Cafe Hayek

Masters Fellowship at GMU

Just wanted to let you know that there's a new full-time full-fellowship Masters program in economics here at George Mason University. The application deadline is April 18. Tuition is covered plus you get an annual stipend of $24,500. If you want to change your life and change the world, more info is here.

Sunny Side Up

My optimism about the American economy can be found here in my commentary for NPR's All Things Considered. I'll post the text soon.

Can't Get No

Here is a very clever web site from Joshua Hall, Robert Lawson, and Dirk Mateer that uses song lyrics to teach economics.

The tragicomic state of public education

Are your local property taxes too low? Feel like the public schools aren't getting enough funding? After all, spending per student has only DOUBLED over the last 40 years and increased almost every year for the last 25 years or so. But we know it's not enough. Well now you can make a difference. You can contribute even more than what you're forced to contribute through your property taxes. At DonorsChoose.org, you can help the cash-starved public schools finally get the resources they need! This is not from the Onion:

DonorsChoose.org is a simple way to provide students in need with resources that our public schools often lack. At this not-for-profit web site, teachers submit project proposals for materials or experiences their students need to learn. These ideas become classroom reality when concerned individuals, whom we call Citizen Philanthropists, choose projects to fund.

Proposals range from "Magical Math Centers" ($200) to "Big Book Bonanza" ($320), to "Cooking Across the Curriculum" ($1,100). Any individual can search such proposals by areas of interest, learn about classroom needs, and choose to fund the project(s) they find most compelling. In completing a project, donors receive a feedback package of student photos and thank-you notes, and a teacher impact letter.

   

The tragedy is that creative teachers probably do struggle to find funding for creative projects. That's because they're in public schools. There is little or no incentive for funding increases to please the customers, be they students or their parents.

Alas, In 2007, donors have already funded $4,176,945 worth of resources for  students through  DonorsChoose. Please, if you are one of those donors, give your money elsewhere. Help students get out of a system that wastes resources on such an extraordinary scale. Give to a charity that helps students get into private schools where there is at least some accountability. Go here, then choose your state, and then select "Private Scholarship Groups" to find a charity in your state.

The Essence of a Masonomist

Arnold Kling very eloquently explains the uniqueness of economics as taught and researched at George Mason University.  Here's an excerpt:

At MIT and other bastions of mainstream economics, most economists are to the left of center but to the right of the academic community as a whole. These economists are known for saying, in effect, "Markets fail. Use government."

Masonomics says, "Markets fail. Use markets."

Somewhere along the way, mainstream economics became hung up on the concept of a perfect market and an optimal allocation of resources. The conditions necessary for a perfect market are absurdly demanding. Everything in the economy must be transparent. Managers must have perfect information about worker productivity and consumers must have perfect information about product quality. There can be nothing that gives an advantage to a firm with a large market share. There cannot be any benefits or costs of any market activity that spill over beyond that market.

The argument between Chicago and MIT seems to be over whether perfect markets are a "good approximation" or a "bad approximation" to reality. Masonomics goes along with the MIT view that perfect markets are a bad approximation to reality. But we do not look to government as a "solution" to imperfect markets.

Masonomics sees market failure as a motivation for entrepreneurship. As an example of market failure, let us use a classic case described by a Nobel Laureate, which is that the seller of a used car knows more about the condition of the car than the buyer. Masonomics predicts that entrepreneurs will try to address this problem. In fact, there are a number of entrepreneurial solutions. Buyers can obtain vehicle history reports. Sellers can offer warranties. Firms such as Carmax undertake professional inspections and stake their reputation on the quality of the cars that they sell.

Masonomics worries much more about government failure than market failure. Governments do not face competitive pressure. They are immune from the "creative destruction" of entrepreneurial innovation. In the market, ineffective firms go out of business. In government, ineffective programs develop powerful constituent groups with a stake in their perpetuation.

I'm proud to be a Masonomist.

The Ultimate Indictment

If you want to know what's wrong with economics education in America, go here. It's a web site created by Wal-Mart to convince viewers that Wal-Mart is good for America because lower prices free up income for people to enjoy other things. How bizarre is it that a company has to spend thousands if not millions of dollars on this web site and elsewhere making the case that low prices are good?

Quality of Education

This week's EconTalk podcast is with Rick Hanushek. He argues that the quality of education (as measured by international test scores) is a powerful predictor of economic growth rates across countries. Coming up over the next few weeks on EconTalk: Barry Weingast on violence and power, Deborah M. Gordon on the economics of ant colonies, Paul Romer on growth and George Shultz on economics and diplomacy.

Steve Jobs on teacher unions

Steve Jobs, speaking at a conference on educational reform, sacrifices a few future dinner party invitations with a moment of intellectual honesty. The AP reports:

Apple Inc. CEO Steve Jobs lambasted teacher unions Friday, claiming no amount of technology in the classroom would improve public schools until principals could fire bad teachers.

Jobs compared schools to businesses with principals serving as CEOs.

"What kind of person could you get to run a small business if you told them that when they came in they couldn't get rid of people that they thought weren't any good?" he asked to loud applause during an education reform conference.

"Not really great ones because if you're really smart you go, 'I can't win.'"

In a rare joint appearance, Jobs shared the stage with competitor Michael Dell, founder and CEO of Dell Inc. Both spoke to the gathering about the potential for bringing technological advances to classrooms.

"I believe that what is wrong with our schools in this nation is that they have become unionized in the worst possible way," Jobs said.

"This unionization and lifetime employment of K-12 teachers is off-the-charts crazy."

At various pauses, the audience applauded enthusiastically. Dell sat quietly with his hands folded in his lap.

"Apple just lost some business in this state, I'm sure," Jobs said.

Animation Contest

Many people responded with varying degrees of interest to my idea of creating short web-based economics lessons—brief (3-4 minute) animated pieces. So I thought I'd create a contest. If you're interested, read on.

