Category Archives: The Wisdom of Robin Hanson

Relate this to Tobin’s q

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Justin Fox reported,

>Ocean Tomo calculates intangible assets simply “by subtracting the tangible book value from the market capitalization of a given company or index,” so the rise in intangibles since the 1970s is in part just a reflection of rising stock market valuations. But that’s not all it is: the cyclically adjusted price-earnings ratio on the Standard & Poor’s 500 Index has risen about 2 1/2 times since 1975, while the intangibles increase has been almost fivefold.

Tobin’s q is the ratio of the stock price to the replacement cost of capital. I am tempted to write:

q = P/K = (P/E)(E/K), where P is the stock price, E is earnings, and K is capital.

As Fox points out, a fair amount of the rise in q since the late 1970s comes from a higher P/E ratio. But I gather that if you think of K as tangible capital, then E/K also has soared.

Fox’s piece was mentioned in Scott Sumner’s discussion of what I called the fifth force. But Robin Hanson got me to take a look.

I would note that intangibles in the economy include not just firm-specific intangibles but also general intangibles that lead to better patterns of specialization and trade. Institutional improvements in India and China, as well as lower transportation and communication costs, come to mind.

Tyler Cowen has much more, including a hypothesis that accounting issues are involved.

The Dark View of Schooling

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Bryan Caplan thinks that schooling is not about education. He thinks instead it is about signaling.

Bryan’s view is benign compared with John Holt.

society demands of schools, among other things, that they be a place where, for many hours of the day, many days of the year, children or young people can be shut up and so got out of everyone else’s way. Mom doesn’t want them hanging around the house, the citizens do not want them out in the streets, and workers do not want them in the labor force. What then do we do with them? How do we get rid of them? We put them in schools. That is an important part of what schools are for. They are a kind of day jail for kids.

Thanks to a commenter on this post for the pointer.

Bryan is also mild in comparison with Ivan Illich.

A political program which does not explicitly recognize the need for de-schooling is not revolutionary; it is demagoguery calling for more of the same.

Illich’s DeSchooling Society starts with a chapter “Why We Must Disestablish School,” which opens

Many students, especially those who are poor, intuitively know what the schools do for them. They school them to confuse process and substance. Once these become blurred, a new logic is assumed: the more treatment there is, the better are the results; or, escalation leads to success. The pupil is thereby “schooled” to confuse teaching with learning, grade advancement with education, a diploma with competence, and fluency with the ability to say something new. His imagination is “schooled” to accept service in place of value. Medical treatment is mistaken for health care, social work for the improvement of community life, police protection for safety, military poise for national security, the rat race for productive work. [Does this foreshadow the classic “not about” post by Robin Hanson?] Health, learning, dignity, independence, and creative endeavor are defined as little more than the performance of the institutions which claim to serve these ends…

the institutionalization of values leads inevitably to physical pollution, social polarization, and psychological impotence…this process of degradation is accelerated when nonmaterial needs are transformed into demands for commodities; when health, education, personal mobility, welfare, or psychological healing are defined as the result of services or “treatments.” I do this because I believe that most of the research now going on about the future tends to advocate further increases in the institutionalization of values and that we must define conditions which would permit precisely the contrary to happen. We need research on the possible use of technology to create institutions which serve personal, creative, and autonomous interaction and the emergence of values which cannot be substantially controlled by technocrats.

The New Left had its vices. As with the Occupy Wall Street movement, within their smoldering discontent it is difficult to discern how they would address economic organization. In The Mind and the Market, p. 345-346, Jerry Muller writes of New Left icon Herbert Marcuse,

his work, unlike Keynes’, was less than useless in providing tangible institutional solutions. For Marcuse was fundamentally uninterested in institutions, whether economic or political….Marcuse proceeded as if these fundamental issues of modern political and economic life could simply be ignored.

The New Left also bequeathed to us an academy where the oppressed-oppressor narrative becomes the sum of all scholarship. As Muller puts it on p. 344,

Scholarship, in this understanding, was not about objectivity…The model of the professor as critical intellectual, liberating his or her audience from one or another variety of false consciousness, became institutionalized in some academic disciplines, above all literary studies and sociology. Three decades after the zenith of the New Left and the publication of Marcuse’s Essay on Liberation, for example, the annual convention of the American Sociological Association was devoted to the theme of “Oppression, Domination, and Liberation”; it focused on racism as well as “other manifestations of social inequality such as class exploitation and oppression on the basis of gender, ethnicity, national origin, sexual preference, disability and age.”

But one thing I will say for the New Left is that they were not the hard-line statists that we see on the left today. On the contrary, they viewed government technocrats as part of what they called “the system,” and opposition to this system was a centerpiece of New Left ideology.

Ken Kesey, in One Flew Over the Cuckoo’s Nest, coined the term “the Combine” to describe forces of control that deprived people of freedom supposedly for their own good. Interestingly, John Taylor Gatto, another anti-schooling radical, wrote a Cliff Notes version of the novel that emphasized its anti-authoritarian aspects.

I imagine that if universal pre-kindergarten had been proposed by Richard Nixon, the New Left would have denounced the scheme as fascist. In that sense, I miss them.

We Are Still Tribal

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Robin Hanson writes,

People quite often find it prohibitively hard to talk merely because different groups have gotten into the habit of talking differently, even though their concepts could be translated without great difficulty. And members of these groups often go out of their way to signal group loyalty by choosing to talk differently than outsiders.

