Southern Economic Meetings Rundown

Just got back from the Southern Economic Association Meetings. New Orleans was fun and the presentations were informative but I'm happy to be home. When I was growing up I remember Dad had an affinity for top-5 or top-10 lists, I guess he passed it on to me. Below are my top-5 papers from the conference along with their abstract and a couple sentence comment.

Title: "Educations Gambling Problem: Earmarked Lottery Revenues, Government Spending, and Charitable Donations"

Abstract: I examine the impact that lotteries introduced to support education have on overall funding for education, accounting for both government expenditures and private charitable donations. State government education expenditures do not significantly increase when an education lottery is introduced. However, the fact that states claim to use lottery revenues for education may have a negative impact on charitable contributions to education related causes. This in turn would imply that total support for education  decreases with the introduction of a lottery. Empirically, I examine the impact of the introduction of education lotteries introduced between 1989 to 2008. Using both donor-level survey data and nonprofit tax returns, I demonstrate that donations to education-related organizations fall with the introduction of a lottery. This result seems to be driven by donors’ response to the new (often highly publicized) government revenue source rather than by a decrease in nonprofit fundraising efforts.

Comment: Donors lower contributions in response to *perceived* increases in government spending on education and this perception hinges critically on the kind of advertising. This is an interesting result. At this point the data is too aggregated (I think) but it would be interesting to know who is decreasing their private donations and whether this would be true under a different distribution mechanism for lottery money. Since most lottery participants are lower income the lottery money could primarily be used to finance programs for low income schools.

Also I should mention, the whole session this paper was on was fantastic with interesting research presented by Sarah Helms and Jeremy Thornton.

Title: Birth, Death, and Public Good Provision

Abstract: None

Comment: This takes a standard voluntary contributions mechanism and asks what happens when some members of the group "die" and new members are "born". Don't worry, nobody was harmed in this experiment! But, it is an interesting twist on a standard game because the "young" inject their optimism into a situation that is fraught with bitterness.


Panel on "Biblical Foundations of Economic Freedom and Market Exchange". So it was not a paper; however, the panel provided a lot of questions to sort through. Chief among those questions was how to talk to people who are process rather than results oriented. In economics we talk about outcomes usually not processes so we have a difficult time even having a conversation with theologians and others because something that has a good process does not often obtain good outcomes. There are no concrete papers associated with the session (at least I couldn't find links) but I'm sure we will be talking about it soon.

Title: The 17th Amendment, Senator Ideology, and the Growth of Government"

Abstract: None

Comments: There are some big questions in economics. For example, what can explain the growth in the size of government. One rule that might explain some of that growth is the 17th amendment. The popular election of Senators rather than the appointment by the state legislature. Popular election meant that Senators were not instructed by their state legislatures about how to properly represent the state but acted like free agents accountable mainly to the voters who were less informed about their actions. The paper was still in preliminary stages.

Panel on "How Should We Discuss Markets vis a vis Morality . . . " had a really long title but was an absolutely crucial discussion to have. The authors discussed different variations on how people act in moral capacities whether they are in voluntary or government settings. There was some discussion that reflected the "Biblical Foundations . . ." panel where good intentions sometimes seem to mean more to people than good outcomes. The trouble is in the communication with other people to help them understand economics. All good arguments rest on three points: logic, credibility, and emotional appeal. We have a difficult time with emotional appeal ---I think part of this is that voluntary associations are not the primary provider of many charitable services so people have a growing feeling we need the market to support charitable activities.

The final thought I will close with was a thought from Dwight Lee on the panel just mentioned (paraphrase): Market failure is treated as endemic of the market system. On the other hand, government failure is treated not as an endemic failure of the system but a failure of not doing a good enough job.

Quote of the Day

This quote comes from Francis Chan's book Crazy Love (p. 80),

"When I was in high school, I seriously considered joining the Marines; this was when they first came out with the commercials for "the few, the proud, the Marines." What turned me off was that in those advertisements, everyone was always running. Always. And I hate running.

But you know what? I didn't bother to ask if they would modify the rules for me so I could run less, and maybe also do fewer push-ups . . . Somehow this realization does not cross over into our thinking about the Christian life. Jesus didn't say that if you wanted to follow him you could do it in a lukewarm manner. He said, 'Take up your cross and follow me.'"

Some Thoughts on the Election

I am stuck in Atlanta. Shockingly this is not the fault of Delta but Greyhound. Since I'll be sitting here a while (until 4am) it seemed like a good time to write. The last few days have been despairing and there has been an albatross question hanging on the conservative community, "How did this happen?" I thought it would be like chicken soup for the soul to chronicle the recent happenings from my perspective.

In the primaries Romney did not energize me, but, neither did the other candidates. Then a couple months passed and he selected Paul Ryan as his running mate. That started to get me excited. Having seen Paul Ryan speak a couple times he struck me as articulate and principled. The Ryan selection gave me a reason to believe this could be a supportable ticket.

But, the conventions did not really provide much boost in the polls and Mitt did not seem comfortable giving stump speeches and marshaling campaign rallies. Then the awkwardness was replaced with a dynamite performance in the first debate where he caught President Obama flat-footed. After the first debate, liberal commentator Chris Matthews was asked for his thoughts, "I don't know what [Obama] was doing out there. . .What was Romney doing tonight? He was winning! If he does five more of these nights, forget it! That's my thought". In that hour-and-a-half I started thinking of him as a real candidate with a shot at winning. He brought up his business acumen. He seemed committed to casting off regulatory burdens for businesses and working towards a solution for the mounting debt. These were good signs. A bunch of other people must have seen things in a similar light. The buzz vaulted him passed Obama in the Real Clear Politics average. That was the first time in the election cycle the Republican candidate outperformed President Obama in the poll averages

From the graph you can see the average reflects, more-or-less, a momentum in favor of Romney throughout the debates; however, towards the end of October this momentum waned. What happened? I'm sure you are aware of the banter:

1. Romney seemed to coast and there was no final burst to the finish line.
2. Obama had a great "ground game" to help Democratic voter turnout
3. Obama appeared bipartisan when photographed with Chris Christie
4. Romney did not hammer home on the Benghazi incident
5. ETC. 

