Thursday, December 22, 2011

Trip Notes

Yesterday I joined the club of people who have flown halfway across the country and back on a single day, for the purpose of a business meeting*, on someone else's expense account, carrying nothing but a wallet and phone and wearing a suit. Here are some random notes from that trip.

People often get annoyed at crying babies. But think about it from the baby's point of view. They are in a bizarre alien atmosphere, completely separated from their familiar environment. They are constantly assaulted with a barrage of strange sights, smells and sounds. Unfamiliar and alien people are everywhere. In the natural habitat of the human baby, that kind of thing would only happen if they were lost, or being abducted. Human instinct says that babies should always be in a familiar place, surrounded by familiar people. This is one of many ways our instincts are not meant for the modern world.

I wonder if anthropologists have done studies comparing how often babies cry in hunter-gatherer tribes in a natural environment, compared to how often they cry in our odd artificial environment of civilization.

Speaking of artificial, my new dress shoes are horrible. They scraped a hole in my dress socks, and then started chafing my heel. The rotten things actually drew blood. There is dried blood on the inside top heel of my right shoe. And the soles are starting to visibly wear, after just a little bit of walking around.

When I got my Vibram Fivefingers shoes, I loved them. Now I wear them all the time, but I do not love them so much. I have gotten used to the benefits, and the minor annoyances loom larger. But today, after suffering through wearing and walking around in 'normal' shoes, an interesting thing happened. I did not fall in love with the Fivefingers again. Rather, I decided that I loathe and despise anything that is not a Fivefingers. This is a perfect example of hedonic adaptation.

It is easy to forget the wonders of civilization. I wonder if anyone else stopped to think how awesome it was that we were soaring above the clouds inside a giant fire-breathing metal beast. Looking down on clouds in the late afternoon or early morning is amazing. But until I stopped to reflect on this, my main thought were annoyance over a 90-minute delay.

*Technically it was a job interview, in my case.

Friday, December 16, 2011

Online Schools

Online K-12 schools are much more common than I thought they were. A lot of students are leaving public schools and signing up with online charter schools. This article starts with a big list of complaints about these online schools, but then gets to this:

By fall, 1,800 students had enrolled in the Tennessee Virtual Academy.
About 75 of them came from the struggling Memphis city school system, including the children of Denita Alhammadi.
In a neighborhood teetering on the edge of middle class, Ms. Alhammadi has converted her living room into a classroom. Two desks are for her children, Romeo, 13, and Yasmine, 8. Another is for Ms. Alhammadi, a former Army supply officer who is also studying online, through Kaplan University.
Within weeks of attending a K12 information session, Ms. Alhammadi had become parent and teacher, wrapped into one. She spends as much as six hours a day as the official "learning coach" for her children.
Like many parents who move their children to online schools, she had worried about violence. But no single reason leads families to make the switch. The students are a broadly diverse group, ranging from entertainers and athletes in training to children with cancer, seizure disorders, peanut allergies or behavioral problems. Some have been expelled from regular schools. In many cases their parents are simply dissatisfied.
Kathryn Ubiarco, whose son and daughter are also enrolled in Tennessee, said that her daughter's school in Memphis had not been teaching her to read. "There's no way to come up with the B that she got in reading last year," Ms. Ubiarco said. "The child can't read." She believes the virtual school curriculum is more rigorous.

It is probably true that, right now, the average charter school is worse than the average public school. But individuals making decisions about their lives do not care about averages. Charter schools offer them a choice and an option. Even if the charter school is run by a money-grubbing corporate sociopath, being given the option to enroll in it will improve your life, especially if you live in a rotten school district or have difficulties with regular school.

Whenever a new industry develops, quality is very uneven and there are often a lot of frauds trying to make a quick buck. But over time, competition causes the bad ones to fail and the good ones to gain market share. If there is only one online charter school operating in a state, it will probably be pretty bad. If you are the only charter school in the market, then all you have to do is perform a bit better than the worst schools and attract students from those places, and students that really hate normal school. This lack of competition allows you to deliver a low-quality product to captive consumers and make massive profits.

But if there were five options for online charter schools, and parents knew the test scores and college placement rates for each one, things would look a lot different. Each company would have to deliver a better product, and spend resources to do so, driving profits down to zero.

Even the current crop of experimental and low-quality online schools are a better option for some people. That is what a market economy does: deliver options. Our current public school system forces everyone to do the same thing the same way, and the education is often alarmingly low-quality. This cannot last. Giving people more choices is the only way forward.

Tuesday, December 6, 2011


I just saw a new word get invented.

We are in the public economics workshop going over a rough draft of a paper. The Czech professor was pointing out a mistake, and said, 

"You repeated it twice, so it is not a typo, it is a thinko."

We all liked this new word. It makes sense. A typo is an error in typing, and a thinko is an error in thinking.

Edit: It seems that the word is already used in computer science, and it means the exact same thing.

Wednesday, November 30, 2011

Squirrel Research

While walking around campus to get some sunlight, I saw a lady working with a squirrel trap and talking with two of the groundskeepers. I listened for a bit and then joined the conversation.

The squirrel researcher is a PhD student here, and she obviously had a good rapport with the groundskeepers. I would wager that those two guys were very different from her in terms of political beliefs, lifestyle, culture, and IQ, but they still had the camaraderie of people who work outdoors with living things. There were interested in the capturing and tagging process, and they try to schedule their work so they do not interfere with the research. They know that the squirrels are doing a lot of damage; over the summer a dozen trees had to be removed because the squirrels had stripped the bark. I got the impression that they respected her as one of the team.

She was doing a population study, trapping and tagging the squirrels with ear tags. The best current guess is that there are around 500-600 squirrels on campus, but nobody has done recent research. Her long-term research project is investigating the effects of squirrel population control with an oral contraceptive. In addition to population counts, it will involve toxicology studies, including capturing hawks on campus and drawing their blood to see if they are affected.

People have been deliberately interfering with her squirrel traps, either closing them or stealing them, presumably because they think that the squirrels are being killed. This kind of ignorant emotion-driven action is harming the research, and if she cannot prove that her contraceptive program works, then people will continue to manage squirrel populations by culling.

I commented that these were probably the same people who feed the feral cats. She started complaining about the feral cats, the damage they do, and how the university would not approve any plan to control their numbers. She also mentioned an incident in which a cat was tormenting a trapped squirrel, and said, "I am a vegan, but I wanted to kill that feral cat and eat it for dinner."

I got the impression that she was a serious nature-lover; she really believed in keeping a natural balance, controlling invasive species, and never killing anything without eating it. I am much more sympathetic to that viewpoint than the typical animal-lover who falls in love with cute furry things without any thought for the big picture.

Tuesday, November 29, 2011

Seigniorage and Fractional Reserve Banking

Edited to fix math:

Seigniorage is the income that the government gets by printing money. It costs the government a few cents to print a $20 bill, and they get to spend it to purchase $20 of goods and services. Of course, printing money causes inflation. If the government tries to get too much income from seigniorage, the result is hyperinflation.

However, if the economy is growing, as modern economies typically do, then you need to keep expanding the money supply or there will be deflation. If the population is growing by 2% an year and real per-capita incomes are growing by 2% a year, then the government must increase the money supply by 4% a year to get an inflation rate of zero. There is 4% more actual stuff being produced each year, so in order for money to be worth the same, we need 4% more money. Increasing the money supply by 6% a year would produce an inflation rate of 2% a year, which is about the right amount.

Fractional Reserve Banking is the banking system used in all countries in the modern world. Put bluntly, it means pretending that loans are money. Most of the money in your checking account and savings account is not backed up with actual cash. Your bank probably has cash reserves that are less than 10% of the value of its depositors' checking and savings accounts.  The rest of your money was used to make loans to people. You get to treat your bank accounts like money, but it is not money the government printed. It is money that the bank made up by loaning your money out to people and then telling you that you still have the money.

This system is just as unstable and volatile as it sounds. Many of the economic crises in history have been caused or worsened by the failures of banks using this system. Even when banks do not fail, the economy is harmed by the fluctuations in the money supply that result from changes in the percentage of money kept in reserve by banks.

It would be possible to change the laws so that retail banks that deal with consumers would be forced to keep full reserves. This wound inevitably mean that you would never get any interest on your bank accounts, and would in fact have to pay the bank a fee for storing money and processing transactions. If you wanted to earn interest, you would have to withdraw your money and go to a different company that handled loans. 

