Month: November 2006

A loyal MR reader asks…

What do you think the world would look like if everyone knew as much about Economics as you do?

I imagine many facets of the world would remain the same.  For example, demand curves would still slope downward and to the right.  But what of politics?  Would politics change?  Would libertarianism remain a defensible political position?  It seems to me that much of what makes libertarianism so desirable is the public choice problem.  We’re rationally ignorant, and probably somewhat irrational as well.  Would a moderate left-leaning position such as Matt Yglesias’s suddenly become much more tenable?

With all due respect to myself, I doubt if politics would improve much.  To flesh out the scenario a bit, it can’t be that everyone is a clone of me.  Sex aside, who would fix my computer, leave comments on this blog, or do all the talking at cocktail parties? 

Once a reasonable degree of human diversity is introduced, coalitions need to be built.  Building coalitions requires politics.  That includes compromises, horse-trading, shading the truth, and so on.  "Me as politician" is not an especially wonderful vision.  If I acted like Tyler the blogger, I would lose power very quickly.  Even if I stayed in office.  Having some "me’s" in the voting booth wouldn’t much change this.

We might avoid a few total bonehead policies, if only by shifting the bargaining point.  But government wouldn’t become much more efficient, at least not as long as coalitions need to be built.

The costs of building coalitions are also a neglected element in the theory of organizations.  Even in the private sector, once we consider cohesion and morale, businesses have many fewer degrees of freedom than we might think.  That is why merit pay and prediction markets are not as common as an economist might expect.  Too often those institutions put people at odds with each other.

So don’t even think of voting for me, for Alex, or for whomever you might think of as smart.  Vote instead for someone who shares one or two core values with you, and is a good coalition builder.  And then make sure that their coalition doesn’t violate those core values.

Addendum: Matt Yglesias chips in.

A simple theory of where the women are beautiful

For a few weeks twice a year, after Ramadan and before Christmas,
thousands of Lebanon’s young men return from jobs abroad – and run
smack into one of the world’s most aggressive cultures of female
display.  Young women of means have spent weeks primping and planning
how to sift through as many men as possible in the short time
available.  The austere month of Ramadan ended a week ago.

country’s high rate of unemployment pushes the young men to seek work
elsewhere, sometimes in Western countries like France and Canada, but
mainly in the United Arab Emirates, Saudi Arabia and the other oil states on the Persian Gulf.  The women, inhibited by family pressures, are generally left behind.

MR readers will not be shocked to learn these women strongly prefer the Lebanese men with foreign jobs and foreign incomes; here is the full story of competition and rent exhaustion.

My simple theory of where the women are attractive has two variables: income inequality, and the willingness of wealthier men to marry beautiful women from the lower income and social classes.  Women then compete for lucrative marriage prizes.  That puts Cuba (the wealthy men are the tourists) and Brazil near the top of the list, where they belong.  New York City isn’t bad, and this mechanism won’t hurt China either.

Profile of Kevin Murphy

Many people call him the smartest economist in America:

“Kevin is far and away the smartest guy in the field,” says Freakonomics
author Steven Levitt…”Often, the better you get to know these guys, the less
ingenious they seem.  It’s just the opposite with Kevin.  Not only is he
widely regarded as the smartest economist on earth, but he can also fix
your refrigerator.”

The article also explains why every one of Murphy’s 60-plus papers is co-authored.  The pointer is from Craig Newmark, and also from Steve Levitt.

Addendum: Try also Levitt and Dubner on the economics of weather.

Why doesn’t God save everyone?

Even an agnotheist can care about this question.  It is simple:

The first prediction of the model is that God will not offer a salvation contract where everyone is saved.  If God sets θ=0 then all individuals receive s, but there would be no rearrangement of bundles and hence no utility benefits for God to balance the lump sum cost C.  This cannot be an equilibrium.  On the other hand setting θ=infinity would mean no individuals choose s, and no rearrangements, and this cannot be an equilibrium.  Thus θ will be set between these extremes, with the value depending on the forms of the divine and human utility functions and endowments.  Some, but not all individuals are predicted to choose salvation, and this is consistent with both the scriptures and observation.

Doesn’t this result fall apart if God can…um…perfectly "price discriminate" in his commands?  From Paul Oslington, here is more, namely a rational choice theory of God.  How about this bit:

Paradoxically, the more effective is the salvation mechanism the more it will turn the unsaved away from what God prefers.  Individuals choosing salvation will force up the prices of inputs into commodities God prefers be consumed, so that unsaved individuals will substitute away from commodities God values to those God frowns upon.

Who said pecuniary externalities do not matter? 

And here is John Derbyshire on God and religion, he is no longer a Christian.

The Stern report on global warming

1. Stern never says what discount rate he is actually using.  I find
this bizarre, to say the least.  One account from the FT estimates he uses a
figure between 2 and 3 percent.

