Wednesday, August 20, 2014

Kiesling and the Transitional Gains Trap

At Knowledge Problem, Lynne K. asks a question that's been burning a hole in my head for a couple of weeks now: should regulated utilities be allowed to participate in the household PV market? In particular, I'm wrestling with a Lucas Critique response to this:
I want to step back and ask why the regulated distribution utility should be involved in the residential solar market at all. The growth of producers in the residential solar market (Sungevity, SunEdison, Solar City, etc.) suggests that this is a competitive or potentially competitive market.
Professor K lists 4 vital premises of the regulated model here. At its heart, electricity delivers comforts to hearth and home. With the technology available at the time of mass electrification, the best way to do that was to have regional plants, distribution grids, and household meters. The grid got lumped in with the generation as the "supply side" rather than as what it really is: a middleman, a mancgere if you will. As technology has been changing, the regulated model is growing less salient.

But that doesn't by itself imply that the legacy companies (NOVEC in my neck of the woods) should be barred from participating. They tend to have not only good physical capital, but they're large employers of linesmen and electricians. If you want to contact someone with the specific knowledge in space and time about the grid, you can't do any better than calling your local utility. This competence, as well as the relatively low cost of physical capital, is extremely valuable to the end customer.

Then again, regulated utilities also have a comparative advantage in currying, securing, and protecting political favor. The Lucas Critique bit that has me buffaloed is this: does the present discounted value of all the marginal technical expertise and physical capital possessed by utilities outweigh the marginal risk of giving the keys to the solar clubhouse to guys who've proved (Enron) more than capable of navigating the halls of the several state legislatures already?

In trade economics, there's something called the "infant industry" argument. The gist of the claim is this: new firms are at a natural disadvantage when competing with incumbents, since they go bankrupt faster in a price war. Or perhaps they need some time to establish trade relationships to get over an initial start-up hump. These might be reasonable claims, but as we're seeing right now this very moment, the big barriers to entry for, say Uber, airbnb, and Lyft have nothing to do with technological hurdles and everything to do with regulatory and legislative opposition. But here's the pickle (I hope you like pickles): the grid complicates the story. Legacy taxi companies don't also conduct road maintenance and new construction. Regulated utilities do string new cable and tend to substation maintenance. Because of their political influence, my idea of separating generation and distribution into distinct entities is very probably not much more than a silly pipe dream.

The division of labor is limited by the extent of the market. Home PV generation expands the notion of what counts as the "market" for electricity distribution. If splitting distribution and generation is politically unrealistic, then at least keeping the regulated utilities focused on their core competencies seems reasonable. Were it not for the great threat of the utilities petitioning government officials for special treatment in home generation, I'd happily welcome more competition. My prior belief however is that the existing utilities would act more like local taxi cartels and would think nothing of using their already considerable political clout to elbow rivals straight out of the market. This does not seem to be in the best interests of the end customer.

Lynne asked:
The regulated distribution utility’s main objective is, and should be, reliable delivery of energy. The existing regulatory structure gives regulated utilities incentives to increase their asset base to increase their rate base, and thus when a new environmental policy objective joins the exiting ones, if regulated utilities can acquire new solar assets to meet that objective, then they have an incentive to do so. Cost recovery and a guaranteed rate of return is a powerful motivator. But why should they even be a participant in that market, given the demonstrable degree of competition that already exists?
I'd also ask: why should they even be a participant in that market, given their proven advantage at shutting down the competition that already exists?

Mine's more of a public choice question, so perhaps it'll be of less interest to the folks who actually get to make these sorts of decisions. As for the typical constituent, to the extent that they even care about these issues, it'll probably end up being framed as an issue of trust. I can easily imagine appeals to brand loyalty and trust showing up in the rhetoric. "The alternatives to having clean, reliable energy delivery are too awful to bear, so why not stick with the name you trust?" Electricity is not euvoluntary.

Tuesday, August 19, 2014


A dear friend of EE recently severed affiliation with an advocacy group (start here, more here). Her leaving, or rather her leaving in this particular fashion, has sparked some discussion. I'd like to briefly address a point that came up yesterday.

If you read through the first link above, you'll see that one of The Peej's complaints about YV was that their decision to hire Miriam Weeks was marred by the Duke University student's "few libertarian bona fides." In conversation yesterday, A-Cast called into doubt the economics acumen of Ms. Weeks.
The offending passage in the Time piece is here (preceding ¶ included for context)
But my porn work pays the exorbitant tab for one simple reason: Demand for porn actresses, especially extremely young ones like myself, far exceeds supply. How interesting that the same basic principle explains why my tuition bill is so high in the first place.

