A photo of a painting? How derivative!

It’s not news that the rising popularity of ebooks has got the publishing world in a frenzy. This article is on a new ebook model that treats the distribution of books as akin to public radio broadcasting. Content is supported by a minority of people who think that spending money on things they can get for free is worthwhile (signaling patron-ism) while everyone benefits from the content. Even authors seem to benefit by getting a larger share of the profits and exposure to a wider audience. Obviously, success is not guaranteed any more than traditional publishing but the profit incentives are there.

I like the public radio analogy, but I think there is a better one – and that’s from the art world. The production of art is not non-profit, yet the distribution isn’t controlled by major publishers.  Well that might be because original artworks, and even some of the better reproductions are too expensive for most people… But who cares – there is plenty of good art that’s freely available on the web for your viewing pleasure.

Media like radio and visual art have a very different history than book, music and movie publishing (I’d also add beer to that, but that’s a post for another day) but the trend is towards diversification, appealing to a longer tail and quality improvements on the margin. While the industry might be losing money on the whole, this is a clear case of markets tending towards Pareto optimality. Centralized, top-down publishing schemes are becoming more obsolete to be replaced with artist-driven, self or free distribution of content that’s supported by key patrons.

This is not to say that distribution and other jobs not related to content creation are in jeopardy. After all, most authors are not going to be experts on how to design websites, content sharing platforms, etc (In other words, not every author is going to be Cory Doctorow – who’s stance on copyright and tiered approach to selling his novels is the best I’ve seen).

Since authors will no longer be able to take advantage of old publishing networks, authors will need help from idea people, software engineers and social network experts. Exposure to markets will rely on getting picked up by the right circles on twitter or reddit (or where-ever) or to try and get noticed by important and respected bloggers. In other words, Oprah’s role only more distributed. There’s plenty of efficiency and value to add by consultants and there will be plenty of money in the market.

“Within state budgets, police and education are often the alternative to Medicaid costs. Are we so sure that Medicaid produces the maximum benefit for the money? Low-quality moralizing about the poor is not an answer to this question.”

That was from Tyler Cowen. Of course, projects like Medicaid are less about producing maximum benefits and more about signaling to voters that we care about the poor.  This makes it very difficult to effect the status quo.

That said, Medicaid should be one of the last parts of the health care budget to cut.  More of our health care aid should be like Medicaid, which is relatively cheap and also targeted at those who really need the assistance.  The correct Medicaid decisions depend on other budget choices, but ideally Medicaid is low on the list of recommended cuts, even if it may require some cuts.

Now, I’m quite sympathetic to the poorest of the poor being taken care of, but I had no idea until this week that “being taken care of” in this particular case means even better treatment than the treatment those who are paying to support Medicaid receive.

Nothing like a good dose of reality to reaffirm my disdain for the State!

Considering evidence is an important role in rationality, Bayesian analysis, and in the Less Wrong sequences.  This EWOT post brought to mind this older post by Eliezer (which, low and behold, was already open in my browser when I went to go look for it).

The type of anarcho-capitalism schilling I see on EWOT and other blogs reminds me of the Salem witch hunt imagery that Eliezer evokes:

no matter what the accused witch said or did, it was held a proof against her.

Just in case the parallel isn’t obvious, in the forementioned blog, high quality of care is used to support the anti-gov’t position on public health care (in this case, because the high quality- and therefore high cost – of care isn’t fair to those truly footing the bill). However, I’ve seen the opposite result – low quality of care – also being used to support the anti-gov position.

This practice surely isn’t restricted to this issue (or anarcho-capitalists!). The job of a pundit is to use their narrative to explain the outcome of any event and so, you get multiple hypotheses explaining the same event and no hypothesis seems to have the power to exclude any another one.

But the main problem is that each observer has their one-size-fits-all glove and they’re looking for hands to fit it to…and any hand will do. Any evidence they encounter confirms the theory because the theory can be retrofit onto the evidence.

This is why careful reasoning is so important.

If an observer sees high quality of care for medicare patients as evidence that you should have disdain for the state, shouldn’t low quality of care be evidence that one shouldn’t have disdain?

The statement can be broken down as such:

prior: high disdain for the state

hypothesis: if public health insurance provides better care for those who are not paying for it than for those who are, then one should have disdain for the state

evidence: high quality care for medicare patient

outcome: high disdain for the state

This is a perfectly legitimate libertarian theory and how the original evidence calculation should have been formulated. The outcome matched the prior and therefore did not shift it much.

However, the hypothesis was, in actuality, retrofit to the evidence.

In a true probability calculation, if the outcome had been different (say, for example, medicare refused to cover the ultrasound imaging), the hypothesis would have been smashed. It would have been evidence that people receiving public health care do not get higher quality care than those who are paying for it, and we could not support our prior (disdain for the state). Clearly, if public health care sucks, the state is doing something right (keeping costs low for taxpayers, perhaps).

I’m going to generalize here and say that this is not what most libertarians (or any other political-identifying group) would have done. They would have simply found some other hypothesis that supports their prior (if the government isn’t providing high quality care, then disdain for the state, for example).

This a particular problem when you don’t allow yourself to expect counterevidence. In a practical sense, if no evidence you encounter has the ability to shift your beliefs, then you’re not coming up with testable hypothesis.

In just over a day, a powerful computer program accomplished a feat that took physicists centuries to complete: extrapolating the laws of motion from a pendulum’s swings.

Developed by Cornell researchers, the program deduced the natural laws without a shred of knowledge about physics or geometry.

The research is being heralded as a potential breakthrough for science in the Petabyte Age, where computers try to find regularities in massive datasets that are too big and complex for the human mind and its standard computational tools.

The cool part is not just the physics, but the use of an evolutionary algorithm to fit deterministic equations to any data set. The point is to find relationships in real data and see if it has any predictive power.

This approach, of course, misses the stochastic/ probabilistic properties of nature but still a useful tool.

The other cool part is that the the tool is free for the public to download (windows, linux or mac).

I did some little tests to see how it works. In excel I created the simple function f(x) = x^2 / 32 + sin(x). For the x’s I took a list of automatically generated random integers from random.org and set the confidence level at .9 for all numbers.

After about 2 minutes, it came up with this:

x/32 is ~= to .03x so the program did a pretty good job, I think.

Now lets try something more interesting: inputing 2 lists of random numbers for x and y:

If the purpose of the engine is to to find relationships between raw data, it stands to reason that it could find relationships where none exist.

Lets test the meme that LA Lakers wins/loses predict stock market price changes. I used the data from Nasdaq rates (between 1987 and 2007) provided by the LA Time and also converted Lakers performance into quantitative terms. -1 represents a championship loss, +1 a championship win while 0 represents a time when the Lakers didn’t make the finals:

Lets graph the function:

According to our function, a victory is suggestive of stock market losses and a finals loss is indicated by some NASDAQ gains. Of course, the last two years of data have smashed these “predictions.”  Interestingly, our equation predicts the highest gains when the Lakers don’t make the playoffs at all. I think this is suggestive.

Flying no flag of convenience, the guy uses ice floes around the North Pole to support and cloak highly mobile capital and productive labor; with a flair for anarchy, he disregards all laws of intellectual property to create an abundance of goods that he then feels free to distribute according to a little understood moral code; his superior logistical system flagrantly disregards all national borders and crosses them with impunity…

Read the whole thing: it makes a nice point about what gifts economies of scale have given us.

To make things worse, complete stories, ones with more details tend to be more convincing. We thus not only gravitate to stories, but stories with embellishments. Are there better (and more likely to be correct) ways of satisfying our curiosity?

Andrew Gelman gives us a bit of a hint:

Many years ago, Don Rubin convinced me that it’s a lot easier to think about “effects of causes” than “causes of effects.” For example, why did my cat die? Because she ran into the street, because a car was going too fast, because the driver wasn’t paying attention, because a bird distracted the cat, because the rain stopped so the cat went outside, etc. When you look at it this way, the question of “why” is pretty meaningless.

Similarly, if you ask a question such as, What caused World War 1, the best sort of answers can take the form of potential-outcomes analyses. I don’t think it makes sense to expect any sort of true causal answer here.

Here’s a recent one I enjoyed that seems to be about Robin Hanson’s near/far biases and preference for visible signaling:

…white people in places like Los Angeles or Austin, TX will often promise to learn Spanish in hopes of being able to ask local taco stands about whether or not their carne asada is grass fed (”¿Ha leído usted Michael Pollan?”).

In order to reach this level of fluency and obnoxiousness, white people believe they must put themselves into a local immersion. This means a promise to watch only Spanish language TV, listen only to Spanish language radio, read Marquez in his native tongue, and watch foreign films with the subtitles turned off. There are some instances of white people doing this for almost a week!

