That's My Bush

I have to say that I'm pretty shocked by Bush's decision to impose duties on Chinese exports. I think this is very likely to be a bad policy, although I should note that I have some sympathy with the use of quotas to create export-oriented jobs in extremely poor countries. One irony of free trade is that it can make it harder for some countries to make any money trading, and a lot of small countries worry about the China effect.

Still, this policy isn't aimed at retaining some space for poor countries to maintain their exports. It's simply a duty on Chinese exports that might have that effect, but very well might not. It seems to me that this is likely a political move designed to cause problems for Democrats.

I don't know exactly what the logic is, but the timing is suspicious. Is this designed to take the issue away from the Democrats? Is it designed to produce splits among Democrats? Is it designed to embarrass a particular Democratic presidential candidate, or make it harder for Democrats to raise money?

Of course, the possibility remains that Bush has always wanted to impose these duties, and now the political climate finally allows it. Whatever the case, this reinforces my belief in the worthlessness of the Bush administration. Very few people agree entirely with one party. We count on the other party to stand up for its principles in a way that forces compromises. The Bush administration, though, has exactly the wrong Republican values. Bush is more than happy to work with the Iranians if that's what it takes to hurt gay people. Put a little pressure on our trade policy, though, and he wilts like a little flower.

In fact, I can't help thinking that this is partly the point. After all, if Bush goes balls to the wall to fight gay rights, but fades quickly when it comes to trade, it makes it less attractive for people like me to vote for Democrats. The Democrats won't be able to protect gay people from Bush, but they will be able to reverse a lot of progress we've made on trade. It's in line with Bush's all-or-nothing, "you're with us or you're against us" approach. "Haha," Bush seems to be saying to people like me, "Don't you regret Democratic control of Congress?" No, I don't. Congress is finally challening Bush aggressively, and when Bush is able to make the consequences perverse, what I really regret is his election in the first place.

[For what it's worth - approximately nothing - the Times says, "Mr. Gutierrez [the Commerce Secretary] said that the administration’s step was based on careful study of Chinese subsidy practices and was being carried out irrespective of any pressure from Congress."]

[UPDATE: added link above]

A Convenient Experiment

I saw Al Gore's movie "An Inconvenient Truth" yesterday. Global warming definitely belongs in the "important if true" category. However, it's also important not to undertake costly changes if they aren't necessary, so I think we should take an empirical approach to the whole issue.

Luckily, Gore provides a good experiment we can perform to determine if society is already taking enough measures to reduce carbon emissions. Gore analogizes society to a frog that will jump out of a pot of boiling water if it's thrown in while the water is boiling, but won't jump out if it is thrown in when the water is cool and then gradually heated. Gore's point is that we don't notice incremental change around us and have to be shocked out of our complacency.

It strikes me, though, that this is unlikely to be true. If there's a serious problem, we will respond whether it appears slowly or all at once. A good test of Gore's proposition would be to run the experiment with the frogs and see what happens. If the frogs behave in the way he describes, then maybe he has a point. I suspect, though, that all of the frogs will jump out of the pot, regardless of when they're put in. If that's true, then society is already responding adequately to the problem of global warming and all this alarmist rhetoric is dangerous and irresponsible.

In Tepid Defense of New York City

I'm not a huge fan of NYC, largely because it's so dirty and expensive. I will say this, though: New York is a model for environmentally responsible living. Lots of New Yorkers don't have cars. They live in a fairly dense environment. They have taken a page from Chicago's book and built vertically. The fact that they live in a horribly polluted environment that will probably take years off their lives (seriously) is mostly not their fault.

What I don't understand is why NYC's design hasn't been replicated elsewhere. I understand why you wouldn't want to copy certain aspects of it, but overall the idea of a dense city center linked to outlying residential areas by mass transit seems like a good one.

This is especially true because if you were starting from scratch, you could build a much better mass transit system. New York's subways were first built by competing companies, and the lack of a cohesive design is obvious (it's even more obvious when you know that different lines use different gauges of rail, so that some cars don't work on some lines). New York also has to deal with a lot of suburbs that contribute little in the way of taxes but drain off high-income residents and contribute to lots of congestion. A newly designed city could avoid some of those problems.

