Discover Your Macadamia Nut

Writing at the Foundation for Economics Education, Duke University Professor of Political Science Michael C. Munger excoriates Ricardo. Comparative advantage, he argues, is a dead letter in an age of highly mobile capital, fewer obstructions in labor markets, and an astonishing acceleration in the market discovery process.

ATSRTWT

Analysts seeking to understand idiosyncratic patterns of production and exchange need look no further than the two fundamental questions of economics:

1) Opportunity cost: what is the value to all salient parties of alternative uses of the resources in question?

2) Division of labor: to what extent does the structure of the market permit buyers and sellers to strike a mutually beneficial (dare I say euvoluntary?) exchange?

Answer these two questions, my friends, and you can explain why it was that New England was home to most American manufacturing in the 19th century (lower opportunity cost for building multi-story mills plus Western European immigration) as well as the advent of the sharing economy (insanely cheap communication allows for otherwise idle resources to be employed rapidly). The "comparative advantage" of dumpy Connecticut mill towns was an illusion, little more than the vagaries of historical accident and geographical fancy. Imagine an alternate history where Jamestown had been a few miles north, out of the swamp and the disease. Semi-skilled laborers might have landed in Roanoke rather than Boston and the American industrial revolution might have taken place on the Potomac. And don't tell me for an instant that you think there's something innately advantageous about an ambitious family renting out a spare bedroom with Airbnb.

So is there any role left for comparative advantage? Shall we toss Ricardo's poor bones onto the pyre and be done with him? I'm not entirely sure.

Admittedly, it was a significant intellectual achievement to show that the weaker trading partner benefits from trade, even if the stronger partner is better at everything. But those fixed differences have largely disappeared in many markets. The question of what should be produced, and where, is now answered by dynamic processes of market signals and price movements, driven by human ingenuity and creativity. The cost savings resulting from successfully dividing labor and automating production processes dwarf the considerations that made comparative advantage a useful concept in economics.

Emphasis added.

Judged against the immense volume of commerce on this little blue-green planet of ours, the macadamia nut is pretty humble. Yet this sensitive little guy is picky about climate. Perhaps not as sensitive as the vanilla orchid, but you're not likely to find a macadamia farm in Wisconsin. Dairy farmers give up too much milk production to justify a futile attempt at hothouse macadamia trees, at least at typical market prices. Australia is better suited to the task (70% of world macadamia nut production is Australian). You might say that fixed geographical differences persist in some agricultural markets. Nuts. Spices. Wine. Wild-yeast beer.

And, perhaps also in natural talents. "Ringo isn't even the best drummer in The Beatles" may be a false Lennon quote, but it captures the spirit of immutable differences in endowments. Try as I might, I'll never have the lungs and paddle-like extremities of Phelps, nor will I be able to dunk from the free-throw line (indeed, I'll never be able to dunk at all, except on my daughter's toy hoop). I will never write anything as good as either Charge of the Light Brigade or Ozymandias. I can't sing. But where Munger's point shines, it is here. Ability is one part natural talent and 99 parts practice. I had no particular affinity, no natural talent for operating a nuclear reactor, nor for churning out button blanks. Yet I performed these tasks admirably enough with sufficient practice. Opportunity cost and the division of labor determine the extent to which I am able to discover and hone what talents nature has bestowed. Comparative advantage is a starting point, a suggestion. At the extremes, in winner-take-all tournament competition, it might still matter, but for most of us, we pick something that suits our tastes and then practice until we get good at it.

And then we have to start all over again when the market conditions change. Life, friends, ain't easy in the hive.

Behind The Times

Imagine if you will a small community. In this community live three dudes named Ned, Ted, and Jed. Ned, Ted, and Jed each have a measure of competence in medicine. Ned's the best of the bunch. He graduated at the top of his class at Johns Hopkins and landed himself a prestigious chair at the Mayo Clinic. Ted wasn't quite so good. He always had trouble with written exams, so he washed out before earning his MD. Still, he's got steady hands and keen eye for detail. Jed is a slimeball. Jed got a "medical degree" in the mail from the Universidad de Tierra Bomba, an institution that will send you your very own piece of paper suitable for framing embossed with the word "diploma" for the discount price of $1500 US.

