Best Books 2021

I read 23 books in 2021, but none that were written in 2021. Tim Ferriss stopped reading new books deliberately but for me it just happened, something about this year made me want to hang out in the ancient world instead.

I read about how five thousand years ago the Indo-Europeans figured out how to ride horses and use wheels, and so ended up spreading their language to half the world. I read about the Bronze Age Collapse three thousand years ago. Also set three thousand years ago are the semi-mythical events of the Aeneid and the Odyssey; I particularly enjoyed Emily Wilson’s new translation of the latter. From two thousand years ago, Caesar’s Commentaries reads like an action-packed fantasy novel but gives real insight into history and strategy. It was also a good year to go back to the Biblical events of two to three thousand years ago, though I didn’t make it cover to cover.

The one book about the modern world I gave 5 stars in 2021 was The Dictator’s Handbook: Why Bad Behavior Is Almost Always Good Politics. The short version of my review is that it’s secretly a development economics book:

Bueno de Mesquita, author of The Dictator’s Handbook, is a political scientist but his analysis is very much economic, in both the methods (rational choice & methodological individualism) and in the focus on material incentives as the main driver of behavior. The book is good as a manual for aspiring tyrants, but suprisingly great as an explanation for why many poor countries stay poor.

So overall compared to 2020 I don’t have many good books to share, apart from things like The Odyssey that you presumably already know about. The best new writing in 2021 probably isn’t happening in books at all, but in Substacks. Many bloggers switched to the Substack blogging/newsletter platform last year because it makes it easy to monetize their writing, while many professional journalists switched over as a way to keep being paid to write while enjoying near-complete editorial freedom. I recommend Byrne Hobart on finance and business strategy, and Razib Khan on history and genomics. Probably my favorite writing of 2021 was the return of Scott Alexander to blogging, now at Substack as Astral Codex Ten. He is also a great demonstration of just how much the monetization game has changed, as less than a year into the new Substack he is making enough money to start giving large amounts of it away.

2021: Our Most Popular Posts

While the blog got its start with Joy Buchanan in mid-2020, we are now just finishing up our first full year and now have a full weekly slate of bloggers. This seems like a good opportunity to reflect on our most popular posts from each of our regular bloggers. We hope you enjoy looking back at these popular posts.

Monday: Mike Makowsky

Makowsky‘s most popular post was from May 2021, titled “Academic Publishing: How I think we got here.” This post generated a significant amount of discussion on Twitter among economists and other academics, and is the second most widely read post on this blog with almost 10,000 views. Makowsky outlined the history and incentives of “how we got here” in terms of the problems with academic publishing, and he is skeptical that there is any easy fix. It seems there is nothing economists love arguing about more than our profession itself. (Follow Makowsky on Twitter)

Tuesday: Scott Buchanan

Scott Buchanan‘s most popular post is “Money as a Social Construct” is from September 2020. It discusses the very basic definition of what we mean by money, and the importance of social trust for both the functioning of money and general social order. The related theme of cryptocurrencies is something he has written a lot about in the last few months of 2020. (He is not yet on Twitter!)

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If Tyler is talking about a new variant…

For some Americans, this Thanksgiving was the first holiday that felt normal in a long time. Being re-united, without Covid restrictions, is something to celebrate.

On the other hand, a new coronavirus variant was just discovered in South Africa. It’s scary enough that travel bans might be imposed. We have all (just about) learned to live with the original strain from Wuhan, but scientists want time to figure out how dangerous and infectious this new strain is. Maybe at this point people are tired of being lectured about risks. No matter how much or little a person sacrificed for Covid-19, they might feel like that storyline has become too boring to deserve any more of our attention. We cannot stop looking out for new variants that might force us to put cherished traditions on hold again. Coronaviruses kill. My advice is to keep following news from Tyler Cowen, Alex Tabarrok, and Emily Oster.

Oster has been consistently reasonable about family and health risks. She argued to open schools and essentially said that you can see grandparents if the risk is small enough (even though the risks are never zero). As I said before, another trustworthy source of information throughout the pandemic has been Tyler and Alex, who put up almost all of their material in real time at Marginal Revolution.

I’ll share something a friend wrote to me today:

Although [his wife’s name]’s chemo treatment continues to show good long-term signs, this morning we discovered that [she] tested positive for COVID. That’s bad news, the good news is that [she] is already getting the antibody treatment and some extra fluids at the hospital as I write this.

“The antibody treatment” did not exist when the first Covid-19 waves swept through New York with such devastating consequences.

