Give Trade a Chance

A random walk along the Internet today led me to a disdainful look at Thomas Friedman, which led me to his Wikipedia entry, which led me to a criticism piece entitled, "FLATMAN I'm sorry, but the world's still round."

I have mixed feelings about Friedman: I don't agree with him that America needs to compete to maintain it's hold on high tech sectors nor do I feel that the US needs to maintain a dominance in finance. No one thing is the key to prosperity; that's what globalization is for in the first place.

He has some interesting takes how globalization changes cultural norms, though. And while he might put too much stock in the idea of trade as a universally peaceful solution (a la the Golden Arches Theory of Conflict Prevention) it conveys a powerful point. Take this criticism of the theory, penned by Siddharth Varadarajan: "cross investment and extensive trade relations have never prevented countries from going to war against each other."

That's quite a claim, especially since he's citing historical evidence. Especially since we tend not to study times war almost broke out (and we really don't study potential wars that never had a chance to break out, like the US invading Canada anytime in the past fifty or so years). It's hard to measure trade's impact on peace and while I don't think it prevents all conflict, it's even more absurd to claim it prevents none.

Newtonian Time

Taking a little study break, I added an article about Newtonian time to Wikipedia. Newtonian time is a facet of neo-classical economics and because of its rigidity, it assumes away endogenous change. Austrians openly reject the idea of Newtonian time and embrace real time instead, which is an article I'll write later.

Wow, this is what I do for my break? I'm going to go watch American Dad.

Checking for Fallacies

Way back when, Mike and I came up with the idea of The Fallacy of the Unclaimed Dollar. I doubt this idea is new, but the fallacy goes a little something like this: If something hasn't happened yet, it's probably a bad idea. The name comes from a joke economists like to tell each other about a professor refusing to pick up a dollar bill because if it was really there, someone would have picked it up by now.

(Side Note: I actually want to change the name to Fallacy of the Unclaimed Fortune, but for consistency's sake, let's keep with the original name.)

It's recently occured to me that Austrians may be committing this fallacy despite our focus on the ongoing process of market change, that circumstances aren't predetermined. At the very least, we get dangerously close to commiting this fallacy when we dismiss a government agency as inefficent because "if it was a good idea, the private sector would have done it."

Granted, that's just the tip of the iceberg for arguments against Agency X (the government isn't spending their own money; they don't have a strong vested interest in being effective or efficent; they lack the relevant knowledge to accomplish such a task and on and on and on). And far be it from me to suggest a rationale for government agencies. But if we are to be scientists and if we are to avoid the intellectual traps of lazy or simplistic arguments, we should be prepared to move past this standard claim and acknowledge this is not a sufficient argument for everything.

Dirty Deeds Done With Dogs

In an attempt to stave off the apparent orgy of dog-fighting going on Scotland, new anti-animal fighting laws will be going into effect shortly. The new laws punishes anyone engaging in activities related to the fights (including distributing tapes of them) with severe penalties of up to 12,000 pounds and up to a year in prison.

I really don't have a problem with dog-fighting, and not just because I'm a cat person. My main source of skepticism comes from the supporters of bills like these who then gladly eat bacon, chicken and humanity's other "animal friends."

I don't know how a feel about animal torture in general; my heart says it's wrong but my head can't figure out a reason and having "bad feelings" isn't enough to infringe on another's liberties. I do know that with all the crazy injustices going on the world, focusing on a small part of the population watching dogs fight is an absurd waste of one's time. I guess perspective is the first thing you loose when you live in a prosperous society.

O Brother, What Art Thou Thinking?

Last week Mike guest posted about labor laws and spawned a 10-comment (!) debate on the subject. I thought about responding to some criticisms via comment but since I don't have much of anything to write about just now, I thought I'd turn it into a post.

In the comments section, I wrote that employers should be able to fire employees for whatever reason they want. And yes, that includes for reasons of race, marriage status, religion and every other distinction you can think of. Why? Consider the reasons an employer would do this: 1) because he's a jerk in which case it's his lose and 2) because the customer wants it in which case why punish the employer? Before you argue, ask yourself if you'd like to see Denzel Washington as a Nazi or William H. Macy as Martin Luther King. It's an extreme case, but the basic ideas are constant.

