Month: June 2007

Claims that intelligent left-wing bloggers couldn’t possibly agree with

We don’t take steps to redress inequalities of looks, friends, or sex life.  We don’t grab a kidney from you to save someone’s life, even though that health difference was unfair brute luck.  Redistribution of wealth has some role in maintaining a stable democracy and preventing starvation.  But the power of wealth redistribution to produce net value is quite limited.  The power of wealth creation to produce net value is extraordinary.  Most of America’s poor are already among the best-off of all humans in world history.  We should be putting our resources, including our advocacy and our intellectual resources, into wealth creation as much as we can.

That’s me, quoting me; I pulled the material from the inner guts of Typepad software.

Ricardian rent theory

Lex, a loyal MR reader, asks:

My understanding of Ricardo’s theory of rents is that they are based on the least productive land used.  Shouldn’t rent be based on the most productive land not used?  Is that merely a semantic difference?

Ricardian rent theory is strange. Let’s say you have three pieces of land, yielding 3, 5, and 10. Rent will be 7, or 10-3, with apologies to Samuel Hollander. The marginal piece of land, the one yielding three, is allocated to wages and profit from capital.  (You can treat profits as an afterthought in this model.) The rest goes to landowners.

Why might that distribution result?  In the Ricardian model you can (and do) augment labor through Malthusian breeding.  So labor doesn’t have much bargaining power in the long run.  Any move in favor of wage labor creates more people and lowers the wage of labor to the return on the marginal unit of land.  If you have some extra land, even if it isn’t incredibly productive, you can always breed more people to cultivate that marginal unit.  So the value of the least valuable piece of land in essence sets the wage.

Land is inelastic in supply, and thus the landowners reap the rest of what is produced.  We can also see that the last plot of land used (and not the marginal piece of land not used) determines rent and wages, because it is the actually used piece of land which regulates population and the return to labor.

That is my quick and dirty take on Ricardo, noting that "what Ricardo really meant" became a cottage industry about one hundred and ninety years ago…

The best sentence I read today

[From the NY Times.]  I commented earlier
on the contradiction between how college presidents think students
should be judged – they believe it is fine to judge all students
according to one standard that usually has little to do with their
strengths and goals – and how they wish to be their colleges to be
judged.

That’s Seth Roberts.  From Arnold Kling, here is a very good post on set points.

Efficient rent-seeking

I wish to thank the many loyal MR readers (buyers!) who pre-ordered my Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist.  On Amazon.com it went from non-existent in the rankings to a peak of #220, hovering most of the day in the mid-200s.

The offer of access to my secret blog still stands; pre-order the book and write to [email protected] 

By the way, here is Daniel Klein on the use of tying to produce public goods.  Or think of the economics this way: ex post copyright brings monopoly rents to some producers.  Some of those profits are competed away by advertising, except in this case "the ad" is intended to provide real (not just persuasive) benefits to the consumers.  Here are books and papers on efficient rent-seeking.

Addendum: I’ve now been adding new posts to it, but of course I can’t tell you their topics!

Behavioral economics and poverty

Mullainathan worked with a bank in South Africa that wanted to make more loans. A neoclassical economist would have offered simple counsel: lower the interest rate, and people will borrow more. Instead, the bank chose to investigate some contextual factors in the process of making its offer. It mailed letters to 70,000 previous borrowers saying, “Congratulations! You’re eligible for a special interest rate on a new loan.” But the interest rate was randomized on the letters: some got a low rate, others a high one. “It was done like a randomized clinical trial of a drug,” Mullainathan explains.

The bank also randomized several aspects of the letter. In one corner there was a photo—varied by gender and race—of a bank employee. Different types of tables, some simple, others complex, showed examples of loans. Some letters offered a chance to win a cell phone in a lottery if the customer came in to inquire about a loan. Some had deadlines. Randomizing these elements allowed Mullainathan to evaluate the effect of psychological factors as opposed to the things that economists care about—i.e., interest rates—and to quantify their effect on response in basis points.

“What we found stunned me,” he says. “We found that any one of these things had an effect equal to one to five percentage points of interest! A woman’s photo instead of a man’s increased demand among men by as much as dropping the interest rate five points! These things are not small. And this is very much an economic problem. We are talking about big loans here; customers would end up with monthly loan payments of around 10 percent of their annual income. You’d think that if you really needed the money enough to pay this interest rate, you’re not going to be affected by a photo. The photo, cell phone lottery, simple or complicated table, and deadline all had effects on loan applications comparable to interest. Interest rate may not even be the third most important factor. As an economist, even when you think psychology is important, you don’t think it’s this important. And changing interest rates is expensive, but these psychological elements cost nothing.”

Mullainathan is helping design programs in developing countries, doing things like getting farmers to adopt better feed for cows to increase their milk production by as much as 50 percent. Back in the United States, behavioral economics might be able to raise compliance rates of diabetes patients, who don’t always take prescribed drugs, he says. Poor families are often deterred from applying to colleges for financial aid because the forms are too complicated. “An economist would say, ‘With $50,000 at stake, the forms can’t be the obstacle,’” he says. “But they can.” (A traditional explanation would say that the payoff clearly outweighs the cost in time and effort, so people won’t be deterred by complex forms.)

Thanks to a reader — his name mistakenly deleted from my email — for the pointer.

Sophisticated, Unintelligent-Non Design

The buds or leaves of many plants are arranged not randomly but in sophisticated spiral structures that exhibit many mathematical properties involving Fibonacci sequences and golden angles. 

FlowerA theist might see evidence of intelligent design in these structures.  An evolutionary biologist (or economist) might see evidence of unintelligent design i.e. they will assume that since the patterns are far from random there must be some functional advantage to spiral patterns and that natural selection operating over many generations results in a convergence to or near the optimum.

