet so many still fervently believe.

As one noted scientist in the field observed: "Hunter gatherer societies are highly egalitarian -- but not peacefully egalitarian, violently egalitarian."

If you are hard-wired to believe something, and then some academic lectures you that it's not so, it's entirely rational to become annoyed or worse.

As to ignorance, as Blinder's Law says, the more economists agree on something the more they are ignored. But even such ignorance can be rational.

As a prime example, two major surveys of economists found that the one single thing they agree upon most is: "rent control is bad".

Yet here in NYC, where rent control has existed as an "emergency measure" since WWII, no politician ever invokes an economist saying that.

If you are a voter here with a rent controlled apartment you don't want to hear what the economists say (and know you are "bad"); if you are a politician representing such voters you don't want to hear it (and be a hypocrite). And if someone recites it to you, effectively telling you that you are a bad person or a hypocrite, you get mad about that -- entirely rationally -- so they don't. And as to the masses of other voters here who aren't affected by rent control much one way or another, it's entirely rational for them to be ignorant of what the economists say (See: Buchanan, Tullock, public choice).

So there we have it: mass ignorance of an economic essential, enforced by ire when the essential is mentioned, all quite rational at its own operating level.

Mark Bahner writes:

Spencer writes to Arnold Kling, "You also made a point I hear from many that it took WW II to bring employment backs. But WW II was just the new deal on steroids of massive government spending to create job and demand.
If you are saying that WW II is what ended the depression what you are really saying is that the problem with the new deal is that it just was not large enough."

Well, certain New Deal programs were simply bad ideas. If a little bit of a bad idea is bad, more of that same bad idea is unlikely to be good.

For example, look at the New Deal's price supports for agriculture. The Agricultural Adjustment Act and Commodity Credit Corporation basically paid farmers not to produce products.

The larger version of that would be to pay the farmers even more to produce even less. That's bad for taxpayers and bad for consumers...and prevents inefficient farmers from getting the price signal that they really ought to find a new line of work!

That problem was corrected by WWII, by the fact that people left the farms and moved into the cities, to build tanks, airplanes, ships, etc. (And later automobiles, commercial airplanes, refrigerators, TVs, etc.)

See page 32 of this document:

http://www.census.gov/prod/2002pubs/censr-4.pdf

Especially note this sentence:

"The smallest increase in the metropolitan population occurred during the 1930s (8.2 million people). This was also the last decade when the nonmetropolitan population increased, although it remained larger than the metropolitan
population into the 1940s."

In other words, the New Deal's agricultural policies delayed people making the necessary move away from farms and into cities. (As well as leading to such obviously stupid practices as the federal government buying milk, and then pouring it on the ground.) More of such policies would simply create more harm...not pull the country out of the Depression.

Steve writes:

I wouldn't say that 5) [tenure...] is all that edgy - it's the sort of thing that people say all the time. Not that I necessarily agree with it, but this is far from the first time I've heard that assertion.

Steve Sailer writes:

I quite agree with point #3 about "status seeking" in education, but I would add that much of this reflects quite rational attempts to keep your children away from violent males. For example, the last thing you want is for your daughter to develop a taste for bad boys who will hit her and leave her to raise the kids alone while they are in prison. Paying a huge amount for a home in an upscale suburb with a high school with upscale students can be an excellent investment in your daughter's and future grandchildren's long term welfare.

spencer writes:

Mark -- I know what happened to my Grandfather and many other relatives in the depression of the 1930s. He lost his job on the railroad and could not get another one. So he moved back to the farm to live with his parents so he could eat. That was extremely common in the depression. The county my family is from in Kentucky is one of the poorest counties in the country. It's population peaked in the 1890 census and the only decade since then when the population grew was the 1930s exactly because of people like my Grandfather. This implies that the problem was not agricultural policies. Rather it was a lack of employment opportunities in other economic sectors. What evidence do you have that my interprepretion of the data is incorrect and your interprepration is correct.

James writes:

Spencer,

Your empirical analysis does not *imply* anything, especially about what the "problem" was that caused the high unemployment of the depression. The sample size is just too small.

The assumption that bad agricultural policies and lack of demand are mutually exclusive is rather strong to hang an interpretation of events on.

The demand for transportation by rail is derived from the demand for goods transported by rail. If there is a price floor on the kinds of agricultural goods moving through KY's rail lines, then the quantity demanded of those goods falls. This has the secondary effect of reducing the demand for rail transport.

In addition, many of the New Deal programs had the adverse effects of cartellizing industries. When Cartels reduce output in order to maximize profit, they have less demand for factors of production, including labor.

For what it's worth, not everyone who associates WWII with the end of the Depression believes that the causal mechanism was increased government demand. Printing money to fund the war, despite its problems, brought nominal prices back to levels at which markets could clear. On a bleaker note, drafting the poor and unemployed and sending many of them to their deaths inevitably lowers unemployment.

wkwillis writes:

James and Spencer
The 1920s and especially the 1930s were the decades when transportation shifts between railroads and trucks dramatically decreased income for railroads.
Instead of high value and employment break bulk shipments, you got low value and employment bulk shipments. Less money, less employment.

wkwillis writes:

Quadropole
Astronomy and Geology are observational sciences, as distinguished from experimental sciences.
The problem of salt deposits in geology is one of those where theory, experiment, and observation, are not intercompatible. The geologists have to respect observation, but they have chosen theory over experiment.
I don't know what the situation is in astronomy and astrophysics. Well, we do have the pioneer problem, now generalised to some long period asteroids. At least they are no longer attempting to attribute the mispositioning of the pioneer probes to heat leak from the radioisotope generators.

