Author: Rick Weber

David Friedman on Judging Outside Your Expertise

Rick Weber Liberty , , , , , , ,

David Friedman writes:

Accepting the views of experts on a question you are not competent to answer for yourself, assuming that you can figure out who they are and what they believe, is often a sensible policy, but one can sometimes do better. Sometimes one can look at arguments and evaluate them not on the basis of the science but of internal evidence, what they themselves say.

He goes on to give examples of inconsistent claims made by global warming alarmists. His (short) post is worth the read. Here are my 2 cents:

First, (in response to the block quote) deferring to experts is sensible but requires a certain degree of expertise in picking out who they are which is a difficult task. We’re all human, and it’s hard to hold something in your head without thinking it’s true. That makes it hard to not be arrogant. We need to emphasize strongly that interpreting information is hard, and the outcomes are not at all obvious. Those concerned with anthropogenic climate change (myself included) are better served by stressing the uncertainty involved and making arguments centered on appropriate risk management.*

Second, The issue of climate change boils down to a series of sub-issues that need to be considered carefully:

We need to think about costs and benefits. A warmer world would be a boon for many people. If we could set the average world temperature, we would want it to be higher than 0 Kelvin. We might even want it to be warmer than it is today.

We need to think about the uncertainty surrounding what’s happening, as well as what we can do about it. We should be particularly skeptical about cost estimates for any effort to try to control the environment.

(This one’s a bit of a non sequitur.) We should use this as an excuse to do things that would help reduce the costs of climate change that we should be doing anyways. Specifically, we need to liberalize immigration policy in wealthy nations. Let’s say there’s a 0.00001% chance that climate change has a bad outcome, and that specifically that outcome is that the entire country of Bangladesh will catch fire and kill everyone. That’s a good excuse to let Bangladeshi’s come to America, but we should be doing that anyways. It’s a low cost (actually a negative net-cost) solution to a potential problem of climate change.

Here’s one that I think the smarter alarmists/deniers already recognize: this is a political discussion. Politics and the truth don’t mix. But recognizing this point and making it widely known may allow people to tone down and argue something closer to the truth.

skepticalscience
Global warming will lead to catastrophic… life?

Both sides like to think of themselves as skeptical (as demonstrated by that masthead which warns that we might have to suffer through the addition of a habitable continent (?)), and good for them. We should value skepticism in this. But that skepticism shouldn’t lead us to make bold claims on one side or the other. It should lead us to ask a lot of “what if?” questions. This is a risk management issue, not a social engineering one.

* I like Taleb but I’m not as worried by GMO’s as he apparently is, but I haven’t read that paper either.

Here’s why you should default on your student loans. And here’s why you shouldn’t.

Rick Weber Law , , , , , , , , ,

This article popped up on my newsfeed the other day and I (as always) read the headline (“Why I defaulted on my student loans”), looked to see if it was posted by one of my sane or insane Facebook friends (no idea…), then promptly forgot about. Then I saw this response: “The New York Times Should Apologize for the Awful Op-Ed It Just Ran on Student Loans” (posted by a sane friend). Okay, let’s give this some thought.

Lee Siegel (of the first article) writes that he made some bad decisions and faced the prospect of either living a life he didn’t want, or defaulting on his obligation. The question then is “should more people follow his example?”

Choosing a major is essentially an entrepreneurial decision. You are investing in a set of human capital goods that you hope will provide a return in the future sufficient to justify the cost of the investment. One thing we know about entrepreneurship is that it usually fails. We also know that this failure is often not socially wasteful but simply a cost of experimentation. America was lucky to end up with a system of bankruptcy that is uniquely easy on defaulters… why lucky? Because it turns out that this system meant to merely shift resources towards farmers also allows entrepreneurs to quickly dust themselves off and get back to work on their next experiment. Some turn out to be brilliant and ultimately outweigh the costs of past failures.

But this wasn’t what Siegel was advocating. His decision was to not pay his debt but to stay in the line of work he trained for. His thinking was “sunk cost, and now it’s someone else’s problem.” Yes, the higher-ed industry is screwy on all sorts of margins, and yes, he probably didn’t have great information beforehand. But rather than learn from his mistake, he simply ignored it.

