Thursday, December 30, 2010

Prosperity and Migration

Last summer, I had the great pleasure to attend a week-long seminar offered by the Institute for Humane Studies. When I heard that my friend and professor Bryan Caplan would be attending one of them this coming summer, well, I just had to apply. It seems that most of my conversations with Bryan are about standard-fare nerd stuff, and not nearly enough about economics. It would be nice to have a week's worth of lunchtime conversation in a more relaxed atmosphere.

So most of these things have little essay questions to answer, usually centering on some question involving liberty in one way or another. I chose to field one question on poverty and one on immigration. I think the two are closely related, but the way the prompts were framed, there wasn't a good way to get that across in 400 words each. Here are the prompts (in bold) and my answers:

Why are average citizens in some countries – such as South Korea, Germany, or Chile – relatively wealthy while citizens in other countries – such as Zimbabwe, Haiti, or North Korea – relatively poor?

The greatest triumph of the Liberal Age is the great mass of people lifted out of poverty. Freedom of contracture, so mundane an assumption to us in the comfortable West, helped deliver us from the misery of self-sufficiency. The rule of law, crafted over centuries in open access court cemented those rights to property that permit the prudent exercise of risk. Large, liquid capital markets, often the butt of scorn from legislator and pundit alike, allow entrepreneurs the opportunity to transform dreams into reality. Freedom to enter into and exit from business arrangements discourages institutional atherosclerosis, rewarding vigorous competitors and punishing sluggards. These basic preconditions of prosperity are historically rare and notoriously difficult to reproduce by art or artifice.

There is a canard that prosperous countries are wealthy for similar reasons, but poor countries are each destitute in their own way. Vicious tyrants and petty tinpot dictators flaunt citizens’ natural rights, confiscating treasure along with attendant opportunities in self-indulgent exercises of arbitrary power. Politically connected cronies capture monopoly privileges at pennies on the dollar, while the State runs printing presses day and night, knocking the legs from under holders of the sovereign currency. Frustrated citizens, knowing they lack equal protection under the law, refuse to challenge the status quo in stacked or indifferent courts. Persistent social arrangements hinder wealth mobility, generating chronic underclasses. Foreign policy administered from afar by comfortable bureaucrats, well-intentioned or otherwise, acknowledges and legitimizes corrupt regimes, while often harming innocent civilians as a result.

Zimbabwe, Haiti, and North Korea are more straightforward than some of the more marginal nations. Zimbabwe has the worst monetary policy since the Weimar Republic. Haiti is hobbled by climate, disease, the legacy of the Duvaliers, the aftermath of failed public works projects from the 1950s, and persistent regime uncertainty. North Korea is in the grip of a ruthless autocrat bent on the unrelenting exploitation of his subjects. Under such illiberal conditions, it would be folly to expect any of these countries to flourish. It is even more depressing to realize that the exceptionally well-to-do in these kleptocracies are often no better off than the median trial attorney in the United States. Other poor countries are more difficult to explain. Instead of being statistical outliers, they simply chronically sit in the boggy bulge on the left side of the distribution. These countries are of the greatest empirical interest, and should be studied more.

Proponents of open or greatly liberalized immigration often argue that residents of an impoverished country should have the right to enter can peacefully work in wealthier countries. Supporters of restricted immigration counter that the current citizens of a nation have the right to limit, through legislation, the number of people seeking to enter their country for economic reasons. Which, if either, of these arguments do you find more compelling? Why?

In my estimation, the only plausible argument against free and open migration concerns public health. Some filter is needed to prevent the spread of drug-resistant tuberculosis, exotic influenza strains, cholera, or other (communicable) airborne pathogens. Even this argument is shaky, since much of the disease afflicting poor countries is related to tainted water supplies and poor sanitation. Rotavirus is all but unknown in the United States, and we have the miracle of the flush toilet to thank for it. By imposing arbitrary migration barriers on people, political leaders are effectively dooming millions to the agonies of diarrhea, blood poisoning, parasitic invasion, malnutrition, and other myriad ailments that have been effectively conquered in the developed world.

The common economic arguments against open immigration are pure balderdash. Labor markets are emphatically not zero-sum; new workers create new opportunities for specialization and trade. If it were true that economic activity were somehow crystallized into static patterns, it would make more sense to bar recent graduates from entering the labor market, since they are more likely to be in direct competition for incumbent positions than immigrants who lack cultural capital and country-specific tacit knowledge. Luckily for freshly-minted 22-year old professionals, there is no such crystallization, and having access to the products and services provided by others, regardless of their national origins, allows them to avoid the curse of self-sufficiency and to focus on their own productive advantages. Trading with others is mutually satisfactory, even (and I think this can be easily overlooked) if the trade is between third parties. More productivity means we generate more surplus, and people tend to avoid packing their things and moving under the expectation that they are going to be less productive. Current citizens are, simply put, wealthier by dint of having access to the enhanced productivity of others. The issue of rights is a red herring. Even if exclusion rights exist, the exercise thereof limits the opportunity set of all parties. Draconian immigration policy makes everyone poorer, even Draco.

The balance of the arguments are either easily debunked with some simple fact-checking (such as claims that immigrants are more prone to committing crime… hint: they are not), countered with the realization that some problems are caused by other policy (drug trafficking, for the most obvious example), or addressed with efficiency criteria (the probability that severe political externalities could manifest are trivial compared to the boon to the economy.


I think if I had any marginal insights while writing this, it's that I probably chronically underestimate the implications of economic activity. Here I sit, fingers on a machine that lets me communicate almost costlessly with people all over the world. It's the dead of winter, and I'm comfortable with rolled-up sleeves in a brightly-lit building. I have shoes on my feet, Bill Leeb crooning to me through headphones I picked up for the equivalent of ten minutes' work (it's Noise Unit at the moment, off Strategy of Violence, probably his second or third best studio album next to Tactical Neural Implant and maybe Tenebrae Vision), and a notable lack of mud, smoke, and feces anywhere near my person. In any historical or geographic sense, from behind the veil of ignorance, I could not reasonably expect to have landed in such amazingly lucky conditions. As a humanitarian, I want to extend my luck to those who don't have it, and this urge becomes stronger when I realize that I can improve my own lot by doing so (though I must admit I'm comfortable enough so that the selfish reasons for doing so are pretty close to insignificant). It's probably true that free and open immigration won't magically lift the world's destitute out of their miserable conditions, but it could have a host of consequences unrelated to direct productive efficiency gains.

