And Dignity For All.

Rev. Dr. Martin Luther King Jr. Day always raises my melancholy. I'm melancholy for the rubbish Whig history of race relations I was taught in my public school. I'm melancholy thanks to the public opinion surveys and FBI crime data I've worked with. I'm melancholy because there is easily-picked low-hanging fruit right there rotting on the branch: end the thrice-damned drug war once and for all.

I think I'm mostly melancholy because of an ongoing, resolute refusal of folks to grant commonplace dignity to all. Some of us refuse to grant dignity because of profession choice, others because of what folks choose to pursue a hobbies, or with whom they wish to have sex, or to which gods they pray. Some folks withhold dignity on the grounds of income or spending habits. Others withhold dignity related to military service or the lack thereof.

I'm a dishwater-dull, American, white, suburban dad. I've got it better than almost everyone on earth. I count myself extremely lucky that I can afford the luxury of merely indulging melancholy rather than suffering impotent rage over easily-corrected injustices. Everyone on earth should have a presumption of dignity, not just people like me. I suppose it's my ordinary human frailty that the best I can do is to teach my children and the few who heed me here at EE (& elsewhere) to respect the autonomy of strangers, to lend them dignity regardless of race, of social status, of profession, of gender, of age, of nationality.

Dignity is much like trade: it is mutually beneficial. By delimiting what others are allowed to do with their time and talent, the universe of exchange opportunities available to me quite naturally expands. Will some of the choices folks make be non-euvoluntary? Perhaps. But when people are denied the dignity to discover for themselves what is best in life, they necessarily suffer the often-grim alternatives. Build euvoluntarity. Build dignity.

Area Man Demands You Pay for His Breakfast

Perhaps you've already encountered the unlovely neologism "hangry." If you haven't, it's an unfortunate portmanteau of "hungry" and "angry," and it describes the irritability that naturally accompanies low blood sugar and elevated cortisol. Even if you've never heard the term before, you've almost certainly experienced the phenomenon. We've all skipped breakfast once or twice for one reason or another, and we've all delayed lunch. We've all felt the comforting tide of digestion ebb to expose the craggy rocks underneath, and even if we're scrupulously diligent about minding our food intake, we all know someone less cautious.

My crabby mood can ruin your good day. If my crabby mood is the direct result of skipping my morning bagel (cream cheese and lox are the only proper toppings for a bagel; anyone who utters otherwise shall be branded a heretic and shunned) then there's an uncompensated externality there. My failure to exchange makes you worse off. You should be willing to subsidize my breakfast, right?

No? You don't owe me breakfast you say? You don't want to reward my inattentiveness you say? You don't want to encourage future episodes of reckless fasting you say? You don't want me to take advantage of you you say? I see. Even though my mood has certain public goods aspects to it, namely that it is not excludable (and indeed, non-rival to some extent). it's still pretty widely recognized that my mood is my own responsibility.

Of course, when I say "widely recognized" I mean in the culture in which I live. It's a social convention. Contrast forager cultures in which the entire day's haul is shared proportionally among the entire group. And like other social conventions, they are subject to change. Terms and conditions apply and all that.

So it goes, it seems, with education. Education, like nutrition, is largely a private good: through my education, I earn higher wages, enjoy greater productivity, and so forth. There are many happy outcomes of education for which I am well-compensated. However, I am not well-compensated for my refined mannerisms (don't laugh), my keen ability to vote responsibly (okay, that one you can laugh at), nor my new-found propensity to conform to those social conventions that are coeval with an advanced university education. My college education unintentionally benefits you the same as my Moons Over My Hammy™.

As a fraction of total expenditures, higher education is subsidized (chiefly through non-dischargeable-in-bankruptcy lending) far more than food (SNAP, food banks & al). Unfortunately, just like me being a crankypants hold-out, subsidized students have less incentive to behave prudently in higher education.

So the Andrea's Question puzzle: we want students to be prudent in their decisions to seek education. Shuttering Sallie Mae is a political non-starter, and I struggle to imagine how to overcome what seems like an impossible pro-college bias among high school guidance counselors. I have faith in the power of rhetoric, and I give all the applause I have in my frail mortal form to Mike Rowe for doing his best, but I worry that attempting to raise the relative status of skilled physical labor is up against some extreme institutional barriers. What do you suppose the most effective prudence-enhancing approach still in the choice set might be? Suggestions welcome in the comments, because I confess myself with very few ideas of my own here.

Swiper No Swiping or: How I Learned to Stop Worrying and Love the Game Theoretic Analysis of Hookup Culture

"It is a truth universally acknowledged, that a single man in possession of a good fortune must be in want of a wife."

-J. Austen, Pride and Prejudice

I gather from the kids these days that mobile phone applications have replaced seedy dive bars as the go-to venue for taking a spin on the ol' genital mashing lottery¹. "Swipe right" is the "hey baby" of 2014. To credit technology for the apparent rise of casual sexual encounters is perhaps a bit premature. To illustrate why, let's swipe right on some elementary game theory.

Consider a single player. Call her Ann. Ann finds herself at the start of her sexual career and is faced with two options:
a) Participate in the casual sex market
b) Participate in the marriage market
Since this is ~elementary~ game theory, omit from consideration opting out altogether, or exotic choices like... well, use your imagination.

Before that choice, Ann was secretly assigned by Nature to one of two types.
Type L (for licentious). There is no penalty for choosing (a) after type is revealed. There is a penalty for choosing (b) after type is revealed.
Type D (for demure). There is a penalty for choosing (a) after type is revealed. There is no penalty for choosing (b) after type is revealed.

My conscience urges me to point out that what I'm about to do is methodologically suspect. I am going to assign numbers to utility. Doing this covertly drafts several stealth assumptions into this model, some of which I find terribly implausible. I excuse myself by noting that I'm doing a comparative statics problem here, rather than utility comparison. On the margin, you can (probably) toss out assumptions of well-ordered convex utility functions and still get similar results. Whether or not the model holds up when tested at extreme parameter values is questionable. So as far as a bit of insight into why some people might marginally choose regrettable mating decisions, this might be useful, if not entirely accurate.

My conscience temporarily sated, let's define a few structural parameters.

First, we need Ann's type assignment probability. Remember that Ann doesn't know what her type is as she makes her choice over (a) or (b). Only afterwards will she find out. Let's call this probability α. With Pr = α, Ann is Type L, and with Pr = (1-α), Ann is Type D.

Next, we'll want a parameter for a successful casual sex match. With Pr = β, Ann finds a partner for the evening. With Pr = (1-β), she spends the night alone.

Next, let's define γ as Ann's discount rate. For arithmetic purposes, this is just a multiplier that lets us compare payoffs earned in the future to payoffs earned now. For social science purposes, this is a contentious mess. Empirically decomposing the inputs to individual discount rates is a hassle, and even when aggregating, it's hard to measure, and harder yet to isolate specific treatment effects. Over a person's lifespan the discount rate can change wildly, some of it because of normal lifecycle reasons, some of it for cohort reasons, some cultural, some from exogenous shock, some for psychological reasons, some from conformity, some idiosyncratic. Beware stories that attempt to reduce discount rates to a monocause. I include this here for discussion, but I'll omit it from the model since I don't want to make things too intractable. Not yet anyway. Maybe in a follow-up post.