My brother correctly pointed out that firms do not fire people on a whim and they have a vested interest in seeing them work out. Yet he paradoxically thinks it's a good idea to require firms to have "proof of ineptitude" before firing someone. If the firm has a vested interest in seeing the employee do well, then why do you need a law requiring the firm not fire employees that could do well? (Consider this article I wrote about Donald Trump and his hiring practices for The Apprentice.)

Labor laws like these are layered in truthiness. For example, my brother also cites that he's been in the "real world" for about nine years and implies I'm detatched from it's realities. But his experience is a weakness as much as a strength because he's only been on the labor side. Not surprisingly, he thinks labor should be protected from management citing the "human cost." Feelings as opposed to facts.

The fact of the matter is if you start favoring one group, you punish another and usually several others. I may have been in the "ivory tower" for most of my life but it's not like I've been studying English literature. Economics is the study of choice and it's chiefly concerned with creating a better world; the conclusions I have made have not been arrived at lightly. And for the record, I've worked jobs myself. I've had good employers and bad employers; I've seen good employees and bad employees. The world is not so uniform you can ethically make a law that favors one side; laws are good for issues of homogeneity, not diversity.

A Wee Bit of Culture

Prometheus is by far my favorite figure in Greek mythology. Defiant. Intelligence. A bit of a wise ass but also the patron of human civilization. Like the authors that wrote of him (notably Lord Byron and Percy Bysshe Shelly), he recognized the grand potential of free minds and free societies.

I stumbled on this poem about Prometheus, written by Lord Byron and published in 1816. Comparing Prometheus to the human spirit Byron wrote,

And a firm will, and a deep sense,
Which even in torture can descry
Its own concenter'd recompense,
Triumphant where it dares defy

Facts and Theories

At its most basic, good economics is about two things: good theory and good data. Some will say it's more about the data and some will emphasize the theory but a good economist combines both into a coherent explanation about the world around us. If your theory can't be supported by the data, you better rethink your theory. Yet if your data says one thing but you can't construct an explanation that's consistent with accepted truths, there's something probably wrong with your data.

That reality came to head Friday night when an AU student and I got into a discussion about income data. He pointed to the old claims that the rich are getting richer and the poor are getting poorer. Remembering an IHS seminiar Steve Horwitz spoke at a few years ago, I pointed to data that said the poor were getting richer, too.

He responded that the data--which tracks a family's income over time--is flawed because poor people move more than other people, so you don't count them and there's a sampling bias. He, who has been studying income data for ten years, noted stasticians have come up with a weight to adjust for this and when applied, the poor are getting poorer. (Note that according to the data 95% of the lowest quintile move up from it at least one quintile, suggesting that must have been one hell of a weight to make such a drastic change. Perhaps poor people are literal nomads...)

I've never heard of this weight, so I let it go and gave him the benefit of the doubt. "So what's your explanation, then?" I asked. His theory was quite....elaborate.

He noted that the rich are more likely to save than the poor. Seems reasonable. So, he said, the rich put their money in a bank and live off the interest and the wealth stays at the top. I insisted we follow the money beyond that. So we agreed that the bank could then take all of that money and lend it to a corporation which then could give it all to their highest paid inwhich the whole cycle could start over again.

Now to fully grasp this AU student's theory, replace every "could" with "always" because that's the only way the money could stay at the top. He insisted that all you need is that higher liklihood for savings but, as I tried to explain, that doesn't work. Money leaks out and spreads around; it moves between classes, industries and countries. It's a medium of exchange--that's why we have it.

I also wanted to point out that even if this "100% always" theory held, it still wouldn't mean the data's telling a good story. Companies don't give millions to CEOs just because they feel like--they do it as a reward for making the company more efficient which means society just got richer. I avoided that point, however, as I suspected the conversation would quickly devolve into conspiratorial claims that the rich focus on keeping the downtrodden poor.

Still, the bias claim was new to me so I e-mail Steve Horwitz about it. He responded quite quickly and suggested the burden of proof rests on the AU student. The PSID data is highly respected and widely used; what special ability allows for him to know how much to reweight the data? I'm not sure how I feel about this; it seems pretty straightforward to run surveys and ask people how many times they've moved in the past five or ten years, even if you include complications such as students moving from college to home.

But Steve offered an even better bit of evidence that the poor have gotten richer over the past thirty years: They have more stuff. Even if there's more debt, are they really "poorer" if that debt means having AC, cable and a washer and dryer? They clearly don't think so.