People have proposed this as a way to escape the economic volatility of our current banking system. This would be a big and difficult change, and I do not know if it would be worth the cost. A big problem for these proposals is that the creation of 'credit money' is not limited to the retail banking system. There is a 'shadow' banking system used by large corporations and financial institutions that also converts loans into assets and trades those assets like money. The recent financial crisis featured a run on this shadow banking system, which caused a fall in the money supply.

Everything I have said so far is basic monetary economics. Now I will combine the facts about Seigniorage and Fractional Reserve Banking and point out something that I have never seen anyone discuss.

Fractional Reserve Banking means that the money supply increases by much more than $1 for every dollar the government prints. If the government increased the supply of currency by 1% a year, then we could have inflation of as much as 10%. Every dollar the government prints is transformed by the banking system into a lot more dollars.

This means that almost all of the seigniorage in modern economies goes directly to financial institutions. The money supply of the USA increases by about 5% a year, which means that somebody is getting seigniorage income equal to 5% of the money supply each year. The government is only getting a fraction of this. All of the rest goes to banks. Given that the money supply (M2) is around 9 billion dollars, that is over $400 billion every year going to the banks

Some of this subsidy will be passed along to consumers in the form of lower prices for banking services, to the extent that banking is a competitive industry. However, the total profits of the financial industry have between around $350 billion on average for the past 10 years. If the industry was competitive, that number would be a lot smaller. A lot of people who study the issue say that banks are making abnormally large profits.

It is probably a coincidence that financial industry profits are close to the annual amount of seigniorage captured by the financial sector, but it seems clear to me that banks are getting vast quantities of free money on a regular basis. It is not technically a subsidy, but the facts of fractional reserve banking and the money multiplier mean that almost all of the 'inflation tax' must be going straight to them.

If fractional reserve banking were eliminated, you could support all of the operations of a modern state with nothing but seigniorage. Most of the budgets of the USA and other developed countries go to transfer payments like Medicare, Medicaid, Social Security, and other entitlement spending. Operations costs are typically 5-10% of GDP. The USA could support all of its discretionary and military spending with no federal taxes at all, if it could capture all of the seigniorage from an increase in the money supply of about 15% a year. That is very high, and would distort the economy, but the current system of taxation also causes a lot of distortions.

Cutting our military spending to pre-9/11 levels and trimming some of the obvious fat from government would take the required money supply growth down to about 10%, which would give an inflation rate of about 7%. That is still high, but I would definitely take 7% inflation in exchange for no federal taxes.

Huge changes like this are nothing but fantasy thought experiments, of course. But it is possible to imagine a world where all of the operations of all levels of government can be supported with only seigniorage and taxes on externalities like pollution. With proper economic policy, the taxation of productive activity could be swept into the dustbin of history.

Tuesday, November 22, 2011

Reputation versus Credentials

Last Friday I went to the opening of an MFA (Master of Fine Arts) exhibit at the university. It had a sculptor and an engraver showing off their work. I was impressed with the work of the engraver. He was a true craftsman, cultivated an early-1900's feel to his work, and was dressed in vintage clothing. He had set up his studio and tools in the art gallery, so we could learn how he did his work. You could tell that he was good and that he really loved what he was doing.

My grandfather was an engraver. I have one of his engraving tools, although I thought it was a leather-working tool. I now understand more about what he would have been doing. My grandfather never got a college degree. I will ask my family more over Thanksgiving, but as far as I know, he never had any formal training in engraving. I assume that, like most people of that time, he learned his many skills by practicing on his own, doing an apprenticeship, or taking odd jobs.

At the exhibit, I met one of the Tae Kwon Do black belts and started chatting. He had a stainless steel beer stein that he wanted engraved with a coat of arms, and was going to hire the engraver to do it. He was very happy to find someone who could do that kind of work. This is the only time I have ever met an actual paying customer at any of these artist exhibits.

I was also happy to see someone keeping an old craft alive. I hope that the engraver has a good future and that the market rewards him for his work. But it really bothered me that he was getting a Master's degree. He is probably going to end up with a lot of debt as a result of this training, and I do not think that it will really help him. Engraving is not something that you should get a degree in. It is something that you should do, and get paid for, and get better at with practice. There is no theory required, no long period of essential studying and training before you can be trusted, like with science or engineering. In the past, engravers like my grandfather never messed with any of that. 

I see the existence of an MFA in engraving as a symptom of something wrong with our society. We have become obsessed with credentials. Everyone seems to accept that the only way to advance in life is to go to college and get a degree in what you want to do. This is silly. If I wanted to hire an engraver, or any kind of artist, I would not care if he or she had an MFA degree. I would want to see samples of the work and talk with other customers. If the engraver had started engraving work right out of high school in a society that supported this career path, he would probably be a successful businessman by now, and would probably be a better engraver as well.

The area my parents live in supports a vibrant industry of potters. They will often go to pottery shows and buy good, hand-made pottery from these local artists. I am fairly sure that most of these potters do not have any kind of degree. They learned by doing, as part of the family business or an apprenticeship. From what I can tell, the quality of their work, in both technical and artistic terms, is much better than the pottery I see displayed at the exhibitions here.

I know why the obsession with credentials developed. Until the great urbanization of the late 1800's, there was no need for credentials in most things. People knew each other, and they knew who did good work. Even in things like law and medicine, there were no credentials. You were a lawyer if people were willing to pay you to do law. Word of how you did got around, so you had to do good work to maintain your reputation.

When people moved to cities, this source of information disappeared. It became much harder to get information about people, and so it became easier for incompetent and fraudulent people to take advantage of ignorant customers. In response to this, there was a demand for some kind of minimal quality control. If you moved to a new city, you would have no way of knowing which doctors were any good because you did not know any previous patients, but with a credential you would have some assurance that the doctor met a set of professional standards.

Unfortunately, over time the credentialing process was captured by professionals who used them to keep their own wages up. By making it much harder for other people to become doctors or lawyers, the existing doctors restricted competition and got richer. They claimed that the restrictions were for the benefit of consumers, but the restrictions were never applied equally to all of the professionals. They were just imposed on the new ones, and they gained the force of law, so it was impossible to opt out of the system and choose an uncredentialed service provider.

Young people choosing careers saw these high wages, and devoted lots of effort to gaining the credential. Over time, the credential started to lose any meaning; it was just an artificial hoop to jump through, as this article on law school demonstrates:

PHILADELPHIA — The lesson today — the ins and outs of closing a deal — seems lifted from Corporate Lawyering 101.
"How do you get a merger done?" asks Scott B. Connolly, an attorney.
There is silence from three well-dressed people in their early 20s, sitting at a conference table in a downtown building here last month.
But the three people taking notes are not students. They are associates at a law firm called Drinker Biddle & Reath, hired to handle corporate transactions. And they have each spent three years and as much as $150,000 for a legal degree.
What they did not get, for all that time and money, was much practical training. Law schools have long emphasized the theoretical over the useful, with classes that are often overstuffed with antiquated distinctions, like the variety of property law in post-feudal England. Professors are rewarded for chin-stroking scholarship, like law review articles with titles like "A Future Foretold: Neo-Aristotelian Praise of Postmodern Legal Theory."

This credential-seeking is a huge waste of resources. I would guess that 90% of all college degrees, and probably a lot of advanced degrees as well, could be replaced by some combination of an IQ test, personality test, on-the-job training, and a close look at high school performance. 

The system of credentialing, of putting vast amounts of effort into a single line on a resume, is not suited for the modern world. We need to understand that it developed as a temporary fix to a temporary set of social conditions. With modern information technology, we can do much better. We can get something that looks more like the reputation-based system of social interaction that allowed people to start productive careers without wasting so many tears of their lives.

By this point in the semester, I know a lot of information about my students that would be very valuable to an employer. I have a good idea of their intelligence, dedication, discipline, attitudes, work habits, and attendance patterns. Any teacher who does more than lecture and give standardized tests can say the same thing.

But all of that information will be crammed into a sausage maker and turned into a single letter grade. Anyone who actually has any hope of graduating will fall into one of only three categories: A, B, or C. The cutoffs are maddeningly unfair and arbitrary. Sometimes the difference between an A and a B is very small, especially compared to the wide variety of aptitude, from genius slacker to dim workaholic to true overachievers, that all gets thrown in the 'A' bucket. Then that grade will be mixed in with a bunch of others and turned into a GPA. The end result is so worthless that employers have almost no idea about people, and so they force them to go through a long and messy screening process.

