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Ronald Bailey cites a fascinating experiment conducted by British economists Daniel John Zizzo and Andrew Oswald. First, the researchers placed subjects in a gambling game. Then, as Bailey reports,

At the conclusion of the gambling sessions, each player was given the chance to spend his own money to anonymously "burn" some of the cash won by his fellow participants. It was made clear that there was no prospect that burning his fellow player’s winnings would in any way make him richer. In fact, if he chose to burn another player’s money, he had to pay between 2 cents and 25 cents for each dollar subtracted from the other player’s take.

Zizzo and Oswald found that nearly two-thirds of players happily paid for the privilege of impoverishing their fellow participants.

This might explain Paul Krugman's attitude toward highly-paid CEOs.

Discussion Question. Would you be willing to pay something to have some of Bill Gates' wealth taken away (not given to someone else, but simply destroyed)?

'Mindles Dreck' discusses one cause for volatile prices in the stock market. Small changes in beliefs about future earnings can lead to large swings in prices. He cites this paper by Mordecai Kurz.

if agents disagree then the state of belief of each agent, represented by his conditional probability, must fluctuate over time. Hence the distribution of the individual states of belief in the market is the root cause of all phenomena of market volatility.

Bill Sterling of Trilogy Advisors mentioned Kurz's work to me after I wrote Future Uncertainty and Present Indeterminacy.

Discussion Question. Can you give an example of an optimistic scenario and a pessimistic scenario for the U.S. economy for the next five years?

'Jane Galt' suggests that Japan's stagnation may be caused by demographics, and that as the population ages in the U.S. we may face similar problems. About Japan, she writes

the population is aging fast. People alive today know that there are not enough people in the workforce to support a public pension; they're trying to sock it away for their retirement. Unfortunately, all this saving, much of which goes into government bonds for boondoggle construction projects with a negative net return, is killing their economy now, which doesn't improve the future outlook.

This is a very Keynesian point of view. It says that the problem in Japan is excessive saving. I would raise two quibbles.

1. The saving might not be excessive if the rates of return were higher. If the saving were being channeled into more productive investments, the returns would be higher, which would reduce the need for saving.

2. My favorite solution for demographics, which is a phased-in increase in the retirement age, might help here. If people know that they are going to spend more of their years working and fewer years where they are not earning a salary, then the need to save decreases.

Discussion Question. Some people, including economists, argue that to keep social security sound we have to save and invest more. Does Japan's experience raise questions about this?

Economist Stan Liebowitz thinks that it is puzzling that CD's still sell, given the volume of music downloading that takes place.

We have more downloads than legitimate sales; that's a very big market. You don't need sophisticated analysis to see a 30 percent drop in CD sales and to say that it wouldn't be due to a minor recession. And that's the kind of thing you should see if there's a massive amount of pirating that's much greater than what existed before.

What is surprising, according to Liebowitz, is that we do not see a 30 percent drop in CD sales.

Discussion Question. Music downloading can both substitute for and complement CD sales. What does the observed behavior say about the relative magnitude of these two effects?

Doug Bandow points out that the pharmaceutical industry has created a great deal of wealth, and this has made it a tempting political target.

Federal and state officials are seeking to control prices, limit sales, destroy industry marketing networks and undercut patent rights. These efforts could hobble an industry that today dominates the globe while providing manifold health benefits through new drug discoveries.

I also have written on this topic, in Cruel Paternalism.

Discussion Question. Are there ways to reduce the marginal cost of medicines to consumers without destroying the incentives for research?

Brad DeLong makes the case that comparative advantage is the most poorly-understood principle of economics.

a huge number of people think not in terms of "comparative" but of "absolute" advantage: they think that if American businesses can produce goods using less worker time than other countries, that we have no business importing such goods. But they are wrong. The true source of long-run wealth is for us to specialize in what we are best at--not for us to distribute traded goods-sector workers around all sectors and make everything in which we are more productive than other countries.

Discussion Question. Suppose that I can mow my own lawn three times faster than someone who I might pay to do it. Should I mow my own lawn?

Reason's Ron Bailey argues that farm subsidies in rich countries serve to aggravate poverty in poor countries.

Out-competed by rich subsidized farmers, farmers in poor countries (who often make up more than half the population) are stuck on a subsistence-farming treadmill--never able to afford better seeds, equipment, or fertilizer that would help them compete and improve their families’ lives.

Bailey argues that governments in poor countries also take measures that are counterproductive from the standpoint of reducing poverty.

Discussion Question. Eliminating agricultural subsidies would help taxpayers and consumers in developed countries, as well as making it easier for poor countries to export their products. Why are agriculture subsidies so entrenched politically?

Rudiger Dornbusch says that Latin America's economic performance is unacceptably poor.

Over the past 20 years, annual per capita GDP growth in Latin America averaged 0.35%. At that pace, an economy would need 200 years to double in size. In Asia, the standard of living doubles every decade.

...Profound misgovernance, not bad luck, is to blame for economic stagnation.

Dornbusch argues that in Latin America, privatization has meant little more than temporary windfalls for governments, which used proceeds from asset sales to finance wasteful spending. Corrupt governments that operate for personal gain rather than the general welfare are the heart of the problem, in his view.

Discussion Question. Some of the corrupt leaders are democratically elected. Can anything be done about the problem?

I say that information wants to be free, but people need to get paid. The writer of a blog called Objectionable Content writes in a long post called "The Net Ecology" that

Information won't be free for two reasons.

1. Need is fungible -- scarcity in other areas means that producers of information still need to engage in trade in order to survive
2. The scarcity of the new -- scarcity will continue to obtain in information products not yet produced Let's start with the second point.

His point is that people need to get paid in order to create the first copy of an information product. This means that the need for trade and markets is not going away.

Discussion Question. Are markets still appropriate if the cost of maintaining a market is higher than the cost of providing the actual good or service, an issue raised in Asymptotically Free Goods?

Business Week reported on the results of a study that was published by Xavier Sala-i-Martin in an NBER working paper.

We estimate poverty rates and headcounts by integrating the density function below the $1/day and $2/day poverty lines. We find that poverty rates decline substantially over the last twenty years. We compute poverty headcounts and find that the number of one-dollar poor declined by 235 million between 1976 and 1998. The number of $2/day poor declined by 450 million over the same period.

For the world as a whole, Sala-i-Martin found that inequality in world income declined over the past twenty years. Much of the progress that occurred was in China and India. The situation in Africa actually worsened.

Discussion Question. What policies might eliminate the poverty that remains, particularly in Africa?