Sleepless in Morgantown

When it comes down to it, it's not that hard to find additional lists that places West Virginia last. And the CDC has generated yet another. It turns out that West Virginians are the most sleepless of all the 50 states, with 1 in 5 residents reporting that they didn't get a single good night's sleep within the last month.

(I'm having trouble finding the actual study itself-- help?)

The determinants of sleeplessness at the state level, anyone? Average number of kids? Long-term career opportunities?

2009 Gus Rankings: Week 8

It's a bit tardy, but here's this week's Gus Rankings. Iowa still holds the top spot, and Temple finds itself at 23-- a tribute to it's 5-1 record in FBS games, but also a highlight of the difficulty in accounting for FCS losses. The Owls lost to Villanova to start the season. We'll have to find a way to deal with this situation next year, but a non-arbitrary solution has thus far avoided me. I'm open to suggestions...

File this under: Quote of the day, ideas, bad

In the process of perusing as much literature as possible on global public goods, I came across this gem:

Capacity building in developing countries is critical to achieving the objective of financial stability and market efficiency. The seigniorage earned by the central banks of industrial countries could be an appropriate funding source.

Honestly-- that's exactly how it reads. As a section header, no less.

Just to clarify-- the policy suggestion is to generate seigniorage for the goal of promoting financial stability.

Wow.

It's from Global Public Goods: Taking the Concept Forward. And who, you ask, published this nugget of wisdom? The United Nations Development Programme, that's who. Let's hear it-- the international development community, everyone!

More Peltzman Effects in NASCAR

From Public Choice, "Rubbin' is Racin'" by Pope and Tollison:

The Peltzman Effect is a well known and controversial theory in the literature. Studies have struggled to find a dataset that can accurately test for the presence of the effect. We have created a unique dataset and use a natural experiment from the sport of stock car racing to test the theory. Using race-level data from NASCAR events, we find strong evidence that a major safety regulation has led to more on-track accidents and an increased risk to both spectators and pit crew members.

FYI: If you were wondering how this differed from a 2007 paper by Nesbit and Sobel, according to footnote 5, page 5, the Pope and Tollison dataset covers the implementation of the HANS device.

What are Frowning Economic Educators?

I'll take "Jeopardy! Contestants Don't Know Economists" for 500, Alex.



Do you think this will affect Matt's love for Jeopardy?

[HT: Boettke]

Funny personal story below the fold.
+/-

When I was in the third grade, my grandma and I would play Jeopardy! against each other for dimes. So I would secretly watch it on one channel at 7PM while she was watching Wheel of Fortune in the other room. Then I'd watch it again with her (and win a lot of dimes, obviously) at 7:30PM. Sorry Grandma...

Infinite Monkey Hypothesis or Not?

The Bay Guardian realizes what is important in Governor Schwarzenegger's latest veto message:

On Distance Variables in Hedonic Regressions

My paper "Inconsistency in Welfare Inferences from Distance Variables in Hedonic Regressions" with Michael Farmer and Cliff Libscomb is now forthcoming in the Journal of Real Estate and Finance Economics. It's intended audience is for researchers doing applied work that involve estimating the determinants of housing prices.

If you are considering using a "distance to" variable in a housing demand regression, below the fold you can find the cliff notes from the paper on why direct interpretation of these variables is misleading.
+/-

Here is a very common applied research scenerio: You have data on a bunch of housing sales in a neighborhood or metropolitan area. You think there is some significant landmark that may be relevant, perhaps downtown or some toxic waste dump along the periphery. To control for this, you calculate every observation's distance from said site and include it in your regression as "Distance to CBD" or "Distance to Toxic Waste Dump." The expectation is often that the coefficient will tell you how these things will influence housing prices. As our paper demonstrates, this is not a correct interpretation.

Q1: Why is it not correct?
As long as distance to something matters, then distance to virtually anything will also matter in a regression. One of the easiest ways to think of this is with the Toxic Waste Dump on the periphery example. Suppose on the periphery directly opposite to the waste dump is a park. Is the coefficient picking up your proximity to the park, or distance away from the waste dump? Unless you are very familiar with the area, there are probably many of these types of landmarks that you are not even aware of as a researcher.

Q2: What does the distance variable tell us, if not the value of a landmark?
Basically, they give you an indication of the optimal area in terms of location.

Ultimately, you can think of a distance variable as a line moving through space. Any other line you happen to draw through space will have an angular relationship with it that will (unless it is orthogonal) influence the coefficient on your distance variable. If there are multiple competing locations, these lines become collinear if they are all included, but if you only use a subset the coefficient becomes a weighted average of the most dominating influence(s).

Q3: Ok, if distance to something matters, can we just treat it as a proxy variable, or otherwise use it to obtain unbiased estimates of the other coefficients?

Yes, but once you realize this is what you are functionally doing, you are much better off by formally modeling it rather than thinking of it as a proxy variable. Include latitude, longitude, and their quadratic counterparts. The resulting coefficients will allow you to solve for the max/min coordinates.

Q4: Are all "distance to" variables like this?
No, some distance variables are actually "distance to nearest." This problem emerges when all observations have a common point. Suppose there are multiple pollution emitters, and the variable is measuring the distance to the nearest one. This is ok, because the variable is not capturing each observation's relative position in space.

Q5: Can I just fix this problem with a spatial autoregressive (SAR) or spatial error model (SEM)?
No, the standard SAR and SEM are designed to capture a interdependent relationship (like a spatial multiplier), not a directional effect or an optimal position in space.

Q6: I would really like to know the welfare significance of some local amenity, is there a work-around to get at this without the "distance to" variable?
We do intend that to be the next stage in our research and we have some specific ideas, but nothing we're willing to market at this point (this point being Oct 27, 2009).

