Drive by on inequality

Quick post, which is just a repost of a response to an essay Woj linked on Facebook by Roger Koppl called "Inequality Matters."


I think he misses the point about why most people don't talk about it being terribly important, or rather both points.

1: Inequality can be due to political shenanigans, but it can also be due to differences in productivity, differences that often increase as more possibilities for increasing productivity increase. There is no reason to assume that any given unequal distribution is due to nefarious ends. There will always be inequality so long as there are differing rewards for differing degrees of work and success.

2: Most paragraphs starting with "There is too much inequality" end with "And so the government should have a program redistributing from those who make more to those who make less." When most people complain about inequality they are not thinking of the 6 families of US sugar producers who are rich because of tariffs, or even politicians who sell favors. They are complaining that some people make lots of money, regardless of why.

In other words, until people understand that inequality is not itself unjust, but injustice can exacerbate inequality, they are going to be barking up the wrong tree. In fact, in their efforts to improve equality by redistribution they are likely to make the problem worse.

How Freedom Dies Indeed

Warren over at Coyote Blog has an absolute knack for finding those "This is exactly what is wrong with your philosophy/behavior" quotes. In this case, he precisely sums up why letting government do whatever it is popular enough to get away with is a one way ratchet. Go over there and read it, but plan a few moments to really think about what our human tendency to want to hand over power to government when "our team" is in control means.

What defines "good governance?"

In further discussion about whether constitutions were good, necessary, the devil's work, etc., a somewhat strange issue popped up: no one seemed to agree upon what makes for good governance. There seemed to be no convenient way to compare countries. When the best categories you can come up with are "Pretty Successful, Hasn't Exploded Yet" and "Hell hole" you really have hit a road block in the debate.

Thinking upon this further, there does seem to be a bit of a gap in even agreeing upon what government's prime metrics should be, much less how to measure them.
Should government try to maximize freedom? Even if you can agree upon that (and strangely that is not always possible) defining freedom is a little difficult. Measuring whether US or UK is more free is far more so.
Is the mark of a good government a strong economy? That should be easier to measure, but as it turns out isn't too obvious either. You can use per capita GDP, but then can you say a poor country that is growing quickly has a better or worse government than a relatively rich country that grows slowly? Maybe the poorer nation is fantastically governed, and just needs time to catch up. Throw in the fact that GDP isn't even a good measure of wealth, and how easily economic numbers can be cooked by less honest regimes and that is no longer a good estimate.
People sometimes cite crime statistics, or health care, or some other factors, but those suffer many of the same problems as GDP. Crime rates might be useful on a city by city, county by county level, but at the national level you run into problems of categorization, differences in demographics, and even just straight cultural differences that cloud the issue. Health care is no less awkward. The UK and most other nations measure life expectancy differently than the US, due mostly to how they treat death in the first few days of life, and that makes direct comparison remarkably difficult if you don't know all the subtleties and correct for them.

In the end, the best way to compare that I can think of is to look at net immigration between two countries. If more people are moving from Country A to Country B than from B to A, you can probably assume B is considered to be a little better across all possible criterion. This also has the advantage of being a pretty clear number, with data over time. One can argue that this is because of B having a better economy, less civil strife, or just looser immigration laws, but everything but immigration laws can perhaps then be bundled into "outcomes people wants from their government." (In fact, maybe looser immigration laws too.) If people want a multitude of different things from the government of the territory they choose to live in, perhaps it is best just to look at what bundles of those things they choose, and then consider why some bundles are chosen over others.

EconResponse: Seidman on the Constitution

This past week's EconTalk was with Louis Seidman about a book he wrote about the Constitution, and the fact we don't need one, and probably shouldn't have one. (That's the weak form; I think he actively suggests we should not have one, and having one is bad, but he sort of oscillates around that.) This is a really good EconTalk, and everyone should really listen to it, as I think he misses the point of constitutions and what their purposes are, but makes some really good points despite that.


I am going to skip the summarizing and assume you are going to listen to the podcast, partially in the interest of remaining (blessedly) short, and partially because the talk remains focused enough that there is really just one point to discuss.

Long story short, Seidman claims that the United States Constitution, and constitutions in general, are pointless at best, and authoritarian at worst. The first point he supports by demonstrating that legislators often completely ignore the C., and often times in ways that are good points. For example, the Louisiana Purchase was pretty certainly not constitutional, but might have been a good thing to do. Likewise, many things the Federal government does are blatantly unconstitutional but it doesn't seem to matter because the C. can't order people around or control troops etc to enforce itself. Other countries don't have constitutions and they don't explode, so how do we know that they are useful?

