Unconstrained Optimism

I live for drugs... it's great

2011-12-28T05:31:00.000-08:00

This fall semester, I was fortunate enough to take a Law and Econ class from the puissant Alex Tabarrok. Instead of writing a term paper on the partial effects of slinging empty oil cans at the heads of drag racers, I elected to investigate some of the myths of... wait for it... the DRUGS!

If you're of a certain age, a supercilious sneer ought to set up base camp at the corners of your lips, preparing a push to the summit once the weather clears a little bit. Drugs are bad, right? Drugs ruin lives, turn users into abusers into total trainwrecks, right? This is your celebrity; this is your celebrity on meth... not even once. DARE to keep your Gummi Bears off dat juice.

Or whatever.

Point is, there's a lot of propaganda surrounding drug abuse, and the (occasionally explicit, often implict) claim that drugs lead to a life in tatters, implying causality, is sort of at odds with what I would consider common sense. Indeed, it seems as reasonable to me that someone who is having a rough go of it would turn to self-medication as that drugs veer an otherwise decent life off-track. Ordinary statistical treatments have a tough time getting at actual causality. Ordinary Least Squares regressions can show whether or not two factors move together, but are mostly silent when it comes to saying what causes what. That's what theory is for.

Or a clever two-stage regression.

What now? What's all this? Well, look, if we can make the claim that a proxy for individual drug use predicts some sort of individual adversity and we can't plausibly make the claim that the adversity can affect the proxy, then we've got a good case for actual causality.

That's sort of confusing, so let me be a little more specific. I've got some data on positive urinalysis results. I've also got crime data from the FBI and some community drug use stats from the CDC. Basically, what I've done is used the crime data of the individual's hometown (specifically, the home town of record, at the time of enlistment) to predict the probability of drug use by the individual. Nice. So, if the property crime rate of Hookset, New Hampshire is 7.4 per 100,000, then we can say that people (Soldiers) from this charming burg have, oh a 0.43% chance of pissing hot for weed (numbers simulated, natch). Take this number and slap it into an equation that tries to predict some adverse outcome, like divorce or AWOL or non-availability or whatever, and hey-presto, we should be able to show actual causality, right?

Well, maybe. Of course, the 2-stage regression didn't work. I got the first stage numbers to fit pretty well. Indeed, I think I can comfortably claim that growing up in a high-crime community probably predisposes folks to use drugs and to a rather strong degree. However, while I was able to show that drugs and adversity correlate, I was unable to show the two-stage relationship.

Now, this is consistent with my claims, but I've still got a bunch of nagging problems. Yeah, my instrument passed the first condition (first-stage correlation) with flying colors, but it clearly fails on the second condition. All this tells us is that it's a bad instrument. To put it delicately, BFD. I was looking for a bad instrument, and by golly, I found it, but this (and this is crucial) does not imply that it's a bad instument for the reasons I claim. At best, it's a rather weak tea. In short, I found no evidence to support the claim that drugs unidirectionally lead to individual adversity. Not exactly an overwhelming claim.

Still, better than nothing, I reckon. Maybe I can buff this turd out and try to get it published. At best, it can maybe knock a little wind out of the abolitionist argument. Fat chance on that though.

Capital as Language

2011-12-18T23:41:00.000-08:00

These will just be some random musings.

Capital is, of course, anything that is a means to satisfying some ultimate goal.

I have been reading a book on linguistics, because i am becoming increasingly curious about the potential relationship between the study of language and the study of the economy. Language is, of course, unpredictible in its future course, just as new capital combinations are by their essence unpredictable (because to envision a future, profitable, combination of capital is to bring it about; that doesn't mean that one cannot imagine new innovations or, for that matter, the direction of language).

I'm also becoming convinced that the term 'labor' is vacuous. To work on is necessarily to apply higher order goods to solving an economic problem. Labor without any previous knowledge or experience in the world would be useless - everything that is in labor is.the accumulation of a lifetime of experience, and is a specific type of capital. The only question that hangs out there is regarding time; but that is not something specific to 'labor.'

To start, here is my reasoning: The use of tools is universal among humans, just as language use is. It also has no meaning outside of those subjectively given. The capital structure, just like language, is built up from ever more complex combinations of simple factors, which can then be used to combine with other simple and complex entities to form even higher level entities. The complexity only arises when the nature of what must be communicated (produced) calls for it - complex, large combinations of words (capital) don't necessarily crowd out simpler ones, but the large ones depend on the small ones... The problem with much development policy seems to be putting the cart before the horse, introducing complex physical elements into a populace whose experience does not match...

Edward Sapir, who's "Language: an introduction to the study of speech" I'm reading, breaks down a 'word' thus: 'unknowingly' - the root word is "know", un, ing, and ly are adjuncts, thus (b) + A + (c) + (d) where.he parentheses note an element of a word that has no fundamental meaning on its own. (Of course, fundamental meaning is determined only in context; in the case of a discussion of language all of the adjunct elements of speech become independent elements on their own.) One could do a break-down and map the elements and relations in a short story, but that would be a lot of work.

The 'radical' (or fundamental) element is the simplest symbol that corresponds to anything we would recognize, yet on its own it cannot convey a thought (outside of a context suggesting another element). For example, if I were to come up to you and just say, "know," you would have no clue what I mean. Any attempt to communicate a thought requires three things: two fundamental elements and a specific relation between them. Thus, the farmer kills the duckling.

The same seems to be true for any capital good as well - a single capital good has no value, until it is combined (in some specific way) with a second piece of capital, usually a skilled person or people. It is the combination and the relation that is important: each on its own does not make a production process.

Different words mean different things at different times, which is true for capital as well. Words are also never single-specific: if you can't remember a word, you can usually come up with some close substitute, or approximate the word using other words. The same is true for capital goods: a hammer might be the most useful tool in the situation you're in, but a rock will substitute for whatever you need to hit. Words, like capital goods, carry different meanings as time advances, some becoming obsolete and some being invented, and others still being plucked from obscurity into a surprising role.

The structure of a language (all of the elements and their relations) is also analogous to the structure of production. Simple language elements, like words, must be understood in order to construct a sentence, a more complex thing. Whether an epic poem, a short story, a novel, or an academic paper, the more and more complex elements that make up a language rest on the strength of the simpler objects. If the simple objects are ambiguous or ineffective at drawing ideas out of the reader, the whole novel will surely be worse. Business organizations will involve as many elements and relations as a novel. Picturing an organization using its net worth captures as much of the image of the whole organization about as well as a page count does the contents of a novel (organizational economists, of course, know this well, as do management/economic sociology scholars)...

