What is Economics?

Jacob Viner is rumored to have said that "Economics is what economists do." This paragraph from the Economist suggests Viner is right now more than ever.

Economics has fragmented in the past 15-20 years, both in subject and technique. No aspect of human behaviour is off-limits and a miscellany of methods are in vogue, adding laboratory experiments, randomised trials and computer simulations to the traditionalist’s blackboard and chalk. Many of the brightest stars in economics parade their scepticism, insisting on how little economists really know (or indeed how little real economics they know). The discipline is more exciting, ingenious and intrepid as a result. But it is also unruly and untidy. Some economists are still patiently adding to a cairn of knowledge. Many are throwing rocks.

What do you think? Is there a core of economics that has remained largely undisturbed over the last 15-20 years? Is the miscellany of methods as widely accepted as the above paragraph suggests? And, if so, is it a passing fad or a paradigm shift?

2011 Gus Rankings: Week 4

Here are this week's Gus Rankings. Not a surprise: LSU leading the pack at 6 points. Definitely a surprise: South Florida right there with LSU at 6 points as well!

And a new challenger has emerged for the last position-- Justin Ross' Indiana Hoosiers! They are in sole possession of the last spot in this week's Gus rankings, securing -6 points for themselves thus far. Then again, losing to Ball State, North Texas and Virginia will do that to a team.

And, as we head fully into conference play, the conferences themselves rank as follows (average team ranking provided):

1. Big 12: 2.3
2. SEC: 1.5
3. Pac-12: 1
4. Big East: 0.63
5. ACC: 0.42
6. Big 10: 0
6. Mountain West: 0
8. Sun Belt: -1
9. Conference USA: -1.08
10. MAC: -1.58
11. WAC: -2.5

2011 Gus Rankings: Week 3

This week's Gus Rankings are here; Texas retains the top spot and is joined by USC. Memphis again claims the bottom spot all by its lonesome.

Blockquoting X

X = Lawrence H. White on the Euro zone:

By constraining himself against temptation, Odysseus achieves a better outcome than if he had left himself with moment-by-moment discretion. In light of recent news, it is ironic that the man who knew to bind himself against short-sighted behavior was Greek.

2011 Gus Rankings: Week 2

After only two weeks of games, Gus has put its flag in the sand and stoically proclaimed both the best and worst team in the nation. Our first rankings of the season can be found here.

Texas claims the top spot as the only team with a perfect Gus Ranking. Texas slipped by BYU this weekend after defeating Rice to open the year. In their other games, BYU defeated Ole Miss and Rice defeated Purdue-- thereby earning Texas the top spot.

Memphis finds itself on the other end of perfection-- the only team with the worst possible score. Memphis lost to Mississippi State and Arkansas State, and Mississippi State themselves lost to Auburn and Arkansas State fell to Illinois.

Win projections and regression to the mean

I get a kick out of win projections regardless of sport; not to pick on Peter King, but this is just the most recent in a long, long, long-standing tradition.

King picks no team in the NFL to have a record better than 12-4 and no team to have a record worse record than 3-13. At face value that may not seem like anything bizarre, but that would be a truly historic level of parity. Not since 2003 have either of those predictions come true-- no team finished below 3-13 during that season-- and the last time both of those conditions were met was in 1993. Basically, he's predicting a level of parity not seen in professional football in about twenty years.

When computer models run these things, you tend to find most likely outcomes. The problem is, when you've got 30+ samples of teams, something fairly unlikely is probably going to happen to somebody. There was a projection for baseball wins a few years back that predicted something like 8 teams to have exactly .500 records. Not only had that never happened (or even close), but the total number of exactly .500 teams was something around 8 over the previous 10 years.

I can understand why someone would predict this-- someone's more likely to remember a significant error (you picked my team to go 1-15 and they made the playoffs!) than a pretty-close prediction (boy, they sure showed you-- 11-5 instead of 9-7!). Nonetheless, I'd love to see someone step out on a limb-- and I'd have no problem with them trumpeting their prediction at the end of the season if it ended up correct.

Blockquoting X

X = Charles Goodhart.

In some countries which have suffered hyperinflation, ‘dollarisation’ has occurred, as in Argentina, Peru and--to some extent--Russia, and similarly with respect to the Deutschmark in Yugoslavia [...] What is remarkable in these cases is how high the inflation tax rate on domestic currencies has to climb before the public switches to an alternative foreign currency--although once such a switch has occurred, it does not reverse easily or quickly, and when the public does decide to abandon the inflating domestic paper currency, the alternative, privately chosen, good money can virtually drive out the ‘bad’ official money.