All of those things probably had some impact. Large numbers of Democrats are citing negative spillovers on the Republican Party from their Tea Party segment. In a similar vein some pundits are telling the Republican party there are branding problems and the country wants their message to be more moderate. While I do not agree with every plank in the traditional Republican platform (most notable immigration and death penalty) I do not believe this is the real problem.

Romney ran on the economy and did not touch other issues. Hammering home the poor economic performance was the best strategy available. See the graph below. But, notice, this does not account for the 3rd quarter growth of 2%. Not that 2% is something special but it represented an improvement over 1.3% in the 2nd quarter:

The recent economic conditions, however dismal, were showing an improving trend. While unemployment numbers were not fantastic ---increasing from 7.8% in September to 7.9% in October it was not an egregious increase. I am arguing that these numbers sowed thoughts of, "Give it time," in the electorate. The folks over at Monkey Cage were writing that the incumbent advantage combined with improved growth numbers did enough to push Obama over-the-top.  

In fact, it is possible that we are starting into recovery. Macroeconomists think that business cycles last about 7.5 years. Given that the United States started into the bust part of the cycle in late 2007 we should see recovery with some good policies. Will this be a U-shaped recovery or a W-shaped recovery? Not sure. I'm hoping that Tyler Cowen provides some insight on the topic at the Southern Economic Meetings. Of course, there is also the prospect that things will get worse. We do not know how negotiations with the fiscal cliff will work out. That will be a game-changer with big consequences for well-being in the United States.

So the conversation does not end here but keeps going . . .

One thing is clear: Life is still wonderful. God is still constant, unchanging, and good. I am thankful for the grace offered through Jesus Christ. I am excited about the spirit working in me, pushing me in the process of sanctification. I am thankful for my wife, family, and friends. I'm certain that God can use us to advance His kingdom. So there is still purpose, meaning, and loving relationships. These things will never depend on what political party wins the election.        

Monday School: Character Part III

A couple of the recent posts have been on character transformation which was the subject of Andy Stanley's series "Character Under Construction". I recommend Andy Stanley's podcast, they are both clear and challenging. The last post was about "taking off the old". This post is about "putting on the new". Stanley remarks, "To put on the new is to learn to counter the specific lies that you are most tempted to believe with the specific truth of God's word." We must saturate ourselves in God's word so we can combat the lies.

In a beautiful comparison Stanley uses a story many of us have heard from Matthew chapter 4, Jesus' temptation. As an aside, I love the way Stanley often tells his congregation that he knows they will be tempted to gloss over the story saying, "Yeah, yeah, I've heard this before." But, he reminds them to listen
take-it-in,

Matthew 4:1-4

Then Jesus was led by the Spirit into the wilderness to be tempted by the devil. After fasting forty days and forty nights, he was hungry. The tempter came to him and said, “If you are the Son of God, tell these stones to become bread. Jesus answered, “It is written: ‘Man shall not live on bread alone, but on every word that comes from the mouth of God.’”

We need to be prepared to counter the lies we that face us with truth. Jesus had not eaten in a *long* time and he certainly had the power to turn the stone to bread. But, Jesus knew that he was "led by the Spirit" for a different purpose. The lie was that his needs were legitimate and he had a right to fulfill those needs even if those actions conflicted with God's purpose.

Matthew 4:5-7

Then the devil took him to the holy city and had him stand on the highest point of the temple. “If you are the Son of God,” he said, “throw yourself down. For it is written:

“‘He will command his angels concerning you,
    and they will lift you up in their hands,
    so that you will not strike your foot against a stone.’”

Jesus answered him, “It is also written: ‘Do not put the Lord your God to the test.’”

Once again, we must counter truth with lies. The lie here is that we need to prove ourselves. But, do we really need to prove ourselves to others? Moreover, what if that action in a desire to prove ourselves or conform compromises our integrity? 

Matthew 4:8-11

Again, the devil took him to a very high mountain and showed him all the kingdoms of the world and their splendor. “All this I will give you,” he said, “if you will bow down and worship me.” Jesus said to him, “Away from me, Satan! For it is written: ‘Worship the Lord your God, and serve him only.’” Then the devil left him, and angels came and attended him.

Jesus will ultimately come to rule as King. The devil is offering Jesus a shortcut. No cross, no suffering, no pain and you still get what you want. But, taking short cuts and compromises are like bowing down to Satan. Stanley says that he has written under this verse, (paraphrase) Nothing we gain from broken fellowship with the Father is worth it.

We need to shift our thoughts away from, "I know I shouldn't . . ." to "It has been written . . .". This method was good enough for Jesus and should be good enough for us.

But memorizing verses can be difficult, right? When I was teaching the Economics of Compassion course we covered a large amount of material. Some of my students asked me, "How can we remember all of this?" I told them, "We tend to remember the things that we think about." This wasn't meant to be rude, but, rather a statement of how we learn.

After hearing five sermons in the series (1 more to go) much of our transformation depends on awareness and abiding. We need to be aware of the lies that we believe. But, what is a lie? A deviation from the truth. What truth? The truth about God, ourselves, and others. How do we learn to spot a lie? By abiding in Christ and God's word. The two things that make for excellent character are abiding and awareness. What is more they have a reciprocal relationship! There is no substitute for abiding in Christ and paying attention.

