Friday, February 25, 2011
Thursday, February 24, 2011
Wednesday, February 23, 2011
"This paper, the outgrowth of discussions among a group of ecologists and economists, offers and analysis that we hope will go some way towards reconciling the conflicting intuitions. The binocular vision that can be obtained from using both ecological and economic insights raises questions that might not occur in either viewpoint alone."
The paper was easy to read and the combination of ecologists and economists proved fruitful. For example, in the reading I learned more about the levels of resource consumption and thoughts about the negative impacts of such consumption. But, also it was satisfying to see big ecological names listed as co-authors admitting there are trade-offs between environmental and non-environmental objectives. In fact, the notion of tradeoffs are central to the models they present: intergenerational social welfare functions.
The utility at any point in time is determined by the "productive base" which are three different capital assets. The authors write, "The capital assets include manufactured capital, human capital, and natural capital. The productive base also includes the knowledge base and society's institutions." From there the authors identify two criteria by which consumption might be judged to be excessive:
- The Maximize Present Value Criterion: Social welfare from consumption can be lower today; but, it must be offset by an equivalent amount of future utility. Tradeoffs can be made, but, they must be compensated for.
- The Sustainability Criterion: Social welfare must not decrease over time. There is no unique consumption path to adhere to this rule. Society makes tradeoffs on manufactured, natural, and human capital such that there is no decline in utility from Period 1 out to the end of time.
Then, the authors extend the model by asking the following two questions. First, what happens if there is a changing population? Second, what happens if there is technological change? By making some further assumptions in their theoretical model the authors then empirically make the case that Genuine Wealth is increasing for many of the wealthy nations, but, decreasing for poor nations.
Put another way, rich countries are consuming at sustainable levels; but, poor countries are consuming too much.
You might be thinking this quite odd. How can poor people be consuming too much!?! The creation of wealth is slower than the increase in population so mechanically there will be lower per capita genuine wealth. However, the authors cite three other reasons why poor countries A) Consume too much and B) Do not create more wealth.
- Insecure and poorly defined property rights - Where there are poorly defined property rights wealth is difficult to create. Imagine that you owned a store but you didn't know whether it would be taken from you by the government or some thug. Would you make investments that are necessary to increase wealth? Also, with natural resources when there are not clearly defined property rights there may be a tendency to overconsume. (Clearly this is not always the case)
- Failure of the market to incorporate negative externalities - If the market does not incorporate negative externalities such as various forms of pollution to water, earth, and air then there will be an over-production of pollution. Some pollution is necessary for the production of goods and services; however, these could be minimized if we were better able to account for the negative impact on natural capital.
- Government Subsidies - If rich countries are providing subsidies to agricultural industries (which are the bread and butter of many poor nations) then they are artificially lowering the price of home agriculture compared to overseas agriculture. This disadvantages those poor countries since they are competing on an uneven playing field.
There is a growing concern for our impact to the environment. This paper is an admirable attempt to discuss the tradeoffs between social and environmental concerns. The environmental questions are still difficult to answer because they face the same difficult question they always have: How do you value a non-market good? What does this mean for us as Christians? We are called to care for the Earth ---to be good stewards. In our personal lives of consumption we can certainly make alterations; but, for these larger questions: What ought we do? I would love some feedback.
I'm not normally an advocate of many policy prescriptions; however, agricultural subsides strike me as an important policy that should be repealed. These subsidies are the largest corporate welfare program out there, they disadvantage wealth creation in poor countries, and cause them to allocate resources in ways that are environmentally destructive.
Sunday, February 20, 2011
The Club of Rome, a group of scientists from a variety of fields which formed in 1968, commissioned "The Limits of Growth" from systems scientists at MIT (the book was published in 1972). On the Club of Rome website they discuss the impact of that publication, "The Report explored a number of scenarios and stressed the choices open to society to reconcile sustainable progress within environmental constraints. The international effects of this publication in the fields of politics, economics and science are best described as a 'Big Bang': over night, the Club of Rome had demonstrated the contradiction of unlimited and unrestrained growth in material consumption in a world of clearly finite resources and had brought the issue to the top of the global agenda." The report cited a number of scenarios some quite dismal.
