Wed, 17 August 2016
Pierre Desrochers returns to the podcast to discuss the fossil fuel divestment movement in higher education. He recently co-authored a paper titled "Blowing Hot Air on the Wrong Target? A Critique of the Fossil Fuel Divestment Movement in Higher Education" with Hiroko Shimizu.
The fossil fuel divestment movement seeks to combat the environmental damage done by the fossil fuel industry by preventing university endowments from investing in fossil fuel stocks. More than 1,000 universities have divested themselves of fossil fuel stocks because of this movement's influence. There are a number of problems with this approach:
1. University endowments can't budge stock prices unilaterally.
University endowments are small potatoes in the world economy. Even if they could affect the stock prices of oil companies, they would just create an arbitrage opportunity for other investors to buy those stocks at discounted prices. This more than anything makes divestment an exercise in futility.
Camerer (1998) tried to influence prices in a horse betting market by placing large bets and then pulling them out at the last minute. He found that he was unable to budge prices even little. Divestment activists are trying to do what Camerer was trying to do, and they won't have any more success.
Some activists have internalized this criticism, and instead argue that divestment is important for symbolic moral reasons.
2. Universities will face higher risk if they choose to divest.
If university endowments divest themselves of fossil fuel stocks, they will be less diversified. Having a wide range of different (and uncorrelated) stocks allows a university endowment to hedge itself against risk.
Since oil stocks haven't given particularly high returns in recent years, activists have been able to argue that divestment makes sense from an investment perspective. But you can't predict future returns based on past ones. The prices of these stocks reflect the expected value investors place on them, so to the extent that the future profitability of oil companies can be predicted, the prices already reflect those trends.
Furthermore, if student activists are allowed to direct universities' investment activities, it may be difficult for universities to hire the most talented fund managers.
3. The movement is hypocritical.
While activists can't affect fossil fuel production by manipulating stock prices, they could affect it by demanding less fossil fuels themselves. And yet they attend their anti-petroleum protests in kayaks made from petroleum.
Activists want change without personal sacrifice. A round-trip flight from New York to Europe releases between 2 and 3 tons of carbon into the atmosphere, but few environmental activists are willing to skip their exotic vacations in favour of less carbon-intensive activities.
4. The alternatives to fossil fuels are not so great.
There's a lot of focus on solar and wind power as replacements for fossil fuels. But an electrical grid needs to work even when it is neither windy nor sunny, and storing power is costly. You need other sources of power to take up the slack when wind and solar can't deliver.
In a misguided attempt to appease environmentalists, Germany shut down many of its nuclear plants to replace them with wind and solar power plants. In order to keep consistent power, Germany has had to burn coal. But what would they do if they couldn't use coal to produce power when the sun and wind aren't working?
The UK's solution has been to burn wood pellets, which is arguably worse than petroleum for producing power.
An advantage of fossil fuels is that humans have been able to substitute them for energy that would have, in the past, been produced on the surface of the Earth. The more we extract from underground, the less of the Earth's surface needs to be dedicated to producing for humans. Indeed, global forestation has been increasing, not decreasing, over the past few decades.
5. The global transportation system depends on fossil fuels.
Fossil fuels offer a highly concentrated form of energy that is vital to transportation. While electric cars have made great advances in recent years, even the best can't travel nearly as far as a gas-burning car with a full tank. Electric cars are also prohibitively expensive for most people, and must be subsidized to compete with cheaper-to-produce gas-powered cars.
And of course, we drive around on asphalt, which is itself a petroleum product.
The advantage of having a well-functioning global transportation system powered by fossil fuels is that it allows regions to specialize in what they're good at producing. Pierre's book, The Locavore's Dilemma, deals with issues of food security. If you can produce tomatoes in fertile Mexico and ship them to frigid Canada, you don't have to expend the energy of building and heating greenhouses in places where tomatoes wouldn't grow naturally.
Camerer, C. F. (1998). Can asset markets be manipulated? A field experiment with racetrack betting. Journal of Political Economy, 106(3), 457-482.
Desrochers, P., & Shimizu, H. (2012). The locavore's dilemma: in praise of the 10,000-mile diet. PublicAffairs.
Desrochers, P., & Shimizu, H. (2016). Blowing hot air on the wrong target? A critique of the fossil fuel divestment movement in higher education. Frontier Centre in Public Policy.
Fri, 22 July 2016
Garett Jones returns to the podcast to discuss the issue of ethnic diversity. There is a wide body of research showing that ethnic diversity can reduce the productivity of teams, firms, and even whole countries.
