Reading Notes for August 25, Introduction
Economics 210a, Fall 1999
Paul David (1985), "Clio
and the Economics of QWERTY," American Economic Review
75:2 (May), pp. 332-337.
Paul David (1993), "Historical Economics in the Long
Run: Some Implications of Path- Dependence," in G. D. Snooks,
ed., Historical Analysis in Economics, London: Routledge,
Statisticians call a process ergodic if, as you look
sufficiently far into the future, knowledge of where the process
is now does not help you estimate where it is going to be: in
a sense, where it is now doesn't matter for where it is going
to wind up.
The opposite of an ergodic process is a non-ergodic
process. Consider a coin-flip random walk: if heads (which happens
with probability 1/2) then X(t+1) = X(t) + 1; if tails (which
happens with probability 1/2) then X(t+1) = X(t) - 1. If you
are forecasting the future value of X at some point very far
in the future--no matter how far you look--your best estimate
of its future value is its present value X(t): where it is now
matters a lot for where it is going to wind up.
Thus an ergodic process is one in which in the long-run
history doesn't matter: knock it into an unusual state in one
period or other and in the long run it will return to normal,
behaving as if the large shock had never happened. A non-ergodic
process is path-dependent: know it into an unusual
state in one period or other and it will never return
to normal--or, rather, "normal" will change, for what
"normal" is depends on its historical development,
how it got there.
Clearly a world in which important economic processes are
non-ergodic is one in which economic historians get more
respect and earn higher wages relative to, say, equilibrium theorists.
This piece is Stanford (and Oxford) economic historian Paul
David's attempt to convince non-historian economists (and economic
historians too!) that historical development really matters,
that practically everything interesting in the economic world
How strong a case do you think he makes? Is the example important
enough to be convincing? And how could you go about analyzing--or
building tools to analyze--a world in which you began viewing
everything not as the lowest-cost highest-utility equilibrium
of a system determined by (fixed) tastes and technologies but
instead as the result of some highly path-dependent positive-feedback-loop-driven
S.J. Liebowitz and Stephen E. Margolis (1994), "Network
Externality: An Uncommon Tragedy," Journal of Economic
Perspectives 8:2 (Spring), pp. 133-50.
Liebowitz's and Margolis's work is the first we shall read
this semester of which economists and economic historians have
sharply divergent opinions. Some think that it is an excellent
piece--a convincing demolition of David's prime example--a powerful
stroke for the "equilibrium matters more than history"
view--that shows us that the keyboard is not a mal-functional
institution, and that the market is efficient.
Others see Liebowitz's and Margolis's piece as an example
of what is wrong with the methodology of economics. They say
that to place the point of view with which you agree on the high
ground of the null hypothesis, and then to be careful not to
consider any powerful evidence against the null, and then to
conclude that the absence of evidence is evidence of the absence
of effects--that this is bad methodology.
I find myself of two minds on this issue...
J.M. Keynes (1933), "Economic Possibilities for Our Grandchildren,"
Essays in Persuasion (New York: Norton,1963), pp. 358-373.
This is one of my favorite pieces ever--it is, in fact, a
large part of the reason that I decided to become an economist.
Its argument is, I think, wrong--but I find its argument incredibly
appealing and very well reasoned. As you read it, think about...
- ...the fact that Keynes is writing (in 1930) at the beginning
of the Great Depression. The official unemployment rate in Britain
had been 17 percent during the 1921 post-WWI recession, had only
dropped to 9.7 percent at its minimum in 1927, and by 1930 was
back at 16.1 percent. Yet Keynes is optimistic. Why?
- ...the fact that Keynes believes that "in the long run...
mankind is solving the economic problem"? Have we,
here, today (at least in the U.S.), "solved" the economic
problem? Would Keynes have expected us to solve the economic
problem given how rapidly technology has advanced since 1930?
- ...Keynes' conclusion that: "Avarice and usury and precaution
must be our gods for a little longer yet"? How much longer
do you think he would say "a little longer" is? How
much longer do you think "a little longer" will be.
Apropos of "avarice and usury and precaution," there
is a story--an apocryphal story--told of Russian revolutionary
leader Vladimir Lenin, in exile in Zurich during World War I,
eating with a guest at some Swiss hotel and being asked how,
in the socialist utopia to which he looked forward, goods would
be distributed. How would you keep people from taking more than
their share, and leaving none for the rest?
Lenin--apocryphally--pointed to the sugar bowl on the table,
with its lumps of sugar and its spoon. "How," he asked,
"does the hotel keep people from taking more than their
share of sugar, leaving none for the other guests?" Implicitly,
under socialism all commodities will be as abundant as sugar
in Swiss hotels. And all people will be educated to behave with
courtesy and politeness--to use what they need and leave "as
much, and as good" for others.