Month: August 2007

Farewell to Alms

I’d like to soon start the MR BookForum on Greg Clark’s A Farewell to Alms: A Brief Economic History of the World.  I hear you’re all getting your copies now.  Ideally I’d put up the first post within 5-10 days, noting that the first session will be setting and overview.  You won’t need to have started the book by then.  Are you in fact all getting your copies from Amazon or elsewhere?

Here is David Warsh attacking the book.  Don’t discuss book content in the comments (save that for the BookForum), just let me know if the copies are coming through…

Beware self-deprecation

It usually implies even greater self-praise:

Norman Mailer…ruminated on his failure to win the Nobel Prize.

It wasn’t
politics that soured his chances, he declared; it was stabbing his
second wife with a pen knife in 1960. "The Swedes are very intelligent
people and they’re proud of their prize, and they’re damned if they
want to give their prize to a guy who is a wife stabber and as sour and
bitter as I am, and I don’t think I can blame them," he said.

I believe that Mailer has become a quite underrated writer, especially his Harlot’s Ghost.  But wife-stabbing is not the main reason why he has failed to win the prize.

Here is the link and article, which focuses on Gunther Grass, another tricky self-deprecator.

What accounts for reading speed?

Clever tests are being run:

To knock out sentence context, they changed word order (e.g.
“Contribute others. The of Reading measured”). To knock out whole word
recognition, they alternated capital and lower case (e.g. “ThIs tExT
AlTeRnAtEs iN CaSe”). And to knock out letter-by-letter decoding, they
substituted letters in such a way that word shape was maintained (e.g.
“Reading” becomes “Pcedirg”).

Letter decoding was found to
account for 62 per cent of reading speed; whole word recognition 16 per
cent; and sentence context 22 per cent.

I wasn’t there for the tests, but I believe that is measuring reading speed at margins other than what we find on the printed page.  "Knowing what is coming" is in my view most important for reading fast.  (I like to say "It took me 45 years to read that book."  If you think you "just started" the book in your hands right now, you are failing to understand the proper marginal unit.)

I find that when I try to read graphic novels, I am not a very fast reader at all.  My eyes get confused from not knowing where the next block of text will appear. 

I am also struck by an incidental remark toward the end of the article; we are getting closer to the truth:

…among the faster readers, predicting words from sentence context made a
bigger contribution to reading speed than among the slower readers.

Addendum: Here is my previous post on reading speed.

The dangers of compulsory education

‘Attendance is now compulsory for every young witch and wizard,’ he replied.   ‘That was announced yesterday.  It’s a change because it was never obligatory before.  Of course, nearly every witch and wizard in Britain has been educated at Hogwarts, but their parents had the right teach them at home or send them abroad if they preferred.  This way, Voldemort will have the whole wizarding population under his eye from a young age.’

Damn, that Voldemort is eeeeevil.

Tabarrok on Dobbs

I just taped an interview on immigration with a reporter for Lou Dobb’s show on CNN.  It’s supposed to be on tonight.  I had a few good lines. (I’m sure I wasn’t as composed as these answers suggest but this is the gist.)

Q: Are you in favor of open borders?

A: I was delighted when the Berlin wall fell and certainly hope that my grandchildren live in a world where it is easier to move between countries.

Q: (After discussing the 19th century immigration of the Irish).  But weren’t the Irish legal immigrants?

A: The Irish were legal immigrants not because they were especially law-abiding but because the immigration law was less restrictive at that time.  If people are worried about illegal immigration the solution is simple, make the immigration laws less restrictive.

I think they were hoping for a "crazy" open border person to make Lou Dobbs look good in comparison.  In which case (believe it or not!) I suspect I disappointed their hopes by being eminently reasonable – we will see how much of the interview gets on the air and what is left on the cutting room floor.

Addendum: My kids thought it was hilarious when Lou called me a complete idiot!  I didn’t get much airtime but my Open Letter on Immigration got lots of attention.

Thanks to everyone in the comments who watched!

Subprime fact of the day

..the problems in the subprime mortgage market are relatively small. 
Currently, losses are estimated to be at most $35 billion – equivalent
to a stock market decline of about 0.2%.  (Last week the value of stocks
traded in US markets were down a not terribly unusual 1.5%, or 7 times
the total expected decline in the value of these mortgages).

