Friday, February 25, 2011

Friday Links 2/25

In 2000 John List spent a year at the University of Arizona with Vernon Smith, Mark Isaac, Jimmy Walker, Jim Cox, and a slew of other excellent experimental economists. Following that year List, who was already a frequent publisher in the area of environmental economics began using experimental methods and started his meteoric rise to his current professorship at the University of Chicago. Often he is cited for his breakthroughs in "field experiments" (although there were clearly many predecessors such as Peter Bohm and Vernon Smith); however, I would characterize his research as starting a renaissance with field experimentation. Nevertheless, the article is well-written and talks about a variety of interesting economics questions.

The Knowledge Problem blog provides a good post on why fair trade coffee may not be good for poor farmers.

Tyler Cowen discusses how to learn econometrics. Also, an addendum adds that Mark Thoma has a whole series of lectures on Econometrics on YouTube. I will definitely be brushing up prior to the PhD program!

Always love how William Easterly elucidates how development plans actually work, although sometimes you must get past the bitter sarcasm.

Thursday, February 24, 2011

Don't blow on you, don't blow on me, blow on the fellow behind that tree.

NIMBY everywhere. In this case, the website "Wind Turbine Syndrome" reports on revolts in Denmark, supposedly the most wind-turbine-friendly country in the world.

Today's title is a tribute to the late Senator Russell Long, who said that tax reform could be defined as "Don't tax you, don't tax me, tax that fellow behind that tree."

Wednesday, February 23, 2011

Are We Consuming Too Much?

Before posting Malthus Part III having a brief discussion on sustainability would be good. Today in class we will discuss the Arrow et al article titled, "Are We Consuming Too Much?".  The article appeared in the Journal of Economic Perspectives in 2004. Interestingly there are many ecological authors on the paper with the economists ---a combination rarely seen. The authors write:
"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:

  1. 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. 
  2. 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.

  1. 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)
  2. 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.
  3. 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

Malthus Part II: Neo-Malthusians v. Neo-Institutionalists

Are we consuming too much? Is the earth capable of handling more consumers? For a quick recap about what is commonly believed about Malthus:  He assumed land and technology were fixed. He also assumed that passion between the sexes would lead to a geometric growth in population. These assumption implied that we could only coax so much harvest from the land and while production was flat population was increasing. Soon, we would enter doomsday scenario (see ominous photo below) because there would not be enough food supply. This dismal view has not come to pass; however, the central ideas have been carried forward by Neo-Malthusians.

The Neo-Malthusian perspective was popularized by Paul Ehrlich with his book The Population Bomb in 1968. The subtitle of the book reads, "While you are reading this book four people will have died from starvation. Most of them children." The notion that starvation and population growth are directly tied together is characteristic of the Neo-Malthusians which believe that growth in population causes poverty. Ehrlich himself predicted that, "The battle to feed all of humanity is over. In the 1970s hundreds of millions of people will starve to death in spite of any crash programs embarked upon now. At this late date nothing can prevent a substantial increase in the world death rate". In fact, the world death rate has "dramatically decreased" from 1970 to 2010. Yet, Ehrlich was not the only intellectual who held such beliefs. 

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, "What is needed, to use a basketball term, is a full-court press--an all-out effort to lower fertility, particularly in the high-fertility countries, while there is still time." The authors rationalize policies to lower fertility by citing the increased strain on resources. So, in the words of Gertrude Stein, "Is there any there there?" Are we overstraining resources?

The Journal of Economic Perspectives published a paper in 2004 called "Are We Consuming Too Much?" by Kenneth Arrow and massive list of co-authors including Paul Ehrlich. In the beginning of the paper they note the large increases in per capita consumption in the last 100 years. Energy has increased by a factor of 16. Fish Harvesting has increased by a factor of 35. Carbon emissions have increased by a factor of 10. There is no doubt whether consumption has increased. Also, there are concerns that we are consuming resources such as water at a rate faster than the aquifer will replenish. Once those facts are established we must ask the question, "Are we consuming too much?" And, "What would a sustainable pattern of consumption look like?" These authors characterize consumption as excessive if it limits the "productive base" for successive generations. The productive base consists of manufactured, natural, and human capital. They conclude that there is some excessive consumption but not by the rich countries ---generally by poorer countries. In the next post when I discuss the Neo-Institutionalists I will explain more about this conclusion. 

