EconTalk this week

Author and syndicated columnist George Will talks with EconTalk host Russ Roberts about the state of the country, the nature of politics, and at the end, a little about baseball. The conversation begins with Will discussing his career and how someone with a Ph.D. from Princeton got involved in politics and then writing. Will then discusses the current political environment and how little some things have changed in politics. Other topics include the future of journalism and Will's predictions for how the Chicago Cubs will fare this season (4th place).

Power back ..... at last

Got power back this morning but still waiting for water. Having power is a step in the right direction however. At least I can blog again for the first time in nearly a week. I assume there is still a world out there somewhere!!!

Who Is (More) Rational?

That is the title of a new NBER Working Paper by Syngjoo Choi, Shachar Kariv, Wieland Mueller and Dan Silverman. They use revealed preference theory as a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximise.

Using data from a field experiment they find that there is considerable heterogeneity in subjects' consistency with utility maximisation. In particular high-income and high-education subjects display greater levels of consistency than low-income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. They also note that consistency with utility maximisation is strongly related to wealth.

The abstract for the paper reads:

Revealed preference theory offers a criterion for decision-making quality: if decisions are high quality then there exists a utility function that the choices maximize. We conduct a large-scale field experiment that enables us to test subjects' choices for consistency with utility maximization and to combine the experimental data with a wide range of individual socioeconomic information for the subjects. There is considerable heterogeneity in subjects' consistency scores: high-income and high-education subjects display greater levels of consistency than low-income and low-education subjects, men are more consistent than women, and young subjects are more consistent than older subjects. We also find that consistency with utility maximization is strongly related to wealth: a standard deviation increase in the consistency score is associated with 15-19 percent more wealth. This result conditions on socioeconomic variables including current income, education, and family structure, and is little changed when we add controls for past income, risk tolerance and the results of a standard personality test used by psychologists.

EconTalk this week

Daron Acemoglu of MIT talks with EconTalk host Russ Roberts about the role income inequality may have played in creating the financial crisis. Raghuram Rajan in his book, Fault Lines, argues that growing income inequality in the last part of the 20th century created a political demand for redistribution and various policy changes. This in turn created the push for higher home ownership rates and led to the distortions of the housing market that in turn led to excessive risk-taking in the financial market. Acemoglu suggests a simpler story where the financial sector through its political influence distorted the rules of the game, benefiting executives in the industry, which in turn led to outsized rewards and ultimate instability in the financial industry. The conversation discusses ways of distinguishing between these two arguments and what might be done to change the incentives of politicians.

New blog on the block

I have come across an interesting new blog: markpenningtonlondon. Mark Pennington is Reader in Public Policy and Political Economy, Department of Politics and International Relations, Queen Mary, University of London. He opens his blog with a nice posting on Ronald Coase's essay on "The Market For Goods and the Market For Ideas". Pennington writes,

One of the most interesting but neglected of Coase’s ideas is presented in a brief essay on ‘The Market For Goods and the Market For Ideas’, originally published in the American Economic Review in 1974. In this essay, Coase points out the inconsistency of those who cite ‘imperfect’ and ‘asymmetric information’ as constituting a case for government regulation in markets for private goods and services, while remaining steadfast in their support for free speech in the political market for ideas. For its proponents though the ‘free market in ideas’ is plagued with various ‘imperfections’ – such as deception, misrepresentation and downright lying by politicians and pressure groups, coupled with the ignorance of the general public (i.e. voters), over time free speech and the competition it engenders offers the best prospect of ensuring that good ideas prevail over the bad. Attempts to regulate political speech to ensure that only ‘accurate’ and ‘truthful’ information is presented to the public are doomed to fail. Who would decide what is to count as ‘accurate’ and ‘truthful’, and who would ‘guard the guardians’ of public truth should they seek to abuse their authority?

If the above argument holds in the market for political ideas, however, then it is equally if not more valid in markets for private goods and services. As Coase notes, ‘It is hard to believe that the general public is in a better position to evaluate competing views on economic and social policy than to choose between different kinds of food’. Although consumer goods markets are plagued by imperfect information, misleading advertising and the existence of fraud, competition remains the best protector of consumer interests. Indeed, competition is likely to be more effective in the market for most goods and services because the costs of failing to be adequately informed are more likely to be concentrated on those who actually make bad choices– thus incentivising the critical scrutiny of advertising claims. In the market for ideas by contrast, failure to be adequately informed has externality characteristics – the decision to vote for a bad idea has consequences not only for the individual concerned but for the wider society at large. By making this point, Coase anticipated the argument made by Brennan and Lomasky (Democracy and Decision, Cambridge University Press, 1993) and more recently by Bryan Caplan (The Myth of the Rational Voter, Princeton University Press, 2007) that democratic politics is afflicted with the problem of ‘rational irrationality’ and that the ‘market for ideas’ is more likely to ‘fail’ than is the market for private goods.