UPDATE: I should have mentioned that some of the numbers that follow in the example are illustrative. As we go forward, I'll get the right numbers.

I'm going to lay out my idea of a "script" or story line for the first idea--the economics of the minimum wage. If you want to enter the competition, you can do the first minute or so of what I've outlined or all of it. Put your work up on the web and send me the URL.

What's in it for you? I'm pretty confident I can raise some money for this project, so also tell me what you'd charge to do the full-blown version or the next one. If I choose you and I can raise the money, we'll go forward.

What I'm looking for is the most visually compelling approach. Success will be measured by whether people want to watch this either because it's interesting or funny or intriguing or ideally, all three.

This video is what I'm after in terms of pace and visual appeal. One reason it works is because it's very clever. But it also works because you want to see what's next and the pace is perfect--just slow enough so that you can figure out what's going on and fast enough so that you don't get bored. It inspired me, not because I want to do an animated power point presentation on the minimum wage, but because the pace made me realize I could tell an animated story.

So here's the rough, rough, idea for the minimum wage. It's a rough draft. Your entry is a rough draft, too. You can leave holes in the narration or fill them in with your imagination. Or you can email me for more info or ideas.

And some of my ideas are bad ones. They won't work visually. Feel free to do something different. What I'm looking for is the idea of how you'd approach the story, not the details.

There are two elements to the story. One is words. The other is visual. Some of the words could be part of the visuals appearing as text on the screen. Or they could be voice-over. So in this outline of the story, I'm going to give you the words and suggestions for the visuals. Don't worry about the words for now. Focus on the visuals. My visuals are very much suggestions. If you have a better visual idea (or a more feasible visual idea) feel free to do something different.

Questions? Send me an email. Roberts at GMU dot edu.

Deadline for submitting your entry: March 7th.

 

Here's the narrative I have in mind, at least as an outline. Good luck!

 

THE NARRATIVE

WORDS (1): People call me heartless because I'm against increasing the minimum wage from $5.15 an hour to $7.25 and hour.

VISUAL (1): An economist without a heart. Maybe the economist is a stick figure who opens up the door to his heart like the tin man and there's nothing there. Or maybe he empties a briefcase and there's a kidney and a spleen and a liver and he keeps shaking it put no heart comes out.

WORDS (2): Let's look at the minimum wage a little more closely. There are about 140 million people who have jobs in America. About 2 million earn the minimum wage or less. About 7 million earn less than $7.25

VISUAL (2): 140 stick figures, each representing a million. Seven of the stick figures are shown in a different color. We zoom in on those.

WORDS (3) What's going to happen to these folks who currently earn less than the proposed minimum wage of $7.25? Why, they're going to get a raise! They're all going to earn more than they do now! Or most of them anyway. Some of them are going to lose their jobs.

VISUAL (3) Stick figures celebrating as money rains down on them or dollar bills flutter down.

WORDS (4) According to most economists who have studied the minimum wage, about 1 million of those workers will lose their jobs when the minimum wage goes up 40%.

VISUAL (4) Show six of the seven stick figures celebrating. Show one dejected and forlorn.

WORDS (5) Why will these workers lose their jobs? When wages go up, employers will look for cheaper alternatives. They will use technology and hire fewer workers who are more skilled. That's why a fast food restaurant today has so few workers compared to the old days. When workers are relatively expensive, you try and find machines to do the job. Not every employer will be able to use technology. But some will. And workers will lose their jobs.

VISUAL (5) Lots of choices here. I'm open to ideas.

WORDS (6) Which workers will have trouble finding work? The least skilled workers. If you're an employer paying your workers $7 an hour, a raise to $7.25 isn't as likely to make you find a cheaper alternative than when you're paying your workers $5.15. The two million workers making $5.15 an hour or less are the most vulnerable ones.

VISUAL (6--more of whatever you did in (5))

WORDS (7) If a million low-skilled workers are laid off, can't they find work somewhere else? Some can, but it's going to be tough. If you're worth $6 to an employer, the employer won't find it worthwhile to pay $7.25. Any bargaining power you had is ruled out by the new law.

VISUAL (7) Maybe an employer measuring the worth of an employee with some kind of monetary tape measure. Show worker going from door to door and coming up empty.

WORDS (8) So 6 million workers get a big pay raise--40% more per hour. One million get a big pay cut. Low wage jobs are often the first rung on the ladder for people trying to get started. A minimum wage makes it harder to get on the ladder.

VISUAL (8) Dozens of ladders with people slowly climbing up them. Some ladders have no rungs at the bottom--the rungs start up really high. We see people jumping, trying to reach the first rung but unable to get there.

WORDS (9) So why am I the heartless one?

VISUAL (9) Lots of possibilities here.

The master at work

All of the episodes of the Milton Friedman's "Free to Choose" series are here. (HT: David Peterson). And a thank you to Bob Chitester, the producer of Free to Choose and the Friedman PBS bio for putting this up and for his work on behalf of liberty and economic education. Here is John Fund at the WSJ summarizing Chitester's achievement:

This week's PBS special pays tribute to the many achievements of Milton Friedman. One that is often underappreciated is the extent to which he demonstrated how visual images could influence and shape public debate. As his most ardent electronic disciple, Bob Chitester deserves the free-market community's equivalent of an Oscar.

Help Wanted

I'm looking for someone who might be able to do some simple animation to tell economic stories. For example, I have an idea for a narrative that would show how the minimum wage hurts the workers with the lowest skills. You could make it a full-blown documentary or animated story. But what I'm thinking of is a low-level of visual sophistication (stick figures or crayonesque drawings) that would have a certain stylish simplicity so that you could create this kind of visual story quickly and at relatively low cost. But it would be fast-paced enough and entertaining enough that people would want to watch.

