Month: August 2006

Why I disagree with Milton Friedman on monetary policy

by  Tyler Cowen

Milton writes to Greg Mankiw:

Nothing that I have observed in
recent decades has led me to change my mind about the desirability of a
monetary rule which simply increased the quantity of money at a fixed
rate month after month, year after year. That rule would get rid of the
mistakes and that is probably about all you could expect to get from a
monetary system.

Greg counters that the lender of last resort function of the central bank may interfere with a fixed monetary rule.  Fair enough (in fact I think the earlier Milton admitted this point, although the later Milton may agree with Larry White’s comment on Greg), but my objection is more day-to-day.  Hardly anyone is willing to live with the consequences of a strict rule for the monetary base.

In particular, the resulting short-term interest rate volatility would be much higher than, prior to experience, most people had expected.  Liquidity is quite scarce.  The demand for funds goes up and sometimes, in the absence of Fed smoothing, the supply just isn’t there.  Price has to adjust.  No, interest rate volatility is not the end of the world but few people believe this makes for a better marketplace.  That is why hardly anyone in the world of central banking defends monetary base targeting these days, even though the idea was fairly popular twenty-five or thirty years ago.

The Swiss tried to target their monetary base, briefly, in the mid 1980s.  No one was willing to live with the resulting interest rates and especially the exchange rates; the latter is an additional problem for small open economies.  So they stopped.  Times since then have not exactly been the Weimar hyperinflation in Bern and Zurich.  The Swiss are better off for having a multitude of targets.

We shouldn’t target the monetary base either.  If we have enough discipline to stick to a base target, we also have enough discipline to endure a regime of acceptable "muddling through."

Addendum: Correct me if I am wrong, but didn’t Milton repudiate the money target idea a few years ago and suggest inflation targeting as an acceptable substitute?

Philosophical journeys

by  Tyler Cowen in

As a young teen I wanted to start with all of Plato’s Dialogues (yes including Parmenides, which I loved, but I didn’t finish The Laws) plus the major works of modern philosophy.  I used the old John Hospers text to identify Descartes, Leibniz, Spinoza, Hobbes, Locke, Berkeley, Hume, and Kant.  I read some Aristotle too, although he bored me.  Then I read lots of Karl Popper and Brand Blanshard, the old-fashioned defender of rationalism and critic of positivism.  I gobbled up George Smith and Antony Flew on atheism.  I was influenced by Ayn Rand’s moral defense of capitalism, though I was never impressed by her as a philosopher. 

Much later I read Nozick, Rawls, and Parfit.  Parfit made by far the biggest impression on me.  The other two, however smart, seemed predictable.

In graduate school I read Quine avidly.  George Romanos’s book on Quine I found more useful than any single Quine work, although Word and Object and the essay on "Two Dogmas of Empiricism" are the places to start.  Quine remains a major influence, including on how I think about blog posts.  Which thicket of assumptions might lead one to a possible conclusion?  I took a class on philosophy of language with Hilary Putnam and developed interests in Kripke and others, but they never displaced Quine in my affections.  I developed a fondness for William James.  From Rorty I saw more value in the Continentals, although I prefer to misread them.  I flirted with the early German romantics and their rejection of philosophy, at times mediated through J.S. Mill.

Later experience with Liberty Fund interested me in "deep" readings of Montesquieu, Tocqueville, Maimonides, and some of the other "Straussian" texts.  I’ve never been a Straussian, though.  I’ve made attempts to understand Heidegger but without any success. 

Right now the philosophy journals I read are Ethics and Philosophy and Public Affairs.  When it comes to metaphysics, mind-body problems, and the like, I prefer books, usually of a semi-popular nature.  The academic debates on these topics are too rarified to interest me very much.

That is my path, in a nutshell.  I don’t pretend it is an optimal sequence for others. 

The bottom line: I have learned to focus on the philosophy which clicked with me at the time.  The rest was just so much blah blah blah.  Philosophy books are more like self-help tomes, or fun record albums, than they let on.

Any suggestions for how our reader should choose a path?

Tullock Insults

by  Alex Tabarrok in

Call me a masochist but one of the great pleasures of being at George Mason is that I am regularly insulted by Gordon Tullock.  You have to understand, however, that in my profession not to have been insulted by Gordon is to be a nobody.   

In anycase, here is one from yesterday.

"Gordon," I asked, "do you think we should ban child labor?"  "No, keep working."

The other day Gordon asked me to read one of his papers and I pointed out a few typos.  "Excellent," he said, "this will surely be your greatest contribution to economics."

Gordon is prone to pressing people with difficult questions.  One of my colleagues responded, "Gordon, I’m not that good at thinking on my feet."  Without missing a beat Gordon pulled up a chair and said "well sit down and we’ll see how you do then."

Comments are open if you would like to memorialize your own Gordon insults.

Market Leaders that Went Under

by  Alex Tabarrok in

I’m looking for a list of big firms that went under, i.e. either they went bankrupt or out of business in some sense.  I’m interested especially in firms that succumbed to ordinary market forces so Texaco which went bankrupt due to a lawsuit doesn’t count and neither does Enron.  Famous names that once dominated their field are ideal.  Examples so far include:

KMart
Pan Am
Atari
Penn Central
Polaroid

Comments are open for your suggestions.  Thanks in advance.