Brad Delong and Scott Sumner, "Fed Up"

In a Reason magazine article entitled Fed Up, Brian Doherty writes:

The Berkeley economist Brad DeLong, a popular blogger and former Clinton Treasury Department official who once dismissed Mises’ general monetary theory as “batshit insane,” still told this story in the October 2008 issue of the liberal American Prospect: “The current financial crisis has its roots in Greenspan’s decision to keep interest rates very low in 2002 and 2003 to head off the danger of a deflation-induced double-dip recession.…Six months ago, I would have said that his judgment was probably correct. Today… I can no longer state that Greenspan made the right calls with respect to the level of interest rates and the housing bubble in the 2000s.”
[...]
Scott Sumner, a monetary economist at Bentley University who writes the much-cited blog The Money Illusion, thinks the Federal Reserve was and is too tight with interest rates and money for optimal economic performance. “As everyone knows by now,” Sumner complained in June, “the once kooky and discredited Austrian business cycle model has now become conventional wisdom.”

Interesting. What do you think?

Congrats to David on the 2009 Lavoie Prize!

It has been announced that TPSer David Skarbek has won one of this year's three Lavoie Prize for his paper on "Self-Governance in San Pedro Prison."

Here is a blog post where David summarizes this work, in which he explains why the San Pedro prison is among the safest prisons despite being governed by prisoners instead of guards.

Congrats, David!

Vromen on Freakonomics

TC at MR points us to Jack J. Vromen's essay in the Erasmus Journal for Philosophy and Economics, titled "The Booming Economics-Made-Fun Book Genre: More Than Having Fun, But Less Than Economic Imperialism."

It was the second part of the title that caught my interest, and indeed the essay is not so much a recent review of the way in which economics has expanded in popularity as it is a discussion of what constitutes economics and its place in social science. In particular, Vromen offers a response to the genre's critics that view this as "economics imperialism."

These critics are found in the other social sciences and parley their overall critique of economics (or at least what they perceive economics to be) and its expansion into "their" subject matter. By "their" subject matter, it is taken to mean the general non-econ aspects of life that tend to be discussed in this genre (more sex is safer sex, tipping your dentist, identifying the cheating sumo wrestlers, etc). They apparently view this as economists stealing their subject matter to apply our own (distasteful) methodology towards understanding it. In short, the criticism is that they do not want people "thinking like economists" in their subject area.

My favorite passage comes on page 79, in which he dismisses this critisim on the grounds that ideas are public, not private goods (whether he catches the irony or not, I cannot tell):

This presupposes that subjects (and issues and phenomena in general) can be appropriated by some discipline in a similar way as natural resources in some territory, such as oil and gas, can be appropriated by some foreign country or company. But are the subjects tackled or addressed by some discipline like that? If economists start tackling “outlandish” phenomena, are other disciplines that traditionally tackled these phenomena thereby denied access to them? It seems not. Unlike natural resources, which are private goods, subjects are more like public goods. Their “use” by the one discipline does not diminish the opportunities for other disciplines to “use” them. Disciplines cannot be dispossessed of their subjects in the same way that countries can be dispossessed of their natural resources.

That is thinking like an economist to determine the subject domain of economics, and the critics will not like it. I loved the essay, and highly recommend it.

Happy Anniversary to the Berlin Wall Collapse

Do check out this book review on the subject at Reason:

On February 6, 1989, Gueffroy and a friend attempted to escape from East Berlin by scaling die Mauer—the wall that separated communist east from capitalist west. They didn’t make it far. After tripping an alarm, Gueffroy was shot 10 times by border guards and died instantly. His accomplice was shot in the foot but survived, only to be put on trial and sentenced to three years in prison for “attempted illegal border-crossing in the first degree.”

Twenty years ago this month, and nine months after the murder of Gueffroy, the Berlin Wall, that monument to the barbarism of the Soviet experiment, was finally breached.

[...]

When the whole rotten experiment suddenly failed, eventually bringing to an end not just Moscow’s Warsaw Pact client governments but the proxy civil wars it fought in the Third World, instead of engaging in overdue self-criticism many commentators clung to shopworn shibboleths. In 1990 the academic Peter Marcuse, also writing in The Nation, bizarrely claimed that East Germany “had never sent dissidents to gulags and rarely to jail” and expressed outrage that the “goal of the German authorities is the simple integration of East into West without reflection,” instead of heeding the pleas of the intellectual class who were at work on a more humane, less Russian brand of socialism.

Blockquoting X

X = Mancur Olson, The Rise and Decline of Nations:

Special-interest groups also slow growth by reducing the rate at which resources are reallocated from one activity or industry to another in response to new technologies or conditions. One obvious way in which they do so is by lobbying for bail-outs of failing firms, thereby delaying or preventing the shift of resources to areas where they would have a greater productivity (1982, 63-64).

File this Under... Profit and LOSS System

They are called Winkers. Just watch the video.



[HT: Angela]

[UPDATE!]

Here are some additional details from the Winkers Website:

Year Introduced: 2009
Developer: William A. Jones, a retired man from Washington state
Price range: $149-569
Each pair hand-painted by request
Available in human eyes, ducks, clap boards, owl eyes and lion eyes

I stand by my original prediction that the market will sort this entrepreneur accordingly (and by that, I mean into the waste bin). Please let me know if you spot a pair of Winkers in your neighborhood, though. In fact, take a picture and I'll post it on the blog.

Nook-and-Mortar

I am tentatively planning on buying a e-reader in the Spring, so I've been keeping an eye on the new product lines that are coming out, the latest being the Nook from Barnes and Noble. It is hard not to appreciate the way innovation has been the primary point of competition. My favorite examples from a Wired review:

One of the best things about hardcovers or paperbacks is that you can give them to family and friends. E-readers, so far, haven’t offered that to consumers. Instead, devices such as Kindle have locked down books and made it impossible for users to lend books that they have bought. Nook tries to change that with its LendMe feature. Nook users can loan books to friends for two weeks and those e-books can be accessed through PCs or smartphones such as the BlackBerry and the iPhone. Lending the book through Nook makes it unavailable to the original owner, but at the end of the two weeks, the book reverts back to its owner.
[...]
Most of us turn to Amazon when it comes to buying books, but there is something to be said for walking into a bookstore, sitting there with a cup of coffee and browsing. The Nook lets you do just that. In a neat trick that takes advantage of Barnes & Noble’s brick-and-mortar stores, the Nook lets users read entire e-books for free in-store.