I'm prone to the conceit that ideas have power, and that good ideas germinate in fertile soil. In addition to importing good ideas together with foreign labor, we are able to export good ideas as remittances. Who knows but that some inventory control scheme created in the United States could catch on in Botswana, reducing shrinkage and permitting more food to find their way into the mouths of hungry kids (to leverage a popular heartstring-pulling tactic). The simple act of welcoming strangers isn't just morally right, it's efficiency-enhancing, and here's the kicker that often gets overlooked, for everyone. Germans who invite Turks to rebuild Munich mean that I'm able, should I so desire, to buy a better Mercedes-Benz than would be available in the counterfactual.

Of course, I didn't do much to delve deeply into the drawbacks of immigration in my answers above. I've seen, firsthand, the dynamics of Turkish life in Germany. I've even briefly been an expat myself, so I can appreciate anti-foreigner bias, and I have to conclude that while plenty of it is in-group bias, there's a fair share that stems from shitty labor policy. If I'm in a heavily regulated industry, with high barriers to entry and abundant protection, I doubt I'd be thrilled with welcoming competition that played fast and loose with my society's rules, no matter how much it needed to be shaken up. I might even see how parents might not want their kids to be "contaminated" by contact with bizarre cultures. Such contact tends to generate uncomfortable questions that parents haven't approached in their own thinking yet. I would still maintain that all these little frictions are piddling compared to the overall efficiency gains, and that rough spots tend to get smooth over time. Ethnic groups that don't breed into the local population usually end up finding a comfortable niche (usually) and plug along with the rest of us.

Hm. I've been mulling over my feelings on the dragon sleeping at the foot of the bed. My next post will probably be on that topic, but I might return to this. Growth is an important subject, and I think the Jones/Kling/Hayek milieu has perhaps more to offer on the topic than has been adequately explored yet.

Wednesday, December 22, 2010

Uber Alles

Nietzsche’s übermensch is my typical go-to example of poorly understood abstractions, second maybe to Adam Smith’s invisible hand or Lamarck/Darwin/de Vries’ biological evolution. I may be more inclined to give the author a pass on this point; in part because he was a raving madman by the time Thus Spoke Zarathustra (hereafter referred to as TSZ) reached its final draft, but mostly due to the capricious filter of time and the intentional distortions of partisan fanatics. Instead of a figure unbound by the conventions of tradition and duty, most folks will gleefully conjure an image of a state-sponsored superhero, all agleam in princely regalia, lording over the hoi polloi with a calm, noblesse oblige dignity, a beatific smile, and the machinery of industry crowding the scenery. The übermensch of the popular imagination is personified in comic books as the doughty paragon of virtue or in totalitarian propaganda as either the leader himself, or as is more common the yet-unidentified Heir, the Immanent Man whose glorious path is to be cleared by His dutiful servants (who just happen to wield temporal power for the indefinite future). These images are thoroughly inconsistent with the image conjured in TSZ. I assert that since the 1885 publication of TSZ, the figure that comes closest to capturing the true intent of the übermensch is modern pop singer Ke$ha.

Nazi propaganda aside, consider the context in which Nietzsche lived and wrote. The mid- to late- 19th Century saw the rise of German industry and with it the same economic and cultural turmoil that engulfed the rest of the Continent. Compared to their cousins in the New World, the European existence carried with it legacy institutions: the tattered vestiges of feudalism, the often erratic reach of the Church, the twilight of monarchy, and the caustic grip of the guilds. Combine this with an increasingly assertive labor class, and we have the necessary conditions for the emergence of a new archetype: a metonym for a man not in opposition to the wider mores, but independent of them, orthogonal to both convention and trendy philosophy. Nietzsche’s Prometheus was as unlikely to be a devout Christian as a fiery Socialist. Though the prose was challenging to untangle, even in the original German, it is clear that though the übermensch lives in the context of his times, he is not defined by his opposition to them, but his rejection of them, and ultimately his transcendence of them. Critics of the post-nihilistic aspects of the übermensch have mocked the Galtian (Galtic?)individualism implicit in the trope, perhaps misunderstanding the true nature of the character. Again, the difficulties in untangling the dense, frequently crazy prose can be troublesome, but I interpret no suggestion that the übermensch be anything but an abstraction, a model, a Platonic ideal. The disdainful rejection of Christianity by TSZ’s avatar is, at its root, not that different from Nietzsche’s recurring contempt for the ascetic aesthetic. The aversion to noble and king that permeates the text is typical of a more generalized contrariness that notes that man-in-wilderness is suffused with a vigor absent in bureaucratic arrangements. The all-too-human would be as at home in a Lockean as a Hobbesian wilderness; he bumps and grinds on the pockmarked back of Leviathan, guzzling cheap wine and taking earthly pleasure without being consumed by the Beast. To see the perilous parkour present in his pleasurable prancing on the beast’s broad back, examine the following stylized facts and see where we can find a good match.

1. The übermensch exists apart from conventional morality. In the 19th Century Germany, this was the set space defined by the intersection of the main (Catholic, Lutheran, Calvinist, Jewish) religious traditions, legacy feudal norms, and emerging bourgeois virtues. This is not to say that the übermensch is diametrically opposed to such morality, but divorced from it, unencumbered by either the need to obey or the desire to intentionally flaunt.

2. The übermensch is hedonistic. This is a corollary of (1), as Nietzsche’s great gripe with Christianity was the culture of self-denial. He saw no middle ground between denial and gratification; a man could either suppress or indulge his whims. If mention is made of anhedonia in Nietzsche’s works, it is almost certainly conflated with asceticism. For practical purposes, we can safely assume that the übermensch has a strictly increasing utility function in earthly pleasures.