That is from an excellent short essay by Stephen Cecchetti.

Addendum: Michael Mandel gives his look at the bright side.

The First Fundamental Theorem of Welfare Economics

The first fundamental theorem of welfare economics is often misunderstood, especially by technical economists.  Briefly, the theorem says that a market outcome is efficient (Pareto-optimal). The theorem, as proven with great mathematical beauty by Arrow and Debreu, requires a number of reasonably strong assumptions such as very large numbers of buyers and sellers who have perfect rationality and perfect information.

Since the conditions required for the theorem’s proof are unlikely to hold in the real world it’s common for people to reverse the theorem to suggest that markets cannot be efficient.  Thus Rodrik says:

The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions.

Now what is wrong with this is very simple.  The First Theorem gives sufficient conditions for a market to be efficient it does not give necessary conditions.

Thus, as a matter of logic, the fact that the theorem’s conditions are not satisfied does not prove that market outcomes can be improved, even by "well-designed" interventions.

As an empirical matter, the difference between the sufficient and necessary conditions turns out to be quite large.  We know from Vernon Smith’s work, for example, that markets can be competitive with only a handful of traders; nor do the traders have to be perfectly rational.  In fact, markets can be very efficient with zero-intelligence traders.

Perhaps even more importantly technical economists seem to think that the First Theorem is the ultimate expression of "the invisible hand" or what makes markets good but in fact the First Theorem is but a pinched and limited expression of the virtues of markets.  The First Theorem, for example, says nothing about innovation, experimentation, or the discovery process.  Nor does the First Theorem say anything about markets and political philosophy.  You will not learn from the First Theorem that markets are not simply a "mechanism," markets are peaceful exchange.

To be clear, I am correcting a misuse of the First Theorem.  I am not asserting that markets are always perfectly efficient.   But really what kind of standard is perfect efficiency anyway?  The internal combustion engine isn’t even close to being perfectly efficient but my car gets me to work every day, is fun to drive and gives me the freedom of the open road.

Aren’t rich people good for anything?

Felix Salmon asked:

More generally, you need liquidity to profit from a liquidity event.  If illiquid paper plunges in price, you can buy it up (with cash), hold it to maturity, and make a tidy sum.  But where’s that cash going to come from?  That’s the question.

I am glad to see this in the new Portfolio magazine finance blog.  Felix is always interesting, here is his post on whether we are facing a liquidity or insolvency crisis.

Discover Your Inner Economist India

I’ve been to India twice and both times I have been received with the utmost hospitality and enthusiasm.  I loved the food, the music, the diversity, and the more-than-occasional chaos.  Most of all I loved how the people engaged me so directly, and how every moment was so full of human drama and stories. 

Since India has given me so much, I wish to make a merit-based gift to India in return. 

My new book Discover Your Inner Economist: Use Incentives to Fall in Love, Survive Your Next Meeting, and Motivate Your Dentist offers a chapter on how to help other people.  In the book I suggest several principles:

1. Cash is often the best form of aid.

2. Give to those who are not expecting it, and,

3. Don’t require the recipients to do anything costly to get the money.

I would like to live by these principles, and I am asking you to help me.

If you want to try a new form of charity, keep reading here, because I am about to send money to people in India, to people who are not expecting it and who will not be asked to do much of anything to get it.

You are about to tell me the names of people I should send money to.  I will then send money.

Simple. 

Here is the plan in more detail:

1. The recipient must live in India and receive the money in India.  I just need enough information to send the money via Western Union.

2. Send your email to DiscoverYourInnerEconomist@gmail.com.
Only emails to this address will be considered.  The email must contain
the legal name (as documented on ID papers) of a person who will
receive the money, his or her state in India, and the city of his or
her local Western Union branch.  You can be the person yourself, or you
can send the information on behalf of someone you know.

3. With your email, send a one sentence proposal of how the money will help India.  I am keen to send much of the money to poor people, either directly or indirectly, but of course India is not just about poor people.  Proposals of all kinds are eligible, including using the funds to help expand your steel factory, and yes using the money to open a new call center.  But you must not give the money to beggars

4. Only one email per person is allowed.

5. By the end of the week I will send $1000 to India, via Western Union.  One person will receive $500, the other recipients will get $100 a piece; I will email the wire numbers to each approved person.