When this technique is unavailable or fails, white people will immediately turn to books and computer software as a last ditch effort to make good on their promise. After about a week, most white people will give up and blame someone for their failure (”this software is terrible,” “there aren’t enough people in Portland who speak Farsi!”). But rather than discarding the books and software packaging, white people will simply put them in the most visible part of their book shelf. This allows white people to believe that they have not failed since they can resume their studies at any time until their death.

Read the whole thing!

Here’s a link to the full list.

People have always had a religious or quasi-religious reverence for nature. In modern times, some people have started to see nature more as an enemy to be conquered than as a god to be worshiped.

I would actually say the opposite is true. People have historically and especially prehistorically a fear of nature. This may look like reverence but, from what I understand, it seems likely that people deified nature not out of love and respect, but from fear.

As in – “Lightning God, I’ll sacrifice my best goat if you stop scaring me” or “Rain God, how about some rain so I don’t starve.”

People today have never had a greater understanding of the forces of nature and been as immune to weather effects, in all but extreme cases. Since the hippie movements, and continuing today with the green movements, I don’t think you’ve ever seen a more profound respect for nature from the general public, and have responded by demanding our institutions take measures to protect nature.

We understand that economic growth relies on using nature’s resources, but have people ever before have concluded on such a grand scale that nature needs to be protected? Property rights have been used for this purpose for centuries now.

You can certainly debate the efficacy and the intentions of the political class in regards to environmental legislation, but the motives of the general public seem relatively clear.

I don’t think the reasons are altruistic, but maybe environmentalism is the newest form of signaling status… and it’s cheap too. Becoming an environmentalist only requires the purchase of a few buttons and demanding that other people do the changing.

The reason?

A total of 75 people have died from swine flu (in a state of 18 million).

In contrast, 1,429 people died on NY roads in 2005.

What is Paterson’s purpose other than freak people out?

A group of rich Germans has launched a petition calling for the government to make wealthy people pay higher taxes.

The group say they have more money than they need, and the extra revenue could fund economic and social programmes to aid Germany’s economic recovery.

This is just insane. Why don’t they invest or donate their money if they really want to help recovery?

Seems like they’re overestimating the “G” aspect in the Keynesian C + I + G + X − M = Y(GDP) formula.

Why do we care so much about the “agrarian myth”? Do we really think farmers of old had so much better time than we do? Is tourism and leisure really worse than hard labor?

Not only would those farmers probably not agree with the agrarian myth, those who use it to make some sort of moral argument are usually doing so hypocritically. Maybe the photographer should give up his lens in favor of a plough if he thinks farming is so great. I’ll bet he finds that this life is difficult and (for the farmers who sold off their land to tourism industry) less financially valuable.

Why are we supposed to be morally horrified at the fact that people are richer today and therefore have more time to drink beer and go skiing (though hopefully not at the same time) than during subsistence farming days?

So if Austrian Business Cycle Theory is right, booms of credit promote resource reallocation. But, like Bob, I don’t think Krugman’s point holds any water. All of this was being done on cheap credit, remember, so you don’t really have to reallocate capital to housing sector. As for employment, who says that new jobs in construction and related industries was being drawn from the unemployed sector?

It seems to me that, besides for the people already in construction, we were getting a lot of immigrant labor and ‘teenagers’ growing up into the construction field. The boom doesn’t have to be preceded by unemployment, just shift resources away from potentially sustainable ones (at an opportunity cost of economic stability) to unstable ones.

It found that about half the customers noticed the calorie counts, which were prominently posted on menu boards. About 28 percent of those who noticed them said the information had influenced their ordering, and 9 out of 10 of those said they had made healthier choices as a result.

But when the researchers checked receipts afterward, they found that people had, in fact, ordered slightly more calories than the typical customer had before the labeling law went into effect, in July 2008.

These are fascinating results. People are generally conscious of the change, think they are responding in a positive direction, but actually doing the opposite. I’d be interested to see how people are making more unhealthier choices.

I’d be willing to bet that they are switching to foods that they perceive as being healthier, but actually contain more calories. This could be a result from an information asymmetry. The calorie counts are usually the ‘bare minimum’ of what fast food joints offer, without the fixings, sides and drinks. Perhaps people are switching to lower calorie foods, but getting more of the high caloric ‘frills.’

If we don’t assume rationality, another explanation is that people are unobservant and ignorant about what they’re putting in their mouths.

This also calls into doubt the ability for regulation to achieve the desired affects and highlights the important of price signals, especially because we’re in a recession. People are looking for the cheapest food these days and so will respond to price signals much more strongly than health signals.

HT2 Jeffrey Miron

http://jeffreymiron.blogspot.com/2009/10/calorie-postings-and-food-habits.html

I think Nassim Taleb (author of the Black Swan) and Daniel Kahneman (prospect theory) would say that the disasters that we are most likely insure ourselves for are the ones that are the least likely to happen, and could leave us even more vulnerable to the real black swans (which we can’t predict anyway).

In other words, trying to prevent disaster (for example, one that would cost a significant portion of GDP) we would spend trillions on and then miss the real problem completely. We simple suck at predicting these sorts of things.

And, if we did get lucky and manage to prevent disaster (the example Taleb uses are laws that could have prevented 9/11) we would never know disaster had been avoided in our version of the multiverse, and all people would see is needless expense.

as Walter Block argued with great flair, in general the police shouldn’t punish blackmailers. Yes, you are arguably a moral degenerate, a huge jerk, etc. etc. if you blackmail someone, but why is it a crime?

… if some producer happens to know that David Letterman is building his own special Top Ten List (you know I had to work in some cheesy pun in this post), and if that producer has the legal right to blog about it, talk about it, even to write a book about it, then how in the world is it a crime for him to give Letterman the option of buying his silence?

The way I see it, the only true crime involved with blackmail per se, would be if Letterman paid the guy $2 million, and then the guy went ahead and spread the gossip anyway. Of course, the crime there would be violating the deal, not the offer a deal in the first place.

If its the government’s job to enforce contracts (even private, secret contracts) but the government makes those contracts illegal, than it makes it more likely that a blackmail agreement would blow up in the way that Bob describes.

This is probably why Letterman didn’t pay the blackmailer… there’s no guarantee that he would have kept his silence. If there was a court that would enforce these agreements, however, than both parties could have been happy.

I’m sure this issue is too sticky to change, though.

I think McWilliams misses a key point in favor of farmers markets, though. You can buy obscure produce that you just can’t find in most supermarkets.

In addition, the centrality of the market, competition is more direct and should theoretically help lower prices. Anecdotally, from my own experience as a consumer and seller in a farmer’s market, most customers don’t feel bad walking away from your booth without trying anything… even after you offer a free sample.

I like farmers markets and the competition they provide for grocery store produce isles, though not for any particular love for locally grown produce.

2. You’ve heard (and perhaps disagreed with) the concept of subsidizing alternative energies… but what about taxing them? Jeffery Miron reports that solar panel importers are facing $70 mill in new tariffs. I suspect this may be part of the ‘buy american’ campaign. I wonder what the environmental left has to say about it.

3. Bob Murphy links to a hilarious video from Jon Stewart about the alleged super-majority of Senate democrats. Why can’t they pass anything? I don’t agree with many of Stewarts supporting points of public option for health care, but still a good video.

4. Dave Prychitko tells us about supply and demand. The Dems arguments for a public option to keep costs down and raise consumership just don’t work, if supply and demand curves are right. I’ve made the same arguments for public option for college education.

In my portrait Twitter consists mainly of social benefits yet it offers few private gains for many generators of the content.  So why do so many people do it?  Maybe it tricks our instincts for sociability or connection.

We can use the information generated by Twitter in interesting ways. What’s not so clear is what the Tweeters get out of it.

There are no financial costs to using the service, but it does have to compete with other social networking sites (so there is an obvious opportunity cost) and time costs to using the service.

In terms of evolutionary adaptation, what are the benefits of using twitter to improve fitness (what are the proximal psychological causes)?

The US government has relaxed its control over how the internet is run.

It has signed a four-page “affirmation of commitments” with the net regulator Icann, giving the body autonomy for the first time.

Previous agreements gave the US close oversight of Icann – drawing criticism from other countries and groups.

I’m sure we’re supposed to like that the federal government is giving up some of its control (I wonder how game theory or public choice theory explains that), but does it count if they’re just handing the reigns over more fully to a different institution?

This is just some loose speculation. I’m fairly certain that Icann has some critical function for smooth operation and, more importantly, organization, of the internet.

Population health did not decline and indeed generally improved during the 4 years of the Great Depression, 1930–1933, with mortality decreasing for almost all ages, and life expectancy increasing by several years in males, females, whites, and nonwhites.

I’m a bit skeptical about this. Prychitko mentions that there could be a lag effect, that ill health effects didn’t show up until after the scope of the study. I think this is probably right. After all, health statistics aren’t health statistics measured by hospital visits?

