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.

Has there ever been an actual example where predatory pricing has been used to clear out the competition and then take over the market? It seems to me that there is too much information asymmetry to actually pull this off. In addition, monopolies are either efficient and price low (so who cares) or other players come into markets. So its never actually a problem, just a theoretical hyperbole that economists like to muse about and politicians like to drum up scare about to increase their own influences.

The so-called predatory price cuts have not spilled over to the sale of textbooks. Is that good news for students (as the Booksellers’ argument suggests) or bad news?

Of course its bad news to the corporations.. So-called “predatory pricing” keeps prices low. So price wars only hurt the profits of the big publishers. Everyone else wins. Any bets on when they’ll start calling for price controls? you know… to “correct” for the market?

The US economy grew at an annual pace of 3.5% between July and September, its first expansion in more than a year.

The growth was helped by a substantial government spending plan, including a scrappage scheme to boost car sales.

Post hoc ergo propter hoc anyone? That’s some pretty shoddy journalism. Of course everyone, especially the White House, is going to buy the story. But, of course, if you didn’t see the recovery it wouldn’t mean that the stimulus didn’t help.

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.

This amusing story demonstrates the point:

And then Stephan Kinsella relays this anecdote about Tom Woods’ debate with ING Chairman Tom McInerney (HT2 Bob Roddis):

McInerney had mentioned that Bernanke was a diligent and knowledgeable student of the Great Depression. So, when it came time for the Q&A, one audience member asked Woods to briefly explain the Austrian view of Great Depression and how it might differ from Bernanke’s view. After Woods did this, McIerney took the stage, and as if he were about to unload a devastating blow against Woods, said to him, “this might seem like a bit of an attack. Don’t take it too personally.” And then…. he began to rant about … the relatively small size of the country of Austria. I kid you not.

Some audience members began to laugh; others cringed, as McInerney dug his hole deeper while under the illusion that he was unleashing a deadly zinger. Woods kept trying to stage whisper that Austria had nothing to do with the school of Austrian economics, but McInerney, undeterred, plowed on. Thus, when Woods took the stage he said, “this might seem like an attack, but don’t take it too personally…” And then Woods commented that we may as well say we shouldn’t listen to Milton Friedman, since the GDP of Chicago is pretty low.

On the other hand, maybe if we can make Austrian economics obscure enough, we can make all opponents look like fools during debates!

Actually, the more important thing is to become mainstream enough that the average economics-interested person knows at least something of your ideas before-hand.

That is, if you care about Austrian economics at all.

I wonder if the post-Keynesians have this problem at all.

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 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.

Mayor Daley claimed that the Olympic games would help jump start the economy – I guess allegedly through government “stimulatory” spending in preparation, considering it will be more than 6 years until game time.  The dissapointment is similar to that when New York lost it’s bid for the 2012 games.

However, Daley is probably wrong about the positive economic impact of the games:

When combined with the substantial upside risks inherent in costs of public works projects, the expected overall net benefit of hosting an Olympic Games is substantially negative.

I have a feeling this is really about political rent seeking under the guise economic stimulus for the people.

HT2 Russ Roberts/Cafe Hayek

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)?

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.

The G20 will announce tomorrow that they will become the new “permanent council” for international economic cooperation. Who the hell do they think they are? Who voted for this? Who gives them the authority to have this power over our wellbeing and our very lives?

As I hear more about the protesters, I disagree with their “mission” even more. But the above is a truth that few seem to recognize.

I’ve been following this story closely because its sort of unclear what the protesters in Pittsburgh are actually advocating for (or against).

Most MSM reports seem to agree that they claim anti-capitalist anarchists – though I suspect most of them are probably something closer to libertarian socialists. Here’s why I think this.

Take a look at this report.

One banner read, “No borders, no banks,” another, “No hope in capitalism.” A few minutes into the march, protesters unfurled a large banner reading “NO BAILOUT NO CAPITALISM” with an encircled “A,” a recognized sign of anarchists.

It makes me wonder if the protesters even know what’s going on at the summit. The G20 dislikes capitalism even more than these protesters. I understand the anti-establishment mentality of the protesters, but their blaming the wrong target. In what universe, after all, is bailouts associated with free market capitalism? Market anarchy is much closer to capitalism than the pseudo-capitalist, government run mercantilism we have now.

This is the other reason I don’t think they’re true anarchists:

Bret Hatch, 26, of Green Bay, Wisconsin, was carrying an American flag and a “Don’t Tread on Me” flag.

“This is ridiculous. We have constitutional rights to free speech,” he said.

Yeah you do, but not if you get rid of the government. So either this guy is not an anarchist or he’s an idiot. Gadsden flags are popular with Ron Paul’s Campaign for liberty movement, so possibly this guy is a “straight up” libertarian.

Likely the crowd is mixed. They are all angry at the establishment that is controlling the economic forces around them. I think you haven’t heard support or denouncement from the Republican or Democrat leadership because, unlike the tea baggers and town hallers, the protesters aren’t really solidified around a part of the political spectrum.

