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 PST
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 PST
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:
Fri, 20 March 2015
Don Boudreaux is a professor of economics at George Mason University. He blogs at Café Hayek. I invited him to discuss civil asset forfeiture on the podcast because of a conversation we had about it at a recent Mercatus Center colloquium.
Civil asset forfeiture is the practice of the state taking someone’s property on suspicion that the property has been used for wrongdoing, without having to charge the owner with a crime.
Civil asset forfeiture had its origins in British maritime law. The British had difficulties with pirates along the Barbary Coast. When the pirates were apprehended and their ships brought back to London, British courts had difficulty deciding what to do with these ships. The ships’ owners were outside the jurisdiction of British law, so the courts couldn’t try and convict them, but they couldn’t send the ships back to them either only to have them return to the seas with a fresh pirate crew! Parliament thus passed a law allowing the courts to charge the property itself with the crime if and only if the property’s owner was outside the jurisdiction of British law.
Civil asset forfeiture, in this very limited form, was part of American law from the beginning. In the late 19th century, when alcohol was prohibited in some states, law enforcers started using civil asset forfeiture to confiscate the property of those suspected of producing, trafficking, and selling alcohol. This allowed them to circumvent due process, as American law only guarantees due process rights (such as the right to a trial by jury, the right to an attorney, the presumption of innocence, etc.) to human beings, and an alcohol still is not a human.
The US Supreme Court ruled on civil asset forfeiture in the case of Bennis v. Michigan (which Don wrote about in a 1996 article coauthored with A. C. Pritchard). John Bennis was caught with a prostitute in the 1977 Dodge Dart he co-owned with his wife, Tina Bennis. As a result, the state confiscated the car. Tina Bennis, however, had no knowledge of her husband’s wrongdoing, and argued that she should at least be entitled to her half of the proceeds from the sale of the car. The case went all the way to the US Supreme Court, where then-Chief Justice Rehnquist wrote the majority opinion in favour of the State of Michigan. Rehnquist argued that civil asset forfeiture was constitutional since it had been a part of British law when the Constitution was adopted. Rehnquist neglected the fact that the civil asset forfeiture law at that time had only applied when the property owner was outside the legal jurisdiction of the court. John and Tina Bennis were both within the legal jurisdiction of Wayne County, Michigan where the car was seized.
Police usually seize the assets of those groups in American society that have little political clout. A young black man driving in an expensive car and carrying a lot of cash can be pulled over and have his car and cash seized on suspicion that he might be a drug dealer. White, middle-class Americans rarely face the blatant, unjust seizure of their assets.
However, in a recent case, the City of Philadelphia seized the white, middle-class Sourovelis family’s home after their son sold $40 of heroin on the front lawn. The Sourovelis family is now suing the City of Brotherly Love in a class-action suit with others whose property the city has seized (see Sourovelis v. City of Philadelphia). This case has drawn more public attention to the injustice of civil asset forfeiture, though still less attention than the issue deserves.
For more information on civil asset forfeiture, you can learn about it from the Institute for Justice, a DC-based public-interest law firm that works against civil asset forfeiture.
Fri, 27 February 2015
Erik Kimbrough, assistant professor of economics at Simon Fraser University, is an experimental economist. In this episode, we discuss his paper, "Norms Make Preferences Social" which he coauthored with Alexander Vostroknutov.
Direct download: Experimental_Economics_Norms_and_Prosocial_Behaviour_with_Erik_Kimbrough.mp3
Category:Methodology -- posted at: 1:14pm PST
Fri, 6 February 2015
Jimmy Morrison is an independent filmmaker who is currently directing two films: The Housing Bubble and The Bigger Bubble. The Housing Bubble deals with the history of business cycles in America, spanning from the First World War to the 2008 crash. The Bigger Bubble deals with the aftermath of the 2008 crash. These films began as a single project, but Jimmy chose to split it into two films in order to tell the full story.
The films’ website provides a synopsis: