Category Archives: Economics

Are Barbarians Responsible for the Industrial Revolution?

I’ve been thinking about the Great Divergence the past few days and I came up with an idea that is a little different, perhaps crazy. My idea is basically that Europe was taken over by foragers late in its history whereas China was a society of farmers for thousands of years and continues to be largely descendants of farmers. I’m just spitballing and I know this idea is all conjecture, non-rigorous, etc., but I just wanted to write it down. My idea is a synthesis of a few disparate thoughts I agree with…

1. Biology has some degree of influence on broad outcomes. Ideas about genetic heritability from Gregory Clark, Bryan Caplan, Garett Jones, etc. have greatly influenced my thinking; although controversial, their methodology and results seem valid to me.

2. Robin Hanson’s idea of forager/farmer values. Foragers have liberal/modern values and farmers have conservative/old world values because of the nature of farming (stationary) vs. foraging (roaming/nomads) and farming leads to things like wealth accumulation and inheritance. Here is a link. I’ll excerpt some key thoughts (Type A are foragers and Type B are farmers)…

“Type A folks care less for land or material possessions, relative to people. They spend more time on leisure, music, dance, story-telling and the arts. They are less comfortable with war, domination, bragging, or money and material inequalities, and they push more for sharing and redistribution. They more want lots of discussion of group decisions, with everyone having an equal voice and free to speak their mind. They deal with conflicts more personally and informally, and more prefer unhappy folk to be free to leave. Their leaders lead more by consensus…

TYPE *B* folks travel less, and move less often from where they grew up. They are more polite and care more for cleanliness and order. They have more self-sacrifice and self-control, which makes them more stressed and suicidal. They work harder and longer at more tedious and less healthy jobs, and are more faithful to their spouses and their communities. They make better warriors, and expect and prepare more for disasters like war, famine, and disease. They have a stronger sense of honor and shame, and enforce more social rules, which let them depend more on folks they know less. When considering rule violators, they look more at specific rules, and less at the entire person and what feels right. Fewer topics are open for discussion or negotiation.”

According to Robin Hanson, the industrial revolution aligns with forager notions of equality and sexual behavior and the modern world is reestablishing many forager norms. I’m not sure if he says this, but when I think about the areas of the world that are the most conservative/religious/etc. on different margins; they are often the areas where farming has been established for the longest period of time: the Middle East and China. For instance, the conflict between the US and the Middle East might be in a sense a clash of forager and farmer values/norms.

3. I always thought the idea of White Supremacy was a little ironic. White Supremacy proponents look down on other races as inferior and often as savages or unrefined. But, when you read about Roman, Greek, and others impressions of the various Germanic tribes, they thought exactly the same thing about the Germanic peoples (that they were barbarians, uncivilized) that Germanic descendants would later think about say Africans and Asians.

4. #3 leads me to a thought about a major difference between China and Western Europe. China had been a farming society for thousands of years (5000?) or so and there might have been selection pressures to make Chinese people more conservative and more farmer oriented over that timespan. This is perhaps where my idea is the weakest though as I don’t know as much about European history. From my naïve understanding, the populations of Western Europe (Germany, France, UK, etc.) are different than the populations in those areas during the Roman era with perhaps the exception of Germany. Most of the population in those areas today are descendant from various Germanic tribes that originated from Scandinavia and spread throughout Western Europe in different waves from 300 – 1000 AD. After the fall of the Roman empire, Western Europe was increasingly made up of people of the Germanic tribes. There’s also an implicit assumption here that the Germanic tribes were more forager oriented than say the Romans or the Chinese and that this made them genetically different (more forager/liberal oriented and less farmer/conservative oriented).

So my idea is basically that Western Europe was more inherently forager oriented than the Middle East and China. The next part of my argument is that perhaps to get to a point like the industrial revolution you need to meet a few conditions. First, farming is a necessity because you need to develop large populations to support the benefits of science. Just basic economics, but the return to a cure for cancer is much larger in a world of a billion people than a world of ten thousand people. Also, with a large population you are more likely to have geniuses and perhaps there are network effects where smart people make other smart people better (standing on the shoulders of giants or increasing returns to scale). But, the industrial revolution itself is a liberal revolution so although you need farming, the society that is at the frontier of farming, yet at the same time the most liberal will be the first to adopt the practices that would lead to the industrial revolution. England was a society that was able to piggyback on the farming advances of Rome and the Middle East, but it consisted of a population that was fairly new to these technologies and perhaps had not genetically adapted to them as much. In other words, they were foragers that adopted an already advanced level of farming.