He refers to what seems like a fascinating article, which is behind a paywall. If I could put this in Hansonian terms, I would say that language is not about clear communication. It is about signaling tribal identity. Often, it is important for the signals not to be easily picked up by another tribe. And, yes, of course, this applies to jargon used in various academic disciplines.

Incidentally, one of the ways I describe the three-axis model is that progressives, conservatives, and libertarians speak different languages. Each responds to disagreement by, in effect, shouting louder in a language that the other party does not understand.

UPDATE: thanks to a reader, a quote from the article

we have acquired a suite of traits that help our own particular group to outcompete the others. Two traits that stand out are “groupishness” — affiliating with people with whom you share a distinct identity — and xenophobia, demonising those outside your group and holding parochial views towards them. In this context, languages act as powerful social anchors of our tribal identity.How we speak is a continual auditory reminder of who we are and, equally as important, who we are not. Anyone who can speak your particular dialect is a walking, talking advertisement for the values and cultural history you share. What’s more, where different groups live in close proximity, distinct languages are an effective way to prevent eavesdropping or the loss of important information to a competitor.

The author, Mark Pagel, has a book called Wired for Culture, which I will want to look into. On the Amazon page for the book, Herbert Gintis has a fascinating review.

John Cochrane on Health Care

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A reader asked me to comment on Cochrane’s essay from October 18. The title of the essay was “After the ACA,” which might indicate that Cochrane mis-forecast the election. To make a long story short, I agree with his economic prescription but disagree with his political diagnosis for why we have what I call insulation instead of real health insurance. Cochrane’s explanation for the absence of the latter is:

Because law and regulation prevent it from emerging. Before ACA, the elephant in the room was the tax deduction and regulatory pressure for employer‐based group plans. This distortion killed the long‐term individual market and thus directly caused the pre‐existing conditions mess. Anyone who might get a job in the future will not buy long‐term insurance. Mandated coverage, tax deductibility of regular expenses if cloaked as “insurance,” prohibition of full rating, barriers to insurance across state lines – why buy long term insurance if you might move? – and a string of other regulations did the rest. Now, the ACA is the whale in the room: The kind of private health insurance I described is simply and explicitly illegal.

My thoughts:

1. Nowhere do we observe the Cochrane (or Kling) health insurance system, or anything close to it. This suggests that something other than anomalous U.S. regulations are at work.

2. Health care is something that people love to have others pay for. Insert obligatory Robin Hanson reference.

3. Very few people understand insurance in general. Most people seem to be more loss averse than risk averse. They will buy extended warranties on cheap goods but ignore risks of catastrophic events, such as floods.

4. All around the developed world, third-party payment dominates direct consumer payment for health care. Perhaps consumers feel that if they are spared the need to take out their credit cards then it is easier sustain the belief (illusion?) that their doctors really care about them.

5. All else equal, doctors prefer being paid by someone other than the patient. They prefer to be thought of as offering the “gift of healing.” Of course they do want to get paid.

It turns out, much to doctors’ dismay, that all else is not equal. Third party payers impose all sorts of unpleasant paperwork and regulation. But you won’t see many doctors lobby for consumer-paid health care as the solution. They seem to view paperwork and regulation as an evil plot foisted on them for no apparent reason, without recognizing that it as an intrinsic result of introducing a third party into the payment process.

Cochrane goes on to discuss health care supply. Again, I agree with his prescription, which is to allow for vigorous competition. But he seems to regard health care regulation as an evil plot foisted on society, without recognizing that it may emerge naturally.

Competition is a trial-and-error process. In health care, we equate consumer protection with prevention of error, creating a trade-off between consumer protection and competition. Our choice along this trade-off is affected by the problem of “the seen and the unseen.” Health care errors have concentrated, direct impact on identifiable patients. Competition has diffuse benefits that show up indirectly in an ill-defined broader population. I think it is very difficult to convince people to trade off consumer protection for competition. And, of course, incumbents in the health care industry will do their best to persuade people not to make that trade-off.

While I think Cochrane’s essay will appeal to those who are already inclined to agree with him, others are unlikely to be persuaded. Incidentally, I had the same reaction to John Goodman’s book, Priceless.

Neither Cochrane nor Goodman addresses the arguments for intervention that derive from Arrow and Stiglitz. Arrow focuses on asymmetric information between consumers and doctors, which appears to justify consumer protection. Stiglitz focuses on asymmetric information between consumers and insurance companies, which appears to justify mandated health insurance.

Both the Arrow argument and the Stiglitz argument have merit in theory. My own view is that other forms of “market failure” are more important in practice. The “seen and the unseen” problem that I alluded to earlier means that, contra Arrow, we have too much consumer protection in medicine, not too little.

As I suggested earlier, the health insurance market suffers from the fact that consumers choose on the basis of loss aversion rather than risk aversion. Moreover, contra Stiglitz, there is that evidence relatively healthy people, rather than opting out of health insurance, are more likely to pay for it. This reflects the fact that the personality characteristic of conscientiousness drives both health and the propensity to obtain insurance. As a result, health insurance companies are treated to favorable selection, not adverse selection.

Having said that, I do not think it is Arrow and Stiglitz that libertarians need to overcome. I think we need to understand the deep-seated cultural beliefs that pertain to health care and either adapt our recommendations to those beliefs or try to change them.