The second point is that saying "You can't do X because it is unconstitutional!" is rather authoritarian and anti-thought, and that you shouldn't rely on that but rather try to convince your interlocutor of your points. That's the nutshell version.

So, here is the over all point Seidman misses I think: the point of constitutions is to take certain matters off the table entirely. Which matters are key, and some constitutions are better than others in this regard, but the important point is that having every issue up for debate is dangerous.

Take for instance slavery, one of the glaring omissions of our C. Imagine if every 50 years or so we had to have a debate about whether or not to reinstate slavery. From a purely economic perspective this would be quite wasteful as you would have people employed in studying and coming up with reasons for and against slavery, presumably smart people who could be doing something more productive. From a terrifying public policy perspective, what happens if the third or fourth time around there isn't a good orator on the anti-slavery side, but a brilliant and charismatic spokesman for the pro-slavery side? Sooner or later this is going to happen, which means sooner or later slavery will come back in vogue, even if under a slightly different name.

If that example seems far fetched, consider the debates between J.M. Keynes and F.A. Hayek. Arguably Hayek won the intellectual debate, but Keynes just smashed him in the realm of public opinion, due in large part to his relatively simple message and massive personal charm. If English hadn't been Hayek's second language, or Keynes had a stutter, things might have been very different.

The roots of Seidman's misunderstanding of this point is his misunderstanding of collective vs individual action, and his seeming conflation of negative and positive rights.

He often says "we want" or what "we can do" when describing the actions of governments, but the key point he thus misses is that governments are made of individual people, and even when acting as representatives have their own incentives and goals that do not, and can not, align with every one of their constituents. While it is certainly possible that this works out fine, it is more likely that politicians will use this to their own ends. Constitutions limit their ability to do this.

Counter intuitively, however, this defection by governmental agents is not the greatest danger inherent in governments. Rather, it is when governments do exactly what their voters want in times of passion that cause the most damage. By his own admission late in the podcast he says he does "not generally take a position on unrestrained majoritarianism" (right around 47:30). However, that is exactly what constitutions are meant to do, limit the harms that the majority can inflict on minorities and indeed themselves, just because it seemed like the best idea at the time. No one wants to be in a position where they have to argue persuasively as to their right to live with a lynch mob who thinks otherwise.

That last point is the junction of his misunderstanding of state action and the nature of rights. He often speaks in terms of positive rights, using phrases such as "you have to do X" instead of negative of the form "you can not do X to me." In so far as a constitution enumerated positive rights, I would agree that it would be authoritarian. However, negative rights are most certainly not authoritarian, as they do not require actions, but rather demand that you not do certain ones. Requiring that the government not kill you without a trial is not authoritarian, it limits the authority of government. Again, is it really preferable that we have to persuade others that they don't have the legal right to kill us? Consider the recent drone strikes against US citizens without any warrant or judicial review, and how Obama has yet to be thrown out of office before you decide that you can trust your fellow citizens to uphold your right to life of their own accord.

Also, as an aside, Seidman often makes the case that while aspects of the Constitution made sense 200 plus years ago, arguing that the decision that was made then still applies is authoritarian. He does not, however define at what point in time such decisions go from the legitimate will of the people to authoritarian nonsense. Which is to say, how often should we be willing to scrap everything and start over? 240 years is apparently too long, so is it 150? 50? A few weeks?

The US C., for all its many faults, seems designed to be a permissive rule set of what the government can do, which is to say what the national majority can do, and taking everything else off the table at the national level. I think Seidman is correct that ours has some serious issues, and only perpetuates as well as it does due to the fact the people seem inclined to agree with the general idea, but this is not due to an inherent flaw in the overall concept of constitutions, but with this particular manifestation. Seidman's lack of clarity on the subjects of positive and negative rights and governmental action (in addition to what level that action occurs on, which I didn't touch upon) prevent him from seeing that there have to be objective laws that limit the actions the government or a majority can take, if only because at the time of decision we can not rely on cool headed reasoning to restrain ourselves and our agents.

Amazon coining money, sorta

So, Warren over at Coyote Blog linked to this story in MIT Technology Review about Amazon's Virtual Currency. The idea is really interesting, but I want to find out a few more things:

1: I am going to be able to spend these in Amazon's store on anything, not just apps for the Kindle Fire, right? It seems almost metaphysically certain that will be the case sooner or later. Presumably media downloads like movies and e-books will come first, but, yea being able to drop virtual coins for a toaster would be nice.

