Fri, 23 September 2016
Today's guest on Economics Detective Radio is Chuck Marohn, founder and president of Strong Towns.
Strong Towns is a non-profit that seeks to reform America from the ground up, starting with its towns and cities. It aims to promote healthy local economies by improving local governance.
The Growth Ponzi Scheme
Chuck began recognizing the problems in America's towns and cities when he was working as a civil engineer. He recounts a story of working in a little city in central Minnesota in the late 1990s. The city had a 300-foot pipe that had cracked, allowing ground water to leak in and overflow their treatment facility. Chuck proposed a $300,000 solution to fix the pipe. However, this was a tiny town with an annual budget of $85,000. So Chuck went to higher levels of government (the federal government, the USDA, etc.) to find someone to fund the project. They all said, "This feels like maintenance. We don't have money for maintenance, so you need to pay for this yourself." Since the feds would only fund expansion projects, Chuck devised a plan: He would propose the largest expansion project he could, then repair the pipe as part of the expansion. This wasn't so much deviousness on his part as it was standard practice in his profession. He designed a couple miles of new pipe, doubled their treatment facility, and as part of that he included repairs for the old pipe. This new project cost $2.6 million.
Everyone was happy about this project. The grant agencies were happy. The legislators issued glowing press releases and held a big ribbon cutting. Chuck got a big bonus from his company. The city was ecstatic. The only lingering problem was that this tiny city that couldn't afford to maintain 300 feet of pipe would now be left with a few miles more pipe and a larger treatment facility.
This is an example of one part of what Chuck calls the Growth Ponzi Scheme. This is when cities and towns expand in ways they can't maintain without further expansion.
There's a political reason why things like this happen. Building new infrastructure is very politically appealing. You can build a new highway and name it after a prominent politician, you can have a big ribbon-cutting ceremony, and you can get all sorts of good press for the project. Maintenance is less sexy; you close down a lane of some existing highway, delay everyone's commute, and then you don't have a ribbon-cutting or positive press for all the potholes you filled in. That's why higher levels of government have been paying for big projects and passing off the responsibility for maintaining them to local governments. These local governments become insolvent when the revenue from the initial big project runs out and the maintenance expenses come due.
This process leads to a form of development where the local tax base is not sufficient to pay for the infrastructure that supports it. When the expansion can't go on any longer, the infrastructure crumbles, the affluent people leave, and the community ends up locked in poverty.
What's Wrong with Big Box Stores?
Embracing this form of unsustainable growth has made our cities less dense and walkable. Instead we have heavily subsidized driving as a means of getting everywhere. One consequence of this has been the rise of big box stores.
The public debate on big box stores tends to miss the mark. The left says big box stores crowd out local businesses, which is true. The right says they pass the market test, offering lower prices and thus improving poor people's standard of living, which is also true.
What both miss is that these big box stores only pass the market test because they don't bear the costs of the infrastructure needed to support them. By subsidizing infrastructure, and by building our cities to be spread out and unwalkable, we make bringing groceries to the people unviable. Instead, the people drive to where groceries are.
In addition to the rise of big box stores, we've seen the demise of small town living. While small towns still exist, they used to have enough small businesses, shops, and grocers to allow a full and comfortable life without leaving the town. Today, small town life consists of driving to the regional hub, perhaps multiple times every week, to get many of your necessities.
What's Wrong with Hastings Street?
Chuck coined the term "STROAD" to push back against the interchangeable use of the terms "street" and "road."
A street is where value lives. Homes and businesses locate themselves along streets so that they can be connected to rest of the transportation network, but the street itself features narrow lanes, low speed limits, and good sidewalks because it's designed more for pedestrians and less for vehicles.
Roads, by contrast, are not meant to be valuable locations in themselves; they are optimized for transporting large volumes of traffic over long distances. They feature wider lanes and faster speed limits.
STROADs are an unhappy blend of both elements. Wide lanes and low speeds make them bad for both pedestrians and drivers. One example of a STROAD is Hastings Street in Vancouver, which tries to be a major thoroughfare for thousands of commuters during rush hour, while still catering to the many businesses along its ten-kilometer span.
Because of its high volume of traffic and many stop lights, motorists can expect to average just twenty kilometers an hour on their commutes to downtown Vancouver.
Gentrification as Part of an Organic System
Chuck wrote an article titled "The Gentrification Paradox," in which he argues that gentrification was actually a healthy part of urban development in the pre-automobile age:
The pre-automobile development pattern was an organic process. It was both incremental and complex... Gentrification – investment followed by displacement – was part of the natural order of things and, as with any organic system, it had a positive role in making things work for everyone.
