May 2008

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The Economics of Pirate Tolerance

"The Invisible Hook: The Economics of Pirate Tolerance," is now available, here.

Abstract: Can criminal profit-seeking generate socially desirable results? This paper investigates this question by examining the economics of pirate tolerance. At a time when British merchant ships treated black slaves as slaves, some pirate ships integrated black bondsmen into their crews as full-fledged, free members. Enlightened notions about equality did not produce pirate tolerance, however. I argue that self-interest seeking in the context of the criminally-determined costs and benefits of pirate slavery was responsible for pirates' progressive racial practices. Analogous to Adam Smith's invisible hand, whereby legitimate persons' self-interest seeking can generate socially desirable outcomes, among pirates there was an "invisible hook," whereby criminal self-interest seeking produced a socially desirable outcome in the form of racial tolerance.

Coming soon: "The Calculus of Piratical Consent: Criminal Foundations of Constitutional Democracy"

Happy Hayek's Birthday

Don Boudreaux reminds us that it is Hayek's 109th birthday today.  Following Don's lead, I'll celebrate with one of my favorite Hayek quotes:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."  (The Fatal Conceit, p. 76)

Hayek could have easily substituted "the social sciences" for economics in that statement.

Few humans can say they have profoundly changed the world of ideas and the world in which they live.  Hayek is one of them, and a good hunk of humanity is better off for it.  And they could be better yet if Hayek's work (along with Mises and all the rest) were to have even more influence than it has already. 

The world would also be a better place were more people to emulate Hayek as a model of scholarship and civility.  We need more people willing to start with the assumption that those who disagree with them are only guilty of intellectual error rather than maliciousness or stupidity.

Let's also hope that this century is the century of freedom and spontaneous order rather than statism and scientism.

And feel free to use the comments to add your own favorite Hayek quotes.

Homobasketballicus -- 2008 edition

I've worked as a basketball coach on and off since the summer of 1978.  Anyone who knows me, will learn quickly that I am actually sort of crazy about the sport.  I watch literally thousands of games a year ranging from middle school to three levels of high school to college at every level (DIII, DII, DI and NAIA and even JUCO) and of course professional basketball from the D-League to Euro League to the NBA (though I really only watch the NBA during the pre-season and first month of the season and then follow lightly through the season and pick up intensely watching only after the NCAA championship is over).

I often use basketball analogies in my lectures to highlight the importance of the rules of the game on the strategies that players will use in deciding how to play the game --- whether that game be basketball or the game of economic life.

One of the real joys in my life has been my ability to share this love of the game of basketball with my family, friends and my wife and kids.  And as for any person who coaches the opportunity to coach their own son is a real thrill.  This is my last year coaching my son during the AAU season.  Stephen has played AAU basketball since he was 12, and organized basketball since he was 9.

Anyway, a lot of my students and even colleagues have found my obsession with the sport of basketball strange to say the least, and of course wonder why my attentions are often drawn away from economic research to a game that seems so far removed from the concerns of economics and political economy.

Well, here is the weblink to the 2008 U17 Fairfax Stars and the player profiles.  I have been coaching most of these boys since 9th grade, and we have traveled throughout the US playing against some amazing athletes --- many of whom you will see on TV in the coming years.  It has been an honor for me to work with them and I am just thrilled to be doing so again this spring/summer for one last time.  I encourage you to take a quick look at the accomplishments of these young men both on and off the court.  Perhaps some of these kids will be playing at your institution of higher learning starting in 2009.  They are great kids, some are extremely academically gifted (one boy actually scored a perfect score on his SATs and has a 4.0 GPA, and did I mention he is 6'9" and was an All-District performer last season for his HS team), and they can all contribute to a college basketball program. Let me know if your school's team could use some help!  I cannot promise that they will major in economics, but I can promise that they are the sort of student/athletes that will make any institution proud to have them compete for their teams.

Random Sightings of Sensible Economics (well not so random)

Kevin Grier asks "Is more regulation always the answer?"

Larry White explains why looking carefully at the Fed figures might make sense of contemporary monetary policy in a way that the conventional wisdom misses.

Glen Whitman
on the Post Soviet diet of Cubans and the "health benefits" of such a policy.  Though Glen I wonder really how one could infer that the improved health conditions were a consequences of communist policies when in fact they are correlated with the breakdown of the communist system which wipes out a supply network for Cuba, and Cuban policies of autarky.

David Beito gives some more evidence on why Herbert Spencer was a good guy that classical liberals should embrace rather than hide.

