9-5 Economists

A very long time, I had a colleague and friend who I concluded was only an economist in working hours. Having come across another example more recently, I thought it would be worth explaining the concept.

Suppose there is some issue on which economics implies a straightforward conclusion, but an implication short of a proof. Minimum wage laws provide a simple example. The conclusion that raising the minimum wage will reduce the employment of those currently receiving a minimum wage is a straightforward implication of the assumption that demand curves, in this case for a particular sort of labor, slope down. It is however possible, with sufficient ingenuity, to construct a model of the labor market (every employer of such labor is a monopsonist holding down employment in his tiny niche in order to hold down the wage he must pay) or the market for goods and services produced by low paid labor (customers for those goods and services much prefer to buy if they know the workers are all being paid at least $15/hour and there is no easy way for producers who pay that much to prove it to customers) which yields the opposite conclusion. 

The response of a real economist will either be "raising the minimum wage almost certainly reduces employment for low skilled workers" or (less likely but not impossible–I am thinking of a real example) "one of those odd models might possibly be right, I will look for a natural experiment by which I can test it."

The response of someone who is only an economist in working hours is to believe whatever he would believe if he was not an economist. If that requires him to believe that raising the minimum wage will not reduce employment for low skilled workers and someone points out the inconsistency with economics, he will justify himself on the grounds that the economic argument is not actually a proof, so its conclusion could be false.

For an example on the other side of the political fence, consider a conservative economist who wants to support trade restrictions.

In either of these cases, there may still be a way for a real economist to support the  conclusion he wants. In the case of the minimum wage, his argument  might be that the loss of employment to some is more than balanced by higher wages to others, so that the total earnings of low skilled workers go up instead of down. If that is his argument he will want to look for evidence on the relevant elasticities, may support his point by observing that losing a ten dollar an hour job increases leisure by an hour for every ten dollars lost, and will be bothered by the possibility that losing a ten dollar an hour job removes the first step leading to a fifteen or twenty dollar an hour job.

In the trade case, the argument might be that although free trade produces net benefits for Americans the gains go to richer people than the losses, so a gain in value measured in dollars leads to a loss in value measured in utility. If he is a real economist he will want to make some effort to find out if the claim is true, to estimate the income distribution of gains and losses and their relative size. Alternatively, if he is both a real economist and a cynic, he may agree in private that the economic effects of trade restrictions are negative but support them as a way of getting the rust belt votes needed to elect politicians who will do other things whose effects are positive and larger.

In either case, the simple test is whether an economist's views tend to diverge from those of his ideological allies when the ideology clashes with the economics.  If they do he is a real economist. If they do not, he is only an economist in working hours.

P.S. (added later) John Cochrane points at an example of something worse than a 9-5 economist, an economist who engages in public demagoguery that relies on the economic ignorance of his listeners and has the gall to do it while citing his professional qualifications as an economist.

Stable Cryptocurrencies

There are two problems with using Bitcoin as a substitute for conventional currencies. One is that transaction costs are high; I gather there are some proposals to solve that. The other is that its value is very unstable. So far that has been a plus, since the value has mostly gone up. But in general it is a minus, since it means that if you are holding a substantial amount of currency for transactions you are also speculating in its value, whether or not you want to. 

That raises the interesting question of whether it is possible to construct a cryptocurrency with a stable value. Basecoin is a recent attempt to do so. I have not examined how it works carefully enough to offer any opinion on it, but I think in principle the project is doable.

Suppose you want a currency which exchanges at one for one with the U.S. dollar. There is a real world example of a solution to that problem, although it was for paper currency not cryptocurrency–the Hong Kong dollar issued by the Bank of Hong Kong and Kowloon (I think also by a second bank–all this is from memory, so details may be off). It maintained a constant exchange rate with the dollar (not one for one) by a simple mechanism. Any time the $HK went above the target rate the bank printed more, any time it went below they bought some and took them off the market.