These thoughts however continued to persist even when data could not support such claims of catastrophe. In 1980 economist Julian Simon was so convinced of the wrong-headedness of claims about resource scarcity and population growth that he wagered Paul Ehrlich. Ehrlich chose five metal resources: copper, chromium, nickel, tin, and tungsten that he believed would increase in price over the 1980s. Simon bet the prices of these commodities would all decrease. Simon won. The specifics of the bets and other subsequent bets are actually well documented on Wikipedia.
In 1992 Limits of Growth came out with a renewed model that took account of new demographic trends in families, ecological realities such as soil erosion, and several other factors. The authors write,
"If present growth trends in world population, industrialization, pollution, food production, and resource depletion continue unchanged, the limits to growth on this planet will be reached sometime within the next one hundred years. The most probable result will be a rather sudden and uncontrollable decline in both
population and industrial capacity"
More doom and gloom. If I make it to 2092 I will know whether or not their prediction came true. But, there does seem to be a bewildering persistence in the message: Despite lower death rates, floundering predictions, and lost bets Neo-Malthusians still maintain the need for population control. For example, in Beyond Malthus (2002) the authors write,
Saturday, February 19, 2011
Thomas Malthus was born to country gentry in 1766 and received an impeccable education throughout his youth winning many awards at the Jesus College at Cambridge until he graduated in 1788. He entered the Anglican Priesthood following graduation and famously penned An Essay on the Principle of Population in 1798. According to Landreth and Colander (History of Economic Thought 4th Ed.) the effects of population interested Malthus for three reasons: 1) In 1790 food prices in Britain were increasing, 2) There was growing concern over the movements toward urbanization, 3) Malthus believed that by demonstrating strain on resources through population increases he could reveal a flaw in arguments of utopian theorists (direct interventions wouldn't work because population growth would cause diffusion of public goods and larger labor supply). The publication was an immediate success and caught the attention of numerous intellectuals from a variety of fields. The premise of the Essay can be summarized in Malthus' own words:
I think I may fairly make two postulata. First, that food is necessary to the existence of man. Secondly, that the passion between the sexes is necessary, and will remain nearly in its present state. These two laws ever since we have had any knowledge of mankind, appear to have been ﬁxed laws of our nature . . . Assuming then, my postulata as granted, I say, that the power of population is indeﬁnitely greater than the power in the earth to produce subsistence for man. Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will show the immensity of the ﬁrst power in comparison to the second. (Malthus 1798/1986, 8–9)
The central point was that if his assumptions were correct population would outstrip food supply. By no means did he believe that his assumptions were iron clad. For example, he believed that if technology improved the food supply would also improve. Landreth and Colander absolve him of his assumption about technological improvement noting that no economists have developed a good model of when and how technological innovation might occur. Economic historian Ross Emmett notes that:
The assumption that Malthus discounted technology is based in part on the diﬀerence between the way he stated his population principle the way he discussed the means by which humans escape its consequences.
While the principle is stated with elegant, mathematical precision, the means of escaping its consequences are identiﬁed in “conditional” statements: “If” humans ﬁnd more arable land, or “if” they adopt new technologies, “then” food production can increase enough to feed the ever-increasing population. Conditional statements are weaker than positive statements such as “the power of population is indeﬁnitely greater than the power in the earth to produce subsistence for man” (Malthus 1798/1986, 9). But they have the same force if the author thinks the condition will be satisﬁed.
This misunderstanding led some people to grant economics the title of the "Dismal Science" TANGENT!: Although dismal science was talked about in reference to Malthus' ideas it was in fact coined earlier in a different context. Because economists believed that people of all races were productive and capable of trade, others who believed blacks to be inferior deemed economics the "dismal science"
Malthus however did not make such doomsday predictions, instead, he was cautiously optimistic. He believed that technology could change. Also, he placed his faith in social institutions such as marriage. He believed that if fathers incurred the cost of bearing children there would be less children overall. If fathers considered how much children cost and whether they could afford children with their present occupation they would delay marriage. He called this "prudential restraint".
He did not talk with much reference to the environment as many other Neo-Malthusians have discussed. We will talk about these views in Part II and the views of the Neo-Institutionalists.