Compare that to other systems that have been developed to report information about people. Ebay's feedback system is basically a copy of old-fashioned reputation and gossip, and you can learn a lot about a seller in a short time. A more relevant comparison is credit reports, which do a good job of reporting the relevant information about people. Think about how easy it is for reliable people to get a loan, compared to how hard it is for them to get a job. A visitor from another planet, or from our own past, would be amazed at how easy it is to get people to hand you tens or even hundreds of thousands of dollars based on a promise to repay, compared to how hard it is to get them to agree to give you a regular check for a promise to work.

It would be easy to make transcripts as useful as credit reports. Teachers could rank the students in their class, from best to worst, on attributes like punctuality and reliability in addition to cognitive skills like critical thinking. We could choose a few attributes from a list to describe each student. With good interface design, the entire process would take less effort than grading a single set of essays or free-response tests.

Students should be able to see all of their reports, which would give them useful feedback and allow them to post a complaint if necessary.

This could be combined with a wide array of standardized tests that allow people to demonstrate competence in everything from accounting to welding. Then various reporting agencies would take the raw data and figure out how to analyze it to produce useful reports for prospective employers.

It is easy to envision a world in which the process of job applications, even interviews, becomes redundant. Employers would tell the job requirements to the reporting agency of their choice, and  then get reports that score all high school students on those requirements. As students progressed in their education and accumulated skills and a reputation for a good work ethic, job offers would start to show up the way that credit card offers show up in my mail. Students would quit school whenever they were offered an attractive salary. The employer would then be asked to report information, much like the school did.

It may seem off to skip the interview process, but numerous studies have shown that interviews are much worse at selecting ideal candidates than subject-matter tests. Charismatic narcissists routinely get hired over people with actual skills. Job interviews could someday be seen as a relic of the days when reliable information about people was so scarce that it was seen as necessary to try to guess their character and competence from a five-minute conversation

The concept of such a comprehensive 'digital reputation' might scare people. It should not. This kind of information would allow people to be matched with jobs that are better suited for them, giving a higher salary and quality of life.

Thursday, November 17, 2011


This article presents further evidence that, for many people, swearing (cursing) provides readily available and effective relief from pain. However, overuse of swearing in everyday situations lessens its effectiveness as a short-term intervention to reduce pain.

Wednesday, November 16, 2011

Election Strategy

Some things do not change:

The September 11th speech by Wallace was his first really adroit one. It was a bid to the discontented liberals wavering behind President Truman. What he said publicly they have been saying privately with increasing bitterness - even those who support the President. Henry Wallace appealed to the atavistic fear of all progressives - the fear of "Wall Street". This fear is not the sole property of the progressives. It belongs traditionally to the Democratic Party. It began with the agrarian Jefferson's battle against Hamilton, it continued with Jackson's fight against Nicholas Biddle's bank, it found its Silver tongue in the crusades of William Jennings Bryan, and it came to full flower under Wilson and Franklin Roosevelt. In a very important sense, it is the reason for the Democratic Party -- because the only way to explain the lasting alliance between the South and the West is their mutual fear of domination by the industrial East. Today the South can agree on no issue with the West – except "Wall Street."

from a memo on Truman's 1948 re-election strategy. Note that they are talking about Henry Wallace, not the segregationist governor George Wallace.

Also note that during this time, Southern whites always voted Democratic. As game theory and the median voter theorem would predict, and as the memo describes, this meant that they were basically ignored. Now that they always vote Republican*, they will similarly be ignored.

History buffs will probably want to read the whole thing. The tone of naked political calculation is quite impressive, and there are lots of great bits, like:

The liberals are numerically small. But, similar to manufacturers and financiers of the Republican Party, they are far more influential than mere numbers entitle them to be. The businessman has influence because he contributes his money. The liberal exerts unusual influence because he is articulate. The "right" may have the money, but the "left" has always had the pen. If the "intellectual" can be induced to back the President, he will do so in the press, on the radio, and in the movies. He is the artist of propaganda. He is the "idea man" for the people. Since the rise of the pressure groups, the men of ideas who can appeal to them on their own ground, in their own words, have become an essential ally to the alert candidate in modern American politics.


The leaders of labor must be given the impression that they are once more welcome in the councils of the Administration. Much of this cultivation can be done only by President Truman himself. Immersed in the staggering burden of his work and preoccupied with his day-to-day problems it is easy for the incumbent of the White House to forget the "magic" of his office. The mere extension of an invitation to William Green, Dan Tobin, Philip Murray, Dubinsky or any of the prominent leaders to "came in and talk with me" has a stupendous effect on them and their followers.
One by one they should be asked to '"come by" and the President should ask them for their advice on matters in general. (This is a question of delicate "timing" -- it is dangerous to ask a labor leader for advice on a specific matter and then ignore that advice). No human being -- as every President from Washington on has ruefully learned -- can resist the glamour, the self-important feeling of "advising" a President on anything.


It is said invariably, and always without analysis, that the President is the Chief of State, the Symbol of Government. What the theorists as well as the politicians do not observe is that the public gets its impressions of its President mostly from the actions he takes when performing as Chief of State – as the Head of Government. The masses of the people rarely if ever think of him in his role of Government administrator, or as the responsible policy maker on our national economic problems.
They really form their lasting impressions from watching his incidental gestures – when he appears as the representative of all the American people….
…[A]t home the American people are daily forced to think of their President as a politician for the good reason that the news stories deal only with his activities as a politician – because it is what he is engaged in doing. His calling lists, week in and week out, are filled almost entirely with Government and Congressmen with whom he consults on problems that are important to the nation, but appear to the average reader complicated and dull.

Some things do change, however, The memo discusses Italians as a distinct ethnic group with a distinct political strategy. Nowadays Italians are just 'white people' and nobody thinks of them as a distinct group. Other 'facts' about the political process, like the loyalty of the Presidential cabinet and the public's toleration for the president acting like a politician, have changed.

The economic illiteracy is also astounding. The memo talks at length about the desirability of wage and price controls, like the ones that Nixon passed that caused massive damage to the economy. I shudder to think about what might have happened if these laws were passed. The suburbs might never have been built, and the last half-century would have seen a population crammed in decaying rent-contolled apartments.

* A cynic would say that Southern whites have a long and distinguished history of voting against whichever political party is known as the party of civil rights.

Monday, November 14, 2011

Shakespeare and Kansas

This article about Shakespeare's criminal connections, combined with my knowledge of how much low-class vulgarity is in his plays, made me imagine a future civilization that considers gangsta rap the epitome of civilized refinement, the way we treat opera and Shakespeare plays. It is also easy to imagine our current inner-city gangsters being romanticized the same way our society romanticizes pirates.

On a happier note, this article about Hispanic immigrants revitalizing dying Midwest towns shows how entrepreneurial people can respond to incentives in such a way that society is improved. One person's dying small town is another person's chance to buy a good, cheap house and start a better life:

Wednesday, November 9, 2011

Culture Clash

Be it so. This burning of widows is your custom; prepare the funeral pile. But my nation has also a custom. When men burn women alive we hang them, and confiscate all their property. My carpenters shall therefore erect gibbets on which to hang all concerned when the widow is consumed. Let us all act according to national customs!

Sir Charles James Napier, the British Army's Commander-in-Chief in India from 1849–1851, reacting to a Hindu priest's complaint about making Sati illegal.

A similar even was also recounted in a book about his administration:

A man had been condemned for murdering his wife; his chief sued the general for pardon.
[Napier:] "No! I will hang him." 
[Chief:] "What! you will hang a man for only killing his wife!" 
[Napier:] "Yes! She had done no wrong." 
[Chief:] "Wrong! No! but he was angry! why should he not kill her?" 
[Napier:] "Well, I am angry, why should not I kill him?" 

I have glanced through the book, and it seems to be full of fascinating and disturbing passages like this one:

Sir C. Napier classed under the head of slavery, the dragging young girls from their homes for the harems of the great; and often he rejoiced at being the instrument of Providence to suppress the cruelty exercised towards women, though to do so, he was forced to wield the sword so terribly in battle and give the axe of justice such a sweep; but the feeling respecting the non-right of women and children to their existence and freedom demanded the sternest repression; for the examples of unmitigated cruelty and debauchery given by the numerous ameers, had a wide currency which sharp justice only could counteract. 

