Anti-Dismal

Supply and demand or what?

noreply@blogger.com (Paul Walker) — Wed, 18 Nov 2009 21:09:00 +0000

This report from Reuters is of comments about oil prices made by energy consultant Daniel Yergin recently in Singapore:

"Oil prices today do not reflect the world's supply and demand fundamentals. Instead, prices are reflective of the weak dollar and expectations of a strong economic recovery," Yergin told reporters on the sidelines of a conference.

This seems odd to me. Isn't it true that all that is being said here is that expectations matter? It isn't supply and demand that's important, rather its expectations about supply and demand that matters. But don't the ideas of supply and demand today embed expectations about the future, so what Yergin is saying is that it isn't supply and demand that matter, its ... well ... supply and demand that matters.

Interesting blog bits

noreply@blogger.com (Paul Walker) — Wed, 18 Nov 2009 19:39:00 +0000

Carpe Diem on More Selective Concern on Sex Imbalances.
David Friedman on The Ambiguity of "Utility". Do economists and the philosophers think of utility in the same way?
Bryan Caplan on The Effect of Children on Happiness: The Latest from the Research Frontier.
Arnold Kling on The Economics of Electric Cars.
Eric Crampton on Returns to Office. In the UK research finds that serving in office almost doubled the wealth of Conservative MPs, but had no discernible financial benefits for Labour MPs.
Al Roth on Louis Menand on the market for PhDs in English. "What the surveys suggest is that if doctoral education in English were a cartoon character, then about 30 years ago, it zoomed straight off a cliff, went into a terrifying fall, grabbed a branch on the way down, and has been clinging to that branch ever since. Things went south very quickly, not gradually, and then they stabilized. Statistically, the state of the discipline has been fairly steady for about 25 years, and the result of this is a kind of normalization of what in any other context would seem to be a plainly inefficient and intolerable process. The profession has just gotten used to a serious imbalance between supply and demand." "
Peter Klein on Keynesian Anti-Economics

Chris Berry on Adam Smith

noreply@blogger.com (Paul Walker) — Wed, 18 Nov 2009 18:15:00 +0000

Chris Berry, Professor of Political Theory at University of Glasgow is a leading expert on the life and work of one of the University of Glasgow's most famous academics, Adam Smith.

In this 10 minute talk, Professor Berry describes the making of the man, the global significance of his writing and explains why Smith's work still resonates with us today.

ADAM SMITH IN 10 MINUTES

Adam Smith was born in Kirkcaldy in 1723. He entered Glasgow University at the early - but for the time not unusual - age of fourteen.

He studied logic, metaphysics, maths and later Newtonian physics and moral philosophy under some of the leading scholars of the day. In 1740 Smith was awarded a Snell Scholarship (which is still in existence today) to study at Balliol College, Oxford. Smith preferred Glasgow, however, because Oxford’s curriculum was antiquated and he thought the teachers were lazy since, in contrast to Glasgow, their salary did not depend on the number of students taught.

After a period of freelance lecturing, Smith returned to Glasgow University, first as Professor of Logic in 1751 and then a year later as Professor of Moral Philosophy, a post he held until he left academia in 1764.

The mid-eighteenth century saw a period of intense intellectual activity, known as the Scottish Enlightenment. Universities were key players in this outburst of enquiry, with Glasgow a major force. Smith himself is of course the figure of overwhelming historical significance. But he was not alone. Smith’s fellow professoriate included pioneering chemists William Cullen and Joseph Black, as well as engineer and inventor James Watt who also worked at the University). Another historically important figure is a pupil of Smith’s, John Millar. Who became Professor of Jurisprudence and the author of a key work in what we would call historical sociology.

