Wanted: Economics Stories

There have been a number of attempts by economists to write fiction that teaches economics, including at least one series of mysteries. None, in my opinion, works very well.

It occurred to me some time ago that a better approach might be to look for works not by economists but by good writers that happened to contain important economic ideas. So far I have only two candidates. One is a short story: "Margin of Profit" by Poul Anderson. The other is a poem, "The Peace of Dives" by Kipling. They are both excellent works of their kind and each is primarily about economics, broadly defined. The point of Poul Anderson's story is that, in order to keep people from doing things you don't want them to do, you don't have to make doing them impossible, merely unprofitable. Kipling's poem is an allegory describing how economic interdependence leads to peace.

If I had a lot more pieces of the same sort I could create a collection to be used as suplementary reading in economics courses—much more interesting and enjoyable reading than most textbooks. Unfortunately, I don't.

Hence this post. I am looking for suggestions for good works of literature—poems and cartoons also qualify—that succeed in making an important economic point.

Why Do We Give Gifts?

Economists find the widespread practice of giving gifts puzzling for a number of reasons. The most obvious one is that we generally expect individuals to know more about their own preferences than other people do. So it would seem that a gift in money, which I can use to buy whatever I most value, would almost always make more sense than a gift purchased for me. While there are exceptions, cases where the giver happens to have special knowledge that the recipient does not, it is hard to see how they can explain what we actually observe. And besides, the knowledgeable gift giver could always send me a check accompanied by a note recommending the book he would have bought for me, leaving it up to me to decide whether to acccept the recommendation.

At first glance, the idea that giving a gift shows you were willing to go to the trouble to find one seems even less persuasive--why not simply send a check equal to the value of the gift you would have bought plus the value of the time you would have spent finding it? But there are two variants on this argument that might work.

The first, which I came up with long ago, is based on Becker's analysis of the economics of altruism. If I am an altruist with regard to you it is in my interest to be well informed about your preferences in order that I can recognize situations where I have an opportunity to confer a large benefit on you at a small cost to me. It is also, via Becker's Rotten Kid Theorem, in my interest for you to know that I am an altruist with regard to you, since that makes it in your interest to act altruistically towards me--loosely speaking, because the richer I am the more I will be able to help you. For details see the relevant chapter of my webbed Price Theory text.

If I am well informed about your preferences, it is relatively inexpensive for me to find a gift you will like. Hence giving a gift you will like meets the requirement for a signal of altruism--it is cheaper to send the signal if it is true than if it is false.

This is, I think, a logically possible explanation of gift giving, but I don't find it a very convincing one. I now have a second candidate.

Suppose we accept the plausible idea that I can be modeled as two individuals in one body. The first is a short run pleasure maximizer--the me that almost always wants an ice cream cone or another potato chip. The second is a long term utility maximizer--the me that promises not to have ice cream for desert until he has lost five pounds and tries to force the first me to keep the promise.

Most of us do not face an immediate budget constraint. Spending an extra few dollars on a gift doesn't mean that I can't afford an ice cream cone today, it means I will have a few dollars fewer when I retire. The long run me cares about that, but the short run me doesn't. Spending an extra hour shopping, on the other hand, is a cost that occurs now and so counts for both versions of me.

We now have a second explanation of gift giving. By giving you a gift instead of cash, I demonstrate that the short run me as well as the long run me cares about you.

When proposing an economic theory of behavior, it is worth thinking about whether it has any testable implications. This one does. A critical assumption in the argument is that the gift giver does not face a short term budget constraint--that spending money on a gift doesn't mean going hungry to bed or having to spend an extra couple of hours shoveling snow. It follows that the giving of money instead of purchased goods ought to be more common among people who do face such a budget constraint.

Since I am by nature lazy, hence a theorist, I will leave to someone else the project of actually finding data that could be used to test the explanation I have just offered.

Global Warming: Confusing Moral and Practical Arguments

In controversies over global warming, one issue that keeps coming up is whether it is anthropogenic, whether if the world is getting warmer it is our fault. So far as I can tell, the question stated in that way is almost entirely irrelevant to the controvery; it reflects a confusion between moral and practical arguments.

Suppose the cause of global warming is not human action but changes in solar activity or some other external factor. Suppose also that the consequences of global warming will be catastrophic. Finally suppose that there is something we can do to prevent global warming, say raising the albedo of the earth with orbital mirrors, high altitude pollution, or whatever. Isn't the argument for doing it precisely the same as if we were causing the warming? Hence isn't "whose fault is it" a wholly irrelevant distraction?

Of course, the questions of causation and prevention are not unrelated. If we are causing global warming that suggests one possible way of preventing it—stop whatever we are doing that causes it. But doing that may be, indeed very likely is, enormously costly, perhaps more costly than letting global warming happen. It might even be impossible, if what we have already done is enough to cause long run catastrophe even if we don't do any more of it. And even if we are causing it and could stop doing so, there might be better solutions.

Concerning Global Warming More Generally

I should add that I am taking no position here on the other usual questions about global warming. I do not know if it is happening, although it seems likely enough. I do not know if, if it is happening, it is due to human action, although that again seems a plausible enough guess. And it is not all clear to me that, if it happens, it will be a bad thing, let alone a catastrophe.

The crucial fact for me is that the more persuasive predictions of bad effects are well into the future; at one point the estimate was a sea level rise of half a meter to a meter over the next century. In my view, the next century is sufficiently uncertain so that it makes little sense to take expensive precautions against risks that far off. By the time the risk arrives, if it arrives, we may have already wiped outselves out in some other way. If we have not wiped ourselves out, our lives may have changed in a way that eliminates or even reverses the problem; communting via virtual reality produces little CO2. If we are still around and the problem is still around, we are likely to have a level of technology and wealth that will make possible a range of solutions well beyond what we are currently considering.

All of these are reasons why I think a persuasive case for doing something about global warming requires evidence, not yet available, of serious negative effects in the fairly near future. But that conclusion does not depend on whether whatever is happening to the climate is or is not our fault.

Dishonest Words

Consider first the case of "homophobia." In current usage, it is applied to any negative view of homsexuals or homosexuality, whatever its source. Thus, for instance, someone who is opposed to homosexual activity because his minister told him that the bible says it is wicked would routinely be labelled homophobic.

A phobia is an irrational fear. It is occasionally argued that the source of negative views of homosexuality is the fear that one might have homosexual inclinations, but it is a considerable stretch to claim that source for all negative views. It seems obvious that some people are opposed to homsexuality because they think their religion condemns it, some because they think it has bad consequences, and some for any of a variety of other reasons. Labelling all of them "homophobic" is a way of (falsely) implying a single cause for the conclusion--and, by doing so, attempting to stigmatize all those who hold it and dismiss all possible reasons they might have.

A second example is the term "racism." In a recent exchange here, Mike Huben referred to "racist science" in a context where it meant "(hypothetically) correct scientific research that demonstrated the existence of differences among the races" (if this is not a fair summary, I expect Mike to correct it). That was a striking definition of the way "racist" is used to mean, not "hating or despising other people because of their race" but "holding beliefs on racial subjects other than those of the person using the word." Again, that usage is an implicit argument and a dishonest one, since the implication again is that the only possible reasons for disagreeing with the speaker's views on the subject are bad ones.

The pattern is not limited to people whose politics I disagree with. Libertarians do the same thing. In our context, the question is how to label people who disagree with libertarian views, on particular subjects or more generally. The two popular choices are "statist" and "collectivist."

Both are wrong. There are lots of reasons why someone might favor the draft, or minimum wage laws, or price controls, or the war on drugs. Worship of the state is no doubt one possible reason, but certainly not the only one. Belief that what really matters is the collective and not the individual is one possible reason but not the only one. Each of those views could readily be held by someone who agreed on the whole with libertarians about values, outcomes they wanted, but disagreed about the consequences of particular policies. Most obviously, someone might favor the draft because he believed it was necessary in order to defend the U.S., and want to defend the U.S. precisely because he was in favor of freedom and thought the U.S. was much freer now than it would be if someone else conquered it.

In each of these cases, the pattern is the same. We have a conclusion that might be reached for any of a variety of reasons. Someone who wants to attack the conclusion does it by picking one reason he considers particularly unattractive and indefensible, using that reason to label the conclusion, and thus (dishonestly) implying that anyone holding the conclusion does it for that reason.

Lieberman for President?

Difficult as it may be to believe, I think I have come up with a scenario for the next election that nobody else has suggested.

Consider Senator Lieberman's qualifications for the Democratic nomination.

1. He is a long term senator and an (admittedly unsuccessful) vice presidential candidate.

2. In the most recent election, he demonstrated an ability to attract Republican votes unmatched, so far as I know, by any non-Republican candidate in recent history. Connecticut is not, it is true, a Republican state. But holding the Republican candidate for senate to 10% of the vote is still a striking accomplishment.