Tyler Cowen
on the Cowles Commission economists.  But Tyler, I would distinguish between brilliance and insightful.  No doubt these guys were brilliant, but not necessarily the most insightful when it comes to understanding the real world and possessing great judgment when it comes to issue of public policy.  Yes, brilliant and well meaning people can be wrong.  As Gary Becker once summed up the most important lesson he learned from Milton Friedman "Economics is not just a game played by clever people."  The economists associated with the Cowles Commission were (are) no dobut the cleverest of the clever, but they were more often than not wrong on the major issues of their day.  Imagine what modern economics would have looked like had the post-WWII period not been dominated by Cowles and Rand, but instead by organizations that resisted the intellectual alliance of statism and scientism!!!  Not sure any of those guys would make the list of the most insightful contributors to the science of economics even recognizing that they were (are) no doubt brilliant minds.

Finally, Anthony Evans raises questions about the
economic rhetoric.


Wal-Mart's Drug Plan

Just an update on Wal-Mart's prescription drug program that I blogged about here.  The company has announced that it is expanding the program (which offers monthly supplies of generics for $4):

to offer 90-day supplies for $10 and add several women's medications at a discount. It also said it would lower the price of more than 1,000 over-the-counter drugs.

That list of women's medications includes very common breast cancer and osteoporosis drugs. 

Once again, Wal-Mart demonstrates that "big" and "profitable" can be completely compatible with "making people better off."  The next time someone asks how private initiatives, whether for profit or civil society, will take care of the poor and the sick (or women for that matter), you might remind them of this program.  And then you can compare this to Medicare and Medicaid, where costs keep rising and service keeps declining.

HT:  Michael Moynihan at Hit and Run.  Wal-Mart defenders might also see the new Utne reader piece Michael has on the big boxes.  UPDATE:  that Utne piece is a reprint of Michael's original piece in Reason in January 2008.

Yes Virginia There are LAWS of ECONOMICS

I am honored to be associated with The Economic Way of Thinking.  Independent of my involvement with the book, I consider the book the best book to teach the principles of economics.  In fact, prior to my involvement I taught from the book for 15 years.  Economics provides us with a set of tools for thinking.

But economics also has LAWS that hold across cultures and over time.  This is not popular to say anymore, but perhaps that is why it is more important than ever to say!

Last week we had a discussion sparked by Samuel Fleischacker's work on Adam Smith. My colleague Dan Klein wrote a response to Sam's work under the provocative title "Was Adam Smith a Leftist?"  Sam was giving a chance to respond to Dan's remarks and then it was opened up for discussion.

Sam's argument -- which is very reasonable on any particularly point and always well written -- does not in the end hold in my opinion.  Fleischacker makes an important contribution to Smith scholarship by contextualizing him in his time, and also countering politicized readings of Smith.  But in my opinion Sam misses certain key elements in Smith's economics which transcend time and place, and in fact are universal laws of economics.

Ludwig von Mises was the last really great economist to emphasize the laws of economics.  Since that time, it has become fashionable to question that there are laws of economics.  In fact, the insistence on the laws of economics is often taken as a sign of dogmaticism.  But I never really have understood this charge.  If I insisted that there was a law of gravity, would I be accused of dogmaticism?

Economic laws are always stated with the "holding other things constant" clause.  So they admit a certain flexibility that critics often forget to mention.  A classic example of this is the recent wave of critiques of the rational actor model.  Rationality is omnipresent, but its manifestation is institutionally contingent.  In other words, individuals choose means to obtain ends in the most effective way possible, but which means they choose and what ends they choose to pursue are a function of the institutional environment within which they choose.  Similarly, demand curves slope downward, but the interesting factor in any application is the context of choice --- the number of substitutes available, and the urgency of demand, and the constraints one faces in choosing.

In my mind the entire process in economics is pretty straightforward: good methodology leads to good analytical methods; good analytical methods aid the process of logical reasoning; good logical reasoning estabilishes certain basic laws of economic life that are enduring truths (dare I say inexorable!); and public policy analysis not based on the laws of economics results in unintended and undesirable consequences.   I would even state that philosophical arguments concerning justice will be revealed as intellectually bankrupt unless they recognize the laws of economics --- the rationality of actors, the importance of incentives, and the knowledge of time and place. Economics without an understanding of philosophy and political philosophy may be sterile and boring, but political philosophy without economics is little more than daydreaming.