I think about some of the cultural/political innovations that led to the industrial revolution and they seem to confirm my story of needing a more forager/liberal bent in the population: the protestant reformation, development of the scientific method, ideas of economics and the battle between self-interest and passion (I’m thinking of Hirschman’s The Passions and the Interests: Political Arguments for Capitalism before Its Triumph), ideas on liberty and democracy, etc. all seem to be fairly liberal revolutions.

Also, even when I think within Europe or within Asia it maps onto this forager/farmer map. Within Europe, I would label the UK, France, Sweden, and Germany as more forager/liberal and Italy, Spain, and Greece as more farmer/conservative oriented. Their economic development and ideas about women, leaders, and norms seem to map well onto the forager/farmer distinction and so do their historical populations. When I think of Asia, China seems more farmer oriented and Japan seems more forager oriented. Japan’s development of farming was rather late in contrast with China and the Japanese seem more liberal on many dimensions, although not all. My story could also be used to explain why the dark ages occurred and why there was a huge growth reversal in large parts of Europe after the fall of the Roman empire. There’s probably a lot more going on there though.

General Musings

1. One of the issues I get worked up about – concept of addiction. This post is about the ineffectiveness of Alcoholics Anonymous. Link

2. This is a presentation disputing that the “Hot hand” in basketball is a fallacy. I often think to myself why are sports analytics so untouched by simple game theory. The results of this paper seem totally obvious to me.

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3. Ross Douthat wrote an article about the conservative surrender in regards to gay marriage. Link

This article brings up some issues I want to expound on.

It has always confused me why libertarians/conservatives have this kind of unquestioning attitude regarding the freedom of people to offend. For example, people like Gavin McInnes or Adam Carolla often rail on and on against political correctness, support Paula Deen, support Duck Dynasty, or support Chick-Fil-A’s right to be against gay marriage.

First of all, oftentimes freedoms are mutually exclusive. My freedom to yell at you precludes your freedom to walk around undisturbed. Libertarians often mention things like the Non-aggression principle and that as long as you don’t use aggression or violence then it is okay. But the problem as I see it is that there are many, many ways that people can be harmed besides being punched in the face or having their radio stolen.

The funny thing is is that both Adam Carolla and Gavin McInnes also go on and on about how Los Angeles is a shitty place to live and sometimes yearn for yesteryear when people were more civilized and kids didn’t talk back. But, how did yesteryear come about when youngsters respected their elders? Well, I would guess the norms were different. Inherently, when norms were different means that when someone violated the norms of the times then there were costs or consequences involved. That is a big part in producing those norms; the disapproval or other costs of not conforming to the norm. In the 1960s if a 15 year old said, “Fuck you!” to the local hardware store owner there would be a much bigger difference in social consequences versus today. What I am saying is that to get back to the 1960s would require a kind of political correctness about manners or behavior.

In a way it is no different than today when a majority of people want to live in a world where gay people aren’t called faggots. We want to live in a world where it’s not funny to joke about slavery (Paula Deen). To get to this world means that when people violate norms, then there are big social consequences. Duck Dynasty’s freedom to expound on slavery comes at the cost of other people’s freedoms as well. I never hear talk about the benefits of political correctness. Yes, it curtails people’s individual freedoms, but it also can give others freedom as well. We just care less today on the margin of respecting your elders, but more about things such as racial equality and gender equality.

I also think about transaction costs and bargaining. We can’t negotiate these things because there are too many people involved and other indirect factors. It would be hard to get 50,000 people that were offended by Duck Dynasty to each pay $1 to negotiate with Duck Dynasty to change their behavior. The lowest cost solution for all these multiple norms violations is to just impose social consequences on all violators; judgment, sneering, and financial penalties.

I will say that this kind of thing is a grey area and it’s hard to calculate exactly how much people are offended versus how much joy the person doing the offending is getting or how much that freedom is worth. But, just like in the 1960s, freedom of speech didn’t mean that you could really say whatever you wanted to, whenever without some kind of social consequence. A 10 year old in 1960 couldn’t go up to a mother and tell her that she was fat and that her children were ugly and dumb without facing severe consequences even if that consequence is limiting his freedom.

