Cafe Hayek

Nye on wine (and war and taxes)

The latest EconTalk is John Nye talking about his book, War, Wine, and Taxes. John has many interesting insights into the political economy of trade, the history of trade policy, and why Ricardo's canonical example of comparative advantage is particularly weird.

Bernstein on trade

This week's EconTalk is William Bernstein talking about the history of trade. Learn how the first Jews got to Manhattan, why Christopher Columbus was really lucky and the political economy of the Corn Laws. The conversation ends with the modern political economy of trade.

The Least Attractive Jobs

The latest EconTalk is a monologue by me on the following question: does our standard of living require people at the bottom to do the lousy jobs that we don't want to do? This question was posed to me by a news correspondent for a national network. He assumed it was true. That is, he assumed that to keep people comfortable at the top of the income distribution requires an underclass. Implicit in this argument is the idea that our standard of living is a zero-sum game. In the podcast I discuss why this isn't true--why our standard of living isn't a zero-sum game and how the jobs at the bottom of the economy have evolved over time.

Globalization Podcasts

In these two Cato Institute Daily Podcasts, I discuss globalization with Cato's Caleb Brown.  The first is here; the second is here.  Both are quite brief.

Coyle on the soulful science

Diane Coyle talks about her book, The Soulful Science, in the latest episode of EconTalk. It's a very nice overview of the state of economic research today. And while I think she is overly confident about what we know and don't know, her book is a very thoughtful introduction to what is going on in the field. Our conversation focuses on growth, the measurement of happiness, and the interaction of economics with the other social sciences.

Iraq and Germany

As the aftermath of the Iraq war continues to be chaotic, there is a tendency to hope that this is just a passing phase and that time and action, such as the surge, will lead to better outcomes in the future. This article by David Stafford in the Washington Post, looks at the parallels between post-war Iraq and post-World War II Germany. In both cases, there was looting, anarchy, and disappointment at the pace of progress. There was also a political struggle over how to deal with those who had been involved in an evil government before the war.

But as Chris Coyne points out in this week's EconTalk (and as Stafford mentions briefly in his article), there are crucial differences between Germany and Iraq. And between Iraq and Japan, the other successful result of US attempts to export democracy after war. Coyne also examines numerous other failures of US efforts to export democracy--Cuba, Somalia, and Haiti, just to name three, that failed miserably because the basic institutional infrastructure for democracy could not be created from scratch.

Coyne argues that most interventions hoping to create democracy don't just fail, they make things worse. He argues for non-intervention and free trade as the best hope of helping people living under miserable conditions.

McCloskey on capitalism and the virtues

The latest EconTalk is a conversation with Deirdre McCloskey on capitalism, community, the virtues, agricultural romance, religion and a few other topics along the way. The sound quality is mediocre, but I hope you find the content worthwhile. She has a lot of interesting insights into many many topics.

Cowen on money

The latest EconTalk is a conversation with Tyler Cowen on money. We talk about how the Fed works, private money, the gold standard and assorted other topics related to money.

Markets and Community

The latest EconTalk is Stephen Marglin talking about his new book, The Dismal Science: How Thinking Like an Economist Undermines Community. He and I have a very different view of how markets change the world but interestingly, we both have a deep respect for Hayek's insights into knowledge.

Sowell on EconTalk

The latest EconTalk features Thomas Sowell talking about his new book, Economic Facts and Fallacies. Next week, Vernon Smith talking about Rationality in Economics which will be a conversation about constructed order and emergent order.

Vermeer's Hat

The latest EconTalk is a conversation with Timothy Brook, author of Vermeer's Hat, a lovely book that looks at the  dawn of globalization in the 17th century by examining Vermeer's paintings and other bits of Dutch culture. We talk about the beaver trade (that supplies the fur that becomes the felt that becomes the hat of a wooing officer in a Vermeer painting) and  porcelain from China (that holds fruit in the foreground of another). We also discuss how different attitudes toward the foreign and the novel affect the evolution of a nation's prosperity.

The Realist

The latest EconTalk is here—William Easterly talking about the ideas in his two books, The Elusive Quest for Growth and The White Man's Burden. He is remarkably unenthusiastic about the ability of the West to help the rest of the world in any grand way. Small steps, yes. Big overhauls are impossible. Growth must come from the bottom up and must be woven into the culture of the country. It must emerge. A great contrast with the optimism of Paul Collier.