3. The übermensch is beyond an antichrist. This is another often-puzzling neologism of Nietzsche’s design. In his world, belief in God was immaterial to the extent that belief didn’t adjudicate behavior. An antichrist reviles and rejects the aspects of Christianity that Nietzsche thinks corrupts and weakens the natural human spirit. The übermensch has progressed beyond this to the extent that he dismisses the idea of God as childish fantasy, no different than the Tooth Fairy and worship of such a deity akin to writing letters to Santa. The übermensch has drawn back the curtain on the world and found the wizard wanting. To strain the analogy, he decides to just stroll through Oz rather than douse the witch and click his heels back to the Dust Bowl.

4. The übermensch is not affiliated with the state. As with religious considerations, concerns of secular authorities lie in his null set. The übermensch will not take up arms to defend trite traditions or arbitrary political boundaries. The übermensch does not seek office, does not supplicate for rents, does not beg protection. He is his own patron, his own ward, his own tribe. This stylized fact alone restricts the head count of possible living übermenschen, since there is no escaping collective action problems without completely returning to a savage state of nature. A certain reading might suggest a bit of a paradox here: hedonism is best fulfilled with the trappings of capitalism: well-functioning capital markets, sensible legal institutions, all that jazz, but there must be a politically vested class capable of maintaining order and protecting property rights. By definition, this class cannot be populated by übermenschen, and I suspect Nietzsche sensed this contradiction, setting TSZ in the tone of the Tao Te Ching or The Odyssey, as the saga of an individual in lieu of his otherwise preferred treatise (rant, if you’re feeling unkind).

So what does the stylized übermensch resemble? These stylized characteristics leave us quite a few degrees of freedom. We have the broad strokes of a proto-Randian hero, unbound by feeble concerns for charity, perhaps a titan of industry, well-dressed and fit, striking deals, and deftly avoiding needlesome pestering by pudgy, pale proletarian bureaucrats. Perhaps we have this, but we might also have a marvelously astute arbitrageur, recklessly exploiting a narrow window of opportunity, winking through the rip in the social fabric she’s using to siphon masses of treasure from a cowed public.

TSZ really points back to the Fool of the tarot. The disconnected ciper, the Uncarved Block, the Last Gunslinger all hearken to a similar idea: the clay from which übermenschen are thrown. The final product need look no more like the Galtian paragon than a drinking cup need resemble Waterford crystal. What we’re left with is closer to a traditional maximization problem in economics, subject to some unorthodox constraints. The objective function is actually almost exactly what we start with in the textbooks: utility as a function, positive in consumption, negative in labor. The narrow calculus used to maximize this function actually makes the other stylized facts redundant: concerns over religion, charity, the state, or the brotherhood of man are all orthogonal to the utility function: they simply never enter the decision process. Our agent is optimizing the C/L ratio, nothing more. All we need to find is someone who has chosen to exploit an opportunity for self-oriented gain. My preferred candidate for exemplar of this strategy is pop singer Ke$ha.

Finding a musician who fits the stylized characteristics is child’s play. Fill an auditorium with half-baked acts and throw a dart blindfolded. You’re almost guaranteed to wound someone who doesn’t give a rip about the Church or the State. You’re unlikely to hit someone without so much as a shred of talent though. Nor are you particularly likely to puncture the sleeve of people who didn’t work their fingers to the bone to get where they are (yes, there are some pop stars who were just plain lucky, but don’t let your availability bias fool you: they’re few and far between). I would be willing to bet that if that auditorium contained people who had no discernible talent, and had exerted little effort to get where they are, you’d be looking at no more than a handful of acts. Of these, we might find the (early) Sex Pistols (though I might argue that the young John Lydon certainly paid his dues living in Thatcher’s squalor), Kris Kross, or any given reality star-turned-singer the world is likely to see. I would counter with the observation that these acts either grew into something wonderful (the Sex Pistols transcended conventional definitions of art and Lydon proved his chops definitively in PIL), amounted to mere one hit wonders, or just flopped commercially. That, or they attempted to just outright cheat (Milli Vanilli), and reaped the ill harvest of their iniquity. I can think of no other act that put forward so little effort, flaunted convention, and has managed to achieve commercial success the way Ke$ha has. I shouldn’t have to address how blisteringly insipid her lyrics are, or the Krogeresque pedestrianism of her backing tracks. True, other “artists” have relied heavily on autotune to either mask the inability to sing or to generate vocal effects otherwise impossible to reproduce using the natural voice, but none among the ranks of chart-toppers can rival her brilliant combination of aggressive stupidity, wrenching assonance, dismal profanity, and palpable ineptitude. Her music is a naked, unapologetic loogie in the eye of good taste, and she’s caterwauling all the way to her stockbroker’s doubtless tastefully appointed chambers.

More than anything, it’s the string of conditional probability that makes Ke$ha so unlikely, and probably not to be repeated. Her commercial success is proof positive that we’re living in a Hansonian Dreamtime, where our per-capita wealth is so staggeringly high that we can afford to lavish wealth on those who not only fail to provide evidence of talent, but who baldly write large their infantile spasms, in ham-fisted crayon, flatulent and troglodytic all the while. She is the anti-Banksy and our duly appointed usher into a new age.

Saturday, December 4, 2010

Culture, Rational Choice, and Economic Development.

Okay, here are my thoughts with a little more elaboration. Once I know what the heck I mean when thinking of culture, I think I'll write a paper on it. If you have any disagreements, please let me know! Debate can only clarify my thoughts.


