I attended an interesting talk yesterday at SJSU by Dwight R. Lee on the topic “Misers vs. Philanthropists: And the Winner Is?” (part of a provocative lecture series sponsored by the Econ department).
His attempt to prove that misers helped the world more than philanthropists was only a partial success, mainly because he made assumptions about how well philanthropists spent their money that were somewhat arbitrary and unconvincing (probably too favorable to many philanthropists). He did a good job of explaining why philanthropists were overrated and misers underrated. The miser who hides money in his basement provides diffuse benefits to other holders of money by driving up the value of the money, providing nobody with much incentive to understand the effect. The beneficiaries of philanthropists are much more concentrated groups of people, who notice the benefits in ways that public choice theory describes for comparable political handouts.
I’m a bit puzzled as to whether the benefits he attributes to misers are often offset by central bank policies.
The best part of his talk was the great analogy he gave to suggest in a concise way that can be understood by an average person why the fact that workers get laid off isn’t an argument against free markets. He asked whether anyone in the audience liked pain. Nobody raised a hand. He then asked whether anyone would want to be completely without pain. Nobody raised a hand at this point either, correctly anticipating the description he would give of people who never feel pain (a disease known as CIPA, which significantly reduces a person’s life expectancy). Likewise with markets, plant closures are a symptom of mistakes in resource allocation, and we can expect systems that suppress those symptoms to perpetuate mistakes.
Economics
In the latest issue of Econ Journal Watch, Bryan Caplan and Donald Wittman hold an inconclusive debate on whether democracy produces results that are sensibly related to voters’ interests. They come much closer than most such discussions to using the right criteria for answering that question.
But they fail because they implicitly assume that inaccuracies in voters’ beliefs are random mistakes. If that were the case, Wittman’s replies to Caplan would convince me that Caplan’s evidence of voter irrationality is as weak as the arguments that consumer irrationality prevents markets from working, and that Wittman’s proposed experiments might tell us a good deal about how well democracy works.
On the other hand, if you ask whether voters have incentives to hold beliefs that differ from the truth in nonrandom ways, you will see a fairly strong argument that voters’ inadequate incentive to hold accurate beliefs causes systematic problems with democracy.
Imagine that you live near a steel mill. This means that believing that steel import restrictions are bad will increase the risk that your acquaintances will dislike you (because you views endanger their jobs or their friends’ jobs), and will probably bias you toward supporting protectionism.
Or take the issue of how gun control affects crime rates. There are some obvious patterns of beliefs about this which the random-mistake hypothesis fails to predict. Whereas the theory that people adopt beliefs in order to indicate that they think like their friends and neighbors (combined with some regional variations in gun ownership that created some bias before people started thinking about the issue) does a much better job of predicting the observed patterns of belief.
Because this seems to be a widespread problem with democracy, I’m fairly certain democracy works poorly compared to markets and compared to forms of government such as Futarchy which improve the incentives for policies to be based on accurate beliefs.
Robin Hanson has another interesting paper on human attitudes toward truth and on how they might be improved.
See also some related threads on the extropy-chat list here and here.
One issue that Robin raises involves disputes between us and future generations over how much we ought to constrain our descendants to be similar to us. He is correct that some of this disagreement results from what he calls “moral arrogance” (i.e. at least one group of people overestimating their ability to know what is best). But even if we and our descendants were objective about analyzing the costs and benefits of the alternatives, I would expect some disagreement to remain, because different generations will want to maximize the interests of different groups of beings. Conflicting interests between two groups that exist at the same time can in principle be resolved by one group paying the other to change it’s position. But when one group exists only in the future, and its existence is partly dependent on which policy is adopted now, it’s difficult to see how such disagreements could be resolved in a way that all could agree upon.
Tyler Cowen claims that market prices say the “demand for raw materials will continue to outstrip the supply”. But I don’t see the market prices saying that. Tyler seems to be extrapolating from trends of the past few years.
He seems to be ignoring what futures contracts for delivery several years out are saying. Here’s what I see for commodities with futures contracts several years out:
| Commodity | Nearest future contract | Farthest future contract |
|---|---|---|
| Silver | $7.307 | $7.848 (Jul 2009) |
| Crude Oil | $51.15 | $42.41 (Dec 2011) |
| Natural Gas | $6.304 | $5.721 (Dec 2010) |
| Copper | $1.477 | $1.255 (Dec 2006) |
Gold and silver prices are expected (as usual) to maintain their purchasing power, while prices of other commodities that have had big run-ups recently are expected to fall.
I’ve been making some investments that are based on the belief that markets are underestimating Chinese/Indian demand over the next 5 years or so. But markets are clearly saying that the Hubbert Peak arguments are either wrong, or unimportant due to the likelihood of a switch to alternative fuels. And with metals, it sure looks like we are seeing merely a combination of asian demand and a weak dollar.
For a long time I’ve thought that the weakest part of the argument for Futarchy is the problem of choosing a good measure of national welfare. Democracy is sufficiently subject to manipulation by demagogues (e.g. convincing voters that Saddam had some responsibility for Sept. 11 or that confiscating guns will make us safer) that turning politicized disputes about factual questions over to an institution that maximizes GDP would probably be an improvement even if the flaws in using GDP cause it to do foolish things like preferring Microsoft’s commercial crap to free alternatives. But it would be hard to convince people addicted to having democratic processes decide questions of fact to ignore such flaws.
I want to propose that such a system should be designed to maximize life expectancy instead. That measure seems to correlate fairly well with a number of things we value such as wealth and happiness. I’m not sure how it correlates with equality, and suspect it is imperfect at putting the optimal weight on increasing that, so I’m not claiming it’s a utopian solution. But I doubt there’s much risk that maximizing lifespans would increase inequality.
