Author: conversableeconomist

Back in the 1971, Herbert Simon (Nobel ’78) published an essay on the “attention economy.” It famously noted that “a wealth of information creates a poverty of attention.” He offered insights about how economic organizations (and people) needed mechanisms to receive and process large amounts of information, and then pass only the relevant portion of that information. (Simon won the Nobel prize “for his pioneering research into the decision-making process within economic organizations.”)

Yaqub Chaudhary  and Jonnie Penn suggest that artificial intelligence may shift the parameters of the tradeoffs between information and attention, and instead might lead to what they call an “intention economy.” They describe this prospect in “Beware the Intention Economy: Collection and Commodification of Intent via Large Language Models,” published December 30, 2024, in a Special Issue of the Harvard Data Science Review with papers on the theme “Grappling With the Generative AI Revolution.”

From the abstract:

The rapid proliferation of large language models (LLMs) invites the possibility of a new marketplace for behavioral and psychological data that signals intent. This brief article introduces some initial features of that emerging marketplace. We survey recent efforts by tech executives to position the capture, manipulation, and commodification of human intentionality as a lucrative parallel to—and viable extension of—the now-dominant attention economy, which has bent consumer, civic, and media norms around users’ finite attention spans since the 1990s. We call this follow-on the intention economy. We characterize it in two ways. First, as competition, initially, between established tech players armed with the infrastructural and data capacities needed to vie for first-mover advantage on a new frontier of persuasive technologies. Second, as a commodification of hitherto unreachable levels of explicit and implicit data that signal intent, namely those signals borne of combining (a) hyper-personalized manipulation via LLM-based sycophancy, ingratiation, and emotional infiltration and (b) increasingly detailed categorization of online activity elicited through natural language.

This new dimension of automated persuasion draws on the unique capabilities of LLMs and generative AI more broadly, which intervene not only on what users want, but also, to cite Williams, “what they want to want” (Williams, 2018, p. 122). We demonstrate through a close reading of recent technical and critical literature (including unpublished papers from ArXiv) that such tools are already being explored to elicit, infer, collect, record, understand, forecast, and ultimately manipulate, modulate, and commodify human plans and purposes, both mundane (e.g., selecting a hotel) and profound (e.g., selecting a political candidate).

I confess that I am only partially persuaded that the “intention economy” is fundamentally new and different from the “attention economy.” The classic book by Vance Packard, The Hidden Persuaders–about how our wants and desires can be and are manipulated by business, media, and politicians–was written back in 1957. As Chaudary and Penn write: “At time of print, the intention economy is more aspiration than reality.” But here’s an example of what they have in mind:

[A] concrete example helps to illustrate how the intention economy, as a digital marketplace for commodified signals of ‘intent,’ would differ from our present-day attention economy. Today, advertisers can purchase access to users’ attention in the present (e.g., via real-time-bidding [RTB] networks like Google AdSense) or in the future (e.g., buying next month’s ad space on, say, a billboard or subway line). LLMs diversify these market forms by allowing advertisers to bid for access both in real time (e.g., ‘Have you thought about seeing Spiderman tonight?’) and against possible futures (e.g., ‘You mentioned feeling overworked, shall I book you that movie ticket we’d talked about?’). If you are reading these examples online, imagine that each was dynamically generated to match your personal behavioral traces, psychological profile, and contextual indicators. In an intention economy, an LLM could, at low cost, leverage a user’s cadence, politics, vocabulary, age, gender, preferences for sycophancy, and so on, in concert with brokered bids, to maximize the likelihood of achieving a given aim (e.g., to sell a film ticket). Zuboff (2019) identifies this type of personal AI ‘assistant’ as the equivalent of a “market avatar” that steers conversation in the service of platforms, advertisers, businesses, and other third parties.

In short, imagine persuasive messages that are far more individualized, in several senses. These messages could be based on a considerably wider range of data about you: where you live and work,travel patterns, family status, past purchases, past internet searches, and the like. Your personal data could then be compared with personal data of others to find statistically similar people. The messages you receive, based on how you are categorized based on your personal data, would also be phrased in the language most likely to appeal to you–again, based both on how you have personally responded in the past and how others who are statistically similar to you have responded. These messages could also be “dynamically adjusted,” meaning that instead of getting the same message over and over, you would receive an ever-changing series of messages.

Chaudary and Penn recognize that some of this just sounds like better-targeted advertising, but they argue that there are “possibilities of intervening on—and commodifying—a higher order of user intentionality than that seen in the attention economy.” Perhaps the bottom line is that AI tools are already starting provide back-and-forth interactions, sometimes in the series of advertisements you see, sometimes in the form of chatbots, and sometimes even forms like providing medical advice or therapy. As these interactions multiply, it’s important to remember that AI is both a tool for you to use, and also a tool for others to use in communicating with you. In neither case is the AI your friend, with nothing but your best interests at heart.