Williams and O'Reilly (1996) review dozens of studies showing that ethnic diversity has a negative impact on group performance. In the two decades since, more research has reinforced that result. Alesina and La Ferrara (2005) find that increasing ethnic diversity from 0 (only one ethnic group) to 1 (each individual is a different ethnicity) would reduce a country's annual growth by 2 percent. Multiple studies (La Porta et al., 1999; Alesina et al., 2003; Habyarimana et al., 2007) have shown that ethnic diversity negatively affects public good provision. Stazyk et al. (2012) find that ethnic diversity reduces job satisfaction among government workers. Parrotta et al. (2014a) find that ethnic diversity is significantly and negatively correlated with firm productivity.
This may seem strange to you. If you're like me, you probably enjoy diversity. You probably don't observe the problems of low morale and high marginal costs that researchers have found in ethnically diverse workplaces.
If that's the case then you, like me, live in a bubble. An apparent exception to the rule that ethnic diversity lowers productivity comes in high-human-capital groups. I say "apparent" because there hasn't been much in the way of direct study of this particular issue. However, some results are suggestive. For instance, the same researchers who found that ethnic diversity reduces firm productivity in general found that it increases firms' level of innovation as measured by patents (Parrotta et al., 2014b). Most of the people I know fall into this category of highly skilled, highly educated individuals, so it shouldn't be surprising that my experience (and maybe yours) is not the norm.
Given that diversity is so costly for organizations, there is a huge industry dedicated to diversity training to mitigate these effects. However, a recent issue of the Harvard Business Review argues that diversity training seems to be a general failure.
To the extent that diversity is a plus for firm profitability, firms will tend to seize this opportunity without the need for legal intervention. And indeed, there are some types of diversity that seem to have positive impacts on firm profit. For instance, a recent study by Alesina, Harnoss, and Rapoport (2016) indicates that birthplace diversity improves productivity. This is different from (and in this sample, uncorrelated with) ethnic diversity. People might all share the same ethnicity, but the evidence indicates that if they come from different places they tend to have complimentary skills that make them better at working together.
As Garett points out, this is roughly the plot of every movie and TV show ever made by Joss Whedon.
The causes of all these effects have been studied by experimental economists. (For an overview of the history of experimental economics, listen to my interview with Erik Kimbrough.) One way to test this is to look at how ethnically diverse groups play various games. In a study looking at the different ethnicities in Israel, Fershtman and Gneezy (2001) found that people did not discriminate against Sephardic Jews in the dictator game but they did discriminate in the trust game, indicating that discrimination was driven by a (mistaken) lack of trust in the minority ethnicity. Surprisingly, even members of the minority tended to discriminate in this way.
Glaeser et al. (2000) found that pairs are less trustworthy when they have different ethnicities or nationalities. The really shocking thing about this is that this study was performed on Harvard undergraduates, who we might think of as the people least likely to discriminate in this way.
Easterly, Ritzen, and Woolcock (2006) show that ethnolinguistic fractionalization has a negative impact on the rule of law:
The basic story that Easterly, Ritzen, and Woolcock tell is that ethnic conflict makes it difficult to achieve a consensus on how the government should be run, thus leading to worse government.
Alesina, A., Devleeschauwer, A., Easterly, W., Kurlat, S., & Wacziarg, R. (2003). Fractionalization. Journal of Economic growth, 8(2), 155-194.
Alesina, A., & Ferrara, E. L. (2005). Ethnic diversity and economic performance. Journal of economic literature, 43(3), 762-800.
Alesina, A., Harnoss, J., & Rapoport, H. (2016). Birthplace diversity and economic prosperity. Journal of Economic Growth, 21(2), 101-138.
Easterly, W., Ritzen, J., & Woolcock, M. (2006). Social cohesion, institutions, and growth. Economics & Politics, 18(2), 103-120.
Fershtman, C., & Gneezy, U. (2001). Discrimination in a segmented society: An experimental approach. Quarterly Journal of Economics, 351-377.
Glaeser, E. L., Laibson, D. I., Scheinkman, J. A., & Soutter, C. L. (2000). Measuring trust. Quarterly Journal of Economics, 811-846.
Habyarimana, J., Humphreys, M., Posner, D. N., & Weinstein, J. M. (2007). Why does ethnic diversity undermine public goods provision?. American Political Science Review, 101(04), 709-725.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1999). The quality of government. Journal of Law, Economics, and organization, 15(1), 222-279.
Parrotta, P., Pozzoli, D., & Pytlikova, M. (2014a). Labor diversity and firm productivity. European Economic Review, 66, 144-179.
Parrotta, P., Pozzoli, D., & Pytlikova, M. (2014b). The nexus between labor diversity and firm’s innovation. Journal of Population Economics, 27(2), 303-364.
