Results for “thomas schelling”
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Open Letter – The Signatories

My Open Letter on Immigration has been officially released by the Independent Institute.  It has now been signed by over 500 economists including 5 Nobel Laureates – Thomas Schelling (University of Maryland), Robert
Lucas (University of Chicago), Daniel McFadden (University of
California, Berkeley), Vernon Smith (George Mason University), and
James Heckman (University of Chicago).  Many other prominent economists are also signatories including Eugene Fama, Robert Pindyck, Jeffrey Perloff, Barry Eichengreen, and Steven Salop to name just a few of many.

My personal thanks to everyone who signed and all who helped to make this a big success.  Thanks!

Iranian nukes

If you want to argue for optimism, try the following:

Iranian nukes will create an Israeli-Iranian alignment of political interests.  Iran is more hated by the Arab states than is often let on.  Iranian nukes increase the chance that Arab terrorism will be directed against Teheran rather than Tel Aviv or Manhattan. 

Iran with nukes will carve out a greater sphere of influence, in part at the expense of Israel and America.  But it will seek to stabilize that sphere, and "Israel" and "stability" likely will be seen as complements.  Iran won’t want Iraq under the control of al Qaeda.  Israel and Iran would work together, albeit covertly, to limit further proliferation in the region.

Some of the Arab nations would find themselves forced into a de facto alliance with israel, if only to resist Iranian power.  This is not obviously a bad outcome.

Most politicians — whether religious fanatics or not — are pragmatic.  The status of a nuke could be a substitute for the status earned by Iran from supporting terrorism and bashing Israel.  More importantly, nuclear powers do not generally want to transfer much power to decentralized, hard-to-deter terrorists. 

Iran tends to be ruled by councils rather than lone maniacs, a’la North Korea, a far more worrying example.  Groups are conservative by their nature.  I am aware that the Iranian president sometimes sounds like Hitler, but the talk could be geared to appeal to the Iranian public

Yes I do fear nuclear proliferation — greatly in fact — but Iran getting nukes is neither a) a fact which causes me to up my priors on how bad proliferation will be (which is very bad), nor b) an undeterrable nukeholder.  They are a big fat sitting duck, and their history is to seek regional power against Arabs and into central Asia.

Let me sum up the underlying theoretical reasons for relative optimism: 1) the quest for status is often quite local in nature, 2) Arabs and Iranians often distrust each other, 3) it is not all about us; often the U.S., or Israel for that matter, is a symbolic token in local struggles rather than the real target, 4) politicians tend to be pragmatic, and 5) international political coalitions are often more fluid than the rhetoric of politicians would suggest.

Here is Thomas Schelling on Iranian nukes.

But if you wanted to argue it the other way, I would suggest the following:

1. Iran will face another civil war and the losers might lob a nuke at Israel as a kind of going-away present.

2. Israel feels secure with its current nuclear deterrent only because it knows that no hostile country has a counter deterrent against Tel Aviv.  If Israel felt less free to use its nuclear weapons, it would feel less secure.  It would be subject to repeated regional military taunts, which would eventually lead to war, nuclear or otherwise.  The new book The Bomb in the Basement: How Israel Went Nuclear and What It Means for the World — highly recommended by the way — is excellent on this issue.

3. Western crazies will someday sneak a small nuke into Teheran, leading to Iranian retaliation.

4. Iranian early warning systems may be unreliable, or subject to manipulation, and erroneously report an Israeli first strike.

Seasonal advice from the dismal science, Part 3 of 3

Buy next year’s Christmas gifts next December, not next week. The sales will beckon and a few organized shoppers will be tempted. Resist. What you gain in lower prices, you will lose as the year wears on. There are interest payments and storage costs, but worse is the loss of adaptability. If your gifts are carefully chosen, some of them will need to be junked as your friends, or their tastes, change. If they are bland and generic, worse yet. Flexibility is valuable, and there’s nothing wrong with paying for something valuable.

Make your New Year’s resolutions a little firmer. It was Thomas Schelling who pointed out that the your fight to lose weight is effectively a battle of wits with yourself: the body-conscious dieter battles the weak-willed gourmand who chooses chocolate dessert at every opportunity. Elementary game theory suggests that your inner dieter can gain the upper hand by making a strategic pre-commitment. Make a bet with a friend that you’ll lose 20 pounds or donate $200 to a favorite charity, and another one that if you don’t lose 10 pounds you have to send $200 to Martha Stewart.