Jon Hartley interviews Myron Scholes (Nobel ’97) on “Academic Finance, Black-Scholes Options Pricing, and Regulation“(“Capitalism and Freedom in the 21st Century” podcast, January 5, 2025). The interview includes insights about what was happening in economic finance in the 1960s and 1970s after the “big bang” represented by the work of Harry Markowitz. Here are a few points that caught my eye:

The interview has considerable detail on the development of Scholes’s work with Fisher Black in creating the Black-Scholes option pricing formula. Here’s a taste:

And so Fisher and I started talking about options … And we started working together, and we very quickly came to a theory of how to solve the option by setting up the replicating portfolio. But we tried to think about how to do it for myriad state variables. And even though the theory was correct and could be done, it was basically the state variables would be multiple, and then figure out how to integrate. Once you had a differential equations with all these state variables made it impossible to come to a conclusion or solution quickly.

So then Fisher and I said, well, let’s make an assumption, which is false, that the interest rate is constant, and that the volatility is constant. And we got and the option was European, and therefore, we can get a closed form solution. So that we got a closed form solution and that became known as the Black Scholes option pricing model.

The underlying theory was published in the Journal of Political Economy with the model or given its assumptions. Now we know that every model has an assumption, every model has an error, every model is an incomplete description of reality. How well does the model do in making predictions? And that’s the key. Basically the model has done very well over time. There’s a lot of people who say the model doesn’t do this, the model doesn’t do that, but it does pretty darn great. …

At the time the Black-Scholes model was published was coincident with the birth of the first listed options trading in the Chicago Board Options Exchange in Chicago. So there was 16 options were traded on calls, call options at that time on 16 securities.

That was in 1973. Then it was the case that there was the old grizzly traders who thought they had the experience from the over the counter market and the new young turks who were going to be market makers and trade on the floor of the Chicago Board Options Exchange. So here’s an idea with experience only and intuition versus a model. And the young guys had the model … Fisher Black made sheets of paper which talked about the Delta and the pricing at different levels of the stock price relative to the exercise price. And they could look at the sheets. And there was a war between the grizzly intuition people and the model people, the young turks who had no intuition, but they had the model. And in a matter of about six months or so, the young turks had wiped out the grizzlies, okay, the intuition people.

Merton Miller apparently used to refer to criticisms of the the Modigliani-Miller theorem (that the value of a company is based on future profits, not capital structure) with an analogy I had not heard before, about horse and rabbit stew Scholes tells it this way:

When I got to Chicago at the time Merton Miller had come to Chicago in 1960, I came there first as a student in ’62. And Merton came from Carnegie Mellon, having worked with Franco Modigliani to develop the idea of capital structure equilibrium. Because it was felt, prior to Merton and Franco Modigliani’s work, that how you finance your activity was determinant what the cost of capital was on investment. So if you use more debt, it was cheaper than equity, and therefore there would be a level of debt you would use that would reduce your overall cost of capital.

Merton Miller and Franco Modigliani said, no, that’s ridiculous because economically, if you think about the pie, it’s how you’re dividing up the pie is not necessarily what you wanna think about it. What the pie is itself, how the pie is going to grow, and that means that the risk of the underlying investments of the firm are the risk of the assets, and not how they’re financed. And they prove that rigorously by arbitrage models and the like, and showed that basically that was true, which was a great innovation.

Obviously, over time, Merton’s work and Franco’s work was criticized simply because people thought about bankruptcy costs and other things that would interfere. And Merton’s summary was very good, he said, my theory is a little bit like horse and rabbit stew. There’s one horse and one rabbit in the stew, and what my ideas are, obviously the horse and all these conundrums and critic of the horse as the stew is the rabbit.

For most of us, January 1 is New Year’s Day. But for the copyright lawyers among us, it is Public Domain Day, when a new batch of copyright materials first published back in the 1920s lose their intellectual property protection. Jennifer Jenkins and James Boyle, who direct the Duke Center for the Study of the Public Domain, provide an overview of some of the best-known works that are now in the public domain, along with an argument for the importance of having intellectual property protection eventually expire, in “January 1, 2025 is Public Domain Day: Works from 1929 are open to all, as are sound recordings from 1924!” They also try to answer some of the big questions, like: “Popeye was already in the public domain, but he does not eat spinach until a 1933 cartoon. So is “Popeye-eating-spinach” in the public domain yet?

Here is a very limited selection from Jenkins and Boyle of some works that have just entered the public domain. With links! Because now and into the future, these works in the public domain.

Books and Plays

• William Faulkner, The Sound and the Fury
• Ernest Hemingway, A Farewell to Arms
• Virginia Woolf, A Room of One’s Own
• Dashiell Hammett, Red Harvest and The Maltese Falcon (as serialized in Black Mask magazine)[4]
• John Steinbeck, Cup of Gold (Steinbeck’s first novel)
• Richard Hughes, A High Wind in Jamaica
• Oliver La Farge, Laughing Boy: A Navajo Love Story
• Patrick Hamilton, Rope
• Arthur Wesley Wheen, the first English translation of All Quiet on the Western Front by Erich Maria Remarque
• Agatha Christie, Seven Dials Mystery
• Robert Graves, Good-bye to All That
• E. B. White and James Thurber, Is Sex Necessary? Or, Why You Feel the Way You Do
• Rainer Maria Rilke, Letters to a Young Poet (only the original German version, Briefe an einen jungen Dichter)
• Walter Lippmann, A Preface to Morals
• Ellery Queen (Frederic Dannay and Manfred Bennington Lee), The Roman Hat Mystery