Finally, we'll need a parameter for the probability that Ann will participate successfully in the marriage market. Let's use ω. With Pr = ω, Ann marries. With Pr = (1-ω), Ann ends up with cats. Lots of cats.

At the risk of drifting into differential equations territory, β and ω are both partially functions of [potential partners'] α parameters. That is to say, the more people in the {temporary mating|marriage} market, the higher the probability of finding a match in that market. For the purposes of this exercise, assume that participants know which market they are in and that no participants attempt to participate in both markets at the same time. Modeling infidelity is another exercise entirely.

Let's say that a successful booty call yields v and a successful marriage yields w units of pleasure. Failure of either one yields 0.

If Ann is Type L, she'll pay a penalty of -c for successfully participating in the marriage market, no penalties otherwise.
If Ann is Type D, she'll pay a penalty of -d for successfully participating in the casual sex market, no penalties otherwise.

With Pr = α, Ann earns a payoff of:
β*v + (1-β)*(0) for playing (a)
and
ω*w + (1-ω)*(0) + ω*(-c) for playing (b)
With Pr = (1-α), Ann earns a payoff of:
β*v + (1-β)*(0) + β*(-d) for playing (a)
and
ω*w + (1-ω)*(0) for playing (b)

Ann is therefore indifferent between playing (a) and (b) when
α(β*v + (1-β)*(0)) + (1-α)(β*v + (1-β)*(0) + β*(-d)) = α(ω*w + (1-ω)*(0) + ω*(-c)) + (1-α)(ω*w + (1-ω)*(0))

simplified:
βv - βd + αβd = ωw - αωc

If βv - βd + αβd > ωw - αωc, Ann will play (a). Casual sex.
If βv - βd + αβd < ωw - αωc, Ann will play (b). Marriage market.

Casual sex is increasing in the probability of a successful right-swipe and costs of regrettable marriage; decreasing in social stigma against licentiousness and the probability of a happy marriage. Reverse that for marriage market participation.

And this gets interesting when we consider that the probability parameters are something of a commons. The more people that participate in the casual sex market, the greater the probability that Ann will find a match for any given attempt. If, ex post, Ann is a Type D attempting an (a) strategy, she would prefer to have had incentives encouraging her to pursue a (b) strategy instead. Similarly, if Ann is a Type L attempting a (b) strategy, she'd regret settling down and probably be a bit disgruntled that her society had provided her incentives to marry that schlub Jasper (no relation to the Peanut Butter Kid).

Think of "traditional" marriage and everything that goes along with it as a set of institutions that attempt to avert the regrets of licentiousness. The tradeoffs are the foregone opportunities of short-term associations. Knocking down that Chestertonian fence can reveal that if Ann is a Type D living the life of a Type L, the costs could be quite real and quite salient.

There's an interesting tragedy in there. If identifying type ex ante is either very costly or downright impossible, and if Ann's incentive structure is the product of human action, but not human design, a semi-stable equilibrium emerging from the joint and several negotiations between human minds, what is her optimal strategy? Which parameters should she try to strengthen? Which should she try to weaken? She can't choose her culture. Can she choose her discount rate? Can she select her cultural filters? By choosing the non-dominant strategy, does she run afoul of a concentrated costs-diffuse benefits dilemma? How can she overcome this problem? What would you do?


¹ Apologies for the horrific idiom. Blame it on my low blood sugar.

Not All Substitutions are Created Equal

The Dub-MOE takes up Bryan Caplan's challenge and issues an essay on conservative authoritarianism. An excerpt:

Like liberals (and everyone else), conservatives can be guilty of mental substitution, which happens when people confronted with very difficult questions substitute much easier questions that don't require much reflection. This isn't the same thing as breaking a complex problem down into its constituent parts. It's changing the question, albeit subtly: "should the government punish people who produce and listen to this music?" becomes "do I want my kids listening to this music?" Sometimes the substitution is explicit for rhetorical effect: "do you want your kids listening to this garbage?!" Indeed, the best examples of conservative authoritarianism that come immediately to mind involve sex, drugs, rock & roll, war, and immigrants.

Art (who I can now count as a co-author!) buries the lede a little. The problem isn't that conservatives (or anyone, really) make little mental substitutions, but that they make rubbish substitutions.

Consider the same question mulled by Solon. Instead of "do I want my kids listening to this music?", the Divine Maxim of Plato would ask "would I be willing to bar my parents from listening to this music?"

The role of the government is to act as the servant of the people. When the reverse occurs, dominion and injustice probably aren't all that far behind.

Substitute questions aren't wrong in principle. The puzzle is how to align folks' incentives to start making good ones.

Daunting, but our euvoluntary future depends on it.

Turning Aretaic

VA House candidate (and economist) Dave Brat is a fan of Deirdre McCloskey. Oh my. Oh me oh my. People, if stuff like this can happen, why do we even have an AEA at all?

Madison knew something about Democracy (big D for the system rather than for the everyday practice) that might perhaps have eluded more populist thinkers: pure majority rule can be as tyrannical as the worst despot who ever sat on a throne. His prophylactic against public tyranny was constitutional republican constraints on the authority of the US sovereign. I kindly suggest to you that this is insufficient.

Tradeoffs abound, including in politics. The typical high-level tradeoff is between rules and discretion. The Constitution needs to provide a framework for a functioning rule of law, but it must be amendable. The dilemma should be obvious: given enough time and effort, an ambitious sovereign can erode its constitutional fetters enough to get back to the serious business of encreasing its dominion (Hume, of Commerce).

So if in a democracy, the government is us, and we want to gird ourselves against our own propensity for tyranny, what shall we do?

I return to Plato's Divine Maxim: never to use violence to his country no more than to his parents. If the citizen is sovereign, this antique, forgotten little gem of jurisprudence is the spoonful of sugar that can help the medicine of citizen governance go down. In Jim Buchanan's terms, it wrings the romance right out of politics. It's delightfully sobering to force yourself to ask "would I be willing to fine, imprison, or execute my parents for this infraction?" And of course, sometimes the answer will be "yes", and of course, people will still disagree on important issues, but this tiny heuristic obliges voters to rid themselves of the many far-mode biases they carry, at least when they enter the voting booth.

So here's my dilemma, closely related to Andrea's Question: knowing this, what should I do? I know from studying economics that the deadweight costs of rent-seeking brought on by ignoring Plato's Divine Maxim erode folks' capacity to cooperate peacefully on their own terms. But I also know that Plato's Divine Maxim is massively unpopular. Scorned, even. I might encourage some of my friends and colleagues to bring it up when they get to the voter preferences part of their Public Choice courses. I might even prod my fellows in the land of PPE to write more about it. But I think the best chance I have of actually convincing another human for realsy-dealsies is to teach my daughter why I think it's a good, low-cost tool for evaluating policy and politicians. And that's the problem. That's exactly the problem.

Imagine if you will the tableau where a precocious middle school girl holds forth on forgotten antique jurisprudence in her civics class. No interpretation of government, progressive, conservative, whiggish, or otherwise (not even mainstream libertarian) hews to this doctrine. It's perhaps classically liberal, as Adam Smith sang of Solon's virtue in TMS, but classical liberalism is a fossil, and it's in neither my self-interest nor my daughter's to have her rile up her teachers or fail her classes.