Sign a petition: Alan Greenspan to replace Santa Claus. “He knows if you’ve been bad or good, so be good for goodness’ sake.” Haven Gillespie’s famous lyrics suggest that behind the cotton-wool beard lurks Clint Eastwood. What a joke. We all know that Santa loves the kids too much to follow through with sanctions on naughty children. Naughty children know it too, which is why parental threats over the next few days will go unheeded. Nobel laureates Finn Kydland and Edward Prescott anticipated just such credibility problems – with monetary policy, as it happens, not stockings, but the principle is the same. Inflationary monetary policy has been banished by drafting in hard men such as Paul Volcker and Alan Greenspan. Now that Mr Greenspan is retiring we know what his next post should be: Replacing that soft old fool Santa Claus. Children would know they had to be good, would be good, and the stockings would be filled after all.

Merry Christmas.

Seasonal advice from the dismal science, Part 1 of 3

Burn your Christmas card list. Deep down, we all know that many Christmas card exchanges are more like vendettas than expressions of seasonal goodwill. Is your yearly card from former neighbors Mr. and Mrs. Grinch a genuine effort to keep in touch – or does it reflect the fact that they’ll be damned rather than be the first to stop? Thomas Schelling argues for a bankruptcy procedure in which all lists should be burned and people could start again, motivated only by genuine good-will. Take his advice and you’ll be doing yourself a favor, not to mention releasing all those near-strangers you inflict cards upon. (Read more.)

Take your children to a good fire-and-brimstone Christmas service – but make it brief. Robert Barro and Rachel McCleary have investigated the connection between religion and economic growth, with two notable results. First, belief in heaven and hell is good for business, presumably because it generates trust and substitutes for expensive legal proceedings. Second, time spent in church is not time well spent: presumably you make some contacts but could more profitably seek them elsewhere. To ensure successful offspring, send them to a church that instills the fear of God into them without demanding too much face time. Shop around.

Establish firm property rights over the TV remote. I can’t stress this one too much. Ronald Coase taught us that disputes over shared resources can always be resolved, provided the costs of negotiation are low and property rights are clearly established. Arguments only happen because it’s not clear who has the right to name the channel. Therefore, somebody must be given the control of the TV remote and should auction off the right to choose the channel to the highest bidder, perhaps in half-hour slots. It doesn’t matter much who the owner of the remote is – the choice of programming should be the same. Still, in our household I’ve always been in favor of giving the job to the paterfamilias.

Further advice to follow tomorrow.

Favorite business books

Steve Levitt in The Financial Times:

My favourite business book is A Whack in the Side of the Head by Roger Von Oech.  It certainly is not a traditional business book.  It is a book about how to generate ideas.  My view is that business people spend too little time trying to generate ideas and too much time making reports.  I always go back to this book when I am in a rut.

Stephen Dubner picked Thomas Schelling’s Choice and Consequence.

Is Grand Central Station still a focal point?

We all know Thomas Schelling’s classic analysis of focal points.  One of his original examples stipulated that two individuals are to meet somewhere in New York City, but they do not know the time or place.  Where would they appear?  Schelling suggested that a twelve noon meeting at Grand Central Station (actually called Grand Central Terminal), beneath the central clock, would be focal.

Focal points change, and of course trains have become a less important form of transportation.  I have been to Manhattan many times, but have not been in GCS in a good twenty years.  And when I take the train, I usually end up getting off at Penn Station.  Stick with noon as the time, which place would you find focal today?  I see a few options:

1. The clock at Grand Central Station remains focal.  Where else to go?  Note the clock stands above the designated information point as well.

2. The clock remains focal, but only because Schelling himself has kept it that way with his analysis.

3. Ground Zero.

4. The Empire State Building.

5. The US Air Shuttle Terminal at La Guardia.

6. A central point at Times Square.

7. The Metropolitan Museum of Art or perhaps at Picasso’s Les Demoiselles D’Avignon painting at MOMA. 

I will opt for number two, but for my mom I would wait on the stairs of the Met.  What do you think?  Comments, of course, are open.

Addendum: Brock Sides picks a focal point for Memphis and for the world; on the latter I say in front of The White House.

The Undercover Economist

Companies find it more profitable to increase prices (above the sale price) by a larger amount on an unpredictable basis than by a small amount in a predictable way.  Customers find it trouble some to avoid unpredictable price increases — and may not even notice them for lower-value goods — but easy to avoid predictable ones…

Have you noticed that supermarkets often charge ten times as much for fresh chili peppers in a package as for loose fresh chilies?  That’s because the typical customer buys such small quantities that he doesn’t think to check whether they cost four cents or forty.  Randomly tripling the price of a vegetable is a favorite trick: customers who notice the markup just buy a different vegetable that week; customers who don’t have self-targeted a whopping price rise. 

I once spotted a particularly inspired trick while on a search for potato chips.  My favorite brand was available on the top shelf in salt and pepper flavor and on the bottom shelf, just a few feet away, in other flavors, all the same size.  The top-shelf potato chips cost 25 percent more, and customers who reached for the top shelf demonstrated that they hadn’t made a price-comparison between two near-identical products in near-identical locations.  They were more interested in snacking.

