Model: Supply and demand

This post is part of a series where I quote and link to short descriptions of different social-science models and perspectives. The idea is to collect important models in easily accessible formats to help people aspiring to take a “many-model” approach to reasoning.

Supply and demand


This video on the equilibrium price and quantity is from Marginal Revolution University, the online economics education site run by economists Tyler Cowen and Alex Tabarrok:

For more, there are several videos in the series that come before and after this one that are helpful. And here’s the section on supply and demand from the free economics textbook The Economy.

Model: Where you stand depends on where you sit

This post is part of a series where I quote and link to short descriptions of different social-science models and perspectives. The idea is to collect important models in easily accessible formats to help people aspiring to take a “many-model” approach to reasoning.

Bureaucratic politics / Where you stand depends on where you sit

(Political science)

From Encyclopedia Brittanica:

Bureaucratic politics approach, theoretical approach to public policy that emphasizes internal bargaining within the state.

The bureaucratic politics approach argues that policy outcomes result from a game of bargaining among a small, highly placed group of governmental actors. These actors come to the game with varying preferences, abilities, and positions of power. Participants choose strategies and policy goals based on different ideas of what outcomes will best serve their organizational and personal interests. Bargaining then proceeds through a pluralist process of give-and-take that reflects the prevailing rules of the game as well as power relations among the participants. Because this process is neither dominated by one individual nor likely to privilege expert or rational decisions, it may result in suboptimal outcomes that fail to fulfill the objectives of any of the individual participants.

Most discussions of bureaucratic politics begin with Graham T. Allison’s 1969 article in The American Political Science Review, “Conceptual Models and the Cuban Missile Crisis,” although this work built on earlier writings by Charles Lindblom, Richard Neustadt, Samuel Huntington, and others…

Perhaps the most-abiding concept from the bureaucratic politics model, and the shorthand many have used to define it, is that actors will pursue policies that benefit the organizations they represent rather than national or collective interests. This idea, that “where you stand depends on where you sit,” is often called Miles’s law after the Truman-era bureaucrat who coined the phrase. A central and intuitively powerful claim of bureaucratic politics explanations, this premise has been criticized for its narrow view of preference formation. For example, critics note that it fails to explain the role of many important actors in the original bureaucratic politics case study of the Cuban missile crisis. Yet even the early bureaucratic politics theorists, including Allison, were explicit in acknowledging that other factors, such as personality, interpersonal relations, and access to information, also play important roles in the bureaucratic politics process. For these theorists, three key questions guide one’s understanding of the policy-making game: (1) Who are the actors? (2) What factors influence each actor’s position? and (3) How do actors’ positions come together to generate governmental policies?

Inequality and public policy

From ProMarket:

Indeed, the analysis shows that the share of public expenditures in GDP has a negative, significant, and large effect on inequality. For a given level of inequality of market income, a rise of public expenditures by an additional percent of GDP reduces the Gini coefficient of disposable income by 0.35 percentage points. Since the size of public expenditures across the OECD countries varies from 35 to 55 percent of GDP, this variable can therefore explain variability of the Gini coefficient of 7 percentage points across these countries. The Gini of disposable income in the OECD countries varies from 0.25 to 0.4. Hence, changes in public intervention can explain half or even more of these differences.

Journalism, academia, and the worst of both worlds

I wrote last week that “Under the right conditions, it’s reasonable to think that the best analytical journalists will outperform at least the average academic.” Here’s a very different view, from Corey Robin at New York Magazine:

When academic knowledge is on tap for the media, the result is not a fusion of the best of academia and the best of journalism but the worst of both worlds. On the one hand, we get the whiplash of superficial commentary: For two years, America was on the verge of authoritarianism; now it’s not. On the other hand, we get the determinism that haunts so much academic knowledge. When the contingencies of a day’s news cycle are overlaid with the laws of social science or whatever ancient formation is trending in the precincts of academic historiography, the political world can come to seem more static than it is. Toss in the partisan agendas of the media and academia, and the effects are as dizzying as they are deadening: a news cycle that’s said to reflect the universal laws of the political universe where the laws of the political universe change with every news cycle.

