Revise and resubmit

by  Tyler Cowen in

For a novel about memory, the plasticity of the novel’s narrative was one of its most realistic elements.  Proust was always refining his fictional sentences in light of new knowledge, altering his past words to reflect his present circumstances.  On the last night of his life, as he lay prostrate in bed, weakened by his diet of ice cream, beer, and barbiturates, he summoned Celeste, his beloved maid, to take a little dictation.  He wanted to change a section in his novel that described the slow death of a character, since he now knew a little bit more about what dying is like.

That is from the new and quite interesting Proust Was A Neuroscientist, by Jonah Lehrer.

Carbon Offsets

by  Alex Tabarrok in

Climate Care is a carbon offset firm used in an effort to be green by the UK Conservative party leader.  One of Climate Care’s projects pays Indian farmers to substitute human powered pumps for diesel pumps.  Opponents of the conservative party are having a field day:Treadle

Climate Care points out that even children can use treadle
pumps: ‘One person – man, woman or even child – can operate the pump by
manipulating his/her body weight on two treadles and by holding a
bamboo or wooden frame for support.’  Feeling guilty about your two-week break in Barbados, when you flew
thousands of miles and lived it up with cocktails on sunlit beaches?
Well, offset that guilt by sponsoring eco-friendly child labour in the
developing world!

Ala Larry Summers, I don’t see the problem.  Westerners pay Indian farmers to produce cotton, why is producing carbon-sinks any different?  It seems that some environmentalists are more interested in producing guilt than in reducing carbon.

Addendum: I am not claiming that carbon offsets work, in some cases the offset would have happened anyway so there is no net gain.  According to some, replenishing human energy creates more carbon than pumping oil.  But these are different objections.

Thanks to Mike Makowsky for the pointer.

Baiting gold bugs

by  Tyler Cowen in

In short, you don’t get anything out of a gold standard that you didn’t
bring with you. If your government is a credible steward of the money
supply, you don’t need it; and if it isn’t, it won’t be able to stay on
it long anyway. (See Argentina’s dollar peg). Meanwhile, the
limitations on the government’s ability to respond to fiscal crises,
the necessity of defending against speculative attacks in times of
crises, and the possibility of independent changes in the relative
price of gold, make your economy more unstable. It’s a terrible idea,
which is why there are so few economists willing to raise their voices
in support of it.

Here is more, from Megan McArdle.  I’ll add the related sentence "Who wants a pro-cyclical money supply?", and we don’t know what the new gold/dollar par should be, which means we risk a significant deflation during the transition to a commodity standard.

In the very long run, our monetary standard might be determined by what is least susceptible to counterfeiting or alchemy/nanotechnology.  I doubt if this will help gold, and monetary economics will end up as a special case of a more general theory of encryption.  One day they’ll solve Riemann’s Hypothesis and the price level will just go poof…!

Avian Flu – update

by  Alex Tabarrok in

Avian Flu has been out of the news for a while but the threat remains.  We are just now learning how lucky we got last year.  It has been confirmed that H5N1 can transmit human to human.

A woman on the Indonesian island of Sumatra caught the H5N1 bird flu
virus from poultry in May last year [2006] and passed it to
relatives. A new study by a US university has apparently confirmed
for the first time that bird flu has been transmitted from human to
human. It is the nightmare possibility that health authorities have
been fearing ever since the disease first appeared.

It happened in Indonesia last year [2006] and reveals the world only
narrowly avoided a global bird flu pandemic….Of 8 family members who caught the disease, 7 were soon dead.

Facts about CEOs

by  Tyler Cowen in

1. In Danish data, if a CEO’s child dies, the value of that CEO’s company falls by one-fifth in the following two years.

2. If a CEO’s wife dies, the value of that CEO’s company falls by fifteen percent.

3. If a CEO’s mother-in-law dies, the value of that CEO’s company rises slightly.

4. American CEOs with McMansions run companies which significantly underperform the market

The Danish paper is here, the McMansions paper is here.  On both studies, see today’s WSJ, "Scholars Link Success of Firms to Lives of CEOs," the ungated link is here.

When should you buy a home?

by  Tyler Cowen in

Jeff, a loyal MR reader, asks:

I’m currently considering buying my first home.  I’ve aware of the condition of the current housing market, and am not counting on any appreciation to make this financially viable.  However, I still am not sure that a home purchase will maximize my well-being.  I won’t ask for a personal evaluation of my financial decision, but I am interested in where I should seek quality advice.  I’m afraid my realtor’s incentives are structured so that he would like to see a sale irrespective of what is best for me.  Is there a resource beside my realtor I should contact?  In general what is some practical advice to reduce the principal-agent problem in my daily life?

Like Robin Hanson, often my preferred mode is meta-advice.  Once you have received all the rest of your advice, in which direction are you likely to overweigh it?

My view is that Americans are more likely to overrate the value of buying a home, if only because they underestimate the probability of divorce.  It is also harder for them to imagine career opportunities in other geographic areas, plus many people overestimate the historic returns to real estate.

I can’t think of comparable biases that would favor renting, especially in our sub-prime, not so liquidity constrained age, which in my view has been dented only temporarily.

An alternative approach is to see the buy/rent decision as equal in value for the marginal buyer, and ask where you stand relative to the market margin.  Since this would be Jeff’s first home he is probably young and that also suggests renting.

Here is a good post on home ownership rates.  Here is a good Arnold Kling post on real estate.

Readers, what do you all think?

Eight more years until I am rational

by  Tyler Cowen in

Here is a new study of how age affects and channels decision-making abilities:

The sophistication of financial decisions varies with age: middle-aged
adults borrow at lower interest rates and pay fewer fees compared to
both younger and older adults.  We document this pattern in ten
financial markets.  The measured effects cannot be explained by observed
risk characteristics.  The sophistication of financial choices peaks
around age 53 in our cross-sectional data. [emphasis added]  Our results are consistent
with the hypothesis that financial sophistication rises and then falls
with age, although the patterns that we observe represent a mix of age
effects and cohort effects.

Here is the paper.  Here are non-gated versions.

Should economists rule the world?

by  Tyler Cowen in

Here is Anil Hira:

This article examines more carefully the oft-made hypotheses that (1) "technocrats" or politicians with an economics background are increasingly common and (2) that this "improvement" in qualifications will lead to improvements in economic policy. The article presents a database on the qualifications of leaders of the world’s major countries over the past four decades. The article finds that while there is evidence for increasing "technification," there are also distinct and persistent historical patterns among Asian, African, Middle Eastern, and Latin American leaders. Using statistical analysis, the article finds that we cannot conclude that leadership training in economics leads to better economic outcomes.

Here is the (only temporarily non-gated) link, thanks to Bill Evers for the pointer.  There is also an article in the Chronicle of Higher Education on this work, I am told.  The natural defense of economists, which I will not attempt, is to cite selection effects for which economists achieve public office, and what they must do to rule. 

I am happy to admit that governing is most of all about building viable coalitions (more than having good policy knowledge, at many margins), and that we economists are not especially good at that.  So I don’t find this result a surprise.

How much cash should you carry?

by  Tyler Cowen in

Bryan Caplan gets abstract:

At a recent GMU lunch, two economists sparred over the optimal
quantity of cash to keep in one’s wallet. Economist A holds very little
cash, on the grounds that you can pay for virtually everything with
credit cards. Economist B holds lots of cash, on the grounds that the
foregone interest is virtually nothing, and his time is very valuable.

Whose side do you take, and why?  Value of time and foregone interest calculations are welcome.

My view is simple.  If you have a job ("economist"), and you live in the safe suburbs, hold gobs of cash, even if you don’t want to use it very often.  Economists like Bryan stress that people notice monetary opportunity costs but often ignore time opportunity costs, so the bias is toward too little cash on hand.  Paying with cash is sometimes quicker, you make fewer ATM trips, and you pay fewer special fees for using non-home bank ATM machines.  The cashless society may someday come, but it’s not here yet.  Don’t join it before its time.

Here is an earlier and related post on the tennis ball problem.

Addendum: Greg Mankiw weighs in, hold more cash!

Facts about milk

by  Tyler Cowen in

1. Global milk prices have doubled over the last two years.

2. In some parts of the United States, milk is more expensive than gasoline.

3. There are reports of cows being stolen from Wisconsin dairy farms.

4. The rising demand for milk is coming mostly from developing nations; the average Chinese consumes six gallons of milk a year, up from two gallons in 2000.  China is now the world’s leading milk importer.

5. Parts of New Zealand are booming.

6. Only 7 percent of all milk commercially produced is traded across national borders.

7. Sufficiently high (market-driven) milk prices may render many milk price supports and subsidies irrelevant.

Here is the article (NYT, permalink may be pending but not yet).

A Farewell to Alms, through p.272

by  Tyler Cowen in

…comes again on the question of science.  He points out correctly that most of the major technological innovators did not get much for their efforts.  Clark therefore does not see the late 18th century or early 19th century as giving special incentives for science.  I agree as far as he goes, but I view the incentives for science more broadly.

Core Europe, starting in late medieval times, developed a new and still poorly understood organizational technology.  This was, very roughly, the ability to work in groups, cumulate technologies and advances, and learn from each other in competitive environments.  Most notably, this new technology led the Florentine and Venetian Renaissances, especially in the visual arts.  But there was more.  The rise of printing.  The rise of classical music, starting in 1685 or whenever.  The rise of early modern philosophy.  Europe goes crazy with inventiveness, albeit in splats and bursts.  (Clark’s own chapter 12 gives good evidence for this tendency, though it will play a less central role in his version of the story.)

It is also the case that most of these bursts of inventiveness didn’t do much for the average standard of living.  Yes mastering oil paint technique made Florence richer but not so much.

It just so happened that one of these bursts came in science, technology, and engineering.  And it came in England, mostly for reasons of "national character."  It just so happened that the English burst did more for the standard of living, for reasons of external benefits.  But having had such a burst was not unique to England.  England was just one spoke on a more broadly turning wheel, and a European distribution of bursts was well in place prior to most of the special conditions we might find in England.

England, by the way, also had the literary revolution of the 18th century, and England plus Scotland drove the rise of modern economics.  There is no Chinese Adam Smith and that is because that Europe was pulling decisively ahead in ideas production.  I consider this a fact of great importance whereas for Clark it is a sideshow to some other story.

Most generally, I see the historical problem of growth through the lens of culture — in the sense of the history of the arts, music, and letters — more than through the economic history literature.  I am very taken by Max Weber’s writing on Western music and also his conception of the broader style of Western rationality.  And I see the rise of these organizational improvements as a central — the central? — story of early modern Europe and the move to prosperity.  It simply took a long time to apply these organizational movements to science, and to turn that science into concrete technical advances.

None of this need contradict Clark and indeed you will find parts of this narrative in his book.  But unlike Clark I would not superimpose this on a broader Malthusian story or an emphasis on the long run.  Nor am I putting much stock in genetic evolution.  So these organizational/technological improvements, in my view, move closer to the center of the story of European progress.

Unlike Clark, I think incentives to create matter greatly, but not through patents or other direct pecuniary rate of return effects.  The great creators have a burning desire to create, provided they have the opportunity to do so.  This new European technology of organization (whatever it should be called), combined with growing wealth for the upper classes, meant that such creative opportunities were far more available than ever before.  And powerful intellects grabbed them, for reasons of psychic incentives.  So incentives are paramount to the European story, while Clark remains correct in criticizing the standard account of how those incentives might have mattered.

I also see England has having innovated with the quality of its state in particular its fiscal grounding.  I wish this played a larger role in Clark’s account although of course I understand why it does not.  Institutions are not allowed to become a competing force on center stage.  The economic returns from colonies might be given more play as well.

Overall I am willing to accept many of Clark’s arguments, but I always go back to wanting to superimpose a broader institutional story on his microfoundations.

He resists that move, and that is the major place where I part company with him.  I think he is too intent on pushing institutional and ideological factors off the stage; I am happy to allow Clark’s factors on the stage — most of all gradual growth downward mobility and quality of labor — but I want a very busy and cluttered stage.

I believe, by the way, that if Clark’s vision were correct, Australia and New Zealand would be stronger economic powerhouses than has turned out to be the case.