Before the twentieth century, cities would gradually grow and change over time. But we've used zoning laws to turn our neighbourhoods into unchanging time capsules. Cities used to be antifragile, to borrow a term from Nassim Taleb.
In the past, poorer people would buy property on the outskirts of town, on which they would live and run small businesses. Over time, as the city grew, these outskirts would gradually come to be incorporated into the urban ecosystem. These properties would become more valuable and they would grow with the community, perhaps adding a second storey and expanding the business.
You couldn't do this today. Building codes and zoning laws make any new development into a million-dollar endeavor. People with very little capital can't start with a small property and gradually increase its value over time. This makes the modern form of urban development much less equitable than it was in the past.
Fri, 16 September 2016
Today's guest is Steve Horwitz, he is the Charles A. Dana Professor and Chair of the economics department at St. Lawrence University.
Steve recently wrote an article titled, "Make Babies, and Don't Let the Greens Guilt Trip You about It." This was a response to an argument made by the bioethicist Travis Rieder, who was recently profiled by NPR. Rieder argues that it is immoral to have children because of the burden additional humans place on the Earth, in particular because of the risk of catastrophic climate change. Here's how that NPR piece put his argument:
"Back at James Madison University, Travis Rieder explains a PowerPoint graph that seems to offer hope. Bringing down global fertility by just half a child per woman 'could be the thing that saves us,' he says. He cites a study from 2010 that looked at the impact of demographic change on global carbon emissions. It found that slowing population growth could eliminate one-fifth to one-quarter of all the carbon emissions that need to be cut by midcentury to avoid that potentially catastrophic tipping point."
The problem with this sort of reasoning is that it views human beings as consumers and not as producers and innovators. Humans are able to contribute to the division of labour and to come up with ideas. That division of labour allows everyone to become more productive.
Rieder's ideas echo those of Thomas Robert Malthus, and he is wrong for much the same reasons. Malthus anticipated a world where the diminishing returns in agriculture and exponential population growth would lead humanity to subsistence in a few generations. As Malthus predicted, populations did skyrocket, but contra Malthus, people got significantly richer too. What happened?
Innovation happened. Along with that innovation, and contributing to it, was a finer division of labour created by population growth. As Adam Smith wrote, "the division of labour is limited by the extent of the market."
Humans create resources, not by violating thermodynamics, but by discovering better ways to satisfy our needs with the physical matter that exists. Resources are subjective. To a farmer 500 years ago, striking oil was a nuisance. It would ruin his crops and destroy the value of his land. Yet today, the very same oil is a valuable resource because we've discovered how to make it useful. Julian Simon challenged the idea that we're running out of resources, declaring human innovation to be "the ultimate resource."
Rieder and other environmentalists are different from Malthus in that they worry not about more people eating too much food but about them releasing too much carbon. A lot of this comes down to our estimate of the social cost of carbon. Rieder sees this cost as being so high, it outstrips all other concerns. He expects apocalyptic changes in the Earth's climate within twenty years.
Economists are not climate scientists, we aren't trained to be able to perform our own studies on the relationship between carbon emissions and global climate. But what we can do is look at the bulk of the published research. The two things we could say about this to someone like Rieder are, first, that he seems to have based his arguments on the absolute highest estimates of the climate impact of carbon, where a reasonable person might have looked at the median estimates. And second, people who have performed meta-analyses of this literature have found evidence of publication bias towards finding a larger impact, meaning the best estimate would be somewhat below the median estimate once we correct for publication bias. If the kind of climate change Rieder sees coming in twenty years is really more like two hundred years away, it changes the argument a lot.
With the costs of climate change so far out in the future, and the costs of abatement concentrated on the present, our cost-benefit analysis needs to account for the discount factors in such long time spans. The projects that have to be sacrificed today to abate climate change over the next couple centuries have their own benefits that need to be weighed against the costs of releasing greenhouse gasses into the atmosphere. It all comes down to opportunity cost.
Fri, 9 September 2016
This week's episode of Economics Detective Radio deals with the economic thought and continuing popularity of Marx. No, not Groucho! The other Marx!
My guest on the podcast is Phil Magness, a historian who teaches at George Mason University. Phil recently wrote a piece entitled, "Commie Chic and Quantifying Marx on the Syllabus." Recently, the Open Syllabus Project released a data set including thousands of college syllabi. To many people's surprise, Marx and Engels' Communist Manifesto enjoys massive popularity!
