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.

Cold, Hard Cash

Microwaves thaw faster than stovetops.

Negative interest rates (or the threat thereof) are encouraging Swedes to hoard cash. Curious.

It's my impression that most ordinary folks don't pay very close attention to the deliberations of central bankers. Only when inflation runs amok or oddities like negative interest rates show up will the casual observer take note. Stuffing currency into mattresses or switching to barter systems are gentle revolts against the monetary authority. I occasionally wonder what the 21st century version of torches and pitchforks would resemble.

Perhaps we'll find out in Viking country.

Prices are Information, Mass Grave Edition

There was recently a nasty, fatal heat wave in Karachi. Around 1600 low-income residents died thanks to an unfortunate confluence. Here's how one resident wrote of the tragedy at Cracked (ATSRTWT):

Morgues were faced with shortages of space, and with so many people dying so rapidly, the graveyards found themselves in a seller's market. But would they stoop so low as to gouge poor? Grieving people whose loved ones had died so tragically?

You know the answer to that already. You've seen reality TV. You know the world is a horrible place.

Taha says that a grave plot is often a bargain, sold for the equivalent of 15 USD. But like a morbid version of Uber, graveyards responded to the demand by jacking up their prices several times, all the way up to 150-500 USD. For many of the bereaved, 150 USD is an entire month's salary. With the demand for grave plots and their prices soaring, there was only one logical solution: communal graves. Over 500 mass graves were dug to handle the corpses, with some holding as many as 100 bodies.

 Burial space is scarce. And it has a very inelastic short-term supply. Much as you might like, conjuring new plots quickly is not easy. Luckily for the bereaved, cheaper alternative exist. That is, indeed, one of the functions of the price mechanism. Raising prices to more than a family can afford robs both buyer and seller of a potential transaction, so when it's done, it's done to coordinate competing claims. If I have only five open spots in my cemetery, but ten people come to bury their dead, what other choice do I have? I must turn five away. And yes, this means they'll need to find a potters' field, but I'm just as surprised as you are about this act of God.

Price gouging may seem venal and parasitic, but those high prices encourage people on both sides of the transaction to bring to bear their cleverness and their industry to solve human problems. Sometimes, it's how to bury the dead. Let's hope that for the next time, it includes bringing economic growth to the poor and desperate of Karachi. No one should have to die because they can't keep cool in the summer.

Dairy Regulation Reform in the EU

EU Commission report on repealing dairy quotas:

ATSRTWT

Aren't we running the risk of over-producing again?

No, there is not a risk of the same sort of structural surpluses as in the past. The guaranteed price for butter and skimmed milk powder now merely serves as a safety net – such as during the 2009 dairy crisis, where it put a floor in the market. This means that producers are looking at the market when they decide how much to produce. Increased focus on added-value products (such as cheese and yoghurts) as well as on ingredients for nutritional, sports and dietary products have a strong potential in terms of growth and jobs for the EU.

I guess what I'm saying is: don't get your hopes up too much.

Ebony And

The US Fish and Wildlife Service demolished more than a ton of confiscated ivory products in Times Square last Friday. Read the press release here. Pay special attention to the closing paragraph.

Fish and Wildlife acknowledges that their crush porn was symbolic. The trade will continue as long as there are willing buyers and sellers, willing producers and consumers. If you're an elephant, you still have cause for concern.

So why do it then? Why publicly destroy seized inventory? Surely the DEA knows that when it torches bushels of weed or when totalitarians ignite piles of books or when ISIS sledgehammers heretical sculpture, that these ritual acts of purification and destruction are almost entirely symbolic, right? The notion that someone was on the cusp of buying a set of ivory combs and then changed their minds after witnessing some public spectacle is beyond ludicrous, particularly when weighed against the predicted production increases due to the inevitable price response.

If you want to slay elephants for their tusks, this is the way to do it.

Contrast this story, a biotech firm will be 3D printing ersatz black rhino horn, genetically identical to the free-range equivalent. This will tank prices, making poaching unprofitable. It's economically literate, even if it lacks the same crowd-pleasing spectacle as a handgun turn-in or a library bonfire.

It is precisely because the trade in ivory is so revolting that ill-conceived publicity stunts need to be avoided. It's a pity that no one at Fish and Wildlife is in any danger of losing their job over this reckless tomfoolery.

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

Tortious Non-Vaccination

E.V. in WaPo on making the refusal to vaccinate a tortious offense.

I think Prof. Volokh is probably right about the liability frustrations. Defining the class of defendants creates bad incentives. If your property taxes are going to go up because you don't want to vaccinate your kids, one of the margins will be for citizens to go full-bore off-grid, evading birth certificates, dodging primary education, and that sort of thing. I'm not sure that's an improvement.