What is culture? Culture is the sum of knowledge that is irrational – that is neither logically consistent nor empirically verifiable. Why do people have knowledge that is irrational? Because there exists uncertainty – uncertainty in the way that Frank Knight meant it, as the fundamental ignorance of the future that a probability distribution cannot be applied to it, in other words, something that cannot be insured against, to differentiate it from risk. If there is certainty, or if there is an objective probability distribution of something, then all action collapses into rational action, as there is an objective constraint that can be maximized.
So when do we run into uncertainty? As Douglass North notes, much of human history has been the story of bringing our understanding of the physical world out of uncertainty into certainty, and thus changing our knowledge of it from irrational, ie religion, witchcraft, etc., into the rational, or functional relationships between things. By doing so, we have made human interaction more complex, so that uncertainty has increased – while primitive hunter gatherers had to construct an irrational system in order to understand the world, their interpersonal relations were relatively rational: those within the family were to be protected and had enumerated roles; women bore children and gathered resources, men hunted, and outsiders were threats. Given this worldview, the ends that individuals pursued could be rationally planned; the means which people pursued those ends were fraught with true uncertainty – would dancing a certain way bring rain? Would eating the brains of your enemies give you their power? Primitive culture, then, is primarily found in the means that people use to pursue common ends.

In the modern world, the physical world is much more predictable. We still do not know exactly what the weather will look like tomorrow, but we know that we cannot affect it by dancing, and we have a fairly good idea what causes the weather that does occur. True uncertainty these days lies in two places – in ourselves, and in other people. Our culture has developed in order to help us deal with this aspect of human life. Our lives are non-ergodic, to use the term that North uses. An ergodic system is one which returns to a previous state; our selves never regress to a previous state – at every moment of time we are a different person that we were previously, and we can never know who we will be in the future. The ends we pursue are irrational – determined by our culture. There is also uncertainty in other people, how they will react to things, their motivations, etc. How we perceive other people and their motivations has enormous implications for the functioning of the economy: if we believe people are primarily well intentioned, then cooperation and coordination are going to be easier, and the economy will do better than if we never trust the motivations of others. If we see someone innovating in some way, and we believe that this innovation will lead people to do things we don’t approve of, then we will try and quash the innovation.

Again, the only reason for culture is this fundamental uncertainty about the world. If the ends we pursue we all well defined, and the means of pursuing them were all simple functional relationships, then there would be no question what society should look like, and there would be no differences across societies. But given uncertainty things must be interpreted – and the way people interpret things is irrational.
Now, uncertain does not mean completely random, and irrational does not mean completely arbitrary. Psychological studies show that personality is relatively fixed for most people after the age of 30, which makes planning for oneself much easier. The fact that people engage in projects that are long term implies that we expect our future selves to want to pursue similar ends as our present self. And people’s culture is based on reasonable interpretations of past events. This is why we as economists can talk about it – while culture is inherently individual, it is based on shared events and a mental framework which has parts to it which are shared with similar people.

So what does this have to do with how economists usually talk about culture?

1) Culture as preferences – This shows us that culture and preferences are not the same thing. Culture is certainly important in determining the ends which an individual pursues, but it is not the same thing. The preferences of the primitive tribe – the desire to eat, sleep away from exposure, reproduce, etc, are all instinctual, given by genes. As these lower level needs are met, then culture can shape the ends that people pursue

2) Culture as capital – Insofar as the irrational beliefs of people lead to production being better coordinated, culture can be thought of as capital. It is really the same thing as sociologists and mainstream economists talk about social capital, though.

3) Comparative Cultural Advantage (a la Lavoie and Chamlee-Wright) – It is useful to talk about comparative advantage when we talk about the production of goods or services which are consumed. Culture certainly shapes the productive capacity of a country or group of people, but countries do not compete on margins of culture. So saying that a country has a comparative cultural advantage in work ethic is ultimately meaningless, but saying that the attitude towards work affects a country’s comparative advantage in automobile production is valid.

4)Culture as a constitution – this metaphor, made by Storr and John, is useful in the sense that both arise out of the desire to limit uncertainty. If the actions of public officials were known with certainty, then a constitution would be unnecessary, just as culture would be unnecessary without uncertainty.

Should we even talk about culture?

As rational choice theorists, we take ends as given and analyze only the means used to attain those ends. If culture is, today, primarily about the selection of ends, then economists should ignore it and stick to the means used to attain those ends.
The problem arises when the question of economic development comes up. Economic development is never the intended goal of individual actors, but the unintended consequence of those actors in building an economy which makes coordination and cooperation easier. The economist can talk about economic development in three ways.

1) As students of society, we can look at the ends which people pursue which tend to lead to increased economic cooperation, and those ends which people pursue which do not. There need not be any comment about the desirability of the ends, or even the desirability of improved economic cooperation. The rational choice theorist must stay silent on such matters. What he can speak up on is the compatibility of means with stated ends – as Mises and Hayek were in the calculation debate, arguing that socialism and economic performance superior to capitalism were inherently incompatible.

2) As people who believe that improved economic coordination is inherently better for humanity, we can be preachers advocating for ends which lead to economic development, and we can help reframe the actions of others, in particular merchants and innovators, in a positive light. This is the economist as preacher, and is the goal of economists like Deirdre McCloskey, who wants to recast the Bourgeoisie as heroes. The economist here is ultimately usurping the stated ends of individuals with her own, but doing so through persuasion rather than coercion.

3) The economist, finally, can be the planner. There is one case in which the choice of an individual has to do with economic development – that of the policymaker. The policymaker has a vested interest in the economic performance of the society he has influence over, so the economist in advising him can legitimately advise usurping the ends of individuals in society through coercion. The morality of so advising is questionable.

Thursday, December 2, 2010

Economics and Culture?

Economic theory concerns itself with the analysis of means taking ends as given. This is, and should, remain the dominant paradigm within Economics. The problem with this comes when economists want to talk about economic development. Economic development is not an end that any individual pursues. Economic development comes about as an unintended consequence of individuals pursuing ends which enable others to more effectively pursue their own ends. That is why culture, and the selection of ends of individuals is important in economic development. By selecting economic development as an end, the economist is usurping the ends of individuals with his own. Since the individual is no longer weighing his selected ends against one another in making rational choices, rational choice framework is no longer sufficient to understand the process of economic change and development.

It that true? Or is economic development only brought about as unintended consequences of the means individuals select to pursue commonly held ends held by people in developing and non-developing countries?