2: If I write an app and get paid in virtual coins, am I going to have to pay taxes on the coins in dollars? What would that mean for online games if I do? That's a little odd to think about, considering that I can now spend in game currency for little gamey content things in say SWtoR without paying taxes; how is that going to be distinct from buying a little gamey thing from the app store? Is buying a new desktop theme for my Kindle with virtual coins earned selling some other gamey thing all that different from buying a new hat for my Sith with coins earned from slaughtering Jedi? Am I going to have to to pay taxes for credits earned expanding the Sith Empire?

3: The coins are currently pegged to the US dollar at 1 coin = 1 penny. (Well, ok "currently" Amazon plans on just giving away 10 million or so to Kindle Fire users to try out, but from what I understand the plan is to peg them.) Is there a plan in the future to de-peg them from the dollar?

The last question is what makes the first question important, and the second go from "sort of silly" to "extremely relevant." If I am able to keep my services and transactions denominated only in Amazon coins, how is that different from some in game currency? For example, it is not unheard of for players to offer services in say running instances to help lower powered players in exchange for in game currency. Is that different from lending programming or artistic skills to those with less of them in exchange for a virtual currency? There is an exchange rate of SWtoR credits to dollars currently that is every bit as relevant as any other exchange rate, just traded on different markets, so the exchange rate isn't the key to making a transaction "valid." In fact, if Amazon de-pegs the exchange rate, they would have a lot to offer by way of a stable currency. If they promise that the total number of Amazon Coins only will increase by 5% a year say, they most likely will become a much better store of value than the US dollar, even if only in a limited marketplace. If their use expands to ALL parts of Amazon's store, you could conceivably run most of your life's transactions only using the coins, and even just trade them in at market prices for dollars to pay for whatever else you need.

That is going to raise some interesting legal questions... and maybe some serious improvements in our current monetary regime.

EconResonse: Pete Boettke on Living Econ

This past week's EconTalk was with Pete Boettke about his current book Living Economics. I had a busy week last week and just got to really listening the second time yesterday. I might get this week's talk done over the weekend; Woj assures it will whip me into a frenzy. 

The discussion starts with some of Pete's memories working with the late, great James Buchanan. (Which I have an inordinate amount of difficulty spelling.) Some very nice stories and reminiscences. One key point, and one that I think is critical to the overall talk (and the ensuing controversy that apparently sprung up) was that Buchanan believed himself to be firmly in the traditions of Adam Smith, David Hume, J.B. Say and others in his work on Public Choice. This segued into a discussion of Smith and how the notion that self interest on the part of individuals leads to better or worse outcomes largely as a function of the institutions they work in. Over all it led to a discussion that I found interesting, and not particularly controversial, but then I generally like what Pete has to say.

 
Instead of describing what happened, let me instead put forth my understanding of what Boettke was getting at. I haven't followed the tempest that apparently followed in the blogosphere; my favorite tea pot has a little cow face for the spout and contains no abnormal atmospheric events what so ever, and I like it that way. From my second hand understanding, however, it seems that the key grumble was Boettke's quote (itself paraphrasing David Friedman) that 

The difference between economists like us and other economists is that we are not 9-to-5 economists. We are 24-7 economists; we think about it all the time.

He and Russ then clarified that he didn't mean that they were doing research when they should be playing with their kids, but rather that thinking about institutions and rules leads them to be constantly thinking of economics and how people interact. 

In fact, that is the difference he thinks is most important, and the focus of the talk: some economists, he calls them "mainline", think mainly in terms of rules and institutions, with the relevant propositions at their core, while others he calls the "mainstream" focus on "an institutionally antiseptic theory." This latter group disagree on the propositions, with the examples of Stiglitz and Lucas, and only agree on the methodology, which is to say "lots of math." The interesting point is that the math can absorb a lot of propositions, so much so that you can basically create any outcome you want with some tweaking, with just the small problem that certain propositions like 'everyone has different preferences' or 'people have different views on the future' make the math impossible to solve. (Enter multi-agent computer modeling, but so far the mainstream economics journals have not published much of it.) To paraphrase Bryan Caplan "If you assume the economy works just like the requirements of this construct, the construct gives you a great answer. If it doesn't, then you are back to nothing." 

Effectively, mainline economics entails thinking of institutions and individual behavior, micro explanations and solutions to macro problems, and mainstream entails looking for macro answers to macro problems, without considering how and why those problems emerged from the behaviors of individuals. Boettke further summarized it as mainline considers the state a referee while the individuals play the game, while mainstream considers the state a player as well. 