The main deviations between capital and language, I think, primarily involve the fact of scarcity, which is necessarily true for capital, but I'm not sure is meaningful in language.

My primary interest in this is wondering whether the methods of linguistics can be applied to the study of the economy. The more belief-ideologically based our conception of the economy is, the more relevant my work is, so I am, of course, simply pursuing my self interest in this case...

The economics of the Fallout universe

2011-08-01T08:33:00.000-07:00

I'm a bit of a latecomer to the Fallout franchise. Perhaps a redolent streak of ludditism (or student-enforced poverty) kept me from opening a Steam account or perhaps I'm just slow on the uptake. Either way, once I discovered these games on the urgings of friends, I was immediately hooked. I've found that the standard game reviews usually do the design team justice: the games (and I refer primarily to Fallout 3 and Fallout: New Vegas) are large, immersive, and well-balanced, suitable for novice as well as experienced players, with elements that appeal to the classic traditions in FPS and RPG gaming. Despite a host of often annoying glitches, gameplay is flexible enough to accomodate a fairly wide range of styles and the faction system employed in New Vegas ensures that repeated playthroughs need never be mere rehashes of previously beaten games.

But like in any sprawling fictitious universe, game designers are obliged to mimic a functioning economy. The extent to which this effort proves convincing showcases a strange tension between what is plausible and what is, for lack of a better term, fun. Writers must optimize along a much different objective function than actual merchants (or central bankers, or currency arbitrageurs, or what-have-you), and it shows. Similarly, players' derived utility function has wide margins along the killing-the-naughty-faction frontier, but not much along the trade-with-isolated-population-centers region. Let me explain by way of describing typical mid-game play.

The setting of the games is a retro, 50s-style post-nuclear wasteland. Living as I do in Northern Virginia, Fallout 3 appeals to my sense of familiarity, set as it is in the Washington D.C. area. Many of the place names are ones I recognize (or are close derivatives thereof), and the Metro stations are lovingly rendered to more or less resemble the real thing. Having worked for a season in Death Valley, I find the stylized Southwest of New Vegas more or less congruent with my memories of the place. Consistent with the finer traditions of post-apocalyptic literature and film, roving bands of raiders patrol the wasteland, indulging in cannibalism, slavery, and mayhem. In addition to these Mad Maxesque raider enemies, there are two flavors of modified humans: the ghouls, humans transformed by extended exposure to radiation; and Super Mutants, humans exposed to a virus that has an effect not expecially dissimilar to that of gamma radiaiton on mild-mannered physicists bearing the Banner surname. Various mutated flora and fauna abound, some tame, some hostile. The wasteland itself is rendered to appear as bleak and hopeless as one might hope: the color palette is dark and muted, nothing shines (and when the few noteworty exceptions are found, the effect is startling), and vegetation is generally sparse. Indeed, the player finds, immediately following the brief opening sequences, the wasteland is unforgivably harsh. Oddly, however, this seems to pose no significant problem to the main character.

Curious indeed that the player's character can find copious food, drink, ammunition, piles upon piles of working pre-war technology, weapons, armor and components from which to fashion makeshift gear that rivals the best technology available before the bombs fell. How is this possible? Now, before I continue, let me briefly explain an economic theory often (mis?)characterized as "there is no such thing as a 20 dollar bill lying in the middle of the street." This points to a key tenet of microeconomic analysis: the no-arbitrage condition. Basically, if there's a way to make a free buck, someone's already done it. Prices reflect true scarcity, and where else would you find scarcity than in a post-nuclear wasteland, especially 50 years or more on? There shouldn't be boxes of insta-mash, sugar bombs, cram, and salsbury steak lying around, nor should there be stores of abandoned medication, surgical equipment or arms and armor, not with hostile creatures roaming about. It doesn't take much imagination to conclude that some enterprising individual would have organized well-armed scouting parties to scour the wasteland for all these unguarded (or lightly guarded) troves and warehoused them somewhere secure. The only things one might reasonably expect to find in a well-populated wasteland like the one portrayed in the game are trash (spent needles, junk metal, scrap electronics, broken wood) and naturally grown comestibles: apples, wild barley and the like. Some hardscrapple farming might be possible, but only on hard-to reach escarpments or other highly defensible positions. The lavish abundance of cheaply obtained resources present in the games beggars belief.

On the simple evidence that the player's character (a naive teenaged vault dweller in FO3, a feckless courier in FO:NV) is able to amass an enviable fortune while traveling alone (optional companions notwithstanding), it is clear that everyone else living in the environs is criminally lazy, bafflingly stupid, or inhumanly generous. The larger factions (mixing game factions here, the Brotherhood of Steel, the Enclave, the NCR, Caesar's Legion, the Great Khans, et al) would have pilfered every single tidbit of useful stuff within their grasp and stuffed it into some abandoned vault or safehouse or somewhere and posted well-armed guards at the entrance. So supplied, the faction in question would then face the ages-old economic question: is this stuff for sale or not?

This fundamental question isn't as facile as it seems. After all, we all, each of us asks this question routinely day after day. Take milk--milk is just some stuff you squeeze out of a cow. Yet for some folks, they have less milk than they want, so they'll give up consumption of other stuff to get some milk. Other folks have a lot more milk than they want in order to consume stuff that isn't milk. That's the line that separates dairy farmers from everyone else. A more convincing wasteland economy would have fewer goods strewn about and more rough-and-ready market commerce, so long as prices accurately reflect relative scarcity and the currency is stable. Fallout treats these conditions only slightly better than most games of its ilk.

Prices. This is usually the big cock-up in games. Almost all games prevent direct player arbitrage, preventing players from buying low and selling high (there are occasional exceptions, and a few games that feature exploitable production opportunities that can result in functionally infinite cash, these features are probably a result of the difficulty of anticipating player cleverness) though the real flaw in most games is a fixed-price scheme. Fallout allows players to purchase costly skills to narrow the bid-offer spread, but this is still somewhat suspect in a world where the price of ammunition is the same regardless of whether or not there is a pending war between heavily armed and armored antagonists. I can forgive a game for failing to program agricultural futures contracts, but to ignore price "gouging" seems an odd omission. Well, at least the writers are sensible enough to have decent monetary policy.