Phil took a closer look at the numbers and reached some startling conclusions:
What could account for the popularity of The Communist Manifesto? Phil identifies two hypotheses: First, it could be the case that Marx simply is the most important thinker who has ever lived, beating out all but Plato by a wide margin. Second, Marx could be enjoying outsized popularity because university faculty outside of economics are overly enamoured with his thought.
The latter seems like the truth.
While Marxian thought does dominate some corners of philosophy, history, literary criticism, and many other subfields, we would expect classes in those areas not to focus on The Communist Manifesto but on Marx's other works. Das Kapital is in 1447 syllabi, right around Rousseau's Social Contract.
The Communist Manifesto is a political leaflet, not a work of deep scholarship. The fact that it dominates not only the works of other thinkers but also Marx's other works indicates that it is assigned primarily for its political conclusions.
How has Marx Avoided the Dustbin of History?
Marx' economic thought was rejected by economists even within his own lifetime. All of his economic analysis shared a fatal flaw: the labour theory of value.
Marx observed that capitalists earn profits above the wages paid to workers. In his framework, this would only be possible if the capitalists exploited the workers. This was met with an empirical challenge: If profits are the result of exploitation, how come profit rates aren't highest in capital-intensive industries? Instead they are relatively consistent across the entire economy.
Engels claimed that Marx would resolve this issue in the later volumes of Kapital. He even held a Prize Essay Competition to see if anyone could anticipate Marx' solution to this seemingly intractable problem. But the later volumes didn't offer a satisfactory solution.
Austrian economist Eugen von Böhm-Bawerk wrote the definitive critique of Marx, Karl Marx and the Close of His System. The marginal revolution of the 1870s, which laid the groundwork for all of modern economics, offered a simple solution to the problem that has stood the test of time: interest.
As Böhm-Bawerk points out, workers are paid when the work is performed. But capitalists only earn revenue once the final product is sold. So if production takes time, we must account for interest. A unit of currency today (gold, silver, dollars, pounds, etc.) is not worth the same as that same unit tomorrow or next year. Leaving aside inflation, people subjectively value money today over money in the future. When you adjust future revenues accordingly, profits are actually very close to zero throughout the economy.
This is the explanation that any modern economist will give you. So when a modern economist assigns Marx, it's to teach about his role in the history of economic thought, not to teach his ideas on their own merits. That's why so few economists are assigning Marx at all!
Marx the scientist may have fallen out of favour, but Marx the political theorist survived and thrived. Marx inspired the political left, and through a twist of fate his adherents came to power in Russia and spread his influence around the world.
Fri, 2 September 2016
Market urbanism is the synthesis of classical liberal economics and an appreciation for urban life. Market urbanists are interested in economic issues specific to cities, such as housing affordability and urban transportation.
Nolan wrote an article titled "Reclaiming 'Redneck' Urbanism: What Urban Planners Can Learn From Trailer Parks." As Nolan points out, trailer parks are remarkable in that they achieve very high densities with just one- and two-story construction. They do so while providing remarkably low rents of between $300 and $500, or $700 to $1,100 per month to live in brand new manufactured homes. They are also interesting in that the park managers provide a form of private governance to their tenants.
A century ago, there were many kinds of low-income housing available to people of lesser means. Low-quality apartments, denser housing, and boarding houses have largely been regulated out of existence. The remarkable thing about trailer parks is that they haven't been made illegal or untenable by regulation. The one thing trailer parks don't have is a mixture of uses, but they get around this by locating close to business areas.
Cities in Europe and Japan, which didn't adopt American-style zoning, have much higher density and more mixed-use neighbourhoods. Houston, which has taken steps to de-regulate, has seen more development of this sort recently. It seems like dense, mixed-use neighbourhoods pass the market test whenever they are allowed.
Sonia Hirt, in her book Zoned in the USA, explains why city planners became focused on separating uses. When these rules were first being adopted, industry polluted much more than it does today, so there was a health justification for separating them. But there were also superstitions, such as the idea that having children close to groceries would spread disease.
William Fischel's homevoter hypothesis states that local homeowners engage in political activism to prevent development, thus protecting their home prices. They may justify their opposition to development in terms of environmentalism or preserving local character, but homeowners stand to gain or lose a significant portion of their life savings depending on the price of their homes. This makes local politics particularly hostile to new development and denser, more affordable housing.
Meanwhile, people blame everything except land use restrictions for high housing prices. Foreign buyers have been a recent scapegoat in Vancouver, which adopted a tax on foreign buyers, thus popping its housing bubble. Airbnb is also blamed for high housing costs, though its effect is certainly negligible.
