Daily Life Economics

INTRODUCTION TO ECONOMICS

2010-05-17T02:52:00.000-07:00

The Scope and
Method of Economics
The study of economics should
begin with a sense of wonder. Pause
for a moment and consider a typical
day in your life. It might start
with a bagel made in a local bakery
with flour produced in Minnesota
from wheat grown in Kansas and
bacon from pigs raised in Ohio
packaged in plastic made in New
Jersey. You spill coffee from
Colombia on your shirt made in
Texas from textiles shipped from
South Carolina.
After class you drive with a
friend on an interstate highway
that is part of a system that took
20 years and billions of dollars to build. You stop for gasoline refined in Louisiana from Saudi
Arabian crude oil brought to the United States on a supertanker that took 3 years to build at a
shipyard in Maine.
Later you log onto the Web with a laptop computer assembled in Indonesia from parts
made in China and send an e-mail to your brother in Mexico City, and you call a buddy on a cell
phone made by a company in Finland. Your call is picked up by a microwave dish hidden in a
church steeple rented from the church by a cellular company that was just bought by a European
conglomerate.
You use or consume tens of thousands of things, both tangible and intangible, every day:
buildings, rock music, iPods, telephone services, staples, paper, toothpaste, tweezers, pizza, soap,
digital watches, fire protection, banks, electricity, eggs, insurance, football fields, computers,
buses, rugs, subways, health services, sidewalks, and so forth. Somebody made all these things.
Somebody organized men and women and materials to produce and distribute them. Thousands
of decisions went into their completion. Somehow they got to you.
In the United States, over 146 million people—almost half the total population—work at
hundreds of thousands of different jobs producing over $14 trillion worth of goods and services
every year. Some cannot find work; some choose not to work. Some are rich; others are poor.
The United States imports over $257 billion worth of automobiles and parts and about
$229 billion worth of petroleum and petroleum products each year; it exports around $62 billion
worth of agricultural products, including food. High-rise office buildings go up in central cities.
Condominiums and homes are built in the suburbs. In other places, homes are abandoned and
boarded up.
Some countries are wealthy. Others are impoverished. Some are growing. Some are not.
Some businesses are doing well. Others are going bankrupt.
At any moment in time, every society faces constraints imposed by nature and by previous
generations. Some societies are handsomely endowed by nature with fertile land, water, sunshine,
and natural resources. Others have deserts and few mineral resources. Some societies receive
much from previous generations—art, music, technical knowledge, beautiful buildings, and productive
factories. Others are left with overgrazed, eroded land, cities leveled by war, or polluted
natural environments. All societies face limits.
CHAPTER OUTLINE
Why Study
Economics? p. 2
To Learn a Way of
Thinking
To Understand Society
To Understand Global
Affairs
To Be an Informed Citizen
The Scope of
Economics p. 7
Microeconomics and
Macroeconomics
The Diverse Fields of
Economics
The Method of
Economics p. 10
Descriptive Economics and
Economic Theory
Theories and Models
Economic Policy
An Invitation p. 15
Appendix: How to
Read and Understand
Graphs p. 18

Notes on Nobelity

2009-10-24T22:59:00.000-07:00

by James M. Buchanan *
1986 Laureate in Economics
17 December 2001

October-December 1986

I am an early riser, and I had finished my breakfast, brushed my teeth, and was on the way out the door of my Fairfax townhouse, when the telephone call from Stockholm came at 6:32 a.m. on 16 October 1986. My schedule called for a half-day's work at George Mason University before driving down the Shenandoah Valley in October's colorful splendor to my country place, tucked deep in Virginia's Applachians. My wife, Ann, had been at the country place all summer; we had not yet made the semi-annual, quasi-move from the country place to Washington's suburbia, a move that we delay each year as long as possible.

The telephone call changed all such plans. I called Ann, then Betty Tillman, my long time girl Friday, and escaped from the townhouse after only one other call, from CBS morning news. On arrival at the office, shortly before 7 a.m., it was already abundantly clear that 16 October would not be an ordinary day. Representatives from the print, sight, and sound media had commenced to arrive, and the parking lot was soon filled with sending towers and dishes. The phones went wild, and Betty rounded up all of the building's clerical staff, plus graduate students as they arrived, for assistance. Helen Ackerman, the university's public relations director, arrived to help with press contacts. We hastily organized a news conference for 11 a.m., which went on for an hour with perhaps one hundred in attendance.

After the Prize Award Ceremony, Professor James McGill Buchanan poses with his wife Mrs. Ann Backe Buchanan and his administrative assistant Mrs. Betty Tillman (right in photo).
Copyright © Pressens Bild AB
Photo: Lasse Hedberg

In part this unexpected concentration of attention on my selection for the Nobel award was temporal and locational. Congress was not in session, and the Iran-Contra scandal was bubbling just beneath the surface of exposure. The Washington suburb, Fairfax City, is only a half-hour from the district. I was "the news" of the day, and quite in contrast with Robert Solow, who, a year later, was named as the 1987 Nobel Memorial Prize recipient on the day after Black Monday.

Basically, the early releases were informationally accurate and largely biographical. Who is James Buchanan? Where and what is George Mason University? What is public choice? Perhaps I responded too quickly to the last of these questions, and perhaps in my eagerness to be understood I jumped too readily into the application of public choice analysis to the budget deficit. As a result, all sophistication in evaluation was lost, and the secondary journalistic accounts that appeared in the days immediately after 16 October were simplistic, grossly misleading, and could have been taken to be insulting to me, personally. Alone with most of the other Nobel laureates in economics, my selection was ridiculed by the media ignoramuses, in my case on the grounds that any fool knows that public choosers seek to promote their own interests. This type of criticism, stemming from uninformed journalistic arrogance, is unique to economics, and it is a cross that we bear in a science that has never isolated itself sufficiently from the public discourse. Every man his own economist - this has proved to be the scourge of rational public discourse for the lifetime of political economy.

Tertiary accounts, both positive and negative, that appeared in the weeklies and monthlies were more thoughtful, since these accounts were written by journalists who made at least some effort to understand the award by reading my books rather than the reports of other journalists.

It was apparent, very soon after 16 October, that, had I chosen to do so, I could have "enjoyed" widespread media exposure on the Washington-based talk shows that are centered on economic and political events. My very early reactions were surely the correct ones. Aside from a first-day appearance on the McNeil-Lehrer PBS news hour, I turned down all invitations for television, radio and guest column slots. I am not a policy analyst, and my views on current issues should carry little more weight than those of anyone else. I was determined not to become an "instant expert" on everything merely because I had achieved the notoriety of the Nobel Memorial Prize.

A full day did not pass before I came to realize that my selection was special in its own way, and unrelated to me in a directly personal sense. As I suggested earlier, I had never entertained a prospect of Nobel Prize status, despite considerable academic acclaim, because I held myself, my work, and my affiliation, to be too far outside the mainstream both of my own discipline and the American academia. (And I know that I should have never been selected for such an award had the selection committee been drawn senior American economists!) But this very distance from the central thrusts in subject matter, research method, ideology, institutional affiliation, regional location, and personal history also insured that, once the distinguished Swedish committee chose me for the Nobel award, I would become, in a real sense, "representative" for all members of the several intersecting sets of scholars and students. As I stated in my return to a celebration in my honor in Tennessee in early 1988, "if Jim Buchanan can be selected for a Nobel Prize, anyone can." And I felt that this sentiment was indirectly expressed in the hundreds of calls, telegrams, and letters of congratulations that poured into Fairfax from all corners of the globe during those weeks in late 1986.

In a sense, I do embody something of the American myth of social mobility. For how many farm boys from Middle Tennessee, educated in tiny, poor, and rural public schools, and at a struggling state-financed teachers college, have received Nobel prizes? How many scholars who have worked almost exclusively at southern universities have done so, in any scientific discipline? How many of my economist peers who are laureates have eschewed the use of both formal mathematical techniques and the extended resort to empirical testing?

When the singularity of my position along these and several other dimensions is recognized, it is perhaps not surprising that so many seemed to sense that my selection was, indeed, a vindication of the outsider. And the simple fact that my selection offered hope and encouragement to so many among the "great unwashed" scattered throughout the academic boondocks has been, when all is said and done, the most gratifying aspect of the whole experience of "Nobelity."

I was not, of course, surprised at all by the outpouring of congratulations from my research peers in public choice, with whom I had worked variously for decades. As I emphasized at the first day's press conference, I recognized that I did represent this whole group. There was no single or unique contribution attributable to me, alone, that provided the basis for the committee's action. The award was, I think correctly, bestowed in recognition of an important research program in political economy, a program that involved many participants, including many colleagues, students, and coauthors. I was presumably signaled out as representative because of the extended period of my research concentration, the leadership role that I had assumed, and the increasing emphasis on the constitutional implications of the program, implications that I have always particularly stressed.