Friday Links

No matter who is elected our fiscal affairs must be fixed. This is a nice lesson on the basic problems from the Wall Street Journal.

There is a large literature in economics on rent-seeking (think privilege seeking). This blog post points out the shameless lengths special interests go to keep the privileges coming. On a related note, when we increase the size of the government we see more of this kind of behavior because the prizes to special interests are larger than before. I have never understood how this lesson is not understood by more people.

While we are talking about rent-seeking I read a nice quote from the intellectual father of that term Gordon Tullock. He argues that economists should be actively engaged in public discussion on economic topics.

Also, just listened last night to this excellent podcast by Bryan Caplan on his book the Myth of the Rational Voter. It is 80 minutes but worth every minute of it! You are in for a treat that will give you some serious things to think about.

Who's in your top 5?

I just ran across an article that was helping to prepare PhD candidates for the job market. Here. In perusing the article I came across a list of common questions. One question stood out:

Which senior economists do you wish to emulate? Why?

Watching football at a friend's house over a year ago I remember he asked me this question. At the time I didn't have a very good answer, it wasn't a question I had given much thought to. But tonight I spent some time thinking about who is in my top 5 and the qualities they have. Without further ado, 

Ronald Coase - His willingness to ask what appear to be obvious questions like "What is the nature of the firm?". Even when others condemned those questions as silly he pressed on. Also, his exhortations to go out into the field and study how the world actually works are important.

Charles Plott - His intellectual curiosity spans multiple fields and he demonstrated that experiments could be relevant for both policy and firm-level decision-making.

Daniel Hungerman - His econometric work really opened my eyes to interesting public economic questions when the only research experience I had was in doing experiments. Also, his research in the field of Economics and Religion has been really interesting because he has been a forerunner in attempting to identify causal relationships between religion and economically/politically relevant action (which is really hard to do).       

Elinor Ostrom - Her work on polycentrism (multiple centers of authority) demonstrated institutional nuance in what can become a heated and dichotomous debate of government versus non-government. Also, she had a fantastic and kind personality in addition to being a top-notch scholar.

Mark Isaac - He has done a lot of significant experimental research on public goods provision and topics in industrial organization.  Anyone would like to make such contributions to their field; however, that is not the main reason Mark is in my top 5. Anything I accomplish in economics will be because of his mentorship. His patience in listening and his friendship have benefited me more than economics but also in showing how to be a virtuous man. If I am half the teacher to my students Mark has been to me I will be doing a great job.

Monday School: Character Part II

The name of the podcast series I have been listening to was Andy Stanley's "Character Under Construction". He notes that, "The biblical imperatives apart from biblical thinking always result in short term obedience and long term frustration." Another example of this line of thinking is in G.K. Chesterton's famous remark, "Christianity has not been tried and found wanting; it has been found difficult and not tried." Frustration from failed attempts at rededicating our will leaves us thinking Christianity is impossible. Just remember, "I can't but He can."  

When it comes to renovating our character it is a two-step process. The first step to renewal is taking off the old. The second step is putting on the new. Each present their own unique challenges.This particular podcast (#4 in the series) was about taking off the old.

Our beliefs shape our attitude. How we think of a person shapes our attitude towards them. What we think of our spouse shapes our treatment of them. What we think about God colors our whole life. Therefore, because these attitudes shape our behavior and we want to be transformed it is imperative that we take off the old. Thanks be to God who has instructed us to go back to the most basic level. Stanley says, "God wants to deal with us at the fundamental belief system level . . . A renewed mind doesn't resist God like an un-renewed mind."

We need to identify the lies that fuel our attitudes and behavior. Stanley communicates the following message (paraphrase): Listen to your excuses and rationalizations because those rationalizations support lies.  

Some examples:

What's the harm in ____?

Everyone else is doing it.

Who is going to know?

But, I love him/her

He/She deserves it

I can't help it

What else supports lies? Fear and pain. When we examine the places we overreact we can generally find a lie embedded in our thoughts. Also behind the temptations that best us are lies. What lies support the areas where we are most susceptible to sin?
 

So the sermon was a call to be cognizant of (1) Excuses, (2) Overreactions, and (3) Temptations. All of these can give us clues to the lies that keep us back from "taking off the old". When we expose the lies they lose their grip and as Jesus said, "Then you will know the truth and the truth will set you free" (John 8:32).

Character Part I

My first year in the economics PhD program, was both successful and difficult. The worst part of the year was how I turned my back on communion with God. Of course there were excuses, the most frequent being, "too busy". But, it is time for renewed attention. I have been listening to Andy Stanley podcasts called "Character under Construction".  He has a great capacity for teaching; and, listening to these sermons has been an encouragement to an ongoing project: the renovation of my heart.

What does it mean to have good character? Stanley defines character as doing what is right, as God defines right, no matter the cost. But, how can we know, "what is right, as God defines right"? This requires surrender and renewal.

First, the surrender part is a statement that, "I can't but He can" ---the acknowledgement that when we attempt to rededicate our will or make ourselves we become better versions of ourselves, not necessarily more like Jesus. This falls short of the Christian goal to gain in our likeness with Christ until we can say, as Paul wrote, "I no longer live but Christ lives in me" (Galatians 2:20).

Second, what is renewal and how can it help to obtain good character? Renewal is to make new again. To do this we must take off the old and put on the new (Ephesians 4:22-24, Mark 2:22). In fact, we are told in Paul's letter to the Romans,

"Do not conform to the pattern of this world, but be transformed by the renewing of your mind. Then you will be able to test and approve what God's will is ---his good, pleasing, and perfect will." (Romans 12:2)       

So we can know "what is right as God defines right" because the Bible tells us when our mind is renewed that we can "test and approve". That sounds awesome! How does renewal happen? How do we become transformed? "I can't but He can". You can't manufacture character it is produced with a life spent abiding in Christ (John 15).

