Category: Economics

Why do intellectuals oppose capitalism?

This essay by the deceased Robert Nozick has a few years on it, but I never knew there was an on-line version. It is the best piece I know on why so many intellectuals oppose capitalism. See my earlier blog post on the inability of some researchers to find a single registered Republican within some departments of MIT and other universities (of course Republicans commonly fail capitalism but I suspect that is not the objection of the MIT faculty). With thanks to Cato, Newmarksdoor, and BrianMicklethwait.com.

Here is one excellent sentence of many:

“The intellectual wants the whole society to be a school writ large.”

Bhagwati criticizes the WTO

Read this on how the WTO is becoming a forum to regulate the behavior of the poorer nations, rather than bring free trade. Eminent trade economist Jagdish Bhagwati of Columbia University calls WTO a “sham,” and a “legal…straitjacket of do’s and don’ts…”

Here is a money quote:

“The developing countries are scared out of their wits now,” Bhagwati says, “because they don’t understand what they’re being forced to sign. The agreements are going way outside the trade issues and involve a helluva lot of things like your access to oil, your access to intellectual property and capital controls…. When I looked through the investment agreements, it was worse than reading my insurance policy for the fine print. I couldn’t make anything out of it, and I’m a reasonably informed person, a pretty smart economist as they go.”

Do you know what made you happy?

Nobel Laureate Daniel Kahneman is engaged in some fascinating work, read this summary:

“…the duration of an experience plays essentially no role when evaluating how well it becomes etched in our memories.

Kahneman believes the most direct way to evaluate experienced utility is to ask people how they feel at a certain moment, a notion he calls “moment utility.”…But because researchers are more interested in extended outcomes, more often the question they ask is memory-based: “How was it?” Kahneman said this is a different question that reflects the individual’s global evaluation of an entire episode in the past and it may not be a direct assessment of the individual’s real-time state. This “remembered utility,” said Kahneman, is not a very good guide when predicting outcomes. The “total utility” of a state is derived from the moment-based approach of measuring the real time pleasure or pain experienced by the individual.”

In other words, one of our selves does the living, another keeps the memories.

“”When people make decisions, the remembering self is in control, Kahneman explained. “We make our decisions in terms of our memories and basically, we maximize remembered utility, not the actual total utility,” he said. “The only thing we can learn to maximize through personal experience is remembered utility.””

And don’t you forget that.

Also read our earlier blog posts on whether people understand their own happiness, here, and here.

If Shemekia were Sally would she earn more?

Steve Levitt, recenty profiled in the NYT Magazine has written another amazing and sure to be controversial paper. Levitt and co-author Roland Fryer begin The Causes and Consequences of Black Names with some startling statistics on the racial divide in names. For example, “more than forty percent of Black girls born in California in recent years received a name that not one of the roughly 100,000 white girls born in California in that year was given.” Blacks are more segregated by name than are other races – the majority of Asians, for example, choose from the same name-pool as do whites. Segregation by naming has also increased over time. Prior to the late 1960s, for example, blacks and whites chose from the same name-pool to much greater degree than they do today.

Other studies have shown that when sent resumes identical but for name, employers more frequently ask for follow-up interviews with applicants who have stereotypical white names. Levitt and Fryer respond to these studies in two ways. The first response I find unconvincing. They argue that it is unlikely that a black name could have a big impact on earnings because “Once an employer has met a candidate in person, race is directly observable. A person’s manner of speaking, dress, interview responses and on-the-job performance no doubt provide far better signals of productivity than a name.” No doubt – but this is a rather facile interpretation of the audit studies. The point of these studies was not the literal one that employers discriminate on the basis of a person’s name! The point is that if employers use names to discriminate on race at the resume stage then they probably discriminate on race at every other stage in ways that are harder to identify.

Levitt and Fry have a more convincing but sure to be controversial response to this larger issue. They find that black names signal a variety of other characteristics that could plausibly be connected with lower labor productivity. Here is a key quote:

a woman with a BNI equal to one (implying a name that no Whites have) is 10 percentage points more likely to have been born to a teenage mother and 9 percentage points more likely to have been born out-of-wedlock than a Black woman living in the same zip code with the same age and education, but carrying a name that is equally common among White and Blacks. The woman with a Black name is also more likely to have been born in a Black neighborhood and to herself be unmarried.

In other words, names carry information even after the typical information available on a resume has been taken into account and the information that especially black names carry plausibly suggests lower productivity. It’s papers like this that explain why professors need tenure.

Do scientists know what makes you happy?