It would create pressures to keep peoples’ hearts beating when they’re brain-dead, and to put undesirable restrictions on activities such as skiing and rock-climbing. But it’s not obvious why that would be significantly different from the biases of existing governments.
Book Review: Entrepreneurial Economics: Bright Ideas from the Dismal Science, edited by Alexander Tabarrok
This collection of papers has a bunch of very good ideas.
The patent buyouts chapter shows how most patents could be put into the public domain (fixing some problems associated with monopoly) while also increasing the incentives for innovation (at least in areas such as drugs where the patent system works moderately well). Two minor weaknesses in the paper: it ought to explain why this is a better use of money than funding research directly (I expect this could be done by analyzing the incentives and track record of small startup drug companies versus nonprofit/government researchers). The joint randomization for substitutes works well if there’s unlimited money to buy patents, but if a patentholder can make joint patents too expensive to buy by falsely claiming that its patent is a substitute, then it’s hard to analyze whether problems result (although I’m fairly sure they could be dealt with).
The chapter on decision markets (aka idea futures) provides some hints on how many of the problems with democracy could be fixed. Hopefully this will encourage readers to seek out his more thorough argument.
The time-consistent health insurance proposal describes a good free-market alternative solution to many of the problems that government-run insurance proposals claim to address.
The chapter on gene insurance would address additional problems with people born with genes that scare insurers, but only if it were possible to require buying this insurance prior before an infants genes get tested for defects. But it’s unclear how such a requirement can be enforced – it seems possible that a mother will often be able to get a fetus tested secretly before the government realizes it’s time for the child to get insured.
The section on organ shortages provides some interesting arguments that the medical establishment profits from the shortage of organs created by laws against the sale of organs.
The chapter on securities regulation is too longwinded but contains good evidence that competition between securities regulators will help investors.
Book Review: Catastrophe: Risk And Response by Richard A. Posner
This book does a very good job of arguing that humans are doing an inadequate job of minimizing the expected harm associated with improbable but major disasters such as asteroid strikes and sudden climate changes. He provides a rather thorough and unbiased summary of civilization-threatening risks, and a good set of references to the relevant literature.
I am disappointed that he gave little attention to the risks of AI. Probably his reason is that his expertise in law and economics will do little to address what is more of an engineering problem that is unlikely to be solved by better laws.
I suspect he’s overly concerned about biodiversity loss. He tries to justify his concern by noting risks to our food chain that seem to depend on our food supply being less diverse than it is.
His solutions do little to fix the bad incentives which have prevented adequate preparations. The closest he comes to fixing them is his proposal for a center for catastrophic-risk assessment and response, which would presumably have some incentive to convince people of risks in order to justify its existence.
His criticisms of information markets (aka idea futures) ignore the best arguments on this subject. He attacks the straw man of using them to predict particular terrorist attacks, and ignores possibilities such as using them to predict whether invading Iraq would reduce or increase deaths due to terrorism over many years. And his claim that scientists need no monetary incentives naively ignores their bias to dismiss concerns about harm resulting from their research (bias which he notes elsewhere as a cause of recklessness). See Robin Hanson’s Idea Futures web pages for arguments suggesting that this is a major mistake on Posner’s part.
Continue Reading
Posner makes some good arguments against foreign aid, but his implication that the U.S. should do nothing to make AIDS treatments available to backward countries is misleading. Much of the cost of the treatments is the R and D cost of designing the drugs rather than the marginal cost of additional doses. The patent buyout scheme proposed by Michael Kremer (see the book Entrepreneurial Economics) provides a way to significantly reduce those costs, while probably benefiting wealthy countries. A government or charity would buy many patents and put them in the public domain. The price would be set by auctions which would be kept honest by sometimes selling the patent to bidders instead of making the patent free. Ideally the price would be a bit higher than the private value of the patents, to reflect the fact that the social benefits exceed the value that the patentholder would get from enforcing the patent, resulting in improved incentives for drug development and in the drugs being available to people who can’t afford the patent holders’ prices. The most likely downside is the cost associated with using taxes to finance the buyouts (can someone show that private charity would be able to handle this?).
It is unclear whether the simpler approach of making exceptions to patent laws for backward countries would work well. It would depend on how hard it is to smuggle drugs from those countries to wealthy countries (which would harm the incentives to develop new drugs).
I returned home from a weeks vacation and discovered on Friday morning that one of my investments (Phazar Corp, symbol ANTP) had doubled since I had last looked at it. While there is a slight chance that this was due in part to buyers with inside information that it’s likely to sell equipment used in new tsunami warning systems, it looks like most or more likely all of the buying came from momentum players whose connection with reality is more tenuous than normal. So if I had been following the stock instead of snowboarding, I would almost certainly have sold before Friday at a lower price. As it happened, I had the patience to postpone my sale until Monday morning, getting what I expect will prove to be an unreasonably good price, and also delaying taxes on the profits. This is not the first time I’ve seen evidence that slightly slower reactions to price changes would be profitable, but it’s certainly the most dramatic.
The latest issue of my favorite investment advisory newsletter, The Whitebox Market Observer, has a good point about industrializing countries:
It is nonsense to think that China as a whole will become rich because the Chinese individually are poor. The ugly truth is that poor people don’t matter. They don’t matter as consumers because they don’t have any money; they don’t matter as producers because once they start producing they do not stay poor for long. Show me a persistently poor factory worker and I will show you a rotten factory, no threat to the U.S. or anyone else.
and goes on to note the similarities with Japan of the 1960s and Taiwan and South Korea of the 1970s, which started competing with U.S. companies using low wages to make up for their mediocre reputation for quality, and within about two decades switched to competing on quality.