Klingon Bastards

On Twitter:
1)

.@GarettJones Banking crises are not new, so how can we stop history repeating itself? #PalgraveChat

— Palgrave Economics (@PalgraveEcon) November 19, 2015

2)

>@PalgraveEcon Worst case scenario is we have to live with crises: Humans are faddish, bubble-prone. (1/2) #PalgraveChat

— Garett Jones (@GarettJones) November 19, 2015

3)

>@PalgraveEcon Best case scenario is that we can make the financial system (not just banks!) more robust to shocks. (2/2) #PalgraveChat

— Garett Jones (@GarettJones) November 19, 2015

4)

Good trick, if you can pull it off. https://t.co/J20VO9t6qg

— Cold November Duck (@Spivonomist) November 19, 2015

5)

>@Spivonomist Indeed, good policy is hard to pull off, between policy commitment issues, lags, and knowledge problems. #PalgraveChat

— Garett Jones (@GarettJones) November 19, 2015

6)

Good thing we enjoy a high-IQ society. If anyone can get the job done, it's bright people working in functioning institutions. @GarettJones

— Cold November Duck (@Spivonomist) November 19, 2015

7)

@Spivonomist All options are bad, it's a matter of degree: It's the Kobayashi Maru all the way down! #PalgraveChat pic.twitter.com/GS7Pwwt9Vu

— Garett Jones (@GarettJones) November 19, 2015

8)

@GarettJones I still wonder how meta that simulation is meant to be in-universe.

— Cold November Duck (@Spivonomist) November 19, 2015

That last tweet of mine there (I'm Spivonomist) demands a little explanation.

In case you aren't a Trek fan, the Kobayashi Maru is a computer simulation given to last-year Starfleet officer candidates. With the original programming, it is an unwinnable scenario. Your ship receives a distress call from an allied vessel. If you choose to respond, you are quickly ambushed and destroyed. If you ignore the call, your ally is annihilated. There is no classic Pareto-enhancing victory strategy.

Except to cheat.

That's what Kirk did: cheated. Both in the original Roddenberry film and in the Abrams reboot, James Tiberius Kirk surreptitiously rewrote the code for the simulation and emerged victorious over the Klingon (presumably Romulan after the Khitomer Accords were signed) foes. In the Abrams reboot, I think the screenplay suggested that the cheating itself was part of the test. Or if not, by the time Picard's crew was tooling around, it surely would be.

If this test is as meta as I hope, it checks for lateral thinking and a willingness to bend the rules. In 1982, when Wrath of Khan introduced the test, Kirk's cheating came across as sincere cheating. In 2009, the cheating seemed part of the game. If the metaphor was meant to extend to the nexus of politics and financial markets, Jones is right on the money. Even Hollywood sees that the Commanding Heights are big-time cheaters, and so long as the consequences are still beneficial, the audience should be okay with it.

I think Roddenberry [ed. Adam Gurri reminds me that it was Nick Meier, not Gene Roddenberry who wrote and directed Wrath of Khan. Thank you, Adam. ed. add.: via GJ Jack Sowards coined the term Kobaysahi Maru after his neighbors] would have been appalled. There's a certain type for whom the rules are sacrosanct. Cheat not lest ye be cheated. Tinkering with the architecture of big-time institutions is risky on scales I think even pretty well educated people probably don't comprehend very well. And our political and commercial elites have been tinkering for many decades, with no plan to stop. If Jones is right, and I see no good reason to dispute his point, the real trick is to make sure any further tinkering is done with the grave lessons of good public choice economics in mind.

And like I tweeted, this is a very good trick if you can pull it off.

TFP vs Mandatory Minimum Sentences

"TFP" is a term of art from [macro]economics that stands for "total factor productivity." We have these equations that represent production and we want to see what happens when various input factors change. Very basically, it's how we tend to model whole economies using a modicum of math. Some inputs are very easy to measure. Total labor hours worked come straight out of data forwarded to the IRS for tax purposes. There are also periodic surveys conducted by the St. Louis Federal Reserve and some statistical analysis by the Bureau of Labor Statistics, part of the Department of Labor. We also more or less know how much physical capital exists, again because firms have to report depreciation to the IRS. Interpolation fills in the rest, and there's a 70-30 labor-to-capital cost ratio that is pretty stable over time.