If the newest strain turns out to be a serious development, then in many ways we are better prepared to deal with it than we were before. We probably will blow through the red tape on at-home rapid tests faster the next time around (I’m such an optimist!). We already have contact tracing apps that protect privacy. Vaccine scheduling software is already in place. Everyone has masks at home.

The biggest difficulty I foresee is not coming up with scientific solutions but agreeing as a society about which tools to use. Some people might (will) not even believe the new strain is real.

EWED was started right at the moment when Marginal Revolution commentary on Covid seemed the most crucial. So, sometimes I will do little more here than keep up the echo. Do tweets, phone calls, letters, blogs, or talk about Covid around the Thanksgiving table. Don’t give up.

It’s now clear, whether or not the news out of South Africa turns out to be serious, that we are living with a new problem that will last a long time. It’s a marathon, not a sprint.

If you ever read much of the New Testament, you’ll see a theme in the letters of Paul to cities he has visited. The brand-new churches were doing well, while he was with them in person. Then time goes by and the community or doctrine starts to fray.

Paul wrote these words to the church in Galatia, more than a year after he had visited them:

Let us not become weary in doing good, for at the proper time we will reap a harvest if we do not give up. 

Galatians 6:9
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Calling Behavioral Economics a Fad

Josh Hendrickson and Brian Albrecht have a Substack called Economic Forces that is a source of economics news and examples. We have linked to EF before at EWED.

Albrecht just published an op-ed titled “Behavioral Economics Is Fine. Just Keep It Away from Our Kids”. I’ll to respond to this, just as I responded to that other blog. I think the group of people who are pitting themselves against “behavioral economics” is small. They might even think of themselves as a minority embattled against the mainstream. So, why bother responding? That’s what blogs are good for.

I agree with Albrecht’s main point. The first thing an undergraduate should learn in economics classes is the classic theory of supply and demand. Even in its simplest form, the idea that demand curves slope down and supply curves slope up is powerful and important.*

Albrecht points out that there are some results that have been published in the behavioral economics literature that turned out not to replicate or, in the recent case of Dan Ariely, might be fraudulent. Then he makes a jump from there by calling the behavioral field of inquiry a “fad”. That’s not accurate. (See Scott Alexander on Ariely and related complaints.)

In his op-ed, Albrecht names the asset bubble as a faddish behavioral idea. Vernon Smith (with Suchanek and Williams) published “Bubbles, Crashes and Endogenous Expectations in Experimental Spot Asset Markets” in Econometrica in 1988. Bubbles have been replicated all around the world many times.  There is no doubt in anyone’s mind that the “dot com” bubble had an element of speculation that became irrational at a certain point. This is not a niche topic or a very rare occurrence. Bubbles are observed in the lab and out in the naturally occurring economy.

Should we start undergrads on bubbles before explaining the normal function of capital markets? No. Lots of people think that stock markets generally work well, communicate reliable information, and should be allowed to function with minimal regulation.  Behavioral Finance is usually right where it should be in the college curriculum, which is to be offered as an upper-division elective class for finance and economics majors. I am not going to do research on this, but I looked up courses at Cornell, and there it is: Behavioral Economics is one of many advanced elective classes offered for economics students. I don’t know how they teach ECON101 at Cornell, but it would seem like they are binning most of the behavioral content into later optional courses.

In a social media exchange, Albrecht pointed me to one of the posts by Hendrickson on how they handle the situations where it seems like economic forces are not explaining everything. Currently, for example, it seems like the labor market is not clearing right now because firms want to hire but wages are not rising. The quantity supplied seems lower than the quantity demanded at the market wage. Hendrickson claims that this market condition is temporary. He says that firms are cleverly paying bonuses to attract workers so that they won’t have to lower wages in the future when conditions return to normal post-Covid. This would be a perfect time to discuss downward nominal wage rigidity, a pervasive behavioral phenomenon.** It has been studied extensively in lab settings. Nominal wage rigidity has implications for monetary policy. Wage rigidity might be a “temporary” thing, but it helps to explain unemployment. Some of the research done by behavioral economists in this area follow the Akerlof 1982 paper on the gift exchange model. It was published 40 years ago by a Nobel prize winner and cited extensively.*** The seminal lab study of that theory is Fehr et al. 1993. There have been hundreds of replications of the main result that people will trade out of equilibrium due to positive reciprocity.

