Month: May 2006

Stumbling on Happiness

by  Tyler Cowen in

Finally, in Part VI, "Corrigibility," I will tell you why illusions of foresight are not easily remedied by personal experience or by the wisdom we inherit from our grandmothers.  I will conclude by telling you about a simple remedy for these illusions that you will almost certainly not accept.

That is from Daniel Gilbert’s Stumbling on Happiness, so far the best book this year. 

He takes Proust and turns it into social science.  Your brain distorts both your anticipations and your memories; we do not know how happy we were or how happy we will be.  Here is a short article on Gilbert.  Here is a long article on Gilbert.  Here is a short piece on why dreading pain can be as bad as pain itself.  Or is it…?  Was it…?

The economics of plagiarism

by  Tyler Cowen in

The economics of plagiarism are changing:

1. Plagiarism is now easier to catch and publicize, mostly because of the Web, Google, and computer search programs.

2. We are exposed to more influences, whether consciously or not, than before.

3. "Cut and paste," and other technologies, make cheating and plagiarism easier.

4. Borrowing from others will become more common but also more acknowledged and transparent, if only to avoid punishment preemptively.

5. The younger generation is less taken aback by the idea of plagiarism.  Perhaps rap music and sampling are an influence, not to mention mash-ups and digitally altered photos.

6. The notion of "originality" has become murkier.

7. Editors and portals will be seen increasingly as sources of originality.  What percentage of your favorite blogs are produced by "Control C"?

8. Plagiarism is least just when an idea is stolen before the creator can bring it to the public.  That said, some of these forms of plagiarism are efficient, if not always fair.  We can expect the "good executors" to steal from the "idea people"; not all of the latter can execute well, nor are they typically good at selling their ideas to the executors.

Michael at 2blowhards.com has further commentary.  I owe these points to a conversation with Tim Harford (ah, but how much of this was his?), who covers the topic in today’s Financial Times.

The forever stamp

by  Tyler Cowen in

The post office is planning a ”forever" stamp for letters, good no matter how many times postal rates increase.  That means people could say goodbye to those annoying 2- or 3-cent stamps that have to be added to letters every time rates go up.  The idea for the special stamps, which would be sold at the same price as other first-class stamps, was included in proposals announced yesterday that would also raise stamp prices 3 cents — to 42 cents — next year.

Here is the story.  Yes this is a hedging device, but it also represents an attempt to peg a real rate of return.  Write down a simple but absurd model.  The initial rate of return on holding the "forever stamp" is k, and is given by the hedging and liquidity value of the stamp asset.  In equilibrium that should be equal to the rates of return on other assets.  Do you want to stimulate the economy?  Just print more stamps and give them away, thereby diminishing their marginal utility and thus lowering their marginal return.  Watch real interest rates fall accordingly (hey, this is an equilibrium model) and watch investment and gdp rise.  As Philip Cagan once asked, who needs "money" for open market operations?  We can control the real variables directly, no?  Small levers can make for big effects.

You have my admiration if you can pinpoint what exactly is wrong with this argument.  Comments are open…

Do football coaches maximize returns?

by  Tyler Cowen in

David Romer says no:

…the behavior of National Football League teams on fourth downs departs from the behavior that would maximize their chances of winning in a way that is highly systematic, clear-cut, and statistically significant.  This is true even though the decisions are comparatively simple, the possibilities for learning and imitation are unusually large, the compensation for the coaches who make the decisions is extremely high, and the market for their services is intensely competitive…The departures from win maximization are toward "conservative" behavior…

In other words, too many punts and field goal attempts.  But why?

…the natural possibility is that the actors care not just about winning and losing, but about the probability of winning during the game, and that they are risk-averse over this probability.  That is, they may value decreases in the chances of winning from failed gambles and increases from successful gambles asymmetrically.

If you take a gamble and it fails, and you have lost for good, it hurts so so bad.  Coaches value "being in the game until the end" for its own sake.  They are unwilling to give up all sources of hope, even when the associated gamble would maximize their returns.

What does this say about how we run our lives?

That is from the just-arrived April 2006 Journal of Political Economy (I’m sorry Alex, but the JPE is better and more interesting than the QJE, all things considered).  Here is an earlier version of the paper.  Here is my earlier post on the NFL draft.

