Why I need to read Piketty

I haven't read Thomas Piketty's Capital in the Twenty-First Century yet, but I need to.

From what I've read, his history of inequality is top-notch and makes the book a must-read, but his predictions for the future and his policy suggestions are not.

I'm of the opinion that inequality is an unimportant distraction from the real issue: The well being of the poor. That's what people should care about.

It's flawed to believe that inequality itself causes riots and social disorder (which is not the same as saying they are bad, but encourage bad behavior). Those uprisings occur when people can no longer afford food, and capitalism, globalization and technology have made food cheap and readily available in developed nations. Agricultural subsidies deserve no credit.

Despite what Robert Reich claims, real incomes and standards of living have been increasing in America. Reich cherry pick one way of calculating interest rates - the CPI inflation calculator - and underestimate wages by ignoring non-monetary forms of compensation like health care.

So in comes Piketty with the idea that at certain points in history, interest rates outpace growth. He's not just accidentally invoking the idea of of a negative sum game: he's pursing it head on. That's a terrible trend and if he's correct that it is happening now and here to stay, everything I believe would be suspect and ripe for revision.

So that's the big question for me, is Piketty correct in his future predictions, and what about the policy recommendations he makes? Surely his fans already supported them and are using his book to rationalize that view, and just as surely people who oppose those policies are going to ignore his book because it challenges their world view.

There's some troubling talk about Piketty having a soft spot for command and control policies and the USSR. I'd have to read it for myself to make that call, but if true it's a serious flaw.

The thing I find most interesting is that Tyler Cowen is a critic despite having recently written "Average is Over" which also predicts a future of structural inequality. Tyler is one of my favorite living economists and his response implies that Piketty doesn't have a slam dunk, but still wrote a book people need to read.
Read more...

The flawed mind of Richard Horton

Tyler Cowen talked a big game when he recently shared a link to an editorial by Richard Horton with the introduction "The editor of Lancet is anti-scientific and full of mood affiliation"

Big words, and after reading what Horton wrote, I see Cowen is entirely right.

Pick up any economics textbook, and you will see the priority given to markets and efficiency, price and utility, profit and competition. These words have chilling effects on our quest for better health. They seem to marginalise those qualities of our lives that we value most of all—not our self-interest, but our humanity; not the costs and benefits of monetary exchange, but vision and ideals that guide our decisions.

What Horton is saying is that he does not have the stomach for pragmatism, and believes surface-level emotions are more important than thwarting actual hardships.

To take what he wrote seriously, one would have to believe that Horton opposes using triage in a crisis.

The simple triage model I'm familiar with pictures a hospital overwhelmed with victims of a massive event. Say there are a few dozen staff members on hand, but hundreds of victims in various conditions. Instead of trying to treat everyone, the medical workers divide the patients into three groups: Those with minor injuries that are probably not life-threatening, those with life-threatening that can probably be saved and those with life-threatening injuries that will most likely die or that require a massive amount of work to save.

The first group is set aside to be worked on later, the second group is treated and the third group is left to die.

That's the reality of the situation, unfortunately, and triage isn't simply about coldly letting patients die. It is about saving as many lives as possible, and attempting to set aside emotions that would cloud judgment and end up hurting more people.

Economics gives us a path to make life better for everyone, especially the poor and sick, and that path is made up of markets, efficiency, prices, utility profits and competition.

Keep in mind that the American health care system is racked with economics problems, and going forward with Horton's mindset of trying to provide health care like a cruise ship buffet has made it unaffordable for many people, and has leeched a lot of money out of the hands of ordinary citizens.

How many people have to die needlessly so that Horton can be emotionally satisfied?

Horton went on in his essay to quote left wing critics of mainstream economics. Here's a sample:

Clare Chandler, a medical anthropologist (also from the London School), took a different view. She asked, what has neoliberal economics ever done for global health? Her answer, in one word, was “inequality”. Neoliberal economics frames the way we think and act. Her argument suggested that any economic philosophy that put a premium on free trade, privatisation, minimal government, and reduced public spending on social and health sectors is a philosophy bereft of human virtue... 

