Month: January 2005

Rules of Just Conduct versus Social Justice

Elizabeth Anderson and other commentators misunderstand Hayek and in the process they fail to understand the sense in which market outcomes may be said to be just (Tyler comments also).

Hayek argued that the concept of social or distributive justice was "empty and meaningless."  Anderson tries to use this argument, which she explains well, to suggest that any idea of libertarian or free market justice must also be empty and meaningless.  Hayek, however, did not argue against rules of just conduct, "those end-independent rules which serve the formation of a spontaneous order."  Among such rules may be Nozickian or Lockean rules of voluntary exchange.

It’s quite possible, for example, to be a good Hayekian and also to say that I deserve my income because it was acquired by just conduct, e.g. by production and trade.

True, it is an accidental fact that I live in a time and place where my skills are highly prized.  In this sense, I do not deserve my income (i.e. my income is in part a function of things beyond my control).  But I do deserve my income in the sense that it was acquired justly and to take justly acquired earnings may be an injustice.

Markets for football possessions

…[in] the "Field Position Auction" proposal we submitted to the N.F.L. at the end of the 2002-3 season. In it, the loser of the overtime coin flip decides the yard line where the offense starts, and the winner chooses between taking the ball or starting on defense. We would also like to present an alternative method that achieves the same result, but eliminates the coin flip.

At the start of sudden-death overtime, the teams engage in a silent auction to decide possession. Each team writes down the yard line at which it would be willing to start its offense. The numbers are given to the referee in sealed envelopes; the team that picks the lower yard line gets the ball first. The first team to score wins. There is no coin flip. Each team has an equal chance to take possession, and the team willing to give up more field position gets the ball.

Otherwise the coin flip winner ends up triumphant sixty percent of the time.  Here is The New York Times link, and thanks to Robert Schwartz for the pointer.

Do people deserve their market prices and wages?

Here is part of Anderson’s argument:

Let’s consider first Hayek’s claim that prices in free market capitalism do not give people what they morally deserve. Hayek’s deepest economic insight was that the basic function of free market prices is informational. Free market prices send signals to producers as to where their products are most in demand (and to consumers as to the opportunity costs of their options). They reflect the sum total of the inherently dispersed information about the supply and demand of millions of distinct individuals for each product. Free market prices give us our only access to this information, and then only in aggregate form. This is why centralized economic planning is doomed to failure: there is no way to collect individualized supply and demand information in a single mind or planning agency, to use as a basis for setting prices. Free markets alone can effectively respond to this information.

It’s a short step from this core insight about prices to their failure to track any coherent notion of moral desert. Claims of desert are essentially backward-looking. They aim to reward people for virtuous conduct that they undertook in the past. Free market prices are essentially forward-looking. Current prices send signals to producers as to where the demand is now, not where the demand was when individual producers decided on their production plans. Capitalism is an inherently dynamic economic system. It responds rapidly to changes in tastes, to new sources of supply, to new substitutes for old products. This is one of capitalism’s great virtues. But this responsiveness leads to volatile prices. Consequently, capitalism is constantly pulling the rug out from underneath even the most thoughtful, foresightful, and prudent production plans of individual agents. However virtuous they were, by whatever standard of virtue one can name, individuals cannot count on their virtue being rewarded in the free market. For the function of the market isn’t to reward people for past good behavior. It’s to direct them toward producing for current demand, regardless of what they did in the past.

Now, I am torn between "strict philosopher" and "common sense morality" views.  In the former, I am a metaphysical determinist who doesn’t think much of desert arguments — whether pro-market or not — in any context. 

But for purposes of argumentation, let’s put on the common sense hat.  I then think that most voluntary transactions — at least in democratic market economies — are in fact reasonably just.  The biggest problem is fraud — Enron and the like — and that cannot be blamed on Hayek.  The share price of Enron — when it counted as the seventh largest firm in terms of capitalization — was a Hayekian obscenity if judged as an information aggregator.  The problem was that prices were tricked by inflated earnings estimates and did not perform their Hayekian duties properly. 

Another fairness problem is that some people are born into terrible neighborhoods and face unfair odds in life.  But the information aggregation function of prices is again far from the leading culprit in those cases.  In fact price floors and ceilings usually make poverty worse and less fair.

The complex concept of merit encompasses many values.  One of those values — but not the only one — is how much other people are willing to pay for what you have to offer.  Let’s start with that as a workable concept, and modify it whenever deviations will serve the general welfare.  Nozick goes wrong in thinking that no other notion of merit can override a prescription for laissez-faire, but consenting acts between capitalist adults should serve as the proper default.  If I buy a wonderful stinky cheese for $10, barring fraud, most likely all is well in the moral universe in this case.