3. Odd though it may seem in the light of the religious conflicts of past centuries, his status as a deeply believing Jew probably makes him more attractive to the Republicans' religious hard core than any other Democrat.

It is true that Lieberman's support for the Iraq war looks, at this point, like a liability. It is less clear if that will still be true in a year or two, with the Democratic majority in Congress having to share the problems associated with that particular mess and the blame for whichever bad outcomes they support—no good outcomes being available. And there is the argument that someone with a record of support for the war is best placed to get us out of it, as Nixon was best positioned to abandon U.S. hostility to communist China.

One minor objection that might be raised to Lieberman's nomination is that he is not, at the moment, a Democrat. The obvious response is that that was not his choice; it was the Democrats who rejected Lieberman in the primaries, not Lieberman who rejected them. If the party now wishes to kiss and make up, there is no reason he should object. And they are, after all, currently counting on him to provide the crucial vote required to maintain their status as the majority party in the senate.

Which raises another and still more interesting, if even less probable, scenario. The Democrats are not the only party in search of a presidential candidate.

But I don't think I will explore that one today.

A Tactic for Libertarians

I recently heard a campus talk that concerned the division of authority between administrative agencies and courts. I was struck by the degree to which the speaker's arguments took it for granted that both courts and agencies were doing their best to do good, hence that the important difference between them was their relative expertise at dealing with particular sorts of questions.

When the time came for questions, I pointed out the implicit assumption and went on to discuss the implications of the same assumption in a different context—the punishment of criminals. The police probably know more about crime, are more competent to determine who is or is not a criminal, than most judges and virtually all jurors. Hence, following out the logic of the speaker's argument, the obvious conclusion is that the decision of who is guilty should be made by the more competent police not the less competent courts. We could save quite a lot of time and trouble by simply having the police who arrest suspects go on to decide whether or not they are guilty and, if they are guilty, impose suitable punishments. If the speaker was not happy with that conclusion, I thought he might want to reconsider the assumptions from which it followed—in his context as well as mine.

It occurred to me that the exchange was worth mentioning here as an example of a tactic that other libertarians may find useful when arguing with people on the left. Most such people, at least in my experience, take an optimistic view of the competence of government to help the poor, regulate safety, set conditions of employment, and do many other things. But they are, I think correctly, sceptical of government law enforcement. Pointing out the implications of their optimistic assumption when applied to law enforcement may be one way of getting them to rethink those assumptions as applied in other contexts.

An analogous tactic ought to work when arguing with conservatives. They tend to take an optimistic view of the workings of the police and criminal (although not civil) courts, at least when arguing with liberals. But they are, I think correctly, sceptical of the competence of government in a wide variety of other contexts, such as the regulation of business or the control of land use. It should be possible to suggest to them that, if the government cannot be trusted to decide how best to preserve endangered species or prevent businesses from mistreating their customers and employees, one ought to be at least mildly sceptical of its competence to decide who deserves to be locked up or executed. The incompetence of government is an argument against the Occupational Safety and Health Act—but also against the death penalty.

To avoid making the same mistake I described at the beginning of this post, I should add that "incompetence" is a somewhat misleading term, since it assumes that the individuals in question have the correct objectives and merely make mistakes in how to achieve them. A large part of the reason to be sceptical of government as a way of organizing human affairs is that the particular individuals making decisions often have the wrong objectives, that the results that best serve their interest are not the same as those that best serve the objectives they are nominally supposed to be pursuing. That is true in the regulation of business, it is true in the control of land use, and it is equally true in the prosecution and punishment of criminals.

How to Eliminate the Publishing Industry

Publishers serve three important functions:

1. The physical production and distribution of books.

2. Assisting authors in writing books.

3. Filtering books, selecting from the very large number that potential authors wish to write a small number to actually be published.

The first function has been and is being eliminated by the web. An author can, by webbing his work, make it available to a very large audience at a cost close to zero. He can make it available to readers who prefer hardcopy at a modest cost via Lulu.com or one of its competitors.

The second function is important but does not require publishers. I got more editorial assistance on Hidden Order from my agent than from my editor, and there is no obvious reason why the useful part of what editors do could not be done by small firms providing editorial assistance to authors. Currently the job of copy editing seems to be mostly done by freelances anyway, although they are paid by the publisher rather than the author.

There remains the third function. To judge, at least, by horrified accounts of the contents of editorial slush piles, enormously more books are written than are worth reading. While publishers do an imperfect job of searching out the needle of literature in the haystack of slush—imperfect in both directions—they do a much better job than a reader faced with millions of webbed texts could do for himself. In order to eliminate publishers, we need an alternative filter, ideally a better one.

As it happens, there is a firm already in the business of finding small needles of worthwhile material in large haystacks of text. It is called Google. Google's core business consists of figuring out what pages users will want to read out of the much larger number of pages that might conceivably have something to do with their query. It performs, and performs very well, a different version of the same task performed by publishers as filters.

I therefor propose that Google ought to undertake the project of replacing publishers. To do so it needs to create mechanisms by which readers can find, not pages of information, but books—the particular books those readers will want to read, buried in an enormously larger number of webbed books that those readers will not want to read. I leave the details of the project to Google's very talented employees.

Getting it Wrong

Following up links to a recent post of mine, I came across an article on my father in the Washington Post. It was an interesting piece not for what it got right but for what it got wrong.

The author starts with a simple and interesting puzzle. Most of the articles published on Milton Friedman after his death agree that he was a great economist. Many compare him to John Maynard Keynes, another great economist. But Friedman and Keynes held different, indeed inconsistent, views; an important part of Friedman’s accomplishment was to undo the effect of Keynes' accomplishment. If Keynes was right, how can Friedman be a great economist? If Friedman was right, how can Keynes be?

It is an interesting question, but the author gets the answer wrong. He concludes that both Keynes and Friedman were right. Keynes' version of economics was correct for the forties and fifties, Friedman’s for the seventies and eighties, when the Keynesian model "had played itself out."

That is a claim that neither Keynes nor Friedman would have taken seriously. Keynes titled his magnum opus “The General Theory of Employment, Interest and Money” not “The Theory of How Employment, Interest and Money Will Work from 1930 to 1960.” Part of the work that earned Friedman his Nobel was A Monetary History of the United States (coauthored with Anna Schwartz), in which he demonstrated that the Keynesian analysis of the Great Depression, the centerpiece of the Keynesian view of economics, was based on a historically mistaken account of what actually happened. It is an odd view of science in which the historical facts about the 1930’s changed between 1940 and 1970.

The author starts his discussion by claiming that economics is somehow less of a science than physics, hence its truths more temporary. Yet the history of physics offers precisely the same puzzle. Newton was a great physicist. Einstein was a great physicist. Part of Einstein’s accomplishment was to show that Newtonian physics was, in certain fundamental ways, wrong.

Newton was wrong, wrong not only now but then, but Newtonian physics provided the foundation of ideas on which later generations of physicists, including Einstein, built. Keynes was wrong, but his attempt to make sense of what he believed happened during the Great Depression provided a theoretical foundation on which later theorists, including Friedman, could build. Hence Friedman’s comment on Keynes: “In one sense, we are all Keynesians now; in another, no one is a Keynesian any longer"—misquoted by Time Magazine as “We are all Keynesians now.”

Stores as Art

It was a little before nine in the morning, the cab for the airport was at 10:30, and my daughter needed a new pair of headphones, the old ones having died. I called a local electronics chain; the recorded message said they opened at ten. I called Fry’s. The voice at the other end of the phone informed me that they had opened at eight that morning. She sounded mildly surprised that I would ask.

While trying to decide which of ninety-seven different models of headphone to buy, I was also contemplating the nature of Fry’s. My conclusion was that Fry’s is best understood as a work of art. It combines an elaborate variety of features, from the hours it keeps to the flashing lights that notify you that a checkout clerk is free to the junk food in the checkout aisle, from the selection of goods to the décor—my local Fry’s flaunts an ancient egyptian theme—all designed to convey a single consistent feel, appeal to a particular sort of customers.

In the case of Fry’s, an electronics supermarket, the target is geeks. The whole ensemble is designed to make geeks, technophiles, feel at home, feel that this is their place. To fully explain how they do it I would probably have to be an artist capable of creating a similar work myself, and I’m not. But I am enough of a geek to recognize what they are doing and admire their skill in doing it.

Fry’s is merely the example ready to hand, since I live in Silicon Valley. If this piece were being written by my friend Steve Landsberg he would probably cite Wegman’s, a supermarket chain limited, so far as I know, to northern New York state. Steve can go on at some length about the MegaWegman stores that are the stars of the chain; he has been known to argue that the existence of Wegman’s is itself a sufficient reason to live in that part of the country.