During a recession, particularly during the Great Depression before widespread health insurance coverage, even the very sick probably avoided hospital visits.
I wonder how many diseases went undiagnosed until after the depression was over, just because people couldn’t afford the doctors visits?
This would have two affects: give the appearance that there is less illness during the depression and give the appearance that health declined significantly after the Depression. This would make the population look even healthier during the bad economic times by comparison.

I’m not ruling out the findings of the study, of course, but I would appreciate more skepticism on the matter.

Mostly, this seems to be because of field specialization and the general depth of knowledge that exists, especially in scientific fields. You can dabble, but its simply too time consuming to become an expert in lots of different things. In addition, the specialists insists on “jargonizing” their fields, perhaps specifically to prevent polymaths outshining their own work.

My question is whether the internet is helping or hindering the goals of polymaths?

How does one become a polymath without condemning themselves to poverty?

HT2 Tyler Cowen

My wife and I were speculating on how long last Friday’s Rosh Hashanah service would last. We both figured on two hours, but my wife said, “Services always last longer than you expect.”

He poses the question of rational expectations. Despite years and years of experience, Hamermesh (and myself, actually) are really bad at predicting when services will end, even though the prayers are always the same.

So what gives?

Possibly, if you think services are boring, your mindset can affect your expectations about how long services will last (in which direction would depend upon the type of person you are).  Maybe we just have poor memories for this sort of thing.

Personally, I think a large part is variability within the service. At my synagogue, the first day of Rosh Hashannah services lasted a half and hour longer than they did on the second day. The rabbi was in a rush the second day and let the first day drag out. They also started late, but since they started before I got there in both cases, all I observed was the end result.

This is because the long tail consists of diverse tastes and personalities which only a medium like the internet can cater too. As businesses realize that this is a great potential source of revenue, the sector expands and even more people discover long tail products that they didn’t know they liked.

I got this story from Tyler Cowen, which is no surprise because this type of collecting and ordering of tastes via the internet is the kind of thing he loves, and talks about in great detail in his new book: Create Your Own Economy.

Economist.com reports favorably U.C.-Berkeley researcher Malcolm Potts’s claim “that slowing population growth is essential if poverty is to be eradicated.”

On what basis do the Economist.com reporter and Mr. Potts believe that a larger population is necessarily incompatible with the eradication of poverty?  The standards of living of at least 4 billion of the approximately 6.8 billion people alive today are incomparably higher than were the standards of living for nearly everyone who lived prior to the industrial age

He’s coming to almost the opposite conclusion of Robin Hanson, where population growth is necessary for economic growth, not its downfall.

I understand his point as well: people are productive so the more people there are, the more overall productivity their is. In addition, we need a young healthy population to take care of the elderly and maintain a high standard of living for all.

However, I don’t see net population growth as being essential to economic growth, at least not in a future economy. Fresh blood always is good for economic growth, but as long as we at least maintain our numbers, there should always be a new supply of talent and the old codgers can die off or retire.

I think the original article may be mistaken GDP, which will grow when population grows regardless, and GDP per capita. The per capita term is a far more important measurement of individual (and therefore national) wealth. Who cares if GDP growth is slow if our personal incomes are growing fast, but population is staying steady?

Most of the population growth is from poor nations and, presumably, when those nations get richer they will stop reproducing so much. An unproven, but not a bad, prediction that has been observed many times in the economic development of nations.

I think Hanson should have phrased his point a different way: are there physical limits to improving efficiencies of resource use and technology gains?

I don’t think anyone can say for sure if humans will ever approach the physical limits of existing matter of the universe, but every generation predicts that resource use efficiency will max out… whereupon the technology is improved, allocation becomes more efficient, or new material is invented or discovered that supersedes the need for the resource completely.

Furthermore, our forecasting abilities to predict this new tech is very bad and some of the more important tech would probably be considered Black Swans.

Its interesting to think about what efficiency limits we might face with current technology and try to envision how virtual reality might play out after the singularity. But to predict the end of humanity in 10 thousand years?

I bet futurist cave men where doing the same thing.

According to the report, the correlation is directed by this cause based on temporal information, but considering all the social changes (not all of which where government directed) where happening at the same time, how can they distinguish between them?

What we might have is Hume’s classic problem of cause and effect. Researchers and officials think that their policies are effecting outcomes just because those policies exist. Its a bit harder to control for these things, since we can’t make controlled experiments with large scale, unpredictable systems like the economy or human social behavior (which smoking could qualify as) .

2. Tyler Cowen talks about the saliva market in South Africa. Apparently, its very competitive.

3. Brazil plans on restricting sugar cane production to prevent deforestation of the Amazon. I guess biofuels aren’t as ecofriendly and environmentalists would like to think. However, I don’t understand why Brazil doesn’t just subsidies rather than legislating more bans. If the costs farmers had to pay where closer to their natural costs, farmers would cut back on their own.

4. Open Economics blogs asks “What is Socialism in 2009?” and is Obama really a socialist? The answer of course is ‘no.’  But, then again, modern liberals are not classical liberals and capitalism was originally a derogatory term, so we’ll see if they left comes to accept the term and try to redefine it for themselves.

5. Toro’s Running of the Bulls blog tackles the large question of market rationality.  It’s a great post, but I think he misstates Jeffery Friedman’s point though. Friedman is trying to point out in the case of the crisis, irrational exuberance came out of government incentives, not market forces. People acted stupidly, but not necessarily irrationally, under the traditional assumptions of what rationality means: they where simply reacting in a predictable way based on the available information. The information turned out to be wrong, but that’s not the fault of 99.9% of investors.

We where talking about how apartment owners overcharge for rent in New York City. He said something along the lines that it was ridiculous that with the housing market what it is, that landlords could justify such a high rent.

What the broker missed was that the part of the housing market that collapsed is the demand for mortgages. That is, owning homes. If fewer people are owning homes, that means more people should be renting. This drives prices up, not down, like my broker thought.

This may be less true for certain markets in New York, where Wall Street and finance people are left in droves. But, I’m not looking at these high rise condos anyway.

I’m not sure if Hanson is continuing our discussion in this post in Overcoming Bias today, but he reaffirms this position, extending it pretty much all of nature:

Yes, nature would be saved if we destroy ourselves without destroying nature in the process, but hopefully we’ll avoid this scenario.  We might also somehow coordinate to prevent competitive growth.  For example, we might empower a world government to protect nature, prevent innovation, or prevent population growth.  But I honestly see little prospect of this.  We now live in a very competitive world, and even governments mainly just redirect competition, toward controlling those governments.

I find it a little odd that he would say this. It contains elements of truth… at what point will governments stop promoting ecological conservationism at the cost of economic competitiveness?

But I think he misses another element. I don’t think it will escape the attention of capitalist that they rely on the earth for natural resources and that technological advanced will decrease, not increase, our reliance and impact on nature and not the other way around.

People have been falsely predicting that we’ve reached the earth’s carrying capacity for centuries, and they’ve all been wrong. This is not because of government incentives (well, not totally) but because of market forces.

I think Hanson’s assumption of continuing population growth is also incorrect. As economic competition produces wealth throughout the globe, population levels will steady out without having to approach the earth’s physical limits. Add the technology of lessening out eco footprints and I don’t think there’s anything to worry about.

Hanson is being alarmist – some will say economic growth needs to happen anyway, so government interventions are just delaying, and worsening, the inevitable, while others will say that we need to stop “progress” to protect the natural rights of mother earth.

As an economist, I find it odd that Hanson would imply that population will keep growing but technology will reach a limit.

I find it much more likely that, in astronomical time, the human population will dwindle out into nothing because we no longer feel the drive to reproduce than we’ll reach the physical carrying capacity of the entire universe.

Clyde Prestowitz makes his case for higher tariffs by slaying a strawman (”Obama can help free trade with tariffs,” Sept. 10).  According to Mr Prestowitz, the case for free trade relies on the validity of “the assumptions that the markets are perfectly competitive, that exchange rates are not manipulated, that there are no economies of scale, that there is no cross-border investment or cross-border transfers of technology, and that there are no government subsidies or export requirements.”

Bordeaux is hinting at a larger point here, I think. Neo-classical models of free trade do indeed rely on these assumption, but even though these assumptions are demonstratively inaccurate doesn’t mean that free trade doesn’t work and that slapping on high tariffs are a good idea.

This is a sort of composition fallacy. He concludes that an economic principle is incorrect based on some of assumptions being incorrect. Just because a common model is flawed, doesn’t mean the principle doesn’t work it practice – it may just mean we don’t yet understand why it works.

Jeff Harding from Daily Capitalist blog is already calling Obama’s proposal of new financial regulations (which are really more like hints of a proposal) New Deal V. 2.0 (hint – in austro-capitalist land, this is a bad thing).

I’m willing to reserve judgement to see what he wants to passed and what actually gets through Congress, but I share Harding’s general distaste for the thing. If there’s one sure way to screw up regulations, it’s to let the economists draft it and the politicians pass it.