But it's probably not utterly crazy for insurance firms to pick up some of the coordination problems. They're very practiced at actuarial science, and if you have large firms dedicated to monetizing something, you can bet they'll put some time and treasure towards expanding the scope of their industry.

What does that mean here? Well, if you can sell anti-vaxxer policies, insurance companies will have strong financial incentives in producing brand-new vaccines.

As long as we have non-compliant parents, why not have them pick up some of the cost of advancing medical science for the rest of us?

Matching Pennies and the Blizzard that Wasn't

Imagine if you will a game. It's not a very exciting game. Perhaps it's something you play with a cellmate in a Javanese prison when all you've got is the grimy clothes on your back and a couple of stray coins you've managed to pick from the pockets of the guards. The name of the game is Matching Pennies. Here's how you play.

Each of you has one standard US penny. Each penny is inscribed with the bust of a US president on one side (heads, or 'H') and the other side with the image of a famous Washington DC landmark (tails, or 'T'). Out of view of the other player, you select either H or T. Once selected, you reveal your choices at the same time. If the coins match, you both win. If they do not match, you both lose.

Like I said, it's not a very exciting game. But it's a pedagogically useful game once you expand it a little bit. As I've described it, you have a 50% chance of both winning, assuming you choose randomly (Schelling effects aside). But if you have a chance to have a round of non-binding cheap talk before you scurry off to make your selection, "let's pick heads, bro," your chances of winning ~theoretically~ approach 1 (empirically, there are almost always some vandals/defectors/rogues/fools). Cheap talk is one way of coordinating activity for greater mutual benefit.

Today is the 27th of January, 2015. Meteorologists have been predicting a massive blizzard for the Northeast for the past few days now. What was supposed to be three feet in some places was more like four inches. The dismay of tobogganers is matched only by the chagrin of economists who were eager to observe the effects of Uber's plans to suspend surge pricing during the sneaux.

The idea, she is this: surge pricing entices otherwise recalcitrant drivers onto the roads. If you need a ride badly enough, one will be available. On the margin, passengers may be more willing to go out for the evening for whatever reason strikes their fancy. Do away with the surge pricing, and you should see more stranded passengers. That, or delayed service, or whatever other inconvenience you might easily imagine.

But in this case, Uber's livery service will act more like a game of matching pennies, with the announcement that surge pricing will be suspended acting like the cheap talk round. More of the rider players will select 'T' and sit it out in their apartments rather than risk being stranded without a reliable ride home. There should have been both supply-side and demand-side effects if the announcement were working properly. This storm would have been an ideal opportunity to test how stationary the demand curve would have been with enough advance warning.

Alas, it was the blizzard that wasn't. We'll have to wait for the next one to find out. Let's hope Uber has the foresight and the courage to once again put their signature pricing scheme on hold to discover whether or not folks are any good at forward induction.

Cheap talk: totes magotes euvoluntary, you guys.

Porn v. Prostitution, Prolific Profits.

Warning, salty language ahead. Porn star Lisa Ann on the difference between porn and prostitution.



Note the central thesis: the profits earned by corporate interests are evidence that pornographic actresses provide a great deal of consumer surplus. She contrasts this with one-on-one prostitution, in which the workers are relatively anonymous, there is no corporate structure in the US (with some exceptions for Nevada bordellos), and profits are low.

High-end golf courses often hire professional players to instruct members on the finer points of how to select and swing a club. These same pros earn more on the PGA tour, bring more enjoyment to more punters if you will. Would anyone claim that pro golf instructors are being exploited in the off-season?

Not everyone has what it takes to be a Jack Nicklaus or a Lisa Ann. Not everyone wants to be a Jack Nicklaus or a Lisa Ann. It might be a fine thing to share your talents with more people, to bring more felicity to the world, but the labor calculus is up to the worker as much on the links as between the sheets. Assessment of opportunity costs can be a hard slog, but it's made no easier (or more accurate) when done on others' behalf.

I appreciate that Lisa Ann acknowledges that prices contain information, but I'd appreciate it more if she would refrain from assuming others' BATNA. The world is a large place, and there is a great deal of space for a multitude of careers. Consider the possibility that some sorts of sex work can be complements rather than substitutes. Perhaps some of Lisa Ann's feature films are used by working girls to prime clients for one-on-one attention, similar to how pro golf instruction helps recreational golfers better appreciate the skill and finesse on display at the PGA's Masters Tour.

h/t Mistress Matisse for the link.

Gossip

Is gossip euvoluntary? Gossip raises or lowers someone's relative social status without their knowledge or consent.