Using bankruptcy to subsidize risky experimentation turns out to make sense in some cases (it’s hard to believe, but there it is). And this might be justified in some cases in schooling… it might be worth it to subsidize 100 post-secondary schools that try all sorts of crazy methods on the chance that we learn something useful from the experience. And I think we can justify defaulting on student loans that were made in fraudulent circumstances (“Hey Buddy, wanna get a degree?”). It might be sensible to allow loan forgiveness for students who get a degree in a field that turns out to be obsolete by the time they graduate… as long as it’s paired with a policy requiring student loan applicants to watch a 12 hour long video course on employment projections and labor economics.

We might even justify subsidies by partial loan forgiveness for students studying art or some other field that might generate positive spill overs–but if we do, the decision shouldn’t be left to those who already owe a lot of money for attending an expensive school. It’s not up to Siegel to determine that he should get a subsidy. He wasn’t suggesting walking away from his mistake and starting fresh, he was suggesting letting someone else pay for the cost of his mistake while he reaped the rewards.

If there’s anything to learn from Siegel’s decision, it’s that understanding costs isn’t a requirement for writing in high profile news papers and so we should be leery of policy advice given by journalists. I think the second article I linked to makes a compelling case that Siegel is a bum.

Mundane work is morally praiseworthy

Rick Weber Liberty , , ,

Economists hold an important piece of wisdom that needs sharing: noble acts don’t occur in a vacuum. Mundane acts derive moral worth through their support of heroic acts. Even if they aren’t praised as heroes, everyone who is being productive should feel warm and fuzzy inside for their contributions.

Let’s put this bit of knowledge together with the “equimarginal principle” (EP). EP is an outcome of the intuitive idea of the Law of Diminishing Marginal Return: if you keep doing more of something, each extra bit yields smaller benefits. First slice of pizza: great. Second slice: good. Third slice: meh. Fourth slice: regret. EP gives us a rule to improve our life: cut back on pizza and drink more beer. Balance your choices so that the marginal net benefit is equal across all avenues. If it’s not, then cut back on those choices that yield relatively low benefit and do more of the things with high marginal benefit.

This applies on a societal level too. And to charity. What is the marginal value of an extra dollar invested in cause X? Cause Y? Take some money out of the low marginal benefit cause and shift it to the other. Cancer research is a worthy goal, but you can do more for the world by donating to a less saturated cause. I’m not saying nobody should research cancer. I’m only saying the marginal researcher could create more value in some other venue.

Back to my main point. The team that cures cancer will be lauded as heroes. But some of that praise belongs to the people who support them. The people who made their equipment made their project possible. So did the people who provided gasoline so they could drive to work. These people won’t get this praise, but recognition isn’t the root of morality.

These unsung heroes are making the world a better place. They allow the “real” heroes to pursue their comparative advantage. It’s not just those on the front lines who are making the world better. EP tells us that pursuing that praise isn’t always praiseworthy. You are short-changing your cause if you pooh-pooh support roles. And because of the nature of voluntary exchange, “support role” doesn’t have to be narrowly defined to “volunteer for your preferred cause.” Just by being productive in your usual life you are contributing something. It’s certainly praiseworthy to go further and donate to some cause, but we shouldn’t ignore the fact that working for others (i.e. your customers) is virtuous in and of itself.

Contribute to society where you can contribute the most net benefit. Pursuing praise alone is not how you make the world a better place.

And don’t forget: you’re part of society too. So don’t be afraid to treat yourself!

Garbage could be beautiful

Rick Weber Economics , , , , , ,

And I don’t mean in the artistic sense, though that’s an option and one that sheds light on the larger question of what to do with garbage. I recently heard a podcast on garbage incineration; how it’s widespread in Europe as a way to generate electricity and reduce the need for landfills. The discussants were wondering why America doesn’t do more of that and concluded that progress was barred by a combination of NIMBYism and the fervor of recycling enthusiasts. Whether you agree with the producer of that segment or not, they are certainly correct that this industry is stagnant, and this rigidity results in plenty of unnecessary inefficiencies. But I think the real low hanging fruit is in waste collection.