Because I’m reading Taleb (sorry to keep bringing this up), I can’t help thinking that new regulations will not help us deal with the “black swan” that was the financial crisis. Regulation is retrospective and is not likely to help us forsee new problems.

Last week I wrote that people think that their decisions influence the outcome of those decisions. This is especially true with buying insurance. Buying insurance, for most people, on even risky things is a tacit admission of fallibility. Auto insurance is mandated, health insurance is used often and life insurance is about the family. But we simply do not insure against some of life’s biggest risk (and, since I’m reading Taleb, we’re not even talking about Black Swans here, which you can’t really insure against anyway by definition).

But I wonder what other incentive signals might be at play. Is there really no market for microinsurance, is government signals creating too many moral hazards to make people view this type of insurance as a necessary cost?

Prospect theory tells us that people are very risk averse and overweight the likelihood of extreme events occurring. Why then do we not insure against those events?

Perhaps I am correct in postulating that we think that deciding not insuring ourselves against these risks is effectively protecting us against them (or at the very least, what we ignore cannot bother us). It’s a frightening thought, and explains catastrophes like Katrina or 9/11 are apparently made worse by poor disaster management strategies.

They’re using one tried and true way to build a successful blog: stack it with econ and poli science professors from top universities and nobel laureates.

Thinkmarket blog has a list of the contributers.

Daron Acemoglu (MIT)
Viral V. Acharya (NYU) and Matthew Richardson (NYU)
Amar Bhide (Columbia U.)
David Colander (Middlebury College)
Steven Gjerstad (Chapman U.) and Vernon L. Smith (2002 Nobel laureate)
Michael Goldberg (U. of New Hampshire)
Juliusz Jablecki (Polish Central Bank) and Mateusz Machaj (Wroclaw U.)
Katerina Juselius (U. of Copenhagen)
Thomas Lux (U. of Kiel)
Joseph E. Stiglitz (2001 Nobel laureate)
John B. Taylor (Stanford U.)
Peter J. Wallison (American Enterprise Inst.)
Lawrence J. White (NYU)

Any top-tiered econ professors are more than welcome to contribute a post or two to our blog as well.

While nature shows and nature lovers often give lip service to the wonders of natural selection, in fact they mainly love the particular species alive now.  When nature adapts to recent changes, nature lovers mostly disapprove.  Most folks react similarly when economic competition creates winners and losers; they say they approve of the competition that led to our current wealth, but they disapprove when new winners, e.g., Walmart or Borders, displace old losers, e.g., small stores.

Hanson’s general point is well taken – competition in the natural world produces new winners and these new winners may not satisfy our aesthetic values. Hanson seems to think we should just over this.

Ecology is not so simple though. Human development is changing the environment on a different order of magnitude than evolution works. Species that are well suited to human changes may actually do longer term harm to the environment than local (in time and space) successful adaptations may suggest.

For example, a bird species may nest well in tall buildings and so their numbers grow, straining the resources of the local fish stocks. These downstream affects may adversely affect ecosystems, causing other species to die off – including the original birds. Population explosions that represent temporary success are not necessarily stable. We may only be seeing the upswing of a population bubble that will dramatically burst. Or maybe we’ll see a slow decline in environmental integrity that affects our own fitness.

As an economist, I’m surprised Robin Hanson isn’t considering the long term affects of over-enthusiastic growth.

Hanson wants to draw a parallel between our capitalist systems and other ecosystems. And while many exist – it’s based on the same principles after all – he forgets that animal societies lack institutions that keep capitalism running by protecting property rights (which prevents the type of over-exploitation that invasive species are famous for).

Zach muses:

At an Overcoming Bias meetup group I went to a couple weeks ago, several people claimed that learning how to think rationally has helped them get ahead in life. My instinct is that this is probably true, but it doesn’t seem to me that rationality enthusiasts are statistically better off than irrational folk.

First: we all make rational and irrational decisions on a daily basis. That is, although we often so not always behave ideally to maximize expected utility, a lot of what we do is good enough. Second, I would call rationality enthusiasts only “aspiring rationalists”—there’s no guarantee that they’ve actually achieved what they claim to value, though I like to give people the benefit of the doubt.

I can see how Zach might have seen the people at the meetup as overemphasizing the benefits of studying rationality. But they wouldn’t be too different from fitness enthusiasts who go on about how running, swimming, or weightlifting have improved their lives.

Overstated benefits? Likely.

But there are areas where understanding and counteracting failures of rationality don’t experience diminishing returns as sharply. On a larger scale almost anything with high payoff and sufficient complexity qualifies. War, politics, global catastrophic risks are all examples.

photo by mescon on Flickr

On an individual basis, I have an easy example: clinical depression.

Cognitive therapy, which has since been incorporated into more comprehensive Cognitive Behavioral Therapy is centered around the idea that depression always manifests as dysfunctional thought. The approach is to stop depressive thought. This is regardless of the etiology: effectively counteract the manifestation of dysfunctional thought, and you are effectively treating the symptoms of depression. Hinder the occurrence of the dysfunctional thoughts, and you limit the onset of depression.

A key part to this is the idea that depressive thoughts are the result of errors of thinking. Sound familiar? For a sad or frustrating occurrence to form become a depression instead of temporary grief or anger, depression-prone people must succumb to a false piece of reasoning about whatever is bothering them.

David Burns, M.D., psychiatrist and important figure in the development of Cognitive Therapy

Many cognitive distortions are also logical fallacies; related links are suggested in parentheses.

1. All-or-nothing thinking – Thinking of things in absolute terms, like “always”, “every” or “never”. Few aspects of human behavior are so absolute. (See false dilemma.)
2. Overgeneralization – Taking isolated cases and using them to make wide generalizations. (See hasty generalization.)
3. Mental filter – Focusing exclusively on certain, usually negative or upsetting, aspects of something while ignoring the rest. For example, focusing on a tiny imperfection in a piece of otherwise useful clothing. (See misleading vividness.)
4. Disqualifying the positive – Continually “shooting down” positive experiences for arbitrary, ad hoc reasons. (See special pleading.)
5. Jumping to conclusions – Assuming something negative where there is no evidence to support it. Two specific subtypes are also identified:
   • Mind reading – Assuming the intentions of others.
   • Fortune telling – Predicting how things will turn before they happen. (See slippery slope.)
6. Magnification and minimization – Inappropriately understating or exaggerating the way people or situations truly are. Often the positive characteristics of other people are exaggerated and negative characteristics are understated. There is one subtype of magnification:
   • Catastrophizing – Focusing on the worst possible outcome, however unlikely, or thinking that a situation is unbearable or impossible when it is really just uncomfortable.
7. Emotional reasoning – Making decisions and arguments based on how you feel rather than objective reality. (See appeal to consequences.)
8. Making should statements – Concentrating on what you think “should” or ought to be rather than the actual situation you are faced with, or having rigid rules which you think should always apply no matter what the circumstances are. Albert Ellis termed this “Musturbation”. (See wishful thinking.)
9. Labeling and mislabeling – Explaining behaviors or events, merely by naming them; related to overgeneralization. Rather than describing the specific behavior, you assign a label to someone or yourself that puts them in absolute and unalterable terms. Mislabeling involves describing an event with language that is highly colored and emotionally loaded.

Personalization (or attribution) – Assuming you or others directly caused things when that may not have been the case. (See illusion of control.) When applied to others, blame is an example.

(from Wikipedia)

Another form of therapy based on careful examination of cognitive processes is (incidentally named) Rational emotive behavior therapy.

As a formerly severely depressed person, learning successful strategies for dealing with my own thoughts has been the primary vehicle to recovery.

But, in the end, I agree with Zach’s general perspective: learning about rationality (and its failures) does not greatly or immediately make us capable of making better decisions. It’s general knowledge, after all. Applying rationality to the complex situations we face still remains the more important undertaking.

Of course, I’m personally interested in understanding how I can use rational thinking to get ahead, in personal and professional life, but I haven’t seemed to be able to inductively reason how I might go about this. Any ideas?

1. Provide the energy demands to your virtual city in the online flash game Energyville. HT2 Robert Simione.

2. What do disgraced NY governor Eliot Spitzer and GMU economist Tyler Cowen have in common? They’re both in this economics podcast from The Takeaway (on post bailout banks) – though only one of them had their name misspelled in the transcript (you’ll have to discover which one for yourself).

3. Media power – CNN releases a mistaken report about a US Coast Guard drill, presenting the incident as a real shooting. The scary part is that CNN report was based on intercepted radio signals.  Something tells me it shouldn’t be so easy for the media to do this.

4. The most recent world’s oldest person is no longer the world’s oldest person. Why aren’t people able to live past 115 years? The bible says Moses lived until 120.

