Sunday, October 19, 2014

Just-so stories are just human

We love narratives. We produce and consume just-so stories all the time.  In today's NY Times, Konika Banerjee and Paul Bloom ask "Does Everything Happen for a Reason?" They add, "Of course not. But studies suggest we have a natural urge to think so."  We are pattern-seeking. This is a very practical tendency acquired via evolution. It has the well known downside that jumping to conclusions entails risks. Nevertheless, Banerjee and Bloom wind up this way:
Some people are more prone to find meaning than others. In large-scale survey studies also reported in the journal Cognition, we found that highly paranoid people (who tend to obsess over other people’s hidden motives and intentions) and highly empathetic people (who think deeply about other people’s goals and emotions) are particularly likely to believe in fate and to believe that there are hidden messages and signs embedded in their own life events. In other words, the more likely people are to think about other people’s purposes and intentions, the more likely they are to also infer purpose and intention in human life itself.
WHATEVER the origin of our belief in life’s meaning, it might seem to be a blessing. Some people find it reassuring to think that there really are no accidents, that what happens to us — including the most terrible of events — reflects an unfolding plan. But the belief also has some ugly consequences. It tilts us toward the view that the world is a fundamentally fair place, where goodness is rewarded and badness punished. It can lead us to blame those who suffer from disease and who are victims of crimes, and it can motivate a reflexive bias in favor of the status quo — seeing poverty, inequality and oppression as reflecting the workings of a deep and meaningful plan.
Not everyone would go as far as the atheist Richard Dawkins, who has written that the universe exhibits “precisely the properties we should expect if there is, at bottom, no design, no purpose, no evil, and no good, nothing but blind, pitiless indifference.” But even those who are devout should agree that, at least here on Earth, things just don’t naturally work out so that people get what they deserve. If there is such a thing as divine justice or karmic retribution, the world we live in is not the place to find it. Instead, the events of human life unfold in a fair and just manner only when individuals and society work hard to make this happen.
We should resist our natural urge to think otherwise.
We have also developed the scientific method of inquiry whereby we seek to do better than be "just-so" storytellers.

Just-so storytelling is the way most people discuss the everyday price gyrations on asset markets. Stock markets have had a bad October -- and there is no end of explanations.  Also in today's NY Times,  Robert Shiller discusses, "When a Market Theory is Contagious ... Is the world suffering 'secular stagnation'? Yes or no, the idea alone keeps hurting stocks." Shiller notes the prominence of "thought viruses."

These viruses and many other just-so stories are always out there. But buy-and-hold investment strategies are too boring for many. They flock to the casino with predictable results.

Thursday, October 16, 2014


The LA papers are full of worries over the local drought but have yet to discover, pricing, incentives, and politicized misallocations. This is why I was happy to find Eduardo Porter's "The Risks of Cheap Water" in the NY Times.

Water can be metered and sold. There is no reason other than politics for nutty politicized allocations. Politicians do like politicized allocations. There is a nice post on all this by Alex Tabarrok at MR. Gary Libecap has been all over California water policy missteps for some time.

Milton Friedman quipped, "If you put the federal government in charge of the Sahara Desert, in five years there'd be a shortage of sand.” People smiled. But in California, we have droughts, popping water mains, water cops to patrol who waters when. Dirty cars are now a local badge of honor. It's funny bit it's not.

Wednesday, October 15, 2014


Getting my own medical care, I have encountered more than a few medical professionals who are practicing  here from abroad and who treated me very well.  I was glad they are here and I expect that they are also better off practicing medicine in the U.S. than in their native land. Good old fashioned gains from trade.

This morning's WSJ includes an op-ed by E. Fuller Torrey, "How the U.S. Made the Ebola Crisis Worse ... The total number of Liberian doctors in America is about two-thirds the total now working in their homeland."  Torrey wants the U.S. to produce more home-grown health professionals so that this kind of thing cannot go on. Expect others to call for restrictions on how many professionals from abroad are allowed to practice here. Gary Becker advocated auctioning immigrant permits to the highest bidder. That would not address the problem that Torrey writes about.