Gossip is dang close to ubiquitous among humans. It certainly predates civilization (pre-writing cultures in the Amazon Basin and on Papua New Guinea gossip just as much as your nosy Aunt Gertrude) and it definitely happens in early childhood.

The just-so story of atavistic gossip is something like this: subsistence foragers desperately needed to know whom to trust. Successful bands developed keen senses for when (and how) to communicate important social information relatively error-free. Gossip emerged from the selection process, together with all the attendant hedging (admissions of third-hand sourcing, "I heard", &c) and clear signals that the speaker is gossiping rather than doing some other sort of talk.

Q: do all the tacit norms surrounding gossip help keep it euvoluntary? I think folks understand that the problem isn't so much with the gossip as with the behavior that triggers it. And as long as everyone's in on what gossip is, what it means, and how (un)reliable it is, is it really a problem?

Ignoring for the moment that it's utterly impractical to attempt to curb gossip, I don't think anyone really wants to ban it. Sure, you'll hear folks in leadership positions urge people to exercise restraint, but very rarely do you find any sincere attempts outside of, say, military basic training to quash gossip.

Hm. Maybe if we thought about prices more like we think about gossip we wouldn't get so bent out of shape every time we think the rent is too damn high. Maybe what those prices are doing is hen-clucking around the water cooler about the relative value of that apartment.

Just the Tip

Quoth @interfluidity: "perhaps there are some domains where payment itself is a consumption good."

Context here.

Would you tip an android? How about a perfectly convincing one? Why do you tip?

Unless, of course, you don't tip.

Some possibilities:

1. You appreciate good service and wish to encourage more.
2. It's expected. The costs of being a Mr. Pink are greater than the value of the money you'd pony up.
3. You are genuinely magnanimous. You wish to redistribute your wealth to the relatively poor service workers you encounter.
4. You've worked service jobs in the past and you know how difficult they can be compared to the scale pay.
5. You want to flirt with the waitress (if this has ever worked for you, let me know in the comments, as I'm still trying to prove to Meat Mountain Mungowitz that unicorns do exist).
6. You want to signal to other diners your fitness as a potential mate and to reduce the relative status of less-generous tippers.

There are many ways to play status games. Conspicuous tipping is one. Does that mean it is euvoluntary? For Buscemi up there, he endured the scorn of his fellows for being a cheapskate (and I suspect that #2 is one of the reasons why the practice is so durable). And #4 suggests that the institutional equilibrium for tip recipients isn't euvoluntary (tbf, several states have converted server positions to regular-scale jobs subject to ordinary minimum wage requirements, though that doesn't seem to have done much to dent the practice of tipping in those states, afaik).

When robots take over service jobs, how quickly will the practice of tipping disappear? What mix of #1-6 will result in waifu-style animatronic servants, and which will result in hyper-efficient flying spider-appendage machines? Which sort of world do you wish to live in?

When the robots do start to take over, it's hard to tell from afar if folks will be interested in putting lots of resources into tip-generating features. And it's also hard to tell if that would be a bad thing. Prices convey information after all, and if people are willing to throw a few extra bucks at Boob-bot 5000 while leaving the Mantisblimp's jar empty, that suggests that form matters in a very real economic sense.

I don't know about you guys, but I can't wait to see what happens.

Big Bad Heteroskedasticity: Bezos vs Krugman vs Andreessen Edition.

Paul Krugman accuses Amazon of asserting monopsony power by pressuring publishers to reduce prices, likening Jeff Bezos to J.D. Rockefeller.

Does Amazon really have robber-baron-type market power? When it comes to books, definitely. Amazon overwhelmingly dominates online book sales, with a market share comparable to Standard Oil’s share of the refined oil market when it was broken up in 1911. Even if you look at total book sales, Amazon is by far the largest player.

The econ 101 explanation is in the following graf:

So far Amazon has not tried to exploit consumers. In fact, it has systematically kept prices low, to reinforce its dominance [that's one hypothesis, anyway -SLW]. What it has done, instead, is use its market power to put a squeeze on publishers, in effect driving down the prices it pays for books — hence the fight with Hachette. In economics jargon, Amazon is not, at least so far, acting like a monopolist, a dominant seller with the power to raise prices. Instead, it is acting as a monopsonist, a dominant buyer with the power to push prices down.

Amazon is a mancgere, a merchant that neither improves nor alters its wares, but rather offers the conveniences of transporting goods from seller to buyer with as little fuss as possible for buyers. By being the largest middleman, Amazon is (ostensibly) able to extract monopoly/monopsony rents on multiple margins. If you're a publisher, your BATNA is to try to get books out in tottering brick-n-mortar joints. If you're a reader, maybe you can look around for a pirated .pdf or something (hands up if there's a Barnes & Noble in a 20 minute drive of where you are right now, let alone the good ol' mom and pop book store).