Consider two states of the world.

1. Under a highly regulated regime, golden boy Ned runs neurosurgery at Mayo, Ted finds work as a chartered accountant, and Jed runs a meat chop shop in a poorly lit dungeon on the wrong side of the tracks.
2. Under an industry-regulated regime, Ned's still at the Mayo clinic, Jed's can't do any better than making high octane nightmare fuel, but mediocre Ted perhaps can find a way to make a living helping patients in need.

Recall your Bastiat. Ted is the unseen cost of heavy regulation in medical provision. The stated purpose of a medical license is so that we don't have a bunch of Jeds running around sloppily amputating limbs all willy-nilly without the sanction of peers. But a dedicated Jed will flaunt license requirements the same way he'll flaunt basic sanitation. Licensing crowds out Ted, not Jed. And the slack is picked up by Ned. Hence the repeated cries of "there's a desperate shortage of nurses."

Why do I bring this up? Well, click this report from Maryland at your own risk. A botched elective butt surgery ended up fatal for 34 year old Kelly Mayhew. "Mayhew and her mother drove from Maryland to the surgeon’s office, which is a basement apartment in a two-family home in Queens." Classic Jed, right guys?

It'd be facile of me to claim that a more competitive pricing arrangement under eased licensing requirements would have forced this Queens basement surgeon out of business, but perhaps Ms. Mayhew would have reconsidered her choice of health care provider with lower out-of-pocket expenses. On the margin, perhaps it's more ethical to permit intermediate medical provision. And that's what it's all about, right? Ethics in medicine? #ButtGate

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.

Cheerleading is not Euvoluntary?

Deadspin longform piece on NFL cheerleading. Prepare for BATNA disparity.

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Evidently, NFL cheerleaders must conform to rather strict guidelines or lose the gig. And the effective hourly rates are straddling the minimum wage line (a point I find tendentious having been in the military where the effective hourly wage for round-the-clock duty days gets in kissing distance of single-digit percentages of the MW). For cheerleading, pro sports is vaguely akin to a monopsony buyer of labor, but only vaguely since you'd have a hard case that cheerleading skills are ever meant to be durable (few accredited universities have cheerleading majors). And the competition is certainly there:

For anyone fed up with constant pressure, scant pay for tons of work, and the requirement that you build your entire schedule around a seasonal part-time job, there's the omnipresent threat of being kicked off the team. "If you don't fall in line and suck it up," says the cheerleader, "there's someone else dumb enough that would replace you."

"Dumb enough". A curious accusation, this. This endeavor appears to be highly competitive, so do all these aspiring cheerleaders form a horde of ignorant bimbos? Maybe I've gotten more compassionate as I age, but I would strongly hesitate to cast aspersions like this. Before calling someone "dumb", I think I'd prefer to gather stronger evidence. Particularly since the women that tend to land gigs like these tend to use the money for university tuition. Though, to be fair, perhaps college attendance is not necessarily the indicator of intellectual quality it might be under other circumstances.

I predict that when it comes to generating a lot of public sympathy, this is a lead balloon. NFL cheerleaders are attractive young women with good career prospects. And as the last graf notes:

Mostly, they do it for Sundays. "The gameday experience—that's what keeps people coming back," says the former cheerleader, who even now gets wistful thinking about those moments on the sideline before kickoff, watching players hype themselves up, looking down the tunnel and seeing Ray Lewis doing his trademark dance. There's nothing quite like it.

In-kind compensation. The sort of in-kind compensation that is unavailable working for any other employer. Frankly, I'm sort of surprised the NFL doesn't charge cheerleaders to be on the field.

Bang, Bang, Bang Goes the Trolley

It had not occurred to me before, though it should have.