Currency. Ah, the joys of free banking. The currency of choice in the Fallout games is the humble bottlecap. Popped fresh from the top of a delicious Nuka-Cola or a refreshing Sunset Sasparilla, caps are the legal tender of choice in the wasteland. I suppose we're meant to take for granted that there isn't much in the way of seigniorage with respect to the gutted factories that produced the beverages of choice and that counterfeiting is sufficiently difficult (indeed, New Vegas boasts a side quest that allows the player to shut down a counterfeiting operation) to prevent unwanted price inflation. The game, intentionally or otherwise, neatly sidesteps Gresham's Law by effectively declaring a competitive, non-specie fiat currency (for more on free banking, see The Theory of Monetary Institutions by Lawrence White). You can't clip or shave caps, so that's nice. Using caps ensures stable nominal prices, but the games fall flat when the situation demands that real prices should shift.

The world of Fallout appears to be saying something like: "here you are in a world of nuclear devastation, please enjoy the endless bounty that half a century of banditry was unable to capture. While you're here, please take advantage of a degree of price stability that a century of central banking was unable to approach. Mind the radiation." So sure, the relative scarcity is ludicrous, and the indifference principle is busted (this suggests that in this simplified world, the player should be roughly indifferent between purchasing goods from a vendor or scrounging from the wilds), but for all that, nothing in the trade system makes the game any less fun to play... even for an economist (this is, of course, making the rather wild claim that economists are capable of "having fun").

I do wonder though, how the enjoyment of the game would change if the economics were modeled better. Players would be obliged to become merchants or farmers (or tradesmen of some other stripe) as well as warriors, and would be required to defend hoarded booty against thieves. Prices would fluctuate, asset bubbles or speculative frenzies might erupt, and bond vigilantes would be nearly as dangerous as armed mercenaries. I don't imagine this sort of gameplay to be palatable for everyone, but if Obsidian makes an MMO version, I can imagine allowing players to pursue some sort of merchant or financier option.

So, why won't games more closely model a real economy? The chief reason is probably that it needlessly complicates gameplay. If all they did was to include fluctuations in the real price of ammunition or guns, players might resent the additional constraint or just feel cheated. More complicated financial innovations would probably detract from what is basically a souped-up shoot-em-up game. Moreover, even though modeling real economic shocks in a video game might help gamers get a better grasp on real-world economics, including appropriate expository dialog would be tricky for writers, complicated by the fact that younger players usually just flick through dialog blindly anyway. Still, I think there might be a good way to pass along good economic intuition inside a fun video game. Imagine including elements of the Russ Roberts/John Papola Keynes vs. Hayek videos in a setting where you have the Bloody Mess perk. I'd have to laugh my ass off if I saw such a thing.

The Alchian-Allen controversy

2011-04-26T17:31:00.000-07:00

Down in the Bahamas, a discussion got started in the hotel room with Jesse and Kyle regarding an example used to illustrate the Alchian-Allen theorem in Walter Williams’s class. The Alchian-Allen theorem states that if a flat cost is added to any two goods, one low-quality and one high-quality, people will choose more of the high-quality goods relative to the low-quality ones. The flat cost added to each good makes the number of low-quality goods that one must give up to get the high quality good lower, lowering the relative cost of the high-quality good.

The example that Walter Williams gave in class was that one would expect that couples with children would be more likely to go on nice dates to the theater than a cheap one to the movies, because the couples with children must pay a flat fee to a baby-sitter regardless of their choice of date.

The objection was raised in class (by Sam, I believe) that the baby-sitter should not enter into the decision making calculus because at the point where the couple makes the decision of which date to go on the babysitter is a sunk cost. The couple with children, therefore, would be just as likely to choose the movie over the theater as the couple without children.

Walter Williams, then, was wrong, if the problem is framed as it is above. William framed it in such a way that he would be right – that there is a sorting effect due to the flat cost which makes the couple who wants to go to the theater more likely to pay for a babysitter, with the end result being that you see more couples with children at the theater than at the movies. There’s also the possibility that both prof. Boettke and Charity-Joy suggested, that couples make the choice of a high-quality or a low-quality date before hiring the baby-sitter, and don’t change their plan once they make the choice. Which saves Prof. Williams’s example as well.

That misses the main point of controversy though, which is this: if someone makes a plan to do one thing over an alternative because of a flat cost involved, do they change their plans if they pay the flat fee before making the choice between alternatives?

Option 1: Once the babysitter cost is paid, the couple with children will choose the same way they would have if they were childless. The A-A effect does not apply, except potentially in the selection effect.

Option 2: (my argument) At the point in time after the babysitter is paid but before the couple actually goes to either the theater or the movie, the couple still takes into account the flat cost because going to either the movie or the theater requires that the flat cost be paid again. So the cost, after the baby-sitter is paid, of going to the theater is the price of the theater ticket and the foregone movie, and the cost of going to the movie is the price of tickets and the foregone theater trip. The value of both the foregone theater trip and the foregone movie include the price of the babysitter because either choice in the future necessitates the hiring of a babysitter. Thus, even once the babysitter is paid this time, the movie and the theater still cost the same.

My intuition comes from the claim that on a trip to Maine, tourists will more likely choose expensive lobster than cheap lobster because in order to get expensive Maine lobster ever again one has to take a trip to Maine, so even though the current trip to Maine is a sunk cost the A-A effect still applies.

I’m interested in getting this resolved so that I can stop thinking about it.

The High Cost of Cheap Communication

2011-01-13T11:51:00.000-08:00

15 years ago, I don’t think I would have imagined it possible to look someone in the eye as I chatted with them from 5000 miles away. Not, that is, unless I paid substantially for the privilege. Today, a webcam-and-microphone combination is cheaper than dinner for two at Applebees and Skype software costs nothing but the time to install it. E-mail is ubiquitous, texting is close to free, facebook is available on cheap telephones, and twitter can seemingly show up on anything that runs on batteries. Rapid communication is shockingly inexpensive, with the predictable result that a whole hell of a lot more messages make it past the quality filter. The benefits of the communication revolution are readily apparent to anyone who has had to coordinate anything on the hoof (imagine how different is the procedure to make lunch arrangements with friends today than a decade and a half ago).