A year or so ago, I perhaps rashly suggested (on twitter) that economics was the biggest fraud ever perpetrated on the world. Many economists, understandably, disagreed profoundly with that view. But, please, think again.

This is just political claptrap. Chandler doesn't like bottom-up approaches politically, so therefor approaches that use bottom-up methods must not really want to make the world a better place. Free trade and a constrained role for government are methods for making like better for eveyone, especially the poor. There has never been a greater tool for eliminating poverty than capitalism and the free enterprise system, but Horton doesn't find it emotionally satisfying so he opposes it.

To pile on with Cowen's anti-science accusation, Horton has been the head honcho of the Lancet since the 1990's, and was editor in chief when the famous Andrew Wakefield vaccine-autisim study was published in 1998. I can give Horton a pass for publishing a study that was only later revealed to be a fraud, but with all the attention it got, it shouldn't have taken 12 years to issue a retraction.

A few years ago Bill Easterly specifically called out The Lancet out for publishing multiple medical studies with flawed economic analysis. All of these studies were published while Horton was in place.

As Horton reminded us in the essay, eliminating poverty promotes the general health of the public. Economics gives us the best methods to do that, and it doesn't not involve the snowflakes and rainbow approach Horton finds emotionally satisfying.

Read more...

September is smarter than the smarties

This month has a lot to offer.

Next week Ducktales: Remastered comes out for the Xbox 360.

In the week after that, Grand Theft Auto V hits the shelves.

And now to cap it off Marginal Revolution University is releasing a free six-hour course on international trade.

I'm taking the day off work for the first two. I might have to consider taking a third one off for Mr. University.


Read more...

Two for one from Tyler

Tyler Cowen covers two popular misconceptions about multinational corporations in this new MRU video: The idea that they are often bigger than major nations and that they "exploit" poor workers in other nations.




The error of trying to compare GDP to profits or annual sales was completely lost on me. See the comments for a quick exchange on additional flaws in that line of thinking, and a plug for this Martin Wolf essay.

I plan to use the "exploitation" line about what happened in Haiti after the factories left in future discussions. He also nails it when he says that if they don't think the wages in third world countries are high enough, wouldn't they be driven up by encouraging more countries to compete for those workers?
Read more...

By our powers combined

It's kind of like if someone found a way to combine a stuffed turkey with a hot fudge sundae.

Marginal Revolutionary University, the free registration-optional online class that started a development economics class last fall, now has a much shorter course on the economics of the media.

In a similar approach to how I read books, I will probably finish this course before returning to the development class.
Read more...

Malawi's failed local corn growing policies

Tyler Cowen recently posted this video detailing the flaws in Malawi's corn policies, which restrict the import and export of corn.



As of a result of locavore-style food production policies, we see extreme volatility in corn prices, about 60 percent, from the harvest season to just before next year's harvest season when corn is scarce.

This is what happens when your food supply is restricted to the local area's climate. Imagine if there was a natural disaster that ruined the harvest in one year. This is the polar opposite of making the food supply more secure. 

Instead of hedging with the world's food supply, Malawi's corn supply depends on the whim of chance and as a result, corn becomes scarce each and every year.
Read more...

Mr. University is out to corner the education market

Alex Tabarrok made a clever point that in hindsight, is blatantly obvious.

New online education models, such as Marginal Revolution University, will allow the best teachers to take a larger share of the students.




The mechanism we see here is our old friend, the rock star theory of rising inequality, where technology allows fewer and fewer musicians to rise to the top, reach a wider audience and take a bigger share of the profits.

It can work the same way with teachers, where microphones and videos let them reach more students and the most popular ones will attract large classes while lackluster teachers will get less and less.
Read more...

Guns, Germs and Steel: The MMO

I'm enjoying my free development economics course at Mr. University that started this week. One of the videos in the course covers Jared Diamond's "Guns, Germs and Steel," a book I placed on my list of top intellectual influences.

