Economics needs better critics: Jared Bernstein edition

A couple of weeks ago Vox.com published and essay by Jared Bernstein titled “What economists have gotten wrong for decades: Four economic ideas disproven by reality.” I was unaware of it until a discussion emerged on twitter last week, in which people were offering explanations for why economists were not only wrong but wrong in ways that harmed lower income people disproportionately. The discussion was irritating because it was premised on the assumption that Bernstein’s essay was a accurate, when nothing could be further from the truth. The four economic ideas are not economic ideas at all. 

Bernstein begins by describing Alexandria Ocasio-Cortez questioning Jerome Powell, the Chair of the Federal Reserve, about the natural rate of unemployment:

“The topic was the so-called natural rate of unemployment: the idea, believed by many economists and policymakers, that there is a rate at which unemployment could get so low that it could trigger ever-rising inflation.”

He then went on to argue that the natural rate is one of a number of things that economists have gotten wrong and that have hurt low income individuals:

“The natural rate of unemployment that AOC questioned is one such idea (more on that below). There are three others worth singling out:

• that globalization is a win-win proposition for all, an idea that has deservedly taken a battering in recent years;
• that federal budget deficits “crowd out” private investments; and
• that the minimum wage will only have negative effects on jobs and workers.

Economists and policymakers have gotten these ideas wrong for decades, at great cost to the public. Especially hard hit have been the most economically vulnerable, and these mistakes can certainly be blamed for the rise of inequality. It’s time we moved on from them.”

This is pretty much all wrong. The statements about globalization and the minimum wage are flat out false. They are not consistent with basic economic theory. You will not find them in any textbook that I know of. They are not consistent with any economic research that I know of. The other two statements contain a grain of truth, but are poorly explained by Bernstein.

The Natural Rate of Unemployment

Is there a rate of unemployment below which inflation will start to accelerate? I would answer “Yes.” And I think most economists would agree with me. What is that rate? I would answer “Damned if I know.” And I think most economists would agree with me. The problem is that the rate at which inflation will start to accelerate does not appear to be constant. In addition, as Betsey Stevenson pointed out in a recent article in the Washington Post the Fed’s actions have made it more difficult to identify the relationship.

In order to completely deny the idea of a rate of unemployment below which inflation will accelerate you would have to claim that the unemployment rate could go down almost to zero without causing prices to increase. Certainly, our experience during WWII when government demand drove the unemployment rate down well below normal levels does not support this conclusion. Price increases eventually led to government price controls and rationing.

Globalization

Next Bernstein turns to the economic theory suggesting that globalization is win-win for all. But half-way through his discussion of globalization he throws this in:

“But the theory never said expanded trade would be win-win for all. Instead, it (and its more contemporary extensions) explicitly said that expanded trade generates winners and losers, and that the latter would be our blue-collar production workers exposed to international competition. True, the theory maintained (correctly in my view) that the benefits to the winners were large enough to offset the costs to the losers and still come out ahead. But as trade between nations expanded, policymakers quickly forgot about the need to compensate for the losses.”

That’s right Bernstein just said that economic theory never said it was a win-win for all, it always said there were winners and losers. This wrong idea of economists was never even an idea of economists.

Crowding Out

Like the natural rate of unemployment there is a kernel of truth here. Other things equal, an increase in government borrowing can raise interest rates and discourage private investment, but economists do not all believe that any government borrowing will necessarily crowd out private investment. Many economists would argue that it depends on the circumstances. Many textbooks also include the possibility of an accelerator effect, or crowding in. If the economy has a lot of unemployed resources, government borrowing resulting from deficits may have little effect on interest rates, and if the deficit spending increases aggregate demand it could encourage private investment. The results for a model depend on the assumptions you make. The result, in reality, is an empirical question, and there is no reason to believe that the answer is always going to be the same.

The Minimum Wage

Bernstein claims that “The theory is that free markets set an “equilibrium” wage that perfectly matches supply and demand given employers needs and workers’ capabilities. Force that equilibrium wage up and rampant unemployment will result.

When I was coming up in the profession, our textbooks argued that believing minimum wages could help low-wage workers was akin to believing that water flowed uphill. Their message was particularly comforting to conservative politicians who wanted to protect the profits of employers of low-wage workers.”

The phrase “Force that equilibrium wage up and rampant unemployment will result,” should make any economists cringe. If one of your students said it, you would feel a deep sense of sadness at your failure to convey the basics of supply and demand.

This is the classical textbook model of the minimum wage.

The minimum wage only affects the market to the extent that it increases the wage above the equilibrium, not the extent to which it raises the equilibrium. The positive effect for employees is the increase in the wage. The negative effect is the decrease in demand for labor. Those who still have jobs gain those who are unable to get work lose. Bernstein knows that textbook models of the minimum wage do not claim that everyone will be worse off. How do I know that? Because the graph is from jaredbernsteinblog.com where he refers to it as the classic textbook model.

By the way, the blogpost also has a pretty good description of the way that variations in the model (What if the higher wages increase demand? What if employers do not respond very much to increases in wages? What if labor markets are not competitive?) Unfortunately, the fact that Bernstein appears to understand the economics of minimum wage increases makes his Vox.com piece even more irritating. What they do point out is that it is possible to create models that produce very different outcomes. And these differences do not arise from making completely ridiculous assumptions. Whether the higher minimum wage creates an increase in demand is an empirical question. Whether labor markets are competitive is an empirical question. The same goes for how much demand for labor responds to a higher wage. By the way, occasional I run in to people who seem to think it will be completely unresponsive to an increase in the wage. If you truly believe this then you should not be willing to settle for an increase to $15. Why not $50, or better yet $1,500?

So, economic theory suggests that the effect of the minimum wage is an empirical question. My reading of this research is that small increase in the minimum wage tend to have small negative effects on employment.

Economics should be criticized for actual flaws. There are plenty of them. Women and African Americans are significantly under-represented in economics. Economists don’t study enough history. How can you really understand how people respond to changes in constraints if you don’t know anything about how constraints change over time? Economists tend to take a good thing and go too far. Math is good, but does everyone who wants to be an economist need to master real analysis and get a perfect score on the quant section of the GRE? Identifying causality is a good thing, but should we only studying things where we see a clear path to doing this? The list could go on. We don’t need to make up imaginary flaws.