Stazyk, E. C., Davis, R., & Liang, J. (2012). Examining the Links between Workforce Diversity, Organizational Goal Clarity, and Job Satisfaction. In APSA 2012 Annual Meeting Paper.
Williams, K. Y., & O’Reilly III, C. A. (1998). A review of 40 years of research. Res Organ Behav, 20, 77-140.
Sat, 25 June 2016
Two days ago, Britain voted to leave the European Union (EU). The "leave" option won with 52 percent of the vote, leaving elites and the media frustrated with voters for choosing what they perceive to be the "wrong" option.
The EU can be thought of as three things: A trade union known as the European Economic Area (or EEA), a currency union (the Euro) which Britain was never a part of, and a central regulatory body.
The EU has been around in one form or another since the 1950s. Although its primary function was always to facilitate trade among European states, its ultimate goal was to prevent Europe from falling back into the brutal wars that had consumed it during the first half of the twentieth century. The Union brought freedom of movement for goods and services and for people across member states.
This freedom of migration only became controversial after the fall of the Berlin Wall. Many poorer states in Eastern Europe joined the EU in the 1990s, creating the opportunity for large numbers of economic migrants to enter the wealthier states of Western Europe (a good thing, from my perspective!). Opposition to open migration was one motivating factor for some in the Leave campaign, but it wasn't the only factor.
Many older Brits who voted to leave did so out of a desire for national sovereignty. The most important legislative body in the EU is the European Commission, the members of which are appointed by the various states. There's a democratically elected European Parliament, but it is less influential than the Commission, having only the power to approve or reject proposals by the Commission.
The members of the Commission are appointed to specific roles. So, for instance, a Slovenian is in charge of transport policy for the entire EU, a Lithuanian is in charge of health and food safety, and a Portuguese politician is in charge of research, science, and innovation. Many in the Leave camp resented having British policy set by unelected politicians from other countries.
What's next for the UK?
While the Leave campaign may have won the referendum, they don't control policy going forward. The only thing that must occur is for Britain to exit the EU. It doesn't have to adopt any other of the Leave campaign's policy goals.
Sam argues that the best option for the UK would be to stay in the European Economic Area (EEA) and the European Free Trade Association (EFTA). This EEA option would maintain the economic benefits of free trade with the EU. This would place Britain in a similar position to Norway and Iceland, which both chose not to become EU member states while participating in the EEA. Britain could also aim for a trade agreement that is tailored to its particular needs, like that of Switzerland.
Brexit puts the EU in a bit of a bind. If they work out a favourable deal with Britain, other states might try to leave once they observe how painless it is. But if the EU adopts a punitive stance towards the UK it could send a bad signal to the other states. Just how voluntary is this club if you're punished for quitting?
More details about the institutions of the European Union.
Tue, 14 June 2016
When I think of emulation, I think of retro gaming. My Android phone can easily emulate a Super Nintendo, a gaming console from the 1990s, and it can do that because the phone is much more powerful than the Super Nintendo and because we know exactly how a Super Nintendo works. My guest for this episode, Robin Hanson, argues that we may one day be able to emulate human brains. His book, The Age of Em, provides a detailed analysis of what a society made largely of emulated humans would be like.
Whole brain emulation is unlike my emulated Super Nintendo in many ways. With the brain, we're trying to emulate something that we couldn’t build ourselves. The challenge is in developing a sufficiently accurate model of each part of the brain that is necessary for it to function. If we knew how each node in the brain worked, if we could model it such that our node would take the same inputs, produce the same change in its internal state, and send the same outputs as biological brain cells, then all that would remain would be to find the precise network of cells in a biological brain. This could be achieved by scanning an actual human brain. The brain could then be emulated by a sufficiently powerful computer. The emulated brain would have precisely the same memories and thought processes as the person who was scanned. Hanson calls these emulated individuals "ems."
Hanson applies standard theoretical tools to the analysis of this em economy. Here are some of the implications:
1. Ems will be able to operate much faster or much slower than normal human brains.
The cost of running an emulation faster or slower is roughly linear in the speed. That means that for ems working on time-sensitive tasks, a race to develop some new technology first for example, they will likely work many times faster than biological humans, perhaps experiencing weeks or months in the blink of an eye. Ems that work alongside biological humans, for instance those engaged in services, would likely run at the same speed as we do. Ems could also run at slower-than-human speeds, which might be used as a sort of low-cost retirement for ems who have completed their working lives.
2. Most ems will probably live at subsistence.
We live in a world where the supply of human labour is limited by biology. Ems will not be so limited. Once a single em exists, making a copy will only be as costly as the processing power needed to run that copy. This means that the value of em labour will fall to the marginal cost of running an em. The em economy is a Malthusian economy, where the em population can vary instantaneously to keep up with the need for em labour.
