Albert O. Hirschman: Life and Work
Albert O. Hirschman has passed away. Hirschman was a deep thinker whose work has been influential in many fields. Most famously with the must-read Exit, Voice and Loyalty. I am also a fan of The Passions and the Interests his study of ideological transformations in the 17th and 18th century which promoted the pursuit of material interests as a way to tame the passions and thus opened the way to capitalism (profitably read alongside McCloskey’s Bourgeois Virtues). Hirschman’s early work in development, on backwards and forwards linkages, is now being rediscovered and formalized. Tyler looks at Hirschman’s work as it relates to development in a video at MRUniversity. Tyler also wrote in 2006:
Albert Hirschman deserves a Nobel Prize in economics. His early work on the unbalanced nature of economic development was pathbreaking. The Rhetoric of Reaction is a brilliant study in intellectual self-deception. As a historian of thought he integrates wonderfully, such as in his study of how commerce shapes mores.
But he would win the Prize for focusing the attention of economists and political scientists on the phenomenon of voice: the ability of consumer or voter complaints to induce improvements in supply. Hirschman was the first modern social scientist to think about this mechanism systematically.
Hirschman first suggested voice gets stronger and more effective when exit is limited. In his (earlier) vision, if you can leave you won’t complain. Fidel Castro understood this and let many Cubans go, although of course they complained from Florida. It is sometimes suggested that in a world of school vouchers fewer parents would show up at the school board meeting. Don’t yap, just yank your kid.
In reality voice often works best when competitive pressures are strong. HBO is more responsive than was East Germany. You are not wasting your time to complain at Wegman’s, or for that matter at this blog. Competition and voice are more likely complements than substitutes. Hirschman admitted and indeed emphasized this point in his later writings.
Here is Paul Krugman on Hirschman….Here is Alex on the topic of voice.
Hirschman also led a fascinating life. He became a professor only late in life after fighting in the Spanish Civil War, volunteering in the French Army and working in Marseilles to help refugees escape the Nazis. His work in development economics was based on field work when field work still meant working in fields.
As he once said of his work and perhaps also of his life:
Attempts to confine me to a specific area make me unhappy.
Daniel Drezner at the FP annually gives out an award he affectionately calls the Albie. It’s an award for
…any book, journal article, magazine piece, op-ed, or blog post published in the [last] calendar year that made you rethink how the world works in such a way that you will never be able “unthink” the argument.
It’s a fitting award to be named for Albert Hirschman whose simple but powerful ideas do indeed cause you to rethink the world and never to see it the same again.
India, India, India!
Today at MRUniversity we release the first of our country sections, India. In nearly 50 videos we cover key aspects of India’s history, economics, politics and culture from the viewpoint of development economics. Among the topics are India’s Early Growth History, Gandhi and the Salt March, the Green Revolution, Food Crises and the Media, the Rise of Private Education in India, and the Economics of Bollywood.
Tyler and I will both be in Delhi on Thursday December the 20th to talk to students of MRUniversity and others about economics, development and the future of online education. Information on times and places to follow.
By the way, for those of you taking the Development Economics course the India material is bonus to be sampled at will – this won’t be on the exam!
MRU also introduces new features this week including user contributions of links, videos and other materials directly from the video pages, ordering of questions by votes or recency and easier ways to see and access related materials and user contributions.
New Health Care Taxes
Robert Pear at the NYTimes has a good piece on the high-income taxes already scheduled to begin in January:
For more than a year, politicians have been fighting over whether to raise taxes on high-income people. They rarely mention that affluent Americans will soon be hit with new taxes adopted as part of the 2010 health care law.
The new levies, which take effect in January, include an increase in the payroll tax on wages and a tax on investment income, including interest, dividends and capital gains. The Obama administration proposed rules to enforce both last week.
Affluent people are much more likely than low-income people to have health insurance, and now they will, in effect, help pay for coverage for many lower-income families. Among the most affluent fifth of households, those affected will see tax increases averaging $6,000 next year, economists estimate.