So we can explain quite a bit of GDP just using those two factors. Modern macro decomposes that stuff further, picking out education, the role of mobility in fitting jobs to applicants, special categories for certain types of tech, yadda yadda yadda. Everyone's got their special little model, and first- and second-year econ grad students spend many a frustrating night (I assure you from personal experience) fiddling with models of their own. But always always always there's a big pile of productivity left over that can't be explained empirically even when you account for all these little things. By "big pile" I mean usually more than half. And if you extend the time series long enough, almost everything can't be explained by mere capital and labor.

If you've taken undergrad macro, you might recall hearing that TFP is sort of akin to "technology," things that make folks more productive without requiring extra tractors or extrusion molds or whatever. We can make tool dies more efficient by speeding them up, improving tolerances, using fewer materials to do the same job. Or we can use fancy programs written in C-sharp to automate decision-making. Or we can have videoconferencing. Or whatever. That's probably a part of the story, but I find McCloskey's claim appealing: the change in rhetoric, if not a wholesale change in the very structure of English itself to accommodate commerce was what really permitted the flourishing of euvoluntary exchange starting around the same time as the Glorious Revolution. What TFP technically means is just a residual, i.e. the part of the right-hand variable that can't be accounted for by the left-hand variables. If we really knew what it was, we'd be able to model it better.

But it totally exists. And the stylized fact of things is that TFP has gone up and continues to go up in the vast majority, if not every modern economy in the world. This means that on average, every worker in a modern economy produces more in 2015 than in 1955. Every hour, every year of today's labor makes more stuff now, contributes more to the general welfare than sixty years ago.

So when you take a worker out of the 2015 economy to do 25 years for simple possession on a three-strikes today, the social cost is considerably greater than it was in 1974, when Texas was the first state to take this particular stab at getting "tough" on "crime."

If mandatory minimums remain constant as TFP increases, could that be a stealthy usurpation of 8A jurisprudence? Why or why not?

Shouting Fire in a Crowded Barracks

No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law.

No amendment is absolute. The Supreme Court has held that reasonable constraints on the freedom of speech are Constitutional so long as they protect a public interest. Copyright law, for example, impinges on my right to reproduce or distribute certain materials for material gain. Nor am I at perfect liberty to obtain fissile materials, land mines, or earth-scouring lasers (I may have to consult with my attorney for that last one). I have no Fourth Amendment protections if law enforcement agencies seek to confiscate my property on "suspicion" of illegal activity. If I am a foreign national (and perhaps even if I'm an American national) sought in connection to non-state aggression against American interests, I have no Fifth or Sixth protections whatsoever. Indeed, I can even have hummus pumped into my rectum to the point of prolapse, or chained to a dungeon wall until I die of exposure.

No amendment is absolute. The 7th is scarcely upheld when the grand jury is little more than a sock puppet for prosecutors. And the 8th? Ha ha ha. No. Botched execution is the most extreme and obvious example, but I urge you to pick up a copy of David Skarbek's latest to get an idea of how the emergent organizations in prisons act to socialize inmates to the society, including otherwise peaceful offenders. Turning a kid with three simple possession strikes into a lifer is a pretty good example of "cruel" even if it is sadly not "unusual." The 9th? Well, let's just regulate everything, down to how many gallons of water you can use to dispose of your feces and what sorts of light bulbs you are and are not permitted to purchase. That should take care of that one. Ditto 10th.

That pesky third though. The joke amendment. What can the ambitions of the sovereign do to abrogate that sucker? Well,

Step 1: find a clever little workaround for the Posse Comitatus Act, like, oh, say, donating surplus war materiel to police departments.

Step 2: handle the inevitable abuses that arise from letting police play dress-up as Soldiers by inciting discontent either by proxy or through direct speech.

Step 3: await sedition.

Step 4: there is no step 4.

Step 5: declare national state of emergency.

Step 6: it ain't a 3rd violation if the police/FEMA/ATF/& al do it, right? RIGHT?