4. This Freakonomics podcast on learning a second language was pretty interesting. Link

Some snippets from transcript with my thoughts afterwards…

DUBNER: Saiz is from Barcelona and he’s an economist at MIT, where he teaches urban planning. On today’s show we’re asking about the return on investm…ent of learning a foreign language and, wouldn’t you know it, Saiz has calculated exactly that. He tracked about 9,000 college graduates to see how a foreign language affected their wages. He was surprised by what he found.SAIZ: Yeah, unfortunately, and I have to say, of course, because I try to speak three, I was pretty disappointed, and actually we found a very, very small return. What we did find is that after controlling for a host of characteristics, and using, a lot of experimental research designs that are basically trying to compare people who are identical for everything except for the second language, we did tend to find a premium in the labor market of about 2 percent of wages. In other words, if you speak a second language, you can expect to earn, on average, and that’s across many, many different people, on average you can be expected to earn about 2 percent higher wages. To contextualize this, think about your income or your wage being about $30,000, then you would expect to earn about $600 more per year….

SAIZ: I can tell you that there’s research in other countries. Actually the findings in the United States do contrast with what other people following the same methodology found in Turkey, in Russia and in Israel. In these three countries, actually speaking English, which would be the second language, was associated with a substantial return of around 10 to 20 percent. So it’s really I think English speaking countries where that effect is relatively low. And again I think the explanation is very clear. English is the lingua franca….DUBNER: This is Bryan Caplan, at George Mason University.

CAPLAN: All of this study seems to totally fail to teach people how to fluently speak foreign languages. So we can actually see in the data is that under 1 percent of Americans have learned to speak a foreign language very well in school. And this is very well according to them. And since people tend to exaggerate how good they are at things. If under 1 percent claim that they learned to speak a foreign language very well in school, then God knows how many actually did.

I want to highlight two points of the podcast that Dubner doesn’t make explicit. He doesn’t talk about the actual return from learning a second language by the public school system. Because under 1 percent of Americans actually have learned a foreign language from school and then even those 1 percent only get a 2% increase in wages, the ROI is extremely bad. The ROI would be something like under .02%.

Another thing to take away that Dubner doesn’t say out loud is that it’s pretty rational from a cost-benefit analysis why Americans don’t speak other languages or know about other cultures. On the other hand it is very profitable for non-Americans to learn English and about American culture. I guess you can use this idea to defend American ignorance.

Advertising and Ideas as Consumption Goods

The way that economists think about advertising is somewhat mystifying to me. Now, I’m a first year grad student in economics so I may be ignorant of debates that have happened already. But, from what I’ve come across in papers and talking to other students it seems there are two ways economists look at advertising. One idea is that advertising provides information or product differentiation to consumers and the second is that advertising is a complement to the good. To expand on complements I’m going to reference a Tyler Cowen post…

As I understand Becker’s work (with Kevin Murphy) on the topic, individuals consume “social images” or “self-images.” Having Nike shoes gives you the “benefits of being cool” if a) you actually have Nikes, and b) the ad links Nikes to a cool image for your relevant peer group. The standard economic theory of complements then applies for analyzing ads. – See more at: http://marginalrevolution.com/marginalrevolution/2006/04/did_gary_becker.html

Some real life examples of the simplistic nature of economic conceptions of advertising/ideas are…

I’ve been going to a few economics seminars at GMU and have heard other graduate students/professors talk derisively about concepts like fair trade and local/slow food movements. For instance, I overheard two PHD students have a conversation around the idea that local food could never be as high quality as mass produced agribusiness type food. I thought, well it’s not necessarily true that mass produced food must be higher quality (it could be a trade off of quality for price for instance), but more importantly I thought they viewed the whole thing in the wrong way. The way they are viewing it and the way many economists also view it is they only think or care about final goods. These PHD students are saying local food is bad because it produces say an inferior orange to agribusiness’ higher quality orange. But, consumers don’t just care about the orange itself; they also care about how the orange was produced and the idea of local food. I think economists might challenge my claim and say that’s just product differentiation, but I think that misses the point. The way I view it consumers aren’t really consuming different types of oranges, they are actually consuming oranges plus the idea of local food regardless of the quality of the oranges. I reread a Chuck Klosterman essay, It Will Shock You How Much It Never Happened that is a much better written illustration of the point…

PespiCo Incorporated has interesting problems. Around the same time they were making Pespi less cynical, PepsiCo made a packaging change to another of their products, Tropicana Pure Premium orange juice. For whatever reason, PepsiCo changed the orange juice carton: Instead of an orange with a protruding straw, they featured the more literal image of a glass of orange juice. Immediately, orange juice drinkers lost their shit (not all of them, but enough to get attention). They were outraged; they could not believe that Tropicana had altered this essential image of an imaginary orange you could suck. A few weeks later, Tropicana switched back to the original design. This reversal was covered in the February 22, 2009, edition of The New York Times, and the angle of the story was that PepsiCo was dealing with its own version of Coca-Cola’s infamous 1985 introduction of New Coke. However, there was at least one major difference that was mentioned in the story parenthetically, almost as an aside
(There are, it should be noted, significant differences between the two corporate flip-flops. For instance, the Tropicana changes involved only packaging, not the formula for or taste of the beverage.)
The orange juice was the same. As far as I can tell, the size and shape of the container itself was also identical—the only alteration was the picture on the carton. People were appalled because the same product (at the same price) was being presented to them in a slightly different way. If you’re a person involved in the profession of advertising, this kind of scenario is the apotheosis of your vocation. It illustrates a rarified level of consumer appreciation: People aren’t just buying something because of the advertising—they feel like they are buying the advertising itself. An essential piece of what they desire is the image on the carton, even though that image is only there to get attention and inform you of what’s inside. It has nothing to do with juice. It almost never does. This happens all the time: LeBron James does not sell Nikes; buying Nikes allows people to buy “LeBron James” (and whatever that’s supposed to mean outside of itself ). That cliché has been understood by advertisers for generations, or at least since Michael Jordan killed off Converse in the eighties. But—right now, today—everyone knows that this is how the game works. So how can a trick work when everyone knows it’s a trick? Because the trick is the product.

That last two sentences basically encapsulate the idea. There might be a quibble in that Klosterman confuses advertising and branding as the same thing; still I think the point stands and a different story could be told about just advertising. If we were to think about local food, fair trade, and many other green products in this way (that consumers are consuming those ideas) then I think it makes a lot more sense why people make the choices they do. Consumers of fair trade might be wrong about the end results of buying fair trade (distributional income effects), but the same could be said on a whole host of dimensions on many products (homeopathic drugs, vitamins, therapy, AA, etc.) But, economists don’t see anything wrong when people buy emergen-c and think it will cure their cough; I am just saying consuming fair trade goods might be similar and that ideas are not just information or a complement. Advertising and ideas are goods in and of themselves.

Update: I forgot to mention that I have seen something a little similar to this idea in Virginia Postrel’s book The Power of Glamour: Longing and the Art of Visual Persuasion, but I haven’t had time to read it yet.

Asian parents and the things they make their kids do: Why pianos lessons aren’t so different from gold bathtubs

This is a follow up to my last post; I want to expand on the topic of Asian parents and the activities they make their kids do. I am talking about activities like piano, tennis, chess, violin, ballet, calligraphy, etc. But, before I get to the meat of my argument I am going to list some characteristics these activities share.

Generally, these are activities that children aren’t naturally drawn to and instead are ones that have to be imposed on them. Tennis as opposed to basketball or piano instead of guitar/drums. These activities “might” be some of the things that benefit the most from repetition or “hard work” as opposed to other activities that might be extremely talent constrained. These activities also might be the ones where the peak age is young and to become a master you must start at a fairly young age. As an aside, the benefits from starting young and repetition seem to make these same activities the ones communist countries focused their energies on.  And finally, these activities/preferences were all at one time a signal of wealth/status and the hobbies mainly of aristocrats or the wealthy.