Taxi Tip Nudge
NYTimes: New York’s cabbies howled when the city began forcing them to take credit cards. Some even went on strike, calling the requirements a kowtow to tourists and a burden on drivers.
But two years later, the back-of-the-cab swipe has emerged as an unlikely savior for New York’s taxi industry, even as other cities’ fleets struggle to find fares in a deep recession.
The saving grace appears to be a simple nudge. Before the credit card swipe system the average tip was around 10% but the computer offers three tip sizes 30%, 25%, 20% and the average tip has now risen to 18-22%!
Joshua Gross estimates, that this simple nudge has increased the income of taxi drivers by $144 milion per year. Had the drivers demanded this increase via an increase in rates it probably never would have happened.
Sometimes it can be better to be nudgy than pushy, even in New York.
Hat tip: Cheap Talk.
Copyright Unbalanced
Virginia Postrel has a good piece on free market copyright reform:
Making the intellectual case, the Mercatus Center at George Mason University, a hub of free-market scholarship, has just released “Copyright Unbalanced: From Incentive to Excess,” a collection of libertarian and conservative critiques. The book doesn’t oppose copyright per se, but it excoriates the current system’s lengthy terms and expansive enforcement powers.
“Whatever your philosophical position, if you are skeptical of government power, you should likewise be skeptical of the copyright system that has developed over the last century,” writes Jerry Brito, the volume’s editor, in the introduction.
…Consider how the law applies to Robert Frost’s classic poem “Stopping by Woods on a Snowy Evening,” first published in 1923. Back then you only got copyright privileges for works officially registered with the copyright office, and only for a term of 28 years, which could be renewed if you filed again, as Frost did in 1951.
Requiring such simple procedures reserved copyright privileges for creators with strong commercial or sentimental interests in limiting the publication of their works. Today, by contrast, copyright automatically applies to every eligible work, including your vacation snapshots and your 4-year-old’s handmade Mother’s Day card.
Under the law when Frost wrote his poem and renewed the copyright on the volume including it, it would have presumably entered the public domain in 1979, more than a decade after its author’s death in 1963. That’s not what happened. Beginning in 1962, Congress gradually extended copyright terms, and in 1976 it passed a new copyright act that gives works already under copyright a new term of 75 years from their first publication. That meant “Stopping by Woods” wouldn’t go into the public domain until 1998.
That’s not what happened either. Just as the poem’s copyright was about to expire, Congress passed the Sonny Bono Copyright Term Extension Act, which gave existing works a new copyright term of 95 years. (The 1923 Frost volume including the poem was one of the works cited in a lawsuit unsuccessfully challenging the act’s constitutionality.) So Frost’s poem won’t enter the public domain until 2018 — assuming that Congress doesn’t pass yet another extension.
Fifty-six years of copyright was clearly enough to encourage Frost to write the poem. Anything further is just a windfall for his estate and his publisher. The Constitution, reformers are quick to note, gave Congress the right to grant copyrights “to promote the Progress of Science and useful Arts,” not to benefit producers.
You can get Copyright Unbalanced which includes excellent papers by Reihan Salam, David Post, Tom Bell and others here (amzn) and read the first chapter (pdf).
How to Win at Poker
On April 15, 2011, a day that has been dubbed “Black Friday” in the poker community, the DOJ shut down the American operations of three major sites: PokerStars, Full Tilt Poker, and Ultimate Bet.
Michael Kaplan has an update on the story:
In January of this year, Full Tilt and the DOJ worked out an arrangement in which the DOJ took ownership of Full Tilt with the intention of selling it to raise funds to pay back American players. Seven months later, on July 31, PokerStars purchased Full Tilt from the DOJ. Businessweek estimated that the transaction would make $547 million for the U.S. government. At the time, the DOJ vowed to reimburse Full Tilt’s U.S. players; Stars said that it would take responsibility for returning $184 million to non-American customers.
PokerStars followed through on its end of the deal and recently relaunched the Full Tilt site outside of the U.S.
So has the DOJ paid the U.S. players? Of course not.
