Good Money
At the dawn of the industrial revolution as workers left the fields and moved to industrial employment the demand for a means of payment increased dramatically. Workers, once paid in kind, needed to be paid in a medium they could use to buy the necessities of life. Small-tender bank notes, however, were illegal and in Great Britain the production of coin was monopolized by the Royal Mint which failed to provide enough high quality coin to meet the demands of workers and business. Silver coin, despite the efforts of Sir Isaac Newton, was overvalued and fled the country. Gold was too expensive to make coins suitable for workingmen and the Mint could not or would not produce high-quality copper coins.
Good Money is George Selgin’s explanation of how enterprising button makers solved what Sargent and Velde called The Big Problem of Small Change thereby making the industrial revolution possible. Selgin is a monetary theorist so you might expect a dry account of monetary history but the mint-battle between Matthew Boulton, whom Wired once named the ultimate CEO, and copper-king Thomas Williams propels the story forward. If you can imagine, Good Money is something of a cross between Friedman and Schwartz’s A Monetary History of the United States (although not as broad in scope) and a business epic like Barbarians at the Gate. I also liked how Selgin draws on newspapers, novels, limericks and tavern songs to illustrate the problems and events of the time. This bard was both a good economist (he has Gresham’s Law!) and public choice scholar.
‘Tis Gold buys Votes, or they’d have swarmed ere now,
Copper serves only for the meaner Sort of People
Copper never goes at Court
And since on Shilling can full Twelve Pence weight,
Silver is better in Germany
‘Tis true the Vulgar seek it, What of that?
They are not Statesmen,-let the Vulgar wait.
The money problem influenced and was influenced by all of the major events of the day so Good Money is also an economic and political history of the industrial revolution. Here’s an interesting tidbit. Company stores were not so much a way for firms to rip off employees (why not just pay them less?) but were rather a means of economizing on coin. Selgin shows how the shortage of coin sheds light on a number of other otherwise peculiar business practices.
What lessons can be drawn from the history of private coinage? Private money circulated only if it was voluntarily accepted as a means payment. Thus the primary problem faced by private firms was how to create trust and credibility. To encourage circulation, for example, issuers promised to redeem their tokens in gold (which the Royal Mint did not). In turn, the promise to redeem gave producers an incentive to make their coins difficult to counterfeit, which they did by making the coins beautiful – numismatists will appreciate the full-color illustrations of the private coinage produced by Boulton and his rivals – as well as technologically advanced.
Today, the big problem of small change is no longer such a big problem, although shortages of wanted coin continue to occur sporadically around the world (e.g. here and here) as well as surpluses of unwanted coin. Nevertheless, the basic problems of private coinage were trust and credibility. Modern issuers of digital cash face the same problems and thus Selgin’s history is a valuable reminder about the scope and potential of alternative monetary institutions.
Full Disclosure: I was enthusiastic about Good Money when I read it in manuscript which is why it is published by the University of Michigan Press and co-published by the Independent Institute where I am director of research (n.b. you can buy Good Money at the previous link at a small discount to the Amazon price).
Econometrics of Bigfoot and UFOs
Peter Leeson is posting over at Freakonomics on the econometrics of bigfoot and ufos, he finds that states with a lot of ufo sightings also have a lot of bigfoot sightings. Unfortunately, Leeson draws entirely wrong conclusions from his research. If he wants to explain his results, my young colleague needs to study the classics.
Powerful Women: Does Exposure Reduce Bias?
We exploit random assignment of gender quotas across Indian village councils to investigate whether having a female chief councillor affects public opinion towards female leaders. Villagers who have never been required to have a female leader prefer male leaders and perceive hypothetical female leaders as less effective than their male counterparts, when stated performance is identical. Exposure to a female leader does not alter villagers’ taste preference for male leaders. However, it weakens stereotypes about gender roles in the public and domestic spheres and eliminates the negative bias in how female leaders’ effectiveness is perceived among male villagers. Female villagers exhibit less prior bias, but are also less likely to know about or participate in local politics; as a result, their attitudes are largely unaffected. Consistent with our experimental findings, villagers rate their women leaders as less effective when exposed to them for the first, but not second, time. These changes in attitude are electorally meaningful: after 10 years of the quota policy, women are more likely to stand for and win free seats in villages that have been continuously required to have a female chief councillor.
The Myth in Paperback
Just in time for the conventions you can now buy Caplan’s The Myth of the Rational Voter in paperback. If McCain wins I predict Caplan will be in high demand as half the population dazedly asks what went wrong? If Obama wins the great and the good will sigh with relief and the Bush years will be written off as an aberration of democracy since righted.
Economic Philately
Which stamp predicts development and which stamp dissension?
For the answer, Chris Blattman points us to Michael Kevane’s paper on stamps and development.
