Scroll down to find a specific post on this archive. For searching the entire archive, use this search tool.

I continue to view the latest Nobel Prize in economics as being in conflict with the Chicago school. David Warsh has a long essay on Vernon Smith, including this quote on how Smith's first results were treated.

"A great discovery, right? Not quite, as it turned out," Smith later wrote. The paper was dismissed, and dismissed again. "At Chicago they already knew that markets work. Who needs evidence?"

Experimental economics still is not entirely embraced by freshwater economists. For example, Steven Landsburg has a cynical view about what is demonstrated by one experiment, in which people supposedly are willing to sacrifice money to give to someone else, provided that a third party matches the sacrifice.

There are only three explanations I can see for all this. One is that people just really enjoy moving other people's money around, independent of who those people are. Another is that people simply forget that there are no free lunches, and you can't give something away without making someone pay for it. Yet another is that people somehow care less about anonymous faceless taxpayers than about other anonymous faceless strangers. I'm not sure which of these explanations is right, but none of them does much to improve my faith in democracy.

Zimran Ahmed thinks that the results from the experiment are consistent with people supporting tariffs.

Discussion Question. Which explanation do you believe, or do you have another explanation for the experiment's results?

With the ongoing dockworkers' strike, 'Jane Galt' takes a dim view of the role of unions today.

While there's a certain part of me that revels in the glorious struggle of the unions in the 20's and 30's, I think trying to maintain a unionized workforce in 21st century America is a losing battle. Unions are rigid, combative, and fiercely protective of their turf, the exact opposite of what makes our economy so effective. They made perfect sense when people were just more dexterous horses, as in coal mines, or cheaper machines, as in assembly-line workers. But our technology has made that model outdated, not merely because we can replace workers, but because we can make them so much more productive, if only the unions will allow it...I find it hard to see a compelling state interest in encouraging this.

In her view, government labor law is biased in favor of unions, and she would change those laws.

Discussion Question. Why does it make sense for white-collar government workers to have unions?

The Institute for International Economics has published a book by Surjit Bhalla called Imagine There's No Country, which looks at globalization and poverty. Of particular interest is this chapter, which tracks the reduction in poverty in the past fifty years. He finds that the global poverty rate, using a poverty line of $1.08 per day of income (a World Bank standard), has fallen from over 58 percent to just over 11 percent.

It is tempting to conclude that declining poverty in the world is really about declines in China and India...It is true that the 1980-2000 globalization period bypassed poor people in Latin America and sub-Saharan Africa...Asia saw more than a billion people rise out of poverty in just 20 years--a miracle.

Discussion Question. What accounts for the relative success of China and India?

Glenn Hubbard, Chairman of the Council of Economic Advisers, sees the economy this way:

In short, the stock market decline will not cause consumption expenditure to collapse. House price inflation may well moderate in the next few years but there is no housing bubble about to be pricked. Refinancing has helped maintain consumption growth but has not propped it up. And the economic fundamentals are sound.

Certainly, it is conceivable that the economy will not suffer any more adverse consequences from the decline in the stock market and the end of the refinancing/housing boom. However, the more pessimistic scenarios are at least as plausible. I fail to understand why Hubbard and the Bush Administration are willing to bet on Rosy Scenario, rather than propose further stimulus.

Discussion Question. The Federal Budget has taken a large swing toward deficit, and long-term real interest rates are down. Is there an argument to be made that this constitutes enough stimulus?

An article by Joel Garreau in the Style section of Sunday's Washington Post interviews several technology optimists who believe that medical advances will enable people to stave off aging and death. One of those interviewed is Ray Kurzweil, who also gave this recent interview to EE Times. In the Post story, Kurzweil says

"If I look at my kids--kids in their teens, twenties or even thirties...they will be young...The oblivious generation is my own. The vast majority are going to get sick and die in the old-fashioned way. They don't have to do that.

"...I really envision living through this century and beyond..."

Also quoted in the article is biotech entrepreneur William Haseltine, who says that people now in their fifites may live "to 110 or 120 in reasonably good health."

Discussion Question. What does this imply for social security?

As Lawrence Lessig argues his case before the Supreme Court to try to declare the latest copyright extension unconstitutional, he might want to take this quote from Thomas Macauley.

The principle of copyright is this. It is a tax on readers for the purpose of giving a bounty to writers. The tax is an exceedingly bad one; it is a tax on one of the most innocent and most salutary of human pleasures; and never let us forget, that a tax on innocent pleasures is a premium on vicious pleasures. I admit, however, the necessity of giving a bounty to genius and learning. In order to give such a bounty, I willingly submit even to this severe and burdensome tax. Nay, I am ready to increase the tax, if it can be shown that by so doing I should proportionally increase the bounty. My complaint is, that my honourable and learned friend doubles, triples, quadruples, the tax, and makes scarcely any perceptible addition to the bounty.