Meanwhile, planned cities like Irvine, California have apparently been quite successful. With so much money sloshing around, why doesn't someone buy up some land and develop a big, new, highly dense city? Ideally you would control a huge amount of land, to limit free-riding on your borders, but either way it seems quite feasible to me. Is it that it's nearly impossible to assemble large tracts of land in good locations? Is it that the new city's voters might expropriate some of the value you've added to the city?

I was thinking about this while reading a piece in the NYTimes with a title no article could live up to. If we're going to reduce our carbon consumption, better-designed cities would seem to be a major tool at our disposal.

I Know It's Shallow

Don't miss this excellent post from the WSJ Law Blog.

Don't Overrate Chait

As long as I'm attacking political bloggers, I might as well share my disdain for this post by Jonathan Chait, which for some reason Yglesias seems to like.

The basic issue is that Democrats want to question Karl Rove and Harriet Miers about the whole US Attorney scandal. The Washington Post opposes the Democrats' desire to make Rove and Miers answer under oath, arguing that lying to Congress is a crime with or without the oath.

Chait seems to be willfully ignoring the thrust of this argument:

"Furthermore, maybe, just maybe, the possibility that they could be prosecuted if they do lie--i.e., perjury--would help ensure that they don't lie. Perhaps this would work even better than the honor system."

The Post's whole point, though, is that it's not the honor system. Lying to Congress is a crime and Rove and Miers would face punishment if they did it. There's no value-added to making them testify under oath (or so the Post seems to be arguing).

Now admittedly the Post isn't on the strongest ground here. This kind of thing typically devolves into this:

Democrats: We're going to question Rove and Miers under oath to get some answers here.
Washington Post: Don't make them testify under oath, just ask them whatever you want. They can't lie because that would be a crime.
Democrats: If being under oath doesn't make any difference, why are you opposed to it?
Post: If being under oath doesn't make any difference, why are you insisting on it?

Also, I'm not sure the Post is right about the law. Still, whatever the weaknesses of the Post's argument, Chait hasn't "disposed" of it. He's simply mischaracterized it and then ignored it. Although I'm inclined to agree that Miers and Rove should be made to testify under oath, Chait has given me no answer to the Post's claim that it will make no difference.

[UPDATE: the commenters make basically the same points that I do, so maybe I'm the one who's got no value-added here]

Ideology and Per Se Rules

In my last post I discussed a particular per se rule proposed by David Boaz. Now I'd like to step back and examine per se rules generally.

The term "per se" gets misused a lot, so I should explain what I mean. Although it is often used as a synonym for "precisely," per se actually means "as such." In antitrust, a "per se rule" is one that bans a particular activity "as such" - without inquiring into its actual effect. So for instance, price fixing is taken to be anti-competitive in all cases (anti-competitive often simply means "inefficient," not literally anti-competitive). If you prove price fixing, you've won the trial. In contrast, other activities are analyzed under the "rule of reason." Pro-competitive justifications will be heard. An example is "predatory pricing." Courts will not rule against a defendant merely because she lowered prices in the face of competition. The plaintiff must show an anti-competitive effect (it gets more complicated but that's the basic distinction).

The logic of per se rules is that, like stereotypes, they're a real time-saver. If price fixing is always anti-competitive, then it's simply a waste of time to worry about whether it has an anti-competitive effect in a particular case. In fact, we might worry that defendants will stir up enough mud to cloud the issue and confuse the jury. Even if that's not a problem, the direct and indirect costs of litigation justify a per se rule in some cases.

The obvious problem is that, like stereotypes, per se rules are often inaccurate. Over time, as law and economics has gotten more sophisticated, per se rules have given way to rule of reason analysis. This is because we have come to recognize that there are possible pro-competitive consequences where once we saw only anti-competitive ones. Once you realize that the per se rule is sometimes wrong, the problem gets a lot trickier. It becomes a tradeoff between false positives and false negatives, with various court costs thrown in.

So I'm not actually against per se rules (I don't have a per se rule against them). What I'm against is the inappropriate deployment of them. The problem is that lots of ideologues seem to be addicted to them. As David Boaz writes:

One of the values of a political philosophy–sometimes dismissed as “ideology” or “dogma”–is that it gives us a rule, a set of principles, for deciding such questions. We don’t have the time to look at all the data and decide what we think about every issue, and we’re certainly all subject to personal biases on the issues that touch us.

[me again] Very well, but the pro-market assumption is precisely the sort that gets us into trouble. If you want to adopt a rule that will lead to wrong results in lots of cases, you need an account of why those costs are outweighed by the benefits. In the absence of such an account, I'm inclined to think that the per se rule is being used to cut off a debate that ought to take place. I'm ready to dismiss as "ideology" a per se rule that often misleads us but doesn't seem to gain us anything beyond ease of application.

I'm Not for Markets, Per Se

Matt Yglesias isn't a fan of per se rules, apparently. I've been meaning to write a post about per se rules and my general distaste for them, but for this post I'll focus on something that David Boaz writes (and Matt excerpts):

I may want Amtrak to run fast trains between Washington and New York, or I may want to keep my own factory in business. But if I remember that the free-market economy produces the best results for all of us, then I will accept the outcomes of the market process.

[me again] So I'm sympathetic to the point that lots of conservatives/libertarians are hypocrites. This point was well made in Catch-22 in the description of Major Major Major Major's father. Certainly some exceptions are inherently suspect, because they're so clearly motivated by self-interest.

The relevant question, though, is whether it makes sense to truncate our analysis at the "free markets are best" stage. After all, if Boaz is right, we could/should ignore all proposed exceptions and save a lot of time. The problem is that no such presumption is warranted, and we need look no further than his Amtrak example for a good illustration.

Railroads are a classic example of a "network industry." The short version of the story is that in some industries, the fixed costs are high and the marginal costs are low. As a result, the lowest-cost way to produce a given amount of the good in question is with one producer (this is called a "natural monopoly"). However, we face deadweight loss when a monopolist controls production of a good (this is the standard justification for antitrust law). It gets worse: nothing about "natural monopoly" implies that only one firm will enter the market. In a free market, we face the possibility of "ruinous competition" in which we get super-optimal investment or, anticipating the inability to recover fixed costs, we get suboptimal investment or no investment at all.

Network industries, which are a subset of natural monopolies, tend to have the problematic features sketched above. This does not suggest that regulation, much less centralized decision-making, is always the solution. In fact, it's just such a per se rule that I find so annoying. The point is that the per se rule doesn't work in the other direction, either. Network industries are a legitimate and glaring exception to the rule that free markets do a good job of allocating resources.

Now perhaps a real libertarian doesn't care about resource allocation. Government regulation is creeping socialism and is totally unjustified even if it increases aggregate wealth. For libertarians who care about efficiency, though, a "free market is best" presumption is unwarranted. Certainly it's misleading to frame libertarian arguments in terms of economic efficiency and then turn around and say things like "the free-market economy produces the best results for all of us." If only it were so.

[UPDATE: Brad DeLong piles on]

So You Can Laugh If You Want To

I'm generally a big fan of One Laptop Per Child. It's not that I'm overly optimistic about this particular project - it's that I think plenty of experimentation is called for when it comes to development efforts. It might not "work" in the sense of solving all the educational problems in developing countries, or even in the sense of being a worthwhile use of the money ex post, but it does seem to be worth a shot. It has the potential to help people a lot.

Nevertheless, it's an eminently mockable idea. Here are my two favorites: a blog post by Steve Jobs and an alternative project (which I also learned about on Steve Jobs' blog).

Get a Life New York Magazine

So I think the way this works is that I'm supposed to respond to this post about this post about this silly article without acknowledging that I saw this post, because I'm ruining the joke here people.

So this Marcin person intrigues me because his blog looks a lot like mine except, as long as we're being honest, I think my little sidebar area looks better with its fancy script headings. I've never been to London so I can't address the merits of his arguments. I also can't really comment on the New York Magazine article (or is it an entire issue?) in question, other than to say that New York Magazine sucks.