Do you have any experience in this kind of thing? If yes, and if you'd find this kind of enterprise interesting, send me an email at roberts at gmu do edu with a link to something you've done that might be vaguely related. If you don't have the experience but have seen something akin to this, I'd like to see that too.

Visual thinking

I am always interested in different ways to present information which is why I like Edward Tufte's work so much. So here is a visual representation of various ways of visually representing things: A Periodic Table of Visualization Methods. (HT: Boing Boing) Go to the page and mouse over the elements. Don't miss Sd and Ed, the two explicit bits of economics. I got a kick out of Kn. My wife and I are often anchored in the Bay of Mirth.

Manuel Ayau

We ordinary human beings need heroes.  If we choose them wisely, we increase our chances of acting in principled and decent ways.

My heroes include F.A. Hayek, Milton Friedman, Adam Smith, Frederic Bastiat, Thomas Babington Macaulay, Leonard Read, the English Levellers, and H.L. Mencken -- and Manuel Ayau.

Karol and I are fortunate to count Muso (as he is affectionately called) and his wonderful wife, Olga, among our friends.  Muso combines rare entrepreneurial talent with a very deep knowledge of economics and a sincere love of liberty.  He is Guatemala's greatest asset.

I am happy to find in today's Washington Times this tribute to Muso by Richard Rahn.

(And here's an essay that I wrote last year on the occasion of Muso's 80th birthday.)

Teacher Recommended

A number of the yard signs for politicians in my neighborhood in Montgomery County, Maryland boast the endorsement, "Teacher Recommended." That means that the candidate has been endorsed by the Montgomery County Education Association, the teacher's union.

These signs are very useful. As I walk around the neighborhood with my children, I point out the signs and explain that I will be voting against these candidates because teacher recommended is not the same thing as parent recommended or student recommended. In fact, the goals of teachers and teachers' unions often conflict with the goals of parents and students. Parents (and even sometimes students) want teachers to work hard at educating their children. Many teachers want to work hard. But they also like not working hard sometimes. And the unions frequently (always?) oppose changes in educational policy that might make them work harder. The unions support pay raises for teachers unconnected to performance, something many parents would favor. There is always a tension between employee and employer, no matter how dedicated the employee. That is why we pay people and monitor performance. We don't just assume that the level of effort and care is the same regardless of the incentives in place.

I explain to my children that the signs try and exploit a confusion we might have between teachers and education. We're supposed to assume that a candidate that is teacher recommended is pro-education. But the more accurate assumption is that a candidate that is teacher recommended is simply pro-teacher. Being pro-teacher does not make you pro-education and alas, can often be a sign of being anti-education when the goals of teachers and parents conflict as they inevitably do.

Lord Harris

The Obituary ($$) in this week's Economist is of Ralph Harris -- or Lord Harris of High Cross as he became late in his remarkably productive life.  Along with the late Arthur Seldon, Harris made Britain's Institute of Economic Affairs (IEA) an intellectual powerhouse showing the benefits of markets and freedom under the rule of law.

I met Harris only once, in 1999 at the Summer University in Aix-en-Provence.  We sat together in the hotel lobby one morning sipping coffee.  (Or perhaps he had tea; I don't recall.)  He was elegant yet spirited, his smile ready and his wits sharp.  I liked him very much.

Here's a passage from The Economist's fine obit:

To critics, the ideas of the IEA were all the worse for being “German”. Their source was Friedrich Hayek, in fact an Austrian. Mr Harris, fresh down from Cambridge in 1947, had fallen under the spell of Hayek's “The Road to Serfdom”. Serfdom was all around him then: ration books, travel restrictions, the persistent shadow of wartime central planning, and most of all the depressing disposition of people to do what they were told and to suppose that this was modern life. He never believed it. The way to freedom was to unleash the millions of individual actions that made up a working economy, and never to seek to control them.

Shlaes on Phelps

Nice article by Amity Shlaes on Nobel Laureate Edmund Phelps. She describes how he struggled to raise money for an academic center on capitalism and had to settle for being a part of Jeffrey Sachs's Earth Institute:

But the cash didn't pour in, so Phelps couldn't build a giant monument. In the end, with a small amount of funding, his Center on Capitalism and Society became a subset of another, more lavish Columbia undertaking: the Earth Institute. Or to be precise, a subset of a subset of the Earth Institute. The Center on Capitalism and Society is ``a unit of the Center on Globalization and Sustainable Development at the Earth Institute at Columbia University.'' Even the URL, www.earth.columbia.edu/ccs, subordinates capitalism.         

Jeffrey Sachs, the head of the Earth Institute, is a gracious man, and his kindness at inviting Phelps in shouldn't be discounted. Still, there is something inherently wrong with this picture.         

It is capitalism of the Phelps variety that gives nations the wherewithal to fund environmental projects. The wealthier the society, the more likely it is to decide that it wants to go green. This last phenomenon is known as the Environmental Kuznets Curve, after yet another of Phelps's Nobel predecessors, Simon Kuznets. It is more logical for the Earth Institute to be a department at the Capitalism Center, rather than the other way around.         

Presumably, Phelps will now find it a little easier to raise money.

(HT: Carrie Conko)

The Sadim Touch

The Sadim touch is the opposite of the Midas touch. With the Midas touch, everything you touch turns to gold. With the Sadim touch, you ruin everything you touch.

The government has the Sadim touch. Three articles in today's Washington Post make this clear.

The first is that the No Child Left Behind federal legislation ended up benefiting a lot of Bush cronies:

 

The centerpiece of the new research-based approach was Reading First, a $1 billion-a-year effort to help low-income schools adopt strategies "that have been proven to prevent or remediate reading failure" through rigorous peer-reviewed studies. "Quite simply, Reading First focuses on what works, and will support proven methods of early reading instruction," the Education Department promised.