For Soldiers in the field, this means that instead of waiting weeks for APO deliveries (I’m not fond of the “snail mail” moniker), messages that takes seconds to compose whisk their winsome way around the world in mere milliseconds, fresh as a daisy. This, combined with the negligible out-of-pocket expense, means that messages that were once far too trifling to send come pouring in at a rate of knots. The Soldier of yore might have expected to hear about Uncle Frank’s surgery or the fire out by the ol’ barn, but by no means did he help junior with his homework. Today’s combat-deployed Soldier has one boot in theater and if not all of the other, then at least some of the laces still at home to a degree that was unimaginable to the average infantryman of previous wars.

Under normal circumstances, most of us handle split attention fairly deftly. We can track careers, family, football scores, pop culture minutiae, fashion, art, or any of the other tiny stars of interest in our personal galaxies with relative ease. Under normal circumstances, we are not under enemy fire. Think of two competing goods: mission-relevant information and all other information. Like other resources, attention is finite, and plain ol’ microeconomics show that if we make irrelevant information cheaper, people will consume more of it. Logorrhea from home is a tax on Soldiers’ attention and may contribute to a decline in readiness.

Without taking a closer look, it’s impossible to say exactly where the margins are, so the details end up in the good ol’ “it’s an empirical question” pile, so beloved by classroom economists, but that’s fine. There’s also a big steaming policy question I wish I could just ignore. Part of the equilibrium solution is that we’d have to compensate Soldiers for giving up the luxury of staying in contact with family back home (assuming we don’t have Jonesian 0-MP Soldiers), which may or may not be substantial and could hurt morale. At any rate, I’d like to run those crazy regressions. I imagine the data is out there.

H/T Dave Gauntlett

Prosperity and Migration

2010-12-30T08:45:00.000-08:00

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.

-------END--------

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.

Uber Alles

2010-12-22T05:33:00.000-08:00

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- 19^th 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 19^th 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.

Culture, Rational Choice, and Economic Development.

2010-12-04T21:03:00.000-08:00

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.

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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.

Economics and Culture?

2010-12-02T12:43:00.000-08:00

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.

Small business fetishism

2010-07-23T06:52:00.000-07:00

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.

Selection bias and educational efficiency

2010-07-01T06:32:00.000-07:00

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.

Slap Leather

2010-06-28T10:04:00.000-07:00

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.

State vs Government

2010-06-03T12:56:00.000-07:00

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.

Weird Strategy

2010-04-14T07:37:00.000-07:00

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.

The Big Questions

2010-04-11T13:25:00.000-07:00

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.

Art and Science

2010-04-06T13:20:00.000-07:00

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...

XIII

2010-03-22T07:39:00.001-07:00

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.

Fear and Loathing in the Land of Milk and Honey

2010-02-10T07:42:00.000-08:00

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.

Ramblings on a Snow Day

2010-02-08T21:12:00.000-08:00

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!

Wanna trade?

2010-02-01T13:17:00.000-08:00

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.

Random thought

2010-01-24T15:13:00.001-08:00

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).

The Rhetoric of Capitalism

2010-01-18T11:21:00.000-08:00

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?

Capitalism is Murder

2009-12-20T07:51:00.000-08:00

...or so says a new snippet of graffiti on the Holmes Run walking path underneath I-395.

I struggle to grasp the logic supporting this conclusion. Perhaps it's a definitional miscommunication. I suppose it's possible that someone could think that private ownership of the means of production is the same thing as cold-blooded homicide, but I think it's more likely that the author of the sentiment confuses capitalism with government-backed crony corporatism. True, it doesn't have the same ring to it, but the case that Blackwater is a band of thugs is more defensible than, say, Johnson and Johnson being bloodthirsty mercenaries.

"Know thy enemy" springs to mind. I suspect that adolescent anarchists (anarcho-communists, more probably, based on some of the other graffiti in the area) don't know a plugged thing about how the relative ease of transfer of goods and services have contributed to the post-magical abundance each and every one of us enjoys today.

Interesting status dynamics arise in these sorts of subcultures. There's a funny balance between retaining outsider status, which can confer high status within the group (though, low status, obviously, outside) and attracting new adherents. As the numbers in the group swell, the local high status position is threatened. If the original members are unable or unwilling to adjust their status expectations, they will splinter. It becomes a matter of how highly they value outsider status compared to how much they value their cause. I suspect that members of splinter factions more often cherish being misfits. The label of "sellout" is extremely low status, to be avoided at great cost.

Fight the power!

Robocop: a love story

2009-11-30T15:49:00.000-08:00

I've been mulling the Hanson/Caplan exchange about identity preservation in the case of brain uploads. As before, I'm worried about the legal implications of writing a living brain into a machine. In the case of major brain trauma, the development of neural disorders, or vegetative states, individuals retain the same legal rights as they had prior to the change. In the case of a perfectly faithful upload, the replica has no legal rights or responsibilities soever.

Also, since the thought experiments appear to be popular in this debate, consider a coma patient. Someone goes into a lingering vegetative state then awakes 20 years later, a whole new set of cells, with no cognitive continuity in the interim. Is this the same individual that fell into the coma? Does the ghost in the shell slumber next to the corpse?

Consider also the enhancement of the upload. Upgrades should be easily available, with vastly enhanced senses, improved memory, and vastly faster cognitive abilities. If you accept that identity can be transferred and you think that the individual is the sum of the parts (memory, feeling, sensation, emotion, etc), will the upload become something more than the original? Man plus? Could I still call my upgraded self me? Is there a fundamental difference between Lasik eye surgery and an enhancement that allows me to see into the x-ray spectrum?

From a practical standpoint, I'd be willing to upload myself for pure vanity. It's likely that my presence in the distant future is not going to be appreciated much by whatever Neo Sapiens is going to be around, but I'm happy being a wallflower in a fantastic future, even if it means being relegated to an old-uploads home, well away from the supercharged post-singularity world of perfect information and infinite wisdom.

Someone should write an AI bill of rights, if this hasn't already been done.

Gobble Gobble

2009-11-26T09:32:00.000-08:00

There's a lot to be thankful for in the early 21st Century: penicillin, flush toilets, Kindle, adjustable insoles, myelin sheaths in the neocortex, GPS, the Large Hadron Collider. What I'm thankful for this year is the people in my life. People are, and have always been what really makes life worth living.