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Behavioral Economist at Work

A blog post titled “The Death of Behavioral Economics” went viral this summer. The clickbait headline was widely shared. After Scott Alexander debunked it point-by-point on Astral Codex Ten, no one corrected their previous tweets. I recommend Scott’s blog for the technical stuff. For example, there is an important distinction between saying that loss aversion does not exist versus saying that its underlying cause is the Endowment Effect.

The author of the original death post, Hreha, is angry. Here’s how he describes his experience with behavioral economics.

I’ve run studies looking at its impact in the real world—especially in marketing campaigns.

If you read anything about this body of research, you’ll get the idea that losses are such powerful motivators that they’ll turn otherwise uninterested customers into enthusiastic purchasers.

The truth of the matter is that losses and benefits are equally effective in driving conversion. In fact, in many circumstances, losses are actually *worse* at driving results.

Why?

Because loss-focused messaging often comes across as gimmicky and spammy. It makes you, the advertiser, look desperate. It makes you seem untrustworthy, and trust is the foundation of sales, conversion, and retention.

He’s trying to sell things. I wade through ads every day and, to mix metaphors, beat them off like mosquitoes. Knowing how I feel about sales pitches, I don’t envy Hreha’s position.

I don’t know Hreha. From reading his blog post, I get the impression that he believes he was promised certain big returns by economists. He tried some interventions in a business setting and did not get his desired results or did not make as much money as he was expecting.

According to him, he seeks to turn people into “enthusiastic purchasers” by exploiting loss aversion. What would consumers be losing, if you are trying to sell them something new? I’m not in marketing research so I should probably just not try to comment on those specifics. Now, Hreha claims that all behavioral studies are misleading or useless.

The failure to replicate some results is a big deal, for economics and for psychology. I have seen changes within the experimental community and standards have gotten tougher as a result. If scientists knowingly lied about their results or exaggerated their effect sizes, then they have seriously hurt people like Hreha and me. I am angry at a particular pair of researchers who I will not name. I read their paper and designed an extension of it as a graduate student. I put months of my life into this project and risked a good amount of my meager research budget. It didn’t work for me. I thought I knew what was going to happen in the lab, but I was wrong. Those authors should have written a disclaimer into their paper, as follows:

Disclaimer: Remember, most things don’t work.

I didn’t conclude that all of behavioral research is misleading and that all future studies are pointless. I refined my design by getting rid of what those folks had used and eventually I did get a meaningful paper written and published. This process of iteration is a big part of the practice of science.

The fact that you can’t predict what will happen in a controlled setting seems like a bad reason to abandon behavioral economics. It all got started because theories were put to the test and they failed. We can’t just retreat and say that theories shouldn’t get tested anymore.

I remember meeting a professor at a conference who told me that he doesn’t believe in experimental economics. He had tried an experiment once and it hadn’t turned out the way he wanted. He tried once. His failure to predict what happened should have piqued his curiosity!

There is a difference between behavioral economics and experimental economics. I recommend Vernon Smith’s whole book on that topic, which I quoted from yesterday, for those interested.

The reason we run experiments is that you don’t know what will happen until you try. The good justification for shutting down behavioral studies is if we get so good at predicting what interventions will work that the new data ceases to be informative.

Or, what if you think nudges are not working because people are highly sensible and rational? That would also imply that we can predict what they are going to do, at least in simple situations. So, again, the fact that we are not good at predicting what people are going to do is not a reason to stop the studies.

I posted last week about how economists use the word “behavioral” in conversation. Yesterday, I shared a stinging critique of the behavioral scientist community written by the world’s leading experimental researcher long before the clickbait blog.

Today, I will share a behavioral economics success story. There are lots of papers I could point to. I’m going to use one of my own, so that readers could truly ask me anything it. My paper is called “My reference point, not yours”.

I started with a prediction based on previous behavioral literature. My design depended on the fact that in the first stage of the experiment, people would not maximize expected value. You never know until you run the experiment, but I was pretty confident that the behavioral economics literature was a reliable guide.

Some subjects started the experiment with an endowment of $6. Then they could invest to have an equal chance of either doubling their money (earn $12) or getting $1. To maximize expected value, they should take that gamble. Most people would rather hold on to their endowment of $6 than risk experiencing a loss. It’s just $5. Why should the prospect of losing $5 blind them to the expected value calculation? Because most humans exhibit loss aversion.