Films

• A dozen more Mickey Mouse animations (including Mickey’s first talking appearance in The Karnival Kid)
• The Cocoanuts, directed by Robert Florey and Joseph Santley (the first Marx Brothers feature film)
• The Broadway Melody, directed by Harry Beaumont (winner of the Academy Award for Best Picture)
• The Hollywood Revue of 1929, directed by Charles Reisner (featuring the song “Singin’ in the Rain”)
• The Skeleton Dance, directed by Walt Disney and animated by Ub Iwerks (the first Silly Symphony short from Disney)
• Blackmail, directed by Alfred Hitchcock (Hitchcock’s first sound film)
• Hallelujah, directed by King Vidor (one of the first film from a major studio with an all African-American cast)
• The Wild Party, directed by Dorothy Arzner (Clara Bow’s first “talkie”)
• Welcome Danger, directed by Clyde Bruckman and Malcolm St. Clair (the first full-sound comedy starring Harold Lloyd)
• On With the Show, directed by Alan Crosland (the first all-talking, all-color, feature-length film)
• Pandora’s Box (Die Büchse der Pandora), directed by G.W. Pabst
• Show Boat, directed by Harry A. Pollard (adaptation of the novel and musical)
• The Black Watch, directed by John Ford (Ford’s first sound film)
• Spite Marriage, directed by Edward Sedgwick and Buster Keaton (Keaton’s final silent feature)
• Say It with Songs, directed by Lloyd Bacon (follow-up to The Jazz Singer and The Singing Fool)
• Dynamite, directed by Cecil B. DeMille (DeMille’s first sound film)
• Gold Diggers of Broadway, directed Roy Del Ruth

Characters

• E. C. Segar, Popeye (in “Gobs of Work” from the Thimble Theatre comic strip)
• Hergé (Georges Remi), Tintin (in “Les Aventures de Tintin” from the magazine Le Petit Vingtième)

Musical Compositions

• Singin’ in the Rain, lyrics by Arthur Freed, music by Nacio Herb Brown
• Ain’t Misbehavin’, lyrics by Andy Paul Razaf, music by Thomas W. (“Fats”) Waller & Harry Brooks (from the musical Hot Chocolates)
• An American in Paris, George Gershwin
• Boléro, Maurice Ravel
• (What Did I Do to Be So) Black and Blue, lyrics by Andy Paul Razaf, music by Thomas W. “Fats” Waller & Harry Brooks (a song about racial injustice from the musical Hot Chocolates)
• Tiptoe Through the Tulips, lyrics by Alfred Dubin, music by Joseph Burke
• Happy Days Are Here Again, lyrics by Jack Yellen, music by Milton Ager (the theme song for Franklin D. Roosevelt’s 1932 presidential campaign)
• What Is This Thing Called Love?, by Cole Porter (from Porter’s musical Wake Up and Dream)
• Am I Blue?, lyrics by Grant Clarke, music by Harry Akst
• You Were Meant for Me, lyrics by Arthur Freed, music by Nacio Herb Brown
• Honey, lyrics and music by Seymour Simons, Haven Gillespie, and Richard A. Whiting
• Waiting for a Train, lyrics and music by Jimmie Rodgers

Sound Recordings from 1924

• My Way’s Cloudy, recorded by Marian Anderson
• Rhapsody in Blue, recorded by George Gershwin
• Shreveport Stomp, recorded by Jelly Roll Morton
• Lazy, recorded by The Georgians
• Krooked Blues, recorded by King Oliver’s Creole Jazz Band featuring Louis Armstrong
• Deep Blue Sea Blues, recorded by Clara Smith
• The Gouge of Armour Avenue, recorded by Fletcher Henderson and his Orchestra featuring Big Charlie Green
• Mama’s Gone, Good Bye, recorded by Ray Miller and his Orchestra
• It Had To Be You, recorded by the Isham Jones Orchestra and by Marion Harris
• California Here I Come, recorded by Al Jolson

Joe Walker interviews Eugene Fama (Nobel ’13) with the title “For Whom is the Market Efficient?” (The Joe Walker podcast, December 31, 2024). Here are some bits and pieces of their exchange that caught my eye.

Are financial markets efficient?

WALKER: Gene, I was talking with a few friends who work in high finance in preparation for this conversation. And one of my impressions is that a lot of people think of you as holding this extreme position that markets are perfectly rational. But I know that you don’t believe that, and I’ve also heard people who’ve taken your classes at Chicago say that you repeat ad nauseam that models aren’t real and the question is really: how efficient are markets?

FAMA: There’s a different way of putting it, actually: who is it efficient for? That’s another way to put it.

WALKER: Can you elaborate on that?