So, what is the moral of this story? The central point of this post has been to show that population growth is a concern to many people and has been persistent. The doomsday predictions have been failures. But, I suspect that those concerned about population growth are not crying at home with their head in hands. By writing such provocative narratives they have catapulted population growth into public awareness. And, they have many listeners regardless of how often they have been wrong. The next post hopes to illuminate why these arguments persist even in the face of hard data and past experience.   

Saturday, February 19, 2011

Malthus Part I

On Monday students in my Economics and Sustainability class will meet two suitors: Neo-Malthusians and Neo-Institutionalists. Then, a love triangle, more intense than the smoldering Twilight Series, will ensue for their views on population growth. The lecture aims to paint a solid historical picture of Reverend Thomas Malthus and his thoughts on population. Then, fast-forward to the modern debate over population, the environment, and the economy. Part I involves the post today: Who was Thomas Malthus? Why was he interested in population? And, what did he actually say about population?

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

Friday Link 2/18

A few posts ago, Doug wrote on the field of inquiry known as Public Choice. Here's a public choice question that Doug and I have discussed between us: is there a public choice argument to distinguish the pros and cons of private industry unionization from those regarding public sector unions (that is, unions of government employees)? I believe that the answer is "yes." Through avenues such as a standard public choice argument of concentrated versus diffuse costs, we see that public employee unions can have disproportionate influence on elections involving their union. If that translates into disproportionate electoral success, that means the unions dominate the government body that they (the unions) are nominally negotiating with. This has been evidenced in school board elections (not infrequently held on dates different than typical "November" elections) in which unionized teachers are disproportionately elected as members of the school board. The end results is, in effect, that the unions are negotiating with themselves.

The paragraph above is a brief summary of these arguments. For today's link, I recommend the linked article by Prof. Stephen Bainbridge of the UCLA Law School for a more detailed treatment of this topic. (Notice that from his own imbedded link that Prof. Bainbridge makes arguments in support of private sector unions.)

Thanks to Legal Insurrection blog for the tip to Prof. Bainbridge's piece. Full Disclosure: I am an employee of a public organization in which there is a certified faculty union. I have chosen not to join that union. I have discussed on this blog my disagreements with some of the policies negotiated by the union, one of which had a negative impact on my salary.

Monday, February 14, 2011

Until Today, I Thought Karen Was Just A Name

This is an engrossing story from Michael Yon of compassion on the ground among the Karen people of Burma (thanks to HotAir! for the tip to the link). In addition to the standard narratives we would expect from such a story (a brutal, corrupt dictatorship, persecution of an ethnic and religious minority, amazing work by NGOs in a refugee setting), the photo essay also raises important questions about the economics of education. Pay particular attention to the scenes from the school: outdoor hut, wooden benches, large class sizes, pigs roaming the classroom, a single straggly old fashioned chalkboard, and yet look at what the students are learning: literacy in their own language, a foreign language (English), sequences, and what looks like calculating the area of a two-dimensional torus. Tell me again how much a typical American community spends per-pupil on K-12 education, and what the skills are of a typical American high school graduate.

Sunday, February 13, 2011


Given my rant-like post on Mandeville (see below) I was thinking today about the question: "Will I go see Atlas Shrugged?": There are several reasons for me to avoid the movie. Obviously I can't abide the anti-Christian message of Rand and Objectivism. I also thought that Atlas Shrugged was pretty much a joke as a novel. However, all things considered, I think I probably will go see the movie. Here are my Top Ten Reasons For Me To See Atlas Shrugged Even Though I Don't Like Ayn Rand:

10 ) For my entire life, I've gone to movies, concerts, etc. and told myself: I know that this person is committed to just about every left-wing cause I disagree with, but I still think that they are a great actor/singer/musician/songwriter. It's time to bring some balance into my life.

