It’s a flat world after all

In case you missed it, last year UCLA’s Ed Leamer did an excellent critique of Thomas Friedman’s The World is Flat. He plays cat and mouse with Friedman’s use of the term “flat”, offering up a review of economic theory and empirical evidence related to the theme, while making some pretty funny jokes at Friedman’s expense. The full pdf, which will be published at some point in the Journal of Economic Literature, is available here. Below is an excerpt from the conclusion:

We economists have great ideas but not great ways of expressing ourselves. It starts with bad titles. This raises the philosophical question: When economists speak, but no one listens, did we say anything? Thus I understand that it doesn’t much really matter what I think. The market has said that The World is Flat is a great book. But just for my own personal amusement, here comes the summary.

First of all, metaphorical titles as powerful as The World is Flat really matter. With that title, readers have their fears reinforced, needlessly. The debate about how to handle our economic relations with other countries has already been harmed enough by misleading metaphors. Those who favor high tariffs call it “protection” as if a wolf were lurking beyond our borders ready to devour our jobs. And those who favor low tariffs call it “free” trade, as if paying a couple of more dollars for the shirts and jeans we buy at Wal- Mart amounted to a period of incarceration.

Other than the metaphorical mischief, this book is long on anecdotes, interpretations and insight. It’s an eye-opener methodologically because of the clear progress Friedman makes without benefit of the union card we call the Ph.D. in Economics. But he doesn’t get “there”, because, I think, he has little knowledge of the vast amount of work that has been done by economists on these topics. Friedman does get some of the policy response right:

“And it requires a Great Society that commits our government to building the infrastructure, safety nets, and institutions that will help every American become more employable in an age when no one can be guaranteed lifetime employment” p. 277
“My vision is to put every American man or woman on a campus” p. 290

But when Friedman calls this program “compassionate flatism” that is the flat that broke this camel’s back. Worse still, this nonsense metaphor is becoming altogether commonplace, filtering into classrooms and boardrooms. We should take better care of our language.

On the policy front, Friedman misses the distinction between markets and relationships, and thus misses the potential for policy measures that might facilitate the formation of long-term relationships between workers and employers. We economists do a linguistic disservice when we call a relationship- free, frictionless outcome “perfectly competitive”.

The Luddites had it right when they complained that there is nothing perfect about that outcome at all. Frictions are our friends. Frictions give us the peace of mind that we will still have our jobs when we wake up tomorrow. Frictions reduce the chances that one party will try to “hold-up” the other, absconding with the lion’s share of the mutual benefits. Frictions thus give us the confidence to make the relationship-specific investments from which great returns can flow. It’s the friction we call “falling in love” that allows the human species to flourish. I am not endorsing the French solution of permanent jobs for all, which creates a forced one-sided “marriage” between a willing worker and an unwilling employer, without even the benefit of a first “date”. That makes French employers reluctant to marry workers and leaves the French unemployment level unnaturally high. But we should be thinking long and hard about how we can make our “single” workers more “lovable” and what we can do to maintain the “marriages” between employers and employees that are working.

Friedman also misses the point that education works well as a treatment for the income inequality that comes from increased global competition, but not so-well for the talent-driven income inequality of the post-industrial age. Beyond the fact that no amount of education will allow me to sing like Pavarotti, the well-paid tasks of the post- industrial era involve subtle job-specific tacit knowledge that is impossible to teach with the lecture/library work/exam style of University classes, which works best to transmit codifiable knowledge and rule-based decision- making. That’s training, not education. For tacit knowledge, it’s not that experience is the best teacher. It’s the only teacher. That, by the way, brings us back to the need for frictions. Who would have invested in 20 years of formal education and another 10 years of on-the-job training to become an economist, if they thought the job might disappear when they had finally mastered it?

The final third of Friedman’s book is an insightful and lucid discussion of the stress points between the Muslim and the Judeo-Christian world. (You are free to object that I am not competent to review that material.)

But: Physically, culturally, and economically the world is not flat. Never has been, never will be. There may be vast flat plains inhabited by indistinguishable hoi polloi doing mundane tasks, but there will also be hills and mountains from which the favored will look down on the masses. Our most important gifts to our offspring are firm footholds on those hills and mountains, far from the flat part of the competitive landscape. Living in the United States helps a lot, and will continue to. But those footholds will increasingly require natural talent. As a byproduct of our search for personal pleasure, we provide our children highly loaded dice to roll at the genetic craps table. Beyond the all-important luck of the genetic draw, it takes the kind of education that releases rather than constrains their natural talent.