I think its probable that many of them don’t understand capitalism or how its being superseded (and not supported) here. But, I still have to support the movement in general (though not the violent actors.

I can’t wait to see how the politicians will respond.

It is essentially a forum for politicians and technocrats from around the world to put their heads together and plan the world economy.

Well… I bet they would if they could actually do that.

Nevertheless, I get a very uneasy feeling from this meeting. The decisions made there, mostly by unelected “officials” will affect everyone in the world. And we’re just supposed to take it on blind faith that they know the best outcomes for us?

That’s really asking a lot from us… and they didn’t even bother asking!

UPDATE:

“The G20 is going to be the new body counsel that will be the coordinating body for international economic cooperation,” said an unnamed US official

Needless to say, I am speechless. Meanwhile…

Near the venue, police fired rubber bullets at protesters on a march near the venue.

Maybe I’m exaggerating from the story, but the US is handing over central planning of the economy to an unelected governing body, meanwhile dissenters are getting shot (with nonlethal weapons) in the street?

Here’s a piece I wrote for the Stony Brook Statesman, my alma mater and paper I wrote for & edited last year.

I tie public choice theory – how politicians act like (and therefore are) economic agents because they pursue profit-maximizing behavior. I also paint a metaphor about equilibrium theory, comparing the economy to a pool of water and explain the unintended consequences of government interferences in the market place. Then, I hang a giant question mark over the whole picture.

Quite frequently, I hear, “How do you justify working at a state university and holding libertarian views? That’s hypocritical!”

Many libertarians and other small government-minded people deal with this question. I, myself, meet this accusation frequently because I attended a state university and working for a sector that is funded almost entirely by the federal government. I this his answer is satisfactory:

But the State is involved, and heavily. This involvement makes it artificially difficult for private schools to thrive. So should educators and researchers who oppose such involvement as a matter of principle content themselves to teach only at the very small number of schools that get no government funds? And should those libertarian educators and researchers who can find no employment at such schools find some other occupation, even if it’s likely that they can contribute more to the cause of freedom by teaching and researching than by abandoning that career?

Although my recommendations for policy would create outcomes substantially different than what we have, would critics suggest I pretend that I’m living in that world rather than the one that actually exists? If I did so, I would not be doing work that I love, neither would I be putting myself in a position where I can attempt to change it. For libertarians, our best option is to work within the system so we can transform it. We need an evolution in the role of government, not radical revolution.

Government incentives obviously work to effect behavior, even when the people have rational expectations about the outcome (I think game theory has some interesting explanations about why this may be so). From the perspective of the liberty-minded individual:

Another consideration turns on the distinction between choosing rules and choosing how to act within a given set of rules. It would be a clearer case of unethical behavior on my part if I voted for further government involvement in higher education than if I simply accepted the reality of that involvement–a reality unlikely to be changed any time soon. I can legitimately say, “I would arrange education differently, but because that power is not mine, it’s okay for me to work for a government school even though I would prefer that such things not exist. I don’t make the rules.”

This argument, too, has some merit. But it also has a weakness: Society’s rules often are changed by persons who refuse on principle to accept what seems inevitable. “Playing by the rules” is not a free ticket to violate your ethical norms.

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.

I’d like that add that, if this view is correct, I predict that when the banks start lending this money out, we’re going to be hit by lots of inflation.

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.

This is just one mild example of the unintended consequences coming back to haunt us. Government uses policy to create incentives, but outcomes can be just as bad when people respond too strongly to these incentives than when they don’t respond strongly enough. The “clash for clunkers” program is another potential example.

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.

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).

“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.

The blogosphere is humming (or is it a roar?) with glee and angst in regards to Obama’s speech. Honestly, I didn’t pay much attention to it, but I did appreciate Robin Hanson’s comments last night.

So he’s going to save $500+ billion over ten years by having an independent commission “encourage best practices”?  Actually doing that would require this commission to have enormous power and be willing to use it to create many politically powerful enemies.  I see no sign whatsoever that they are actually willing to do this, nor any sign that they would actually be willing to cut medical spending if “spending cuts” somewhere were required by law.  So far this still looks like the usual empty campaign promise to pay for spending deficits by “cutting waste and abuse.”

We’ve now seen this claim a hundred times, but does anybody really believe we’ll be able to finance a public option entirely by cutting costs to medicare and then have regulatory bodies keep costs under control by reducing inefficiencies?

I mean it sounds nice, but the federal government has not, in general, demonstrated an ability to improve efficiency in other areas, so why here?

Usually I take this argument with a grain of salt – we can’t assume that the “clash for clunkers” program will tell us anything the public care program (very different infrastructure will be set up) – but there’s something to be said about the central planner problem in cases like these.

How will it be possible to cut waste and not reduce care? I don’t think this is possible, because patients will have a very different idea about what constitutes waste than bureaucrats (even doctors are involved in making decisions).

