The Coase is Clear

The University of Chicago Chronicle has a nice profile of Ronald Coase, still kicking at 94. I liked this bit of tempered wisdom at the end:

Coase said that “it’s very difficult to imagine a system that would work better than one with private property rights and a market: mechanisms that have proved themselves repeatedly against regimes where central authority is the dominant economic force. A private enterprise system with vigorous, competitive markets seems to function best because central authority cannot have all the diffused knowledge that is captured effectively by the workings of the market,” he said.

Coase’s persistent smile and bright, blue eyes easily belie his nine decades of life, so it is surprising to hear him say he is a pessimist about the world: not because he believes the human condition has worsened, but because “as the 20th century has shown, we have such a capacity to mess things up, and even when we can do the obviously right thing, we so often choose the wrong one.”

[Link via the invaluable Political Theory Daily Review.]

Tyler Cowen's Inevitability Argument

I’m intrigued by Tyler Cowen’s line of argument against social security personal accounts. The argument, as far as I can see goes something like this:

(1) Even if you have a program of personal accounts/forced savings, political reality will still lead to a secondary safety net for the elderly.

(2) A program of forced savings plus a redistributive safety net (welfare program) is worse than just a safety net.

So, (3) Let’s make social security into a welfare program for old people who need it, and just forget about the personal accounts/forced savings.

Tyler’s argument turns on his claim that there is simply no way to get around the fact that we’re going to have some form of redistribution to the poor among the elderly. I am, however, not certain why Tyler is so positive that we’re stuck with some kind of welfare for the old.

It seems to me that the underlying assumption of Tyler’s argument is that it is impossible for the state to credibly commit to a scheme where individuals are responsible for their own long-term welfare. Perhaps if the state could so commit, and people really expected that they would sink if they refused to swim, then they wouldn’t take out huge loans against their personal lockbox accounts, and they wouldn’t upon retirement open their lockbox, burn the money, and expect to get bailed out. But the state can’t so commit, and so we’re going to get a moral hazard problem anyway.

In other words: If people think they’ll get welfare, they’ll act irresponsibly. But if you try to tell them that they won’t get welfare, they won’t believe you, and they’ll still act irresponsibly. Because they’ve acted irresponsibly, they’ll need welfare, and because they need it, they will get it.

I wonder if Tyler would agree that this is the underlying structure of his argument?

Now, I’m not sure what to think of the inevitability argument. I’m pretty sure it’s good rational choice reasoning, but that certainly doesn’t make it true. I have some conjectural thoughts on why it may not be true, which I will share soon.

[Cross-posted on Crescat Sententia.]

Markets are Nice

While I’m doing simple caveman economics, I want to make a very simple point about market competition that I find useful to keep in mind. The fact that markets are “competitive” confuses a lot of people into thinking markets involve some sort of dog-eat-dog zero sum bloodsport. But the competition is competition for the ability to cooperate with other folks in the market. When I cut my prices to undersell the other guy, what I’m doing is trying to give the consumer the most attractive terms of cooperation. In the market, people are clamoring to cooperate with you! They’re trying to make you even better off than the other guys who are also trying to make you better. (Think of those Lending Tree commercials where bankers are in your living room falling over each other to give you the lowest interest rate.) If you think of market competition as competitive cooperation, the market will start to look like this incredible system of distributed niceness. So when you buy something today, be sure to smile.

Livin' La Vida Leisure . . . On 50 Hours a Week

Amusingly enough, Chris Betram at CT jumps on me for extrapolating from an economics article using elementary economic reasoning, apparently so he can quote Marx and harumphingly say, “So goes human nature according to libertarians.”

Well, harumph. I’ll point out that I’ve dwelled on my own preference for “farting around” here and here. We each value extra dollars and extra leisure hours differently, so how we trade them off against each other will differ. But I don’t assume that Europeans and Americans are really so different on average. So I resort to a Marx-style materialist explanation for the difference. Which makes me, apparently, insufficiently Marxist.

Now, I wonder if Chris believes that being “self-sustaining peasants working for their own consumption,” is really “good for them?” Just wondering.