It's ridiculous to compare cities without holding wealth constant. Perhaps the average New York Magazine reader doesn't care about the relative cost of living, but that's a key part of what makes one city better than another. If you don't take it into account, you end up comparing apples to oranges. Greenwich Village might (might) be better than Streeterville, but it also costs way more. For many people, the relevant comparison is not New York vs. London but rather New Jersey vs. London-equivalent-of-New-Jersey.

I know, I know, New York Magazine is just trying to make some money, but this is how New Yorkers got such big heads in the first place. Because New York is one of the best cities to live in if you're fantastically wealthy, people see it as some kind of success story. In real life, though, poor people matter too, or at least they ought to. Whatever "bootstrap sensibility" New York has, though, it hasn't made its way into New York Magazine.

Times

Caption on NYTimes:

Tennessee Defeats Virginia, 77-74
The Volunteers will face Ohio State in the Round of 16.

The "round of 16," I love it. Commonly known (outside New York apparently) as the Sweet Sixteen.

You Can't Take the Sky From Me

My brother brought home some DVDs of the series Firefly. It's as good as they say! The real news, though, is that they're coming out with a Firefly MMORPG. I am basically guaranteed to buy it.

More on MMORPGs later.

More Heat Than Light

So I'm all in favor of using more efficient lightbulbs. I don't know the details of this campaign, but a few things make me suspicious.

The short version is that a coalition has formed to push the government to ban incandescent lightbulbs. I'm always skeptical when such coalitions include industry members, because often they're jockeying for advantage against their rivals. Philips is a member of the coalition, GE is not. My guess is that Philips is better positioned to sell high-efficiency bulbs than GE.

I'm also not sure why government action is necessary. If these new high-efficiency bulbs really are longer lasting and more efficient, consumers should prefer them without regulation. If there's an externality from energy use, the government should just tax electricity and let the market sort it out.

I should also note that the new bulbs shouldn't be thrown away like regular bulbs. I don't trust Americans (or anyone, really) to dispose of these things properly, and they do contain mercury. Responsible environmentalists should weigh this in the balance.

Finally, I don't know if I buy their math. The problem with incandescent bulbs is that they create a lot of heat in addition to light. Sometimes, though, that's not really a problem. For at least 5 months a year we heat my apartment in Chicago. You have to think about the net energy cost of the bulbs: during those 5 months, they are no worse than high-efficiency bulbs in terms of net energy use. Whatever they cost you in terms of electricity going to heat they save you in terms of gas going to heat.

Admittedly they're much worse during the summer, and in some places heat is undesirable most of the year. Still, the math is more complicated than these environmentalists let on.

Economic Calculation Problem in Perspective

I'm ready to admit that I was wrong about the economic calculation problem (see also this post). My claim was that the economic calculation problem is primarily suited to explaining the success of price-based market systems, and that is it therefore largely moot today.

I still think the economic calculation problem is a bit... I don't know what the word is, but it's the kind of observation that changes the way you think. It doesn't actually give definitive answers to interesting questions, but it's still useful as an organizing principle.

However, I no longer think that its time has passed. Yesterday I had an exam question about how to distribute water within a large city. I used the economic calculation problem as a starting point in my discussion. My basic point was that in terms of designing a system of pipes, the informational burdens are not that high. We know that everyone wants clean water, we know roughly how much each house will use (close enough to install correctly sized pipes), and we can figure out an efficient design for the grid. It's true that we need prices so that people use the right amount of water (assuming water is scarce), and use it in the right ways, but the government is probably competent to plan the water grid itself.

In contrast, almost any other good has a much higher informational burden associated with its distribution. Water isn't really homogeneous, but tap water has to be because we're not going to build a separate grid for each grade of water. Even something like peanut butter would be very difficult for the government to get right: there are different brands, different types, and some people don't want it at all.

So the economic calculation problem does a decent job of guiding our intuitions about how water is different from peanut butter (another key difference is the natural monopoly aspect of water provision). Ironically, then, I think one of its biggest uses today is to point out areas in which the government might do as well as or better than the market. Still, it's a more valuable tool than I initially thought.

I Want Handouts

I see on the Freakonomics blog that TimesSelect is now free for college students, including (apparently) law students. Now I can get my Krugman first-hand, bitches.