 

Department officials and a small group of influential contractors have strong-armed states and local districts into adopting a small group of unproved textbooks and reading programs with almost no peer-reviewed research behind them. The commercial interests behind those textbooks and programs have paid royalties and consulting fees to the key Reading First contractors, who also served as consultants for states seeking grants and chaired the panels approving the grants. Both the architect of Reading First and former education secretary Roderick R. Paige have gone to work for the owner of one of those programs, who is also a top Bush fundraiser.

Here's the close of the article:

 

But it is clear that Reading First has been a terrific boon for the textbook publishing industry, and for the department's favored programs. For example, the company that developed Voyager Passport was valued at about $5 million in a newspaper article before Reading First; founder Randy Best, whose Republican fundraising made him a Bush Pioneer, eventually sold it for $380 million. He then put Lyon and Paige on his payroll.

 

Local domination of education is an American tradition, and Bush took up a storied cause in challenging it; reformers since Horace Mann have promoted national education policy as a way to encourage common culture and equal opportunity. But local-control advocates have always warned that empowering heavy-handed federal bureaucrats would breed self-serving, one-size-fits-all solutions. Now, Reading First is making them look like prophets.

Second, the DC school system stinks. But the new mayor is going to fix it:

 

Schools in the nation's capital suffer from a special affliction: too many emperors. The continual battling for control over the school system among government officials and agencies -- as well as the congressional gorilla on Capitol Hill -- has resulted in ever-shifting priorities, an absence of accountability, low morale and waste. It has spawned an endless churning of leadership (six superintendents or acting superintendents in the past 10 years), promoted patronage and spurred endless political infighting.

 

These are hardly the circumstances from which successful school reform springs. Just the opposite: An outside audit of the school system in 2004 found that the District's hydra-headed power structure had left the city unable even to establish a vision for improvement. Indeed, the review concluded that the city had "no . . . strategy for raising student achievement."

 

Into this vacuum strides Fenty with a promise to "demand and deliver results."

Want to wager on whether he's going to be successful?

Finally, George Will writes about how the feds are undermining referenda and legislation that would require the a state to spend at least 65% of its education expenditures on "classroom instruction."

 

But in July the National Center for Education Statistics, part of the U.S. Education Department, undermined this national effort. A report on expenditures for public elementary and secondary education for the 2003-04 school year contained this finding: "The percentage of current expenditures spent on instruction and instruction-related activities was 66.1 percent in 2003-04 for the nation as a whole" (emphasis added). Seasoned students of government verbiage noted the suspiciously vague phrase "instruction-related activities."

 

Opacity is a sign of insincerity: Government language becomes opaque as the government's conscience becomes uneasy. When no Iraqi weapons of mass destruction were found, the U.S. government began speaking foggily of finding "weapons of mass destruction-related program activities."

The government has the Sadim touch--it ruins everything it touches, increasing the demand for more government unless we realize the true source of the problem. Remember Milton Friedman's insight, one of his deepest:

 

And that is the fallacy -- this is at the bottom of it -- the fallacy that it is feasible and possible to do good with other people's money. Now, you see that fallacy -- that view -- has two flaws. If I want to do good with other people's money I'd first have to take it away from them. That means that the welfare state philosophy of doing good with other people's money, at its very bottom, is a philosophy of violence and coercion. It's against freedom, because I have to use force to get the money. In the second place, very few people spend other people's money as carefully as they spend their own. Let me take this down to the situation of New York City right now. About six or seven or eight years ago -- I've forgotten when it was -- John Kenneth Galbraith, in an article he wrote in The New York Times Magazine Section, said, there are no problems in New York City that would not be solved if the New York City budget were twice what it is now. Now, the New York City budget has since then something like tripled. And all the problems are worse. Why? Because the fact is, it's a confusion to identify the City with the people. The New York City's budget is higher, but that means that the people of New York have less to spend. It's only been transferred from people individually to the City. Now, who spends the money more carefully -- the City civil servants or people who are spending their own money? Now, of course, you may say to me, but when the City spends the money, it'll go for the good things, and so even half of it is wasted, it's better off. But that's nonsense. City civil servants and others are just like the rest of us. We're all of us interested in pursuing our own objectives. The label again on the bottle may be welfare or health or education. But you have to look at all of the places where it drops off en route to going there. There are lots of other things that can be accomplished under those titles, and the fact is that no more -- no larger a fraction of the money the City spends goes to good things. Let me illustrate in a very concrete way. A major problem in New York City is housing. Why? Because of bad governmental policy. Rent control, which was continued in New York after World War II, and the only city in the country where it was continued, everywhere else it was dropped. It has caused enormous abandonment of houses, eroding the tax base, public housing, governmental subsidy to housing, so that people who occupy it have no incentive to maintain it. If you had eliminated the government from the housing market and left that money in the hands of the people themselves, the housing situation in New York today would be far better than it is.

If we want children in Washington DC to have better education, if we wants children in Maryland to have better education, if we want children in America to have better education, get the government out of the education business and let parents spend their own money.

Interview with Milton Friedman

The second part of my interview with Milton Friedman is up at EconTalk.

The edited transcript of both podcasts is here.

A Tactic for Explaining the Reality of Imperceptible, but Real, Effects

Tonight in my Principles of Microeconomics class ("ECON 103" at George Mason University) I explained to my students the "real-cash-balance effect."  This is the straight-forward idea that any change in the size of the nominal stock of money in circulation doesn't change the real purchasing power of the total stock of money.

If, for example, the economy today has available for purchase four apples, three lightbulbs, two bottles of wine, and one automobile, no change in the amount of currency in circulation will change this fact.  If the amount of currency in circulation is doubled, the purchasing power of each unit of currency will be cut in half; if the amount of currency in circulation is cut in half, the purchasing power of each unit of currency remaining in circulation will double.  But in both cases the total amount of goods and services available to be purchased will be unchanged.

