Links, April 14th

William Easterley reviews False Economy: A Surprising Economic History of the World By Alan Beattie. Excerpts:
"Looking in hindsight, one can emphasise the favourable factors, minimise the unfavourable factors and produce a plausible explanation. Sometimes these explanations will be orthodox economics 101 (free trade worked!); other times they will be heterodox (government industrial policy worked!). But these “explanations” cannot really be proved or disproved; each particular bout of success or failure is special. Ultimately, they give little guidance – to other countries, or even to the same country in a future period.

Economics has a better track record explaining very long run patterns of success or failure – explaining the level of development (per capita income) more than the economic growth rate. This requires economists to swallow our professional pride and admit that many fluctuations around very long run paths are indeed surprising – they will always resist explanation or prediction.

Even the long run patterns don’t explain everything; any prescription has counter- examples. We must give up the search for the grand unified theory of short run and long run growth and development, a bitter pill indeed. But at least this would keep us from chasing the ephemeral “miracles” for their unstable “lessons”, and keep us from trying to squeeze a prescription out of every last counter-example. Instead, we’d stick with ideas that, on average, for most countries, have stood the test of time."

Mark Thoma discusses Tim Hartford's views on macroeconomics in Macroeconomic Meltdown? and Willem Buiter's views in"The Unfortunate Uselessness of Most 'State of the Art' Academic Monetary Economics".
Thoma's comment from the first discussion:
"We do not have either the theoretical models or the empirical evidence we need to understand this episode thoroughly and completely, and to provide the policy advice that will cure the problem with any degree of certainty. Without solid theoretical models and the associated empirical evidence, we really have no choice but to fall back upon older models that were "built to answer the questions that are important at the moment," i.e. the old-fashioned Keynesian model, and to rely upon loose, but solid theoretical principles rather than a tightly constructed model and vast amounts of empirical evidence. It's quite understandable that economists who have been striving to push the profession in a positive, scientific, solidly theoretical and evidence based direction would resist going backward, and resist strongly, but what choice do we have? Until we have a better mousetrap, the simple, old fashioned one will have to suffice."

Alladi Sudhir Venkatesh profiled in The Other Cicago School (via Freakonomics Blog. Excerpt:
"The underground economy includes a vast array of people providing services that are off the books but otherwise legal. Venkatesh enumerates those having a harder time in the face of the recession: office cleaners, squeegee men, informal security guards, "canners" who scavenge for recyclables (there's less consumption now, so less to recycle) and nannies whose employers have been laid off. And as business contracts, underground workers face certain problems unique to their status. They have no unemployment insurance or other benefits, and, with little protection from law enforcement, they tend to resolve disputes by physical means.

Venkatesh prefers to leave detailed prescriptions to policymakers but nevertheless ventures a few. Microcredit loans, as well as education on risk management and planning, could help shift some black market entrepreneurial zeal above ground. He heartily approves of the proposal by Barack Obama--a fellow pickup basketball player at the University of Chicago when Venkatesh studied there--to expand the Earned Income Tax Credit to give a bigger break to low-income parents. Sales taxes also hit the poor hard, he says; one way to help would be to let them use prepaid cards to buy goods tax free.

Venkatesh is struck by how much the black market resembles the wider society in which it is enmeshed."

Interview with Michael Perelman in 'Politics and Culture'. Excerpt:
"In 1866, British industry could not get cotton from the Confederate states because of the American Civil War. Britain turned to it’s Indian colony for cotton, restricting rice cultivation and causing the infamous famine of 1866. Karl Marx reported that this famine cost the lives of a million people in the district of Orissa alone—a more extreme version of the recent food crisis resulting from the destructive biofuels movement I mentioned earlier. Similarly, when the potato famine hit Ireland in the 1840s, the country’s agriculture was largely geared to exporting crops to England. Local poor people relied on potatoes. When the British finally got around to sending relief, they sent wheat, but the people had no facilities for baking.

In my book, The Invention of Capitalism, I tried to show how British economists and the powerful economic and political forces that they represented went to great lengths to figure out how to make people dependent on purchased food by making it impossible for them to produce for themselves."