I can see the appeal of the line: "L'enfer, c'est les autres", but I'd guess that Sartre didn't bother considering the alternative. Try to imagine for a moment how perfectly unlivable life would be in the absence of others. How much stuff are you able to create from the raw materials around you? How long would it take? Would you survive even a mild winter? We rely on other people for our food, our comfort, our entertainment, our very survival. The alternative to the Zarathustrian nightmare is true wretched misery, starvation, and the most terrifying of all ancient punishments: exile.

So here I am in my cozy apartment in Northern Virginia, surrounded by people on every side and I can't imagine being any more content.

Infants are unable to signal their desire to live, and in the absence of that ability, what is the Functionalist take on infanticide? Also, does criminal law dilute the efficiency of civil law? The latter is a question for the Spivonomist, I think.

Bigger, Longer, and Uncut.

2009-11-23T21:45:00.000-08:00

I've been trying to think of ways in which our rule-making process could prevent things like this. Riding major laws on things like troop funding in order to shame those who might vote against it is not only disgusting, but reveals some sort of flaw in our system. My guess is that a majority of the representatives who voted for (or against) the health care bill read the thing, so the main driving force behind the vote was wanting to be identified with health care reform (or a more honest word, befuckupment), or not.

I propose that every bill that is voted upon first be read out loud, in its entirety, and in order to vote on a bill a congressperson must be present for, say, 90% of the reading. So not only do they have to learn how sausage is made, they have to have their eyelids pinned open and watch while each creepy element is put through the grinder.

I would love to watch around the time the budget is passed. "We're spending HOW much on WHAT?"

Perhaps I am wrong in thinking that public officials have shame, but I do know they value their time.

I also have at times thought the idea of a line-item veto would be useful, but I think that it might too often be used as a political weapon more than anything.

Any other ideas?

It's probably overblown anyway

2009-11-23T08:38:00.000-08:00

With all the heavyweight academics weighing in on the climate e-mail "scandal" (quotes gleefully lifted from the Mungowitz), I've got my own take on the issue.

The birth pains of science were ugly. Scientific inquiry may not have themselves broken the back of the Church, but even if they kicked 'em while they were down, it's fair to say that the Scientific Method has left an indelible imprint on Western Civ. Most of the time, it's been in the service of the advancement of the species, so academic territorialism at its worst meant nothing so egregious as maintaining the status quo.

Here, we have a different situation. Artificial consensus implies massive costs on future generations. Turf wars spell untold trouble.

So should we be surprised? Probably not. Should we be worried? I think so.

Also, are politicians competition for entertainers? Is that why actors feel they have to weigh in on public policy?

Also also, big-ass laughs at KPC hoisting DeLong by a (not necessarily his own) petard.

Endangered Species

2009-11-21T18:10:00.000-08:00

"I don't give a damn about endangered species." -Walter Williams

I don't either, but I have a suggestion for those who do...Start eating them. Well, not quite. If private ownership of endangered species is no longer prohibited, and people figure out that animals like the spotted owl are pretty tasty, there will be an incentive for people to farm them and keep the species alive. Does anyone expect cows or chickens to go extinct?

I find it interesting that environmentalists seem more concerned with the survival of currently living plants and animals rather than increasing their population.

Smile, a-hole

2009-11-21T09:04:00.000-08:00

As far back as I can remember, I've been accused of being dour. I could be living a comfortable retirement in Spain were it not for the fact that no one was obliged to give me a nickel every time they told me to plaster a goofy grin across my sour puss. I used to just hate these comments because I (probably rightfully) resented the implicit (explicit, even?) paternalism in the sentiment. "Who are you to tell me to smile, jerkwad?", I'd think to myself, seldom voicing my ire due to the undeniable awkwardness in telling a cheerier-than-thou person to kindly STFU. Later, I began to bristle at the untoward monotony of hearing the same crap over and over again. Yes, jerkface, I know I'm a miserable cur. Now please zip thy lip and let me stew in my wretchedness in blessed peace.

These days, I've been getting the exhortation to grin a lot less often. I'd reckon it's either because I actually do smile more often or that people are less inclined to tell a grown-ass man to grin like an idiot when there's nothing around to smile at. I'd hope it's the former, because I really do like to think I'm happier with the choices I've made. I'm in exactly the place I want to be and I'm surrounded by precisely the sorts of people I want to be surrounded by. Dang, I've just ended two sentences with a preposition in one paragraph. Take that, Mrs. Underwood and fourth grade English. I'm a bit more worried that it might be the latter. In that case, it means that the signal has stopped being "we want to feel more comfortable around you, so please look happy for our sake" to "you're a lost cause, old man [I'm not old; there's only one or two of my professors who might be younger than me] so go ahead and be as gloomy as you want. We'll just make fun of your peculiar grooming habits and your malapropisms".

Robin Hanson today weighs in on the signalling of smiling, and it's funny that he of all people does so. Funny in the genuinely cheerful sort of funny, because Robin is among probably the top five happiest people I've ever met. He's unfailingly engaging and just plain cheerful. It's hard for me to picture what he looks like without a smile on his face. It kind of leads me to wonder about cultural development of signal control. Eastern cultures tend to value signal control much more highly than in the West, but what were the incentives that led to this sort of development? The Jared Diamond story of geography doesn't seem to fit, and there doesn't appear to be much reason to suspect an analog of cultural evolution at play. It has to be a Schelling point, but why select one particular equilibrium on one side of the Gobi and the other on the other?

Honest nonverbal communication is important under the condition that there is no common tongue. If I'm French and I meet a Romanian hunter in the woods, we might expect more honest outcomes if, in the absence of a common language, I were able to accurately read the other guy's intentions. In a homogeneous culture, say, the Imperial Court, I might obtain better breeding rights if I were able to snooker my peers and make them think I'm more temperate than I actually am.

Well, golly Wally. Maybe it is more of a Diamond story than I thought. The same rivers and mountains that made sure Europe would be fragmented linguistically and politically are those that gave rise to honesty in facial expressions and the wide-open plains in Central and Northern Asia that gave rise to vasty empires also spurred the closed face.

So don't tell me to smile. I'm practicing for my trip back in time to visit the Son of Heaven. Now if I could only remember where Rufus left that phone booth.