However, subsistence might not be as bad for an em as it has been for most humans through history. Ems need not fear starvation or disease. Their consumption goods will all be simulated, and in a world of extremely cheap processing power, simulated luxuries would be cheap as well.
3. An em can work 99 percent of the time and go on vacation for 99 percent of the time, too.
This may seem paradoxical, but it follows from the possibility of creating and deleting copies at will. Suppose you have one em plumber. Each day he can make 99 copies of himself, in order to perform 99 plumbing jobs while he relaxes on a simulated beach, deleting the copies at the end of the day. While 99 percent of his processing power is being used to complete plumbing jobs, each em experiences a life of leisure followed by a single day of work.
4. Biological humans will be a true rentier class.
In a world populated by ems, the value of human labour will fall to near zero. An em brain can do anything a human brain can do, and ems will be produced until their marginal value falls to the cost of processing them. Biological humans won't be able to count on the value of their labour to sustain them, but they will earn vastly more from the wealth they already own. An em economy will grow very quickly, and thus will be able to give very high returns to the owners of capital.
5. The age of em might only last a few years before the next major change.
Robin compares the development of an em economy to three past changes in our society: The evolution of our latest non-human ancestors into humans, the move from a hunter-gatherer society to a farming society, and the birth of our modern industrial society. He observes that with each transition, the growth rate (measured as the increase in brain size before the evolution of humans and as economic growth thereafter) has increased and the period between transitions has shrunk. As ems will be able to experience far more time than we do, and since an em economy will be capable of extremely high growth, it won't take long for em society to produce the next radical shift. Perhaps just a year or two.
What will that shift entail? Robin declines to speculate, as there are too many degrees of freedom to predict with any degree of accuracy.
Read Scott Alexander's review of the book, which I mentioned during the interview.
Wed, 20 April 2016
Mark Thornton is a Senior Fellow at the Mises Institute. He is the author of many books, including The Economics of Prohibition (which you can access for free here), which is also the topic of this episode.
1. Does drug prohibition help stop poverty and homelessness?
The conventional wisdom on drugs is simple: you see drugs and drug abuse mixed with poverty and homelessness and it makes intuitive sense that drugs play a role in causing poverty. It seems to follow that by criminalizing drugs, you can take them out of the equation and help solve the other problems.
Mark disputes this conventional wisdom. First, the causation doesn't necessarily go from drugs to poverty. Poverty can cause people to abuse drugs and mental illness can cause both self-medication and poverty. Second, if you legalize drugs, they won't be sold on the street. Instead, they'll be sold by legitimate businesses with a particular interest in maintaining their reputation and not harming their customers. Prohibition is what creates the black market, which in turn generates violence, crime, and more potent and dangerous drugs, all of which exacerbate poverty. You can't clean up the social problems related to drugs by criminalizing them when criminalizing them is what caused many of those problems.
2. The Suburban Heroin Epidemic
Mark recently authored an article called The Legalization Cure for the Heroin Epidemic. In the article, he calls attention to the rising number of overdose deaths in the United States:
The number of drug overdoses in the US is approaching 50,000 per year. Of that number nearly 20,000 are attributed to legal pain killers, such as Oxycontin. More than 10,000 die of heroin overdoses. I believe these figures vastly underestimate the number of deaths that are related to prescription drug use.
The face of drug abuse has changed in recent decades. Rather than the homeless junkie we might picture when we think of addiction, the new addicts are middle-class people who have been over-prescribed legal opiates like such as Oxycontin and Vicodin. Doctors have been routinely prescribing these addictive opiates and many people turn to the black market rather than going cold turkey when their prescriptions expire.
The problem is that Oxycontin and Vicodin are very expensive on the black market, so many of these unintentional addicts turn to heroin as a cheaper substitute. The problem with buying black market heroin is that you don't know what you're getting. Different addicts need different doses, and you don't know what kind of dose you're getting and what it's been cut with. All it takes is one particularly strong dose to cause an accidental overdose.
3. American Foreign Policy and the Supply of Opiates
Afghanistan is the largest grower of illicit opium, and the supply has greatly increased since its invasion in 2001. The invasion destroyed the country's legitimate economy and many farmers turned to opium production. Being a huge and basically lawless country with a perfect climate for growing poppies, the global supply of opium exploded.
4. Political Lies to Support Drug Prohibition
Mark discusses the political circumstances around the prohibition of marijuana in the United States.