The seeds of Smith's two great books were sown in his professorial years. The Theory of Moral Sentiments appeared in 1759 and drew on his lectures. It went through six editions in his lifetime. Smith’s intellectual range as a lecturer was extensive. Beyond courses in philosophy and jurisprudence he also discussed history, literature and language. He maintained his interest in science and wrote an essay on the history of astronomy. This is notable not only for the breadth of Smith’s knowledge but also as an attempt to link the development of different astronomical accounts to a basic human propensity to seek order.

Although his second great book the Wealth of Nations was published in 1776 we know that he had already considered many of its leading themes at Glasgow as he lectured on as he put it: 'those arts which contribute to subsistence, and to the accumulation of property, in producing correspondent movements or alterations in law and government'. In 1787 Smith was elected Rector of the University and in a letter of thanks remarked that he remembered is professorial days as 'by far the most useful and therefore as by far the happiest and most honourable period of my life'.

If Smith of popular repute is the ‘father of capitalism’, the advocate of ‘market forces’, the enemy of government regulation and believer in something called the ‘invisible hand’ to produce optimum economic outcomes then he would be a disappointed parent. All his work is deeply steeped in moral philosophy. Indeed the simple fact that the final edition of the Moral Sentiments containing extensive revisions appeared in 1790, the year of his death, tells us is that Smith’s commitment to the moral point of view endured alongside and beyond the publication of the Wealth of Nations.

The Moral Sentiments is a leading example of a particular approach to moral philosophy – one that regards it not as sets of rationally or Divine ordained prescriptions but as the interaction of human feelings, emotions or sentiments in the real settings of human life. In many ways it is a book of social and moral psychology. What we can call economic behaviour is necessarily situated in a moral context. But more than that the key theme of the book is an opposition to the view that all morality or virtue is reducible to self-interest. Indeed his opening sentence declares that everyday human experience proves that false, he writes: "How selfish soever a man may be supposed, there are evidently some principles in his nature which interest him in the fortune of others, and render their happiness necessary to him, though he derive nothing from it except the pleasure of seeing it".

Our morality is founded on certain truths about human nature. Everyone is capable of sympathy, or fellow-feeling, and that ability enables us to imagine what we would feel if we were in the situation of another and, once we have made that imaginative move, we can then judge whether those feelings are appropriate. We have to learn about ‘situations’ but Smith believes that happens because humans are social creatures.

Smith illustrates the natural fact of human sociality by likening society to a mirror. It is this responsiveness to others - pleasure in their approval, pain in their disapproval - that Smith used to explain why the rich parade their wealth while the poor hide their poverty. The rich value their possessions more for the esteem they bring than any use they get from them and it is this disposition to "go along with the passions of the rich and powerful" that establishes the foundation for distinctions of status. And it is this desire for esteem that explains the incentive, we all possess, to better our condition. This is one of the links between the Moral Sentiments and the Wealth of Nations. In many ways the moral interactions Smith describes in Moral Sentiments bear on the practices that characterise his contemporary commercial society. The very complexity of that society meant that the bulk of inter-personal dealings were with strangers.

A ‘society of strangers’ is a commercial society which Smith identifies in the Wealth of Nations as one where 'everyman is a merchant'. A commercial society's coherence - its social bonds - do not depend on love and affection. You can coexist socially with those to whom you are emotionally indifferent. As Smith famously said:

“it is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity but to their self-love and never talk to them of our own necessities but of their advantages. Nobody but a beggar chuses to depend chiefly upon the benevolence of his fellow-citizens”

Nothing in this means that Smith is denying the virtuousness of benevolence. When Smith came to write the Wealth of Nations he made it clear that the ‘wealth’ lay in the well-being of the people. This covered not only their material prosperity but also their moral welfare. Accordingly he thought to be in poverty is to be in a miserable condition and commerce is to be praised for improving human life.

The great achievement of the Wealth of Nations was to discern the principles of order in the seeming chaos of commercial or market behaviour – it wasn’t random, it could be reduced to some simple principles. It was for this reason that Smith was described as the Newton of political economy. It is no idle fact that the full title is Inquiry into Nature and Causes of the Wealth of Nations.