Demand for education, kind of like demand for porn, is pretty inelastic. Kids like me have been told our whole lives that higher education is the only way to be successful in America. President Obama made it clear he wants to keep that demand high in a speech in Austin, Texas.
As far as the misuse of terms of art from economics go, I am well-convinced that you've seen worse in print over the years. Heck, just turn on C-Span and listen to any randomly selected Congressman yak for more than 20 seconds. I don't expect A-level economics from a lower-division undergrad, not even a Blue Devil. But Anjie? From her, I expect nothing but the best. So it is that I feel entirely comfortable parsing her comment.

With apologies to Leonard Cohen, everybody knows that the [price] elasticity of demand for a good is just (∂Qd/∂P). Convention typically drops the negative sign. Essentially what we speak of when we discuss the price elasticity of demand is how responsive consumers are to price signals. Perfect price inelasticity of demand means that consumers would be willing to spend infinity for a marginal unit of consumption. "My kingdom for a horse." "Houston, we have a problem." Taco trucks in the desert. Perfect price elasticty means that even the tiniest fraction of a cent hike in the price would eliminate consumption altogether. "I could take it or leave it." The ideal forms are logical bounds on behavior and are not likely to ever actually be encountered. The middle bound between "elastic" and "inelastic" is quite plausible however, and is something of a golden snitch in price theory. If the partial of quantity demanded relative to price is 1, the good is "unit elastic."

When Andrea claims, "Demand for porn is not inelastic," that has a specific technical definition. She means that (∂Qd/∂P) > 1. The advent of cheap Internet porn has shown that dropping the marginal cost of watching others making the beast with two backs has indeed increased the quantity demanded by a whole lot. Pity the poor researcher in 2014 who can't for love or money obtain a control group of men who've never consumed porn.

What Andrea didn't do (and forgive her, she only had 140 characters to work with) was identify the error made in the two paragraphs I quoted above. Look closely and you'll see how Ms. Weeks transitions between the supply of porn ("Demand for porn actresses...far exceeds supply") and the demand for pornography. These are two different phenomena, as anyone who's kept a small stash during a months-long deployment can attest. It's entirely possible for the demand for pornographic actresses to be inelastic while the demand for pornographic products to be quite elastic indeed.

The interesting thing for me, at least as far as the economics goes, is how we think about this market when we get into discussions of elasticity. One of the determinants of demand (distinct from quantity demanded) is the price of substitute goods. If substitutes become cheap, demand drops. If you are employed by a studio, then is amateur porn shot with off-the-shelf equipment part of your market, or is it a substitute? The division of analysis is limited by the extent of the market, so to speak. What is the "right" way to model and measure the elasticity of porn? Is there a "right" way at all? And if it's troublesome to get the positive analysis right, how much more difficult is it to get the normative conclusions right?

Is porn euvoluntary or not? How do we know?

Monday, August 18, 2014

It Snowed in Ferguson: the Logic of Prohibition

Earlier this month, I argued the logic of prohibition. The gist of the economics is this: if a market exists, outlawing it rearranges the institutions supporting exchange, but does not necessarily eliminate trade.

Consider hydromorphone hydrocloride, aka dilaudid. Dilaudid is a powerful analgesic, stronger than morphine, and classified on schedule II in the US (Substances in this schedule have a high potential for abuse which may lead to severe psychological or physical dependence. [source]). Despite its potency and potential for abuse (just ask any med-surg RN), dilaudid seldom joins the pantheon of street drugs the way MDMA, peyote, LSD, and marijuana do. Or more importantly, the way its close cousins morphine and heroin do. And why is this the case? Price elasticity. Dilaudid is a semi-synthetic opioid—its manufacture is a delicate process requiring specialized equipment and knowledge. Morphine and heroin require no hydrogenation process, and are therefore (relatively) less capital-intensive. These differences are reflected in the relative prices and the attending quality control and legal institutions in each market. Consumers can still obtain the pleasant effects of their opioid of choice, the costs simply move margins between strike price and risk premium. The market itself is not destroyed by prohibition.

I've come to wonder lately if there isn't a similar market for racial animus. What would a world look like if the legal market for bigotry were thwarted? As with opioids, I expect there might still be some underlying demand and a creative entrepreneurial class to serve that demand. I expect that by forcibly denying bigots, no matter how loathsome their intentions, the freedom to refuse association that they may turn to less accountable institutions that serve similar purposes.

