The Lively and Logical Logic of Life

Boredom drives a lot of academic research.  After you’ve studied a subject for decades, it isn’t much fun to keep repeating the standard lessons, so you mischievously start looking for counter-examples and loopholes.  Unfortunately, when the mischievous academic talks to a broader audience, he often leaves the impression that the standard lessons are a waste of time.  Frankly, I think that a lot of recent popular economics books fall into this trap.

Tim Harford’s The Logic of Life is a welcome antidote.  Harford argues that the standard economic assumption of human rationality usually works.  In fact, it works in a lot of cases where you might think it doesn’t.

The best example in chapter 1 is condom use by Mexican prostitutes.  It’s easy to say "A prostitute would have to be a brain donor not to use a condom every time."  But Tim demurs.  By bargaining about condom use, instead of using every time, prostitutes raise their income by about 25%.  Still not worth it?  Think again:

In fact, the prostitutes know that while the risks are real, they are modest.  Only one in eight hundred Mexicans carries HIV, and even among prostitutes it afflicts just one in three hundred.  Even if a prostitute is unlucky enough that one of her unprotected jobs is with a man who is HIV positive, the risk that she will catch it is less than 2 percent if one of them is carrying some other sexual infection, and less than 1 percent otherwise…

As far as we can tell, the typical Morelian prostitute is acting as though she valued one extra year of healthy life at between fifteen thousand and fifty thousand dollars or up to five years’ income.

Tim may sound like a typical insensitive economist in this quote, but he’s firmly in the Alan Blinder "hard heads, soft hearts" tradition:

[A] rational world is not necessarily a wonderful one… Rational individuals can make choices that are bad news for others; risky sex is just a particularly clear example.  And when rational individuals face a miserable set of choices, as do the Morelian prostitutes, they cannot do better than pick the best of a bad lot.  We will not solve social problems if we pretend that they are caused only – or even mostly – by the mad, the stupid, and the morally degenerate.

As an academic, I’m tempted to immediately highlight a counter-example.  Morelian prostitutes value a year of healthy life at up to five times their annual income.  But what about Levitt and Dubner’s drug dealers who risk their necks for minimum wage?  Aren’t they irrational?

But for now, I’m going to resist the temptation to dwell on counter-examples.  You’ve got to learn to walk before you can learn to run.  And you’ve got to understand rational explanations for human behavior before you can understand irrational explanations.  The Logic of Life may well be the best introduction to the rational choice approach on the market.  Even better, it’s well-written enough to inspire even jaded academics to get back to basics.   Bravo, Tim.

The Movie Review Index Fund

Index funds are one of the most important practical spin-offs of academic economics. If fund managers are unable, on average, to beat the market index, why not just buy-and-hold the market index, saving transactions costs? Millions of people have profited from this insight.

If you like movies, an analogous tool is available at Instead of posting a review of a new movie, tabulates ALL the reviews of ALL the new movies, and archives them forever. I have used this tool for a couple years, and find that – unlike individual reviewers – this “index fund” of reviewers is amazingly informative. For example, based on today’s post, I’m going to try to talk my wife out of seeing The Village and into seeing The Manchurian Candidate. (Aside: If you haven’t seen the original, you must!)

Good as this index fund is, I do have three caveats:

1. Comedies are systematically under-rated. If half of a comedy’s reviews are positive or mixed, it is probably worth seeing.

2. If any review contains the words “measured pacing,” the movie is probably over-rated. I’d only go if the reviews are 80% positive.

3. Contrary to popular stereotypes, action movies are not graded more harshly. Lots of action movies get great reviews. The Bourne Supremacy, for instance, got 11 positive, 0 mixed, 1 negative.

Gratitude Journals and Loewenstein’s Challenge

Background: George Loewenstein is one of the leading figures in Economics and Psychology.

While walking in Pittsburgh one afternoon, Loewenstein tells me that he doesn’t see how anybody could study happiness and not find himself leaning left politically; the data make it all too clear that boosting the living standards of those already comfortable, such as through lower taxes, does little to improve their levels of well-being, whereas raising the living standards of the impoverished makes an enormous difference. (full story)

Of course, you don’t need Loewenstein to make this point. You could just listen to my favorite song by Johnny Cash, featured in the so-good-it-hurts soundtrack for Kill Bill, Volume 2:

How many times have
You heard someone say
If I had his money
I could do things my way

But little they know
That it’s so hard to find
One rich man in ten
With a satisfied mind

Money can’t buy back
Your youth when you’re old
Or a friend when you’re lonely
Or a love that’s grown cold

The wealthiest person
Is a pauper at times
Compared to the man
With a satisfied mind

The answer to Loewenstein’s challenge can be found in the growing psychological literature on gratitude. Several interesting experiments (like this one) ask subjects to keep a “gratitude journal.” Main idea: Every day, write down things you are grateful for. Depending on the experiment, control groups either do nothing, or keep an “ingratitude” diary, or write down a random childhood memory. The main finding is that keeping a gratitude journal makes people happier than the other treatments.

