July 20, 2017

Words & Numbers: The Illinois Budget is a Mess

Filed under: Economics, Government, USA — Tags: , , , — Nicholas @ 05:00

Published on 19 Jul 2017

This week on Words & Numbers, Antony Davies​ and James R. Harrigan​ tackle the disaster that is the Illinois state budget crisis.

Pro-tip: Don’t let it happen to your state.

July 19, 2017

“The Economics of Trade” | THINK 2017

Filed under: Britain, Economics, USA — Tags: , , — Nicholas @ 04:00

Published on Jul 17, 2017

What exactly is Free Trade and is it always the best policy?

Professor Don Boudreaux of Cafe Hayek discusses the morality of capitalist exchange and its inherent advantages.

QotD: Prices in a post-scarcity economy

Filed under: Economics, Quotations — Tags: , , — Nicholas @ 01:00

The most important piece of information that the price system provides is “How much do I want this, given that other people want it too?” That’s the question that millions of people are answering, when they decide to use less tin, or pay more for tin and use less of something else. Computers are not good at answering this question.

How would a computer even get the information to make a good guess, in the absence of a price system? Please do not say surveys. You know what did really well on surveys? New Coke. Also, Donald Trump, who is not going to be president. We are, in fact, back to some version of the incentive problem, which is that when the stakes are low, people don’t put too much thought into their answers.

In many cases, people are interested in getting rid of prices precisely because they don’t like the signal that it is sending — that the best possible medical care is a scarce good that few people are going to get, or that other people do not value your labor very much. People are trying to override that information with a better program.

But even if we decide that the planners know best, we still have to contend with the resistance that will arise to their plan. Just as Communism’s critics need to remember that money is not the only reason people strive, post-capitalists need to remember that they will be dealing with people — cantankerous, willful and capable of all manner of subversions if the plan is not paying sufficient attention to their needs.

It’s possible that we’ll see versions of a “post-scarcity” economy in things like music and writing, since these are basically versions of activities that people have been doing for free for thousands of years. But when it comes to unpleasant labor like slaughtering animals, mining ore and scrubbing floors, even an advanced society needs to figure out exactly how badly it wants those things done. And so far, nothing beats prices for eliciting that information.

Megan McArdle, “Yes, Computers Have Improved. No, Communism Hasn’t”, Bloomberg View, 2015-09-02.

July 18, 2017

The Solow Model and Ideas

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Published on 3 May 2016

More Solow Model from MRU’s Macro course: the power of ideas in driving economic growth.

A deeper dive into what helps spur the creation of ideas.

According to our previous videos in this section, the Solow model seems to predict that we’ll always end up in a steady state with no economic growth.

But, the Solow model still has one variable unaccounted for: ideas.

So, can ideas keep us growing?

Ideas do one thing really well: they give us more bang for our buck.

This means we get more output for the same inputs of capital and labor. Ideas are a way of upping our productivity, increasing output per worker across different industries.

Just how much extra output are we talking about?

Well, imagine changing the A variable of the Solow model from 1 to 2. This means a doubling of our productivity.

This shifts the entire output curve upward. When output doubles, so does investment. Once investment comes in faster than depreciation, we end up accumulating capital once again.Thus, the economy keeps growing, which further boosts output.

Now, think of what would happen, if ideas continually improved. With each improvement, ideas would keep shifting the output curve upward, which will continually increase investment as well, and allow us to keep to the left of the steady state.

And when we stay to the left, that means we keep growing.

What all this means is, growth at the cutting edge is determined by two things.

First, it’s determined by how fast new ideas are formed, and second, by how much those ideas increase productivity.

You now have a complete picture of our simple Solow model. It’s a model that accounts for catching up growth, due to capital accumulation, and cutting edge growth, due to the buildup of ideas.

Now, since ideas foster growth at the cutting edge, we’re left with the question that naturally follows: what factors help spur the accumulation of ideas?

That’s what we’ll discuss in the next video, so hang tight!

QotD: Where progressives and libertarians agree

Actually, there are four other big areas where the two ideologies converge.

1. Immigration. Immigration restrictions deprive billions of basic liberties, impoverish the world, and do so on the backs of the global poor, most of whom are non-white.