I've written a little on the network nature of money. In the future, expect to see many more posts on spontaneous switching between currencies.

2011 Gus Rankings: Version 3.0

The good folks here at The Perfect Substitute will be generating the Gus Rankings for a third time during the 2011 college football season. For the uninitiated, the original methodology is here. Basically, we generate an objective ranking of all FBS teams based solely on wins and losses.

By virtue of the calculations, a ranking cannot be generated until after the second week of games, as any team with a victory this week necessarily gained it over a team that does have any victories (all 1-0 teams defeated an 0-1 team), so there are no points to add for victories (nor points to remove for losses). There will be a lot of clustering for the first few weeks, but watch how your favorite team separates itself from the rest throughout the season!

Liberty Dollars Subject to Seizure

As many of you know, Bernard von NotHaus, the founder of Liberty Services, was arrested, charged, and convicted for his role in offering minted coins, gold and silver certificates, and electronic account balances intended to circulate as money. Specifically, he was found in violation of Title 18 U.S.C. § 485 (coining metal), Title 18 U.S.C. § 486 (passing coins as current money), and Title 18 U.S.C. § 371 (conspiracy to commit offense or to defraud US). NotHaus currently awaits sentencing and faces up to 15 years in jail, a $250,000 fine, and the possible forfeiture of $7 million worth of minted coins and precious metals seized in an FBI/secret service raid on his offices in November 2007.

Up until now, the focus has been on NotHaus and others immediately connected to Liberty Services--the operative phrase being "until now." As Coin World reports, Liberty Dollars held by others may be considered contraband and, as such, subject to seizure.

[Assistant special agent Glen] Kessler could not provide a blanket position the Secret Service would take toward those owning Liberty Dollars, whether one piece or significantly more.

He said if a Secret Service agent witnessed something considered to be contraband, such as Liberty Dollars, they would be duty-bound to confiscate it.

What a shame.

See also: White, Lawrence H. 2000. "A Competitor for the Fed? Alternative Currencies Face Difficulties in Achieving Critical Mass." The Freeman.

Litter in Space: Free-Rider Problem of the Future?

From the AP:

Space junk has made such a mess of Earth's orbit that experts say we may need to finally think about cleaning it up.

That may mean vacuuming up debris with weird space technology - cosmic versions of nets, magnets and giant umbrellas, according to the chairman of an expert panel that issued a new report on the problem Thursday.

The immediate question which comes to mind is who should pay. One possibility is the original litter bugs. The AP story suggests that half of that is China. Another possibility is those who value a clean orbit in the future. After all, Earth's gravitational will presumably cause most of the litter to burn-up in the atmosphere, eventually. It seems like many of the industries dependent on satellites would be among the candidates willing to pay for a cleaner orbit in the nearer future, but the temptation to free ride would seem extraordinary. In time, it may prove more cost effective to produce satellites capable of deflecting the debris.

It will be interesting to see how this one plays out.

Non-discrimination in the NFL labor market

One powerful argument in favor of free markets that I like to incorporate early in the Micro Principles semester is that market forces help mitigate discrimination. If you choose to indulge personal preferences based on race, sexual orientation, disability status, age, whatever-- you bear the cost of your decision. Peter Leeson's The Invisible Hook has a nice chapter on the issue as it pertained to pirates. I think I've now got a new example.

Michael Vick signed a sizable contract yesterday with the Philadelphia Eagles; 6 years with approximately $40 million guaranteed. The overall deal could be worth upwards of $100 million. Michael Vick is still considered by some to be un-signable-- fan bases would rise up in discontent and protest the move. As such, some teams choose to discriminate-- rightly or wrongly, whatever your moral compass, it's still holding a bias-- against Michael Vick on the basis of his past troubles.

What's this get the Eagles? In theory, a better-than-replacement player because they choose not to indulge their preferences against certain individuals. I'm a 49ers fan-- and a particularly poor season this year that would reunite Andrew Luck with Jim Harbaugh wouldn't be the worst thing in the world-- but I wouldn't have any qualms with the Eagles winning the Super Bowl this year, as this example becomes that much better.

The Game Theory of Usain Bolt's False Start

Usain Bolt was recently disqualified for his now infamous false start at the World Championships, and it has generated controversy for the recent rule change which eliminated the allowance of one false start. What you might not be familiar with is the game theory behind the rule change, and how the ancient Greeks created an incentive compatible rule to solve the same problem.

The essence of the problem is the ability of racers to collude against the heavy favorite, favorites like Usain Bolt. If every runner is given one permissible false start, then in an 8-man race, then a group of 7 colluders can create 7 false starts without resulting in a disqualification. This allows the colluding runners to essentially create a "snap count" in which they cycle through false starts, knowing that some certain number will be the "true start." Of course, the front-runner knows this, which makes them hesitant and more conservative coming out of the starting blocks, shifting the advantage to his slower rivals. This also makes for slow television drama, which reduces the popularity of the sport among those more interested in world record times.

So the IAAF's solution was to ban false starts altogether, which still subsequently damaged Bolt's opportunity (and seems to have backfired on making the sport more popular). Now, the Ancient Greeks devised a different rule altogether to circumvent this problem: they beat anyone who committed a false start.

Sure, it sounds (and arguably is) barbaric to physically abuse an athlete for jumping the start. However, this undermined the incentive to cartel against front-runners. The current cartel system works because there are not particularly strong incentives against being the first false-starter, and it shifts the advantage away from the front-runner. Under the Greek rules, however, being the first false starter meant that you would be beaten and would be in a physically worse condition to compete than your co-conspirators, who have an incentive to free-ride on the first mover. Only a sucker to cheap talk volunteers to be the first false starter in that conspiracy.

So the Ancient Greeks devised what, on the surface, appeared primitive, but was also an incentive compatible rule, and one that the modern sophisticated members of the IAAF presently would like to emulate without the violence.

Andolfatto on Fiat Money and Somalia

David Andolfatto, from the Research Division of the Federal Reserve Bank of St. Louis, summarizes the interesting work of Ostroy, Kocherlakota, Wallace and others, who highlight the role of money as a record keeping device. He then links this literature to my paper with L.H. White on Somalia. Since we here at TPS relish in shameless self-promotion, I thought I'd send this along.

Thanks to Andolfatto for linking to our paper!

Shocking finding of the day

Wait-- let me get this straight: If you lower taxes, then you see strong growth?

Go figure.

(Though I love the "problems" discussed in this bit-- the local economy is so strong that it's hard to find qualified people for expanding businesses and residential vacancy is remarkably low.)

Menu Costs

I'm trying out a new meme, wherein I'll post examples of menu costs captured as I wander about (or, as in the case below, attempts to avoid or defer higher menu costs). Enjoy!

Insuring $12 billion in gold

MR pointed to a fantastically intriguing article yesterday on Venezuela's intentions to transport $12 billion in gold-- 211 tons of it-- back to Venezuela, presumably Caracas. Before we get into it, this is a great phrase:

"...the market in physical gold is tiny, and largely comprised of nutcases."

Not sure if that became the case when Chavez got involved or if he just reinforced that characteristic. Anyway, experts estimate that this could take 40 trips. (Sorry, one more diversion-- but who is an expert in transporting 211 tons of gold?) Naturally, insuring this transfer is something that needs to be considered. The article claims that no company would be willing to take that contingency onto its books (though I think that's more a function of dealing with Venezuela than the sheer value of gold, though both certainly do matter).

As a side note: If Venezuela considers itself socialist-- either in practice or doing what they can to get there-- doesn't the government play the role of providing insurance? Why hasn't anyone brought this point up? Insuring your own transfer makes about as much sense as anything Chavez does anyway.

Anyhow, I think people are thinking of this as a financial issue and not quite enough as a practical issue. Does there exist a risk premium by which, say, Lloyd's would be willing to take this on? I'm sure there is-- in the only previous instance of even beginning to approach this level of gold transfer, the rate came to 3.3%. Chavez' rate would undoubtedly be higher since there's a decidedly non-zero chance that he'd be involved in any nonsense that arises in transporting all that gold. Then again, it's presumably an international deal-- between Venezuela and an insurance company-- so the insurance company can decide not to pay and there's really no legal recourse towards claiming a settlement.

But it would seem that a superior risk/reward tradeoff could be achieved by simply arranging a very large number of transfers-- like in the thousands? I didn't see anything in the article saying that Chavez needed all of the gold quickly, so time's not a large problem. Let's say the going risk premium is 10% for Chavez to keep the numbers easy. That means he's paying $1.2 billion in premiums. What if you didn't pay any premiums and made any of the following arrangements:

- 1 million transfers of $12,000 in gold. Plus: That's a small amount of gold and could be transported in just about any way possible-- civilian aircraft, boats, anything. At current prices, that's what, about 6 or 7 ounces. Minus: That's a whole lot of transfers; coordination costs would be high.

- 100,000 transfers of $120,000 in gold. It's still a fairly small amount of gold-- 60 or 70 ounces, maybe 4 or 5 pounds-- so much of the benefits remain from above while the number of transfers is reduced by an order of magnitude.