Marijuana prohibition went national with the passage of the Marijuana Tax Act of 1937. It too quickly changed from a measure to tax and regulate into an outright prohibition. Even hemp, the non-intoxicating form of cannabis was banned! When propaganda claiming that marijuana was deadly and caused insanity, violence, and criminal behavior was debunked (aka Reefer Madness), the "gateway theory" was born to fill the void. The gateway theory posits that while marijuana might not be addictive or dangerous, it would lead the user to try the hard drugs, such as heroin. This theory became the prevailing view in the second half of the twentieth century.
Commissioner Harry J. Anslinger made up this gateway theory on the spot when arguing for the prohibition of marijuana. Unfortunately, the argument stuck.
Recently, a quote by John Ehrlichman, Richard Nixon's domestic policy advisor (and Watergate co-conspirator) has resurfaced on the internet:
"The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the antiwar left and black people. You understand what I’m saying? We knew we couldn’t make it illegal to be either against the war or black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities. We could arrest their leaders, raid their homes, break up their meetings, and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did."
This quote shows how drug prohibition has long be complicit with the politics of bigotry.
5. Progress Against the War on Drugs
Despite the sordid history of drug prohibition in the twentieth century, we've made slow progress towards a sane drug policy. Marijuana's many health benefits cannot be denied, and legislators are starting to take notice. Medical marijuana has been legalized in many places, and some places have even legalized it for recreational use.
Meanwhile, some jurisdictions have switched from treating drugs as a criminal issue to treating them as a medical issue. Portugal legalized all drugs in 2001. Some police chiefs have even unilaterally changed course in how they deal with addicts, offering help rather than incarceration.
We can only hope that complete legalization is just around the corner.
Sun, 14 February 2016
Ancient Rome went from a thriving civilization to a dystopia before its eventual collapse. My guests today explain how that happened. Lawrence Reed and Marc Hyden co-authored "The Slow-Motion Financial Suicide of the Roman Empire." Lawrence is the President of the Foundation for Economic Education, and Marc is a political activist and amateur Roman historian.
Many accounts of the fall of Rome focus on military problems and the barbarian invasions. However, the Empire was in decline long before the barbarians showed up to finish it off. The barbarians didn't kill the Roman Empire; the Roman Empire committed suicide. There were six important factors in the Empire's decline:
1. Political violence became normalized.
The populist reformer Tiberius Gracchus redistributed public farmland to Roman citizens. His reforms angered the Senate, and his political enemies clubbed him to death in 133 BCE. This was the first open political assassination in Rome in nearly four centuries, but it wouldn't be the last. Suddenly, it became acceptable for powerful Romans to kill their political enemies, and this would spell doom for Rome's republican government.
2. The Roman state gave ever-increasing amounts of free food and entertainment to the masses.
Despite having killed Tiberius Gracchus, the senate did not repeal his reforms in an effort to assuage the masses. Tiberius' brother Gaius Gracchus would take his brother's position and further his reforms, also introducing a system of subsidized grain for the masses. When Gaius also succumbed to political violence, most of his reforms died with him, but not the grain dole. The dole was retained and expanded, proving a huge burden on the Roman state. Successive generations of Roman leaders would buy political popularity with panem et circenses (bread and circuses). The Roman people came to value the dole over all other values. When the emperor Caligula was assassinated, there was a brief opportunity to restore the Republic, but the people preferred the rule of strong men who could provide them with ever more panem et circenses.
3. Roman armies became personally loyal to their generals rather than being loyal to the Roman state or the people.
In the early Roman Republic, the two elected consuls would raise forces from the eligible land-holding citizenry in times of crisis. These soldiers would return to their ordinary lives upon the completion of the war. This would change with the reforms implemented by Gaius Marius in 107 BCE. Marius expanded military eligibility to the landless masses and granted farmland to his veterans. He also set a precedent for much longer military campaigns (consulships had been ordinarily limited to one year). These changes made the soldiers personally loyal to their generals rather than to the Senate and People of Rome, and the generals would use their military strength to intimidate the Senate. Eventually they supplanted the Senate altogether, turning Rome into an empire with a series of strong men leading it as emperors.
However, the soldiers' loyalty only lasted as long as the wealth and land kept coming in increasing amounts, as future emperors would discover while wrestling with the Empire's deteriorating finances.
4. They debased the currency.
The silver denarius was introduced by Augustus with a silver content of about 95 per cent. However, successive emperors, facing ever-increasing demands on the treasury, both from the people who demanded panem et circenses and from the military who demanded ever-more land and money for their loyalty, needed whatever revenue they could get. When taxes would not suffice, emperors would melt down old coins and mint new ones with reduced silver content. During Trajan's rule, the denarius was about 85 per cent silver. By Marcus Aurelius' reign, that was down to about 75 per cent. Septimius Severus dropped it to 60 per cent, and his son Caracalla reduced it further to only 50 per cent.