The trolley problem, which obsesses philosophers like a new shiny rock, even though it is a contrived and intentionally artificial example, does have SOME real world analogs.  The Google Driver will have to have an answer, either implicitly or explicitly ("The road is icy, you are skidding, and then change direction but can't stop.  There is a school tour ahead, with 12 children in the crosswalk.  On the sidewalk there is one old man.  Where do you steer?")

Here are some interesting thoughts.

Anyway, here is what had not occurred to me before.  Economists make everything euvoluntary by assuming perfect competition, with many equally good alternatives for all choosers.  Philosohers make nothing euvoluntary, by eliminating all of the alternatives and forcing people to choose under duress.  It could be Kant's "murderer at the door," forcing choice by threat of violence.  Or it could be the "trolley problem," forcing choice by circumstance. 

But most choices are not made in either conditions of perfect competition or in conditions of extreme duress.  So why do economists and philosophers say they want to study choice?  I'm afraid the Austrian economists have this right.

Euvoluntary Monopoly?

John McManus wrote a memorable (if too-infrequently cited) article in the 1975 Canadian Journal of Economics titled "The Costs of Alternative Economic Organizations." In it, he describes a team of laborers hauling boats along a stretch of the Yangtze overseen by a whip-lashing taskmaster. The wrinkle? The coolies themselves had hired the supervisor. The fellow with the whip was the employee of the team. Mind-blowing stuff, eh?

It's a curious puzzle, perhaps governed partly by timing, partly by the behavior of competitors and customers, partly by luck that determines the optimal organizational form of firms. Questions like, "should I buy out the competition", "should I divest this part of my supply chain", "should I be listening to more Curtis Mayfield" are all necessarily contextual. It depends on the relative scarcity of all the production factors and what's right for GM in 1968 might be very wrong for Ford in 2014. It's a tough business to scry from afar, harder still to second-guess.

And far harder yet when faced with the intransigent laws of public choice. Consider the curious position of the FTC. Nominally tasked (in part) with:

Under this Act, the Commission is empowered, among other things, to (a) prevent unfair methods of competition, and unfair or deceptive acts or practices in or affecting commerce; (b) seek monetary redress and other relief for conduct injurious to consumers; (c) prescribe trade regulation rules defining with specificity acts or practices that are unfair or deceptive, and establishing requirements designed to prevent such acts or practices; (d) conduct investigations relating to the organization, business, practices, and management of entities engaged in commerce; and (e) make reports and legislative recommendations to Congress.

Note that the Commission reports to Congress. Which means by the transitive property of politics, that the Commission reports to a melange of special interests, irrational voters, elite technocrats, and the press. It's pretty easy to imagine a case where the meet and proper organization of a firm within an industry is entirely euvoluntary draws the attention of FTC pettifoggers buoyed by legislators out to tend the interests of their constituents.

Anti-trust is a cudgel. Sometimes you want to give a cudgel to officers of the peace because you want delinquents trammeled. But when it comes to firm organization, as opposed to deceptive practices, the prima facie case for anti-trust legislation may be considerably weaker than folks might imagine. It could very well be that one or two large, dominant firms is precisely the best way to deliver the lowest-cost bundle of goods to the consumer. And it could be that anti-trust browbeatings contribute more to the re-election prospects of a Senator or two rather than the greater public interest.

Edi(o)t: in my haste, I misattributed the source of the riverboat worker claim. The original source was Steven Cheung. I apologize for the sloppy scholarship.

Steven N.S. Cheung, The Contractual Nature of the Firm,@ Journal of Law and Economics 26
(Apr. 1983),1-21 at 8

Status vs. Status Goods

Relative status is a fixed-pie, zero-sum game. If there are ten people in my toy society, there will be no more than ten rank-order positions to fill. You can't create more relative status than exist agents.