So what? Almost all redistributive rhetoric urges people to dwell on the negative – you or other people aren’t getting what is due. This in turn makes people want to “do something” about the problem. And you can rest assured that no matter how much redistribution there is, egalitarians will never say “OK, life’s fair now. We’re done complaining.” No, what they foster is literally a lifestyle of ingratitude – a recipe for unhappiness.

If we really want to make people happier, we would do almost the opposite. Tell people to be grateful for what the market gives them, and try to emulate more successful people instead of envying them. Children hear this all the time, and it is damn good advice. Adults should practice what they preach.

Paul Krugman, Guilty Pleasure

There are lots of good reasons to be annoyed with Paul Krugman. (Like here, here, and here). But as a cock-eyed optimist, I’m very happy to have him around. Think about it: The world’s most famous left-wing economist:

1. Blames European unemployment on labor market regulations that hold wages above the market-clearing level. (The Accidental Theorist, Part 1)

2. Publicly and articulately advocates free trade without hemming or hawing. (Pop Internationalism)

3. Identifies anti-globalization activists as the enemies of the world’s poor. (The Accidental Theorist, Part 3)

4. Titles an essay “In Praise of Cheap Labor: Bad Jobs at Bad Wages Are Better than No Jobs at All” (The Accidental Theorist, Part 3)

5. Points out that if you oppose Big Government, you should favor cutting Social Security, Medicare, and other popular programs. (“The Lost Fig Leaf”) Sure, he’s hoping to scare us away from libertarian rhetoric, but there’s no use running away from the truth.

Yes, he’s been slipping. And it’s tiring to hear an economist so much more successful than me prattling about equality! I don’t begrudge you your publications, Paul, why can’t you let Bill Gates, Monty Burns, and Scrooge McDuck count their billions in peace?

Still, I can’t imagine Paul Samuelson doing any of the above, much less Galbraith. At least in economics, the intellectual climate hasn’t been as good as it is now for a century.

Nerd Pride

The word “nerd” appears to have been coined in 1950 by none other than Dr. Seuss. From the webpage of Eric Raymond:

nerd: n.

1. [mainstream slang] Pejorative applied to anyone with an above-average IQ and few gifts at small talk and ordinary social rituals.

2. [jargon] Term of praise applied (in conscious ironic reference to sense 1) to someone who knows what’s really important and interesting and doesn’t care to be distracted by trivial chatter and silly status games. Compare geek.

The word itself appears to derive from the lines “And then, just to show them, I’ll sail to Ka-Troo / And Bring Back an It-Kutch, a Preep and a Proo, / A Nerkle, a Nerd, and a Seersucker, too!” in the Dr. Seuss book If I Ran the Zoo (1950)… How it developed its mainstream meaning is unclear, but sense 1 seems to have entered mass culture in the early 1970s (there are reports that in the mid-1960s it meant roughly “annoying misfit” without the connotation of intelligence.

When I was a kid, no one wanted to be a nerd. Nowadays, though, nerds are “out of the closet.” People (well, guys) are proud to be nerds. Is this just part of the nerd life cycle – unpopular at 10, proudly nerdy at 33? I very much doubt it. Nerds of my dad’s generation (like, say, my dad!) wanted to fit in with regular folks, not embrace their nerdity.

Why the change? Alex Tabarrok attributes it to the rising education premium. The ratio of nerd to non-nerd earnings has gone up, and the group’s status has risen along with it. This is probably part of the reason, but I primarily credit the Internet. Communication, not economic success, is the foundation of group identity. Lots of non-nerdy sub-cultures have profited from the free-fall in the cost of social interaction. But in contrast to most other sub-cultures, nerds are virtually 100% computer literate. The Internet has been the One Ring of nerddom.

In case you haven’t guessed, yes, I consider myself a nerd. I’m such a nerd that I worry that my sons will fail to embrace their nerd heritage. The best game show in history, Beat the Geeks, began by asking each contestant “What’s the geekiest thing about you?” I still wish I could have been a contestant just to give my response:

“I am the Dungeon Master for an all-economists’ Dungeons and Dragons game.”

Beat that, geeks!