What’s the economic impact of venture capital?

In my post on the case for technology I cited a 2011 paper that found that an increase in venture capital funding in a city was associated with higher income, higher employment, and more new firms in that place.

In this post, I want to clip together a few resources on what we know about VC’s economic and social impact.

Here’s the conclusion of that paper linked above, on VCs and geography:

We find that increases in the supply of venture capital in an MSA stimulate the production of new firms in the region. This effect appears consistent with either of two mechanisms. First, would-be entrepreneurs in need of capital may incorporate the availability of such capital into their calculations when trying to decide whether to start their firms. Second, the firms that VC firms finance may serve as inspiration and training grounds for future entrepreneurs. We further find that an expanded supply of venture capital raises employment and aggregate income in a region. At least some of these employment and income effects probably stem from venture capital allowing entrepreneurs to create value by pursuing ideas that they otherwise could not have. Table 10 summarizes the magnitudes of these estimated effects across our various specifications.

Here’s a bit from a 2000 paper in the Journal of Economic Perspectives:

After addressing these causality concerns, the results suggest that venture funding does have a strong positive impact on innovation. The estimated coefficients vary according to the techniques employed, but on average, a dollar of venture capital appears to be three to four times more potent in stimulating patenting than a dollar of traditional corporate R&D. The estimates therefore suggest that venture capital, even though it averaged less than 3 percent of corporate R&D from 1983 to 1992, is responsible for perhaps 10 percent of U.S. industrial innovations in this decade

And here are several snippets from a 2011 NBER literature review:

Overall we believe that the body of empirical evidence is consistent with the notion that VCs select more innovative companies, and then help them with the commercialization process. The results suggest that VC plays a greater role for commercialization (as measured by bringing products to market, and forging strategic alliances) than for the generation of further innovation (as measured by patents and TFP)…

Company-level studies typically confirm this positive relationship between VC and measures of economic growth. Puri and Zarutskie (2011), using US Census data, find that only 0.11% of new companies created over a 25 year sample period from 1981-2005 are funded by VC, yet these companies account for 4% to 5.5% of employment. They show that VC-backed companies grow faster at every stage of the investment cycle, i.e., both before and after the receipt of VC. Chemmanur et al. (2011a) find a positive effect of VC on company productivity. Davila et al. (2003) and Engel and Keilbach (2007) also find a positive effect of VC on employment.

Overall the literature consistently finds a positive relationship between VC funding and other measures of economic value creation. While the literature seems to identify social value creation, there remains an open question on the social costs of VC.

And one more recommended paper.

What will the new mixed economy look like?

“After the collapse of the Soviet Union in 1991, the 20th century’s ideological contest seemed over,” The Economist wrote in last week’s cover story on millennials and socialism. “Capitalism had won and socialism became a byword for economic failure and political oppression.” These sentences aren’t wrong, but they are misleading. It’s true that market-oriented economies fared better over the 20th century on various measures of human welfare than did centrally-planned ones. But they did so largely by abandoning their commitment to laissez-faire capitalism and inventing something new: the mixed economy.

Before World War II, public spending on social services was virtually nonexistent in OECD countries. In the post-war years it exploded and today averages just over 20% of GDP. In the middle of the 20th century, governments in these economies began providing health insurance, public education, retirement support, and more. In aggregate, these policies not only didn’t get in the way of economic growth; they likely increased it. And they enabled the so-called “capitalist” countries to deliver not just better economic outcomes than centrally-planned ones but also longer, healthier, and more-educated lives for their citizens. The mixed economy was the original “third way,” before that term came to be associated with centrist neoliberalism.

Today, as The Economist notes, “Socialism is storming back because it has formed an incisive critique of what has gone wrong in Western societies.” But the challenge of the 21st century, like its predecessor, is not about capitalism vs. socialism. It is about creating a new kind of mixed economy.

(More here and here.)