The very big problem is the one Adam Smith wrote about many years ago.  Some nations are rich and some are poor. And whereas some poor places can become rich (as in East Asia), many others are less likely to make the transition. Local tribalisms and civil wars (and their consequences) stand in the way. The way to address the problem that Smith addressed is to allow in more Liberians (and others) rather than fewer.

It is worth repeating that a flailing Pres. Obama, eager to leave some kind of a legacy, can do more for the legacy (and for the world) by moving away from his left-wing-hack platform (minimum wage, high-speed rail, green energy, and all the rest) towards reformed immigration. He even says he wants this but is blinkered by U.S. politics as her perceives them. That is not legacy stuff.

Open borders is the idea but that scares too many Americans. An enlightened president would promote a version that trades all of the nutty restrictions now in place with plausible controls: no lunatics, no psychopaths, no fanatics. The enlightened part and the serious work would be to fashion these. The rest of the job would be to knock enough heads in Congress to get it passed into law. Barack Obama would have left a worthy legacy.

Tuesday, October 14, 2014

All the way down

Tyler Cowen cites Jean Tirole's Nobel-winning economics as exemplifying elaborations of principal-agent theory (and problems).  Who do you trust to carry out an agreement? Which parts of the deal are implicit and which are explicit? 

There is the regulator and the regulated. The regulator is beholden to the legislature. The legislature is beholden to the voters, Perhaps. Tirole gets credit for formalizing the story. Here are two equations I remember from way back (undergrad days?): 50% + 1 = 100%; 50% - 1 = 0. This describes voting rules in most democracies. In fact, it is 50% of those bothering to show up and to vote, not 50% of "the electorate" and not 50% of those eligible.

So it is principal-agent problems all the way down.  A great achievement of the advanced economies is the widespread extension of trust to strangers. McCloskey cites Bourgeois Virtues. But these can only go so far; where they end is where principal-agent difficulties show up.

Thursday, October 09, 2014

Private planning

Pete Boettke points us to the Mercatus 40th anniversary celebration of Hayek's Nobel award. Keynote Israel Kirzner discusses the context and the various advances in Austrian economics in these forty years. Watch the video. 

But whereas the idea of centrally planned economies has fallen on hard times these past forty years, the idea of top-down planning of cities and regions remains respectable almost everywhere. In the modern version, the threat of environmental crisis is invoked and conventional city planning is seen as an important antidote. Yet quite a bit of private planning goes on in cities -- and much more could be done. These are the themes of a new anthology, Cities and Private Planning, edited by David Emanuel Andersson and Stefano Moroni that was just published. Included is a chapter by Wendell Cox and myself.

There is a growing library of discussions of private city planning. Look here, here, here, here for starters. There will be more. Most of the authors included in these volumes are on the job.

Sunday, October 05, 2014


James Buchanan's famous description of his work "Politics without romance" hit the nail on the head. But most people cannot or will not shed the romance. Here is Martha Nussbaum chatting with Russ Roberts:
Why do I say, 'government represents the people'? Look, you do not need to show that you win to show that government is in some meaningful sense, yours. Of course, if you have a vote, some people will win and some will lose. But having the chance to weigh in on those policies is what I'm talking about. In the era when women couldn't vote, well they might often get what they wanted by wheedling their husbands and getting the husbands to give them what they want. But there's a crucial difference--namely, that they are being dominated. The government is not accountable to them. And in the era where women have the vote, it's different. Women don't always win. No, of course not. But no individual wins all the time. That's what democracy is about. But on the other hand, you are in that process. And it is in that sense, yours. Even the Constitution, which I think does, by the way, command the agreement and assent of a pretty large proportion of Americans at some level of generality, you know, there's an Amendment process. So, you can always work at organized work to amend the Constitution if you don't like it, and see how it goes. You can't expect to win, but you can participate in that process. Now, as far as education goes, I'm back to what I said before. If government wants to experiment with charter schools or with vouchers, fine. Let them experiment with that. But in the end of the day it's a system supported by the people. And the results, we have to look at the results and see what they are. And politicians will be defeated if they don't do well by that.
It's that simple. It's just about the will of the people. "The people" can always amend the Constitution; "the people" will prevail.

