The Review of Keynesian Economics just last month published a paper I wrote with Lance Taylor, Armon Rezai, Laura Carvalho and Nelson Barbosa. At the moment the paper is open-access (link). These results were put together a couple of years ago with the main features being (a) The US economy functions as a transfer union and (b) The disparities in income are too huge to be overcome by feasible tax-transfer policies.
In the construction of data, we developed a dis-aggregated social accounting matrix model which bins household incomes into percentiles of the income distribution and makes estimates of consumption/saving based on logarithmic interpolation.
I just came across Noah Smith’s post on Mirowski’s social physics thesis (this is the second I believe) where Smith tries to address concerns raised by Mirowski on the ‘casual nature’ of the blog-writer’s understanding of physics envy.
To start with, I quote Noah Smith – “…For more specifics on exactly how ideas crossed from physics to econ, and on which of those ideas remain to this day, one should probably check out Mirowski’s book(though I hope it’s written in a different tone than this interview) …”
The last sentence in bold tells me that Noah Smith has not really read Philip Mirowski, till date, and so probably does not really do justice to one of the best historians of economics in the profession today. I suggest Mr Smith, who often brings out important issues about the discipline with great clarity, take the time to read a brief summary of More Heat Than Light here.
Getting back to the point now, I think Noah Smith is inaccurate on how he is approaching the issue and this is deeply related to ‘citing without reading’…..Yes a lot of this has to do with appropriation of mathematical methods and constrained optimization but the point that Mirowski tried to make is the path dependency of historical events such as the ousting of pre-neoclassical economics from the British scientific academy in the 1870s which perhaps ignited the movement towards scientific legitimacy by constrained optimization in the first place. This is followed by a series of coupling-decoupling episodes because having adopted a methodology which was itself losing credibility in its native profession, it was (in econspeak) less ‘costly’ to continue to mathematize and re-engineer the mode of analysis in existence rather than completely detach from the energetics analogy – a reminder that it isn’t just methods like calculus of variations (there’s also addition and subtraction!) which Mr Smith mentions but in fact the resemblance between entropy maximization and utility maximization. I don’t want to go in detail about the Cowles financing and the migration of physicists into economics after the 1930s depression….
As long as the concept of utility remains in our micro-foundations or as the payoff to action sets (yes game theory too — and ironically, Smith quotes the physicist Von Neumann in his post), we retain that legacy which originated in almost QWERTY like events back in the day. I don’t really have an opinion on whether this is good or bad right now. The real positive to takeaway is that regardless of physics envy, the literature on the history of economics is perhaps better than work on the history of physics. To add one more arrow to the economists’ quiver, lets not forget how the sciences drew inspiration from double-entry book keeping in the first place.
On whether physics envy is relevant today, yes economists make more money and don’t want to be physicists necessarily but the profession as a whole is surely starting to move towards publishing in the ‘style’ of the natural sciences – shorter papers, less technical stuff in the body (online appendices ahoy), team and lab models or research and the recent re-appearance of entropy in the rational inattention literature. Sometimes I read papers in the AER and find it more similar to Nature or Science, than Econometrica/JET. At the same time I find many contributions by economists in Nature or Science. Is it still Physics Envy then? Will applied/empirical work finally liberate us? Lets speak in another 30 years.
John Oliver’s latest episode does an analysis of segregation at the schooling level in the US. Besides his usual ‘goblinesque’ humor, Oliver does a pretty good job of capturing some important stylized facts. I was pretty startled by the fact that New York City has the highest rate of segregation – my preliminary thought was that it would be the South. The link to his video is here:
My latest paper in the International Journal of Political Economy (Taylor & Francis) is now up. This link leads to gated access. Amongst other things, I have developed a simple accounting formula to capture synthetic savings within fractiles. The abstract is summarized below:
Personal savings from top incomes and wealth accumulation in the United States: Results from disaggregated national accounts
” This article explores the determinants and distribution of household wealth. Looking at U.S. data since 1980, it finds convincing evidence that top incomes were saved at high rates and contributed to the steady increase in the household wealth–income ratio. First, I rule out counterclaims regarding the role of housing and real estate prices finding little evidence of their influence on the trends and magnitudes of household net worth relative to disposable income. With savings as the remaining explanation, I present an accounting decomposition formula that captures savings rates for any reference group using the dynamics of intergroup accumulation rates. This methodology is applied to data from national accounts, balance sheets, and income distribution statistics in order to compute saving rates for the top 1 percent of households in the U.S. income distribution. The estimates also support the idea that top income earners have outsaved other households, thereby capturing an increasing share of wealth.“
I recently wrote a column on my paper “Capital and the Hindu rate of growth” at Ideas for India. A cross-post was published in Business Standard