He identifies basic principles such as the human propensity to ‘truck, barter and exchange’ that he argues underlies the division of labour but says that this depends on a market and that requires some institutional structures like those that uphold justice such as government and how that in turn mutually relies on principles of public finance.

All of this is placed by Smith into a historical narrative. In his Glasgow lectures he had outlined an account of four stages of social organisation focused around the characteristic form of economic endeavour – hunter-gatherer, herder, farmer, commerce - and in the Wealth of Nations he gives a set-piece account of the transition from the farming to commerce. This process of social change was not brought about by deliberate human policy. This fact reveals for Smith a general truth about social life, namely, that it is pervaded by unintended consequences. This supports the widely-held view of Smith as an opponent of attempts to direct ‘the market’ but, in fact, what he really opposes is the attempt to direct individual’s activities, their ‘natural liberty’ to pursue their own ends in their own way. This is itself a ‘moral’ position and Smith never abandons that perspective.

In the opening chapters of the Wealth of Nations, he celebrates the productiveness of the division of labour with the example of pin-makers but later notes that those whose lives were spent performing a "few simple operations" were rendered "stupid and ignorant" and were incapable of "forming any just judgment concerning many even of the ordinary duties of private life". The 'morality' into which these individuals are socialised is defective; the 'mirror' in which they see themselves reflects back to them to their "mutilated" condition. This is the probable course of events, says Smith, unless "the public" takes remedial steps by instituting a subsidised system of elementary schooling. This example clearly illustrates how Smith's social and moral theories cannot be fully understood in isolation and must be seen as a whole.

Adam Smith’s legacy has had global impact and it is fitting that the work of a world-historical figure was forged in this world-class University.

(HT: ASLL)

The effect of immigration on productivity

noreply@blogger.com (Paul Walker) — Wed, 18 Nov 2009 05:21:00 +0000

A new NBER Working Paper, No. 15507, by Giovanni Peri looks at The Effect of Immigration on Productivity: Evidence from US States. The abstract reads,

Using the large variation in the inflow of immigrants across US states we analyze the impact of immigration on state employment, average hours worked, physical capital accumulation and, most importantly, total factor productivity and its skill bias. We use the location of a state relative to the Mexican border and to the main ports of entry, as well as the existence of communities of immigrants before 1960, as instruments. We find no evidence that immigrants crowded-out employment and hours worked by natives. At the same time we find robust evidence that they increased total factor productivity, on the one hand, while they decreased capital intensity and the skill-bias of production technologies, on the other. These results are robust to controlling for several other determinants of productivity that may vary with geography such as R&D spending, computer adoption, international competition in the form of exports and sector composition. Our results suggest that immigrants promoted efficient task specialization, thus increasing TFP and, at the same time, promoted the adoption of unskilled-biased technology as the theory of directed technologial change would predict. Combining these effects, an increase in employment in a US state of 1% due to immigrants produced an increase in income per worker of 0.5% in that state.

The results look good for the effects of immigration on local economies. Something New Zealand should keep in mind.

Time for U.S. to declare bankruptcy?

noreply@blogger.com (Paul Walker) — Wed, 18 Nov 2009 03:42:00 +0000

Scott Beaulier and Peter L. Boettke ask this question in this piece in the East Valley Tribune. Drawing on the discussion of the public debt by a guy called Adam Smith, Beaulier and Boettke write,

Rather than erode debt obligations through inflation, the debt could be repudiated through bankruptcy proceedings. Like individual bankruptcy cases, the United States government would admit that it is unable to pay off existing debts. The repudiation would force future politicians to credibly commit to sounder economic policies and, perhaps, would help to avoid future cycles of deficits, debt, and debasement.

