Month: November 2007

Trudie and Prudie meet

Here is the link to the video.  Emily Yoffe, who writes the Prudie column at, was extremely gracious and charming and articulate.  She vouched for the central role of self-deception in human affairs, and in the videocast she had an excellent anecdote about Steven Landsburg and his proposal to improve happy marriages.  Will Wilkinson was the moderator.

Here is an associated ten minute podcast, with me.  You can subscribe to Cato podcasts on iTunes here.

Why are there no grocery stores in poor neighborhoods?

Well, there are some, you will find Ralph’s all over Los Angeles.  But why aren’t there more?  (This query is posed here, here, and here, among other places.)  Factor #1 in my view is lack of cars.  Living in an inner city has its downsides, to say the least, but at least you don’t have to buy a car.  Yet the modern grocery store is designed for car transport, both how you get there and how you get the groceries away and of course the radius of advertising.  With fewer cars per capita the tendency is for smaller, more local stores, which is precisely what we see in poor neighborhoods.  Not surprisingly poor people are most likely to have cars in LA, and thus most likely to have grocery stores there as well.  For that matter real grocery stores are not all that common in wealthy but relatively carless parts of major cities, such as Manhattan.

Crime is surely a factor as well, what do you all think and what other natural experiments come to mind?

Repugnance is Repugnant

Many people find the idea of selling human organs for transplant to be repugnant which is why Roth argues that we should focus more on improving efficiency through kidney swaps.  I’m all in favor of swaps and have also suggested that one argument in favor of no-give, no-take rules is that they are ethically acceptable to more people than organ sales.

Nevertheless, I think Roth assumes too quickly that repugnance is a constraint to be respected rather than an outrage to be denounced and quashed.  People’s repugnance at inter-racial dating or homosexual sex is no reason to prevent free exchange – the same is true for organ donations.  Repugnance itself can be repugnant.

Is it not repugnant that some people are willing to let others die so that their stomachs won’t become queasy at the thought that someone, somewhere is selling a kidney?

What people think repugnant can change rather quickly with changes in the status-quo.  Adam Smith said that in his time there were "some very agreeable and
beautiful talents of which the possession commands a certain sort of
admiration; but of which the exercise for the sake of gain is
considered, whether from reason or prejudice, as a sort of public
prostitution."  What were these talents that people in Smith’s time thought akin to prostitution?  Acting, opera singing and dancing.  How primitive, how peculiar.

In the not to distance future I think people will look back
on the present and think us
primitive and peculiar.  Letting thousands of people die while organs that could have saved their lives were buried and
burned.  So much unnecessary pain; all for fear of a little exchange.  How primitive, how peculiar.  How repugnant.

Why stupid questions are important

"What’s the main thing one learns visiting Asia?"  That’s the first question that comes to my mind when reading Megan McArdle’s travel thoughts from Vietnam (one example here, note it is my stupid question, not hers, another more humorous example here).  Almost every word in the question is stupid — "main"?, "thing"? — or it is easy to point out that Asia is a huge, diverse and many-splendored place.

We nonetheless do most of our thinking in terms of stupid questions, whether we like it or not.  It is important to turn stupid questions to our advantage, because in fact that is the main thing we’ve got.  While visiting Asia I have learned:

1. Population density really can simply crush the environment, and such density is a more common state of mankind than even a New Jersey boy might imagine,

2. Asians are in general far, far friendlier in their home environs, which is perhaps a question of emotional security,

3. It is possible to have billions of people, and massive stretches of land, both urban and rural, with virtually no major problems of street crime (what is in fact the most dangerous Asian country to wander around in?), and

4. A mere collective act of will could make the food better in many, many (non-Asian) countries.

I might have read these points in books, but I would not have learned them had I not been to Asia and asked myself some stupid questions.  Most of all I’m impressed by just how much population density matters.

Claims I made to David Levy yesterday

The richness of early twentieth century economic thought remains to be fully appreciated by historians of ideas.  Pigou, Wicksteed, Pareto and many others led a behavioral revolution. rooted in Smith and Jevons.  Veblen’s best work was splendid, but it was less of an outlier than is usually thought.  Duesenberry and Scitovsky drew directly on these earlier traditions.  "Freakonomics" was common, albeit with lower-tech statistics.  The notion of economics as household behavior dates from Aristotle and was never lost.  Marshall was in reality an institutionalist.  Experimental economics comes from William James and Edward Chamberlain.  The real question is how so much got lost in the 1940s and onwards.  Contemporary economics is oddly conservative, moving back to the 1900-1930 period in its emphases.

China re-estimate of the day — whoops!