Classmate Bo Bayles posed an interesting question about a massive multiplayer online game to act as a computer model to demonstrate Diamond's biological determinism theory of why some nations develop and others stagnate:

Suppose I created and successfully marketed a large online video game that randomly assigned players to geographic areas that had features associated with Eurasia and then watched as the game evolved. Would these observations carry much weight in academia? Should universities be doing this sort of thing?

What would such a game look like if it wanted to accurately represent Diamond's model?

It would require players to start in different areas with different environments. However, it would not be as simple as providing one group more items to harvest, monsters to fight or quests to complete. That would simply show that ownership of natural resources leads to growth, which Diamond has made clear was never his point.

Instead, diamond spoke about sometimes the plants and animals around a civilization required fewer people to work to achieve subsistence levels. It took five people to feed five people in ancient Papua New Guinea while only four ancient people were needed feed five in the Fertile Crescent. That freed up one fifth of the workforce to accomplish other tasks, which lead to progress and civilization.

For the Guns, Germs and Steel online game players would need to have some kind of ticking time bomb that needs to be kept in check daily, such as hordes of enemies that try to overrun the village but provide no experience points when killed or an ancient well that requires constant sacrifices of materials mined from nearby resource nodes.

One starting village would have an easier time meeting that daily upkeep because of their surrounding environments, such as nodes that produce raw materials at a faster rate or materials for weapons that make warriors more powerful and allow a smaller group of players to hold off the ravaging hordes. This would allow some players from the gifted village to go on quests or craft better items for his faction.

The only problem would be that this game wouldn't be fun for most players, as farming or grinding all day merely to keep from dying is not a rewarding experience. Perhaps that's why Sim Subsistence Farmer or Civilization: Bushman never took off.
Read more...

Say hello to Mr. University

Tyler Cowen and his partner in crime Alex Tabarrok just announced they are offering zero-tuition online courses this fall. The first Marginal Revolution University class will be on development economics and launch Oct. 1.

I encourage both of my readers to sign up. Mostly so we can compare scores, but also for the shared cultural experience. The MRU lessons are going to be compact and make extensive use of videos. Please sign up here.
Read more...

High-tech coping

When I was a child I had a recurring image of my future that scared and depressed me.

I pictured myself living alone in a high-rise apartment inside a large, impersonal city. Everyday I would get up, go to work in an office, then come home and watch TV until I fell asleep. That was all I would do until I died an anonymous, lonesome death.

I avoid writing about my personal life on here and won't go into the details, but I suffered a personal tragedy recently and really needed the support of my friends. Because I moved last year, most of my friends lived two states away.

Enter Facebook. I don't "cry wolf" with frequent self-pitying posts for my friends to see and when I shared my story, I was awash in supportive replies and direct chat messages from some people I haven't talked to in years. This lead to several phone calls which were extremely comforting and I did reasonably well.

I'm reminded of Tyler Cowen's debate with Roger Scruton titled The end of friendship: Do social media destroy human relationships? where Cowen argued that social media enhances human relationships.

For all that malarkey about the telephone driving people apart instead of bringing them together, I found technology made comfort from friends available to me beyond walking or driving range.

It's wrong to suggest that the telephone alone could have made this all possible. I got the bad news around 11 p.m. at night and it was too late to call anyone but my very closest friends. I was also able to reach a lot of people quickly, some of whom I haven't talked to in a long time. Some of the people who reached out to me were the last ones I expected to hear from and who I never would have thought to call.

Last year when I moved here I realized I was risking living a version of living my childhood fear, but social media has made that fear obsolete.
Read more...

Maybe it's good the rich have more political power

Whenever the mournful dirges start about the supposed death of American democracy and how the rich have too much power, I've never stopped and asked if that's always a bad thing.

This morning a book review from Tyler Cowen stirred an idea that will bring me blank stares and quiet frowns from my friends, but it's still important to ask. Do we really want the poor to have more political power?