What's more, their very size allows them the luxury of discriminating on multiple margins. Krugman identifies an editorial margin related to partisan politics and delivery times:

Last month the Times’s Bits blog documented the case of two Hachette books receiving very different treatment. One is Daniel Schulman’s “Sons of Wichita,” a profile of the Koch brothers; the other is “The Way Forward,” by Paul Ryan, who was Mitt Romney’s running mate and is chairman of the House Budget Committee. Both are listed as eligible for Amazon Prime, and for Mr. Ryan’s book Amazon offers the usual free two-day delivery. What about “Sons of Wichita”? As of Sunday, it “usually ships in 2 to 3 weeks.”

I'd add that you don't even have to reach that far. One of the unintended upshots of the fragmented local book markets is that micro-markets could thrive. As other-Sam notes, the content curation issue is extremely important. Book store owners anticipate customers' purchases, and stock the shelves accordingly. This sends production signals back to publishers to tell them the sort of talent they should be scouting. These days, the signals are chiefly coming from a single retailer. If this retailer is non-neutral, future content could be skewed. If this retailer rejects tail risks, future content could be leptokurtotic. Either one of these is unjust, especially for our descendants.

Krugman recommends swift government intervention. I do not. A wise and benevolent sovereign might remedy the content curation problem, but wise and benevolent sovereigns are sadly in short supply. An agency chartered with the sort of authority required to monitor the business operations of a bookseller of all things is, in other regimes, called a "censor." The question the careful analyst (and entrepreneur!) should ask is: "is there an alternate institutional arrangement that would solve the problems of content curation, monopsony coercion, & al without creating greater systematic risks?"

I think the answer is "yes." At the risk of being glib, consider an Uber of books; a bitcoin of books. Or of any non-durable consumer goods. Amazon provides a centralized service. They're so large because they're able to cheaply solve the very difficult problem of how to match buyers and sellers. This problem can be solved in an algorithm, perhaps on the blockchain. Warehousing and delivery are entirely separable from the core competency of Amazon.

Is Amazon euvoluntary? I guess the answer depends on what you want to compare it to.

See Marc Andreessen's commentary here.

h/t the ST Gang

Prices are Information, 21 CFR Part 312 Edition

Prices perform a dual function. They inform buyers of the relative scarcity of goods, and they let producers know the relative value their customers place on their wares. Prices eliminate dissembling, as they make explicit opportunity costs: to obtain X, I have to give up exactly this many Y.

For IND, the FDA has gazed upon the visage of the price function and rendered its Yelp review: "did not meet my expectations 2/5 would not use except in an emergency." (viz.)

Excerpted:

First, charging should be allowed only to facilitate development of a promising new drug or indication that might not otherwise be developed, or to obtain important safety information that might not otherwise be obtained. The preamble to the 1987 charging rule made clear that there should be compelling justification for taking the unusual step of allowing charging for unproven therapy during its development, stating that ‘‘cost recovery is justified in clinical trials only when necessary to further the study and development of promising drugs that might otherwise be lost to the medical armamentarium.’’ (52 FR 19466 at 19472). FDA believes that philosophy should continue to apply to charging in a clinical trial in this final rule. Accordingly, § 312.8(b)(1)(i) requires that a sponsor wishing to charge for its investigational drug in a clinical trial provide some evidence of potential clinical benefit that, if demonstrated in clinical investigations, would provide a significant advantage over available products in the diagnosis, treatment, mitigation, or prevention of a disease or condition. Products that are likely to meet this criterion are also likely to be eligible for fast track development programs and priority review (see FDA’s guidance for industry on ‘‘Fast Track Drug Development Programs— Designation, Development, and Application Review’’ (January 2006) including the priority review policies for the Centers for Drug Evaluation and Research and Biologics Evaluation and Research in Appendix 3 of that guidance (available on the Internet at http://www.fda.gov/cder/guidance/index.htm)).

Short version: prices can be used as a last resort to get pharma firms to make a drug. Apart from that, unproven remedies are snake oil until proven otherwise. It's unjust to charge for potentially useless treatments.

Is that true? Rather, it is true from afar? Assume that the patient knows that the drug is risky and that it might not work as advertised. Shouldn't she still be free to try, even if trying means that she should compensate the apothecary for the trouble? The moral intuition behind this seems like the same one that seeks to prohibit gambling: ex-post regret aversion. Not only could you still be sick, but you'll be poorer for your trouble. I suppose the corresponding risk that the drug never gets developed in the first place rests secure in Bastiat's unseen. Out of sight, out of mind.

Second, charging should be permitted only for a trial that is necessary for the development of the drug. Therefore, § 312.8(b)(1)(ii) requires that the sponsor demonstrate that the data to be obtained from the clinical trial would be essential to establishing that the drug is effective or safe for the purpose of obtaining initial marketing approval of the drug, or that it would support a significant change in the labeling of the sponsor’s approved drug. For example, the trial could be designed to provide data that would support approval of a new indication or generate important comparative safety information.

IOW, information is valuable. If the administration of the drug produces no clinically useful information, then the treatment is not valuable. I suppose if your name is "FDA", your attention is directed to the objects of your charter: pharmaceutical firms, rather than to patients. This is cold comfort if you're a patient.

Third, charging must be necessary to the conduct of the clinical trial. Under § 312.8(b)(1)(iii), a sponsor is required to demonstrate that clinical development of the drug could not be continued without charging because the cost of the drug is extraordinary. The cost of the drug may be extraordinary because of manufacturing complexity, scarcity of a natural resource, the large quantity of drug needed (e.g., due to the size or duration of the trial) or some combination of these or other circumstances. In response to comments, this extraordinary cost criterion for charging for the sponsor’s drug in a clinical trial has been revised to clarify that the resources of an individual sponsor are considered in determining whether cost is extraordinary.

Well that explains it. The FDA has 0 economists on staff. Or at least none with any meaningful input into the justification for rules such as these. Only a bureaucrat could look at the value of the alternatives uses of ingredients to determine the value of a product.

Good grief.

Actuarial Euvoluntarity

Alexandra Farrington of Fairfax, VA has posted a petition on change.org to have George Mason University President Angel Cabrera call for the resignation of Professor Walter Williams. Her complaint is that Williams (disclosure: Williams was my Microeconomics I professor) made bigoted remarks (link 1 link 2) "against the gay community." viz:

In his column, he says that gay people are worse than smokers and those that are obese. His argument is, homosexuals should have higher health insurance than heterosexuals solely because they identify as homosexual. He relates this to non-smokers, who have lower health insurance than smokers. Mr. Williams believes that because gay individuals have a lower life expectancy, they deserve to pay more for their health insurance. Not only is his conclusion offensive and discriminatory, but his information is out of date: the basis of his evidence comes from a report issued in the late 1990's when HIV/AIDS was more fatal than it is now.

I believe this is the offending passage from the first link:

According to the International Journal of Epidemiology, life expectancy at age 20 for homosexual and bisexual men is eight to 20 years less than for all men. That's a lifestyle shortening of life expectancy greater than obesity and tobacco use. Yet one never hears of insurance companies advertising lower premiums for heterosexual men. You say, "That would be discrimination." You're right, but why is it acceptable for insurance companies to discriminate against smokers and the obese but not homosexuals? After all, they are all Americans and protected by the Constitution. It's really a matter of politics, as seen by the journal's publication of an article titled "Gay life expectancy revisited" (http://tinyurl.com/25ejq2d). The publication had to soft-pedal its study results because of complaints that pointing out life expectancy differences between heterosexuals and homosexuals had become fuel for homophobia. The bottom line is that homosexuals have far greater political power and sympathy than smokers and the obese.

Emphasis added. Williams is making a public choice claim. Actuarial science is discriminatory by its very nature. Indeed, that's precisely the point: bowtied number crunchers crawl mortality data to rigorously price mortality risk based on observable characteristics. Because the insurance industry is (relatively) competitive, firms would lose customers in a big hurry if they attempted to charge customers more for matters of mere taste—if there is no actuarially sound justification for charging gay customers more, there's a very lucrative commercial opportunity for a firm willing to serve these customers at lower (read: actuarially fair) rates. This is the basic logic of the marketplace. Econ 101, if you will.

But it's obviously incomplete logic. Those tweed-wearing, bespectacled, bowtied number crunchers have sense enough to indulge a little backward induction. They're in the business of pricing mortality risk, a skill that lends itself naturally to the pricing of political risk as well. In a competitive market, a single participant is a price-taker. Here, the marketplace is in political sympathy, and insurance firms are idea takers: unless the premium differential is of sufficient magnitude, it's simply not worth it to the firm to buck popular opinion and discriminate along sensitive margins. A firm that stands to earn an extra $50,000 from increased premiums won't spend $100,000 in legal fees and fines to obtain those premiums. This is the basic logic of the regulated marketplace. Econ 312, if you will.

Prices are information. They tell buyers to modify their consumption and suppliers to alter the goods under delivery. In the case of actuarial analysis of mortality, this signal is sometimes useful. You can send a price signal to a smoker that her behavior has costs not immediately borne by her. It's an incentive to quit. Price discrimination in this case takes a non-euvoluntary habit and makes it more so by making the regret more immediate: it (admittedly, imperfectly) shifts the future costs to the present. Ditto overeating or being sedentary. But there's no such useful signal to the consumer for homosexuality, or left-handedness, or being ginger or whatever else a clever actuary might stumble upon as being a salient variable in the tables. The normative question about the role of insurance in society is whether or not it's socially useful to force insurance firms to pool these sorts of non-modifiable risks. Should relatively long-lived women subsidize men? Should relatively healthy Asians subsidize Whites?

Like it or not, from the point of view of the practical firm, these are political questions, and in order to maintain a hard-fought reputation of being utterly and ponderously boring and predictable, the insurance industry will not attempt to fight public opinion on questions like these.

As far as the contents of the petition, is it euvoluntary for the university to continue to permit Williams to teach PhD Micro I? I'm afraid the limits of my Smithian sympathy are tested here. Williams is certainly thought-provoking in class. And he certainly communicates on the barbarism-civilization axis of Arnold Kling's tripartite rhetorical model. But in my (admittedly limited) experience, he tends to draw libertarian conclusions from his analysis. I cannot recall an instance where he advocated the sovereign exerting unjust dominion over constituents. But my experience is limited to the single class I took from him and the few hallway discussions we've had over the years. The natural counterargument is that merely by mentioning moral opprobrium (as in the second link above), he raises in an unsophisticated audience additional ire against his disfavored groups; ire that might result in state-sponsored violence (#Ferguson). If that's the case, there's a good opportunity for men and women of good conscience to respond using careful, rigorous economic analysis, the kind you might learn in Professor Williams's class.

Cupcakes [hoax]

It's tough to tell what is and isn't dedicated satire sometimes. I'm strongly inclined to think that the person responsible for the @CupcakeCrewNYC Twitter account is having a big ol' laugh at their followers' expense, but I'm not exactly sure what the joke is supposed to be.

For those of you with the good sense not to click through, this is the account listed on the website of an itinerant cupcake business. Nothing on the predictably bland website will prepare you for the, let's call it charged political commentary and colorful language you'll encounter on the Twitter account. It's, well, it's incongruous.

Some might even classify it as hate speech.

Here's the puzzle: would you still be morally justified in buying their cupcakes? Does shopping there implicitly endorse their political beliefs? Does boycotting them send a signal that their political beliefs are wrong?

Prices are information, but they're sort of a dumb signal. If someone doesn't buy from me, it just (credibly) tells me that the alternative uses of their cash are more attractive. To explain why, we need to rely on (non-credible) speech. Hence the importance of preserving First Amendment protections. Without the ability to doubly signal displeasure, making clear how and why this particular cupcake vendor is wrong.

Still though, the market rewards people who are good at delivering value to customers. Are political beliefs separable from business practices? Should they be? Why or why not? Can it ever be euvoluntary to truck, barter, or exchange with hateful people? Explain.

Update: further investigations suggest that the Twitter account has been compromised and that the cupcake truck is out of business. The point about commerce and morality is still salient however. Are vendors' political beliefs relevant to shoppers?

Of the Division of Tariffs

It is a consistent source of man's wonderment the many ways in which mutually felicitous exchange is made. Consider the curious case of the two-part tariff. A two-part tariff is when the customer pays a periodic fixed fee, often in exchange for lower piece-rates. Unless the firm is a protected monopoly, in which case the first part of the tariff (sometimes hidden in public expenditures) aids in the extraction of monopoly rents. Part of the recent dust-up between taxi organizations and ridesharing services have exposed something curious about the multi-part tariffs bound in livery.

The Dub-MOE and I hinted at some of the demands that Birmingham is mulling w.r.t. Uber, Lyft, Sidecar et al. Among them is a requirement for an extra $500k in liability coverage, borne by each driver.

The by-driver requirement specifically set my hackles up. I'm already alert to Yandle's Bootleggers & Baptists story, so I've a keen nose for mischief when it comes to pronunciations from professional taxi organizations, but the peculiar thing here is that while other aspects of taxicab livery could run like a protected (local) monopoly, it seems unusual that the insurance industry, itself highly protected via regulation should be complicit. In other words, why would taxicab companies not have full mutual insurance rather than piecemeal coverage?