Will future Barnes and Noble stores be replaced by coffee shops with wireless access to their books? How will libraries adapt to a world in which returns will be automatic, and hence no late fees?

There is also a relevant status signaling issue. When e-Reader's first started coming to the market, some critics remarked that it would not take hold because it would hide people's "intellectual trophy case i.e. the giant bookshelf of all the books I've read." I suppose now e-Readers create a mobile trophy case of unrevealed size, increasing the status of those who read at least enough to warrant the purchase of an e-Reader.

F. Scott Fitzgerald's tax returns

Think that reading about tax returns is interesting? Me neither, but I thought this was an interesting bit about F. Scott Fitzgerald and his tax returns. Some fun bits:

That year [1920] only roughly 7 percent of the population—7,259,944—even filed tax returns. Today, about 45 percent of the population files returns...

...

...the modern equivalent of Fitzgerald’s annual income would be roughly $500,000...Fitzgerald’s income was almost tax free (5.5 percent effective rate), while today’s taxpayer making $500,000 would probably pay 40 percent in income and Social Security taxes.

...

Over Fitzgerald’s working life, he reported a total of $449,713 in gross income, and he paid $24,666 in taxes—thus the effective tax rate of 5.5 percent.

And for my first effort with the hide-a-text function, do you know which book of his was most printed during his lifetime?

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This Side of Paradise.

Externalities: Body Odor Edition

From the AP (dated 9/2/2009):

HONOLULU - A vote on a Honolulu City Council proposal that would bar people with offensive odors from public transit vehicles is being delayed.

The proposed ordinance would make it illegal to have "odors that unreasonably disturb others or interfere with their use of the transit system."

Councilman Nestor Garcia said Wednesday the proposal has some technical problems that need to be addressed.

Granted, Coasian bargaining probably doesn't work here. I assume they mean city-owned when they say "public transit," so there is a legitimate concern of granting the property right to the party that values it the most. In this case, some people value being stinky while others value the absence of stink on people.

I think it is interesting what people will have to admit to themselves in order to support or oppose this ordinance. Body odor is something of a random variable that is only partially determined by personal hygiene. Also random is the manner in which this must be enforced. If we think of body odor as a continuous spectrum, one must identify where they think the cut-off will be as well as where they are on the spectrum. Can they get the city to credibly commit to a point on the spectrum, even in tough financial times?

Update: Rachel Herz points out a similar ban has been in place in Novia Scotia for a few years:

The city of Halifax in Nova Scotia imposed a ban on scent in 2000, specifically artificial scent, which resulted in elderly ladies being kicked off buses for wearing perfume and high school students being accused of "assault" for sporting hair gel and Aqua Velva in class. I have not found confirmation that anyone has ever been jailed or fined for these Canadian scent offenses.

Herz goes on to point out, legitimately in my view, that the psychology of smell coupled with these laws could create class and race issues.

2009 Gus Rankings: Week 7

Here are this week's Gus Rankings. Of note:

- Note that Virginia Tech, with two losses, is still ranked very high (#4). Recall that their losses are to teams that are a combined 12-1. Losing to good teams does little harm in the Gus Rankings.

- There are seven undefeated teams left, and the lowest is ranked #11.

- As the season presses on, there is more spread in the rankings-- 39 points between the highest and lowest-- but also more opportunity for larger movements for individual teams due to the fact that your score is a function of the performance of more and more teams (namely, the ones you've already played).

The BCS rankings just came out for the first time this week; don't worry, we're watching how Gus stacks up to it and others as the season progresses...

More state business rankings!

It's almost to the point where there's no end to the ways to describe a similar idea. Economic freedom/state business climate/best place to start a business, anyone?

Anyhow, here's a list from Forbes that talks about the best places to launch a small business. The ranking seems to be an indication of the number of small businesses per capita...if that's the case, it misses some of the details, but as a general overview it's still worthwhile.

One of these days with these rankings...

How much stimulus money actually gets spent?

Seems like a fair question; Andrew Leigh takes a stab at it, at least in Australia, emphasis is mine:

Using survey evidence, I estimate the impact of a $12 billion package of household payments delivered in Australia between March and May 2009. Forty percent of households who said that they received the payment reported having spent it. This is approximately twice the spending rate that has been recorded in surveys assessing the 2001 and 2008 tax rebates in the United States. Using an approach for converting spending rates into an aggregate marginal propensity to consume (MPC), this is consistent with an aggregate MPC of 0.41-0.42. Since this estimate is based only on first-quarter spending, it may be an underestimate of the longer-run impact of the package on consumer expenditure.

Regardless of what side of the fence you're on, it's important to note the non-equivalence on the consumption end between tax rebates and stimulus checks. (Albeit between different nations.)

Understanding the Equal Marginal Benefit Principle

Note: This post is going into my teaching archive to help students who miss this particular class. For my fellow econ teachers, you might find it an alternate way of teaching EMBP.

The equal marginal benefit principle says that consumers will chose their consumption bundle in such a way that the Marginal Utility (MU) per dollar will be equal across all goods. In other words, the last commodity they purchase will yield the same level of marginal utility per dollar spent. Mathematically, it is expressed across N goods as:
It is important to understand that this condition is referring to an outcome of a process, that is, it is something consumers are moving towards. The intuition can be illustrated with a simple example.

