Month: April 2009

One economist’s perspective on the law and economics movement

In this piece, from a CrookedTimber symposium, I stress that market-oriented economists are culturally and intellectually quite different from their counterparts in the legal side of academia:

One topic which interests me is how the “conservative” law and economics movement, as it is found in legal academia, differs from “market-oriented” economics, as it is found in the economics profession. The “right wing” economist and legal scholar will agree on many issues but you also will find fundamental variations in their temperament and political stances.

Market-oriented economists tend to be libertarian and it is rare that they have much respect for the U.S. Constitution beyond the pragmatic level. The common view is that while a constitution may be better than the alternatives, it is political incentives which really matter. James M. Buchanan’s program for a “constitutional economics” never quite took off and insofar as it did it has led to the analytic deconstruction of constitutions rather than their glorification. It isn’t hard to find libertarian economists who take “reductionist” views of constitutions and trumpet them loudly.

I also discuss my experiences teaching at GMU Law, why the law and economics movement grew so rapidly, and why the initially conservative nature of that movement is more or less over.  Read the whole thing.

TED interviews Tabarrok

Following up on my TED talk, is this interview with Matthew Trost.  We cover whether limited natural resources are a constraint on growth, the Lebensraum fallacy, The Wire, the tragedy of the commons and other topics.  Here's one bit on growth and democracy in the context of China and India.

A lot of people say that India has been held back by its democracy. But let’s remember that despite being a poor country India’s democracy meant that its government never let millions of people starve. No politician wants to starve potential voters. In the long run, I think India is going to benefit from its democracy and not be harmed by it. Democracy is, in a sense, like markets. It provides information and feedback, it leads to a more open system and it constrains government from the worst kinds of abuses. I think that the more China proceeds along the wealth path, the more difficult they will find it not to have a democracy.

Keynes’s *General Theory*, chapter eleven

This chapter is a wild ride, often verging on incoherence but sometimes falling into brilliance.  In any case it is hard to follow.

The first page or two of this chapter presages Tobin's "q theory" and the notion that differential rates of return determine additions to the capital stock (or lack thereof).  The theory of irreversible investment, and the corresponding notion of option value, has made q theory obsolete although not in a way which damaged Keynesian theory.  Quite the contrary.

The end of section i notes that the rate of interest, as used to evaluate capitalized streams of future income, has to come in part from outside the market for capital goods themselves.  This whole section will make more sense once you've read the notorious chapter 17.  Maybe the claims are true as stated in this chapter (all relations are those of general equilibrium in the final analysis), but what Keynes actually meant here is not so obviously true.  He is hinting at the notion that a liquidity trap can halt new investment and that the rate of return on money can "rule the roost."  When and whether this can be true is a central question for contemporary macro and we will return to it.

Parts of section ii hint at the later "reswitching" debates in capital theory and in this section Keynes is drawing upon Irving Fisher's notes on the problem.  He's again getting at the claim that a purely "real" (non-monetary), partial equilibrium theory of interest won't carry much explanatory power.  I don't think he is wielding the right weapon here.

Section iii pokes a hole in the Fisher Effect.  Keynes points out that if expectations of inflation induce a higher nominal interest rate, why don't those same expectations cause prices to go up now?  This adjustment, by the way, would eliminate the nominal premium on the rate of interest.  This simple yet powerful point doesn't get the attention it ought to.  Storage costs for goods and services may eliminate this paradox but perhaps not completely.  It is striking how few economists have thought this problem through.

The chapter ends with a blizzard of arguments about the importance of expectations.

Whew!  Overall this chapter supports my view that Keynes was obsessed with capital theory and had deep ideas on the topic.  But in terms of understanding the overall argument of the GT, if you can follow chapter 17 (ha), you needn't worry too much about all the difficult arguments and passages here.

Against torture prosecution

At many blogs (Sullivan, Yglesias, DeLong, among others) you will find ongoing arguments for prosecuting the torturers who ran our government for a while.  I am in agreement with the moral stance of these critics but I don't agree with their practical conclusions.  I believe that a full investigation would lead the U.S. public to, ultimately, side with torture, side with the torturers, and side against the prosecutors.  That's why we can't proceed and Obama probably understands that.  If another attack happened this would be all the more true.

On top of everything else, major Democrats in Congress are likely complicit and the Democrats as a whole hardly made this a campaign issue in 2004; in 2008 the economy was their winning issue, not torture.

One of the excellent students in my Law and Literature class wrote the following sentence in his final paper:

In some of the books, and almost all of the movies we have seen that the law goes as far as people are willing to support it.

That sad truth is another cost of the practice of torture.  The American public, now having affiliated itself with torture, will be reluctant to condemn torture for some time to come.  The "endowment effect" here seems to be strong.

An acquittal or mistrial would lose the chunk of world opinion that Obama has been winning back.  And a trial might prompt another terrorist attack, if only to force acquittal and make America look bad once again.

Pushing for prosecution would more likely endanger rule of law than preserve it, which is a sorry state of affairs.

Addendum: Here is more from Matt Yglesias.

Sentences to ponder

Cities that instituted quarantine, school closings, bans on public
gatherings and other such procedures early in the epidemic had peak
death rates 30 percent to 50 percent lower than those that did not.

That is from a study of the pandemic of 1918-1919 and here is more, from 2007.  The best place to follow what is going on in Mexico — where such restrictions are now common — is ElUniversal.  People in Mexico are dying of the flu every day; what is the chance that only the benign version of the virus crosses the border?

Are you hot?

Ever since the 2003 outbreak of SARS, or severe acute respiratory syndrome, Hong Kong has used infrared scanners to measure the facial temperatures of all arrivals at its airport and at its border crossings with mainland China.