I just read Bootleggers and Baptists by Adam Smith and Bruce Yandle. They work to put some flesh on Yandles' original 1983 rendering of the model. They apply it to recent events including Obamacare, Detroit and Wall Street bail-outs, etc.

Everyone knows that politics make strange bedfellows but Yandle's insight was to describe the nature of the bedfellows in the modern U.S. context. The book is remarkably slim (under 200 pages) but it could have been as almost as lengthy as the accumulated Federal Register. But that would be repetitious; the same theme repeats itself daily -- add what goes on in state and local government.

In the "Why Baptists?" chapter, the authors take note of our spiritual side and describe how their model brings that into the analysis of daily politics. The most vocal "Baptists" these days are environmentalists; they provide cover for the many Solyndras.

Smith and Yandle refer to the "Occupation" demonstrations and note that these could have been a Bootleggers and Baptists moment. Prompting relaxed mortgage underwriting standards, politicians were on the side of the housing affordability angels; mortgage originators thrived under the Fannie/Freddie implicit (soon to be explicit) bail-out guarantee.  Then after 2008, Wall Streeters craning for bail-out money were allied with those eager to be seen as "doing something" to "save jobs."  That theme is still alive. In this morning's NY Times, Neil Irwin rehashes why Lehman Bros. could have/should have been bailed out.

But, like Nussbaum, the "occupy" street people had a much easier time with the old chestnuts. In their case, just good old fashioned (and romantic) anti-capitalism.

Wednesday, October 01, 2014

High or low densities?

Urban economists and urban planners love "density". I put it in quotes because the details (How high? Where? At what cost?) are often ignored. The argument is simple. New ideas prompt productivity and growth. We form new ideas when we interact with others. Higher densities prompt higher volumes of encounter and interaction. 

But there is also the problem that the dominant trend has been to lower average densities. See, for example, Bruegmann's indispensable book. 
“Most American anti-sprawl reformers today believe that sprawl is a recent and peculiarly American phenomenon caused by specific technological innovations like the automobile and by government policies like single-use zoning or the mortgage interest deduction on the federal income tax.  It is important for them to believe this because if sprawl turned out to be a long –standing feature of urban development worldwide, it would suggest that stopping it involves something much more fundamental than correcting some poor American land-use policies.  In the following chapters I will argue that the characteristics we associate today with sprawl have actually been visible in most prosperous cities throughout history.  Sprawl has been as evident in Europe as in America and can now be said to be the preferred settlement pattern everywhere in the world where there is a certain measure of affluence and where citizens have some choice in how they live.” (p. 17)
 At the level of the urbanized areas, the U.S. trend has been towards lower average densities. Considerable detail (courtesy of W. Cox) is available here and here.

I have mentioned previously that my fromer student Chen-Yi Lin looked at U.S. talent migration at the sub-metroplitan level (the PUMAs) and found considerable complexity in terms of the many densities that attract smart and credentialed people (Lin, C.Y. (2013). Talent migration: Does urban density matter?, Unpublished doctoral dissertation, Los Angeles: University of Southern California). Collaboration opportunities are available in all sorts of places -- and in many ways.

The American Community Survey data show that "work at home" has risen steadily, from 3.2% of all workers in 2000 to 4.4% in 2013. Still small but the public transit industry commands many billions of dollars of annual subsidies and cannot touch this rate of growth. I would say that the trends we see facilitate collaboration and innovation at many densities -- including low densities. 

Saturday, September 27, 2014

To life

Probabilities and distributions are hard to grasp. We usually avoid the problem by settling on mean values and hope they are somehow representative. But every stat textbook warns students that one must at least look at variances also; large variances undermine the usefulness of means and medians.