The argument that the rich have too much influence over legislation is usually constrained to the realm economic issues, and it props up the myth that richer Americans on average pay a smaller percentage of their income in in federal income taxes as a result of their political influence. What about other issues?

Cowen references his mood affiliation fallacy concept, which means mistakenly rejecting an idea because it criticizes something you think deserves a better reputation. He wrote:

I would be falling prey to the fallacy of mood affiliation if I simply assumed the author wanted policy to be more responsive to the wishes of the poor and middle class. Still I can ask whether this would be a desirable end. Aren’t they less educated and less well-informed on average? Don’t they also care about politics less and derive less of their status from political processes and outcomes? Do I want them to have a greater say over social issues, including gay marriage? No.

We know that education correlates with both higher incomes and higher support for gay marriage, so that issue could regress under power redistribution. Cowen also listed contradictory wishes from the uneducated, such as wanting tariffs and cheaper goods. These are impossible and more power from uneducated voters would hurt the poor.

Matthew Yglesias made a similar point:

Needless to say, the disproportionate influence of the rich on the political system is also troubling from an accountability perspective. It suggests that elected officials will be more responsive to the objective needs of the prosperous at the expense of those whose objective needs are more pressing. But pining for a world in which policy outputs precisely reflect the views of the public is neither here nor there in terms of obtaining a better political system.

No one wants a system where the poor have no political power. However, believing that giving more political power to the poor will produce benefits universally is flawed and reads like a chapter out of The Myth of the Rational Voter. The average American leftist would have a tougher time passing the social issues he or she cares about if the poor had a larger platform and voted more


This should be uncomfortable idea for anyone who believes in representative government.
Read more...

Cowen on eliminating agricultural subsidies

I'm a sucker for a good anti-agricultural subsidy remark. Here's what Tyler Cowen had to say in a recent reader-submitted Freakonomics Q&A:

Q. Let’s say the ~$20B in U.S. subsidies for corn wheat, rice, soybeans, dairy, etc. are gradually dialed down to $0 in the next 10 years. What do you think the impact on food would be ? Would prices rise? Would flavor and health improve?<

A. Eliminating agricultural subsidies would improve the federal budget and the long-term fiscal outlook. There is no reason not to do it.

That said, sometimes foodies overemphasize how much those subsidies skew the world of food. Many of the bad sides of our corporate food world would still remain, or be virtually as prominent, though only customers would have to pay for them. We will still have too much corn syrup in our diets, and too many fruits and vegetables without much real taste and too much processed food.

Some agricultural subsidies make food more expensive, such as when they are combined with price floors, other subsidies make it cheaper, or lead to a distribution of surplus abroad, keeping food off the home market but boosting the amount of aid. The overall effects of agricultural subsidies on food prices are quite complex.

How many times have we all heard someone criticize agricultural subsidies, but before we could bring our hands together to applaud, the speaker went on the say the only problem with them is they are going to the wrong farmers.


Read more...

Some local food is really good

Last year I wrote a post that defended the buy-local movement on purely aesthetic grounds, saying if someone enjoys knowing precisely where their food comes from, it's great they can pursue that as a hobby.

A few days ago I wrote about Tyler Cowen's new book on food. In an NPR interview about the book, Cowen was asked how his criticism of the "virtue" of local food jives with his love of eating regional food when traveling. He responded:

A lot of local food is very tasty. I'm very happy to eat it. I just don't think it's the same thing as saving the world.

I want to make sure my position on this is crystal clear. There's a lot of dishes served in local restaurants that are made in small batches of a high quality. There are cheeses, jams and breads made by hand that come out better than some of the mass-produced versions.

My qualm with this is that it's an extremely expensive way to eat. Some of the local food is only marginally better - and some is no better at all. There's a spectrum here.

I was at a recent gardening event and they had a tasting booth to compare local and supermarket foods. It was billed as a way to prove to people that local produce tastes better, but the game was rigged. Everyone knew which was which before they tasted it. They compared local apple cider to apple juice, which is unfair. I grabbed a pair of carrot sticks and switched them around on myself and couldn't tell the difference.