The Eye of the Needle

“If I could have the answers to five questions in political science/sociology, the appeal of Stalinism to intellectuals would be one of them,” wrote Tyler not long ago. There are few statements, in my judgment, that shed more light on his question than the following passage from the diary of Joseph Davies, US Ambassador to the USSR from 1936-38. (His diaries were later published as Mission to Moscow).

Davies freely admitted that Stalin was guilty of massive atrocities, but admired him anyway for his good quasi-Christian intentions. I kid you not:

Both Germany and Soviet Russia are totalitarian states. Both are realistic. Both are strong and ruthless in their methods. There is one distinction, however, and that is as clear as black and white. It can be simply illustrated. If Marx, Lenin, or Stalin had been firmly grounded in the Christian faith, either Catholic or Protestant, and if by reason of that fact this communistic experiment in Russia had been projected upon this basis, it would probably be declared to be one of the greatest efforts of Christian altruism in history to translate the ideals of brotherhood and charity as preached in the gospel of Christ into a government of men… That is the difference – the communistic Soviet state could function with the Christian religion in its basic purpose to serve the brotherhood of man. It would be impossible for the Nazi state to do so. The communistic ideal is that the state may evaporate and be no longer necessary as man advances into perfect brotherhood. The Nazi ideal is the exact opposite – that the state is the supreme end of all. (Journal entry, July 7, 1941)

This all makes me very glad that Liberation Theology did not come along earlier. A Christian Marxism would have fared far better with the common man.

On the Contradictions of the People

Larry Bartels has gotten national attention for his work on Bush’s income tax cut, inheritance tax cut, and public opinion. (Here is the full article; here is the digest version; here is what Alex Tabarrok had to say about Bartels). Bartels’ main point is that public opinion verges on contradictory: the public believes that inequality has gone up, agrees that inequality is bad, agrees that the rich should pay more taxes, BUT still supports two tax cuts that mostly benefit the rich.

Bartels is right, although since I belong to the tiny minority of people who favors however much inequality the free market delivers, for once I have to celebrate the public’s folly.

What Bartels does not seem to realize, however, is that the contradiction he laments is only one of many. Here are a few more:

1. Spending. The public wants less total government spending. In the 1996 General Social Survey, for example, here were the public’s views on cutting government spending:

Strongly in Favor of 40%
In Favor of 41%
Neither in Favor nor Against 10%
Against 4%
Strongly Against 2%
Don’t Know/No Answer 3%

However, the public also opposes cuts in virtually every kind of government spending except for foreign aid! Browse any of the numbers at the GSS webpage by clicking on “subject,” then “spending.”

2. Regulation. The public leans strongly toward less government regulation of business. From the 1996 GSS:

Strongly in Favor of 15%
In Favor of 33%
Neither in Favor nor Against 31%
Against 14%
Strongly Against 3%
Don’t Know/No Answer 3%

But the public is favorable toward virtually all particular forms of regulation. Browse any of the numbers at the GSS webpage by clicking on “subject,” then “economy.”

3. Welfare. 64% believe we spend too much on welfare, according to the excellent National Survey of Public Knowledge of Welfare Reform and the Federal Budget. But only 26% are willing to actually enforce a 2-year limit if welfare recipients would have to take a “low wage that would make it difficult to support a family.” Just 16% favor cutting off benefits to a person who is “unable to get a job” (whatever that means).

Since low-wage jobs are the only ones that former welfare recipients are likely to get (and who should do low-wage jobs, if not former welfare recipients?!), the public is in a quandary. It wants to spend less, but as a practical matter is unwilling to kick anyone off the rolls. In fact, the public heavily favors not only job training, but guaranteed government jobs/community service when the deadline runs out. Yea, that’ll save a lot of money.

The big lesson is that public opinion is not just wrong, but downright silly. On balance, the leftists who hate the Bush tax cuts should be thankful. If the public started being logical, we could easily see spending cuts, deregulation, and American citizens “forced” to take the “demeaning” jobs currently done by illegal immigrants. As Eric Cartman would say, “Sweeeeeeet!”

Whittaker Chambers and the Idea Trap

Alex Tabarrok assures me that one of my most under-rated papers is “The Idea Trap,” published in the June 2003 issue of the European Journal of Political Economy. In this paper, I set up a simple political-economic model with three variables: growth, policy, and ideas. The model is governed by three “laws of motion.” The first are near-tautologies:

1. Good policies cause good growth.

2. Good ideas cause good policies.

The third law is much less intuitive:

3. Good growth causes good ideas.

The inspiration for law #3 was my empirical finding that people with high income growth “think more like economists.”