If your theory is sloppy, then your data probably is too, especially when your data contradicts accepted truths.

Labor Laws

This is Mike, Guest Posting here. More like homecoming, but I still consider myself a guest. I told the story below to David, who begged me to blog it. I am currently studying Anthropology and Buddhism in Thailand, which gives me an interesting chance to see a lot of economic questions in a slightly different setting. Depending on my reception I may blog some of those too.

A friend of mine from Germany and I had dinner the other night and discussed German labor laws. In Germany it is exceedingly difficult, or at least very costly to fire a person. A very solid foundation of evidence of incompetence and damage to the firm must be laid before even thinking about firing a person, because a lawsuit and a government intervention will speed right in to the rescue. The intent, as is the intent with so many economic policies, is to benefit the poor, oppressed working classes against the evil corporations. The actual effect I leave as an exercise to you. I would suggest as a starting point that the laws benefit the already employed at the expense of the desiring-to-be-employed and the bottom lines of the employers. However, some employers have found an ingenious (if illegal) workaround.

Say an employee is peforming at a level that ought to get him fired but in Germany would not, due to the hassle. A manager at this employee's firm will speak to his counterpart in a competing firm and ask them to hire the employee away, through a headhunter. The employee, excited about being hired away, takes the job at the competitor and begins work there. Meanwhile, the new firm gives him a slight raise, but the raise and the salary are actually paid by the original firm. Why?

Because the labor laws allow a grace period of about a month after hiring in which companies can still fire new employees freely without much difficulty. So after a few weeks feigning due diligence, the new employee is unceremoniously let go, unable to sue his old firm which he left voluntarily and unable to sue his new firm which is exempt from the ruleswas still in the grace period. Apparently entire industries will engage in this kind of trade back and forth, under the table, all to maintain some form of efficiency.

The market finds a way, albiet a little messy. But who loses? That's right, labor.

The Meaning of Collusion

Skeptics of the market love conspiracies; it's an easy way to side step the observed and provable to make outrageous claims. To no surprise of my own I came across a few conspiracy-laced theories Friday night, the most notable of which was the "implict collusion between car manufacturers."

What? I said. We see intense compeition between such firms; how can one claim they are secretly colluding?

Well, the AU student in question used to work in the industry and noticed the profit margins for car parts and vechiles was "identical." He concluded there's an acceptable level of profit and they collude to keep that profit steady.

I bypassed the obvious point that if they are setting the price they collectively could increase it easly suspecting he would respond with the standard "keeping up apppearances" defense. Instead, I pointed out that uniform prices are not evidence of collusion (though I don't doubt such prices are more or less uniform). An enforcement mechanism designed to hinder defection is evidence. What is the enforcement mechanism for car makers?

His answer was vague, claiming firms would be kept out of "special deals" if they defected. Backroom deals. Secret agreements. Implict collusion. It's not that I don't think conspiracies can't exist, it's just I'll only consider them a possibility if there lacks a better explanation.

To explain uniform prices, I noted the role of risk. Just as oil companies experience high profits and high losses (but unremarkable profits when the quarters are averaged), car companies probably demand higher mark ups because they deal in durable (and thus riskier) goods. At least one AU listener acknowledged the role of risk in determining profits but my fellow conversationalist did not seem to agree.

NOTE: My AU counterpart also cited the perfect competition model as evidence of collusion; in "perfect competition" there are no profits (which is not true; there are no windfall profts). Thus, the industry is not perfectly competitive. I told him it's distrubing when PhD econ students think a model completely describes reality. PC is useful to explain some phenomena but as Hayek noted, the model lacks all elements of actual competitiveness. He mumbled something and let the issue drop there.

The Gravity of Incentives

There are very few wide ranging Rules of Economics, especially when you compare it to the hard sciences. Easily one of the most basic is "incentives matter." We see it everywhere: when prices increase, supply responds as fast as it can; when a grocery line is shorter, people are more likely to gravitate towards it; when wages for a job increase, more people are willing to do the work. Incentives play as vital role in economics as gravity does in physics.

So imagine my surprise when one of my first conversations with an AU econ grad student involved him saying "incentives aren't that important." I was stunned.

He stated that many people do things without monetary gain. In a way, it's true. Most of human history existed in a cooperative structure where people--in small family units--did favors for each other. But that doesn't mean incentives aren't important. Sometimes people do things for moral or social reasons. Sometimes it's as basic as simple survival. Sometimes you do something nice because it gives you a warm fuzzy feeling. All organisms are creatures of purpose and humans are no expection.