According to Steven L. Kessler, an attorney based in New York City who specializes in forfeiture law…“In one of its publications [the ‘National Asset Forfeiture Strategic Plan 2008–2012’], the government talks about bringing in $2 billion in forfeitures and returning only $700 million.” Recouping Full Tilt funds will be “a long, drawn-out process to the point that you will need to be out five or six or seven figures for it to be worth pursuing. The system is set up so that you are discouraged from going after your money….Plus, look at what you’re exposing to get back what belongs to you. You have to wonder if it will turn into a tax case.”
In other words, as in other asset forfeiture cases, the government is grabbing up property and keeping as much as it can for its own coffers. Even if some of these sites were fraudulent, one wonders if the players would not have better off without government “protection.”
The full article also includes a good markets in everything item.
Hat tip: Ben Mathis-Lilley.
Marcia Angell’s Mistaken View of Pharmaceutical Innovation
At Econ Talk, Marcia Angell discusses big Pharma with Russ Roberts. I think she gets a lot wrong. Here is one exchange on innovation.
Angell: The question of innovation–you said that some people feel, economists feel, [the FDA] slows up innovation: The drug companies do almost no innovation nowadays. Since the Bayh-Dole Act was enacted in 1980 they don’t have to do any innovation….
Roberts: But let’s just get a couple of facts on the table…[The] research and development budget of the pharmaceutical industry is, in 2009, was about $70 billion. That’s a very large sum of money. Are you suggesting that they don’t do anything–that that’s mostly or all marketing? That they are not trying to discover new applications of the basic research? It seems to me basic research is an important part. Putting that research into a form that can make us healthier seems to be a nontrivial thing. You think they are–what are they doing with that money?
Angell: If you look at the budgets of the major drug companies–just go to their annual reports, their Security and Exchange Commission (SEC) filings, you see that Research and Development (R&D) is really the smallest part of their budget. If you look at the big companies you can divide their budget into 4 big categories. One is R&D, one is marketing and administration; the other is profits, and the other is just the cost of making the pills and putting them in the bottles and distributing them. The smallest of those is R&D.
Notice that Angell first claims the pharmaceutical companies do almost no innovation then, when presented with a figure of $70 billion spent on R&D, she switches to an entirely different and irrelevant claim, namely that spending on marketing is even larger. Apple spends more on marketing than on R&D but this doesn’t make Apple any less innovative. Angell’s idea of splitting up company spending into a “budget” is also deeply confused. The budget metaphor suggests firms choose among R&D, marketing, profits and manufacturing costs just like a household chooses between fine dining or cable TV. In fact, if the marketing budget were cut, revenues would fall. Marketing drives sales and (expected) sales drives R&D. Angell is like the financial expert who recommends that a family save money by selling its car forgetting that without a car it makes it much harder to get to work.
Later Angell tries a third claim namely that pharma companies do no innovation because their R&D budget is mostly spent on clinical trials and, “it’s no secret how to do a clinical trial.” I find this line of reasoning bizarre. I define an innovation as the novel creation of value, in this case the novel creation of valuable knowledge. Is Angell claiming that clinical trials do not provide novel and valuable knowledge? (FYI, I have argued that the FDA is overly safety conscious and requires too many trials but Angell breezily and nastily dismisses this argument). In point of fact, most new chemical entities die in clinical trial because what we thought would work in theory doesn’t work in practice. Moreover, the information generated in the clinical trials feeds back into basic research. Angell’s understanding of innovation is cramped and limited, she thinks it begins and ends with basic science in a university lab. Edison was right, however, when he said that genius is one percent inspiration and ninety-nine percent perspiration–both parts are required and there is no one-way line of causation, perspiration can lead to inspiration as well as vice-versa. Read Derek Lowe on the reality of the drug discovery process.