So, why don't I think this should be controversial? Because I see the economics that is taught at the big schools, the papers that make it into the big journals, the economists with big names, and you generally don't hear them saying "Well, in reality the economy is a hell of a mess and far too complicated for us to really understand deeply, much less control easily, and so it is best just to step back and let people do their thing, and so long as we keep them from directly hurting each other, everything will work out pretty well." Mainstream economists generally say just the opposite, something along the lines of "We can make all the outcomes better, if only you give us the power to make it so!" Which is probably why they are so popular; as much as people need to be reminded there are some problems that we can't try to fix without causing more damage, we love those who tell us otherwise, whether it actually works out or not. And getting back to the 24-7 vs 9-5 point, if you think of economics as the behavior of large aggregates, it is hard to imagine that you are applying those ideas to many different areas of your life. 

Any road, definitely listen to this Econtalk. Boettke has a lot of good things to say, not only about how we think about economics, but how we teach it to others.

Social Norms and Apathy

Last Monday Woj over at Bubbles and Busts and I got into a bit of a debate after class. Then Tuesday we started again, after clarifying "What were you actually saying Monday?" After a few minutes we started talking past each other again, so obviously it is time to take this to the internets!

The trigger to this long and confusing discussion was the Federal ban on Intrade just after the last election. (Nov. 26 the CFTC sued Intrade for letting US citizens bet on things, see here.) My offhand comment was that, paranoid as it sounded, it was quite a coincidence that this happened right on the heels of Intrade's markets calling the US presidential election correctly, so maybe it was a result of politicians not liking anyone accurately gauging their chances of winning. Woj replied that everyone makes predictions from polls and the like, and those didn't get shut down. My theory (entirely unsubstantiated, mind you) is that most polls are wrong, either due to normal error or strong bias, and really offer very little value to someone making a decision on whether to back a candidate. If you are trying to make a point about a candidate's chances there is always one poll or another you can quote to make it. However, Intrade has the prestige of betting markets, which are known for being more accurate than straight polls over all. It is possible it is too strong a signal to be ignored, and doesn't allow enough wiggle room around it. (The literature on betting markets illustrates many cases where folks don't want accurate forecasts so they can do what they want with less constraint.) The other point in the theory was that at the least, if pols wanted to get rid of ALL predictions of success, they would have to censor news agencies which would whip a large number of people into a frenzy, but shutting up Intrade just required shutting citizens out of an online betting market, which people apparently believe the government has the right to do.

That's when things got hairy.

Woj and I argued back and forth on this, most of which is lost to me now because I didn't understand his disagreement, and I don't think he understood mine. At this point I will digress into spelling out clearly what I meant.

Social norms are strange things. Rules generated by humans in general don't need to be internally consistent, and often just don't make sense as a result. In this case, my position is that the social norm may be that gambling is not inherently wrong, but also that the government has the right to make it illegal (or regulate it, whatever.) At first glance this doesn't make sense, as if the general social rule is that something is ok, why would society also agree that the government can make it not ok?  It is not because people are crazy. It is because whether or not you should do something is not attached to whether or not you can, or should be allowed, to do something.
Our classmate Derek provided a good example upon which I will elaborate: If your neighbor puts some really ugly pink flamingo lawn ornaments in his front lawn, you might grumble and hate that he did it, but you can recognize that he has the right to do it. You don't go over and kick them down or call the HOA/police on him, or whatever else you might do if he didn't have the right to put them out, such as you might if he put them up in your yard.
Likewise, as a society you don't have to agree with a given bit of legislation to accept that the government had the right to pass it. You can accept that the government has the right to set speed limits on its roads without agreeing with the level.

Now, in speaking with Woj, I stated that the government's banning of Intrade and the resulting deafening silence could be taken as evidence that the social norm is in fact that the government has the right to regulate and ban organized gambling. This might have been a bridge too far. Woj made a good point that just because you don't see people voting officials out of office or marching on the capital wielding pitch forks doesn't mean that the social feeling was that the government has the right to ban gambling. After all, most people are ok with the idea of poker night for the guys, online poker (which is banned now), and even public figures like Brian Caplan openly betting other economists about certain predictions. Oh, and what is the stock market other than a bunch of people gambling? That's all true, but... things are about to get long. Longer.