To cultivate character we should be people focused on association, not imitation.

Neighborhood Dynamics

Another post in preparation for the Urban and Regional exam on Wednesday. In class we covered two models of neighborhood change (1) Filtering and (2) Arbitrage. These are both models of neighborhood change and are of interest to urban economists because neighborhoods are a huge determinant of how people value homes and, from a social point of view, neighborhoods create environments where kids can grow to reach their full potential.

The filtering model states that the housing stock trickles down from high income to low income over time. Let me illustrate this with an example from another context. Suppose we are in the market for automobiles and there are three income categories: high, middle, and low.  High income people want to buy a new car and decide to trade in their old car (which still has a significant amount of useful life). The middle income people look at the car traded-in by the high income folks. If that traded-in car is at least as good as their current car and costs less they will trade-in their old car. This trickling down of the automobile stock continues.

There is a similar process with housing that occurs because (1) Architectural style changes, (2) Technology in housing gets better, and (3) Physical deterioration happens.  Though a house can be maintained to be up-to-date with new technology and physical deterioration can be slowed if maintenance costs ever exceed the price a house can fetch on the market watch out! That home will depreciate in value and a similar process will take place in the housing market, albeit with significantly higher transaction costs than the car market!

The arbitrage model is a model based on prejudicial preferences. What do I mean? The assumption that high income people like to be around other high income people and white people like to be around other white people drives this model.  Imagine a border between a high and low income neighborhood (or different races). High income people along that border do not like where they are living because they are close to low income folks.  But, low income people like living near high income people for some reason. This was not clearly explained in class, but, there is literature on positive spillovers from public services like police patrol, fire safety, not to mention peer effects in schools. Then we need some "shock" to disturb the equilibrium like a redrawing of school zoning for example. Once this shock happens people from the border decide to move to the interior of the higher income area. But, anticipating this those already in the interior know they will be on the new border of low and high income housing. Because of this expectation they decide to move. Where does it end? We were not told in class, but, there are at least two reasonable thoughts about closing the model (1) Transportation costs become too great to move further away, (2) The benefit to the low income group declines as lot sizes get further from the CBD which would mean spillovers would not be as great.

The filtering model provides a reasonable explanation about why we see income increase away from the central business district. Also, the filtering model suggests that we have a choice with respect to low income housing options (1) We can build low income housing explicitly, or (2) We can subsidize the purchase of new housing and the housing stock will trickle down to the low income earners. 

But this is a treatment of the structure not of other meaningful housing attributes like public services and quality neighborhoods which empirically seem to be the reason people select their households. There is a looming question in all of this, how do you provide people all of these things in a scarce world? Just relying on the private market difficult trade-offs will need to be made. The governmental track record does not evoke confidence (see government's hand in the housing crisis). In addition, some attributes that spur success are less tangible, like a culture of achievement. Hard for the government to legislate that. Still another approach, underused, is the voluntary association approach. Nonprofit organizations of different kinds and churches certainly have a role.

Urban Sprawl

There are so many things I want to write about. The political chatter on facebook has reached a fever pitch. Some things people have written have been thoughtful and poignant but overall the medium does not seem to lend itself to a quality forum for discussion. I hope to write a little bit about the political climate soon. In addition, there will soon be posts on the "Liberty and the Market Process" colloquium readings and discussion from last week, however, studies come first. The last midterm for the fall semester is on Urban and Regional Planning and while working through the class notes I thought it was a good opportunity to just post on some topics here. This particular post is on Urban Sprawl (more posts on cities to come!).

What is Urban Sprawl? Why is it considered a problem?

Urban sprawl refers to the "excessive" spatial growth of cities. Urban sprawl is believed to be problematic because it represents market failure. There are three common market failures that are discussed: (1) The positive externality of open space, (2) The negative externality of pollution, (3) The negative externality of millage rates. I discuss each of these in turn. First, open space is valued through the market based on its productive use, but, the productive use does not capture the aesthetic value that urban populations place on the open space. Because new developments do not account for this positive externality open space is under-provided in the market. Second, because people are locating further from their occupations there are longer commutes associated with sprawl. The costliness of these longer commutes is amplified when we consider the congestion of roads which lead to even longer commutes. Third, when housing sprawls further from the city new infrastructure like roads, sewer, electric must be built to accommodate the new structures. But, because property taxes do not fully cover the large up-front cost of this infrastructure this places a burden on other taxpayers.

What does it mean for something to be excessive? That implies there is an optimal amount of city growth. This is somewhat difficult concept to wrap your arms around because first you need a model to tell you what is optimal and second you are going to have serious measurement problems.

What policy prescriptions are associated with fixing Urban Sprawl?

There is a policy prescription associated with each of these market failures. With respect to open space the thought is that developers are not accounting for this aesthetic benefit therefore developers should pay a development tax equal to the cost on society of not having the open space. To handle the pollution caused through commute times one thought is that people could pay time-of-day tolls to alleviate congestion during rush hour. Or people could pay tolls during all the time which would increase the commute cost giving people a reason to drive less. With the millage externality up-front costs can be managed through the implementation of an impact fee where the developer pays a fee equal to the cost of the new infrastructure. This means that property taxes will be able to cover the maintenance of that infrastructure. Finally, the policy often provided by Urban Planners is zoning and urban growth boundaries (UGB). Both of these policies are attempts to restrict "excessive growth". Zoning allows for particular land uses in a given area while UGBs draw a circle around the current land use and do not allow for development past the boundary (until the planners decide the boundary needs to be expanded)

What are the problems associated with these policies? Which policies seem to have the most merit?