A point that I haven’t sufficiently appreciated in the past is that there is no simple trade-off between work and leisure. Working more hours can increase leisure time. I was simplifying in my story, as was Prescott in his (as he notes). Higher taxes don’t necessarily make it more worthwhile to consume leisure, they make it more worthwhile to do stuff that isn’t taxed. If you’re taxed at a very high rate, it can make sense to spend a lot of time fixing your own car, cleaning your own house, preparing your own meals, doing your own laundry, mowing your own lawn, doing home improvements, or whatnot — that is, working for one’s own consumption. However, if taxes were lower, you could earn enough money to pay someone else to do these tasks in LESS TIME than it would take to do it all yourself. So, at the end of the day, you’d have more time for genuine farting around, even though you worked more TAXABLE hours. So it’s not at all clear that Americans do work less, or do consume less leisure. We go to the office so that we can relax.

Is the Importance of "Moral Values" an Epiphenomenon?

You’ve probably read Virginia Postrel’s NYT article on work on religion and politics by Ed Glaeser and his students (one of whom, Jesse Shapiro, I’ve met through IHS), but I just wanted to point out just how important this stuff is if it’s on the right track. They give a structural explanation for the apparent increase in the religiosity of politics at a time when religious participation is declining. They argue that there is an optimal group size for rhetoric targeted at the extremes of the political spectrum and the size of religious groups in the US now close to optimal.

While outsiders may know something about a candidate’s more extreme positions, group members know more – because the messages are aimed specifically at them.

“When I go out and say, ‘I want to tax all the rich and I want to end outsourcing,’ I can give that message to an economically left-wing audience without the economically right-wing audience hearing it with exactly the same probability,” Professor Glaeser said. “All you need is some ability to target your message, and then you’re going to go to extremes.”

Those in-group forums work, however, only if the groups are just the right size. They have to be small enough to be homogeneous and big enough to be influential. “The model has this very odd prediction that the power of social groups is most when they’re roughly 50 percent of the population,” Professor Glaeser said.

If a group is too small, it’s not worth courting. But if it’s too big, it includes too many of your opponent’s supporters, making targeted messages impossible. If everybody goes to church or belongs to a union, membership in either group will not predict voting behavior.

The fascinating upshot seems to be that if trends in the religiosity of the population continue, the kind of targeted messaging Rove & Co. have been using with such success may become obsolete. The seemingly deep divisiveness of the Red State/Blue State sham may be nothing more than a hiccup of demography, and all this hair-pulling clamor about learning to talk to the churchy folk may be beside the point.

Irrational People, Efficient Markets; More Libertarian Paternalism

I think Bainbridge’s article on efficient markets vs. behavorialism is good. Now, because of my fairly Hayekian/Coasian sensibility, I can’t buy the ECMH in it’s strict formulation. Indeed, I agree with most behavioralist findings, although I often disagree with behavioralists about the upshot of those findings. Now, I do find it intriguing that Thaler puts his money in index funds, just like you would if you thought the ECMH was true. And it is what I would do if I wasn’t so poor I had to beg for money on my blog. Indeed, it looks like the ECMH does a good job of approximating the real world (or the other way around), despite the falsity of a number of its underlying assumptions. So how does it do this? Well, in the gap between idealized behavioral assumptions and actual approximately efficient markets is entrepreneurship. There are folks and firms out there gathering intelligence, keeping their eyes open, trying to cash in on ephemeral assymetries in information, and thereby moving prices to what they ought to be.

The interesting thing about efficiency-enabling entrepreneurship is that it is NOT a built-in assumption of the theory. There are institutional antecedents — legal, moral, cultural — to an effective climate of intelligent, creative proift-seeking. So, despite the fact that Thaler is right about the quirks and foibles of human decision-making, our institutions, both formal and informal, are good enough to induce behavior that reasonably approximates neo-classical efficiency, making it right for Thaler to invest as if the ECMH were true.

The way I see it, the interesting questions are the questions about the way various institutional structures, formal and informal, facilitate efficiency-approximating behavior. We know way too little about this. And here’s a connection to so-called “libertarian paternalism,” discussed below. Will Baude says he liked the Sunstein/Thaler paper. I didn’t dislike it, exactly. But, like Klein, I found the idea of libertarian paternalism needlessly confusing (and perhaps even willfully and strategically confusing). The interesting thing about framing effects, cognitive biases, and so forth, is that boundedly rational agents like us are not necessarily indifferent between formally equivalent institutional designs. So, if this is true, its pretty obvious that insofar as we’re picking institutional designs (as often we must) we should pick the ones under which we’re more likely, given our psychological constitution, to satisfy some normative standard, whether it be efficiency, public health, or whatever. Great. Are S & T saying anything more interesting than that, true though it may be? But according to S&T’s idiosyncratic usage James Madison is among history’s great paternalists. Yet I don’t think that’s why we call him a founding “father.”