I am going to focus on this last point and what I have thought a lot about after studying economics. Anecdotally, I think there are times when prices steer people down the “wrong” path. In premodern times it seems that a lot of value/beauty considerations were mainly driven by a price/scarcity function. What I mean to say is that beauty was extremely intertwined with how expensive something was and by default how scarce it was. I also see the causality as running mostly one way in that if something was scarce and expensive then it was considered beautiful and not the converse that something was first declared beautiful and then became expensive. So my thesis is, “Things in the past were beautiful mainly because they were expensive and scarce and not because of individual preferences.” I admit that stated this way the argument might be too strong. Preferences did matter in the past, but relative to modern standards they were a smaller factor.

And what is wrong with price/scarcity determining beauty? The main issue is that most people believe they are unique and that their beliefs and preferences aren’t driven entirely by outside forces. I like grime, basketball, Vietnamese food, and that is what makes me who I am; I tell myself. We denigrate people that are easily affected by others, we call them posers, wanna-be’s, conformists, sheep, gullible, etc. We also have multiple folk stories (The Emperors New Clothes) and sayings that stress this point, “If all of your friends jumped off a cliff, would you!?” Don’t do things just because they are popular or because an expert told you to do it; make up your own mind.

What I am saying is that the price system acting as the main determinant of beauty is just a different version of this idea. We should be repulsed by this concept because instead of appreciating something genuinely you are relying on the price system to guide your preferences. I have some real world examples I would like you to think about that might strengthen my case.

The first one is the changing beauty status of gold in most of the world’s cultures. In premodern times it seems almost as if gold was considered universally beautiful. Cultures as diverse as Egypt, China, and the Mayans all considered gold extremely beautiful. Probably not coincidentally, gold was also used in most of these cultures as a commodity currency and as a store of wealth. In modern times although gold is still valuable, its value in terms of beauty has dropped significantly. And contrastingly, an extravagant use of gold today is often a signal of bad taste. I am thinking of things like Donald Trump’s all gold “luxury rooms”, gold rims, gold jewelry, gold chandeliers, gold dining sets, and the like. This video is a good illustration of the idea…

Using a lot of gold today means that you are tacky and is a direct illustration of the point where we judge people negatively who use the price system as their only determinant of beauty. It is also seen as old fashioned and from another time.

Another example I often think of is why for a certain period of time most American homes were entirely carpeted and now we’ve almost gone in the complete opposite direction. These days on the real estate market, hardwood floors are demanded and when a whole house is carpeted it is a real detriment to sales. There must have been a time when carpeting was a new mass market technology and the benefits it offered in terms of heating were very attractive and novel to people. Reinforcing my point is the fact that carpeting was usually an additional cost. I’m just guessing on this point, but my intuition comes from renovation shows when they rip up the carpeting in most homes they usually restore the original floors and this is considered an upgrade. Because this was a new technology and was more expensive people flocked to it and in turn carpeting was considered beautiful for awhile. That previous generations coveted carpeting is reflected in architecture magazines and print media from the 1970s and earlier. But, by the 1990s the era of carpeting was declining and regardless of the heating considerations most buyers now prefer hardwood floors and consider carpeting distasteful.

Perhaps, one of the most extreme examples of this price=beauty phenomenon is the DeBeers monopoly on diamonds. Although, I’m not the most knowledgeable on the subject; I think the gist of it is that DeBeers bought up all the diamond mines in the world, restricted their supply, and launched one of the most successful marketing campaigns ever and convinced women across the world of its beauty and value. I propose that the diamond would not mean what it does as an engagement ring if it was not expensive and it would probably be replaced by another expensive jewel if it’s price were considerably lower. I will admit it is hard to disentangle which came first the beauty or the price, but one can easily do the thought experiment of a world where diamond prices were different and how it would affect our perceptions of its value. A more concrete example of this is the price of cubic zirconia which are considerably cheaper, but nearly identical in looks to the human eye.

There are countless other examples in history of “fads” where for a brief period of time an item was considered extremely beautiful because it was expensive such as Dutch tulips in the 17th century.

And why do I think what Asian parents make their children do is a version of this price/beauty formula? It doesn’t seem to me a mere coincidence that it just so happens that every activity Asian parents choose for their children are activities that rich people of a previous generation took part in. And it is my supposition given the rest of my post that rich people of those generations did those activities because they were expensive and were mainly signals of wealth. Asian parents, I am telling you, “If all of your friends forced their kids to play piano, would you!?” Using price or scarcity as the only determinant in a thing’s cultural or aesthetic value is shallow and shortsighted.