9 ) It's clear from that trailer that the writers have brought the movie into contemporary time. It will be fun to watch the debates among the Rand True Believers as to whether Nothing That She Wrote Can In Any Way Be Altered (think Howard Roark in The Fountainhead).

8 ) Watching the audience will be a spectacle beyond anything on the screen.

7 ) Memo to Rand Fans: The idea that if the government taxes or regulates something, less of it will be produced is neither original with, exclusive too, or even best represented by Atlas Shrugged. However, if it brings in even 100 people who somehow aren't aware of this basic fact, the movie will have a certain kind of success.

6 ) I like trains.

5 ) I am a complete social outcast in my family because I have no interest in long boring fantasy series like The Rings Trilogy or the Harry Potter series. As very few other people want to talk about real movies like North by Northwest, Marnie, Goldfinger, The Last Picture Show, or Bottle Rocket, maybe the fact that I go see this long, boring fantasy series can keep our conversations going.

4 ) Or at the very least, if I say "But have you seen Atlas Shrugged?" and complete silence follows, maybe people will then, as a compromise, want to talk about North By Northwest, Marnie, Goldfinger, the Last Picture Show, or Bottle Rocket.

3 ) I'm certain that Ayn Rand would say that I am not intelligent enough not to believe in God. Here's what I believe: "Truly I tell you, unless you change and become like little children, you will never enter the Kingdom of Heaven." (Matthew 18:3)

2 ) Did I mention that I like trains?

1 ) Gary Cooper was a great actor, but his performance in the courtroom scene in The Fountainhead makes this oak desk I'm sitting at seem animated by comparison. I am hoping against hope that, given all of the wooden dialog in Atlas Shrugged, somebody will emerge to erase this stain from Coop's legend.

Saturday, February 12, 2011

Final Jeopardy! (3)

The last point I wanted to make on the issue of tournament incentives is really just to reiterate what Doug said in a post several days ago: economists need to be aware of the principles of justice that people perceive in non-market allocations.

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.)

What we can't forget is that it is equally true that a ) through the market, Ford, Xerox, Microsoft, Apple, Google and so forth have transformed not only business but society, but b) each of these organizations has set a boundary between market exchange and hierarchical allocation. The Boards of Directors of these corporations act as political committees, not as markets. Inside a hierarchy or acommittee, the participants are going to react to principles of justice and fairness. The same goes for allocations inside a family, inside a church, inside a university, or inside a branch of the armed forces. And, whether it's simple a matter of better understanding or for more prescriptive purposes, economists can not be blind to how principles of justice outside the market are and/or should be formed.

Friday, February 11, 2011

Friday Links 2/11

This is a new wrinkle in the blog. On Fridays I will post links to interesting reading material that popped up throughout the week. Akin to a rummage sale, there will hopefully be something worthwhile in the pile.

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

Mandeville Happens?

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.

The Nature of Rent Seeking

Last week I wrote about the field of Public Choice, which is the application of economics to the political process. One of the best known ideas from Public Choice concerns "rent seeking". This blog post is a riff on a recent Econ Talk podcast with Mike Munger and Russ Roberts.

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

Waging a Living

The last couple days in class we have been watching the documentary Waging a Living. The documentary serves two purposes. First, the visuals and presentation style of a documentary lend themselves to showing students, rather than telling them, about important topics related to poverty. The other purpose? Variety. The premise of the documentary is to follow four working families as they struggle to provide for their family at a low wage. Robert Weisberg, the director of Waging a Living, commented in an interview, “My goal was to get people to take a new look at the prevailing American myth that hard work alone can overcome poverty”.

The documentary was extremely depressing. Fathers not paying child support. Difficult tradeoffs between health care and rent payments. Loads of debt. Divorce and single motherhood. Addiction. But, despite the depressing visuals and gut wrenching moments the video succeeds in telling a story about how Americans struggle to provide for themselves and the people in their care.