Mars, Bitches is Making Sense

Matthew Yglesias is absolutely right about asteroids vs. Mars. NASA needs things to do for institutional reasons, but fortuitously there's something valuable they could be doing. Instead they're spending their money on things that won't improve our lives at all. Spending our money, that is.

It's Too Bad About the Sycamores

Oddly for someone who will probably live in cities for the rest of his life, I'm quite interested in landscaping and particularly the selection of trees. Michael Dirr has written an excellent book on the subject. Sadly, he doesn't recommend planting sycamores, which can be quite beautiful trees (this link might not work permanently, but right now it has some great images).

I understand his point (I don't have his book in front of me, so this is from memory, and I might be misremembering). Sycamores are vulnerable to a disease that makes their leaves look ragged. Their bark can be stunningly beautiful, but it can also be mediocre or worse. If the rough outer bark doesn't drop off, it can look horrible. It's a large tree, which makes it unsuitable for most locations, and its form can lack grace. I've seen specimens that are extremely ungainly.

And yet... and yet it's too bad, because when their bark looks nice it looks very nice indeed. Down the block from my apartment there are two sycamores, side by side, that are near perfection. If every sycamore could look like them, it would be a great tree to plant. It's a great tree for all seasons, because its bark is so lovely during the winter. It's a historically important tree: it is also known as a buttonwood, and the NYSE first met under a sycamore.

If I ever have enough land, I'll probably plant a few, but mostly I think it's too bad about the sycamores.

A Few Ideas to Save the World

I think one of the biggest challenges facing us is the elimination of extreme poverty. I think most people agree that this is important, but of course there's lots of disagreement about the best means to the end. Anyway, I was reading about One Laptop Per Child, and I came across this idea:

As a part of this movement the OLPC Foundation maintains a web-based listing of individuals and organizations who are prepared to contribute their services and/or products in support of children in XO laptop programs throughout the world.

[me again] So basically you can sign up, and they keep your information on file. Maybe they don't need a lawyer right now, but if they ever do, they can contact you. It's a way of overcoming a serious transaction cost: there are probably willing volunteers for all kinds of tasks, but matching volunteer to task is very difficult.

So probably what we should have is some kind of centralized database for all non-profits. It wouldn't include anything too personal, just contact information and a list of basic skills/interests. If a non-profit in South Africa needs a real estate lawyer in Virginia, the system would match them up. Of course this already goes on informally, but it depends on social networks that aren't nearly as powerful as the internet.

The other idea I've been thinking about, one that has clearly taken off, is distributed computing. My current favorite is World Community Grid, but there's no shortage of projects out there (if you do sign up for World Community Grid, why not join the Dinosaur Comics team?). Strictly speaking this isn't about the elimination of poverty, but it's an example of technology bringing together resources for the common good.

Just My Opinion

Tarun told me that there will be a seminar at UCSD on legal pragamtism (or something). We then argued about whether the class should read some of Posner's opinions. Posner is a leading legal pragmatist, and I have to assume they will read some of his books, or at least passages. His opinions are a closer call. Anyway, I'll spell out my reasoning, and you be the judge.

So I should start with the root of my argument, which is that legal pragmatism is a "worldly philosophy." It's not meant to be merely metaphysical, it's to be judged by its outcomes. Moreover, the channel through which it's supposed to achieve those outcomes is judicial decisionmaking. Now, it's true that legal pragmatism is sort of a hybrid. To some extent it's simply a reformulation of pre-existing thought, more of a way of thinking than a guide to decisionmaking. Still, it's a hybrid, and it does have this aspiration to guide judges toward better decisions.

Posner is the most prolific judge in history, and during that time his pragmatism has evolved. Some of his opinions are strikingly original, and they are widely reprinted in casebooks. In a recent case we read, Posner's pragmatism (and particularly his adoption of the Holmesian view of contracts) was clearly on display.

Tarun argued along two lines (that I remember). First, there's no guarantee that Posner's opinions say anything about pragmatism. Pragmatism is a theory, and Posner might not be applying it. Furthermore, we wouldn't study Kantianism by observing the choices a Kantian makes. That is to say, practice and theory are distinct, and we're interested in theory.

The first objection is a good one, but I think it overstates the difficulty we face. Posner is heavily associated with legal pragmatism. If he's not practicing it, then it's not for lack of trying.