Longevity and morbidity data are of particular interest for all the obvious reasons. The good news is that the trends are very favorable if you enjoy living. Visit any old cemetery and note the life spans recorded on the old tombstones and markers. And as average life expectancies increase, so must the associated variances.

I mention all this because I had trouble digesting Dr. Ezekiel Emanuel's  "Why I Hope to Die at 75." The man is a scientist and an ethicist. He knows that every statement (generalization) in his essay must to be stated in terms of distributions. He even includes one in the essay.

Even the relevant distributions are conditional; the one that applies to any one individual is contingent on the years already reached -- as well as the state of health, etc.

Whether it is Immanuel Kant or Daniel Gilbert, many wise people have had something to say about our ability to know our state of mind in the future. There is not an epidemic of suicides among the old an infirm because most cling to life and hope for another day.  I hope that when Dr. Emanuel reaches 75 that he is able to say "not so bad after all."

Monday, September 22, 2014

Shout it

Here is the announcement of David Andersson and Stefano Moroni's edited volume Cities and Private Planning.  It includes a chapter by Wendell Cox and myself.  Look at the TOC to find many of your other favorites.

There are many types of planning; I often refer to bottom-up and top-down. Both are, of course, always in play. Identifying the proper division of labor is an interesting problem. When it comes to cities, it is a hugely interesting problem. Nevertheless, city planning is widely presumed to be a top-down activity. When I talk to reporters, they usually begin with the cliche that Los Angeles being "unplanned" how can such a thing not spin into a dystopian nightmare. Other think we are already there.

A related problem has to do with the failure of economists to clarify their central theme; markets are important because they coordinate an uncountable number of private plans. This also describes how cities work. Read the book; shout it from the rooftops.

Thursday, September 18, 2014

Writing about cities

The City by Deborah Stevenson is reviewed here by three not-so-sympathetic reviewers. Perhaps that's for the best and I hope Stevenson agrees.

I am beginning to think that most of us write for (and are only heard by) others in our own bubble. The odds are slim that I would have read the book had there not been the request for a review. Her's to "reaching across the aisle."

What is our biggest economic problem? In my view, it is growth. I am interested in cities insofar as they are an essential part of the growth riddle. In Deborah Stevenson's view, the big problem is class warfare. Her task was to show the role of cities in pitting the haves against the have-nots. Future work will have to get all this under one cover.

Food nuttiness

Did someone say that the rich are different? Here is Pierre Desrocher's review of "The latest culinary fad: famine food ... Middle-class foodies are paying a fortune to eat what peasants once lived on." I know nothing about psychiatry so I can only chuckle. One of Pierre's interests is food nuttiness; he and his wife wrote about it in The Locavore's Dilemma.

On a related note, here is the PBS NewsHour's coverage of the "GMO debate". In the producers' quest to be even handed, they gave equal time to serious people concerned with the science of health and nutrition and, on the other side, lunatic luddites shown gleefully destroying crop on an experimental farm in the Philippines.

Saturday, September 13, 2014

Too crazy

Today's WSJ includes Peter Thiel's "Competition is for losers ... Only one thing can allow a business to transcend the daily brute struggle for survival: brute profits."  He also notes "Economists use two simplified models ... perfect competition and monopoly." Ugh!

Too many economists (and their textbooks and their other writings) are guilty of all this. But are serious people (in our out of the field)? To be sure, some economics texts, beginning with Alchian and Allen to Paul Heyne (later Heyne, Boettke and Prychitko), were much more careful. "Monopoly" (just one seller or source) exists where it is protected by law (public schools for people too poor to send kids to private schools or to home-school). Otherwise any market-power (successful product differentiation) and any profits are fleeting and must be maintained via steady hard work. Surely Thiel knows that this is what business people do all day.

Apple was pressed to introduce new product last week; they could not rest on any "monopoly" advantage -- and they were surely not "perfect competitors." Advertising and clever merchandising are never enough; the buyers are not that stupid. Consumers' tastes are subjective and formed in mysterious ways. They constantly consider possible substitutes; there are no "perfect" substitutes, only good ones and not so good ones. That distinction is again a complex and personal one ("in the eye of the beholder").