A Criticism of Coase

2009-11-18T12:56:00.000-08:00

It was good timing that the day after we got to hear Coase's "The Problem of Social Cost," and two days after Judge Richard Posner was a guest on Econtalk, Pete Boettke draws attention to James Buchanan and his disbelief in the process of cost-benefit analysis in Law and Economics, especially when it comes to distribution of rights.

Buchanan's argument is made in a great 2005 article called "Cost, Choice and Catallaxy" (I hope the link works; otherwise you can just Google scholar it and it's on Google books). Before I present his argument, here's a nugget to chew on: "To cover costs and to maximize profits are essentially two ways of expressing the same phenomenon." (This is apparently from one of Coase's early articles.)

Buchanan and Coase agree on a whole lot; both think the reduction of transaction costs is valuable and neither believe in a zero-transaction cost world. Their disagreement comes from Coase being an 'objectivist' and Buchanan a 'subjectivist.' To Buchanan: "Coase is... an objectivist in the sense that, to him, 'efficiency' in resource use has an existential reality independent of the market exchange process." Basically, there exists efficiency outside of the subjective actors participating in exchange. On the other hand, Buchanan stipulates that we know trade results in a more efficient allocation of resources because we know that all voluntary trade is mutually beneficial - but we cannot say anything about transactions that do not take place. "Coase is able to place a positive value on the open trading process because it generates efficient results; I am able to place a positive value on the open trading process because only through such a process can we be assured that parties secure mutuality of gain." In the farmer-rancher example, we know that the outcome is efficient with the rancher paying the farmer for his damaged crop only because this transaction takes place. We cannot know how much the farmer values the non-addition of another steer if they don't trade; maybe the farmer would be willing to accept a payment to allow the steer, but he doesn't trust the rancher. This is a case where transaction costs can be lowered. Maybe he values his crop more than the added value of the steer. If the transaction costs cannot be lowered, no court can know if enforcing an agreement with these stipulations would be 'efficient.'

Or, in Buchanan's words "...the subjectivist cannot go beyond these limits [of mutual gains to trade] and discuss the prospective assignment of rights with a view towards minimizing transaction costs, even if possessed of an authority to do so." Or, "agreement remains the only test for efficiency."

There's a lot more in the essay; he doesn't just poke at Coase, he has a section where he posits a possible solution. And, of course, he agrees with Coase that we should kick poor old dead Pigou a few times for good measure. I think the most important aspect of this paper is that by using economic efficiency as a measuring stick for the law we're asking judges to be central planners, using information that they cannot possibly know to design efficient outcomes. We know how that usually turns out.

Thoughts? I came away from class yesterday thinking that cost-benefit analysis was a useful tool for the judiciary (though not to the monstrous level that Posner takes it) but I am now not so sure.

Teratogens: not just for breakfast anymore.

2009-11-18T09:17:00.000-08:00

The genome reacts to teratogens in the environment by going haywire. Sometimes, these bastards cause cancer, sometimes birth defects. Usually, where they go, misery follows. However, on a long enough time scale, they can be useful because once in a while, they induce an advantageous mutation which may be adopted through the delightful process of natural selection.

Taking the evolutionary paradigm as a model, can one make the case for lousy workers acting as teratogens in industry? Most of the time, they act counterproductively and need to be chemo'd to the curb. Occasionally, perhaps, their noxious presence leads to improvements in the way we order industry.

The Downside of Specialization

2009-11-16T13:05:00.000-08:00

As some have already pointed out, not all of the reactions to Elinor Ostrom getting the Nobel Prize were positive. The most productive comments in the link that Dr. Boettke provides read something like: "I never had to read anything by her in my PhD program, she must not be worthwhile." You don't need much imagination to guess some of the less productive comments (Hint: the commenters are as emotionally mature as 15 year old boys with a headset playing Halo).

The former of these brings to mind a question - if Orstom's work is important enough to merit a Nobel, WHY have people in PhD Econ programs not read her? I think the answer lies in too much academic specialization. Specialization, as any basic micro class will teach you, is extremely important to the functioning of the economy. The same is true in academics, God forbid if to graduate with a PhD one need master not only their subject but many others. Now, Ostrom's PhD is in Political Science, not Economics. Therefore, it would seem to follow, the benefit from reading her work would be low for an Economist. Clearly, this is false. The reason is that all social scientists are trying to answer the same fundamental questions: how to people act, and how do people interact, given different environments? This is true for Economists, Historians, Sociologists, Political Scientists...

This means that overspecializing and only reading things by people who got their PhD in Economics means neglecting valuable resources.

I want to link to a great essay, titled The American Scholar, by Ralph Waldo Emerson. Here's a link. Emerson's prose is spectacular and his message pertinent. Being in a PhD program means becoming a Scholar first, seeking Truth wherever it is, and whatever you specialize in second. Otherwise, "the state of society is one in which the members have suffered amputation from the trunk, and strut about so many walking monsters, — a good finger, a neck, a stomach, an elbow, but never a man." (or woman)

(I got the essay recommendation and topic idea from McCloskey's "How to Be Human* *Though an Economist" I promise to post something and not mention McCloskey sometime soon...)

Questions from a Novice Economist

2009-11-15T18:02:00.000-08:00

First post!

1.) C. Romer has said that the government spending multiplier is 1.6. Government does not create wealth, it only redistributes it through taxation, debt, and inflation. This leads me to think that the multiplier could, at best in some magical world without leakages be equal to 1. Does perpetual motion exist in macroeconomics? If I am missing something in the whole multiplier calculation process, could someone enlighten me?

2.) Is all involuntary unemployment, with the exception of an individual being fired for incompetence, a result of government action? Examples are price controls, taxation, regulation, and labor contract enforcement.

3.) Is a system of voluntary government funding, a lottery for example, sustainable?

I know it's a short post...but I need to get back to the Macro hw.

P.S. Sam, thanks for inviting me to contribute!

Kelo (the case, not the misspelled submarine)

2009-11-13T11:21:00.000-08:00

Buzz on the blogosphere is on Pfizer and the Kelo case. You may remember that this was the eminent domain case a few years back when some dinkwater town in Connecticut (New London or something) bulldozed a neighborhood so that a drug company could build a bigass compound there. The case went to SCOTUS and those guys said that it was hunky-dory for a community to invoke eminent domain so long as the benefit to the community was on net positive, even if land was being taken from one private owner and given to another. In this case, it was a homeowner being relocated in favor of an impressively large pharmaceutical manufacturer.