Recall Hume:

May not the sovereign lay claim to [superfluous (unemployed) labor], and employ them in fleets and armies, to encrease the dominions of the state abroad, and spread its fame over distant nations? It is certain that the fewer desires and wants are found in the proprietors and labourers of land, the fewer hands do they employ; and consequently the superfluities of the land, instead of maintaining tradesmen and manufacturers, may support fleets and armies to a much greater extent, than were a great many arts are required to minister to the luxury of particular persons. Here therefore seems to be a kind of opposition between the greatness of the state and the happiness of the subject. A state is never greater than when all its superfluous hands are employed in the service of the public. The ease and convenience of private persons require, that these hands should be employed in their service. The one can never be satisfied, but at the expense of the other. As the ambition of the sovereign must entrench on the luxury of individuals; so the luxury of individuals must diminish the force, and check the ambition of the sovereign [emphasis SLW].

I'd like to think there are good, non-confrontational negotiations that might return the job of policing back to the euvoluntary provision of decent law and order. I worry that as a practical matter for very large jurisdictions, that ship might already have sailed. If you live in an area with cowboy keystone cops, I sincerely wish you the best of fortunes. Let's just hope I'm a false Cassandra and my paranoia is the product of a worried mind and nothing more.

Then again, hope in one hand, sue for libel in the other. See which one fills up first.

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.

Survivorship and the Precautionary Principle

Hindsight and Confirmation biases aid each other dearly.

Surely by now you've chuckled into your sleeve at some of the preposterous historical claims about how the Internet would be a flash in the pan, or about how we'd all be living in geodesic domes, eating reconstituted foods, traveling by jet-car, and sending our kids to summer camp on the moon. Prediction is hard, especially about the future.

Note well however, what the Precautionary Principle attempts to do. It slings on the back of mulish regulators the saddlebags of not just ordinary prediction, but anticipation of Calliopic non-ergodic entangled threats, dolloping kaibosh after kaibosh atop the delicate sundae of human invention.

Shannon Chamberlain: Railroads: stopping deaths from turning into famines since 1775...

Lynne Kiesling: [nit picky economic historian] since 1815 [/nit picky economic historian]. Shannon, I may plagiarize you on that in my classes! 1815 is the approximate date when Stephenson's Rocket became commercially available, after Watt's low-pressure steam engine patents expired, which had thwarted the development of high-pressure steam engines since 1776.

Samuel L Wilson: Shouldn't it be 1827, when the B&O first started running?

Why do I adore this exchange? Shannon's claim is that the initial development of commercially viable steam powered travel was the significant evolution of rail. Lynne made the point that the bottleneck in the development of the technology was patent squatting. My approach is to refrain from counting chickens until they're hatched. Each of these claims has some merit, albeit from different approaches. I'd give credit on an exam for any of these, contingent on an appropriate defense of the claim.

"Inevitablity" is immutably ex post. It wasn't "inevitable" in 1602 that the following year Japan would ditch foreign trade, fold its arms, and lionize the warrior class till Commodore Perry crested the horizon, the ruddy light of the rising sun backlighting his sails. Similarly, James Watt's external condenser (this word still gives me the heebie-jeebies two decades after having worked in an engine room for my Naval stint) is a necessary development for intercity rail transportation, but it's not sufficient. Like Professor Kiesling notes, the regulatory environment influences which technologies flourish and which can end up throttled on the workshop floor.

And as I point out, there may be good reason ex ante to indulge patience. Can we count 2009 as quando ex for cryptocurrency? Or will 2014 and the rise of dogecoin matter? Regular circulation sometime in the future? Could the PP have killed rail in 1815? What can the PP kill today?

How much less euvoluntary will the world be if innovation is stifled from overactive applications of the precautionary principle?

GDP vs EE IV: Metric or Target?

Ignore for a moment some of the shortcomings of GDP accounting. Consider instead its role. The positivist, ecological economist sees the "circular flow" model with clinical detachment: a cash-flooded Venturi nozzle, measuring the force and vigor of commerce. She marks and notes relationships between suites of external factors that influence and may in turn be influenced by the adsanguinity of the economy. But even with close scrutiny, she hews ever close to the Lucas Critique.