I explained to my class that if foreigners who earn dollars by selling goods and services to Americans lost their dollars, or chose to shred and burn their dollars, the purchasing power in these lost or destroyed dollars would nevertheless return to the U.S. economy in the form of higher purchasing power of the dollars remaining in circulation.  It's the real-cash-balance effect.

But one difficulty in explaining this effect to students is their correct intuition that any amount of dollars that foreigners might hoard or destroy is a teensy-weensy fraction of the total stock of dollars -- such a small fraction that the increase in purchasing power enjoyed by dollars remaining in circulation (as a result of foreigners steadfastly and forever refusing to spend their dollars) is so small as to be unnoticeable.

And that which is unnoticeable seems unreal -- or, at least, questionable.

So here's the analogy I use: Suppose you're standing on the edge of an Olympic-sized swimming pool.  The water in the pool is perfectly still.  You pull a dime from your pocket and toss it into the pool, and you watch it sink to the pool's bottom.

Does the addition of the dime to the pool raise the pool's water level?  Of course it does.  Is this effect noticeable?  No, it's not.  But the fact that the higher water level (resulting from a lone dime being chucked into the pool) is unnoticeable does not mean that the effect isn't real.

And so it is with the real-cash-balance effect.  Any amount of dollars that foreigners keep 'permanently' out of circulation -- because foreigners lose some dollars, because some dollars start to circulate as currency abroad (as in Panama), or for whatever other reason -- will be such a small portion of the supply of dollars that the effect that this reduction in nominal cash balances will have on the purchasing power of dollars remaining in circulation will be imperceptibly small -- imperceptibly small, but nevertheless undeniably real -- just as real as is the increase in the level of the pool caused by the lone dime.

The Flutie Factor

It is commonly believed that Doug Flutie's November 23, 1984 touchdown pass to Gerald Phelan against Miami capping an thrilling 47-45 victory as time expired was responsible for boosting applications to Boston College in subsequent years. I even stupidly told someone yesterday that my memory was that applications had doubled or tripled in the next year.

Turns out they only went up 16% in 1984 and 12% the next year. This article from a Boston College magazine does a nice job chronicling the facts and how I wasn't the first to misremember them or misrepresent them. It also questions the existence of any bump at all:

So was the Flutie factor real? The answer is that Doug Flutie increased               applications to Boston College, but not nearly as much as the public and the media believe or as academic planners at some institutions seem to hope in justifying the millions of dollars they invest in football.
 
Applications to BC did surge 16 percent in 1984 (from 12,414 to 14,398), and then another 12 percent (to 16,163) in 1985. But these jumps were not anomalous for BC, which in the previous decade had embarked on a program to build national enrollment using market research, a network of alumni volunteers, strategically allocated financial aid, and improvements to residence halls and academic            facilities, says John Maguire '61, Ph.D.'66. The chairman of the board of Maguire Associates, a well-known enrollment management consulting firm, Maguire headed admissions at BC from 1971 to 1983. "Doug Flutie cemented things, but the J. Donald Monan factor and the Frank Campanella factor are the real story," he said, referring to BC's former president and executive vice president.
 
Michael Malec, a BC sports sociologist who has studied the relationship            between athletic success and enrollment, notes that in 1972 the College of A&S opened its doors to women, and in 1974 the University acquired three residence halls at Newton College and built three more residence halls (the Mods, Edmond's, and Rubenstein), adding Walsh Hall in 1980, effectively doubling the pool of applicants and the housing capacity. "Doug Flutie made some terrific contributions to BC," said Malec, "but his personal impact on enrollment during    this period has been exaggerated."
 
Applications to BC had in fact increased 15 percent in 1973 (the year after Fr. Monan took office), 13 percent in 1975, and 14 percent in 1976—years when football was successful but not remarkably so. Between 1970 and 1983, in fact, applications to BC increased in 12 of 13 years, no matter the fortunes of the football team, and they nearly doubled (6,605 to 12,411) between 1970 and 1978...

In a 1994 article in the Economics of Education Review, BC economist Robert Murphy reported on a study of 55 universities with I-A football programs (BC was not in the study group) that found a positive and statistically significant correlation between a winning football season and increases in applications. But the predicted application increase based on the research was a modest 1.3 percent tied to a three-win improvement over the previous season.

It's always good to watch out for post hoc ergo propter hoc. The true BC story casts doubt on the presumption that George Mason is going to see a big increase in applications in the aftermath of the success of the basketball team. But a lot of people had never even heard of George Mason before the past two weeks. It will be interesting to see how it unfolds. Go, Patriots!

Play Ball at GMU

What do GMU Economics, GMU Law, and GMU basketball have in common?  In Slate, my colleagues Pete Boettke and Alex Tabarrok reveal the answer.

Sleep Less. Think More.

One of my favorite institutions is the Institute for Humane Studies (IHS) -- a powerhouse of a resource for young scholars doing research with a broadly (classical) liberal orientation.  (Truth in advertising: I serve on the IHS board.)

One of IHS's most fruitful efforts is its impressive series of free summer seminars.  I encourage all students reading Cafe Hayek to check out this link and to seriously consider applying to attend one of these intellectually stimulating events.

Spread the word

If you have a daughter or any women friends in college, you might want to alert them to a recent study of the American Medical Association.  The Washington Post reports in an AP story:

The American Medical Association is warning girls not to go wild during spring break. All but confirming what goes on in those "Girls Gone Wild" videos, 83 percent of college women and graduates surveyed by the AMA said spring break involves heavier-than-usual drinking, and 74 percent said the break results in increased sexual activity.

The women's answers were based both on firsthand experience and the experiences of friends and acquaintances.

Sizable numbers reported getting sick from drinking, and blacking out and engaging in unprotected sex or sex with more than one partner, activities that increase their risks for sexually transmitted diseases and unwanted pregnancies.

Fascinating, isn't it?  Who knew?  What would we do without the AMA? So be sure and tell any women that you know.  Spring break can be hazardous to your health.  You see, it is a health issue:

The AMA is trying to call attention to underage drinking among women because their bodies process alcohol differently and put them at greater risk for health problems, Dr. J. Edward Hill, AMA's president, said Tuesday.

Pretty sexist remark bordering on the patriarchal but I'll take it as true for now.  The AP story did quote one woman who was a little less than impressed with the value of the AMA's findings and advice. I have to wonder whether she's an econ major with a respect for consumer sovereignty:

Kathleen Fitzgerald, a 21-year-old junior at Illinois State University, said the AMA's effort to raise awareness is a good idea, but probably won't do much to curb drinking during spring break.

"I think a lot of students wouldn't really pay that much attention to it," Fitzgerald said. "They would just be like, `Duh, that's why we do it.'"

What economists do

One of the challenges of being an economist is that nobody really knows what you do.  If economics is what economists do, then economists are consultants, corporate toadies, professors, labor union hacks, macroeconomic forecasters, applied mathematicians, financial analysts and so on.

I tend to focus on a much narrower set of activities, the Hayekian sphere of page 76 of The Fatal Conceit:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

In this definition of economics, the focus is on the complexity of phenomena that are the product of human action but not human design.

David Brooks, in yesterday's New York Times ($$), attacks a particular kind of economics for failing to be relevant in today's complex world.  I think he's attacking a straw social science.  His piece opens:

Once, not that long ago, economics was the queen of the social sciences. Human beings were assumed to be profit-maximizing creatures, trending toward reasonableness. As societies grew richer and more modern, it was assumed, they would become more secular. As people became better educated, primitive passions like tribalism and nationalism would fade away and global institutions would rise to take their place. As communications technology improved, there would be greater cooperation and understanding. As voters became more educated, they would become more independent-minded and rational.

Brooks has confused a number of different things here, mainly materialism or maybe Marxism with economics.  Instead of "profit-maximizing," he might have said "calculating creatures always rationally pursuing their self-interest."  In that more accurate definition, he could have allowed for altruism, religion and even tribalism.

Brooks continues:

None of these suppositions turned out to be true. As the world has become richer and better educated, religion hasn't withered; it has become stronger and more fundamentalist. Nationalism and tribalism haven't faded away. Instead, transnational institutions like the U.N. and the European Union are weak and in crisis.

Communications technology hasn't brought people closer together; it has led to greater cultural segmentation, across the world and even within the United States. Education hasn't made people moderate and independent-minded. In the U.S. highly educated voters are more polarized than less educated voters, and in the Arab world some of the most educated people are also the most fanatical.

All of this has thrown a certain sort of materialistic vision into crisis. We now know that global economic and technological forces do not gradually erode local cultures and values. Instead, cultures and values shape economic development. Moreover, as people are empowered by greater wealth and education, cultural differences become more pronounced, not less, as different groups chase different visions of the good life, and react in aggressive ways to perceived slights to their cultural dignity.

But the materialistic vision has never been all there is to economics.  Adam Smith wrote The Theory of Moral Sentiments, a fundamentally anti-materialistic work.  As Brooks acknowledges elsewhere in the piece, economists are increasingly interested in culture and psychology, major interests of many of my colleagues here at GMU.

Economics, which assumes people are basically reasonable and respond straightforwardly to incentives, is no longer queen of the social sciences.

Maybe, maybe not.  I'll agree with Brooks that the narrow, materialistic vision of some economists is often inadequate.  But people do respond to incentives, as Brooks inadvertently proves near the end of his piece.

It turns out that it's hard to change the destinies of nations and individuals just by pulling economic levers. Over the past few decades, America has transferred large amounts of money to Africa to build factories and spur economic development. None of this has worked. As the economists Raghuram Rajan and Arvind Subramanian demonstrated, there is no correlation between aid and growth.

At home, we spend more money on education than any other nation. We have undertaken a million experiments to restructure schools and bureaucracies. But students who lack cultural and social capital because they did not come from intact, organized families continue to fall further and further behind — unless they come into contact with some great mentor who can not only teach, but also change values and behavior.

The failure of foreign aid and educational spending is due to a failure of incentives.  Materialists may think that spending money is the way to achieve particular ends.  But if the incentives for performance are missing, merely spending money without the incentives to spend it wisely will never achieve its objectives.

Brooks is right that economic levers don't always move the world, but I would substitute the word "financial."  Money isn't always the most important lever.  As Adam Smith understood along with his modern-day colleagues, money isn't the only thing that motivates people.

In the middle of the piece, Brooks writes:

It all amounts to this: Events have forced different questions on us. If the big contest of the 20th century was between planned and free market economies, the big questions of the next century will be understanding how cultures change and can be changed, how social and cultural capital can be nurtured and developed, how destructive cultural conflict can be turned to healthy cultural competition.

I think economists are going to get better at understanding how cultures change.  But we won't be very good at figuring out how to change them.  That, I would suggest, is an important application of the earlier quote from Hayek.  But then again, we'll probably be aware of our limitations.  I'd be worried about the anthropologists.

ABCs of Education

John Stossel promises to have much good information and wisdom about schooling in this hour-long special that will be telecast tomorrow night.  I'll not miss it.

Stossel truly is the finest broadcast journalist of our age, specializing (as he does) in making that which typically is unseen seen.

I'm also eager, by the way, to read his forthcoming book.

Dull economics

Why is it sometimes so hard to make economics exciting? The brilliant Don Cox explains here.  The answer turns out to depend on Equation 14.