Suppose a consumer is at a football game with $10 of income he plans to spend. With this $10, he can purchase different quantities of pretzels, beers, and nachos, which are each $1 in price. The Table below illustrates the marginal utility experienced with each unit of consumption:

Marginal Utility per Unit by Item

Notice that with each item, they experience diminishing marginal utility (the more they have, the less they want a little bit more).

Based on the above table, how will the consumer spend the first of their $10? It makes sense that they would get "the most bang for their buck" and buy the first beer, which yields 100 marginal utils (as opposed to 50 or 28 for pretzels and nachos, respectively).
Now, how does the consumer spend their 2nd dollar? They could buy their first pretzel (50 more utils), their second beer (60 more utils), or their first nacho (28 utils). Since the second beer adds to their utility at the greatest rate, they will have the second beer.
How about the third dollar? They can buy their first pretzel (50 more utils), their third beer (45 more utils), or their first nacho (28 more utils). With their third dollar, they will purchase their first pretzel. This process continues, of course, so that we can see a break down of how each dollar of spending will occur:
As you can see, with the first $9 they purchased 4 pretzels, 4 beers, and 1 nacho, and are now indifferent on the 10th dollar of spending. On the 10th dollar, the marginal utility is equal across all goods.

See Also: The EMBP in One Picture

Some Rights are Just Wrong

Granting rights is easy, as this news snipet points out:

Starting next July, every person in Finland will have the right to a one-megabit broadband connection, says the Ministry of Transport and Communications.

Enforcing rights like these without violating other rights, now THAT is quite difficult.

[HT: Kate]

Finding the Interesting Question

Here is the trailer for The Box:

The interwebs seems to think that the movie's premise is an interesting question:

Your family is in a financial crisis. You receive a box with a button inside and you have a choice. If you push the button your family will get 1million dollars BUT someone you don't know gets killed. would you do it?

Actually, I think the interesting variants of the question would be:

What is the minimum amount of money that would convince you to push the button? What are the determinants of this amount (e.g. financial status, etc)?

Suppose you knew someone was offered the opportunity to push the button, what would you be willing to pay them to not push the button? How does this change in the presence of free-riders?

Suppose you could pay to be removed from the population eligible to be killed by the button-pushing. What would you be willing to pay? Note that each person who does pay increases the probability for others of being selected for death. Therefore, a cheaper alternative may be to pay others to stay on the list.

FYI #1: if no amount of money would convince you to push the button, then your answer is infinite.

FYI #2: I expect the movie itself to be boring.

Types of blog posts we try not to write

As rants go, this is a doozy. Though I'm definitely using this line as often as possible:

In fact, human-caused global warming is well-established science, far better established than any aspect of economics.

It works on so many levels!

Large Hadron Collider Update: October 14, 2009

For those that follow the blog especially close, I've provided occasional updates on the progress of the Large Hadron Collider. The best background post is here, other related posts are here, here, and here. The NYT gives an update, and notes that "[i]n December, if all goes well, protons will start smashing together in an underground racetrack outside Geneva..."

The lesson, as always: With government, months means years.

(By the way, that NYT article is interesting insofar that people have written papers describing how the Large Hadron Collider is being sabotaged from the future.

A pair of otherwise distinguished physicists have suggested that the hypothesized Higgs boson, which physicists hope to produce with the collider, might be so abhorrent to nature that its creation would ripple backward through time and stop the collider before it could make one, like a time traveler who goes back in time to kill his grandfather.

Bizarre. The papers which put forth these theories are here and here.)

(Edited: Justin beat me to it!)

2009 Gus Rankings: Week 6

Here are this week's Gus Rankings. No change at the top or bottom this week. Virginia Tech gained six points over the weekend and gives a good example of the power of having defeated winning teams. Three of their points came from beating Boston College, but also got single points from victories by Duke, Marshall and Nebraska. Their single loss came to the second team in the rankings, Alabama, and they haven't lost yet. If Virginia Tech had won that game they would have a sizable advantage on the rest of the field.

At this point, it may be worthwhile to look at which conferences seem to be doing the best. I won't provide anything of length at this point, but look at the top 11 teams (3 teams tied for ninth):

SEC: 3
Big 10: 2
Big 12: 2
ACC: 1
Mountain West: 1
Pac-10: 1
WAC: 1

Should be to fun to see how it shifts around once conference play begins. Having more successful conference opponents from top to bottom should rise the tide of all the boats in the conference.

A comment on comments

I have observed for the last several months on blogs that I frequent, most notably Cafe Hayek and EconLog, that a commenter (or commentators) with the handle(s) "Justin R" and "JR" occasionally appear, without any link that helps identify the author. This person is not me. I always leave a hyperlink back to my personal webpage or TPS, and apart from an occasional violation, I leave my full name (Justin Ross). The blog author puts their reputation on the line to some extent when blogging their ideas, and I feel it is most appropriate to do the same when leaving comments, especially if that comment is leveling some kind of criticism.

Congratulations Dr. Ostrom!

With great pleasure I congratulate my colleague Dr. Elinor Ostrom for winning the Nobel Prize in Economics! As one of the co-founders of the Bloomington School of Public Choice, it is well deserved.

Here is a link to The Workshop in Political Theory and Policy Analysis, of which Lin is co-founder and senior research director.

War and Politics

That's the title of TPS friend Pavel Yakovlev's first book. Here it is at Amazon. Here is the product description:

This monograph is a collection of empirical and theoretical essays on the interplay between political regimes, military spending, and economic growth. Chapter 1 surveys the literature on political regimes, policies they choose and their economic consequences. Chapter 2 examines how democracy and conscription may affect the number of battlefield deaths and the value of a statistical life in military conflicts. Chapter 3 investigates how arms trade and military spending may affect economic growth. Chapter 4 examines the efficiency of political markets and factors influencing political polarization. Chapter 5 summarizes the findings and suggests the avenues for future research.

