Month: January 2008

Animal Spirits

Keynes kept two sex diaries.  The first documents people…

The other sex diary is more puzzling and, in a way, more informative. An economist to the core, Keynes organized the second sex diary also year-by-year, but this time in quarterly increments.

Unfortunately for us, however, this second sex diary is in code. And as far as I know, no one yet has been prurient enough to crack it.

Here’s what Keynes’ tabulation looks like. For every quarter-year from 1906 to 1915, he tallies up his sexual activities and totals them under three categories: C, A, and W.

…according to Keynes’ tabulation, what he did most frequently and consistently was C. It happened seventeen times from May to August of 1908, twenty-eight times (!) from August to November that year, twenty times from February to May of 1909, and so on. That’s a lot of C. The high numbers for C loosely (but not consistently) correlate to university holidays, the break at Easter and the longer summer holiday, when Keynes would have had more leisure to pursue and enjoy his bouts of C.

More here.  I debated whether to close comments on this post but I trust Marginal Revolution readers to keep to their high standards.

Hat tip to

Mark Bittman on the economics of meat

In this excellent piece, I was most struck by the following passage:

But pigs and chickens, which convert grain to meat far more efficiently
than beef, are increasingly the meats of choice for producers,
accounting for 70 percent of total meat production, with industrialized
systems producing half that pork and three-quarters of the chicken.

Let’s say you want to protect the environment, and you are going to eat some meat, should you eat cows or pigs?  Pigs.  Let’s say you care about animal cruelty.  Pigs are smarter and more social than cows.  A pig (or chicken) also seems to yield less meat per unit of animal suffering.  That would imply it is better for animal welfare to eat cows rather than pigs.  The conflict between environmental goals and animal welfare goals is one of the most significant underreported stories in this area.

Code Red

The book is by David Dranove and the subtitle is An Economist Explains How to Revive the Healthcare System Without Destroying It.  Here is the Amazon listing.  Here is the book’s home page.

Code Red is one of the two or three best books on the economics of health care.  It is especially strong on how the current mess evolved historically and what has been tried (or not tried) along the way.  This is the place to go to understands PSROs or what happened to the HMO revolution.  Dranove is very pro-Medicare but he (reluctantly) rejects single-payer systems for limiting innovation.  Instead he finesses the market-government divide by calling for federalistic competition:

Congress should mandate that all states reach targets for the number of uninsured, say, below 5 percent within 5 years.  Congress could tie compliance to a set of financial carrots and sticks, and it does with Medicaid.  To prevent a race to the bottom, Congress should also specify a minimum benefit package.  It would then be up to each state to devise the most effective way of meeting these coverage goals.

I fear that minimum benefit packages will prevent insurance from ever being cheap plus I wonder if Medicaid shouldn’t be done on the national level.  This book won’t make anyone fully happy, but it is a must for fans of health care policy.

Logic of Life – Chapter 2: Game Theory isn’t Always about the Games We Play

This review is cross posted on, the management & social science blog.

    It’s a pleasure to be back at the Marginal Revolution. Let me start out by agreeing with Tyler and Bryan. Tim Harford is one of the leading popular social science writers and we’re lucky to have him.

    Today, I’ll focus on Chapter Two of Tim’s book, "Las Vegas: The Edge of Reason." In this chapter, Harford describes game theory. In a nutshell, game theory studies any situation where (a) you have multiple people striving to achieve a goal and (b) your actions depend on the actions of the other people in the game. By most accounts, game theory is one of the great accomplishments of modern social science. Once you realize that people’s actions are both utility maximizing and interdependent, then game theory can help you model just about any form of cooperation or conflict.

    Harford discusses the basic concepts of game theory with vivid examples ranging from poker, to nuclear war, to quitting smoking. And, as expected, game theory usually provides a great deal of insight. Harford shows how game theory can also be enormously useful, even life saving. Harford recounts how economist Thomas Schelling realized that some situations might encourage participants to jump the gun and initiate devastating conflict. What Schelling realized is that these dangerous games had low information, such as the US misunderstanding a Soviet action, and starting nuclear war. Schelling advocated increased communication between the US and Soviet leadership, including the creation of the hotline between Moscow and the US, which helped defuse tensions in later Cold War disputes.

    I’ll finish this post with my one big criticism of game theory, at least the basic version described by Harford and taught in intro courses. In game theory 101, you assume that people develop optimal strategies in response to other rational actors. One huge problem with a lot of these models is that the games are very complicated. It’s hard to imagine most people perform the mental acrobatics of game theory actors.

    One response is that game theory is empirically well supported, which suggests that some process drives people to the strategies described by game theory. For example, Harford describes how economists and mathematicians used game theory to sort through the insanely complex game of poker and that the optimal game theory strategy was actually fairly similar to what world class poker players do.

    So game theory is supported, right? Not so fast. Game theory has two parts (a) a description of optimal strategies, and (b) a prediction that people will actually solve the game and find these strategies. In my view, game theory 101 is well supported, in poker at least, on point (a), but not (b). In other words, world class poker players rarely sit around and do backwards induction, or any other flavor of equilibrium analysis, but they still obtain strong strategies through trial and error.

    What I suspect is that world class poker emerged from an evolutionary process. Very smart people can figure out certain strategies, but nobody can figure out the whole game by themselves, lest they become full time mathematicians. The typical world class poker player probably inherits a bunch of rules that were tested by earlier generations, and adds a few new twists. Competition weeds out bad rules. Even Steve Levitt, star economist, Harvard & MIT grad, developed his own idiosyncratic strategy, rather than solve the game himself.*

    In the end, game theory is really a first step in understanding complex interactions. The next step is developing an evolutionary theory of games where actors inherit a tool box of strategies from previous generations of players. Already, there is a fairly well developed genre of game theory taking this approach, but I welcome the day when it becomes refined enough so that it can account not just the strategies of leading poker players, but how these strategies emerged from generations of competition.

*According to the news reports, he developed his own "weird style" rather than completely solve the poker game. But it works for him! What would Johnny von Neumann say?

Simple thoughts about stimulus

If every American saved the rebate and invested it in equities, we might be (ever so slightly) better off.  Government can borrow at a low interest rate for us.  Of course we’re being told to spend the money.

Most fundamentally, more aggregate demand is not the answer because insufficient aggregate demand was not the problem in the first place.  Just as a social framing effect (and lots of fraud) led subprime loans to be perceived as
"not very risky," right now social framing effects — call them collective fear — are causing lower asset prices, some degree of
credit constipation, and higher risk premia.  The economy is undergoing a sectoral shift toward less risky assets and that can bring an economic downturn.  The shift itself is costly, it brings thorny coordination problems (e.g., sudden insolvencies, overturning of credit expectations), and lower-yielding assets also mean less wealth.  Lack of liquidity simply is not the fundamental problem. 

Arguably there is a secondary negative aggregate demand shock at work, mostly because asset prices are lower from the sectoral shift.  Monetary policy should offset this secondary effect, to keep things from getting worse, but still monetary policy won’t and indeed can’t set things right again.   

More speculatively, you might argue that boosting aggregate demand may convince people to postpone their adjustments to the sectoral shift, thereby making the coordination problems last longer.  Maybe, but I won’t push that on you for lack of evidence.  Another speculative argument is that boosting aggregate demand can push us all back into optimistic expectations but that is unlikely. 

The bottom line: Our expectations from the Fed or a stimulus plan should be very modest, even if the boosts to aggregate demand are done perfectly.

Fairfax City Public Library

For many moons I have been looking forward to the opening of a new library building in Fairfax.  I’ve been going to the old location for eighteen years, so surely progress is a good thing?  I noted:

1. The apex of the ceiling is now four or five times higher.
2. The space for computers is now four or five times greater.
3. The space to sit and read is now four or five times greater.
4. It now takes seven or eight minutes to park and get into the new fortress-like building, as opposed to one minute for the old building.
5. The space for parking is about ten times greater, much of it underground in a complex garage.
6. The space for books does not appear to be greater at all.
7. The shelves for the "New Books" section are slightly more squat, which means that about a quarter of the new books cannot be shelved with the spine and title facing outwards.

John DiNardo against Freakonomics

Here is John DiNardo’s review of Freakonomics, and here, and here are all three reviews he has written; one version was just published in the Journal of Economic Literature.  These reviews struck me as grumpy and unfair, ultimately citing few contrary facts and boiling down to the complaint that the authors have not disproven all competing theories, or that the authors do not have a complete account of what a good explanation would look like.  Three separate reviews of one book?  And a popular book at that?  What is going on?  DiNardo is not some guy in his pajamas, rather he is a tenured professor at the University of Michigan with presumably a high opportunity cost.  I am reminded of Einstein’s rejoinder.  Upon being presented with a book of essays called something like "The critics against Einstein" (that is a paraphrase) he replied with something like "If they were right, one would have been enough."  The point is not that Freakonomics is infallible (on most particular issues I genuinely do not know exactly how robust their results are and to know would take a good bit of study), but rather that factual criticism on a single point is usually the best way to make critical progress.  Now I would like to read a philosophy of science critique of Stephen Hawking’s A Brief History of Time.

What I’ve been reading

1. Forgotten Continent: The Battle for Latin America’s Soul, by Michael Reid.  A good treatment of the region’s recent history; it is best for its balanced assessment of what market-oriented reforms have managed or not.

2. Where Have All the Soldiers Gone?: The Transformation of Modern Europe, by James J. Sheehan.  Blah, blah, blah, blah, Europe has fewer soldiers than it used to, blah.  Blah.  Sheehan is a first-rate historian, but there’s not much to this book.

3. Architecture of Authority, by Richard Ross.  This book is nothing more than photos of jail cells, parole hearing rooms, Mary Boone Gallery, and the like.  Thought-provoking.

4. Due Considerations: Essays and Criticism, by John Updike.  Scattered essays on just about everything.  Completely apart from his fiction, Updike is simply one of the smartest and most impressive people out there.  It is amazing how many topics he knows so much about and how well he writes about them.

5. Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (And Stick You With the Bill), by David Cay Johnston.  This is quite a good compendium of different ways that government screws us over, written from a mixed populist/libertarian point of view.  Recommended.  I expected not so much but the substance here held my attention.  I’d now like to know the total welfare cost of all these bad policies.

John McCain on the economy

Matt Yglesias writes:

…these would be my sober-minded, non-psychic points about John McCain and the economy:

All of this leads me to conclude that John McCain would not govern very well on economic policy issues…

On policy, I am heartened if he realizes he does not understand economics.  Are the other Republican candidates equally self-aware

I don’t put much weight on what the Republican candidates say about economics one way or the other.  In the current situation a Republican should favor whichever candidate would be most popular in office.  That candidate would have the best chance to check a Democratic Congress or perhaps put forward some alternative agenda.  Furthermore national interest-minded Presidents tend to favor better economic policies than does Congress, especially if that President is of your party persuasion.  A Democrat should favor, on economic issues at least, whichever Republican is most vain and most likely to seek fame in office.  That means lots of legislation passed and working with a Democratic Congress on issues such as health care. 

Two points: a) I don’t have strong views on which particular candidates fit these descriptions, and b) foreign policy is in any case more important for evaluating a candidate overall. 

Here Matt discusses McCain’s economic advisors.  Here is Dave Leonhardt on McCain and the economy.  I assume, by the way, that McCain’s invocation of Kemp and Gramm is an attempt to build a right-wing coalition, not an actual statement of his preferences.

Prediction markets as bribery?

Harald, a loyal MR reader, writes to me:

What would happen if some famous rich person walked into a presidential prediction market and said: "Hello, I’m selling shorts for candidate A, to the value of a hundred million dollars if he should win. I’m not doing this because I don’t believe candidate A will win, indeed, I want her to win. I hope everyone who can help candidate A win, by campaigning, talking to friends, or even just voting, will buy a short from me (I’m practically giving them away!) and go out and do it with a healthy economic self-interest in their hearts!"

Regulators aside, could such a scheme work?  It is best done as a contingent claims market, rather than in the InTrade format.  You buy insurance for a penny, and you get a payout of a thousand dollars if candidate X wins.  Claim holders may then support and talk up candidate X.  Of course people who won’t change their votes for a thousand dollars also will try to buy up the contingent claims.  So the sponsor might restrict purchases to people who live in swing states or who can prove independent voting affiliation or an absence of previous campaign donations [TC: I’ve edited this section a bit for clarity]. 

How about giving away assets that pay off if some important social problem is solved?  How much would it cost to mobilize a strong enough army of voters to oppose farm subsidies?   

Book forum

Our next installment on Tim Harford’s The Logic of Life will pop up Sunday night or Monday morning.  Guest blogger Fabio Rojas will be (re)joining us to discuss chapter two, which covers among other things the game of poker.  Save up your book comments for then!