2. Occupational licensing. Licensing laws bar tens of millions of people from switching to more lucrative and socially valuable occupations, all to benefit richer insiders at the expense of poorer outsiders.

3. War, especially the War on Terror. Since 2002, the U.S. has literally spent trillions fighting the quantitatively tiny problem of terrorism by waging non-stop wars in the Middle East. We don’t know what the Middle East would have looked like if the U.S. had stayed out, but it’s hard to believe it would be worse. And there’s no end in sight.

4. The criminal justice system, especially the War on Drugs. Hundreds of thousands of non-violent people, disproportionately poor and non-white, are in prison. Why? To stop willing consumers from doing what they want with their own bodies.

These four issues are so massive, you’d expect a staunch progressive/libertarian alliance would have been forged long ago. But of course it hasn’t. Why not? Some progressives flatly disagree with one or more of these policies; see Bernie contra open borders. But the bigger stumbling block is that progressives place far lower priority on these issues than libertarians. That includes war, unless the Republicans hold the White House.

Why not? I regretfully invoke my Simplistic Theory of Left and Right. The heart of the left isn’t helping the poor, or reducing inequality, or even minority rights. The heart of the left is being anti-market. With some honorable exceptions, very few leftists are capable of being excited about deregulation of any kind. And even the leftists who do get excited about well-targeted deregulation get far more excited about stamping out the hydra-headed evils of market.

Bryan Caplan, “Progressive/Libertarian: The Alliance That Isn’t”, Library of Economics and Liberty, 2017-06-22.

July 16, 2017

QotD: The value of price controls in World War 2

Filed under: Bureaucracy, Economics, Government, History, Quotations, USA — Tags: , , — Nicholas @ 01:00

In World War II price controls [in the United States] were administered by the Office of Price Administration (OPA). I have been present at discussions where serious attempts were made to assess the OPA’s damage to the Allied cause, measured in terms of the equivalent number of German panzer divisions. The estimates tended to be large.

Steven Landsburg, The Armchair Economist, 2012 revised edition.

July 15, 2017

Another critique of Nancy MacLean’s book smearing economist James M. Buchanan

Filed under: Books, Economics, History, Politics — Tags: , , , — Nicholas @ 05:00

In the Washington Post, a fellow Duke professor airs some concerns over MacLean’s recent character assassination attempt, Democracy in Chains:

Professor Nancy MacLean’s book Democracy in Chains has received considerable attention since its release a few weeks ago. A recent Inside Higher Ed article reports on the critical reviews and Professor MacLean’s allegation that these critiques are part of a coordinated, “right-wing” attack on her work. The book’s central thesis — summarized elegantly in the Inside Higher Ed piece – is that Nobel Prize-winning economist James M. Buchanan “was the architect of a long-term plan to take libertarianism mainstream, raze democratic institutions and keep power in the hands of the wealthy, white few.” MacLean concludes that Buchanan’s academic research program — known as public choice theory — is a (thinly) disguised attempt to achieve this purpose, motivated by racial and class animus.

As president of the Public Choice Society (the academic organization founded by Buchanan and his colleague Gordon Tullock), I am writing to respond to Professor MacLean’s portrayal. Since she believes that critiques of the book are part of a coordinated attack funded by Koch money, let me begin with a disclosure. I have no relationship with the Kochs or the Koch organization. I have never received money from them or their organization, either personally or to support my research. I have not coordinated my response to the book with anyone. I do, however, have a personal connection to Buchanan. My father was a longtime colleague and co-author of Buchanan’s. I am also very familiar with Buchanan’s academic work, which relates directly to my own research interests. In short, I know Buchanan and his work well, but I am certainly not part of the “dark money” network Professor MacLean is concerned about.

There are many things to be said about Professor MacLean’s book. For an intellectual historian, the documentary record constitutes the primary source of evidence that can be offered in support of arguments or interpretations. For this reason, intellectual historians generally apply great care in sifting through this record and presenting it in a way that accurately reflects sources. As numerous scholars have by now shown (see here, and links therein, for an example), Professor MacLean’s book unfortunately falls short of these standards. In many instances, quotations are taken out of context or abbreviated in ways that suggest meanings radically at odds with the tenor of the passage or document from which they were taken. Critically, these misleading quotations are often central to establishing Professor MacLean’s argument.


