Category: Economics

Economists in the Media

by  Alex Tabarrok in

I am quoted on how economists are portrayed in the media:

It is the best of times. It is the worst of times. It is not uncommon, for example, to see critiques of economics in the media which are about as sophisticated as saying “look at those silly physicists who think that a bowling ball and a feather fall at the same rate.” Even people who should know better like David Suzuki say ridiculously, obtuse things when it comes to economics–perhaps for ideological reasons.

At the same time, the quality of the coverage of economics in the media is often excellent and has never been better. Greg Ip, David Leonhardt, Catherine Rampell, Adam Davidson, Stacey Vanek Smith, Cardiff Garcia, Megan McArdle all do superb economic commentary and reporting not just about the economy but about economics. And those are only the people off the top of my head, I could name many more.

The public also has access to top economists through the blogs and social media. I would count Paul Krugman, Tyler Cowen, John Cochrane, and Jeniffer Doleac in this category.

While some people claim that economics is out of touch or obsolete, economics passes the market test. Economists have never been more in demand. Designing new types of markets is a big part of the internet economy and computer scientists, followed by economists, are the leaders in this field. Google and Facebook run billions of dollars of auctions using what was once an obscure economic theory (Vickey-Clarke-Groves auctions). Google, Facebook, Uber and Airbnb all hire economists to better understand data and design new economic mechanisms. Even some online games like Eve Online are hiring economists to help to run virtual economies–one such economist, Yanis Varoufakis, went from a virtual economy to a real economy when he became Greece’s Minster of Finance.

If you want to understand the world and make it a better place there is no better degree than an economics degree because it is so versatile.

Has the wage-education locus for women been worsening?

by  Tyler Cowen in

That question is the focus of some recent research by Chen Huang.

Women’s labor force participation rate has moved from 61% in 2000, to 57% today.  It seems two-thirds of this change has been due to demographics, namely the aging of the adult female population.  What about the rest?  It seems that, relative to education levels, wages for women have not been rising since 2000:

I discover that the apparent increase in women’s real wages is more than accounted for by the large increase in women’s educational attainment. Once I condition on education, U.S. women’s real wages have not increased since 2000 and may even have decreased by a few percentage points. Thus, the locus of wage/education opportunities faced by U.S. women has not improved since 2000 and may have worsened. Viewed in that light, the LFPR decrease for women under age 55 becomes less surprising.

You can consider that another indicator of the Great Stagnation.

Raj Chetty is returning to Harvard

by  Tyler Cowen in

That is the word on Twitter.  Does he want grandchildren more than he used to?  You may remember my Conversation with him, a short while after he moved to Stanford:

CHETTY: So if you’re in your mid-30s, only something like a quarter or less of girls growing up in the Bay Area are married, and we show in our paper that every extra year you spend growing up in the Bay Area, you’re less likely to get married. I remember telling my wife, “I don’t think we need to worry. Our daughter will be fine in terms of earnings. It’s just that she might not be married if we move to California.”
COWEN: So, you’ve lowered your expectations for grandchildren?
CHETTY: Yes. [laughs]

*Blockchain and the Law*

by  Tyler Cowen in

The authors are Primavera De Filipp and Aaron Wright, and the subtitle is The Rule of Code and it is published by Harvard University Press.  I am sent many books on crypto and blockchains, but this is the one I feel is useful to an educated readership.  It’s not for specialists, but if you have a good general economics and also law background, as one would expect from MR readers, but don’t “get” crypto, this is the book-length treatment for you.  It sees merit and potential in crypto, without buying into any particular claim just for the sake of hype.

It is striking that crypto learning and debate really has not occurred through books much at all, nor in the mainstream media.  It has been through white and yellow papers, various on-line fora, Medium essays, Twitter, Reddit threads, and a variety of other venues.  I believe this is a paradigmatic example of how knowledge spreads these days and it should be studied very seriously as such, because it is the most extreme case of the new methods I know.

Towards An International Court of Smart Contract Arbitration

by  Alex Tabarrok in

Firms involved in international commerce routinely contract that disputes are to be resolved by private courts of arbitration such as the International Court of Arbitration, the London Court of International Arbitration or the Singapore International Arbitration Center. These courts of arbitration compete for clients and thus have an incentive to resolve disputes fairly, quickly and inexpensively. Courts compete, for example, to provide arbiters who are experts not simply in the law but in the relevant area of commerce. The New York Convention of 1958 says that private arbitration decisions will be enforced by the national courts of any of the 159 signatories; thus private arbitration leverages national enforcement but is otherwise not tethered to national law (e.g. in US see, Mitsubishi v. Soler Chrysler, National Oil v. Libyan Sun). Over time private courts of international arbitration have developed a system of law that transcends nations, an anational law–this is the new lex mercatoria.

I propose that courts analogous to the courts of arbitration that govern international commerce be created to govern smart contracts in virtual space. Arbitration of smart contracts will develop a new private law that will evolve to meet the needs of virtual commerce, a true lex cryptographia. At first, it might seem contradictory to advocate for courts of smart contracts and the development of lex cryptographia. Isn’t the whole point of smart contracts that no courts or lawyers are needed? Similarly, lex cryptographia is usually understood to refer to the smart contracts themselves–code is law–rather than to law governing such contracts. In fact, it is neither desirable nor possible to divorce smart contracts from law.