You may read this and say something like, "hey, this guy is claiming that the 1964 Civil Rights Act caused blue-on-black brutality in Missouri. What a jackass." Let me disagree with the first half of that statement. I am not claiming that an end to the oppression of minorities created hate in anyone's heart. I am claiming that given the existence of hate, the institutions meant to govern it matter a great deal. What we seem to have done is apply a liberal dose of wishful thinking to the dilemma of hate in America. You can legislate a market in bigotry away no more effectively than you can a market in opium. Product bans in alcohol put power in the hands of crooked mobsters. Product bans in narcotics put power in the hands of crooked cartels. Product bans in bigotry put power in the hands of crooked police. Bigotry is scandalous and obscene. If the constituency has an interest in reducing or eliminating its trade, an orderly wind-down in an open setting of voluntary exchange is far better than employing para-military state thugs to harass and murder with impunity and unaccountability.

As I mentioned to Sarah, good cops are good; good institutions are better.

Friday, August 15, 2014

Can Exchange with a Robot Be Euvoluntary?

Can it?

Work is the price we pay to get the things we want. If that price drops to near zero, isn't that cause for celebration? Or is dignity irreversibly tied to labor? So much of human history (especially the written parts) are bound up in the things people do to produce goods and services, it strains the imagination to picture the alternatives.

Even if we could more accurately imagine what a post-labor world would resemble, what influence do we have here and now in shaping its institutions? Is it even our duty to do so? Does the knowledge problem vanish when contemplating future events?

From the point of view of the post-robot revolution, we're behind a Rawlsian veil. Be a help and not a burden.

h/t Other Sam

Thursday, August 14, 2014

Hume in Missouri

David Hume, Of Commerce (1752):
The bulk of every state may be divided into husbandmen and manufacturers. The former are employed in the culture of the land; the latter work up the materials furnished by the former, into all the commodities which are necessary or ornamental to human life. As soon as men quit their savage state, where they live chiefly by hunting and fishing, they must fall into these two classes; though the arts of agriculture employ at first the most numerous part of the society.*2 Time and experience improve so much these arts, that the land may easily maintain a much greater number of men, than those who are immediately employed in its culture, or who furnish the more necessary manufactures to such as are so employed.

II.I.6 If these superfluous hands apply themselves to the finer arts, which are commonly denominated the arts of luxury, they add to the happiness of the state; since they afford to many the opportunity of receiving enjoyments, with which they would otherwise have been unacquainted. But may not another scheme be proposed for the employment of these superfluous hands? May not the sovereign lay claim to them, and employ them in fleets and armies, to encrease the dominions of the state abroad, and spread its fame over distant nations? It is certain that the fewer desires and wants are found in the proprietors and labourers of land, the fewer hands do they employ; and consequently the superfluities of the land, instead of maintaining tradesmen and manufacturers, may support fleets and armies to a much greater extent, than where a great many arts are required to minister to the luxury of particular persons. Here therefore seems to be a kind of opposition between the greatness of the state and the happiness of the subject. A state is never greater than when all its superfluous hands are employed in the service of the public. The ease and convenience of private persons require, that these hands should be employed in their service. The one can never be satisfied, but at the expence of the other. As the ambition of the sovereign must entrench on the luxury of individuals; so the luxury of individuals must diminish the force, and check the ambition of the sovereign.
Capital and labor are complements. This is as true in the useful arts as in the maintenance of public order.

Robocop was a warning, not a suggestion. Law enforcement is best when it approaches what a reasonable person might agree to ex ante given the opportunity to bargain. What's happening in Missouri (and what's being prepared in the rest of the country) is hardly euvoluntary.

Wednesday, August 13, 2014

Twice Upon a Time

I like my moral philosophy like I like my economics: descriptive rather than prescriptive. I see Adam Smith's two big works (Wealth of Nations and Theory of Moral Sentiments) as written in precisely the same manner: Big Daddy Smith observed and reported rather than sermonized. The tradition that proceeded from this approach (which has roots in the Western canon) is reflected in one of the first exhortations breathed in the direction of ruddy-faced first year grad students in economics: economics is a positive science. It's okay to have normative views, but keep them partitioned from your work.

Let's commit a utopian fallacy and say that this advice sticks. Moral philosophy isn't concerned with what should be, but rather with what is. A positive moral philosophy takes intuitions as exogenous. Jon Haidt's half-dozen dimensions lay the foundation for a moral analysis of, for example, voter opinion. And the origins of moral intuitions can be examined with neither approbation nor disapproval.