The other day I saw a garbage truck and it struck me that the institution of “garbage day” is just a hold-over from the days before apps and algorithms were available to efficiently route garbage trucks to where they’re needed. For that matter, the trucks could be different; the service level could be different, and surely resources could be saved.

There are plenty of ways garbage could be picked up, and they could all coexist next to one another. Different towns and different neighborhoods

This sort of competition would be beautiful. The results would be better service, less room for corruption, clean trucks taking away your garbage when it’s necessary and saving resources* in the process. Rich neighborhoods would have sleek electric wagons grabbing their trash cans from the side of the garage in the middle of the night. In poor and rural neighborhoods something more like Uber would give the out-of-work construction worker a  way to pay for his truck.

The problems are surely due to regulations that limit innovation and competition. So, how could we open up this market? Debate and committees is the correct response, but it’s not the only one. “If I were a Silicon Valley millionaire,” I thought while driving past that truck, “I could change this, and probably make a buck doing it.”

So here’s the exciting part: A wealthy libertarian-type benefactor (or even a non-profit funded through a Kickstarter campaign (don’t forget to comment on this article!) could make a bet with the mayor of some city (which would need certain features to be a viable first candidate) that privatization would work. The bet goes like this:

  1. Pass legislation that opens up genuine competition in trash collection in one year.
  2. Private garbage companies spring into existence and do a better job at a better price (as determined by a study we will pay for by a consultant you will pick).
  3. If (2) does not happen, we will pick up the tab at your current provider for one year.

Obviously, our first hurdle is structuring the bet property to avoid problems like Waste Management from abusing their position. And that’s probably a big problem. But here’s the thing: if someone can figure this out, and motivate the right people to contribute, it will:

  1. Make it easier for an electorate/politicians to face the risk that something will go horribly wrong, and
  2. Create a profit opportunity for the (probably) tech billionaire backing this.

Opening up waste collection to competition allows for the possibility of the next Uber or AirBnB being in the garbage business. And for that matter, this betting approach might be used for other industries. For Uber to use this approach would be even easier. They would have to pay for a study on transportation in some city, and could offer to bet some lump sum to the city if competition doesn’t work.

*”Saving resources” has practically become a verbal tic with me. I use it as a synonym for the much less evocative “reducing costs.”

Can we count on juries?

Rick Weber Law , , , , ,

Towards the end of this week’s Cracked Podcast an important issue was raised: juries are peopled by human beings and human beings are not naturally good at figuring out cause and effect. Over the last few hundred years the sort of evidence juries would have to evaluate were fairly simple; things like “does the glove fit?” (Okay, that’s a bad example.) But now juries are faced with expert witnesses discussing things like DNA evidence which requires a jury capable of interpreting statistical evidence. This is fine if the defendant has the money to hire their own expert witnesses, but for poor defendants they might well get railroaded by the ignorance of the jury. Is there anything that can be done?

Some more thoughts on what to do with conspiracy theorists and other libertarian sympathizers

Rick Weber Liberty , , , , ,

Just a quick note on a perennial topic…

Years ago I met my (now) ex-girlfriends crazy uncle. For whatever reason we ended up talking about how some policy or other was a bad idea. “Oh cool,” I thought, a fellow traveler. And then he started talking about how 9-11 was an inside job. “Okay, sure, whatever, but there’s so much else. We could actually convince people that, for example, a better regulatory system could improve the world.” To which he replied that yes indeed 9-11 sure was extra inside-job-y.

Now, this guy was a legitimately crazy uncle, so whatever. But this exchange wasn’t about his being a crazy uncle, because I’ve met plenty of non-crazy, non-uncles who have been similarly zombie-like. Whether they’re of the “Obama is a secret gay Muslim” variety, or any other variety of conspiracy theorist, they are just completely uninterested in attacking the Democratic party for any sensible reason. And this is true of anti-Republicans too. There the conversation is something like “war sure is bad, huh?” “Yeah, and Bush’s puppet masters set the whole thing up.” “Okay, let’s just assume that’s true, how do we reduce the amount of war?” “By getting hung up on evidence that only convinces people who don’t need any more convincing!” “I’m going to go get another drink.”