But does Natasha like my books?

by  Tyler Cowen in

Despite the strong positive feelings that characterize newlyweds, many marriages end in disappointment.  To understand this shift, the authors argue that although newlyweds’ global relationship evaluations may be uniformly positive, not all spouses base their global adoration on an accurate perception of their partner’s specific qualities. Two longitudinal studies confirmed that whereas most newlyweds enhanced their partners at the level of their global perceptions, spouses varied significantly in their perceptions of their partners’ specific qualities. For wives, but not for husbands, more accurate specific perceptions were associated with their supportive behaviors, feelings of control in the marriage, and whether or not the marriage ended in divorce. Thus, love grounded in specific accuracy appears to be stronger than love absent accuracy.

Here is the paper, and thanks to Robin Hanson for the pointer.

Giant fire-breathing robots with rocket boots and laser eyes

by  Tyler Cowen in

So requests one MR reader.  Will he settle for the economics of robots? 

Start with Robin Hanson’s paper.  Robin argues that robots will become close substitutes for unskilled human labor.  That requires the wage rate to fall to the cost of robot production.  Capitalists become extremely wealthy but laborers might die off or at least go hungry.  Someday a robot might be as cheap as a laptop is today. 

But will this happen?  Since the Industrial Revolution, there have been numerous predictions of falling real wages due to the advent of machines.  But across any thirty-year time horizon (some would say fifteen-year, but not I) real wages have risen and in the long run they have skyrocketed.  The marginal return to capital has not gone up much if at all.

Even if we have really, really good robots (I still think Deckard was a replicant), they won’t substitute for all forms of unskilled labor.  Maybe they can drive a car, but will they fluff your pillow?  The remaining poor will fill jobs robots cannot handle, own small bits of capital, or live off of charity and transfers.  Don’t forget, we are talking about a ridiculously wealthy and scientifically advanced world.  A small capital investment might carry you through the rest of your life.  Plus if robots will be so good, can’t they help the rest of us learn some skills or acquire some capital?

We will see a "cost disease" for services which cannot be handed over to robots, but so what?  Low productivity sectors may take up an increasing share of the economy in real  terms, but again this is most of all a symptom of plenty.

The robots also have to compete against technologically augmented humans, whom I suspect will be the real force of the future.  Complex biology is hard to master, so let nature handle that and just purchase the mechanical add-ons, no?

So I don’t worry about the special features of robot economies.  It is simply fears of Malthusian overpopulation but with metal rather than flesh.  The difference is that there is a more obvious profit incentive to produce lots of robots, since they can be owned for profit.  But modern technology would have pushed up wages even if we had not seen the falling birthrates as of late. 

In Battlestar Galactica they call robots "toasters."  In their world that may be a morally dubious judgment, but they seem to have the economics just about right.  Now if we let robots vote, or if they have torrid affairs with top DOD research scientists who hold the secret computer codes to our planet’s defenses, that is another matter…

Here is my previous post on robot economies.

FDA Shock

by  Alex Tabarrok in

In a stunning
decision the DC Circuit Court of Appeals ruled yesterday that dying patients have
a due process right to access drugs once they have been through
FDA approved safety trials.  The FDA’s refusal to allow firms to sell and
patients to buy these drugs "impinges upon an individual liberty deeply
rooted in our Nation’s history and tradition of [respecting the right of]
self-preservation."

A patient’s fundamental right could be rebutted if the FDA can show that its policy of barring access to these drugs is "narrowly tailored to serve
a compelling governmental interest."  (This issue will be decided on
remand).  But the opinion, by Clinton appointee Judge Judith Rogers and backed by Chief Judge (and GMU faculty
member) Douglas Ginsburg, is strongly worded.

The court writes:

A right of control over one’s body has deep roots in the common law. The
venerable commentator on the common law William Blackstone wrote that the right
to “personal security” includes “a person’s legal and uninterrupted enjoyment
of his life, his limbs, his body, [and] his health,”…barring a terminally ill
patient from use of a potentially life-saving treatment impinges on this right
of self-preservation.

In perhaps the most shocking statement the court says the FDA is like
someone who interferes with another person trying to aid a third.
The court cites the Restatement (First) of Torts:

[someone who] intentionally prevents a third person from giving to another
aid necessary to his bodily security, is liable for bodily harm caused to the
other by the absence of aid which he has prevented the third person from
giving.