Institutions, Norms, and Culture

This post started out as my attempt to understand an argument that John Wallis was making about institutions, but it kept expanding. I’m posting it now because fall semester is approaching and we are supposed to get the galleys for our book in the next couple of days. In other words, I need to stop messing around with this and get to work.

Thorstein Veblen (1899)

“The institutions are, in substance, prevalent habits of thought with respect to particular relations and to particular functions of the individual and of the community: and the scheme of life, which is made up of the aggregate of institutions in force at a given point in the development of any society, may on the psychological side be broadly characterized as a prevalent spiritual attitude, or theory of life." (Veblen, 1953, p.131)

John R. Commons (1931) called “collective action in control, liberation and expansion of

individual action.”

Douglass North (2005)

“institutions―formal rules, informal norms, and their enforcement characteristics.” (North 2005, 48)

“The institutional framework consists of the political structure that specifies the way we develop and aggregate political choices, the property rights structure that defines the formal economic incentives, and the social structure―norms and conventions―that defines the informal incentives in the economy. The institutional structure reflects the accumulated beliefs of the society over time, and change in the institutional framework is usually an incremental process reflecting the constraints that the past imposes on the present and the future.” (North 2005, 49).

Elinor Ostrom (2005)

"Broadly defined, institutions are the prescriptions that humans use to organize all forms of repetitive and structured interactions including those within families, neighborhoods, markets, firms, sports leagues, churches, private associations, and governments at all scales." (Ostrom 2005, 3)

Avner Greif and Christopher Kingston (2011)

“Greif (2006, Chaps. 2 and 5) defines an institution as a system of ‘institutional elements,’

particularly beliefs, norms, and expectations that generate a regularity of behavior

in a social situation. These institutional elements are exogenous to each decisionmaker

whose behavior they influence, but endogenous to the system as a whole.”

John Joseph Wallis (2017)

“Institutions are the agreed upon rules of human interaction within a group or an

organization and the means and method of their enforcement. An organization can be an

organization of organizations, and rules can apply across organizations as well as within.

Norms of behavior are repeated patterns of human behavior within a group, no matter its

size, that occur regularly enough that individuals form expectations about the behavior of

others. The patterns are followed often enough that small or individual deviations do not

change expectations. All norms are subject to change if behavior changes.

Eric Alston, Lee Alston, Bernardo Mueller, and Tomas Nonnenmacher (2018)

“We define an institution as a rule that recognized entities (individuals or organizations) devise and enforce. Norms are longstanding patterns of behavior shared by a subset of people in a society or organization (e.g, governments, firms, universities, churches, and families.) (Alston et al 2018, 13)

Alesina and Giuliani

“we refer to culture as values and beliefs (one could say informal rules) and to institutions as formal institutions. (This approach is also followed in most of the empirical papers trying to disentangle the two concepts.)”

Joel Mokyr (2017)

“Culture is a set of beliefs, values and preferences, capable of affecting behavior, that are socially (not genetically) transmitted and that are shared by some subset of society.” (Mokyr 2017, 8) “Institutions are socially determined conditional incentives and consequences to actions.” (Mokyr 2017, 9)

It is widely, although not universally, accepted among economists that institutions are one of the most important determinants of long-term economic growth (Acemoglu, Johnson and Robinson 2005). But what are institutions? The definitions of institution provided by Veblen, North, Ostrom and Greif are very broad. Institutions are ideas or beliefs that are shared among a group of people. Some economists, however, argue that institutions are distinct from norms and culture. They don’t argue that norms and culture are un-important, only that for purposes of analysis they should be distinguished from institutions. I’m not convinced that the narrower definition of institutions is a good idea.

Are institutions agreed upon rules but not norms?

John Wallis argues that the “logical relationships between the agreements, rules, and enforcement that sustain institutions are not the same as the logical relationships between behavior, rules, and enforcement that sustain norms of behavior. By their very nature, norms and institutions are necessarily different things.” He goes on to explain that “A theory of institutional change cannot be a theory of everything about human behavior. From the beginning of modern institutional social science, the core focus has been deliberate attempts by organizations to formulate agreed upon rules (Wallis 2017, 42).” Finally, he suggests that “If we define institutions as norms, then it becomes too easy for some people to compare norms and outcomes and completely ignore agreed upon rules. If we abandon attempts to understand how changing agreed upon rules actually affect our norms of behavior, then we will never understand how deliberately to reach collective goals for our societies.” (Wallis 2017, 43) Wallis also notes that agreed upon rules are often not enforced, while norms must be followed by a sufficient number of people or they are not norms. Alston et al credit Wallis with persuading them to distinguish between institutions and norms, although the do not adopt exactly the same definitions.

There are common themes in these rationales: a theory of institutions can’t be everything, formal and informal rules are fundamentally different, the use of formal and informal institutions is confusing, and the use of these terms leads people to undervalue the influence of one of them.

Wallis tries to make the case that the essential nature of agreed upon rules and norms are different:

“With the exception of some types of criminal activity (defined in a multitude of

ways across times and societies), the enforcement of most agreed upon rules depends upon the people and their relationship to which the rule may apply. As a result, observed behavior often does not conform to the agreed upon rule.

Enforcement of norms is probabilistic, but also automatic. If you speak, dress, or act the

wrong way, you bear the consequences. Driving on the left in a society where the norm is

driving on the right can get you killed. Behavioral norms only matter if there are consequences, if there are not consequences to how we dress, we dress however we want. Enforcement of agreed upon rules is very often optional, it depends on the relationships supported by the rule. You and I write a contract containing a clause that you must deliver goods at a specific time and place or incur a penalty, a clause enforceable by a court. The time passes and you have not delivered the goods, do I take you to court? It depends on the value of our relationship. All of this is by way of saying that the essential nature of institutions as agreed upon rules and norms as patterns of behavior are different.”