There are, of course, many other examples—Apple stores surely qualify. In each case someone with artistic abilities much superior to mine has figured out to create an ensemble, a combination of aesthetics, products, marketing, that sends a consistent message. Properly viewed, it is a new art form, and one of considerable depth and subtlety.

The Mont Pelerin Society, Milton Friedman, and the World

I spent most of a week recently in Guatamala at a meeting of the Mont Pelerin Society, an organization created by Friedrich Hayek after the Second World War. At the time it was created, supporters of free markets were rare, especially in the academic world. One reason to create the Society was to give people with classical liberal views the opportunity to spend at least a few days a year with other people who did not regard their beliefs as obvious nonsense, fit only for the wastebasket of history.

Some decades later, a number of people associated with the Society, including my father, suggested that perhaps it was time to dissolve it. Views that had been regarded as obviously obsolete in the late forties had become, if not always accepted, at least widely known and widely viewed as serious contenders in the marketplace of ideas. It was no longer necessary to go to some far corner of the world to find colleagues who shared a generally pro-market viewpoint; with luck there were at least one or two down the corridor.

The argument that ultimately persuaded him and others that the Mont Pelerin Society ought to be continued was that, although libertarian views were now widespread and respected in the U.S., the situation was very different elsewhere. Especially in the Third World countries of Asia, Africa and Latin America, and to a significant degree even in Europe, believers in free markets still found themselves in the situation that Hayek and others had faced when the Society was founded, isolated in a sea of left wing orthodoxy. For them, at least, the Society could continue to serve its original purpose.

I was reminded of this reading the comments on my memorial post for my father. What was striking was not the number but the geographical diversity. In addition to the U.S., condolences came from people who identified themselves as from:

Angola
Argentina
Australia
Bangladesh
Belgium
Brazil
Canada
Costa Rica
Croatia
Denmark
France
Guatamala
Germany
Hong Kong
Iceland
Ireland
Italy
Japan
Maldives
Mexico
Netherlands
Phillipines
Poland
Portugal
Romania
Serbia
Scotland
Singapore
Spain
Sweden
Switzerland
Taiwan
Turkey
UK
Uruguay
Venezuela

M.F.

Cattle die, kindred die,
Every man is mortal:
But the good name never dies
Of one who has done well.

Darwin, Reproduction and Religion

I do not often link to other blogs, but I just came across a fascinating post in Future Pundit, arguing that Darwnian evolution will reverse both falling birth rates and declining religious belief—indeed is already reversing the latter.

The theoretical argument is simple and persuasive. Humans vary in, among other things, their taste for having children. It seems likely that some of that variation is genetic. We are now in an environment where reproductive success is limited mainly by parental choice, not by resource constraints; most people in developed societies could afford to rear many more children than they do. So people with more of a taste for having children, those who are more phyloprogenitive, will out-reproduce those who are less, increasing the share of their descendants in the population and, eventually, bringing average birth rates back up. While the author does not carry the argument all the way, the logical implication is that the process will continue until reproductive success is again constrained by resources—a Darwinian version of Malthus' old argument for why a society rich enough so that the cost of children was low could not be in long term equilibrium.

The second half of the argument, and the one the post centers on, is the relation between religion and fertility. FuturePundit quotes various authorites to the effect that, on a world wide basis, more religious people are also more fertile, not only across societies but within societies. By his account, while the decline in fertility has not yet reversed itself, the decline in religious belief has, due largely to the greater fertility of believers.

It is a persuasive argument, but I have one problem with it. Human generations are long, so human evolution is slow. I can well believe that if we maintained the world more or less as it is for five or ten generations, FuturePundit's predictions would come true; fertility rates would begin to rise and religious belief continue to become more common.

We are not going to maintain the world more or less as it is for that long. We live in a time of very rapid change, driven by technological progress. That makes all long term predictions highly uncertain—the main reason I am opposed to expensive precautions intended to prevent long term consequences of global warming.

Here is a short list of possible technological changes that might—or might not—reverse one element or another of the equation:

1. Artificial wombs, to convert the cost of childbearing from time and pain to money, thus giving a reproductive advantage to higher income couples and richer (and, on average, less religious) societies.

2. Uploading—the ability to reproduce oneself by copying the brain's software to a computer.

3. Advanced virtual reality or very good recreational drugs, providing the illusion of a heaven on earth to compete with religion's (I think illusory) promise of a future heaven, leaving the more active parts of life, including reproduction, to people with a strong preference for reality over fantasy.

Readers are invited to contribute more items for the list.

Academic Tabu

I have just been looking over a recent article by Roland Fryer and Steven Levitt in the American Law and Economics Review, "The Black-White Test Score Gap Through Third Grade." It is interesting for what it tells us about race, but more interesting for what it tells us about the state of academic discussion in present-day America.

The authors observe that, while black students enter the school system substantially behind white students as judged by tests of reading and mathematics, the difference vanishes if you control for a small number of environment variables such as socio-economic status of parents and number of books in the home (the authors are not entirely clear about which variables are used where, but those are two of the ones they mention). That result appears to support the conventional belief that racial differences in outcome are due to environment, not to innate differences.

As the children move through the first few grades of school, however, that situation changes. Black students fall behind white students at about a tenth of a standard deviation a year; that remains true even after controlling for the environmental variables that eliminated the initial difference.

The article is in large part about the authors' search for an explanation. In an earlier piece they had conjectured that the difference was in school quality; in this one, with more data, they are able to reject that explanation. The pattern exists for black and white students in the same school, even in the same classroom. It does not exist for hispanic and white students and it reverses for asian and white students. After exploring a variety of alternative explanations, the authors conclude that they cannot explain the data.

Having eliminated all of the possible environmental causes that they can think of, one might expect them to next consider the obvious alternative explanation: Innate differences between the races. That is not the only possibity, of course; I can think of a few more environmental explanations, such as different treatment of blacks and whites by schoolteachers and others or differences in peer group pressures. If, as I think likely, black students tend to socialize with black students and white students with white students, and if black youth culture is less friendly to education, or differs in other relevant ways, from white youth culture, that also might explain the observed pattern.

Nonetheless, insofar as the results are evidence in the controversy over racial differences, they are evidence in favor of such differences, since they are the results one would expect if blacks were on average innately worse, and east asians innately better, at certain things than whites. That explanation is not on the authors' list of conjectures to be tested. The authors try every environmental explanation they can think of a way to test, are unable to explain the data, and, instead of considering a non-environmental explanation, throw up their hands.

Their discussion of the omitted possibility is limited to a single footnote, which reads:

"This theory, if true, also re-introduces the possibility that genetics could play a role. Because we have little evidence on this either way, we choose to exclude it while noting that it is a possibility."

Including that footnote marks the authors, in my view, as more courageous than the typical academic. Nonetheless, it translates as "our results support a view not to be discussed in polite society, so we won't discuss it."

Which tells us something about to what degree the beliefs, at least the stated beliefs, of polite society are based on open enquiry into the evidence, and to what degree on prejudice.

I should probably add that the one discussion of the question of racial differences I have seen that actually provided real evidence against them was by Thomas Sowell in Ethnic America: A History. It was possible only because Sowell, being more courageous still, was willing to seriously consider the possibility that different racial outcomes might reflect genetic differences. He offered the economic performance of West Indian immigrants as evidence that the poor economic performance of American blacks is due to neither genetics not prejudice. West Indians are blacker than Afro-Americans, in terms of both genetics and appearance, yet their family income gets up to the U.S. average in a single generation. Readers curious about his explanation of the difference are invited to read his (very interesting, for many other reasons as well) book.

Balance of Power

A few comments on the recent election and related matters:

1. Like some, but surely not all, libertarians, I was hoping that the Democrats would get control of at least one house, and so was glad that they did. Gridlock is your friend.

2. A single senate seat made the difference between a Democratic majority and a Republican majority. In Montana, the Democratic candidate got 49% of the vote, the Republican 48%, and the libertarian candidate 3%; while one cannot be sure what would have happened if there had been no LP candidate, that at least suggests that, absent the LP, the Republicans would still hold the Senate. I have not looked at the House races to see if there is a similar pattern there.

3. The Democrats' hair thin majority depends on two independents, Bernie Sanders and Joseph Lieberman. On the face of it, that ought to give each of them enormous leverage. My guess is that, in the current political situation, supporting the Republicans is not a practical option for either, however, so I’m not sure how that potential leverage will affect actual committee assignments and the like. It should be interesting.