Now the critiques are well-known.  Marginal products are determined in a broader social and economic context, plus the distribution of wealth may be unfair.  But the American public comes close to having the correct view here.  On one hand, it is widely recognized that taxation to finance public goods, including some degree of social insurance, is morally legitimate.  At the same time, people are seen as deserving what they earn, again fraud aside.  We ought to think twice before treating earned incomes as a "social pie" purely up for grabs.

But those judgments are piecemeal rather than foundationalist.  Few people agree with Robert Nozick in treating property rights as absolute.  More generally, we cannot justify all distributions, prices, and incomes from some set of first principles.  Rather we start with what we have and go from there.  And then the $10 for the cheese does in fact represent justice.  Furthermore we can believe this while admitting that the child born in the South Bronx does not receive a fair shake.

Anderson also confuses the manner in which prices are forward-looking.  A measured price for a consummated transaction reflects supply and demand from the past.  To the extent that a person’s merit was reflected by what she can get others to pay, this is OK.  There is no contradiction between backward-looking and forward-looking perspectives.  It remains true that such prices will not reflect, say, the purity of a person’s heart.  But this point stands without worrying about time frames.  Anderson writes as if "information aggregation" is some independent, ex ante functional purpose which causes prices to move in morally undesirable directions.  In reality information aggregation is an ex post property of a competitive bidding process, it does not on its own drive prices away from some pre-existing benchmark of moral merit.

Some of Anderson’s statements are hard to parse:

"the function of the market isn’t to reward people for past good behavior. It’s to direct them toward producing for current demand, regardless of what they did in the past."

OK, but past rewards will have come from efficacious past behavior in satisfying consumer demands.

Anderson also argues that even a productive and meritorious person cannot insure adequately against all possible future disasters.  It is well-known that markets do not produce many kinds of long-term insurance and indeed this remains a puzzle.  But here a dose of more Hayek — not less – would seem to be in order. 

The bottom line: A coherent notion of moral merit includes more than just your ability to serve others through the marketplace.  So market returns won’t coincide with personal merit, even putting aside the dilemmas of determinism.  But voluntary transactions — in many settings — provide a rough but non-absolute starting point for what is fair.  And if we are looking for causes of unfairness, the Hayekian informational role of prices is simply not a major culprit. 

Should you have an option on a flat tax?

Stephen Moore writes:

The central idea behind the Freedom to Choose Flat Tax is to create an optional post card flat tax, which would be offered to tax filers as an alternative to — rather than a replacement of — the current tax code.  There would be no deductions whatsoever, except for a generous personal deduction and child deduction.

The flat rate would, of course, be somewhat higher.  Might many people prefer to pay a little more to avoid the hassles of the current system?

I can think of some problems:

1. Many people might fill out two tax returns and pay the lower one, thereby raising tax filing costs.  That being said, the new and second return won’t take much time.

2. Let’s say everyone paid the higher flat rate.  How long will it stay flat for?  Won’t Congress auction off privileges and deductions as they have done in the past?  In the meantime our taxes have gone up, and in the long run we might return to tax complexity.  We are addressing symptoms rather than underlying causes of the problem.

3. The benefits of having a flat tax are often overrated.

Still, the idea has its virtues.  Transition costs would be low.  The relevant legislation would be relatively simple, and easy to explain to the public.  And it might lower tax filing costs significantly.

The quotation is from The Wall Street Journal Op-Ed page, 27 January 2005.  Here is more information.

The ol’ dollar, it’s gonna go down

Bill Gates and Warren Buffett are short the dollar.

“I’m short the dollar,” Gates, chairman of Microsoft Corp., told
Charlie Rose in an interview late yesterday at the World Economic
Forum in Davos, Switzerland. “The ol’ dollar, it’s gonna go down.”

Gates’s concern that widening U.S. budget and trade deficits are
undermining the dollar was echoed in Davos by policymakers including
European Central Bank President Jean-Claude Trichet and German
Chancellor Gerhard Schroeder.

The dollar fell 21 percent against a basket of six major currencies
from the start of 2002 to the end of last year. The trade deficit
swelled to a record $609.3 billion last year and total U.S.
government debt rose 8.7 percent to $7.62 trillion in the past 12

“It is a bit scary,” Gates said. “We’re in uncharted territory
when the world’s reserve currency has so much outstanding debt.’…

Gates reflected the views of his friend Warren Buffett, the
billionaire investor who has bet against the dollar since 2002.
Buffett said last week that the U.S. trade gap will probably further
weaken the currency.

“Unless we have a major change in trade policies, I don’t see how
the dollar avoids going down,” Buffett said in an interview with
CNBC Jan. 19.

Thanks to David Theroux for the pointer.