Then again, if that's what I'm worried about, perhaps I need to learn to exercise another of the classical virtues: courage. The vitality of the Republic may just depend on such small gestures.

From Coruscant To Tatooine in Less Than 12 Parsecs

I met a stranger from a distant land. He told me of grand spaceports, shining plinths, vertiginous superscrapers, and a furious economic bustle that lifted my mercenary heart. His was a spacefaring race, you see. Deep in the hearts of the Galactic Barquentines his folk used to ply the starscape nestled the key to space travel: a core of refined phlebotinum.

Alas, the stranger's heart was heavy. In his land, the stellar vessels were lovingly crafted in his home country of Mungertopia, but every dry dram of raw phlebotinum was to be found in one place and one place only: the neighboring nation of Spivonostan. The Mungertopians were brilliant, productive engineers and scientists, notable for their grace, courage, and professionalism. Contrarily, the Spivonostanis were dour, dull, and poor. Phlebotinum mining had crowded out their traditional way of life and thanks to the conversion of (nearly) all of their physical capital, they were entirely dependent on trade with the Mungertopians to maintain their national income. This, the stranger said, weighed on his conscience. Commerce with his people had the effect, even if unintentional, of sowing dependency in the Spivonostani culture. It was exploitation, so he claimed.

"Hold on a minute," I rejoined. "Isn't there a decent case that they're the ones exploiting you?"

"Huh?" He sounded puzzled and a little amused, as if he was caught between two possibilities: I was either trying to make a dumb joke or our meeting had turned my thoughts to jelly. Either way, there was patient pity in his reply. "We're rich, they're poor. We have an advanced economy, they produce just one thing. They're, in your own words of euvoluntary exchange, desperate to trade."

"But you can't make your spacecraft fly without what they have. Consider yourselves enlightened. Where I come from, our political leaders have installed puppet governments just so we could put cheap bananas on our cereal in the morning." I reminded myself of the embarrassing news coverage I watched as a boy of Operation Just Cause and the terrible rout of Noriega. "Look, your economy is just as dependent on theirs as theirs is on yours." I was warming to the topic. "The trade may not be fully euvoluntary, but it's at least voluntary, right? You said it yourself, the alternatives would be to return to their traditional ways, making both your lands worse off." I wanted to insert a pregnant pause, but he mistook my silence for an invitation to rebut.

"But all that wealth ends up in the hands of the oligarchs that own the mines." I could almost feel the indignation spill from his clenched hands. "They own the mining equipment, they keep wages low, they buy up any patch of land that has even a remote chance of having a vein of phlebotinum underneath it. Trading with these people empowers these oligarchs. It's immoral."

"So you're worried about the inequality in Spivonostan?" I was careful to be a little vague here, intentionally not specifying exactly what sort of inequality he found worrisome.

"That's one part of it, yes. The average Spivonostani earns but a tiny share of the massive gains from trade generated by the phlebotinum economy." I could tell that he was on the cusp of making a common error: comparing his own situation with that of the target of his pity. Luckily, he caught his mistake and proceeded, "I'll grant that they're better off mining phlebotinum on the evidence that they've chosen to do so without being coerced beyond the promise of what we Mungertopians can offer in trade, but Justice demands that gains from trade be proportional. Isn't that what your Aristotle said?"

"It is. Where I come from, prudent, thrifty foreigners save and borrow in the hopes of migrating to my prosperous country to create a better life for themselves and their family. Can't the Spivonostanis do the same?" My pride and prejudice have a hard time passing up an opportunity to flog open borders, after all. "Wouldn't free migration at least mitigate some of the exploitation problems you cite?" I hoped that some elementary economics was part of his education. "Good outside options should help increase the reserve wages of the workers in Spivonostan."

"Would that this were true, young man." I was a little taken aback at being called young by this dude who looked barely out of his twenties. Maybe they've solved the aging problem in Mungertopia. I shrugged it off. "Our land is poisonous to the Spivonostanis. They can't survive here." He sounded forlorn, as if this were old, painful news. "This is a technological problem, not economic, not political, not even philosophical."

At this, he bid me a brief farewell and got back inside his wee spaceship. I watched the "my other ship is a Corellian Corvette" bumper sticker dwindle in the distance as he flew off. And I pondered.

You see, we here in the affluent West are awfully accustomed to being the Mungertopians. We're in the "first world", we're comfortable, we're rich, and we can afford the luxury of indulging condescension towards the rest of the world. But if the Singularity folks are right, we'll sooner or later find ourselves in the shoes of the Spivonostanis and it will be our brain emulation (or maybe AI) descendants who'll be trading asymmetrically with us. And it's worth considering if we want ourselves or our flesh-and-blood descendants to end up the butt of condescending paternalism of the sort we find in the new imperialism.

Why is it worth considering? Because one of the answers to Andrea's Question is that ideas, particularly given weight and time to germinate, can influence attitudes. A revival of bourgeois dignity can help not only boost human flourishing here and now, but it can underpin the approach our mechanical descendants have towards our meatier progeny. The only downside might be to stick a thumb in the eye of our contemporaries who so greatly enjoy fancying themselves to be better judges of our behavior than we are.

Of course, given the right temperament, that might be a virtue rather than a vice.

Was Aristotle a Euvoluntary Exchangeur? NE Bk 1

How do each of the classical virtues inform and support euvoluntary exchange? It's philosophy amateur hour here at EE as I review first Nicomachean Ethics and later Aquinas on the relationships between virtue and purposeful human action. I don't plan to reinvent the wheel, but perhaps it's wise to check the foundations of the canon from time to time to see if and where modern moral intuitions disagree. Let's start with Book 1.

In NE Bk 1, section 5, we find the following, a point perhaps insufficiently stressed by economists when speaking to the public:

The life of money-making is one undertaken under compulsion, and wealth is evidently not the good we are seeking; for it is merely useful and for the sake of something else. And so one might rather take the aforenamed objects to be ends; for they are loved for themselves.

In econo-speak, our lectures (and our equations) are full of what we call "derived utility." This is simply to say that with a few oddball exceptions, people don't collect wealth simply to have access to an idle vault full of gold bullion or stacks of paper bills. Even Walter White collected that storage locker full of Benjamins for his family (NO SPOILERS IN THE COMMENTS PLEASE). Measured wealth is an idle claim on something that we actually value like happiness, satisfaction, fun, pleasure, joy, or the abatement of discomfort. For economists, this is a wholly unremarkable point. For the pundit class and for the income inequality agitator, this point is often casually ignored. To Aristotle, as to your garden-variety economist, the value generated by a voluntary exchange is prima facie evidence that the fruits of the trade are to be "loved for themselves," and the money-making part of it is mere chaff.

nb: you can't bake bread without chaff.

An unexpected upshot of this is that analytical tools like the Gini coefficient misstate the underlying value generated by economic activity, relying on the imperfect proxies of wealth or income (and I urge you to pay close attention to which version of the Lorenz Curve is being peddled) to estimate how much better off some are than others.