Of course, our call for debt repudiation is not a new one. Like many good ideas in economics, Adam Smith was there long before us. “When it becomes necessary for a state to declare itself bankrupt ... a fair, open, and avowed bankruptcy ... is both least dishonourable to the debtor, and least hurtful to the creditor,” he argued. In other words, when the financial storm arrives — and it will — the juggling tricks must stop.

I like this idea!

EconTalk this week

noreply@blogger.com (Paul Walker) — Wed, 18 Nov 2009 02:00:00 +0000

Richard Posner, federal judge and prolific author, discusses the financial crisis with EconTalk host Russ Roberts. Posner (despite the title of his recent book on the crisis, A Failure of Capitalism) places most of the blame for the crisis on the Federal Reserve, inattentive regulators and the subsidization of risk. He also criticizes economists for complacency in the face of impending disaster. A recent convert of sorts to Keynesianism, Posner confesses some disillusion with the implementation of the stimulus plan and the expanding role of the Federal government.

Nonsense upon stilts

noreply@blogger.com (Paul Walker) — Mon, 16 Nov 2009 03:43:00 +0000

At Offsetting Behaviour Eric Crampton posts an article he wrote for NORML on the New Zealand Drug Harm Index. See here. Eric opens by saying,

If the New Zealand Drug Harm Index is nonsense, then Detective Senior Sergeant Scott McGill’s claim that recent police action against marijuana prevented $379 million in social harm is nonsense upon stilts. Social cost measures provided in reports like the “New Zealand Drug Harm Index” and “Costs of Harmful Alcohol and Other Drug Use” are very good at providing very big numbers related to harms but are not terribly useful for public policy purposes. We’ll here contrast the method used in these kinds of reports with proper economic analysis.

There is a real issue here, in that some of the economics underlying these types of "social harm" indexes is just plan bad. When discussing the infamous BERL report on the cost of alcohol Eric writes,

In sum, social cost measures like those derived in BERL’s report of the costs of harmful alcohol use differ substantially from economic notions of social costs and consequently are of very limited policy relevance.

Eric then goes on to discuss the Drug Harms Index. He points out that there are common features between the alcohol cost report and the drug harm report. He concludes that

In sum, the Drug Harms Index mixes together costs of drug use with costs of prohibition and costs borne by drug users with costs imposed by drug users on others so opaquely that it is difficult to say to what possible policy use their numbers can be put. This is truly disappointing; a proper measure that provided the different categories of harms could be very useful in helping to decide which drugs would best quickly be legalized and which might be of lower priority. If it were the case that the vast majority of the costs of marijuana use were really costs associated with prohibition and if external costs were relatively low, a very good case could be made for legalization combined with an excise tax to defray those external costs. If it were the case that methamphetamine were associated with very high relative costs, with most of those costs being due to drug use rather than to prohibition, and with a greater proportion of those costs falling on external parties, that would provide a reason to legalize marijuana while keeping P prohibited. But we simply cannot say anything useful from the numbers as presented.

and

It seems that the main use of the report is in agitprop: providing big scary numbers with a sciency feel that can help to justify ongoing prohibitionist policies. After all, if the costs of drugs are over a billion dollars, we’d be crazy to even consider legalization, wouldn’t we? Well, maybe not if those costs accrue more to prohibition than to drug use. Unfortunately, from the report as it stands, we just cannot tell.

Bad economics can be used to justify almost anything, which is why reports such as those on the social costs of alcohol and the New Zealand Drug Harm Index need to be examined very carefully. People should not take them at face value. Read all of Eric's piece and you will come away with a healthy scepticism towards such measures.

Avoiding a new inflationary cycle

noreply@blogger.com (Paul Walker) — Mon, 16 Nov 2009 03:31:00 +0000

In this audio from VoxEU.org, Domingo Cavallo, former minister of economy and minister of foreign affairs in Argentina, talks to Romesh Vaitilingam about the dangers of a future resurgence in world inflation, as economies that have adopted very expansionary monetary and fiscal policies in response to the crisis are tempted to ‘inflate away the debt’.