A semi-spoiler:
The book is based on his dissertation, and one of the more interesting findings that emerge from it is that democracies substitute kapital for labor at a higher rate than dictatorships, as do countries that employ the draft. You can think of countries without a draft being forced to pay market wages for soldiers, and thus substituting to more military machinery, whereas the draft carries the ability to coerce labor at below-market wages.

If you think more elaboration on those ideas would interest you, then do check out the book. Especially if you are a doctoral student interested in conducting similar lines of research.

Disclosure: In compliance with new federal regulations, let it be known that I received no compensation for this review.

File this under: Incentives matter, not taking the escalator

Check out this video from a subway station in Sweden.

Q: How do you get more people to take the stairs?
A: Make it into a piano.

Best Careers

We've talked about best and worst jobs before, CNN Money chimes in with their top 50 careers, based on "great pay and growth prospects." College professor comes in at #3, the top end seems to be laden with health- and technology-related jobs. The way in which these rankings tend to develop rarely involves more than a smattering of consideration, though the opportunity cost of your employment is always fun to consider.

In-N-Out

Outside of consistently good Mexican food, there's nothing I miss more in the culinary realm by living in the eastern portion of the country than In-N-Out. Nothing compares. Five Guys is passable but a weak substitute.

Why do I bring this up? There's a new book about In-N-Out, and it's here.

Inventives Matter: Tax Cheats Edition

From Yahoo News (HT: Jason Oberle):

Dangle some cash and a lot of people are happy to turn in their employers for cheating on their taxes.

Since Congress beefed up whistleblower rewards in late 2006, tips about suspected tax cheats owing at least $2 million have jumped more than tenfold, the Internal Revenue Service said in a report Thursday.

In 2008, the agency received tips on 1,246 suspected tax dodgers, each owing more than $2 million. That's up from 116 big-money tips in 2007.

...

The 2006 law targets high-income tax dodgers, guaranteeing rewards for qualified whistleblowers if the company in question owes a least $2 million in unpaid taxes, interest and penalties. Tips about individuals also qualify if the taxpayer has an income of at least $200,000.

The most interesting part is the last excerpted paragaph, in my view. We don't care about cheating in the abstract, just cheating from firms with more than $2 million in unpaid taxes and individuals with at least $200K in annual income. True, on a case-by-case basis it might not be worth pursing smaller dues. However, these are the groups who will be most inclined to fight the accusations. Furthermore, smaller taxpayers in the aggregate still probably account for a good chunk of change, and excluding them from eligibility does not do much for deterrence of evasion.

My thoughts on tiebreakers in Major League Baseball

I was struck during the pregame show of last night's Twins/Tigers tiebreaker of how often these games end up being particularly competitive. Last night's game was no exception. Last year, the White Sox defeated the Twins 1-0, the Rockies defeated the Padres in an epic 13-inning game the year before that, and even more well known is the Bucky Dent game from 1978 and Bobby Thompson's legendary home run in 1951. Those are all one run games, and with the exception of last year's White Sox/Twins game-- a good game in its own right-- the other four are, independent of circumstance, in the upper one hundredth of one percent of professional baseball game sever played. What is it about tiebreakers that elicit such quality baseball? Furthermore, what is it about one game producing such high quality baseball as compared to a series? Is there something about both teams facing elimination that generates more competitive games?

Here's a list of the 13 tiebreakers that have been played in MLB history. Note that prior to 1978-- so starting with 1962 and heading back in time-- tiebreakers were 3 game series. Counting yesterday's game, there have been 8 one-game tiebreakers. Four of the games were decided by one run, and another had a 2 run difference.

Testable implications: Are Game 5s/7s in series more competitive than the previous games? Of the tiebreaker series that came down to a Game 3, one of them was a 1-run game and another was a 2-run game. I'm not going to count through baseball history, but I wonder how it all stacks up.

Further testable implications: What about other sports?

Possible policy implication: If both teams are faced with the possibility of elimination, and the games are found to be more competitive, and long run commercial interest is a function of competitive nature of important games, would professional sports leagues be well-advised to eliminate series and have a one-game-take-all playoff structure? There's a lot more to consider-- namely, ad revenue declines in a one-and-done scenario (and thus the value of purchasing broadcasting rights to a championship series), as well as cultural issues (mostly with baseball)-- but it's nonetheless worth thinking about. Oftentimes, people like to say that a seven game series is not long enough to effectively separate the better team in baseball. I don't disagree. But if seven's not good enough and there's no prospect for lengthening the series, why not move to one game if the game is likely to be very good?

Interesting note: Football is the only sport that currently lines up as coming down to one game for playoff advancement, and it is clearly the most popular of the four major sports.

Another interesting note: Basketball recently switched from 5 game series in the first round to 7 game series-- thereby reducing the chance of a double elimination game-- and the argument could be made that basketball's popularity in the recent past has declined.

Yet another interesting note: College basketball's playoff structure is one-and-done and is massively popular.

“Primacy of Theory” – Hmm. Dan Klein Chimes In

Dan Klein sent me his thoughts on the discussion that has been taking place concerning Human Action. With his permission, I am posting them here:

"Reading Emily’s post, I find myself unsympathetic with her distinction between “economic theory” and “empirical economics” (or “applied economic theory”).

Continued below the fold.
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Where philosophers including Hayek and Polanyi—and Berkeley(?), Hamilton(?), Kant(?), Spencer(?), James (?), etc., etc. – say that all observation or perception emerge from higher-level cognitive goings-on (associations, mechanisms, categorizings, etc.), no one nowadays would disagree. I take this as the nub of Hayek’s “Primacy of the Abstract,” (in New Studies), a title that is regrettable in the “Primacy.”

Hayek is against “the assertion that the abstract presupposes the concrete” (p. 37). Fine: It is wrong to say “first comes the concrete and then comes the abstract”. But I think it is a mistake to take Hayek to be saying “first comes the abstract and then comes the concrete.” In speaking of babies and lower animals, Hayek makes it pretty clear that the abstracts evolve in relation to a species/life experience.

