Monthly Archives: September 2016

When Price Regulation is the Solution. . .

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Scott Alexander writes,

Some people have talked about funding research via “prizes” rather than through an investment-and-profit model. Some people say we should fund it publicly through the NIH or something, which we already sort of do to a degree. Still other people say that we should abolish the FDA, cut the costs of drug development by an order of magnitude, and, um, see what happens. I don’t know about any of those things. I just feel like until you’re ready to set these up and have some idea that they work, do the thing that probably is going to result in people having the best access to the most life-saving drugs. Which right now looks like no price control.

Read the whole thing. His point is that, holding other policies equal, price controls would result in less pharmaceutical innovation and considerable harm.

I am going to drop the “other policies equal” assumption to make a point. That is, whenever someone proposes price controls as a solution, I assume that some other government policy is the problem. In the case of pharmaceuticals, the FDA really does impose huge costs, and those are what feed into drug prices.

To use another example, rent control is often a “solution” to the problem of restrictive land-use regulation. The minimum wage is a “solution” to the problem that payroll taxes and labor market regulations create a large wedge between the cost to firms of employing workers and the take-home pay that finds it way into those workers’ pockets. Price controls in medical care are a “solution” to the problem of government policy that subsidizes demand and restricts supply.

Economies are Embedded in Cultures

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Peter Richerson, et al, write,

Economic competition is an important and typically peaceful form of CGS.

CGS is “cultural group selection.” Pointer from Joseph Henrich in comments on a Tyler Cowen post.

In my view, cultural group selection fits well with Austrian economics but poorly with Chicago economics. Hayek and others pay attention to cultural norms, while Chicago economics is more purely individualistic. See Erwin Dekker’s book.

For example, if you take the Chicago view that focuses on atomistic optimization by individuals, then racial discrimination seems to be unlikely in a market economy. Someone who is willing to hire blacks seems likely to out-compete someone who only hires whites.

However, suppose that you have a group norm in which refusing to hire blacks is considered cooperation and hiring blacks is considered defection. Also, suppose that groups that are more effective at rewarding cooperators and punishing defectors tend to be more successful. In that case, racial discrimination could persist because of cultural group selection.

The theory of cultural group selection can create discomfort if you like to believe that social outcomes are purely deterministic. Instead, with group selection a wider range of outcomes becomes possible, with the potential for norms and practices to survive that seem arbitrary or even counter-productive. While one might object that this makes the theory messy, I think it is realistic.

I believe that one of the important limitations of what in Specialization and Trade I disparage as MIT economics is that it ignores cultural context. Instead, I believe that the fact that economies are embedded in cultures is very important.

Alan Kirman on Microfoundations

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He writes,

Although in fields such as statistical physics, ecology and social psychology it is now widely accepted that systems of interacting individuals will not have the sort of behaviour that corresponds to that of one average or typical particle or individual, this has not had much effect on economics.

Note that in macroeconomics, an economist will say that a model is “microfounded” if (and, seemingly, only if) you use a representative individual to represent the entire economy. Kirman, like me, objects to this. However, in my opinion one does not need a lot of floofy rhetoric about “complex adaptive systems” to know that this is wrong. It is sufficient to recognize the importance of specialization in the economy.

Why (some) Governments Protect Intellectual Property

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Sinclair Davidson and Jason Potts write,

We propose a new model of intellectual property based on the stationary bandit model of government. We argue that new ideas—of the sort that become patents, copyrights and trademarks—emerge as economic rights, born global as it were into a world of roving bandits. They seek protection from a stationary bandit, who extracts tribute in return. The key insight of our new model, however, is a sharper distinction of who those bandits are.

…vulnerable subjects seek protection for their private economic property from the banditry of other governments, by registering their property with their own government, whom they trust to be powerful enough to protect it as they peacefully engage in trade and commerce throughout the world.

In return, they grant that government an exclusive right to exploit them through perpetual taxation of the property.