I think this argument exaggerates the differences between formal (agreed upon) rules and informal rules (norms). Wallis describes default rules like those in contract law, or divorce law that he argues are agreed to but frequently not followed. These are not actually example of people not following the law. Rules of this sort specify what injured parties may do, not what they must do. If someone does not pay their debt to me, the law says that I may try to garnish their wages; it does not say that I must garnish their wages. But this does not mean that garnishment law does not matter. Not using the law has been the rational for enacting a law. Proponents of the 1898 Bankruptcy Act claimed that one of the benefits of the law would be that people could avoid court (Hansen 1998). After the law was enacted the use of Credit Adjustment Bureaus expanded (Hansen and Hansen 2006 and Hansen and Hansen 2020). Choosing not to exercise your right does not in any way undermine the law.

There are agreed upon rule that declare what people must do rather than what they may do (they are prescriptive rules, not default rules) that are neither followed nor enforced. To be clear I am not talking about cases where the third party makes a choice within the bounds of the law not to enforce; I’m talking about situations in which there is a clear rule that is supposed to be enforced but is not (see Basu 2018). In the United States, for instance, many state and local governments did not end official segregation until the late 1960s, long after the Supreme Court had declared it unconstitutional (Rosenberg 2008).

So there are cases in which agreed upon rules are not followed and not enforced, but there are also cases in which norms are not followed or enforced? There is evidence that people frequently follow the norms of their society regarding things such as fairness, trust and cooperation (see Pseudoerasmus on pro-social institutions). But both ethnographic and experimental research find that norms are not always followed. Ellickson famously documented that people in Shasta County tend to follow norms rather than the law in dealing with stray cattle, but he also found that the norms were not always followed.  Wiessner (2005) found numerous cases of punishment for norm violation among the Ju/’hoansi Bushmen, implying that there were numerous cases of norm violation. There is  evidence that people are frequently willing to incur costs to punish people that violate social norms when dealing with them (Henrich et al), that third parties are also willing to incur costs to punish norm violators (Fehr and Fischbacher 2004), and that people also engage in anti-social punishment (Hermann et al 2008). Other studies suggest that enforcement of norms may be influenced by the severity of the violation, the cost of punishment, the circumstances under which the violation takes place (existence of mitigating circumstances), the identity of the norm violator, and the identity of the person injured by the norm violation. In general, people appear to respond to benefits and costs (including retaliation) of norm enforcement (Przepiorka and Berger 2016; Balafoutas and Nikiforakis 2012). The Ju/’hoansi Bushmen appear to have been particularly sensitive to the threat that punishment posed to ongoing relationships. In sum, enforcement of norms is not automatic, and, like agreed upon rules, enforcement can depend on relationships.

Proponents of a more restrictive definition of institutions also tend to argue that norms are stickier, harder to change, and change more slowly than institutions. Again, I don’t think the evidence on this is entirely clear. There is some evidence that norms are not only subject to policy influence but capable of rapid change (Nyborg et al 2016). As mentioned previously, it took more than a decade to end state enforced school segregation. In my own research it took 100 years to obtain a lasting federal bankruptcy law in the United States; the 1898 Bankruptcy Act alone took nearly twenty years of organized lobbying. In contrast, social norms regarding women in the work force, marriage, and sexual preference have changed quite rapidly. Understanding, social norms can potentially increase the ability to promote change in them (Bicchieri 2016)

I am not arguing that we cannot distinguish between agreed upon rules and norms. I’m arguing that we should not exaggerate the differences between them. Nevertheless, it is possible to distinguish between agreed upon rules and norms. It is not clear, however, that this distinction is going to take us far in developing a general theory of institutions. Whatever, you call them there is a lot of variation within each of these two categories.  We can develop theories that explain Congressional activity, the relationship between federal and state legislation, judicial decision making, or the interaction between legislative and judicial activity. We have a variety of theories for these different situations, but is it reasonable to expect a general theory to cover all of them? How much less likely is it that this general theory will also help us to understand changes in agreed upon rules in Canada, Israel, Switzerland, China, Burundi, Venezuela and Saudi Arabia? Can we develop a single theory that goes beyond some basic statement about individuals balancing the costs and benefits of attempting to change institutions given the set of institutions for changing institutions that they face?

Social norms are similarly variable. We tend to emphasize prosocial norms because of their connection to economic development, but there are plenty of norms that negatively affect well-being: female genital mutilation, racism, sexism, etc. People follow norms for a variety of reasons. There are beneficial and harmful formal rules that people follow or don’t follow for a variety of reasons. They follow norms because they are in their self-interest narrowly conceived; they follow them because they have internalized the values associated with them; they follow them because they fear punishment by others, including supernatural beings. But all of these things are true of formal rules as well.

Are institutions formal rules but not culture.

Several of the definitions at the beginning of this post distinguish betwen institutions and culture. Alesina and Giuliano, for example, state that “Semantically speaking, we find it counterproductive and confusing to label culture (meaning values and beliefs) as informal institutions. We find it confusing to label “everything”—from, say, the level of reciprocal trust in a society to constitutional rules about voting systems—as institutions. Clearly—this is the crux of our paper—culture (or informal institutions) and formal institutions are interrelated, but the label “informal institutions” implies that formal institutions determine informal ones and that the latter are of secondary importance. Once we agree that formal and informal institutions interact, and that either one may cause the other, then identifying certain values and beliefs as culture or informal institutions becomes merely a matter of semantics. We prefer the term culture over informal institutions; we find it more appropriate and less confusing. Similarly, for brevity, we sometimes refer to formal institutions simply as institutions.”

Parts of this argument simply do not make sense to me. For instance, Alesina and Giuliano believe that “the label “informal institutions” implies that formal institutions determine informal ones and that the latter are of secondary importance.” How does the label informal imply that it determines formal, thereby rendering of secondary importance? Notice also this appears to be the opposite of Wallis’s suggestion that “If we define institutions as norms, then it becomes too easy for some people to compare norms and outcomes and completely ignore agreed upon rules.” Alesina and Giuliano suggest that political economists will fail to study informal rules, while Wallis suggests they will fail to study formal rules. Neither claim is supported.