More ‘Little Black Lies’

Black life expectancy is lower than white life expectancy.  On this basis, President Bush argues that social security is a worse deal for blacks than whites.  Paul Krugman says this is a lie but his primary counter-argument is shockingly weak:

Mr. Bush’s remarks on African-Americans perpetuate a crude misunderstanding about what life expectancy means. It’s true that the
current life expectancy for black males at birth is only 68.8 years –
but that doesn’t mean that a black man who has worked all his life can
expect to die after collecting only a few years’ worth of Social
Security benefits. Blacks’ low life expectancy is largely due to high
death rates in childhood and young adulthood. African-American men who
make it to age 65 can expect to live, and collect benefits, for an
additional 14.6 years – not that far short of the 16.6-year figure for
white men.

True, life expectancy at birth isn’t the right statistic but neither is life-expectancy at 65.  Consider the following simple example: suppose that 95 percent of blacks die before the age of 65 but that the 5% who survive to 65 have the same life expectancy as whites.  Krugman would then claim that social security isn’t discriminatory, but that would be absurd – 95 percent of blacks would be paying payroll taxes for all of their working lives and in return they would receive nothing.

As HedgeFundGuy points out a more relevant measure of life expectancy for social security is life expectancy at 20, when working-life begins, and at this age black life-expectancy is still a significant 6 years less than that of whites.

Life expectancy isn’t the only thing that affects social security redistribution, however, marriage rates, number of dependents, disability, income and even the time pattern of income matter also.  It may be that when all of these considerations are taken into account that on average social security is no worse a deal for blacks than for whites but this will be true only because social security is a hash of redistributionist tendencies few of which are well understood let alone well justified.

Addendum: See also Heritage’s rebuttal which makes a number of other good points especially the fact that lumping in the disability program with social security is not appropriate.  Although the programs are connected historically they can, are, and should be treated as independent for purposes of reform and analysis.

Not all frames of reference are zero-sum

I am sometimes in environments with large numbers of attractive women. Other times I am in environments where attractive women are rare. In the former case, I do not become desensitized to all the hot young women, (or at least, only a little bit.) I still react differently to the different crowd. Male brains are programmed to react to certain signals of beauty. We are attracted to women who appear fertile…, and [anatomy is] part of that (although perhaps for foolish reasons, ie the equivalent of peacock tails). Having more of those signals does not make the signals meaningless. If what we are attracted to is fertility, then if everyone looks fertile we will be attracted to everyone.

…Is all beauty relative? Hell, no! A man in a crowd of 22 year-olds will do more ogling than a man in a crowd of 60-year olds, even if he is in those crowds long enough to adjust his beauty scale. He may become choosier about which 22-year olds he finds attractive, but he will still find a higher proportion of the women attractive.

Read more here, and yes it is safe for the workplace.

My question: When do we find that purely voluntary games are zero-sum?  If my neighbor resents my excellent music collection my gain still probably exceeds his loss.  Or if I compete more effectively for a spouse, my spouse gains; the net gain is usually positive even if other men lose out.

Since status is almost everywhere, virtually all marketplace transactions have both positive-sum and negative-sum elements.  But the average expected return on these games still has to exceed what is available from purely private pleasures, otherwise drop out from the game.  So few of these games create zero or negative value, all things considered.  Nor do we have a good idea which voluntary games should be taxed at the margin for a relative excess of negative-sum status competition.

Fidget your way to better health

The most detailed study ever conducted of mundane bodily movements found that obese people tend to be much less fidgety than lean people and spend at least two hours more each day just sitting still. The extra motion by lean people is enough to burn about 350 extra calories a day, which could add up to 10 to 30 pounds a year, the researchers found.

Here is the full story.  Here is another summary.  And check out the thin researcher.

Strange proposed regulations

An Oklahoma senator hopes to revive cockfighting in the state by putting tiny boxing gloves on the roosters instead of razors.

The Oklahoma legislature outlawed the blood sport in 2002 because of
its cruelty to the roosters, which are slashed and pecked to death
while human spectators bet on the outcome.

But State Sen. Frank
Shurden, a Democrat from Henryetta and a long-time defender of
cockfighting, said the ban had wiped out a $100-million business.

try to revive it, he has proposed that roosters wear little boxing
gloves attached to their spurs, as well as lightweight, chicken-sized
vests configured with electronic sensors to record hits and help keep

Here is the full story.

Why does America have inferior raw ingredients?

Mostafa Sabet, a reader, writes:

I agree with your point [TC: my link] about raw ingredients and wonder why the richest nation in the world has such crappy raw ingredients?  We can afford it and obviously people can tell the difference.  Sure it won’t affect the McDonalds’ and freezer section food, but why does it go all the way downstream unless you pay exorbitant amounts of money for it?  When I was in Egypt, not exactly first world, the raw ingredients were far superior to the ones here.  Any ideas? 