The good wishes of so many warmed my heart, but these messages were accompanied by a surprisingly large number of calls, telegrams, and letters from the world's self-proclaimed saviors. I had encountered the occasional kook previously, but the Nobel Prize announcement offered a focus upon which many more could direct their efforts at persuasion. Boxes piled high with pleas; if I would only endorse this or that scheme (economic, military, moral, philosophical, political, or religious) the world would surely come right. And these pleas covered the whole spectrum of rationality, ranging from the ravings of the near-insane to the entirely plausible petitions of sincerely devoted rational-if-romantic reformers.

Once again, and early, I imposed an internal rule for my own behavioral responses. The notoriety of "Nobelity" did not elevate me to the peaks of wisdom, and a pronouncement by me or any other laureate, or any collection of laureates, should command no more respect than pronouncements by anyone else. I resolved to abjure all invitations, whether for signatures of support, or for participation in congresses, conferences, or meetings that carried the aura of Nobel-identified intellectual-scientific elitism. This resolution was surely inspired, in part, by my observations of the common folly of scholars and scientists who pretend to be wise beyond their own borders.

Two Years of High Demand: 1987, 1988

George Stigler, the Nobel Laureate in Economics Sciences in 1982, told me shortly after my own award was announced that the event would disrupt my life for six months, but, after such an interim, things would return more or less to normalcy. With me, the period was two years, rather than six months. The years 1987 and 1988 were the "busiest" of my life, if "busyness" is measured by external lectures, talks, seminars, conferences, and miles traveled. And the opportunity costs were measured in the papers and chapters in books that did not get written, and more seriously, the ideas that may have emerged but which now may never reach my consciousness.

The economist in me recognized that the post-Nobel increase in demand for my services need not have increased my amount supplied, and that fully rational choice behavior on my part should have enabled me to control my own schedule more adequately than I did. But why does an individual’s supply schedule slope upward? Why did I accept more lecture commitments as the honoraria and fees moved substantially upward after the Nobel notoriety? Surely, I did not "need" the added income. I have no children to ruin by passing on a larger personal fortune; I do not get my kicks from larger personal payments to the Internal Revenue Service.

Did I, subconsciously, recognize that my normative message had become, due to the Nobel-induced attention, more respectable, and hence, that I could, at least indirectly, now exert more ultimate influence on public opinion? In this case, the higher fees would have been non-causal in my behavior. But I have long classified myself as lacking, the didactic urge. I have, with reasonable consistency, eschewed the role of either preacher or prophet. Was I deceiving myself? Did I really seek to save the world after all?

I do not think I have been trapped in such self-deception. I think, instead, that my personal supply schedule slopes upward for the standard pecuniary reasons. As Lord Bauer suggested to me when we talked about this point in late 1988, "one can never escape from one's own shadow." Past experience describes who I am, and through almost all of my experience income, as such, did matter. And an ingrained pattern of supply response did not suddenly vanish due to modified pecuniary circumstances that the Nobel Prize award insured. In a very real sense, the two years measure the time it took for me to begin to respond rationally to demands in my modified environmental setting. Perhaps George Stigler was simply a more rapid learner, or, perhaps, he was burdened less by an impecunious past.

But let me be honest with myself. There is another aspect of my behavior on the lecture circuit that does carry positive value in my preference function, over and beyond either pecuniary emolument or ultimate ideological purpose. I enjoy the "performance itself, within limits, and given the appropriate setting. I enjoy the sense of command over and upon the attention of others; the actor that is deep inside all professors-teachers emerges to make me "feel good," to charge me up. And, so far as I can sense it, this positive feedback is largely unconnected with the subject matter of the argument and with the fee that I am being paid. And it is this utility value that, at least in some part, determines the direction of my response to varying forms of invitation. I know the type of audience that works best for me, and I tend to be more receptive to the predicted audience and to the environmental setting for presentation than I am to the fee or to any anticipated ultimate influence on opinion.

Professor James Buchanan receives his award from the hands of His Majesty King Carl Gustaf of Sweden at the Stockholm Concert Hall.
Copyright © Pressens Bild AB
Photo: Börje Thuresson

The direction of response here is related to the "social distance" aspect of my Nobel award. I am perceived, and widely so, as the only Nobel prize representative of the "great unwashed" in American academia, those thousands of faculty members and students who spend their lives in the public and private colleges and universities of our land without the prestige value of intellectual-scientific, and social, ranking. I am of the non-elite, from which it follows, more or less as a matter of course, that I get my warmest and surely my most wholesome reception during those visits to the academical villages, south, north, east, or west, that rarely see a Nobel prize winner, and whose members hold potential "Nobelity" to be beyond their aspiration levels.

In these settings, what I actually say in my lectures, seminars, postmeal talks, and informal discussions is much less important than the fact that I am there as a Nobel prize winner. But, as noted, to these particular audiences, I am a larger-than-life Nobel laureate, because I have emerged successfully from an academic background and environment that members recognize to be analogous to their own. The very deep populist elements in my psyche are stirred by the direct feedbacks of my appearances in these settings. So, when I do a summary reckoning, perhaps the utility accounts are not so askew as they may seem when first examined. But two years was, for me, a time sufficient to enjoy the one-time plaudits of my genuine "fans." This part of "my show" surely ended with 1988.

Aftermath

I have never been tempted to make pronouncements on this or that policy issue. Hence, the fact that any statements on my part will, post-Nobel, necessarily, be more worthy of public notice need exert no feedback influence on my behavior. The "responsibility of Nobelity" in any direct sense of the term is surely among the least of my concerns. But there is an aspect such responsibility does raise issues of personal morality. I suggested that I have never felt an urge to save the world or, indeed, to treat myself to be more responsible in a civic sense than any other person. On the other hand, I also recognize that unless someone, somewhere, takes the lead in promulgating constitutionalist ideas that are inherently "public," then we could scarcely expect such ideas to enter into public consciousness. We shall not secure the social order that is within the realm of the possible if each of us sits by and waits for the process of social evolution to work its will. There is, for me, a categorical distinction to be made between the presumptive arrogance of anyone, Nobel laureate or anyone else, who takes it on himself to tell others what they should do, and the attitude of someone who actively enters as a participant in a discussion of social change with all persons treated as reciprocating contributors.

The second of these roles does not, and cannot, be motivated directly by simple self-interest. There is little or no personally identifiable interest to be furthered in attempts to persuade other persons to agree to multi-person political "trades" that involve changing, the rules by which we live together in a polity. Some ethic of constitutional responsibility is required here, some interest that extends beyond that which is of measured utility value directly to me, and which is, at the same time, something other than the single-minded pursuit of "truth" which describes the idealized ethical norm for the natural scientist. At least some of the players in the inclusive social game must attend to the rules that define the game, the constitution of order, and such attention does not emerge from private self-interest, at least directly, or from "scientific discovery," as such. Within limits, we make our own rules for living together. And this central presupposition of the constitutionalist carries with it the implied ethical principle that dictate attention to the workings of the social order.

How does acceptance of this presupposition and this principle affect my own behavior in the aftermath of short-term "Nobelity?" Precisely because I am the only constitutional political economist that has achieved or seems likely to achieve Nobel Prize status, do I not carry on my shoulders the particular "burden" for all would-be constitutionalists? In a sense, I surely must do so. And the acknowledgement of this fact alone offers me the incentive to put off the obscenity of retirement as long as proves to be physically possible. Recognition of my uniqueness along this constitutionalist dimension of interest shapes the direction and content of my projected efforts in the 1990s.

My aims are limited. My tools are words that enter arguments presented in books, essays, and lectures-arguments that develop quasi-abstract ideas which challenge the minds of
those who are members of the academies. My own experience, both pre- and post-Nobel, tells me that ideas do have consequences. But far too many of my peers in the social sciences and philosophy concern themselves too much with normatively defined consequences while neglecting the task of reinforcing, maintaining, and sometimes originating, the ideas without which consequences lose all moorings.

Postscript, 1999

A decade has gone by since the preceding sections of this essay were written, and the dated sense of the material comes through in several places. There is, however, relatively little that should change if given an opportunity for a thorough re-writing.

The world has, of course, dramatically changed over the decade. The essay was written before the full impact of the revolutionary events in central and eastern Europe was recognized or predicted. The 1990s are years of post-Cold War, with implications that are not yet fully understood.

The bust of Alfred Nobel is seen in the background as Professor Buchanan receives his diploma and medal from His Majesty King Carl XVI Gustaf of Sweden.
Copyright© Pressens Bild AB
Photo: Lasse Hedberg

The arguments developed in the immediately preceding section now seem more important than they did a decade earlier. I am deeply concerned about the apparent apathy of citizens everywhere, about the absence of outrage at the sometimes petty intrusions of governments into our lives, about the failure to appreciate developing crises in welfare democracies. Most fundamentally, I am disturbed by an apparent public failure to appreciate and to understand the relationships between the constitutional structure that defines the parameters of social-economic-political life and the patterns of outcomes that we observe. In the new century, more than ever, we must attend to the rules of the game.