These assumptions have an interesting implication: there exist “multiple equilibria” – one where growth, policy, and ideas are all good, and another where growth, policy, and ideas are all bad. I call the later “the idea trap,” because bad ideas sustain bad policy, bad policy sustains bad growth, and bad growth reinforces bad ideas. Implausible? Think about any of the world’s economic/political basket cases. How often do the people in those countries admit that their worldview is a failure, and humbly turn to their more successful neighbors? Not often. Or consider: When do crazy demagogues get the most serious hearings? In most cases, when a country is already going down the drain.

In any case, I was recently reading Whittaker Chambers’ Witness, and noticed that his story about communist conversions is directly relevant to my model:

[A] man does not, as a rule, become a Communist because he is attracted to Communism, but because he is driven to despair by the crisis in history through which the world is passing… In the West, all intellectuals become Communists because they are seeking the answer to one of two problems: the problem of war or the problem of economic crisis.

Think about the inter-war period. The problems of war and economic crisis loom large. So what happens in the world of ideas? People flock to a new viewpoint almost guaranteed to make both problems vastly worse! The effects of Communism on economic crisis are all too familiar: famine, chaos, slave labor camps. And of course any country that might go Communist is going to have a lot of trouble retaining domestic capital, much less attracting foreign investors.

The effect of Communism on war is less direct, but the history is pretty clear. The rise of Communism greatly increased the demand for Fascism in Italy and Nazism in Germany. By terrifying people, the Communists convinced many to hold their noses and support brutal dictatorships as an alternative. And by allying with Hitler against Poland in 1939, Stalin made Communism the junior sponsor of World War II.

My take:
Bad ideas launched the bad policies of World War I, which in turn devastated Europe. The devastation in turn made people like Chambers embrace even worse ideas, leading to even worse policies, culminating in World War II. The only thing that surprises me is that the world ever recovered… but then again, in my model escapes from the idea trap are supposed to be random surprises.

The Freedom of a Confucian

The great free-market economists and libertarian philosophers of China were not Taoists, but Confucians, according to Auburn University philosopher Roderick Long. I often say that I never doubted the value of history of thought until someone tried to convince me of it, but Long’s “Rituals of Freedom: Austro-Libertarian Themes in Early Confucianism” Journal of Libertarian Studies 17(3) is an amazingly interesting and learned paper. It is true, Long admits, that the Taoists have a few grand libertarian passages. The favorite from Lao-tzu has to be:

The greater the number of laws and restrictions,
the poorer the people who inhabit the land.
The sharper the weapons of battle and war,
the greater the troubles besetting the land.
The greater the cunning with which people are ruled,
the stranger the things which occur in the land.
The harder the rules and regulations,
the greater the number of those who will steal.
The sage therefore does not contrive,
in order to bring about reform,
but teaches the people peace of mind,
in order that they might enjoy their lives.

Tao Te Ching Section 57

Unfortunately, Long points out, a much stronger theme in Taoist is primitivist hostility to modern civilization. Listen to Lao-tzu describe the Taoist utopia:

Lessen the population. Make sure that even though there are labor saving
tools, they are never used. Make sure that the people look upon death as a
weighty matter and never move to distant places. Even though they have
ships and carts, they will have no use for them. … Make sure that the
people return to the use of the knotted cord [in lieu of writing]. … Then
even though neighboring states are within sight of each other, [and] can
hear the sounds of each other’s dogs and chickens … people will grow old
and die without ever having visited one another.

In contrast, Long finds much of value in the Confucians:

The early Confucians, by contrast, may not be as radical in
their anti-statism as the Taoists, but in my estimation they make up for this flaw by firmly
yoking their anti-statism to the cause of civilization, commerce, and the Great Society;
their overall program thus looks a lot more like contemporary libertarianism than the
Taoist program does. One Confucian text, while noting approvingly Laozi’s hostility to
despotism, sharply criticizes Laozi for wanting to “drag the present age back to the
conditions of primitive times and to stop up the eyes and ears of the people”; the best
ruler instead “accepts the nature of the people,” which is to long for “beautiful sounds
and forms,” “ease and comfort.”

The highlight of Long’s article is his discussion of the Sima Qian (c. 145-85 B.C.). Almost two thousand years before Adam Smith, Qian opined that “Wealth and currency should be allowed to flow as freely as water!” and had arguments to defend his position. And who said that Chinese intellectuals had no appreciation for the merchant class? Few Western thinkers match Sima’s appreciation of entrepreneurship:

These, then, are examples of outstanding and unusually wealthy men.
None of them enjoyed any titles or fiefs, gifts, or salaries from the
government, nor did they play tricks with the law or commit any crimes to
acquire their fortunes. They simply guessed what course conditions were
going to take and acted accordingly, kept a sharp eye out for the
opportunities of the times, and so were able to capture a fat profit. …
There was a special aptness in the way they adapted to the times …. All of
these men got where they did because of their devotion and singleness of
purpose. … [T]here is no fixed road to wealth, and money has no
permanent master. It finds its way to the man of ability like the spokes of
a wheel converging upon the hub, and from the hands of the worthless it
falls like shattered tiles. … Rich men such as these deserve to be called the
“untitled nobility” …

Murray Rothbard praised Sima in his history of economic thought, but Long notes that he neglected to mention that he was a Confucian!