The objection felt by many in those communities that value property rights and the rule of law was not insubstantial at the time, and largely justified. This was an utter abrogation of many centuries of well-established property rights laws and suggested that city councils could arbitrarily seize property from anyone if it suited the needs of their tax coffers (like in the recent California safe deposit box issue [H/T Mike Munger]). All of this was ex ante, and we have now arrived in the comfort of our luxury sedan to the dappled forest that is ex post, where Pfizer has decided to shutter its New London operations.

So how should we react to this? Schadenfreude? Some people are, and for the sake of civility, I won't attack any of them for impropriety (indeed, I quite sympathize). Instead, I've been mulling my own mixed reactions. One hand has on it the same righteous indignation it had from the original ruling, while another bears the weight of a great feeling of futility. From a practical standpoint, the common law was eroded for what was, ex ante, an illegitimate display of coercive authority and ex post has shown to have been the simple destruction of wealth. Both my inner Hanson and my inner Caplan are weeping. One from the mirror of history and the other from the muddy earth of a scrapped industrial park. Both liberty and efficiency have been mugged by a blind lady who probably has nothing on under her billowy robes. Tell me how this makes ours a society that best suits the will of the people.

The Kilo class submarine is a Russian diesel-electric boat, known for its surprising silence when operating on battery power. No relation to the case, other than New London being well known for submarines.

The Bourgeois Virtues

2009-11-12T20:33:00.000-08:00

I really like the name of this blog, I must say. How one can go through life as a pessimist I don't know. Maybe you get caught with your pants down a little less often, but in the terms of Professor Walter Williams, I prefer opting for the type II error when it comes to predicting a better future than a type I error (he professes the reverse, though, but after having dinner with so many politicians maybe it's merited).

We as economists (or future economists) should be optimistic about most things not related to the expansion of government. If you listen to the popular idioms regarding economists - that they've predicted nine of the last five recessions, etc, heck, Economics's nickname is the Dismal Science thanks to the writings of the Reverend Malthus, and if you read the writings of the Reverend Krugman you might be inclined to think the definition is still valid. Really though, if you look at what Economics tells us, it's hard to think of it as anything BUT an optimistic science. The Fundamental Theorem of Exchange tells us that voluntary trade is mutually beneficial, which means that people, by the simple act of trading with each other can make everyone better. Ricardo teaches us that everyone - not just the rich, the powerful, the least ethical, so on, but everyone can be enriched by specializing in the thing they are comparatively best at. Economics even tells us that greed, that dirty vice that we're all supposed to resist, can be turned into a productive force.

Despite all of this, there is hardly a shortage of doom-saying Economists. If you took a poll of Economists writing for a public audience, they might say that the Mayans were unrealistic in believing that we would get to 2012. Certainly, when the economy is rocky people are more willing to listen to the people who think we're on a train to hell.

So what I want to do is highlight an economist who is telling us just the opposite - Deirdre McCloskey. McCloskey is, as maybe some have heard, my current academic crush. I recently read her latest book The Bourgeois Virtues: Ethics for an Age of Commerce. It is a book seemingly aimed at two audiences: first and more generally, it is aimed at those who think Capitalism is a force of amorality or immorality, and she argues that it is in fact conducive to a moral world. Her second target audience is the economist, especially the Utilitarian economist, and her goal is to preach the virtue of Virtues. Economics seems to have become a science where Prudence, or Utility, is king (if there is even anything else in play). She thinks we economists should remember and take into account ALL of the virtues when practicing our science.

She reaches back to Aristotle and St. Thomas Aquinas for these virtues, of which there are seven; the Pagan four, Courage, Justice, Temperance, and ol' Prudence, and the Christian three, Hope, Faith, and Love. As a side note, while previous sentence contains scary words like 'Saint' and 'Christian,' non-believers like me can take just as much from it (and heck, even Ayn Rand once said the only philosophers ever worth a damn were the three A's: Aristotle, Aquinas, and... you guess). Ever the economist, McCloskey actually has a chart of each of the virtues, with 'self vs community' on the x-axis and 'profane vs transcendent' on the y axis. So what does McCloskey qua virtue ethicist have to say to economists? Well, lots of things - this is a 600 page book and volume one of a conceived of six volumes - but the basic message is this: the economy cannot run on Prudence alone. Entrepreneurs require Courage and Hope and Faith (not just a low CRRA), workers and capitalists require a Love of their work and a love of those close to them, and a love of your fellow man doesn't always hurt. Society must be Just (something Pinochet didn't understand) and, yes, Prudence and Temperance are necessary for making things work.

Why the Bourgeois Virtues? Well, because we're all Bourgeois now. Even the detractors of Capitalism are all Bourgeoisie these days - how many Proletarians get to sit around for four years reading and learning how evil wealth is?

So let us Economists stay optimistic (Hope + Faith + Courage) and convince others that our science is anything but dismal.

Good on Paper

2009-11-11T05:48:00.000-08:00

There's an old canard mocking the rift between theory and practice: "it looked good on paper". You hear this one with failed civil, nuclear, or mechanical engineering projects from time to time, but most often, you hear it with failed social engineering projects, like building pointless dams in Haiti or Egypt, or slapping price controls on, or creating silly make-work projects to restore employment. Of all the failed social engineering projects I hear "it looked good on paper" about the most frequently, the one that sticks in my craw is that of Socialism.

I can't find anything even remotely appealing about Socialism, using any metric, including equality. It's inefficient, illiberal, unjust, and tyrannical, and that's on its face. In practice, I agree, it's far worse than on paper, but by no stretch of the imagination does it at all look good on paper. I do so wish people would stop saying that it does.

Turns of phrase are the shambling undead. To kill them, you need a clean headshot.

The Price of Men

2009-11-09T10:07:00.000-08:00

A homemade sign by my house advertises, “Free truck and two men. $49!” I could use a free truck, so I called the number.

“Hello?” A man answers. He sounds slightly distracted. I hear a TV and conversation.

“Hi, I’m calling about the free truck.”

“Oh, yes!” I have his attention now, “a free truck and two men to help you move, only $49 for one hour.”

One hour? That’s not enough time to get to IKEA and back. “I’m not moving,” I explain, “I just need the free truck.”

“No, no. You pay for the men, and then you get the free truck.”

I think I’m beginning to grasp the free truck concept. “Ok then, tell me about the men. Are they tall?”