Eventually this would spiral out of control into hyperinflation; emperors couldn't debase the currency fast enough to keep up with skyrocketing prices. By 268 CE, the denarius was just a bronze coin with a bit of silver brushed on its surface; the silver content was less than one per cent. Nor did they understand the connection between rising prices and currency debasements, which led to…
5. They instituted Draconian price controls.
Rather than halting the debasement of the denarius, the Romans instituted (predictably) disastrous price controls. Dicoletian issued his Edict on Maximum Prices in 301 CE. Diocletian set one price for the whole of the empire, from modern-day Iraq in the east to Britain in the west. In regions where the costs of goods were significantly higher than the legal limit, markets dried up, riots broke out, and many people were put to death for selling at too high a price. The law was so disastrous that it was eventually dropped.
6. They instituted onerous taxes.
Monetary reforms under Diocletian and Constantine switched the empire largely to a gold standard, which was an improvement over the hyperinflationary denarius. However, the benefits of this gold currency were not felt by those outside of the military and the bureaucracy; most people had to scramble to get enough gold to pay their taxes. People who couldn't pay were sold into slavery.
When the barbarian invasions came in the fifth century, the people welcomed them as liberators, freeing them from the yoke of the Roman tax collectors.
[Note: A phone rings in the background of the recording at 10:20. Don't be alarmed! Your phone isn't ringing.]
Fri, 11 December 2015
Garett Jones is Associate Professor of Economics and BB&T Professor for the Study of Capitalism at the Mercatus Center, George Mason University. His book, Hive Mind: How Your Nation's IQ Matters so Much More than Your Own is the subject of this episode.
The book deals with an empirical puzzle: IQ is a weak predictor for earnings. We all know high-IQ people who live paycheque to paycheque, and lower IQ people who succeed brilliantly. And yet, when we look at the relationship between nations' average IQ scores and their incomes, the relationship is strong. Nations with the highest average IQ scores are eight times wealthier than nations with the lowest IQ scores. How can we resolve this apparent contradiction?
Garett documents five main channels for the spillover effects of IQ:
1. Smarter people are more patient, they save more and build up more capital.
When economists test people's patience, high-IQ people tend to be more willing to wait for a larger amount of money in the future rather than taking a smaller sum now. This is important at the national level because savings tend to stay within a country* and fund investments within that country. That means living in a higher IQ nation generally means having more capital available to compliment your labour.
2. Smarter groups are more cooperative.
Economists use the iterated prisoner's dilemma as an idealized scenario where cooperation is at odds with people's individual, short-term incentives. Jones looked at the many times economists have studied this in experiments and correlated the cooperation rate in these experiments with the SAT scores of the schools the study participants were drawn from. He found that higher SAT schools produced more cooperation in the iterated prisoner's dilemma.
In later research, Al-Ubaydli, Jones, and Weel (2014) found that higher IQ groups were more cooperative, but higher IQ individuals were not. A high-IQ person in a low-IQ group would not foolishly cooperate when everyone else was defecting, but high-IQ groups could coordinate on a cooperative solution despite not knowing that they were in a high-IQ group.
3. Smarter people are more informed voters and are more likely to support market-oriented policies.
Caplan and Miller (2010) document the tendency for high-IQ people to think like economists.
4. Smarter groups make more productive team members.
Jones uses "O-ring" technologies (drawing on an idea from Kremer (1993)), in reference to the fatal part that cause the Challenger disaster, to show how high-IQ workers can be indispensable in many sectors of a modern economy. While many economic models assume substitutability between high- and low-skilled labour (e.g. three low-skilled workers can do the work of one high-skilled worker), O-ring sectors don't have this feature. When one mistake can completely destroy a project, low-skilled workers can have effectively negative marginal products.
5. Peer effects cause those with high-IQ peers take on the behaviours of high-IQ people, implying that low-IQ people in high-IQ countries will be more patient, cooperative, informed, and productive than low-IQ people in low-IQ countries.
It's well documented in the social science literature that people take on the behaviours of their peers. This effectively multiplies the positive effects of the first four channels by making low-IQ people behave like high-IQ people.
Jones sees a virtuous cycle between IQ and development. Higher IQs lead to better economic outcomes, and better economic outcomes lead to better health outcomes and higher IQs. But despite the great importance of this subject, people have been extremely reluctant to research differences in IQ between groups for fear of finding an unpalatable result. One of Jones' aims in writing this book is to make it more acceptable for people to do research in this area.
We also discuss Jones' recent debate with Bryan Caplan on the subject of open borders. Jones' work on IQ spillover effects give us reason to use caution in supporting open borders.
*This is actually another economic "paradox" that economists don't fully understand. One would expect savings to be invested where they face the highest returns, regardless of national boundaries, but that seems not to be the case.
Al-Ubaydli, O., Jones, G., & Weel, J. (2014). Average player traits as predictors of cooperation in a repeated prisoner's dilemma.
Caplan, B., & Miller, S. C. (2010). Intelligence makes people think like economists: Evidence from the General Social Survey. Intelligence, 38(6), 636-647.
Jones, G. (2008). Are smarter groups more cooperative? Evidence from prisoner's dilemma experiments, 1959–2003. Journal of Economic Behavior & Organization, 68(3), 489-497.
Kremer, M. (1993). The O-ring theory of economic development. The Quarterly Journal of Economics, 551-575.
Direct download: IQ_and_the_Wealth_of_Nations_with_Garett_Jones.mp3
Category:general -- posted at: 7:00am PDT
Fri, 30 October 2015
Ash Navabi returns to the podcast to discuss his essay, "Will Iceland's Sovereign Money Proposal End Economic Crises?"
In April of 2015, Frosti Sigurjonsson, Member of the Parliament of Iceland and Chairman of the Committee for Economic Affairs and Trade, made a bold proposal to end fractional reserve banking and replace it with a system he calls "sovereign money."
Fractional reserve banking is the system under which banks create money by lending out a portion of depositors' money, keeping only a fraction to pay out on demand. One problem with fractional reserve banking is that the mismatch between banks' assets and liabilities leaves them exposed to bank runs and financial panics. To solve this problem, the central banks of the world function as "lenders of last resort" to save insolvent banks from going under. However, the more insidious problem with fractional reserves is that the injection of new money directly into credit markets artificially lowers interest rates and incentivizes entrepreneurs to take on longer term projects than the real savings available in the economy can sustain. Having central banks intervene to keep the cheap credit flowing does nothing to address this problem, and in fact makes it worse.
Under the Icelandic proposal, while there would be a 100% reserve requirement for private banks, the central bank would still be able to create money at will. Ash critiques this on the basis of the "Cantillon effect." The Cantillon effect is the phenomenon whereby the creation of new money transfers wealth to the early holders of that money. If a new dollar is created, the first holder of the dollar can use it to buy goods before prices have adjusted upwards. However, as people exchange the new dollar and use it to bid on various goods, the sellers of those goods will adjust their prices upwards to account for their consumers' greater willingness to pay. If you are the last to get hold of the new dollar, then you've been bidding against the holders of new money for a long time before seeing an increase in your income, thus making you poorer in real terms.
By centralizing money creation in the central bank, Sigurjonsson's proposal would enrich those to whom the central bank lends. In particular, the proposal would allow the central bank to grant money directly to the government to pay for government spending. Thus, the Cantillon effect would enrich those who are paid directly by the government at expense of those who aren't. Ash argues that this would invite cronyism, since those with the right connections will be able to benefit from these Cantillon effects.
In the end, it's not clear whether the sovereign money proposal would have been a net good or a net bad. It could have reduced credit expansion, but the cronyism inherent in the proposal could easily outweigh the positive effects.
Fri, 16 October 2015
Cornelius Christian is an Assistant Professor of Economics at St. Francis Xavier University. His research concerns development economics, economic history, and the economics of conflict and violence, which is the topic of this episode of Economics Detective Radio.
Cornelius' paper "Lynchings, Labour, and Cotton in the US South" deals with violence against black people in the post-reconstruction South. Historians have hypothesized that there was an economic motive to lynchings, noting that more of them occurred when cotton prices were low. Black and white workers competed with one another in the agricultural labour market. Cornelius' findings indicate that lynchings were used by white labourers to scare black workers out of the labour market, thus raising their own wages. He finds that lynchings happen in the wake of economic shocks when agricultural wages are low. He also finds that, when lynchings occur in a given area, black people tend to migrate out of the area and agricultural wages rise for the remaining white workers.
In "Economic shocks and unrest in French West Africa," Cornelius and his coauthor James Fenske show that, while economic shocks matter as a cause of civil unrest, the institutional context matters. During French West Africa's colonial era, there were oppressive poll taxes that had to be paid regardless of crop yields. When negative economic shocks occurred, either because of low world prices for agricultural goods or poor rainfall, farmers were not able to pay these taxes and engaged in riots and political violence. In the post-colonial era, the poll taxes no longer exist and political violence no longer follows negative economic shocks.
Cornelius references recent research linking droughts during the Mexican Revolution to insurgency in particular areas. Areas that had particularly bad droughts during the Mexican Revolution produced larger uprisings, and that in turn affected the political and economic fates of these areas up to the present day. He also references Bruckner and Ciccone's 2011 Econometrica paper, "Rain and the Democratic Window of Opportunity," which shows that democratic change frequently occurs in the wake of negative economic shocks in Sub-Saharan Africa. Bruckner and Ciccone are testing Acemoglu and Robinson's (2001) thesis in "A Theory of Political Transitions."
