by Tyler Cowen
on September 18, 2011 at 3:11 pm
1. A new paper on Japanese monetary policy and why it didn’t work better (pdf).
2. Markets in everything (disgusting).
3. Bob Frank summarizes his new book on Darwin > Smith.
4. How is tennis spin changing? And how much are the chess pieces really worth?
5. Sending children through the mail (not the worst thing we do with them).
Robert Frank’s point about the suits is essentially nonsense. Wearing a suit is actually productive: it produces information that can be consumed by the employer. And it enhances the workplace by beautifying it. Moreover, we don’t keep spending on suits ad infinitum. There are diminishing returns. Thus, spending money for competitive purposes starts to look not so different from many other sorts of spending.
I agree with his conclusion: we should have a tax cut on income earned from savings and investment. But that conclusion can be argued for without resorting to these odd arguments he makes.
I think that is Professor Frank’s point. The problem is that everyone is sending the same information and the only way to distinguish one’s signal is to wear a more expensive suit.
Yes, there is diminishing returns to suits, but this fact does not negate his arguments. When all the suits cost $5,000, one interviewee I am sure will pull out his I-Phone and pretend to have series of important appointments coming up.
First of all. comparing humans buying suits or houses to animals who grow bigger horns is absurd in a variety of ways. We control the kind of things we buy and we understand trade-offs associated with the behavior. Second, even the ‘losers’ in the process are not creating waste as he claims. Suits are still useful and so are bigger houses. To conclude that a highly progressive progressive consumption tax would actually help competition sounds crazy. I mean, is he saying that the guy competing for the job would quit the search? Or that he would buy a cheaper suit and still win?
The whole article read like wordplay to me for pushing a liberal agenda (government is smarter than regular people).
I think he believes that that everyone competing for the job would buy a cheaper suit. So basically they would all be in the same place relative to each other, but without having to spend as much.
And you understand this is insane right? If anything, the richest applicant will buy the more expensive suit. Overall, we could even have more money being spent on suits if the job is really worth it. Hey, maybe they would start buying suits in Mexico.
Seriously, how many times do we need to have this same conversation with these guys?
You seem to be talking past Frank’s points. He did not say that humans do not understand trade-offs or that the status goods they buy are useless.
Rather, the point he is making is that when utility depends on relative status rather than absolute quantity of goods consumed and when there are information asymmetries that make signaling necessary, market outcomes may be highly inefficient. You can dispute those premises if you wish or you can argue that efficiency is overrated, but it’s not clear how much good it does to dismiss his argument because it is “pushing a liberal agenda.”
You can actually address the liberal agenda separately. If we pass a law that everyone must wear school uniforms to job interviews, the signaling will be squeezed out in other places (not to mention public choice, the only one left out of the negotiation will be the individual). Eventually everything must be legislated and that’s the endgame. We’ve seen that movie. Until they promise where they would stop, then I reserve the right to assume they never would.
I don’t think I am talking past his points, I am only trying to show that his argument is a fallacy. Of course social behavior is not always efficient and there will always be information asymmetries out there. But the problem is that he uses those assimptions to conclude that:
– Markets are not doing there jobs
– The way to solve this is to have government taxing us so we behave in the way a bureaucrat thinks is right
And that is just the usual liberal non-sense.
Fancy suits, if they are in fact all the rage among job applicants in finance (and my anecdotal evidence suggests otherwise–a friend of mine was recently hired by a mutual fund where he had the potential of making 7 figures within a few years and he does not have any fancy suits to speak of), have nothing on the mother of all “wasteful” signaling games, called higher education. You’d think someone at an Ivy League business school would be aware of this.
The fact that everyone wears a suit says something. Looking at the big picture, it appears to make the opposite point. Everyone is trying to look the same.
As for elk, maybe large antlers are like having big feet.
But this is both not the point and also not really true. Go visit a tailor shop sometime and they will tell you all the options available for a suit like the lining used, the blend of the fabric and even whether you want to be able to unbutton the cuff button. Some people with tailored suits love the last option because it allows them to go around with an unbuttoned cuff button to show they paid a lot more for their suit than other people.
There is a range of quality from the cheaper $300 suit one might buy at a department store to the $1,500+ suits favored by investment bankers and certain politicians. A trained eye can tell the difference and this point is not lost on the wearer.
i work for a IT company where suits are actually frowned upon. Developers are famous to come to work wearing sandals and stained t-shirts. But then you will hear them bragging about who has the largest amount of monitors in their office or who has a more powerfull desktop at home. Footbal players will get tatoos. Movie stars will do their hair.
Seriously, what does this prove? That humans value social indicators? Can we even start to measure how much these indicators are ‘efficient’ or not? Even worse, are we really saying that markets are not doing their job because they are alowing humans to behave the way they want to?
If no one else will say it.
Footnote 31 of the paper on Japanese monetary policy:
“One experiment that has not been tried is a large scale fiscal expenditure financed by purchases of government bonds by the BOJ. This, however, surely runs the risk of creating run-away inflation.”
That may well be right. And not just inflation. Also an even bigger debt mountain down the road. Classic Latin American-style myopia. But just wait. Next week’s The Economist (which has inexplicably swung radically leftwards since the recent August summer holidays) will get the idea of using Japan’s failure to try out this (stupid) policy as yet another reason for experimenting with it in Europe through massive purchase of the government bond’s of basket-case Southern Europeans.