So when Hayek says “primacy of the abstract” what he means is something like the following: Abstracts are as primary as concretes. He is not saying that all abstracts come before all “concretes”.

Now, in Hayek’s paper, I don’t notice a single occurrence of the word “theory.” Hayek is essentially talking about things like a squirrel’s perception of a nut being emergent from higher cognitive goings-on.

Emily writes:
“The observation of all facts and phenomena in the world take place through a lens of theory. For Mises, there is no such thing as observation without prior theory.”

I object to this. We should avoid saying that squirrels theorize. Likewise, when I merely observe a baseball game, I am not theorizing. Theorizing is a form of human discourse (which could of course be discourse with oneself in one’s own head). Theory is an artifact of human discourse.

A useful way to think of “theory” is as explanation. Explanation is a matter of discourse – the squirrel does not explain.

Explanation implies an explanandum. An explanandum implies some facts.

Another useful way to think of “theory” is as articulate interpretation. That too implies facts to be interpreted.

“Factual” statements are presumed acceptable to all parties of the communication.

Sure, in any discourse situation, factual statements reside within what Hayek calls “abstractions”, but if the set of statements are regarded as “factual,” then those “abstractions” are not, within the discourse situation, theory.

(My take of facts and interpretation is given on pp. 3-5 of the following paper)

Emily expounds what she identifies as the “Misesian position in acknowledging the primacy of theory.” She champions “the primacy of theory.”

But, irrespective of whether we view “theory” as explanation or as interpretation, we must have facts to do theory. I don’t see a contest of “primacy” between facts and theory. If we must speak of “primacy” – the value of which I doubt – then, in theorizing, facts and theory are dually “primary.”

Any kind of theorizing must presuppose some facts. It is by recourse to the factual that we answer the questions: Theory of what? Explanation of what? Interpretation of what?

When Emily speaks of “the primacy of theory,” I am tempted to ask her, “The theory that you say is primary is a theory of what, exactly?” Notice how Emily shifts to: “a method for developing an [unlimited number of relevant refutable hypotheses].” A “method,” hmm. Has it turned into the “primacy of method”?

Within a discourse situation, neither of the following is true:
1. The facts determine the theorizing.
2. The theorizing determines the facts.

To say that you can always open up what are treated in one situation as “factual” to dispute, that you can change the discourse situation, is true enough. But such recursion will never bring you to a “primacy of theory.”

Congrats, Thomas Johnson!

I'd like to send along a hearty congratulations to long-time TPS reader Thomas Johnson, who recently won the Chookaszian Prize, "given annually to the student or group of students at the Kellogg School of Management who have written the best paper in the area of financial risk management." The web page for the award is here. Tom's winning paper: "Approximating Optimal Trading Strategies Under Parameter Uncertainty: A Monte Carlo Approach"

Great job, Tom! Can we claim this as some shameless self-promotion? You bet!

Glad my tax money is helping this along

The Federal Trade Commission has found the scum of the Earth to crack down on-- us bloggers! Turns out that we now have to clearly disclose freebies and payments when reviewing products. So, in the interest of keeping in line, I have received one (1) complimentary book which I did not review. I also get paid seven figures for doing this. One of the two previous statements is true.

I'll leave the other bloggers to themselves to follow the law!

2009 Gus Rankings: Week 5

This week's Gus Rankings are out, you can find them here. Virginia Tech jumped up to grab the top spot, and Alabama, LSU, Iowa and Texas round out the top 5. Washington remains strong, as its two wins over teams with a combined eight wins nicely offsets their three losses to teams with a combined two losses. Rice remains last (sorry Marshall!) though the gap has shrunk.

Continued Discussion on Human Action

Roger Koppl, over at Thinkmarkets, and Will Luther (here at TPS) add several important points to the discussion of Mises’ Human Action. I will respond to Noel and quickly touch on some of the other contributions to the conversation below the fold.

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Will’s comments remind of a great Rothbard quote: “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a "dismal science." But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” The same could be said of reading Human Action. As Noel quiet openly admits, he finds Human Action to be a painstaking read. Understandable. But it doesn’t take a woman’s intuition to read something before arguing over its meaning.

If you start a fight, expect a few jabs ;)

That said, Noel is not alone in the views that he holds. I am under the impression that these are common reactions to Human Action and Noel is a brave soul to raise these questions. To tie into some of the points raised in the course of this discussion by Roger and Will, I think some clarification is possible by suggesting that the way Noel is using the term theory is not at all how Mises uses the term. For Noel – and please correct me if I am wrong – theory is the same as hypothesis and conjectures.

Economic reasoning is a process of moving from an unsystematic collection of beliefs (poor theory) to a (A) systematic and internally consistent general theory of human action. From here, (B) specific hypothesis or conjectures may be logically derived involving concrete and contextual relationships and (C) confront the evidence. I think Austrians would say that if the evidence (C) doesn’t line up with the conjecture (B), check that C is consistent with what B suggests we should be looking at. If so, check the move from A to B before you reconsider A.

When developing another scientific question to examine, the relationship between B and C in t1 never forms the basis for A in t2. To be uncharacteristically (and humorously) Randian – A is A. I see my explanation as mapping with the process Will describes using the terms (A) the hardcore (B) the protective belt and (C) the given phenomenon.

Regarding Noel’s concluding statements concerning the relationship between modern economics and the natural sciences. I disagree with Noel about the degree of emulation of the natural sciences, the acceptance of the difference in the nature of social science ‘data’, and would be interested in discussing the amount of progress that has been made as a result of adopting the methods of the natural sciences. All for another day, I suppose.