Jason writes:
Astronomy and Geology are observational sciences, as distinguished from experimental sciences.
Exactly. And a science where you can readily experiment (e.g. chemistry) is going to be a lot more productive than one where you can't.

Not that you can't do experiments in observational sciences; but you have to be clever about it and there are more hypotheses that are impractical to test.

Among observational sciences, astronomy has the benefit that the things you can observe are largely isolated from one another. Economics is at the opposite end of that spectrum.

Ramon writes:
The question of deductible is one of costs vs benefits. I seriously doubt that Arnold wants a $10,000 health insurance deductible in vacuo. More likely he wants a $10,000 health insurance deductible because it reduces his costs sufficiently to make it worthwhile to self insure that $10,000. For a home insurance policy, I suspect the cost reduction is smaller than the opportunity cost on self-insuring with the $10,000. I suspect the cost difference here is precisely because the first $10k of home owners damage is much less likely than the first $10k of health care needed.

A 10,000 deductible in health insurance reduces costs because people reduce doctor visits substituting for cheaper treatments or no treatment. On the contrary, high deductibles in homehowners insurance don't reduce the loss after the loss has ocurred.

In both cases there is a moral hazard problem resulting from people not taking care of themselves or their homes after buying insurance. The difference is that, in the homeowners insurance case, partial coverage makes deductibles unnecessary.

Mark Bahner writes:

Spencer writes, concerning his grandfather, "He lost his job on the railroad and could not get another one. So he moved back to the farm to live with his parents so he could eat. That was extremely common in the depression."

He continues, "The county my family is from in Kentucky is one of the poorest counties in the country. It's population peaked in the 1890 census and the only decade since then when the population grew was the 1930s exactly because of people like my Grandfather. This implies that the problem was not agricultural policies."

No, that implies there ***was*** a problem with agricultural policies. Those agricultural policies deliberately boosted the prices of agricultural goods, by deliberately paying farmers not to produce. This had two effects:

1) It made it harder for people like your grandfather to earn enough to eat (because the prices for food were artificially raised), and

2) It encouraged people to move back onto the farms, even though the increasing farm productivity meant that people should have continued to move OFF of the farms.

Spencer asks, "What evidence do you have that my interprepretion of the data is incorrect and your interprepration is correct?"

As I noted, common sense suggests that your interpretation is incorrect, at least regarding FDR's agricultural policies. Once again, FDR essentially paid farmers MORE to produce LESS. The extension of that would be to pay farmers an infinite amount to produce nothing. Common sense says that you shouldn't pay people more to produce less!

Now, if FDR had put in a massive "GI Bill" in the 1930s, essentially paying people to educate themselves to be able to better perform new (non-farm!) jobs, that would be paying people a lot to produce nothing. But in this case the "nothing" being produced would actually be people better trained for modern (non-farm) jobs.

So if FDR had people like your grandfather money so that they could go back to school to learn new(non-farm, non-railroad) skills, that would at least not violate common sense.

Again, it's basic common sense that it's not a good idea to pay people more to produce less. And it's basic common sense that doing even MORE of that bad idea wouldn't turn it into a good idea.

P.S. James writes, "For what it's worth, not everyone who associates WWII with the end of the Depression believes that the causal mechanism was increased government demand. Printing money to fund the war, despite its problems, brought nominal prices back to levels at which markets could clear."

Yes, I agree that, in addition to the dumb policies like the agricultural subsidies, there was the fact that the additional spending was by and large NOT created by deficit spending, but by raising spending AND taxes. In other words, FDR (and Congress!) was paying farmers to be unproductive...but even worse was doing so by raising taxes on productive people!

Here is the federal government debt from 1900 to 1950:

http://www.publicdebt.treas.gov/opd/opdhisto3.htm

Some values from that spreadsheet, of debt in billions:

1925: $ 20.5
1930: $ 16.1
1935: $ 28.7
1940: $ 43.0
1945: $258.7
1950 $252.7

Obviously, the debt exploded from 1940 to 1945. So the government printed a lot of money without raising taxes.

Here is another page:

http://www.eh.net/encyclopedia/article/noll.publicdebt

Notice that the federal government actually BALANCED THE BUDGET in 1937-1938...right smack in the Depression!

Again, it's a bad idea to pay people to produce **less**...but it's even worse to raise taxes on other people, to pay that first set of people to produce less.

Mark Bahner writes:

Note: Regarding my last comment, it's Figure 17 that shows that the federal government actually balanced the budget in the 1937-1938 time period.

That fact is also shown in the first link I gave. The federal debt (in billions) from 1935 to 1940 was:

1935: $28.7
1936: $33.8
1937: $36.2
1938: $37.1
1939: $40.4
1940: $43.0

Another thing that I didn't mention is that I recall reading somewhere that the Fed raised the Required Reserve Ratio in 1937! That's completely insane. In one of my economics classes at college, changes in the R.R.R. was described as the "atomic bomb" of monetary policy. Very small raises in the R.R.R. have extemely contractionary effects on the money supply. So it's absolutely terrible to raise the R.R.R. in the middle of a depression.

There were just some really, really dumb economics moves by the federal government during the Depression.

dearieme writes:

Quadrupole, "Is astrophysics a science?" No, not in the sense I implied. If you admit it as a science, next thing you'll be admitting Social Anthropolgy. (Though, on the other hand, it is perhaps a source of equally tall tales. Hm.)

Comments for this entry have been closed
Return to top