Take money, the most commonly cited spontaneous order. If we have one society that uses money and another that does not, what methods of analysis can economists use to analyze that situation? Either they can use economic theory and explain why one society has a money economy and another doesn’t, or he can approach the question as a problem: how to get the economy that does not use money to use money. On some fundamental level, that’s bad economics, just as “how do we make poor nations rich” is, on some level, bad economics. We are positing an end which people don’t pursue, and we can’t use rational choice and economic theory in the selection of ends; we must take them as given.

The exception is when a group of people, usually a dictatorial group, actually pursues economic development as an end.

Friday, July 23, 2010

Small business fetishism

I can't quite wrap my head around what's so all-fired special about small business compared to his larger bretheren. Look fellas, all businesses start out small. That's as true for the mom and pop grocery store or the corner adult bookstore as it is for General Dynamics or Microsoft. You know how small companies get big? by delivering value, that's how. Come on now. The sad truth of the matter is that most small businesses, especially the ones that stay small just don't deliver all that much value. Yeah, yeah, there could be other reasons, like if you're in an industry that doesn't scale well (think granite quarrying or roofing services) but by and large, when policy favors small business it does one of two things:
  • it elevates the importance of relatively low-value-added enterprises
  • it promotes (again, relatively) excessive risk-taking by encouraging the formation and propagation of itty bitty ventures.

Don't get me wrong here now. Vigorous competition and the entrepreneurial spirit are critical for any vibrant economy, but siphoning talent from established providers of value destroys the creation of surplus, especially once you adjust for the inherent uncertainty of a startup.

Let's use an example to illustrate what I mean.

Hugh is an out-of-work chemical engineer. Now, it just so happens that Dow has a plant not too far from where he lives, but because Congress is offering hiring incentives to small businesses (for the sake of argument, let's say that this is defined by firms who have 20 or fewer employees), he's offered a compensation package that just edges out what Dow is offering. So Mr. Jass, Hugh, takes a job at Flybynite Chemicals, a small bioplastics firm bicycling distance from his apartment (the poor goofball's old house got foreclosed last year). He's all happy about his new job and is ten kinds of excited about getting to work on the thrilling project of turning corn into car parts. Six months later, and the enthusiastic but mostly incompetent amateurs who run the company go broke and have to lay everyone off. Hugh is out another job, and back on the dole.

On the margin, there could be lots of Hughs. Folks who would have been better off taking jobs with large firms, producing products that people want and supported by competent management. Instead, we have policy that champions one class of business over another, to the detriment of both the worker and the economy as a whole. Policy makers simply do not have the requisite information to judge whether or not employment with a large firm is less preferable than employment with a small firm. Only the workers themselves and the folks actually involved with the firm have the knowledge to make anything even approximating a best guess about the relative value of their resources (and yes people, labor is a resource. They call the hiring/firing departments in most companies Human Resources with little willy-nilliness involved). By pushing for more small business activity, we're shelving the valuable contributions made by big players, proven players, and taking risks with, yes, you guessed it, other people's money (well, maybe not money specifically, but with talent, time, and expertise, which are all worth a heck of a lot of money out there in the Wide World of Business). It's a recipe for misery and it's being sold to us in a cute perfume bottle as eau de economic recovery. Pathetic.

Thursday, July 1, 2010

Selection bias and educational efficiency

Ordinary civilian education tends to be mostly garbage. I'll admit that I've enjoyed most of the classes I've taken, but I'm also forced to admit that few of them in any way contributed to my workplace productivity (especially my lower-division classes). Of course, the natural underlying assumption here is that education is a capital good, not a consumption good, which may or may not be entirely defensible. I suppose one could make the case that the reason people (and by people, I mean non-arts majors here) sign up for film studies classes is to become better rounded individuals. Granted, I'm not sure why or how this justifies public assistance, but hey, who am I to complain about educational subsidies? Still, it's tough to justify many of the classes I took to get where I am on a cost-benefit basis, and that's just counting the cost to me, which is a fraction of the total real costs.

Then I look back at the classes I took in the Navy. Of those, close to zero were useless in my professional development. Perhaps the HTFF (heat transfer and fluid flow) class I had for a couple of weeks towards the beginning of power school didn't add too much to my ability to operate and maintain the reactor on my boat, but that's really the only one that crosses my mind.

As you might imagine, the public choice questions associated with this phenomenon race through my mind. Most obviously, the Armed Services have budget restrictions they have to justify to Congress, plus the people who teach classes are uniformed service members whose incentive structures don't encourage overconsumption of frivolous education. This is a bit unsatisfactory though. On the margin, there should be some slopover. If the civilian model drifted into the military, we would see crypto techs taking sonar courses and machinist mates taking boiler tech courses. To the extent that such courses contribute to a service member's productivity and professional development, this happens, but no one in uniform takes classes just for fun, at least not in my experience. I could be wrong. What you won't find is a soldier taking a Gender Studies or Modern Dance class during working hours.

Not, until that is, this soldier makes the move from the enlisted ranks up to O-gang. Once on the road to gentlemanhood, we see all manner of useless transcripts, filled o'erflowing with no-value-added humanities courses, forgotten social sciences lectures, and discarded out-of-major notebooks (mostly filled with halfhearted doodles). Why the discrepancy? If you would have asked me while I was still in the Navy, I probably would have cynically noted that officers don't really add much to operational efficiency, at least not afloat. I don't think I agree so much with that sentiment anymore. It's true that the crew knows very well how to operate the boat, but there really is a lot of coordination work that officers perform: work that makes for an efficient fleet (I can't directly comment about the ground forces, but I suspect that many of the same dynamics are present there as well). Whatever the details, the DoD throws piles of cash at useless education for officers, so long as the courses are provided in a university setting. What gives?

I can't give a truly satisfying answer, but it appears that the Joint Chiefs value the signal that a degree generates. Add to that a generous helping of institutional inertia, and kablammo, we have a whole mess of butterbars wandering around knowing stuff that doesn't do a lot to help them kill the enemy more effectively.