The People's Romance

The latest EconTalk is a conversation with my colleague Dan Klein on the economics of coordination—how markets connect people around the world doing various parts of a task that get combined into a finished product without any of the people contributing the task necessarily knowing that they're working together. Along the way, we talk about what Dan, calls The People's Romance, the idea that the highest human activity is a government project of some kind that "we" work on together. Dan argues that such an urge to is widespread and that it degrades our culture. I argue it's dangerous. Enjoy. Next week is William Easterly.

The Bottom Billion

The latest EconTalk is a conversation with Paul Collier about the ideas in his book, The Bottom Billion. I think he is overly optimistic about military intervention and the productivity of voluntary standards in helping people in desperately poor countries. But his discussion of conflict is very interesting. I never realized how common rebellion and violence is in poor countries. Reading about it got me thinking about the incentives that conflict creates and the incentives that produce conflict. I also never thought about the challenges of land-locked countries, a phenomenon that Collier highlights. William Easterly is scheduled to appear on EconTalk in two weeks. He'll provide a different perspective.

The Hand of the State and the Virtual State

Fans of Edward Castronova and virtual words will find this of interest. Second Life is protecting its players/customers/citizens from bad financial decisions. Art imitating life or something more fundamental?

Winners and losers from trade

This week's podcast is with Don Boudreaux, my co-host here at the Cafe and the author of Globalization, a superb primer on trade policy and the phenomenon of globalization.

Don argues in the book and in the podcast that to point to an American steel worker put out of work by imports of Brazilian steel and say that he is "harmed by trade" is to misunderstand the nature of trade and its winners and losers. He says it's like saying that a man whose wife leaves him for another man is harmed by love. After all, the man married because of love. The man is the product of his parents who were touched by love. So it is with the steel worker. His steel job exists because of trade. His whole life is supported by trade of various kinds. So in what sense is he "harmed by trade?"

It's a profound point. It forces you to see just how trade and specialization and the division of labor create the incredible lives we lead, lives of wealth and health unimagined by previous generations.

But having said that, I think there is something else to add, something about the way our self-worth and pride and satisfaction are tied up in our work. An out-of-work steel worker still has a very good life compared to generations past and the success of his life up until the loss of his job is indeed due to trade (and sometimes to the protectionism that worker would like to see made stronger). But there's no denying that it's very tough on a person who has invested most of his life in a particular skill to suddenly find that there's no demand for that skill. Yes, it's the price of progress and it's a price worth paying. Yes, it's not particular to foreign trade, as Don points out, but is the result of all kinds of economic change. But there is something deeply poignant about it, nevertheless.

It is a mistake to use protectionism to keep that worker from having to deal with change. But that doesn't change the potential sadness of the situation. I've argued that the real consolation for that worker who loses his job and struggles to find another that is as satisfying is knowing (if he knows any economics) that his children and grandchildren will lead better lives because we tolerate economic change.

If computer-based learning caused George Mason and other universities to shut down, it would be a good thing. (Remember, I'm assuming in this story that students choose computer-based learning over brick and mortar education.) I would applaud it and I'm sure Don would too. But many great teachers would have trouble finding jobs that paid as well or that led to as satisfying a life on the job. Younger teachers would find an easier time adjusting and finding new opportunities. And some of those opportunities would come into existence because of the resources saved by shutting down universities. But that wouldn't change the sadness of the out-of-work teachers who find themselves unable to use the skills that they have proudly honed.

As Don points out eloquently in the podcast, most of us willingly embrace and accept economic change even though we know that it sometimes has disparate effects on us. There is always a temptation to ask for an exemption from the costs while enjoying the benefits.

So I agree with Don that it's wrong to say that trade creates winners and losers. We are all winners. But it's also true that the benefits from winning are not evenly distributed and that the political demand for exemptions from certain kinds of economic change isn't going away.

Ironically, the richer we become, the more specialization we have. The more specialized you are, the greater the risks (and rewards) from economic change.

The lesson, I think, is that education should give you a range of places to apply your specialized skills. It's better to learn how to program than to learn how to program in HTML. It's better to know how to write than to know how to write an article for a traditional newspaper. It's better to know how to communicate generally than to know how to write.

It is better to learn how to learn than just to learn something specific.

Munger on the firm

Here is the latest EconTalk, Mike Munger talking about the Coase and transaction costs and the nature of the firm.

About half way through, I raise the example of how hard it is for a department store to compete with the various stores in mall that carry similar merchandise. The shoe store has to live and die selling shoes. They have to cover their costs including rent or go out of business. The department store in the same mall has much less precise information on how its shoe department is doing. It has to impute a rent. It provides without charge the accounting and other services shared by all the sections within the store.