Pointer from Scott Sumner. This theory suggests that the country that ends up with the largest sector of copy-able products (pharmaceuticals, movies, novels, etc.) will be the country with the largest navy. Hmmm…

Cities that Attract College Graduates

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Rebecca Diamond writes,

the additional benefits college graduates gained from having access to a variety of desirable local amenities actually outweighs the negative effects of high housing costs. The 50 percent increase in the wage gap between high school and college graduates from 1980 to 2000 actually understates the true increases in economic inequality due to changes in wages, housing costs, and local amenities by at least 30%.

Pointer from Mark Thoma.

I think that the story she tells is pretty close to my model of gentrification.

1. Some high-skill enterprises locate in a downtown area. Think of the New Commanding Heights industries of health care and education.

2. This attracts well-educated professionals.

3. This attracts amenities that well-educated professionals enjoy. Bicycle lanes. Sushi restaurants. Opportunities to meet other well-educated professionals.

4. Rents and house prices go up.

5. Former residents are driven away by declines in low-skill jobs, higher housing costs, and lower propensity to enjoy bike lanes, sushi, and opportunities to meet well-educated professionals.

Gains from the Internet not in GDP

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Shane Greenstein writes,

what is the contribution of more timely information to economic productivity? Seems like many gains are not measured. If they are, where do those gains show up in national statistics? In which industries?

In fact, I can think of one way in which more timely information reduces GDP. If firms can monitor sales more carefully in real time, then they will hold less inventory. Inventory investment is a component of GDP.

Read the entire post. It lists many benefits of the Internet that do not necessarily make it into measured GDP.

Interpreting Monetary Facts

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Scott Sumner writes,

1. The Fed’s official goal is 2% headline PCE inflation.

2. PCE headline inflation has averaged 1.12% over the past 8 years.

3. Thirty year TIPS spreads are 1.66%, equivalent to 1.4% PCE inflation.

4. Top Fed officials are discussing the need to tighten monetary policy in the near future.

His interpretation is that Fed officials have been doing a lousy job of hitting their target, and they continue to send out harmful signals.

My interpretation is that the Fed cannot hit its target. Imagine that Citibank set a target for 2 percent inflation. Does anyone think that they could succeed? Well, think of the Fed as Citibank.

Instead, mainstream economists think of the Fed this way: In general equilibrium models, supply and demand conditions determine relative prices. But what about the “absolute” price level? What ties it down? We need another variable, so let’s invoke the quantity of money. Except–oops–money is very hard to define, because so many different financial instruments serve as money nowadays. So let’s just wave our hands and say that central bankers control the price level, without being able to provide a convincing account of exactly how they do so.

Reviewing a Cold-War Era Book

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I review The Quest for Community, by Robert Nisbet.

Nisbet warned that weakening of ties of work, family, and religion would give people a sense that they have lost control of their destinies, producing this sort of alienation. It seems to me that the support in this year’s Presidential primaries for the socialist politics of Bernie Sanders and the caudillo politics of Donald Trump, which shocked many observers, would not have surprised Nisbet. Nor would the recent work of Robert Putnam or Charles Murray on cultural decay.

Modernity is a Package, Continued

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Malavika Nair and G.P. Manish write,

In recent years, many thousands of so-called “untouchables,” or Dalits, members of the lowest group in the Indian caste order, have risen out of poverty to become wealthy business owners, some even millionaires.

By taking advantage of the greater economic opportunity brought about by market reforms, these Dalit entrepreneurs provide us with an important example of the power of markets, not just to bring about economic emancipation, but to fight deeply entrenched social discrimination.

In Specialization and Trade, I argue that most pre-modern specialization was similar to the Indian caste system, in that you were born into your occupation. Part of modernity is getting to choose your occupation, and markets are an essential component of that.

Feel free to return to the book’s web site to peruse and comment on the reviews. One review, by Herbert Gintis, disturbed me. He is entitled to claim that what is right in the book is not original and what is original is not right. However, I found his tone to be snotty and uncharitable, which lowers my estimate of him considerably.