Category: Economics

Tyler, you are always so optimistic.  But your own "dismal science" offers neither empirics nor analysis to back this attitude up.

The standard economic arguments about resources focus on the margin, while the real problem is infra-marginal.  Don’t be misled by all that talk of prices and substitution.  We are running out of resources and soon. 

Think about eating your beloved dark chocolate, Tyler.  Let’s say you have only four squares left of Lindt in the cupboard.  Yes, as you eat more the shadow price of each remaining square goes up.  Big deal.  You are still going to eat all the chocolate before dinner.  Economics tells us only that you will end up on the Pareto frontier, but that frontier still has some pretty miserable points.  We are about to approach them.  Who cares if prices mean that we meet our doom while equating private first-order conditions?  We are simply too voracious for the resources at our disposal.

Market signals and property rights do not work for the globe as a whole, unless you have monopoly ownership of the entire world (hmm…).   Property rights work best for local problems, such as fishing in a single lake or who should wash the dishes.  Private property won’t cure the problems of bad air, poisoned oceans, global warming, or the overall carrying capacity of the planet.  We will get doom, doom, and more doom.

The real question is empirical: are global demands for resources big enough so that the problem resembles you with your four squares of chocolate?  Yes.  The environment is toast, sooner or later and probably sooner.  And it is doomed precisely because capitalism is such a wonderful productive machine.  Do you really think you can fill the planet with so much rapacious human biomass without significant and indeed overpowering external effects?  Our only hope is that we all become plugged-in machines who don’t need much of an environment any longer.

It is true that resources prices have been falling, on average, for some time now.  But the Industrial Revolution is a remarkably recent development and we are just getting started.  Mankind’s current productive powers truly are unprecedented, a fact which you libertarians love to stress in other contexts, just not this one.

It would be mere luck if energy-saving technologies outraced nature-destroying ones.  And even if this were the case for a while, energy-saving technologies, in the long run, simply encourage us to raise our rapaciousness up another notch.  The infra-marginal becomes even more infra- than we ever dreamed.

Now let us get speculative.  Did I mention that in the economics of the future — once we are in exponential growth modes — the concept of price will hardly matter?  It will be more like an engineering problems where 10x of today’s gdp is produced every week, and we have to see whether this wrecks the globe in ten or rather twenty years’ time.  Don’t even bother recycling.  Furthermore all you futuristic nerds out there should downgrade the relevance of price theory, given the size of the changes you have in mind.

My parting shot: Maybe you think I am a pessimist.  But it probably is better if resource pessimism is true.  Life as a hunter-gatherer is still life.  And those Pygmies produced some pretty good vocal music.  If the price of energy were to keep falling, that would mean everyone could, within a few generations time, own the destructive power of a nuclear weapon in his or her iPod.  Now that’s scary.

As I have said in the past, Tyrone really is a pessimistic fellow.  If that dark chocolate is gone, it is usually because I ate it in advance, knowing he would otherwise steal my supply.  There are only so many cupboards in the kitchen, and Tyrone has learned all my hiding places.  And why didn’t I buy more at the store in the first place?  It is simple: I had to take Tyrone to his Zen Buddhism class; this sad sack doesn’t own a car.

Ed Leamer reviews Thomas Friedman’s The World is Flat.

When the Journal of Economic Literature asked me to write a review of The World is Flat, by Thomas Friedman, I responded with enthusiasm, knowing it wouldn’t take much effort on my part. As soon as I received a copy of the book, I shipped it overnight by UPS to India to have the work done. I was promised a one-day turn-around for a fee of $100. Here is what I received by e-mail the next day: “This book is truly marvelous. It is perhaps the greatest book ever written. It will surely change the course of human
history.” That struck me as possibly accurate but a bit too short and too generic to make the JEL happy, and I decided, with great disappointment, to do the work myself.

Don’t let the opening fool you, in the course of much fun at Friedman’s expense Leamer does a superb job of reviewing economic geography, trade theory, and recent economic history.  And lest you think he picks easy targets, Paul Samuelson and others come in for some knocks as well. 

Hat tip to Prashant Kothari at the Indian Economic Blog.

Take my son to the prom.  At $500 cash and $300 expenses, surely he is charming.

Housing is a special form of wealth…If its price falls after a bubble, the cost of consumption is falling at the same time as the amount of wealth. In fact, the country has become richer, because all the same real assets exist, but their replacement cost has fallen.

Also, since houses are mortgaged, the wealth loss is shared by household and banks, while the consumption cost gain is entirely to households. The real wealth of households will thus have risen, and consumption should increase (I am thinking that banks are owned by richer people, who save more). Am I right on this?

Here is the link.  Here is my previous post on this topic.  So is Eric right not to worry?