We discuss the fall of the Soviet Union and some research showing that East Germans still expect the state to do more for them than West Germans. However, the younger generation's attitude is more similar to those of West Germans.
Cornelius' most recent research deals with witch trials in early modern Scotland. Unlike the other cases of violence he's looked at, witch trials happened more after positive economic shocks rather than negative ones. The reason, Cornelius discovered, was because early modern Scots cared a great deal that the proper legal procedures were followed in each witch trial. These procedures were costly, and so people could only afford to try and execute a witch when times were good. Witch trials are, essentially, luxury goods.
The common thread in Cornelius' research is that context matters. There's no one thing that causes violence in all times and places; it depends on the institutional context. In the post-reconstruction South, colonial West Africa, and revolutionary Mexico, negative economic shocks led to violence. However, this was not the case in post-colonial West Africa and early modern Scotland. History is not deterministic, so to understand history we need to understand the incentives faced by the individuals of a given time and place.
Direct download: Violence_Lynchings_Civil_War_and_Witch_Trials_with_Cornelius_Christian.mp3
Category:general -- posted at: 10:00am PDT
Tue, 7 July 2015
…or How I Learned to Stop Worrying and Love Inequality.
David R. Henderson (http://www.davidrhenderson.com) is a research fellow at Stanford University’s Hoover Institution, and a professor of economics at the Graduate School of Business and Public Policy, Naval Postgraduate School, in Monterey, California.
Thomas Piketty’s Capital in the 21st Century (http://amzn.to/1LT9jLG) managed to do something unprecedented among equation-dense economic tomes, it became the #1 selling book on Amazon.com. The book tapped in to a hot topic among politicians and the general public: the high (and possibly rising) wealth and income shares of the top 1%. However, David points out that although the book was a best-seller, it wasn’t actually a best-reader. Amazon logs the sentences people highlight, and the top five most-highlighted sentences in Capital all appear in the first 26 pages (www.wsj.com/articles/the-summers-most-unread-book-is-1404417569). It seems that, at least among kindle readers, most people didn’t make it past the introduction. It appears that people buy the book to back up the views they already hold.
David thinks that the huge interest in economic inequality in general and the wealth of the 1% in particular was sparked in the 1990s by politicians, including Al Gore, and picked up by journalists like Sylvia Nasar (https://en.wikipedia.org/wiki/Sylvia_Nasar), before influencing the economics debate. Piketty has been able to ride this wave of public interest at what appears to be its crest.
David distinguishes between inequality of wealth, inequality of income, and inequality of power. Income inequality is the difference in the amount of income we each take in in wages, interest, dividends, and government transfers (e.g. welfare or social security payments), the four main sources of income for most people. Wealth should ideally include the total value of a person’s assets in addition to the stream of income he is likely to earn in the future, though this stream is more often ignored in wealth statistics. Wealth inequality is not the same as income inequality. Critically, since people earn variable income throughout their lives, income inequality doesn’t capture what we think of as the gap between “rich” and “poor.” Retired people who own two-million-dollar homes might have low incomes, but they certainly aren’t poor. Or, to use an example that’s relevant to myself, as a PhD student my income probably sits in the bottom quintile, and yet I can expect a much higher income after I graduate.
The major factor in both income inequality and wealth inequality (measured by current assets and not expected earnings) is age. Teenagers earn little or nothing, but they grow into adults and gain skills and education, their incomes rise, and they gain wealth through savings. Even if everyone had the same lifetime earnings, there would still be significant inequality in any given year since some people would be young low-earners, while others would be older, wealthier high-earners. And since the older people would have had the chance to accumulate wealth over a lifetime, they would have twenty times the wealth of their younger counterparts.
While there is a correlation between wealth and power, that correlation is by no means perfect. David gives the example of Bill Gates who discovered the hard way that when you have too little political influence, it can be costly. Gates was hit with a long and costly antitrust suit, after which he greatly expanded his lobbying efforts; he had learned his lesson. David agrees with Joseph Stiglitz’ argument (http://amzn.to/1LT9dDC), to some extent, that large accumulations of wealth are the result of rent seeking. Local governments restrict the building of new homes and developments that could expand the supply of housing. Thus, they keep real estate prices artificially high to the benefit of those who already own their homes. This is an example of successful rent seeking by homeowners to the detriment of non-homeowners. However, while Stiglitz would argue that this justifies a higher tax rate on the wealthy, David prefers the more direct solution of simply reducing or removing these restrictions.
The following are also mentioned in this episode: