Daniel Drezner and Jean Buridan

Daniel Drezner remains on the fence, concerning the next Presidential election.

He writes about supporting Bush, Kerry, or perhaps a third party candidate (unlikely). But why should he restrict himself to “pure strategies”? Why can’t he support some candidate with some positive probability? How about, for instance, “I support Bush with p = 0.63.” Or “I support Kerry with p = 0.57”, and so on. That way we would know how strong (or weak) his current view is.

We could interpret those p’s in several ways. First, it could be Dan’s current estimate of where his final support will end up. Second, it could be a general measure of expected relative enthusiasm for the candidates.

It is not enough to make up your mind, you should also give the world some sense of your confidence in such judgments. And “Bush with p = .50000001” is a very different story than “Bush with p = .997”. (As an aside, note a potential paradox of voting. How many meta-rational voters, aware of their own fallibility, can justifiably believe that their error-prone participation will improve the final outcome?)

Then a question arises. Once you are playing around with these p’s, you don’t need to have a final point of view at hand. You will have some “p” right now.

Dan writes: “This year I can’t muster even the tiniest amount of enthusiasm for any candidate.” Fair enough, but why not give us a number?

What about me?

Alex is precluded by the Constitution, so can I go with “Dan with p = 0.73”? He is photogenic, and could handle both economics and foreign policy.

Addendum: I enjoy asking people the mischievous question “with what probability do you believe in God?” It is amazing on one hand what strong opinions people have on religion, and on the other hand how ill-prepared they are to come up with an actual number.

Markets in everything

Price a Chilean cemetary charges for an alarm built into coffins to ensure against mistaken live burial: $462

That is from Harper’s Index, in the latest issue of Harper’s. Here is a related link.

Here is some evidence on the likelihood of being buried alive.

The Italians take things further, albeit at a higher price:

In 1995 a $5,000 Italian casket equipped with call-for-help ability and survival kit went on sale. Akin to bleeping devices which alert relatives to an elderly family member’s being in trouble, this casket is equipped with a beeper which will sound a similar emergency signal. The coffins are also fitted with a two-way microphone/speaker to enable communication between the occupant and someone outside, and a kit which includes a torch, a small oxygen tank, a sensor to detect a person’s heartbeat, and even a heart stimulator.

What I would want: Satellite radio, Spenser’s The Faerie Queene, and a cell phone with a good battery.

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!”

Common sense on antitrust

It is hard to improve on the words of Richard Epstein. He tells us that antitrust law should be directed against cartellizing behavior, not unilateral business practices designed to gain competitive advantage:

One theoretical social response to cartels would be to follow the libertarian line that treats them as ordinary contracts to be enforced against private defection. At this point, the only relief comes from new entry – unless the cartel extends its reach to include them as well. Unhappy with this response, the traditional common law refused to enforce cartel agreements in the hope that a healthy dose of cheating will lead the cartel to crumble. The antitrust laws turned up the heat by exposing members of cartels to criminal sanctions and, later, treble damage actions.

Thus far the antitrust law looks intelligible enough, but a big monkey wrench is thrown into the works by Section 2 of the Sherman Act, which reads as follows:

Every person who shall monopolise, or attempt to monopolise, or combine or conspire with any other person or persons, to monopolise any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony,…

Here it is critical to note that Section 2 only deals with criminal responsibility. The right to bring private actions was only added into the Clayton Act some 25 years later. But that switch makes all the difference. Looked at through the prism of criminal law, Section 2 could be read to import the criminal law of attempts into the antitrust law. Anyone who tries to form a cartel but fails can be hit with heavy criminal sanctions, on the simple parallel to the law of attempted murder or attempted robbery. The only thing that distinguishes the attempt from the success are circumstances beyond the control of the actor; and if the level of punishment is insufficient for successful wrongs, then we get a bit more deterrence by allowing punishment for the attempts that did not hurt anyone as well.

Unfortunately, the introduction of private actions has worked a real revolution in the theory of antitrust, as Section 2 liability is paraded in all sorts of cases, in both high-tech and traditional industries, in which the unilateral decisions of companies on pricing and marketing are said to support hefty treble damage actions. Here the cold logic of cartels does not identify the misallocations that the law seeks to correct. Rather, the tough-minded structural thinking of the antitrust lawyer yields to so-called “intent” evidence, which usually amounts to some incautious statement or e-mail to the effect that some large company such as Microsoft is out to “crush” its rivals by adopting such nefarious strategies for its product as lower prices, better services, or more convenient terms. After all, the most effective way to exclude a rival is to offer a good or service for free.

In this new non-Euclidian world of potential liability, harm to competitors is no longer treated as a sure sign that market processes have weeded out inefficient competitors. Now a low cost for goods becomes a form of predation, the language here suggesting that a company that goes after another is like a wolf that chases a rabbit. Low costs, or zero costs, which provide immediate short-term benefit for consumers, are treated as though they hold a long-term peril to our general economic well-being. The upshot is that we develop fine-spun theories to explain why Microsoft has committed some ultimate market sin by securing a prominent place for its Internet Explorer icon on its desktop. All this is not to say that there is not some place for state intervention in network industries, because mandated interconnections on non-discriminatory terms seem to be as important here as they are in telecommunications and transport. But once we get beyond that important set of obligations, then the relentless application of the antitrust laws will sap the vitality of the very competition that these laws are supposed to preserve.