What about the bigger issue of distinguishing between institutions and culture? The central problem with these attempts to separate institutions from culture is that it is inconsistent with the definitions of culture and the way the term is used by people working on cultural evolution.

Mokyr, for instance, relies upon Boyd and Richerson, but Boyd and Richerson do not treat institutions as separate from culture. In Boyd and Richerson (2008, 306) they follow Samuel Bowles definition of institutions as: “the laws, informal rules, and conventions that give durable structure to social interactions in a population.” They explicitly describe how the sort of “agreed upon rules” that Wallis emphasizes are a part of an evolving culture:

Cultural evolution can also amortize slow, costly deliberate, conscious decisions

over many individuals. In law, for example, legislators, lawyers, and

judges expend much effort crafting legislation and interpreting it. To the extent

that they are successful, the entire society benefits. Most of us do not need to

participate in the costly process of legal decision making; we merely need to

know something of the laws that apply to us. Indeed, to the extent that everyday

mores and the formal law coevolve, individuals can acquire useful behaviors

economically by quite unconsciously imitating the behavior they see around

them. In this way, culture is analogous to habit formation in individuals. Variants

that were invented by deliberate reasoning and carried to dominance by

formal collective decision making may be acquired by subsequent generations

through unreflective imitation (Boyd and Richerson, 2008, 307).

Indeed, if one considers Boyd and Richerson’s definition of culture as “a set of beliefs, values and preferences, capable of affecting behavior, that are socially (not genetically) transmitted and that are shared by some subset of society” it is hard to see how you could argue that it does not fit formal rules such as laws.

Back to Veblen

Veblen had the broadest definition of institutions. In his first book, The Theory of The Leisure Class (1899), he explained that, "The institutions are, in substance, prevalent habits of thought with respect to particular relations and to particular functions of the individual and of the community: and the scheme of life, which is made up of the aggregate of institutions in force at a given point in the development of any society, may on the psychological side be broadly characterized as a prevalent spiritual attitude, or theory of life." (Veblen 1912, 190) Veblen explicitly defined both as ideas that were shared by a group of people. “The physical properties of the materials accessible to man are constants; it is the human agent that changes-- his insight and appreciation of what these things can be used for is what develops (Veblen 1919, 71).” Consequently, “the evolution of society is substantially a process of mental adaption on the part of individuals under the stress of circumstances which will no longer tolerate habits of thought formed under and conforming to circumstances in the past." (Veblen 1912, 192)

To Veblen this process of mental adaptation should be the central concern of economists: “To any modern scientist interested in economic phenomenon the chain of cause and effect in which any given phase of human culture is involved as well as the cumulative changes wrought in the fabric of  human conduct itself by the habitual activity of mankind, are matters of more engrossing and abiding interest than the method of inference by which an individual is presumed invariably to balance pleasure and pain under given conditions that are presumed to be normal and invariable (Veblen 1919, 240).”

Veblen’s conception of institutions is the most consistent with the definitions of culture developed by people working on cultural evolution, and largely adopted by economists. Individual institutions, shared habits of thought correspond to memes or cultural elements (Mesoudi 2017). His “scheme of life” is essentially synonymous with culture, at least as it is used by some anthropologists. For instance, Richard Dunham suggests that “culture consists of shared ideational phenomena (values, ideas, beliefs, and the like) in the minds of human beings. It refers to a pooled body or “pool” of information that is both public (socially shared) and prescriptive (in the sense of actually or potentially guiding behavior) (Durham 1991, 3).” And “the new consensus in anthropology regards cultures as systems of symbolically encoded conceptual phenomena that are socially and historically transmitted within and between populations.” (Durham 1991, 8) Henrich, defines culture as “the large body of practices, techniques, heuristics, tools, motivations values, and beliefs that we all acquire while growing up, mostly by learning from other people (Henrich 2016, 3).” But this view of culture isn’t isolated to anthropologists who study the coevolution of genes and culture. The cultural anthropologist Eric Gable also describes culture as “ideas and their embodiment in artifacts and activities (Gable 2011, 6).” Like Veblen’s definitions of institutions and scheme of life these definitions of culture are very broad and emphasize the role of shared ideas that are transmitted over time within a society. These definitions of culture include not just norms, but also legal and political institutions and technology. They include the influence of shared ideas on both the objectives that people deem worthy and the means to achieve those objectives.

The definitions provided by North, Ostrom and Grief are like Veblen’s in defining institutions in terms of shared ideas or beliefs. Because of the emphasis on “rules” it is not clear that they are quite as broad as Veblen. Although the rules of games do not just tell people what they can and can’t do; they also tell you what you should want to do. Modern institutional analysis, especially that reflected in the work of North from Structure and Change in 1981 to Understanding the Process of Economic Change in 2005, seemed to be moving toward a Veblen like approach. Institutions are shared ideas that influence human behavior.  

Pulling formal rules out of culture creates two problems. First, to the extent that culture is defined in terms of ideas that are shared by members of a society, both at a point in time and over time, formal (agreed upon rules) fit within this definition. Unlike norms they agreed upon, written down, and not actually known to everyone. But these things are true of religion, science, and technology as well are these not part of our culture? In my reading of Henrich, the fact that because of culture not all of us have to carry all of the knowledge in our heads is the secret of our success.

Second, terms like “scheme of life” and “culture” tend to suggest that, while we can study particular institutions or memes, they add up to something that can also be considered as a whole. “When we use the word “culture,” we are generally referring to a system of meanings, a system of ideas, present in a myriad of human actions, form the most mundane to the most exalted (Gable 2011, 8)”. Pulling institutions out of culture leaves us without a concept for all the socially shared information and assumes away the possibility that the whole is more than the sum of the parts. It is not clear to me that this makes sense. Rosen (2006) makes an interesting case for viewing law as part of a culture. For instance, he notes that what counts as evidence in a court (trial by ordeal or DNA?) is not something that is separate from a society. Were coverture and Jim Crow laws not part of American culture? In our work, we find that bankruptcy laws and their use have evolved in response to interest group activity but also in response to changing beliefs about debt and failure (Hansen and Hansen 2020).  

References

Acemoglu, Daron, Simon Johnson, and James A. Robinson. "Institutions as a fundamental cause of long-run growth." Handbook of economic growth 1 (2005): 385-472.

Alesina, Alberto, and Paola Giuliano. Culture and Institutions.  w19750. National Bureau of Economic Research) "Culture and Institutions." Journal of Economic Literature 53, no. 4 (2015): 898-944.

Alston, Eric, Lee J. Alston, Bernardo Mueller, and Tomas Nonnenmacher. Institutional and organizational analysis: concepts and applications. Cambridge University Press, 2018.

Balafoutas, Loukas, and Nikos Nikiforakis. "Norm enforcement in the city: A natural field experiment." European Economic Review 56, no. 8 (2012): 1773-1785.

Basu, Kaushik. The republic of beliefs: A new approach to law and economics. Princeton University Press, 2018.

Bicchieri, Cristina. The grammar of society: The nature and dynamics of social norms. Cambridge University Press, 2005.

―. Norms in the wild: How to diagnose, measure, and change social norms. Oxford University Press, 2016.

Boyd, Robert, and Peter J. Richerson. "Gene–culture coevolution and the evolution of social institutions." (2008).

Durham, William H. Coevolution: Genes, culture, and human diversity. Stanford University Press, 1991.

Fehr, Ernst, and Urs Fischbacher. "Third-party punishment and social norms." Evolution and human behavior 25, no. 2 (2004): 63-87.

Gable, Eric. Anthropology and egalitarianism: Ethnographic encounters from Monticello to Guinea-Bissau. Indiana University Press, 2010.

Greif, Avner, and Christopher Kingston. "Institutions: rules or equilibria?." In Political economy of institutions, democracy and voting, pp. 13-43. Springer, Berlin, Heidelberg, 2011.

Hansen, Bradley. "Commercial associations and the creation of a national economy: The demand for federal bankruptcy law." Business History Review 72, no. 1 (1998): 86-113.

Hansen, Bradley A., and Mary Eschelbach Hansen. "The role of path dependence in the development of US bankruptcy law, 1880–1938." Journal of institutional Economics 3, no. 2 (2007): 203-225.

―. "Religion, social capital and business bankruptcy in the United States, 1921–. 1932." Business History 50, no. 6 (2008): 714-727.

Hansen, Mary Eschelbach, and Bradley A. Hansen. "Crisis and Bankruptcy: The Mediating Role of State Law, 1920–1932." The Journal of Economic History 72, no. 2 (2012): 448-468.

―. Bankrupt in America:  A History of Debtors, Their Creditors, and the Law in the Twentieth Century. University of Chicago Press, 2020.

Henrich, Joseph. The secret of our success: How culture is driving human evolution, domesticating our species, and making us smarter. Princeton University Press, 2017.

Henrich, Joseph, Richard McElreath, Abigail Barr, Jean Ensminger, Clark Barrett, Alexander Bolyanatz, Juan Camilo Cardenas et al. "Costly punishment across human societies." Science 312, no. 5781 (2006): 1767-1770.,

Hermann, Benedikt, Christian Thöni, and Simon Gächter. "Antisocial punishment across societies." Science 319, no. 5868 (2008): 1362-1367.

Hoebel, E. Adamson, and Karl N. Llewellyn. Cheyenne Way: Conflict & Case Law in Primitive Jurisprudence. Norman: University of Oklahoma Press, 1983.

McNamara, Rita Anne, Aiyana K. Willard, Ara Norenzayan, and Joseph Henrich. "Weighing outcome vs. intent across societies: How cultural models of mind shape moral reasoning." Cognition 182 (2019): 95-108.

Mesoudi, Alex. "Pursuing Darwin’s curious parallel: Prospects for a science of cultural evolution." Proceedings of the National Academy of Sciences 114, no. 30 (2017): 7853-7860.

Norenzayan, Ara, Azim F. Shariff, Will M. Gervais, Aiyana K. Willard, Rita A. McNamara, Edward Slingerland, and Joseph Henrich. "The cultural evolution of prosocial religions." Behavioral and brain sciences 39 (2016).

Nyborg, Karine, John M. Anderies, Astrid Dannenberg, Therese Lindahl, Caroline Schill, Maja Schlüter, W. Neil Adger et al. "Social norms as solutions." Science 354, no. 6308 (2016): 42-43.

North, Douglass Cecil. Structure and change in economic history. Norton, 1981.

―. Understanding the Process of Economic Change. Princeton University Press, 2010.

Ostrom, Elinor. Understanding institutional diversity. Princeton University Press, 2009.

Przepiorka, Wojtek, and Joël Berger. "The sanctioning dilemma: A quasi-experiment on social norm enforcement in the train." European Sociological Review 32, no. 3 (2016): 439-451.

Rosen, Lawrence. Law as culture: An invitation. Princeton University Press, 2006.

Rosenberg, Gerald N. The hollow hope: Can courts bring about social change?. University of Chicago Press, 2008.

Veblen, Thorstein. The theory of the leisure class. Macmillan, 1912.

―. “Why Is Economics Not An Evolutionary Science” in The Place of Science in Modern Civilization and Other Essays. B.W. Huebsch, 1919.

Wallis, John Joseph. "What Institutions Are: The difference between Social Facts, Norms, and Institutions and their associated rules and enforcement."  University of Maryland (2017).

Wiessner, Polly. "Norm enforcement among the Ju/’hoansi Bushmen." Human Nature 16, no. 2 (2005): 115-145.

Blog Post From Nebraska

We are visiting my family in Kearney, Nebraska. When we are here in the summer we go for walks in the nearby cemetery. There is a lot of shade there, and many of the tombstones are interesting. For instance,

 

I looked over and said that looks like land leveling equipment, and it was. At the bottom it says “He left the land better than he found it.” Nebraska, particularly the part west of the 100^th meridian has historically been a relatively dry place (although the south side of Kearney was under water when we got here after a storm dumped about 9 inches of rain). There is, however, a lot of water under the ground, making it possible to produce water intensive crops if you can irrigate your fields.