5. Arnold Kling thinks that we should lower our expectations of expertise, especially in the social sciences. There’s just just too much we don’t know, that so-called experts claim to know.

6. Take a photographic field trip to the Creation Museum with Rationality Now. Interesting pictures and great (skeptical) commentary from Dan. I highly recommend going through the whole series. HT2 Neece at Having Dead Cats blog.

7. The highly anticipated Monopoly City Street was so popular on it’s Sept. 8th release date, that it crashed servers. The game will be reset next week, presumably with more bandwidth.

New York City, MTA Bus

The first major issue with this poster is the choice of the word “risk.”  Slips, trips and falls are potentially injuring but is the action itself risky? Walking or running out of a bus is risky because there exists the potential to trip, but once you’ve already started to trip no new risks are being taken because, presumably, you don’t choose to follow through with the trip – it just happens. The poster should have said “running is risky because you may slip, trip or fall” or maybe “slip trip or fall is dangerous.” But slipping can’t be said to be risk-taking, at least not how I understand the word.

I think this picture is self explanatory about why reference frames are important. The other glaring error is the quantitative element: that a slip, trip or fall is twice as risky. Twice as risky as what, exactly? If you’ve already tripping, the risk that you will continue to fall is fairly high – probably more than 2. So I don’t think that’s what they mean.

Most probably, slip trips and falls cause bus-related injuries two times more frequently than some other incident – though we can only imagine what that might be.

Since they also qualify the statement with sometimes – when exactly should I be worried about slipping and tripping? What are the risks when these conditions don’t apply?

What bothers me so much about this poster is that they don’t provide reference, nor do they explain under what conditions are slip, trips and falls more likely (only that they sometimes are). Reading that poster, should I be nervous about suddenly and randomly slipping out of my seat – because, sometimes, that’s twice as likely (twice as likely as gravity reversing and I get stuck to the ceiling, maybe?)?

This poster basically tells me nothing because they don’t frame it around a stable reference or provide relation – I don’t know how likely I am to trip at any given moment. Realistically, I realize that the poster is only trying to make passengers aware of a common problem in bus safety, but it would have taken about an two extra seconds to realize the statement is nonsense and to fix it.

Now, every time I see it on the bus (thankfully not every day) I am forced stare at the poster in frustration.

“Following implementation of the act, the trajectory of the economy changed materially toward moderating output decline and job loss,” the president’s Council of Economic Advisers told Congress.

It looks like somebody needs a lesson in post hoc ergo propter hoc. I’m sure their statistics are all nice and tidy, though.

Instead, “woofie” is given based on mutual respect (whether its for a job well down or a good conversation). Woofie is used as the de facto currency, and will buy you anything you need, but it also seems to be self-reproducing. In other words, I don’t have to give up my own woofie to give some to another.

It’s a neat idea, and it makes sense in a society where one’s social capital is more important than one’s labor skill. It seems to me, however, that this would produce hyper-social societies, where “loners” are doomed to be poor, and only the super-rich can afford to take a social holiday.

Dan Davis, MP says that this creates:

…a huge intrusion on privacy, yet … little or no improvement in security.

But what’s the evidence of the latter. If Freakonomics is also correct in reporting that there are over a million cameras in London, then over 1000 crimes in London have been solved in London this year by cameras. The obvious question that nobody seems to be asking is whether the money could have been spent more efficiently elsewhere.

This NYT article reports on the findings from a book by William Bowen and Michael McPherson, who found that the graduation statistics from US Public Universities are not good.

Only 33 percent of the freshmen who enter the University of Massachusetts, Boston, graduate within six years. Less than 41 percent graduate from the University of Montana, and 44 percent from the University of New Mexico.

Of course, the obvious conclusion that they draw is that Public schools are failing college-goers. The Obama administration is responding by shifting funds from loan subsidies to direct financial aid, but this may only help enrollment not completion.

They also conclude that students pick colleges that aren’t the best match for them, smart kids going to worse schools because of proximity to home or other reasons. This is particularly a problem for poor students.

For poor students, staying in school for four or more years in order to graduate can really rack up the tuition bills. The mainstream conclusion is probably to direct more financial aid and improve college matching programs in high schools.

I think Cato Institute’s Charles Murray would come up with an alternate conclusion. All financial aid does is drive up demand and costs of colleges. Perhaps cutting financial aid and changing social attitudes about seeking 4 year degrees will lower demand, cause costs to fall which will instigate “substandard” universities – which don’t graduate as many students – to close. If we restrict financial aid only to the very poor, we can make college cheaper for everyone, and save lots of time for people who don’t need 4 year degrees.

I don’t think its a stretch to assume that the man had no meteorological basis for making this claim, yet we hear these sorts of statements all the time. Why do people commonly assume that there are physical relationships between past and future events? Or, even worse, that past events can somehow influence the outcome of future events even when lacking a direct causal element?

I’m currently working my way through some of David Hume’s philosophy. He seems to focus on one important notion; that causal relationships, even down to apparent the physical laws of the universe, are influenced by our perceptions. In other words, we assume, despite lack of evidence, that a falling object will conform to Newtonian laws of motion everywhere in the universe. We make inferences about effects without completely understanding the causes because all previous experience has given rise to these expectations – and so we want all future experiences to conform as well. Furthermore, because these experiences must be filtered through human consciousness, events (and our expectation about future events, causes and effects) are inherently biased.

This notion can be extended one step further, by discussing the statement from the guy on the radio.

Not only do people seem to have askeptical expectations about causal relationships (by assuming a deterministic worldview and ignoring the effect of subtle variations on outcomes) and too brazenly draw inferences about the world, but there is also the expectation that the human brain can bend outcomes at will.

Radio guy wills there to be a mild winter and has some expectation that this will occur – despite the lack of data that links weather patterns in this way. Sports fans often wear their lucky jersey or sit in a specific way, in order to meta-influence the game.

Hume was only half way there.

Not only do our minds distort our expectations for cause to preceed a predicted effect, often these expectations are based nothing more than hope, desire and observation biases. Once these biases are set up, we think that our [incorrect] expectations can have an affect on actual outcomes.

Right now, I’m coming through the news and trying to predict what the next trending topics will be.

HT2 Tyler Cowen.

Why? Two main reasons:

1. Robert Wright publicly said that this was foolish, apologized for the poor editorial oversight that led to it, and says they’re going to try never to do this again. This looks sincere to me, and given that it’s sincere, people really ought to be allowed more chance than this to recover from their mistakes.

2. Bloggingheads.TV has given me a forum to debate accomodationist atheists who are insufficiently condemning of religion – for example my diavlog with Adam Frank, author of “The Constant Fire”. Adam Frank argues that, while of course we now know that God doesn’t exist, nonetheless scientific wonder at the universe and its mysteries has a lot in common with the roots of religion. And I said this was wishful thinking, historically ignorant of how religions really arose and propagated themselves, and a continuation of such theistic bad habits as thinking that things of which we are temporarily ignorant are “sacred mysteries”. And no one at BHTV complained that I was being too confrontational, or too anti-religious, or that it was unfair to have the diavlog be between two atheists.

In the rest of the post he reiterates his commitment to the mission of antitheism.

Harvard Law Professor Cass Sunstein leaning suggestively on a doorframe

I spent most of the afternoon yesterday obsessing about Cass Sunstein, whose views on just about everything from free speech to animal rights confuse the heck out of me on first glance.

In general, that means it’s time to learn more.

Here’s what happened: a friend of mine on Facebook, yelling about other things, was gracious enough to share this The New York Post :

Advance copies of Sunstein’s new book, “On Rumors: How Falsehoods Spread, Why We Believe Them, What Can Be Done,” have gone out to reviewers ahead of its September publication date, but considering the prominence with which Sunstein is about to be endowed, his worrying views are fair game now. Sunstein is President Obama’s choice to head the White House Office of Information and Regulatory Affairs. It’s the bland titles that should scare you the most.

[...]

Sunstein was appointed, no doubt, off the success of “Nudge,” his previous book, which suggests that government ought to gently force people to be better human beings.

Fascinating! I haven’t read Nudge, either (this is what happens when one’s book budget goes down the drain) but from what I know, Sunstein seems to enspouse a modified form of libertarian paternalism.

The Post column has actually made me more interested in Sunstein’s work. Considering the press Pop SocSci authors like Malcolm Gladwell get, it seems to be not very well understood outside of law and behavioral economics.

I guess I should stop ignoring the guy.

Most brazen part of this: I have a copy of Cass Sunstein‘s 2007 book Worst Case Scenarios sitting right in front of me.

The beer is gone, but the book remains unfinished.

One of the few things “pro-labor” movement actually got right?

Thomas Jefferson is rolling over in his grave.

An otherwise interesting BBC article on the Google book scanning deal ends with this:

Many believe the issue of rights over out-of-print books would best be solved by legislation and not the courts.