Please recall that the purpose of insurance is to guard against idiosyncratic risk. For ordinary drivers, this means pooling with all other drivers of your type and based on many long years of ongoing statistical analysis, with careful retrospective studies of relevant characteristics, you protect your own private assets against adversity. But for taxi services? The residual claimant should be the one footing the insurance bill. The regulatory kayfabe I've been hearing from taxi associations are all aimed at protecting the interests of the customer, and I can't for the life of me understand why this should place an extra burden specifically on the drivers. In a suit, the firm would be named as primary litigant (Ken can correct me if I'm wrong here, I know he secretly reads EE, even if he'll deny it till he's blue in the face). So the histrionics about drivers getting extra coverage must have something else under it, otherwise it'd be transparent rent protection, and even Florida sugar cartels have more sense than that.

So is there a behavioral reason? Perhaps part of the point of lading drivers with their own insurance payments is for the "Peltzman Effect", in which risk abatement is greeted with marginally riskier behavior. The standard image for this can be found at Eric Crampton's blog Offsetting Behaviour—a steering wheel with a spike sticking out of it is one way to get drivers to compensate for all those wonderful airbags that surround and cushion them. Theoretically, if someone else is picking up the tab in case you get in a wreck with a passenger in the back, you'll be (again, marginally) more inclined to take a chance on a freshly-red light, or to text your sweetie behind the wheel, etc. But this is, of course, ultimately an empirical claim, and the subjects under study for the original Peltzman Effect literature weren't Uber drivers: they didn't have the countervailing effects of driver rating systems. Direct customer feedback can more easily match passengers' risk tolerance to the specific circumstances of the road on that particular day. It's a curious conceit to claim that there's a public interest in this small-scale negotiation, other than the safety of other drivers and pedestrians (beyond existing statutes against reckless endangerment, that is).

So what do you think? Is it reasonable to insist on additional two-part tariffs for Uber drivers or is the indemnity insurance already offered by the firm sufficient? Why or why not? How would you test the claim? Please show your work.

Skeeball: Euvoluntary?

Zach W. notes an oddity with carnival games (link).

Mom could buy a stuffed animal for a fraction of the price of the minimum number of carnival tickets you'd need to win the thing. And that's the best case scenario. Many (most?) carnival games are flat-out rigged.

But people still buy their tickets. Why? Wouldn't it be more efficient to just buy the crappy t-shirt with plain old cash?

Or is there more to the transaction? What else is the carny offering? The chance for a loved one to signal prowess? The chance for a kid to have some fun overcoming a contrived challenge? Fun?

Judging by dollars and cents, there's no way a carnival game could be euvoluntary. Thank goodness that's not how people actually reckon the value of their time and attention.

Insider Trading is More than a Feeling

Insider trading, making stock market exchanges on information that has yet to be made public, violates US statute law (15 U.S.C. § 77a, 15 U.S.C. § 78a, SEC Rule 10b-5, & al), but more importantly, sanctions against jumping the queue, so to speak, have a common law pedigree. Nearly any statute that can be traced to English common law antecedent is likely to appeal to the inherited common sense of the median Anglophone.

Insider trading offends the sensibilities of even folks who otherwise have no direct interest in the goings-on of the finance industry. Poll your (non-economist) friends. Ask them to give one-word summations of insider trading. Don't be too shocked to hear words like "slimy" or "thieving" or "fraudulent" come up pretty regularly. We've got an idea of insider trading that well predates the Oliver Stone version of a greasy Gordon Gekko, and it's in the cigar smoke swirling round the head of the Mr. Moneybags plutocrat popularized by the should-be-banned-by-the-Geneva-Convention board game Monopoly. Insider trading is unfair, it's a breach of trust, it's greedy, profiteering. It's vile.

It's also information. If a firm is in trouble for whatever reason, active insider trading lets the market know ahead of time if the time is right to divest, maybe even convert the physical assets to a higher-valued use. But we block (and I can't stress this enough) through common law moral intuitions this information from being used. The Samuelsonian economist in me is aghast at the inefficiency.

But I'm bathed in the milk of euvoluntary exchange: I believe in the importance of examining morality without romance. Here, as in most instances of financial instrument exchange, folks' far-mode musings lead them to think of one and only one side of the exchange. Consider that for everyone who sells stock, there must also be someone to buy. If you're claiming that in an insider trading situation that the other side of the exchange is taken advantage of, you might consider asking how that happens.

Look, a contract is struck when there's offer and acceptance. If the GTM is offering to sell me his riding lawnmower from last year for five bucks, I might begin to suspect that something's up. If I investigate and find out that making the trade is still in my best interest, in what sense is he exploiting me? It's the same in the stock market. If Chrysler's management knows that production forecasts from last quarter were too optimistic and they attempt to take out a short position, who's being exploited? Production is weak one way or the other, it's got nothing to do with the paper claims against the firm. Nothing at all. the paper just lets management tell the market a little earlier. Prices, or in this case the offer of a price is information. No one says you have to actually buy the dang offer. Right?