The Asian
Development Bank presented official survey results indicating China’s
economy is smaller and poorer than established estimates say. The
announcement cited the first authoritative measure of China’s size
using purchasing power parity methods. The results tell us that when
the World Bank announces its expected PPP data revisions later this
year, China’s economy will turn out to be 40 per cent smaller than
previously stated……The number of people in China living below the
World Bank’s dollar-a-day poverty line is 300m – three times larger
than currently estimated.

Here is more.

Game theory and balance sheets

What’s really the problem these days?

The single best thing that could happen would be for the true magnitude
of the losses suffered by banks and other exposed parties to be
revealed and put in the P&L. Until what happens, fear of getting
stuck with the hot potato makes banks unnaturally unwilling to extend
credit against the kind of collateral that they would not have thought
about twice accepting at the beginning of the year.

Here’s the source.  This is an important game to understand.  Think of bank managers as being collectively averse to admitting a loss, if only because they might be blamed for that loss.  So at first no one admits losses.  Even though the market knows the losses are there, the market just doesn’t know exactly where.  But then the market has no accurate valuations for some asset classes.  Those asset classes can’t serve as collateral because just about any result — relative to an unevaluated base — could count as a loss and we’ve already seen that managers are loss-averse.  Plus dealing with hard-to-value assets is difficult in any case.

The simple lesson is that bad news can be good news.  "Predictability of environment" is a public good across managers.  Once managers admit their losses, market liquidity can spring back to life and we can avoid a credit crunch.

Once managers admit their losses, that is.

China fact of the day

When next summer’s Olympics roll around, the Beijing Weather Modification Office will be poised to intercept incoming clouds, draining them before they get to the festivities.  No fewer than 32,000 people
nationwide are employed by the Weather Modification Office — "some of
them farmers, who are paid $100 a month to handle anti-aircraft guns and rocket launchers" loaded with cloud-seeding compounds.

Here is the story.

Who waits longest for coffee?

Tim Harford reports:

Caitlin Knowles Myers…with
her students as research assistants, staked out eight coffee shops in
the Boston area and watched how long it took men and women to be
served. Her conclusion: men get their coffee 20 seconds earlier than
women. (There is also evidence that black people wait longer than white
people, the young wait longer than the old, and the ugly wait longer
than the beautiful. But these effects are statistically not as

This does not seem to reduce to greater complexity of drink for the female customers, read these clarifying remarks from the researcher.  One question I have is when the order counts as having started; in my family I am sure that the women spend more time ordering.  The simplest explanation, however, is that the staff feel more implicit psychological pressure to meet the needs of the male customers.  I’ve also found that indecisive behavior at the counter leads to slower service, I have one particular (male) friend in mind.  I am myself virtually always a decisive orderer.

Along not totally unrelated lines, here are new but not surprising results on which waitresses receive the biggest tips.

I am dared to believe the dollar is undervalued

Paul Krugman writing in Economic Policy estimates that at a real dollar depreciation rate of 2% per year the US is headed for a steady-state capital-account position of -15 months’ GDP, and that at a rate of 4% per year is headed for -7 months’ GDP. Yet foreigners–both private and central bank–are not demanding any yield premium on US assets.

This worries him, very much: situations in which large numbers of speculators, investors, and financiers hold irrational expectations are situations that could rapidly move southward overnight should reality intrude into the mind of the capital market.

Link here.  I know full well that in most sensible intertemporal models the U.S. dollar is overvalued and must fall further to set right the trade balance.  But these same intertemporal models don’t explain business cycles or unemployment very well (they do at times, but that’s it), so why should they explain currency values?  Nor do these same macro models command the full loyalty of Krugman and other pessimists in different settings.

I do know that purchasing power parity predicts long swings in exchange rates to some crude extent, and right now I’m dead set against family summer vacation in Europe.  So I will accept this dare and assert that the U.S. dollar is undervalued in world currency markets.

Pascal’s wager and religious diversification across children

Justin Wolfers of the Wharton Business School spoke on Pascal’s Wager, saying that if one believes in religion then the greatest risk is choosing the wrong one.  And how to hedge against such a risk?  Mr. Wolfers advises the following: Have lots of children and bring each one up under a different faith.  That way, if people don’t get into heaven themselves, at least they will have maximized the chances that one of their children will.

Here is the link.  God may hold this sort of maximizing behavior against you, but surely not against your kids…

Markets in everything, but not for everybody

A cigarette vending machine that can tell adults from minors by
determining their approximate ages based on bone structure, wrinkles
and the way their skin sags went on sale Monday.