I was relying on this pattern of behavior in stage 1 of the experiment for the test to be possible in stage 2. The main topic of the paper is whether people can predict what others will do. High endowment people fail to invest in stage 1, so then they predict that most other participants failed to invest. The high endowment people failed to incorporate easily available information about the other participants, which is that starting endowments {1,2,3,4,5,6} were randomly assigned and uniformly distributed. The effect size was large, even when I added in a quiz to test their knowledge that starting endowments are uniformly distributed.

Here’s a chart of my main results.

Investing always maximizes expected value, for everyone. The $1 endowment people think that only a quarter of the other participants fail to invest. The $6 endowment people predict that more than half of other participants fail to invest.

Does this help Mr. Hreha get Americans to buy more stuff at Walmart, for whom he consults? I’m not sure. Sorry.

My results do not directly imply that we need more government interventions or nudge units. One could argue instead that what we need is market competition to help people navigate a complex world. The information contained in prices helps us figure out what strangers want, so we don’t have to try to predict their behavior at all.

Here’s the end of my Conclusion

One way to interpret the results of this experiment is that putting yourself in someone else’s shoes is costly. We often speak of it as a moral obligation, especially to consider the plight of those who are worse off than ourselves. Not only do people usually decline to do this for moral reasons, they fail to do it for money. Additionally, this experiment shows that, if people are prompted to think about a specific past experience that someone else had, then mutual understanding is easier to establish.

I’m attempting to establish general purpose laws of behavior. I’ll end with a quote from Scott Alexander’s reply post.

A thoughtful doctor who tailors treatment to a particular patient sounds better (and is better) than one who says “Depression? Take this one all-purpose depression treatment which is the first thing I saw when I typed ‘depression’ into UpToDate”. But you still need medical journals. Having some idea of general-purpose laws is what gives the people making creative solutions something to build upon.

Behavioral Economics Conversation: Cutler and Glaeser

I haven’t written a formal response, yet, to the “behavioral economics is dead” claim going around Twitter. I’m too busy doing my referee reports on behavioral papers to write in depth about why behavioral is not dead. Incidentally, I’m not loving the most recent paper I was sent, so maybe that’s a point in the column of Team Death. I’ll write a few posts intersecting with the arguments being had.

First, I’ll point out two places in a CWT discussion of health and cities where the phrase “behavioral” was used. This is obviously a current conversation. David Cutler probably wouldn’t say that behavioral economics is his field, but here’s how he describes puzzles in decision making over health issues. (bold emphasis mine)

Everything that we know in healthcare is that people have difficulty choosing on the basis of price and quality. It goes back a little bit to some of the behavioral issues that we were talking about, but I think it’s slightly different. If you go to the doctor, and the doctor says you should take medication X, and you go to the pharmacy, and the pharmacy says that’ll be $30, a fair number of people will walk away and say, “I don’t have $30.”

What we would hope they would do is go to their doctor and say, “Doctor, is there any way that there could be a cheaper medicine that might work because $30 is hard for me this month?” In practice, people are extremely uncomfortable doing that. They really don’t like to go to their doctor and say, “Doctor, how do I trade off the money here versus the medicine?”

David Cutler

The previous issues Cutler mentioned had to do with time preference and delayed gratification. The turmoil over dieting alone is evidence that people don’t always make the best decisions.

Here’s the second of two appearances of the word “behavioral”, in response to Tyler’s question about how to make cities healthier.

I certainly join the crowd of economists who have argued that congestion pricing is the best way to deal with urban traffic jams. There’s no reason not to charge people for the social cost of their actions on that. And giving away street space for free is just crazy, especially since we now have technologies that can handle this.

And if we introduce autonomous vehicles without congestion pricing, you have just lowered the cost of sitting in traffic, which means the first-order behavioral response is that more people will sit in traffic, and our congestion will get even worse unless we introduce this from the beginning. So I think pricing is really good.

Ed Glaeser

In the second use of the word, it sounds like an individually-rational decision to sit in your autonomous vehicle and read blogs until your arrive at your destination. Maybe we can use mechanism design to reduce traffic congestion and improve life for all.

Whether or not you think behavioral economics is dead, economists are going to keep using the word “behavioral” for a long time.

I did a quick Ngram to get a sense of how common the word is, although this does not restrict the search to books about economics. Ngrams are easier to interpret if there is a comparison word. I choose the word “clustering” because it’s also a relatively new technical term. Both words were quite rare before 1930.

If you missed the small discussion about behavioral econ, Mike Munger did a link round-up here. Tomorrow’s post will be Vernon Smith’s view of behavioral economics.