Here’s the thing: there are plenty of good arguments for opposing whoever it is you want to oppose. Yes, it feels good to talk about how the bums in charge are pawns for the cartoon-mustache-twirlingly-evil powers that be. But if you want to be taken seriously, keep it to yourself.

I see two things going on here. First, these conspiracy zombies are simply bad at thinking like economists. The first rule of being a good economist is that you have to recognize opportunity cost. By perseverating on the big, exciting, good-vs-evil struggle amongst competing factions of the Illuminati (I guess?) you attach all your attention to something you’re unlikely to have any real influence on at the expense of minor but achievable goals like marginal improvement of the immigration system, or school choice, or any number of other things the other side is willing to discuss with you (yeah, yeah, they aren’t willing to discuss that stuff because they’re convinced that your side is in a deal with the devil too…).

Second, and this is more troubling, people have a natural predilection to these sorts of things. People would rather get excited about conspiracies than actually make the world a better place. Is there anything we can do about that? I don’t know. Maybe we need to convince rank-and-file Republicans and Democrats that aliens are conspiring to pit humans against one another by making us argue unproductively rather than simply reform immigration policy. Maybe Krugerz was right?

A proposal to help curb grade inflation.

Rick Weber Liberty , ,

I have a stack of midterms I’m procrastinating grading, but I’m not simply going to babble on about some minor nuisance in my own life, I’m going to expound on a modest, but promising intervention into the problem of grade inflation which, I believe, costs us millions of dollars every year.

Here’s the basic problem: schools serve a mix of roles, including signaling, human capital formation, and pure consumption. Unfortunately, universities face a problem of grade inflation. I have encountered many students who were very angry that I should even dare to suggest that a C is an acceptable grade. This, despite the fact that C has never been sold as anything but “average- simple, common, adequate but ordinary”.

And why is grade inflation a problem? It makes the signal of a college degree less meaningful. And the result is that students have to pile on ever more credentials at ever more selective institutions to prove themselves. It also leads to students turning school into a GPA maximization game rather than an intellectual pursuit. For top students this isn’t a real problem, but for the rest it may be costly. So here’s my proposal…

Maybe we should be describing the grade distribution as being like the Fahrenheit scale… 73 is just about right; sure it’s a few degrees off, but it’s close enough for government work. 93 Is about as hot as you’d ever really want it to be. Any hotter is superfluous, and besides, this school doesn’t give A+’s. The 90’s are hot; exceptionally so, but the 80’s are pretty warm. Once in a while an 85 degree day can be quite nice, But you don’t really even want too many 80+ grades on your transcript. This is related to a fact that always amazes my students: in econ grad school an A means you over-invested in a class and wasted energy that could have been spent on advancing your dissertation. Too many B’s for a typical undergrad means that they aren’t doing enough intellectual, spiritual, social, and personal exploration outside of class. So what about F’s and D’s? Well, the analogy might fall apart here, but I don’t think we need to sell students on going for F’s, although I think one or two would probably build character.

I think that if this description spread through high schools and colleges then we might just calm the students and parents down a bit. Doing that might just allow us all to slow down enough that the students might actually learn something and retain it.

On the value of nature

Rick Weber Economics , ,

I was listening to a really cool episode of RadioLab. The third act asks the question, “what is nature worth?” During part of it they discussed the fall and rise of bees in Mao county, China. Bees disappeared after farmers started using pesticides and had to be replaced with human labor. Against all expectations output actually increased 30% (they never did say how much these workers impacted bottom lines compared to when the bees were doing the job). But then economic growth happened and increased wages and put pressure on farmers.