What then, of “chains on democracy”? It is true that Buchanan did not think much of unfettered, majoritarian politics and favored constitutional rules that restrict majority rule. But the foregoing discussion should already make clear that this conclusion was not based on an anti-democratic instinct or a desire to preserve the privilege of a few. Instead, Buchanan’s careful analysis, originating in his seminal work with Gordon Tullock, The Calculus of Consent, led him to the conclusion that in choosing a political framework (“constitution”), all individuals will typically have good reasons to favor some restrictions on majority rule in order to protect against the “tyranny of the majority.” As he argued, democracy understood simply as majority rule “may produce consequences desired by no one unless these procedures are limited by constitutional boundaries” (Buchanan 1997/2001: 226). In other words, what justifies “chains on democracy” for Buchanan are his commitment to individual autonomy and equality, and his emphasis on consent as a legitimating principle for political arrangements. To paint his endorsement of constitutional limits on the use of political power as motivated by an anti-democratic desire to institute oligarchical politics is to fundamentally misunderstand Buchanan’s sophisticated, subtle approach to democratic theory, which was committed above all to the idea that political arrangements should redound to the benefit of all members of a community.

Office Hours: The Solow Model: Investments vs. Ideas

Filed under: Economics — Tags: , , , — Nicholas @ 04:00

Published on 7 Jun 2016

Ideas are a major factor in economic growth. But so are saving and investing. If you were given the choice between living in an inventive (more ideas) or a thrifty (more savings) country, which would you choose?

The Solow model of economic growth, which we recently covered in Principles of Macroeconomics, can help you make the choice. In this Office Hours video, Mary Clare Peate will use our simplified version of the Solow model to show you an easy way to work out each country’s economic prospects, and then compare them to see where you’d rather be.

July 14, 2017

The Peltzman Effect

Filed under: Economics, Government, Health, USA — Tags: , , , — Nicholas @ 05:00

The odd situation where increasing the safety of an activity by adding protective gear is offset by greater risk-taking by the participants:

In the 1960s, the Federal Government — in its infinite wisdom — thought that cars were too unsafe for the general public. In response, it passed automobile safety legislation, requiring that seat belts, padded dashboards, and other safety measures be put in every automobile.

Although well-intended, auto accidents actually increased after the legislation was passed and enforced. Why? As [Professor of Economics Steven E.] Lansburg explains, “the threat of being killed in an accident is a powerful incentive to drive carefully.”

In other words, the high price (certain death from an accident) of an activity (reckless driving) reduced the likelihood of that activity. The safety features reduced the price of reckless driving by making cars safer. For example, seatbelts reduced the likelihood of a driver being hurt if he drove recklessly and got into an accident. Because of this, drivers were more likely to drive recklessly.

The benefit of the policy was that it reduced the number of deaths per accident. The cost of the policy was that it increased the number of accidents, thus canceling the benefit. Or at least, that is the conclusion of University of Chicago’s Sam Peltzman, who found the two effects canceled each other.

His work has led to a theory called “The Peltzman Effect,” also known as risk compensation. Risk compensation says that safety requirements incentivize people to increase risky behavior in response to the lower price of that behavior.

Risk compensation can be applied to almost every behavior involving risk where a choice must be made. Economics tells us that individuals make choices at the margin. This means that the incentive in question may lead the individual to do a little more or a little less of something.


The fact that incentives reduce or increase behavior is an economic law: Landsburg posits that “the literature of economics contains tens of thousands of empirical studies verifying this proposition and not one that convincingly refutes it.” Incentives change the effectiveness of government policy and shape day-to-day life.

QotD: Did the Holocaust Undermine the German War Effort?

Filed under: Economics, Europe, History, Military, Quotations — Tags: , , , — Nicholas @ 01:00

One of the great paradoxes of the Second World War is that while German troops on the Eastern Front were starving and freezing to death for lack of supplies, the rail transport of Jews to the death camps proceeded with uninterrupted Teutonic efficiency. The explanation is found in a profound insight by the historian Gerhard Weinberg (born 1928); that for the Nazis the extermination of Europe’s Jews was the purpose of the war, not a distraction or a side show. A complication was that this “Final Solution to the Jewish Question” was a state secret, even though it might have been the worst-kept secret in history.