An analysis of the imagery on postage stamps suggests that regimes in Sudan
and Burkina Faso have pursued very different strategies in representing the
nation. Sudan’s stamps focus on the political center and dominant elite (current
regime, Khartoum politicians, and Arab and Islamic identity) while Burkina
Faso’s stamps focus on society (artists, multiple ethnic groups, and
development). Sudan’s stamps build an image of the nation as being about the
northern-dominated regime in Khartoum (whether military or parliamentary);
Burkina Faso’s stamps project an image of the nation as multi-ethnic and
development-oriented.
Markets in Everything: Panhandling
In Memphis, a local FOX News reporter, Jason Carter, donned old
clothes and hit the streets earlier this year, earning about $10 an
hour. “Just the quasi-appearance of being homeless filled my cup,”
Carter observed. That all the money is beyond the tax man’s clutches
adds to the allure of professional panhandling.Carter prepared for his stint on the street by surfing the Internet,
where a variety of websites dispense panhandling advice. NeedCom, for
example–subtitled “Market Research for Panhandlers”–offers tips from
Baker and other pros on how to hustle. The website’s developer, Cathy
Davies, wants it to get people “thinking about panhandling as a
realistic economic activity, rather than thinking that panhandlers are
lazy or don’t work very hard.”
More here, overly sensationalistic but interesting in parts.
Thanks to Tim Groseclose for the pointer.
The Return of the Zombie
The Congressional Budget Office estimates that there is only a 7% probability that someone born in 2000 will receive their Social Security benefits as promised today. The better news is that with a probability of 58% the cut in benefits will be 20% or less.
Since the CBO isn’t trying to predict future policy, these "probabilities" should be taken with more than a grain of salt. Sill these numbers are an arresting way of presenting the basic data on projected Social Security revenues and scheduled payments.
Hat tip to Paul Krugman.
Go Mason!
U.S. News and World Report ranks George Mason the #1 up-and-coming National University. The economics department and the law school are doing very well but so are many other innovative departments. The report notes:
Established in 1972, Mason is a relatively young university. Not bound by tradition and old ways of thinking, the university and its
faculty embrace technology and new approaches to learning. Mason was
the first university in the country to offer doctoral programs in
conflict resolution, bioinformatics, computational social sciences, and
information technology; and the first to offer a graduate degree in
biodefense.
The Worst Idea I have Heard Today
One idea that might prevent a repeat of the turmoil: a commission that
would vet financial products before their release, akin [to] the Food and Drug Administration’s
evaluation of drugs before they’re released to the market. McFadden
suggested, “we may need a financial-instrument administration that
tests the robustness of financial instruments and approves only the
uses where they can do no harm.”
Nobel laureaute Daniel McFadden quoted at Real Time Economics. Do tell what will be left when we approve only things "that can do no harm."?
Might I also suggest that before calling for a financial FDA, Prof. McFadden should investigate what economists who have studied the matter have concluded about the safety and effectiveness of the real FDA.
Different Ways to Know the Mind of God
Stephen Hawking famously thought that physics would reveal the mind of God. In fact, Hawking gave physics a 50:50 shot by the end of the last century. Guess he lost that one. But fellow Nobelist Jim Heckman has beat Hawking to the punch using "powerful statistical methods to evaluate the effect of prayer on the attitude of God toward human beings."
Let Y be God’s attitude arrayed on a scale ranging from zero to one. This is an unobserved variable. Let X be the intensity of prayer in the population. It too is scaled between zero and one. The population density of prayer is summarized by a univariate density f(X) which has been estimated by Father Greeley (1972)….
The paper, which goes on like that for a while, is actually quite interesting but if you are looking for the bottom line it comes at the end:
The method presented here is applicable to a number of important problems….For example, one can extend current empirical work in a variety of areas of economics to estimate the effect of income on happiness or the effect of income inequality on democracy.
Thanks to David Glenn and Lee Spector for the link.
Milton Friedman is Responsible for Scarcity
Should we be surprised that the Milton Friedman Institute at the University of Chicago is opposed by the likes of Marshall Sahlins? I happily farm it out to Brad DeLong:
Sahlins’s claims that it was "the market-industrial system [which]
institutes scarcity"… seemed to indicate a total,
willful, and culpable ignorance of practically all of the non-market
settled agricultural societies of the past ten thousand years.
By the way, guess where these institutes are located?
I, Dirt
Potting mixes often contain sphagnum peat moss from bogs in Canada
or Ireland. Bark fines might come from a sawmill in the Deep South.
Coconut "coir," a peat moss substitute, gets shipped all the way from
Asia.
A common ingredient in potting mixes is perlite, which makes the
soils airier while also retaining moisture. In its final form, small
white pellets, it appears to be something synthesized in a factory. In
fact, it comes from a volcanic sand mined on the Greek island of Milos.
Shipped to the United States, the ore is heated to 1,400 degrees
Fahrenheit, at which point it pops into kernels.
The always-interesting Joel Achenbach writing in the Washington Post.
Nationalism versus Peace
Paul Krugman has good column today on the threat of nationalism to globalization.
Shortly
before World War I another British author, Norman Angell, published a
famous book titled “The Great Illusion,” in which he argued that war
had become obsolete, that in the modern industrial era even military
victors lose far more than they gain. He was right – but wars kept
happening anyway….…the belief that economic rationality always prevents war is an
equally great illusion. And today’s high degree of global economic
interdependence, which can be sustained only if all major governments
act sensibly, is more fragile than we imagine.