There is, however, a third – often overlooked – possibility.  Sophisticated structures may be the result of unintelligent, non-design.  Here’s an interesting article, for example, arguing that the spiral patterns in flowers are the result of physical processes of attraction and repulsion.  In particular, check out this cool movie which shows magnetized drops of ferrofluid being dropped into a dish that is magnetized at its
edge and filled with silicone oil. The droplets are attracted to the edge of the dish and repelled from one another.  What’s interesting is that when the droplets are dropped slowly they float directly away from one another in a simple pattern but when they are dropped quickly they form intricate spirals with different properties depending on how quickly they are dropped.  (Note that the movie is a bit long – just grab the slider and you will see what is going on).  The physical model is only suggestive of what is going on in flowers, of course, but the idea is generating new testable predictions about the kinds of patterns we should see in real flowers.

My suspicion is that quite a few of the sophisticated patterns that we see in nature and elsewhere is neither intelligent nor unintelligent design, i.e. not functional in any direct sense, but rather the result of unintelligent, non-design.

Why don’t we have real Chinese food in the United States?

We don’t — just believe me — outside of a few places such as Monterey Park or Flushing, Queens.

Dan Drezner poses the query, and considers immigration restrictions as a factor, though without endorsing that hypothesis.  Immigration can’t be the key reason, since I can learn to cook the stuff (really), there is plenty of excellent Chinese food in Tanzania (really), and most French food in America is cooked by Mexicans (that you already knew), albeit with instructions.  The main problems are simple:

1. Cantonese food requires super fresh ingredients, lots of vegetables, and amazing seafood.  That’s three strikes right there, especially below the gourmet price level.

2. Sichuan and Hunan foods are oily, often very spicy, and most of all use lots of animal fat.  Nor do they hesitate to serve up chicken kidneys, pig’s maw, and the like.  This is essential for these cuisines to taste good but it all goes against the American grain.  To cite one example, Mexican food cooked with fresh lard tastes much better than with vegetable oil, yet most Mexican families, within a generation and a half, make the switch to vegetable oil (que triste!).

3. Even today most Chinese cities are huge gardens with massive swathes of small-plot farmland, right within the city.  Shanghai too.  The short food supply chain makes many things tastier, as they are sold fresh in daily markets.  The cuisine is designed around that system, whereas mass-produced American cuisine meshes with long-distance trucking.  This clash of culinary civilizations penalizes true Chinese styles, though I’ll still predict that real Sichuan will be the next big food trend here in the U.S.  In my household, it already is.

Since there is excellent and reasonably authentic Chinese food in densely populated Chinese-American communities, consumer demand (see #2) is probably the major factor.

For the comments I’ll stipulate no rehashing of the usual immigration debates; you all have enough chances to do that.

p.s. On MR it’s China Day!

Hell Money

I’ve always liked this joke.

Paddy O’Brien died and as is the Irish custom the mourners were throwing money into his coffin.  The town miser, whom everyone despised, cried out "I loved Paddy O’Brien.  Whatever anyone else puts into the coffin, I will double!"  Thinking the miser a little bit drunk the townspeople took this as an opportunity to teach him a lesson.  Gathering all their money they showered the coffin with $3012 in bills and coins, more than had ever before been given at a funeral.  The miser then gathered the money, wrote a cheque for $6024 and threw that in.

The Chinese have a similar custom of burying the dead with money but like the miser they understand monetary economics (if not perhaps signalling theory).  Big white guy explains in his interesting post on Chinese hell money.
Hell10
Hat tip to Marcus at the Mises Economics Blog.

Robert Fogel is optimistic about China

In 2040, the Chinese economy will reach $123 trillion, or nearly three
times the output of the entire globe in the year 2000, despite the
influence of several potential political and economic constraints. 
India’s economy will also continue to grow, although significant
constraints (both political and economic) will keep it from reaching
China’s levels.  The projected decline of the EU15’s global share of GDP
means that Asia will be poised to take up the role of promoting liberal
democracy across the globe.

We also are told that the Chinese market in 2040 will probably be
larger than the combined markets of the U.S., EU15, India, and Japan. 
Chinese per capita income will be $85,000, more than twice the forecast
for the EU15.

Here is the paper.  Fogel does argue for his conclusions.  His main point is that simple extrapolation of human capital trends, namely China’s potential for more higher education, and further shifts out of agricultural labor, will get the country most of the way there.   He also argues that after 25 years of 8-10 percent growth, massive bankruptcies are unlikely.  Chinese leaders have, in Fogel’s view, a good strategy for the devolution of power and the co-optation of elites.

If you wish to be brought back to earth, here are my views on the future of China.  I believe it is the only time I have ever used the phrase "business cycle burp" in my writings.  But sadly, Yana and I have yet to make it to Shanghai.  Now that she has graduated from high school, I am hopeful we will get there…

How to find my secret blog (new posts below this one)

It is simple.  Pre-order a copy of my forthcoming Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist.

It is by far the most fun book I have written, and it was written with you in mind.

Here is the Amazon link, which also offers a book synopsis.  Here is Barnes&Noble.  Then, just send an email to [email protected] and tell me you bought the book.  I’ll send you the site address right away. 

But please, in receiving the site address you are making a pledge not to give it away, publish it, blog it, or otherwise reveal it.  Please don’t, it is our agreement.  You are also pledging your word that you actually pre-ordered the book.  I appreciate your cooperation in this matter.

My secret blog has 43 posts, plus who knows I may blog there a bit more or take special requests over there.  I would describe it as quirkier and more offbeat than MR, sometimes ribald, and in some ways more personal. 

This offer won’t last forever, and the secret blog won’t be up forever, so pre-order the book now!

And please, do forward this post to at least two (or maybe more) of your friends.