This lead to a question about how to go about discussing the issue of conservation. On the one hand, this economic analysis means that we don’t take nature as being implicitly worthless and discussing it this way will help the cause of conservation. On the other hand, it doesn’t jive with our intuition (or perhaps our moral sense) that if some aspect of nature appears worth very little or seems irrelevant we still probably shouldn’t downsize nature.

All fair enough. So here’s where things go bad… the host then asks if there is an alternative to the conservationists moralizing and the economists’ cold calculating. Economics does in fact have an answer! Two if we can call Nassim Taleb an economist (surely one who does a lot of normative work).

Taleb would argue (with allusions to the argument I’ll present below) that prudential risk management (i.e. management of fluctuations in those economic values brought up above) calls for an appreciation of the potential for black swans. In the case of the bees there was a series of black swans; the bees disappeared (-), human workers were more productive (+), economic growth (+) made human labor too expensive (-, for farmers and pie-baking grandmothers). We want to be averse to the sorts of risks that might be wildly negative and so should diversify our approaches and bee (that was a typo but I’m keeping it) sure we’re not opening ourselves up to negative black swans–which would involve being very skeptical of cost benefit analyses that justify excessive environmental harm. This point was made (but not fully appreciated, I would argue) by an environmental economist on the program in pointing out that some changes are irreversible.

Taleb’s argument works because the complexity of ecological and economic systems means that such wild variation is possible. There can be cascades of cause and effect that create dire consequences to what may look like a small change. In other words it would be a fatal conceit to imagine that anyone can engineer an environment.

Not so obvious is that if we don’t want to deliberately prune too aggressively we also don’t want to sterilize nature by trying to stop all change. We are part of this environment after all; glorified beavers at the end of the day.

That said, what they closed with was good thought: biodiversity [like market diversity] serves as an extension of our brains. We can draw on the imagination evolution provides us to live better lives. I would add that you can view that as narrowly economical (imagining “imagination capital” being depleted along with rainforests) or more broadly as pursuing “the good life.”

Hayek on Human Rights Day

Rick Weber Current Events , , , , ,

It turns out it’s Human Rights Day today! I came across a call on Twitter: “Don’t fight for your rights. Fight for equal rights.” This reminded me of an argument from Hayek: “If we knew how freedom would be used, the case for it would largely disappear…. the importance of our being free to do a particular thing has nothing to do with the question of whether we or the majority are ever likely to make use of that particular possibility… The freedom that will be used by only one man in a million may be more important to society and more beneficial to the majority than any freedom that we all use.”

This thought entered my brain when I was in a Constitution of Liberty reading group back in San Jose and has been percolating ever since. It has profound implications for how we think of freedom as a concept, and especially for how we should think about the sorts of liberties we want to support. I think the second part is obvious: even if I don’t need the freedom to own a business (for example), I’m far better off in a world where immigrants are allowed to start businesses like eBay. The same is true for more controversial liberties… we simply don’t know who ought to have the rights necessary to transform the world, and we don’t know what those rights are. So we should be prepared to err on the side of giving “too many” people “too many” liberties.

The first part (the implications for how we think of freedom as a concept) is a bit trickier. Hayek is arguing that the rights we all have aren’t terribly important. That is, it’s the marginal rights that matter. We all have the right to life. It’s important, but it’s not going anywhere anyways. If we want to improve the future, we need to keep an eye to things within our control; we could revoke the right to life (you know what I mean… that other thing is a whole different can of worms and you should write your own blog post about it…), but that’s not even on the table. What we need to be concerned with is those rights that we could conceivably lose because they don’t seem that important.

For example: women should be allowed to sign contracts, own property, and start businesses. We all know that to be the case based on our sense of fairness. But Hayek bolsters that argument: we should want that set of rights to be held by as many people as possible regardless of sex and possibly even regardless of species (District 9 and Planet of the Apes are two movies that would be very different if we attached rights to sentience rather than humanity). We don’t want rights to only go to people we care about, we want them to go to people who can use those rights to make the world better.

Rational ignorance and institutions

Rick Weber Politics , , , ,

I’m grading a question I gave to my class on rational ignorance so I’ve been restating myself repeatedly… and in doing so refining my view on rational ignorance.