Some local food certainly is a high quality product. However, it's rather silly to suggest that the way to save the environment and improve the economy is to ask everyone, including poor people, to buy high-end furniture, clothing and automobiles. The same logic holds true for food.

Read more...

Is Tyler Cowen really a "foodie"

I am completely entranced by Tyler Cowen's new book "An Economist Gets Lunch: New rules for everyday foodies." There is an audio interview, a video clip and a free chapter. I have digested all of them so far, but I'm waiting for the price to dip down before I read the whole thing.

Cowen shares his bag of tricks in finding a good, cheap meal using economic detective work. If there are five carts selling fried chicken in a small foreign village, go out and try it, as competition produces better results. Avoid restaurants that can skate by on their atmosphere and focus on the ones with lousy decor, because they must have a great product to stay in business.

He also challenges some of the major assumptions of the "foodie" movement. In an interview about the book, for example, Cowen said:

I think as individuals, people overrate the virtues of local food. Most of the energy consumption in our food system is not caused by transportation. Sometimes local food is more energy efficient. But often it’s not. The strongest case for locavorism is to eat less that’s flown on planes, and not to worry about boats.

In the first chapter under the words "Food Snobbery" he says modern foodies (and food writers and commentators) make three major hoity-toity assumptions: The best food is more expensive, modern agricultural is inherently bad and consumers can't be trusted to make good decisions when it comes to food.

This raises a good question. Cowen calls himself a foodie, but wants to distance himself from the gullible, pretentious hacks that claim a monopoly on food appreciation, why would he bother wrestling for that soiled mantle? The term "foodie" sounds childish and brain-dead, like it was coined by a slack-jawed kid who's favorite meal is paste. Let the snobs have their label.

In the same vein, I strongly support progress, but I don't try to grapple with lefties for the term "progressive." The American left stole the term "liberal" from its classic and international usage, so people like me had to take the term libertarian.

As a former food columnist with a degree in baking and pastry arts, I am part of Cowen's same brand of food enthusiasts. Truth be told, I don't know anyone who doesn't enjoy food and seek to enjoy their meals on their own terms.
Read more...

Tyler Cowen on food snobs

I'm a big fan of economist Tyler Cowen, even though I have to overlook his embrace of the ugly term "foodie" which I associate with food snobbery. While I can't use his excellent ethnic dining guide of the Washington DC area directly, I have benefited from the universal advice on finding a good ethnic restaurant.

Cowen recently spoke with Freakonomic's Stephen Dubner about American food, foodies, and in particular why he's not a food snob.

Let me just give you a few traits of food snobs that I would differ from. First, they tend to see commercialization as the villain. I tend to see commercialization as the savior. Second, they tend to construct a kind of good versus bad narrative where the bad guys are agribusiness, or corporations, or something like chains, or fast food, or microwaves. And I tend to see those institutions as flexible, as institutions that can respond, and as the institutions that actually fix the problem and make things better. So those would be two ways in which I’m not-only not a food snob, but I’m really on the other side of the debate.

While I'm on the fence about Cowen being a food snob himself, he does hit home an important point: the people I associate as food snobs get tied up in shallow anti-capitalism and blatant conspicuous consumption.



Last night I made Swedish meatballs from an earl 1980's cookbook. Ingredients included standard ground beef, sour cream and bread crumbs made from a slice of cheap white bread. The tomatoes were the cheapest ones I could find and the egg noodles I served it on fell under the generic supermarket label.

The recipe even called for a packet of onion soup mix, so I wouldn't be able to say it was from scratch, if I cared about that sort of thing. I don't, and nothing was organic, locally-made or "fair trade."

It was a great dish, and not despite those details. Most of the details the food snobs spend so much money are simply irrelevant.
Read more...

Apple can't control the iPad price

A friend who works at Best Buy told me that his manager had to enforce a strange policy against a customer this week, and things got pretty heated.