What I suspect, is that if the public option gets passed, we will realize that the studies comparing American to European health care weren’t telling us the whole story. Health indicators depend on a lot more than complete health insurance coverage. I suspect we’ll see wider coverage, but higher costs (until price controls are legislated, of course) but no significant improvements in general health statistics.

It seems like they are going to game the system with incentives to promote treatment (rather than healthy prevention; diet and exercise, etc) – things that keep people from dying, but not necessarily healthy. Unless price information is introduced, I can’t see how the system – public or private – will be improved.

That being said though, I wouldn’t necessarily say “no” to a public plan that was able to use pricing incentives to encourage consumers to make choices about health care options and introduce real competition between providers. I believe that only a market system can keep costs under control.

Although you won’t see this in the popular presses, labor markets function according to economic theory. Real wages have been rising over the last 28 months with rising unemployment, as Bob Higgs reports, something that also happened during the Great Depression.

I don’t think that Higgs successfully tackles cause and effect here. My gut is that rising wages is contributing to unemployment (and not the other way around) because employers are firing employees rather than slashing wages. Could this contribute to general cost inflation?

Robert Murphy links to some comments in a Matt Yglesias blog post.

Brad:

I love it when liberals characterize not confiscating wealth from taxpayers as a “cost.” By that logic, failing to confiscate the entire GDP “costs” the government $13 trillion every year. Those bastards! Blowing a hole in the budget! Liberals really do see every dollar in the US economy as belonging to the US government first.

Commenter2:

Liberals really do see every dollar in the US economy as belonging to the US government first.”

Yes, Brad, I for one, do. Who prints the dollar in the first place? Who issues it? And whose collective will imbues the dollar with its value?

This is pointing at a deeper issue (which I will return to again): where does the economic value behind a dollar come from? From the labor that represents it’s earnings or by its physical existance? Dollars circulate and GDP grows, but how do people become richer?

Obviously, commenter2 is wrong: wealth can be built without governments printing money – you can be sure the free market would take care of this problem – but is there a vital role that government plays in basic economic activity?

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.

Well you have to give Chris Betram credit for trying to support the concept of death panels. I understand, but vehemently disagree, with his larger point: that ‘death panels’ are the necessary extension of the social engineering experiment that is universal health care (and by that I mean NHS-style, government-owned everything).

Afterall, without markets to coordinate supply and demand, costs will skyrocket unless rationing is carefully planned.

Betram quotes one Ronald Dworkin:

… we should aim to make collective, social decisions about the quantity and distribution of health care so as to match, as closely as possible, the decisions that people in the community would make for themselves…

I don’t buy this: if we’re just using the collective to make decisions for the individual, its because some institution(s) doesn’t – or finds it inconvenient to – believe that the individual can make personal decisions about their health care that produces optimal social outcomes (whatever this is perceived to be). Therefore, simply by making that argument in favor of employing technocrats to engineer decisions about health care in the community, and perhaps circumventing an individual’s choices, it’s a tacit admission that we think consumers are stupid about their health care.

Well… even if consumers aren’t stupid, the ‘deciders’ don’t think individual decisions (even if they are rational and informed) produce the best outcomes for society as a whole (see my lunch line post). This may or may not be true, but to support this type of socialized health care is to imply that central planners can produce more efficient outcomes than decentralized decisions in a free market. Which I don’t think anyone thinks is true. And there doesn’t seem to be strong empirical evidence to discriminate which option is more efficient than the other (except that our hybrid solution is the least efficient of all).

Maybe we should at least try free markets before assuming that they won’t be able to provide efficient solutions and insure everyone who wants to be? And, even if they turn out to be less efficient, perhaps we should go with this option anyway and accept some reduced efficiency to preserve more individual freedoms – if it does come down to “death panels”.

HT2 Tyler Cowen

No sooner do I ask Austrian economists when they think inflation will hit and gold prices will rise, Bob Murphy announces that gold has risen to $987 an ounce. This is way up, but not close to the calls of $2000 per ounce that I’ve been hearing on goldbug radio ads.

PS – he also links to this story about how the IRS is now taxing the ownership of physical gold at 28%. But I don’t get how this works. If I own a gold bar, will they try to tax it every year or only when I sell it (and it’s considered ‘capital gains’)?

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 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.

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.

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.

Freakonomics is always a good one for the feeder.  Today they have a post about the cost of hot dog vendor licenses near the NYC Met Museum (which I happen to work very close to).  An interesting debate is going on in the comments section, between people who think that the vendors can break even, who think they can profit, and those who think the vendors must be operating at a loss.

It serves to demonstrate that, without sales receipts, speculation is meaningless.  Nevertheless, my hunch is that they must be making some profit otherwise, there would be little incentive to stay in the area. If you can profit just as much in a less heavily trafficked area (because the licenses run higher in auction) then why put the extra work in to serve to larger crowds?

Either the vendors have incomplete information about sales in different areas, are irrational or they are making a larger profit.