The Tinbergen Brothers by Auke R. Leen

2009-10-24T22:57:00.000-07:00

In 1969, Jan Tinbergen, aged 66, received the first Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel, often mistakenly referred to as the "Nobel prize in economics." Jan shared the prize with Ragnar Frisch. Four years later, Jan's younger brother, Nikolaas (Nico), too, was awarded the Nobel Prize in Physiology or Medicine. Nico was 66 years old. He shared the prize with Karl von Frisch and Konrad Lorenz. What lucky coincidence! Or was it? What made it possible for these two siblings to win the prestigious prizes? Was it their genes or their educational and social upbringing? Which brings us to the classic tug-of-war between nature and nurture. Which has the strongest influence on a person's life, nature or nurture? A look at the brothers' family background as well as the educational and social environments in which they grew up, might throw light on these questions. We shall also take a look at their work, their groundbreaking ideas and the opposition to these ideas, and the uncanny way in which their lives seemed to duplicate each other.

Jan: Quiet Mathematician

Jan was born in April 12, 1903, the eldest of five children: four boys and a girl. Nico, the third child in the family, was born in April 15, 1907. The Tinbergen children grew up in a warm, open and intellectual atmosphere. Before her marriage, their mother, a spontaneous person, worked as a primary teacher. Their father, a real pater familias, always stressing the harmony of family life, studied medieval languages at Leiden University. Next to his occupation as high-school teacher, he also became an expert on medieval Dutch literature. The Tinbergen family lived in a house in The Hague, a town near the Dutch coast, where the parents often organized discussions with the children's teachers and classmates. The family regularly had outdoor drawing lessons together, went on bike rides or took long walks.

Jan was a quiet child with a strong interest in mathematics and the natural sciences. During high school, he joined a group of students who would meet after school to do experiments in a physics lab. He faithfully attended the weekly lectures, especially those on physics, organized by a learned society. Jan did not only develop in a purely intellectual way. World War I was brought closer to home when his mother gave assistance to war casualties. Children from war-torn Belgium received shelter in the Tinbergen home. The war had a great influence on Jan's negative attitude towards militarism. He would later refuse to join the compulsory Dutch military service.

In 1921, Jan graduated from high school with the highest honors. Right after graduation, he started his studies in mathematics and the natural sciences at the University of Leiden. To save on boarding expenses, he commuted by train during his first year. To spare his parents even more, he accelerated his studies by attending second year classes in advance. During his spare time, he gave math lessons to high school students. He donated the money he earned to the Dutch Red Cross to help in their relief efforts for the children of Russia, who were suffering from food shortage.

Soon after, Jan became the assistant of Paul Ehrenfest, professor in Theoretical Physics at the university. Later, Jan became a frequent visitor to the Ehrenfest home when he became the private tutor of Ehrenfest's son. He also took part in the discussions when Ehrenfest was visited by Einstein, Bohr, Heisenberg and Pauli. Notwithstanding what must have been such impressive visits with these famous physicists, Jan shifted his interest to economics on his second year. He explained his move by saying that he realized that self-interest was a major factor that steered his interest towards physics, instead of a genuine concern about his own usefulness in society. At the time, Jan and his future wife whom he met in high school, had decided to dedicate their lives to the goals of the Social Democratic Labor Party. Ehrenfest made a last ditch effort to bring Jan back to the field of physics by advising him to spend the summer of 1923 studying physics at Goettingen in Germany. To no avail. After a fruitless attempt to contact the local Socialist-Communist Student Club, Jan left within a few weeks of staying in Goettingen, overcome by homesickness. Ehrenfest was not totally averse to Jan's interest in economics. In fact, he was interested in the analogies that could be used in the study of both these fields. Jan's thesis entitled "Minimum Problems in Physics and Economics" was certainly parallel to this line of thinking. But in the end, Jan's concern for the causes of poverty made him switch from physics to economics.

Physicists at Leiden, 1924. From left to right: Dieke, Goudsmit, Tinbergen, Ehrenfest, Fermi, Kronig. Jan Tinbergen would later shift his interest to economics.
Copyright © Chicago University Press

Nico: Outgoing Adventurer

Nico was the adventurer in the family. He liked sports such as running and playing hockey. Outdoor activities like camping appealed to him. He loved taking pictures of nature. He hated institutionalized activities such as going to school and taking piano lessons. He often missed his classes. Instead, he would wander to the nearby dunes. Except for gymnastics and drawing, in which he excelled, he had poor marks in all other subjects. His parents, however, were not too hard on him. When his report card showed poor marks, his father would eventually ask him if the poor grades were really necessary. And Nico knew what to do. Though it did gnaw on him that he just did what he liked most. In his later studies, he felt compelled to say that he was not merely indulging in his hobbies. With his overriding love for nature (save his youngest brother), Nico was aware that he was an exception to the family nature (norm) of serious study combined with left-liberal thinking. Just for the aesthetic pleasure of it, he could watch the activities of sticklebacks for hours on end. During his high school years, he joined a club that studied wildlife in its natural surroundings. Given his dislike for any formal education, he was still undecided what to do when he finished high school. Only later on in life did he follow his brother Jan's example by applying his research to social problems.

On the advice of Professor Ehrenfest, Jan's mentor and family friend of the Tinbergens, Nico went to the German coast of Königsberg in the company of the famous experimental biologist Thienmann, to watch the autumn migration of the wild moose. Back home, he decided to study biology at Leiden University. His studies, however, did not have much influence on his biological fieldwork. Still, he was primarily interested in watching and photographing the behavior of wildlife, for example, herring gulls. He saw all of this, more or less, as a sport. Only gradually did he develop a more scientific attitude towards bird watching. Which meant a painstakingly continuous observation of animals and an ingenious experimentation to check scientific hunches. This would become Nico's trademark. This was, however, not sufficient. The thesis he wrote, though an uncommon subject at that time, was only accepted after grave doubts. (Maybe because it was less than 30 pages long!) His thesis about the orientation of the digger wasp was more or less the result of a summer family holiday, during which he made the chance discovery of a nearby colony of digger wasps. The day after receiving his doctor's degree at the age of 25 (the same age that his brother got his doctor's degree a few years earlier), he married his high-school girl friend and fellow member of the youth nature club. Jan himself, got married years earlier to his high school sweetheart and fellow member of the socialist youth organization.

Introducing Econometrics

In the 1930s, Jan devised the first macro-economic model ever. In this model, the focus of economic analysis was no longer on the abstract relation between individual goods and prices. Instead, it was shifted to the concrete relationships between economic aggregates like total income, consumption and investment. His work involved the statistical observation of theoretically founded concepts, namely mathematical economics working with concrete numbers. He was later invited by the League of Nations to analyze the American economy in much the same way that he studied the Dutch economy. This resulted in his time-honored study of 1936, in which he introduced mathematics and statistics to test the different existing trade-cycle theories to the rest of the world. The study, among others, posed the question: is it overinvestment or underconsumption that causes depression? Or is it something else? A confrontation with the facts was necessary to find the answer. This was, however, not a common method in those days - empty theoretical boxes and measurements without theoretical basis characterized economic analysis then. Jan's model introduced econometrics, a synthesis between mathematics, economic theory and statistics. In this model, it is the task of economic theory to formulate hypotheses, which are in turn formed into mathematical relations that are subsequently tested by the use of statistical data.

For Jan, econometrics is essential in economic research, a vision that was, and still is, being contested. An analogy would best describe the issue. It is an acceptable truth that a city that can be reached by train can also be reached by foot. Applied to the study of economics, one will get the same results, whether using mathematics or plain language, but using the former is more efficient. The argument against Jan's model runs like this: suppose that using mathematics is the same as taking the night train. The train runs through territory that you cannot see in the dark and thus, you could end up in the wrong station. Translated into economics it means: You may not have looked at the real empirical meaning of each equation and would therefore arrive at the wrong conclusion. But then, counters Jan, suppose there is no day train?

In a Dutch paper in 1950, Jan posed the question: "Can economic theorems be proven without the use of mathematics?" Unlike in physics, economic causes cannot be separated and analyzed in real world experiments. Wages determine prices, prices determine quantities sold, quantities sold determine employment and employment determines wages. It is a shortcoming of our natural languages that these interdependencies cannot be discussed without the use of mathematics. At the end of the same paper he cited an examination in which students were made to solve mathematical problems by verbal logic, something that could have been easily done by using simple mathematics. For Jan a ridiculous situation, indeed, although it can be appreciated as a form of puzzle sport. He compared this situation to that in the world of business and politics and hoped that in the future there would be no need to solve economic problems in the style of the puzzle sport. One day, there would be enough trained econometricians in business and politics who would understand and appreciate its importance in economic analysis.