The question this raises is, What is the best way of dealing with the inconsistencies that Coase notes? I can't help thinking the answer is to extend the free speech reasoning to the markets for good and services. That is, allow competition in the market for goods and services as well as in the market for ideas. So let us deregulate economic markets so they are as 'free' as the ideas markets. If the government cannot regulate the market for ideas, why do we assume it can regulate markets for goods and services?

Kidney transplantation: the xkcd view

xkcd comic take on kidney transplantation.

Otteson on Adam Smith

Noted Adam Smith scholar James R. Otteson has a new book out on Adam Smith. It is published by Continuum Press, and it is volume sixteen of a twenty-volume series entitled "Major Conservative and Libertarian Thinkers" edited by John Meadowcroft of King's College London. For more on the series see here.

The preface for the book reads:

This book is a part of a series entitled “Major Conservative and Libertarian Thinkers.” The series aims to introduce these thinkers to a wider audience, providing an overview of their lives and works, as well as expert commentary on their enduring significance. Thus Adam Smith begins with a short biography of Smith; it then gives an overview and discussion of his extant works, focusing on his two major publications, the 1759 Theory of Moral Sentiments and the 1776 Wealth of Nations; and it concludes by discussing what Smith got right, what he got wrong, and why he is still worth reading—which he most definitely is. Also included is a bibliography of primary and secondary sources.

A slim volume like this can address only a fraction of the richness of Smith’s work, so it can be only a primer. One principle that has helped guide my selection of topics has been the aim of the book’s series.[1] Thus I have given added weight, where appropriate, to aspects of Smith’s thought that justify, or at least explain, his inclusion in a series about major conservative and libertarian thinkers. Depending on how one defines those terms, there are aspects of Smith’s thought that are conservative and aspects that are libertarian; and there are aspects that are neither.

I also try to make sense of Smith’s writing not only in the small but in the large as well—that is, not only in the details of this or that argument in this or that work, but in the larger aims of Smith’s scholarly corpus. I believe there is a coherence to Smith’s work, and, though I realize a book like this places limits on an attempt to demonstrate a claim like that, I do my best to make it plausible if not ultimately convincing.

In writing the book I have been conscious that for some readers it might serve as their first introduction to Smith, and for others it might serve as their only introduction to him. For a thinker as important as Smith, that makes the stakes for a book like this one high indeed. I have striven to present Smith in a way I believe he himself would have approved: charitably but objectively. No author, however brilliant, got everything right, so the reader will also find in these pages periodic discussion of problems or objections, as well as indications of ongoing scholarly criticism or debate. But I believe that some important aspects of Smith’s contributions endure, and I hope that by the end of this book you are convinced of that as well.

The best way to understand Smith remains, and will always remain, reading his works for oneself. If this book gives you reason to think that you should read Smith, it will have served its primary purpose.

Seven myths about free markets

Stephen Hicks, the executive director of The Center for Ethics and Entrepreneurship, talks with economist David R. Henderson on seven myths about free markets

EconTalk this week

Tyler Cowen of George Mason University and author of the e-book The Great Stagnation talks with EconTalk host Russ Roberts about the ideas in the book. Cowen argues that in the last four decades, the growth in prosperity for the average family has slowed dramatically in the United States relative to earlier decades and time periods. Cowen argues that this is the result of a natural slowing in innovation and that we expect too much growth relative to what is possible. Cowen expects improvements in the rate of growth in the future when new areas of research yield high returns. The conversation includes a discussion of the implications of Cowen's thesis for politics and public policy.

Greens support free expression: sometimes

Homepaddock very correctly writes:

It’s difficult to decide which is more offensive, the decision to prevent Australian Prime Minister Julia Gillard speaking in Parliament or Green Party co-leader Russel Norman’s explanation for doing so:

“The government of the day could invite all sorts of unpleasant people, like (former United States president) George Bush for example they had in Australia, that I think a lot of Members of Parliament would be uncomfortable with and so we thought the best thing was to keep a simple precedent.”

Heaven forbid the delicate ears of our Members of Parliament should be assailed with something which discomforts them!