My suspicion is that there's a confusion between intentions and incentives. The profit motive is icky, no matter how useful it might otherwise be. (Partially) overcoming this aversion was one of the finer upshots to emerge from the coffeehouses of London. Each time this hardy weed springs up it endeavors to choke the garden of prosperity. Keep your Roundup handy.

Pay to Win

"Free to play means pay to win." In an inversion of a classic gaming trope, Free-to-Play games often, for a few dollars more, allow newer players to buck their natural disadvantage and pwn, instead of being pwned. This breeds conflict, as veteran gamers with hundreds (thousands, even) of hours dedicated to honing split-second reflexes and lightning-fast heuristic calculations find themselves hopelessly outgunned by some sweaty neckbeard with mommy's credit card. In Hansonian terms, the elite gamers are akin to highly skilled foragers who are very good at hunting under egalitarian terms; the only asymmetries are in skills developed through practice (and I encourage you to watch the finals of a Starcraft tournament so you can judge for yourself how refined are some of these skills). In a FtP game, microtransacting players who buy powerful gear are like farmers who've discovered the cheat code of "let's just build a fence around these goats instead of running around the woods all the dang time."

The foragers in this metaphor resent the farmers for being contemptible cheats (judging by the ample scorn heaped upon "casuals" by the more dedicated gaming community), while the farmers send valuable signals to developers.

Valuable signals? Hear me out. Economics isn't always 100% consistent, and a great many economists disagree on a great many things, but one point of large agreement is something called the "equimarginal principle." That's a jargon-y way of saying that people economize on costs, that they strive to get the biggest bang for their... well, it's misleading to say "buck"... for the value of what they give up, be it time, effort, attention, or claims on other resources. Sometimes it's a buck, but sometimes it's just whatever else they might have been able to do. People perform their "felicific calculus" and pursue the greatest reward at the lowest cost. Since everyone's got a different schedule of opportunity costs, microtransactions offer game designers the chance to let players reveal their margins. For some folks, grinding 100 hours for loot is hunky-dory: perhaps they don't have much else to do with their time. For others, dropping $10 to get the irl cash store version is more sensible.

And the proliferation of FtP games means that the economic profits are sure to be wrung from the system. Competition and all that, don't you know. Of course, this is great news for serious gamers. Diminishing returns for FtP games means that traditional, subscription-only multiplayer titles still have a future. While the FtP market is quickly becoming saturated (we might even be a few years past the threshold on that), serious gamers might well find solace within titles that raise a paywall to keep casuals out. Competition permits, even encourages diversity.

Are FtP games euvoluntary? So long as developers aren't hampered from responding to market signals, I'd say yes. The alternative is to try to cram the genie back into the bottle, and that seldom ends well for anyone. Especially the genie.

Mulish Stewardship

Again with the idiosyncratic definitions, this guy. Stewardship is a stab at mimicking a euvoluntary exchange when one of the transacting parties is unable or unwilling to haggle the terms of an exchange for one reason or another. The wards of a steward could be minors, infirm, comatose, mentally vacant, or brute animals. For that matter, 'tis common usage to assign stewardship over land, intellectual property, or other intangibles.

Over at Sweet Talk, I followed up yesterday's post with some musings about environmental degradation that often gets a lot of talk, but not so much conspicuous accounting (by this, I mean that many journalists and activists balk at the notion of attaching a dollar value to the environment, even though the BLM and USGS do indeed provide these estimates). My question is this: is stewardship euvoluntary? There must be some price at which keeping a species alive can no longer be justified. But since necessarily one party is unable to advocate on its own behalf, what is the just way to find that margin?

Majority rule probably isn't very good. People with no resources directly on the line have no incentive to vote prudently. How about fiat rule by elites? Is that any better? Why or why not?

Economists like to flog the idea of private (or quasi-private) ownership of wild herds. Assigning residual claims to a human foists all the good private incentives where they can be calculated more-or-less accurately with all that lovely skin in the game that keeps folks honest. But with global-scale threats, this is... well, let's call it "problematic" to assign residual rights to a single individual. In lieu of that, what's the next best way to solve the knowledge problem when we've got looming stewardship issues for the several species under the threat of extinction?

For those exchanges that can never be euvoluntary, it seems wise to seek robust surrogate pricing methods. Primum non nocere bleeds the coffers dry, laissez faire soaks the veldt in innocent blood. Surely there is a better way. Surely some reckoning is at hand.