The second objection is simply wrong, I think. The whole point of pragmatism is that it's bound up in actual judicial decisionmaking. Pragmatism turns judges into policymakers much more openly than other legal theories. Because of this, it raises a bunch of questions about the coherence of pragmatism as a decisionmaking system, the competence of judges, the constraints of legal precedent, etc. It's true that you can ignore these things, but why would you want to?

The analogy I have in mind is Locke and the various constitutions he wrote. Certainly, when you're studying his political philosophy you can't leave out his theoretical works. Still, I imagine that reading his constitutions would be enlightening as well. After all, political philosophy is ultimately about governance, which is a very hands-on thing. To the extent that a major theorist rolled up his sleeves and applied his ideas, it's very interesting to see what compromises he had to make, what the results were, etc. With Posner we have an embarrassment of riches, and it seems to me that it ought to be put to use.

Lightyears Ago

I don't know why, but I get a kick out of this quotation from a WSJ article on virtualization and the server market:

"We hardly ever buy a new server," Mr. Siles says. "The last server I bought was almost a fiscal year ago."

I love the concept of a fiscal year as a measurement of time. It turns out that a fiscal year isn't always 365 days for various reasons, but it's never very far off. Except in a few very specific contexts, I don't see what you get by adding the word "fiscal."

Ideology and Policy

Regardless of our economic system, we need a government that performs its basic functions competently. The problem is that ideology is eroding our institutional capacity to make good policy.

A great example is the global warming debate. Our political leaders lagged for years, but might finally be catching up. Obviously, though, their commitment is superficial. They haven't really assimilated the fact of global warming into their worldview.

This is obvious in Congress's decision to start Daylight Saving Time earlier this year. Now, it's true that historically the big cause of the rise in global temperatures has been carbon accumulation in the astmosphere. It's hard to avoid the conclusion, though, that an extra hour of sunlight a day will have a substantial effect. True, it comes in the springtime (in the northern hemisphere), but the heat will accumulate and much of it will persist into the summer.

What's really infuriating is that everyone is treating it as a minor change. It's not a minor change for the polar bears that find their habitat literally melting away. Even if you don't care about polar bears, global warming is projected to cause desertification in Africa and South Asia. People could die because Congress is so stupid and ignorant that it doesn't understand the basics of global warming.

Fighting the Last War

All this anti-capitalism stuff reminds me of a post I think I've linked to before, in which Matthew Yglesias considers the merits of Hayek et al. This passage stands out:

The thing about Hayek that's always worth keeping in mind was that things were quite different in his day. In particular, lots and lots of people thought that the Great Depression had totally discredited capitalism...

This war is over, though, which is also why I think the economic calculation problem is overblown. It's a good way to understand why prices are almost certainly necessary, but it tells us little about particular markets. In other words, like the term "anti-capitalist," it's really a relic of the last war. Socialism will never really go the way of "crossing the T," but it's not on the agenda in the US. The crucial thing today is to deepen our understanding of particular markets, such as healthcare, telecommunications, and pharmaceuticals. These are markets in which laissez faire does not work, but statism probably doesn't work either. It's a new war, and it's time to let the old battles sink into history.

Markets, State, and Utopia

In thinking about capitalism, it's important to keep in mind what we mean. Capitalism could mean a system in which many economic decisions are made by individuals and resources are generally allocated by a market system based on prices. Almost everyone would agree that capitalism in this sense is a good thing. Most "anti-capitalists" want to work to improve outcomes within such a system, rather than replacing the system with a command economy (or something else). So I take it the question is, do anti-capitalists have good points to make about the distribution of wealth, the effects of consumerism, and other alleged pathologies of the market system?

The answer is almost indisputably that they do. Economists have identified countless ways in which markets malfunction. The mere fact that we take for granted that the state will provide national defense shows how deeply ingrained "anti-capitalist" ideas have become.

There's something else going on here, though. The moment philosophy does something useful, it's re-labeled. This is how we got psychology and astronomy. Similarly, anti-capitalist arguments tend to start out on the margins, make their way into mainstream economics, and cease to be called anti-capitalism. So for instance, I take it as uncontroversial that the market messes things up when there are externalities, when monopoly power is exercised, when fixed costs are high and marginal costs are negligible, etc.