The normative, engineering economist sees instead GDP as a challenge. Poring diligently over periodic 10-K reports, he sketches up "potential GDP" artifacts using sophisticated econometric techniques based on historic data and cautious assumptions about future behavior. In the specifications of this economist, GDP is a policy goal, and its shibboleths are legion: aggregate demand, targeting, stimulus, RBCT, so on, so forth, & al. In this land, the conductor leads the orchestra, the coach heads the team, the coxswain skippers the gig.

These two approaches are not wholly uncomplementary, but they do reflect deeply different default views about the relationship between the citizen and the state. The first approach yields to individuals the residuals of their actions. If you want to work, that's great: you get paid for producing something others want. If you want to stay home and putter in the garden, that's also fine since it's you that bears the costs. In contrast, the marginal couch potato in the engineered world imposes external costs: each hour of leisure, each minute of factory downtime, each ounce of excess inventory takes away from our collective hale and well-met productive merit.

When GDP is an end, anything you elect to do that doesn't contribute to measured national prosperity imposes a negative externality.

The lemma to this is, of course, almost nothing is euvoluntary. Get hurt in a skydiving accident? Your foregone productivity is a social cost. Crack your skull open on the pavement because you're too stupid to wear a helmet? Your recuperation means time away from work. Shame on you, worker. Like to stay at home and get high? You're a drag (heh) on the economy, you loathsome parasite. Internal costs are cleverly inverted here, and even when no other possible collective action problem can be identified, this "lost productivity" is an easy donkey to flog. An orchard of meddlesome political art is too soon then to blossom.

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.

-Adam Smith via Dugald Stewart, Lectures in Edinburgh as noted in the introduction to WoN.

Euvoluntary Excess Capacity

One of the reasons for fiscal policy (government spending) in contrast to monetary policy (putting more currency* in circulation) is of excess capacity: for whatever reasons, firms who could be making stuff are instead squatting over a pile of thumbs. According to the folk version of the arguments in favor of expanded fiscal policy, government spending mobilizes these slack resources, generating economic activity and reducing unemployment. And as we've pointed out before here at EE, unemployment is not euvoluntary.

Let's grant for a moment that there really is such a thing as "potential GDP" and that the malaise in the labor markets is entirely exogenous. Ask this question: can idle resources be euvoluntary? I think there's some pedestrian morality that suggests that firms have a short laundry list of obligations: they're obliged to hire [Americans if they can], they're obliged to produce, they're obliged to subscribe to an ever-changing moral contract penned by chimeric fairness norms. They may even, having undertaken the delicately frustrating duty to squirm from a womb of diligent fancy bound in a corset strung by the Agents of Congress, be obliged to exist.

But does that imply that slack production is not euvoluntary? Can non-exchange meet Munger's conditions in the sidebar? More to the point, are the marginal exchanges abetted by government spending more or less euvoluntary than failing to trade? More yet to the point, how would you adjudge the comparison? You'd need to ask a whole bunch of questions I don't see many people asking. Like, why is it exactly firms aren't producing (and some baldfaced assertion won't cut it here. It's dishonest to just blurt out what you think is a likely answer. That's what we delicate folk call "bullshitting")? What is your counterfactual (and the status quo is an inappropriate counterfactual when other folks are making perfectly plausible contributions to the conversation)? What is your metric (this one drives me up the wall. Throwing out a BEA or NBER or FRED graph is insufficient. To be convincing, you have to, you know, convince your readers why they should care about your metric as opposed to others. Making things up is also silly, sloppy, and unconvincing)?

I guess these are good reasons why macro is so hard. I might even be willing to claim that good macro is nearly impossible. What counts as "data" is open to interpretation, counterfactuals are all ad hoc, and many assumptions are tacit. How dismal.

As for the question I'm asking? Can excess capacity be euvoluntary? I'm not even sure I can ask that question in a way that will be consistent to everyone. And this question precedes questions of whether or not the government should employ policies, let alone which ones should they choose.

The relationships between philosophy, policy, and economics are sketchy, even on a good day.



*yes, I am well aware this is a bit of a mischaracterization. The nuances of the money supply are off-topic here. I'm willing to bring it up again in the off chance that anyone actually cares.