Was the Iraq war worth it?

noreply@blogger.com (Paul Walker) — Mon, 16 Nov 2009 03:10:00 +0000

This question is asked by Jeffrey Miron at the Libertarianism, from A to Z blog. His conclusion:

My forecast for Iraq's future: renewed violence between Sunni and Shiite as the U.S. funding that has temporarily bought peace dwindles. And any pretense of democracy will vanish. In the end we will have replaced one authoritarian state with another, at enormous cost.

Ending up were you began, at a huge cost, doesn't look like good economics.

Self-interest is not selfishness

noreply@blogger.com (Paul Walker) — Mon, 16 Nov 2009 03:08:00 +0000

This point is made over at the Adam Smith's Lost Legacy blog by Gavin Kennedy with regard to the writings of Adam Smith.

‘Self-interest’ and ‘self-love’ in 18th-century discourse did not mean selfishness and were clearly distinguished.

Bernard Mandeville (1724) celebrated selfishness as a virtue (as did Ayn Rand in the 20th century). Smith regarded Mandeville’s teachings as “licentious” (Moral Sentiments, 1759: TMS VII.ii.4: 306-14)).

But the point is more general. When economists say we are self-interested they do not necessarily mean that we are selfish, as many non-economists seems to think. Selfishness may be sufficient for self-interest, but it is not necessary.

Paul Milgrom on market design

noreply@blogger.com (Paul Walker) — Thu, 12 Nov 2009 20:41:00 +0000

This video is of Paul Milgrom's 2009 Nemmer's Prize Lecture on "The Promise and Problems of Market Design".

The abstract of Milgrom's talk is:

"Market design has become an exciting area of economics research, with many of its findings useful for setting detailed rules in real markets. For matching markets, most proposed designs aim to be "straightforward" - making it a dominant strategy for participants to report information truthfully. But some recent matching and auction designs sacrifice incentive-compatibility conditions to give priority to various other desiderata. This lecture reviews the goals of market design and the unavoidable trade-offs that are sometimes required, and explores how economists should seek to resolve these trade-offs. "

Paul Milgrom Nemmers Prize Lecture from Steve Goldband on Vimeo.

Incentives matter: football helmet file

noreply@blogger.com (Paul Walker) — Thu, 12 Nov 2009 04:58:00 +0000

This comes from a story in the Wall Street Journal about head injuries in football in the US. Are helmets part of the answer to head injuries or part of the cause? The incentives on how you play the game change depending on whether or not you are wearing a helmet.

The authors of the article write,

"Some people have advocated for years to take the helmet off, take the face mask off. That'll change the game dramatically," says Fred Mueller, a University of North Carolina professor who studies head injuries. "Maybe that's better than brain damage."

and

But while these helmets reduced the chances of death on the field, they also created a sense of invulnerability that encouraged players to collide more forcefully and more often.

and

What nobody knew at the time is that these small collisions may be just as damaging. The growing body of research on former football players suggests that brain damage isn't necessarily the result of any one trauma, but the accumulation of thousands of seemingly innocuous blows to the head.

The problem is that there's nothing any helmet could do to stop the brain from taking lots of small hits. To become certified for sale, a football helmet has to earn a "severity index" score of 1200, according to testing done by the National Operating Committee on Standards for Athletic Equipment, or Nocsae. Dr. Robert Cantu, a Nocsae board member and chief of neurosurgery at Emerson Hospital in Concord, Mass., says that to prevent concussions, helmets would have to have a severity index of 300—about four times better than the standard. "The only way to make that happen, Dr. Cantu says, "is to make the helmet much bigger and the padding much bigger."

The problem with that approach, he says—other than making players look like Marvin the Martian—is that heavier helmets would be more likely to cause neck injuries.