Jan Tinbergen
Copyright © Jan Tinbergen Institute, Amsterdam

Criticism from John Maynard Keynes

Jan met the hardest criticism from the man who started the macroeconomic revolution in economics - John Maynard Keynes. Keynes was opposed to the method of multiple correlation which Jan used in trying to quantify the relative importance of the different elements that caused a business cycle. He thought that the method was merely "hocus pocus" since it did not contain all the variables, especially those that cannot be measured, for instance social, psychological, and political factors. And how about expectations and the role they play in making investments? Tinbergen maintained that a residual variable that would touch on the other influences would address this question, and expectations can always be based on the past and thus be extrapolated. Wittily, Keynes asked for an experiment. He remembered that the seventy translators of the Septuagint were shut up in separate rooms with the same Hebrew text and came out with seventy identical translations. What is the chance, he asked, that the same miracle would be vouchsafed when seventy multiple correlators are similarly shut up with the same statistical material? Keynes considered Jan's method as weak since the materials and relations described in the model were non-quantifiable, variable and non-homogenous. It was a model of thinking that lost is use as soon as one tried to give it an empirical content. A critique echoed in those days by the so-called modern Austrians, of whom Tinbergen's contemporary Hayek, was an early exponent. Notwithstanding, Tinbergen held Hayek, who was director of the Austrian Business Cycle Institute, in high esteem.

In his Prize Lecture, Jan Tinbergen admitted as much that Keynes may have been right in that he never succeeded in predicting the fluctuations in business investments. After the war, Jan's interest changed to developmental economics. He became more interested in the structure of the world economy itself and not in its fluctuations.

Keynes' last comment on Jan's method, just before World War II, brooked no further discussion. He said that notwithstanding the high opinion he had of Jan as a person, he was still not persuaded that his "statistical alchemy" was ripe enough to become a branch of science. "But," he continued, "Newton, Boyle and Locke all played with alchemy. So let him continue."

To get an idea of the awarded work of Jan Tinbergen, the lively correspondence between Keynes and Tinbergen is a stimulating way to start. See Collected Writings of John Maynard Keynes. Volume XIV. Macmillan, Cambridge, 1973. For a recent book of this most important period in economics see Albert Jolink, Jan Tinbergen: The Statistical Turn in Economics: 1903-1955, Chimes, Rotterdam, 2003.

Nikolaas Tinbergen vs Colleagues in the Medical Profession

Criticism to Jan's work happened at an early stage of his career. The opposite happened to Nico - the work that got him the Nobel Prize went uncontested; the clash with his colleagues came later. By the time Jan held his Prize Lecture, econometrics was firmly accepted in mainstream economics and today, it is still accepted all over the world as a universal benchmark to check the results of different economic policies, debunking Keynes earlier prediction. But the things Nico said in his Nobel Prize Lecture made him almost the laughing-stock of the medical profession. In his lecture, Nico took up the issue of autism, i.e a child's inability to relate to people and situations in a normal way starting from infancy. He maintained that it was possible to restore an autistic child to normalcy by establishing a secure mother-child bond; thereby suggesting that the cause of early childhood autism is due to the failure of the mother and child to establish or maintain a normal bond.

This, however, was not the kind of research that got him the Nobel Prize. He got it for his work in reviving and developing the biological science of animal behavior: ethology. His first work looked at the landmark orientation of homing wasps. He showed the importance of visual cues that enable the female wasps, despite the many different nests they build, to return to the correct one.

What made Nico really famous is his demonstration of the "hawk/goose effect." His work explained the behavior of chicks to defend itself from danger: when a goose flies overhead the chick will show no response but if it is a hawk it crouches as if to fend itself from danger. This response was initially thought to be an inborn ability but it is now proven to be learned. The relation between his earlier work and his later theory on autism is obvious. To say that autistic children are "ineducable" and remain dependent all their lives reveals a lack of knowledge about the problem according to Nico, since we still do not have any idea of the causes of autism. What we do have is a mass of disconnected information in search of a theory. All negative predictions about the future are, in reality, no more than statements about the failures of past attempts. According to him, the opinion of experts cannot be trusted since they cannot look into the future. And, he continued, was it not equally the case that until the causes of cholera, smallpox and many other illnesses were discovered, they were considered incurable too?

The strong point in Nico's ethology-based research on "human animals" echoes his earlier work on ethology: a painstaking and continuous observation of animals and humans in their natural habitat. Zoos and natural history museums had always bored him. Much like parents or persons involved in the day-to-day care and education of autistic children, ethologists have always studied children in their home environment. No wonder it is the first group that supports him most. Nico presented a plausible hypothesis and the design of a promising therapy. To him, adaptedness is fundamental and autism is the result of an emotional imbalance. Contrary to mainstream idea, it is not a result of a disorder in the working of neurotransmitters. Neither is it genetic.

Of the works of Nikolaas Tinbergen, the following books can be recommended: The Study of Instinct, Clarendon Press, Oxford, 1951 and (together with his wife) Autistic Children. New Hope for a Cure, George Allen & Unwin, London, 1983. The first book was a remarkable success. It made continental ethology known all over the world. It is clearly written and is a handbook to do ethological behavior research. The book on autism gives the "animal" ethological base to be used for "human" ethology. For a recent biography of Nico Tinbergen see: Nico's Nature: The Life of Nico Tinbergen and his Science of Animal Behaviour, Hans Kruuk, Oxford University Press, 2004.

Conclusion

In the introduction we posed the question: nature or nurture? Two brothers with different natures seem to duplicate each other's fate. The adventurous Nico did not have his brother Jan's quiet nature and love for study. Still, both were rewarded for their individual efforts, arrived at through different methods. They did share several factors: genes and family upbringing that encouraged intellectual curiosity and independent thinking. And they certainly got the same encouragement from their family to do what they liked best, and to do it well. Well enough to be given the highest accolade one can get for their respective fields. No matter what the critics may say.

Protecting the Environment

2009-10-24T22:56:00.000-07:00

The regulation of practices that affect the environment has been a relatively recent development in the United States, but it is a good example of government intervention in the economy for a social purpose.

Beginning in the 1960s, Americans became increasingly concerned about the environmental impact of industrial growth. Engine exhaust from growing numbers of automobiles, for instance, was blamed for smog and other forms of air pollution in larger cities. Pollution represented what economists call an externality -- a cost the responsible entity can escape but that society as a whole must bear. With market forces unable to address such problems, many environmentalists suggested that government has a moral obligation to protect the earth's fragile ecosystems -- even if doing so requires that some economic growth be sacrificed. A slew of laws were enacted to control pollution, including the 1963 Clean Air Act, the 1972 Clean Water Act, and the 1974 Safe Drinking Water Act.

Environmentalists achieved a major goal in December 1970 with the establishment of the U.S. Environmental Protection Agency (EPA), which brought together in a single agency many federal programs charged with protecting the environment. The EPA sets and enforces tolerable limits of pollution, and it establishes timetables to bring polluters into line with standards; since most of the requirements are of recent origin, industries are given reasonable time, often several years, to conform to standards. The EPA also has the authority to coordinate and support research and anti-pollution efforts of state and local governments, private and public groups, and educational institutions. Regional EPA offices develop, propose, and implement approved regional programs for comprehensive environmental protection activities.

Data collected since the agency began its work show significant improvements in environmental quality; there has been a nationwide decline of virtually all air pollutants, for example. However, in 1990 many Americans believed that still greater efforts to combat air pollution were needed. Congress passed important amendments to the Clean Air Act, and they were signed into law by President George Bush (1989-1993). Among other things, the legislation incorporated an innovative market-based system designed to secure a substantial reduction in sulfur dioxide emissions, which produce what is known as acid rain. This type of pollution is believed to cause serious damage to forests and lakes, particularly in the eastern part of the United States and Canada.

Taxes and Economic Growth Response

2009-10-24T22:54:00.000-07:00

Great article, but you fail to include any counterarguments.

1. Remember a crucial counterpoint here:

I can find reverse situation. Rather than working based on reward, individual actors may work to achieve a set income level (to provide for their family). If taxes go up, they may work more to provide for their family (if unhappily).

A large increase in salary (functionally equivalent to a tax break) may lead workers to reduce hours and enjoy fruits of their labor (given assumptions about the diminishing marginal utility to wealth).

Counterintuitive but actual true of human behavior.

2. Statistically, we have trouble finding such a relationship between taxes and growth. This should be troubling. Some suggest actual level at which the Laffer curve turns is around 70-80% if you look at states like Sweden.

State spending also has a lower marginal propensity to import than individuals and so in an open trading system, government spending has more bang for economy.

3. taxes that are used to provide services you might otherwise purchase (such as healthcare or education) are likely to be inefficient but are simply using the government as an intermediary for spending.

---

If you would like to contact the Economics Guide you can do so by using the

What Happens if Interest Rates Go To Zero?

2009-10-24T22:40:00.000-07:00

Can interest rates go to zero? Could they even be negative? I've heard that this has happened before. What would cause something like that to happen and what impact would it have on the economy?

A: Great questions!

First we need to distinguish between nominal and real interest rates. The article What's the difference between nominal and real? The quick answer is that nominal interest rates are the ones you typically hear about (prime rate, etc.) whereas real interest rates factor out inflation.