Finally, the point that Roger makes about Mises being a scientist is probably the most important. To pejoratively relegate Human Action to the realm of philosophy implicitly suggests a rather low opinion on the extent to which philosophy informs science. Again, a point for another day. But as Roger points out, the contributions of Mises on such grounds as the impossibility of economic calculation under collective ownership of the means of production is not philosophy – its economic science. It is not an arbitrary distinction either.

Austrians are viewed by many as ideologically biased economists. One reason for attaching the label and making it synonymous with free market may be a failure to distinguish this type of positive theoretical argument about the relationship between private property and human action from its normative implications. Perhaps the reason Noel’s more mainstream friends call him an Austrian is not because he read one chapter in Human Action and has a publication in the RAE, but because they too conflate the economic and philosophical arguments.

Microfinance Bleg

I've agreed to participate on a panel discussing microfinance. The panel will convene in about a month, and my role is to give "the economics perspective" on microfinance. I think this means to describe theory, intuition, and existing evidence on the subject to the general public. Any recommendations on what I should read before hand?

My priors on microfinance:

• Its availability has probably made targeted populations better off, and is probably doing no harm otherwise, on average.
  
• It is probably difficult to attract financial capital to many of the areas targeted by microfinance nonprofit organizations, so there probably is not much crowding out of private investment.
  
• There is probably some desirable crowding out to the extent microfinance is a substitute for other forms of foreign aid we know are less effective.
  
• The returns to microfinance probably would not outweigh other reforms like trade liberalization, particularly in agriculture and immigration.

As a further question, in what ways is microfinance substantively different from payday lenders in the United States? Payday lending functionally seems to serve as high interest small loans to people with low incomes and poor/no credit history. Note that I see this as a favorable comparison to both microfinance and payday lenders. Empirical work on payday lenders is probably better than that of microfinance, so I would like it if I could make a plausible case for external validity.

There we go, I would appreciate it if you helped me update my prior with thoughts, counterpoints, and suggested readings.

Responding to Noel Campbell, Part Deux

I cannot help joining Emily (and Art at DOL) in responding to Noel Campbell (Noel responds to Art here).

One should not be surprised that Noel doesn't "get it." He starts his first post by noting that he's "never read Human Action once, much less twice." Personally, I don't think the Misesian position is that extreme. My initial reading of HA was consistent with most of my undergraduate economics education (from a non-Austrian perspective). In fact, I would claim that Mises is simply a classical economist in many respects.

Here's a short reading list for folks like Noel who'd like to understand what it is that (at least some of) those crazy Austrians are doing (and, whether what they are doing classifies as science). Below the fold, I briefly outline a couple points that I take from these works and show how they relate to Human Action and Austrian Economics more broadly.

Mises, L. Human Action.
Polanyi, M. The Study of Man.
Polanyi, M. The Republic of Science.
Lavoie, D. The Interpretive Dimension in Economics: Science, Hermeneutics, and Praxeology.
Rizzo, M. Mises and Lakatos: A Reformulation of Austrian Methodology.

Continued below the fold.
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1. Contrary to what Joe Friday might tell you, there's no such thing as "Just the facts, Ma'am."

All so-called objective facts require an act of interpretation; and interpretation is necessarily subjective. The mere acts of asking a particular question or observing particular facts is subjective. The scientist is concerned with particular questions/facts (and not others) because of the historical context in which he finds himself. So we can cease and desist (to continue with the Dragnet metaphor) with equating science to 100% objectivity. It just ain't so, folks.

2. Less than pure objectivity does not spiral into absolute relativism where one cannot know anything.

Simply put, we can mimic objectivity from a particular position with particular assumptions. And from this position we attempt to learn more things.
Rizzo lays out a Lakatosian framework. First, we have a set of hardcore propositions that we cling to and are very hesitant to reject. For Austrians, these are things like "Human action is purposeful behavior," and "Man acts to reduce felt uneasiness." These things are what define a particular approach, in this case Austrian Economics, and cannot be changed without dismissing the approach and adopting a new approach. Next, we have a protective belt. This includes things that can change to explain a given phenomenon. Let me give an example:
The price of bread falls from $2 to $1 and yet individuals buy less bread. We could conclude that individuals are irrational (that they do not act purposefully to reduce felt uneasiness). But this would violate our hardcore propositions. So instead, we first investigate alternative explanations by adjusting those things in our protective belt. Is quantity held constant? What about quality? Because if the size of bread shrank and quality got worse, the real price of bread may have increased. Now, if after checking all those things in our protective belt we find that the only answer that suffices requires rejecting a hardcore proposition, we do just that. But this constitutes a paradigm shift. We are no longer doing Austrian Economics but something else.

Mises makes a similar point on page 19:

It is usual to call an action irrational if it aims, at the expense of “material” and tangible advantages, at the attainment of “ideal” or “higher” satisfactions. In this sense people say, for instance—sometimes with approval, sometimes with disapproval—that a man who sacrifices life, health, or wealth to the attainment of “higher” goods—like fidelity to his religious, philosophical, and political convictions or the freedom and flowering of his nation—is motivated by irrational considerations. However, the striving after these higher ends is neither more nor less rational or irrational than that after other human ends. It is a mistake to assume that the desire to procure the bare necessities of life and health is more rational, natural, or justified than the striving after other goods or amenities. It is true that the appetite for food and warmth is common to men and other mammals and that as a rule a man who lacks food and shelter concentrates his efforts upon the satisfaction of these urgent needs and does not care much for other things. The impulse to live, to preserve one’s own life, and to take advantage of every opportunity of strengthening one’s vital forces is a primal feature of life, present in every living being. However, to yield to this impulse is not—for man—an inevitable necessity.

Rather than rejecting the hardcore, Mises considers the protective belt. He notes that we get the same prediction if we adjust the utility function to include non-material considerations. Therefore, rejecting the hardcore proposition is unnecessary.