Yaron Pasher is a young Israeli historian who studied under Weinberg. In this book he sets out to explore how the implementation of the Holocaust fatally undermined the German war effort between 1941 and the final collapse in May 1945. Unfortunately Pasher is simply out of his depth trying to write military history from the perspective of logistics (admittedly, one of the hardest things that any historian can attempt!).

Much of the text is a mish-mash of rehashed secondary sources about the course of operations on the Eastern and Western fronts. The reader bogs down, like a Panzer division in the Spring thaw, in a welter of inconsistently transliterated Slavic place names. The narrative is interspersed with glimpses of the progress of the Final Solution repeatedly hammering home the same assertion: if all those trains that carried Jews to the death camps had been used to carry supplies and reinforcements to the Front, the Wehrmacht might have performed better against the Russians.

Yaron Pasher, “Holocaust versus Wehrmacht: How Hitler’s “Final Solution” Undermined the German War Effort”, Strategy Page, 2015-09-02.

July 13, 2017

Each month in the United States—a place with about 160 million civilian jobs—1.7 million of them vanish”

Filed under: Business, Economics, Technology — Tags: , , — Nicholas @ 05:00

Deirdre McCloskey addresses the fear that technological change is gobbling up all the jobs:

Consider the historical record: If the nightmare of technological unemployment were true, it would already have happened, repeatedly and massively. In 1800, four out of five Americans worked on farms. Now one in 50 do, but the advent of mechanical harvesting and hybrid corn did not disemploy the other 78 percent.

In 1910, one out of 20 of the American workforce was on the railways. In the late 1940s, 350,000 manual telephone operators worked for AT&T alone. In the 1950s, elevator operators by the hundreds of thousands lost their jobs to passengers pushing buttons. Typists have vanished from offices. But if blacksmiths unemployed by cars or TV repairmen unemployed by printed circuits never got another job, unemployment would not be 5 percent, or 10 percent in a bad year. It would be 50 percent and climbing.

Each month in the United States — a place with about 160 million civilian jobs — 1.7 million of them vanish. Every 30 days, in a perfectly normal manifestation of creative destruction, over 1 percent of the jobs go the way of the parlor maids of 1910. Not because people quit. The positions are no longer available. The companies go out of business, or get merged or downsized, or just decide the extra salesperson on the floor of the big-box store isn’t worth the costs of employment.

What you hear on the evening news is the monthly net increase or decrease in jobs, with some 200,000 added in a good month. But the gross figure of 1 percent of jobs lost per month is the relevant one for worries about technological unemployment. It’s well over 10 percent per year at simple interest. In just a few years at such rates — if disemployment were truly permanent — a third of the labor force would be standing on street corners, and the fraction still would be rising. In 2000, well over 100,000 people were employed by video stores, yet our street corners are not filled with former video store clerks asking for loose change.

We could “save people’s jobs” by stopping all innovation. You would do next year exactly what you did this year. Capital as well as labor would perpetually be employed the same way. But then we would perpetually have the same income. That’s nice if you’re doing well now. It’s not so nice if you’re poor or young.

Job protections for the old have in fact already created a dangerous class of unemployed youths in the world — 50 percent among Greeks and black South Africans, for instance.

Words & Numbers: Do Airlines Charge Too Much?

Filed under: Business, Economics — Tags: — Nicholas @ 04:00

Published on 12 Jul 2017

This week on Words & Numbers, James R. Harrigan and Antony Davies tackle the issue of airline pricing. Why do they charge what they do? What do those prices mean? Is it too much and are passengers being ripped off?

QotD: What are “network effects”?

Filed under: Business, Economics, Quotations, Technology — Tags: — Nicholas @ 01:00

Few buzzwords are hotter in tech circles than “network effects.” This was so 15 years ago, when I was an MBA candidate grinding through job interviews; it is so today. Probably, when the heat death of the universe is imminent, and our nine-tailed descendants are trying to figure out what to do, some bright Johnny will suggest we can keep things going if we can just add another 2 billion stars to our user base.