Tyler disagrees (see his entry below for more information) with Loewenstein on the implications of happiness research. It’s evident that the key figures also come to different conclusions on even simple policy questions. Consider the following quotes from the NYT Magazine article (written by Jon Gertner):

One experiment of Gilbert’s had students in a photography class at Harvard choose two favorite pictures from among those they had just taken and then relinquish one to the teacher. Some students were told their choices were permanent; others were told they could exchange their prints after several days. As it turned out, those who had time to change their minds were less pleased with their decisions than those whose choices were irrevocable.

Yet just a few pages we are told that Daniel Kahneman, recent Nobel prize winner and another key player in this field, “sees a role for affective forecasting on consumer spending where a ‘cooling off’ period might remedy buyer’s remorse.”

Do you know what makes you happy?

“You are wrong to believe that a new kitchen will make you happy for as long as you imagine.”

Conversely, a tense marriage or a trick knee will give you more agony than you think. But most things matter less than we think they will, an old theme from the seventeenth century French moralist La Rochefoucauld. There is a good deal of experimental evidence that we make these “happiness mistakes” time and again, failing to learn from experience.

So argues Daniel Gilbert, professor of psychology at Harvard, profiled in today’s New York Times Magazine (registration required). Daniel Kahneman, last year’s Nobel Laureate in economics (with Vernon Smith), once told me that time spent with friends, not new gadgets, is what people really enjoy.

Our brains are trying to regulate our behavior, not trying to make us happy. According to Tim Wilson,

“We don’t realize how quickly we will adapt to a pleasurable event and make it the backdrop of our lives. When any event occurs to use, we make it ordinary. And through becoming ordinary, we lose our pleasure.”

We systematically fail to realize how powerful our psychological defenses are, once those defenses become activated. But Gilbert suggests we might need these carrots and sticks to get things done, even if they are illusions.

George Loewenstein, an economist at Carnegie-Mellon, says

“…he [Loewenstein] 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.”

I buy the basic claims about happiness, but dispute the political conclusion. To the extent we should care about happiness, our imperative is to boost the rate of economic growth, strengthen Western civilization, and hope that Western-style institutions spread around the world. All of these mean a heavy reliance on markets, incentives, and the rule of law.

The mind of Paul Krugman

Here is an interview with Paul Krugman, talking for the left-wing audience of LiberalOasis and thus, believe it or not, less restrained than usual. Here is one revealing bit, talking about the United States post-9/11: “I felt for a little while there like I was all alone, [that] they’re all mad but me.”

He also uses the phrase “My finest hour” is a non-ironic way, when speaking of the California energy crisis.

He talks about his new book The Great Unraveling: Losing Our Way in the New Century as well. I will offer some comments once my copy arrives.

Restaurant economics

It has long been a puzzle why certain commodities receive a higher “mark-up” than others. Why is popcorn so expensive at the movie theater? Why is wine so expensive in fine restaurants?

Daniel Boulud, one of New York’s leading chefs (Daniel, Cafe Boulud, and DB Bistro Moderne), addresses this question in his recent memoir Letters to a Young Chef. Boulud tells us that wines make up 30 percent of revenue in his restaurants and have a mark-up of two to three hundred percent.

John Lott and Russ Roberts (yes, that is the John Lott) once raised the possibility that a high drinks price is a way of charging those people who wish to linger at the table longer. Boulud offers another explanation based on price discrimination. He (p.62) claims that drinkers of fine wine are “a great clientele,” and are “willing to indulge.” They will expect “only the finest ingredients,” such as good truffles, and are willing to pay for them. By offering these people fancy wines at high prices, you induce them to pay a higher net price for their meal. At the same time you need some acceptable, cheaper wines: “Those [other] customers are your future and you cannot afford to drive them away with the sticker shock of a Greatest Hits wine list.”

Boulud also claims that good restaurants are well-situated to invest profitably in wine, thus the special importance of wine for revenue.

The book contains many kinds of advice. Keep your knives sharp, we are told, and if you want to make other chefs happy, serve them a pig’s head, not caviar.

Will Vouchers Split the Democratic Party?

The debate so far Tyler 1, Alex 1, Tyler 2.

Let me take Tyler’s weakest point first. He writes, “Imagine politicians upping the voucher amount and coverage to win votes each election cycle…” What like education spending is not a political issue today? In fact, over the past several decades we have doubled real per-capita spending on schooling with zero increase in productivity. It’s possible that government would set an education voucher at too high an amount (but let’s get it above zero before we worry about this!) but at least we will get something for our money.