I get the feeling that I would have liked Napier, but the not guy who wrote the book. I am not sure which is more alien to modern sensibilities, the Indian culture of shameless patriarchal violence or the British culture that created such self-righteous and overblown prose to justify colonialism. But I am certainly glad that the British culture ended up leaving such a large mark on the world, and then turning into the mindset that we have today.

Wednesday, November 2, 2011

Historical Musings: Byzantine Empire

Popular imagination is an odd thing. Most people in the USA are familiar with the Roman Empire. Even people who paid no attention in history class will know of its existence from movies, and have a vague idea of its culture, power, and place in history. Political commentators often make reference to ancient Rome, usually in the context of its culture, institutions, and values. They often draw parallels between the USA and Rome. It is a common cultural reference point, like Shakespeare and the Bible.

The Byzantine Empire, however, is not nearly as well-known, despite the fact that it was the major cultural, military, and economic power of the early Middle Ages. For hundreds of years after Rome fell, the Byzantines, who called themselves Romans, were a powerful, stable, advanced civilization. And yet, when people think of this era of history, they think of the Dark Ages of Western Europe, with petty kingdoms and Viking raids. I cannot think of any kind of popular entertainment that features the Byzantine Empire. It is almost totally absent from our cultural consciousness, known only to people with a scholarly interest in history.

Americans like to think that they will always be remembered by history, no matter what might happen. We look around and see that we have dominated the last century. We have been the major cultural, military, and economic power of the world. We hope that, even if something happens and our country falls apart, future generations will know and care about us the way we know and care about the Roman Empire.

It is possible, however, that the prize of historical memory will go to the British Empire. They were the ones who started off as a little island nation and went on to rule a quarter of the globe. They were the ones who spread their language, law, and culture all over the world. They were the ones who started modern capitalism and the Industrial Revolution. They were the ones who fought piracy and slavery on a worldwide scale, in a remarkably successful effort to remake the world according to their cultural values. I can easily imagine the British Empire being embedded in the popular culture of a thousand years in the future the way the Roman Empire is in ours, especially if India becomes a world power in the future and has a big effect on that culture.

Compared to the British historical legacy, the century of American power looks rather less impressive. Our biggest achievements were defensive actions against various forms of tyranny, and the continuation of a scientific and economic system that we mainly inherited from the British. Even if we end up being the last outpost of Anglo-American civilization, the way that Byzantium was the last outpost of Roman civilization, that will not guarantee us a place in history.

The USA might share the historical fate of the Byzantine Empire, barely remembered at all in a thousand years, regarded as a mere adjunct to a grand civilization that remade the world. History might remember us as but a dwindling power, an insignificant offshoot of the grand British Empire, that tried to continue the civilization but fell slowly to pieces in a world that grew increasingly chaotic and fragmented. Our very name could be assigned to us by later historians.

If this is depressing, it should not be. The people of Byzantium lived good lives, and their civilization was worth preserving and fighting for. To our modern eyes, they would seem like impoverished savage primitives, but compared to the rest of the people of their world they were the richest and most civilized nation. History is a rather poor judge of what really matters, as I have noted before. If we accept the fact that history might not know or care about anything we do, then it becomes easier to abandon grand ambition and focus on making the lives of individuals as good as possible.

Thursday, October 27, 2011


Little things like these make me feel better about the future:

Curry Parmesan: Sikhs rescue Italy's famous cheese
ZIBELLO, October 26, 2011 (AFP) - A master in the art of making Parmesan cheese, Manjit Singh is part of a large community of Sikhs in northern Italy who are shoring up an industry under threat of extinction.
Since moving from India seven years ago, the former taxi driver has become the main cheesemaker in a small family-run factory that produces thousands of rounds of the world-famous cheese.
Graziano Cacciali, who runs the Parmesan plant in Zibello, took Singh on as help in 2004 after undergoing a heart bypass operation and said he has enjoyed teaching him skills that Italians were no longer prepared to learn. 

This is an excellent example of how open immigration, and free exchange in general, makes everybody better off.

Economists usually do not pay much attention to 'culture' but it seems that Sikhs have been very successful in a lot of areas. They tend to impress the people they work with or for. The religion and culture has a lot of interesting parallels with Judaism. 

Anthropologists have a lot of different ways of describing group identity and its effects, but I think the economic concepts of branding and franchising also apply. I mean no disrespect with this analysis; it shows how good business models and good cultures solve similar problems in similar ways.

Think about how restaurant chains work. Many restaurants are run by people who are owners and entrepreneurs, not employees of an organization. The owner pays for the right to use a brand name, and agrees to adhere to the brand's quality rules. In exchange, the owner gets more customers, people who trust the brand. When the system works well, everyone wins. The biggest potential problem is quality control. Each individual restaurant owner has an incentive to cut quality to make money, taking advantage of the brand's good reputation. The company that owns the brand must control this with constant monitoring,  backed up with the threat of taking the franchise license away from bad owners.

'Sikh' is a brand owned and maintained by the community and religious leaders. Each individual Sikh is like a restaurant owner. They pay for the right to use the brand by committing to the religious rituals and beliefs. The turban and beard and kirpan are like a brand logo. The Sikh philosophy and teaching are the quality rules. The combination of a distinctive brand and well-enforced quality rules give the Sikhs an advantage over random people. Just like travelers will often go to a restaurant chain they trust rather than a local establishment of unknown quality, the Imperial British army and civil service preferred to hire Sikhs, and now Italian cheesemakers are also more likely to hire Sihks over random people.

An individual has an incentive to adopt the brand but fail to deliver the quality. This would reduce the value of the brand. The owners of the brand fight this by maintaining the power to excommunicate people who harm the brand. Therefore, it makes sense to put more trust a Sikh who sends credible and costly signals that his religion is very important to him. The more arbitrary and distinctive the religious commitment, the better.

This system can fail in one of two ways. The first way is for the brand to become meaningless through a gradual decline in standards. This would happen if the brand owners did not punish people who broke the standards. The second failure mode is paying more attention to the signals than the actual quality control. Imagine what would happen if the owners of a restaurant brand only cared about what the sign looked like but did not inspect the kitchen. A religion can fail in this way, when the leaders focus exclusively on the branding and logo aspects rather than the underlying quality of the human being. For a religious brand to be successful, there must be external signals to show that people are committed to the quality rules, but everyone must understand that the quality rules are more important than the signals.

And if the brand can avoid these two problems, success can bring its own risks. It is common for successful brands to be attacked by jealous competitors who cannot compete honestly. Jews suffer from this a lot, much like Wal-Mart and Starbucks, and there are isolated reports of similar things happening to Sikh children.

Monday, October 24, 2011

No-Default Loan Option

One of my fellow grad students just sent me the following email:

[We] were discussing whether the ability to option into a loan where you legally cannot default (like student loans) on all loan types (car, home, etc.) would be a good thing or bad thing.  We both decided that we didn't know, but that there would be potentially really bad sorting mechanisms put into place.  Do you have any thoughts on this?

Once I started typing my answer, I realized it would make a good blog post, because it illustrates a lot of important topics. This is a question where different assumptions will give us very different answers. Economic theory can tell us what will happen under different assumptions, but only empirical data from the real world can tell us which assumptions are true.

One set of assumptions is that people are rational and that the default risk is mainly based on the character of the borrower. In this case, such loans would only be a good idea. They would give people the option of credibly revealing their type. Banks would charge lower interest rates on the loans where people could not default, because those loans loan would be less risky. If you were a responsible person and you knew you would repay, you would sign up for the no-default option to get the lower interest rate. If you thought you might default, you would pay a higher interest rate for the right to do default. The current system is a pooling equilibrium, where everyone with the same credit score pays the same interest rate. This new system would generate a separating equilibrium, where different people make different choices and pay different rates. This is the 'sorting mechanism' that my friend mentioned. The current system means that good borrowers pay for the deadbeats, and this option would eliminate that. It would generate a higher interest rate for deadbeats, meaning that they would take out less loans and less resources would be wasted on them.

