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One of the hot topics of the week is evaluating the merit of Hayek's Road to Serfdom. I read this book about two years ago now, and I have to say I agree almost entirely with Tyler Cowen's re-assessment of the thing. 

I was surprised by the book: it was not nearly as extreme as I was expecting. In fact, it lays out what to modern eyes are highly reasonable arguments for why the central planning that was dominating the world at the time was doomed to fail. His primary target was the extreme central planning of the fascist and communist states, but his arguments applied equally to the government-planned wartime economies of the Allied powers. 

The book I read immediately afterwards was one by J. M. Keynes. Many of those who currently cite the Road to Serfdom to back up their political views might be surprised to learn that Keynes shared Hayek's fundamental concerns. He agreed with the book's argument about the dangers of central planning; where he differed was in the degree of the response. That Keynes' proposed "middle way" is now considered to be at the Left end of the spectrum speaks volumes about how much society has changed in the past 70 years.

Moreover, that Hayek's predictions failed to materialize is a testament to the degree to which we've internalized many of his arguments in the book. I would argue that the same can be said for Marx. The extremes that both men were railing against no longer exist as credible threats to our society, despite what some will have you believe. In re-reading these texts, their arguments would almost seem quaint were it not for the recognition that the problems were, at the time, very real. 

The flip side to all of this is that this particular book has lost much of its relevancy to the problems we are dealing with today, much in the same way that many of Marx's writings are of little use in addressing contemporary issues. That may not please the self-styled radicals at either end of the ideological spectrum, but for the rest of us it is very good news indeed. 

Last December I wrote about Nassim Taleb's The Black Swan and proceeded to tell anyone who would listen to Read This Book. You will have to forgive my boyish enthusiasm. It was probably a classic case of getting really excited about that-which-you-have-read-most-recently. Happens all the time.

Since then, however, I've read a number of criticisms - concerning both Taleb and his ideas. None, however, was nearly as comprehensively devastating as this one by Eric Falkenstein. Although written some time back, it's new to me and in the interest of balance I feel obliged to link to it here. It's certainly worth a read if you've read Taleb or are at all interested in questions of probability and prediction. For instance:

"Taleb is consistently amusing because his criticisms of others apply so neatly to himself: he claims he is an empiricist yet supports his points with anecdotes. The Black Swan makes fun of ‘experts’ with credentials, but he states he does not deign to engage with anyone not sufficiently expert; he states he is not interested in being a speaker-bureau commodity , but routinely travels the rubber chicken circuit; he derides forecasters who don't give a full accounting of their prior forecasting history, yet delinks old remarks about Value-at-Risk, and recategorized his extinct Hedge Fund as a hedge, not a fund; he claims to prize humility, yet is most immodest; he argues against applying the law of large numbers, and also of inferring too much from small samples; people apply models to reality in biased manner, people naively extrapolate data without the appropriate theory; forward thinking is adaptive, forward thinking is error-laiden. Some people think inconsistency is a sign of genius; I think it just reflects confused thinking."

"Black Swan argues that standard statistics is flawed because it is backward looking — it uses ‘historical’ data — and argues that standard measures of risk like the normal distribution are ‘frauds’. I too prefer future data, but it is hardly a practical alternative. The Gaussian distribution is common in theory because it is so analytically tractable; it often creates closed form solutions that allow one to see how one variable affects another, and has nice properties, such as the fact that two Gaussian random variables added together is also a Gaussion random variable. In practice, no one actually believes in this view, and makes ad hoc adjustments.... Non-economists often giggle at the term ‘fat-tailed’ or homoskedasticity, but indeed most real world distributions are not ‘Normal’ or Gaussian, they simply have fatter tails than average. Does this imply statistics is a fraud? Well, if you mistake the map for the territory, indeed, this is news."

Mike Moffat at WCI takes a stab at explaining why there is such a disconnect between what economists think and what people think economists think. In sum:

"The economists who stay on the air tend to be the ones who are most willing to promote a black/white worldview. That tends to skew the view of the general public, as most economists tend to see everything in shades of grey."

This is pretty much what I was arguing when I referred to the "Richard Dawkins Effect" on the likes of Paul Krugman and others. Nuanced argument isn't entertaining. The one-handed economist rules the roost.

But is that always the case?