Basecoin works on the same principle. In theory it eventually shifts from pegged to the dollar to pegged to a market basket of goods.

Pre-bitcoin, Chaumian digital cash was supposed to provide a currency that could be exchanged by sending messages, with neither party having to trust or know the identify of the other. The problem was that it required an issuer, a trusted bank. A digital currency makes enforcing money laundering rules hard, an anonymous digital currency, which the Chaumian version would have been, makes it impossible, so governments very much don’t want it to exist, which makes it hard to establish a trusted issuer. 

The beauty of Bitcoin is that there is no issuer, so the problem goes away.

How do you maintain a stable digital currency without an issuer, a private central bank? I do not know the details of how Basecoin proposes to do it, but here is my version:

You start with ten issuers, each a respected private firm, probably in different countries, each with a private key/public key pair that it can use to prove its identity. You have some way that the software can measure the exchange rate between your currency and the dollar–the Ethereum people I have talked with refer to a mechanism for reporting real world facts to the software as an oracle and have some ingenious ideas for making one work. The software then establishes the following rules:

1. Any time the exchange rate is above the target, one of the issuers can create one more coin. Which issuer gets to do it depends on which ones created the last nine coins–they go in sequence. 

2. Any time the exchange rate is below the target, one of the issuers, again in sequence, is supposed to buy a coin and take it out of circulation.

3. An issuer that fails to obey rule 2 is no longer in the sequence for rule 1. Each time it fails to obey it, its debt to the system goes up by one. Only when it has repaid that debt by taking the corresponding number of coins out of circulation does it rejoin the sequence of issuers.

4. If the exchange rate is above the target and the issuer whose turn it is to issue a dollar doesn’t, after an hour it loses its turn to the next issuer in sequence.

Assume an expanding demand for the currency, first from its initial spread, in the long term from economic growth. Issuers profit because they are getting an interest free loan in the form of the the coins they print to hold the value down to a dollar. That gives each issuer an incentive to obey rule 2, so as to maintain its ability to issue.

Rule 4 exists mostly to cover the possibility of an issuer going out of business or being shut down by its government. There should be a mechanism making it possible, if that happens, to transfer its status to a new issuer. In the simplest case, that is done by selling the private key that proves its identity to another firm that wants to replace it. 

What is wrong with this proposal?

I was pointed at this problem, and at Basecoin, by my son Patri. I gather it has been discussed at some length recently, so I may well be reinventing the wheel, but I find it more interesting to think such things out for myself than to start by reading what other people have written.

That reminds me of an anecdote about my friend and ex-colleague the late Gordon Tullock. Someone prominent wrote an article. Tullock wrote a rebuttal. The original author wrote a response, claiming that Tullock had entirely misunderstood the original article. It included the line (by memory so not verbatim):

We have all been long impressed by how much Professor Tullock has written. It is even more impressive to realize that he has written so much without being able to read.

Did the Death of Copyright Hurt Anyone?

Intellectual property in digital form is easy to copy and easy to share, which makes enforcing copyright law against it difficult, often in practice impossible. Thus the shift of Intellectual Property—music, books, movies—to digital makes it much more difficult for copyright law to serve its traditional purpose of providing an incentive to create by rewarding the creators. The obvious conclusion is that creators of intellectual property should now be much worse off than before and much less, or lower quality, work should be being created.

The question, to which I do not know the answer, is whether it actually happened. My casual impression is that books are as good as they were ten or twenty years ago. I consume almost no music and almost no video, so cannot judge their quality–do others think it has declined? 

The other half of the question is the effect on producers. Have musicians gotten poorer? Do movie companies make less money than they used to? Are there fewer professional authors supporting themselves by their writing? 

If the answer to all of these questions is "no," that casts serious doubt on the conventional interpretation of the function and importance of copyright law.

For any graduate student in economics who is looking for a thesis topic, I suggest that trying to find an answer to that question and then an explanation for that answer would be a project worth pursuing.