Here’s the basic story: an election is forthcoming and we need to decide how we will vote. One possibility is that we follow heuristics (such as “I’m going to vote for the Democrats”). Another is that we delve through all the available information and make a calculated decision based on what we expect will be the outcomes of each candidate’s proposed policies (or what we think their policies actually will be). In a perfect world the median voter would be making a decision on the second basis. But each voter faces an opportunity cost of being more informed. And because a tie is highly unlikely I can cast a ballot I might otherwise regret but I won’t have to worry that it will actually change the outcome of the election.

The outcome is that people vote stupidly. But if that were really the problem it wouldn’t be that big a deal. Yes, people are wasting their votes. But really, we’re not facing a situation where “the truth” is on the ballot. The real problem is that the terms of political competition aren’t what we want them to be. This is still a Prisoners’ Dilemma, but the outcome isn’t “we all accidentally vote for the jackass.” The outcome is “the competition is inescapably between jackasses.”

In a world where rational ignorance were a problem because of the ignorance part political races would still be about a reasoned debate about how to improve the world. But that isn’t what politics is (and it probably never was). Instead it’s about marketing. It’s about grabbing the scarce attention of voters that has little if anything to do with information or anything you can be ignorant about.

In other words, rational ignorance is not an epistemic problem, it’s an institutional problem. It does not simply change the intelligence of the outcome of a vote, it reduces the role of intelligence and rationality in elections. It changes the rules of the game so that a politician’s efforts towards being “right” have little bearing on their success. What really matters is garnering the irrational support of voters.

Why I prefer Jon Stewart

Rick Weber Liberty

I recently learned that Jon Stewart may be leaving the Daily Show next year. I worry that we will be losing something very specific in Stewart as the host. What he brings to the table is a higher intellectual standard. It’s clear to me that he holds everyone to a higher standard, including his audience.

I stopped watching Colbert early on. I think Colbert is funny (maybe even funnier) but Stewart goes for jokes that require the audience to see the absurdity in politics in a way that points toward the truth. I’ve only seen a few segments of John Oliver’s show (I’d love to pay HBO for access but I’m not willing to pay a cable company for that access!). I remember when Oliver was hosting the Daily Show and I felt like he was mostly pandering to the audience. I don’t like to feel patronized like that. But the few segments I’ve seen on his own show are mostly thoughtful. So there’s reason to hold out hope.

I don’t know what we can expect from Stewart in 2016 but I’m looking forward to it. Here’s to you Jon Stewart! May you keep raising the bar!

Update: if that (first) link still isn’t working, try cutting and pasting this: nymag.com/daily/intelligencer/2014/10/jon-stewart-rosewater-in-conversation.html

Some Thoughts on Voting

Rick Weber Economics, Politics , , , , , ,

A while ago I bought a Willie Nelson album because Willie is excellent. People who say “I don’t like country music” haven’t listened to Willie Nelson.

Willie would be the first pig-tailed president. We must elect him for social justice!

Even though I can get the album without paying for it, I paid because I want to tell Willie Nelson that I appreciate him. But my purchase was also a dollar vote (a five dollar vote, really) telling would-be musicians to be more like Willie Nelson.* For undertaking the expense of making that vote, I even got access to the album through Amazon. That’s good if I want to load it onto my phone for a road trip, but most of the time it’s actually easier for me to listen to that album on Grooveshark. In any case, I got to express myself, listen to Willie Nelson in a barely easier fashion under some circumstances, and it only cost my $4.99.

Now let’s do some lazy economics. My cost of expressing my preferences was approximately $5. If I’m rational we can infer that my benefit was at least as great. I got access to the album (that’s worth about 2 cents to me), I got to express my appreciation of Willie, and I got to make an infinitesimally small impact on the artistic landscape.