Friday, February 18, 2011
Monday, February 14, 2011
Sunday, February 13, 2011
Saturday, February 12, 2011
Earlier this week I was saddened to hear of the passing of my friend and former colleague Edward Zajac who introduced to me the idea of The Political Economy of Fairness. One of the biggest errors that economists can transmit is that, because we study the market we perceive that market transactions are the dominant form of human cooperation. Of course, this is not the case. Two obvious counter-examples are things such as the family and voluntary associations. However much we debate the proper scope of government, I think that everyone can agree that some core government functions such as the armed forces are organized primarily in a non-market setting. But even in the "private" sphere the reality is that private, decentralized voluntary action is constantly redefining the boundary between the organization of productive activity as a market as opposed to the hierarchy. (The works of such luminaries as Alchian, Coase, and Williamson attest to this). The most important feature of a market economy is not that most economic activity is market-organized, but rather that it is market disciplined. (We should also add that even governments can disciplined in some ways by the market. A university has to compete in the market for labor for faculty, staff, and administrators and in the markets for inputs. Simply existing as a quasi-government entity could not, for example, insulate a university from the effects of a shortage of inputs caused by price controls. If a university decides that it is not going to pay Accounting faculty more than Economics faculty, it may find it difficult to fill its faculty positions in Accounting.)
Friday, February 11, 2011
Price Ceilings: Ok, this is old news; however, students tend to pay more attention to recent examples (rather than 1970s gas prices). Shortages caused by price ceilings are not fictional fairy tales or things of bygone eras. Ethiopia recently set price ceilings on a number of basic food items. The result? This article sounds the same as theory would predict.
Free Media: Currently Mark and I are writing an article about the LAPD and how William Parker reversed a culture of serious corruption. Corruption is a serious problem in developing economies. Media is one important missing link in helping citizens hold corrupt government officials accountable. Free African Media is a new media center that is helping to provide unbiased information to the continent. Here is their About Us page.
Tribalism: Moral psychologist Jonathan Haidt turns tribalism on its head in his plenary talk to the Society for Personality and Social Psychology. How much are conservatives discriminated against in academia?
Thursday, February 10, 2011
Doug has been leading the Moral Sentiments Readings Group through a new biography of Adam Smith. In Thursday’s reading, we saw the philosophical landscape of Smith’s development in the midst of predecessors such as Hutcheson, Hume, and Mandeville.
I had heard of Mandeville primarily through people in the Austrian Economics arena, but Keynes writes as a strong fan of Mandeville in the General Theory because Mandeville anticipated the paradox of thrift. Keynes seems to take great pleasure in Mandeville’s skewering of the Calvinist virtue of thrift. (So, I guess that means that Hayek and Keynes can together do a big love rap for Bernard Mandeville?)
I must admit that doing the background reading for a single session is hardly a deep scholarly inquiry, but from the poetic version of The Fable of the Bees and some random excerpts from the collected writings I just couldn’t understand the attraction of Mandeville to free market economists. Adam Smith’s version of the invisible hand is that we don’t need to rely on the good intentions of people in our market interactions in order to obtain public well-being. But Smith in other writings, especially in the Theory of Moral Sentiments, describes the virtuous function of such traits as sympathy and a sense of public duty. Mandeville views private virtues in any sphere as a stumbling block against the totality of the prosperity of society. The beehive ceases to thrive when the participants take on virtuous behavior. From what I read, I don’t see how any Christian could honor much in Mandeville. In fact, I found what I read to be more dismal than most of the dismal science, and really anti-Christian. If we have Adam Smith I don’t see why economists need to spend much time on Mandeville except to say that Smith got correct what Mandeville may have, in some partial way, anticipated. Just because Henry VIII had peoples’ heads chopped off doesn’t mean that we have to think of him as a pioneer of modern brain surgery who just got a few of the details wrong.