As I'm a little strapped for leisure time today, I'll leave you with this passage:

Presumably, however, to say that happiness is the chief good seems a platitude, and a clearer account of what it is still desired. This might perhaps be given, if we could first ascertain the function of man. For just as for a flute-player, a sculptor, or an artist, and, in general, for all things that have a function or activity, the good and the 'well' is thought to reside in the function, so would it seem to be for man, if he has a function. Have the carpenter, then, and the tanner certain functions or activities, and has man none? Is he born without a function? Or as eye, hand, foot, and in general each of the parts evidently has a function, may one lay it down that man similarly has a function apart from all these? What then can this be? Life seems to be common even to plants, but we are seeking what is peculiar to man. Let us exclude, therefore, the life of nutrition and growth. Next there would be a life of perception, but it also seems to be common even to the horse, the ox, and every animal. There remains, then, an active life of the element that has a rational principle; of this, one part has such a principle in the sense of being obedient to one, the other in the sense of possessing one and exercising thought. And, as 'life of the rational element' also has two meanings, we must state that life in the sense of activity is what we mean; for this seems to be the more proper sense of the term. Now if the function of man is an activity of soul which follows or implies a rational principle, and if we say 'so-and-so-and 'a good so-and-so' have a function which is the same in kind, e.g. a lyre, and a good lyre-player, and so without qualification in all cases, eminence in respect of goodness being idded to the name of the function (for the function of a lyre-player is to play the lyre, and that of a good lyre-player is to do so well): if this is the case, and we state the function of man to be a certain kind of life, and this to be an activity or actions of the soul implying a rational principle, and the function of a good man to be the good and noble performance of these, and if any action is well performed when it is performed in accordance with the appropriate excellence: if this is the case, human good turns out to be activity of soul in accordance with virtue, and if there are more than one virtue, in accordance with the best and most complete.

This, my dear readers, is a sketch of the first mainstay of Aristotelian virtue: arete (ἀρετή), roughly translated as "excellence", though it's a particular flavor of excellence, devoted to ends that are consonant with the other limbs of a virtuous life. Of course, Andrea's Question again occurs to me: knowing that virtuous euvoluntary exchange is fine and dandy, but is there anything practical to do with this knowledge? The idea of mounting a soapbox to proclaim the superiority of a life lived in harmony with classical virtue is just absurd enough that people like me would find it appealing. I guess there's some hope to be found earlier on in Book1:

To judge from the lives that men lead, most men, and men of the most vulgar type, seem (not without some ground) to identify the good, or happiness, with pleasure; which is the reason why they love the life of enjoyment.

Even vulgar types can enjoy life. Remember this the next time you find yourself inclined to badmouth crap TV reality programming or ban sugar.

You got to know there's fun to be had.



I like this song, but I genuinely had no idea how silly the video is. This is the first time I've seen it.

The Optimal Quantity of Unwarranted Media Harassment is not Zero

Today is the seventh of March, 2014. Yesterday, an elderly Japanese-American man was the subject of relentless media badgering. A Newsweek correspondent tracked this man down, suspecting him of being the fellow who wrote the Bitcoin protocol. The histrionics over the past day remind me less of Edward R. Murrow and more a fulvid Charles Foster Kane.

What would Coase say?

The Ouroborotic nature of journalism can be frustrating for those who have not yet learned to collapse the moral telescope. From the individual journalist's point of view, the public's interest is an ironclad straitjacket. Career incentives are centered on scoops, on eyeballs, on pageviews. But from the news consumer's point of view, the media exists to highlight what's interesting in the world. Each is in partial thrall to the other. It's an equilibrium. That does not imply that it's the only equilibrium.

The Schelling in this Point is man's natural propensity to truck, barter, and exchange in gossip. Individually, since each member of the public has as little to no ability to influence the content of the news, the costs of reckless quasi-paparazzi are easily swamped by the benefits of consuming salacious tabloid pablum. Curbing the hunger for frivolous human interest stories is costly: it requires the discipline of a well-informed temperance. Rigorous personal virtue is hard, therefore the analyst should expect it to be rare. Because it is rare, the rigorous analyst should also expect a vigorous market in sleazy journalism.

If you're so inclined, perhaps you might encourage the people in your circles to temper their propensity to gossip. For everyone else, journalism cannot ever be reasonably expected to be anything other than non-euvoluntary (particularly when the alternatives are too horrible to reasonably contemplate) and we'll just have to accept that the occasional harassment of people who just want to mind their own damn business and build play train sets in peace are simply part of the costs of having a free press.

Right?

A Game of Institutions Book 1: Euvoluntary Coordination

I beg your indulgence for a brief series of posts. In them, I shall expand on the Shughart/Thomas piece, discussed here. Casual readers can think of this as a brief introduction to elementary game theory. For my more knowledgeable readers, think of this as some preliminary spitballing prior to an actual project.

Before I get to the specifics, I'll need to walk you through the basics of practical game theory. I apologize if this is old hat—please feel free to skip ahead if you like.

First off, the Twitter version of game theory. It's a way to analyze strategic behavior. That's it. Nothing fancy. There are three basic elements to any game: players, payouts, and choices. Most instructors will start out with 2-player games to illustrate the mechanics of finding an equilibrium solution, since it helps students moisten their feet without the risk of drowning. We can do the same here, but discussing constitutions necessarily implies more than just 2 players. Getting there will be easier if we start with the simplest case first: euvoluntary constitutions and the Coordination Game.

A (sequential) two-player CG goes a little a-something a-like this. P1 chooses to play left (L) or right (R). P2 then also chooses to play L or R. If both players play L, each earns 10. If both players play R, each earns 5. If either one plays L and the other plays R, each earn 0. Here's the payoff matrix, with P1 and P2 payoffs separated by a comma:

	L	R
L	10,10	0,0
R	0,0	5,5

The actual amounts in the cells are for illustration only. What's important here is the symmetry: P1 and P2 are equally better off by picking the same choice than by accepting their BATNA. And worthy of note for euvoluntary exchange purposes, their BATNAs are identical (nb: I know that the proper parlance would be "Best Alternative To a Coordinated Outcome, but let's just stick with our tried-and-true acronym). With symmetrical payoffs, none of the players' sense of fairness or justice is offended. We work together to produce something, then split the proceeds even-Steven.

What's the point then of a constitution? In a sequential game, I pick L, then you pick L, we're good to go. Equilibrium outcome, hooray (and yes, [R,R] is also an equilibrium outcome)! Well, if we're playing a repeated simultaneous game, it'd be nice to know beforehand what the expectations are for play. Think of it as a preliminary cheap-talk round. I say "left" you say "cool" and off we go. Recall from S&T that a euvoluntary constitution is one that does not require ex post enforcement to remain valid. This qualifies. There's no upside, no incentive to play anything but the agreed-upon action.

To make this game more interesting, you can include more players, discount rates, production functions, and whatever other bells and whistles you might like. But the core observation that no coercion is needed to reinforce the terms of the constitution remains so long as we've got symmetrical payoffs and a barren BATNA.

So what are some real-world analogs to this coordination game? Well, partnerships come to mind. Think about the default legal rules for a partnership: there's joint and several legal liability, but more to the point, any of the partners can dissolve the partnership at any time for any (or no) reason whatsoever. This is an attractive feature for firms wishing to signal euvoluntarity.