Shall We Crucify Mankind on a Cross of Austerity?

My post on the 17th Amendment got me thinking about William Jennings Bryan. What a character that guy was. He enjoys lingering fame for his efforts to force a newly-strengthened Washington DC to acknowledge and reflect the Will of the People. But most interestingly, he's also possessed of his fair share of infamy thanks to his participation in The State of Tennessee v. John Thomas Scopes and the embarrassing drubbing he got on the stand at the hands of Clarence Darrow: "We have the purpose of preventing bigots and ignoramuses from controlling the education of the United States." Ouch.

It's not my purpose here to dredge up the ugliness of the early Progressives. Instead, consider Bryan's approach to free exchange between consenting adults: those exchanges against which he bore enmity were to be the subject of control by the state. He did not champion for the virtue of temperance, he championed for the vice of wrath, channeled through the iron truncheon of the 19th Amendment.

In retrospect, we look back at the moral shortcomings of Bryan and men like him and chortle at their bucolic, benighted values, smirking and patting ourselves on the back at our obviously superior morality.

Yet still we turn to the unremitting power of the state to ossify our evaluations of euvoluntarity, expecting the eschaton ere long. Scott Sumner tries to sell monetary policy as a free lunch. Paul Krugman says that anyone who disagrees with him is a liar, a fool, or worse.

W.J. Bryan's arrogance did a lot of damage. Apart from being a prohibitionist, he was a war hawk. Sumner and Krugman probably won't be responsible for the rise of a large criminal underclass or the deaths of hundreds of thousands of young men in the cold Continental mud, but is it at least possible that history will judge each of us poorly? Is it possible that our grave certitude is inexact? Is it possible that we're wrong?

Therein lies the comparison: what are the relative consequences between a) being right and failing to act and b) being wrong and acting. This is a hardheaded question that deserves clear, hardheaded thinking. The euvoluntarity of future generations depends on it.

What are your null hypotheses?

Interlude: Change in my Pocket (goin' jing-a-ling-a-ling)

Before I get back to my series on the meta-euvoluntarity of the Constitutional Amendments, I want to devote  a post to something that's been buzzing around the econ and law blogs lately. You might have read about a proposal that runs something like this: the US Treasury, under its authority to utter currency strikes a coin redeemable for $1 Trillion. Tim Geithner at his George Raft-iness saunters over to The Bernank and flips the coin over to him in exchange for a thousand billion dollars' worth of interest-bearing Treasury instruments (though if it's legal tender, there's nothing really stopping them from picking up all the garbage CDOs that ended up on the Fed's balance sheet, but let's not complicate this any more than it already is) You can read two defenses of the proposals here (h/t Tyler Cowen). You can read heaps of scorn elsewhere. (more below the break)

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes

The CFTC has cheerfully complied with industry elites and blocked US citizens from participating in prediction exchanges (good commentary here). Part of the published justification for shutting down prediction markets is that they don't serve the public interest. This is a peculiar claim, but one very interesting for euvoluntaryists.

The benefits of prediction markets are unambiguous: their existence forces people to put up or shut up. With thick, ubiquitous prediction markets, cheap talk would dry up in a hurry. John Law-type flim-flam artists would find themselves out on their ear. But lest we forget, Law had the ear of Louis XV. Ditto for the Motion Picture lobby: Hollywood and DC enjoy a notoriously cozy relationship.

So the ban on Intrade is classic Olsonian public choice: concentrated benefits (to sleazy studio stuffed shirts) and diffuse costs (to folks who might have otherwise benefited from higher-quality forecasts i.e. everybody else). That's not how the CFTC sold it though. They made a euvoluntary claim: something about the "public interest". Even more interesting, the actual claim against Intrade was over commodities, as if off-exchange futures trades threaten to destabilize the market (I think?). I'm not entirely sure what logic underpins this argument.

The bit that interests me is the breakpoint at which elite collusion snaps. I wrote a post a short while ago about collusion in the three estates, and it occurs to me that the same mechanism that throttled the Church/State alliance might also strangle the bedfellowing of film executives and Congress. Intrade and sites like it present obvious efficiency gains to consumers, but squashing these services won't generate any theses nailed to the doors of your local AMC. The closest we see is the backlash against attempts to regulate the Internet and those are largely quite tepid. What would it take to defang Hollywood and dissolve their pairing with the Legislature? Could well-made video games possibly be our version of the Lutheran Church?

