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.