Smart contracts execute automatically but only simple contracts such as those involving escrow are really self-enforcing. Most contracts, smart or dumb, involve touchstones with the real world. Canonical examples such as the smart contract that lets you use an automobile so long as the rent has been paid illustrate the potential for disputes. Bugs in the code? Disputes over the quality of the car? What happens when a data feed is disputed or internet service is disrupted? Smart contracts applied to the real world are a kind of digital rights management with all of DRMs problems and annoyances.

Some of these problems can be dealt with online using decentralized mechanisms. But we don’t yet know which decentralized mechanisms are robust or cost-effective. Moreover, when marveling at the wisdom of crowds we should not forget the wisdom of experts. Nick Szabo once remarked that if contract law was suddenly forgotten it would take hundreds of years to recover the embedded wisdom. Contract law, for example, is filled with concepts like mistake, misrepresentation, duress, negligence and intention that are not easily formalized in code. Contract law is a human enterprise. And the humans who write contracts want law with terms like negligence precisely because these terms fill in for gaps which cannot be filled in and formalized in contracts let alone in code.

I am enthusiastic about smart contracts on blockchains. Smart contracts will significantly reduce transaction costs and thus let people create valuable, new private orderings. But it will be more profitable to integrate law and code than to try to replace law with code. Integration will require new ways of thinking. The natural language version of a contract–what the parties intend to agree to–may not map precisely to the coded version. Arbiters will be called in to adjudicate and thus will have to be experts in code as well as in law. Smart contracts can be made by anonymous parties who may want a dispute resolved not just privately but anonymously. Smart contracts can be designed with escrow and multisignatory authority so arbiters will also become decision enforcers. All of these issues and many more will have to be understood and new procedures and understandings developed. The competitive market process will discover novel uses for smart contracts and the competitive market process among arbiters will discover novel law. Law will adjust to business practice and business practice to law.

In short, the best way to create a vital new lex cryptographia is through competitive, private arbitration built on the model that already governs international commerce.

Yale Politic interview with me

by  Tyler Cowen in

I enjoyed this one, lots of real questions from Eric Wallach, not “tell us about your book” and the usual snoozefest.  Here is one bit:

So you like the idea of pardons– how do you work through that one?

I don’t even firmly believe that punishment is justified morally. Maybe it’s necessary, maybe you just can’t do without it.  But the mere fact that someone has wronged another, I don’t think causes them to forfeit their rights in the way that was claimed in classic, early modern political philosophy. Once you think wrongdoers still have their human rights, on what grounds do you punish them? Could be that you simply have to– either the public won’t accept another option and they would overthrow your non-punishment regime and bring in fascism, and something with a lot more punishment would come about.

I get that– I’m not saying you can just toss away the keys to all these jails. But insofar as you have options of not punishing people – who in the cases I’ve read about it seems they’re not going to go out there and continue their serial killing sprees – I think we just simply ought not to punish them. Martha Stewart, again, that seems to me a very clear case. Undo the wrong. If I were a president, I’d consider just only pardoning people and then resigning. I know I couldn’t get away with it forever, but it’s one way to think about the job.

There are other points of interest, new and interesting throughout.

Washington Metro Qatar markets in everything

by  Tyler Cowen in

Metro significantly relaxed its policies on extended hours for the Washington Capitals’ run to the Stanley Cup Final, including extending service for Thursday night’s series win without ever planning for any cash to change hands, WTOP has learned.

Since last summer, Metro has required a $100,000 deposit for each additional hour of service, and Metro suggested Wednesday that the Capitals’ parent company, Monumental Sports and Entertainment, would cover those costs for Thursday night’s game.

In fact, Thursday night’s extended service was part of a trade between the Caps and Metro that Metro valued at $100,000, Metro spokesman Dan Stessel said in an email…

Revised requirements issued last year normally call for the $100,000 deposit two weeks ahead of an event for each extra hour of service. Instead, Metro is billing each of the other groups that agreed to pay for the extended service for Capitals playoff games after the fact, Stessel said…

The bills being sent to those other groups — Qatar (via the Downtown BID), Comcast and Uber — will already include the discount for any fares paid during extended hours of service.

Here is the bizarre story, via Bruce Arthur.  For those of you who don’t get the joke, the D.C. Metro system shuts down too early relative to when many sporting events are likely to end.

From the comments, Vitalik Buterin

by  Tyler Cowen in

Analyst

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1. In retrospect, was it a good decision to have ethereum bytecodes executed on every single mining node? And if not, would he have selected sharding and plasma or a different solution?

2. How confident is he that transitioning to proof-of-stake will be successful? What are the risks of proof-of-stake?

Vitalik Buterin

I’ll answer this one here in detail because it’s probably too technical for it to be valuable to put a good answer into a Conversation with Tyler.