Designing Monopoly
In Alabama it is illegal to recommend shades of paint without a license. In Nevada it is illegal to move any large piece of furniture for purposes of design without a license. In fact, hundreds of people have been prosecuted in Alabama and Nevada for practicing "interior design" without a license. Getting a license is no easy task, typically requiring at least 4 years of education and 2 years of apprenticeship. Why do we need licenses laws for interior designers? According to the American Society of Interior Designers (ASID) because,
Every decision an interior designer makes in one way or another affects the health, safety, and welfare of the public.
This hardly passes the laugh test. Moreover as Carpenter and Ross point out in an excellent article in Regulation from which I have drawn:
In more than 30 years of advocating for regulation, the ASID and its ilk have yet to identify a single documented incident resulting in harm to anyone from the unlicensed practice of interior design…These laws simply have nothing to do with protecting the public.
Most states do not have license laws for interior designers but the unceasing lobbying efforts of the ASID have expanded such licenses. Fortunately, unlicensed interior designers are fighting back! I love that unlicensed designers in New Hampshire have formed a anti-license league, Live Free and Design. Tuttle Lives!
Against Intellectual Monopoly
Against Intellectual Monopoly is a relentless, pounding, take no prisoners attack on patent and copyright law. It joins Lessig’s Free Culture and Heller’s The Gridlock Economy as an instant classic and a must-read on these issues.
Many people argue that the patent system has gone wrong in recent years, Boldrin and Levine argue that the patent system was rotten from the start. James Watt they say was a "scoundrel" who with his politically-connected partner Matthew Boulton used the patent system to crush their innovative opposition and delay the industrial revolution.
During the period of Watt’s patents, the United Kingdom added about 750 horsepower of steam engines per year. In the thirty years following Watt’s patents, additional horsepower was added at a rate of more than 4,000 per year. Moreover, the fuel efficiency of steam engines changed little during the period of Watt’s patent; however between 1810 and 1835 it is estimated to have increased by a factor of five.
Will books be published without copyright? Boldrin and Levine point out that the 9-11 Commission Report was profitably published by Norton despite being available free for download. Not to mention the fact that most of the great works of literature were published without copyright. Boldrin and Levine are top-notch theorists but AIM is widely accessible and it succeeds best with its many historical discussions and contemporary anecdotes.
AIM does suffer in places from a lack of a lack of nuance and a surprising ability to ignore trade-offs. Boldrin and Levine argue, for example, that among the reasons we don’t need patents are a) because ideas aren’t copied immediately, they take time to diffuse, b) first movers have significant advantages and c) trade secrecy is often a more effective "means of appropriating returns" than patents.
Quite right on all three counts but each of these reasons also explains why patents are less costly than one might at first imagine. After all, what Boldrin and Levine are really saying is that intellectual monopoly would exist even without intellectual property law.
A standard model used to explain why patents might be useful implicitly
assumes that ideas are transmitted instantly at zero cost. Boldrin
and Levine smash the premise of this argument but the premise is sufficient for the conclusion not
necessary. Indeed, once you acknowledge that the slow diffusion of ideas helps entrepreneurs to appropriate the returns to their innovations it becomes an open question of how slow is best? When is the appropriability of returns strong and when is it weak? Doesn’t it differ for different goods? Shouldn’t intellectual property law recognize these differences? It’s clear, for example, that ideas are diffusing more quickly than ever before. On Boldrin and Levine’s argument, faster diffusion of ideas implies lower appropriability and thus a stronger argument for intellectual property law. Needless to say Boldrin and Levine are too busy using
a "mallet to smash shiny myths" to make this argument. (To be fair, they are more nuanced in
the conclusion.).
Similarly, Boldrin and Levine argue that the larger the market the less patent protection is needed, hence globalization implies less patent protection. Again, quite right (see also my paper, Patent Theory versus Patent Law, on this point). But you won’t see Boldrin and Levine drawing the corollary conclusion that more intellectual property rights are optimal the smaller the market, despite the fact that we have a very successful example where increased patent rights for smaller markets generated considerably more innovation, namely the Orphan Drug Act.
For economists, it’s also surprising how little marginal analysis you find in AIM. For example, Boldrin and Levine ask, Did Rowling really need a billion dollars to write Harry Potter? Surely, a few million would have been enough. But that’s like saying that taxing lottery winnings won’t reduce the number of buyers because the winner will still get a huge return on her dollar of investment.
The bottom line is that that there is a Laffer curve for innovation – more appropriability increases innovation at first but innovation declines when appropriability extends too far. I agree with Boldrin and Levine that rent-seeking has put us on the wrong side of the Laffer curve for innovation. We need to reduce intellectual monopoly with patent reform, less copyright protection, and a greater use of patent substitutes like prizes. But unfortunately, when it comes to innovation there is no invisible hand theorem which moves us automatically to the top of the curve.