All of these prescriptions are wrought with problems but some are better than others. There are significant measurement problems with the valuation of open space beauty.  Even if open space could be "socially valued" you might think that if open space is valuable to city dwellers then they can contribute their money to conservation nonprofits that purchase and preserve land.

With respect to the UGBs there is an arbitrariness in determining the boundaries.  Moreover, to the extent that land at the boundaries have more access to open space and open space is valuable this should reflect in their housing value. However, because UGBs are subject to change this person will likely lose value on their home and engage in rent-seeking behavior to try to restrict growth to maintain their housing values. The existence of a UGB creates a bootleggers and baptists public choice problem where current residents desire to restrict land use to keep their housing prices artificially high while planners and environmentalists like it because it decreases sprawl.

Zoning also has similar problems where it makes land artificially scarce. Moreover, the creation of a zoning bureaucracy as well as the rent-seeking that ensues from the bureaucracy to the state and local governments as well as rent-seeking from developers is a drain on resources that could have been allocated to more productive uses. With respect to urban sprawl and zoning it seems to be a case where the cure is worse than the disease.

The bottom line on UGB and Zoning is that there are possible benefits to society; but, these benefits are difficult to measure. Moreover, these policies are difficult to implement in an appropriate manner that does not perturb market allocations of housing goods too much. To the extent we value the ability for people to have affordable rent or housing these policies are quite detrimental. To say the least, it is unclear that benefits exceed costs. 

The congestion fee and impact fee ideas have some merit because their administrative costs would be relatively low with both. Also measurement of the impact fee should be relatively easy since there is a more concrete idea about how much infrastructure costs. Also, even though congestion as a social cost would be difficult to measure the price can be manipulated to search out what price produces a good flow of traffic (again, there are measurement problems, "what is a good flow?") . . .

I think the post has gotten long enough. I'll post on another Urban topic tomorrow.

The Market and Entrepreneurship

These past few papers have feverishly banged at the door shouting, "Economics is not a science based entirely on allocations!" This new round of articles from Hayek and Kirzner are making the same point, however, with different emphasis. Rather than a particular focus on the economic calculation problems of social planners ---the aim of the previous articles by Mises and Hayek (I will write about these soon) --- these articles attempt to articulate the processes inside of markets.

All intro students of economics are acquainted with the model of perfect competition. The intersection of supply and demand curves determines equilibrium price and quantity. However, Hayek and Kirzner do not portray the market with the stillness and tranquility of equilibrium, but, a market in which entrepreneurs are restless in their attempts at improvement. Ironically, this competitive process (where each entrepreneur attempts to provide better products at lower costs) is completely removed from the competitive model. All of the action, so to speak, occurs outside of the model.

This might seem like an academic exercise and you might be asking yourself, "So what?" The big point here is that in our focus on outcomes we turn our attention away from process. Turning our backs on process is detrimental because there are good economic lessons to be learned from the process. For Hayek the "good economics" being missed by the model of perfect competition is discovery. Discoveries and innovations lead us to new products and decrease costs of providing products. But, these innovations and dynamics which are the engine of growth in our economy are not captured in the model of perfect competition ---not even close.
 
//Start wonkiness
Our mathematical models are completely incapable of handling the Austrian critiques for two reasons: (1) Disequilibrium behavior, and (2) Surprise. First, there is a French word used in general equilibrium analysis called "tatonement" which translates as groping. Agents are always groping towards an equilibrium resting place. Like water poured into a bowl it will stop swirling once it reaches a resting place. Bottom line, we always model things as moving towards equilibrium and do not know how to model things moving out of equilibrium. Second, our rational expectations models presume that there is no surprise. With respect to discovery this means that if you want to build innovation in a model you must presume a probability distribution over the arrival of new inventions. But, how do you know the probability distribution? At present, this is the best we can do. In a rational expectations framework you cannot start with innovations having a measure of zero and then suddenly have a non-zero measure.
//End wonkiness

Akin to the criticism Hayek and Kirzner levy against the competitive model I have a similar example culled from game theory. George Akerlof's work on asymmetric information  is a canonical model in economic theory where the common example is used cars. Imagine you are shopping for automobiles at a used car lot.
You are not certain whether you're buying a good car or a lemon. Since you are a rational shopper you form an expectation about the value of the car.  However, the dealer knows this expectation is less than the most valuable car on his lot. Thus, he removes that car from the set of cars he offers you. Now you form a different expectation about the value of the remaining cars. The dealer continues to remove cars he values more than your expectation. This keeps going and can result in an equilibrium of complete market failure. However, we observe in the real world that used car dealers have developed warranties to overcome some of these problems. Other entrepreneurs have developed ideas like Carfax.

The point? Entrepreneurs turn Akerlof's lemons into lemonade.

This point is not as evident when we focus on equilibrium rather than process.

The Sabbath (Book Review)

The Sabbath by Abraham Heschel tip-toes the line of soul and mind. The dream-like prose is packed with zeal for a day he calls, "a palace in time":

The seventh day is a mine where spirit's precious metal can be found with which to construct a palace in time, a dimension in which the human is at home with the divine; a dimension in which man aspires to approach the likeness of the divine. For where shall the likeness of God be found? There is no quality that space has in common with the essence of God. There is not enough freedom at the top of the mountain; there is not enough glory in the silence of the sea. Yet the likeness of God can be found in time, which is eternity in disguise.

According to Heschel there are two divisions of the world: space and time. We are well acquainted with space, creating and toiling, but, we are less familiar with time. First, we start with space. Our endeavors in space can help us understand God as Creator. For example, I built Adirondack chairs the other week, therefore, I created on a much smaller scale. Furthermore, I can tell you, there is satisfaction in the toil and I feel a connection to the chairs built. In this sense, with this small metaphor I gain insight into God. Yet, as Heschel points out the likeness of God is too grand to be captured in an object.

What Heschel spends much more pages writing about is time. Writing about the nature of time Heschel looks to the Bible and ancient rabbis. Genesis 2:2 reads, "On the seventh day God finished his work," Exodus 20:11 reads, "In six days the Lord made the heaven and earth." Wait a minute . . . He made the heaven and the earth in 6 days but finished on the 7th? The rabbi's resolved this by stating that menuha was created on the Sabbath. Menuha is not an object like my Adirondack chair that can be grasped, rather, Heschel states menuha means something akin to "tranquility, serenity, peace, and repose". God created an architecture in time and menuha is the special attribute of the seventh day.

The fact that God blessed the seventh day, and not the other days, should hint that the seventh day is special. What this means is that time is not homogeneous ---some time is different than other time. What I take this to mean is, there is time for creating and time for remembering that we were created. On the seventh day we remember our relationship with God, that remembrance is a refuge from a fury of sound and distraction. What is more, this remembrance carries us through the rest of the week.

Heschel regales the reader with stories of Jewish people practicing the Sabbath and embracing the day with vigor and longing. There are many stories that could be presented here, but, I will share only one,

Rabbi Solomon of Radomsk once arrived in a certain town, where, he was told, lived an old woman who had known the famous Rabbi Elimelech. She was too old go out, so he went to see her and asked her to tell him what she knew about the great Master. ---I do not know what went on in his room, because I worked as one of the maids in the kitchen of his house. Only one thing I can tell you. During the week the maids would often quarrel with one another, as is common. But, week after week, on Friday when the Sabbath was about to arrive, the spirit of the kitchen was like the spirit on the eve of the Day of Atonement. Everybody would be overcome with an urge to ask forgiveness of each other. We were all seized by a feeling of affection and inner peace.

This book gave me a passion and appreciation for the Sabbath that I did not have before reading this book. Heschel (below) at one point asks, ". . . is there any institution which holds out greater hope for man's progress than the Sabbath?"

This is a great question. Given the level of pressure and stress, which negatively impacts many people's lives, it would seem we need to learn the discipline of rest. Not merely diversion but a palace in time that anchors our identity as image bearers of God.

Symbiotics, I mean, Economics

Earlier this week a package arrived. It was heavy like a box of rocks but contained about twelve books and a large packet of reading material. The Mercatus Center holds its first meeting for the Adam Smith fellows in mid-October and there is quite a bit of material to digest before we meet. So, I thought the blog would be an opportunity to (A) Pass along what I am learning, and (B) Serve as a repository so I don't forget what I'm learning.

This post will be a brief discussion of the first two articles in the packet Lord Lionel Robbins on "The Significance of Economic Science" circa 1935 and a later 1964 vintage by Nobel-Laureate James Buchanan called "What Should Economists Do?". In historical context both of these articles have important messages about economic method that are still relevant for modern discourse.

Robbins' central point was that economics is incapable of conducting interpersonal comparisons of utility. Other scholars at the time were using the law of diminishing marginal utility as justification for the redistribution of wealth. While Robbins upheld the belief that we could measure marginal changes for an individual he eschewed the notion that we could compare between individuals.

For example, at the extreme, there are two brothers, one named Rich N. Come and the other named Noel N. Come. Robbin's contemporaries said that Rich received less satisfaction from $1 more money than Noel received from that same dollar. Thus, the government could transfer wealth from Rich to Noel because that would result in higher social utility. However, Robbins' main point is that this justification relies on knowledge of the magnitudes of utility. In fact, there is no science that can accurately obtain such magnitudes.  Side Question: Does the literature on happiness and advances in neuroeconomics hold out hope for measuring such things? (To be discussed later)

Additionally, Robbins attempted to make a sharp distinction between (1) The objective function and (2) The economical way in which that objective is obtained. As economists Robbins said we have no way of knowing what is the best objective: more equal distribution of wealth, more meritorious distribution of wealth, etc. But, given a particular objective we should be able to talk about the lowest cost way to achieve that goal. He writes, "Without economic analysis it is not possible to rationally choose between alternative systems of society".

Buchanan uses Robbins' arguments to discuss how economists have been obsessed with the allocation of scarce resources among competing ends. Briefly, he discusses how his contemporaries got around Robbins' problem of interpersonal utility comparisons. These people created mathematical constructions called "social welfare functions" to arrive at aggregate levels of utility. While Buchanan understands the reason economists have focused on allocation he endeavors to suggest that economists would gain greater insight about human nature through studying the process of exchange ---not outcomes alone.

One passage I found particularly interesting, and summarizes his thoughts nicely, was his discussion about the name "economics". Buchanan writes, 

"Were it possible to wipe the slate clean [change the name economics to something else], I should recommend . . . "symbiotics" . . . Symbiotics is defined as the study of association between dissimilar organisms, and the connotation of the term is that the association is mutually beneficial to all parties. This conveys more or less precisely the idea that should be central to our discipline. It draws attention to a unique sort of relationship that which involves the cooperative association of individuals, one with another, even when the individual interests are different."

In 1964 Buchanan made arguments that our focus on outcomes was leading us to become a backyard of mathematics. However, when we focused on the process we learned something useful. How are human actors considering costs and benefits? What social or legal rules are salient in their decision-making process? What social or legal rules will people invent to overcome problems? For example, Buchanan said that the free-rider problem in public goods provision could be overcome through the creation of a constitution that had coercive power. He thought this was an economic action where at least a subset of people were able to pen a mutually beneficial agreement. This was symbiotics. 