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

Final Jeopardy! (2)

I love my job.

I enjoy my teaching and my research. The committee work is boring, but if that's the worst part of my job, I'm doing just fine. I consider it a gift from God that the taxpayers, students, donors, parents, and alumni that support Florida State University pay me to do something I enjoy so much, and I try to make sure that they receive their money's worth.

Just a couple of months ago, the FSU administration announced a program to provide raises to 40 of its senior faculty. I was told I was eligible, so I began work on what FSU calls "the binder." A couple of weeks ago, the FSU administration realized that it was in a bind with the faculty union, and that, in fact, I was not eligible to even apply for the raise. (Quiz question: what criteria do you think that a faculty union requires for raises of this kind? Quiz answer: essentially seniority on site in Tallahassee! This shouldn't surprise any economics student.)

Anyone who knows me knows that even before this situation I have criticized unions which reward seniority above everything. I say that because it's obvious that I have a personal reason to be upset with the union over this. Set aside for a moment the fact that I put in several weeks of work on my binder before I was ruled ineligible. At the end of the day, I was not hurt. I am making exactly the same wage I was before, doing the same job I love. It's just that there are now 40 other people who are getting raises for a criterion I believe to be unjust. I feel that I am losing-out in a Tournament World? I am worried that I will receive the six months worth of Rice-A-Roni rather than the first-place prize. How does that make me any different than one of the workers in Jesus' parable about the workers in the field? It doesn't. My attitude makes me just like one of those workers. This situation causes me to be be deeply sympathetic with the attitude of the worker who wondered "Why is he getting that money instead of me?" But what I cannot ignore was what Jesus replied to someone very much like me (ESV):

"'Friend, I am doing you no wrong. Did you not agree with me for a denarius? Take what belongs to you and go. I choose to give to this last worker as I give to you. Am I not allowed to do what I choose with what belongs to me? Or do you begrudge my generosity?' So the last will be first, and the first last."

Saturday, February 5, 2011

Final Jeopardy! (I)

"A dispute also arose among them, as to which of them was to be regarded as the greatest. And he said to them, 'The kings of the Gentiles exercise lordship over them, and those in authority are called benefactors. But not so with you. Rather, let the greatest among you become as the youngest, and the leader as one who serves.' "
------Luke 22:24-26

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.

(I guess it's a bad coincidence but an instructive lesson to me that this post arrives the day before that ultimate American tournament: Super Bowl XLV or whatever its Roman Numeral is this year, and only a few days after I posted on Facebook the exciting news that FSU was ranked "#1" on college football signing day.)

Thursday, February 3, 2011

Dimensions of Prayer

The slender paperback "Dimensions of Prayer" by Douglas Steere sat dusty and mostly unread on my shelf since I purchased it in August 2009 at Duke Seminary. Douglas Steere writes with powerful prose, and the wisdom of a life lived with Christ causes truth to pour from each page. The book was well organized and divided into four chapters and numerous subsections. The way Steere regales the reader with stories and wisdom from giants of the Christian tradition made the concepts easy to understand and a joy to read. Once you have set your mind to reading "Dimensions of Prayer" you could finish it in a flash. I would recommend this book to anyone who wants to develop a more powerful inner life.

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

Public Choice: Politics without Romance

Two of my classes today happen to cover the same material: public choice. Public choice is the application of economic models of self-interest to political science. The central assumption is that politicians are not glowing angels of virtue but prone to the same self-interested behavior as we might expect from anyone else. Basically public choice is, in the words of James Buchanan, "politics without romance".

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

The Sword and the Covenant

Yesterday in our sustainability class Mark and I discussed Common Pool Resources and Public Goods. These two categories of goods are listed in the 2x2 matrix from my earlier post titled "public goods". But, in this blog post I'm talking about Common Pool Resources which characterize many environmental goods: aquifers, wildlife, forests, fisheries, oil, grazing pastures, etc.

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.