Angell infuses normative claims to the industrial organization of the pharmaceutical industry. Over the past two decades there has been an increase in the number of small biotechnology companies, often funded by venture capital. Most of the small biotechs are failures, they never produce a new molecular entity (NME). But a large number of small, diverse, entrepreneurial firms can explore a big space and individual failure has been good for the small-firm industry which collectively has increased its discovery of NMEs. The small biotechs, however, are not well placed to deal with the FDA and run large clinical trials–the same is also true of university labs. So the industry as a whole is evolving towards a network model in which the smaller firms explore a wide space of targets and those that hit gold partner with one of the larger firms to pursue development. Angell focuses in on one part of the system, the larger firms and denounces them for not being innovative. Innovation, however, should be ascribed not to any single node but to the network, to the system as a whole.
Angell makes some good points about publication bias in clinical trials and the sometimes too-close-for-comfort connections between the FDA, pharmaceutical firms, and researchers. But in making these points she misses the truly important picture. Namely that new pharmaceuticals have driven increases in life expectancy but pharmaceutical productivity is declining as the costs of discovering and bringing a new drug to market are rising rapidly (on average ~1.8 billion per each NME to reach market). In my view, the network model pursued on a global scale and a more flexible and responsive FDA, both of which Angell castigates, are among the best prospects for an increase in pharmaceutical productivity and thus for increases in future life expectancy. Nevertheless, whatever the solutions are, we need to focus on the big problem of productivity if we are to translate scientific breakthroughs into improvements in human welfare.
Are Prediction Markets Against the Public Interest?
Here is more on the CFTC’s attack on Intrade:
Why doesn’t Intrade just obey the complicated law and become a licensed exchange? They tried, but the CFTC won’t give them a license. When an established, licensed U.S. commodity exchange applied for permission to do what Intrade does, the CFTC turned them down, too.
Most importantly, in rejecting Nadex’s application to trade “political event derivatives contracts” the CFTC said this:
As a result of reviewing the complete record, the CFTC determined that the contracts involve gaming and are contrary to the public interest…
Thus the CFTC’s attack on Intrade is not about following or not following a particular regulation; it goes much deeper, the CFTC is arguing that all such markets are against the public interest.
Addendum: Kenneth J. Arrow, Robert Forsythe, Michael Gorham, Robert Hahn, Robin Hanson,
John O. Ledyard, Saul Levmore, Robert Litan, Paul Milgrom, Forrest D. Nelson,
George R. Neumann, Marco Ottaviani, Thomas C. Schelling, Robert J. Shiller,
Vernon L. Smith, Erik Snowberg, Cass R. Sunstein, Paul C. Tetlock, Philip E. Tetlock,
Hal R. Varian, Justin Wolfers, and Eric Zitzewitz disagree with the CFTC (among others).
Attention Scarcity, Ego Depletion and Poverty
Poor people often do things that are against their long-term interests such as playing the lottery, borrowing too much and saving too little. Shah, Mullainathan and Sahfir have a new theory to explain some of these puzzles. SMS argue that immediate problems draw people’s attention and as people use cognitive resources to solve these problems they have fewer resources left over to solve or even notice other problems. In essence, it’s easier for the rich than the poor to follow the Eisenhower rule–“Don’t let the urgent overcome the important”–because the poor face many more urgent tasks. My car needed a brake job the other day – despite this being a relatively large expense I was able to cover it without a second’s thought. Compared to a poorer person I benefited from my wealth twice, once by being able to cover the expense and again by not having to devote cognitive resources to solving the problem.
SMS test the theory with small experiments in which people are asked to play simple games. Poverty is simulated by giving some players fewer game resources. Players in the “poverty” conditions are then shown to devote more attention to the current round and less attention to future rounds, including borrowing more from future rounds. In perhaps the most surprising experiment, SMS have players play a family feud game with and without hints:
Experiment 5 offers more direct support for
the notion that scarcity creates attentional neglect.