I think it’s fair to say that people who vote are doing so to express their views (as I did). But I think they usually vote for the wrong person. If I decide candidate Bob is less terrible than candidate Andy, that doesn’t mean I should vote Bob. I think candidate Carol actually reflects my views fairly well, and I’m sure she won’t win the election. But I also know that if either Andy or Bob wins, it will be by 300 or more votes**; so if I vote for Carol I won’t change the outcome and thus won’t be “wasting” my vote. In fact, if I vote for Bob I’m wasting my vote because I’m sending the message that we need less of the stuff Carol calls for and more of the stuff Bob does.

But in any case, we all pretty much understand that while your vote matters on average, it doesn’t matter on the margin. Put simply, the costs of voting are significantly higher than the benefits you would get if your vote magically actually did change the outcome multiplied by the probability that such a miracle occurs. So probably people vote to express themselves, and as long as their doing that, voting for the Republicans (Democrats) is like buying a popular album you hate because there’s another popular album you hate more. Don’t do that!

* Being more like Willie Nelson doesn’t mean impersonating Willie, it means being excellent.

** In an election with fewer than 5000 voters you might actually have a reasonable chance of affecting the outcome, but if you aren’t voting in a small town election you can safely assume that your vote won’t determine the winner.

A New Chicago School?

Rick Weber Economics , , , , ,

Consider America’s transportation system. I like to imagine that it ought to be a certain way. I imagine a world where a lot of freight travels competitive rail lines. And occasionally a transport truck traverses the country side, maybe to serve a new or small market without a rail road. I imagine a truck entering a town, passing some sort of device that alerts the local police that a vehicle has entered the town without the appropriate toll-paying transponder. Since this is the first time this has happened, the officer hands the trucker an application and signs him up on the spot. Oh! And there aren’t major freeways all over the place. Just a lattice work of efficient highways skirting the edges of towns and winding byways trailing through the country side. Perfect motorcycling roads and beautiful markets all in one.

My perfect world wouldn’t have much room for the fast modern engines we’re used to cars having. Planes and trains are fast enough for long distances and for shorter distances we simply don’t need to go so fast. The technology in those modern engines is malinvestment. That capital exists because interference with markets has skewed the relative financial benefits of different research (e.g. at the expense of investment in technology necessary for seamless and efficient toll-roads). This skewed capital structure also indirectly subsidizes fast-food while implicitly taxing the experience of traveling through, rather than past, small towns.

But what would actually keep it that way? It’s all a bit too good to be true. Am I being Utopian? Yes, but I think there might be some merit in that. My utopia can be thought of a limiting case; one of many possible best-case scenarios. We might conceive of a yard stick akin to Pareto Optimality but in a dynamic setting.

The world can be dynamically-Pareto optimal and have economic profits, but only those that arise as a result of productive entrepreneurship. Actions that create net value should be the only ones that generate profit. And externalities (whether pollution or politics) should be resolved by property rights and liability law. At least in the long run.

Such a world would serve as a benchmark in exactly the same way as Perfect Competition, and I would name it similarly. Perfect Markets (I’m open to suggestions) would be those that are simply too perfect to exist in the real world, but would offer a limiting case against which differing scenarios might be considered.

I suspect that something like this has already been offered but I’m only slowly working my way through one work and it will be a while before I get to another notable work. That first (from the Austrians) I suspect would be (justifiably) critical of what I’m discussing and perhaps it is a project best suited for applied mathematicians. It would certainly allow a good deal of theorem proving and other apparent mental master–… mastery (yes… mastery…). For some time there might be little apparent use or scientific merit in this. But number theory only became valuable with the advent of computers centuries after mathematicians started thinking about the minutiae of numbers. It’s not always for us to say that something doesn’t have a use just because we don’t see it yet. It’s a good idea to let some curious mathematical tinkerers doddle away at problems; they might turn out to have offered a valuable and useful gift to future generations.

A Letter to Stuff You Should Know

Rick Weber Economics

SYSK recently published a podcast introducing the idea of socialism. Below is my open letter to them.

Hey guys,

I love your podcast but was bracing myself for the socialism episode (I’m an economist interested in the socialist calculation debate, I’m no expert but many economists don’t even know about this debate). You guys did a great job discussing socialism and I was pleasantly surprised. Most people think “socialism can’t work because people will be lazy” but you rightly pointed out that gulags are a strong motivator and the real problem was a sluggish adaptation to changing conditions due to a non-spontaneous price system.

