Coordination Problem

Efficient Anarchy

I have a new paper forthcoming in Public Choice entitled, "Efficient Anarchy." You can view it here. Here is the abstract:

Can anarchy be efficient? This paper argues that for reasons of efficiency, rational, wealth-maximizing agents may actually choose statelessness over government in some cases. Where markets are sufficiently thin, or where government is prohibitively costly, anarchy is the efficient mode of social organization. If total social wealth under conditions of relatively lower levels of trade is not substantially smaller than it is under conditions of relatively higher levels of trade, the cost of government may exceed the social benefits it provides. Likewise, if the cost of a formal state is sufficiently large, even substantial differences in social wealth under these two scenarios may prove too small to justify the formation of government from a cost-benefit perspective. The framework I provide explains the persistence of anarchy in two major areas where we tend to observe it: among primitive societies and at the global level.

The Laws of Lawlessness

I have a new paper on anarchy, available here. Here is the abstract:

Can anarchy produce social order? When government is absent widespread violence and banditry threatens to plunge society into bloody chaos. Such was the case among the inhabitants of the Anglo-Scottish borderlands between the 13th and 16th centuries. The border people pillaged, plundered, and raided one another as way of life they called "reiving." In the face of the threat this lifestyle posed for social order, border inhabitants devised an overarching set of customary rules called the Leges Marchiarum to regulate the reiving system. These `laws of lawlessness' governed all aspects of cross-border interaction and spawned novel institutions of their enforcement including, "days of truce," bonds, "bawling," "broken men," "trod," and deadly feuds. The Leges Marchiarum and its institutions of enforcement produced social order amidst anarchy along the border.

The War on Drugs and its Consequences

The Economist this week has a paper on the re-election of Álvaro Uribe in Colombia (see here). Among other things, the article explains the nefarious effects of the “war on drugs” on Colombia and other Latin American countries. Any article in a well-respected magazine explaining that drug prohibition (and US drug policy with regard to cocaine) is not a good idea because of its terrible unintended consequences (especially in terms of violence) is rare enough to be mentioned. As The Economist puts it:

The main barrier between Colombia and normality is the failure of cocaine prohibition in consuming countries around the world. Until richer countries move to legalize the drug, removing the superprofits and violence that its illegal status attracts, even an exceptional leader, such as Mr Uribe, will struggle to complete the task of pacifying his country.

Drug prohibition has been a failure for many years, and its consequences on the developing world have been terrible. Hopefully some day this now old message (Milton Friedman has explained this for a long time) will be heard.

It Is the Question that Drives Us!

Tyler Cowen asks the question any assessment of modern economics must consider.

Also, Ed Phelps announces the introduction of a new journal, Capitalism and Society.

The Berkeley Electronic Press, together with the members of the Center on Capitalism and Society, Edmund Phelps (Director), Amar Bhidé,  Roman Frydman, Bruce Greenwald,  R. Glenn Hubbard, Janusz Ordover, Richard Nelson, Andrzej Rapaczynski, Jeffrey Sachs, Robert Shiller and Joseph Stiglitz, are pleased to announce the launch of the Center's new peer-reviewed journal, Capitalism and Society. 

The capitalist system is noted for its outstanding dynamism. Yet established economic theory does not capture that dynamism. The Center (and its new journal) aim to further understanding of the mechanisms of capitalist dynamism and the important satisfactions it bestows.

Capitalism and Society (supported by a generous grant from the Kauffman Foundation) provides an outlet for scholarly work that advances the goals of the Center whose length, subject matter, approach, etc. might preclude publication in a standard journal.  We want to stimulate and provide a forum for discourse for ideas that may not be proven beyond a reasonable doubt. Accordingly we will publish papers along with the commentary of a reviewer, leaving room for "agreement to disagree."

Seems to be a perfect outlet for the Austrian economists to jump into the conversation.  BTW, what do you think the link is between Tyler's question and the gap in our theoretical understanding of capitalism that drives the new journal?

Op-Eds On Targeted Tax Incentives

John Shoaf and I have an op-ed today in the Memphis Commercial Appeal on the targeted tax incentive program in Memphis (i.e., the PILOT program). The op-ed is a good summary of the position we take in the study (see here).

I also have an article on targeted tax incentives (and the Memphis case) this week in Forbes Magazine (see here). While the article in Forbes may reach more people, I believe our paper in the Commercial Appeal may have a greater local impact. We have already been in touch with a few local policymakers who are interested in our view.

Body Type, Steroids and Sports Performance

I am currently watching the French Open tennis match between Rafel Nadal and Lyetton Hewett.  Rafel Nadal is a tennis sensation and also in possession of one of the most buff bodies we have seen in tennis.  Not quite as buff as Chip Hooper (a college All-American in 1980s and journeyman pro), but Nadal's results are more impressive on the pro tour.  Athletes in general are nowadays bigger at a younger age than ever before.  On my high school basketball team we had two players who were 6'6" or so and though both were very good athletes (played in college, etc.) they were by today's standards very skinny coming at way under 200lbs, but at that time they were the norm.  Just look at the different pictures from elite athletes from time past compared to todays.  Here is Bjorn Borg, my favorite players from my youth.  Compare his body to Nadal's. 

Perhaps this is an unfair comparison only because of the differences in the basic frame that the player had to work with to start.  So compare Michael Jordan in college with Michael Jordan as veteran professional.  And finally just look at LeBron James's body as a teenager.

  

What is my point?  Commitment to weight training has obviously made a strong impression on the youth trying to excel in sports.  And overall fitness training for that matter.  Rod Laver's left forearm was bigger than heavyweight champion Floyd Patterson's, but the rest of his body was underdeveloped.  I once met a sports trainer who told me that he worked on John McEnroe once for a sore shoulder and he was convinced the guy was deformed --- strong left arm, non-existent right arm, no upper body definition, but great legs.  That was the tennis players body in 1970s-1980s.  And McEnroe has admitted to using steroids in his career --- they were legal at the time.  Borg, in fact, was perhaps the best athlete playing tennis during his era and I believe his playing weight was 155lbs even though he stood close to 6ft.  Though his heart beat was under 50 per minute, his 100 meter sprint was reportedly in the 10 second range, and in his youth he was supposedly as good a hockey prospect as he was a tennis prodigy (and remember he turned pro at 15).

Now do I believe all these guys are on steroids?!  NO.  It is just that they train so much harder at a younger age.  But there is no doubt that they are always looking for an advantage to improve their performance.  An elite athlete doesn't spend his/her time watching TV all day and eating ice-cream and chocolate cake.  So they are always looking for performance enhancing ways.  What is it that steroids do anyway?  By taking a pill do they make you a better athlete?  No.  Steroids don't give you better hand-eye coordination, nor do they improve your competitive attitude and willingness to win.  What they do is help an athlete recover between work outs and recover from injuries.  But the athlete is the one who has to put in the time working out and eating right to get bigger, stronger, faster.

Barry Bonds just passed Babe Ruth.  Marion Jones just won an international track meet. And yet the allegations of steroid use continue to swirl and charges of cheating seem to cheapen their accomplishments ---- though in both cases they never tested positive for steroids.  I have no doubt that they have sought every advantage to excel in their chosen endeavor.  So did Ty Cobb, Babe Ruth, Bill Tilden, Don Budge, George Miken and Bob Cousy.  Diet fads, training techniques, etc. have always circulated around sports to help athletes recover quicker and work harder.  In the 1970s it was rumored that one of the leading tennis players in the world used cocaine to dull the pain of the grueling side to side work outs his coach put him through.

And should we be shocked in horror that people use whatever devices are at their disposal to gain an advantage.  Don't academics always look for an edge in the competitive game of scientific discovery?  We drink coffee to stimulate our minds.  Thomas Szaz has a wonderful phrase for the social sanctions imposed by the state on certain activities and not others --- ceremonial chemistry.  Alcohol is accepted, pot is not.

I am not advocating drug use to enhance either our minds or our bodies for performance.  I don't think the science is refined enough for us to know the long term risks and I believe that in many walks of life we are myopic and prone to make unwise decisions.  But they are our decisions to make.  If a pill was here before me and would improve my IQ by 100 points, would I take it for the sake of science, would I fault others if they did when I didn't? 

Despite all that is wrong with modern sports, we can still marvel at Barry Bonds's hand-eye coordination and perfect timing and discipline at the plate, we can marvel at the beauty and speed of Marion Jones, the strength, agiility and skill of Lebron James, and the mastery of the clay court tennis game by Rafel Nadal.  Though keep in mind that I am stil pulling for Roger Federer this week because to me he epitomizes progress in the sport as he combines the backcourt game of Borg with the net game of Samparas to take tennis to an entirely new level of greatness.

The Problems With Targeted Tax Incentives

John Shoaf and I have a new study out. Local Tax Incentives in Action: The Payment-in-Lieu-of-Tax Program in Memphis, Tennessee is a study of Memphis and Shelby County’s “PILOT” program. The study, published in the Policy Series of The Mercatus Center at George Mason University, finds that the program’s focus on using tax policy to attract economic activity is valid, but questions the reliability of existing estimates of programmatic impact and cautions against the discretionary nature of the program which creates incentives for lobbying and political gamesmanship. After discussing the limits of the PILOT and similar targeted tax incentive programs, we offer concrete solutions. In my view, this study is a very good example of the logic of economics in policy debates. (See here to download the study.)

Is It Reasonable for a PhD Student to Worry about being caught in the academic version of a 'Roach Motel'?

Yes, according to this summary of a recent paper by Paul Oyer of Stanford University. See the discussion of this paper at Slate.

If you are concerned about ending up at an institution that "you cannot check out of", then the advice is straightforward --- go to the best graduate school that you can get into that will pay your full way, decide on a research program early and work closely with the top person at your school in that field, write early and often, attend conferences, and publish (and the higher the placement in terms of rank of journal the better).

Good luck.

Schools Out for the Summer --- Time to Study Seriously

A classic from my youth was Alice Cooper's "Schools Out" --- you know:

School's out for summer School's out forever School's been blown to pieces

No more pencils
No more books
No more teacher's dirty looks

Anyway, as college terms have ended it is time for students to really jump start their studies. If you are a high school student, read great novels this summer. Ayn Rand's books would be perfect, especially the great Atlas Shrugged. At some point you should also read your way through the classic works in literature for your own enjoyment, and not for grading and course credit. If you are older and in undergraduate school and hope to really educate yourself, get the course syllabus from St. Johns College in Annanpolis, MD and consider working your way through the Great Books.

Now if you are an undergraduate studying economics and have aspirations to becoming a professional economist make sure you get a healthy diet of mathematics on the one hand and history on the other. Read great historians, just like you read great novelists, to learn to write, and read mathematics and reason through problem sets in order to learn how to think clearly and rigorously. It is mistake to confuse formalism and rigor, but it is also a mistake to reject reading mathematically oriented work simply because you have doubts about injudicious applications. As Marshall argued mathematics can be an indispensible servant to serious thinking, but what it cannot become is the master. In the Austrian critique of mathematical economics it is this question of the master-servant relationship that is being raised, not a wholesale rejection of mathematics as a discipline. But in addition to reading math and history, if you have time read the great works in economics, learn the evolution of economic ideas, and read the great public policy debates and know the main positions. A good place to start is with Milton and Rose Friedman's Capitalism and Freedom and then Free to Choose.

If you are a graduate students in economics, read the journals and write. You write as you read, so pick the great writers in economics to read ---- starting with McCloskey's discussions on the writing of economics. Write economic analysis everyday --- 3 to 5 pages. Learn how to construct an argument, and understand how big is big. And also remember that the best economics is also joyful economics. Steve Levitt, for example, obviously enjoys tremendously thinking like an economist. I had Kenneth Boulding as one of my teachers and I must say that he combined a sheer joy of ideas with a passion for the task of learning that was absoultely amazing and downright inspiring. Read thinkers like that and stay away from those that labor with their words, and produce boring work. My favorite writers in economics are: Gordon Tullock, James Buchanan, Axel Leijonhufvud, Ronald Coase, Mancur Olson, and Murray Rothbard. My favorite thinkers in economics are Ludwig von Mises, F. A. Hayek, Israel Kirzner, and James Buchanan so the two groups are not perfectly interchangable. But there is no doubt a connection. The bottom line --- read to learn to write, and then write daily to refine your craft, and then share with others completely so you can get the critical feedback you need.

If you are a professor, use the summer to read all the things you are not able to digest during the academic year due to other obligations. Read popular treatments of policy issues, and historical works. I like biographies --- both of people --- e.g., Richard Parker's biography on John Kenneth Galbraith --- and of ideas --- e.g., David Warsh's Knowledge and the Wealth of Nations. Enjoy the time away from preparing lectures and pursue your passions. One of the best pieces of advice I ever got was that the trick to academic life was to pursue your passions, allow your heart to dictate your interests, but learn to analyze your passions with your head.

Just remember 'schools out for the summer'.

Can Growth Be Explained Without The Entrepreneurial Process?

The Economist last week had an interesting article on growth theory and a recent book by David Warsh: Knowledge and the Wealth of Nations (see here). The article summarizes the state of the economics of growth since Robert Solow’s famous paper in 1956 and the rise of endogenous growth theory in the last thirty years (especially with the work of Paul Romer). Romer’s argument rests on increasing returns to scale and the non-rival nature of knowledge. According to The Economist, Solow has expressed doubts with regard to Romer’s endogenous solution. As the article puts it:

Solow did not intend in his 1956 model to deny that innovation is often dearly bought and profit-driven. The question is whether anything useful can be said about that process at the level of the economy as a whole.

As I read the debate, economists are stuck in between two solutions. On the one hand, technology falls like “manna from heaven” and thus no one can really explain the process of productivity change—it is exogenous. On the other hand, endogenously produced knowledge has increasing returns properties. But even then, one may wonder where those ideas come from. We are still in a closed universe.

Among neoclassical economists, Kenneth Arrow has the most acute perception of that issue. “While dissemination of existing information can certainly account for some gains in productivity,” he explained, “it is clearly necessary for sustained growth to have information new to the entire system, not merely learned from others. Where does this new knowledge come from?” Moreover, these models generally rest on assumptions that guarantee the increasing marginal productivity of capital.

Economists should consider the solution that reconciles both sides of the debate: entrepreneurial discovery. Indeed, it is only through entrepreneurial discovery that technological change becomes endogenous and that the need to do away with the fundamental assumption of decreasing marginal returns in economics disappears.

One reference is Israel Kirzner’s chapter 4 in Discovery and the Capitalist Process. The work of Randall Holcombe is also useful here. Finally, see my working paper, “Economic Transformation, the Pretence of Knowledge and the Process of Entrepreneurial Competition” (here), written for the debate on Economic Transformation at the New Zealand Treasury where I developed all these points.