Fortunately, in doing some more reading this evening, I came across some of Hayek’s writings on Mandeville. Hayek indeed has great praise for Mandeville, but from what I read that praise had very little to do with either the ethics or the economics in The Fable of the Bees. The Hayek that I read admits that Mandeville’s economics leaves much to be desired. What I read is that Hayek emphasizes a separate part of Mandeville’s writings in which (Hayek argues) Mandeville was one of the first philosophers to discuss the unplanned evolution and development of social institutions such as language. In this regard, Mandeville models a giant social canvas of unintended consequences. Even here, Hayek’s emphasize is on Mandeville setting the stage for others. I guess I can see Hayek’s point, but how do we know that Mandeville isn't simply the stopped clock who got things right twice a day? This probably sounds cranky coming from someone who believes in the total depravity of mankind. But I also believe that, from the very moment of the Fall, there has been established a difference between good and evil, and that, although we are unable to achieve righteousness on our own, the story of the Bible is God's invitation to a banquet in which righteousness will eventual be restored. As Jesus has instructed us, we are to pursue, however haltingly, God's will on Earth as it will be in heaven. If what Mandeville is arguing is that we are best off simply to let our natural depravity run on auto-pilot, then I think that there are serious problems in reconciling Mandeville with the Gospel. Instead, I believe that Christians can strive to bring the Gospel into whatever is our calling: whether as teachers, entrepreneurs, physicians, economists, and so forth.
David Henderson breaks down the term "rent seeking" in the Concise Encyclopedia of Economics
David Ricardo introduced the term “rent” in economics. It means the payment to a factor of production in excess of what is required to keep that factor in its present use. So, for example, if I am paid $150,000 in my current job but I would stay in that job for any salary over $130,000, I am making $20,000 in rent. What is wrong with rent seeking? Absolutely nothing. I would be rent seeking if I asked for a raise. My employer would then be free to decide if my services are worth it. Even though I am seeking rents by asking for a raise, this is not what economists mean by “rent seeking.” They use the term to describe people’s lobbying of government to give them special privileges. A much better term is “privilege seeking.”
That is a good explanation and jives with the popularity of the idea in Public Choice. But, the hallmark of rent seeking is that it is a contest. Each person in the contest allocates resources towards the goal of winning the contest. Whether they win the contest or not the resources have been spent. These exercises cause resources to be spent in unproductive ways. Yet, these contests exist beyond government lobbying for the right piece of legislation. These contests also exist in patent races for technology between private firms. What makes the rent seeking for the right legislation and technological races different? Discovery and Feedback.
When firms in the market compete in a contest to have the best technology new products are discovered that improve the lives of consumers. These contests can sometimes be pretty risky. Firms do not necessarily know in advance how valuable a product could be. But, if those products are not valuable to people the firm will receive "feedback" from the market that what they are selling is not in demand. Then, they will go back to the drawing board to try to invent new products that are valuable. There is some waste in the discovery process because not everyone who allocated resources is rewarded for their invention. Firm competition, however costly, ultimately leads to consumers being able to purchase goods that are valuable to them. Because consumers can discipline firms they can direct innovation.
On the other hand, I'm having trouble understanding what contests over legislation discover. Also, I'm having trouble understanding how the feedback works in the political process. This is a topic for another day.
Wednesday, February 9, 2011
There are numerous topics worth talking about, but, three common threads stick out as enormously important: family structure, geography, and education. Each of the people in this story lived in broken families with many children under their care. For the single mothers (and one single grandmother) there were three, four, and seven children respectively. The man in the documentary faithfully payed $200 in monthly child support with his meager $12.75 hourly wage ---he lived in San Francisco, CA. The incidence of poverty and single parenthood is high. According to the Census there were roughly 800,000 families in poverty in 2008 and 2009. The percentage of those families headed by Single Mothers were 18.4% and 18.8% respectively. The rate of single motherhood is significantly higher amongst the poor than other populations. Also, mothers tend to be worse off following divorce because there is a sizable correlation between low education and single motherhood.
The geography of the people in this documentary is problematic because they live in areas with high cost of living: San Francisco, CA, New York City, NY, and Hazlet, NJ. Unfortunately, poverty measures do not make geographical adjustments (neither does the Earned Income Tax Credit). The lack of geographical adjustment is an obvious alteration that should be made to the poverty line and tax code. However, many states such as New York have already made changes to reflect the fact that income in New York City is quite different than other areas. Also, some states have adopted higher minimum wages than federal law. But, to demonstrate the vast differences in purchasing power consider that if you lived in Tallahassee and earned $10,000 that would be equivalent in cost of living to $24,000 in San Francisco.