So how does a department store compete? How does the business model of a department store survive?

In the podcast, I promised to come back to this question. But I forgot to. I'll give my answer eventually, either in a future podcast or in the comments section to Munger. But in the meanwhile, feel free to listen to the podcast and leave an answer of your own in the comments to the Munger podcast.

Virtual Salami

Since interviewing Edward Castronova, I've continued thinking about how prominent these virtual playgrounds are going to be in our lives. Then I came across this NYT article on hitting the clubs on the virtual Lower East Side of New York:

It began as a typical night on the Lower East Side. A few weeks ago a crowd of young urbanites gathered in the bowels of Cake Shop, the pastry cafe cum music club on Ludlow Street, to see a performance by an indie-rock band, the Virgins. A couple of minutes into the show the subterranean space was already packed to capacity and smelling of stale beer, so I left.

I walked a few blocks to my apartment on Avenue A, turned on my computer, directed a small, pixelated representation of myself to enter a small, pixelated representation of Cake Shop, and rejoined the show. There were no imperious bouncers or foul odors to contend with, and no fluids of any kind expectorated on my shoes. Except for a slightly choppy video feed, it was by my standards a pretty successful evening on the town.

Despite knowing that its real-life inspiration exists right outside my door, I have spent the last few months making such visits to the Virtual Lower East Side (vles.com), a three-dimensional, Internet-based social network fastidiously modeled on a small but influential swath of Manhattan real estate.

The article includes this nice shot of a virtual Katz's Delicatessen. You can just see the salamis hanging in the window if you look carefully:

Exodus to the virtual world

The latest EconTalk is Edward Castronova talking about his new book, Exodus to the Virtual World. He argues that people will increasingly spend time living in the virtual world, playing these large-scale multiplayer real-time games such as World of Warcraft and Second Life. Very interesting. He then explores the implications for the "real" economy. I was skeptic at first, but I think he is on to something that most of us who don't play these games are missing.

The book is superb, full of interesting observations about this world and the virtual one.

Property rights in Africa

The latest episode of EconTalk is Karol Boudreaux talking about the effects of letting people own things--giving coffee bean growers in Rwanda more freedom to do what they want with their beans and letting people in South Africa own their own houses. Karol does a superb job laying out the background and the reforms along what what they achieved and failed to achieve.

Intro to the wonderful world of Austrian economics

The latest EconTalk features Pete Boettke talking about what makes Austrian economics both different and useful.

Fair trade and free trade

Here's the latest EconTalk: Mike Munger and I talk about fair trade coffee and free-trade agreements.

Coming next week, Pete Boettke on Austrian Economics.

Nature

The latest episode of EconTalk is a conversation with Daniel Botkin. He has a lot of interesting things to say about how humans view nature and how our metaphors color our policy preferences.

Worst case scenarios

The latest EconTalk is a conversation with Cass Sunstein about his new book, Worst Case Scenarios. The main focus is how hard it is for humans to deal rationally with low probability catastrophic events. When one of these occurs, such as 9-11, we tend to overestimate the risks of another disaster.

Here is a smaller tragedy that I brought up in the conversation. Last summer, a first-base coach in the minor leagues was killed by a line drive. A terrible tragedy. As far as I know, no major league coach has ever been killed by a batted ball. And this may have been the first minor league coach killed by a batted ball. It's a terrible tragedy. But something has to be done, even though the odds are miniscule that such an event will happen again:

Baseball wants to prevent another tragic accident like the one that killed Mike Coolbaugh.

   General managers decided Thursday that first- and third-base coaches will wear some sort of head protection next season, a move that came four months after Coolbaugh was struck in the neck by a line drive during a minor league game.

   Coolbaugh, a former major league player, was a coach for the Colorado Rockies' Double-A team in Tulsa when he died July 22. He had been hit by a liner as he stood in the first-base coach's box during a Texas League game at Arkansas.

   Some major league coaches responded by wearing helmets the rest of the season.

   "There was a sentiment that as a concept this was a good idea," said Joe Garagiola Jr., senior vice president for baseball operations in the commissioner's office.

   GMs will decide on the exact form of protection when they meet next month at the winter meetings.

   "We're going to come back in Nashville with some options: liners, hard caps, helmets without flaps, helmets with flaps," Garagiola said.

It may indeed to be a good idea for coaches to wear helmets. But it may be a bad idea. My guess is that it may cause some coaches to be less vigilant, knowing that they're wearing a helmet. But whether it is a good idea or not, what is more interesting is that something is going to be done to try and prevent something from happening that is unbelievably unlikely.