Ur-morality, the genesis of the thing, may be ultimately inscrutable. It's plausible that a long, arduous guess-and-selection process eliminated those societies with dysfunctional common moralities, and only those with good group preservation characteristics survived to spread their memes far and wide, but this is difficult to test for pre-civilization societies, since they left no record of their stories. But it's an appealing hypothesis. And we can certainly observe what happens to the transmission mechanism under duress.

In that last link, Sarah plucks the heart from what F. Spufford hinted at in chapter 3 (I think it was chapter 3) of Red Plenty: fairy tales are how societies ensure morality survives. Crack open a compendium of bedtime stories and you'll find wee nilla wafers of temperance, prudence, wit, wisdom, courage, excellence, love, harmony, patience, faith, and all nicely resolved in the time it takes a toddler to fall asleep. Under the totalitarian panopticon in Spufford's Soviet dystopia, the fairy tales evaporate, even in the minds of the elders that drifted off to dance in the Dreaming with iron-toothed Baba Yaga beating the sides of her mortar chasing them there when they were but babes in their mothers' arms. Luckily, after the Iron Curtain fell, a number of former Soviet state universities funded efforts to collect and record the many regional folk tales and songs across their lands. The University of Vilnius boasts 1.9 million folk artifacts. And that's just for dinky little Lithuania, a nation of scarcely 3 million people. Granted, not all of those are concerned with the intergenerational transfer of moral foundations, but it's a great relief to find that this sort of lore is at least being preserved.

I'm needled by a concern, however. Fairy tales are nicely adaptive for the purposes of their society. They are cultural capital, if you will. And like ordinary capital, they are suited to the production of a particular output. And like the farriers' foundry optimized to produce horseshoes in the age of the automobile, it could be that some fairy tales have outlived their usefulness. But, and here's the bit that troubles me, how do we know which tales have outlived their usefulness? How do we liquidate old ones? How do we create new ones?

I commiserate with folks who bemoan the bowdlerization of the old stories at the nibs of Disney's screenwriters, but I don't think it follows that the old stories in their original forms are necessarily best suited to the moral challenges of today's social orders. Sure, I'm classicist (and classist) enough to insist that Aristotelian virtue ethics still have a place in modern society, but I'm not so naïve to imagine that parents will read the Ethics to put their children to sleep at night. Nor do I fancy that there exists a silver bullet that will permit the technocratically-minded to develop era-appropriate morality tales ex nihilo. Morality emerges from the complex interplay of history and individual choice. And it has a natural lifespan linked inextricably to the lifespan of the men and women in whose righteous minds it inhabits. The dilemma of the intergenerational exchange in morality is how to make this trade in intuition more euvoluntary without overmuch risking either incoherence or sclerosis. It's a worrying puzzle, one unlikely to become less so as the pace of cultural change increases.

For those of you who can't wait that long, you can pre-order Augie and the Green Knight here.

Tuesday, August 12, 2014

Don't Fear the Reaper Bot

Via VG247, a Bulgarian entrepreneur nets himself over $100,000 in 2013 by auction house arbitrage.


Condensed version: he gets the script for a bot from a friend. He modifies that script to scour the in-game real-money auction house. The bot buys undervalued items, then re-sells them at higher prices. He pockets the difference.

Contrast Turner:
I say that I am useful to the king, and to ealdormen, and to the rich, and to all people. I ascend my ship with my merchandise, and sail over the sea-like places, and sell my things, and buy dear things which are not produced in this land, and I bring them to you here with great danger over the sea; and sometimes I suffer shipwreck, with the loss of all my things, scarcely escaping myself.
What things do you bring to us?
Skins, silks, costly gems, and gold; various garments, pigment, wine, oil, ivory, and orichalcus, copper, and tin, silver, glass, and suchlike.
Will you sell your things here as you brought them here?
I will not, because what would my labour benefit me? I will sell them dearer here than I bought them there, that I may get some profit, to feed me, my wife, and children.
"Cherokee Brook" makes no improvements to the in-game items he resells. He doesn't even take them across the wide, winedark sea. He buys low and sells high. He exploits sellers' naivete about the "correct" price.

Both of the exchanges his bots make, the buying and the selling, are consistent with the welfare theorems of economics; each party is better off for having made the trade. But C.B. has access to better information, so does this edge mean that the exchange can no longer be counted as euvoluntary?

Note that his bots' prescience didn't extend to other types of bots. Gold farming scripts caused great inflation, meaning that he was stuck trying to sell goods for which there were no buyers.

Interesting that. It's almost a metaphor for something.

Please refrain from the "too bot to fail" jokes, people.