1: There is absolutely nothing inconsistent with people breaking the law in small, individual instances and yet thinking the legislature had a right to pass the law. Again speeding/traffic violations. Based on my driving experience, most people exceed the posted speed limits on highways, as well as most other places, and at least in NoVA turn signals are treated as totally optional. However, I feel very confident that most people would think me crazy for asserting that therefore there should be NO speed limits enforced. Historically, most people have when I suggest that.

2: It is possible people consider organized gambling businesses something that need to be regulated, but not small scale individual gamblers. In fact, this seems to be the norm. We also like to regulate super market produce, but don't worry too much about our neighbor who sells stuff out of her garden. This gets back to the previous post about how most people don't think the rules apply to them, or even exist. Humans are strange like that, possessing a certain schizophrenia when it comes to things between people they know and strangers. Your neighbor who is not a professional farmer and just grows tomatoes for a few extra bucks, she's fine, but that guy who makes his living based on whether or not his thousands of tomatoes are good and safe to eat, we had better hire someone to keep an eye on him!

3: Then there is how the great mass of indifferent people affect things. Indifference is actually fairly important here, so I will take a moment to discuss it.

There are five possible states a person can have regarding another's right to do something: strong agreement, weak agreement, total indifference, weak disagreement and strong disagreement. The strong/weak modifier simply denotes whether you are willing to take action to affect that right one way or the other. So for instance, I am strongly against the notion that my neighbor has the right to take my tv over to his house without asking; should he try, he will find locks installed, and probably some lead coming his way should those not do the trick. On the other hand, I am weakly in agreement with his right to play loud music in his car; I wouldn't call the cops on him, yet if someone else did I wouldn't go out and defend his right to deafen himself, I would probably just shake my head and think about what a silly situation it is.

The interesting thing is that weak preferences behave differently from strong. In establishing social norms related to "Does someone have the right to do something" weak and indifferent positions are functionally the same as strong agreement. Functionally is the key word there. If I put up a pink flamingo in my front yard, and the whole neighborhood does nothing but grumble a bit, it is functionally identical to everyone agreeing that I have the right to do so but not liking that I did. Society behaves exactly as if they agree that I have the right to do it. This is important, because if I am not certain if it is ok to do, all I can go on is society's reaction when I do, and if they all act as if it is fine, even if it isn't, the consensus for the next guy considering gaudy lawn ornaments is "Huh, apparently that's fine."

In establishing social norms, inaction in individually enforcing the rule is the same as agreeing that it need not be the rule. Enforcing need not be driving someone out of town on a rail; something as simple as shunning or just commenting on how ugly that plastic bird is are the usual tools. The key is that a large percentage of people need to individually do it for it to matter. A few pushy people attempting to enforce a norm alone are just annoying if they are a small percentage of the group.

Government, however, is power wielded by the few pushy people. The social norm that government has the right to pass legislation on a matter only requires weak/indifferent preferences. However, when deciding policy politicians treat the indifferent as if they don't exist. The only ones that matter are those who will act upon and express their preferences in a way that will affect the politicians. This is why relatively small interest groups have such seemingly disproportionate power in government. The NRA wields tremendous power not because they have a lot of members, but because they can get a large number of people to stop simply grumbling and actually go out and vote for or against a candidate. Politics is largely controlled by the people who really care about given issues, and the rest who only provide opinions don't matter. The only thing that matters is whether or not enough people care about an issue one way or another for politicians to get away with it.

Woj at the time pointed out that voting hardly matters, only a tiny fractional amount, in deciding most elections. This is true, but meaningful action in this case is not limited to voting. Often writing letters to congressmen actually helps a bit, or writing a blog that people actually read (not mine), starting organizations to focus people into action, and all sorts of other behaviors that affect how politicians act. Of course, sometimes democracy fails and you have to start rioting and killing politicians like has been popular in the Mid East lately (where democracy will probably fail again.) That's the problem with government: it takes pretty big behaviors on the part of the citizens to limit what politicians can get away with once things get rolling in that direction. Indifference in this dimension gives the government the effective right to do things, and then only those who really care matter, and in any given field those are the tiny minority.

So, it stands to reason that the government would ban Intrade participation because they can without expecting any real push back, even while ignoring news program pols, because if they did ban news program pols those organizations would beat said politicians about the head and neck with the 1st Amendment. (Of course McCain-Feingold limited what people could say about politicians while those politicians were running for office, and that was ok, so who the hell knows.)
Does government acting in a certain way without obvious backlash then act as evidence of a populace with the social norm that government has the right to act that way? I would say yes, if only functionally. If not functionally, one has to then wonder what the effect of social norms is on government if any given norm may or may not actually apply.