Don on antitrust

Here's a video (sort of) of Don discussing antitrust at EconTalk. Let me know if you like this.

Bonus podcast on health care costs

Here's a midweek bonus podcast on the issue of health care costs that came up recently at EconTalk and here at Cafe Hayek. It's an interview with Henry Aaron of the Brookings Institutions about the challenges of measuring administrative costs and how much they might fall if we had government-funded health care.

Market tyranny?

For Joel Waldfogel, the glass always seems to be half-empty. In the latest episode of EconTalk, I suggest it's half full. He argues that fixed costs reduce choices and can cause you to be punished by people with preferences that are different from yours. I argue that most of the time, other people's preferences are irrelevant and that when they're not, the market finds alternative ways to make us happy.

Bhagwati on Trade

I regret that I was unable to attend this Cato Institute event featuring the great trade economist Jagdish Bhagwati.  But I -- and you -- can listen to the event here.

Romer transcript

An edited transcript of my podcast with Paul Romer is now up at the Library of Economics and Liberty. Paul has a lot of fascinating things to say. Check it out. One of my favorite parts is where he explains the benefits of multinationals in poor countries:

Russ Roberts: What's the mechanism?  Does Nike improve the life of that worker out of kindness or does competition force them to? 

Paul Romer: Oh, I think it's overwhelmingly competition. There's sometimes a little bit of pressure which makes them do what is basically charitable giving. But look at China right now or India right now. Why are foreign firms that are operating in China and India or Vietnam—why are they paying workers more than they used to?

What happened was that it wasn't just Nike that came in. The government let in a lot of other firms. All of those firms started to compete for the best talent there in the nation, and that process of competition started to drive up wages. You don't want to use the Indian strategy of saying, "Okay, we'll let in one big firm and then we're pulling up the drawbridges and, you know, you can do whatever you want." What you want to do is open it up and say, "Hey, any firm that wants to come in, go for it. Compete as hard as you can to get our best workers."

And that'll reward the workers who have the best skills. It'll give incentives for those other workers to acquire skills and it'll give them opportunities to do things with their skills that they couldn't have otherwise done.

Russ Roberts: In what sense are those workers using the knowledge that that multinational has?  I love that idea. What do you mean exactly? 

Paul Romer: Nike's discovered a recipe for taking rubber and cloth and a few other things and then creating something that people value in the United States for a price of, say, $100. They can take raw materials worth probably pennies and create something that I might go to the store and pay $100 for.

To create that additional value, they have to go out and find somebody who does the rearranging according to their recipe. If they could get somebody at an extremely low wage to do that rearranging, then they'd pay that low wage. But over time what they find is they're competing with other employers. They have to pay higher and higher wages to get people to do that rearranging.

Now if there are lots of people like Nike trying to find workers to do high-value rearranging tasks, they'll be willing to pay quite a bit as they compete with each other. But imagine that Nike only had ideas that could produce things that were worth, say, $10. Nike could never afford to pay—and its competitors could never afford to pay—very high wages to get people to rearrange something to make something worth $10.

But when they're making something that's worth $100, they'll compete and ultimately start to pay higher and higher wages. So the fact that they've got an idea, a recipe, that can create quite a bit of value means that they'll pay quite a bit to have somebody follow that recipe.

There's lots of people out there with good recipes competing for workers. They'll bid up those wages and, in a sense, part of the value that Nike creates will in some sense be taken away by those workers, and taken in a way that we feel is good for the world as a whole. It's good that workers throughout the world will have higher wages in the future than they have now.

The big impact of pharmaceutical industry profits

Proponents of a single-payer system in health care argue that it would save costs because of lower industry profits and lower administrative costs. Arnold Kling argues that the impact would be minimal. Is he right?

According to Public Citizen, a source not particularly friendly to corporate interests, pharmaceutical industry profits in 2002 (the year I happened to stumble on) were 36 billion. If all pharmaceutical companies were forced to serve the public at zero profit, that would lower US health care expenditures from 1.3 trillion to 1.3 trillion.

That's a pretty small change

I'll carry it out to a few more decimal places. In 2002, total health care expenditurea in the US were $1.342 trillion. So taking out ALL pharmaceutical profits lowers that number to 1.306 trillion. I don't think there's any way you can argue that the profitability of the pharmaceutical industry is a large factor in the size of US health care costs or that moving to a system where government could exploit its power as a large buyer of drugs would lower total expenditures.

Does anyone have data on administrative costs in the current system?

EconTalk reminder

EconTalk has been nominated for best podcast as part of the 2007 Weblog Awards. It's a popularity contest. You're allowed to vote once every 24 hours through this Friday. So you can vote at least five times. (You can actually vote more than that from different machines.) Right now, EconTalk is falling steadily behind because another of the nominated podcasts released on Sunday has presumably told its listeners to vote. I taped this week's EconTalk before the announcement, so most of our listeners don't know to vote. So again, go here and vote early and often. Thanks.

Growth in health care expenditures

This week's EconTalk is with Arnold Kling talking about health care. it's a very nice introduction  to the incentives affecting our health care decisions both privately and publicly. One issue that came up is the change in the proportion of health care costs paid out of pocket vs. third party payments. Here are some data, taken from an HHS publication, "Health, United States, 2005":

In 1960, 55 cents of every dollar of health care was out-of-pocket. In 2003, it was down to 16 cents.

Vote for EconTalk

EconTalk has been nominated for best podcast in the 2007 Weblog Awards. You may vote once every 24 hours until Friday, November 8th. We were nominated last year as well and finished second. If you're a fan, please show your support, vote early and often, and help spread the word about EconTalk.

Tragedy of the commons

Here is Bruce Yandle talking about the tragedy of the commons and the evolution of regulation of the environment. Particularly interesting is the role that common law played in preventing environmental damage. Most people seem to think that before 1970 you could dump garbage into the air and water. Not so. as Bruce points out, judicial decisions at the state level played a crucial role in improving the environment before the federal regulation of the 1970s. This is a wonderful introduction to the economics of the environment.

Bruce BDM is Good

EconTalk listeners and others will enjoy this profile of Bruce Bueno de Mesquita. It mentions a very clever idea to promote peaceful coexistence between the Israelis and the Palestinians (HT: Alex at MR):

Recently, he’s applied his science to come up with some novel ideas on how to resolve the Israeli-Palestinian conflict. “In my view, it is a mistake to look for strategies that build mutual trust because it ain’t going to happen. Neither side has any reason to trust the other, for good reason,” he says. “Land for peace is an inherently flawed concept because it has a fundamental commitment problem. If I give you land on your promise of peace in the future, after you have the land, as the Israelis well know, it is very costly to take it back if you renege. You have an incentive to say, ‘You made a good step, it’s a gesture in the right direction, but I thought you were giving me more than this. I can’t give you peace just for this, it’s not enough.’ Conversely, if we have peace for land—you disarm, put down your weapons, and get rid of the threats to me and I will then give you the land—the reverse is true: I have no commitment to follow through. Once you’ve laid down your weapons, you have no threat.”

Bueno de Mesquita’s answer to this dilemma, which he discussed with the former Israeli prime minister and recently elected Labor leader Ehud Barak, is a formula that guarantees mutual incentives to cooperate. “In a peaceful world, what do the Palestinians anticipate will be their main source of economic viability? Tourism. This is what their own documents say. And, of course, the Israelis make a lot of money from tourism, and that revenue is very easy to track. As a starting point requiring no trust, no mutual cooperation, I would suggest that all tourist revenue be [divided by] a fixed formula based on the current population of the region, which is roughly 40 percent Palestinian, 60 percent Israeli. The money would go automatically to each side. Now, when there is violence, tourists don’t come. So the tourist revenue is automatically responsive to the level of violence on either side for both sides. You have an accounting firm that both sides agree to, you let the U.N. do it, whatever. It’s completely self-enforcing, it requires no cooperation except the initial agreement by the Israelis that they are going to turn this part of the revenue over, on a fixed formula based on population, to some international agency, and that’s that.”

Other than the word "whatever," which suggests that measuring and monitoring would be a piece of cake, there is a lot of wisdom here.

Fooling ourselves

At the University of Chicago, where I went to graduate school, a quote from Lord Kelvin, was carved in stone at the Social Sciences Research Building: When you cannot measure...your knowledge is meager and unsatisfactory. We graduate students took in this credo like mother’s milk. I came out of Chicago with a tremendous confidence in the power of economics and the ability to quantify that power.

But over the years, I have become increasingly skeptical of the power of statistical techniques to measure causation in complex systems. Edward Leamer’s indictment of modern econometrics, “Let’s take the ‘con’ out of econometrics” is the best known critique of our habits as empirical economists but it has not been taken to heart by the profession.

My thoughts on this issue came to a head with my recent podcast with Ian Ayres on his new book SuperCrunchers. The book is about the power of statistics to improve decision-making. And of course, facts and numbers are crucial for making wise decisions. And there are many examples where statistical analysis helps us in our private and political lives to overcome irrational prejudice or bad ideas. 