This week The Economist confidently writes — “In today’s recessionary world, the ECB could buy several trillion euros-worth of bonds without unleashing inflation.”
I first noticed The Economist advocate the printing of money in Japan in the 90s.
This was before I was an Austrian or had even heard of that field of economics, and I didn’t really understand how morally wrong it was. The world is destined to learn the hard way.
“The world is destined to learn the hard way.”
Not necessarily. There is a real alternative on the table as can be seen by the surprisingly ferocious attacks of The Economist and the Financial Times on The Germans. Like everyone else on this earth the Germans of course are self-interested and not perfect and were earlier too naive and/or charitable with the Southern European basket cases. But some years ago the Germans fairly deliberately turned away from corporatist dirigisme and, notwithstanding their own Public Choice political decision making problems, represent a Model of sorts today.
Taking the economy and institutions as a whole it is not too much of an exaggeration to say the Germans are the vanguard of the strongest and most successful and competitive economies in the world, the northern European ones (though The Economist and the Financial Times believe they know better).
An obvious way to counter the Keynesian shrill at this moment in time is to support Germany’s conservative posture towards its profligate neighbors. I think if he was an Austrian Minister of Finance today Schumpeter would have done so. The pragmatic prudence of the German Schule, cautious custodians of court-bound common-sense, is today where the action is.
The action of timely inaction is the fountainhead of timely liquidation.
When I saw the title of 4(b) and clicked on it I thought I’d get an article about global wood prices or some such. I did not.
Not every day you get an analysis of chess piece evaluations based on 100k+ games by 2300+ players presented by a GM. Larry Kaufman’s piece is great, thanks.
Before concluding Japanese monetary policy didn’t work, we’d want to know the goals of the BOJ. And once we found those goals we’d want to know why they tightened monetary policy in 2000 and 2006.
Once we know all that we are likely to conclude the policy “succeeded,” but that the BOJ had the wrong goals.
When I worked in a university and went to visit a firm, I donned a business suit. But when company people visited me, they failed to don academic ragamuffin garb. Why did they feel that they could insult my community with impunity?
I’ve wondered if it is the same signal in the opposite direction. Poor attire, bad hair, and grotesque teeth mean you are toiling away too hard to worry about inconsequential things.
I still seek the middle kingdom…
Well, which way is the spigot of funds and jobs flowing?
When I visited them it was to ask for research funds. When they visited me it was to ask for novel ideas. Experience showed that it was novel ideas that were in short supply in their world.
I’ve been on hiring committees in academe (physics), and we often mocked people who wore nice suits for interviews.
The chess article equates having a FIDE rating of 2300 with being a “reasonably strong” player. Yikes. There’s still some useful stuff in there for the keen amateur though.
Nadal and Djokovic and other players with extreme western grips (more Nadal than Djokovic) do not hit harder, they do hit more accurately. Watch Safin-Hewitt in +
Do Nadal and Djokovic, with their western grips, hit harder than Sampras and Becker circa 1996? No. They’re more consistent and have a much larger margin of error (their shots usually land on the service line), but not harder hitters.
Bob Frank and Russ Roberts on EconTalk.
Surely Robert Frank is aware of Bryan Caplan’s argument that higher education is the most expensive form of signalling in America? Maybe the universities are the place to start implementing his proposal. Also, since the universities already collect vast amounts of personal financial data from most of their applicants, we could get them to collect the tax, too!
Hayek somewhere remarks that he suspected that Darwin learnt about competition, evolution and so on while an undergraduate at Edinburgh. So Smith was one of the giants whose shoulders he stood on.
I also start with the assumption that the author is overselling his point. If Adam Smith was amazed the degree to which self-interest benefits society enough to make the point, that doesn’t mean he didn’t get it.
Darwin explicitly acknowledged the intellectual debt owed to Malthus from whom he got the idea that an exponential population increase ultimately had to face fierce competition for limited resources. His work is also peppered with the phrase “natural economy.” I don’t remember whether he explicitly named Smith as an influence but Hayek is almost certainly right that there was either direct or indirect influence on his ideas.
I believe Darwin mentions Smith explicitly in his journal.
The more I think about Robert Frank’s argument, the more flimsy it seems. I guess a progressive tax would reduce the returns and cost of status signalling by giving the rich less of an advantage and thereby making the signal a less useful indicator of wealth. I don’t see that as having a substantial impact on the spending patterns of most Americans relative to the other impacts that a change in progressivity would have. Also, his example of buying a home in a district with a good school isn’t an example of signalling, It is the same as buying a house with a nice view, or with oil under it, or whatever. You’re paying for access to a scarce resource, which is exactly the thing the price system is supposed to do. There is no externality involved. He truly crosses into pseudo-intellectualism when he claims the US economy is “more competitive than ever” but produces more waste. What data could he possibly have to back up such fluff.
Robert Frank has three thoughts:
1. People seek positional goods.
2. This is foolish and wasteful.
3. Government (run by insightful people like him) should step in and prevent this foolish waste.
This is his litany, repeated *ad nauseam*.
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