Excellence in Economic Education --- McDaniel College

On April 29th I gave the Inaugural Donald Rembert Lecture in Enterprise Economics at McDaniel College in Westminster, MD.  My lecture was "Mainline versus Mainstream Economics and the Argument for Economic Liberty."  I began with this quote from Lord Acton: “But it is not the popular movement, but the traveling of the minds of men who sit in the seat of Adam Smith that is really serious and worthy of all attention.”  And I went from there to explain mainline economics as those economists who have contributed to our understanding of purposive choice within constraints and invisible hand explanations of market phenomena.  I draw a line from Smith to J. B. Say to F. A. Hayek.  On the other hand, mainstream economics is defined as whatever is currently scientifically fashionable, and the line includes Smith, but also Malthus, Keynes, Samuelson, and Stiglitz.  Sometimes mainline and mainstream are aligned, but often in the 20th century they have diverged significantly.  I offered some explanations as to the divergence and why the deviations from the mainline by the mainstream distorts knowledge in economic science and can be downright dangerous in public policy applications.

I enjoyed very much my visit to McDaniel.  I was thrilled to meet Donald Rembert --- a man of great intellectual passion and knowledge, and committed to giving back to his college.  The faculty at McDaniel was extremely welcoming to me and my wife (and my son Stephen, who is actually considering McDaniel and had a very positive visit).  The chair of the department, John Olsh, made sure that our trip went as smoothly as possible. And one of my former students at GMU, Brian Baugus (who now teaches at King College in Tenn, and who is a 1989 graduate of McDaniel) made the trip and introduced me for my talk --- which was a special treat.  It was just a very enjoyable visit for me and my family, and I just hope my lecture met the expectations of Mr. Rembert and Prof. Olsh.

However, my talk was just the end of the evening for the economics community at McDaniel.  Before my talk, three graduating seniors presented their research in front of a packed audience.  And I am here to tell you, they were amazingly articulate in their presentations.  Courtney Novotny presented her research on the problems with the pension system in Germany; Kayla Wiles presented her research on initiatives to increase agricultural productivty in less developed countries through educational programs; and Chris Martin presented his work on entreprise restructuring in Romania.  Chris and Courtney's papers were actually fairly rigorous econometric studies, while Courtney's was presented more in the narrative form associated with policy studies.  Chris Martin, in fact, will be pursuing his PhD starting next fall at Johns Hopkins University.

I was very impressed with the poise of the students, the obvious skill and care the faculty had demonstrated in developing these students, and the support of both the faculty and student body for economic research and education at McDaniel.  My impression that the students at McDaniel get a very high quality education and that at least as far as economics is concerned the level of commitment that McDaniel has to developing intellectual rigorous projects among its seniors is unusual. 

I am very interested to learn about high quality educational programs in economics at the undergraduate level.  What schools would you list as the top 5 undergraduate programs in economics?  What dimension would you use in coming to that assessment?

Attention-Grabbing Advertising: Gates and Buffet in a NetJets Plane

NetJets, the world leader in fractional ownership in business jets put out an attention-grabbing advertising in The Economist this week. I don’t pay much attention to advertising in general and I ignore most ads in The Economist (or so it seems to me). So coming across an ad that grabbed my attention was novelty, and it reminded me of some of the issues around the economics of advertising.

Only_netjets_the_economist_apr2608

Over the last two centuries, economists have had many strange (and possibly useless) debates. One of them was about the role of advertising. In the 1950s and 1960s many economists held the view that advertising was not part of a firm’s production costs and thus was a waste. One of the best responses came from the Austrian camp with Israel Kirzner who argued that advertising plays a very important role in alerting people about an opportunity available to them. Advertising is a crucial component of the entrepreneurial process (e.g. see Kirzner’s Competition and Entrepreneurship and the foreword to Advertising and the Market Process).

Fractional ownership in private jets has been growing for more than a decade and many companies (e.g. NetJets, Flexjet, Flight Options, CitationShares, FractionAir) have entered the field. Price competition is fierce. The difficulty in this business is to coordinate the demands of thousands of customers at short notice. Richard Santulli, NetJets’ founder and CEO wants to alert the readers of The Economist that his company has the best offer for them. Gates and Buffet may own their own jets (I don’t know), but showing them as NetJets customers surely sends a message. Buffet is known for his frugality and if he uses NetJets it must make sense from a cost perspective (he also owns the company). This is more attention-grabbing than presenting a table full of figures for instance.

Another championship for Coach Walters and the GCC Men's Tennis team

08mtenpac600 The college experience I had at GCC is what I hope for my own son's.  I had great friends, I learned much from my teachers that changed my life, and I was fortunate enough to play 4 years of a varsity sport for a fantastic coach -- Joe Walters.  During my time at GCC, we did not compete in the President's Athletic Conference (PAC), but instead competed as an independent in DIII.  We often played DII and sometimes DI teams on our schedule, which included an annual trip down south.  And we won.

Soon after I graduated, GCC joined the PAC.  And Coach Walters just won ... and he has just kept on winning for all those years since.  Over 300 match wins, and all those PAC championship.

Emergency and Supplemental Spending: the Great Fiscal Scam

The natural proclivities of government are about concentrating the benefits (of government activity) in the hands of small groups in the short run and dispersing the costs over the populace in the long run. In short, government is about spending now and paying later. These proclivities manifest themselves in a very interesting way in the US budget.

Every year, there are two types of spending in the US budget: discretionary and mandatory (the distinction is a bit strange for those not accustomed to public accounting because that distinction is really a convention and nothing more: elected officials in Congress have the power to revoke any law they want including Medicaid which is part of mandatory spending). Every year, the US President submits his budget to Congress in February and by October the budget is voted. During that period, more spending can take place as part of the current fiscal year (whereas the budget under discussion is for the next one); this is what is called supplemental spending.

For decades, supplemental spending represented only a very small fraction of the total budget (around 1%). Supplementals were justified because of new spending that the Federal government had to incur and had not been accounted for in advance. In the last decade however, things have changed. More and more spending is qualified as supplemental (and in general “emergency” as well although emergency spending is not necessarily part of supplemental and supplemental can be non-emergency).

In a very good Mercatus Policy Series paper (see The Never-Ending Emergency), Veronique de Rugy explains why this is happening. Her take is that the US government faces lots of perverse incentives and as a result, spends more and more money outside the initial budget. Supplemental appropriations currently represent more than $100 billion a year and there are already supplemental in discussion for FY08 and FY09 that would be in the order of $178 billion (and yes it is unusual to have supplemental for the coming FY). Just yesterday, House Democratic leaders were looking to add $3 to $4 billion in domestic spending to the emergency war supplemental beyond economic stimulus and troop-related funds. That spending comes on top of $12 billion for both 13 extra weeks of unemployment benefits for those whose eligibility has expired and a boost in GI education spending that has broad, bipartisan support.

Supplementals are not part of budget caps and deficit accounting, rules that are supposed to constrain the natural proclivities of government. Supplemental enables agencies to get more funds without having to make difficult tradeoffs since these moneys are not voted as part of the general funds. Supplementals are akin to “off-balance sheet accounting,” which is why all this is ironical. Private entrepreneurs have gone to jail for not revealing unfunded liabilities and doing various accounting gimmicks. However, legislatures can vote unsustainable budgets based on weird accounting rules because they make the rules and have the power to print money (and to tax of course but even that power is becoming less and less useful).

The natural proclivities of government have no limits (I came across another interesting example recently and I’ll post something about it soon). It is frightening and the consequences could be lethal for Americans. Read Veronique’s piece, it is well-worth the read, as it is the best work available on the subject.

Rushing to War, Part Two

Thanks to the generosity of the Koch Foundation, we have inaugurated a Visiting Speaker Series in Political Economy here at St.  Lawrence.  Our kickoff speaker in March was co-blogger Chris, who did a fantastic job with a talk on After War.  Last night was our second speaker for the  semester, Pierre Desrochers of the Geography Department of the University of Toronto at Mississauga.  Many of you are probably familiar with Pierre’s work.

As I did with Chris, I gave a brief introduction that both said something about the speaker but also talked about the issues each was addressing.  I tried to pick themes that illustrated the ways in which libertarianism shares the values of the left. In  Chris’s case, I talked about the anti-imperialist tradition of classical  liberalism.  For Pierre last night, I talked about the parallels between the War in Iraq and the calls, especially in the current issue of Time, for a “war on global warming.”  I share a slightly revised and extended version of my thoughts on those parallels below.

Continue reading "Rushing to War, Part Two" »

Front Page Coverage, But Where is the Economics?

20080414135447_3i The Wednesday April 23rd edition of The Washington Post has a story about a UN report on the food crisis that is spreading throughout the world.  The proposed solution to the "silent tsunami" is government policies of aid and a mix of command and control.  Josette Sheeran of the World Food Program is quoted as stating that "I think much of the world is waking up to the fact that food doesn't spontaneously show up on grocery store shelves."