Defining an acceptable school is a legitimate issue but one that we already face today with private schools, charter schools, and home schooling. I see no reason why private schools under a voucher system could not be regulated as private schools are today. Private schools do face some minimal regulations including hours and some content requirements but I don’t think these have been a significant constraint. Some private schools will undoubtedly teach nonsense but Tyler seems to forget that Ebonics, to give just one example, was a creature of the public schools not the private schools.

I will agree, however, that current voucher plans are typically terrible. Existing vouchers are often limited to poor students and sometimes just to poor students in “failing” schools, the voucher amounts are typically low and to add insult to injury it is often illegal to add-on to the voucher amount (a type of price control). Finally, nowhere near enough students are suported. The DC plan, for example, is aimed at some 2,000 students in a school system of 66,000.

I recommend John Merrifield’s School Choices: True and False as an antidote to this kind of limited thinking. Merrifield’s bottom line is that we need a system under which the government in no way discriminate against parents who send their children to private schools.

Being a collector is cheaper than you think

“…80 percent of the lots Christie’s sell go for under $8,000.” From the Thursday New York Times (registration required), and why couldn’t an editor improve the grammar in that sentence? The median lot at Sotheby’s sells for $4,177, at Christie’s South Kensington, a branch, the median lot sells for $2,259. More than ever before, collecting is no longer the exclusive province of the wealthy.

Why I worry about vouchers

Alex (my co-blogger) and I have been arguing for years, it is perhaps no surprise that now we do it in the blogosphere. He is more optimistic about the performance of school vouchers than I am. He notes that housing vouchers have worked well, better than government housing, I think that school vouchers are more problematic than housing vouchers for several reasons:

First, government must define which schools are acceptable recipient of vouchers. In the short run it is fairly clear, it is far less so if we have vouchers in place for twenty years and schooling evolves. What about schools that teach black supremacy? Radical Islam? Creationism? Remember how controversial a few supposedly obscene NEA grants were? Not all those grants went directly to the artists either. What if an educational program involves home schooling plus ten hours of class time a week? Would that qualify for a voucher? Defining “suitable housing” does not involve a problem of nearly this magnitude.

Second, school vouchers could become the new middle class entitlement, as I mentioned in my New Zealand post earlier today. Imagine politicians upping the voucher amount and coverage to win votes each election cycle, just as they are now extending senior health coverage to prescription drugs. Again, we have not seen this with housing vouchers but “parents” are a much bigger and stronger constituency.

If I had my finger on the vouchers button, I would press it and allow experimentation at the state and local levels. So many American urban public schools are a disgrace. But few partial deregulations have worked better than promised. Most have created perverse incentives and occasioned considerable backlash, we all know that electricity “deregulation” has been a mixed bag at best, although the idea in principle makes sense.

If we are going to move forward with vouchers, I would like to know what the plan will look like, once it gets through the political meatgrinder. I don’t know any voucher proponent who has done this.

How rich are you, globally?

If you earn $36,000 per year, you are in the top one percent of our planet, for a more comprehensive look at your relative status, check out the Global Rich List, don’t use commas when you type in your yearly income. Their stated goal is to encourage charity and make us feel happy about how rich we are, in reality I think they are trying to make us feel guilty about how rich we are. They don’t mention the policies and cultural attitudes that created this wealth.

The reference is from the blog of John M Scalzi.

Addendum: Donald Sensing tells us much more about the genesis and meaning of the list.

“Blame Sarbanes-Oxley”

Peter Wallison, in today’s Wall Street Journal (registration required, and yes you have to pay), serves up a biting critique of Sarbanes-Oxley, the recent legislation aimed at limiting conflicts of interest within corporations.

Here is a key passage:

…this was a wholesale change in the governance of American corporations, putting significantly more authority into the hands of independent directors and correspondingly reducing the power of corporate managements…it may have had unintended consequences – a reluctance of managements to take the risks and make the investments that had previously brought the economy roaring back from periods of stagnation or recession…The independent directors of a company are part-timers…Unfamiliarity in turn breeds caution and conservatism…They [directors] have little incentive to take risk and multiple reasons to avoid it.

There is not much more to the Op-Ed than that, no real facts, but this is an important point. Passing Sarbanes-Oxley was a kneejerk reaction from a Congress that felt the need to do something, anything, about corporate scandals. The Senate voted for it 99-0 (only a few negative votes in the House), never a good sign, unanimous votes often mean that an angry and uninformed public opinion rules the day. Time will tell what costs we will pay for this mistake.

Here is a small bit on implementation costs, but keep in mind they are secondary to the question of how investment gets distorted. I realize that corporate insiders are not the ones to trust here, but they don’t like the law either.

Let’s accept the fact that corporate governance isn’t always fair, and opt for the system that does the best job of delivering the goods.

Addendum: Here is a direct link.