Consider this, then. Marriage, under no-fault divorce, is closer to the default rules for partnership than it was under a statutory harm regime. That is to say that the rules for divorce we have now are more euvoluntary than they were prior to 1969. If you believe Wolfers and Stevenson (and you should, their econometrics are impeccable), domestic violence rates and suicide dropped precipitously because of no-fault divorce, with no long-term impact on overall divorce rates (yes, there was a spike at the time of the regime change, but you can think of that as pent-up demand). But what if the more-euvoluntary institutional rules were in fact unfit for marriage? Marriage rates in the US began to tank in the 1970s, and the median age of first-time married couples has risen (CDC and Census). If you believe Charles Murray, these trends rend asunder the tissue paper of society. Let's ditch the normative assumptions and take at face value both the Wolfers/Stevenson claims and the Murray conclusion. Is it possible then to have an increasingly euvoluntary institution that produces decreasingly euvoluntary outcomes? Another way to think about this is whether or not we can have instances of private goods that add up in a separating equilibrium to a public bad.

If that smells a little bit like a false dichotomy, it's because it probably is. There are other ways to discourage single parenthood (on the margin, naturally) while preserving liberal freedom of association. Reconsidering the move away from virtue ethics towards Kantian moral imperatives or naked utilitarianism might be a good place to start. Aspirational sentiments in fiction might be another. Solving great social problems is off-topic here, I merely wish you to consider if Simpson's Paradox need apply to institutional choice, and if it does, what are the implications for default rules?

Okay, so I didn't get all that heavy into the game theory in this post. For forthcoming posts in this series (under the 'S&T' tag), I'll make things a little bit more rigorous. I'd like to get to where we're estimating comparative statics for an n-player game, including terms for fairness preferences. I hope to convince you that this approach can help explain why we see the sorts of big institutions we have, and if I do my job right, that both Locke and Rousseau can be correct about the origins of the state.

Sounds fun, doesn't it?

Infant Farming

Noah Smith shared my MIE post on selling babies to Twitter. Adam Blackstone objected to my proposition:

@Spivonomist I mean that puppy mills are evil. Extending that to humans would be evil also.
— Adam Blackstone (@Celt_Englishman) November 21, 2013

The argument he's making is this: prices send information to both buyers and sellers. People who know they can earn a profit by selling children have an incentive to increase production. Ex ante, producers (in this case, biological mothers) have little in the way of quality control and can produce lemons, for lack of a better term. In the agricultural industry, farmers can turn bad lemons into lemonade. There is no such mechanism for dealing with unsaleable children. Indeed, some kids might be so rotten that producers would have to pay adoptive parents to get their surplus inventory out of the warehouse.

Blackstone is dead on the money with this observation. Children are heterogeneous. To clear the market, so to speak, prices would necessarily have to be tailored to the product on offer. It would be more like a market in cut gemstones than one in rubber bands. And yes, some prices might have to be negative.

It's this price heterogeneity I think that would be fatal to my idea. It would be sufficiently unfair that certain types of children would sell for a hefty premium while others would be negative price duds, that well-intentioned folks would organize politically to shut down the venture before it ever started. The problem isn't that prices couldn't adjust to match children to homes, it's that voting constituents object to using the price system efficiently.

So okay, that's one thing. That's for children bred for the purpose of being sold. But does this same logic apply to surrogacy? Why or why not?

Euvoluntary Glamour?

Virginia Postrel has a new book out on glamour.

ATSRTWT

In lieu of (or, better yet, in addition to) that, watch this interview she did with Nick "The Jacket" Gillespie.



The bit in there about politics should sound familiar to regular readers here. I've flogged the idea of political kayfabe, which is a calculated attempt to bamboozle the constituency with glamorous talk. It's also unsustainable. As fairy dust evaporates on dawn's touch, political flimflammery sours in the second term. Note especially which presidents had comparatively decent lame duck administrations (Clinton, eg) and the lack of glamour they engendered.

Private glamour is a categorically different matter than public. The glamour of statecraft ensorcells children to don the vestments of war and bear arms abroad in a bid to encrease the dominions of the sovereign. That seems to me somewhat different than My Little Pony: Friendship Is Magic LARP.

Private glamour can be weird, particularly for those uninvolved in the scene. For me, I find fashion baffling. I also find quite a bit of the paraphernalia of professional sports mystifying. But seldom do I second-guess anyone else's fandom peccadilloes, given my sentimental attachment to monochrome samurai epics, the early Herzog work, and the modern iterations of hybrid FPS-RPG titles. Private glamour strikes me as euvoluntary, at least until it isn't. Until it causes harm.

There's the rub. Glamour is necessarily deceptive. That is its nature. It's escapism. And sometimes what folks want to escape is things like family responsibility, or social obligations, or the basic responsibility to be a decent human being. And perhaps in moderation, that's fine. Perhaps it's not all that bad once in a while to dress up like Fluttershy and make bad equine puns. The difficult puzzle is to second-guess someone else's optimal amount of self-deception. Is it reasonable to deploy paternalistic instincts when someone's WOW penchant starts to interfere with their regular bathing regimen? More to the point, is it wise to grant the coercive authority of state-sanctioned bureaucrats to make those sorts of decisions on the behalf of citizens?

The answer is probably, "maybe". But when it comes to questions of voluntary deception, it seems to me that the precautionary principle argues in favor of self-determination. The burden of proof is on the censor. Any ideas about how to ensure the censoring authority regularly shoulders that burden would be greatly appreciated.

Monopsony Jones

Is the existence of monopsony (single buyer, contrasted with single seller in monopoly) a dashing little bit of a priori theory or a revealed empirical fact? Or is it both? The most uncharitable interpretation of research that finds evidence to support employer shenanigans against their workers is that it's a snipe hunt: researchers with an axe to grind pour themselves diligently into a task that lends some space to exaggeration. I don't think that's the case though. It's my impression that much of the behavioral econ literature is correct in identifying values that underpin wage rigidities, and that even though a lot of the empirical work I've read leans a bit towards question-begging, it's perfectly plausible to me that low-skilled labor is systemically underpriced. In a Bayesian sense, I'd have to say that I have relatively strong priors that the question is difficult to resolve using mere econometrics.

I'd also admit to some waffling over whether or not poverty is a public bad. It's obvious that poverty is bad—it contributes to misery not limited to malnutrition, lower life expectancy, violence (maybe), and a host of petty insults linked to relative status and self-image. But just because something is bad and it happens to members of the public doesn't make it a public bad. To elevate the private discomforts of relative immiseration to a public concern, the advocate either draws on the sense of pity that slumbers in all feeling peoples or appeals to spillover effects, as one might with public health initiatives (scarlet fever might be spread thanks to collective action lacunas, eg). Recall that excludability is a necessary condition for public goods or bads. Let's assume that both the normative (pity) and the positive (spillover) case has been made and that yes, having poor people around makes everyone worse off.

I'll leave it as an exercise to the reader to decide who in this exercise has moral weight, if people born on the wrong side of a political border should influence either our tender spirits or whether the malaise of poverty slips the border patrol in the dark of night.

So if we accept premises (a) that a firm can be a monopsony buyer of labor and (b) relative poverty is a social rather than a private condition, by what logic might we arrive at the bramble of bureaucracy that penetrates poverty relief efforts that hover from local all the way to international? Imagine all the talent that could be freed by salting the earth where the thicket of wage intervention and in-kind transfers once stood in lieu of a universal guaranteed minimum income. Think about disconnecting poverty relief from work.

