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Last Modified: 1999-07-02
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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, pp. 29-40.

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 is path-dependent.

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 process?

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.

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