Status goods have no such restriction. Like any other kind of goods, production and trade are positive-sum. Moreover, relative status using positional goods is multi-dimensional. I can be the flashiest trout fisherman on the lake in my decked-out gig bob with the flames and the lightning bolts airbrushed onto the gunwales, but the second I pilot that demonbane sucker up to the yacht club, I'm about as posh as grey dishwater. Diverse status goods allow folks to participate in more and varied status contests.

Or to refrain from participating whatsoever.

That's one of the great things about a thick economy. We're free to select the subculture in which we are most comfortable participating. Tyler Cowen notes in Create Your Own Economy that it's easier than ever to fashion the tapestry of your consumption. Some of that will be purely utilitarian, some will be for signaling, and some will be experimentation. Some will be an admixture of all three.

The alternative, the BATNA if you will, is rank ordering based on something else. You can't simply wish away the desire to obtain relative status. If not on personal possessions, then on what shall rank-ordering be based? My research on PNG cultures suggests violence as a likely candidate.

No thanks. I think it's more euvoluntary to have many leather-bound books and my apartment smells of rich mahogany.

Homeowners' Associations: Euvoluntary?

I live in Northern Virginia. More specifically, I own a home in Northern Virginia, which means that like it or not, I am also a member of a homeowners' association. I have a few guesses about why HOAs are so popular in NOVA, but they're all just-so stories. My favorite tale right now is that the HOA system is a way to coordinate political transients with the permanent bureaucratic class. Every few years, there's a regime change with the elected officials and there's a key swap with the outgoing elites. This gives the carpetbagging element an incentive to personalize their temporary dwellings with their potentially tacky imported local flavor, wrecking the aesthetic of the area. Career bureaucrats, Beltway Bandits and other locals guard against this by forming stable coalitions. The HOA offers some basic services in exchange for a fee and an enforceable pledge of conformity. 

Is this a euvoluntary exchange?

I might be a little close to this question to answer it objectively. I think I should first point out that I'm pretty happy with my HOA. Apart from some rocky billing issues early on, I haven't had any run-ins with them. My neighborhood is reasonably attractive, property values are fairly stable, and the pool is clean. No complaints. However, it does occur to me that even though I'm happy with the ex post outcome, my exchange with my HOA isn't euvoluntary. Why?

Because unattractive alternatives, that's why. My choices are the following:

1. Buy a house with an HOA at a normal market price (which may or may not be eye-popping for those not familiar with the real estate market here) and get a decent place to live.
2. Continue to rent and keep flushing a grand a month down the toilet.
3. Move further west, thereby enduring morning I-66 traffic between Manassas and Fairfax, which may be marginally better than driving in Italy, but not by much.
4. Find alternative living arrangement, like my car or a refrigerator box or a university basement.
5. Worst of all, move to Maryland.

I could pay the premium to do any of these, but I could also turn down a $10 bag of ice after a hurricane or refuse to pay $1000 for a bottle of water off a taco truck in the desert. Despite the ugly BATNA, I don't know for sure if people feel ripped off when they move here. I've lived a lot of places in the US, and I think I'm comfortable saying that as far as regions go, Northern Virginia holds its own against most contenders. In other words, even if the terms of trade are circumstantially coercive, the quality of the product being exchanged admirably makes up for the lack of decent outside options. 

I sort of wonder if there's a more general point in there. If there's a good balance between value generated on both sides of a trade, I don't think people cry exploitation even if there is some violation of another condition of EE. Naturally, this is a matter of perception, and people tend to be pretty bad about donning the shoes of sellers, if even they try. Could it be that HOAs aren't so bad because new arrivals to the DC area have a pretty clear counterfactual picture in their mind already, but if you take those same folks to a factory in Bangladesh, they don't have the appropriate snapshot ready?

What do you think? Do you think people get worked up more over the preconditions for euvoluntary exchange or over the immediate terms of trade? Does moral ire change vary based on near vs far bias? Where else in the world might HOA-type arrangements prove sustainable?

Competition and Virtue

Michael Walzer in a very interesting short essay.

Does competition corrupt us? Do markets thwart virtue?