That's the bulk of my pitch for a basic income. I think it's probably not that much of a stretch to say that it would be more euvoluntary than the status quo. But what it's missing, why no one has seriously forwarded a proposal that would shutter big swaths of the federal budget falls afoul of the illusion of Tantalus. What looks like low-hanging fruit might actually be the jawbone of an ass wrapped in a palm leaf.

Paternalism is popular. And by "popular", I mean that even loopy libertarians harbor pretty strong preferences over what constitutes right behavior (they're just less inclined to wield the cudgel of the state to see their ideal world flourish). Disbanding state-run poverty relief programs disrupts the thousand little fingers folks use to prod others, be it in matters of recreation, mastication, or procreation. To my consternation, I have to admit that there's massive (misguided if you ask me) social benefit to lending state force to scolds, left and right (which side is in ascendance is probably more a matter of luck than anything), so efforts to muzzle leviathan will be met with thrashings of the beast itself over the frenzy of its handlers.

Then again, maybe I'm wrong about the relationship of work, income, paternalism, and poverty relief. What if the underlying purpose of minimum wage statutes isn't to make sure that workers break the spine of employer monopsony but to erect a palisade to segregate undesirables? What if Hume was right and the true purpose of leviathan is to encrease its dominions? Is it not futile to stand athwart both history and society, shouting "here and no further" as the beachhead of petite bourgeois dignity is worn underfoot? Is the universe of euvoluntary exchange better expanded by entrepreneurial endeavor or by resistance to the scope of state coercion? I'm not asking as a rhetorical device. I legitimately don't know the answer.

And to try to plumb it more, I'll do another post on Kirznerian entrepreneurship by the end of the week. Stay tuned.

Against (Only) High Skill Immigration?

I'd like you to think about a toy economy today. If you're put off by a lot of econo-jargon, don't worry. I will do my very best to keep it to the barest minimum. Mostly what I'd like you to do is to compare an economic argument with a corresponding moral argument and see if you can get them to square. This is an extensive post, so I'll put it below the fold.

Soylent Taxes Are People.

From Casey Mulligan, via N. Greg Mankiw & Peter Boettke, a snapshot of average statutory marginal tax rate hikes since 2007.

Taken from an NBER paper here (gated, I think). If you are able to access the paper, please do. It's much better than this oversimplification. Mulligan is very careful to point out costs, benefits, and transfers. More to the point, he generates estimates for both employer and employee responses to statutory requirements. 

Think of this in terms of Munger's recent podcast on rules and norms. The ACA is a brobdingnagian alteration of the rules of medical insurance and labor alike (both of which, we've argued on this blog are not euvoluntary). When the written rules are tuned without reference to the informal norms,discord and unpredictability prevail until the new ways of doing business are assimilated. In this case, the very point of the individual mandate is that the median healthy household is supposed to subsidize the elderly, the ill, the infirm. That the indigent and the lazy also end up cross-subsidized is a piffling moral concern, a small price to pay for (allegedly) universal coverage. Distortions to the labor market (more part-time labor, marginal firms electing to refrain from expansion, & al.) are similarly petty when placed side-by-side with that warm, fuzzy feeling you get in your belly from achieving something as great as Medicine For All.

But Sam, you cry, that's delusional. You can't ignore those costs. That's real suffering, real destruction of human capital when recent college graduates can't get a job for all these new labor market frictions. Real working parents forced to make ends meet holding down a trio of disjoint part time jobs scattered across town. Real retirees shoehorned back to work so they don't end up chowing down on Fancy Feast brand cat food.

To which I say, take public choice seriously. Constituents have chosen to uncheck the box that says, "constitutional constraints on majoritarian whims." Every time a principled candidate for high office seeks your vote, she is hindered, stymied, blocked, mocked, and exposed to all manner of fretful attack. When it comes to basic economics, the median voter is not trained to think past stage one. And even if he were, the inaccoutable nature of decision-making by voice runs afoul of the concentrated benefits, diffuse costs problem. If it costs me nothing to vote for unicorns that fart strawberries and piss lager, you can bet that's exactly what I'll do even if what I get is an ordinary donkey with a papier mâché horn stuck to its forehead.

By the same token, take public morality seriously. Try to avoid being surprised when your friends and family end up unswayed by your economically literate arguments against O-care. Even when they're willing to look past the political kayfabe that is the name of the statute, they're sure to keep its intent well in mind. Indeed, Mulligan's chart up above isn't Cassandra for regular people, it's reassurance that someone will be footing the bill for sick kids. It's justice.

When you take these concerns seriously, the scope of the problem becomes a bit more daunting. How do counter a BATNA desperation argument with marginal tax rate increase projections? How do you put a human face on tax accountancy? Suggestions are welcome.

Caplan on Coercion

My great friend Bryan Caplan offers an excellent public choice critique of standard theories of taxation. He raises an old question: "why does the sovereign direct tax collection and regulation towards firms rather than individuals?" The standard, Coasean answer is "transaction costs." It's quite difficult to coordinate the efforts of a bureaucratic apparatus towards the great mass of humanity.

The common-sense rejoinder is obvious if you've spent any time studying East European political history: get citizens to rat on each other. It might even pay bounties (which work remarkably well for criminal scofflaws) to enforce regulatory compliance. Caplan says that this sort of Stazi/KGB/Brownshirt menace would be universally reviled among freedom-loving Americans.

Maybe that's true. My experience with nosy neighbors suggests that Bryan might be slightly off the mark, but overall I think he's got a pretty good point. Of course if you would have told me in 1911 that Lithuanian children, residents of one of the most freedom-loving nations in the history of European Civilization, would one day come to snitch on their own parents, I probably would have thought you bonkers. People can adapt to surprising conditions, even famously tolerant Balts, even famously independent Scots-Irish migrants.

At any rate, if I'm reading the literature right, there does appear to be evidence to suggest that the technology for citizen enforcers exists even without any frog-boiling. Immigration. Sniderman &al have a 2004 paper in the APSR called "Predisposing Factors and Situational Triggers: Exclusionary Reactions to Immigrant Minorities" that concludes that native residents are all too happy to invoke exclusionary measures against outgroups. There's a small flotilla of similar studies with similar results.

As a euvoluntary exchangeur, this should bother me. Undue, citizen-led state coercion dams the river of trade, shrinking the trout pond in which we angle for those voluntary arrangements that make us all a little better off each time. As a game theory dabbler, it's actually kind of a relief. Why? Because the folk theorem can also support an equilibrium with more open borders and lower overall regulatory and tax burdens. For at least marginal improvements in this direction, ask yourself if New Zealand, Hong Kong, and Singapore are all just bizarre flukes, isolated island (or peninsular) nations with no great lessons to teach the rest of the world. It might be that that's the case, and their relative freedom of association or lack of coercion or whatever you want to call it is strictly a product of historical accident, irreplicable elsewhere, but I again urge you to consider that Lithuanian schoolchild. If a 4th grader in 1971 can cheerfully yak about the anti-state sentiments of mom and dad to the KGB whereas her daughter in 2001 would find the very notion alien and probably a Paul Bunyanesque tale of fancy (not kidding here folks, these are my relatives I'm talking about), then it's not beyond belief that the US could move in the direction of a stable equilibrium of more immigration and lower regulation.

How to get there? I'm afraid I'm still, to my shame, unable to give Andrea a satisfying answer.