Market Failure? Academic Departments

by  Alex Tabarrok in

The Angry Professor describes a new budgeting system at LSU:

Several years ago LSU moved to a business model budget. Under this
model, each department has control over its own funds. We might choose,
for example, to give everyone a big raise. Or, we might choose to hire
new faculty. We might purchase equipment, or furniture.

As
with all such schemes, the administration makes sure that they will get
money from somewhere to sustain their bloated salaries. Each department
pays a "tax" to the college, which is determined by enrollments and
indirects as earned in "Year Zero" (the year before the new budget took
effect). If the department fails to generate at least the enrollments
and indirects earned in this year, the college will take the shortfall
out of the departmental budget. We’re not talking about that funny fake
money that colleges usually shuffle around, but real dollars: my
raises.

Some good things have come out this arrangement:

My department and several others have taken
advantage of the new model by "firing" the custodial staff provided by
Physical Facilities and hiring a private contractor to keep the
bathrooms looking spiffy. I must say, the bathroom has never looked
cleaner, and my office carpet has been vacuumed for the first time in
several years.

But, of course, the Angry Professor is angry. 

In the social sciences, every department is trying to offer
statistics courses in house, so we now have about 8 courses titled
"Introduction to Statistics in [insert department name here]." 

But why doesn’t the Coase Theorem and comparative advantage apply?  The problem here can’t be the budgeting.  I suspect a lack of property rights.

Each department is now in direct competition with every other for undergraduate enrollments.

Sounds good to me but the Angry Professor has a rebuttal:

The marginal departments, the ones with the
lowest possible academic standards, are pulling in vast numbers of warm
bodies and the tuition dollars associated with them. The departments that formerly only provided degrees to the football players are now thriving.

But grade inflation and the incentive to take easy courses in easy departments is nothing new, the only difference is that now the easy departments have funding commensurate with enrollments.  The bottom line, therefore, is that the angry professor is angry at the students for not choosing classes more wisely. 

A better grading system that takes into account the fact that some departments and professors grade easier than others would help students to make better choices.   It’s not obvious to me, however, that on the whole the students aren’t making rational choices.

Thanks to Tom Slee for the pointer.  I hope to say more about his interesting new book, No one Makes You Shop at Wal-Mart, in the future.   Contrary to the title it’s about how markets fail, not a defense of Wal-Mart!

The Limits of Tying

by  Tyler Cowen in

A pen may refuse to dispense ink unless it’s being used with licensed
paper. … A shoe may refuse to provide some features, such as high-tech
cushioning of the sole, unless used with licensed shoelaces. …Will
these things actually happen? I can’t say for sure.

So writes Felten, channeled through CrookedTimber.  This world sounds like fun, but it is unlikely to come about.  Most people wouldn’t buy a pen like that, and even a monopolistic pen supplier (hardly the case) would maximize profit by offering a more valuable product.  Tying has three primary rationales:

1. The main product actually works better with certain accompaniments.  The supplier wishes to either avoid complaints, liability, or damage to reputation.  Your local Denny’s won’t mash together french fries, blueberries, and coffee for you.  Not even if you beg, offer a large tip, or whine about "Markets in Everything."

2. Price discrimination.  Make them buy the printer with a specified printer cartridge.  People who use the printer more need more cartridges.  Under certain conditions, the cartridge can be priced so as to charge the high-value users more for the entire package.  That leads to higher profits than charging everyone the same price, at least if the right conditions are satisfied.  This is usually welfare-improving, I might add, as it leads to higher output.

3. Desire to use one monopoly position to take over another newly opened, declining-cost market.  Tying can give you a first-mover advantage and discourage entrants.  The model here is complicated but it can work out to support this result.  Try this one too, and here.  The iTunes case may be an example here.  Apple wants market power in both the on-line songs and the hardware market, and thinks it can leverage one into the other.  But notice that both markets must be susceptible to monopolization on the cost side, namely the presence of increasing returns for the first and dominant supplier.

In any case, I doubt if iTunes (as we know it) will be the industry standard ten years from now.  And if so?  "Let them listen to Cake!" I am willing to say.

The bottom line: Our pens and paper are safe.

The progress of science

by  Tyler Cowen in

In one experiment, experts in karate, boxing, kung fu, and tae kwon do all took turns striking the dummy in the face.

The researchers were surprised to find that boxing is the fighting style capable of delivering the most force in a single punch.

Boxer Steve Petramale delivered about 1,000 pounds (453.6 kilograms) of impact force, the equivalent of swinging a sledgehammer into someone’s face…

The tae kwon do spinning back kick delivered more than 1,500 pounds (680.4 kilograms) of force, while the kung fu flying double kick produced about 1,000 pounds (453.6 kilograms) of force.

But the undisputed winner practices a discipline known for its ability to deliver a knockout: Muay Thai, also known as Thai boxing. 