It is hard to read this piece and not stand in awe of Long’s command of the Chinese literature. This is a body of thought comparable to Western philosophy in its intricacy and depth. Even if you couldn’t care less about Chinese proto-libertarians, this article exemplifies the true meaning of scholarship. And so the Sage says: check it out!

Terror Betting Markets and the 9/11 Commission

Remember “terrorism betting markets”? The program was killed one day after it made headlines – so much for democratic inertia! Opponents plausibly argued that these markets made terrorism pay. According to a press release by Senators Wyden and Dorgan:

Terrorists themselves could drive up the market for an event they are planning and profit from an attack, or even make false bets to mislead intelligence authorities.

Of course, you hardly need terrorism betting markets to make money from terrorism; all you need to do is short the stocks of firms that will be adversely affected (say… airlines?). So if betting on terrorism scares you, you should still be scared! But before you start losing sleep, check out the findings of the 9/11 Commission. They find no evidence of 9/11-related stock market manipulation. Here are the two key passages:

There also have been claims that al Qaeda financed itself through
manipulation of the stock market based on its advance knowledge of the 9/11
attacks. Exhaustive investigations by the Securities and Exchange Commission,
FBI, and other agencies have uncovered no evidence that anyone with advance
knowledge of the attacks profited through securities transactions. (pp.171-2)

Highly publicized allegations of insider trading in advance of 9/11 generally rest on reports of unusual
pre-9/11 trading activity in companies whose stock plummeted after the attacks. Some unusual trading did in fact
occur, but each such trade proved to have an innocuous explanation. For example, the volume of put options–
investments that pay off only when a stock drops in price–surged in the parent companies of United Airlines on
September 6 and American Airlines on September 10–highly suspicious trading on its face. Yet, further investigation
has revealed that the trading had no connection with 9/11. A single U.S.-based institutional investor with no
conceivable ties to al Qaeda purchased 95 percent of the UAL puts on September 6 as part of a trading strategy
that also included buying 115,000 shares of American on September 10… The SEC and the FBI, aided by other agencies and the securities industry, devoted enormous
resources to investigating this issue, including securing the cooperation of many foreign governments. These
investigators have found that the apparently suspicious consistently proved innocuous. (p.499)

It is worth pointing out that even if the 9/11 Commission had found evidence of a terror/stock market connection, there would still be almost no case against the original plan for terrorism betting markets. The maximum bet was under $100. I like the economic theory of suicide as much as the next economist, but I still can’t imagine any would-be terrorist changing his mind over a Benjamin.

Thanks to my colleague and terrorism betting market lightning rod Robin Hanson for the 9/11 pointer. See also Alex’s short piece In Defense of Prediction Markets, kindly made available by Mahalanobis.

Evolution in One Lesson

Graham Bell may well have written the best book on evolution since The Selfish Gene. Most works on evolution are either overly speculative or incomprehensible to anyone without a degree in chemistry. Bell’s Selection: The Mechanism of Evolution hits a perfect middle ground, inter-weaving 175 central lessons of evolution with fascinating experimental details. Did you know that biologists have deliberately tried to breed the biggest mice on earth? It only took 35 generations to increase average weight by 7 standard deviations, from 25g to 43 g.

Selection reads like a well-organized treatise on intermediate microeconomics. It begins with the “Crusoe economics” of biology: asexual organisms. We can illustrate the basics of evolution using simple RNA viruses, and there are plenty of experiments that do so. If you want to increase the speed of reproduction, for example, all you have to do is put your RNA viruses in a resource-rich environment, and evolution does the work. After laying these building blocks, Bell branches out to more complex cases: selection on several characters, social selection, sexual selection.

Like a lot of good economics, Bell’s lessons are obvious upon reflection, even though few of us could have figured them out on our own. Here is a simplified version of one of his thought experiments on the advantages of sex:

Suppose there are three equally important genes. Designate the more fit allele + and the less fit allele -. You start with the following two strains: +– and -++. In an asexual reproduction, the -++ strain takes over, because it has two + genes and its rival only has one +. But with sexual reproduction, one-eighth of the offspring of the two strains are +++. The future is theirs.