A "legitimate state purpose"

Read the opening paragraph of Fields, et al. v. Palmdale School District, a case handed down on November 2^nd by the U.S. Court of Appeals for the Ninth Circuit. The majority opinion – including the words below – are from the pen of Judge Stephen Reinhardt.

When parents of schoolchildren in Palmdale, California learned from their sons and daughters that they had been questioned in their public elementary school about sexual topics such as the frequency of "thinking about having sex" and "thinking about touching other peoples’ private parts," some of them exercised their constitutional right to take their grievance to the courts. The questioning was part of a survey the Palmdale School District was conducting regarding psychological barriers to learning. The parents brought an action in district court against the School District and two of its officials for violating their right to privacy and their right "to control the upbringing of their children by introducing them to matters of and relating to sex." They brought both federal and state claims. The district court dismissed the federal causes of action for failure to state a claim upon which relief could be granted and dismissed the state claims without prejudice to their right to re-file in state court. We agree, and hold that there is no fundamental right of parents to be the exclusive provider of information regarding sexual matters to their children, either independent of their right to direct the upbringing and education of their children or encompassed by it. We also hold that parents have no due process or privacy right to override the determinations of public schools as to the information to which their children will be exposed while enrolled as students. Finally, we hold that the defendants’ actions were rationally related to a legitimate state purpose.

Read again the final three sentences of this quotation.

The state – government – politicians and their henchmen and toadies – strangers specializing in duping the masses into believing that these same duplicitous strangers are capable of superhuman feats of beneficence – are ruled by a U.S. court of appeals to have a "legitimate" reason to interfere with parents’ decisions about how to expose children to "sexual matters."

As my good friend Roger Meiners remarks about this ruling by super-lefty Judge Reinhardt, it’s rather anomalous that lefties so publicly bemoan the likelihood that non-lefty judges threaten personal freedoms.  Is this ruling not deeply offensive to all who love liberty?

Game Language

Tyler responds to the claim that game theory is a dead end because it doesn't generate testable implications by giving five possible reasons why game theory is still worth pursuing and understanding:

1. Behavioral approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

2. Computational approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

3. Evolutionary approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

4. Experimental approaches will flesh out how humans actually behave.  Game theory will end up with clear predictions, just give it time.

5. The real world is in fact indeterminate or close to indeterminate.  The indeterminacy and multiple equilibria of game theory are not a problem, but rather reflect how closely the theory mirrors reality.  Yes you might prefer sharp, clear predictions, but tough tiddlywinks, you're not going to get them.  Faithfulness to reality is more important than fulfilling abstract methodological strictures.

Here's one I'd suggest:

6.  Game theory generates no predictions about the real world but it is a useful way of organizing your thinking about various real-world phenomena.  It's a language that helps avoid mistakes or confusion.

That having been said, I think the kind of phenomena that game theory helps with are more limited than most of the profession seems to think.  Competition reduces the role and importance of strategic behavior and makes game theory less useful.

Tyler's closing argument implicitly make the point about organizing your thinking:

The bottom line: Like so much of economics, the strongest argument for game theory is simply to chat with someone who doesn't know any.

The problem is that game theory can organize your thinking the wrong way because it tends to cause its users to underestimate the power of competition.  I assume this is a result of taking payoffs as given when in fact they are often endogenous and affected by market forces. 

I once was confronted by a graduate student (at a university where I taught in the past)  who angrily complained that I was poisoning my students by naively telling them that price controls on gasoline cause lines to form. When I asked him why he thought otherwise, he patiently explained to me that Professor X (a noted game theorist) had taught the graduate students that "anything can happen."  (He said it proudly, as if it were the highest virtue of a theory.)

That's true, I replied, anything can happen.  It's possible that at the exact same time price controls are imposed, demand could collapse for other reasons or supply could shift out wildly due to some new technology.  But I think those changes are unlikely.  Or maybe some side component of the legislation would rule out lines.  But in the absence of those changes, lines would form.  I was willing to bet large sums of money that binding price controls like those we had in the past with gasoline would again result in drivers waiting in line.

The market/competition approach to price controls is, of course, wildly "unrealistic."  But I would argue it does a better job of helping you organize your thinking in a lot of situations where people often use game theory.

The Mistake

In an earlier post, I asked readers of Cafe Hayek to identify the mistaken economic reasoning in one of the people quoted in an AP story on how air travel is hurting the environment.

I received many interesting and thoughtful responses.  Many people identified mistakes, but for me the most egregious, straightforward mistake was this sequence:

First, from the top of the article:

Air travel has boomed in recent years thanks largely to cheaper flights

Then the following quote from Environment Minister Elliot Morley:

"The evidence is that people will simply pay the tax and continue to travel and we won't actually stop the growth," Morley told British Broadcasting Corp. TV.

So the cause of the increase in air travel is a downward sloping demand curve, a phenomenon that Morley denies.  So Morley believes that people will keep traveling no matter how large the tax—a vertical demand curve.

British reader Trevor Sayers notes this quote farther down:

Environmental pressure group Friends of the Earth, however, said it favored an aviation fuel tax.

"The Department of Transport's own models on aviation growth show dramatic reductions in air travel when assumptions are added for fuel taxes and other factors," the group's director Tony Juniper said in a statement.

Sayers notes:

Marvelous! Here we have the minister demonstrating in a nutshell that lack of competence is no bar to promotion in the modern Labour party, why it is that under their stewardship High Street sales trends are at the weakest they've been for 22 years, that the Minister for the Environment doesn't talk to the Minister for Transport, and that the only things my government learned from the Boston Tea Party were to disarm the population and surveil them more closely.

Shame we can't have a stupidity trading scheme, so there is an absolute limit on the amount of such emissions from the political sector!

(The links are his.)

Congrats as well to Joe Orzechowski for identifying the same error.