2. The correct rate depends on a society’s rate of investment.  If
government regulates, taxes, or otherwise pulls resources from the
private sector, we need to estimate how much of these resources would have gone
into investment and how much would have gone into consumption.  Stern
never does this.

3. The resources that would have gone into investment should be
discounted by the (risk-adusted) rate of return on investment.  This will be much higher than two or three percent, although of course it does not apply to the entire gross upfront cost.

4. The resources that would have gone into consumption are harder to discount, especially if we are comparing those resources across
the generations, and if the change in question is "large"
rather than "small."  I tend to favor a very low or zero discount rate in these settings, if only because there is no pure time preference across the
generations.  (Before you are born, you are not sitting around impatiently, waiting, unless of course you are a character in Maeterlinck’s The Blue Bird.)  In any case this is predominantly an ethical question, and no correct answer follows directly from examining marginal analysis and market prices. 

If the change is "small" for the affected people, in the precise sense of not much affecting their marginal utility of wealth, we should discount by the market rate of interest, adjusted for risk, taxes, transactions costs, etc.  I don’t find Stern very clear on such matters. 

5. Since the Chinese save and invest more than do Americans, the
correct social discount rate should be higher for China than America. 
If the Chinese are earning ten percent a year on savings of fifty
percent, that gives a rough discount rate of about five percent.  Don’t
tell me that US and A is saving zero percent a year (no way), but we are saving less than the Chinese.

All other things equal, that means we should invest more to stop global warming than should the Chinese, and that is not even considering our higher income. 

6. Stern argues that if the environment is worsening, this might
justify a negative discount rate for some environmental amenities.
This is theoretically possible, but with substitutability between
environmental and non-environmental goods, it is unlikely.

7. Cost-benefit analysis works best for small changes which can be
evaluated at market prices.  I don’t think it tells us much about
evaluating the costs of, say, one hundred million poor "climate-change"
refugees.  Under my ethical views, which refer to a notion of property rights, the true costs of those refugees are
higher than market prices/incomes will indicate.

8. Lower discount rates don’t always make global warming costs more important.  Say the rate of discount is zero.  This implies that one-time adjustment costs fade into insignificance, compared to ongoing gains from economic growth.

9. For this entire exercise, the results are very very sensitive to
the choice of discount rate.  Some of this requires ethics, not just economics.  Stern
notes this clearly, but the relevant caveats don’t seem to find their
way into his final presentation of the estimates.

The bottom line: Stern avoids many of the common mistakes in
this area.  He stresses that a multiplicity of discount rates is required.  But his treatment of discount rates is far from transparent and it is in some regards incorrect.  That said, the "mistakes" slant the analysis in both directions, rather than confirming any prior that global warming is a significant economic problem.

The other bottom line: I do understand, and accept, the case for doing something.  But I don’t yet see how this report adds to that case.  Maybe I’ll read on.

Here is a critique from The Economist, and here.  Here is Cass Sunstein on the study
It also seems the report
relies on excessively high estimates of econoimc growth.  Here is one critique of the science.  Here is a detailed Bjorn Lomborg critique.  New Economist blog points to these supporting materials.

*The Economist* is blogging

Find it here, starring Megan McArdle.  This promises to be a major economics and current events blog. 

Sadly the blog posters seem to have the "pseudonym" of anonymity, but I bet you all know Megan’s style by now and can guess which are her entries.  I don’t know who the other bloggers are, but I believe they are Economist staff.  This is also a good controlled experiment for how quickly smart people can learn the skill of blogging.

Stay tuned…

Addendum: Jane Galt explains more, and do tell them in our comments what you think of the new blog…

Second addendum: If you are looking for controversy, try their new Lancet post

The Kerry Joke

John Kerry this week has been abjectly apologizing for his statements on Iraq and education.  According to Kerry he intended to critique President Bush:

Do you know where you end up if you don’t study, if you aren’t smart,
if you’re intellectually lazy? You end up getting us stuck in a war in

But what he said was:

You know education, if you make the most of it, you study hard, you do
your homework, and you make an effort to be smart, you can do well. If
you don’t, you get stuck in Iraq.

The irony is that the joke he intended to make is a lie but what he actually said may be the truth.  The disaster in Iraq was created by a bunch of highly educated intellectuals but the soldiers fighting in Iraq do have less education than the young men and women who have stayed home.  According to historian David Kennedy, quoted in the October issue of the Atlantic, 50 percent of 18-24 year olds in the general population have some college education compared to only 6.5 percent of the same age group in the U.S. military.  (Kennedy’s figures are contested by others.)

American political correctness extends to more than women and minorities and as in those areas it prevents discussion of important but uncomfortable truths.

Should Californians walk more?