That is from Tim Harford’s new The Undercover Economist: Exposing Why the Rich are Rich, the Poor are Poor — and Why You Can Never Buy a Decent Used Car (don’t trust Amazon, the release date is November, not January).  This book is one of the very best introductions to the economic way of thinking.   "Required Reading," says Steve Levitt, what better endorsement could you want?

Here is Tim’s home page, including his FT "Dear Economist" columns.  Here is Tim’s Private Sector Development Blog.  Here is Tim’s recent FT piece on Thomas Schelling.  Comments are open, in case you have other examples of comparable supermarket tricks.

What did this Prize mean?

Yes it is Thomas Schelling and Robert Aumann, wonderful picks.

The Nobel website says: "for having enhanced our understanding of conflict and cooperation through game-theory analysis."  Here is the NYT article, no permalink yet.  FoxNews offers similar information.  Both men clearly deserve the prize.  I view this year’s award as a welcome swing back to the philosophical, theoretical, and speculative dimensions of economics.  In recent years the Committee seems to have gone out of its way to reward the scientistic approach to economics (Heckman and McFadden, for instance).  All these earlier picks were good ones, but I am happy to see Schelling — a fruitful generalist if there ever was one — and Aumann, a deeply philosophical thinker, get the nod.  Aumann I don’t know personally, but there are few scholars I admire more than Thomas Schelling.

A critic on Critical Mass

I recently finished Philip Ball’s Critical Mass.
The bad news: it’s twice as long as it needs to be and his criticisms
of economics are rather odd (no, ability to forecast share prices is not the
test of the subject’s validity). The good news: it’s packed full of fun
stuff about the relevance of various physical and agent-based modelling
techniques to the social sciences. Even better, you can read Ball’s own
summary and find out whether you like it.

Thomas Schelling was there first again with
his chessboard model of racial segregation. The bottom line: racial
preferences which would seem to accommodate mixed neighbourhoods turn
out to lead to extreme segregation, as shown in (b) below.

Schelling

Robert Axtell, one of the founders of the Sugarscape agent-based modelling system, predicts that within a few years we will be able to run models with billions of agents, rather than Schelling’s 50 or so. Artificial worlds beckon.

Choosing whether to binge

A chunk of your brain is responsible for anticipating whether something will be fun or not. Apparently, cocaine and other addictive substances (including spouses, according to Tyler) can fool it – cocaine turns out to be not nearly as much fun as you thought it was going to be.

This is bad news for rats, who can starve to death while binging on coke, but humans realise they have been fooled and in moments of calm reflection can take steps to avoid the ‘hot mode’.

This from Douglas Bernheim and Antonio Rangel’s paper on addiction, which made it to the American Economic Review. A fascinating compromise between a rational addiction model and a neurological approach.

As so often, though, Thomas Schelling was there first.

The virtues of a nasty central banker

The most important application of the time-consistency ideas in Kydland and Prescott’s work (with due credit going also to Barro and Gordon and Kenneth Rogoff) is to monetary policy. Consider a central bank that wants low inflation and low unemployment. To keep inflation low the central bank promises to hold down the growth rate of money. Let us suppose that the public believes the central bank’s promise and as a result they plan on low inflation in their writing of contracts. At some point, however, unemployment will increase and the central bank will be tempted to juice the economy with a spurt of inflation. Since the public has planned on low inflation a higher than expected inflation rate will be very effective at reducing unemployment and thus very tempting.

But the situation that I have just described cannot be a rational equilibrium. When the central bank promises to keep inflation low the public will say, ‘this promise isn’t credible – if we take the central bank at their word they will surely try to deceive us later with high inflation rates’. As a result, the public does not plan on low inflation and when the central bank does want to reduce unemployment it must increase inflation even more than when low inflation was expected. The only equilibrium of this game is one with high inflation and no systematic reduction in unemployment.

How can we improve the situation? Surprisingly, a nasty central banker can make everyone better off. A nasty central banker cares only about reducing inflation and not at all about reducing unemployment (think fat-cat Republican living off fixed income bonds). Precisely because a nasty central banker won’t juice the economy to reduce unemployment, the nasty central banker can credibly commit to keep inflation low. The public believes the promise and safely plans for low inflation. Unemployment is the same in both scenarios – because the central bank can never systematically surprise the public with higher than expected inflation – but inflation itself is lower with the nasty central banker and thus the public is better off.

Thomas Schelling once described a similar idea this way: If you are kidnapped who do you want in charge of the negotiations, your loving wife or your nasty ex-wife? Easy, right? But suppose that the kidnappers know in advance who will be in charge of the negotiations – now who do you want? See? Sometimes, nasty people do good things.