“It is never a good thing for private parties to make deals for the public good,” said Martin Manley, the founder of Alibris.com, an online store which sells used, rare and out-of-print books.

“The public good is meant to be solved by regulators who are somewhat accountable and by legislators who are wholly accountable,” Mr Manley told BBC News.

Now, I’m not a big fan of copy right law and I support Google in their efforts, but Mr. Manley has this completely wrong. The enforcement of private contracts is certainly within the realm of the judicial system. Google is not trying, nor should be expected to, make deals for the “public good.”  They are simply trying to provide a service that consumers find desirable – and working around stone age copyright law in trying to do so. But don’t think for a second that just because Google doesn’t charge internet users directly for their services that Google is acting for the purposes of the “public good.”

Make no mistake, this is a private deal for private interests.

And as for his second quote… yes, copyright law needs to be reworked by legislatures, but it doesn’t sound like this is what he’s saying. It sounds like Manley wants congress to pass some bill that would erase private contracts and copyrights to “protect the public good” of having free books online (which, incidentally, I don’t think one of the rights protected by the constitution).

I hope this quote was taken out of context. Imagine what kind of precedent it would set if congressman could just erase copyrights or patents when deemed to violate the “public good”? Manley claims that legislators are more accountable that judges, but was it judges that were trying to interfere with private contracts during the financial bailouts?

What Manley is suggesting, using erroneous assumptions, is that judges are trying to legislate from the bench via private interests (which is false, they’re just trying to uphold bad laws) in a way which violates the public good (also false: he confuses Google and google customers for the general public). His claimed solution, if I’ve interpreted correctly: give legislators even more power to uphold subjective public good.

Hint – what legislators claim is the public good is more often than not special deals for private interests. In this case, what Manley wants is a deal that works out for Google. What happens when the next special deal is struck for some pharmaceutical company that Manley doesn’t like so much?

There is a good reason why we have checks and balances and that political power is divided the way it is. I would say this recommendation is borderline unconstitutional.

To continue the noble tradition:

1. I’m not entirely sure, but I think Robin Hanson is saying he’s a successful blogger and economist because he’s so pretty.

2. There seems to be some debate ( started by Steve Horowitz, continued by Mario Rizzo) about Ludwig von Mises’s position on free banking. Horwitz claims that Mises prefers his own approach rather than the strict market-anarchist of Rothbard. I’m glad. I don’t much like Rothbard’s take in this regard.

3. Bob Murphy apologizes to Paul Krugman and Tyler Cowen (I’m not entirely convinced either of them deserve it).

4. Freakonomics reports that, in Detriot, the average home price is less than a good used car. The low price could encourage immigration to Detroit, but probably not since there doesn’t seem to be much to do once you get there (career-wise).

5. Carl Zimmer quits bloggingheads and hints at a conspiracy that the editor Robert Wright is a secret creationist (or at least sympathetic).

I was wondering how people respond to different incentives. For example, which would turn Oliver into a more prolific blogger: if I paid him, per post, some relevant sum or if I threatened to cut off a digit for every week he went without crossing some threshold for number and quality of blog posts?

I’ve started listening to audio recordings of the Federalist Papers. I have to say that, at least so far, I’m not impressed by some of the arguments that they where making in favor of passing a Constitution that would unite the States under a Federal government. I realize that I can’t relate to some of them, just because the world we live in and the state of the country is just completely different.

For example, the argument that  a large Federal government is more efficient and has a larger pool of talent to draw on than many decentralized confederacies seems a bit silly now. However, during a time of inept local politicians (well maybe that hasn’t changed) and a much smaller population, this argument (from Federalist #3) must have made a lot more sense.

However, take this argument from Federalist #2 (written by John Jay):

They [the people] considered that the Congress [of 1774] was composed of many wise and experienced men. That, being convened from different parts of the country, they brought with them and communicated to each other a variety of useful information. That, in the course of the time they passed together in inquiring into and discussing the true interests of their country, they must have acquired very accurate knowledge on that head. That they were individually interested in the public liberty and prosperity, and therefore that it was not less their inclination than their duty to recommend only such measures as, after the most mature deliberation, they really thought prudent and advisable… every succeeding Congress, as well as the late convention, have invariably joined with the people in thinking that the prosperity of America depended on its Union.

Jay’s premise is that the majority of people were happy with the federalist goals of the original continental congress (a premise which he doesn’t provide support for) and then assumes that because the members of the congress were popular, they must have also been wise and knew what was best for the country. Then he rounds it off with a fallacious appeal to authority and historical precedence to support a large federal government.

It’s interesting to note that the Federalists were also against drafting the Bill of Rights.

Ron Paul’s new book End the Fed has a few celebrity endorsements:

“Rarely has a single book not only challenged, but decisively changed my mind. ”
–Arlo Guthrie

“Everyone must read this book — Congressmen and college students, Democrats and Republicans — all Americans. The Federal Reserve, which serves private banks, has compromised our economy and is undermining our freedom. It can and must be stopped now. Ron Paul shows us how and why we must end the Fed. Read this book!”
–Vince Vaughn

I knew Arlo Guthrie, to the chagrin of his hippy and yuppy fans I’m sure, is a libertarian-minded conservative. I didn’t know about Vaughn, though.

HT2 Taking Hayek Seriously

Jeff Harding from The Daily Capitalist writes:

Peter “As Seen on TV” Schiff is another. He runs EuroPacific Capital and made a very big name for himself predicting the collapse of the economy. There are many film clips on YouTube where he famously embarrassed many Wall Streeters and economists by his insight into the economy. Peter is of the Austrian School of economics and does an excellent job in articulating these ideas.

There is one hitch to Schiff and that is in making money for his clients. He predicted global equities would be the place to be after the crash and he also predicted that we’d be in hyperinflation. Neither of those things worked out well for him. While I enjoy his film clips, I have tuned him out.

According to this standard Austrian story (or at least how Peter Schiff interprets it) inflation should be heavy and gold prices should be through the roof. However, neither of these things are happening yet. One reason may be because banks aren’t lending out the stimulus money yet and that much of it has yet to be spent.

As the months drag on, however, this story seems less reliable. So here’s my question:

When will Austrians abandon the idea that we’re still heading into hyperinflation – or how much would they bet that it will occur if given reasonable odds?

One possible answer: just in time for hyperinflation to kick in, allowing free market capitalism to get blamed for the mess again.

Robert Murphy shares this piece from Larry Kudlow:

In Hayekian and Misesean terms, bad investment and spending decisions are being remedied through the free-market corrective process. And, greased by easy money, today’s market correctives may produce a much stronger V-shaped recovery than the stock-market consensus expects.

Talk about misrepresenting a position! According to Hayek and Mises, using easy money to grease the wheels is the exact opposite of market correction. This is exactly what creates monetary inflation and unsustainable bubbles. So what looks like V-shaped recovery is actually, on the recovery end, only the illusion of recovery.This easy money gets funneled into bad investments which eventually come crashing down when the market can no longer support them.

This is like saying the Yankees are going to start scoring more points by trimming all that dead weight from behind the plate – by getting rid their pitching staff. He’s got some idea of how to win a baseball game, but only pays attention when the Yankees are at bat. In other words, he’s only understanding half of Austrian Business Cycle Theory – the part where easy money creates a boom, but doesn’t see the long term, stable strategy.  He’s analyzing a complex situation but only looking as far as his nose – while trying and failing to throw some peanuts towards the ‘free market’ crowd.

What would yours be?

Here’s mine -

1. Wealth of Nations & Theory of Moral Sentiments – Adam Smith
2. Principle of Political Economy and Taxation – David Ricardo
3. The Constitution of Liberty – FA Hayek
4. General Theory – JM Keynes
5. Capitalism, Socialism and Democracy – Joseph Schumpeter
6. Principles of Economics – Greg Mankiw
7. Growing Artificial Societies – Axtell & Epstein
8. Human Action – Ludwig von Mises
9. Principles of Economics – Carl Menger
10. Monetary History of the United States – Milton Friedman

*disclaimer – I haven’t read all of these yet, but they’re on the lineup.

I’m always excited when life presents us with ready made natural experiments. A couple days ago, I wrote about the dedicated line manager at the cafeteria where I work and how I thought that his salary is probably more costly than the benefits he provides (efficiently moving lines). Well today, just my luck, the line manager was no where to be found. Lunch goers would have to navigate to the cash registers by ourselves.

Did the cafeteria devolve into a den of chaos?

The answer is no! People where just about as good at creating order spontaneously, as when managed by a central planner.  Well this isn’t exactly true. The cashiers themselves called out to whoever was next on line, notifying that they were free, and could accept a new customer.

I did make one interesting observation, which may or may not be significant. The only major difference between the outcomes of the two scenarios is that the line manager would generally arrange for two customers to be waiting at a register at a time. Without the manager, people waited for the cash register to completely clear before walking up to it. At higher volumes of traffic it *may be* that this would slow down the flow, but I didn’t notice a difference in practice.