The whole point of freedom of speech is that it applies to everyone, whether we agree with them or not. If Russell Norman is soooooooooooo sensitive that he can not cope with listening to Julia Gillard that's his problem - why does he just sit outside Parliament while Gillard is speaking - but it's not a basis for curtailing freedom of expression. Norman just ends up looking small minded and petty.

Atlas Shrugged trailer

Opens in U.S. theaters April 15th, 2011.

But when do we see it here?

But will the president listen

to economist N. Gregory Mankiw when he says:

Listening to the president, you might think that competition from China and other rapidly growing nations was one of the larger threats facing the United States. But the essence of economic exchange belies that description. Other nations are best viewed not as our competitors but as our trading partners. Partners are to be welcomed, not feared. As a general matter, their prosperity does not come at our expense.

My guess is no since the president knows that most voters don't see international trade the way economists do. And the president is more worried about voters than economists. Many voters, and not just in the U.S., see competition with China as a big threat to their country. Economists never trier of telling people that trade makes both parties better-off, but to no avail people still see countries as competing.

But we don't compete with other countries, this is a false analogy that comes from thinking that countries are like firms, they're not. As, even, Paul Krugman has said, A Country Is Not a Company. The point is that Coke and Pepsi, for example, do compete, one gains at the others expense, but New Zealand and Australia, for example, don't, their loss is not our gain. International trade is not a zero-sum game. To see this, note that while Coke may wish to put Pepsi out of business, so that Coke can increase their sales and prices and therefore profits, New Zealand would not gain if we put Australia "out of business".

Why? Well in the Coke/Pepsi case, Coke gain a lot, in terms of sales and profits, from not having Pepsi to complete with and lose little since Pepsi doesn't buy much , if anything, from Coke. Or Coke from Pepsi. This is not true of the New Zealand/Australia example. We may gain some sells if Australia stopped producing, but we would lose much more. Australia is our biggest export market and if they "went out of business", they would stop importing, and that would hurt us a lot. Also they are suppliers of much of our useful imports and that would stop too, which would hurt us even more.

Countries trade, they don't compete. And thus increased prosperity in Australia - or China - does not come at our -or the U.S.'s - expense.

So women are nicer that men? maybe not .....

This paper, An experimental test of behavior under team production, by Donald Vandegrift and Abdullah Yavas reports on experiments on the behaviour of subjects involved in team production. The abstract reads:

This study reports experiments that examine behavior under team production and a piece rate. In the experiments, participants complete a forecasting task and are rewarded based on the accuracy of their forecasts. In the piece-rate condition, participants are paid based on their own performance, whereas the team-production condition rewards participants based on the average performance of the team. Overall, there is no statistically significant difference in performance between the conditions. However, this result masks important differences in the behavior of men and women across the conditions. Men in the team-production condition increase their performance relative to men in the piece-rate condition. However, this gap in male performances across conditions diminishes over the course of the experiment. In contrast, women in the team-production condition show significantly lower performance than the women in the piece rate. As a consequence of these differences, men in the team-production condition show significantly better performance than women in the team-production condition. We also find evidence that men show stronger performance when they are in teams with a larger variation in skill level.

In other words women free ride more than men. Counterintuitive?

(HT: Organizations and Markets)

The law of unintended consequences, another example

Professor Sonia Bhalotra asks Where have all the young girls gone?

The widespread availability of ultrasound scans in India is giving rise to abortions of female foetuses on an unprecedented scale, according to new research by Professor Sonia Bhalotra from the University’s Centre for Market and Public Organisation.

I'm sure that this outcome wasn't the one intended when the technology was developed.

Her (Professor Bhalotra's) study of ‘sex-selective’ abortion in India reveals that nearly half a million girls are aborted each year, which is more than the number of girls born annually in Britain. The practice is concentrated among relatively rich and educated Hindu families. According to Professor Bhalotra, this is consistent with ‘modern’ women being more receptive to new technologies and their wanting to have fewer children. She also suggests that Muslim women may have a stronger abhorrence of abortion.

Before this study, there was considerable anecdotal evidence of girl abortion in India, but no direct records of the practice. Using information on half a million births in India over more than three decades, this research identifies a dramatic decrease in the ratio of girls to boys being born after, and only after, the arrival of ultrasound machines in India.

Prof. Bhalotra speaks to BBC World Service here.