People wishing to buy cigarettes have to look at a facial
recognition camera in the upper section of the machine and press a
button. In about three seconds, the machine determines whether the
person is 20 years old–the legal age to buy cigarettes–or above. The
purchase will be allowed if the machine is satisfied.

Here is the full story.  But if you want to feel better about markets again, here are lots of strange toys, with photos.  The second page is even better.  #8 and #11 are, um…strange, even for Japan.

The roots of medical innovation

In a much-praised piece, Jon Cohn argues that the NIH, not commercial incentives, is the key to American medical innovation.  He writes:

The great breakthroughs in the history of medicine, from the development of the polio vaccine to the identification of cancer-killing agents, did not take place because a for-profit company saw an opportunity and invested heavily in research. They happened because of scientists toiling in academic settings. "The nice thing about people like me in universities is that the great majority are not motivated by profit," says Cynthia Kenyon, a renowned cancer researcher at the University of California at San Francisco. "If we were, we wouldn’t be here." And, while the United States may be the world leader in this sort of research, that’s probably not–as critics of universal coverage frequently claim–because of our private insurance system. If anything, it’s because of the federal government.

The single biggest source of medical research funding, not just in the United States but in the entire world, is the National Institutes of Health (NIH): Last year, it spent more than $28 billion on research, accounting for about one-third of the total dollars spent on medical research and development in this country (and half the money spent at universities).

A few points should be made:

1. The strength of American medical innovation stems from the combination between the NIH, private philanthropy, and commercial incentives.  Cohn has lots of (just) praise for the NIH, as basic research is often a public good.  But he doesn’t say enough about philanthropy, and he confuses pro-NIH evidence with showing the superfluity of commercial incentives.

2. Send some flowers to Cynthia Kenyon, whom I could not personally quote in this manner with a straight face.  You would never know that universities are profiting from drugs, and patenting them, at an unprecedented rate.  Universities are also forming partnerships with drug companies at an unprecedented rate. 

3. Companies must work very hard to translate basic research into usable applied form and the U.S. is a clear world leader in this regard.  A drug idea is not the same as a drug.  Cohn at times admits this, but is he really denying that the supply curve here slopes upward with regard to expected profits?  You can cite all kind of "mixed" factors about commercial incentives but at the end of the day that is the basic question.

4. Statins, Prozac, and anti-AIDS drugs are notable examples of #1.  Or try this list of Merck products.  Merck and Pfizer are much more than simply marketing or doctor bribery machines, although admittedly they are that too. 

5. The standard arguments against commercial "me-too" drugs are considerably overrated.

6. FDA restrictions are at least partly responsible for the costly, overly concentrated, and blockbuster-oriented nature of U.S. and other pharmaceutical companies.  Tight regulations discriminate against the small company and the small idea.  Even if you think tight regulations are a good idea, don’t blame these tendencies on the big bad corporations.

7. It is odd for Cohn to cite me as his libertarian foil, since the referenced piece very clearly cites the NIH as a critical factor behind American medical innovation.  This odd citation again represents the desire to replace "anti-commercial" arguments with an easier-to-make "pro-NIH" case.

9. The NIH works as well as it does because the money is mostly protected from Congress.  It is not a success which can easily be replicated.  The more money is at stake, the more Congress wants to influence allocation.  We should guard this feature of the system jealously and try to learn from it.  If we can.

The bottom line: Arguments for the NIH are not arguments against the importance of commercial incentives for medical innovation.

Addendum: Read Clive Crook too.

Why is Kasparov still alive?

One loyal MR reader wrote in the comments:

He’ll [Kasparov] be fine. Killing him would be too bad a move in terms of PR.

But that is exactly my worry.  Putin has many would-be enemies.  What better retaliation than to do something evil and make it look like Putin is possibly at fault?  (That is in fact one theory about the polonium poisonings.)  Maybe you think Putin has already signaled credibly that he wouldn’t kill Kasparov, but if that is the case then he could in fact turn around and order it done and not take the blame.  Either way the equilibrium looks like assassination.  The going rate for an assassin simply isn’t that high and surely somebody has at least that much at stake in the outcome.

When I was a little kid I saw TV coverage of the assassinations of Bobby Kennedy and Martin Luther King.  I recall wondering why every famous politician, or at least every reachable famous politician, isn’t assassinated.  Or why isn’t the equilibrium quantity of product sabotage — accompanied by options trading of course — very high?  The sabotage doesn’t have to hurt people to lower share prices.

If some people find it worthwhile to send spam, why don’t many more?  Is the cost structure really that heterogenous on the production side? 

I might add these are important questions for understanding a future of extreme nuclear proliferation.