One method of irrigation is to lay a pipe along the side of the field. Water comes out of holes in the pipe and runs along the rows.

This system obviously requires pretty level land. Land levelers used large construction equipment like the scraper pictured on the tombstone to turn land that could not be irrigated into land that could be irrigated. I remember when I was a kid it seemed like there was land leveling going on all the time. I don’t notice it as much now. That may be because I am not around as much, but it may also be due to development of and expanded us of center pivot systems. In the center pivot the pipe is elevated and rotates around the field. Its not quite as demanding in terms of the land. 

Center pivots are very common in this part of Nebraska. This is what the land looks like just south of Kearney. Circles inside of squares.

The squares are the result of the system of land surveying established by the Land Ordinance of 1785. Each square is a one square mile section (640 acres). The circles are due to the center pivot irrigation. As it rotates around the field it creates a circle.

Center pivot irrigation was developed in Nebraska after WWII. You can find out about ts development and impact in Richard Hornbeck and Pinar Keskin. "The historically evolving impact of the Ogallala Aquifer: Agricultural adaptation to groundwater and drought." American Economic Journal: Applied Economics 6, no. 1 (2014): 190-219. http://projects.iq.harvard.edu/files/heep/files/dp39_hornbeck_keskin.pdf

This is another tombstone that some people might be surprised to find in Kearney, but there are several like it.

In the late 19^th and early 20^th centuries, a number of people immigrated to Kearney from The Levant. Here is some information on the Lebanese Community in Kearney Part 1 and 2 and here is some information about the Eastern Orthodox Church they established, St. George Orthodox Church

While we are on the subject of settlers in Nebraska, on the flight here (btw this is the first summer in 25 years that I have not driven through fly over country between Fredericksburg, VA and Kearney, Nebraska) I finally got a round to reading  Edwards, Richard, Jacob K. Friefeld, and Rebecca S. Wingo. Homesteading the Plains: Toward a New History. U of Nebraska Press, 2017. The book challenges pretty much all of the conventional wisdom (of academics) regarding homesteading, and provides new insights based on a study of homesteaders in two counties in Nebraska.

Finally, I need to make my usual pitch for two of my favorite museums

Pioneer Village in Minden

and the Stuhr Museum in Grand Island

Both are amazing and both are just a little (less than 20 minutes) off of interstate 80

“You think it’s dead but de past ain’t stopped breathin’ yet.”

“The past is never dead. It's not even past.” William Faulkner, 1951.

“You think it’s dead but de past ain’t stopped breathin’ yet.” Zora Neale Hurston, 1934.

The past is obviously central to discussions of reparations for slavery. At the hearing on a commission to study reparations Ta-Nehisi Coates cites Ed Baptist’s The Half Has Never Been Told, claiming that 60 percent of GDP was accounted for by slave produced cotton and that the value of slaves was greater than all other assets combined. Both statements are incorrect. Baptist (and the historians who have not called him out on the errors in his book) can be blamed for the first error but not for the second.

Coates is wrong about the percentage of GDP accounted for by slave labor because Baptist is wrong.

The following section in bold is from an earlier blog post of mine.

Baptist The Half has Never Been Told (page 321-2)

“But here’s a back- of- the –envelope accounting of cotton’s role in the US economy in the era of slavery expansion. In 1836, the total amount of economic activity―the value of all the goods and services produced―in the United States was about $1.5 billion. Of this, the value of the cotton crop itself, total pounds multiplied by average price per pound―$77 million―was about 5 percent of that entire gross domestic product. This percentage might seem small, but after subsistence agriculture, cotton sales were the largest single source of value in the American economy. Even this number, however, barely begins to measure the goods and services directly generated by cotton production. The freight of cotton to Liverpool by sea, insurance and interest paid on commercial credit―all would bring the total to more than $100 million (see Table 4.1).

                Next come the second- order effects that comprised the goods and services necessary to produce cotton. There was the purchase of slaves―perhaps $40 million in 1836 alone, a year that made many memories of long marches forced on stolen people. Then there was the purchase of land, the cost of credit for such purchases, the pork and the corn bought at the river landings, the axes that the slaves used to clear land and the cloth they wore, even the luxury goods and other spending by the slaveholding families. All of that probably added up to about $100 million more.

                Third order effects, the hardest to calculate, included the money spent by millworkers and Illinois hog farmers, the wages paid to steamboat workers, and the revenues yielded by investments made with the profits of the merchants, manufacturers, and slave traders who derived some or all of their income either directly or indirectly from the southwestern fields. These third order effects would also include the dollars spent and spent again in communities where cotton related trades made a significant impact another category of these effects is the value of foreign goods imported on credit  sustained the opposite flow of cotton. All these goods and services might have added up to $200 million. Given the short term of most commercial credit in 1836, each dollar “imported” for cotton would be turned over about twice a year: $400 million. All told more than $600 million, or almost half of the economic activity in the United States in 1836, derived directly or indirectly from cotton produced by the million odd slaves― 6 percent of the total US population―who in that year toiled in labor camps on slavery’s frontier.”

Where do I begin? The approach is fundamentally flawed. Baptist begins with gross domestic product (GDP), the value of all the final goods and services produced in the country during the year. He refers to this as a measure of the total economic activity. He notes that the value of cotton production equaled about 5 % percent of GDP. No problems so far. But he then adds the cost of the inputs to the production of cotton. Anyone who has taken Principles of Macroeconomics knows that you can’t do this; it is referred to as double counting. If I buy $1000 worth of wood and then make it into a table that I sell for $1,500, we do not add $1,000 and $1,500 because the value of the wood is included in the value of the table, the final good. If he is going to engage in double counting for cotton he would need to engage in double counting for all other goods. He then adds the costs of transportation and insurance; these only count toward US GDP to the extent that they are produced by Americans. He also adds the sales of assets: land and slaves. Again, the sales of assets are not counted in GDP. GDP only counts the value of final goods and services produced during the year. Not all purchases are counted as part of GDP. Only purchases of newly produced goods and services are counted in GDP.  Comparing his calculation of economic activity related to cotton to GDP is meaningless.