Ok, my colleague said, so why can't we use moral or social incentives do get things done? Why the emphasis of material incentives? He cited collective farms as a prime example where people pitch in out of sense of community. I have no doubt these communities exist because they emulate the social structure of hunter-gatherer societies. Large scale societies (and by "large" I talk of a hundred or more) tend not to be able to function in this way.

There are many reasons why this is but I would say enforcement is a main one. Allow me to digress into a personal example. I went to a very small school--my graduating class was ten and that was a big class. There were roughly thirty students in the high school in total. Thus we pretty much hung out with each other even if we had little in common. (In fact, of these thirty-odd people I only consider a few to be friends and I talk regularly to an even smaller number.)

Contrast this with most high schools, which are much larger. Clicks are not just common, they are a staple of growing up (and being an adult come to think of it). People gravitate towards those that are like them. In small societies, if you piss off others, you're alone. In large ones, if you piss off others, you just hang out with your friends. Typical strategies of guilt and ostracism don't work between strangers.

Not all kinds of incentives matter all the time. Social incentives work better in small groups; material incentives work better in large groups. But I'm not willing to say incentives aren't that important no more than I'm willing to point to a hot air balloon and question the significance of gravity.

Through the Looking Glass

Last night I had a date with this girl I met online. It turned out we were both first year PhD economics students (me at Mason, she at American) and we've been talking via e-mail comparing classes.

During this date, I discovered that American University's economic department leaned left. So after dinner, we decided to go to meet up with some of her friends from the program in a bar. It was here I discovered AU's program was Very Leftist.

It's hard to overstate how different I learned our departments and student body were. When I mentioned I was from Mason, there were cringes and looks of horror. When I noted I had friends at Cato and IHS, they were visibly shaken. They talked of the Soviet Union just not having the right people in charge, of incentives not mattering that much and an "implict collusion" between car makers.

I had never fathomed an economics department could seriously embrace these ideas in this day in age, especially at a world-renown school like American. But there it was, Ying to Mason's Yang; stir to Mason's shake; Bizarro to Mason's Superman (or perhaps more appropriately, Superman to Mason's Bizarro because Superman is a socialist).

Over the next few blog posts, I plan to retell--to the best of my ability--some of the discussions I engaged in with AU's econ students. I think it's worthy to engage in such dialogues; its helpful and neccessary to do so if you want to continue to claim to be a scientist. Hopefully my retellings will demonstrate that.

The Return of Mike

My old blogging partner (and co-founder of L3) Mike will be back for a guest post. Let us all wish him the best of luck and hope he decides to stay. His articles are always insightful and thought-provoking and I'm looking forward to reading his economic commentary once again.

Quick! Someone Give Us Something To Honor!

Here's a sampling of what the House did on Legislative Day of February 8, 2006:

-H.RES.670: Congratulations to the Pittsburgh Steelers for winning the Super Bowl.

-H.R.4456: Renaming a post office in Arkansas the "Hattie W. Caraway Station."

-H.R.389: Saying how great museums are in this, the "Year of the Museum."

-H.R.660: And let's not forget this month is National Mentoring Month which stands for some pretty awesome ideas.

-H.R. 657: Catholic schools are pretty cool, too.

Each of these required 40 minutes of debate (I'm thinking debate is a requirement for all resolutions). Don't get me wrong: I'm all in favor of lawmakers wasting time; it gives them less time to do something damaging. But as long as they are not doing anything really important, they might as well be occupied doing something productive like picking up trash. Crimminals do it so it's got to be good enough for politicians, right?

Hippies Get High (But In A Way That Makes It News Worthy)

Mike sent me an e-mail containing this link with the exclamatory subject, "Malthus!"

The link led me to a page describing "Z-Axis Urban Agriculture," otherwise known as putting a bunch of plants in a skyscraper. The article warns of the growing population growth of the planet and even with improved technology, humanity may have trouble finding the land to feed itself (which may or may not be true as we don't know what this new technology will look like).

The article trumps the buildings as a way to reduce a community's "ecological footprint" and other nonsense about needing to increase the quality of urban settings. The artist's conception even sports tiny wind power plants at the top.

The strangest bit about all of this is Julian Simon had a similar idea except he was more ambitious. Using hydroponic bays, we could grow all the food for the whole world in a giant 100-story building the size of a small state (I think it was New Jersey).