I'll note a few of the arguments I've heard from modern "anti-capitalists" and argue that, while of course they might be wrong, they deserve consideration.

Rampant consumerism makes us worse off

One argument is that we're not really better off as a result of the much greater wealth we enjoy relative to our ancestors. This argument goes too far, I think, even if it is hard to show that we're actually happier. A similar argument has more traction, though: consumption spending might not be as high if people weren't using it as a way to signal wealth and status. "Positional goods" have been part of economic theory for over a century, but they don't seem to have entered the public consciousness. One example strikes me as especially salient: housing, which is literally a positional good. Some suburbs near NYC (and I'm sure elsewhere) have minimum lot sizes to keep poor people out. To live there, you're forced to have a yard that might be much bigger than you want. This happens to be enacted through a local ordinance, but I'm fairly certain there's a lot of inefficient consumption of housing tied to the desire to avoid poor people (and, in fairness, the associated crime). Once you start thinking about this dynamic, it's hard to stick with a presumption of efficiency.

Wall Street

Undoubtedly capital markets are important. We need to send the right signals about saving and investment, and we need to connect savers to investors. The question is whether it makes sense to spend as much as we do on our capital markets. To put this another way, the quest for information about the value of assets is like the search for treasure. It's likely to draw super-optimal resources. To see this, picture getting information about a corporation one minute before everyone else. I take it this would be highly valuable, and (so long as people would trade with you) you could make a fortune. However, what is the social value of this information? True, the stock price will reflect information more quickly, but only by a minute. When the private reward is so much higher than the public gain, we should see individuals spending too much for information. In fact, the market for prompt information about asset values is immense. Again, we want some resources devoted to this task, the question is whether the unregulated market provides the right amount.

NPR

This isn't really a critique of capitalism, but it's worth noting that by far the best radio is noncommercial. This should at least make us less rigid in our insistence that markets have an edge over non-market institutions. In general the advertiser-supported content market is dysfunctional, and there are good theoretical explanations for this. In practice, NPR and HBO are vastly superior to their advertiser-supported competitors.

Implications

The fact that I used HBO and NPR as examples should point the way to the real issue. NPR is a non-profit supported by a variety of foundations and by listener contributions. HBO is a for-profit corporation. Just because we have identified a problem with the market doesn't mean that the market can't provide solutions. Furthermore, even if the market is fundamentally flawed, it may be the best we can do. Our real task is not to figure out what approach is best on a system-wide level, but to tailor our approach to the case at hand. In the examples above, I think the market is probably best for capital, non-profits and the market together seem to provide good radio and TV, and the state might need to get involved to prevent some of the wasteful over-consumption and self-segregation that's going on in real estate (or, if you like, the state needs to stop zoning for over-consumption).

This is why so much of the debate is misplaced: our tools are not so blunt that we have to figure out whether capitalism or something else is better in general. "Anti-capitalists" are surely wrong about many things, but they're not wrong that the world is complicated and markets aren't the only, or always the best, way to fulfill our desires. It is inappropriate to dismiss them, particularly when their arguments are economically sophisticated and empirically supported.

In Defense of Anti-Capitalism

Dice and I got into it over on Dave's blog. He shut the thread down, presumably because tempers were flaring. That's fine, his blog. I've calmed down a bit, but I'm still convinced that Dice is wrong. I'll explain why in two posts. This post shows the particular things that Dice gets wrong, the next post will show why anti-anti-capitalism is misguided in general.

This is all in the context of "Buy Nothing Day," something I know very little about. I believe it involves setting aside a day on which no shopping is to be done. Dice makes several misstatements of economic theory. Dice in bold, me in regular type:

Barriers to trade are inefficient and lead to lower wealth for everyone. Flatly untrue, as Dice later acknowledged.

And what’s wrong with buying stuff? It’s only bad if you can’t afford it. It's easy to think of reasons that buying stuff might be bad, beyond affordability. Dice defends his statement by arguing that activists aren't concerned with externalities, they just don't like consumerism. This ignores that anti-consumerism is surely motivated in part by things like externalities (this seems to be at the root of anti-SUV sentiment, for instance). Unless affordability is read so broadly as to make the statement tautological, it also ignores all sorts of bad decisions consumers can make (Dave has posted about this). One example of what I mean is that ~24 million Americans own HDTVs. ~12 million don't actually watch HDTV on them, and ~6 million think they're watching HDTV when in fact they're watching regular TV. This doesn't prove that they're making bad decisions (it's nearly impossible to do so, given that we don't have access to people's preferences), but something seems to be going wrong.

if people bought fewer things in aggregate, that would lower demand and slow down the economy. The companies that borrow from banks have to sell things to somebody. This is untrue so long as the central bank can adjust interest rates. It's a common misunderstanding, but it's definitely wrong. Dice defends the statement by arguing that the goal of "Buy Nothing Day" is to reduce consumption to the point that we all live like monks. I dispute this. Moreover, if this were their goal, then surely they wouldn't care about GDP growth. It's like telling the Amish that they're wrong because their beliefs would entail giving up text messaging.

My guess is that the [anti-capitalist] ideology is driven by a) ignorance of economics This is almost certainly wrong - the best critiques of capitalism have come from within economics - but I flag it more for its irony.

I'm Caught in A Trap, I Can't Get Out

So I've been thinking a bit about Paul Krugman and his influence. In particular, I wonder what will happen if a Democrat wins in 2008. It might be a good time to retire his column in the New York Times and either take an administration position or concentrate on academic work. Alternatively, it would be interesting to see him shift back to what he did with his column in the late 90s, mostly analyzing the economy and defending markets.

It seems to me that he's caught in a classic pundit's trap. The short version is that he's established such a reputation as a Bush-critic that he's sunk into the background in terms of changing people's opinions. It will be notable if he ever praises Bush, but aside from that his columns will not change many minds (it doesn't help that people like me no longer read him because it's too inconvenient to circumvent TimesSelect).

The long version is captured in a thought experiment. Let's say you're going to face a number of yes-no choices about policy matters. Each of these issues has an ideological dimension, but it also has a "right" answer that will be evident after the fact. Now you have to choose an adviser to help guide you through the choices. Each adviser has some expertise, but isn't perfect at predicting outcomes. Imagine that each adviser looks to factual inputs and comes up with a point on a 0-1 scale. If the point is closer to 0, the estimated correct answer is no, and if the point is closer to 1 then the estimated correct answer is yes. Advisers can't (reliably) tell you the underlying number, they only tell you the yes-no outcome of their process. Some advisers have biases that make them more likely, other things equal, to prefer one choice over the other. In other words, in addition to the normal error that shifts estimates, they also include a built-in shift to the left or the right (you can think of the ideology any way you want, "left" and "right" need not correspond to political ideologies).

Now, do you want a neutral adviser or a biased one? The neutral adviser is on average correct, while a biased observer might on average give you bad advice. However, if you can identify the bias, you can ignore him when he conforms to that bias and listen to him when he plays against type and recommends something he's inclined not to support. The nature of the process is such that these recommendations are the ones you can have the most confidence in. Thus, depending on how much you value that confidence, and depending on the size of the errors in question, you might want a biased adviser rather than a neutral one.

Now I think my point about pundits becomes clear. Some pundits spend a lot of time trying to disguise their biases so that people see them as neutral advisers. Some pundits have obvious biases, and they only really make a splash when they say something out of character. This is the trap: the more loyal you are to your side, the less your advice matters except in the rare instances when you criticize your side. You can imagine a sort of time lag, as people figure out your bias, so that your effectiveness declines over time (let's hope this is happening to Fox News).

You can partially overcome this trap by being accurate in the first place. I trust Krugman on economics more than I trust comparable liberals who don't have his background. Still, the public probably can't tell Paul Krugman from Thomas Sowell in terms of economic expertise, and might not even be able to tell Krugman from the WSJ op-ed page. So I think Krugman has fallen into the trap.

Of course pundits aren't just advisers. Krugman provides arguments for liberals and sheds extra attention where it's needed. A Democratic administration may spring Krugman from the trap, in a sense, but maybe he'd be better off focusing his energy elsewhere.