FAMA: Well, for almost everybody, the market is efficient in the sense that they don’t have information that’s not already built into prices. People who have special information, the market’s not efficient for them. So let’s say insiders, for example, typically have special information. So as far as they’re concerned, this stock is not priced totally efficiently because they have information they know will change the price. But for everybody else, assuming it’s efficient, it may be a really good approximation. … So if you say, tell me about professional investors, I’ll say a very small fraction of them show evidence of having information that isn’t already built into the price. So that’s going to the top of the food chain, saying even among the professionals, there are very few that have information that isn’t already in the price. If I go out to the public, alright, the market’s efficient for everybody out there.

Why all tests of market efficiency involve a “joint hypothesis,” because they are tests of the underlying model of price formation in financial markets.

So the problem is, this is what I call the joint hypothesis problem. You can’t tell me that prices reflect all available information unless you take a stance on what the price should be. So you have to have some model that tells me, for example, what is risk and what’s the relation between risk and expected return. And then we can look at deviations from that and see if the market is efficient. So there is what I call this joint hypothesis problem. You need a model that tells you how prices get formed. So in the jargon that’s called a model of market equilibrium. You need to join that with efficiency, then I can test it in the context of whatever model you tell me is determining prices. …

Okay, so you cannot test market efficiency without a story about risk and return, which is a market equilibrium issue. The reverse is also true. You can’t test models of market equilibrium without market efficiency. So these two things are like joined at the hip. They can’t be separated. People who do market efficiency, they almost don’t exist anymore. Everybody takes it for granted in the academic sphere. It’s considered uninteresting to test. But everybody that does market efficiency understands the joint hypothesis problem. But it’s not that widely recognized among the people who do asset risk and return models. It’s implicitly assumed, but they never make it explicit.

Why Fama, and others who argue for market efficiency, are the most important figures in behavioral economics.

FAMA: Behavioral finance, well, that had its time, but everything is behavioral after all. … Now the problem is that behavioral finance, behavioral economics, doesn’t have any models of their own. It’s just a criticism of other models.  So I’ve always chided Dick Thaler and told him, “Hey, it’s easy to criticize my models if that’s what you guys do. Give me a model of yours that I can criticize.” Never happens.  I really get under his skin when I say, well, there’s no real behavioral economics. It’s just a branch of efficient markets. You don’t have a model of your own. You just have a criticism of efficient markets. So they’re really just my cousin.

WALKER: I heard a debate between you and Thaler where you said that you were the most important person in behavioral finance.

FAMA: That’s what I said. That’s another one of my lines. Without efficient markets they’d have nothing to criticize.

Back in 1956, the federal government created the Highway Trust Fund. The basic idea was to use money collected from the federal tax on gasoline and diesel fuel to pay for construction and maintenance of federal highways. When the interstate highway system was completed back in the early 1990s, this obviously meant that less funding was needed. But the Congressional Budget Office projects maintenance spending for the federal highways at nearly $60 billion in the next few years, gradually rising over time. Meanwhile, fuel-tax revenues for the Highway Trust Fund are below $40 billion per year, and gradually falling over time with the rise of higher-mileage cars in the short-run, and also the rise of electric vehicles in the long run.

Of course, one option is just to fill the gap with general tax revenues, which is what we have in fact been doing in the last few decades. But if we would prefer to return to something closer to the earlier “user pays” approach, in which the main users of highways pay for their maintenance, then there is an argument, laid out by Michael E. Gorman, for “A Vehicle Mileage Tax for Heavy Trucks?” (Regulation magazine, Winter 2024-2025).

Why a mileage tax just on heavy trucks?

1) Heavy trucks do most of the damage to highways. Gorman discusses the evidence form the most recent Federal Highway Administration report.

A 2000 Federal Highway Administration (FHWA) report estimated that for each mile traveled, combination trucks (a tractor with one or more trailers) imposed a road repair cost average of 66¢ a mile (FHWA 2000). For all trucks, the estimated road maintenance cost per mile traveled ranged from 4¢ to 40¢ (in 2024 dollars) depending on the weight of the load. According to Bureau of Transportation Statistics (BTS) calculations, trucks today effectively pay 4¢ per mile (calculated at 24.4¢ per gallon and 6.1 miles per gallon average).

In short, the fuel taxes paid by trucks don’t come close to covering the highway maintenance costs that they impose. As Gorman points out, heavy trucks also have additional social from their contributions to air pollution and traffic congestion.

2) There are relatively few heavy trucks compared to passenger vehicles, and the truck already need to keep track of their mileage for business and regulatory purposes. Indeed, most trucks already have transponders for when they are passing through toll plazas and weighing stations. Thus, the practical task of applying a mileage tax to heavy trucks is relatively straightforward. Several states have been conducting pilot programs with a vehicle-mileage tax for trucks–New York, New Mexico, Kentucky, and Oregon–with the general pattern that “[w]hile the initial set-up costs were significant, the ongoing administrative costs were slight.”

3) A worry about applying a mileage tax to personal vehicles is that it potentially invades the privacy of users. This privacy argument carries little or no weight when applied to the business of heavy trucks.