There's also the possibility that a university experience could help provide some civilizing effect on new officers. I'm skeptical about this as well. The wardroom civilizes faster and more thoroughly than the quad. Hm.

I wish I'd have more policy suggestions here. Let's say that (and this is being generous here, people) half of the classes your average officer takes can be applied towards operational performance, this is still a MASSIVE waste of fleet resources. Mind you, this is not just in terms of direct expenditures like salary, tuition, books, etc., but in lost productivity. I have to imagine that there's some efficiency enhancement we could make here. Maybe something like juicing up OCS to include one semester of military-specific education (military history, for example) and one semester of electives (computer science or something). That, or maybe keep the current system but force-waive garbage courses (you know the ones I mean).

I don't imagine that if I were an officer, or even a former officer that I would support any changes to the system (other than maybe closing the service academies). Military members retire relatively young, and to enter the civilian work force with an abnormal degree means entering the civilian workforce with a broken signal: not an encouraging prospect. Practically, as long as the college degree remains a valid signal for the population at large, it will remain an important signal for uniformed servicemembers. Ho hum.

Monday, June 28, 2010

Slap Leather

The big news today is the SCOTUS case that overturned Chicago's handgun ban. Mulling this over, I have been forced to revisit my stance on the applicability of the Second Amendment as well as the rights and responsibilities of gun owners.

One thought experiment I like to run with myself is something like this: what if everyone in this room were armed right now? If I find myself at a gun show (which happens a lot less these days than it used to), I nod and scratch my undercarriage solemnly, since a question that dumb deserves no greater answer. But what if I'm in a church? Depends on the church, I suppose. I'd probably be a lot more comfortable in a well-armed church that's received threats than surrounded by hands filled with prayer shawls or rosaries or whatever. How about a bus? Again, depends on the bus. Prisoner transfers aside, your average bus rider doesn't inspire a lot of confidence, but how would the ubiquity of firearms change the social miniscape? The standard micro analysis suggests that the relative costs of scuffles, disagreements, and other generally pugilistic behavior would increase greatly, leading to less consumption of unruliness, but when the shit hits the fan, you'd better make like a quack and duck.

You can repeat this experiment as you like. One iteration I keep coming back to is the classroom. Surely, the famous dreadful school shootings would not have been as terrible if someone had fired back. Then again, how much less would I be willing to fail a student who I knew was packing heat? I wonder what sort of adjustments professors would make with armed students filling a lecture hall. Depends on the professor, most likely. I reckon lots of 'em wouldn't hardly cotton to it at all. Could you imagine your average Gender Studies professor applauding students' decision to carry? Me either.

At any rate, maybe we could think of this gun thing as regulatory stimulus. Look people, open carry is a Schelling point in the violence prevention coordination game. Better even is the threat of concealed carry, since some folks can (maybe) free ride. We tried giving the auto industry a jump-start with Ca$h4Clunkers, so why not let regulatory relaxation goose the firearms industry? There's not even any deadweight loss here. Hell, it's probably a K-H improvement. It would generate a few jobs for Colt anyway. Maybe. Gun making is probably pretty capital-intensive. Or so's my guess. I've never visited a small arms factory. I should though. I bet it'd be fun. Hm.

Anyway, I'm going to ask around how people feel about the ruling. If I find anything interesting, I'll post it. Okay bye.

Thursday, June 3, 2010

State vs Government

John Wallis gave a talk yesterday on a paper he's working on with Doug North about the difference between the state and government. The basic argument is that we should look at the state as the organization that organizes other organizations. The government is an organization that is part of the state, and to the extent that the government is the state, we observe strong governments and less tendency for civil wars and suchlike. One of the upshots of this is that hidden organizations within a state can hinder development efforts. This is a hell of a challenge for people interested in eradicating poverty. If there isn't one organization that subsumes the power to use violence, then both identifying and appeasing all interested, powerful parties can be prohibitively expensive.

I'm not sure how to feel about all this. I like the idea of clearly defining the difference between the state and the government, but I'm leery of the sort of reaction that this might generate in the development community. It's a good justification for bringing warlords into the fold, as well as working on making governments more transparent, so it could either lend legitimate authority to tinpot dictators or work towards establishing sound governance. Eh, whatever. I actually suspect that IMF and World Bank won't much care anyway. Too much bureaucratic inertia to change policy anyway.

Wednesday, April 14, 2010

Weird Strategy

Suppose you were one of those unfortunate souls with an absolutely bizarre first name, like my old friend Hrothflarr or Buttertenkin or B'drak'nar or what-have-ye. Let's also suppose you're in the job market trying to get work as an office assistant or dental hygienist. Let's further suppose that the people reviewing your resume and cover letter are otherwise inundated with pleas for their attention and they have limited resources for reviewing the material you send them. Let's make one more heroic assumption and say that there is a less than trivial chance that they will see your stupid, hard-to-pronounce, offensive, or trashy name and just pitch your otherwise quite informative personal information straight into the bin.

Now, you don't have to be a game theorist to understand that you have no control over the actions of other people. Sure, if you were inclined, you might lobby for regulations forcing HR personnel to stop discriminating on the basis of having a stupid name, but I think that even the notoriously economically ignorant Congress would smell something amiss with that kind of proposal (though, don't count them out just yet; they've surprised me in the past). Enforcement of this sort of regulation would be pretty close to unenforceable, not to mention preposterously costly and rather pointless. Point is, HR folks are people like the rest of us, and people do as people do, and names are a signal. Yes, they are an impressively noisy signal, and it would be cool to have Battleaxe V. Scarwound III working in Accounts Receivable, hiring that person might be a bit risky, all other things equal (the V stands for Victoria).

So what should you do with your idiotic name? For most of us, the answer seems obvious: get it legally changed. You can do this without telling your friends or relatives, thereby preserving the sense of kinship you have with all your other buddies named Grothnar the Vicious and Punky Brewstarr. It's like the mullet of appellations: business on the tax forms, party on the wedding invitations. It's a very low-cost strategy and it should have a wide range of returns (the quilt of conformity casts a wide shadow). I find it surprising that it's not a more common transaction. Looking for work is tough enough already; why burden yourself with the handicap of a buffoon's name?

Maybe the returns to identity are powerful enough to overcome incentives. I'm sure that any one of you could come up with a thumbnail mathematical model to illustrate the flow of value associated with changing or retaining your name under various conditions (minimum wage, labor regulations, transfer payments, etc). It might be the case that the parameters in this model are such that people are sufficiently compensated for holding their dumbass names.

There's a lot to think about here; the history of immigrants changing surnames upon arrival to the States strikes me as one particularly interesting historical example. There's also the matter of the near/far split between the distant reception of the name signal and the close retention of cultural or personal identity. I might have a whole line of thinking to do on this.

Sunday, April 11, 2010

The Big Questions

What questions define Economics? To me, the most important problems that we have to tackle are: Why did the Industrial Revolution happen where it did, when it did, and why not elsewhere? and What caused the Great Depression? If Economics is the study of social behavior, especially in the marketplace, it would be hard to think of any event of comparable impact. These questions can be distilled to the more universally applicable "What are the causes of wealth?" and "What causes the economy to fall off the tracks?"

Macroeconomics has a lot to say about both of these, but its contributions to the first one seem unsatisfactory; the business cycle literature seems much more compelling than the growth literature. While the bumps that happen in modern economies is probably a much more poignant area of study right now, given the current state of the world, I find the first question much more interesting. Most of the non-class related economics reading has been about the Industrial Revolution, and why it happened.

I came into graduate school thinking that the change that enabled the IR was the growth of humanism - the belief of an individual that he or she can do something to improve his or her lot in life. Once that becomes the norm people are more willing to do little things differently; apply new technologies and methods to their work, come up with new ideas themselves, etc. The major inventions certainly helped, but as I mentioned last post a steam engine is useless if it is only a curiosity or a mental exercise on the part of its creator. I justified my belief by looking at how philosophy and theology had changed to some extent post-Aquinas. Obviously I can think of a hundred problems with this as the cause of the IR, one of which would be showing that a lot of people, rather than the select few clerisy thought this way; another would be showing that economic growth didn't encourage humanism rather than the other way around.

My primary source this year (as I'm sure no one will be surprised to learn) has been Deirdre McCloskey. I loved The Bourgeois Virtues (even though, I admit, she was long winded), though this seems like it lays some foundation rather than looking at the cause of economic growth. Her next book in the series, Bourgeois Dignity: Why Economics Can't Explain the Modern World, explicitly looks at and criticizes some current explanations, including Gregory Clark's work and Douglass North's. Her next-next book The Bourgeois Revaluation: How Innovation Became Virtuous is available in rough parts on her main page.

Right now I'm going through Douglass North's "The Rise of the Western World." We'll see what he convinces me of.

Tuesday, April 6, 2010

Art and Science

I went to the Smithsonian Museum of American History the other week to enjoy the spoils of imperialism. Wandering through one of the random exhibits on something like "what do we use coal for?!" I ran across a display that featured an imagined conversation between two chemists; the gist of it was them arguing over what they should do as chemists - one was talking about how he wanted to be able to use what they had discovered in order to make things people can use; the other responded 'we just need to learn more stuff, who cares how it can be used. That's the art of chemistry, we're scientists!' Or something like that.

I think this dichotomy between 'art' and 'science' is important. Science for the sake of science is important, yes, but economically insignificant. If we're wanting to explain the Industrial Revolution we can't look at science as the spur of it; we have to look at the 'art' of the sciences. The steam engine was invented in something like the 2nd century B.C., and several times again over the next couple hundred years. It wasn't for a long time before anything like it was used productively. It's not like they didn't have coal in the ancient times. I would wager that science was much more advanced in the past than we commonly credit it, but that for some reason there was a disconnect between science and its application.

It also led me to think about the distinction between the science of Economics and the art of Economics. I feel like advising policy or action based on Economic science is tricky, since unintended consequences are more probable and have more drastic effects.

It will be something I will be thinking about the next couple days, instead of the Macro test...

Monday, March 22, 2010


The 13th Amendment to the US Constitution is short and sweet:

Section 1. Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.
Section 2. Congress shall have power to enforce this article by appropriate legislation.

Now, there are a few ways to interpret this guy. The most obvious is that human beings may not be considered chattel: trucked, bartered nor traded. The other bit, the involuntary servitude, this is a bit harder to pin down just as easily. Involuntary service is performed under duress or threat; it is service performed when trade would not be conducted voluntarily otherwise. One might easily make the case that mandating the purchase of services is involuntary servitude, being that one side of the transaction is involuntary. You might think of this as slavery on its head: where the master is forced by fiat to accept the service of others.

If Congress passed a law mandating that every citizen purchase ten gallons of Boudreaux's Butt-Paste every year, would it be reasonable to cry foul by the 13th Amendment? It would be involuntary service to Blairex Laboratories, Inc. on the part of every citizen of the US.

On the other side of these purported rights, let's imagine I was a window washer and the City of Alexandria decided that clean windows were a natural right. They then passed Clean Window legislation and insisted that anyone who didn't patronize my services would be subject to fines and/or imprisonment. What then, if I were the only window washer in town, would occur if I decided to pursue my dream of shucking oysters in Oregon. I would then be violating the natural rights of my former customers and would be subject to terrible penalties. I would be an immoral monster. Anyone who didn't step up and wash windows would be just as guilty. Indeed, in a world that claims we have the natural right to the labor of others must necessarily be one in which everyone becomes a supplier of that service. I will work on a mathematical model to prove this. My point is that mandating access to labor necessarily implies involuntary servitude.

Maybe I'll just swap my windows out for plywood.

Wednesday, February 10, 2010

Fear and Loathing in the Land of Milk and Honey

Anonymous, impersonal market transactions make us wealthy. These transactions are predicated on high trust. The "stranger danger" phenomenon as well as the assertion that all men are potential rapists are low trust activities and beliefs.

Empirical question: how well does per capita wealth correlate with non-market mistrust of strangers?