There is, however, an even deeper problem with this back of the envelope accounting:

perhaps $40 million

probably added up to about $100 million

might have added up to $200 million

Baptist is simply pulling numbers out of thin air, or a hat, or wherever it is that he gets them. Back of the envelope calculations tend to involve simplifying assumptions. Baptist seems to understand the term to mean that he can just make things up. The only reference provided is to Table 4.1. Table 4.1 does not provide, as one might assume, information about shipping and insurance. It does not even have any information at all for the year 1836.

Both historians and authors of fiction tell stories, but the stories that historians tell are distinguished from fiction by their grounding in the sources. Historians are constrained to tell stories that they can support with evidence from their sources. Baptist has thrown off this constraint and set himself free to simply make up numbers (or events).

Coates is also wrong about the relative importance of wealth in slaves, but he has to take the blame for this one himself.  

Baptist did present estimates of the value of slaves as a percentage of total wealth. Olmstead and Rhode have criticized these estimates. They point out that the estimates suffer from the inaccurate citations that are typical of Baptist’s work and suggest that the slaves accounted for about 14.1 percent of wealth not the 1/5^th that Baptist suggested. Baptist’s wealth estimates Table 7.1, however, are not outrageous in the way his claim about production is. 

In fact they are pretty much the same as the estimates presented in Table 4 from Measuring Slavery in 2016 Dollars by Samuel H. Williamson and Louis P. Cain (based upon work by Gavin Wright). The value of slaves equaled about 18% of total wealth. The majority of wealth was in the North, not the South, and slaves did not account for the majority of wealth even in the South. Coates stated about wealth was probably based on the frequently stated claim that the value of slaves exceeded the value of railroads and factories. That claim is true, but it is misleading because the United States was still primarily and agricultural economy. A relatively small portion of wealth was in manufacturing and railroads.

Coates history was accurate in emphasizing that the story did not end with the end of slavery. It is bad enough to deprive generations of people of the opportunity to create and pass on their wealth, but the descendants of slaves were systematically, murdered, robbed, and deprived of basic civil rights. I live in Fredericksburg, Virginia; I am 56 years old, and segregated schools here only ended during my lifetime. It was 1968 before an African American, Venus R. Jones, graduated from the public college that I teach at. Numerous studies continue to document that African Americans are discriminated against in courts, by bankruptcy attorneys, by employers, etc. The past keeps breathin'.

Finally, I will note that economists, especially economic historians have been working on estimates of the value of reparations for quite a while. The overall, approach tends to be similar to the role that economists sometimes play in legal cases estimating the extent of damages. The focus is usually on lost wages. If you are thinking that is a relatively limited view of the cost of being enslaved, well, yes. In any case, here is a recent paper by the political scientist Thomas Craemer that refers to some of the earlier literature, describes the difficulties associated with estimating the loss to African Americans during slavery, and estimates how those losses should be valued now.

My current inclination would lean more toward focusing on the current disparities in wealth, which can be though of as summing the effects of slavery and its aftermath.

Gavin Wright on Slavery and Anglo-American Capitalism

Gavin Wright's Tawney Lecture  Slavery and Anglo-American Capitalism Revisited is now available

Public Goods, Private Roads, and the Case of Scandinavia

In We Can Build the Roads, and Other Things Too Mike Munger argues that roads are not public goods and that the examples of Sweden and Finland support this argument. I think there are a few problems with this argument.

One problem arises from the way we tend to explain public goods in economics. We tell students that they are non-rival and non-excludable. Rival means that one person’s use of a good diminishes the benefit for other users: if you drink my coffee that will diminish the benefit that I get from it. Excludable means that it is possible to exclude other people from using a good at a reasonable cost. In fact, I generally do not have any problem keeping people for drinking my coffee. The most common example of a public good is national defense. The benefit you get from us not being invaded by North Korea does not diminish the benefit I get from it, and it would be very difficult to exclude either of us from those benefits. The problem with public goods is that because people can get the benefit without paying, they will tend to free ride, and the good will be underprovided. Munger points out that that roads are often rival and people can be excluded. Interstate 95, which runs through Fredericksburg, is a good example. Heavy traffic makes it rival more often than not, and we have new toll lanes that you have to pay to use.

Munger notes that what most people think of as public goods, things like roads and public education, are not “pure public goods.” But it is not unreasonable for people to think of many of these things as “public goods,” in the sense of things that the state may have a role in providing, even if they are not “pure” public goods. Rivalry and excludability are matters of degree, and to the extent that something has the characteristics of non-rivalry and non-excludability positive externalities tend to exist. While I may be able to exclude you from direct access to the good, I can’t completely prevent you from getting some of the benefits. When the fire department puts out the fire in my house, you are better off because it won’t spread to yours. Yes, I can exclude people from a school and after a point it becomes rival, but if someone does get an education, I can’t exclude other people from benefiting from that as well. I can exclude people from getting flu shots, but I can’t exclude them from the benefits of others getting the shot. What people tend to think of as public goods are goods that many people believe to have significant positive externalities. Standard economic theory tells us that the market equilibrium will tend to underprovide goods with positive externalities, and that government action (or possibly some other sort of cooperative action) might be able to move society to a point where the marginal benefit to society and the marginal cost to society are closer to being equated. Just because you can have a private road, or a private school, or private security does not prove that there are not benefits to public provision of education, and roads, and police.

Not only are rivalry and excludability matters of degree, they are not necessarily the same in all situations. A road is a piece of land that can be used by some sort of traffic. Merely being a road does not make something inherently public or private. The question “Are roads public goods?’ doesn’t really make sense.  If I owned a ranch in Wyoming and built a road on that ranch, nothing about that road would make it a public good. Similarly, if I build a road in a new housing development that only connects to one public road way there are unlikely to be benefits to people who do not live there and excluding people is unlikely to be an issue. On the other hand, the street that I live on in downtown Fredericksburg is non-rival most of the time and it is hard to imagine any scheme for excluding people that would be worth the cost. Personally, I am perfectly happy paying my taxes and not having to participate in its management.