Since Buchanan wrote this article there has been some progress towards becoming a process-oriented rather than allocation-oriented science. I will expound on this in a future post.  The question I'm asking myself now is, "Why did the Mercatus Center want us to read these?" I think that the overall goal is to get us to think about the market as an emergent process rather than something that is "in equilibrium". Such a framework for thought would put emphasis on institutions as well as entrepreneurial action (either new products or via collective action). In essence, focus on the process puts humans, not allocations, at the center of economics. I think this will prove to be a useful window through which we can look at the world.

This is not esoteric economics but matters in the following sense. If we are a science that focuses on outcomes without much regard for the process in which outcomes happen we will be less attuned to opportunity costs and unintended consequences, two things we profess to teach our students (and on this blog we have professed could help make the world a better place). More to come.

Christians and Merit

"Serious Christians have to struggle continuously against the temptation to view 'merit' uncritically."

Read more, much more, at this wonderful essay by Walter Russell Meade.

Thanks to Instapundit for the tip.

Elinor Ostrom

There was sad news this morning that Nobel laureate political scientist Elinor Ostrom has passed away (she won the prize in Economic Science in 2009). Prof. Ostrom pioneered a fusion of field-based, almost anthropological, research with the experimental methods of her colleagues at Indiana, notably Prof. James Walker, to teach us much about how real people solve real commons dilemmas problems. She wasn't a Polyanna; common dilemmas indeed are problems and sometimes failures occurs. But she also documented the ability of people with local knowledge and local institutions to do much more than those textbook models which read something along the lines of "this is market failure... the government must intervene to fix the problem." She called the focus of her model "polycentrism." You can find her biography and her Nobel Prize lecture here.

We Will See Clearly

Motivations matter. There was a story from an experimental economics lecture that illustrates this point well, 

Consider these three scenarios: 1) I trip and spill a hot cup of coffee on you, 2) I walk up to you and toss a hot cup of coffee on you, 3) Someone else hits me over the head with a 2x4 and I spill a hot cup of coffee on you. In all three situations a hot cup of coffee has been spilled on you ---but you feel differently and would judge me differently in each scenario. 

What really gets under our skin is the motivation. Yet, it is not easy to infer motivation from conduct and there are also biases we must fight against. For example, in psychology there is the well known Fundamental Attribution Error in which we blame the character (attribute) of someone rather than the circumstances (Here are some examples of attribution error). Most things are mixtures of circumstances and character. 


Today in church we read a passage that I have read many times before (1 Corinthians 13:12), but, never in this way, 

Now we see things imperfectly, like puzzling reflections in a mirror, but then we will see everything with perfect clarity. All that I know now is partial and incomplete, but then I will know everything completely, just as God now knows me completely.

I always perceived what would be made complete was my lack of informational knowledge.  Like explaining the presence of suffering in a world with a loving God. Or, asking about dinosaurs. But, our pastor pointed out that the last part, ". . . just as God now knows me completely," suggests something else. We see each other imperfectly. We do not know the hard battles each other are fighting. And, on top of that, we fear that if we were to give the benefit of the doubt they would take advantage -or- things would never get better. When we see things clearly we will see each other as God sees us.


We should be people that refuse to live in fear, but, instead pick the path of love. And, we should know that whatever sufferings we endure from love are not in vain. I want to close with a beautiful and poignant part of Rick Joyner's book The Final Quest:

I looked at the old eagle, and for the first time I noticed the scars amid his torn and broken feathers. However, the scars were not ugly, but were lined with gold that was somehow not metal, but rather flesh and feathers. Then I could see that it was this gold that gave off the glory that emanated from the eagle, making his presence so awesome.  

“Why did I not see this before?” I enquired. 

 “Until you have beheld and appreciated the depths of the treasures of salvation, you cannot see the glory that comes from suffering for the sake of the gospel. Once you have seen it, you are ready for the tests that will release the highest levels of spiritual authority into your life. These scars are the glory that we will carry forever. This is why even the wounds our Lord suffered are with Him in heaven. You can still see His wounds, and the wounds that all have his chosen ones have taken for His sake. These are the medals of honor in heaven. All who carry them love God and His truth more than their own lives. These are the ones who followed the Lamb wherever He went, being willing to suffer for the sake of truth, righteousness, and the salvation of men. True leaders of His people, who carry genuine spiritual authority, must have first proven their devotion this way.”     

First Day at ASREC: First Session

I think I should start writing up some summaries of the papers we saw at ASREC. The papers were overall very interesting and the people were a delight to talk to. The presentations that Mark and I gave were well attended and it was surreal to present with a Nobel Prize winner in the front row. Chapman University has a gorgeous campus and I hope to be going back there for the ASREC graduate student workshop in June. Without further ado here are some very brief summaries of the papers on the first session I attended.

Entry into Local Religious Markets (did not see an online version): (using late 19th century data from Scotland): attempted to track the likelihood of an additional church entering a geographical region given N existing churches in that region. He calculates the likelihood of entry at various levels of N and has a rich set of controls, down to details such as "Does the congregant speak Gaelic?". One of the interesting things he found was that there was more entry by the Free Church of Scotland because of the cross-subsidization from rich churches in the city to the new rural church plants which lowered the cost of entry. There was an interesting discussion about how greater religious pluralism in an area should make people less religious but that it seems that pluralism actually increases attendance.