4. A recent publication from the Cato Institute analyzes the libertarian role in American electoral politics, using a much broader category than LP voters. Defining a libertarian as someone who responds like a liberal to poll questions on social issues and like a conservative to poll questions on economic issues, the authors find that libertarians make up about ten to twenty percent of the electorate. That’s far from a majority, but still a big voting bloc—probably bigger, for instance, than the black vote.

Most interesting, they find that that bloc is shifting its vote. In 2000, Bush got 72% of the libertarian vote. In 2004, he was down to 59%, while the Democrats almost doubled their share. If they had done a little better, they would have won.

This supports the argument I made almost a year ago, suggesting that the Democrats ought to be trying to pull libertarians, broadly defined, out of the Republican coalition. I will take this opportunity to repeat the suggestion I made there, that the Democrats should come out in support of medical marijuana, either in the form of a change in federal law or of a policy of deference to state law. It would be a clear symbolic signal to libertarians, broadly defined, and I don’t think it would alienate much of the present Democratic base.

Concerning Status

Apropos of my recent post on status ... .

I've recently spent some days at a fairly fancy hotel in a moderately poor part of the world. One thing that struck me was how many hotel employees there were hanging around ready to help the guests at any opportunity. In part, of course, this is a natural result of the low cost of labor. What's puzzling is that there are so many, mostly doing nothing, as to give the impression that the marginal product of the last few must be very close to zero.

It occurred to me that perhaps what they are really there for is not to do but only to be. Humans value status. Having lots of people around you who are visibly lower status than you is one way of giving you the feeling of high status, which you may well enjoy.

Along similar lines, I was thinking about the difference, in the U.S., between fancy hotels and nice but not fancy hotels—consider a Hampton Inn as an example of the latter. The space and comfort of the accomodations isn't very different, although the fancy ones have more polished marble in the bathrooms. I wonder if a good deal of what you are paying for, and what makes the difference in characteristics between the two sorts, is status, provided in part by surplus employees.

Apropose of which, my wife remarked during our most recent summer trip that she feels more comfortable in the kind of hotel or motel where it seems natural for her to hold open the door for the properietor or a worker who is going through it with an armful of laundry.

Private Schools for the Poor

I recently heard a talk, accompanied by a video, by James Tooley, who has been studying private schools in poor countries—not private schools for the rich but private schools for the poor.

The results sound extraordinary. In slum areas of countries such as Nigeria it appears that a majority of poor children are being educated in private schools, charging on the order of five dollars a month. Parents are willing to pay that because they believe they are getting, in various ways, a better education for their children than in the free public schools. Tooley tested a random sample of both private and public school children, and confirmed that opinion; the children going to the (inexpensive, slum) private schools consistently tested higher than the children going to the public schools.

His talk reminded me of E.G. West's fascinating book Education and the Industrial Revolution, where he describes a very similar pattern among the English working poor in the early 18th century—in that case with no free public schools available.

As a libertarian I found the talk, and the accompanying video, encouraging, not merely because it provides evidence to support my beliefs but because it suggests that, however difficult the push for libertarianism may be in the political arena, we have allies--billions of human beings applying their intelligence to living their lives as best they can, frequently below the radar of their governments.

One Cheer for China

Having just discussed China with a pleasant lady who fears that the Chinese are buying up all the world's resources, I thought it would be worth explaining why I regard the existence of China as a good thing.

I expect quite a lot of important technologies to develop over the next few decades. I also expect that there will be attempts to block some of those developments, whether under the rubric of the Precautionary Principle or other, and perhaps better, arguments. On the whole, I prefer that those attempts fail. While I recognize that there are potential dangers, even serious dangers, in some of the likely technologies, I think the dangers of blocking them are probably greater.

As a general rule, if you cannot block a technology everywhere, you cannot block it anywhere. Once nanotech, or artificial intelligence, or life extension, is developed somewhere in the world, it will be hard to prevent people elsewhere from using. Seen from this standpoint, China has two things going for it:

1. It is sufficiently powerful so that the U.S. cannot push it around.

2. It is sufficiently different from the U.S. so that it is likely to want to ban different things.

Hence there is a reasonable hope that the technological developments that are banned in the U.S. will be permitted in China, and vice versa.

As an earlier example of the same principle, consider the desirable effect of France's demonstration to the rest of the world that it really is possible to shift to nuclear power on a large scale.

I should probably add that China also has lots of smart energetic people, and there is at least some possibility, if present trends continue, that it will end up more capitalist than the U.S. And that what I have said about China also applies, with slightly less force, to India.

What’s Wrong With Steroids?

From time to time, I see a news story about some athlete who has been caught using steroids to improve his performance. Everyone seems to agree that this is a bad thing and should be punished, but it is not entirely clear why.

I can see three possible answers. The first is that, since steroid use is currently banned, the athlete who uses them is breaking the rules, cheating in a competitive game. That leaves unanswered an obvious question: Why are steroids banned? Absent the ban, using steroids is no more unfair competition than practicing on the weekend.

The second answer is paternalistic. Steroids can have undesirable long run effects on their users. If athletes, many of them young and inexperienced with the world outside their profession, are free to use them, they may do so even when they should not. That is especially likely in the competitive world of sports. A carpenter who performs ninety percent as well as a competitor can expect to receive about ninety percent of the competitor’s income. A professional football player who runs ninety percent as fast as his rivals is no longer a professional football player.

Given the paternalistic assumption, the argument seems plausible, but it is strikingly inconsistent with how we treat other competitive sports. Taking steroids may indeed reduce your life expectancy, but so does driving a car around a racetrack at something over 200 miles an hour. In that case too, a ten percent reduction means, not that your salary as a race driver goes down ten percent but that you are no longer a race car driver.

The third and most interesting answer is that competitive sports are special because what is being consumed is relative not absolute output. We reward a race car driver not for driving faster than 230 miles per hour but for driving faster than any other driver in the race. It is at least arguable that our pleasure from watching our favorite baseball team play depends not on how well it plays but on how much better it plays than the opposing team.

If that is true, then a change that makes one driver faster or one team better produces a benefit for that driver or that team, but a change that makes all drivers faster or all teams better produces no benefit for anyone. A change that makes all athletes faster and cuts three years off their life expectancy makes nobody better off and makes all athletes worse off. That sounds like a plausible reason for preventing such changes, insofar as we can.

Comments? Is that a plausible explanation? Is there a better one?

Eugenics and Libertarianism

I’ve just been reading Matt Ridley’s very interesting book Genome, which I highly recommend. It contains, among many other things, a brief history of the eugenics movement. Compulsory eugenics, in the form of sterilization of the “feeble-minded” and similar schemes, is sometimes blamed on Herbert Spencer and Social Darwinism, hence on laissez-faire beliefs, hence on libertarianism. Judging by Ridley’s account, that is almost precisely backwards.

Spencer was indeed concerned about human eugenics but, as a believer in laissez-faire, he did not propose using government to improve them. Compulsory eugenics originated with Galton and was rapidly taken up by the British left, with supporters including Shaw, Wells, Keynes, Laski and the Webbs. The idea spread across the political spectrum; Winston Churchill was one of many enthusiastic supporters. The result was an attempt, in 1912, to enact compulsory eugenics into law.

It was successfully opposed by Josiah Wedgewood, who Ridley describes as a radical libertarian. His central argument was not that it was bad science but that it was a striking violation of individual liberty. He made that argument sufficiently persuasive to force the government to withdraw the bill. Another opponent was G.K. Chesterton, best known today as a Catholic apologist and the author of some early mysteries. Chesterton was another radical libertarian, although a somewhat odd ones, to whom I devoted a chapter in the second edition of my Machinery of Freedom.

In addition to libertarian politicians such as Wedgewood and Cecil, compulsory eugenics had another important opponent: The Catholic church. Compulsory sterilization was implemented in a considerable number of countries, including the U.S. and Sweden, and almost implemented in Britain. It was not implemented in countries where the Catholic church was powerful. In that case, at least, the Church’s opposition to the latest findings of modern science put it where it belonged, on the side of the angels.

We were there too.

To be fair, I should add that there was a second push for compulsory eugenics in the early 1930’s, successful in some European countries but not in Britain. This time the failure was at least in part due to intellectual changes associated primarily with the left, the shift from belief in genetic determination of human beings to belief in social determination.

As Ridley points out, there is a different sort of eugenics that is alive and well in the modern world—decisions by parents related to the genes of their actual or potential offspring. He discusses two versions.

One is represented by the Committee for the Prevention of Jewish Genetic Disease, an organization that uses blood tests of school children to identify the carriers of genes for Tay-Sachs or cystic fibrosis. “When matchmakers are later considering a marriage between two young people, they can call a hotline and quote the anonymous numbers they were each assigned at the testing. If the are both carriers of the same mutation … the committee advises against the marriage.”

The other is the increasingly common practice of parents using amniocentesis to identify embryos carrying the extra chromosome that leads to Downs syndrome, and aborting them.

Obesity, Wireheads, and the case for and Against Paternalism

I'm currently working on a chapter of my book Future Imperfect dealing with mind drugs. It occurred to me, listening to a lunch talk by a colleague, that the issue I am raising there is central to the most recent of the World's Great Problems—obesity, which I discussed briefly in an earlier post.

Suppose we come up with really good pleasure drugs, drugs that give us lots of pleasure without negative side effects such as hangovers or cirhosis of the liver. If we accept the economist's model of the rational actor, their invention is clearly a good thing. It expands our choice set, provides us one more and possibly better way of getting what we want.

To people sceptical of the rational model, that conclusion is less clear. To see the problem, consider an extreme version. Larry Niven, in some of his stories, describes wireheads, people who have had a wire inserted into the pleasure center of their brain and stimulate it with a mild electric current. The intense pleasure that results dominates all other concern, making it possible for a wirehead to die of hunger and thirst because getting food or drink is simply more trouble than it is worth.

For a more homely example, consider a pleasure drug that many of us overdosed on a couple of days ago: Chocolate bars. If you have more elevated tastes, substitute dinner at a four star restaurant in Paris. While it is true that food is useful to keep us alive, sufficient food for that purpose--lentils, powdered milk, vitamin pills, rice or potatoes--does not cost very much or taste very good. Most of what we spend on food buys pleasure. In modern societies, calories, even moderately tasty calories, are cheap. People like to eat. Voila: An obesity "epidemic."

I would like to be thinner, but am not very good at getting that way. Considering the situation as an economist, I conclude that the benefit of lost weight must be less than the cost. Introspection provides a less complimentary picture of my role in the situation. It looks rather as though I am, like Niven's wireheads, irrationally willing to sacrifice my own long term welfare to my own short term pleasures.

For a different angle on the situation, consider a question I raised in another recent post: Does consumer sovereignty, the principle of accepting individual actions as proof of what we value, apply if we have good reason to regard the actions as due to evolutionary mistakes, adaptations to a past environment very different from the one we now live in? In most past environments, after all, eating when you had the chance, eating enough to get fat, was a sensible strategy, since next month might be famine. From an evolutionary standpoint, current obesity is simply one more case of humans being poorly adapted to their current environment.

Following out the logic of that argument, one would conclude that greater choice sometimes makes us worse off. If so, is that an adequate reason to abandon libertarian conclusions—to, for example, support government restrictions on fat in food, cheap junk food in restaurants and grocery stores, and the like. Is it a good argument, following out the line other economists have taken with regard to gasoline, to support high taxes on food, designed to force consumers to compensate for their irrational tastes?

If we had a government run by benevolent philosopher kings, that might make sense. The problem with it in the world we live in is that although I may sometimes be a bad judge of my own welfare, sometimes even a bad judge in predictable ways--arguably the central point of behavioral economics--I have one enormous advantage over any one else when it comes to making decisions about my own welfare. Unlike almost everyone else in the world, I can be trusted to put my own welfare very high in my priorities. Once we shift the decision to someone else, however rational, we can expect him to make decisions for me in his interest rather than mine.

Which brings us back to an old libertarian argument—for certifying doctors instead of licensing them. Patients, however rational, are imperfectly informed about the competence of doctors. Why not solve that problem by having some competent authority decide which physicians are allowed to practice? That is the theory of medical licensing as it now exists. The practice, as shown long ago, is that the medical profession uses licensing to hold down the number of physicians, sometimes in ways unrelated to their professional competence. That is why it would be better to allow the competent authority to certify doctors, telling patients whether that authority considers them competent, and then let the patients decide for themselves whether to accept the authority's judgement.

If you do not find that claim convincing, you might consider the wide range of other professions that also require licensing—yacht salesmen, egg graders, barbers and the like. It would be a curious coincidence if it turned out that medical licensing existed, and functioned, for wholly benevolent purposes—unlike every other example of professional licensing.

Why Bureaucrats don't Maximize their Budgets

William Niskanen, in a book published many years ago, proposed a simple model of government bureaucracy. The more money a bureaucrat controls, the more important he is, so bureaucrats want to maximize their budgets. The bureaucracy knows, and the legislature does not know, what a government bureau can do at what cost. The legislature knows how much any level of output from a bureau is worth to it. So the rational bureau misrepresents its production function in a way designed to trick the legislature into giving it the largest possible budget. It does so by finding the largest level of output that it can produce at a cost just barely below the value of that level of output to the legislature and then exaggerating the cost of any lower level of output by enough to make it higher than its value.

When I first read the argument it struck me that it contained a fundamental mistake. So far as I can remember, I never published that conclusion. I recently came across a version of Niskanen's argument in an online discussion, so thought I might as well take the opportunity to explain why it is wrong.

Consider two bureaucrats. Abe has a ten million dollar budget and is required to purchase $9,900,000 worth of paper to be sent to the IRS for printing tax forms on, leaving him $100,000 for himself, his secretary, and rent for his office. Bernie has a one million dollar budget and is required to do nothing at all. Which would you rather be?

Generalizing the example, I suggest that the size of the budget in Niskanen's model ought to be replaced with the surplus, defined as the difference between the size of the budget and the lowest cost at which the output the bureau has agreed to can be produced. That difference represents resources that bureaucrats can divert to their own purposes.

I'm curious. Niskanen's book was published a long time ago. Have other people proposed the same modification?

Score One for Richard Epstein

or

It Depends Whose Ox is Gored

California's Proposition 90, if enacted, would limit eminent domain seizures of property to property intended for a public use narrowly defined. It would also require government to compensate property owners if the value of their property is reduced by governmental actions such as new land use regulations. It thus enacts into law the position that Richard Epstein argued for in Takings and reverses, so far as California is concerned, the result of Kelo.

Santa Clara County's Measure A, if enacted, would impose a bundle of land use restrictions on property owners in Santa Clara County.

With an election coming up, I have been receiving the usual flood of electoral junk mail. The most interesting piece is a glossy flier arguing against Measure A—not on the grounds that the proposed land use restrictions are a bad thing but that:

"If Proposition 90 and Measure A, the land use initiative, both pass, there would likely be numerous claims for compensation filed by property owners who contend that their property has been substantially damaged as a result of the restrictions on property contained in Measure A."

Elsewhere in the flyer, the total cost to Santa Clara Country taxpayers is estimated at a billion dollars.

The economic argument for Epstein's position is straightforward. Government actions, like private actions, should only be taken if they make us on net better off, if their benefits, summed over everyone affected, are larger than their costs, similarly summed. If an actor is free to ignore some of the costs of his actions he may take them even if costs are larger than benefits. So government actors, like private actors, should be forced to bear the costs that their actions impose on others. It is the same argument used by economists to support tort law in general and environmental regulations such as emission fees—Pigou's solution to the problem of externalities implemented via the legal system.

Consider the application of the argument to Measure A. Its supporters argue that by keeping land in the county from being developed—the measure, among other things, imposes a minimum parcel size in hillside areas of 160 acres (a quarter of a square mile) and a minimum acreage per dwelling unit of 40 to 160 acres depending on slope—the measure makes the county a pleasanter place for its current residents to live in. If so, and if the benefit to current residents is greater than the cost to landowners of limiting their ability to use their land, then the residents should be willing to vote for the measure even if they have to compensate the landowners. If, as the authors of the flyer obviously assume, residents are unwilling to vote for it if they have to pay the cost, that is evidence that the measure on net makes people worse off, which is a reason why it ought not to be passed.

The flyer is presented as an argument against Measure A, written by people who sound as though they consider Proposition 90 a bad thing. It in fact is an argument for Proposition 90, a demonstration that shifting the costs of political acts to the people who expect to receive the benefits makes it less likely that governments will do things that ought not to be done.

Score one for Richard Epstein.

It's Worth Checking

"By "demographic," I mean the Muslim world's high birth rate, which by mid-century will give tiny Yemen a higher population than vast empty Russia."

Mark Steyn, America Alone

I have not read Mark Steyn's new book; the quote is from a webbed excerpt. For all I know many of his claims about the implications of high birth rates in the Muslim world and low birth rates in Europe may be true. But his claim about Yemen and Russia struck me as sufficiently surprising to be worth checking.

A few minutes of googling got me to a page of summary demographic data from the U.S. Census Bureau. Their population estimate for Yemen in 2050 is 71 million, which is indeed surprisingly high. Their estimate for Russia, however, is 109 million.

Population estimates that far ahead are inherently uncertain; they depend in part on reproductive decisions by people not yet born. But insofar as there can be an authoritative source for such an estimate, the Census Bureau comes a lot closer to qualifying than Mark Steyn. Googling some more, this time on references to Steyn's book, I have not yet found anyone else who bothered to check his numbers. Reviewers and bloggers, at least the ones I found, simply took them at face value.

After all, it wouldn't have been printed if it wasn't true, would it?

Are Children Giffen Goods: An Economic Puzzle

Suppose someone invents an inexpensive and reliable way in which parents can choose the gender of their offspring. From the economic standpoint, this represents an increase in quality—you get a child of your preferred gender instead of a fifty-fifty chance—at no significant increase in cost. Increased quality at constant cost corresponds to decreased cost at constant quality; you are now getting more for your money. Lowering the cost of something increases the quantity demanded.

Do you conclude that, as a result of the new invention, the birth rate goes up? If not, why not? Are children Giffen goods?

Hint: I am fond of the sort of mathematical puzzle which consists of a proof of something obviously false, for example that two equals one; the puzzle is finding the mistake in the proof.

Should Irrational Preferences Count?

The field of behavioral economics deals with predictable patterns of behavior that appear inconsistent with rationality as economists understand it. My one contribution to the field is a chapter, "Economics and Evolutionary Psychology," in the book Evolutionary Psychology and Economic Theory; a draft is available on my web page. In it I try to show that several patterns of behavior which are puzzling in terms of the assumptions of economics make sense in terms of evolutionary psychology; they can be explained as behavior that got hardwired into us because it increased an individual's reproductive success in the hunter gatherer societies where our species spent most of its history.

Consider, as one example, the endowment effect, the observation that individuals value items that belong to them more than items that do not even if, as in the classic Cornell coffee cup experiment, who owns what is the result of random chance. I explain this as a commitment strategy designed to enforce property rights in a world without police and courts, the human elaboration of the territorial behavior observed in many animal species.

The usual rule in economics is to take values as we find them expressed in behavior. In deciding whether one situation is more or less economically efficient than another we are judging whether it does a better or worse job of giving people what they are observed to want, not going behind preferences to judge whether it does a better or worse job of giving them what they ought to want.

Suppose you accept my explanation for the endowment effect, or some similar explanation for some similar, apparently irrational, pattern of behavior—that it exists not because it serves the present interest of the individual but because it served the (reproductive) interest of other individuals long ago in a very different environment. Should you still take it as a given in evaluating economic institutions?

Before answering "obviously yes," which I am tempted to do, you might want to consider a simpler question of the same sort. You observe A add some cyanide in B's wine glass, while B is looking the other direction. You ask B if he wants to drink what is in the glass. B replies that he does. Do you conclude that his drinking it is, on the principle of revealed preference, a good thing?

Pornography and rape

One argument sometimes offered for laws against pornography, or against some kinds of pornography, is the claim that consumption of pornography leads to violence against women. A counter argument is that it has the opposite effect, that imaginary sex, including imaginary violent sex, is a substitute for the real thing.

I recently attended a talk by an academic who had found an ingenious way of using a natural experiment to find out which was true. Access to the internet makes pornography more readily available—not only cheaper and easier to find, but more private and so less likely to lead to embarassment and other negative social consequences. Internet access increased at different rates in different states. Data on rape rates by state is available. So he looked to see whether, controlling for other variables, increased access to the net correlated with an increase or decrease in rape. It correlated with a decrease—about a ten percent drop in rape for a ten percentage point increase in internet access, with the exact numbers varying according to just how he did the analysis. There was no similar relation for murder, which suggests that the result is not simply picking up the effect of some third variable that correlates with both internet access and violent crime.

As further evidence, the author repeated the analysis, separating out the data according to the age of the perpetrator. His conjecture was that the men most benefitted by the availability of internet porn would be young adult men living with their parents, since they would find it difficult to consume other forms of pornography without risking discovery. The results supported the argument; the reduction in rape was concentrated in the 15-19 age group.

Readers interested in the details can follow the link at the beginning of this post and read the original paper.

The Economics of Status

They say in Harlan County
There are no neutrals there
You'll either be a union man
Or a thug for J.H. Blair

Which side are you on?
Which side are you on ...

Some people view the world, or at least major parts of it, as a zero sum game where one person gains only to the extent that another loses. Starting with this point of view, it is natural enough to see all disagreements as questions of which side you are on. Do you favor workers or employers, landlords or tenants? The alternative is to see disagreements not merely as about how to divide up the pie but about how to change its size. It becomes not only a question of us vs them but also of our arguments vs their arguments, with some hope that one set of arguments will eventually persuade almost everyone.

These different viewpoints are reflected, in political oratory and political thinking, in the difference between relative and actual measures. If we define the poor as the bottom ten percent of the income distribution we can be confident that they will always be with us. If we define the poor by the real income of the tenth percentile as of, say, 1900, then the problem of poverty has been solved—the number of people in developed countries with incomes that low is close to zero.

Economists mostly reject the zero sum point of view, since they routinely deal with issues of how to expand the size of the pie, how to increase economic efficiency (for details of just what that means, see the early chapters of several of my books). One plausible response is to observe that although economists may care only about absolute outcomes, people care also, and a lot, about relative ones. How much one employee is paid is often less important to him than how his pay compares with that of other employees. Robert Frank, an original and interesting economist, has written a whole book (Choosing the Right Pond) on the economic implications of the fact that people care about relative status.

It seems obvious that, if one's concern is status rather than real income, we are in a zero sum game. If my status increases relative to yours, yours has decreased relative to mine. So this point of view seems to support the approach to politics that sees it mainly as a question of who gets to benefit at the expense of whom, of which side who is on.

Like many things that seem obvious, this one is false. It is true that my status is relative to yours. It does not, oddly enough, follow that if my status is higher than yours, yours must be lower than mine, or that if my status increases someone else's must decrease. Status is not, in fact, a zero sum game.

This point was originally made clear to me when I was an undergraduate at Harvard and realized that Harvard had, in at least one interesting way, the perfect social system: Everyone at the top of his own ladder. The small minority of students passionately interested in drama knew perfectly well that they were the most important people at the university; everyone else was there to provide them with an audience. The small minority passionately interested in politics knew that they were the most important ones; their friends were there to be herded into meetings of the Young Republicans and Young Democrats in order to get them elected to positions in those organizations that were the stepping stones to further political success. The small minority ... .

I exaggerate, of course; no doubt there were some students who regarded themselves as at the bottom. But what was clear from that experience was that status was not a simple objective ordering on which everyone agrees. We all value status. But what matters to me is my status as I perceive it; what matters to you is your status as you perceive it. Since each of us has his own system of values, it is perfectly possible for my status as I view it to be higher than yours and yours as you view it to be higher than mine.

The point has been born home to me repeatedly since in other contexts. There are quite a lot of people in science fiction fandom, the Society for Creative Anachronism, and I am sure many other social circles, who work at a not very high status and not very highly paid job while putting their real passion and energy into their hobby. One reason to do so, although not the only reason, is that it lets them buy status. They may succeed in their hobby because they are really talented in it, they may succeed because it matters enough to them so that they are willing to put much more of themselves into the hobby than other people.

Being a male nurse is not a terribly high status job—but that may not much matter if you are also King of the Middle Kingdom. And the status you get by being king does not reduce the status of the doctors who know that they are at the top of the medical ladder and the nurses at the bottom.

Consider, for another example, teachers. Elementary school teachers have a positive public image but not much real status—outside of the classroom. But in the classroom, where they spend quite a large part of their time, they are king, queen, mother, father, alpha wolf, wise mentor, ultimate figure of authority for fifty minutes out of every hour—or at least they can be those things if they want to and are competent at the job. That may be one of the most important fringe benefits of teaching. Professors get it too—along with more status outside of the classroom. That may be part of the reason that both professors and schoolmarms have a reputation for being bossy sorts who are sure they know best; they spend a large part of their lives in an enviroment where they probably do know best, and are entitled, to a considerable degree, to boss the other people in the room around. It may also be part of the reason that people are willing to take those jobs even when they can make more money doing something else.

For a third example, consider advertising designed to confer status on products—clothes, perfumes, automobiles. People it convinces buy the products and get the status. People who do not see the ads, or see them but are unconvinced, do not associate the goods with status and so do not lose status by not buying them.

If status is not a zero sum game, then one way of evaluating a society is by its economic efficiency with regard to status, by the degree to which it expands the size of the status pie, allows practically everyone to be above average. One conclusion is that the last thing we want is a system for objectively ranking people, for defining status in a way that everyone agrees on. A second conclusion is that if we are so unfortunate as to get such a system, rational individuals in search of status will promptly subvert it, create their own subgroups with their own rankings. It is, after all, much easier to increase your status if you can find a way of dong it that does not decrease anyone else's.

Drugs for Africa: A Modest Proposal

My previous post mentioned the issue of how to make medical drugs for conditions such as AIDS available in poor countries. On the face of it, there should be an easy solution. Sellers want to make money; you cannot make money trying to sell someone something at a price he cannot afford to pay. One would expect drug companies to be happy to charge lower prices in poorer countries, as long as they get enough to more than cover the actual production cost of the drug.

The problem is resale. How can the drug company be sure that the drugs it sells at a cheap price in Zambia don't get resold in France or the U.S., reducing the quantity it can sell in those countries at a high price? One possible solution is to control distribution; once the drug is in the patient it cannot be resold. But that may be difficult to do in poor countries, lacking the infrastructure to monitor what happens to the drugs once they get there.

I have another solution. Let charitable donors in rich countries buy out the patent on the second best AIDS drug or combination of drugs and public domain it—let anyone who wants make it. Buying the second best drug should not be that expensive, since it probably is not making much money any more. And even if the same company owns the first best drug, it should not lose too many sales, since most customers who can afford the best drug will keep taking it.

This proposal has one large advantage over the usual alternative of forcing drug companies to make their drugs available at a low price in poor countries, with the threat that if they do not the countries in question will simply refuse to enforce their patents. That proposal makes the development of new drugs less profitable and so buys a short run gain in availability at the long run cost of slowing the development of new drugs. It could be a very large long run cost if the practice spreads from very poor countries up to less poor countries.

My proposal, on the other hand, makes the development of drugs more profitable. You can not only make money on your drug until a competitor brings out something better, you can even get a little more money at that point by selling it to the Gates Foundation or some similar organization.

While on the subject, I have a second suggestion, this one intended to make drugs more available for both rich people and poor people. FDA rules on testing should be designed to encourage drug companies to make not yet approved drugs available abroad in order to use the information so generated to meet the requirements for approval in the U.S. That would bring down the cost of finding out whether new drugs are safe and getting them approved. At the same time it would provide low cost—albeit somewhat risky—drugs for people in poor countries.

My previous post discussed a conflict between good economics and good rhetoric, between an argument that was right and one that was persuasive. These proposals face similar problems. Opponents will argue that it is unjust for rich people to get the best drugs and poor people the second best—even if the realistic alternative is poor people not getting any drugs at all. They will make good demagogic use of the idea that it is wicked to use human beings as guinea pigs for potentially dangerous drugs—despite the fact that using humans as guinea pigs is the only way we have of finding out whether or not drugs are safe.

Compulsory Licensing: A Confusion of Arguments

One solution sometimes proposed for the problem of making medical drugs available in poor countries is compulsory licensing—the government of the poor country sets the price at which the patent owner must license others to produce the drug. The obvious argument against is that while it might reduce the cost of present drugs it would also reduce the supply of future drugs.

I recently heard a talk by someone who tried to test that prediction by looking at U.S. drug companies that had been required to accept compulsory licensing, usually as one of the conditions of a merger. She had a total of six cases. In only one did there seem to be a visible decrease in future patent applications. She viewed that as at least weak evidence against the "conventional wisdom" that compulsory licensing would reduce innovation.

Her sample size was tiny and the data very noisy, making a conclusion in either direction difficult. But that wasn't the interesting problem with the project.

In four of her six cases, the requirement was for compulsory licensing of a patent that already existed. When I pointed out that there was no reason to expect that to have any effect on future research by that particular drug company, she replied that that wasn't what the drug companies, arguing against compulsory licensing, claimed.

Thinking about it, I believe I know what was going on. There are two entirely different arguments for the same conclusion which look similar enough to be confused. One is the argument that I, or any economist, would make. The other is the argument she was rebutting.

Her argument takes the form "If the drug companies don't have enough money from their past research, they can't afford to finance future research to produce new drugs." That sounds plausible, but it's wrong. If future research looks to be profitable, drug companies don't need to finance it from past profits—that's what capital markets are for. If future research looks unprofitable then, however much money drug companies have from past research, they can find somewhere else to put it. That too is what capital markets are for.

The argument that makes sense to an economist is about incentives, not resources. Anything that makes future research less profitable, such as a policy of compulsory licensing expected to apply to future drugs, means that some projects go from just worth doing to not quite worth doing, reducing the amount of future research. In terms of that argument, four of her six cases are irrelevant, since they involved compulsory licensing of patents that already existed. In only two cases did the requirement apply to future patents. So her sample size was not six but two, and one of the two was the one case where she concluded that the result of the requirement was to eliminate research in the area it covered. Insofar as any conclusion could be drawn from her results, it was the opposite of the conclusion she drew.

The argument she was answering was the wrong one from the standpoint of an economist. But I can easily enough believe that it was the argument, or at least an argument, that the drug companies were making—because while it is economically wrong, it is rhetorically right.

With her argument, the drug companies are claiming that they would like to develop new drugs to save lives, but they just can't do it if compulsory licensing deprives them of the needed resources. That sounds a lot more attractive than saying that, while they could develop new drugs to save lives, they won't unless it is profitable.

Mind Drugs

For some years, I have had a book manuscript dealing with the consequences of possible technological changes over the next few decades up on the web collecting comments. I now have a publisher for it and am working on a revision for publication.

Most of the book is written, but there is still one missing chapter–on mind drugs. I expect it to divide into three categories:

1. Recreational drugs. These have a long history; the issues they raise are not new. Presumably progress in the relevant technologies, including understanding of how the mind works, will produce improved versions, drugs that give more pleasure with fewer risks.

2. Enhancement drugs. A few of these have existed in the past, with coffee and Coca leaves obvious examples. Currently some drugs, including Ritalin, are used by students taking exams to temporarily enhance their performance. I gather that modafinil drastically reduces the need for sleep and is said to be used by the military for that purpose. Physical enhancement drugs–steroids–have gotten quite a lot of negative attention, although I have not seen any thoughtful discussions of what, if anything, is wrong with using them.

It seems likely that over the next decade or two better such drugs will become available, for temporary and (perhaps) permanent improvement of mental performance. What interesting consequences are likely to result?

3. Control drugs. This is the interesting and scary category, so far mostly limited to fiction. What happens if there is a drug you can feed someone, perhaps without his knowledge, that will make him temporarily credulous, willing to believe what you tell him? A drug that will make him obedient? A drug that will make her fall in love with you or him feel loyal to you? All of these are real behavior patterns, presumably connected in part to brain chemistry–and we are becoming better chemists.

There are a few hints of such things already. Ecstasy is said to make users temporarily empathetic; empathy might make you more willing to believe someone's story of why he needs help, and provide it. Oxytocin seems to have some effects on trust, sexual bonding, maternal behavior; perhaps an engineered drug could provide similar results of a stronger and more controllable sort. Insects respond sexually to pheromones and there is now a little evidence of similar effects in humans; what perfume manufacturers have long claimed might turn out to be true. And of course knockout drugs from chloral hydrate to rohypnol–a very crude sort of behavior control—have a long and dishonorable history in fiction and fact.

The purpose of this post is to ask for help with my unwritten chapter. What facts don't I know that I should that are relevant to the development of mind drugs over the next few decades? What non-obvious consequences are worth thinking about and how might they be dealt with? Will we, for instance, expand the "absence of duress" requirement in contracts to make a contract unenforceable unless both parties submitted to suitable blood tests immediately before signing, to make sure that neither was acting under undue chemical influence?

Gift Economy x 2

No man is so wealthy that he objects to receiving
A gift in exchange for his gift

(Havamal)

I was thinking recently about the idea of a gift economy, an idea that sometimes shows up in discussions of open source software, and it occurred to me that there are really two quite different things covered by the term, both familiar to most of us in our ordinary life.

You invite a friend and his wife over for dinner, enjoy their company, invite them again. Pretty soon they will feel an obligation to reciprocate, to invite you over for dinner or, if that isn't convenient, invite you to a restaurant and insist on paying the bill. It will never occur to them that they might balance the account by offering you twenty dollars instead, and you would be shocked and, probably, offended if they did.

That is a gift economy of just the sort described in the bit of Havamal quoted above, composed somewhat over a thousand years ago. The transactions are exchanges, value for value, but they take the form of nominally voluntary gifts rather than the bargained exchanges of ordinary trade. As an economist I do not have a satisfactory theory of why we do things that way—and would like to—but as a participant in such an economy I at least know how it feels from the inside.

The second kind of gift economy occurred to me in a discussion with a friend whose interests include the history of fencing and 19th century dancing. He routinely spends a week each year teaching the latter at Newport and has just been making arrangements to make his very extensive collection of source material on the former, distributed in past decades as photocopies, available on the web.

He does not expect to get any gifts directly in exchange. What he does get, in addition to his own enjoyment and the feeling of a useful job done, is status. People sharing his interest recognize his name, treat him as an important person. That too is a gift economy, but of a rather different sort—probably closer to the gift economy of open source software. You pour your gifts out to the world and the world, if you are lucky, repays you in a variety of indirect ways.

That second kind of gift economy is more relevant than the first to one of the interesting issues of the next few decades: How to get intellectual property produced if copyright law becomes, for technological reasons, unenforceable. If I can not prevent you from copying my book, I not only can not charge you for it, I also can not make my giving it to you implicitly conditional on your giving a voluntary gift to me. But I can still get credit for writing it and may be able to find ways of turning the resulting status into other things of value to me.

Some Folk Are Never Satisfied

Back when I was a college student, one of the world's great problems was third world poverty. According to the conventional wisdom, countries such as India could never develop by their own efforts within a market system, as the currently developed countries had done. The only alternatives were central planning plus massive foreign aid—the recommended course for India—or still more central planning ferociously enforced, the course that was supposedly turning the Soviet Union, and would turn China, into modern economies.

Time passed, a handful of small poor countries in Asia became not-poor countries through market processes—further from laissez-faire than I would have recommended, but further still from the prescriptions of the conventional wisdom—and it was noticed that the Soviet Union, despite all its forced sacrifices, was still, for most of its population, a third world country. India and China got the message, shifted away from centralized planning in the direction of markets, and began to get less poor.

Problem solved? Not exactly.

As poor and hungry people get less poor, they get less hungry. With enough food to survive no longer a problem, some of them get fat. Voila—the growth of global obesity. It was brought to my attention by a radio interview with an expert who attributed the problem to increased consumption of vegetable oils and sugars. For some reason he didn't mention the obvious relation between increasing real income and increasing consumption, or that some of the increased calories whose consumption he deplored were being consumed by people who needed them.

Nor is that the only problem. As the Chinese get richer they, naturally enough, want more stuff—consume more raw materials, oil, power. Voila—new worries for those who are afraid we are about to run out of everything, either just before or just after we roast or drown. I have not yet heard any of them wishing aloud that the Chinese and Indians would go back to poverty and starvation, but that seems at least a muted subtext to the complaints.

Some of the concern may be legitimate, although it requires a serious effort to see the problems of too much food as comparable to those of too little. More can be attributed to ideological hostility to capitalism—people unwilling to recognize its striking success in dealing with old problems and so eager to focus on new problems created by that success.

And some is just the human taste for gloom.

Commitment Strategies vs Highjacking

I've just been doing a good deal of travel by air—one reason I haven't posted recently—and so have been thinking a bit about security issues.

On the face of it, almost all of the precautions to keep passsengers from highjacking an airplane are unnecessary—all it takes is a reasonably sturdy locked door between pilots and passengers. One possible response is that highjackers might persuade pilots to open such a door by threatening to kill off crew and passengers one by one until they do. In the post 9/11 world I'm not sure that would work—but suppose it would.

There is a simple solution: Provide the pilots with a second lock that can only be unlocked by someone on the ground. At the first sign of a highjacking they lock it and are now immune to threats. It would be prudent to make sure that potential highjackers know about the second lock, and perhaps to have a lighted sign or prerecorded announcement to signal that it has been activated.

Visual Processing and the Immortality of the Soul

Life after death is a very implausible idea, yet many people, in many different cultures, believe in it. For those of us who do not share that belief and are puzzled by all the reasonable and intelligent people who do, the obvious explanation is wishful thinking. But many of the same people also believe in some version of Hell—and, however useful that may be for threatening misbehaving children, it is not what wishful thinking would suggest as a possible future fate for oneself. I have an entirely different explanation to offer. I propose that the belief in the immortality of the soul is a consequence of the way in which our visual system processes information.

Looking around me, what I see is a collection of recognizable objects—a computer screen, a plastic cup half full of diet coke, a telephone and, in my very messy office, a lot of other things. But none of that is in the information feeding from my retinas to my optic nerves. That information consists of a visual field--a flat plane of various colored regions (actually two, one for each eye). Somehow the software in my brain is converting that very uninformative body of data into a reasonably accurate model of the bit of the world I am looking at.

As with many other things the brain does, it only became clear how hard it was when people started trying to write software to duplicate it and discovered that they couldn't—the information coming in was not adequate to generate the information going out. The explanation they came up with was that the brain cheats. In addition to using the information coming in through the retina, it also uses a body of information, generated by some combination of evolution and experience, about what the world is like, information that lets it discard most of the possible explanations of what it gets from the retina in favor of a small number of likely ones.

One such piece of information is persistance of objects. Having recognized the oddly shaped green region to the right of my visual field as the top half of a plastic cup (the bottom half is dark because of the diet coke showing through), my software does not have to redo the analysis three seconds later—even though the region is no longer in the same part of the visual field, my head having turned a little in the meanwhile. Part of the hardwired information is that if the cup was there recently, it is probably still there, or close. Being a rigid object, it is probably still about the same shape, even if a change in the angle at which I am observing it makes it look different.

Some things violate the rules—soap bubbles, for example. That is one of the reasons why soap bubbles seem like odd, almost magical, objects. And there are optical illusions that take advantage of the rules to trick us into seeing what isn't there. But, on the whole, our image processing rules and the software containing them work very well, much better than any software we can ourselves write.

Things persist. People are things, but things of a special sort; when you talk with a friend over the phone it is not his body you are aware of but the person inside. When he dies the body is still there but the person is not—which is intuitively impossible, since the knowledge of the persistence of things is hardwired into your brain.

Which might explain why so many people believe in life after death.

The Origin of a Novel

I published my first novel—Harald, from Baen Books—a few months ago. It occurred to me that some of you might be interested in how it came to be written.

It started, oddly enough, as an insomnia cure. I found that when I had trouble falling asleep, daydreaming didn't work—because I am the hero of my own daydreams, and so too closely involved with them. It occurred to me that if instead I plotted out a novel, I would have sufficient distance from my characters to be able to drift off.

It worked. Over a period of many months I plotted out parts of several novels and, eventually, all of one. House rules at the time required me, when putting one of our children to bed, to make up and tell three stories. I mentioned to my daughter that I had written a novel in my head and she suggested I tell her that instead.

The problem with telling my daughter stories is that she remembers them better than I do. The result in the past, when I was doing a long series of linked fantasy stories, was that just when I thought I had the characters in an almost impossible situation she would point out that the magic item they obtained three months earlier was precisely the thing to get them out of it. So this time, every evening after putting her to bed, I wrote an outline of what I had told her. As I got near the end I started thinking seriously of turning it into a novel. I wrote the final scene, liked it, and went back and wrote the whole first draft in a month or two. It was so much fun that, during that time, I played almost no computer games.

Illegal vs Unconstitutional: NSA, FISA, and all that

As many of you know, a federal judge has found the NSA warrantless surveillance program to be both illegal—in violation of FISA and various other things—and unconstitutional.

The discussions I have seen so far ignore the important distinction between those two conclusions. The fact that the surveillance violates FISA means that what has so far been done is illegal—and, incidentally, that Bush is a felon, as are lots of people at NSA. But FISA is legislation; Congress can repeal or alter it, and presumably will do so if the appeals court supports the ruling and a majority in both houses believe the current surveillance program is desirable.

Congress cannot so easily repeal or alter the Constitution. So if the surveillance is unconstitutional, that means the surveillance will have to stop.

I should add that, in my view, the illegality of the surveillance has been obvious from the beginning, as I said some time back. FISA was written to control precisely the sort of activity NSA has been engaged in—intercepting communications between suspected terrorists abroad and people in the U.S. It set up procedures for doing so and made it a felony to intercept without following those procedures, or to knowingly use information obtained by such warrantless interceptions.

The only arguments I have seen on the other side are either that Congress repealed FISA without knowing it was doing so when it authorized the use of force or that the President is entitled to break the law in matters of national security. Neither strikes me as plausible. The constitutionality, on the other hand, is a more complicated question, and one that I don't think I have sufficient expertise to answer.

Oddly enough, if Bush believed that what he was doing was unconstitutional that may explain why he did it. FISA provides a two week window after the beginning of a war during which its provisions are suspended—presumably to permit Congress to amend its provisions if necessary. Under the circumstances of the 9/11 attack, it is hard to believe that Congress would have refused to go along with an administration request to make legal the sort of interceptions NSA has been engaged in. But one likely consequence of such an amendment would be a lawsuit claiming that the activity it was authorising was unconstitutional—and if the courts agreed, that would leave Bush unable to engage in surveillance that he, presumably, saw as an important tool for preventing another attack.