One hundred thirty-seven participants played
Family Feud. Some participants could see previews
of the subsequent round’s question at the
bottom of the screen; others could not. We expected
that poor participants would be too focused
on the demands of the current round to
consider what comes next, whereas rich participants
would be able to consider future rounds
and whether moving on was beneficial. All participants
could borrow with R = 3. As predicted,
poor participants performed similarly with previews
(–0.02 T 0.87) and without (0.02 T 1.11),
while rich participants performed better with previews
(0.32 T 0.98) than without (–0.35 T 0.92)
[scarcity × borrowing interaction, F(1, 133) =
4.29, P < 0.05, hp
2 = 0.03; for unstandardized
scores, see table S5].One concern might be that
the poor did not have enough time to consider
the previews. But the experiments above found
that the poor were using too much; they were
overborrowing. Their performance in the nopreview
condition left substantial room for improvement.
Even if poor participants had used
some of the borrowed time to consider the previews
and move on sooner, they could have improved.
That is, the previews benefited the rich
by helping them save more; they could have benefited
the poor by helping them borrow less. But
it appears they were too focused on the current
round to benefit.
Thus, SMS show that poverty (over)-stimulates attention to urgent problems which results in less attention given to important problems–thus, reduce some day to day urgencies and people may become more open to devoting attention to important problems like deworming or hygiene or paying the rent which would in the not-so-long-run result in greater benefits.
Crucially, notice that SMS’s experiments are about the effect of poverty not about the poor. In other words, at least some of our discussion of the poor may suffer from the fundamental attribution error.
CFTC Cracks Down on Intrade
CFTC Press Release: The U.S. Commodity Futures Trading Commission (CFTC) today filed a civil complaint in federal district court in Washington, DC, charging Intrade The Prediction Market Limited (Intrade) and Trade Exchange Network Limited (TEN), Irish companies based in Dublin, Ireland, with offering commodity option contracts to U.S. customers for trading, as well as soliciting, accepting, and confirming the execution of orders from U.S. customers, all in violation of the CFTC’s ban on off-exchange options trading.
Intrade and TEN jointly operate an online “prediction market” trading website, through which customers buy or sell binary options which allow them to predict (“yes” or “no”) whether a specific future event will occur, according to the CFTC’s complaint.
Specifically, according to the complaint, from September 2007 to June 25, 2012, Intrade and TEN operated an online “prediction market” trading website, which allowed U.S. customers to trade options products prohibited by the CFTC’s ban on off-exchange options trading. Through the website, Intrade and TEN allegedly unlawfully solicited and permitted U.S. customers to buy and sell options predicting whether specific future events would occur, including whether certain U.S. economic numbers or the prices of gold and currencies would reach a certain level by a certain future date, and whether specific acts of war would occur by a certain future date.
…David Meister, the Director of the CFTC’s Division of Enforcement, stated: “It is against the law to solicit U.S. persons to buy and sell commodity options, even if they are called ‘prediction’ contracts, unless they are listed for trading and traded on a CFTC-registered exchange or unless legally exempt. The requirement for on-exchange trading is important for a number of reasons, including that it enables the CFTC to police market activity and protect market integrity. Today’s action should make it clear that we will intervene in the ‘prediction’ markets, wherever they may be based, when their U.S. activities violate the Commodity Exchange Act or the CFTC’s regulations.”
In its continuing litigation the CFTC seeks civil monetary penalties, disgorgement of ill-gotten gains, and permanent injunctions against further violations of federal commodities law, as charged, among other relief.
The CFTC acknowledges the Central Bank of Ireland for its assistance in the CFTC’s investigation of Intrade and TEN.
Intrade announces:
We are sorry to announce that due to legal and regulatory pressures, Intrade can no longer allow US residents to participate in our real-money prediction markets.
Unfortunately this means that all US residents must begin the process of closing down their Intrade accounts. We strongly urge you to begin this process immediately:
What is it that Springsteen says, “Well the cops finally busted Madame Marie for tellin’ fortunes better than they do.”
End Software Patents!
Here’s a fun video on the problem with patents brought to you by myself and the great folks at Idea Rocket Animation! Read Launching the Innovation Renaissance (amz) for more (TED book app).