Here is the Slate summary, which includes a link to the paper.  Excerpt:

1) If a media outlet cares about its reputation for accuracy, it
will be reluctant to report anything that counters the audiences’
existing beliefs because such stories will tend to erode the company’s
standing. Newspapers and news programs have a visible incentive to
"distort information to make it conform with consumers’ prior beliefs."

2) The media can’t satisfy their audiences by merely reporting
what their audience wants to hear. If alternative sources of
information prove that a news organization has distorted the news, the
organization will suffer a loss of reputation, and hence of profit. The
authors predict more bias in stories where the outcomes aren’t realized for some time (foreign war reporting, for example) and less bias where the outcomes are immediately apparent (a weather forecast or a sports score). Indeed, almost nobody accuses the New York Times or Fox News Channel of slanting their weather reports.

Here is my earlier TCS piece on media bias.

Which markets do you feel are missing?  Your choice must be technologically feasible and not obviously ridiculous from the cost side.

Hooters Air is going out of business, but on the other hand the works of Brazilian guitarist Bola Sete are now widely available.  Markets in pre-ordered parking spaces are underway.  So I will nominate "simply paying the tiny but time-consuming library fines of people ahead of you in line (why don’t I?)."

List your wish in the comments, or tell us why someone else’s pick already exists.

Addendum: Yes a toilet lock is already on the market.

Second addendum: It is too easy to name illegal markets, instead try to spot entrepreneurial opportunities.

Surrogate motherhood meets globalization.

When Reshma gives birth next month in this small
Indian town, the newborn will be immediately handed over to its
biological parents, non-resident Indians who live in London and who
have been unable to bear a child on their own. In return for renting
her womb, Reshma will be paid $2,800 – a significant sum by Indian
standards.

…"These amounts are still nearly three times cheaper than what surrogacy in the UK would cost us," [the parents] say.

A little strange but I have a lot of respect for the surrogate mother and her husband:

"I have two cherubic children of my own," says
Reshma, who withheld her real name for fear of disapproval by
neighbors. "That couple has none. Imagine how much happiness this baby
will give them."

…Reshma’s husband Vinod – not his real name – says
his paltry $50 montly pay as a painter would not be enough to educate
his two children. He says the extra money will allow him to invest in
his children’s education and to buy a new home.

Thanks to Pablo Halkyard for the pointer.

Brad Setser points to Martin Wolf’s extensive powerpoint slides on the global economy.

• The first set covers financial flows to emerging economies and the crises of the past few years.
• The second
  covers emerging market (and central) financing of the US current
  account deficit and the global savings glut/ investment drought.
• The third covers Martin Wolf’s policy recommendations – his suggests for changing the international financial system. 

Libertarians usually point to government as the source of high taxes.  But in many developing countries it’s the family that is most taxing.   In his amusing account of a "year in Casablanca," The Caliph’s House, Tahir Shah recounts what happens when his workers lost their homes and moved into his palatial estate.

I began to witness firsthand the ancient employment system of the East.  It’s sometimes known as "living off Abdul’s job."  As soon as someone gets work, everyone else gives up their jobs and leeches off the employed member of the family.  The longer you are employed, the more money you need, merely to support the hangers-on.  Anyone with a nice home and full-time job has a vast cast of characters living off them.

Before there were governments there were families that taxed (see Schoeck’s classic Envy: A Theory of Social Behavior for "taxation" in primitive societies).  Creating a market economy is about much more than eliminating regulation.

Addendum: Michael Greenspan has another nice illustration from Rhodesia.

On TimesSelect:

I’m instinctively, emotionally pro-immigration. But a review of
serious, nonpartisan research reveals some uncomfortable facts about
the economics of modern immigration, and immigration from Mexico in
particular. If people like me are going to respond effectively to
anti-immigrant demagogues, we have to acknowledge those facts.

First,
the net benefits to the U.S. economy from immigration, aside from the
large gains to the immigrants themselves, are small. Realistic
estimates suggest that immigration since 1980 has raised the total
income of native-born Americans by no more than a fraction of 1
percent.

Brad DeLong reproduces more text, along with cosmopolitan commentary.  I would also stress the benefits of a relatively free and prosperous Mexico on our southern border.  The path is not without further bumps, but Mexico has turned the corner.  Without high immigration, remittances (second biggest "export," I believe), and the spread of liberal democratic ideas, Mexico probably would have been much worse off.  In the long run this will prove hugely beneficial to the United States, and of course to the rest of Latin America as well.

Tyrone wants to ask the cosmopolitan the embarrassing question: "At some margin immigration slots are scarce.  Why are we wasting them on relatively wealthy Mexicans?"

National self-interest may provide a partial answer.