Finally, educational attainment was low amongst all of the people in this documentary. This was extremely troublesome because once upon a time their were good paying jobs that could be obtained with only a high school degree. But, that time has passed. The Bureau of Labor Statistics provides the following advice to people who will soon be searching for occupations, "Math and computer skills are very important. Strong communication and analytical skills are also important." Certifications and degrees are used to determine candidacy for jobs in a number of fields. Below are statistics about median income and unemployment by level of education.
In the documentary one of the women obtains her Associates Degree. However, her pay increase causes a larger reduction in her overall benefits. This is called an "implicit marginal tax rate" because for each additional dollar she earns she reduces her overall resources because she loses eligibility for a variety of government programs. She aptly calls it, "hustling backwards". For a more comprehensive look at the implicit marginal tax rate there was a good article written at the Mises Institute blog.
The documentary showed the sadness and pain that comes with poverty. Ultimately, I believe the director was correct ---in a sense. Hard work alone may not pull people out of poverty. There are numerous barriers to getting ahead: single motherhood, lack of education, and more stressful situations than I may understand. And, there are many changes that could be made to help these people that haven't yet been made (I'll talk about these in greater depth in another post, but, I think you can see some of them here). But, hard work must be a part of it.
By no means are these comments an exhaustive list; but, I hope these comments are descriptive about the reasons many people, like the people portrayed in the documentary, are in poverty. What can be done? I'm not entirely certain. But, I have my own questions. How can marriages be strengthened? How feasible is it to adjust for geography? Or, will churches and other nonprofits fill the void? Finally, what steps can we take in educational reform that will decrease disparities for low income students?
Monday, February 7, 2011
Saturday, February 5, 2011
FINAL JEOPARDY ANSWER: This change in Jeopardy! rules is a favorite among economists because it demonstrates how people respond to changes in incentives.
FINAL JEOPARDY QUESTION: What was the end of what economists call "linear payoffs?"
Indeed, the popular game show JEOPARDY! is famous to economists because of a change in the rules between the Art Fleming and the Alex Trebek versions of the show. In the original version, contestants who had positive winnings at the end of all three rounds won that amount of money. In economics, that is called a linear payment scheme. In the new version, only the winner is paid the monetary value of their nominal winnings. In economics jargon, this latter is called a "tournament" payment scheme. A typical prediction in economics is that contestants facing FINAL JEOPARDY will behave in a more risk-loving (and therefore exciting) fashion if only the winner gets a monetary prize. Research that I've conducted with Duncan James of Fordham University demonstrates the general accuracy of the tournament model.
This is the first of three posts on this topic that I hope will do three things. First, argue that Jesus was critical of any transformation of life into inter-personal tournaments. Secondly, I'll give a personal example of the trap of tournament thinking. Thirdly, I hope to reiterate Doug's post below about the importance of understanding fairness and justice issues in non-market allocation.
For the first purpose, I opened with the Luke story... one of the good examples where Jesus warns us against viewing life as a tournament in which we receive utility from rank or status. Another example would be Matthew 20 in the parable of the workers in the field, who were bothered not simply by whether their own wages were just, but also for the relative comparisons between themselves and others.
There is plenty to be said about the direct dangers of money or power, but without any doubt Jesus warns us against treating life as a tournament in any aspect: monetary, political, or in our faith. Jesus is saying that he who dies with the most toys wins nothing, and that coming to Christ before someone else is nothing at all like Michael Phelps beating someone else to the buzzer.
Thursday, February 3, 2011
The reason the book sat "mostly unread" was because of my own cowardice. Sometimes truth is difficult to stomach or irritates the status quo. Douglas Steere explains, "To come near to God is to change", if we draw near to God we cannot expect to stay the same. Steere invokes an image familiar to fans of Screwtape Letters when he writes:
"Is it not the dread of this self-awareness and this change that causes each of us to resist the call to continued prayer? . . . It can be put almost as bluntly as this: we do not pray, or we give up prayer, because a strategist within us knows all about what takes place in this prayer chamber, knows that a drastic change is involved, and senses the threat."