- 10,000 transfers of $1.2 million in gold. At this point, that's a considerable sum of money and a lot of transfers to arrange-- the coordination costs here probably outweigh the benefits from spreading the money around.

I think the middle one provides the best characteristics-- yes, it's a lot of transfers, but you'd need more than 10,000 of those transfers to encounter trouble in order to outpace the risk premium (I know I came up with 10% to keep things easy, and that's where 10,000 comes from, but even at 3.3% you'd need 3,300 thefts.) So why not break it up and take your chances with not being robbed thousands of times? You're effectively insuring yourself this way (not in the facetious way I alluded to above). Plus, incentives are high to make certain nothing bad happens to the gold since it's coming right out of your pocket every time the gold never makes it.

And yes, I realize that hiring shady people may be a problem-- but if that's the concern, you can't automatically assume that away at any point in the process. So that impacts all plans. In fact, if you assume that shady people are more likely to get involved when there's more money to be had, then it would be MORE of an issue in large-scale transfers like the ones described in the article.

Thiel, Friedman and Seasteading

I apologize for my lack of presence over the last few months-- with the start of school and the start of college football season (and thus the third incarnation of the Gus Rankings!), I should be a more frequent commentator.

In the meantime, here's a fun article about Peter Thiel, Patri Friedman and seasteading. I think this was my favorite line:

Margaret Crawford, an expert on urban planning and a professor of architecture at Berkeley, calls it "a silly idea without any urban-planning implications whatsoever."

Indeed.

Paul Krugman: Sci-Fi Fan Boy

At the Beacon Blog, Mary Theroux posts an amusing video wherein Paul Krugman states that the US could get out of the slump by faking an alien attack.

If we, If we discovered that space aliens were planning to attack and we needed a massive build up to counter the space alien threat and, really, inflation and budget deficits took secondary place to that, this slump would be over in 18 months. [...] There was a Twilight Zone episode like this in which scientists fake an alien threat in order to achieve world peace. Well, this time we don't need it, we need it in order to get some fiscal stimulus.

Seriously. It was on CNN. Of course, this isn't the first time Krugman has shown is Sci-Fi side. Here's the abstract from his paper titled "The Theory of Interstellar Trade":

This article extends interplanetary trade theory to an interstellar setting. It is chiefly concerned with the following question: how should interest charges on goods in transit be computed when the goods travel at close to the speed of light? This is a problem because the time taken in transit will appear less to an observer traveling with the goods than to a stationary observer. A solution is derived from economic theory, and two useless but true theorems are proved.

Debate @ LSE

The much anticipated debate between George Selgin, Jamie Whyte and Lord Skidelsky, Duncan Weldon will air today at 3PM EST. You can listen online.

The Fed's Balance Sheet: Size and Composition

Here's an illustration of the Fed's balance sheet from the Cleveland Fed.

A lot of talk has focused on the expansion of the Fed's balance sheet since Sept 2008. The big question: why no inflation? Bob Higgs writes:

Ordinarily, one would have expected this development to produce hyperinflation of the general price level. However, the price level has increased quite moderately, and for a while many analysts warned that deflation was the greater risk. [...] Not only has hyperinflation failed to appear; even garden-variety inflation of prices in general has been extremely low by the standard of recent decades.
[...]
The most obvious answer, of course, is that the banks are simply sitting on the reserves, rather than lending them to customers. And why are they doing so? The usual answer is that since late 2008, the Fed has paid the banks a rate of interest on their reserves at the Fed. This interest rate has recently been in the range 0-0.25 percent. Although this is not nothing, it verges very closely on nothing. And if one notes that the purchasing power of money has fallen at least a bit, it is clear that the banks are realizing a negative real rate of return on their holdings of excess reserves at the Fed.
[...]
Moreover, they are doing so notwithstanding that they appear to have the option of lending at 3.25 percent to their best corporate customers and at higher rates to their less creditworthy customers.

So we haven't seen much inflation yet. But if (when?) banks start lending out reserves, we should see it pick up. Right?

Good question. The standard view is that the Fed can simply sell its assets to keep the money supply from expanding when the money multiplyer picks up. But the Fed's balance sheet ain't what it used to be. It is not only larger, but also differs in terms of composition. Note that traditional security holdings have actually fallen since Dec 2007. The net increase stems from loans to financial institutions in 2008 and 2009 (much of which has already been repaid) and then large scale asset purchase programs associated w/ Freddie and Fannie starting around Jan 2009. The Fed can certainly sell these assets. But at what price? Will they be able to suck up enough money when the time comes? We will soon find out.

Addendum: Check out this Barron's article by Walker Todd and Bill Ford.