Competition, commissioning and the quality of healthcare: The evidence on Britain’s NHS reforms

Health reform is always a contentious issue and it is proving so in the UK. Britain’s coalition government is proposing significant healthcare reforms, which include promoting greater competition between providers and changing the way that care is commissioned. In this audio from VoxEU.org Carol Propper of the Centre for Market and Public Organisation talks to Romesh Vaitilingam about the evidence for some of the claims and counterclaims about the likely impact of the reforms.

See also The Health Bill, the NHS and the facts by Carol Propper.

The art of prediction

or why you shouldn't make predictions - if you needed any more evidence on this point. This quote is from The Economist and considers the future of South and North Korea:

“Obviously, sooner or later the country must be reunited,” wrote Joan Robinson, a Cambridge economist, in 1977, “by absorbing the South into socialism.”

Reality has not been kind to Mrs Robinson. From the same article,

South Korea’s central bank reckons that North Korea’s annual income per person was only $960 in 2009, or about 5% of South Korea’s. (This estimate values the North’s output using South Korea’s prices and its exchange rate against the dollar.) This disparity dwarfs the income gap between the two Germanys on the eve of reunification.

Minimum wages in Nicaragua

The effects of minimum wage are much debated, a debate that generates much heat but little light, at least outside of economics. In a new working paper Tim H. Gindling and Katherine Terrell look at The Impact of Minimum Wages on Wages, Work and Poverty in Nicaragua.

In the paper Gindling and Terrell use an individual- and household-level panel data set to study the impact of changes in legal minimum wages on a number of labour market outcomes: a) wages and employment, b) transitions of workers across jobs (in the covered and uncovered sectors) and employment status (unemployment and out of the labor force), and c) transitions into and out of poverty.

Their finding show that changes in the legal minimum wage affect only those workers whose initial wage (before the change in minimum wages) is close to the minimum - a result you would tend to expect. What they find is that increases in the legal minimum wage leads to significant increases in the wages and decreases in employment of private covered sector workers who have wages within 20% of the minimum wage before the change, but have no significant impact on wages in other parts of the distribution. So low wage/productivity workers are affected via increases in unemployment and increases in wages for those who are likely enough to keep their jobs.

Gindling and Terrell's estimates from the employment transition equations suggest that the decrease in covered private sector employment is due to a combination of layoffs and reductions in hiring. Most workers who lose their jobs in the covered private sector as a result of higher legal minimum wages leave the labour force or go into unpaid family work; a smaller proportion find work in the public sector. They find no evidence that these workers become unemployed.

Doha round: setting a deadline

From VoxEU.org comes this interview in which Peter Sutherland talks to Viv Davies about the recently published interim report on ‘The Doha Round: Setting a deadline, defining a final deal’. Sutherland explains why Doha has stalled and presents the case for its immediate completion. He maintains it is crucial that governments now commit to concluding Doha by the end of 2011 or else the round is doomed and all that has been achieved will be lost, with disastrous consequences for world trade. There is also a transcript of the interview available.

Top in the AER

The American Economic Review is the top economics journal in the world. A committee of some very distinguished economists - Kenneth J. Arrow, B. Douglas Bernheim, Martin S. Feldstein, Daniel L. McFadden, James M. Poterba and Robert M. Solow - have selected the top 20 articles published in the AER over the last 100 years.

Interestingly, interesting to me at least, F. A. Hayek's article "The Use of Knowledge in Society" makes the list. About the article it is said:

The author addresses the fundamental question of the nature of the economic system and, in particular, its role in dealing with resource allocation when a fundamental knowledge base is distributed in small bits among a large population. The knowledge needed includes consumer valuations, production relations, and resource availabilities. In particular, general scientific principles, where expert opinion might be best, are only a small part of the knowledge base. The author argues for the importance of a price system in achieving coordination and efficiency in resource use without implying an impossible aggregation of information in a central place.

Also interesting is the inclusion of Armen Alchian and Harold Demsetz paper. “Production, Information Costs, and Economic Organization.”

What is the special role of the firm in organizing production? The authors argue that it is the ability to measure inputs and their productivity and to allocate hired resources in production involving the cooperation of many inputs. It is this phenomenon that explains why all cooperation of factors does not take place through market-determined contracts. The firm is made to be the residual claimant because that approach creates the appropriate incentives for management. Many implications of this hypothesis are developed.

This is an important paper in the theory of the firm literature, although it has come in for much criticism. But that criticism has lead to the development of new theories of the firm.