And thanks to the many readers who identified other errors of reasoning or judgment particularly in the lovely quote from Friends of the Earth which should actually be called either Enemies of Humanity or Friends of the Earth but Not My Friends or Friends of the Earth But Not the Friend of Me:

"Aviation is a rogue sector and its environmental impact is out of control. Climate change is the most urgent challenge facing humanity and yet aviation policy is doing the opposite of what is needed."

Useful Micro

Jason Briggeman  at Productivity Shock disagrees with my claim that the economic way of thinking isn't terribly useful:

Did he really mean to say that understanding economics isn't a particularly useful investment of time and energy for most people, or did he mean macroeconomics?  I agree wholeheartedly if it's the latter -- and all of the examples he uses are macroeconomic, so maybe that is what he meant.

All of us can benefit immensely from solid microeconomic thinking as we "go about our lives, trying to do our jobs".  Two simple examples:

• To understand that each of the persons we meet is an individual who is out to choose from among the set of alternatives he/she faces that alternative which best suits his/her values, is a profound economic insight that can help us in our relationships with our bosses, coworkers, family members, girlfriends, etc. 
• To correctly understand the concept of opportunity cost is to avoid not just the broken-window fallacy of macroeconomics, but also the sunk-cost fallacy, which is absolutely vital to consistently making good decisions in everyday life.

Opportunity cost, consumer sovereignty, sunk costs are sunk and comparative advantage are all very useful.  Most of us, not all, learn these lessons from experience.  These lessons are intuitive.  (I know, comparative advantage is not intuitive, but its application to everyday life is fairly well-understood by most people—sometimes it's better to hire someone to do something than to do it yourself.)  These insights are the source of the common complaint among some economics students that "economics is just common sense."  The complaint is correct.  Most of the underlying principles are common sense.  Not everyone has common sense.  Some struggle to learn its lessons.  But studying economics is not the main way that people live their lives using these principles.

It is the application of these principles, what I called "the economic way of thinking" that is not common sense.  The idea that things exist in the world that are the product of human action but not human design is highly unintuitive to most people.  My claim is that understanding these phenomena, which is economics main gift to human understanding, makes you a more civilized person and a better voter which is lovely but has little direct, tangible personal benefit other than the satisfaction of understanding how the world works. (Incidentally, I call this micro, not macro.  I invite my co-host, Don Boudreaux to post on this distinction.)

Finally, a paraphrase of a quote I heard from Milton Friedman or that I heard attributed to him.  "Economics is easy.  All you have to remember is that people act in their own self-interest and demand slopes downward.  It's applying these insights that's hard."

Definitions

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."  F. A. Hayek in The Fatal Conceit p. 76

"Economics is the study of how to be happy."  GMU student Jen Smith, quoting an unknown economist.  Does anyone out there know who said this first or even second?

"Economics is the study of sex, death and why the lines are longest at the roller coaster." Stephen Karlson at Cold Springs Shops.

Economic Literacy

William Polley and I discuss economic literacy and economic education over at the WSJ's Econoblog.  (This link should be permanently available to non-subscribers.)  Here is a nice excerpt from one of Bill's posts discussing Adam Smith:

"The Wealth of Nations" is a treatise on man's interaction with his fellow man in the marketplace. That is, it's a study of prudence. Today, it ends up being taught as constrained maximization, and in the rush to cover all of the techniques, essential insights can be lost if you're not careful. A thorough examination of the virtue of prudence as Adam Smith perceived it would be time well spent, and it's a nice complement to the idea of constrained maximization for those who are technically inclined.

"The Theory of Moral Sentiments," on the other hand, is a treatise on temperance. It is a study of propriety, sympathy, and justice. Sadly, many people don't even know the book exists or that it was written by the man who is sometimes called the "father of capitalism." Ignorance of Smith's other major work leads people to think that economics is only about greed, self-interest, and rational maximization. As a result, many intelligent people who would be quite capable of becoming economically literate are turned off to economics because they see it as promoting a "greed is good" mentality that doesn't square with their world view. Unfortunately, this perception is so well embedded in the pop culture view of economics and economists that it may be very difficult to reverse.

Is the Finanicial Burden of College Rising?

Here’s evidence against the popular belief that a college education in the U.S. is increasingly out of the financial reach of ordinary Americans.

Emoting With Big Banners

Here's further evidence that government schools are to learning what war is to truth: in Florida, politicians are doing their level best to cram patriotic fervor into kiddies' hearts.  Here's the story.

Thanks to Brad Hobbs for the pointer.

School, State, and Choice

Jeff Jacoby – the great voice of reason at the Boston Globe – calls for separating school and state.

Jacoby rightly understands that for the government to be formally in the business of providing something, that particular ‘something’ is not necessarily – or, perhaps, even likely – to be provided well. This insight holds even when, as in the case of elementary and secondary education, government makes the purchase and consumption of that ‘something’ mandatory.

He understands also that removing government from the business of providing 'something' emphatically does not mean preventing that 'something' from being provided.

Here’s part of Jacoby’s truly excellent column:

Imagine how diverse and lively American education would be if it were liberated from government control. There would be schools of every description -- just as there are restaurants, websites, and clothing styles of every description. Parents who wanted their children to be taught Darwinian evolution unsullied by leaps of faith about an Intelligent Designer would be able to choose schools in which religious notions would play no role. Those who wanted their children to see God's hand in the miraculous tapestry of life all around them would send them to schools in which faith played a prominent role.

Who can argue with this?

Ah, just as my fingers typed the previous sentence I recalled Stacy Schiff sneering in the New York Times at all the choices that today’s Americans suffer – I recalled the letters-to-the-editor, in yesterday’s edition of the Gray Lady, from readers figuratively shaking their heads in vigorous agreement that Americans are cursed with too damn much choice – and I recalled Swarthmore psychologist Barry Schwartz’s recent, attention-getting