The rest of the review will follow the sequence of his chapters: Prayer and the Human Situation, To Pray is to Change, The Power of Prayer, and The Dialogue Between Prayer and Action.
1. Prayer and the Human Situation
Prayer sometimes seems boring and tiresome. But consider how bold the following statement is: "Francois de Sales expressed this [importance o prayer] very simply by telling those who pray to begin by remembering Whose Presence they were to come". How bold! When we kneel to pray and surrender our hearts we are making a declaration that we wish to have communion with the Creator of the Universe!
Moreover, He wants intimacy and relationship with us. Steere reminds us, "We do not project or generate grace. Nor do we initiate the redemptive order or process which, when we let it, sweeps into its course our scarred lives, our prayers, and our concerns for others. The redemptive process is already going on. It sprang out of the heart of the Creator of nature; it is a second kind of creation." He wants intimacy and worship because our proximity to Him will make us beautiful people.
He reaches out for us like in Luke 15; but, sometimes his outreach looks different (He also invented hide-and-seek). Steere relays the following story that illustrates this point,
"There is a Jewish Hasidic story of a rabbi's son who came in drenched with tears from a game of hide-and-seek with some neighborhood playmates. When his father asked him what was the matter, his son told him that he had hidden as was expected but that no one had bothered to seek him. The rabbi drew his son to himself and tenderly told him that now, perhaps, he could for the first time know how the dear Lord felt who also hid himself in order to be sought, and was still waiting in vain for his people to seek him."
God never leaves or forsakes us, but, sometimes He hides to help cultivate an attitude of intentionality and desire. No matter whether we feel God reaching for us, or whether He has withdrawn to cultivate this intentionality, we must place God at the center of our lives. And, He will sustain and grow us.But, more than bustling overtures of God's grand love Steere invites readers into the practical part of prayer.
What do we do when we pray? Steere comments, "The scaffolding of prayer is a human matter," and "In order to pray, you have to stop being 'too elsewhere'" The details such as kneeling, suppine, sitting, whatever ---these are humanly devised. The importance of prayer, Steere says, is to be receptive to the Divine. You have to want to pray. Quoting John Wesley, "Whether you like it or no, read and pray daily. It is for your life; there is no other way: else you will be a trifler all of your days . . . Do justice to your own soul; give it time and means to grow. Do not starve yourself any longer."
Devotional reading is important, but, Steere warns that devotions should not replace prayer. If we substitute reading for prayer we have been tempted to evade direct communion with God. Prayer may take a lot of conscious effort; however, these willful and deliberate acts give rise to communion. Finally, when you pray Steere writes, "Real prayer is focused upon God and God's redemptive love . . . Real prayer is capable of rising to another level."
The wisdom culled from Steere in this section is too much to write in this blog post. But, to close this section: What about distraction? Our minds race in prayer. Teresa of Avila confessed, "My mind wandered about like an insane person from room to room . . . [yet] we are bound to pray with attention and may God grant that . . . we may succeed . . . without wandering thoughts. I sometimes suffer from them and I find the best remedy is to keep my mind fixed on Him to whom my words are addressed." Steere advises us to accept and acknowledge distractions and His grace will cover even some of our most feeble attempts.
2. To Pray is to Change
TO COME NEAR TO GOD IS TO CHANGE. God is the Potter and we are the clay. He is always molding us, and, in prayer we will undergo a continual conversion. The cost of this renewal though is nothing less than our whole lives. We must have hearts that do not hold back. In this section Steere invites adventure and heroics like a brilliant pre-battle speech.
The pearl of greatest price was not purchased for a trifling sum. Someone found it so gorgeous and worthwhile they were willing to give up everything. Likewise we should not hold back with God. Steere advises that our prayer lives will soar when we stop holding back.
Prayer must not ignore adoration. Steere writes, "There are many people in our time who simply have no conception of what adoration is or what part it must take in the practice of prayer . . . The adoration of God in prayer is a mixture of gratitude and reverance and awe." The side effects of adoration are peace and blessing. When we spend time in God's presence, adoring, thanking, praising we will be changed people.