But if money problems can happen to good people at random, for example if they get laid off because of a change in technology, then the situation changes. There are good reasons that our society got rid of debtor's prisons and allowed people to go bankrupt and eliminate their debts. If you suppose that everyone is the same, and faces some small chance of job loss or other misfortune, then the ability to default is best seen as a kind of insurance. If bad things happen, you get to erase your loan, which is like giving you money. We know that buying insurance will improve the expected utility, or well-being, of someone who is risk-averse, and most people are like that. The current default rules mean that everyone gets insurance, which makes society better off. If people had the option of not buying this insurance, then most of them would not bother. Everyone would take the option to default.

Both of these assumptions are simplistic. In reality, 'good' people have a small chance of default and 'bad' people have a larger chance of default. Modeling this situation properly would require some heavy-duty economic analysis and game theory, and I am not going to spend the time to do so, but I have seen similar situations and models in my Financial Economics class so I have a good feel for what would happen.

The current pooling equilibrium gives valuable insurance to everyone, while also causing good people to subsidize the deadbeats. A separating equilibrium resulting from the no-default option would erase both of these effects. Good people would no longer pay for bad people, but if misfortune hit, they would be in very bad shape.

However, we know that a separating equilibrium can only be generated if the 'good' people are better off choosing the no-default option. If the insurance is valuable enough to them, they will choose the default option, even with the higher interest rates that result from being pooled with the bad people.

It is hard to say if a separating equilibrium would emerge. It depends on how much people value the insurance and how many 'bad' people there are. But I am pretty confident that if a separating equilibrium did emerge, it would be better for society. Under rational actor assumptions, giving people the choice of a no-default loan will allow them to be better off, even though they would lose their 'insurance'.

However, this conclusion changes once you add in psychological factors like the overconfidence bias and limited information. This means moving from neoclassical economics to behavioral economics. If people underestimate the chance of misfortune happening to them, then they will not buy insurance when it would be in their best interest to do so. In this case, too many people would choose the no-default option, and end up suffering when misfortune hits and they cannot erase their debts. If you believe these assumptions, the current 'paternalistic' system where everyone must buy insurance with their loans is the best system.

The best option for society would be one that kept the insurance but eliminated the subsidy to 'bad' borrowers. This could be done by the creation of more complete insurance markets. If everybody bought layoff insurance the way they buy house insurance, then the no-default loan would not have any disadvantages. When good people got laid off, they would be able to use the insurance payments to keep paying off the loan. There would be a separating equilibrium where 'bad' borrowers pay more, and society would be better off.

This is another reason to remember the targeting principle. If we want people to have insurance against misfortune, then we should provide it directly, rather than bundling it with loans. Forcing the loans to come with insurance generates unwanted side effects in the form of subsidies to 'bad' borrowers. Our bankruptcy laws were written before most individuals had access to insurance. Before the 1800's, individuals did not buy insurance of any kind. There was no market for it and there were no companies providing it. Now that this has changed, our bankruptcy laws may be obsolete. It is a very good thing to give people insurance, and the side effects were unavoidable back then, but we can do better now.

Sunday, October 23, 2011

Stimulus Jobs

One major difference between now and the 1930's is production technology. Back then, infrastructure projects were very labor-intensive. You could accomplish something useful by gathering up hundreds of low-skilled unemployed people and putting them to work. But that is not true anymore. Most major construction today requires high-skilled workers, from project managers and senior engineers to people who know how to handle a backhoe.

Almost all jobs programs coming out of the government will do nothing to help unemployed people. Instead, they tend to throw money at sectors like health care and information technology where there is very little unemployment. This can be actively harmful, if the money displaces private activity and hires people away from firms where they were already producing useful things.

A Great-Depression style public works program will simply not work in the modern world. If we are going to do fiscal stimulus, we need projects where we can hire low-skilled people to do useful jobs. This article, written by an energy industry insider, identifies one such job:

Energy efficiency is generally more cost effective than pretty much anything else having to do with energy.  Current incentives should focus on that, we should develop energy efficiency jobs and go out and weatherize everybody's house to cut or emissions because the amount of energy we simply waste is pretty mind boggling considering how costly energy use is to us.  
once you start digging into old house, what you find that needs fixing can be never-ending.  The actual work of crawling through somebody's attic or crawlspace with a caulk gun is also especially miserable, dangerous, and temporary in nature, so we should keep in mind that the "green jobs revolution" we often hear touted is something of an idealization.

The work of crawling through attics and crawlspaces with a caulk gun is absolutely perfect for a government jobs program. It requires no special skills and accomplishes something useful. And since it is nasty and people will probably hate it, they will not want to remain on the government payroll for too long. Once they establish a record of steady work, private employers will be more likely to hire them. This kind of thing is the best possible scenario for fiscal stimulus.

Unfortunately, it still has not worked:

Federal and state efforts to stimulate creation of green jobs have largely failed, government records show. Two years after it was awarded $186 million in federal stimulus money to weatherize drafty homes, California has spent only a little over half that sum and has so far created the equivalent of just 538 full-time jobs in the last quarter, according to the State Department of Community Services and Development.
The weatherization program was initially delayed for seven months while the federal Department of Labor determined prevailing wage standards for the industry. Even after that issue was resolved, the program never really caught on.
"Companies and public policy officials really overestimated how much consumers care about energy efficiency," said Sheeraz Haji, chief executive of the Cleantech Group, a market research firm. "People care about their wallet and the comfort of their home, but it's not a sexy thing."

This does not mean that it would be impossible to have a good jobs program. I can tell from the article that this program was badly managed. Instead of letting the market determine wages, the government 'determined prevailing wage standards' or set price controls. That never works. The article later notes that there were 200 applicants for 16 job slots for a green jobs program, which is a sign that the wages it assigned are way too generous. It would be better to pay each person less and hire more people, meaning that less people have to suffer the effects of unemployment. Instead of having a bureaucracy delay things seven months to craft a damaging regulation, they should let individuals choose their own wages.

Also note the math. $93 million has been spent for 538 jobs. That is over $172,000 per job. That number is actually pretty low compared to the amount that tariffs cost to keep a job, but it is still not a good use of money. Also note that this money is just the amount of taxpayer money spent on this program; it does not include the money that other people had to pay, or the time and money spent writing the regulations.

$93 million is enough money to hire over five thousand people at minimum wage for a year and supply them with the basic weatherproofing tools. Instead of trying to get homeowners to pay money to have a stranger of questionable character come to their house, the government should just hire all the people to weatherproof government buildings. The energy savings in the future would have repaid the cost, and a lot more people would have been helped. Then, once people had the experience, they could have been hired by private companies to do this work or something else.

An important lesson from economics is the targeting principle. If you want to do something, you should do it in the simplest and most direct way possible. If you want unemployed people to have a job, then you give them a job. You pay them the money yourself and have them do something useful. Do not mess around with partnerships and training and bureaucracy. Trying to be tricky will almost always generate a lot of negative side effects or will simply not work.

Of course, the Davis-Bacon act and public sector unions would make such a simple targeted program impossible. All of the newly hired people would have to be paid way too much, which means that a lot less people could be hired and they would not want to leave the government payroll. The failure of California's program shows that, even with the optimal situation, with a useful job that needs doing and can be done by unskilled people, our government, with current laws, cannot do fiscal stimulus right.

Friday, October 21, 2011

The War that was not Hell

I grew up thinking about wars as huge nasty horrible bloody things full of savagery and carnage. War was what happened when all of the rules were thrown out of the window. I wondered why anybody would ever willingly enter one if there was any other choice, and thought that such choices were due to madness or socipathy.

But after reading this good article about privateers in the War of 1812, I have a better perspective. Consider the following story:

Boyle won a bruising battle but had little to show for it. The British man-of-war was heavily damaged, and because it was a man-of-war, not a merchant ship as Boyle had originally thought, it had little cargo of commercial value. Boyle could have sunk the St. Lawrence, but that action would have required taking onboard approximately sixty prisoners and then feeding and guarding them for the remainder of the cruise.
Not wanting to take on prisoners and bearing in mind his instructions from Congress and the president that "[t]owards the enemy vessels and their crews, you are to proceed, in exercising the rights of war with all the justice and humanity which characterizes the nation of which you are members" (qtd. in Garitee 1977, 97–98), Boyle sat down with the St. Lawrence's commander to strike a deal. Boyle would release the commander and his crew and return them to the St. Lawrence if they would agree to make immediately for the port of Havana with a promise not to take up arms voluntarily against the United States again. Such a promise, called a parole, had long been recognized as binding on both the parolee and his government. In practice, it was combined with another efficient and humanitarian institution—prisoner exchanges. Each prisoner's parole was treated as a debt. If the British released a captured American prisoner of equal rank, they thereby extinguished the debt and nullified the parole (Petrie 1999, 24–30)
Commander Gordon of the St. Lawrence issued a certificate to Boyle in consideration of Boyle's treatment of British prisoners,: "In the event of Captain Boyle's becoming a prisoner of war to any British cruiser, I consider it a tribute justly due to his humane and generous treatment of myself, the surviving officers and crew of His Majesty's late schooner St. Lawrence, to state that his obliging attention and watchful solicitude to preserve our effects, and render us comfortable, during the short time we were in hispossession, were such as justly entitle him to the indulgence and respect of every British subject" (qtd. in Coggeshall [1856] 2004, 366).