Melchor Menor, a former two-time Muay Thai world champion, uses a simple technique to incapacitate his opponents: a knee to the chest at close quarters [TC: I guess that doesn’t count as a "punch"  Oh well.].

Menor himself was surprised at how powerful this move can be.

"I wasn’t expecting to have the highest force. When he said the power of the knee [kick] was equal to the power of a 35-mile-an-hour [56.3-kilometer-an-hour] car crash, it was humbling."

It also turns out that a kung fu punch is as fast as a snake.  Who would have known?  Here is the full story, which perhaps explains why I prefer tennis.

Is the Peace Corps any good?

by  Tyler Cowen in

A loyal MR reader writes:

I will be graduating from college next spring with a degree in Economics and fluency in Spanish.  Joining the Peace Corps has always been a half-way serious goal of mine (you get to "make a difference" while effectively putting off entering the real world).  What’s your take on the Peace Corps?  Do they actually do any good?  The idealist in me wants to believe so, but obviously, I’m highly skeptical of any program started by JFK.  If this isn’t the best route, do you know of any alternatives that will still fulfill my aforementioned "goals?"

I neither have experience in this matter nor have I read a good book or paper on The Peace Corps.  Readers? 

The conservative vice

by  Tyler Cowen in

Having covered the libertarian and liberal vices, this one seems only fair.  Of course these vices change with the times, but the current conservative vice I would describe as follows:

Using meritocratic arguments to reassign marginal products

It is best explained by example.  An anti-war liberal will say "Our occupation of Iraq has gone badly.  Things are worse than under Saddam."  In addition to contesting this comparison, many conservatives will respond: "But if the Iraqis weren’t so intent on killing each other, they could have a decent society, just like the Kurds do."  The claim is true, but it represents an attempt to reassign marginal products away from one policy and toward some other infra-marginal fact.

Or consider domestic policy.  Policy X does not make a dent in the poverty rate, and this is pointed out by a critic.  A conservative might respond: "But if those people would live by Confucian or Korean family values, they would do just fine."

The conservative vice is not intrinsic to conservatism, but I see it to an increasing degree.  Perhaps it is a response to the combination of a nominal conservative majority in goverment yet a growing inability to control events.

This intellectual move is not in every case false.  If we are considering the relative obligations of citizen and state, for instance, it must be recognized that a state can do only so much for self-destructive citizens.  But when the vice is "applied" to situations where a more consequences-oriented approach is warranted, well, then it becomes a vice.

Albert Hirschman

by  Tyler Cowen in

Henry at CrookedTimber asks:

What do libertarians think about Hirschman’s arguments? Do they read him? Do they have a sophisticated response?

My take: Albert Hirschman deserves a Nobel Prize in economics.  His early work on the unbalanced nature of economic development was pathbreaking.  The Rhetoric of Reaction is a brilliant study in intellectual self-deception.  As a historian of thought he integrates wonderfully, such as in his study of how commerce shapes mores. 

But he would win the Prize for focusing the attention of economists and political scientists on the phenomenon of voice: the ability of consumer or voter complaints to induce improvements in supply.  Hirschman was the first modern social scientist to think about this mechanism systematically.

Hirschman first suggested voice gets stronger and more effective when exit is limited.  In his (earlier) vision, if you can leave you won’t complain.  Fidel Castro understood this and let many Cubans go, although of course they complained from Florida.  It is sometimes suggested that in a world of school vouchers fewer parents would show up at the school board meeting.  Don’t yap, just yank your kid.

In reality voice often works best when competitive pressures are strong.  HBO is more responsive than was East Germany.  You are not wasting your time to complain at Wegman’s, or for that matter at this blog.  Competition and voice are more likely complements than substitutes.  Hirschman admitted and indeed emphasized this point in his later writings.

As far as I know, no one has solved for the proper conditions for when voice is effective.  Here is one recent model.  The general problem is that the motives for voice are poorly understood.

Here is Paul Krugman on Hirschman.  Here is a paper on Hirschman and evolution.  Here is a book on Hirschman.

Addendum: Here is Alex on the topic of voice.  Sadly he and I will not be having a little spat over this one…

Adverse Selection among the Kiwis

by  Alex Tabarrok in

The Unknown Professor points us to Pay Peanuts and Get Monkeys? Evidence from Academia a clever paper on adverse selection in academia.  In New Zealand academic salaries are mostly independent of discipline so someone from a high-flying field like economics or finance is giving up a big American salary to teach in NZ compared to say a professor of literature.  As a result, we ought to expect that the greater the salary in the U.S. the lower the quality in New Zealand.

…discipline research performance is indeed
negatively related to the value of outside opportunities: the greater a
discipline’s average salary in United States universities, the weaker
its research performance in New Zealand universities. The latter
apparently get what they pay for: disciplines in which the fixed
compensation is high relative to opportunity cost are best able to
recruit high-quality researchers and/or motivate their researchers to
be productive. Paying (relative) peanuts attracts mainly monkeys.

It’s a good paper, thus I expect the author will soon leave New Zealand.