By order from the Apple company, no one is allowed to buy more than two of the new iPad tablets. Apparently the supply is smaller than the demand. The 16 gigabyte version sells in the store for $500, and they are going on eBay with a markup of at least $150.

A customer has been placing phone orders at different Best Buys in New England and picking them up. My friend told me the iPad can only be purchased with a credit card - no cash sales - to track customers and somehow this guy had already purchased 18 iPads by the time he got to the local store.

The customer insisted he had ordered a product, which is now in the store, and he has the right to buy it. The manager told him there will be no sale and threatened to call security.

Please pause to consider the absurdity of the situation - security being called to prevent a customer from making a purchase.

Why would anyone create such a weird policy?

I think what the Steve Jobs and his Apple company wants is fairness for customers. The theory goes, by limiting sales while the supply of iPad tablets is low, more of the public will be able to buy iPads at the retail price.

So the obvious question is, why don't they just raise the retail price of a new iPad?

The demand is high, and the supply is low, so the value of an iPad is high right now. The iPads are being scarfed right up as soon as they get on the shelf. When those hungry people have their iPads and the demand lowers, the retail price could go down. So if it's such a simple solution, why aren't they doing it?

The culprit is the stupidity of early adopters.

In 2007 Apple had a similar situation with the iPhone, where the price fell from $600 to $400 after a few months. There was a big cry-in from the early adopters, to the annoyance of both Bill Maher and Tyler Cowen

Cowen reproduced a standard iPhone complaint:

“I just felt so used as a consumer,” he said. “They hyped up the iPhone for six months and built up our expectations, and then they grabbed our extra $200 and ran.”

To which Maher said:

"Early adopters always pay a premium... If you didn't have to be the first on your block to get the latest gizmo, you'd now have an extra $200 to spend on your imaginary girlfriend."

Apple caved to the pressure of blog posts, user comments and negative product reviews from irate, irrational customers. They gave $100 in store credit to the early adopters and apologized.

So to avoid a similar outcry, Apple has decided to keep a fictitious price in place during the early adopter phase.

What do I mean by a fictitious price? Unfortunatly for Steve Jobs and his company, they do not have the ability to tell the public what an iPad is worth. They can set a retail price, but they can never decide a value.

No company has that ability, once the demand for the product is in place and the supply in determined. It really is as simply as supply and demand determine what something costs. Because the retail price is lower than the price the public is willing to pay, all kinds of bad things are happening.

The two iPad limit is not doing a flawless job of keeping scalpers from buying the tablet. However, customers who have legitimate reasons to buy several iPads are feeling the sting of the policy. A student who was acting as a middleman for friends in Europe who can't buy the iPad yet experienced an Orwellian scene while trying to buy a sixth iPad. A California hospital wanted 100 iPads for medical uses, but the order was canceled as well. The policy failed them.

People are able to get the iPad on eBay, but the markup is several hundred dollars. It appears that the policy of not using higher prices is failing those customers, as some are paying more than Apple would ever charge. They are paying the true value, not the artificial retail price. The policy failed them.

So what about the people that buy them at retail price. Aren't they being helped by the policy?

Well yes - but only the lucky ones. Retail customers had to pay additional costs by waiting in lines overnight or essentially winning a lottery by showing up to order at the right time. Some are guilty of cronyism because they only knew when to make a purchase because a friend told them when the iPads are in stock. While they pay the artificial retail cost, they are also putting in a lot of labor to actually make the purchase. Luck is also a big factor in who gets to buy. The policy failed them.

The only way Apple can change the value of the iPad is by reducing demand and increasing the supply. Clearly they are working hard at increasing the supply, and reducing demand - such as removing features from the device - is a terrible solution.

What they have done is attempt to set a "price ceiling" by keeping down the retail price. When there is a gap between the retail price and the value of a product, secondary markets will always emerge. Sales on eBay are unavoidable.

I can't blame Apple for putting such a flawed policy in place, I can only blame my fellow bloggers and Internet denizens who forced their hand with their public display of ignorance after the iPhone was released.
Read more...