. . . uh, I may need to write a Part II Review, because this book was so thick with wisdom I'm finding in nearly impossible to winnow down observations. In short, prayer removes the dross of the world from our hearts and awakens our identities as sons and daughters of the Living God. We are invited to become people that live from the inside out rather than outside-in (which is the way I have done so many things in the past).
Steere is a highly qualified guide to help navigate the terrain of prayer. This book is highly recommended.
Wednesday, February 2, 2011
Studying public choice is vital because people are susceptible to misconceptions. The moment economists admit that the market is imperfect due to problems such as public goods provision or externalities there is mass zeal for corrective interventions such as subsidies and taxes. Yet, this may not always be a good idea. The more legitimate question to ask is not whether the market is perfect; but, whether the political process is better.
The cartoon below is a good example of what some people imagine about economic theories. They forget that graphs must be placed into practice, and so they are essentially saying "A Miracle Occurs"
Mark and I assigned our students to read a Bruce Yandle article titled "Much Ado about Pigou". Alfred Cecil Pigou was the father of the idea that taxes could be used to correct negative externalities. An idea that Yandle points out is gaining significant popularity in a myriad of arenas: taxes on soda (to curb obesity) and taxes on large banks (to curb risky behavior). But, even Pigou did not believe that policy happened in a vacuum. He offered this valuable insight:
[W]e cannot expect that any public authority will attain, or will even wholeheartedly seek, that ideal. Such authorities are liable alike to ignorance, to sectional pressure and to personal corruption by private interest. A loud-voice part of their constituents, if organized for votes, may easily outweigh the whole.
In short, public choice is worth studying because we need to understand: votes are to politicians what profits are to businesses. Sometimes policies are adopted, not because they generate more benefit for the body politic, but because they benefit an important set of people. Finally ---and this speaks to Pigou's statement that "authorities are liable alike to ignorance"--- even if politicians were well intentioned, there is no single Great Mind that could calculate the social costs or benefits needed to arrive at a corresponding tax or subsidy.
Tuesday, February 1, 2011
Common Pool Resources are non-excludable but rivalrous. This means that you cannot exclude people from consumption (non-excludable), but, each persons consumption subtracts from your ability to consume (rivalrous). To see an example check out the video below from Curb Your Enthusiasm (watch until about 1:32): ***I changed the embedded video to a link***
The caviar is a common pool resource. More than sheer comedic shtick, what Larry David said has a corresponding truth in the world beyond television ---and more important than caviar. How do people manage natural resources when there is an absence of private property? The popular prediction came from scientist Garrett Hardin. He presumed that each person, acting in their own self interest, would lead their sheep to graze until there was no more grass on the meadow. This would result in a "tragedy of the commons" where the resource would be depleted beyond its ability for future use.
Yesterday, we discussed Elinor Ostrom's work. She is the first female Nobel Prize winner in Economics. She discusses Hardin's idea and her idea in the following video.
The ability to manage the commons fundamentally comes down to two public goods: covenant and sword. By covenanting, or coming up with a set of rules for the commons, people are providing the public good of order. By monitoring the usage of other members of the community and punishing them when they do not abide by the agreement, people are providing the public good of scrutiny.
There are a wealth of examples on how people manage the commons. Managing the commons even exists as a story in the Bible! But, I will close with an example from Elinor Ostrom's own work from Nepal:
One of my own vivid recollections from doing fieldwork in the Middle Hills of Nepal during the 1990s was seeing an enclosed field with a domesticated cow in the center of a village.In response to my question as to what was happening here, my Nepali colleagues indicated that
the enclosure was a kind of “cow jail.” When three adult members of the local farmer-managed
irrigation system agreed that a member had not followed water harvesting or maintenance rules
after receiving a verbal warning, they were authorized to bring a cow from the errant farmer’s
fields to the village area. In an agricultural village, everyone knows who owns a cow. Thus,
while the cow was grazing in the center of the village producing milk for village council to
distribute, all of the farmer’s neighbors were learning about the farmer’s nonperformance. Once
the farmer had paid a modest fee for breaking the rules, the cow would be returned, so this
second-stage sanction was not severe in the long run. Needless to say, however, most members
of the irrigation system preferred to follow the rules rather than being embarrassed by this form
of a graduated sanction.