The rhetoric is also charmingly misleading. This case has a whole lot of cheap talk papering over a decision to shut down an institution that serves to reduce cheap talk. That's, what... maybe not ironic, but certainly obnoxious. Maybe even predictable. Hilarious, if you're of a particular bent. Which I am.

Ha ha ha.

Markets in Exploitation: Insurance

Economists like to distinguish between "thick" and "thin" markets. The quick distinction is that thick markets have lots of buyers and sellers and high volumes, meaning that conditions in the market are likely to be closer to the textbook description of pure competition. In a purely competitive market, profits are dissipated, market clearing prices are stable, and production occurs at marginal cost. In a thin market, there are fewer buyers and/or sellers, lighter volume and the potential for monopoly rents. A typical example of a thick market would be spot markets in grain commodities: something like 20 billion bushels of corn are produced annually worldwide, much of which is traded in the CBOT. A thin market would be custom yachts or original fine art. Livestock auctions are thick; Sotheby's auctions are thin.

Unfortunately, something is missing from this standard description. Economists like to think of thick markets as efficient and it's a little embarrassing when efficient markets go awry. One way to save face is to invoke probability. If future events are not well-ordered (think Taleb's Black Swan or North's non-ergodicity arguments) or predictable according to a known probability distribution, then systematic bias has fertile soil. Seed that with some common cognitive errors and plow it with distorted nominal prices thanks to wobbly monetary policy and hey-presto, reap widespread market instability with or without piecemeal policy tinkering by the legislature.

So what's the connection between economic crisis and insurance? Plenty. Insurance is a way for people to hedge against disaster. I buy car insurance because, as an individual, I bear some risk for wrecking every time I get behind the wheel. I buy life insurance because I could get hit by a bus crossing the street. I buy homeowner's insurance in case... well, I'm not 100% sure offhand what's covered in my policy, but you get the idea: there are predictable risks out there and even if I don't know my own individual probability down to the fraction of a percent, when I'm put into an actuarial pool of people mostly like me, my probability can be reasonably simulated. That way, as long as the market is thick, we can get reliable prices for different insurance products. In the aggregate, most of the above-board insurance policies you can get (whole life, auto, home, renter's, et al) are euvoluntary.

Some aren't. Think of the sleazy used car salesman with the "so I'm sure you want the extended warranty, right?" line. Think of sketchy overdraft protection you can buy for some bank accounts. Think of shady ticket sales that have you paying out the nose for the privilege of canceling without heavy penalties. Some insurance is generally seen as wise and prudent, other as a sucker's bet or exploitative. These fools' policies could hinge on any one of the ingredients I listed above on the financial crisis farm: unknown probability distributions, cognitive error (or asymmetric information if you prefer), or distortions in interest rates. Usually however, they come smack-dab face-to-face with ex post regret. Sooner or later, so the assumption goes, the poor fellow who bought the extended warranty will look back on the folly of his error and be left feeling ripped off. Poor fellow. Poor, poor fellow betrayed by his own foolishness in the thin market.

Well, that's easy to say after the fact. The problem with Cassandra is that before Agamemnon lies dead, she's just another crazy person jabbering about the future. There's no way to distinguish her from false soothsayers. Ditto for people who wrung their hands over housing prices in 2007, ditto for Ralphie's mom chanting, "you'll shoot your eye out" and ditto for the well-intentioned paternalist clucking a manicured tongue at the rube signing up for a turtle invasion policy. Peering into the future is hard enough, peering into the minds of others as they peer into the future is impossible with current technology.

Claims that odd, thin or irregular forms of insurance demand regulation or prohibition require a substantial burden of proof. Evidence of coercion (by human agency) is sufficient, but what else might cut the mustard? What would you consider to be a sufficient burden of proof for you to interfere with a voluntary insurance sale?

Bonus question: if you squint your eyes right, insurance can be seen as a form of gambling. Do the same arguments that apply to weird or suspect insurance plans also apply to gambling?