Is All Income Inequality Created Equal?

Emmanuel Saez of UC Berkley has recently updated figures for income statistics with 2012 numbers. The damning quote: "Top 1% incomes grew by 31.4% while bottom 99% incomes grew only by 0.4% from 2009 to 2012. Hence, the top 1% captured 95% of the income gains in the first three years of the recovery." Commentary has been interesting. On Twitter, Justin Wolfers caps off a quick overview with this: "If you thought the Great Recession would tame inequality, think again. The top 1% share is back near record levels."

 We here at EE have written about inequality before, and typically in the context of income inequality specifically, rather than wealth inequality. Buchanan would have rapped our knuckles if he'd have caught us. But before we go cut ourselves any switches, let me defend our approach. At least the way I see it, the EE project aims to peer into and categorize the commonplace moral approaches folks have towards the grand world of commerce. And the simple truth is that if you stop most folks on the street (and even well-educated folks with advanced degrees!), they'll tell you that money is money, be it pocket currency, income, wealth or OTC options. I have literally heard with my own two wrinkly ears business school professors conflate income with wealth. So is it worth thinking about income inequality to the exclusion of wealth inequality or timeline inequality or longevity inequality? To the extent that our focus reflects on pedestrian claims of fairness and justice, I'm willing to write us a hall pass.

With that said, let's think a little bit about the Saez report. As you might predict, my first reaction was a spot of frustration. It matters very much indeed what generates an increasingly large Gini coefficient. If we're talking about rents and special privileges granted by government fiat, fat paychecks to greasy fatcats with offices on K Street violate the very spirit of antitrust (collusion in restraint of trade) and are both unjust and unfair, as much to the academic economist as to the irate citizen or bloviating pundit. If, contrariwise, concentrated wealth is a matter of summing the returns to an increasing pile of modest, euvoluntary transactions, it becomes more difficult to claim that the outcome is unjust, even if it appears ex post to be unfair. More difficult, but not impossible.

So my priors are that yes, we've got plenty of the salacious rent-seeking/preservation action happening between Washington and Wall Street, but haven't there also been great advances in the hidden side of truck, barter, and exchange? Hasn't dynamic inventory management spread from sea to shining sea? Don't we have gigantic economies of scale now that we've got billions of people sharing network space? And don't we have this cohort issue where we expect newer workers to earn entry wages as more experienced workers move up into higher deciles, thereby skewing the moral intuitions of our feelings on this stuff? These are the thoughts I've picked up listening to Russ and Mike chew these topics on Econtalk. This is the marrow of my micro courses, of the bits and bobs I've collected studying Alchian and Allen, Friedman and Schwartz, Buchanan and Tullock, Hinich and Munger. These are also the priors I can't quite completely maintain in the face of the the first quote up there in the opening paragraph.

One thing I know for sure is that to get a good update on my priors, I'd want to take a good solid look at how the breakdown looks across industries. If we're seeing very different results in aerospace than in, say, cinder block production, we can say a lot more about the relative importance of political rents. As it is, my gut (a notably useless part of the body for rigorous analytical thinking) tells me that there's no f-ing way that these large numbers can be picked up by either technological advance or rent-seeking alone. This would seem to require a combination assault, where rising stars in the business world would have to both a) improve the delivery of their product and b) successfully lobby for the protection of their business model. At the same time, we'd need to see some decline in LFP among new entrants (more here). These combined efforts might produce these results. Might.

So where's the baby among all this bathwater? Good delivery of product sure sounds nice to me. The rest? Not so much. But Andrea's Question once again pokes its rough nose through the fabric of all my posturing. Yes, we want to get rid of rent-seeking, but what are you going to do about it, Sam? Propose a constitutional amendment? You've got this post series on the Constitution, after all. Well, sure I do. I can even think of what the language would be like. I'd return to something closer to an original interpretation of the Commerce Clause. But much like hitching your Conestoga wagon up to a team of unicorns, I have a hunch that the actual, real life bargaining set is null. Even very modest threats to the rent-preservation societies of America reveals a savage and fierce protection of political privilege. The accumulated rents of elites is gargantuan and even if it's in everybody's interests to eliminate them, coordination failures pretty much guarantee it won't happen. Coase was right.

And I'm afraid I can't hand you a decent second-best proposal. tax-and-transfer schemes are less than useless since the folks who have all the rents will be the ones to best avoid the schemes. Political solutions empower the folks who control the legislature. Duh.

Well, at least they're still making neat toys for us. I hear the new iPhone comes in candy-coated colors! Biometric scanning included gratis.

Adjustable-Rate Mortgages

I am a home owner. Or if I've been playing too many video games, I am a home pwner (your domination is my vacation). Because of this, I tend to get reams of junk mail offering me fantastic refinancing deals. Hooray!

Now, since you've likely deduced that I've a bit of a training in economics, it naturally follows that I have no idea what the yield curve looks like on any particular day. I am however unusually blessed with an eagle-eyed spouse who takes every opportunity to keep from forking over cash moneys to lenders. She loathes interest, whereas I'm stupid enough to think its social benefit is all unicorn glitter and ballerinas pirouetting in a, I don't know, a glade or something. I flatter myself to think I'm on the side of a larger truth, whereas she actually keeps our household ledger in the black. It should be immediately obvious to anyone that she far and away provides a much larger marginal benefit to our household, so it should come as no surprise that she tracked down a few of these offers and looked a little closer.

Surprise, surprise, the ones that sound too good to be true are precisely that. They're either 15 year mortgages (we're not even remotely able to handle that) or they're adjustable rate.

For those of you who've never had to wrangle with the niceties of home financing, an ARM works a little like this: you start out for a couple of years with a relatively low fixed (say, 3%) interest rate on your loan, and when this sweetheart period is up, you start paying interest a bit over the floating market rate. Here, look at this:

That's what a yield curve looks like when it's at home. Source. How you'd calculate your floating rate is that you'd consult your crystal ball to see what this guy will look like each payment cycle down the life of your loan, find the time left on your mortgage on the abscissa, follow it up to the curve then head West young man to the rate on the ordinate. Since you're not the US Treasury, you pay some basis points above that (I'm not sufficiently familiar with the system to say exactly how much). If you're lucky enough, the yield curve will remain nice and low so that you don't get rear-ended by bigger and bigger interest components of your mortgage payment.

Which is what happened to folks in 2008.

Five years ago.

I'll not try to parse the substance of the response to the financial crisis. What I will do is ask why the Ban Barnstormers haven't so much as wiggled their wings at what seems to be an exploitative lending practice. Compared to, say, payday lending, the ARM seems a hell of a lot more deceptive.

Or does it? There's really no information asymmetry to speak of, right? Borrowers in effect become speculators, taking rather large uncovered positions over future market movements (think of the tremendous downside risk implicit here), but it's not like they're being tricked by lenders. In contrast, under a fixed rate mortgage, it is the lender (well, actually the taxpayer so long as we have Fannie and Freddy) who accepts the long-tail downside risk. But who should (normative claim alert!!!) accept the downside risk? It seems to me as if most folks hew to the opinion that it ought to be the big, faceless, indifferent corporations. People get all bent askew over Glass-Steagall (really!), but not so much as a lifted eyebrow when there's this huge industry-wide practice that heaps systemic risks on the shoulders of ordinary citizens.