How to Make Cherry Coke Zero

I consume a lot of soda, mostly Coke Zero or Diet Coke–enough so that I buy it in two liter bottles. I enjoy sometimes switching to the cherry version of the drink for variety. Unfortunately, Cherry Coke Zero is not available in two liter bottles in this part of the country. 

I have found a solution to this problem and am posting it here for the benefit of anyone else in a similar situation. 

Iranian restaurants offer a sour cherry drink as one of the options on the menu. I like it and my daughter likes it, so on a recent visit to our local Iranian grocery store I bought a bottle of the syrup that it is made with. 

Add a dash of that to a glass of Coke Zero and you have a do-it-yourself Cherry Coke Zero.

Friending on Facebook

I get quite a lot of friend requests on Facebook, most of which I decline. I thought it would be worth explaining why here, in the hope that some of the people who want to friend me also read my blog.

All of my FB posts are public, open to everyone. So the only effect of friending someone is that I get to see his posts--some at random, if I correctly understand how FB works, some because they mention me or have some other content that makes FB flag them for my attention.

When I get a friend request, I look at the requester's page to see if there is a particular reason why I would want to see his posts and the comments on them. If they are in a language other than English I almost always decline, since I am not fluent in any other language and so would rarely make the effort to read them. Google translate is getting better, but still not good enough for routine use. If the posts and comments are in English, I look at them to see if there is anything that makes them more interesting than the average of what I am already seeing on FB. If not I usually decline. 

I'm not entirely comfortable with this policy since I worry that people will interpret my declining their request as an unfriendly response, but I don't see much point to accumulating hundreds or thousands of "friends" whose posts I don't actually read.

Is a Complete Sex Change Operation Possible?

In one of Lois Bujold's books, a character is changed from female to male via a high tech medical procedure. In Karl Gallagher's Torchship series, sex change operations are treated as routine options–one minor character has changed f to m in order to be physically qualified for a preferred military role and plans to change back later.

That raises an interesting question. Altering the physical structure of the body looks like something that should be practical with the medical technology we can expect to have sometime in the next century. But a complete change should include a change at the genetic level, from XX to XY or the reverse, and Bujold makes that explicit in her story.

This raises two questions. One is whether the change could be made. I think the answer is pretty clearly yes, given a sufficiently advanced technology. One could, after all, have nanotech cell repair machines, very small robot submarines, that go through the body altering every cell.

The more interesting question is to what degree the result would still be the same person. The Y chromosome contains lots of genes in addition to the gene SRY that determines testes development. So replacing an X with a Y or a Y with an X would change a lot of the individual's genetic code. 

Could the problem be avoided by copying all of the genes not relevant to sex determination from the existing Y to the new X? Possibly. But it will not work the other way because the X is much larger than the Y; there is not room on the Y for all the genes from the X. 

Alternatively, is it an issue that doesn't matter because all the relevant determination of the organism by the genes has already happened in the adult? I don't know the answer.

Comments welcome, ideally by people who know more about this stuff than I do.

Incidentally, Gallagher's Torchship series is very good--I have now reread it twice. In addition to being a good action story, it raises issues that I have seen discussed at length in non-fiction contexts, including hostile artificial intelligence and problems with a society where everyone gets a basic income. Particularly impressive for a new author, which I believe Gallagher is.

P.S. My wife, who remembers books much better than I do, points out that in Bujold's A Civil Campaign the sex change operation only results in the male genitals being XY, leaving all other cells XX. The text implies that a complete conversion was possible but would take longer than was available and "the complications can be strange."

My Visit to Brazil

I got home very early this morning from a two week speaking trip in Brazil. I recorded four of the talks and they are now webbed, along with powerpoints and a video of one talk that someone else recorded. My talk in Rio was live streamed but I have not yet figured out where on the web it is.

A few observations:

The libertarian movement in Brazil–they prefer "liberal"–is very active and quite young. Most of the people at my talks appeared to be college age and at least one was a high school student. I believe my largest talk had an audience of about six hundred; several others were around two hundred. 

Part of the reason it is so active may be that the present state of Brazil is very far from libertarian and a lot of Brazilians are unhappy with it. As one striking example of just how bad things are, I was told that getting a drivers license  requires two hundred hours of lessons–eighty hours before taking the written exam, an additional hundred and twenty hours before taking the driving exam. That is an enormous deadweight loss, presumably existing to provide employment to the people authorized to teach the classes.

Brazilians don't sleep. At least, they see nothing add about expecting a visiting speaker to be at dinner until near midnight then up by six or so to catch a plane to the location of his next talk. In at least one case most of the Brazilians, after dinner, were off to further socializing, a nightclub or equivalent. To their credit, once made aware of their visitor's odd requirements they were willing to accommodate them.

I have often noticed that hotel people seem to believe I am unable to carry my own suitcase, despite the fact that I managed to get it to the hotel. In the past I interpreted this as a tactic designed to extract a tip. But tipping does not seem to be expected in Brazil, and I (and my daughter, traveling with me) still had to make a considerable effort to be allowed to bring our own things up to our hotel room. My current conjecture is that carrying a guest's bags serves as a way in which a hotel signals the high status of the guest.

In countries notably poorer than the U.S. I expect locally produced goods, such as restaurant food, to be inexpensive. That was not the case in Brazil. Part of the explanation seems to be a high level of tax on consumption. I was told that about half the price of what you buy is tax.

It was an enjoyable trip, with lots of friendly and helpful people and only a tolerable level of chaos.

North Korea and Munich

The solution to the present problem of North Korea seems obvious–we should have invaded them a little more than a decade ago, just before they developed nuclear weapons. It looks like the modern version of the lesson of Munich: Britain and France should have opposed Hitler early, when he was still weak, instead of going along with the annexation of the Sudetenland. More generally, it is the argument for a foreign policy of figuring out early who are going to be your enemies and opposing them before they get strong enough to be dangerous.

That argument assumes that your nation not only will have an interventionist foreign policy, it will do it right. The U.S. has an interventionist foreign policy, as demonstrated in, among other places, Vietnam, Iraq and Afghanistan. It had one in 2006. It did not do anything serious to prevent North Korea from obtaining the ability to drop a nuclear weapon on the U.S. because the cost of invading North Korea would have been large and immediate, the cost of not doing it more than two elections away. The benefits of an interventionist foreign policy conducted by a government no more competent at it than ours is are much less than the Munich argument implies. 

The costs are much greater. Modern U.S. history provides several striking examples, but I prefer a less familiar one.

A while back, rereading the first volume of Churchill's history of the Second World War, I discovered something interesting. The first time that Hitler attempted to annex Austria he was stopped not by France or Britain but by Italy. Mussolini announced that Italy would not tolerate a German annexation of Austria and made his point by moving Italian divisions into the Brenner pass. Hitler backed down.

What changed? When Italy invaded Abyssinia, England and France announced that that was a very wicked thing to do and took token actions against Italy for doing it. Mussolini concluded that Italy's World War One allies were not his friends and were not very dangerous enemies. The next time Hitler wanted to annex Austria, Mussolini raised no objection.

In Churchill's view, the correct response of the Allies to the Abyssinian invasion was either to forcibly prevent it or to ignore it. The first would have brought down Mussolini's government, the second would have retained him as an ally. Either a non-interventionist policy or a competent interventionist policy would have worked. The incompetent interventionist policy they actually followed gave Hitler his one significant ally.