Of course, the trucking industry hates this idea. At present, heavy trucks receive an implicit subsity, and a vehicle-mileage tax would raiase the cost of trucking to reflect the actual maintenance costs. It would have other effects as well. For example, it would probably would cause a certain amount of freight to shift to rail, but since the environmental and traffic congestion costs of rail are lower, this shift should be viewed as a social benefit. (If the US was able to reform the Jones Act rules that have raised the cost of ocean-shipping between US ports, then a certain amount of freight could also move across water, rather than over land.)

One way or another, the costs of road maintenance will be paid, either out of general revenues, or if the maintenance is postponed, it will be paid out of additional wear-and-tear on vehicles. A vehicle-mileage tax on heavy trucks is a better choice.

Andrew Peaple interviews “Barry Naughton on the State of the Xi Jinping Economy” at The Wire China website (January 5, 2025). The interview is subtitled: “The economist discusses Beijing’s recent stimulus efforts, and the long-term problems building up as China’s leader implements his model for the country.” The interview is packed with insights. Here are a few that caught my eye:

Chinese echoes of Japan’s stagnation

[N]one of the things that we’ve seen to prop up demand and keep institutional structures intact have yet involved a substantial resolution of large amounts of debt. He [Xi Jinping] keeps refinancing, kicking the can down the road, injecting some funds into the system to keep anybody from failing, but without resolving any of the problems. That’s really a problem, because at a certain point you have to clean up the mess. You mentioned earlier whether China was becoming Japan-like: this is one respect in which it certainly is. Japan spent almost a decade trying to painlessly restructure a financial system that had suffered a huge reduction in the value of its assets. It was the fundamental problem that lay behind the so-called ‘Lost Decade’ in Japan; and now China seems to be repeating some parts of that.

China’s high levels of inefficient investment

When we look at total factor productivity growth, which is the economists’ attempt to figure out what you’re getting from pure efficiency gains, China’s not really experiencing significant productivity growth. That is astonishing, because if we look at this economy that’s implementing all these new technologies, we think, wow, that’s gotta produce some kind of explosive growth in productivity. But we don’t see it.  And it’s fundamentally because, for example, China is investing in lots of semiconductor equipment plants that are losing immense amounts of money; it’s investing in thousands of miles of high speed rail that go where nobody wants to go. There are just these huge, long run implicit costs from not improving the efficiency of your society. Now, of course, on some level, Xi Jinping is making a gamble that all these technologies will at some point come together and produce a sudden surge of productivity. And he might be right. We can’t say for sure that he’s not. But thus far, he’s very much not.  …

Outsiders are much too prone to hear Chinese policy makers say we want to increase domestic demand, and interpret that as being them wanting to rebalance the structure of the economy towards consumption. As far as I can determine, China has never, since 2008, said we’re going to rebalance the economy away from investment, towards consumption.  … Do they really want to do that rebalancing, or do they enjoy sitting atop an economy that can invest trillions of dollars? I think they rather like it. 

Can the US and China reach “reasonably efficient protectionism”?

We need to get beyond the sort of ‘protectionism good, protectionism bad’ argument, and try to craft a set of policies that amounts to reasonably efficient protectionism, that works in the American interest. 

There’s two parts of that which we can lay out pretty simply. One is, let’s decide what are the sectors that we want to protect, and what are the sectors where we can benefit from opening up in the way that you suggest. EVs is a sector that we’re going to want to protect, because we have a big automobile industry that employs a lot of people. It’s behind the Chinese industry in terms of electric vehicles, but it clearly is capable of catching up. By contrast, solar panels or batteries are areas where we don’t really have a significant industry. Chinese producers have meanwhile become very good, and very low cost. We should encourage Chinese investment in the United States to produce these products, both to create jobs and so that we can learn how to produce at that kind of scale and efficiency. We’re going to need a more explicit industrial policy.

The second thing is, we don’t want to trigger a chaotic scramble for protectionism among all the different countries in the world. We want to signal that we have certain interests, but they’re reasonably limited, and we are also interested in reaching a mutually beneficial equilibrium, especially with our allies, but also with China. 

That’s difficult to do, but not impossible. We should keep our minds open to the idea that the U.S. will move towards more protectionist policy, but that it will be articulated in a way that is less disruptive, and benefits the United States’s interests. … This might, with a little bit of luck and wisdom on both sides, lead us to a new equilibrium that’s not terrible. 

Neither “capitalism” nor “socialism” seems to me well-named. As I’ve noted here in the past, my experience is that most Americans who favor “socialism” don’t actually favor the dictionary definition of government ownership of the means of production, but instead favor something resembling a Scandinavian approach to government taxes and spending. However, the Swedes themselves–who after all lived in close proximity to socialism in the style of Soviet Russia for decades–typically say that they are not socialists, but instead follow their own kind of capitalism. Sometimes “socialism” ends up being the name for an aspirational desire for a better world, while “capitalism” is blamed for all the problems of modern living, which means that the comparison is between apples and oranges.

The meaning of “capitalism” is a muddle as well. Robert Fredona, Sophus A. Reinert, and Teresa da Silva Lopes lay out some of the issues in “Forms of Capitalism” (Business History Review, Spring 2024, 98:1, pp. 3-35).