> 1. In retrospect, was it a good decision to have ethereum bytecodes executed on every single mining node? And if not, would he have selected sharding and plasma or a different solution?

Ultimately the answer is, yes given the knowledge we had at the time, no given what we know today. If I was doing Ethereum back then with the knowledge that I have today, I would obviously shoot straight for exactly the design that the research team is shooting for today (Casper PoS, sharding), and I would have actively encouraged developers to work on state channels and Plasma from day 1. Layer 1 scaling (sharding) and layer 2 scaling (state channels and Plasma) are complementary; gains from the two are multiplicative with each other, so it’s not a matter of A vs B, it’s A and B.

Ultimately, for a distributed validation system to work, you need to satisfy two properties:

1. There are enough (randomly sampled) nodes on average validating any given piece of data that invalid data will under no circumstances get through.
2. There are mechanisms that can ensure that if bad data *does* get through (eg. because of a 51% attack), then clients can detect this. In a sharded system, there is obviously too much data for clients to verify directly, but there are indirect approaches that can be used that can give equivalent assurances with some additional security assumptions (STARKs, fraud proofs, data availability proofs…)

> 2. How confident is he that transitioning to proof-of-stake will be successful? What are the risks of proof-of-stake?

Close to 100% confident that proof of stake is possible in principle; many chains are using (crappy versions of) it already. There’s obviously the question of how strong properties we can achieve with PoS though, and there are some edges of that that are still being worked out. The main risks that I see are (i) weird game-theoretic attacks on the specific design that we end up going with, and (ii) pool centralization.

IMO Satoshi’s PoW is really nice in part because of its sheer simplicity; the simplicity helps with decentralization because pretty much anyone can understand how it works, whereas traditional non-PoW consensus algos like PBFT are far more complex. Casper FFG was designed in part to replicate something close to PoW-style simplicity while still having the safety and liveness properties of traditional BFT consensus algos; and I’m obviously interested in minimizing complexity of the sharding design as well.

Here is the link, he offers several other “highly technical” answers in the comments.

My take on why Singapore works so well

by  Tyler Cowen in

That is the topic of my new Bloomberg column, of course I am considering only one small piece of a larger puzzle.  Here is one bit:

I view the development of Singaporean civil service culture as one of the world’s great managerial and political success stories of the last 50 years, though it remains understudied and underdiscussed in the West.

Singapore also mixes many of the virtues of both small and big government. The high quality of the civil service means the country gets “good government,” which pleases many liberals and progressives. The high quality of the decision-making means Singapore often looks to market incentives – congestion pricing for the roads is one example of many – which pleases conservatives and libertarians…

Is Singapore a small government or a big government country? The correct answer is both. Government spending is about 17 percent of GDP, which makes it look small and helps hold down taxes, which is good for business and productivity. (And there are no additional state and local governments.) But if you look at stocks rather than flows, the government owns shares in many critical Singapore businesses, plus it de facto controls lucrative sovereign wealth funds. The government claims ownership of the land, although it allows for active markets for transferring rights of use. All of these resources give the government the ability and credibility to get things done.

I even take on the chewing gum caricature…do read the whole thing.

MAGA?

by  Tyler Cowen in

US exports increased 14.4 percent from YTD April 2016 to YTD April 2018, from $725.8 billion to $830.5 billion.

US imports increased 16.5 percent from YTD April 2016 to YTD April 2018, from $886.2 billion to $1,032.3 billion.

Here is the source, via James Hohman.  You don’t have to credit Trump with much if any of that, the broader point is that, as I argued yesterday, the age of trade is hardly over.

The Economic Limits of Bitcoin and the Blockchain

by  Tyler Cowen in

From Eric Budish at the Booth School of Business at Chicago:

The amount of computational power devoted to anonymous, decentralized blockchains such as Bitcoin’s must simultaneously satisfy two conditions in equilibrium: (1) a zero-profit condition among miners, who engage in a rent-seeking competition for the prize associated with adding the next block to the chain; and (2) an incentive compatibility condition on the system’s vulnerability to a “majority attack”, namely that the computational costs of such an attack must exceed the benefits. Together, these two equations imply that (3) the recurring, “flow”, payments to miners for running the blockchain must be large relative to the one-off, “stock”, benefits of attacking it. This is very expensive! The constraint is softer (i.e., stock versus stock) if both (i) the mining technology used to run the blockchain is both scarce and non-repurposable, and (ii) any majority attack is a “sabotage” in that it causes a collapse in the economic value of the blockchain; however, reliance on non-repurposable technology for security and vulnerability to sabotage each raise their own concerns, and point to specific collapse scenarios. In particular, the model suggests that Bitcoin would be majority attacked if it became sufficiently economically important — e.g., if it became a “store of value” akin to gold — which suggests that there are intrinsic economic limits to how economically important it can become in the first place.

I like the framework of this paper, though I wonder if there shouldn’t be more on the coordination costs of mounting a “double spending” attack, namely how exactly the returns from the attack should be divided.  Perhaps the most positive scenario for Bitcoin is if those coordination costs rise with the returns to the attack itself, in which case a much higher market value for Bitcoin still might be stable.