It seems to me that what may hold true for talking heads on the radio and Tee Vee doesn't always hold true in the blogosphere. Sure, you can find your fair share of biased blowhards, but it strikes me that many of the most prominent economist bloggers are able to carry out interesting and stimulating discussions on important topics without resorting to brow-beating. The discussion is more "academic" in the positive, constructive sense of the term. What's more, this debate is very accessible to the public.

An interesting sub-question would therefore be: why does this nuanced debate seem to thrive on the internets, but not in the traditional media?

I do think Mike is wrong about the benefits of media exposure, however. For instance, in the United States, if you're a prominent economist-blogger you can apparently be invited to lambaste US Treasury officials in person - which is both fun and intellectually stimulating!

- Mervyn King warns against getting ahead of ourselves:

"The gradual improvement in credit conditions that was evident earlier in the year seems to have come to a halt in recent months. And financial markets more generally have been volatile. In part that is because continuing concerns about the ability of some countries to achieve necessary fiscal consolidation are affecting confidence in the ability of banks to repair their balance sheets. More fundamentally, the key underlying causes of the crisis – in terms of the imbalances in global demand – have still not been tackled. Those imbalances are likely to be larger this year than last, and will probably still be around three-quarters of their level at the peak immediately prior to the crisis. Until these underlying problems are resolved, uncertainty about the outlook for the world economy will remain."

(FT Alphaville provides comment)

- Flooding in China pushes the Three Gorges dam ever closer to capacity

- Does happiness affect productivity? Yes. Quality? Not really.

- In praise of Dark Ages

- Catalonia bans bullfighting. Good. I attended a bullfight in Madrid recently - I arrived with what I had hoped was an open mind, willing to make an effort to appreciate this part of Spanish culture. I was left disgusted by what is, essentially, ritualized slaughter for the sake of entertainment. Don't get me wrong: I was impressed by the matadors themselves. Bullfighting clearly requires a great deal of skill and cajones. But so did being a gladiator in ancient Rome. The Italians gave up their bloodthirst many centuries ago. Maybe it's time Spain did the same.

There's no question that "globalization" has been a defining feature of the political economic landscape for the last seven decades. It has led to phenomenal increases in living standards for a huge portion of the world's population. It has revolutionized the way the global community interacts. It has also resulted in a fierce backlash from those who feel threatened by the changes it has wrought, and by those who have been left behind.

But what is globalization, anyway? Economic globalization, in a classic definition, is described by Stanley Fischer as: "the ongoing process of greater interdependence among nations [and] is reflected in the increasing amount of cross-border trade in goods and services, the increasing volume of financial flows, and the increasing flows of labour." For the most part, this definition holds true. However, it's the "for the most part" bit that Paul Romer takes issue with in a recent NBER paper. I can't find an un-gated version, so I'll lay out the basic argument here.

Let's start with the fundamental assumption in economics that more world trade = good, due to comparative advantage. We then add another basic argument: that the life expectancy of the vast majority of mankind depends upon ideas: techniques, therapies, and treatments developed in the health sciences. Capiche?

Now consider this scenario: you have pill X and pillY. A rich-world worker can produce 10X and 10Y pills per hour, using the latest formulas; a worker in a poor country can only produce 3x pills or 5Y pills per hour, and uses and older, generic formula that is less effective. In a typical textbook trade model, the rich-world has a comparative advantage and should export their (more effective) pills to the poor world. However:

"Trade in pills is an obvious sign of inefficiency. The efficient form of trade would have the workers in the poor country making pills that use the same formulas as the workers in the rich country. If the rules in these two countries give workers in the poor country access to the formulas for the pills at no charge, we would have large gains from globalization and no conventional trade in goods or services.

Just to make sure that I am not cited by the thought police, this does not show that trade restrictions are good. Nor does it show that intellectual property rights are bad (or good). It does show that we need a richer vocabulary, one that can allow for the possibility that such ideas as the formula for a pharmaceutical can also flow across a border. If flows of conventional goods and services are the only things we see and describe, we will miss the deeper forces and sometimes get the sign wrong. More conventional trade can be a sign of something wrong: inefficiently low cross-border flows of ideas."

Romer breaks down the concept of ideas into two pieces: technology and rules. Technologies are ideas about how to rearrange inanimate objects. Rules are ideas about how people should interact.