The article also makes an interesting comparison,

One of the strongest arguments for banning helmets comes from the Australian Football League. While it's a similarly rough game, the AFL never added any of the body armor Americans wear. When comparing AFL research studies and official NFL injury reports, AFL players appear to get hurt more often on the whole with things like shoulder injuries and tweaked knees. But when it comes to head injuries, the helmeted NFL players are about 25% more likely to sustain one.

Andrew McIntosh, a researcher at Australia's University of New South Wales who analyzed videotape, says there may be a greater prevalence of head injuries in the American game because the players hit each other with forces up to 100% greater. "If they didn't have helmets on, they wouldn't do that," he says. "They know they'd injure themselves."

This is just the latest example of what economists call the Peltzman Effect. That is, the tendency of people to react to a safety regulation by increasing other risky behaviour, offsetting some or all of the benefit of the regulation.

The effect of maternal fasting during pregnancy

noreply@blogger.com (Paul Walker) — Tue, 10 Nov 2009 18:38:00 +0000

This audio comes from VoxEU.org. In it Douglas Almond of Columbia University talks to Romesh Vaitilingam about his research with Bhashkar Mazumder on women who are pregnant during the Islamic holy month of Ramadan and the impact of fasting on their children – in terms of birth weight and the likelihood of being a boy or girl, as well as later life health outcomes.

Interesting blog bits

noreply@blogger.com (Paul Walker) — Tue, 10 Nov 2009 18:24:00 +0000

Brad Taylor on Corporatism in Everything or: How to Have Government Work for You without Resorting to Bribery
BK Drinkwater is Paging Brad Taylor
BK is also talking about The Corporatism Files: Diaries
Eric Crampton on Heresthetics
Peter Klein get us some Coasean Humor
Céline Carrère and Jaime de Melo ask Has distance died? The distance puzzle is the surprising finding that the volume of trade has become increasingly sensitive to distance. This column shows that low-income countries, which increasingly trade with geographically closer partners, drive the finding. This regionalisation of trade for low-income countries may reflect progress – or problems.

Arnold Kling on economic development

noreply@blogger.com (Paul Walker) — Tue, 10 Nov 2009 04:23:00 +0000

In this Cato Daily Podcast Arnold Kling talks about what drives economic development.

Innovation and entrepreneurship are amazingly good things ... and predatory government and corruption are amazingly bad things.

More unemployment, less crime

noreply@blogger.com (Paul Walker) — Tue, 10 Nov 2009 04:17:00 +0000

This from Tyler Cowen at Marginal Revolution,

With a lot more unemployed people, a lot more people are staying home, and they see more in their neighborhood," said Sgt. Thomas Lasater, who supervises the burglary unit of the police department in St. Louis County, Mo., where authorities recorded a whopping 35 percent drop in burglaries during the first six months of 2009.

An upside to unemployment. Cowen also notes another possible factor helping reduce burglaries,

The falling price of raw materials -- which had been producing copper and other thefts -- may be another reason for the change in trend.

EconTalk this week

noreply@blogger.com (Paul Walker) — Tue, 10 Nov 2009 02:20:00 +0000

Scott Sumner of Bentley University and the blog The Money Illusion talks with host Russ Roberts about monetary policy and the state of the economy. Sumner argues that tight money in late 2008 precipitated the recession. He argues that the standard measures of monetary policy--growth in reserves or the Federal Funds rate--are misleading. Sumner suggests focusing instead on nominal GDP. He argues that the failure of the Fed to counter the drop in nominal GDP in late 2008 intensified the recession and points to the growth in unemployment. Along the way he discusses the Taylor Rule and other monetary prescriptions.

Offshoring and local employment

noreply@blogger.com (Paul Walker) — Mon, 09 Nov 2009 06:29:00 +0000

How do firms who offshore change their local workforce? According to this article at VoxEU.org offshoring is one of the reasons that firms, in Germany at least, employ more highly educated workers at home. In the article Sascha O. Becker, Karolina Ekholm and Marc Muendler say

This column, using evidence from German multinationals, shows a positive correlation between offshoring and the firm’s proportion of highly educated workers. Offshoring firms have relatively more domestic jobs involving non-routine and interactive tasks. But offshoring is far from the only explanation for the shift towards more educated employees carrying out more advanced tasks.

The articles authors argue there are two important lessons from their work,

First, at the level of the individual firm, offshoring seems to be associated with a shift towards more educated workers. We also report a positive correlation between the increase in offshoring and the proportion of highly educated workers in the firm. Both these results suggest that offshoring is associated with an increased relative demand for more educated workers, as traditional theories would predict.
Second, our results support the view that the degree to which jobs involve non-routine and interactive tasks is relevant for their propensity to be offshored.

Famine and a free press

noreply@blogger.com (Paul Walker) — Mon, 09 Nov 2009 06:19:00 +0000

In a comment to the posting Famine and trade, John Small notes the argument by Amartya Sen that no substantial famine has ever occurred in a country with a relatively free press,

I have discussed elsewhere the remarkable fact that, in the terrible history of famines in the world, no substantial famine has ever occurred in any independent and democratic country with a relatively free press. We cannot find exceptions to this rule, no matter where we look: the recent famines of Ethiopia, Somalia, or other dictatorial regimes; famines in the Soviet Union in the 1930s; China's 1958-61 famine with the failure of the Great Leap Forward; or earlier still, the famines in Ireland or India under alien rule. China, although it was in many ways doing much better economically than India, still managed (unlike India) to have a famine, indeed the largest recorded famine in world history: Nearly 30 million people died in the famine of 1958-61, while faulty governmental policies remained uncorrected for three full years. The policies went uncriticized because there were no opposition parties in parliament, no free press, and no multiparty elections. Indeed, it is precisely this lack of challenge that allowed the deeply defective policies to continue even though they were killing millions each year. The same can be said about the world's two contemporary famines, occurring right now in North Korea and Sudan. (Amartya Sen, "Democracy as a Universal Value", Journal of Democracy 10.3 (1999) 3-17)

But I won't mind betting that there is a positive correlation between countries who allow relatively free trade and countries who have a relatively free press. Economic and political freedoms go together. Milton Friedman, for example, argued in "Capitalism and Freedom" that economic freedom is not only desirable in itself but is also a necessary condition for political freedom.

Famine and trade

noreply@blogger.com (Paul Walker) — Fri, 06 Nov 2009 01:59:00 +0000

Famine is an all too common fact of life in many parts of the world. But why do these areas suffer from such food shortages? Climate change? Lack of aid to the effected regions? In an article in the Wall Street Journal Julian Morris argues that we should blame famine on neither of these two reasons. He explains that we should blame famine on trade restrictions, not on climate change or a lack of Western aid. Morris writes,

Although thousands of individuals like Ms. Weldu have been saved by Western charity and taxes, millions more have suffered and died needlessly from famine in East Africa in the past quarter century. But their suffering was not caused by a lack of aid. Nor was it caused primarily by climate change (Western-induced or otherwise). Rather, it was and is the result of policies in the affected countries that inhibit freedom and incentives to trade, own land, and invest in diverse, prosperity-enhancing economic activities.

and continues,

Since the 1920s, global deaths from drought-related famines have fallen by 99.9%. The reason? Continued specialization and trade, which has skyrocketed the amount of food produced per capita, and has enabled people in drought-prone regions to diversify and become less vulnerable.

In places where trade is restricted, people are forced to remain subsistence farmers. So, when drought occurs, the majority suffer and many die.

Children and happiness

noreply@blogger.com (Paul Walker) — Fri, 06 Nov 2009 01:56:00 +0000

Children and happiness, a posting for Eric. One common result from empirical studies on the happiness of people is that the number of children has a negative impact on happiness indicators. The more kids, the lower the happiness of people. This rises an obvious question: Why would people have children? Bad luck? Social pressures? Stupidity? An less obvious answer to this question is that the empirics underlying the result are flawed.