I had known about these kinds of things before but had not thought much about them. The naval part of the War of 1812 was fought with careful attention to honor and the rule of law. There was an amazing amount of trust on both sides. Partly this was because war was bring treated as an aristocratic game where the interests of the elites on both sides were not seriously threatened. In many ways, the opposing naval captains had more in common with each other than their countrymen. Winning the war and serving the interests of their country was less important to them than maintaining honor among their social circle and looking after their own comfort.

But it is true that the European nations had developed a long tradition of laws designed to make war less horrible. In many cases, armed conflict was seen as just another way of doing business. There were very few deaths due to combat, compared to deaths due to disease, which were endemic in the population anyway. There was more glory than horror in this kind of war, especially for the elites. This was the world that the people who started the massive wars of the modern age grew up in. Despite their other faults, most of the elites of this era had a deep respect for contracts and the rule of law. This kind of thing is the foundation of a healthy civilization. Wars fought among people who shared these cultural values really could be an honorable, civilized kind of thing.

European society between the start of the Enlightenment and the advent of mass public education was a thin veneer of civilization layered over a teeming mass of savagery. This is best illustrated in the treatment of Native Americans. Many of the wealthy aristocratic politicians tried to respect the rights of the natives, setting borders and treating them like independent sovereign nations, but the mass of common folk overran the countryside like a plague of rats, taking land with fraud and violence. This is why most of the natives sided with the British government during the Revolutionary War. It is also no accident that Andrew Jackson, the first president actually elected by popular vote, was responsible for the worst atrocities committed against the natives.

There was much evil and corruption within the aristocracy, but for a long time they were the only carriers of the Enlightenment values of reason, tolerance, rule of law, and human rights that eventually spread throughout Western society. A war conducted among such people will not have the same horror as a war where one or both sides are commanded by people who lack these values. The age of these kinds of wars was a brief and strange event of history, but it was real, and it generated a kind of romantic view of combat that still lingers to this day.

Thursday, October 20, 2011

Amazon and Information

Recently I read a Wall Street Journal article about the founding of One paragraph was very surprising to me:

One of [the founder's] more controversial early decisions was to allow customers to post their own book reviews on the site, whether they were positive or negative. Competitors couldn't understand why a bookseller would allow such a thing. Within a few weeks, Mr. Bezos said, "I started receiving letters from well-meaning folks saying that perhaps you don't understand your business. You make money when you sell things. Why are you allowing negative reviews on your Web site? But our point of view is [that] we will sell more if we help people make purchasing decisions."

I have always been used to user feedback and reviews, so I just considered it a natural fact of life on the Internet.  It amazed me that the concept could be controversial or that anyone could question it. Yes, if people post negative reviews of a book, then other customers will not buy that book. They will buy a different book. Then they will be happier with that other book, which means they will be happier with the store and more likely to come back. And chances are that the better-reviewed book will be more expensive, so the store get more profit when reviews steer your customers away from cheap junk and toward good stuff.

People who questioned Amazon's strategy obviously have no idea how the modern world works. Lying, misrepresentation, or even just concealing information is not a viable long-term strategy in the Information Age. Companies that try to prevent information flows in order to sell inferior products will not survive very long, nor should they. People who would prevent the posting of negative reviews have a short-sighted sociopathic mindset. They are trying to make a quick buck by shoving junk onto their customers. Any well-run company, by contrast, will welcome user feedback and use it in their purchasing decisions, in order to reduce the chances of buying or promoting junk.

People have an instinct to lie and hide information. This is because these were good strategies in our ancestral environment of small bands of foragers. If there are only about a hundred people to interact with, and there is no written language, no kind of recording technology, no way to take objective measurements, and there is no rule of law and everything of importance is decided by political intrigue, then a charismatic liar can be very successful. People really can bury negative information forever in that environment. But that world started to end when the Dark Ages were replaced by the printing press and the Enlightenment, and modern technology is finishing it off.

In the modern world, people will find out the truth, and they will reward the people who help them do so. The success of Amazon, and the failure of so many of its competitors, shows this.  But the Wikileaks mess shows that our governments do not get the modern world either. They are like the companies whose now-dead business plans relied on hiding information from people. Diplomacy is still based on lying, deception, double-speak, and other kinds of sociopathic Stone Age behavior, and our government shows no signs of trying to change its behavior. Instead, they continue to use the power of the state to try to fight the tools of honesty.

Saturday, October 15, 2011

Structural Change: Reading

Here's a good article on libraries destroying books.

When your entire local library can be replaced by a USB drive the size of your fingernail, the only thing keeping those books out of an industrial-size furnace is people who have some innate fondness for books. And there isn't much room in this economy for innate fondness.

Wednesday, October 12, 2011

Random Comments

I learned today that wearing Vibram Fivefinger shoes increases the probability that a Hare Krishna evangelist will approach you.

A good rule to follow is to be very individualistic in your consumption patterns, but very cooperative and rule-following whenever you are involved in a production process. Most of the time, individuality is harmful when you are trying to get things done efficiently, but individuality of consumption preferences means that everyone can be happier because there is less competition for the same stuff.

I found an interesting story at the end of an article on property rights:

Property Rights for "Sesame Street"
Janet Beales Kaidantzis
Ever seen two children quarreling over a toy? Such squabbles had been commonplace in Katherine Hussman Klemp's household. But in the Sesame Street Parent's Guide she tells how she created peace in her family of eight children by assigning property rights to toys.
As a young mother, Klemp often brought home games and toys from garage sales. "I rarely matched a particular item with a particular child," she says. "Upon reflection, I could see how the fuzziness of ownership easily led to arguments. If everything belonged to everyone, then each child felt he had a right to use anything."
To solve the problem, Klemp introduced two simple rules: First, never bring anything into the house without assigning clear ownership to one child. The owner has ultimate authority over the use of the property. Second, the owner is not required to share. Before the rules were in place, Klemp recalls, "I suspected that much of the drama often centered less on who got the item in dispute and more on whom Mom would side with." Now, property rights, not parents, settle the arguments.
Instead of teaching selfishness, the introduction of property rights actually promoted sharing. The children were secure in their ownership and knew they could always get their toys back. Adds Klemp, "'Sharing' raised their self-esteem to see themselves as generous persons."
Not only do her children value their own property rights, but also they extend that respect to the property of others. "Rarely do our children use each other's things without asking first, and they respect a 'No' when they get one. Best of all, when someone who has every right to say 'No' to a request says 'Yes,' the borrower sees the gift for what it is and says 'Thanks' more often than not," says Klemp.

Now that I think about it, I remember that when I was young, my parents also did a good job of defining and enforcing property rights. Everything belonged to either me, or my brother, or my parents, and I knew that my stuff was mine, but that I should not take anyone else's property without getting permission.

Tuesday, October 11, 2011

Law and Culture

In the Public Economics workshop today, a professor presented a paper on patterns of tax evasion in Russia. It is relatively easy to evade taxes there; the company pays all taxes so they would report very low wages to the government but pay their workers under the table. They can only do this if the worker agrees to an employment contract with very low reported income; presumably the company splits the tax savings with workers by offering a higher salary. The professor has a data set that connected car ownership to reported income. It is much harder to drive an unregistered car than evade income taxes, so the value of someone's car is a better measure of their income than their reported income.

He found that people working for foreign-owned companies had five to six times as much reported income than people working for Russian companies, but that their cars were only worth about 20% more. This is evidence of large and pervasive tax evasion in domestic companies. There are several possible reasons for this. Foreign companies could be subject to legal action in their home country if they evade taxes. Foreign companies could be watched more closely by the Russian authorities, or they could have standard rules and contracts that they prefer to work by, or they could just have a preference for honesty.

Another interesting fact is that when workers move from foreign to domestic companies, they keep reporting a high level of income. They do not start evading taxes. There are two possible reasons for this. The paper's authors speculated that people develop a preference for honesty after working for foreign firms. However, this explanation was questioned by the other professors. A simple preference story is unlikely, because when people move from a tax-evading domestic company to a more honest foreign company, they stop evading taxes. There is no 'preference for tax evasion' that sticks with people. A better explanation is that the tax authorities would probably audit people who move jobs and report much lower income, so they have to stay honest once their true income is revealed by working for a foreign firm. 

The data also showed that when people move from a foreign to a domestic company, the reported incomes of other workers at their new company go up, but car values do not. Again, the authors assumed cultural transmission of honesty preference, but it is also possible that a big difference in reported incomes for people doing the same job would make the tax authorities suspicious, so once a company reports more income for one person, they have to report more income for everyone else. 

The the economic historian spoke up. He pointed out that there are large costs to lying, cheating, and dishonesty. If your job contract says you get paid $300 a year but you are verbally promised a lot of money under the table at the end of the year, what can you do if your employer does not pay you? Once people have experience operating in an honest environment, they discover that it is more efficient. One person cannot change a system alone, but they can negotiate for an honestly reported high salary if they can plausibly claim that tax evasion is very difficult for them because of their previously reported salary.

This story does not have a clear ending, conclusion, or moral. It is mainly just a look at a part of my life. But it does illustrate the difficulty of figuring out how the world works. There are complicated feedback loops between individual incentives and social conditions, and it is very easy to tell stories about them. Many different stories can fit the same facts. 

Friday, October 7, 2011

POW Economics

This essay is great. It is a British economist's analysis of life in a World War 2 Prisoner of War camp:
We reached a transit camp in Italy about a fortnight after capture and received 1/4 of a Red Cross food parcel each a week later. At once exchanges, already established, multiplied in volume. Starting with simple direct barter, such as a non-smoker giving a smoker friend his cigarette issue in exchange for a chocolate ration, more complex exchanges soon became an accepted custom. Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect. Within a week or two, as the volume of trade grew, rough scales of exchange values came into existence. Sikhs, who had at first exchanged tinned beef for practically any other foodstuff, began to insist on jam and margarine. It was realized that a tin of jam was worth 1/2 lb. of margarine plus something else; that a cigarette issue was worth several chocolates issues, and a tin of diced carrots was worth practically nothing.
In this camp we did not visit other bungalows very much and prices varied from place to place; hence the germ of truth in the story of the itinerant priest. By the end of a month, when we reached our permanent camp, there was a lively trade in all commodities and their relative values were well known, and expressed not in terms of one another – one didn't quote bully in terms of sugar – but in terms of cigarettes. The cigarette became the standard of value. In the permanent camp people started by wandering through the bungalows calling their offers – "cheese for seven" (cigarettes) – and the hours after parcel issue were Bedlam. The inconveniences of this system soon led to its replacement by an Exchange and Mart notice board in every bungalow, where under the headings "name," "room number," "wanted" and "offered" sales and wants were advertised. When a deal went through, it was crossed off the board. The public and semipermanent records of transactions led to cigarette prices being well known and thus tending to equality throughout the camp, although there were always opportunities for an astute trader to make a profit from arbitrage. With this development everyone, including non-smokers, was willing to sell for cigarettes, using them to buy at another time and place. Cigarettes became the normal currency, though, of course, barter was never extinguished.

I love the way that interesting events things are described in a dry, understated tone:

More interesting than changes in the general price level were changes in the price structure. Changes in the supply of a commodity, in the German ration scale or in the make-up of Red Cross parcels, would raise the price of one commodity relative to others. Tins of oatmeal, once a rare and much sought after luxury in the parcels, became a commonplace in 1943, and the price fell. In hot weather the demand for cocoa fell, and that for soap rose. A new recipe would be reflected in the price level: the discovery that raisins and sugar could be turned into an alcoholic liquor of remarkable potency reacted permanently on the dried fruit market. The invention of electric immersion heaters run off the power points made tea, a drag on the market in Italy, a certain seller in Germany.
The essay is a good introduction to basic economics, and a fun look at a historical event. It also shows some constants in how uneducated people people react to economic facts:

There was a strong feeling that everything had its "just price" in cigarettes. While the assessment of the just price, which incidentally varied between camps, was impossible of explanation, this price was nevertheless pretty closely known. It can best be defined as the price usually fetched by an article in good times when cigarettes were plentiful. The "just price" changed slowly; it was unaffected by short-term variations in supply, and while opinion might be resigned to departures from the "just price," a strong feeling of resentment persisted. A more satisfactory definition of the "just price" is impossible. Everyone knew what it was, though no one could explain why it should be so.

You can read the whole thing at The Economic Organisation of a P.O.W. Camp 

Thursday, October 6, 2011


Earlier this week, I and some other guys form the dojo were running 2-mile loops through campus to train for the USMC Mud Run. As we ran, we went over, under, and through various obstacles like signs and barriers. Some people saw us and asked is what fraternity we were pledging for. This was a reasonable assumption. If you see a group of guys doing odd things on campus in September or October, they are probably frat pledges.

The incident got me thinking about fraternities. Before I was an economist, I assumed that fraternities were just parasitic nests of drunkenness and nepotism. But in the last few years, I have learned to think more deeply about features of society. If something persists for a long time, there are probably good reasons for it. I have realized that a lot of things fraternities do are actually useful skill-building exercises.

For example, consider the way they make their pledges wear suits and carry frat paddles. Every fall in my class, there is always a day when about half a dozen guys come into my class wearing suit jackets and bow ties, and I know they are frat pledges. This continues for several weeks. At first, they are obviously uncomfortable and self-conscious. But as time passes, they become much more comfortable. You can see the improvement in self-confidence.

Bring comfortable in a suit is a very useful skill. By forcing pledges to live weeks of their lives in a suit, fraternities develop this skill in their members, which will serve them for the rest of their lives. They will look better in any formal setting. Beyond this, they are teaching their members to be comfortable drawing attention to themselves. Carrying around a frat paddle and wearing a pink bow tie is awkward and embarrassing, but after a while, the pledges get used to it. They learn that there is nothing wrong with being loud, bold, and a center of attention. This too is a useful skill, and will serve them well whenever they have to give a speech or presentation.

There are a lot of skills that help people get ahead in the world. Many of them are a mystery to me, a kind of black magic. I suspect that a lot of what fraternities do is build these skills in their members. The best way to train any skill or learn anything new is to join a group of people who either have that skill already or are also training in it. Fraternities are probably a lot like dojos, but instead of training in physical fitness and mostly obsolete combat skills, they train in the art of social power. The evidence suggests that this training is remarkably effective.

And of course, power corrupts.

Tuesday, October 4, 2011


For a long time European society has had a very bizarre moral belief about how to conduct war. This is the belief that assassination is wrong, somehow more wrong than waging a war that kills thousands of troops. For example, during the Revolutionary War, a Scottish officer and sniper refused to shoot an American officer in the back, an officer that might have been General Washington. He did not regret this decision, because it would have been 'ungentlemanly' to assassinate an officer.

This moral belief may be partly due to the well-known cognitive failure of focusing on individuals. Our emotions honestly do believe that the death of one is a tragedy and the death of a million is a statistic, so we feel more squeamish about ordering the death of one person than ordering a large troop mobilization that could kill millions.

But more cynically, such a moral code clearly benefits the aristocracy at the expense of the peasantry. If I were a selfish political leader or a general, I would do everything I could to promote a moral code that says the targeted killing of people like me is very wrong. If someone were to go to war with my country, I would want then to do so in a way that killed thousands of peasants rather than me or people like me. This moral code allowed the aristocracy to treat war like a game, wasting the lives of thousands of people in pursuit of glory. It worked out great for them, and not so good for the people stuck in the middle. 

Militaristic aristocrats do not care about civilians or troops. They only care about their own life and their personal power and glory. For example, modern research suggests that the leaders of Japan honestly did not care that we were carpet-bombing their cities, killing hundreds of thousands of civilians. This was irrelevant to them; their concerns were more personal:

But Hasegawa and other historians have shown that Japan's leaders were in fact quite savvy, well aware of their difficult position, and holding out for strategic reasons. Their concern was not so much whether to end the conflict, but how to end it while holding onto territory, avoiding war crimes trials, and preserving the imperial system. The Japanese could still inflict heavy casualties on any invader, and they hoped to convince the Soviet Union, still neutral in the Asian theater, to mediate a settlement with the Americans. Stalin, they calculated, might negotiate more favorable terms in exchange for territory in Asia. It was a long shot, but it made strategic sense. 

In fact, Wilson argues, history suggests that leveling population centers, by whatever method, does not force surrender. The Allied firebombing of Dresden in February of 1945 killed many people, but the Germans did not capitulate. The long-range German bombing of London did not push Churchill towards acquiescence. And it is nearly impossible to imagine that a bomb detonated on American soil, even one that immolated a large city, would prompt the nation to bow in surrender.

Thankfully, civilized nations no longer carpet-bomb civilian population centers. But we still have international conventions against assassinations, and we are still squeamish about targeted killings, with the result that we are often forced to engage in large-scale street-fighting, a meatgrinder that kills troops and puts civilians at risk but does not much affect the leaders who actually caused the problem.

If we do not want to treat war like a game, if we actually want to eliminate a threat, then we need to hit the leaders rather than the troops. Troops can be replaced easily, partly because they all have friends and families that will want to avenge them if they die. Killing a thousand ground troops will accomplish almost nothing. As long as the organization has its leadership structure in place, those thousand people can be replaced. Killing the leaders will be more effective at stopping the immediate threat, and it will be a much better deterrent to other potential leaders. And even if you care more about morality than effectiveness, it should be clear that the death of one is preferable to the death of thousands.

We are learning this. We are learning that targeted killings of leaders works:

That doesn't mean that we'll see an end to terror ... But we can reduce it to a statistical nuisance, rather than a cataclysmic danger. And whatever our political views, we should acknowledge President Obama's willingness to unleash our special capabilities in our current campaign to kill terrorists leaders. He's gotten this part right and deserves credit for it.

I am troubled by any kind of extrajudicial killing, but I recognize that the killing of one person can often prevent a messy engagement that kills dozens or hundreds of people. The way forward is not to ban assassinations and revert to medieval notions of warfare and deterrence. We need to face up to reality, acknowledge targeted assassination as a legitimate strategy, and incorporate it into our legal framework so that the ability is not abused. Imagine a world where large-scale military conflict is a thing of the past, and we keep the peace by, after due process of law, arresting or assassinating the individuals likely to cause wars and terrorism. I think that this would be a better world. 

Monday, October 3, 2011


The Armed Forces Journal is not published by the US military and the author of the article I mentioned yesterday was not a military officer. He was a professor at a military college.

Sunday, October 2, 2011

Freedom of Speech

My cousin, a colonel in the Army, emailed his circle of friends the following article form the Armed Forces Journal, which is a magazine produced by the US military:

Growing Up: Toward a new maturity in civil-military relations

I would recommend reading the whole thing, but you may need some explanation or clarification first. You can tell that the article was written by a military mind and that the article is intended for a military audience. It is long, comprehensive, detailed, and full of the kind of vocabulary that only military people are comfortable with. It is also not obvious at first what issue the article is addressing.

The article is basically arguing that military officers should have a right to free speech, specifically the freedom to publicly oppose policies that they think are wrong. This belief may not seem controversial, but it is. People often claim that if military personnel oppose the civilian administration in any way, this is a threat to democracy. The article argues that the real threat to democracy is the suppression of dissent.

The opening paragraphs look like something you would expect a radical anti-military protestor to write:

What if U.S. troops were used — and acquiesced in being used — to conduct extrajudicial targeted assassinations inside the sovereign territory of another country without prior congressional approval or even consultation?

What if U.S. military personnel, weaponry and munitions similarly were used — again with uniformed acquiescence — to conduct aerial bombing of another sovereign country, with at least the partial intent of killing a head of state, also without prior congressional approval or consultation, and the president then openly flouted the legal reporting and troop-withdrawal requirements of the War Powers Resolution?

What if the dramatically expanded size, use and global presence of U.S. special operations forces — operating as they do in extreme secrecy, blurring the boundaries that normally separate military operations from police, intelligence and internal security operations, and subject to minimal congressional oversight — were to pose unseen and unknown challenges to civilian control of the military?

'Civilian control of the military' is a sacred value among the U.S. armed forces. Officers know that dozens of civilizations, including ancient Rome, have been ruined because their armed forces have started meddling in civilian politics, causing everything to descend into armed savagery and civil war. Among our military personnel, it is a source of professional pride, even a foundation of their very identity, that they are not the kind of soldiers that overthrow lawful authority. Like all sacred values and matters of honor, it must be discussed very carefully, which is one reason for the length and language of this article.

One could say that civil-military relations in this country already are relatively mature — if by relatively, one means compared with others (at least regimes with fewer years of democracy, putative or real, under their belts) and by mature, one means generally stable, predictable and democratically nonthreatening. But if by relatively, one means compared with what we could and should be, and by mature, one means having achieved an ideal state of civil-military relations — a strategically effective military, whose leaders provide strategically sound advice, to civilian officials who are themselves strategically competent and answerable to a strategically aware and civically engaged public, all of this undergirded by a critical free press, a vibrant civil society and a properly subordinated military-industrial complex — then we are a far cry yet from adulthood.

This is the central idea of the article, a statement of what we should be. Everything before it lists the problems, and everything after it lists solutions. The first step to finding solutions is to gain a better understanding of reality.

we live today on what might be considered a global battlefield in which there has been an almost total convergence of the tactical and strategic domains of action. There no longer is anything purely tactical or narrowly military that is without almost instantaneous strategic consequence or ramification. Thus, there no longer exists any meaningful boundary circumscribing the proper purview of the military and demarcating it from a pristine civilian domain of strategy.

Here, the author assumes that the audience appreciates the difference between the strategic and the tactical. Strategic choices are things like "We are going to declare war on Germany" and tactical choices are things like "We are going to call in an artillery strike at coordinates XYZ to provide covering fire while the tanks advance along Route Q to attack the German pillboxes on that hill." As the paragraph implies, the ideal has been that strategic choices should always be made by elected civilians while tactical choices should always be made by well-trained military personnel.

This next bit is one of the author's most important points:

6. Civilian direction isn't inherently constitutional or legal.

Just as there is an implicit quid pro quo that civilian authorities be strategically competent and provide strategically sound direction to the military in return for the military's keeping its advice narrowly military, so too is there a quid pro quo that if the military is to live up to its oath of office — to support and defend the Constitution against all enemies, foreign and domestic (not least including those within government who seek to subvert or circumvent it) — civilian authorities who expect unquestioning obedience from the military are in turn expected to act constitutionally and legally. The problem — a problem of overriding import — arises when the military assumes, unquestioningly, for reasons good or ill, that civilian authorities are doing so.

Why would the military consent to being deployed to invade another sovereign country without a declaration of war — or, at a minimum, a priori congressional authorization? Why would the military carry out targeted assassinations in violation of domestic and international law, especially without apparent congressional consultation? Why would the military subject a U.S. service member to inhumane treatment for allegedly passing information it itself had classified to a news organization — the democratic free press — before that individual is accorded due process of law? Why would the military torture (or "coercively interrogate") enemy combatants (or "prisoners of war" if we in fact are at war) and imprison them indefinitely while denying them habeas corpus? Why would the military engage in domestic surveillance and secretly infiltrate citizen groups exercising their rights of assembly and free speech? Why would the military suppress or deny public access to information it possesses for the purpose of nothing more elevated than protecting civilian political sensitivities?

These are examples of where the military acts dutifully at the behest of civilians and assumes, often wrongly, often for reasons of convenience or expediency, that the latter are responsible and accountable for the constitutionality and legality of their actions. Such frequently misplaced assumptions by the military exemplify an over-obeisance to civilian authority, represent an abrogation of responsibility for questioning authority and guaranteeing constitutionality and legality, and demonstrate more than a modest measure of civic illiteracy on the part of those in uniform.

This article makes it clear that many people* in the military are not happy about the things they have been told to do recently, and want to be able to air their grievances and dissents.

My personal opinion is that the military should never have the right to initiate things, but they should always have the right to say "No, we are not going to do this." In other words, both the military and civilian authorities should have a veto on any kind of military action.

*Not all of them