To illustrate: in the 1990s, the Chinese airline industry was one of the most dangerous in the world. While they were using similar airline technologies as other parts of the world, they did not have a common airline language/phrasebook, and this led to confusion. Starting the mid-1990s, Boeing (which had invested in the technology) began offering free training (changing the rules) for airline personel and airtraffic controllers; the number of crashes plummetted. The rules need to fit the technology.

By contrast, Romer points out that private firms have frequently failed to introduce modern water technologies, with clear health benefits, to countries where there weren't effective rules for regulating private monopolies. In this case, it may be too expensive or difficult for private firms to try to change the rules, and so the technology isn't spread.

What is the take-home message?

"How we think is influenced by what we teach, and what we teach about the gains from globalization may do more harm than good. It encourages two types of errors. It suggests that technologies cannot be copied and that rules are easy to copy. In each case, it would be more accurate to say that incentives matter. Rules matter because they change both the incentives for flows of technologies and the productivity of technologies that are available locally. "

So when it comes to economic development, we need to break free from the traditional understanding of economic globalization to consider the transfer of ideas and how they can be implemented effectively. I'm confident that people who work in this field have known this for years - perhaps it's time that academics caught up?

And here I was thinking I was clever by quoting Frédéric Bastiat last week. Since then, I've been tripping over his name in articles debating this or that policy measure - and no surprise, as the man is great for a quote.

But here's a Wiki-article worth reading: Bastiat's parable of the broken window. It's a helpful story for anyone who'se feeling over-stimulated by the stimulus debate.

Also Greg Mankiw reports on a modern-day example of the broken window fallacy literally put into action.

Rory and I have both made our views clear on the recent resurgence of protectionist measures in G20 countries so, instead of spouting off once more, I think it's worth looking at the arguments at work on both sides. Via Megan McArdle:

Proponents of expanding the "Buy American" provisions enacted during the Great Depression, including steel and iron manufacturers and labor unions, argue that it is the only way to ensure that the stimulus creates jobs at home and not overseas.... The proposals are meant to regenerate heavy manufacturing jobs in the United States by forcing government contractors to use domestic materials and equipment, even if they are more expensive.

The logic here is that, in order to prevent stimulus money from leaking abroad, one must spend money on domestic goods. These are, after all, the workers and firms who are going to be hard-hit by this recession. But does anyone else find it odd that these proponents are suggesting that the best way to deal with a consumer-driven recession is to make things that are more expensive? And yet that's what we're seeing once again with the proposed additions to the economic stimulus package that was voted through the US House of Representatives yesterday (see Rory's post below).

It's interesting to see how the arguments for protectionism have changed so little over the years. Thanks to the wonders of the internet, I have managed to track down a biting critique of protectionist logic by 19th century French writer Frédéric Bastiat. In his book, Economic Sophisms, (available at EconLib) Bastiat used his humour and wit to ridicule the policy proposals of his day. Below is Bastiat's essay: "A Negative Railroad" - see if you can draw parallels with today!

I have said that as long as one has regard, as unfortunately happens, only to the interest of the producer, it is impossible to avoid running counter to the general interest, since the producer, as such, demands nothing but the multiplication of obstacles, wants, and efforts.

I find a remarkable illustration of this in a Bordeaux newspaper. M. Simiot raises the following question:
Should there be a break in the tracks at Bordeaux on the railroad from Paris to Spain? He answers the question in the affirmative and offers a number of reasons, of which I propose to examine only this:

There should be a break in the railroad from Paris to Bayonne at Bordeaux; for, if goods and passengers are forced to stop at that city, this will be profitable for boatmen, porters, owners of hotels, etc. Here again we see clearly how the interests of those who perform services are given priority over the interests of the consumers.

But if Bordeaux has a right to profit from a break in the tracks, and if this profit is consistent with the public interest, then Angoulême, Poitiers, Tours, Orléans, and, in fact, all the intermediate points, including Ruffec, Châtellerault, etc., etc., ought also to demand breaks in the tracks, on the ground of the general interest—in the interest, that is, of domestic industry—for the more there are of these breaks in the line, the greater will be the amount paid for storage, porters, and cartage at every point along the way. By this means, we shall end by having a railroad composed of a whole series of breaks in the tracks, i.e., a negative railroad.

Whatever the protectionists may say, it is no less certain that the basic principle of restriction is the same as the basic principle of breaks in the tracks: the sacrifice of the consumer to the producer, of the end to the means.