Among the many examples they offer is a 1939 book written by N.S.B. Gras, a prominent Harvard Business School professor who described six kinds of “capitalism” in Business and Capitalism: pre-business capitalism, petty capitalism, mercantile capitalism, industrial capitalism, financial capitalism, and national capitalism. Gras wrote: “[T]he term ‘capitalism,’ like ‘rheumatism’ and ‘indigestion,’ must be abandoned or differentiated. To be sure, discrimination in the use of the term impairs its propaganda value. Our interest here, however, lies simply in a better understanding of the subject.”

In American politics, it sometimes seems to be assumed that “capitalism” means Republicans and “socialism” means Democrats. But these terms do not exist as a shorthand for 21st century US politics, nor as a way of distinguishing American economic/political arrangements from those of northern Europe. After a review of attempts to define capitalism and to differentiate various “capitalisms,” the authors write (footnotes omitted):

Simple dictionary definitions aside, after a century and a half of good faith attempts by some of our keenest minds, we don’t seem any closer to meaningful agreement about the definition of capitalism or the historical boundaries of the phenomenon. The caution proposed by Weber in defining “religion”—“definition can be attempted, if at all, only at the conclusion of the study”—should perhaps be applied to studies of “capitalism” in equal or greater proportion.

Some definitions seem too inclusive. N.S.B. Gras’s own definition, for example: “a system of getting a living through the use of capital,” by which he means “goods or trained abilities used in producing other goods or services.” Even more inclusive is Deirdre McCloskey’s. She has argued with panache that capitalism and the market economy, which “contrary to what you might have heard, has existed since the caves,” are synonymous. “Market participants are capitalists. You are, for example.” Some seem rather too exclusive: despite his protests to the contrary, Braudel’s insistence on separating capitalism—“a world apart where an exceptional kind of capitalism goes on, to my mind the only real capitalism”—from both material life and the market economy, and finding it only in the “shadowy zone” of great merchants and monopolists “hovering above the sunlit world of the market economy,” seems rigid and artificial (or at least excessively Olympian). In stark contrast with McCloskey’s paleolithic capitalists, some have pushed the “dawn of capitalism” all the way to the 1830s or 40s. Rather than every market participant being a capitalist, most definitions are more restrictive, like David Schweickart’s: a capitalist, for him, is “someone who owns enough productive assets that he can, if he so chooses, live comfortably on the income generated by those assets.” …

Many of capitalism’s staunchest defenders tell us that capitalism without competition isn’t capitalism at all. Peter Thiel—a capitalist by all the definitions we’ve read— tells us, no, “actually capitalism and competition are opposites.” The best definitions risk being somewhat boring. The most interesting ones seem less interested in capitalism’s form than its spirit. Such is Wallerstein’s identification of capitalism’s essential, and essentially irrational, characteristic: “the persistent search for the endless accumulation of capital—the accumulation of capital in order to accumulate more capital” along with “mechanisms that penalize actors who seek to operate on the basis of other values or other objectives.”…

When it comes to capitalism, precision is not always called for, and not always helpful. … Many of the newly-coined “forms” of capitalism that we listed above—perhaps especially the most outré ones, like “sugar daddy capitalism” or “Candy Crush capitalism”—may be ways of identifying not new “forms of capitalism” in the traditional sense but new characteristics of a capacious and polythetically-defined capitalism. Along the same lines, but from a different vantage point, we might think about what the characteristics are that are shared by both “managerial capitalism” and “booty capitalism,” or “mercantile capitalism” and “casino capitalism.” From either perspective, though, we might put it this way: capitalisms form a family.

Another possible approach to capitalism is the spatial. It is no longer enough to think in terms of gradation, or of whole societies as the unit of study, as Frederic Lane once did. “Capitalism,” he argued, “is a matter of degree: it is hard to find a society 100 percent capitalistic or 0 percent capitalistic.”

Naturally, some of these definitions of capitalism appeal to me more than other, but I won’t fight those battles here. I’ll just note that in my own mind, the high-income countries of the world are all “capitalist,” although they model different forms of capitalism that embody different social tradeoffs. Fredona, Reinert, and da Silva Lopes write: “We suggest stepping back and reconsidering the pronouncement of N.S.B. Gras, at the origins of business history, that capitalism must be abandoned or differentiated. Capitalism, whatever it is, whenever it began, seems at once more productive and more destructive than any other force in human history. It also seems intractably plural.”

A.A. Milne is best-known today as the author of the Winnie-the-Pooh books, but he also had his moments are a serious essayist. In a 1940 essay, he offered this comment on the first-rate, second-rate, and third-rate mind. It seemed useful to me to pass along during the present climate of intense partisanship, where comments are often judged by what side you seem to be on, rather than on what you have actually said. Milne wrote:

I wrote somewhere once that the third-rate mind was only happy when it was thinking with the majority, the second-rate mind was only happy when it was thinking with the minority, and the first-rate mind was only happy when it was thinking. With equal truth it may be said that a first-rate mind is not one which does not remember the past, nor is it one which cannot forget the past; it is a mind which will use the past but not be ordered by it. It is a mind independent of everybody and everything but the facts in front of it. It is as little perturbed to find itself sharing a thought with the simple as it is elated to find itself sharing a thought with the subtle. It will fight for what it has discovered to be right …

(In the comforting shadow of these parentheses, I will say that I aspire to be a first-rate mind in Milne’s sense, but with only partial success. As a friend of mine used to say, whenever you pick a side on a given issue, it’s disturbing to notice that some of your co-believers are on your side for very different and sometimes disturbing reasons.)