Over at the Economic Logic blog it is noted that

Leonardo Becchetti, Elena Giachin Ricca and Alessandra Pelloni find that the typical way the empirical studies are conducted is flawed. Among the controls, there is usually income. But this make it difficult to disentangle the monetary for the non-monetary impact of children. Using equivalised household income (income adjusted for the number of people in the household) allows to focus only on the impact on happiness, and children now have a positive impact. Decomposing their sample (the German Socio-Economic Panel), they find that opportunity costs do matter. Theory is saved.

So two kids is better than just one.

Government failure versus market failure

noreply@blogger.com (Paul Walker) — Thu, 05 Nov 2009 17:43:00 +0000

John B. Taylor looks at Government Failure versus Market Failure at his blog Economics One. He writes,

Cliff Winston of the Brookings Institution carefully reviews three decades of empirical research on a wide range of microeconomic policy studies in his important book Government Failure versus Market Failure. He comes to the same basic conclusion; as he puts it "thirty years of empirical evidence... suggests that the welfare cost of government failure may be considerably greater than that of market failure."

Taylor makes the point that government failure should be at the top of the list of what went wrong in the recent financial crisis,

My Forbes magazine column this week reviews the latest empirical evidence on why government actions and interventions--government failure rather than market failure--should be at the top of the list of what went wrong in the recent financial crisis. Some continue to be surprised by my finding. While I focus on macroeconomic policy, mainly monetary policy and fiscal policy, my finding that government failure rather than market failure rises to the top of the list is not at all unsual in the broader context of empirical policy evaluation research.

This last sentence is supported by the Winston book.

John Stuart Mill, "On Liberty"

noreply@blogger.com (Paul Walker) — Thu, 05 Nov 2009 03:06:00 +0000

Mill makes a basic point which the government should consider much more deeply and often:

The object of this Essay is to assert one very simple principle, as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control, whether the means used be physical force in the form of legal penalties, or the moral coercion of public opinion. That principle is, that the sole end for which mankind are warranted, individually or collectively in interfering with the liberty of action of any of their number, is self-protection. That the only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. He cannot rightfully be compelled to do or forbear because it will be better for him to do so, because it will make him happier, because, in the opinions of others, to do so would be wise, or even right. These are good reasons for remonstrating with him, or reasoning with him, or persuading him, or entreating him, but not for compelling him, or visiting him with any evil, in case he do otherwise. To justify that, the conduct from which it is desired to deter him must be calculated to produce evil to some one else. The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign.

Why Armen Alchian should win the Nobel Prize

noreply@blogger.com (Paul Walker) — Thu, 05 Nov 2009 02:27:00 +0000

A posting for Brad Taylor. Fred S. McChesney makes the case as to why Armen Alchian should win the Nobel Prize in economics in this article: Armen Alchian: An Economist-Lion in Winter.

The virtues of limiting executive pay

noreply@blogger.com (Paul Walker) — Thu, 05 Nov 2009 02:13:00 +0000

Yes there are virtues to limiting executive pay. Bruce Yandle makes the case in his article, Regulating Executive Pay Can Reduce Systemic Risk: If they are the right executives,

Yes, it is high time that pay and investment guidelines be mandated for all top level executives who may in the normal course their daily work push the entire economy too close to or even over the edge of systemic risk falls. If nothing else, this Great Recession has taught us that top executives can practically capsize the economy.

But the chief concern is not with presidents and vice presidents of too-big-to-fail banks and other bailed-out enterprises. As large as they are, they are small potatoes relative to the big generators of systemic risk. The critical concern is with top government executives who can create national and international panic, lay the groundwork for international inflation or deflation, and just by voting and writing regulations can change the risk profile of entire industries.

In other words limiting the effects and the creation of regime uncertainty can only help the economy.