Discussion Question. How does the discount rate affect the ability of copyright extension (lengthening the amount of time before a copyright expires) to provide incentives for creative work?

This year's Nobel Prize in economics went to Daniel Kahneman and Vernon L. Smith. Both are known for observing actual human behavior when faced with ordinary economic problems. Kahneman, and his colleague Amos Tversky, identified many systematic biases in the way people deal with risk. Their work focused on the decisions of individuals. Smith pioneered the methodology of creating experimental markets. His work focused on predicting market outcomes by having experimental subjects participate in simulations.

The reason that I describe this year's Nobel as a slap for the University of Chicago is that the Chicago tradition does not open up the assumptions of individual maximizing behavior to empirical study. The famous illustration is Milton Friedman's billiard player, who knowns no physics yet behaves as if he were making elaborate Newtonian computations. Contrary to Friedman, this year's Nobel laureates believe that it pays to study the actual behavior of billiard players.

Here is a press release from Princeton University on Kahneman's award. Here is Vernon L. Smith's home page. Here is the Nobel committee's explanation of this year's award, which includes the following:

A challenging task in financial economics is to consider the extent to which the effects of systematic irrationality on asset prices will be weeded out by market arbitrage.

UPDATE: Zimran "winterspeak" Ahmed confirms my view that this year's Nobel will not be well received in Chicago.

Discussion Question. Both Kahneman and Smith have done studies that support the possibility of wild swings in asset prices. Do you think that the bubble and crash in the U.S. stock market helped sway the Nobel committee on their behalf?

In this essay, I discuss the economic issues related to spectrum allocation and wireless Internet access. Near the end, I write,

Perhaps one solution would be for the FCC to hold another auction. In the new auction, current license owners could put their spectrum up for sale, and the spectrum could be bid on by new or existing owners. Once the spectrum has been re-auctioned, it could be used for any purpose, and it could be sold at any time.

A similar suggestion has been made by David Farber, as reported by Business Week.

Instead of having the FCC allocate the spectrum, Farber and another U Penn professor, Gerry Faulhaber, think Washington should let any organization that now controls spectrum auction it to the highest bidder.

All of this harkens back to Ronald Coase, who first suggested that the private sector could resolve the issue of allocating spectrum.

Discussion Question. Would current spectrum owners realize capital gains or capital losses if their spectrum were put up for auction along the lines suggested?

U.S. News and World Report opines that Federal government spending is rising too quickly.

It's up by almost 14 percent, the biggest government spending spree in a generation. In fact, for the first time in over 30 years, annually appropriated programs controlled by Congress and the president have grown faster than formula-driven entitlement programs like Social Security and Medicare. Only a third of the entire $91 billion increase in annually appropriated funds has been spent on homeland security and national defense; the rest goes for everything from highway construction to farm subsidies.

On the other hand, Paul Krugman writes,

we should have a sensible plan for fiscal stimulus — one that encourages spending now, to bridge the gap until business investment revives...extend unemployment benefits, which are considerably less generous now than in the last recession; this will do double duty, helping some of the neediest while putting money into the hands of people who are likely to spend it. Second, provide aid to the states, which are in increasingly desperate fiscal straits. This will also do double duty, preventing harsh cuts in public services, with medical care for the poor the most likely target, at the same time that it boosts demand.

If these elements don't add up to a large enough sum — I agree with [Jeff] Madrick that $100 billion over the next year is a good target — why not have another rebate, this time going to everyone who pays payroll taxes?

I agree with Krugman. The biggest near-term concern should be the recession. In a recession environment, higher government spending is to be welcomed, not condemned.

Discussion Question. Some conservatives have claimed that Krugman is inconsistent in opposing long-term tax cuts while endorsing short-term fiscal stimulus. Why would Krugman and other economists argue that such a position is not inconsistent?

FCC Chairman Michael Powell made these remarks about spectrum regulation.

We don't seize all the land in the United States and say, 'The government will issue licenses to use land.' If my neighbor puts a fence one foot onto my property line, there's a whole body of law about what I can do about that, including whether I can tear it down. If a wireless company was interfering with another wireless company, it's a similar proposition. There are scholars who argue—indeed, the famous Ronald Coase treatise that won the Nobel Prize was about this—that spectrum policy is lunacy. The market could work this out, in the kinds of ways that we're accustomed to.

Of course, as Thomas W. Hazlett points out, Coase may well have worked out his ideas on how private firms could resolve "the problem of social cost" in the course of his analysis of the FCC and spectrum regulation.

Discussion Question. Can you see how the Coase theorem might apply to the regulation of radio spectrum?