Didn't Adam Smith tell us in The Wealth of Nations that the butcher, the baker and the brewer provides us with our daily meals not due to benevolence but self-interest directed toward mutually beneficial exchange?

So the intellectual battle in economic policy and over the basic lesson of economic science is far from settled.  And while it is important once again to demonstrate to Ms. Sheeran and others the power of the spontaneous order of the market mechanism, to really address this issue we need to detail the facts of the policy failures that are resulting in the recent spike of food prices.

Who have you read that provides the best discussion of the current crisis with food prices from an economic point of view?

BTW, F. A. Hayek once said that the economist is called upon by the public to comment on policy matters more often than any other social scientist but to have his advice ignored almost as soon as it is given.  Such is our plight.  What remedy do you have to rectify that situation?

Dr. Dan D'Amico

Img_3994 It is with great pleasure that I announce that Dan D'Amico successfully defended his dissertation on Tuesday April 22, 2008.  Dan is a deep thinker and committed Austrian economist and radical libertarian social thinker.  His dissertation addressed the 'imprisoner dilemma'.  D'Amico uses economic analysis (market process theory and public choice analysis) to examine and adjudicate the debates in criminal justice.  Should our criminal justice system focus on rehabilitation, retribution, or restitution?  D'Amico argues that while the literature seems to have settled on proportionality, the political production of criminal justice services fails to live up to that standard.

D'Amico also argues that market provision of criminal justice will comparatively speaking outperform state controlled systems.  For his outstanding dissertation work, Dan has also won the Israel M. Kirzner Award for the Outstanding Dissertation in Austrian Economics at GMU.  Congratulations to Dan.

In addition to being an economist full of penetrating insights, Dan is an outstanding teacher.  We will not only be reading and learning from Dan's scholarship for the next few decades, but I imagine the Austrian community will have D'Amico students running around for years to come.  Dan will join with Walter Block at Loyola University of New Orleans next fall and form one of the most promising dynamic duos in the economic teaching ranks.  At GMU, I have benefited greatly over the years from students from Hillsdale, Beloit, and Loyola.  During my career I would argue that the most effective undergraduate teachers as measured by sending students on to pursue a PhD in economics have included Hans Sennholz, Richard Ebeling, and Walter Block.  My prediction is that Dan will follow in that tradition.  We will have to change our nickname for Loyola students from "Block heads" to "D'Amico duplicates" and I for one cannot wait to see the students that Block and D'Amico jointly produce at Loyola and the pure fun I will have working with them here in graduate school at GMU.

Please join me in congratulating Dan for his great accomplishment and wishing him well as he embarks on his most promising future as an economist and teacher.  On a more personal note, Dan is one of the really 'great guys' who has walked the halls of GMU economics and his intelligence, commitment to truth and justice, and his joyous nature will be missed as he moves on to his own teaching and research career.  I know I will miss him very much.  However, I am also thrilled that he has found his career path and am fully confident he will not only make his mark in economics, but will make a significant mark on the lives of hundreds (perhaps thousands) of students over the next few decades.

An Economics of Pirates Research Update

Close to a year ago I blogged about a new pirates paper I was writing investigating the economics of infamous pirate practices. Since then, the paper has undergone massive revisions. The new and hopefully improved paper is now available on my website.

You can download it here: "Pirational Choice: The Economics of Infamous Pirate Practices."  

For those who have emailed me over the past half year or so looking for the paper since I removed it to revise, thank you for your patience; I hope the wait was worth it.

Also in June of last year I mentioned that I would soon be putting the third part of my economics of pirates trilogy on my website in the fall. It's now spring and, as a number of you who have emailed me looking for this paper have noted, the title is up but the link is not yet active. Very soon it will be, so stay tuned.

Finally, I'm now in the process of writing a book on the economics of pirates entitled, The Invisible Hook: The Hidden Economics of Pirates, History's Most Notorious Criminals. It's currently under contract with Princeton University Press and, with any luck, will be out in 2009. Here I explore in depth the economics of all manner of pirate behavior.

March 2008 Issue of The Freeman Now Available

The March issue of The Foundation for Economic Education's excellent monthly magazine The Freeman is now available on the web.  You can find the table of contents here.  Contributors include Gene Callahan, Walter Block, David Henderson and yours truly.  My piece is "Profit:  Not Just a Motive," (PDF) and it explores the problems with the frequent argument on the left that we should "take the profit motive out" of various activities and industries, especially health care.

Enjoy the whole issue!