The NYTimes reporting on how Hong Kong is probably better prepared than any other place in the world for a flu pandemic.

Hat tip to Monique van Hoek.

Why does the music from Cape Verde sound so sad?

Might one reason be recurring famine?:

Despite its name, Cape Verde is an arid landmass with minimal agricultural potential.  The excess mortality associated with its major famines in unparalleled in relative terms.  A famine in 1773-76 is said to have removed 44 percent of the population; a second in 1830-33 is claimed to have killed 42 percent of the population of seventy thousand or so; and a third in 1854-56 to have killed 25 percent.  In 1860 the population was ninety thousand; 40 percent of Cape Verdeans were reported to have died of famine in 1863-67.  Despite a population loss of thirty thousand, the population was put at eighty thousand in 1870.  Twentieth-century famines in Cape Verde were less deadly, but still extreme relative to most contemporaneous ones elsewhere: 15 percent of the population (or twenty thousand) in 1900-1903; 16 percent (twenty-five thousand) in 1920-22; 15 percent (twenty thousand) in 1940-43; and 18 percent (thirty thousand) in 1946-48…

…such death tolls imply extraordinary noncrisis population growth.  For instance, if the population estimates for 1830 and 1860 are credited, making good the damage inflicted by the famine of 1830-33 would have required an annual population growth rate of about 4 percent between 1833 and 1860 — despite the loss of a quarter or so of the population in 1854-56.

That is all from the new and noteworthy Famine: A Short History, by Cormac O Grada.  Here is the book's home page.

Here are the author's working papers on famine.

Countercyclical assets, a continuing series

Lebanon, at least for now:

But while number crunchers elsewhere toil to trim over-optimistic
estimates into punier real results, statisticians at the Banque du
Liban are revising theirs sharply upwards. Lebanon’s GDP grew during
2008, not at an annual rate of 7.5%, it seems, but at 9% or better.

Yet even that trend-bucking number looks modest compared to other
milestones scored by this small, almost comically turbulent country.
Last year the value of deposits in Lebanese commercial banks rose by
15% to an impressive $94 billion, equal to 327% of GDP. Industrial
exports surged 24%. Tax revenues, tourist arrivals, banking profits and
the number of construction permits all soared by a third or more. A
giant 46% leap in net capital inflows helped Lebanon post a record $3.5
billion surplus in its balance of payments, and boosted the Banque du
Liban’s own reserves to a cosy $22 billion, nearly double its holdings
a year ago.

Nor does this upswing show much sign of slowing. Sales of new cars are
up by 19%, and the number of tourists arriving in the country in the
first three months of this year increased by 50% compared with the same
period last year. Property prices are holding the past few years’ heady
gains, and worries that the global recession would force home thousands
of Lebanese expatriates, slashing the remittances that underpin the
economy, have so far proven unfounded.

New thinking in real estate, China market(s) of the day

Who needs

Jin Tai Cheng, a Beijing company, is offering a creative solution for
prospective buyers at its "Ecological Bay" Villa project. The company
encourages future homeowners to date its sales girls and promises a
wedding present of RMB 60,000 to any couple that ends up getting
married. The official story is that the company lured the sales ladies
with a commitment to pay 8% in sales commissions as well as the
opportunity to strike gold by securing a wealthy husband.

Here is the story.  Yet rarely is a market as simple as it sounds at first.  It seems they are trying to pair up "lesser" prospects without portraying them as such:

…a local Real Estate executive I spoke to pointed out that the
girls on offer are not that attractive. His theory is that the
developer is not making money on selling apartments and so it signed a
deal with a matchmaking agency to marry these "unwanted" girls to rich
husbands. In return, the developer will receive much more than RMB
60,000 for every girl they manage to "give away". This way, the girls
don't lose face by putting themselves on sale, the husbands don't lose
face by going directly to an agency to look for a bride, and the
developer makes a nice profit. In a country with too many apartments
and not enough girls, this doesn't sound like a bad idea.

I thank The Browser for the pointer.

Convexifying the choice set, an ongoing series

There is a new proposal for chess:

  • Slight Win: A player wins slightly if any of the following
    conditions hold:
    d. The opponent offers to concede a slight win and he or she agrees,
    e. He or she stalemates his or her opponent.
    f. Without making a move, a player calls the arbiter and proves that as
    a result of her opponent's last move, the same position has occurred thrice.

The player that wins slightly gets 4/6 points, and the player that loses slightly
get 2/6 points.

Why not go further and allow the players to bargain for a split sum of any magnitude?  "I offer you .5713 to stop playing now…"

From the comments, at Effect Measure

It surprises me that no one has mentioned this, so i'll end years of
quietly lurking and say it myself: a possible explanation for the
difference in clinical picture here vs Mexico lies in the sample size
here. 8 of 8 confirmed "swine flu" cases here have not involved serious
lower respiratory infection or death. But about 60 of about 1,000
generally unconfirmed cases of "swine flu" in Mexico have. If those all
confirm, that's about a 6% CFR. From what i've read, we don't have data
yet on the CFR of confirmed cases in Mexico, and we don't have a
satistically significant sample here for measuring phenomena in the
single percentage digits.

This tells me that there is no confirmed or statistically
significant difference in the clinical picture between US & Mexico.

Of course Mexico is where most of the data points lie.  That's Suzanne Bunton.  Read the other comments too.  If the Obama administration believes in competent government, it would be nice if they would meet the public health standards currently practiced by the government in Mexico.  Even a completed fence would not stop a virus and there is otherwise no reason to wait.  Should we in the meantime count on a more favorable mutation to protect us?