Is there reason to suspect that people compartmentalize trust? In Robin Hanson's (and Katya Grace's) worldview, people use near and far processing modes to analyze situations. Market transactions are conducted in near mode, where we can better judge the specifics of the situation and judge trustworthiness on individual merits. Non-market situations are a different kettle of fish altogether. When we contemplate letting our kids out of the house, it's much easier (perhaps even necessary) to employ far reasoning, glossing over the grainy reality and substituting cognitive heuristics for rational judgement.

This near-far split might help explain why anxious mothers won't spend an extra hundred bucks for a better car seat (or an extra few thousand for a safer mode of transportation), but are comfortable with the idea of never letting the kids outside without a caretaker. Decisions inside an automobile are near, immediate, while the outside world is an artificial mental construct, capable of being populated by far-mode demons.

Monday, February 8, 2010

Ramblings on a Snow Day

When I was younger, particularly around the high school era, I was deterred from thinking about entering academics because I had it in my head that we had already pushed the boundaries of knowledge. History was all settled, Psychology, Communication, Economics, the Natural Sciences, pretty much everything except very advanced physical science was all known, and the limit wasn't unknown things to be discovered or rethought but making sure that you digested what other people had already written. Part of that impression is from the way that school is taught up through High School, where uncertainty and interpretation take a back seat to memorization, a legacy I'm sure in some way left in place from positivism in science, even in classes like English. Part of it might have been the general feeling of the 90's and early 00's, embodied in Fukuyama's pronouncement of The End of History after the Cold War ended, with a corrolary in the economy with The Great Moderation.

Well, The End of History didn't last very long, High School ended, and the Great Moderation wasn't so great. Of course, not enough college professors (that I had at least, especially early on) let students in on how dysfunctional Academia really is. We all knew that Keynesian economics didn't work anymore, we all knew WWII ended the Great Depression, we all knew bla bla bla. Maybe it was a little less cut and dry in Ethics, but pretty much everyone agreed that Ethics all just boiled down to taste. And De Gustibus non est Disputandum.

One of the most fascinating things to me since I've become more acquanted with academia is academia itself. The relationship within and between disciplines is just fascinating. I know I've written about overspecialization in academia before, but I continue to be fascinated. Economics and Sociology are pretty much the exact same subject, namely that of human behaviour and human interation. I am probably not stretching if I assume that a first year graduate student in Economics is getting a very different education than a first year Sociology student, the methodology between the two subjects is so different. The same with subjects like Anthropology, Psychology, and Political Science. They're all studying human behaviour from a different lens, and it would make sense for them all to work relatively close together.

I've had a perverse craving to draw some sort of diagram of the sciences , somehow showing the relationship between the human sciences/humanities, social sciences, and the natural sciences. I have since come to the conclusion that I need three dimensions, which makes me sad, because I want to create order.

I have been listening to old Econtalks, and listened to the 03/23/09 podcast with Nassim Taleb. Near the end he goes on a diatribe against theoretical searches for knowledge. He believes that Universities have, on whole, done more harm than good in the search for knowledge.

Alright, enough rambling. I'm going to use another snow day and reread Michael Polanyi's "The Republic of Science," it's good stuff!

Monday, February 1, 2010

Wanna trade?

Today, I find myself how many human lives I would be willing to sacrifice to reduce carbon emissions. No matter how I approach the issue, the number keeps coming back to roughly zero. Both readers of this blog likely understand that emissions controls reduce industrial activity, whether through forcing firms to use expensive scrubbers that they might not be able to otherwise afford or through paying for credits (or via fines, levies, fees, sanctions or whatever else you might think of). From there, it doesn't take much imagination to see how people with relatively few opportunities are hurt when those opportunities are taken away. Sure, they will adapt; people are hella good at adapting when the situation changes, but adaptation is costly, and when the stakes are starving children who need bed nets, removing the ability to work, even if it is what we imagine to be meager work, is utterly abominable.

It's quite a wonder that anyone could accuse proponents of freedom to be out of touch with reality. I suspect there are some folks who never had to confront the guy whose kid has to starve when there's an operational, if a bit sooty, factory just o'er the hill and 'cross the dale. What, a hungry child isn't real enough? Sheesh.

Sunday, January 24, 2010

Random thought

So, if the interest rate is supposed to calibrate the amount saved and the money demanded for capital investment, what does a Social Security system do to the interest rate? Social Security both decreases current income and is somewhat interchangeable with private savings, so it seems to me that by taking money out of the private savings market and spending it on government expenditures (so, assuming the government doesn't just go and put it back in the loanable funds market), wouldn't this artificially inflate the interest rate? (Quantity of saved funds drops as people defer less of their actual income for future consumption since the government does that for them, causing the equilibrium rate to go up).

Monday, January 18, 2010

The Rhetoric of Capitalism

Sam's last post, as well as some idle thinking, has me wondering whether the term Capitalism is an effective term for what economists imagine it to be. (I seem to remember another blog post on this a while back, but I can't remember where, and I may have just imagined it anyways). A purpose of language is to evoke in others what you are visualizing yourself, and as a word 'Capitalism' seems to be doing a bad job of it. My feeling is that Capitalism evokes in us a society where capital is privately owned, while in others the word evokes a society run by Capitalists. I think of early 20th-century US and Britain, Mid-late 20th century Korea, Japan, West Germany. Others think of early 20th century Latin America with United Fruit, post-1991 Russia, and maybe even 21st century US. The former are Capitalist countries, the latter are ruled by Capitalists (granted, the two are not mutually exclusive). Granted, we're using a word popularized by Karl Marx, it's not surprising that many use and perceive 'Capitalism' in the least flattering way possible, and it's not surprising that people can graffiti things such as 'Capitalism is Murder,' which sounds absurd to our ears.

I am reminded of the decision by bloggers over at The Austrian Economists to rename their blog 'Coordination Problem' because of the shift in the meaning in Austrian Economics over time. Would it be worthwhile to come up with an alternative name for the classical liberal's desired society? And what would we use?