What, in the absence of a time machine, can now be done about North Korea? The U.S. could, the President hints that it might, launch a full scale attack, probably nuclear as well as conventional. At this point that might not cost very many American civilian lives, since North Korea probably does not yet have the ability to deliver a nuclear weapon to the U.S. mainland, although it soon will. It would result in a very large number of civilian deaths in South Korea and possibly Japan. And in North Korea. It might happen, but I do not think it is likely to. Or should.

The alternative is to recognize that we are back in the world of mutually assured destruction, this time, fortunately, with a weaker opponent. Technological progress has made it possible for a relatively poor country to build intercontinental ballistic missiles with nuclear, perhaps thermonuclear, warheads. We are, however, enormously richer than North Korea--our GDP is more than six hundred times theirs--and considerably more advanced. The strategy that suggests is the one Reagan adopted for dealing with the Soviet Union, a competition in defensive weapons that they could not afford to win. I do not know enough about the current status of anti-missile technology to judge how workable that is, but I do not see any better alternatives.

Keynes on Newton--and some ideas for fantasy.

I have just come across a fascinating piece, a lecture on Newton by Keynes, delivered posthumously by Keynes' brother and largely based on Newton's unpublished papers, apparently totaling about a million words. The central thesis is that Newton's "unscientific" work was just as careful and logical as his scientific work, that he approached alchemy and theology in the same way he approached physics and mathematics. In each case he was trying to make sense of the world by the power of his mind.

Which suggests an interesting idea for a fantasy–I don't know if it has been done. Suppose Newton was right in his exotic work as in his invention of modern physics. In one possible version he is still around, having discovered the alchemical secret of eternal life and faked his own death. In another, a modern scholar reads through the whole body of unpublished work, correctly works out the magical secrets that it contains and that he concealed, and makes use of them.

And in a third, alternate history, version, Newton's friends fail to pull him away from Cambridge into the conventional world of parliament, civil service, and society. He spends the second half of his life as he spent the first, produces breakthroughs in the Hermetic sciences as great as in the natural sciences, and history forks.

Asking the Wrong Question

A few days ago I spent some seven hours attending a meeting of the San Jose City Council. I was there to speak against a proposed gun control law, but there were other interesting things in the meeting. One of them was a discussion of the Evergreen Senior Homes Initiative, a ballot measure proposed by  developers who want to build 910 units of housing on land currently zoned for industrial use, an idea to which the Mayor is opposed.

His argument is that, despite the references to affordable housing, seniors, and veterans, what the plan actually proposes is a gated community for wealthy residents. He may, for all I know, be correct. It does not follow that building it will not make more affordable housing available for the non-wealthy.

When someone moves into one house he moves out of another, which is then available for someone else to move into. If the development is built and the units are bought by people currently living in San Jose, the net result will be to increase the city's housing stock by almost a thousand units. Doing that will make more housing available in the city and lower its cost. The question the Mayor should be asking, assuming that what he is really interested in is the welfare of the citizens of the city and not merely his ability to control things, is whether the development will draw mostly from current residents or mostly from people who would not otherwise live in the city. Pretty clearly, that question never occurred to him.

The assumption of the Mayor–I think of city planners more generally–is that the way to get affordable housing is to build affordable housing. That is not the only way of getting it. The alternative, very common in the history of U.S. cities in the past, was for poor people to move into housing that had been occupied by, possibly built for, less poor people, vacated when the less poor people moved into newer and better houses. 

The same way poor people get cars.

Embedded Economics: Help Needed from Conrad Readers

As I have mentioned here before, one of my current writing projects is a collection of short works of literature that have interesting economic insights. In a conversation yesterday at an SSC meetup, someone mentioned a Conrad story that sounded as though it would fit in very nicely. Unfortunately he didn't remember the title. I am not sure if he was misremembering something in "Typhoon," which has a scene similar but less interesting, or if there is another story I have not been able to find.

The story as he remembered it involved a ship in a storm, as does "Typhoon." In his version, the money belonging to the crew was in a strong box that got so shaken that there was no way of distinguishing what belonged to whom. The solution was for the captain to instruct the crew members to each write down how much of their money was in the box. He would then add up the amounts and, if they came to more than was actually in the box, dump the box overboard. It's an ingenious solution, although I can see some practical problems, and would fit neatly into my discussion of mechanisms for making it in the interest of individuals to reveal information. The only thing I now have for that is the story of Solomon and the baby which is much weaker, since it depends on the woman who is pretending the baby is hers not guessing what Solomon is up to. 

In "Typhoon," the money that gets mixed up belongs to the Chinese passengers and the much less interesting solution is an even division.

Does anyone here know of the story in question? Does anyone have another work of literature that illustrates another solution to the general problem? Another example of a short work of literature with an interesting economic insight?

My discussion of the Solomon story and the general issue it illustrates

The current draft of the book, webbed for comments

Gun Control and Homicide Rates

Some recent comment threads on Slate Star Codex, my favorite blog, have dealt with the always lively issue of gun control. One standard argument is "we know gun control laws work because the U.S., which has relatively few restrictions, has a much higher homicide rate than countries such as Canada or the U.K., which have much more restrictions."

One response sometimes offered is that there are other countries, such as Mexico and Brazil, with both restrictive laws and homicide rates much higher than in the U.S. That then gets into the question of what comparisons are more relevant, in what respects the U.K. is more like the U.S. than Brazil is.

An alternative approach, which I think more useful, is to ask whether the difference in homicide rates existed prior to the difference in regulation. The web makes that question much easier to answer than it would have been twenty years ago. 

In the case of the U.K., the answer is pretty clear. According to the Wiki page on Firearms Policy in the U.K., the first restrictive legislation was the pistol act of 1903, but it had little effect:

The Act was more or less ineffective, as anyone wishing to buy a pistol commercially merely had to purchase a licence on demand over the counter from a Post Office before doing so. In addition, it did not regulate private sales of such firearms.

The first  significant restriction was the Firearms Act of 1920. There were additional acts in 1937, 1968, 1988, 1997 and 2006.

The data on Homicide rates per 100,000:

Year	U.S.	England&Wales	Ratio
1900	1.2	0.96	1.3
1910	4.6	0.81	5.7
1920	6.8	0.83	8.2
1930	8.8	0.75	11.7
*1946	6.4	0.81	7.9
1950	4.6	0.79	5.8
1960	5.1	0.62	8.2
1970	7.9	0.69	11.4
1980	10.2	1.11	9.2
1990	9.4	1.09	8.6
2000	5.5	**1.71	3.2
2010	4.8	1.14	4.2

*No data for the U.K. 1940-1945
**The figure is for the U.K. rather than England and Wales

Looking at those data, it is hard to believe that the reason the U.K. has a lower homicide rate than the U.S. is restrictive legislation.

My point here is not that gun control doesn't (or does) work. I wouldn't be surprised if some restrictions on firearm ownership reduced the homicide rate, but if so, the effect on the U.S./U.K. ratio is lost in the noise. My point is rather that the sort of factoids that show up in this sort of argument, even when they are true, are rarely as solid evidence as those who offer them claim.

This would be a better post if I had a good example on the other side of the same debate. I don't, but perhaps someone reading this can offer one.

European Speaking Trip in April

I have made tentative arrangements for another European trip. At the moment it looks like four or five talks in two weeks, so I could squeeze in a few more, hence this post. Current schedule:

April 14th, Belgrade

April 21st, Sofia

April 28th, Norway

Sometime between those dates possibly Poland, possibly Milan. For additional talks I prefer places reasonably close to places already on my schedule, so as not to spend too much time traveling.

My usual terms are expenses plus whatever honorarium the host thinks appropriate. Defining expenses gets complicated for a multi-talk trip. If one host has offered to fly me to Europe and back, I expect others to provide accommodations and any additional travel expenses, otherwise it's accommodations plus an even division of travel expenses among the hosts.