Were any of this not so, staying  in business would be pretty simple.

Economists and others have been turning people off for much to long by belaboring implausible models and approaches. Economic thinking is actually indispensable; bizarre claims too numerous to count are made all over the place by people who remain innocent of economic thinking. But many remain in this state because the models and textbooks they had been exposed to were too crazy to take seriously.

Tuesday, September 09, 2014

Alpha cities

People like to choose and join teams. There are many examples. Nationalisms and regionalisms are just two of many. Among the latter, there are city vs country-cousin rivalries which probably exist in most cultures -- with each side claiming peculiar wisdom by which assert their superiority over their rivals. There are also the peculiar distinctions between any country's "alpha city" vs the rest of that country's folk.

Think New Yorkers vs the rest of America. Each side is pretty sure of its own superiority and the awfulness of the other side. I imagine that the same holds for Londoners vs all other Brits, Parisians vs the rest of France, Shanghaiers vs the rest of China, Muscovites vs all other Russians, etc.

This Alpha list is one man's opinion and is not quite right because he lists more than just one city for some countries. The U.S., for example, has many cities where one can find interesting things to do. But in how many of them can the general tourist spend more than two or three days and nights?  Let's be honest, for the U.S., New York (where I do not live and where I was not born) is special. One can spend weeks (or more there) and not be bored.  I suppose the same distinction applies to Paris, London, Tokyo, Berlin, etc.

Urban economists celebrate agglomeration economies. Nothing succeeds like success. There are agglomeration economies (net positive externalities realized via proptitious location) in all cities. But the non-linearities are breathtaking.  The outsized presence of the arts, intellectual variety, fine food, great architecture, etc. in New York stands out. In other words, the real alpha city in each country outdraws the rest by leaps and bounds. 

Thursday, September 04, 2014

NBTO, nothing but trade-offs

Those who favor higher mandated minimum wages argue that the affected workers "need" and/or "deserve" the extra money. The claims are rhetorical but makes sense when made by those low-wage workers who expect to be covered. But Bastiat's distinction between what is seen and what remains unseen is also relevant. The businesses never started, the jobs never created, the promotions that never come are necessarily unseen -- and harder to measure. We have to rely on the law of demand which does slope downward.  In fact, the great man was more specific.
There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.
Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.
Los Angeles Mayor Garcetti wants the L.A. minimum wage to go to $13.75 by 2017. The Great and the Good of L.A. have lined up in support. Here is Eli Broad's op-ed. Broad and others cite a UC Berkeley study which adds that a higher minimum wage is a local economic stimulus; lower income people spend a greater share of their income and multiplier effects kick in.

Free lunch. Those who write and who repeat this stuff are likely to have 401k plans and other links to "corporate America."  Some may even check their accumulated balances on occasion. They have probably noticed that share prices are volatile and responsive to earnings and earnings prospects. In other words it is not simply about digging into other people's deep pockets.

TANSTAAFL is a mouthful.  NBTO, nothing but trade-offs, is much more manageable.

Sunday, August 31, 2014

Transactions cost

It seems strange but for most of its life, economics was a field of study that did not recognize transaction costs. Look at the 200-year Ngram results, below. Ronald Coase changed things. Without him, we would be stuck with Nirvana economics, still teaching things that students could easily see are not terribly useful or linked to the world they know. Today's NY Times includes "Is Owning Overrated? The Rental Economy Rises." The report speculates about cultural shifts in attitudes and the effects of the recession. But it also mentions, "... technology has made borrowing possible on a broader scale, and between strangers. Social networking profiles and rating systems offer a level of trust and verification, and mobile phones equipped with GPS take much of the work out of matching people with nearby services." It is the money, and the trust, and the attitudes, and the possibilities. Tech is changing the world in profound ways. And in ways that conventional measures, including GDP, cannot be counted on to capture. We get better use of the resources and capacities we have. This can go a long way.

ADDED: Here is the econtalk discussion of AirBnB. Listen to the story -- and hear about the numbers.