3. Human Action is not an irrefutable tract.

And Mises knew this. On page 7 he states the following:

Now it is quite obvious that our economic theory is not perfect. There is no such thing as perfection in human knowledge, nor for that matter in any other human achievement. Omniscience is denied to man. The most elaborate theory that seems to satisfy completely our thirst for knowledge may one day be amended or supplanted by a new theory. Science does not give us absolute and final certainty. It only gives us assurance within the limits of our mental abilities and the prevailing state of scientific thought. A scientific system is but one station in an endlessly progressing search for knowledge. It is necessarily affected by the insufficiency inherent in every human effort. But to acknowledge these facts does not mean that present-day economics is backward. It merely means that economics is a living thing—and to live implies both imperfection and change.

Give Human Action a read. And check out Polanyi and the others I listed above. Let's continue the conversation in the comments.

Responding to Noel Campbell on Human Action

Over at Division of Labor, Noel Campbell has thrown down the gauntlet (more here) regarding Mises’ Human Action. Art Carden responds. I was not invited to the fight, but here are my two cents. The way to understand what Mises is doing in developing a “pure logic of action” is developing theory -- that which is prior -- to Noel’s Step 1: Observation. For Mises, economic theory (praxeology) is logical system of human action. Economics, on the other hand, is the application of economic theory to empirical phenomena. This distinction is crucial to understanding Mises’ project in Human Action and elsewhere.

Continued below the fold.
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The observation of all facts and phenomena in the world take place through a lens of theory. For Mises, there is no such thing as observation without prior theory. Thus, empirical observations can either be seen through the lens of poor, under-developed theory, wrong theory, unacknowledged theory, etc etc or through the lens of refined economic theory of human action based on the ideas of marginal cost / marginal benefit thinking. For example, we look at relative prices when examining individual choice because our theory suggests that people evaluate their options on a marginal (not say, an average or absolute) basis. Either way, ‘the facts do not speak for themselves’.

The second part of Mises’ project is to emphasize that the purpose of developing a refined theory of human action is to interpret the world around us; to do proper history; to explain causal relationships from the perspective of individual action. In other words, theory influences the types of questions scientists ask. Theory determines what observations you see when you look out the window or back into history.

In other words, Noel’s point that Mises’ is “leaving off the most important step” is a criticism that I think Mises would level against the standard scientific method. Only in Mises view, that step is the theory informing history. If you take my reading of Mises, then he is saying something more along the line of “Hey guys, I’ve just outlined a method for developing an [unlimited number of relevant refutable hypotheses]. You’ve got about…oh…[two thousand years] worth of explaining [causal relationships of human history] to do. Get crackin’!”

Now that the distinction between economic theory and empirical economics is drawn, it is important to reconsider Noel’s criticism. It may still be that Mises’ development of economic theory is interesting and still irrelevant for the mainstay of economic as practiced. I disagree.

Taking a Misesian position in acknowledging the primacy of theory challenges mainstream views on what economists should do through the implications about what economists can do. If taken seriously, the relationship between economic theory and empirical investigation changes how our knowledge of economic phenomena advances.

There are serious complications (limitations) involved in advancing our stock of knowledge about social phenomena that are not present in the study of the natural sciences. We need the guide of theory to inform how we allocate our scare mental and perceptual resources to the task of making sense of the complexities of the social world. Why do social scientists need theory so desperately? Because the facts of the social sciences are not the same as the facts of the natural sciences. What we take as given are the constantly adjusting plans of millions of other individuals. The underlying variables of the social sciences (resources, tastes and preferences, skills and knowledge) do not have the stable, objective properties of the underlying variables of the natural sciences.

I would venture to speculate that the main reasons mainstream economists like Noel find the ‘primacy of theory’ point either irrelevant or uninteresting fall under some combination of the following: (a) they think their questions are already properly informed by theory, (b) the acceptable methods of investigation are well established in the profession, (c) no qualms of applying the methods of the natural science to the study of human action, maybe by adding a few caveats here and there, or (d) recognizing the differences between natural and social sciences, believe that little is “lost in translation” when applying the methods of the natural sciences to questions of individual action and social phenomena. In another post, I would argue that much of Hayek’s writings on knowledge and scientism are aimed particularly at these issues that arise from a Misesian view of the relationship between Theory and History.

Graphs that make me chuckle

Here's a fun graphic on CNN concerning bailout efforts. The y-axis rates how "bold" each respective effort was, and the x-axis measures its effectiveness. By "fun," I mean "enjoying the lunacy of the attempt."

I think I'd have all the dots in the second and third quadrant, though would have a good time deciding between which quadrant to put each dot. We're off to Oktoberfest festivities this evening; sounds like a good topic over beer. (And discussing the harvest.)

2009 Gus Rankings: Week 4

I apologize for the late release (blame the travel), but here are the Gus Rankings for Week 4.

A few brief notes:

- As expected, the variation in scores continues to increase. The top of the list, Iowa and Virginia Tech, have 7 points, and there is a consistent spread all the way to -5 points. Ties in points and record are becoming less frequent; Gus produces individual rankings for the top 7 teams.

- Washington is still strong despite two losses; USC's success and, more surprisingly, Idaho's success-- three wins each-- are driving their high ranking. Of the two games they've lost-- Stanford and LSU-- only Stanford has lost one other game.

Playing successful teams is how you do well in this ranking system. Washington, at 2 losses, is ranked higher than 9 other teams that don't have a D-IA loss yet.

- Rice has taken a sizable lead as the team #120, with -8 points, three "ahead" of #119 at -5 points. Rice hasn't won any games this year, so the following statement holds for the Owls: Rice has lost four games to D-IA opponents that, combined, have lost 8 other games to D-IA teams. Rice is one degree of separation from 12 losses only 4 weeks into the season.

- I didn't realize this until recently, but the Gus rankings also serve as a quick check to determine bowl eligibility, since only D-IA games count. Get to 6 wins and you're eligible!