Simon, however, was using it only as a hypothetical point to illustrate how humanity was in no danger of "running out of farm land" as these cranks claim we are. It's true that ideas like Z-axis farming are what ensure we don't have to worry about a food shortage and in doing so, these neo-Malthusians are proving their own scares false.

The thing I can't get past (besides the staggering but so far uncited panic number that 80% of the arable land is farmed) is the effort to make a test farm in New York from an abandoned building as part of the general strategy. If land is becoming so scarce, how come there are all these abandoned buildings in urban areas (where land is generally more valuable than its counterparts in rural areas).

If and when this becomes an important tool to feed humanity, it will happen because the rising food prices will make such an endeavor profitable. If not, then not. Either way, we don't need neo-Malthusians making test farms, spreading panic in their wake.

40 Acres and an iPod

Mike sent me this link. Watch it; apparently Lincoln and Washington knew the power of electronics.

Mixed Feelings From the House

I never thought I'd say this, but reading the daily proceedings from the House floor has actually made me more optimistic about government (though I wasn't very optimistic in the first place).

Consider their activities on the first of February, 2006. The House debated for forty minutes on H. Res. 648. An intense debate it must have been because HR 648 "eliminate floor privileges and access to Member exercise facilities for registered lobbyists who are former Members or officers of the House." (They passed it, by the way.)

At the same time, I get more concerned. They spent the same amount of time debating H.R.4659, which extends the Patriot Act (it also passed by the way and was signed by the President four days ago).

And then I get confused. For example, at 5:07 the "House agreed to Senate amendment to House amendment pursuant to H. Res. 653." which relates "to consideration of the bill (S. 1932) to provide for reconciliation pursuant to section 202(a) of the concurrent resolution on the budget for fiscal year 2006 (H. Con. Res. 95)."

But the most damning thing of all is they took a week off, due to reconvene today at 2 PM. God only knows what they did in the meantime.

Channel 101 101

Last week I posted an article about Channel 101, praising it as an improved institution over conventional television.

My colleague, Jason Briggeman, disagrees passionately as he notes that voting in the conventional sense (the prime mechanism for which 101 uses to determine which shows to keep) is not the same as watching a show every week and "voting" that way. The former is simply "talk," putting your stamp of approval, that really doesn't bear a cost to you, on a show of which you shrug your shoulders and say, "why not?" The latter requires the voter to bear a very real cost, such as spending the time to watch the show in question. The former does not. Jeremy made a similar agrument commenting on the difference between American Idol voters and the Billboard rankings.

These are very good points, but let me take a moment to defend 101's methods. I acknowledge that imposing costs for voting is a much more accurate way to discover what people want, ceteris paribus. But it isn't completely divorced from preferences; it still has its uses. More fundamentally, expressing choice for media is not easy because one must consume the product before determining if it was a good idea to do so.

Media companies have developed a few ways of getting around this problem (creating previews, measuring returning audiences, creating advertising campaigns) but these strategies are hardly appropriate for five-minute shows that are to be judged on a episode-by-episode basis (for example, measuring returning audiences would require making two episdoes of a potentially bad concept, meaning one new show wouldn't have as much of a chance to be shown, thanks to opportunity costs). I've toyed with the idea of spliting up each episode and then measuring how many people download the second half, but downloading 2.5 minutes of video nowadays hardly imposes a cost on the consumer. Perhaps there is a good idea out there to solve the problem, but I haven't heard it yet.

It is not that voting (which by the way is approval voting) on 101 is ideal. But given the turnover, 101 does what is sets out to do; the voting system is certainly sufficent and (I'd argue) Channel 101 much more dynamic than conventional television as a result. (Jason and I did come to the agreement that if 101 became mainstream, it could just start turning out crap, depending how it was organized.)

Welcome To the 21st Century

Today on MSNBC, a guy (the Secretary, I believe) from Veterans Affairs pronounced a revolutionary development that change everything for providing veteran's health care. After building up the advancement to suggest a medical breakthrough, he smugly announced they've switched to electronic health records.

Excuse me? Dozens of sectors started using computers decades ago to coordinate and store data. American Airlines completed an automated reservation network as early as 1964. VA finally making it to the punch isn't revolutionary; it's meeting minimal standards. You want it to be revolutionary? Try jumping back half a century.