6. Recipients of the money will execute their plans for helping India.

7. If/when Discover Your Inner Economist is published in India, further names will receive transfers.  I will send at least the net, post-tax value of my Indian advance.  (If the sale of foreign rights is a multi-country deal, I’ll apportion it by relative sizes of book markets for this kind of title.)

I’ve thought long and hard about how to keep the funds away from scammers, and here is the best I can do: All responders are eligible, but the selection algorithm will favor early entrants.  In other words, MR readers (and their friends) with connections to India have the best chance to read this post early, respond, and thus receive a transfer. 

So I would like to ask you a favor, especially if you are Indian or have connections with India.  Please make your nomination as promptly as you possibly can.  (It is also OK to forward this link to people you trust for their nominations; please do.)  This will ensure worthy entries toward the beginning of the email directory.  I believe that MR readers and their friends will put the money to good use and I am asking you to help me in this manner.

One final request.  I am asking my readers — yes that’s you — to also make merit-based donations to India.

You may have noticed that Alex and I have stopped asking for MR donations; we are happy to be prospering.  Would you instead consider sending some money to India?  I already have had several people pledge money off-line.  Remember our MR motto?: "Small steps toward a much better world."

Making your gift is simple.  Just email me at IndiaMerit@gmail.com and ask for names and emails of recipients.  You also can specify whether you want your money to go to the poor or to an Indian business.  You then send the money yourself and email the recipient the Western Union number of your transfer.  You can even send the money on-line.

No, you do not get a tax deduction but your money goes right to the source, with zero overhead and waste.  Have you ever believed that remittances do more good than bureaucratic foreign aid?  I know I have.  I believe we should be experimenting more with zero-overhead giving (see pp.192-6 in my book), and I am asking you to be in on the ground floor of that experiment.

I know that MR has some very wealthy and very generous readers who even make seven-figure donations.  If you are one of these people, would you consider a larger gift of $10,000 or more?  You can distribute the money to as many or as few names as you like.  Just let me know your plan, and how many email addresses I should forward, and the rest is up to you.  I will keep your identity anonymous unless otherwise instructed.  (If you are a potential recipient of money, but want money only from me and don’t want your email forwarded to others, just let me know in the email itself.)

Addendum: In the comments section, please offer your ideas to others for how to use or give away the money.  You can do this whether or not you have a connection to India.

Why people dislike economists, installment #421

I will ignore the appalling possibility that, by reducing congestion, using your car less will encourage others to use theirs more, thus wiping out any benefit from your action.  This kind of economist’s logic creates inertia and despair.

That is from Chris Goodall’s How to Live a Low-Carbon Life: The Individual’s Guide to Stopping Climate Change.  Just imagine, when it comes to the number of players in this game, the guy doesn’t mention whether the appropriate model should use a countable or a non-countable infinity.  Often it makes a big difference for the result.

I had promised to look at the author’s claim that walking and eating meat (to replenish the lost energy) can be less carbon-friendly than driving a car; his analysis does offer the appropriate qualifiers.  The author also argues that flying is about the least carbon-friendly thing you can do.

This book "taught" me that a carbon tax will never be very popular with the hard-core environmental movement.  Their core intuition is "It is wrong to pollute."  They are less interested in the message "It is OK to pollute as long as you pay the price," which is how a carbon tax sounds to them.  Goodall (pp.227-8) insists it is wrong to impose the costs of carbon emissions on the future, no matter what payment or offset you are making today.  In fact a high carbon tax would just show that quite a bit of environmental destruction was going on.  Quite consistently, he argues that we all simply have to stop flying.  Now.

He can mail back his Harvard MBA by boat. 

Here is the book’s web site.  Here is his blog.  Here is his carbon audit of Princes Charles.

India historical fact of the day

In a mere two years, 500 autonomous and sometimes ancient chiefdoms had been dissolved into fourteen new administrative units of India.

That is from India After Gandhi: The History of the World’s Largest Democracy, a truly excellent book by Ramachandra Guha, well over 800 pages and yes it will be finished.

By the way, if you live in India, come from India, or have strong ties to India, please keep a special watch on MR over the next few days.  I’ll explain more soon.