Free Distance Learning

Both of the courses I am teaching this year are being video recorded and webbed. It occurred to me that some of my readers might find one or both interesting.

Economic Analysis of Law
Class Page
Book: Late Draft in HTML  Page Images with Virtual Footnotes
Videos
Powerpoints

Legal Systems Very Different From Ours
Class Page
Book
Videos
Powerpoints

Propaganda Masquerading as News: The Incredible Shrinking Horse

I recently came across a news story which struck me as a good example of how to mislead people, probably for political purposes, without saying anything that was not actually true. The title was "Watch out: Mammals shrink when Earth heats up, study says." The story reported evidence that, at a period when global temperatures were high, a number of ancient mammals became smaller—by fourteen percent in one case, by four percent in another.

There were two things wrong with the story. The first was the repeated use of the term "shrinking." What it was actually describing was evolutionary change, probably over a period of several million years, but the story never said that. It made it sound as though  animals were actually shrinking, and that is how I would expect a casual reader without much scientific background to read it. How else would you interpret "At least twice before in Earth's history, when carbon dioxide levels soared and temperatures spiked, mammals shriveled a bit in size."

At least twice before in Earth's history, when carbon dioxide levels soared and temperatures spiked, mammals shriveled in a bit in size

Read more at: https://phys.org/news/2017-03-mammals-earth.html#jCp

At least twice before in Earth's history, when carbon dioxide levels soared and temperatures spiked, mammals shriveled in a bit in size

Read more at: https://phys.org/news/2017-03-mammals-earth.html#jCp

At least twice before in Earth's history, when carbon dioxide levels soared and temperatures spiked, mammals shriveled in a bit in size

Read more at: https://phys.org/news/2017-03-mammals-earth.html#jCp

The second was the picture that accompanied the story. It shows a modern horse, a Morgan, contrasted with Sifrhippus sandrae. The visual impression is of enormous shrinkage, the modern horse being nearly a hundred times the weight of the ancestral horse. But that is totally irrelevant to the facts being reported, since all of this was happening many millions of years before there were any modern horses.

My conjecture, on which the title of this blog is based, is that the article was designed to mislead, to scare casual readers about the effects of global warming, to make them imagine that it would shrink them by a similar amount. It is possible that I am mistaken, that the author did not care about politics and was merely trying to write a story people would read. Shrinking from the size of a horse to the size of a cat is a much more dramatic story than evolutionary change from the size of a large cat to the size of a medium cat, which is what the story was actually describing.

On either interpretation, I see no plausible way of interpreting the story, in particular the picture, that does not make it a case of deliberately dishonest journalism.

A Proposal to Triple Tax Robots

Certainly there will be taxes that relate to automation. Right now, the human worker who does, say, $50,000 worth of work in a factory, that income is taxed and you get income tax, social security tax, all those things. If a robot comes in to do the same thing, you’d think that we’d tax the robot at a similar level.

(Bill Gates, from a Quartz interview) 

A robot that does a job earns income for its owner. If the owner is an individual, that income gets taxed—income tax, social security tax, all those things. If the owner is a corporation, the income pays corporate income tax then is paid to the stockholders as dividends and taxed again, although at a lower rate than ordinary income.

Gates is proposing that we replace the double tax with a triple tax.

I expect one could construct arguments for special taxes on capital that replaces labor that were not absurd, although there is no particular reason to focus on robots—capital has been substituting for labor at least since the invention of the plow, probably longer. 

But this one is either stupidity, unlikely in the case of Gates, or blatant demagoguery.

A Scrap of Libertarian History

I just came across a letter I wrote to Edith Efron in 1978 on the anarchist/minarchist controversy. It occurred to me that others might find it interesting. I don't remember if she ever answered it. 

But then, I also don't remember writing it.

Crazy Like a Fox

One possible interpretation of Trump's actions is that he is ignorant, stupid, impulsive and thin skinned. During the campaign the obvious implication, which many drew, was that he had done and would continue doing stupid things that would lose him the nomination or, if he somehow got the nomination, the election.

That did not happen. When your theory confidently predicts something that does not happen, it is worth considering that the theory may be wrong. 

Additional evidence against that theory comes from Trump's earlier history. His finances are not public knowledge and some have argued, for all I know correctly, that he would have done at least as well if he had invested his inherited wealth in a collection of low risk interest bearing assets. But he didn't. He engaged in a long and risky series of entrepreneurial projects. If he was as incompetent as many seem to believe, he would by now have lost all or most of his money. 

That suggests an alternative interpretation, that while Trump may indeed be impulsive and thin skinned he is not stupid, that the apparently stupid things he did were for the most part tactics that were intended to win and did win, that it was not Trump who did not understand what he was doing but his critics. 

Hence the title of this post.

How well does that fit what has happened since the election? 

The initial travel ban made very little sense as a way of preventing Islamic terrorism  but quite a lot as a way of giving Trump the image of doing everything he could to defend America from Islamic terrorism. Seen from that standpoint, even its poor design made sense as a way of provoking noisy and passionate opposition, making his opponents in the Democratic party and the mass media seem to be soft on terrorism. It isn't as if the average voter can be expected to pay attention to the details.

The oddest thing about the response of Trump's critics to his moves is the implicit assumption which they would surely disavow if were made explicit—that Trump's motives are benign. On the assumption that his objective was to make America better, his actions look stupid. But not if his purpose was to promote his own power and status. 

The theory I am offering also explains the accusation that Obama tapped Trump's phone. As best I can tell, there is no evidence that it is literally true. But there is evidence, reported in the New York Times more than a month ago, that federal agents acted under a FISA warrant to tap the communications of some members of Trump's team in the Trump Tower. There is probably no evidence that they did so at Obama's urging or in order to provide information to him, but there probably would be no evidence of that even if it were true.

Obama, the New York Times and the rest of the opposition could have responded to Trump's charge by denying that Obama had tapped Trump while conceding that some around him had been tapped as part of a legal investigation, a fact reported a month or more before Trump made his charge. They could even have suggested that confusing the two claims was evidence of Trump's weak hold on reality. Perhaps some did. But the overall impression of their response as I saw it and, I suspect, as most others saw it, was that it amounted to "That's absurd, Trump must be crazy, nothing of the sort happened."

At which point Trump's supporters could respond that something of the sort, even if not exactly the same thing, had not only happened, it had been reported in the New York Times. That might not convince someone paying close attention to the two claims and the differences between them, but not many voters would be. Making people less willing to trust the mass media, especially when they are criticizing Trump, is a win for Trump.

When I offered arguments along these lines in a Facebook comment thread, the response I got, at least implicitly, was that by denying Trump's incompetence I was defending Trump and that Trump defenders were not worth listening to. My response, that assuming your opponents are stupid when they are not is a very dangerous mistake, fell on deaf ears.

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An earlier version of this argument.

Division Rules and Assortative Mating

 [Warning: This post assumes the reader understands the Principle of Comparative Advantage. Those who don't will find an explanation here.]

Assortative mating is the pattern of like partnering with like. A standard example is the tendency of men with college degrees to marry women with college degrees. It came up in a talk I recently heard in the rather different context of the tendency of elite law firms to have partners at similar levels of ability. To an economist familiar with the principle of comparative advantage that looks like the opposite of what we would expect, which started me thinking about why, in different contexts, assortative mating would or would not happen.

Consider a greatly simplified model of the marriage market in a world with the traditional division of labor between household and market production but without the traditional sexual division of labor. The world contains four people, two men and two women. One of the men and one of the women are high income earners—think of them as the college graduates. The other two command lower incomes on the market but are equally good at running a household. The two high income earners can each make $100,000/year, the two low income earners can each make $40,000/year. Any of them can produce household services, cooking, laundry, rearing children, whose cost if purchased on the market would be $60,000/year.

With assortative mating, the two high income earners marry each other. Both work, they purchase household services and are left with $140,000/year. The other pair also marry,  one works and one stays home, and they have an income of $40,000/year. The combined income for the two couples, net of the cost of buying or producing household services, is $180,000/year.

Suppose, instead, that each high income earner marries a low income earner. The high income earner works, the low income earner stays home. Combined income of the two couples, again net of cost, is $200,000/year.

The pattern is a familiar one in the context of trade. One partner has a comparative advantage in earning income, the other in household production. Dividing who does what accordingly can make both better off. The implication of that simple model is that men with college degrees should marry women without them and women with college degrees should marry men without them. That is not what actually happens. Why?

In the case of marriage, there are a number of possible explanations. Many couples meet in college. Educated men and women may get along better with educated partners. Educated men and women may prefer that their children be reared by an educated housewife or househusband.

I want to offer another explanation which is not limited to marriage, one that suggests why pairing would be assortative in some contexts, possibly including law firms, and not in others.

Add one more assumption to my model—that the income of each couple is split evenly between them. With assortative mating, the high earning couple get $70,000 each, the low income couple get $20,000 each. With mixed mating, each individual gets $50,000. As long as income has to be split evenly, the situation is stable, since neither of the high earning individuals would want to switch. Without that assumption it is unstable, since a switch to the mixed mating pattern with a 75/25 division of income in each couple makes everyone better off.

Generalizing from the simple model, we would expect to see assortative mating in contexts where differences among potential partners are large and pairs, or larger groups, are constrained to a roughly equal division, because the loss to the high value partner of having to share equally with the low value partner(s) outweighs the benefit of a more efficient division of labor. We would expect the opposite pattern where potential partners are free to vary the division between them.

Consider again the case of marriage. Husband and wife live in the same house, share the same meals and vacations. That limits, although it does not entirely prevent, an unequal division of consumption. Further, once they have been married long enough to have children they are locked into a bilateral monopoly bargaining situation in which any contract over the division of consumption is largely unenforceable.

Consider next the law firm. A law partnership is a worker run firm, although one where control is limited to a subset of workers. That fact limits the degree to which an unequal division can be maintained among the voting partners. So the prediction is that voting partners will be unwilling to recruit others who are substantially less productive than they are and unable to recruit others who are substantially more productive than they are. They will take advantage of comparative advantage by hiring non-voting members of the firm, whether non-partner attorneys or secretaries, who will receive a different, usually lower, share of the firm's income.  

Finally, consider the issue of immigration. It is in the interest of the population of a high income, high skill country such as the U.S. to admit low skill, low income immigrants due to the usual principle of gains from trade. For people who understand the relevant economics, the chief argument against doing so is that poor people will come not to work but to collect welfare. The solution offered by supporters of free immigration, the solution I offered more than forty years ago in my first book (Chapter 14), is that welfare should not be available to new immigrants. The response to that solution is that immigrants will eventually become citizens, at which point they will vote for income redistribution in their own favor. Hence, it is argued, we should admit skilled immigrants from India and China to work in Silicon Valley but not unskilled Mexicans to pick crops.

How accurate the final step in the argument is in the real world of 21st century America is not clear, but its logic is the logic I have offered for when assortative mating will or will not happen.

Anyone Want a Talk in or near Europe?

It looks as though I will be giving a talk in Moscow on May 30th. If I am going to come that far, I might as well give more than one talk. Is anyone in that part of the world interested? Looking at flights to Moscow, they seem to typically go through London, Paris, Frankfurt, or Istanbul, although I expect there are other alternatives. 

Another alternative is somewhere reasonably close to Moscow, such as Helsinki or Tbilisi. I gave a talk in Georgia once over the internet, perhaps I could give one in person.

My usual requirement is an interesting and interested audience and expenses. An honorarium is appreciated but not essential.

An Interesting Mistake

I recently gave and graded a midterm exam on the application of economics to law. On one problem a number of students made the same interesting mistake, interesting for two reasons. It illustrates one of the ways in which it is easy to misunderstand economic ideas. And it points to a conceptual mistake this is  common, important and dangerous.

The problem involved the effect of alternative legal rules on the interaction between an airline and three thousand homeowners near the airport. One way of dealing with noise was for the airline to reduce it at a cost of a million dollars. Another was for the homeowners to achieve the same effect by soundproofing their houses at a cost of four hundred dollars each, for a total cost of 1.2 million dollars.

Suppose the legal rule is that the airline has the right to make noise and no  liability for the cost to the homeowners. The obvious outcome is that the homeowners soundproof even though it would cost less for the airline to reduce the noise. That suggests the possibility of bargaining, with the homeowners offering to pay something between a million and 1.2 million in exchange for the airline reducing the noise.

With three thousand homeowners that is unlikely to happen. If the bargain is struck, each homeowner gets the benefit whether or not he contributed to the payment. Thus each will be inclined to try to free ride on the expenditures of the others. They face what economists describe as the public good problem—how to produce something when those who pay for it cannot control who gets it.

Suppose, however, that the three thousand houses belong not to three thousand home owners but to one real estate company that rents them out. Now the public good problem vanishes. The company gets the benefit from sound reduction and will be willing to pay for it.

The mistake was not in predicting what happens but in explaining why. A number of students said something to the effect that combining the houses under one owner "levels the playing field" between home owners and airline. The implication of that way of putting it is that the problem is simply a conflict between two sides. Combining the homeowners into one firm increases their bargaining power and so results in their getting more of what they want, the airline less.

The result of the change is that the homeowners, now combined into a single firm, get more of what they want. But so does the airline. It is being paid at least a million dollars, probably more, to do something that costs it a million dollars. Bargaining over how much it gets is a conflict between the two sides. But the agreement to reduce noise at the expense of the homeowners, which is what combining them made possible, is a win for both. 

The reason the mistake is important to me as a teacher is that it illustrates a common problem in teaching economics and probably other things as well. The student has a pattern of ideas in his head, in this case a simple model of conflict where what helps one side hurts the other. He fits what he hears into that pattern, thinks he understands it, and so never gets the actual idea I am explaining.

But this particular example of that problem is important for a wider reason. A lot of people in a lot of contexts take it for granted that games are zero sum, that what benefits one side must harm the other. That is a very dangerous mistake. Consider some examples.

Trade

The term "competitiveness" is routinely used in a way that implies that what matters is how rich or productive the U.S. is relative to other countries, that if China gets richer that makes us worse off. It might be true if we were at war with them, but we are not. In the context of trade, China being richer means that they can buy more stuff from us and sell more stuff to us in our mutual benefit. 

A closely related error is the survival of mercantilist economic theory two hundred years after Ricardo showed why it was wrong, the idea that trade is a war in which each side is trying to sell more than it buys, to get a "favorable" rather than an "unfavorable" balance of payments.

Wealth

Consider discussions over what has happened to the incomes of rich and poor over the past few decades. As best I can tell—it is not a subject I have looked at very carefully—the answer is that across the income distribution people have gotten at least a little richer but that incomes have increased much more for those at the high end of the distribution. This is often represented as the poor or the middle class losing out, with the implication that the wealth of the rich came at their expense, that there is a single pool from which the rich are getting more and the poor therefor less.

Put that way the claim is obviously false, since average incomes have increased enormously over the past few centuries, both in the U.S. and globally. In any particular situation it might be true, since one way of getting rich is to steal stuff from people, whether legally or illegally. But it cannot be true in general. 

Politics

It is tempting to see all political disagreements as conflicts of interest, to assume that it is simply a question of whose side you are on. If you  believe that, there is no point in listening to the other side's arguments. They may say that what they propose is good for everyone, but that is just a trick to blind people to their true motives. It is a very common attitude and a very dangerous one. Carried to its limit, it implies that the other side is your enemy, in which case there is nothing really wrong with lying about them, wiretapping them,  stealing votes. 

All is fair in love and war, and this is war.

Love

Speaking of which, consider the effect on a marriage of assuming that all disagreements are about which partner gets his or her way, which loses out.

I have discussed some of this in at least two previous posts, one on status, one on my disagreements with two other anarchists, one left and one right.

An Application of Economics to Teaching

After answering the exam questions you know the answers to you still have time left. You spend the rest of your time answering  questions you do not know the answers to, in the hope that something you write will fool the professor grading the exam into thinking you know the answer, at least in part, expressed it unclearly and deserve partial credit. Doing this is rational behavior on your part, but the result is to waste your time writing and my time reading. It also adds additional noise to the signal that exams generate, since there is a risk that I will either be fooled into giving you credit you do not deserve or interpret some other student's poorly written answer as entirely bogus when it is not.

I have a solution to this problem, an economic solution, although I like to claim that it was inspired by the story of Socrates and the Delphic Oracle.

Well, one day [Chaerephon] went to Delphi, and there he had the impudence to put this question -- do not jeer, gentlemen, at what I am going to say -- he asked, "Is anyone wiser than Socrates?" And the Pythian priestess answered, "No one." Well, I was fully aware that I knew absolutely nothing. So what could the god mean? for gods cannot tell lies. For some time I was frankly puzzled to get at his meaning; but at last I embarked on my quest. I went to a man with a high reputation for wisdom -- I would rather not mention his name; he was one of the politicians -- and after some talk together it began to dawn on me that, wise as everyone thought him and wise as he thought himself, he was not really wise at all. I tried to point this out to him, but then he turned nasty, and so did others who were listening; so I went away, but with this reflection that anyhow I was wiser than this man; for, though in all probability neither of us knows anything, he thought he did when he did not, whereas I neither knew anything nor imagined I did."

On my exams, knowing what you do not know is worth something—twenty percent to be precise. That is what you get on a question for not doing it. So if you suspect that the best bogus answer you can come up with will be worth less than twenty percent, you are better off leaving the question blank or writing "I do not know," going home early, saving both of us some time and saving me the hassle of trying to figure out which answers are or are not entirely bogus.

I posted on this and some related matters five years ago but thought it worth posting on it again.