One Year of EWED Blogging

We would like to thank the readers and subscribers who have joined us since we started blogging in August of 2020. This has been a great experience. Special thanks to people who have linked to us. Most of our web traffic comes from the United States, but I am pleased to report that we receive visitors from almost every nation in the world.

We believe that the world is better when people keep learning. Reading and writing blogs is a good way to learn. All of the EWED writers have benefitted from reading other blogs. We want to put new facts and analysis into the pool.

Our three most-viewed posts so far for the year 2021 are

  1. Academic Publishing: How I think we got here by Mike Makowsky
  2. Coase and COVID by Jeremy Horpedahl
  3. GDP Growth in 2020 by Jeremy Horpedahl

Looking back to 2020, the most-viewed post was my Complacency and American Girl Dolls.

In winter of 2021 we got some new graphics, like the one below. The importance of the shipping container cannot be understated, for economic growth and trade. Every blog post individually is like one box, not very important on its own, a piece of the essential human discourse.

I see blogging as a complement to both research articles and Twitter. Blogs get published much faster than journal articles and they allow more depth than tweets. By writing a new post every day we stay accountable both to ourselves and to our readers.

The various EWED writers represent a range of opinions, but we all agree that blogging is a way to make “small steps toward a much better world”.

Informational Diabetes

We all recognize that in the Internet Age, it is easy to communicate and to access information.

For the infovores, this is a cause for celebration.

Others worry that this leads to “information overload”, and to the spread of “disinformation” and “misinformation”. While this is clearly true, complaints about it typically seem to come from elites longing for the days when they had the only microphone, before the Revolt of the Public. Its hard to banish “misinformation” without screening out differences of opinion and correct contrarians even if you want to- and for some, such “collateral damage” would in fact be the main goal. But clearly something is wrong with the current information environment.

In a recent podcast appearance, Balaji Srinivasan used a metaphor I like better- Informational Diabetes:

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Learning is FUNdamental

Two items came across my radar this week that were absolutely not boring and also got me thinking. Up front, the links are Alexander the Grate on CWT and a guest Slow Boring on Chad.

Something that stood out to me about the two sources above are that the entertainment aspect made more people push through to the end and learn as a result. Right now, after my kids are asleep, I’m splitting my time between reading The Property Species and watching The Good Place on Netflix. The Property Species is really good, but it’s not catnip for my brain like The Good Place.

My son was home for most of the past week, so one of the things I forced him to do was read out loud. He needs to learn to read, and I know reading simple books out loud is good for him. It was clear that he would have chosen a painful burn over learning in this way.

Alexander the Grate is homeless, but I learned that he prefers the term No Fixed Address (NFA). He and Tyler discuss what it is like to live in DC as a homeless person. Policy is mixed in with interesting stories.

Matt Y’s guest on Slow Boring, Jeff Maurer, delivers information on Chad. As he points out, 16 million people live in Chad, so we should educate ourselves about the political situation and how our own policies would affect the fate of the citizens. He, the self-proclaimed Lady Gaga of Chad, is irreverent for a cause.

CEA on Inflation Today and WWII

This week the Biden Council of Economic Advisers blogged about “Historical Parallels to Today’s Inflationary Episode”.

Consumer demand in 2021 is roaring back after pandemic shutdowns. Demand for airline travel is exceeding expectations. Car dealer lots are empty.

The authors argue that, of all the periods of rapid inflation in American history, the boom after WWII has the most parallels to today.

During WWII, Americans were obviously in war mode. Price controls and supply shortages led to deprivation on the Homefront. Families had trouble buying cars, just like today.

Instead of focusing on consumer or industrial durable goods, manufacturing capabilities were concentrated on military production. Today’s shortage of durable goods is similar—a national crisis necessitated disrupting normal production processes. Instead of redirecting resources to support a war effort, however, manufacturing capabilities were temporarily shut down or reduced to avoid COVID contagion.

Remember when oil had a negative price in 2020? While people in the US were staying home, many were building up personal savings. As soon as the “war” ends, consumers compete as buyers and drive up the prices of the limited available goods.

They present the post-war inflationary episode as dramatic but temporary, because it only lasted for two years. It’s short compared to inflation of the late ‘70’s. They are standing behind the Powell “transitory” story, in their conclusion.

On the other hand, they say that the most comparable moment in history to today involved the price level spiking 20% and taking two years to come down. I’m pondering a very expensive repair on our car, just make sure I don’t have to buy a new one soon.