This week we will examine zero nominal interest rates. Next week we will look at zero real interest rates.

Zero Nominal Interest Rates

A zero nominal interest rate occurs when the interest rate is the same as the inflation rate. If inflation is 4% then interest rates are 4%. If you lent or borrowed for a year at a zero real interest rate, you would be exactly back where you started at the end of the year. I loan $100 to someone, I get back $104, but now what cost $100 before costs $104 now, so I'm no better off.

Typically nominal interest rates are positive, so people have some incentive to lend money. During a recession, however, central banks tend to lower nominal interest rates in order to spur investment in machinery, land, factories, etc. If they cut interest rates too quickly, they can start to approach the level of inflation. Inflation will often rise when interest rates are cut, since these cuts have a stimulative effect on the economy.

According to some economists a zero nominal interest rate can be caused by a liquidity trap:

"The Liquidity trap is a Keynesian idea. When expected returns from investments in securities or real plant and equipment are low, investment falls, a recession begins, and cash holdings in banks rise. People and businesses then continue to hold cash because they expect spending and investment to be low. This is a self-fulfilling trap." There is a way we can avoid the liquidity trap and, for real interest rates to be negative, even if nominal interest rates are still positive. It occurs if investors believe a currency will rise in the future. Suppose the nominal interest rate on a bond in Norway is 4%, but inflation in that country is 6%. That sounds like a bad deal for a Norwegian investor because by buying the bond their future real purchasing power would decline. However, if I'm an American investor and I think the Norwegian krone is going to increase 10% over the U.S. dollar, then buying these bonds is a good deal. If I'm right about the currency jump, then I'll gain 10% from switching from the U.S. dollar to Norwegian krone denominated bonds today. On top of that, I'll also receive the 4% gain in interest.

As you might expect this is more of a theoretic possibility than something than occurs regularly in the real world. However, it did take place in Switzerland in the late 1970s, where investors bought negative nominal interest rate bonds because of the strength of the Swiss franc.

I hope this answers your question about negative real interest rates. In What Happens if Nominal Interest Rates Go To Zero? we examine the case of negative nominal interest rates. If you have a question about interest rates, please contact us, by using the

Good Question

2009-09-11T08:12:00.002-07:00

From my chairman, Don Boudreaux:

This afternoon you interviewed a pundit who claims to be "inspired" by the way that Bill and Hillary Clinton, having been so critical of Barack Obama during the presidential primary campaign, now work so agreeably with him.  I'm not inspired; I'm suspicious.  Were the Clintons lying during the campaign?  Or are they lying now?

This is one of the many questions I'd like to pose to folks like Brad DeLong, who spent years pointing out Bush's dishonesty as if the man was some kind of pioneer. I'll admit that politicians lie to different degrees. Maybe Bush was a bigger liar than most; if 25% of Republicans said so, I'd believe it. But all successful politicians are big liars by the absolute standard we routinely apply to the people we personally know.

CATEGORIES: Behavioral Economics and Rationality

COMMENTS (9 to date)

Latest Comment

david writes:

Perhaps there is a difference in the kinds of things they lied about.

Besides that, even if most politicians on both sides of the fence lie until their tongues turn blue, it's still worth calling them out for it.

Posted June 2, 2009 11:49 AM

fundamentalist writes:

Bryan doesn't understand the rules of the game. For the left, Republicans are liars by definition. Democrats cannot be liars, by definition even if they tell lies. For example, former CBS anchor Dan Rather said of Clinton after his perjury before a grand jury that Clinton had told lies, but that didn't make him a liar.

Posted June 2, 2009 12:36 PM

JH writes:

With the Clintons, I think it's safe to assume they are always lying.

Posted June 2, 2009 1:10 PM

Greg Ransom writes:

It's important to make the vital distinction between liars and BSers -- see philosopher Harry Frankfurt's famous essay "On Bullshit".

Obama is a BSer -- Bush, not so much. Bush, well, not even a good liar.

Obama -- awesome BSer, which means he's rarely a liar at all.

Posted June 2, 2009 1:11 PM

Matt writes:

I don't think the Clinton's are being disingenuous. While the Obama administration is in office they'll be loyal, ignoring differences in public, and afterward they'll admit what those were. I'm not any more suspicious now that they've seemingly forgot their objections to him.
I'm not inspired either. Working well with the man in power is self interested.

Posted June 2, 2009 1:50 PM

John writes:

The Clintons weren't lying - they were just "framing" the truth differently. :)

Posted June 2, 2009 5:28 PM

Methinks writes:

Gentlemen, I can't possibly be asked to answer the question until the meaning of "is" is finally and conclusively determined.

Posted June 2, 2009 7:26 PM

Dave writes:

The real question should be, "Why do people continue to vote for people they know are liars?" Obama is Bill Clinton 2.0 - totally inept and in over his head, but loved by the media and good performer on TV. Every word that he reads off his teleprompter is either a lie or a half truth. But the media loves him so he is never called on anything. Also he is untouchable because of his race.

Posted June 3, 2009 10:27 AM

JackofSpades writes:

As the writers of South Park so perfectly stated through the specter of Rob Reiner, "Sometimes lying is okay, like when you know what's good for people more than they do."

There is no denying that Obama lied through his teeth during the campaign regarding his intentions toward NAFTA. But, so be it, because what mattered was that he gained the support needed to get elected and can now get to the important work of blah blah blah...

I think 90% of the reason why politicians lies are forgiven is based on the ends justifying the means. The left supports Obama's ends so they turn a blind eye to his means, even though they scream bloody murder when Republicans do the same thing (and they do).

The Bill Gates Mystery

2009-09-11T08:12:00.001-07:00

Not long after I started at GMU, Tyler approximately remarked that, "Bill Gates is just crazy - he works like a dog despite his billions." I don't remember how I responded at the time. But when I'm trying to understand the behavior of people whose circumstances are drastically different from my own, I find that a little empathy goes a long way. How does life look through the eyes of Bill Gates?

My old conversation with Tyler came back to me a couple of days ago when I was reading Sloan Wilson's The Man in the Gray Flannel Suit (1955). Here's a dialogue that almost seems like it's ripped straight from a GMU lunch. Tom, the lead character, is talking with his friend, Bill, about Tom's new boss, Hopkins:

Bill sipped his drink thoughtfully. "What do you already know about Hopkins?" he asked.

"Not much," Tom said. "I've hardly heard of him. Somebody told me he started with nothing and he's making two hundred thousand a year now. That's about all I know - I don't think I've ever even seen a picture of him."

"Precisely," Bill said professionally. "Precisely."

"What the hell do you mean by that?"

"I mean it looks like the public-relations boys have cooked up a big deal to put Hopkins on the map, and you've stumbled into it."

"I don't get it," Tom said.

"Figure it out for yourself. Here's Hopkins, about fifty years old, and the president of the United Broadcasting Corporation... Inside the company, he's the biggest deal in the world... But outside the company he's nothing. Taxi drivers don't call him 'Sir.' Waiters more than five blocks from Radio Center don't give him a special table... Don't you see how tough it must be?"

"I'm weeping," Tom said.

"All right. Here's a guy who works fifteen or twenty hours a day - inside the company he's famous for it... And people like him - he knows how to drive people and still make them like him. But what's he get out of life?"

"Money."

"Of course! But if he made only a quarter as much money, he'd still be able to buy everything he wants. Hopkins is a guy of simple tastes... So what's he keep working fifteen or twenty hours a day for?"

"Must be nuts," Tom said.

"Nuts nothing! The poor son of a bitch wants fame! And he's in a position to buy it. So he calls Ogden and Walker and says, 'Boys, make me famous. One year from today I want to be famous, or you're fired!'"

"Oh come on," Tom said, laughing. "You know damn well that's nonsense."

"Perhaps he wouldn't word it that way exactly... He'd say, 'Gentlemen, I believe that for the sake of the company, the major executives must direct more attention to their personal public relations...'"

"I doubt like hell that a man in his position would say that either."

"Okay - be a stickler for detail. What would really happen is that somebody would suggest that Hopkins head a committee on mental health - these guys are asked to do that sort of thing all the time. Usually they refuse. But this time Hopkins figures he's got a chance for the national spotlight. You're right about one thing - he'd never have to say anything about it. He wouldn't have to..."

The whole book is filled with gems like this. If you're short on time, try the movie - it's a great adaptation, and the dialogue is right out of the book.

Hope His Top Advisor Sort of Believes In

2009-09-11T08:11:00.001-07:00

Is it just me, or does Larry Summers damn his boss with faint praise?

"When I've heard him talk about economic issues--with the exception of NAFTA, where I just hope he doesn't believe what he says--he seems intelligent and serious. I wouldn't say I'm bowled over by the brilliance of anything I've heard, but everything has a kind of thoughtfulness to it that's sort of impressive."

Let me put it this way: If Summers put these sentences into a letter of recommendation for a job market candidate, he probably couldn't get an interview, much less a job.