The simplest way to see the point is that it is always costly to find any set of business practices that violate Section 2. The types of arrangement used by the dominant company are often identical to those used by its other rivals. Their common use therefore provides us all the evidence of their efficiency we need. When we prevent dominant companies from using these practices, then from the start we make them balkier than their rivals. Consumers have to pay a hefty price. Yet it is most unclear that they receive anything in return.

My take: His take.

Here is the link.

And you can’t go wrong with this conclusion:

The most dangerous threats to market innovation are government restrictions on entry, which are always difficult to erode even over time.

More on the Patriot Act

Orin Kerr at Volokh disputes my one-liner on the Patriot Act (reprinted here).

The USA Patriot Act has so far been used to fine PayPal $10 million dollars in an effort to crack down on internet gambling, it’s been used to intimidate a New York artist’s collective, and most recently to shut down a Stargate fan site.

I invite readers to read Kerr and follow up on the links I provided. Kerr’s defense is, not suprisingly, one crafted by a lawyer. It consists of the following. Point 1 is accepted as correct. On point 2, Kerr concedes that the artists were intimidated and that the Patriot Act was involved but he says we shouldn’t blame the Patriot Act as other laws could just as easily have been used. Oh, now I feel better. On Point 3, Kerr agrees that the Patriot Act was used to gather information that was used to shut down the web site but thinks it unfair to say the Patriot Act shut the site down. Ok, I give him this one. I should have written the Patriot Act was used to help shut down a Stargate fan site.

The lawyer’s vice is to miss the forest for trees. The point is that laws passed for one purpose are often used for other purposes not originally intended (RICO, anyone?). (Some of them may even be legitimate, I’m not claiming, for example, that the Stargate fan site was legal). In this case, the Patriot Act and the general increased willingness to defer to law enforcement have not to my knowledge led to many arrests of terrorists but have been used for all manner of other purposes.

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!

Double Jeopardy Disaster

Getting a new drug or medical device approved by the FDA is a long and expensive process. The FDA is risk-averse and pays much more attention to the risks of approving a bad drug than to the risks of failing to approve a good drug. As a result, every economist who has ever written a serious analysis of the FDA has come to the conclusion that less regulation would mean more new drugs and more saved lives. (See FDAReview.org for more information. Gary Becker offers a recent statement.).

Approval, however, does not end a firm’s problems because even then it faces the risk of a debilitating lawsuit. Consider how bizarre this is: A team of statisticians, physicians and medical researchers pores over years of clinical data to pronounce a product safe (always noting that this means safe relative to the product’s expected benefits) and then a jury of 12 randomly selected Joes and Janes second guesses them, awards plaintiffs billions of dollars and drives the firm into bankruptcy. This has happened more than once.

FDA approval ought to be a “safe harbor.” Many states already have laws along these lines but they have been weakly enforced. The Bush administration’s efforts to limit lawsuits against firms that have passed FDA approval is a therefore a necessary and welcome piece of common sense. This doesn’t mean that you can’t sue a drug manufacturer. If the manufacturer lies to the FDA or to your physician or if they don’t produce the drug according to specification then by all means sue away. Every drug, however, has side-effects and every drug works differently in different people. That means that there has to be some sort of cost-benefit test to decide if a drug should be marketed. There is an argument for using tort law instead of the FDA to do this test – an argument that gets weaker the more out out-of-control the courts become – and there is an argument for using the FDA instead of tort law but there is no argument for adding tort law on top of FDA regulation, that is a double jeopardy disaster.

My favorite things Scottish

Favorite Scottish painting: I have to go with Henry Raeburn, check out the sense of motion in this picture.

Favorite Scottish novel: I’ve never found Stevenson or Scott very readable, so I’ll opt for Alasdair Gray’s quirky Lanark, a playful fantasy that recalls Tristram Shandy and science fiction.

Favorite Scottish music: Some of you might say Jesus and Mary Chain, but on this one I am stuck by the lack of a true favorite. This list did not much sway me. Must I go with Donovan, Garbage, Annie Lennox, or Lonnie Donegan? The bagpipes don’t do it for me, nor do Belle and Sebastian.

Favorite Scottish economist: For me this is not a no-brainer. No doubt, Adam Smith’s lifetime achievement is number one. But if you actually sat down and talked econ for a few hours, I suspect one would come away with a higher opinion of David Hume. He was, after all, the smartest person ever.

Favorite Scottish smartest person ever: David Hume

Favorite Scottish Commissioner of Customs: Adam Smith

Favorite Scottish biographer: Duh.

Favorite Scottish movie: Gregory’s Girl. This movie gives new meaning to the phrase “oozes charm.”

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.