Anne Krueger's article on “The Political Economy of the Rent-Seeking Society” also makes the top 20:

Many government policies, such as import licenses in developing nations, create rents for some market participants. While the presence of such rents and the distortions that they create have long been noted, this paper recognized the importance of “rent-seeking behavior” and explored its welfare implications. The paper’s central finding is that competitive rent-seeking increases the welfare costs of policies such as trade restrictions. In the context of import restrictions, this result strengthens the case for the use of tariffs rather than import quotas, since quotas create the possibility of rent-seeking behavior. By identifying the importance of rent-seeking activities and providing a framework for analyzing their welfare costs, this paper expanded the economic analysis of the government’s choice of policy instrument to achieve particular goals. It also helped to launch a voluminous literature on the role of corruption and governance in the process of economic development.

An interesting question is, What does the list signals about what is, and what isn't important in modern economic thinking?

The full list is:

• Alchian, Armen A., and Harold Demsetz. 1972. “Production, Information Costs, and Economic Organization.”American Economic Review, 62(5): 777–95.
• Arrow, Kenneth J. 1963. “Uncertainty and the Welfare Economics of Medical Care.” American Economic Review, 53(5): 941–73.
• Cobb, Charles W., and Paul H. Douglas. 1928. “A Theory of Production.” American Economic Review, 18(1): 139–65.
• Deaton, Angus S., and John Muellbauer. 1980. “An Almost Ideal Demand System.” American Economic Review, 70(3): 312–26.
• Diamond, Peter A. 1965. “National Debt in a Neoclassical Growth Model.” American Economic Review, 55(5): 1126–50.
• Diamond, Peter A., and James A. Mirrlees. 1971. “Optimal Taxation and Public Production I: Production Efficiency.” American Economic Review, 61(1): 8–27 and Diamond, Peter A., and James A. Mirrlees. 1971. “Optimal Taxation and Public Production II: Tax Rules.” American Economic Review, 61(3): 261–78.
• Dixit, Avinash K., and Joseph E. Stiglitz. 1977. “Monopolistic Competition and Optimum Product Diversity.” American Economic Review, 67(3): 297–308.
• Friedman, Milton. 1968. “The Role of Monetary Policy.” American Economic Review, 58(1): 1–17.
• Grossman, Sanford J., and Joseph E. Stiglitz. 1980. “On the Impossibility of Informationally Efficient Markets.” American Economic Review, 70(3): 393–408.
• Harris, John R., and Michael P. Todaro. 1970. “Migration, Unemployment and Development: A Two-Sector Analysis.” American Economic Review, 60(1): 126–42.
• Hayek, F. A. 1945. “The Use of Knowledge in Society.” American Economic Review, 35(4): 519–30.
• Jorgenson, Dale W. 1963. “Capital Theory and Investment Behavior.” American Economic Review, 53(2): 247–59.
• Krueger, Anne O. 1974. “The Political Economy of the Rent-Seeking Society.” American Economic Review, 64(3): 291–303.
• Krugman, Paul. 1980. “Scale Economies, Product Differentiation, and the Pattern of Trade.” American Economic Review, 70(5): 950–59.
• Kuznets, Simon. 1955. “Economic Growth and Income Inequality.” American Economic Review, 45(1): 1–28.
• Lucas, Robert E., Jr. 1973. “Some International Evidence on Output-Inflation Tradeoffs.” American Economic Review, 63(3): 326–34.
• Modigliani, Franco, and Merton H. Miller. 1958. “The Cost of Capital, Corporation Finance and the Theory of Investment.” American Economic Review, 48(3): 261–97.
• Mundell, Robert A. 1961. “A Theory of Optimum Currency Areas.” American Economic Review, 51(4): 657–65.
• Ross, Stephen A. 1973. “The Economic Theory of Agency: The Principal’s Problem.” American Economic Review, 63(2): 134–39.
• Shiller, Robert J. 1981. “Do Stock Prices Move Too Much to Be Justified by Subsequent Changes in Dividends?” American Economic Review, 71(3): 421–36.

Incentives matter: the poor and poor incentives file

The most compelling explanation for the marked shift in the fortunes of the poor is that they continued to respond, as they always had, to the world as they found it, but that we — meaning the not-poor and un-disadvantaged — had changed the rules of their world. Not of our world, just of theirs. The first effect of the new rules was to make it profitable for the poor to behave in the short term in ways that were destructive in the long term. Their second effect was to mask these long-term losses — to subsidize irretrievable mistakes. We tried to provide more for the poor and produced more poor instead. We tried to remove the barriers to escape from poverty, and inadvertently built a trap. - Charles Murray, Losing Ground, p. 9