A tough question, I see a few major hypotheses:

1. Things are changing rapidly, just visit Wegmans.  OK, but why has it taken so long?  And of course the revolution remains far from complete.

2. It is an exogenous demand-side question.  Americans have bad taste in food, just as the Chinese have bad taste in lounge music.  Why, for that matter, do the Japanese like karaoke so much?  Why do the Scots serve deep-fried Mars candy bars?  Note that more detailed versions of this hypothesis blame the British connection, Protestantism, and possibly the rule of law as well.

3. Food transportation in the U.S. exhibits economies of scale to an unprecedented degree.  The relative price of canned and frozen and mass-branded goods is thus especially low here.  This discriminates against both quality and freshness.

4. U.S. agricultural is so efficient that large farms replace small farms.  At the margin this raises the marginal cost of "artisanal production" of gourmet items.  The more heavily subsidized European agriculture has preserved many more small farms, which favors quality artisanal production.

5. It can take hours to make a really good mole sauce.  America has high wages, nighttime shopping, plus the best TV shows in the world.  The opportunity cost of good cooking and fine, slow dining is very high here. 

Shiller on Housing Prices

Robert Shiller has a new edition of Irrational Exuberance coming out, this one will feature a chapter on real estate.  Shiller, of course, predicted the stock market collapse and now believes that we are near the peak of housing prices. He is also involved in establishing a futures market that would allow people to hedge against movements in housing prices (see also my post on The New Financial Order). Here is a short interview with him on these subjects.

I too think that housing prices are inflated.  It is certain that prices cannot continue to rise as they have in recent years and when interest rates increase, as they surely will as budget deficits continue to balloon and Asian central banks grow weary of taking losses on their portfolios, prices will fall both because of the rise in interest rates per se and because the increase will prick the bubble.  Yes, Tyler has outed me as well as Brad De Long and Brad Setser.

Do MacArthur Awards stimulate genius?

As part of a program widely known as genius grants, the John D. and Catherine T. MacArthur Foundation most years gives one or more authors $500,000, hoping financial freedom will help the writers produce their best work.

An examination of the program, however, reveals that most of the 31 writers chosen since 1981 as MacArthur Fellows had already hit their artistic peak. That conclusion is supported by the 14 major awards – either a Pulitzer Prize, National Book Award, National Book Critics Circle Award or PEN/Faulkner prize – and 37 minor awards the authors received before getting their MacArthur money.

Surveying book reviews, author profiles and the opinions of literary scholars, Crain’s determined that 88% of the MacArthur recipients wrote their greatest works before being recognized by the Chicago-based foundation. The sheer number of books produced by the writers declined, too, after their MacArthur awards.

It would reinforce romantic notions that great art requires personal sacrifice to suggest that, half-a-million dollars in hand, writers get lazy. But something else appears to account for the failure of the MacArthur program to fulfill its promise: Writers are mostly chosen too late in their careers, average age 48, and well after the literary establishment has recognized them for excellence.

Daniel Drezner offers further commentary.  I see two options.  Either the prizes stimulate genius by paying rewards ex post, or we would be better served by scattering smaller grants to a greater number of unknown writers.  Ex ante subsidies do better than ex post prizes when the relevant creators are liquidity constrained.  That is, without the upfront grant, a great but still obscure writer might have to drop out of the game for lack of money.  Since that is a plausible description of the market for fiction, most prizes and grants in this area should take more chances.  Tenured academics, in contrast, are not usually liquidity constrained (unless they have expensive lab bills); ex post prizes will work better for them.

That being said, it is easy to see why foundations — which involve accountability to a board of trustees — might prefer a more conservative approach.  Yes a foundation may care about the world, but it must also support its own reputation, generate favorable publicity, and build a "ruling coalition" which reaps reputational awards from making quality grants.  All of these factors will militate in favor of awards to established producers.  When accountability is in place, who will opt for a very risky investment which fails in at least ninety percent of all cases?

The Cultural Exception

For years, France has fought what is sees as an American cultural invasion, powered by Hollywood movies, U.S. pop music and giant brands like Coca-Cola.  Now, it is going to great lengths to save an American cultural icon in its backyard: Disneyland

The French government has just finished helping Walt Disney Co. bail out Euro Disney SCA, the operator of two Disney theme parks outside Paris.  A state-owned bank is contributing around $500 million in investments and local concessions to save Euro Disney from bankruptcy.  This comes after 17 years during which French leaders have spent hundreds of millions of dollars and countless hours to ensure that the land of Money could keep Mickey Mouse.  Still saddled with debt, Euro Disney is gambling that expensive new attractions and an improved tourism climate will deliver a turnaround.

That is from the front page of The Wall Street Journal, 26 January.  And here is a previous installment of The Cultural Exception.