But in the course of preparing for the interview, I realized in a way I hadn’t before, that how we feel about the reliability of statistical results lines up incredibly neatly with our political and ideological biases. One example I use in the podcast is the debate over whether allowing citizens to carry concealed handguns deters crime. John Lott and others say yes and trot out the analysis that proves they're right. Their opponents trot out a different analysis and prove the advocates for concealed carry are wrong.

Now I happen to believe that concealed handguns do deter crime and allowing concealed handguns is a good thing. And you can claim that the evidence that shows I'm right is "good" statistical analysis. The other side disagrees. They claim it's "bad" statistical analysis. Who's right? I have no idea. But what's clear to me is that my belief in the virtues of allowing concealed hand guns has little to do with the empirical evidence. And I would argue that the opponents are really in the same boat. They just don't like guns and they've dressed up their prejudices in fancy statistical analysis.

I came to this realization because Ayres thinks LoJack deters car theft. LoJack is a hidden device you put in your car that lets the police trace your car.  Ayres and Steve Levitt found that LoJack has an incredible deterrent effect on car theft. But they think John Lott's work on concealed hand guns is irrevocably flawed. But LoJack is the same thing as a concealed handgun. Ayres and Levitt should like Lott's work and Lott should like Ayres and Levitt. But Lott doesn't like Ayres and Levitt and the feeling is mutual.

It's obvious why neither respects the other. It's not the quality of the empirical evidence. It's just bias. Ayres and Levitt don't like guns and Lott doesn't like the idea that insurance companies (and criminals) could ignore the impact of LoJack if it's really so big. Ayres and Levitt see LoJack as an example of market failure and Lott thinks market failure in this case requires too much ignorance.

The nature of the analysis is such that neither side can convince the other that "their" analysis is reliable. That's not always true. As I suggest in the podcast, Milton Friedman was able to convince the skeptics that inflation is everywhere and always a monetary phenomenon. Friedman won the debate. But how many other studies can you think of where someone staked out a controversial position and convinced the skeptics based on empirical analysis? I think it can be done, but it's rare. And in today's world, most of the interesting empirical claims are being made in cases where  the data are too incomplete and the issue is so complex that we can't move to a consensus. The empirical work doesn't improve our understanding of what's going on. It masks what's going on. It gives a patina of science when in effect the numbers aren't really informing the debate.

In the case of crime, to  isolate the effect of LoJack or concealed hand guns, you have to control for any other causes of crime and control for the simultaneity problem that causation could be running the other way. I'm not sure that can be done. My other favorite example of this is WalMart. There are economists out there who claim that WalMart lowers wages when it comes to a town, even a big town, such as Los Angeles. I don't find this argument believable. But the proponents of such arguments claim to just be using the numbers to tell them what's going on rather than relying on their prejudices as I am. But the numbers can't be crunched sufficiently well to come to a conclusion on WalMart. To do that, you have to control for a bunch of factors that can't be controlled for in real-world data situations.

And that's why there are studies on the other side showing how great WalMart is for a town. But are we moving toward a consensus about the impact of WalMart? Do the analyses improve our understanding? I don't think so. And that's because of the way modern econometrics is done. Regression is cheap so we buy a lot of it. Leamer's point is that this is "faith-based" empirical work. You just keep running the regressions including or excluding this or that, trying this or that specification until you find the result that confirms your worldview before you started the work.

The pragmatists (Peirce and James) and Hayek understood the dangers of rationality and what is essentially fake science. I'll write more on this another time and maybe do a podcast just on this issue.

I've closed comments here. If you want to comment, please listen to the Ayres podcast at EconTalk and let's talk over there in the comments section to the Ayres podcast.

Frank Talk

In the latest EconTalk, I talk with Robert Frank about the virtues of learning economics via puzzles and stories rather than graphs and equations. I am a big fan of graphs but I'm a bigger fan of puzzles and storytelling and I believe that Frank is absolutely right that puzzling over puzzles and telling and listening to stories is a crucial way that many people learn and remember. We discuss a number of interesting puzzles from his new book, The Economic Naturalist including why people in New York might appear ruder than people in Topeka and why brides buy their dress and grooms often rent their tux even though brides usually never wear their dress again and grooms wear tuxes later on.

We spend a little time on the issue of whether people get pleasure from owning a big house or whether they only get pleasure when their house is bigger than their neighbors' houses. Frank sees the growing size of houses as an example of an arms race where the competition to have a bigger house is wasteful—yes, at first when you build a bigger house, you're better off. But when your neighbor builds a bigger house that matches yours, you're back to where you started. I see larger houses as an example of people living better with more living space. When I pressed him during the podcast on this issue, he answered by saying that both factors are relevant—it's an empirical question as to the magnitudes of the two effects.

In this editorial in the New York Times which I saw just after the interview was taped (HT: Rick Koch), Frank makes his case more forcefully and argues that the arms race for bigger houses justifies a steeply progressive consumption tax:

Consider a family that spends $10 million a year and is deciding whether to add a $2 million wing to its mansion. If the top marginal tax rate on consumption were 100 percent, the project would cost $4 million. The additional tax payment would reduce the federal deficit by $2 million. Alternatively, the family could scale back, building only a $1 million addition. Then it would pay $1 million in additional tax and could deposit $2 million in savings. The federal deficit would fall by $1 million, and the additional savings would stimulate investment, promoting growth. Either way, the nation would come out ahead with no real sacrifice required of the wealthy family, because when all build larger houses, the result is merely to redefine what constitutes acceptable housing. With a consumption tax in place, most neighbors would also scale back the new wings on their mansions.

I disagree with the premise that there is "no real sacrifice involved." I think people enjoy the larger house. By discouraging them from building the larger house, the tax reduces the happiness of  homeowners. But my real disagreement is with the claim that the additional savings would stimulate investment. Frank is assuming that everyone will work equally hard in a world where consumption is taxed at very high rates. I doubt it.

Frank goes on to argue for another benefit of high tax rates on consumption:

A progressive consumption tax would also reduce the growing financial pressures confronting middle-class families. Top earners, having received not only the greatest income gains over the last three decades but also substantial tax cuts, have been building larger houses simply because they have more money. Those houses have shifted the frame of reference for people with slightly lower incomes, leading them to build larger as well. The resulting expenditure cascade has affected families at all income levels.

The median new house in the United States, for example, now has over 2,300 square feet, over 40 percent more than in 1979, even though real median family earnings have risen little since then. The problem is not that middle-income families are trying to “keep up with the Gateses.” Rather, these families feel pressure to spend beyond what they can comfortably afford because more expensive neighborhoods tend to have better schools. A family that spends less than its peers on housing must thus send its children to lower-quality schools.

Now it turns out that 1979 was a very good year for family income, but even so, median family income rose 15% between 1979 and 2005 and rose almost 20% between 1980 and 2005. And the way the government measures income doesn't include fringe benefits which are an increasingly important part of compensation. And I don't think the price index that converts nominal into real dollars overstates inflation and understates the growth in real income. So I disagree with Frank that income is up only slightly. So when I see houses getting bigger, I see people spending a larger share of their income on something they care a lot about rather than people keeping up with the Gateses.

I think Frank is right about two things in his article on taxation. One, I think people do spend money on houses trying to get into better school districts and that bids up the price of houses artificially because houses are tied to schools. The way to fix that is to get rid of the connection between houses and schools. The second thing I agree with is that it's better to tax consumption rather than income. But I don't think steeply progressive rates are a good idea. I think they would have strong disincentive effects on productivity, creativity and innovation. I think part of the reason people work long hours and start new businesses and take second jobs is to have more stuff. Taxing the accumulation of stuff at very high rates reduces the incentive to work hard.

Some wisdom from Schumpeter

The latest EconTalk is a conversation with Thomas McCraw about the life and ideas of Schumpeter based on his recent bio of the man. The book is beautifully written and McCraw is very articulate. Schumpeter's dynamic view of competition is his single most important contribution to economics but because it is not easily formalised in mathematics, it has been ignored by most modern economists.

Here are three wonderful quotes from Schumpeter. The first is from Capitalism, Socialism, and Democracy. The last two are from his diary, quoted by McCraw.

There are no doubt some things available to the modern workman that Louis XIV himself would have been delighted to have—modern dentistry for instance. On the whole, however, a budget on that level had little that really mattered to gain from capitalist achievement. Even speed of traveling may be assumed to have been a minor consideration for so very dignified a gentleman. Electric lighting is no great boon to anyone who has enough money to buy a sufficient number of candles and to pay servants to attend them. It is the cheap cloth, the cheap cotton and rayon fabric, boots, motorcars and so on that are the typical achievements of capitalist production, and not as rule improvements that would mean much to the rich man.  Queen Elizabeth owned silk stockings. The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within reach of factory girls in return for steadily decreasing amounts of effort.

Humanity does not care for freedom. The mass of the people realize they are not up to it: what they want is being fed, led, amused, and above everything, drilled. But they do care for the phrase.

Politicians are like bad horsemen who are so preoccupied with keeping in the saddle that they can't bother about where they go.

Robber Barons

Here is the latest EconTalk—Don Boudreaux makes the case for getting rid of antitrust laws. It seems a hard case to make but Don points to evidence that the genesis of antitrust was not consumer protection and that large enterprises often bring lower prices rather than higher ones. He has much more to say. Check it out.

Meanwhile, I'm reading parts of Capitalism, Socialism, and Democracy as I prepare to interview Thomas McCraw for next week's podcast. He's the author of a recent bio of Schumpeter, Prophet of Innovation. Here is Schumpeter on the claim that the monopoly power of large enterprises at the end of the 19th century must have exploited consumers:

If we list the items that enter the modern workman's budget and from 1899 on observe the course of their prices not in terms of money but in terms of the hours of labor that will buy them, i.e., each year's money prices divided by each year's hourly wage rates—we cannot fail to be struck by the rate of the advance which, considering the spectacular improvement in qualities, seems to have been greater and not smaller than it ever was before...As soon as we go into details and inquire into the individual items in which progress was most conspicuous, the trail leads not to the doors of those firms  that work under conditions of comparatively free competition but precisely to the doors of the large concerns...and a shocking suspicion dawns upon us that big business may have had more to do with creating that standard of living than with keeping it down.  (Capitalism, Socialism, and Democracy, Third Edition, pp. 81-82)

Why were the Robber Barons so generous? Why did the workmen of the day have a higher and higher standard of living? One answer is that the robber baron's feared regulation and a political backlash. Another is that they weren't robber barons after all, they were selfless people who wanted to help others. The third answer and it is the answer of Schumpeter, (and Don Boudreaux) is that the robber barons faced competition or at least potential competition. At a point in time, they had monopoly power. But rather than exploit it and invite competition, they chose to expand their profits via lower prices rather than higher ones.

A Grab Bag with Munger

In this podcast with Mike Munger, we talk about "getting the prices right" when choosing between recycling and throwing stuff away, whether it's a good idea to buy local for environmental reasons, peak oil, slow food, and steroids.

Schumpeter

I'm fifty pages into Prophet of Innovation, the bio of Schumpeter by Thomas McCraw, preparing for a podcast with McCraw. Enjoying it very much so far. McCraw claims that the marginalism insights of the Austrian School were a genuine intellectual revolution that paved the way for business to lower price in hopes of exploiting lower marginal costs due to economies of scale. Not sure it's true but it's an interesting claim. Looking forward to the discussion of the role of entrepreneurship. The interview is about two weeks away, so feel free to read the book in advance and send me any questions you might for McCraw. Here is McCloskey's thoughtful review (HT: Greg Mankiw).

Destruction and eminent domain

Lior Strahilevitz has an interesting comment on the recent Epstein podcast. I quote Strahilevitz in the Epstein podcast saying that when someone  buys a Frank Lloyd Wright house to destroy it, the state is justified in taking it from him to preserve its benefits for others. In the comment he says:

"The natural follow-up question, I think, is 'once you have conceded the appropriateness of taking land from someone who wants to destroy it (rendering it valueless) and transferring it to a preservationist who will use it to maintain aesthetic amenities worth $50, is there a logical constraint on transferring land from someone who is generating $50 from it to someone else who can generate $100 from it?' I think the answer is no, but I also think there are institutional considerations that Richard identifies that ought to make us skeptical about the state’s abilities in this regard, as opposed to the market’s.

Do you agree with the underlying logic? If you want to comment, head over to the comment section of the Epstein podcast at EconTalk and join the argument there. (And while you're there, feel free to listen to the podcast, too.)

The Mad Money Machine

Paul Boyer of the Mad Money Machine interviewed me for his podcast. We talk about EconTalk, parenting, my books and the future of information and media. Paul does a nice job on his show—I'm going to check out the rest of his podcasts which typically are about investing and shadowing Jim Cramer's stock picks. Paul's show is sponsored by Index Funds Advisors (IFA). This page of IFA has some nice graphics on the virtues of index funds. Don't miss the Lucky Manager cigarette pack.

Epstein on zoning and Kelo

The latest EconTalk is Richard Epstein talking about zoning and Kelo. He argues that zoning can be a "taking" that deserves compensation. He also has some interesting points on how zoning leads developers to pay more attention to politicians. Not the healthiest set of incentives.

Your inner economist

Tyler and I discuss your inner economist.