Don’t get me wrong: Network effects are important, and I frequently talk about them in relation to everything from media companies to neighborhoods to choices about motherhood. But when I hear the term, the hairs rise on the back of my neck, because it’s often used imprecisely. People say “network effects” when they are really talking about switching costs, or regulatory coordination, or spillover effects, or any number of other things that are at best tangentially related to what the network effect model was built to describe.

Worse, far too many people seem to use the term the way college sophomores deploy the names of philosophers they have just read, in the mistaken belief that a piece of jargon can magically banish disagreement. Your firm doesn’t seem to have a viable revenue model? You’re just saying that because you don’t understand network effects! Someone seems insufficiently worried about the market power of some technology behemoth? It must be because that benighted fool has never heard about network effects!

Network effects are a useful concept, but not when deployed in this slipshod way. Worse, such careless routine deployment actually threatens the concept’s usefulness in conversations where it does offer real insight.

So just what is a network effect? The term describes a product that gets more valuable as more people adopt it, a system that becomes stronger as more nodes are added to the network. The classic example of network effects is a fax machine. The first proud owner of a fax machine has a very expensive paperweight. The second owner can transmit documents to the guy with the pricey paperweight. The thousandth owner has a useful, but limited, piece of equipment. The millionth owner has a pretty handy little gadget.

Megan McArdle, “Facebook Is Big, But Big Networks Can Fall”, Bloomberg View, 2015-10-08.

July 7, 2017

Despite the headlines, the world is getting much better, much faster

Filed under: Economics, Health, Media — Tags: , , — Nicholas @ 05:00

The mainstream media has a built-in bias for bad news, which is understandable: bad news draws eyeballs and clicks because as a species we’re much more attuned to detecting risks than anything else — it’s a good pro-survival trait. Our bias (and reinforcement offered by the media’s bias) leads us all to think things are going much worse than they really are, pretty much all the time. Scott Sumner offers a bit of counterpoint:

The news media is good at storytelling. That’s no surprise, as people like to learn through stories, indeed this preference is probably hardwired into our brains. The news media can’t survive without readers and viewers, and so naturally they focus on storytelling. And the most riveting stories involve war, terrorism, natural disasters, and other serious problems. While the individual stories are usually true, the overall effect is to present a very false image of the world. As a result, at least 90% of Americans literally have no idea as to what is actually going on in the world. Here’s Nicholas Kristof:

    Nine out of 10 Americans say in polls that global poverty has been staying the same or worsening. So let’s correct the record.

    There has been a stunning decline in extreme poverty, defined as less than about $2 per person per day, adjusted for inflation. For most of history, probably more than 90 percent of the world population lived in extreme poverty, plunging to fewer than 10 percent today.

    Every day, another 250,000 people graduate from extreme poverty, according to World Bank figures. About 300,000 get electricity for the first time. Some 285,000 get their first access to clean drinking water. When I was a boy, a majority of adults had always been illiterate, but now more than 85 percent can read.

    Family planning leads parents to have fewer babies and invest more in each. The number of global war deaths is far below what it was in the 1950s through the 1990s, let alone the murderous 1930s and ’40s.

    Aneri and I are reporting from a country whose name, Liberia, evokes Ebola, civil war and warlords like General Butt Naked. That’s partly because we journalists have a bias toward bad news: We cover planes that crash, not planes that take off.

Unfortunately these true lies are hard to push back against. Statistics tells us that the world is getting better at a mind-boggling rate (Seriously, can your brain even imagine the improvement in human welfare associated with 250,000 people a day rising above extreme poverty? I can’t.) But that’s not the world people tend to see. As a result, they elect politicians who pander to their ignorance of the world.

July 6, 2017

Words & Numbers: Let Amazon Play Monopoly

Filed under: Business, Economics — Tags: , , , , — Nicholas @ 04:00

Published on 5 Jul 2017

Amazon’s offer to buy Whole Foods for $13.7 billion sounds pretty great to both parties, but it seems that isn’t good enough. The proposal has a lot of people worried about Amazon becoming an indestructible monopoly, and the government is all too happy to step in and settle the issue. But this concern ignores consumers’ own preferences as well as business and entrepreneurial history. This week in Words and Numbers, Antony Davies and James R. Harrigan discuss the probable future of the Amazon-Whole Foods merger, what it could mean for us, and what it could mean for another once-equally feared corporation: Wal-Mart.

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