I suppose that Obama's defenders might hail his willingness to employ non-sycophants like Summers. And I guess that Summers might say that he's happy to raise the probability that this "intelligent and serious" leader will act as if he were brilliant. But both of these observations strike me as the flip side of sour grapes: Since this is what we've got, it must be pretty good. Isn't "Even his top economic advisor doesn't think much of him, so he's probably a borderline economic illiterate" the more reasonable lesson to draw?

Cruel Caring in Breaking Bad

2009-09-11T08:10:00.001-07:00

Breaking Bad is a show about a terminally ill high school chemistry teacher who starts cooking meth to build up a bequest for his family. You see a lot about the economics of drug prohibition in the show, but you're probably already familiar with it. What's original about Breaking Bad is its highly Hansonian take on the economics of health care. [Warning: Mild spoilers follow.]

Robin Hanson doggedly argues that health care is more about "showing that you care" than about improving health. Breaking Bad shows us the dark side of caring. When Walt finally tells his family about his illness, he gets almost no genuine sympathy. Instead, his family bullies him into accepting painful, expensive treatments that are almost certain to fail. It's all about them and their feelings; both objective statistics and the feelings of the man with two years to live count for nothing. Indeed, it's precisely because his family insists on expensive treatments that Walt keeps making meth even though he's in way over his head.

The main problem with Robins' signaling model of medicine is that (unlike the signaling model of education) it's counter-intuitive. Breaking Bad brings the Hansonian critique of medicine - and "admirable activities" generally - to life.

CATEGORIES: Economics of Health Care

COMMENTS (9 to date)

Latest Comment

drobviousso writes:

I don't know how they did it, but they managed to get both the science and economics fairly correct in this show. I've really enjoyed it.

Posted July 23, 2009 11:23 AM

Steven writes:

If you're looking for more examples from literature supporting Hanson's view, start with War and Peace. I apologize for the length of the quotation, but the whole chapter is worth reading, and it was hard enough to limit my selection to two paragraphs.

From: War and Peace, Book 9, Chapter 16, http://www.gutenberg.org/files/2600/2600-h/2600-h.htm#2HCH0183

"Natasha's illness was so serious that, fortunately for her and for her parents, the consideration of all that had caused the illness, her conduct and the breaking off of her engagement, receded into the background. She was so ill that it was impossible for them to consider in how far she was to blame for what had happened. She could not eat or sleep, grew visibly thinner, coughed, and, as the doctors made them feel, was in danger. They could not think of anything but how to help her. Doctors came to see her singly and in consultation, talked much in French, German, and Latin, blamed one another, and prescribed a great variety of medicines for all the diseases known to them, but the simple idea never occurred to any of them that they could not know the disease Natasha was suffering from, as no disease suffered by a live man can be known, for every living person has his own peculiarities and always has his own peculiar, personal, novel, complicated disease, unknown to medicine—not a disease of the lungs, liver, skin, heart, nerves, and so on mentioned in medical books, but a disease consisting of one of the innumerable combinations of the maladies of those organs. This simple thought could not occur to the doctors (as it cannot occur to a wizard that he is unable to work his charms) because the business of their lives was to cure, and they received money for it and had spent the best years of their lives on that business. But, above all, that thought was kept out of their minds by the fact that they saw they were really useful, as in fact they were to the whole Rostov family. Their usefulness did not depend on making the patient swallow substances for the most part harmful (the harm was scarcely perceptible, as they were given in small doses), but they were useful, necessary, and indispensable because they satisfied a mental need of the invalid and of those who loved her—and that is why there are, and always will be, pseudo-healers, wise women, homeopaths, and allopaths. They satisfied that eternal human need for hope of relief, for sympathy, and that something should be done, which is felt by those who are suffering. They satisfied the need seen in its most elementary form in a child, when it wants to have a place rubbed that has been hurt. A child knocks itself and runs at once to the arms of its mother or nurse to have the aching spot rubbed or kissed, and it feels better when this is done. The child cannot believe that the strongest and wisest of its people have no remedy for its pain, and the hope of relief and the expression of its mother's sympathy while she rubs the bump comforts it. The doctors were of use to Natasha because they kissed and rubbed her bump, assuring her that it would soon pass if only the coachman went to the chemist's in the Arbat and got a powder and some pills in a pretty box for a ruble and seventy kopeks, and if she took those powders in boiled water at intervals of precisely two hours, neither more nor less.

What would Sonya and the count and countess have done, how would they have looked, if nothing had been done, if there had not been those pills to give by the clock, the warm drinks, the chicken cutlets, and all the other details of life ordered by the doctors, the carrying out of which supplied an occupation and consolation to the family circle? How would the count have borne his dearly loved daughter's illness had he not known that it was costing him a thousand rubles, and that he would not grudge thousands more to benefit her, or had he not known that if her illness continued he would not grudge yet other thousands and would take her abroad for consultations there, and had he not been able to explain the details of how Metivier and Feller had not understood the symptoms, but Frise had, and Mudrov had diagnosed them even better? What would the countess have done had she not been able sometimes to scold the invalid for not strictly obeying the doctor's orders?"

Government Health Insurance and Pseudocertainty

2009-09-11T08:09:00.000-07:00

One of the most appealing arguments for government health insurance is the perception that it's "a sure thing." No matter how powerful reputational incentives are, a private health insurance might go out of business, or fall into the hands of a myopic CEO. With government health insurance, on the other hand, you know that you're covered, right?

This is a prime example of what psychologists call a pseudocertainty effect. Tversky and Kahneman originally explained it using two hypotheticals (my paraphrase):

Hypothetical #1: You play a two-stage game. There is a 75% chance that the game ends in stage 1 and you win nothing. However, if you make it to stage 2, you get to choose between $30 with certainty, or an 80% of $45.

Hypothetical #2: You choose between a 25% chance of $30 or a 20% chance of $45.

Most people take the first choice in Hypothetical #1, and the second choice in Hypothetical #2, even though they are mathematically identical. T&K's explanation: Hypothetical #1 looks better due to a "pseudocertainty effect." People are misled by the fact that the P(A|B)=1, even though B itself is far from certain.

What does this have to do with health care? Well, government health care is a sure thing conditional on (a) getting high-quality care for (b) a treatable ailment (c) in a timely manner (d) without getting a secondary infection... etc. In other words, like private health care, government health care isn't a sure thing at all.

Now you could object, "It's not about a pseudocertainty effect. It's about a higher likelihood of good health with government health insurance." If you go down that route, however, you've opened yourself up to a barrage of tough questions. What evidence is there that government health insurance raises life expectancy - or any other major measure of health? Even if it does, is the extra cost worth it? As Tversky and Kahneman showed, people will pay a lot to go from near-certainty to perfect certainty. They're far less eager to pay an arm and a leg to go from a 45.3% chance of living to 80 to a 45.5% chance living to 80.

My point: While "certainty" is of the most appealing arguments for government health insurance, it's silly. But if proponents stop using it, it's going to be a lot harder to win over public opinion. It's a choice between persuasion and honesty. Take your pick.

The Economics and Philosophy of the Wall

2009-09-11T08:05:00.002-07:00

I usually dislike movies based on true stories. But The Tunnel, a tale of five heroes who tunnel under the Berlin Wall to rescue their family and friends, is excellent. We don't just vicariously enjoy the excitement of digging to freedom. We see the tyranny of Communism in its most visceral form - "No one gets out of here alive."

For libertarians, morality doesn't get much clearer than this. But almost all non-libertarians will be equally certain that the tunnelers are good and the East German border guards and secret police are evil. My question is: Why, on this one issue, do non-libertarians so readily accept the stereotypical libertarian position?

Consider: Most East Germans who wanted to flee to the West were probably "economic refugees." Take a look at the emigration numbers. If people were going West for freedom, they might as well have left ASAP in 1949 or 1950. Many did, of course. But the outflow continued year after year. The most obvious explanation: The West's living standards kept pulling further and further ahead of the East's, attracting emigrants who cared a lot more about prosperity than freedom.

So what? Well, conservatives are notoriously hostile to "mere" economic refugees. And if you point out that these economic refugees were selfishly trying to escape redistributionist policies, it's hard to see why liberals would cheer them on. Again, I'm not denying that conservatives and liberals are confident that people trying to escape from East Germany were in the right. I just don't understand the reason for their confidence.

A few possibilities:

1. It's OK to flee from a dictatorship, even if your motive is economic gain and your action undermines redistribution. Question: What if the Berlin Wall enjoyed democratic support? Would it have been OK then?

2. It's OK to keep people out, but not to keep them in. Question: Suppose the Berlin Wall had been erected by West Germany to keep out illegal immigrants. Would it have been OK then?

3. When a nation has been "artificially" divided, it's OK to ignore restrictions on freedom of movement within the nation's "true borders." Question: Where in the world do "true borders" come from? Philosophers may say "the social contract," but it's obvious that almost all real-world borders have been set by force. See for example what happened to Germany after WWI and WWII.