I think this hesitation could be traced back to a customer’s self interested behavior. We’ve all gone through times at the grocery store where you get behind a short line, only to wait behind a really slow person while people waiting on longer lines pass you by. At the cafeteria, perhaps people wanted to make sure that a short line would also be the quickest, by avoiding slow people.

I would like to see a mathematical model of this, because I can’t reason out whether this would cause an overall increase or decrease in the customer flow rate. On the one hand, cashiers have more work to do and spend longer without customers in front of them. On the other hand, new customers direct themselves behind the fastest payers (whereas, the line manager doesn’t know how fast the paying customer will be, before putting a new customer behind them). I don’t know which effect would dominate.

Maybe I could work out this model for a fall project (graphical model to come soon?)

I’m going to try a recurring thing, where I link to other blog posts and make very quick comments about them. We’ll see how weekly Friday posts work for this.

1) Robert Murphy praises Paul Krugman – a huge turn of events from a man who is usually (and often correctly) hypercritical of the Nobel Laureate. I guess Austrians and Keynesians can find some common ground – namely when they’re attacking assumptions made the Chicago school.

2) Tyler Cowen tries to get Peter Boettke to admit that the financial bailouts were a good idea. Boettke predictably refuses, stating that Cowen is misstating what it means to be a libertarian. Cowen hits back with the notion that letting banks go bankrupt instead of bailing them out would still increase the size of government – because you need the court systems to deal with all the fallout. Steve Horowitz weighs in on the Austrian Economics blog, saying that Tyler is confusing increasing the scale of government (which would be necessary to deal with increased work load associated with bankruptcy from bank failure, but would not give government new powers). Horowitz points out the the bailouts increased the scope of government – creating a the feds precedence to use new powers.  I think this last view is essentially correct. I’ve stopped thinking of Cowen as a libertarian for a while now. Stay tooned, because I’m sure this debate is not over.

3) A strange case where the Dutch government has taken legal guardianship over a 13 year old girl, who is trying to become the youngest person to sail, solo, around the world. Her parents are ok with it, but the nanny state has intervened. Possible violation of freedoms or just negligent parents (or both)?

4) My father has a new education related blog, but has yet to post. He keeps trying to get me to teach him, but I everything I tell him he forgets in a couple weeks and asks me to repeat myself. I’m not holding out much hope that his blog will be very successful, but we’ll see. He has some good ideas about providing resources to fellow educators – something he knows a lot about.

You can understand why big-pharmaceutical industries would be interested in studying the placebo effect. In order to fabricate good medicines, the effects have to be real… in the sense that the healing effects are not simply due to psychological residues.

Robin Hason, on Overcoming Bias suggests that their are gaming the system; seeing how, when and where they should conduct research on certain drugs to maximize the placebo effect. In other words, placebo effects for different drugs is widely variant based on different cultures, geographies and the like. Since no drug trial is truly randomized (despite appearances), some studies will report different effects when tested in different areas or subgroups. Pharmaceutical companies would like to test their drugs in ways that allows them to maximize their apparent effectiveness against the placebo ‘background.’ Worse, the NIH and (probably) FDA are staying mute on the subject because they don’t want to lose their corporate funding. Talk about the importance of financial signals!

In a related post, Mind Hacks has an excellent post about how the placebo effect isn’t just the effect of “mind over body” healing, but it is also statistical variations in the way different people respond to disease and medicine. If the subjects of a study are not properly randomized into groups (or a poor sample population is chosen in the first place) then the placebo effect will change the “background” signal of disease progression sans drugs, which will change the apparent effectiveness of the drug. (HT2 TGGP in the comments at OB)

Tyler Cowen links to this piece by Daniel Callahan about how the technology innovations are driving up the price of health care. The point Callahan is attempting to make is that we need to focus more on basic care, rather than higher cost, high-tech approaches (coincidentally, what’s needed when conditions worsen). It’s an argument for funding preventative care, so we don’t need to use these tech-heavy, innovative solutions for care… things that drive up costs.

I agree with the basic premise, but could you imagine someone saying, “no lets keep using this old 386/9mhz computer with 50mb hard drive space and 4mb ram that we bought for $3000 in the mid 90s… new computers are just too expensive.”

My point is that technological innovations should be driving down costs, not bringing them up. When this fails to happen, it is a sure sign of a non-competitive market with insufficient pricing signals going on.

Tyler Cowen says:

The Democrats are right about the need to constrain Medicare expenditures, but the more they attack Republican stupidity and lies, the further they are from understanding why Americans now trust them less with health care reform than before.

This point is well taken. Dems are too focused on bringing down costs without trying to understand why costs are high. Without competition, the only way that I know to bring costs down is by introducing shortages and reducing innovation by by introducing disincentivizing signals to the market. They claim to want to introduce competitiveness through a public or non-profit option, but refuse to take down barriers that prevent organic market competition. Does this make sense?

The cafeteria in the hospital where I work, has a half a dozen cashiers. The people queue up with their food and are directed to the next empty cashier by a dedicated line management director (who, for some reason, wears a doctor’s white coat as his uniform). This caused me to think about why the hospital – the catering services department in this case – felt that this type of signaling was necessary.

If there was ever a case where the traditional economic assumption of rationality is probably correct, it’s here. Consumers, who quite obviously don’t like to wait on long lines, have a very clear goal: to maximize their utility function of food consumption. They want to reduce the amount of time on line and maximize the time they can relax on their lunch break, socialize or get back to work if they need to. Information here is quite clear. The cashiers are set up in such a way that scanning the available cashiers will reveal the next available one. There are ropes clearly marking where individuals should stand, single file, to wait for a cashier. So why are they wasting resources on hiring a line manager, who’s sole apparent purpose is to tell the next person in line which cashier to go to?

Assuming that my employers are themselves rational and have compared the cost/benefit analysis of smooth operation with and without a line manager, I must assume that without the ‘central planning’ of the line, there would be enough disorder that it hurts diners’ experiences and therefore profits.

What this brings to mind is something fellow FS blogger, Robert Simione, said to me the other day about the economic assumption of rationality:

…[E]conomists label “rational agent” as someone who wishes to maximize their monetary gains (or whatever you wish to call their pool of money).  I was thinking about where this assumption comes from, and… about how all through history, philosophers since Aristotle stated that everyone’s goal is to maximize their happiness. Then economists took this idea and consider the monetary value of various happiness costs, and they say: “People trying to maximize happiness is like people trying to maximize the use of their money.” So now I wonder, what if this idea, that “rational” people always try to maximize their general happiness, what if this idea isn’t true? …I think the Efficient Intentions Hypothesis is not always true, and I think that you are right, that we may not be particularly good at finding a path to optimal happiness.

This is an astute analysis that I want to take even further. Even if people are rational, are good at – or don’t even bother trying – maximizing their happiness (which doesn’t appear to be the case), individualist goals under self motivated behavior to reach some new happiness potential does not necessarily produce the most efficient outcomes in aggregate group behaviors.

Its like a story I picked up from Tyler Cowen from Marginal Revolution (via Jason Kottke and other sources). Individuals may choose the shortest route to their destination when driving, but this doesn’t necessarily produce the best outcomes for anybody. Everyone wants to take the shortest routes, but the resulting traffic slows everyone down (the solution, by the way, is to intelligently close certain roads). My cousin-in-law, who is a traffic engineer for the NYC-NJ Port authority, pointed out to me that this is why the NYC’s plan to cut off traffic in parts of Broadway in Times Square and Herald Square was such a good idea. Instead of being stuck in traffic, drivers must take multiple alternative routes through midtown Manhattan, which effectively relieves congestion (and leaves more room for pedestrians).

This is an analogous, though not exactly parallel, story to my line management problem. We have the problem of self interested behavior creating chaos, rather than the smooth order predicted by the invisible hand. But, unlike driving, lunch-goers can see all of their options and select the fastest route accordingly. In this case, picking the cashier with the shortest line prevents congestion at the other registers. It’s not as if consumers are picking out one register just because its the closest or has the most attractive cashier (though this could still be a problem). If people are acting rationally and have no problem acting upon their preferences, I would predict that no line manager should be necessary.

It remains a problem to know exactly how rational people are and if they have enough information to pick a route that maximizes their utility to their expectations. Automobile operators, particularly ones that are well informed about pure route distances but not traffic patterns, may not be entirely rational or have enough information to produce beneficial outcomes. I don’t believe this is true for a lunch line.

In economics, these problem exists, as well as the ever important fact that the central planner has even less information than the markets. So while the aggregate result of self-interested, irrational behavior may be chaos, the outcome may still be preferable than a planned economy under technocratic rule.

This a continuation of Monday’s post.

In the comments of this post by Scott Sumner he links to an exercise of opportunity costs (note that this is apparently not the question that stumped nearly 80% of economists at an AEA convention, but is apparently similar[?]).