Big Bird
From Wired Science which notes why man has succeeded in breeding big turkeys when evolution failed–it’s not as complicated as you might think:
…the key technical advance was artificial insemination, which came into widespread use in the 1960s, right around the time that turkey size starts to skyrocket. The reason is that turkeys over 30 pounds are “inefficient” breeders: It’s difficult for them to actually perform the natural mating act. With artificial insemination, the largest birds can still be used as sires, even if they have a hard time walking, let alone engaging in sexual reproduction.
Hat tip: @m_sendhil.
More on Online Education
At Cato Unbound I respond to some of the critics of my article Why Online Education Works. Here is one bit:
We do need more studies of offline, online, and blended education models, but the evidence that we do have is supportive of the online model. In 2009, The Department of Education conducted a meta-analysis and review of online learning studies and found:
- Students in online conditions performed modestly better, on average, than those learning the same material through traditional face-to-face instruction.
- Instruction combining online and face-to-face elements had a larger advantage relative to purely face-to-face instruction than did purely online instruction.
- Effect sizes were larger for studies in which the online instruction was collaborative or instructor-directed than in those studies where online learners worked independently.
- The effectiveness of online learning approaches appears quite broad across different content and learner types. Online learning appeared to be an effective option for both undergraduates (mean effect of +0.30, p < .001) and for graduate students and professionals (+0.10, p < .05) in a wide range of academic and professional studies.
The High Price of False Security
Charles Kenny has an excellent piece in Bloomberg BusinessWeek about security:
The attention paid to terrorism in the U.S. is considerably out of proportion to the relative threat it presents. That’s especially true when it comes to Islamic-extremist terror. Of the 150,000 murders in the U.S. between 9/11 and the end of 2010, Islamic extremism accounted for fewer than three dozen. Since 2000, the chance that a resident of the U.S. would die in a terrorist attack was one in 3.5 million, according to John Mueller and Mark Stewart of Ohio State and the University of Newcastle, respectively. In fact, extremist Islamic terrorism resulted in just 200 to 400 deaths worldwide outside the war zones of Afghanistan and Iraq—the same number, Mueller noted in a 2011 report (PDF), as die in bathtubs in the U.S. alone each year.
…According to one estimate of direct and indirect costs borne by the U.S. as a result of 9/11, the New York Times suggested the attacks themselves caused $55 billion in “toll and physical damage,” while the economic impact was $123 billion. But costs related to increased homeland security and counterterrorism spending, as well as the wars in Iraq and Afghanistan, totaled $3,105 billion.
Matt Yglesias adds a good point:
Something that I would love to see the Transportation Security Administration, the FBI, the CIA, and whoever else do is pull together an estimate of how many airplanes they think would have been blown up by terrorists if there was no passenger or baggage screening whatsoever. One way of thinking about it is this. If commercial airplanes were no more secure than your average city bus, planes would be blown up as frequently as city buses—which is to say never. I’ve heard some people postulate that terrorists have a special affection for blowing up planes, but I’m not sure that’s right. In the not-too-distant past, Israel had a substantial terrorists-blowing-up-buses problem and had to take countervailing security measures. But unlike Israel, we’re not doing anything to secure our buses. It’s at least possible that nobody blows up American buses because nobody is trying to blow anything up.
I would also add to the monetary costs the price of lost civil liberties and a populace that has sadly grown accustomed to government surveilling, scanning, and groping. As I said some years ago when visiting Independence Hall, the price of eternal vigilance is liberty.
Comprar una casa obtener una visa
It appears that the “buy a house, get a visa” program that I have long advocated will soon been implemented…in Spain.
Spain has between 700,000 and 1.1 million unsold new homes following the collapse of its real estate market in 2008 with an estimated third of them being designed as holiday homes in coastal tourist areas
…Spain plans to offer foreigners residency permits if they buy houses worth more than 160,000 euros, in a desperate attempt to reduce the nation’s glut of unsold property.
…The scheme would also allow foreign buyers to move around the 25-nation Schengen zone freely, as the agreement allows holders of a residency permit of one country in the area to travel to – though not work in – any other.
160,000 euros is the national average price of a property in Spain and that is only $200,000. Spain has some beautiful coastal property and a nice apartment in Barcelona can be had for a bit more. The time to buy could be soon.