The broader point about economics here is that we shouldn’t think of economic models as a bunch of bins to sort things into: “This goes into public goods. That goes in common property.” Or “This market goes in perfect competition; that one goes in monopoly.” Instead, the models help us to understand the influence of things like rivalry, excludability, product differentiation, and barriers to entry. All of which are matters of degree, not simply yes or no.

What about the examples of Sweden and Finland? Munger suggests that they support his argument that roads are not public goods:

A recent report from the Devoe L. Moore Center gives this description:

Two-thirds of roads in Sweden are privately operated and managed by local Private Road Associations (PRAs). These road associations are composed of homeowners who live along private roads. An estimated 140,000 kilometers (about 87,000 miles) of roads are the responsibility of 60,000 PRAs…. The costs of upkeep are divided among members of the association. PRAs that do not accept government subsidies can prohibit traffic at their discretion. Those that receive subsidies must allow all vehicles to travel on their roads.

Private ownership by PRAs has proven to be a cost-effective measure for operating roads according to the the Swedish government. In 2001, a government-commissioned evaluation found PRAs could run their roads at about half the cost as for the national.

Finland employs a similar system. Many private roads are managed by local cooperatives. Finland has 78,000 kilometers (about 48,500 miles) of public roads and 280,000 kilometers (about 174,000 miles) of private roads. Of the 5 million people who live in Finland, around 700,000 of them reside near a private road. Like Swedish PRAs, Finnish cooperatives are made up of homeowners who live proximate to private roads. These homeowners collectively maintain their local roads and are eligible to receive subsidies from the federal government to cover a portion of their expenses.

There are two lessons here, and both are important.

First, many of the things we expect from the state are not public goods. They could be more efficiently and effectively handled by other kinds of cooperation.

Second, roads in particular are emphatically not public goods, and many other nations have solved the problems of road use and financing by decentralizing provision and control. For some reason, the U.S. has allowed itself to become a socialized road system, with no sense of any local ability to improve roads, fix potholes, or cooperate with your neighbors. With available technology, and with the even better technology now being developed, roads can be operated locally and voluntarily. And that’s actually true for many activities we now simply assume are restricted to the state. Some creative rethinking can put us on the road to a better tomorrow.

This description makes the private roads in Sweden and Finland sound very important, and it seems to imply that we don’t have private roads in the United States.

Private roads in Sweden and Finland account for a lot of miles but very little traffic. This is from a paper by Sven Ivarsson, vice chairman of the Board of the National Federation for Private Road Associations in Sweden, and Christina Malmberg Calvo, the World Bank.

“The Swedish road network measures 419,000 kilometers (see Table 1). The Swedish National Road Administration (SNRA) manages one quarter of the network (98,000 kilometers), and the municipalities 10 percent (38,000 kilometers). The remaining two thirds (283,000 kilometers) are privately owned and managed roads. The SNRA roads carry 70 percent of the traffic, the municipal roads 26 percent of the traffic, and the private roads the remaining 4 percent of the traffic. While the private roads arguably constitute a low volume network, some serve vacation home areas and about 50 percent are forest roads mainly opened for commercial purposes, about one third of the private roads carry more than 100 vehicles per day, including some up to a 1,000 vehicles per day throughout the year. This paper focuses principally on the 50 percent of the private road network which is owned and managed by communities, half of which receive state subsidies.”

The situation is similar in Finland. In the 1990s,

“Finland has a surface area of 338 000 km2 and 5 million inhabitants. The road system includes 105 000 km of private roads in residential areas, 77 000 km of public roads maintained by the Finnish National Road Administration (FinnRA), and 23 000 km of city streets and municipal roads maintained by local authorities. Traffic volume on private roads is approximately 1000 million km per year, which is 2.5 percent of the total traffic volume in Finland.” Tiina Korte Also like Sweden many of the roads are through forests, and about 70% of lumber starts on private roads.

Private roads carry 4% of traffic in Sweden and 2.5% in Finland. I don’t know what percentage private roads carry in the United States. That’s right, there are private roads in the United States. As a matter of fact, there have pretty much always been private roads in the United States. Private roads were very important in early America. A lot of research has been done on such roads by people like John Majewski, Dan Klein and Daniel Bogart (see here for instance). There are still many private roads.  If you have spent any time in rural areas, you have probably come across signs on roads that say “Private Property. No Trespassing.” Private roads run to some rural homes, and across private forests, farms and ranches. Here is a template for a private road agreement provided by Orange County, VA.  The agreement provides for a group of people to privately provide for a road.

Points 4 through 7 are interesting

(4)   No public responsibility. Said construction and maintenance is under no circumstances a responsibility of the County, Virginia Department of Transportation (VDOT), the Commonwealth Transportation Board, or any other public entity.

(5)   Emergency services. It is understood that failure of the owners to adequately maintain the Roadway may inhibit the ability of the County to provide emergency services to the parcels, any liability for which shall be borne among the owners.

(6)   School bus service. The provision of Orange County public school bus services on this private road are not guaranteed or implied.  The suitability for any private road for school bus services and routes shall remain at the discretion of the Orange County School Board.

(7)   Liability. It is understood that the County and its agents shall not be liable or responsible in any manner to the developer or the property owners along the road, or to their contractors, subcontractors, agents, or any other person, firm or corporation, for any debt, claim, demand, damages, action or causes of action of any kind or character arising out of or by reason of the activities or improvements being required herein.  It shall not be eligible for acceptance into the State Secondary System of State Highways for maintenance until such time as it is constructed and otherwise complies with all requirements of the Virginia Department of Transportation for the addition of subdivision roads current at the time of such request.  Any costs required to cause this road to become eligible for addition to the State system shall be provided from funds other than those administered by the Virginia Department of Transportation and by Orange County.

The difference between the Scandinavian examples and the U.S example is that Orange County is telling people who want a private road not to expect anything from the government. People in Sweden and Finland, on the other hand, appear to believe that there are positive externalities associated with maintaining the population even in remote parts of the country, and, therefore, subsidize low volume private roads in those parts of the country.