“They are tall enough to move anything in your house!” he enthusiastically assures me.

“I’m not moving,” I remind him. “Are they dark? Are they handsome?”

“Are you joking with me?” I sense some frustration. “Ya Allah!”

“Ya Allah,” I agree, a bit frustrated myself.

“You speak Arabic?” His tone changes suddenly. We are soon to be friends.

“Yes.”

“Where are you from?”

“California.” I explain, “I learned Arabic in the army. Where are you from?”

“Lebanon.”

“My favorite professor is from Lebanon! Someday I want to visit there.”

After telling me about some of the places I must see, my new friend eventually gets back to the original conversation. “For you,” he generously offers, “a free truck and one man, only $35.”

We’re finally getting somewhere. “But,” I reason, “if the two men are $49 and the one you’re offering me is $35, the other must be only $14. I’ll take him.”

He laughs, “You are very smart. Ok, $25.”

Now, I’m trying to be an economist, not a mathematician (as my other favorite professor can attest), but things don’t seem to be adding up, so I calculate aloud, “Two men together are $49, but one at a time they are $35 and $25 – a total f $60. Are you telling me you have a bulk discount on men?”

“Ya Allah!”

Picking my pony

2009-11-06T12:44:00.000-08:00

I think Alex Tabarrok is a pretty cool guy. Eh writes textbooks and doesn't afraid of anything. However, he also thinks Arnold Kling is wrong about inflation being just around the corner. His graph of nominal spending suggests that we could use a spot of inflation to boost nominal spending. I think the subtext (and when I asked him in person, he briefly mentioned it) that there could be a big threat of deflation. I don't disagree with any of this, but I don't share his confidence that inflation (and a big surprise inflation, at that) isn't a-comin' for lil' Opie Cunningham to whistle about through his big ol' buckteeth.

Naturally, I have a picture of my own.

I didn't bother marking up my picture the way Dr. Tabarrok did, but mine kind of speaks for itself. Yes, the data only goes back until 1975, but if you're willing to take me at my word, I assure

you that the mostly straight line that stretches to the left continues to stretch to the left way back farther than 50 years. (Data is from the FRB)

Now, I'm 100% on board with Alex's reasoning. To figure out inflation expectations, you check the markets. TIPS (Treasury Inflation-Indexed [Protected] Securities) are government bonds that adjust their coupon against changes to the CPI (Consumer Price Index). As we can see in the next picture (wow! 2 pictures in 1 post, how about that for value?), TIPS spread against normal 10-year bonds is pretty stable.

Pretty wild, huh? Banks are hanging onto massive excess reserves and nobody seems to think that this implies a wave of inflation in the next decade. How can I possibly explain this?

Well, I could borrow from the behavioralist school and suggest that investors are mad, but I don't believe that for a moment. I think a more reasonable story is that people believe that another asset bubble is coming (or that there are going to be some unprecedented market interventions by the Fed and Congress). I won't mention what I think the worst case scenario is because I don't want to violate the spirit of the blog. Still, I worry that if Alex gets his wish, a little bit of inflation (enough to get us out of a nominal spending slump) won't stay small for long. It would be like pouring a bucket of applesauce down the throat of a sweaty pirate named Sweaty Pete. Once you open up the floodgates, Jerry, that'll be all she wrote. Clamping down on what we'll observe when banks lend out normally again will be hella painful.

Optimistically, the Fed will be able to deal with potential inflation in a timely and smooth manner. Let's stay optimistic.

My Vote Counted

2009-11-05T19:36:00.000-08:00

On Tuesday I voted in the Virginia election. There were only five (or was it six?) positions to vote for. I want to tell you all a little about my experience voting.

First off, I only voted for three of the positions: governor, attorney general, and house of delegates. I guess that last one is like the state legislature or something? I really have no idea.

Well, leading up to the election, I was unsure as to whether I should vote for the D or the R guys. On the one hand, D is pretty close to B, which is the first letter of my first name. But on the other hand, R *is* R, the first letter of my last name. In the end, I chose to go for the R guys, and for reasons other than the first-letter-of-my-name thing.

Bob McDonnell’s competitor had put signs up all over Fairfax saying something to the effect that Bob wanted to get rid of schools. I’m not a fan of public schools, so if Bob is against them, he’s my guy. I just don’t understand why his Creigh Deeds would have gone around paying for a positive advertising campaign for his election competitor.

I voted for Bob McDonnell, and he won by 6%. It’s a good thing I voted for him, because without my vote, he would have undoubtedly lost.

The race for attorney general had a similar story. The guy running against Cuccinelli (I don’t even remember his (or her) name) has been playing ads all over TV saying how Cuccinelli once said that he wouldn’t enforce laws he didn’t agree with. Wow! What a strong endorsement!

Seriously, these Democrats are horrible at the PR game. You guys are supposed to advertise negative qualities about your competitors (or at least talk up the good points of your own business). No wonder Republicans owned the elections last night.

Well anyway, I voted for Cuccinelli. This was a much closer race — Cuccinelli only won by 1%! My vote really counted here.

So in case you’re not keeping track, my vote has counted in two of two cases.

However, there is still the general assembly election. There was no R in this race, only a D. Having run as a third party candidate in the past, I can empathize with the lower-ranked parties. So I voted for the Green Party candidate, Anna Choi. I mean, I like the color green, so why not? And I can tell by her name that she’s Asian, and I like Asians.

Furthermore, her website claims she is a fiscal conservative… which in conjunction with being a Green means she probably just favors raising taxes really high to offset government spending. But that’s ok, because I learned recently from doing my macro homework that in a Keynesian world (which we live in), an equal increase in government spending and taxes results in a net positive effect on the economy. What’s not to love about this kind of fiscal conservatism?

Unfortunately, Anna lost her bid to serve us. It went to the D.

But I refuse to let one bad race prevent me from enjoying my democratic freedoms in this country and knowing that, at the very least, my vote counted in two of the three races.

Remember Remember 5 Nov

2009-11-05T16:09:00.000-08:00

In celebration of the 404th anniversary of Guy Fawkes' attempt to explode parliament, we inaugurate this blog to carry the torch of liberty, justice, and the pursuit of an illuminated future.

I'll say briefly that a good conscience sometimes demands righteous rebellion from time to time, and even if gunpowder treason might cause history to remember you as a blackguard, advancing the cause of freedom is worth a bit of ignobility.