The broader context for Milne’s comment may be of interest. It appears in a short essay called “War with Honour,” from the McMillan War Pamphlets in 1940. Milne referred to himself as a “practical Pacifist.” He wrote: “I am still a Pacifist, but I hope a practical Pacifist. I still want to abolish war.” But in 1940, he argued that, paradoxically, improving the practical chances for the abolition of war required fighting against Nazi Germany. Here’s an unindented slice from Milne’s essay about “Crying ‘Wolf'”:

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The fable of the boy who amused himself by crying “Wolf!” so often that the villagers no longer believed him when the wolf came is used, like all fables, to point a moral. The moral is directed against the boy. “Silly boy! See what happened to him!” But the moral might equally be directed against the villagers. Silly villagers! See what happened to them! For, though the boy may have been no great loss, they also lost their flocks. Did they deserve to lose them? Let us consider the reasoning which went on in a villager’s mind.

1. This boy said “Wolf!” three times when there was no wolf.

2. It is therefore certain that there is no wolf this time.

Could any reasoning be sillier? What he should have thought was:

1. The boy is only there because it is extremely likely that a wolf will come one day.

2. It is certain that, when the wolf does come, the boy will call out.

3. It is not certain, after the thrashing I gave him yesterday, that he will call out again if the wolf doesn’t come.

4. Therefore the chances are that the wolf is here.

And even if it turned out to be another false alarm, the reasoning would be just as true at the next alarm. Stupid, stupid villagers!

To many Pacifists (indeed, to all who write to me) the great stumbling-block in the way is the fact that “Wolf!” has been cried before.

“A war to end war?” they say derisively. “You said that of the last war!”

“Hitler is the devil?” they jeer. “You said that of the Kaiser!”

“This war is different from any other war? Why, you yourself pointed out that militarists said that of every war!”

“We are fighting for Freedom? How you derided these fights for Freedom!”

“We are fighting for God? How fiercely you attacked the Churches for identifying God with their country!”

It is a very good retort; it would carry the house in any school debating society; but it doesn’t prove that there is no wolf.

I wrote somewhere once that the third-rate mind was only happy when it was thinking with the majority, the second-rate mind was only happy when it was thinking with the minority, and the first-rate mind was only happy when it was thinking. With equal truth it may be said that a first-rate mind is not one which does not remember the past, nor is it one which cannot forget the past; it is a mind which will use the past but not be ordered by it. It is a mind independent of everybody and everything but the facts in front of it. It is as little perturbed to find itself sharing a thought with the simple as it is elated to find itself sharing a thought with the subtle. It will fight for what it has discovered to be right, as happily in the serried ranks of the Blimps as in the lonely company of the Shaws.

Even though all the stupid militarists cried “Wolf!” when there was no wolf, yet the wolf is at our door now. Even though all the clever Pacifists said that there was no wolf, when there was no wolf, yet the wolf is at our door now. If we cling to the theory that wolves are delightful creatures when treated kindly as cubs, then perhaps this one wasn’t treated kindly as a cub. If we proved conclusively six years ago that wolves never came as far west as England, then perhaps this one has escaped from a zoo, or is some foul hybrid unknown to zoology. What does it matter how right or wrong we were in the past? There is death, and worse than death, waiting for ourselves and our children. What do we do?

When you listen to economists who have worked in or near government about their role in the mechanisms of policy-making, they are appropriately humble. They harbor few illusions that a quick lecture about, say, the dynamics of supply and demand or the advantages of rule-based monetary policy will convert politicians to their point of view. They are aware that political figures will grab an economic argument if it tends to support their pre-existing views, and ignore the argument otherwise. That said, economics does play a role in real-world economic policy–but how?

Milton Friedman offered one answer to this question in the “Preface” to the 1982 issue of Capitalism and Freedom. He wrote:

What then is the role of books such as this? Twofold, in my opinion. First, to provide subject matter for bull sessions. As we wrote in the Preface to Free to Choose: “The only person who can truly persuade you is yourself. You must turn the issues over in your mind at leisure, consider the many arguments, let them simmer, and after a long time turn your preferences into convictions.”

Second, and more basic, to keep options open until circumstances make change necessary. There is enormous inertia–a tyranny of the status quo–in private and especially governmental arrangements. Only a crisis-actual or perceived-produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable.

I noted last spring an essay by Alan Blinder, who wrote in a similar spirit about the gap between economics and politics. Blinder wrote: “Almost a half century ago, George Stigler (1976, p. 351), later a Nobel prize winner, wrote that `economists exert a minor and scarcely detectable influence on the societies in which they live.’ Stigler was no doubt exaggerating to make his point. But he had a point. And things have not changed much since.”