Prof. Jungshik Sonof Hanyang University (Seoul) asks:

Suppose Mr. A, B and C would like to buy one refrigerator costing $1,000. The best alternative forgone for each of them are as follows: Mr. A would have deposited the money at the bank which pays 10% interest per year. Mr. B would have built a parking facility on his own land with the money from which he would expect net income of $10 per month. Mr. C would have treated lavish dinner costing $1,000 for his large families. In this case, what would be the opportunity cost to buy the refrigerator for Mr. A, B and C, respectively?

 

Fellow False Symmetry blogger Robert Simione wrote:

Mr. A will have an infinite payoff unless the rate of inflation is positive and increasing. Mr. B will have an infinite payoff unless inflation is positive and Mr. C. may get included in a few more wills i guess, but all in all it seems like a question with incomplete information.

I agree with his assessment of the relevant opportunity costs. If its possible to predict the rate of return on A & B’s investments, then we can say their potential profits (and therefore opportunity costs) will be infinite for an undefined (presumably infinite) number of periods. Of course, reality rarely works like this and so there must be some real, finite, opportunity cost, which happens to be incalculable because we cannot predict future conditions. Mr. C’s costs present an interesting problem, because his potential gain is even more incalculable than A and B.  It cannot be defined by any direct monetary amount – even if he does increase his financial capital via improving his ‘human capital‘ – and it’s harder to predict human intention than market processes (I think).

So I agree that this is a question without enough information. But the question I pose takes this one step further: Is there any real situation (or even a realistic theoretical scenario) where it is possible to accurately calculate real opportunity costs?

During Father’s Day this year, my father, brothers, and I went to the horse races at the Belmont Race Track. With an interest in economics, this was going to be a fun opportunity to observe and play in a prediction market (legally). You have several different places for information on the odds of each horse winning. But these fall in to two categories: There are those predictions of the experts, which can be found in any newspaper. And then there are those predictions of the masses, plebians, or “the free market” if you will. These are the odds the track uses to determine your winnings. Not because the track is run by radical free market types, but because its the only way to ensure that the house doesn’t lose any money.

So I tried a little Keynesian experiment:

Hypothesis: An intelligencia could work better than a bunch of rationalist, self-interested bastards.

Equipment: Horse track, odds predicted by experts, horses, odds offered by the teller/free market/proletariat masses, beer.

Method: Whenever the odds offered by the teller are mispriced favorably according to the experts, place a bet on that horse.

Possible sources of error: luck, organized crime.

The result: After 9 races, a few of them won big. In the end, a cool $25 turned into a hot 43 dollars!

Conclusion: We proved that central planners always beat the free market.

Anyway, you might like to independently verify these results.

Big HT2 Scott Sumner.

In a very good review of Tyler Cowen’s new book Create Your Own Economy (which I purchased but haven’t started to read yet) Sumner says in the comments (in reference to framing effects)

They remind me of a personal experience I had that I ask my class about. I bought a Springsteen ticket in 1978 for $10. As I was about to go in someone offered me $50. I ask people “what did it cost me to see the show?” Almost nobody says $50. Oddly, some people say $40. (They are also surprised by how cheap tickets were back then. It was a small show in a Chicago movie theatre. Very cozy. And in 1978 Springsteen was a very charismatic perrformer in an intimate setting.)

I understand the inclination to say the costs as $40. I posed this scenario to several non-economists and got an answer of either $10 or $40. Of course, $10 represents the sunk cost of the ticket and this is obvious. Once the ticket is purchased, there is no opportunity for resale and so no costs of opportunity. But the $40 profit represented by the scalper represents an opportunity cost: the potential gains foregone to pursue a preferred task. The total costs are, therefore, represented by the opportunity cost plus the sunk costs for a total of $50.

This is a confusing concept… why aren’t the sunk costs subtracted? Because the sunk cost (at least in this scenario) are non-refundable. I can’t can’t my initial $10 back, but forgoing the profit I could make from the ticket sale comes costs a $40 profit.

Of course, we must also consider non-monetary costs and benefits… If you consider a Springsteen concert experience more than even $50 in total costs. This makes opportunity costs different to express in real scales and on temporal scales. One commenter (known as “philo”) points this out on Sumner’s blog: opportunity costs are time scale relevant. Framing effects, available choices and preferences over a given time, are important.

Stay tooned: In my next post, I discuss opportunity costs further with fellow False Symmetry blogger, Robert Simione.

I wonder if this isn’t a display of information bias – besides for the obvious problem of the small sample size.  American politics and issues are probably on the news in Iran a lot more often than we’re exposed to Iranian politics.  Maybe there is some neutral terroritory that we can quiz to eliminate the information bias, which tells us nothing about the relative and subjective “informative-ness” of Americans and Iranians.

to just accept the widely accepted fact that air consists of collection of different gases you need “faith” in that science can really resolve and fully explain this kind of things

I see what he’s getting at and agree to some extent.  The general public accepts 99.9% of the basic scientific principles at face value (just intuitively) without questioning them.  But is this faith akin to religious faith?

We accept scientific principles not because we have some deep religious trust in our scientist (maybe some of the big guns have become an exception) but because the public knows, on some level, the type of rigid attitude scientific method implies.

Its a shame, but we, for the most part, no longer teach children about classic science experiments in school or even much at the university level.  I believe this lack is partly to blame for the confusion between trust and faith when it comes to science.

You cannot easily verify this fact by yourself and so you must in the end trust people that have taken to their mission to find these things out.

We can and do trust scientists to do their jobs, but this trust is not akin to faith. To have faith in the bible means you can’t check the references or repeat the experiment.  Even our most basic scientific principles, however, have been published, largely in a public forum.  Want to read about Newton’s or Maxwell’s early physics experiments?  Go to the library and you’ll see all their data and how they intepreted it.  The same goes for any branch of natural or social sciences.

In fact, here is a monthly blog carnival, The Giant’s Shoulders, dedicated to reconnecting with our scientific past.  Look through some of the posts and see how some of our most basic scientific principles used to be falsifiable, hot button issues, needed to be proven with rigor.

jaskaw, in his original post, makes this general point as well, but seems to imply that this type of trust is rational (in contrast to religious faith).  That I’m not so sure about.

Is it rational to trust scientists – who we know have political or personal agendas, who have been known to lie, publish fradulent data, use their connections to stretch the limits of high standard and peer-reviewed publications for personal gain?  We have a real scientific community, and then there’s the one the media presents us with – and it’s not always friendly – that stretches already tenuous results.  The media promises us miracle cures and cancer drugs every other week, but real progress is much slower.

Maybe people are irrational for trusting scientists so much.  99.9% of us will reach for the pill bottle without even a literature review, trusting the work of corporations and government scientists to do the proper vetting.  This is despite the fact that the media plays up reports of ineffective or dangerous drugs, because bad news sells.

Despite all of this, we approach science with a trusting, almost religious-like, blind eye.  We trust in the scientific process and the painfully slow scientific method somehow gives us great results in the end.  But, if we were truly rational about it, maybe we would reject science altogether?  And I say this as a scientist with a first hand account of what the scientific process is all about.

But it is a good thing?  I buy that it would be good for allowing “gay marriage” (in the way that all civil union contracts would be the same for all consenting adults regardless of gender) but why should the state not incentivize the survival of family structure?  How would alimony and child support payments be enforced?  I’m no expert in contract law (or any law for that matter) but treatment of these issues seems problematic – and by that I mean overlooked.  One of the highest rates of single parenthood is in poor black communities, and that doesn’t seem to be working out too well for them (here is just one report)  Maybe we need stronger incentives to retain familial structure, rather than less.

Here’s one more statement of Rizzo’s I find misrepresents reality a bit:

For many centuries the State was not involved in restricting the nature of “marriage.” The terms of marriage were the domain of the Church.

Rizzo seems to forget or neglect the fact that, for a long time, the church was essentially the state.  And I’m not even talking about medieval europe here.  For good or ill, religious attitudes still affect policy makers decisions in the United States.

This points to a larger question (I’m not particularly interesting in debating the plausibility of a real change occurring in the public’s conception of marriage law).  Without a doubt, the role of the Church in people’s lives, from daily rituals to law and governence is waning.  Therefore, is the growth of a allegedly religious-neutral State a natural way for the morality of the majority to express itself?

If we’re replacing religious doctrine with some agreed upon, democratic form of secular humanism (influenced but not dictated by traditional religious tennants) maybe common law that  governs marriage isn’t a bad thing.  Maybe leaving marriage terms up to the individual parties would generate chaos?

On the other hand, tryanny of the majority is something we’re supposed to want to avoid, as well as the assumption that politicians know best.

Truly, this a tricky issue with many layers.  Isn’t it better to discuss them all before defaulting to the standard (though admittedly defensible) libertarian-anarchist position?

PS – Hello World!