4. It's OK to ignore restrictions on freedom of movement if they split up families and close friends. Question: Doesn't this mean that current family reunification quotas are actually monstrously strict? If this seems like hysterical libertarian rhetoric, watch the scene in The Tunnel when people explain who they want to smuggle out. People weren't just willing to risk their lives for their children, spouses, parents, and siblings. They also risked their lives for boyfriends, girlfriends, friends, family of friends, and more.

Frankly, this is yet another issue where I have trouble even imagining what an intelligent, thoughtful non-libertarian would say. Can anyone help me out?

Sumner Digest

2009-09-11T08:05:00.001-07:00

Sumner's latest mini-essay is a thing of beauty. Highlights:

1. Sumner on the Fundamental Attribution Non-Error:

I think we all listen to our friends, relatives, and colleagues complain about their predicament, and then silently think, "Well what do they expect? Their predicament perfectly reflects their character." If they are a lazy spendthrift, then they will go through life thinking that adverse circumstances are always denying them the money they need. If they are envious, then their colleagues will be unfairly promoted ahead of them. Etc, etc.
But when we think about ourselves, well then things are very different. If only we could get out from under burden X, our life would be so much easier... While reading the Portuguese writer Pessoa, I recently came across this quotation:
Whenever I've tried to free my life from a set of the circumstances that continuously oppress it, I've been instantly surrounded by other circumstances of the same order, as if the inscrutable web of creation were irrevocably at odds with me.
%$@#& that inscrutable web of creation.

2. Sumner on the Political Corollary of the Fundamental Attribution Non-Error:

When we form a mental image of another democratic country, we don't typically think in terms of the current leader, but rather a much deeper set of characteristics, what you might call the character of a country. France, Italy, Switzerland, Japan; the names of each of these countries trigger complex mental images for most of us, but how many readers of this blog could even name the leaders of Switzerland and Japan?...

For our own country things are much different... [D]on't we all tend to exaggerate the importance of who is elected? I think this is especially true when the leader is someone you don't like. Deep down, conservatives feel they have never been given a chance; that the liberal elite runs the media, courts, colleges, and there are enough squishy Republicans that nothing substantive gets accomplished. I think this excuse is hogwash, but I am pretty sure it is widely held. In contrast, left-leaning intellectuals often refer to "Reagan's America," or "Thatcher's Britain." But I've never heard the phrases "Jimmy Carter's America," or "Gordon Brown's Britain." Why not? Because if the more liberal candidate is elected, the country will still face the same problems as before, just as Switzerland and Japan will still be Switzerland and Japan regardless of which non-entities happen to hold their highest offices.

3. Sumner on the Power of Zeitgeist (Auf English, daß ist "public opinion.")

Elections are very important, but mostly because of the fact that we have them. The real action is in changing the zeitgeist, not who ekes out an election victory. In some ways we will become much more like France, for instance I think we will move closer to universal health insurance. And in some ways France is becoming much more like the US, as when they deregulated the commercial airline industry and privatized lots of big companies. But none of these long run trends will be determined by who wins elections.

4. Sumner on Leaders Who Make a Difference

In the 1960s most Americans knew that Mao was leader of China, whereas today very few can name Hu Jintao. Does that mean we are less well informed? No. There was good reason to know who Mao was, he was one of the most important figures in world history, and his decisions greatly affected the lives of millions. There is no need to know who Hu is (pun intended.) Fortunately for the Chinese people, Hu could not launch a Great Leap Forward or Cultural Revolution even if he wanted to.

If you can't imagine how one short essay can stitch all these topics and much more together without leaving a visible seam, read the whole thing.

What Would Happen If the Median Economist Controlled Health Care Policy?

2009-09-11T08:04:00.001-07:00

Arnold writes:

On health care, the irrational public--the ones that want government to keep its hands off their Medicare--is helping to fight the Progressives who want to impose a health plan that is based on what I see as a failed model--the Massachusetts plan. In Bryan's ideal world, wouldn't our health care system be run by the wise technocrats of the Obama Administration?

In my ideal world, we'd recognize that economists' textbook arguments against free-market health care are largely bogus (a vestigial reflection of anti-market bias) and respond by abolishing Medicare and Medicaid, medical licensing, and all the other health care regulations on the books. But Arnold still suggests an interesting hypothetical: What would happen if the typical economist controlled health care policy?

Contrary to Arnold, I think it would be a vast improvement over the status quo. I've talked to plenty of left-wing economists about this topic. On balance, their views are much more reasonable than the median non-economist's. Yes, most economists probably favor universal coverage, and I don't. But few economists want a government monopsony. And they're on board for three major reforms that I support:

1. Denying care to people on Medicare and Medicaid when their treatment is expensive and the actuarially predicted benefit is small.

2. Substantially raising deductibles for people on Medicare and (maybe) Medicaid.

3. (Moderately) deregulating medical licensing to allow a greater role for doctor's assistants, nurse practitioners, etc.

In fact, since the typical economist's argument against means-testing Medicare is that it would undermine its popular support, I think that in this hypothetical scenario that I could convince the typical economist to accept a fourth wise reform:

4. Means-testing Medicare.

So answer me this, Arnold: Isn't universal coverage bundled together with these four reforms an improvement over the status quo? And isn't the status quo (or worse) exactly what we're likely to see as long as the median voter has his way?

CATEGORIES: Economics of Health Care

Why Do People Oppose Organ Markets?

2009-09-11T08:02:00.000-07:00

It seems that Bryan thinks most opposition to markets in organs is a function of either ignorance of the likely consequences or perverse and exotic moral premises. This makes me wonder if he has ever debated this issue with anyone? Lots of people understand the economics well enough but continue to believe that markets in organs ought to be illegal.

I have debated the legalization of organ selling with quite a few people over the years. In my experience, 100% of people who can correctly explain economists' standard case for legalization favor legalization, and 100% of people who can't correctly explain the case oppose legalization.

I'll grant that my sample is a little unrepresentative. I suspect that with a little legwork, Will could find a hundred Leon Kass-types who understand the economics of organ selling but still oppose legalization. But I still think that at least 90% of people who can correctly explain economists' case are on board. Am I wrong?

Against Human Weakness

2009-09-11T07:37:00.000-07:00

Whenever a politician is exposed as an adulterer, the same meme always resurfaces: "We're all human, we shouldn't have 'unrealistic' expectations, everyone has moments of weakness, so let's forgive and move on..." Micha Gertner gives an eloquent version over at Distributed Republic:

[T]here is clearly something wrong with the social expectation of life-long monogamy. It is totally unrealistic to the point of being laughable, and seems to lead to more frustration and family disintegration than if the expectation didn't exist at all. I understand some people have trouble dealing with their petty jealousies, but maybe they should try a little Don't Ask, Don't Tell instead of the nuclear option?

I'm not a principled advocate of monogamy; it's not for everyone, and I am after all a fan of Big Love. I am however a principled advocate of honoring your contracts and promises. If you don't want to practice monogamy, here's an idea: Don't agree to it. If you want a non-traditional marriage, write a contract for it. Don't accept the standard-issue version, then pretend that you didn't have a choice.

But aren't monogamous contracts "unrealistic"? This claim makes no sense. If 50% of people who vow life-long monogamy keep their promise, what's "unrealistic" about it? Monogamy is no more unrealistic than hundreds of promises that we expect people to keep - to show up for work on time, buy lunch next time, pay their workers, or give dissatisfied customers their money back. In each instance, if you think the terms are onerous, refuse them. Don't say yes, then blame the fates.

But what about human weakness? Here I take a hard line: Human weakness is a choice, and it should be criticized, not excused. I'm particularly baffled when economists say otherwise. In what economic model is "lots of people feel tempted to do it" a reason to turn a blind eye? I embrace a simple alternative: Do the right thing all day, every day.

Now I know what you're thinking. "Bryan's holding himself up as a saint, but if I spied on him, I'm sure I could dig up all kinds of dirt on him." Perhaps you're even hoping I'll issue a hubristic Gary Hart-style challenge to follow me around. My response:

1. I do many embarrassing things every day. I sing off-key, dance badly when no one is watching, say things about people that I wouldn't say to their faces, and much more. I'd rather not see any of this on Youtube. Still, I insist that my behavior is merely embarrassing. If I thought it was wrong, I would cease and desist - not plead human weakness.

2. Public defenses of human weakness are part of an insidious pooling equilibrium. Someone fails to live up to their marriage vows or other solemn agreements, and bystanders are supposed to either invoke human weakness or stay quiet. What happens if you condemn the guilty party? You risk being singled out for hyper-scrutiny, and harsh condemnation for the smallest stain on your record. (Or alternately, you single yourself out as a bitter, pathetic victim). As a result, wrong-doers caught red-handed deflect attention from their own bad behavior onto those who vocally disapprove of what they've done. What kind of incentives are those?