I just read that the external social cost of having another driver in California — due to accidents and not even citing congestion — ranges from $1,725 to $3,239 a year.

The number seems high to me (I couldn’t spot any problem in the paper), but I learned a new argument for market failure.

An externality arises from the difference between the average and marginal costs of accidents.  Each driver pays, on average, half the cost of an accident involving two people.  But in Coasean terms, the "marginal product" of either driver was to cause the full accident (this seems to ignore that on some days, certain drivers will crash with someone else, virtually no matter what, but of course this does not cover every case either).

So should you go drive in Idaho instead?  Or can the argument be flipped to create a comparable uninternalized benefit from driving?  When you drive to someone or somewhere else, you will bring some consumer surplus or producer surplus to the other person.  Or is the "complementarity of the match" more potent on the downside, with accidents?

That is all from Aaron Edlin and Pinar Karaca-Mandic, in the October 2006 Journal of Political Economy.  The authors also claim that an optimal Pigouvian tax on driving could raise $66 billion in the state of California, more than the other state taxes put together.

Here is an earlier version of the paper.  Guest blogger Eric Helland also covered the Edlin, Kraca-Mandic paper before it was published.  He suggested toll roads were the solution.


In 2004 in my post on the reorganization of the intelligence services, Decentral Intelligence Agency, I wrote:

The implicit model of the 9/11 Commission is command and control –
move all the information from the roots of the tree to the top of tree
and then one all-encompassing-mind will evaluate it and make the right
decision. Does that model sound familiar? Sure it does, that’s the
model of economic planning that is currently lying on the ash-heap of
history. It’s the model that Mises and Hayek subjected to withering criticism in the socialist calculation debate of the 1930s…

An intelligence-Czar faces exactly the same problems. So what can be
done? The intelligence agencies need tools that can spread information
rapidly and widely and that are open to anyone with information whether
they are at the bottom or the top of the hierarchy…Sound familiar?
Yes, blogs and wikis are the right idea. And no I am not being flip.

Today, I am delighted to learn of the creation of Intellipedia.

The CIA and other U.S. intelligence agencies have created a new computer
system that uses software from a popular Internet encyclopedia site to gather
input on sensitive topics from analysts across the spy community, part of an
effort to fix problems that plagued prewar estimates on Iraq.

The new system, called "Intellipedia" because it is built on open-source
software from the Wikipedia Web site, was launched earlier this year. It is
already being used to assemble intelligence reports on Nigeria and other
subjects, according to U.S. intelligence officials who discussed the initiative
in detail for the first time Tuesday….

The system allows analysts from all 16 U.S. intelligence agencies to weigh
in on debates on North Korea’s nuclear program and other sensitive topics,
creating internal Web sites that are constantly updated with new information
and analysis, officials said.

…[Officials] stressed that disseminating material to the widest possible
audience of analysts is key to avoiding mistakes like those that contributed to
erroneous assessments that Iraq possessed stockpiles of banned weapons and was
pursuing a nuclear arsenal.

Thanks to Carl Close for the pointer.

What makes a nation wealthy?

Economists typically explain the wealth of a nation by pointing to good policies and the quality of a country’s institutions.  But why do these differences exist in the first place?

Professor Greg Clark of UC Davis, in his new book-length manuscript, resurrects Malthus, counters Jared Diamond (only recently has the European standard of living surpassed that of hunter-gatherer societies), shows the Industrial Revolution came only slowly, and argues that economists overrate the importance of good policy.  We can separate out the influence of policy by looking at the differential productivity on the factory floor, across regions.  The sheer quality of labor matters more than we used to think.  Quality labor attracts capital, which in turn supports good institutions. 

Here is the conclusion to my column:

Professor Clark’s idea-rich book may just prove to be the next blockbuster in economics.  He offers us a daring story of the economic foundations of good institutions and the climb out of recurring poverty.  We may not have cracked the mystery of human progress, but “A Farewell to Alms” brings us closer than before.

Clark also argues that sub-Saharan Africa is poorer than ever before, and that foreign aid worsens a zero-sum Malthusian trap.  He makes the startling claim that gains in health are the worst thing we can bring to modern Africa.  Here is the full column (by the way, I don’t write the titles or subtitles), which includes a link to Clark’s manuscript. 

The book is not yet out, but it is the best of its kind since Guns, Germs, and Steel

How much does the past matter?

A lot, according to Comin, Easterly, and Gong:

We assemble a dataset on technology adoption in 1000 B.C., 0 A.D., and
1500 A.D. for the predecessors to today’s nation states.  We find that
this very old history of technology adoption is surprisingly
significant for today’s national development outcomes.  Although our
strongest results are for 1500 A.D., we find that even technology as
old as 1000 BC matters in some plausible specifications.

Here is the NBER version, here is a free version.