However, Blinder also emphasizes the role that economists can play in designing legislation to improve the ratio of benefits to costs.

So here’s my advice to economists interested in actual–as opposed to theoretical–policymaking. Don’t forget about efficiency. It matters. We are right about that. But we may have to content ourselves with nibbling around the edges, below the political headline level, to make the details of a complex policy package less inefficient. Call it the theory of the third or fourth best.

Back in 1996, on the 50th anniversary of the legislation that created the Council of Economic Advisers, the Journal of Economic Perspectives had a short symposium on the subject of the CEA and policy advice. Charles L. Schultze, who headed the CEA under President Carter, wrote ” The CEA: An Inside Voice for Mainstream Economics:”

Forty years of observing policy debates, including 15 years of participating in them, have not dulled my amazement at how few participants have a grasp of fundamental economic principles and how differently from economists they analyze issues. Several reasons stand out for the wide divergence between the views of economists and others. First, to politicians the world is full of corner solutions; the idea of continuous cost and demand curves with nonzero elasticities is foreign to their way of thinking. Second, some important principles in macroeconomics and international trade are counterintuitive; for example, the essential reason for a country to export is to import, not to increase total employment. In periods of full employment, additional spending on “good things” like exports or investment can harm the economy. The balance between a country’s saving and domestic investment is by far the most important determinant of the trade deficit, not “unfair” trading practices by foreign competitors. Depending on costs, there is almost always an optimal amount of “bads” that society shouldn’t try to eliminate. Precious few policymakers grasp the principle of comparative advantage.

Third, noneconomists have an almost universal desire to deal with market failures through carefully specified regulation rather than a change in incentive structures. Such specification is the natural function of lawyers, and the legal profession continues to dominate Congress. When government intervenes in the marketplace, our political leaders typically rule out the manipulation of economic incentives to deter undesirable actions because reliance on market responses injects an uncertain, partially random, and therefore “unfair” set of forces into the picture. Yet in the American political context, any use of market forces and incentives for policy purposes would be modest compared to the enormous power that our society readily cedes to the market over a huge slice of our national life.

In the same symposium, Herbert Stein, who chaired the CEA during part of President Nixon’s term of office, wrote “A Successful Accident: Recollections and Speculations about the CEA.” He described the qualifications for an economic adviser in this way:

The qualifications for an adviser differ from those for an innovative scientist or theorist. People who invent new ideas almost invariably have a devotion to them, but an adviser should not be so devoted to some new idea that he is unable to give the president a picture of the options that economics supports. As Frank Knight (1933, p. xx) said, “Anything very original in economics would be wrong anyway.” A few years ago, I wrote of the characteristics necessary in a good economic adviser (Stein, 1991, p. 9). In addition to a stock of economic knowledge, which is “slowly replenished and refreshed with a flow of ideas from the journal mill,” a successful adviser needs “knowledge of the institutions in the field of his concern; a body of relevant statistical information; a set of ideas about how the government works; a political calculus of several kinds; judgment; and communication skills.” These qualities have been sought by the people selecting members of the CEA and generally found in those who have accepted the position.

Oddly enough, we just had a presidential election in which both Trump and Harris were undergraduate economics majors. This fact does not necessarily raise one’s hopes about how economics can contribute to public debate and policy-making. Economists are rarely going to set the policy agenda. But in a political setting, perhaps especially when it can become imperative to “do something,” serious economists do have access to pile of ideas laying around. Some of the ideas in that pile are concrete and spelled out policies. But many of the ideas are instead about the range of ways in which to structure a policy: that is, how to structure taxes, subsidies, payments, regulations, and even institutions in the most useful ways. Pragmatic economists involved in the design of public policy often just want to shape the agenda-of-the-day in a way that promises to improve the ratio of benefits to costs.

As the end of the year approaches, I again find myself in a reflective mode, thinking about my life and work. I remember a comment from Oscar Wilde (1854-1900), who wrote an 1891 essay, The Critic as Artist, in the form of a conversation between Gilbert and Ernest. At one point, Wilde writes:

GILBERT. Ernest, you are quite delightful, but your views are terribly unsound.  I am afraid that you have been listening to the conversation of some one older than yourself.  That is always a dangerous thing to do, and if you allow it to degenerate into a habit you will find it absolutely fatal to any intellectual development.  As for modern journalism, it is not my business to defend it.  It justifies its own existence by the great Darwinian principle of the survival of the vulgarest.  I have merely to do with literature.

ERNEST. But what is the difference between literature and journalism?

GILBERT. Oh! journalism is unreadable, and literature is not read.  That is all.

I do love the line about “the great Darwinian principle of the survival of the vulgarest.” Of course, as a sardonic comment, it has potentially a broader application than journalism, but also to culture and politics.

From the standpoint of my work life as Managing Editor of the Journal of Economic Perspectives, along with my Conversable Economist hobby, words like “unreadable” and “not read” make my shoulders tighten. “Unreadable” means it cannot be read, likely because of infelicitous style. “Not read” leaves open the possibility that it could be read, but few people see it. Part of what drives me in my work life is that I feel an inner drive or momentum to expand the possibilities of the economics that is actually readable or read.