Clergy Regulation (did not see an online version): This was an interesting sociological paper where the author Paul Olson was doing semi-structured interviews with pastors from a variety of Christian churches in a small Mid-western town. The regulation referred to an informal regulation among the clergy in this town to not "steal sheep". That is, there was a kind of cartel agreement where pastors could not pursue another pastor's congregants. From an economic perspective we know that cartels are difficult to maintain because there is always an incentive to deviate. Unless, of course, there is some sort of punishment for deviation. The main form of punishment put forth by Olson was social ostracism. (There is a large sociological literature that suggests pastors are lonely people to begin with. In seminary they're often told not to get too attached to their congregations. And, in interviews pastors often claim their ordainment sets them apart, even if they don't necessarily want to feel set apart.). The social ostracism would take the form of excluding people from invitations to the pastor's Bible study. I talked with Olson afterwards and he echoed what I was thinking, this was the central punishment for breaking the cartel. The punishment that all the other pastors raid the deviating pastor's congregation was not the threat because on some level the pastors believed it would be wrong to do that even if that other person did deviate.  

The more subtle question is, "What do you do when a congregant from another church starts coming to your church?". Among the mainline churches there was a strong norm to call the pastor from the other church to inform them that the family had started coming more and more to their church. There was a partial norm among the evangelical churches.

Another interesting point also came out. Targeting a specific person was not kosher, but, doing a mass event where all were invited was fine. This meant that pastors could get people in the door from other congregations then as one of them said (paraphrasing): If the chickens come to the yard of course I'm going to feed them. 

Exporting Christianity (http://irps.ucsd.edu/assets/001/502436.pdf): This was an extremely polished presentation from Gordon Hanson that was looking at which denominations were successful at "exporting Christianity" to countries outside of the denomination's headquarters. The authors used economic modeling techniques from international trade and industrial organization. Think of the denomination headquarters as a franchise and the newly planted church as the franchisee. In these kinds of agreements there are incentive problems. The denomination has a certain way of doing things; however, the pastor of the newly planted church might want to make some tweaks. The authors find that giving the local pastors more authority is correlated (they make a causal argument) with attracting more adherents. The reasoning is that they have more incentive to improve their congregation. Also, the authors find that strict denominations like Jehovah's Witnesses, Mormons, Seventh Day Adventists, etc. are more likely to succeed when social service provision in a country is weak. That is, people are more willing to accept the restrictions when they are receiving benefits such as healthcare and disaster relief.   

Five Things I Don't Know About You.

Urban legends are hard to put to rest, especially when statistics are abused.

The U.S. has abysmal infant mortality statistics? Well, not exactly.

The U.S. health care system leads to life expectancies that trail the rest of the industrialized world? Well, kind of, but not exactly.

Here is a very nice myth-busting article by health care expert Christopher J. Conover of Duke University and AEI.

Chasing

This weekend Mark and I will be going out to Chapman University in California to take part in the Association for the Society of Religion, Economics, and Culture. The name is a mouthful so it will be ASREC from now on. The program looks really good. Check it out. If you see a project you're interested in I'll check it out and do a write up on the blog.

You might notice that Mark and I are both on the program. He is presenting our out-of-the press research regarding the Parable of the Yeast and I am presenting our research on the Parable of the Great Banquet (I'll let everyone know when they can get a copy off my website).

The crux of the Great Banquet research is that all of us are modern invitees to a banquet, what would cause us to accept or reject an invitation to the banquet? We believe it comes down to how a person values the banquet. In the lab we manipulate how uncertain they are about the value of the banquet. We also manipulate how much they desire other things besides the banquet. One of these "other things" we can desire is social status. We have a desire for recognition, to be the best, and known as the best. Excellence is a good thing, egoism is not.

I do not know if our readers like rap music but I have embedded a music video of my favorite rapper (and he's a committed follower of Christ) Lecrae's rap song called "Chase That" (lyrics here if you prefer not to listen)

Also, congratulations to my friend Brandon Vogt who will be appearing on NPR's interfaith voices segment. You can check his blog Thin Veil here.

The Answer is Blowin in the Wind Part?

A report in this morning's Wall Street Journal (unfortunately behind a subscription firewall) investigated federal stimulus funds given to alternative energy companies, and found that wind farms receiving a total of over 4.3 billion dollars in stimulus funds currently employ 300 people. Even if every one of those jobs is simply a creation of the stimulus package, that works out to over 14 million dollars per job.

"High Rates Don't Always Deliver ...High Revenues"

I was telling Doug that I have been deliberately not posting for many weeks, for the simple reason that many of the policy issues that I wish to address (such as the marginalization of the voluntary and faith sectors from the public sphere) have become highly partisan at this point in the election cycle, and I don't want to post a partisan politics blog. However, here is a good economics example from outside the United States. In the U.K. the coalition government imposed a new surtax on wealthy individuals. The result has been....lower tax revenue. Humans are not electrons; they adjust to incentives, and apparently wealthy individuals in Britain were easily able to adjust their economic activity to avoid the tax. Now, there is a broad call for repeal of the tax as a fear that Britain is losing a generation of entrepreneurs creeps in. Here's the article with the details (thanks to HotAir for the tip).

I'll Be Back

The scene was set. We had a good party going and one of the hosts decided to go catch his breath as he was drowning in school work. Now I want to come back to the party, but, I'm afraid all my guests have left. Nevertheless, I will write. Let me explain why (if there is anyone reading this still).

This weekend my wife and I were walking and talking about the future. She is in planning mode, submitting all kinds of forms for residency and she asked a simple question, "Given what you want to do, what would be the best locations for me to apply?" I stumbled.

Why? Because that would imply that I knew what I wanted to do. I feel in these last semesters I've become a little bit lost. The zeal for economics is still there, but, I feel tired and uninspired. I have lost my sense of direction and now, more than ever, I need this blog.

Though I am busy, yet I will be back with a vengeance.