The Court also notes:

Government regulation of drugs premised on concern over a new drug’s
efficacy, as opposed to its safety, is of recent origin. And even today, a
patient may use a drug for unapproved purposes even where the drug may be
unsafe or ineffective for the off-label purpose.  Despite the FDA’s claims
to the contrary, therefore, it cannot be said that government control of access
to potentially life-saving medication “is now firmly ingrained in our understanding
of the appropriate role of government,”…

If the court’s ruling is upheld it will begin a return to the pre-1962 system in which safety trials alone were required for marketing approval.  I have long advocated returning to a safety-only system.  FDA regulation creates drug lag and drug loss – delays in the introduction of new drugs and increases in the costs of R&D resulting in fewer new drugs.   While more extensive testing is not without benefits, FDA incentives practically ensure that caution will be excessive.

The court was also right to point to the vitality and importance of off-label prescribing.  Once a drug has been approved for some use it can be prescribed for any use, even one quite different than the one for which it was approved.  Since new uses for old drugs are discovered all the time what this means is that we already have a voluntary system of drug review and approval that exists outside and apart from the apparatus of the FDA.  A safety-only system does not mean an absence of regulation it means greater reliance on a voluntary regulatory system that better takes into account the hetereogeneity of patient diseases and preferences – what I have called the Consumer Reports model of regulation rather than our current paternalistic model.

The case, by the way, was brought by the Abigail Alliance named after Abigail Burroughs who died after repeated requests to access experimental drugs were denied, it was later shown that the drugs were effective and could have prolonged her life. 

How to do an economic impact study, properly

by  Tyler Cowen in

My request for requests drew this topic.  I have two simple suggestions:

1. Use a multiplier of 1, not three or four.  The so-called multiplied funds are just sloshing around from one sector to another.  But if your economy is in deep Keynesian unemployment and the project is relatively large, use a multiplier of 1.3 to account for aggregate demand effects.

2. Compare your studied project to the best available alternatives.  Have you been hired to assess the benefits of a new stadium?  Perhaps you think the stadium would be better than the status quo.  But also list the forty-three projects that would be better than a stadium.

I am not aware of any economic impact studies that follow such procedures.  Too often such studies are political marketing rather than an attempt to discover truth.  Here is my previous post on the topic.

What I’ve been reading

by  Tyler Cowen in

1. The People’s Act of Love, by James Meek.  You wouldn’t think a Brit could imitate a 19th century Russian novel, but he pulls it off.  Excellent mid-brow fiction, give it a few chapters to grab you.

2. The Singing Neanderthals, by Stephen Mithen.  The author starts with sexual selection theories of the arts, and then asks why we sing in large groups rather than exclusively one-to-one.  The Neanderthals are portrayed as a static culture, dependent on music for their communication, and thus unable to come up with new ideas.   Recommended for those who like just-so stories and yes that includes me.

3. Capital and Collusion: The Political Logic of Global Economic Development, by Hilton Root.  Here is the book’s web page.  Hilton will be moving full time to George Mason, School of Public Policy.

4. Polio: An American Story, by David Oskhinski.  There are few Pulitzer Prize-winning works you can gulp down and enjoy in a single brief sitting, but this is one of them.

5. You Must Set Forth at Dawn: A Memoir, by Wole Soyinka.  Wonderfully written, sadly he doesn’t seem to see why capitalist enterprise is important for Africa.

6. The Book of Lost Books: An Incomplete History of All the Great Books You Never Will Read, by Stuart Kelly.  Aeschylus, Dante, Kafka, and many others wrote works that were lost, destroyed, or never finished.  (Hey, what about the missing second volume of Hayek’s Pure Theory of Capital?  You know, the one where he integrates the theory of money and capital?)  Here is the history of those works, in bit-sized, ready-to-consume form.  Here is one good review.  If you are tired of popular literary treatments which simply recycle material you already know, this book is for you.  A gem.

7. "The only irreducible reward"…

Housing futures

by  Tyler Cowen in

Read James Surowiecki.  Excerpt:

At a new online site called HedgeStreet, investors can bet on changes
in home prices in certain cities. And later this month the Chicago
Mercantile Exchange is going to start trading futures contracts pegged
to housing-price indexes in ten major metropolitan areas. The Chicago
plan, which is the brainchild of two economists, Karl Case, of
Wellesley, and Robert Shiller, of Yale, is straightforward: if you just
spent, say, $1.5 million on a two-bedroom apartment in Manhattan, and
you want to hedge against the risk that it might be worth $1.2 million
three years from now, you can sell contracts that will reap you a
profit if local prices fall, allowing you to lock in the current value
of your home. Alternatively, if you think the housing boom in Los
Angeles still has a ways to run–or if you’re interested in buying a
year from now but are afraid that you’ll be priced out of the
market–you can place a bet that will pay off if prices keep going up.