Some clarifying points:

  • In economics socialism is defined as centralized control of the means of production (e.g. TV factories, but not necessarily TV sets). A socialist economy is one that takes this to its limit and as far as I know has only existed in Russia between 1918 and 1921.
  • In 1920 Ludwig von Mises wrote Economic Calculation in the Socialist Commonwealth. Prior to this point the official socialist stand was essentially, “1. Capitalism lays the foundations for socialism. 2. ??? 3. Utopia!” Socialists had never described how socialism would solve economic problems (what to produce, where, by whom, for whom, etc.). Mises pointed out that those issues are solved automatically by the working of unfettered markets that match incentives with information. If the price of steel is $X/ton that tells buyers “you’d better feel pretty confident that you can use this steel to create something more valuable than that,” while telling sellers “the resources you are using would be better used elsewhere in the market if you can’t keep your cost below $X/ton.”
  • (This is expressed eloquently by Hayek’s 1945 article, The Use of Knowledge in Society.
  • Market socialism is a system where a socialist economy sets up pseudo-markets. So Josh and Chuck are each put in charge of a plant that makes shoes and each has to get the required leather. In theory they have to compete to get leather (just like in real markets) and that competition provides information about competing uses of different inputs. But if Josh turns a profit he doesn’t get to keep it for himself and if Chuck makes a loss he can’t go bankrupt (though he could get sent to the gulags). This sort of system was proposed in response to Mises’ 1920 article. This is when socialists started actually coming up with a theory of socialism (how it could work to allocate resources so that benefits exceed opportunity costs).

Here’s a great read that covers the essentials of this issue: National Economic Planning: What is Left. It boils down to this: without private property and rule of law (i.e. a situation where the “king” can’t arbitrarily interfere with people’s plans and has to follow the same universal rules as everyone else) there can’t be markets with profits and losses. Without that there can’t be prices that incorporate all the information, which is scattered and often tacit (i.e. non-reportable), relevant to economic decisions. Without those prices it becomes impossible for central planners to know the opportunity costs of their actions and so they cannot make economic decisions that are rational (i.e. weigh benefits to consumers against costs to producers). This is true even if we assume perfectly altruistic and motivated “New Soviet Man” and benevolent dictators.

Without markets central planners are groping in the dark. With markets there are no longer central planners.

Thanks for making my commute more enjoyable!

Your fan,
Rick

Why cash is beautiful

Rick Weber Economics ,

If you had $20 to spend, what would you get? Would it be the bottle of wine a guest brought to the dinner party you invited her to? No? It cost her $20, but you wanted it less than the jar of Nutella and very nice glass of whisky you bought with the last $20 you spent. Economists recognize that that gift was inefficient. She took $20 and turned it into something worth less than $20 by making it a gift for you. And you’ll do the same when she invites you over for dinner.

You agree with me, but you feel like something is fishy. I’m tricking you somehow maybe, but certainly you won’t bring an AJ with you the next time a friend invites you to a party. And you’d be disturbed if they did the same to you. A gift is just more thoughtful.

This was a common theme from my students listened to an Econtalk podcast. But I disagree with that assessment. Not as an economist (from which position I also disagree), but as a sociable person, from an aesthetic position. Cash is beautiful. When you give me a twenty dollar bill you are giving me the sweat of your brow to buy anything my heart desires. And what I receive may very well spare me the sweat of my own brow to meet my own needs. A bottle of wine is thoughtful, but cash gives me access to time and time is the most precious commodity.

Most people, when receiving a gift, would be happier with something that is less valuable to them than they would getting access to anything they want or need via a cash gift. And frankly, I’d rather try to convince them that I wronged them by not giving them cash over a bottle of wine over a bottle of wine. So the next time I go to a party I’ll bring a gift and not cash. At least if that party’s hosted by “civilians”. Economists I’ll just give cash… I’m not sure if that implies I like them more or less.