Don't get me wrong, I think that as long as folks actually understand what it is they're agreeing to (and they have a pretty strong incentive to learn about what it is they're agreeing to for the next thirty years!), any ex post regret is their own ever-loving fault. But I also think that this moral and economic calculus applies in equal measure to other lending markets that people have at various times lit the pitchforks and grabbed the torches over.

So how about it? Are the regrets felt by ARM holders of the right type to make this type of loan non-euvoluntary? What does that imply for the regulatory scheme? Do we have different caveat emptor goalposts here? What to do about it?

Occupational Licensing

My patron here at EE is visiting Australia for the nonce. Surely while on walkabout in a fried-out combie, he's been neatly sheltered from the vicissitudes wrought by an unfettered supply of prostitution.

You see, the Land Down Under employs a Prostitution Licensing Authority. Well, Queensland does anyway. The GTM is in NSW the last I heard. Still, if he heads up the coast to Brisbane, his Vegemite will doubtless go unmolested.

When Friedman criticized occupational licensing in Chapter 9 of C&F, he explained clearly so that laypersons could understand that licensing was an anti-competitive measure. Licensing removes marginal producers from the marketplace, raising relative prices for reasons that have nothing to do with underlying scarcity.

Here's an IJ video making the standard case:


Tullock took it one step further, noting that the deadweight loss from schemes like this might actually exceed the value of the prize. How does that work?

Well, suppose that in the city of Wilsonville, Mayor Sam issues exactly 50 licenses for streetwalking every year. Bidding is competitive. The value of the license comes to $10,000, and the next best alternative for the relevant labor pool is worth $8,000. This means that each bidder should be willing to spend up to but not including $2,000 in lobbying efforts to obtain a license. If bidding is particularly fierce, it only takes 55 aspirants to squander the entire value of the license. Rent dissipation is one of the first things we teach in a Public Choice course and it's a lesson pretty easily absorbed by even the thickest students, so what gives? Is there something else behind the moral intuition of licensing that perpetuates the practice?

Yes. I think so. I think that the marginal suppliers that licensing schemes elbow out are not euvoluntary. That's why we get decisions like Thomas v Collins, 1945 and very little voter pushback against the metastasis of licensure. Kleiner and Krueger estimate (2009) that 38% of all occupations require government-issued licenses (working paper here). And attention is scarce. It's unreasonable to expect the median voter to be well-informed about the economics of licensing, and the mental shorthand of license=quality is a lot easier than carefully parsing present discounted value estimates under different discount rates coupled with systematic risk assessment that adjusts for Poisson elements.

Perhaps there is indeed some public interest tale to weave where customers are routinely fleeced by unscrupulous vendors. How would you analyze this problem if you had to start from scratch? What tradeoffs would you identify? What alternatives would you present? What's the probability that state-issued licenses would end up on your short list of solutions?

And even more interestingly, Andrea's Question again crops up: it's painfully obvious that the growth of licensing carries with it a lot of unfortunate consequences, but what should we do with that knowledge? Is it enough to point out the rank absurdity of manicurist licenses and hope that politicians notice? Probably not.

Also, how does this issue intersect with immigration and global trade?

Edit [a]: Larry White and Frank Stephenson discuss this very issue here.
Edit [b]: A "fried out combie" is a broken-down passenger van. It's Australian slang popularized by 80s pop sensation Men At Work.

Euvoluntary Exchange, Coercion, and the Burden of Proof

Talking on his new book today at GMU, Chris Coyne made a claim that made my hair stand on end. It's the supercharged precursor to Andrea's Question. In so many words, he asserted that the burden of proof is on those who would employ the coercive power of the state to effect change.

To an audience populated by liberty-friendly economists steeped in the traditions of Public Choice and the New Institutional Economics (eg your friendly authors here at EE), this comment raised about as many eyebrows as a village of Inuit discovering that polar bears poop on the ice.

But the way I see it (and Great Googly-Moogly, you should have been there to hear Bob Higgs' answer to my challenge on this point), the converse position is so deeply buried in the inframargins of both the political elite and the public that that particular point in spacetime is one of the few places anywhere or anywhen you can make that claim without eliciting at a bare minimum some sleeve-snickering.

And boy oh boy, this is central to what we discuss here. This is what we call a value disagreement. This is not a difference of interpretation that can be remedied by brute facts. It is a fundamental parting of the moral ways grounded in what entities have standing, legitimacy, or authority in society. This is some foundational stuff here. I fancy myself to imagine that the EE project is an attempt to map some common ground with folks who disagree with this basic principle, then to sketch out what happens when we deviate from this lil' circumscribed area, but sooner or later, we all have to confront upon whom falls this onus.

Right now, the overwhelming majority opinion holds that it's not on the political or intellectual elites who propose policy intervention.

So yeah, after that, Andrea's Question: what can we do about that?

Suggestions?

матрёшка in 東京

Having several irons in the inferno prevents me from watching a lot of documentary films lately. In its stead, I have partially outsourced this liable pleasure (it's not quite guilty in the same sense as listening to old ABBA 8-tracks) to Mrs. Spivonomist. Though it's probably not quite what Adam Smith had in mind with his parable of the pin factory, it does save me time and she's an excellent filter. The most recent flick she screened had to  do with the seedy underbelly of the fashion trade. NPR reviews the film here, CEI shares their opinion here. The Grey Lady chimes in here. The version I got from Ramute was like this: recruiters head out to the wilds of Siberia (more like Novosibirsk, really), entice girls as young as 13 to fly to Japan, then leave them to their own devices in a country where they don't even know how to dial a telephone to call home. Contracts not guaranteed, income not guaranteed, safety not guaranteed. I have only done this once before.

This is not euvoluntary. Full stop.

The BATNA disparity should be trivially obvious to anyone who has spent any time in Eastern Europe, particularly in Siberia. Japan is wealthy, Russia outside Moscow is backwater hinterlands. And regret? Even when you've got a decent middle class family background to fall back on, runway and magazine work is risky as all get-out. Fashion is a bit like sports. Boys have their hoop dreams, girls have cover girl aspirations. Both are suffused with availability bias: we see LeBron James and Kate Upton, but we never see the hordes of mediocre folks who waste (sometimes) years working towards a goal they've no hope of ever reaching.

To put it another way, winner-take-all contests, in private industry just as surely as in government, create rents. The contest over these rents can dissipate their value. Tullock was right (yet again). How strange. The only winning move is not to play. But it is hard to resist the lure, particularly if you're a) young and a bit stupid (apologies to my younger readers) b) possessed of above-median talent (and yes, East European women are more likely than the world average to be endowed with exceptional beauty) and c) low on decent alternatives.

So the Russia-to-Japan model pipeline isn't euvoluntary. I pose Andrea's Question to you: what to do about it? Boycott the fashion industry? Encourage some sort of international treaty that bans the practice? What exactly is the problem? Is it the rents? The BATNA disparity? The regret borne by failed aspirants? All or some of the above? Is there even any plausible remedy at all? Can this problem be disentangled from larger problems of stunted economic development in sovereignties with weak institutions?

Lots of questions here. And it's probably a topic folks feel strongly about. Think of the link between failed fashion modeling and other, more sordid forms of human trafficking.

Here's a trailer for the film: