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