3. Doesn't this contradict my earlier attack on hypocrisy? Not at all. Adulterers who publicly attack adultery are indeed worse than garden-variety adulterers, for the reasons I've previously offered. But people guilty of minor offenses who criticize major offenses are not worse than people who commit major offenses.

My friends often chuckle at my puritanism, but it's a tolerant puritanism. I'm not telling anyone what kind of contracts and promises to make, but merely to honor the contracts and promises they've made. That's not too much to ask of human nature.

CATEGORIES: Economic Philosophy

Does Personality Matter? Compared to What?

2009-09-04T22:48:00.000-07:00

I finally found the time to read "The Power of Personality: The Comparative Validity of Personality Traits, Socioeconomic Status, and Cognitive Ability for Predicting Important Life Outcomes." [new working link!] It's a meta-analysis, so you've really got to trust the authors to be confident in the results. But if the world works the way the authors say it does, all social scientists ought to be paying attention.According to this article, you can measure personality with a simple survey, then use it years or decades later to make good predictions about mortality, divorce, and occupational status. The research team usually reports results from studies with decent control variables, but of course the quality of past research varies. The paper ends with three key graphs.The first shows correlations between mortality and (a) socioeconomic status, (b) IQ, and (c) four of the Big 5 personality traits:

In The Bell Curve, Herrnstein and Murray showed that IQ almost always out-predicts SES. If this paper is right, conscientiousness alone out-predicts IQ for mortality.The second key graph shows the correlation between divorce and (a) SES, and (b) three of the Big 5 personality traits:

Many of us (Arnold for example) think of divorce as a low-SES problem. If this paper is right, though, divorce is much more of a low conscientiousness, high neuroticism, low agreeableness problem.Finally, in the last graph, we see the correlation between occupational status and (a) SES, (b) parental income, (c) IQ, and (d) various personality traits

The specific personality traits are unspecified because the desirability of traits varies from job to job - think salesmen versus librarians. I do wonder, though, why they didn't show a separate bar for conscientiousness, which is supposed to predict job performance in almost any line of work.Overall, I'm inclined to believe these results. In my experience, people are highly yet predictably different in their preferences. Since luck usually averages out in the long run, it seems like these predictable differences should lead to large average differences in people's lives. The fact that prominent personality specialists will stick their necks out and make these generalizations makes me marginally more confident in my initial intuitions. Does anyone else want to read the whole piece, and tell us how convincing you found it - and why?

The Shield: Social Intelligence Gets Ugly

2009-09-04T22:40:00.000-07:00

Bryan Caplan
I just finished the final episode of The Shield, FX's drama about a squad of corrupt LA cops. I loved every episode. At risk of alienating people who will share my evaluation, The Shield is like The Wire, except it's fun to watch.During the final season, I noticed the centrality of social intelligence to the show. While there's a lot of violence, there's a lot more persuasion - and the lead characters are very good at it. What's striking, though, is that the lead characters are particularly good at deception and intimidation. What lie will X believe coming from Y? What threat can X hang over Y's head to make him take some unpleasant action?An example that won't spoil the plot: In one episode, Detective X is on the run from the police, and Detective Y is trying to locate and kill him before the honest cops do. Detective X knows this, so he calls Y to tell him that he's sending a blackmail parcel to the station's captain. As a result, Detective Y has to divide his attention between searching for X, and intercepting X's blackmail parcel in the mail. But then the captain gives Y a street assignment. He doesn't have any trusted confederate to cover for him at the station. So Y goes to detective Z, a divorced cowardly nebbish, and tells him the perfect lie: "I was dating someone on the force, she got mad, and now she's sent a letter badmouthing me to the chief." And of course Z says, "Don't worry, the chief will never get that letter."A key element of The Shield's major characters' social intelligence: Knowing whose opinion counts. Out on the street, the central characters' corruption is common knowledge. There are hundreds of eyewitnesses to their heinous crimes. But since the witnesses are gang members, prostitutes, illegal immigrants, etc., they're either untrustworthy, easily threatened, or both. The upshot: Their testimony isn't much of a check on official abuse. At the same time, of course, there are respected citizens who want to crack down on corruption, but they can't prove a thing in a court of law - and won't act until they can.Outside a game of Diplomacy, deception and intimidation play no role in my life. Not only are they wrong; at least in my social niche, they're highly imprudent. In repeated games, deception quickly backfires; see the proverb "Fool me once, shame on you; fool me twice, shame on me." Intimidation often backfires as well, inspiring anger instead of fear. Indeed, in the absence of high exit costs, intimidation is pointless - people respond by running away instead of knuckling under. Still, I have to admit that I'm fascinated by The Shield's depiction of finely honed social skills so far outside my repertoire. Give it a try - I know of no more entertaining way to learn about the ugly side of social intelligence

The Nuances of EU Unemployment

2009-09-04T22:34:00.000-07:00

When I compare U.S. and European unemployment, critics often object that Europe is heterogeneous. Fair enough, but you can make the same objection to any generalization. The U.S. is diverse, too. How often can you silence critics of the U.S. by pointing out American diversity?Still, I'm happy to be more nuanced. The EU-15 is Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden and the United Kingdom. According to my stereotypes, the countries with less regulated labor markets will have relatively low unemployment during normal times, but sparker spikes during crises. This table shows unemployment now versus a year ago. What's going on?1. High-population France, Germany, Italy nicely fit my stereotypes. So do Belgium, Greece, and Portugal. They've all got high unemployment during normal times, but relatively small spikes.2. A year ago, the EU-15 countries best-known for lower labor market regulation - the UK, the Netherlands, and Denmark - had unemployment well below European norms. The increase in unemployment in the UK and Denmark - but not the Netherlands - has been unusually sharp. Ireland - also known for its relatively free-market policies, looks just like the UK and Denmark - low unemployment a year ago, and a sharp spike since.3. The outliers: Austria, Finland, Luxembourg, Spain, and Sweden. Austria and Luxembourg were low and only rose a little; Finland and especially Sweden started low-moderate and rose fairly sharply. Spain had high unemployment a year ago, but a huge spike since then. The lesson I draw: Noting European diversity makes the case against stereotypical European labor market policy even stronger. European countries that don't act like France, Germany, and Italy do much better. While there are outliers, they're no reason for Euro-optimism: Spain, which manages to have high unemployment and a big unemployment spike, has a bigger population than all of the positive outliers put together.Questions for people who know better than me: What's going on with Finland and especially Sweden? Are their labor market policies closer to Denmark's than I've been led to believe? And what's the deal with Spain? Why do they have high regular unemployment and a big recession spike?

How I Raised My Social Intelligence

2009-09-04T22:24:00.000-07:00

Bryan Caplan
My social intelligence is a lot higher than it used to be. I stillwouldn't say that I'm "good with people." But in my youth, I wastruly inept. In junior high, I had one real friend, and many overtenemies. Since then, I've at least managed to claw my way up tomediocrity.A lot of social intelligence is in details and practice. If I couldtravel back in time and spend five minutes advising myself, though,here are the principles I would try to teach myself.1. Good conversation is an exchange. The most basic form of socialineptitude is to say what's on your mind, even though you have noreason to believe your listeners are interested. Even more cloddish:Saying what's on your mind, even though you know that your listenersare not interested.In a useful conversation, in contrast, there is a double coincidenceof wants. You have to be interested in what I have to say; I have tobe interested in what you have to say. This is an important reasonwhy people with conventional interests seem more socially intelligent. Even if they don't check whether their audience cares, it probablydoes.I imagine that my teenage self would immediately object, "But no one'sinterested in what I have to say." My two replies: (1) If that'strue, it's still better to keep your thoughts to yourself thanantagonize people you're going to see repeatedly. (2) People will bemuch more interested in your thoughts if you make marginal adjustmentsin topics and presentation.2. Be friendly. It's not just good advice for libertarians; it's goodadvice for people. A strong presumption in favor of kindness andrespect almost never hurts you, and often helps you. Note that I say"presumption." Don't "wait and see" if people deserve friendlytreatment. Hand it out first, no questions asked. You will makefriends (very good), avoid making enemies (good), and occasionallyshow undeserved kindness and respect (only mildly bad).3. Keeping friends is more important than getting your way. Youshould think twice before asking anyone for help. If you still thinkit's a good idea, try to make your request easy to refuse. "How wouldyou feel about..." is much better than "Please, please just do me thisone favor!" In the short-run, of course, the pushy approach is ofteneffective. But life is a repeated game, pushing leads to resentment,and your relationships are more valuable than almost any specificvictory.The world often perceives economists as low in social intelligence.Maybe we are, but there's no reason for it to be that way. Theinsight that good conversation is an exchange should come naturally tothe economically literate. A policy of blanket friendliness ought tomake sense to anyone familiar with weakly dominant strategies. Andonce you realize that asking for help is an implicit intertemporaltrade, the wisdom of restraint and delicacy is easy to see.Admittedly, if your social intelligence has always been high, myrecommendations will strike you as obvious. If they're so obvious,though, why do so many smart people act like don't know them?CATEGORIES: Behavioral Economics and Rationality.