While housing is important because it is many households' largest expense, inelastic housing supplies prevent people from moving for labour opportunities. Autor, Dorn, and Hanson (2016) show how many local labour markets in America never really recovered from a trade shock with China in the early 2000's. Much of this may have been due to America's inelastic housing supply. When industries like the furniture industry were outcompeted by Chinese imports, the people who owned homes in furniture-producing towns lost both their jobs and the value of their homes. With home prices elsewhere being so high, many of these people chose to spend the rest of their lives on welfare rather than moving to find work. Ed Glaeser has written more on the costs of subsidizing home ownership.
Home ownership is a bad investment. Having a single, large asset take up a large part of one's portfolio is just bad investing, particularly when that asset's value is correlated with your labour earnings. While one can hedge one's home value against futures markets based on the Case-Shiller index, but few people do this.
Errata: I accidentally referred to The Simpsons character Frank Grimes as Rick Grimes. Rick Grimes is from The Walking Dead. Also, I wrongly said that the paper on the China shock was by Angus Deaton. Somehow I mixed him up with David Autor. Same initials, just reversed?
Fri, 26 August 2016
Today's guest is Francisco Toro, he is the blog editor at The Caracas Chronicles, a group blog about Venezuela.
Venezuela has all the markings of a paradise. It has a lush, tropical climate and access to vast oil reserves. And yet, the Venezuelan government has run the country into the ground. As of now, all but the wealthiest Venezuelans struggle to eat. What went wrong?
It might surprise you, given Venezuela's current state, that the country was for many years a model Latin American country. Before 1989, Venezuela had a stable, two-party democracy. Its economy functioned when the price of oil was high, and it was free of much of the violence that plagued other Latin American nations. That changed in 1989 with an event known as El Caracazo.
El Caracazo refers to a series of riots that occurred in February and March of 1989, and their brutal repression by the Venezuelan army. The details surrounding El Caracazo remain deeply controversial among Venezuelans.
Before 1989, the Venezuelan economy was characterized by cronyism. Many industries were protected from competition both by tariffs on foreign goods and restrictions on entry by new firms. This arrangement could continue so long as oil prices stayed high, but with the fall of oil prices in the 1980s, the economy sunk into a malaise. The government was deeply indebted, and the incoming government tried to implement neoliberal reforms to save both the economy and the government's balance sheet.
Within weeks of the reforms, the riots that would become El Caracazo began. Here's where the controversy lies: Chavez and his supporters on the far left point to these riots as the people rising up against capitalism. But Venezuelans on the right point out that the reforms hadn't had time to take effect when the riots occurred, and therefore they were more likely a reaction against the ongoing economic malaise than the reforms.
In any case, Caracazo marked a turning point for Venezuela that would lead to the rise of socialist president Hugo Chavez, who would control the country until his death in 2013. Chavez' brand of Marxism was a throwback to the socialist regimes of the Cold War. His Venezuela was a mixed economy with very heavy restrictions on its capitalist elements. For instance, Chavez made it illegal to fire an employee for any reason. He imposed price controls throughout the economy. When oil prices were high, they propped up the rest of the economy. When they were low, the regime could borrow to paper over critical shortages. During this time, Chavez received praise from Western intellectuals on the left. Even as late as 2013, Salon was praising Chavez' "economic miracle."
In 2013, Chavez died and was succeeded by Nicolas Maduro. In 2014, the price of oil collapsed, causing Venezuela to default on its debts. The government has attempted to print its way to solvency, causing high inflation. The Chavez and Maduro regimes have kneecapped the capitalist system and replaced it with nothing. Toro argues that even Soviet-style central planning would be an improvement at this point.
There are clear pragmatic reforms Maduro could make to reduce the impact of the crisis. Yet he doesn't, and members of his government who speak out in favour of market-led reforms of any kind are summarily fired. Maduro listens to the advice of a Marxist economist named Alfredo Serrano, who is a mix between a hard-core Stalinist and a utopian campus liberal.
Yet despite the continually worsening economy, Maduro holds on to power. He also maintains the support of about a third of the population. Maduro's regime has managed to place the blame for the crisis on sabotage by a nefarious capitalist conspiracy.
Businesses that hold inventory for any length of time are at risk of having their warehouses raided and filmed as proof that the ongoing shortages are the work of capitalists hoarding goods. Maduro also scapegoats the many people who earn their livings re-selling price-controlled goods, a group that now encompasses one in six Venezuelans. As dubious as these claims are, the government controls the media and seems to have convinced a third of the population of this narrative.
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.