Wonderful read

Bob Kalaba, one of the brightest and finest people I have ever known, once mentioned in passing that, "regression is an admission of defeat."  Jim Manzi, author of the wonderful Uncontrolled: The Surprising Payoff of Trial and Error for Business, Politics and Society, would agree.

Manzi argues that the better way to go in order to figure out what works (and why) involves randomized field trials.  Many businesses perform RFTs all the time.  Capital One does 60,000 of them per year.  With their web-based customer data and access, they can easily do this -- as do many others.

Private sector entrepreneurs are incited by competition to get discovery right.  Discover prices, product mix, opportunities, etc.  This is their great contribution. 

Can their public sector counterparts discover "sweet spots"?  Manzi says "yes" if they embrace RFT.  There is policy variability in the world, but it is not yet suitably evaluated.  Students going to school within and across districts encounter different classroom modes.  There are data here to be mined.

The fifty States should seek and get federal policy waivers in order to experiment.  But are we still in RFT-land here?  In passing, Manzi notes that different communities have sharply different policies re Wal-Mart and big-box stores.  Evaluate variations in outcomes.

But there is a problem here that the author overlooks.  Most communities are not consistent when it comes to a pro- or anti- big-box policy.  There might be a deal one day and no deal another, depending on who has lined up who in city hall.

Minor quibbles aside, this is an amazingly useful (and enjoyable) book.  Students (and others) get good background in scientific method and evaluation.  Business school or policy school students (as well as many others) should read Uncontrolled.   

Pricey popcorn

The economist Steven Landsburg is one of the smartest guys around.  I visit his blog all the time and have enjoyed several of this books.  More Sex is Safer Sex is typical of his approach.  Economic thinking a la Landsburg can be used to reach counter-intuitive conclusions.  Landsburg deploys his ET in this way and (I suppose) finds that the method keeps students awake and readers reading.

The revised version of The Armchair Economist provides more examples of the Landsburg approach.  But the trouble is that his own method can get him into trouble.  He includes a chapter on the oldie "Why popcorn costs more at the movies and why the obvious answer is wrong."  He tries on a price discrimination explanation: the serious cinephiles like the movies-and-popcorn experience and they can be made to pay a differential price via expensive popcorn.  Finding a way to extract higher prices from those with higher reservation prices is the name of the game.

But the author lets this explanation go because no movie theatre is a monopoly; any price discrimination profits made would be competed away.  In Landsburg's brief discussion of price discrimination, he mentions "monopoly" twelve times.  But this is where standard vanilla-flavored textbook econ misleads.  We do not live in a world where there are "perfect" competitors and "monopolists" -- and occasional "oligopolists" if you like game theory.  Rather, there are  varying degrees of pricing power everywhere.  In a world of "imperfect" competition and limited comparison shopping (and only 24 hours in each day), buyers are obliged to fork over some of their consumer surplus.  It happens all the time. 

Landsburg ends the chapter with his popcorn riddle left hanging in the air.  (He recounts all this as part of a discussion he has with a seatmate on an airplane.) I am certain that he gets my point, but he leaves the discussion where it is because he is seemingly attached to the standard model (where price discrimination is only practiced by "monopolists").  That's my point.

"Network Society"

Ed Glaeser has written on the enduring advanages of New York City; Joel Kotkin has been writing about the advantages and the re-bound of areas in what many once called "fly-over" country.  Both make good points and both phenomena are also complementary.

Economists know all about specialization and diversification and how these are dynamic and subject to innovation.  They also know about the charms of amenities (natural in California and cultural in New York).

Ever cheaper and ever better communications opportunities are the new normal and we get "The Network Society".  The label is not mine, but the title of a piece by the amazing Peter Drucker in the March 29, 1995 WSJ -- which I have clung to for classroom use.

Drucker saw that, "In 10 or 15 years, organizations may be outsourcing all work that is 'support' rather than revenue-producing, and all activities that do not offer career opportunities into senior management."

Not the "death of distance", but the ever changing ways in which distance costs, communications costs and transactions costs re-shape the world.

  

Coase and land markets

Here is Russ Roberts' splendid interview of Ronald Coase, who is a treasure at 101 years of age.  Many good people have lives that are much too short.  But Coase puts his longevity good fortune to good use.

Part of the discussion involves the Coase Theorem -- even Coase's qualms about the label and many popular interpretations.

Suffice it to say that market transactions can take place that undermine the argument for Pigouvian taxes or subsidies.

My favorite example involves land markets, especially as in proprietary communities.  But discussions of the Coase Theorem rarely see Coase as a land economist.

Should deaf people locate next to airports?  Will deaf people locate next to airports?

In the simplest ceteris paribus case, a potential negative externality becomes an effective nullity.  In fact, the owners of the adjacent land would see it in their interest to
recruit deaf renters.

In a more complex case, the deaf renters as well as the landlords see the possibility --but trade it off against their real world alternatives.  Would the deaf outbid the warehouses? 

Jim Moore and I once tried to write down all of the possible trade-offs. Bidders compete for sites and site owners compete for the attention of bidders.  The bidders evaluate and trade off (i) the natural characteristics of sites; and (ii) access costs to and from other sites with respect to other locators whose accessibility is valued; and (iii) the positive and negative externalities that might be available because of proximities at each site.  The math is simple.  Too simple.  We never saw all of this as Coasian.

Utopians and murder

Matt Ridley wrote how "Red Tape Hobbles a Harvest of Life-Saving Rice" in this weekend's WSJ.  This is how he finishes:

"Golden rice"—with two extra genes to make beta-carotene, the raw material for vitamin A—was a technical triumph, identical to ordinary rice except in color. Painstaking negotiations led to companies waiving their patent rights so the plant could be grown and regrown free by anybody.


Yet today, 14 years later, it still has not been licensed to growers anywhere in the world. The reason is regulatory red tape deliberately imposed to appease the opponents of genetic modification, which Adrian Dubock, head of the golden rice project, describes as "a witch-hunt for suspected theoretical environmental problems...[because] many activist NGOs thought that genetically engineered crops should be opposed as part of their anti-globalization agenda."

It is surprising to find that an effective solution to the problem consistently rated by experts as the poor world's highest priority has been stubbornly opposed by so many pressure groups supposedly acting on behalf of the poor.

Utopians with an earth-bound agenda can be murderous.  This is an old story.

It is, of course, ironic that libertarians are routinely described as utopian.  But they are little more than Smithians, who want to take humans as they are, and who seek institutions (property rights and competition) that channel the impulses of humans as they are.

This means fewer laws, less politics, fewer visionaries, less coercion by majorities.  That's far less likely to be murderous.

Strong words, but take it from Ridley:

Vitamin A deficiency affects the immune system, leading to illness and frequently to blindness. It probably causes more deaths than malaria, HIV or tuberculosis, killing as many people every single day as the Fukushima tsunami. It can be solved by eating green vegetables and meat, but for many poor Asians, who can afford only rice, that remains an impossible dream. To deal with the problem, "biofortification" with genetically modified food plants is 1/10th as costly as dietary supplements. 

Some good news

Visit a developing country and what is the most important question to ask?  How big is your middle class these days?  Not surprisingly, there are few clear answers.  We expect that a growing middle class indicates an interest in liberal (19th century version) values and the possibility of market-led growth and stability.

To be sure, current events in Europe do challenge this comfortable view.

This piece from the FT offers a nice summary of the challenges to measuring the size of any country's middle class in any year:  Look at car ownership rates. The data in most places are pretty reliable,  And the news is good.  The world's middle class is about twice as big as we had thought.

And expect more "urban sprawl" (aka auto-oriented development).

H/T The Browser.

Sagacious

Kori Schake offers a succinct summary of polcies being pursued by Greece's new leaders. Give us more or we default. This may not play well with German voters, but it does tickle just enough Greek voters.

Bryan Caplan had it right when he wrote The Myth of the Rational Voter: Why Democracies Choose Bad Policies.

Rational ignorance had been an appealing idea. It makes economic sense that those without a direct stake in ballot issues, either do not vote or they vote on spurious grounds. Wrong. Most voters stay and retain emotional attachments to silly platforms.  Caplan shows that the individual's calculus comes down to sticking with bad ideas.  He surely got it right.

IPO

What is the most important thing we can say about what goes on in markets?  (a) a process of error correction by which prices are discovered; or (b) a process wherey market equilirium is found?

Google Scholar shows 22,000 entries for "price discovery" and 90,500 for "market equilibrium". 

Which one preoccupied traders in today's Facebook IPO?

Enough said.  Market participants have a lot to teach those who write about the workings of markets. 

Opportunity

Ross Selvidge points me to this news item about the Politechnico di Milano going all English.  We criticise south Europeans for being stalwarts, but this move points in the other direction.

English rules the world and that makes life easy for Americans. But it makes us less cosmpolitan and deprives us of the many ways that multi-lingualism makes us brighter and better learners.

There was once the opportunity cost argument.  Why spend time learning another language when you do not have to and can learn something else isntead?  But look at all of the "something elses" so many students take up instead.  I am waiting for an innovative school to make the case that they push foreign language excellence.

ADDED

Here is Jonah Lehrer ln the benefits of bi-lingualism.

Creativity in cities

Despite an unfavorable review in yesterday's NY Times, I enjoyed reading Jonah Lehrer's Imagine: How Creativity Works.  Creativity involves activities within and among brains. 

There are networks formed in our heads and there are networks that we form with others -- by which we get into their heads (and vice-versa).  In developing all this, Lehrer mentions the work of Jane Jacobs, Paul Romer, Ed Glaeser and many others who I have cited previously.

We get new things by discovering new combinations of old things (Romer).  But first we have to discover new ideas, which are new combinations of existing ideas -- from those ideas already in our heads as well as those in the heads of people in our network.  The latter is critical. Many of our social networks are formed in the urban spaces where we choose to live, work and play.

But spatial arrangements are also combinations of things we call land uses.  And the combinatorial space is again very large.  This last thought is not explicitly in Lehrer's book, but I have mentioned it several times on this blog.

In fact most combinatorial spaces are much too large for mere humans to identify a "best" or "near best" "solution".  That leaves a hugely important role for flexible land markets.

Slip sliding

Richard Thaler writes about "Slippery-Slope Logic" in this morning's NY Times. Slippery slopes are rhetorical devices.  As such, they may be good conversation starters, but that is all.  I get that. 

Thaler takes aim at Justic Scalia's "broccoli" comment during the recent oral arguments before the Court over Obamacare.  He ends this way:

More generally, we would be better off as a society if we could collectively agree to ignore all slippery-slope arguments that aren’t accompanied by evidence that said slope exists. If you are opposed to a policy, state your case based on the merits — not on the imagined risk of what else might happen down the road. The path of that road is so unpredictable that it may even produce a U-turn.

But on the other side of the discussion, look at Robert Levy and William Mellor's The Dirty Dozen: How Twelve Supreme Court Cases Radically Expanded Government and Eroded Freedom.  This is from their conclusion:

Over the past seven decades, the U.S. Supreme Court has rewritted major parts of our Constitution, including the General Welfare Clause, Commerce Clause, Contracts Clause, Non-Delegation Doctrine, and the First, Second, Fourth, Fifth and Fourteenth Amendments.

Constitional law is not my field, but the authors' case-by-case analysis of the "Dirty Dozen" is eye-opening.  I even wish that there had been more attention to slippery slopes over the past seven decades.

Load, aim, fire ... at own foot (or other body part)

Here are excerpts from an editorial in today's WSJ on an asinine proposal in Congress to de-fund the annual American Community Survey.  It speaks for itself.

The GOP's Census Takers ... Republicans try to kill data collection that helps economic growth ...

The House voted 232 to 190 to abolish the Census's American Community Survey, or ACS, which is the new version of the long-form questionnaire and is conducted annually. Republicans claim the long form—asking about everything from demographics to income to commuting times—is prying into private life and is unconstitutional.

In fact, the ACS provides some of the most accurate, objective and granular data about the economy and the American people, in something approaching real time. Ideally, Congress would use the information to make good decisions. Or economists and social scientists draw on the resource to offer better suggestions. Businesses also depend on the ACS's county-by-county statistics to inform investment and hiring decisions. As the great Peter Drucker had it, you can't manage or change what you don't measure.

The ACS costs about $2.4 billion a decade, which is trivial compared with the growth it helps drive. National statistics are in some sense public goods, which is why the government has other data-gathering shops like the Bureaus of Economic Analysis and Labor Statistics. The House action is like blaming the bathroom scale for your recent weight gain. 

Florida freshman Daniel Webster denounced the ACS as "the definition of the breach of personal privacy, the picture of what's wrong in Washington D.C., unconstitutional." This diminishes all the other things the government does that really are unlawful, especially since the Founders told Congress to enumerate the population "in such Manner as they shall by Law direct." As for privacy, anyone not living in a Unabomber shack won't be much inconvenienced by making this civic contribution. ...

This is pretty good, but I have some additional thoughts. To avoid purely political arguments over the division of labor between private and public sector efforts, as well as worries over which level of government performs which public function, think in terms of comparative advantage.  The ACS is something that the Census Bureau does best.  No one else can come close.  But should it be done in the first place?  The data have widespread uses and applications.  Finally, it is easy to agree with the idea that "basic" research is a government function.  Many (not all) ACS users are social scientists engaged in what we can call basic research.  To take a familiar example, Charles Murray's Coming Apart is (in my view) profound, appeals across the political spectrum, is widely read, and would not exist if the author did not have access to Census Bureau data.

Inspired designers subject to profit-loss

It's truism that one size does not fit all.  Yet, there are fads and some people have to re-learn the truism.  Here is a summary of U.S. pedestrian malls, showing a mixed record of success. 

It's safe to say that the designers of private malls, subject to profit-loss risk, will be less likely to be faddists. If they still are and if they are wrong, they pay the price, as they should. 

In a slightly different context, Chairman Mao suggested we let a hundred flowers bloom. But as Paul Romer has taught us, it is all about combinations.  Designers are the ones who discover newer and better combinations of elements.  Design a chair or design a shopping mall and many more than a hundred outcomes are possible.  The combinatorial space is daunting.  Inspired designers subject to profit-loss is the only approach that I can think of in light of the scale of the problem.

No "death of distance"

Is it a "flat world" or are agglomeration economies more powerful than modern electronic communications?  The next time you fly, see how many people do not fondle a communications device before take-off or after landing. But, then, these are the people who are physically going to or from someplace.

To get back to the question at hand, agglomeration economies win (over space as well as over time, as in path-dependence).  The case is well made by Enrico Moretti in The New Geography of Jobs.  The author cites plenty of facts (for the U.S.) and relevant theory.

Yet, in my view, Moretti stumbles twice.  Too much time is spent on the "decline" of U.S. manufacturing.  It is a jobs decline, but an improvement in productivity.  We went through all this with agriculture.  There is also too much in the way of "market failures" to be fixed by wise policy makers.  Although, to be fair, towards the end of the book a more ambivalent tone is achieved with respect to the track record of U.S. industrial policy.

I did very much like Moretti's discussion of the three types of agglomeration.  1. Size (of metro area) matters; 2. Local "ecosystems" of venture capitalists physically near the inventors and tinkerers is important. ("An increasingly important part of the job involves active monitoring, nurturing and mentoring of new businesses." p. 157); and 3. Knowledge spillovers matter; important connections happen in the elevator, in the office, or anywhere within a zero to 25-mile radius.

"Death of distance" indeed.

Bottom up

Everyone talks about diverse neighborhoods, but who actually does something about them?

To be frank, I had to see Brooklyn's Ditams Park and its Cortelyou Road to believe it. I have never seen such a range of people from the corners of the world as well as the U.S. I was able to infer all this from signage on door fronts and restaurants. It was all pretty amazing.

I got the story of how all this happened from Jan Rosenberg, one of the movers, who explained it all to me -- and sent me to this blog post from 2008 where she had described the work that was done.

It was bottom-up and it was sponatenous and it involved some energetic local people getting serious.

I get very antsy about the "visions" propounded by public officials carrying water for developers and exploiting eminent domain. Even worse, these eposides do not deliver like Jan Rosenberg and her Ditmas Park neighbors.

Good news

I had missed the boat, but it is true that NY has legalized it's gypsy acabs. From what I understand from a chat with a a driver, the legalized drivers can only pick up fares outside mid-town Manhattan, but they can drop off fares anywhere. My one trip (from participating on a panel at CCNY to my hotel in mid-town) with Harlem Car & Limousine was a flat fare. I have yet to find out more, but I like the demonstration effect. This is great ammunition for advocates of legalization in other cities. Will it spread? Stranger things have happened.

Call it "social equity"

Over at Bleeding Heart Libertarians, there is a fascinating discussion of what the phrase really means.  In fact, the site name's sub-head says "Free markets and social justice".  The first part is pretty clear, but the second part is up for grabs.

Philosphers make it their business to probe gems like "social justice" and that's all to the good.  The problem is that weasel words cause serious problems in other realms.

This morning's WSJ includes an editorial headed this way"  "The New Earmarkers ... Cost analysis for transit projects gives way to 'social equity.'"

The text mentions the following:

Under the existing New Starts guidelines, local governments competing for grants must compare the cost of their transit projects with alternative solutions. The Obama Administration's proposed rules would do away with this comparative cost analysis. The new rules put more weight on "social equity and environmental considerations." Such as? Such as the "degree to which policies maintaining or increasing affordable housing are in place."

At the top of the FTA's queue is San Francisco's proposed Chinatown subway, which couldn't get a full funding grant agreement under a more rational review process. The 1.6-mile line will cost $1.6 billion to build and draw just 5,000 new daily riders. Subway commuters would have to descend eight floors to catch the train and then walk the length of four football fields to connect with light-rail lines.

Call it "social equity" or any such thing and the craziest public expenditure is rationalized.  Earmarks, by definition, reward favored constituencies.  How equitable is that? 

California now has the most potholed roads and highways in memory.  Many out-of-staters would be shocked.  Expenditures are hoplessly politicized and basic services are run down.

If the Chinatown subway's $1.6 billion were left instead to generate a 2% annual rate of return, it would make $32 million available each year.  At $75,000 to re-pave one lane-mile, we could rescue 425 lane-miles of California's awful roads each year.

Everyone know that 425 lane-miles of road serves many more people than 1.6 miles of subway.  But does it achieve more "social equity"?  I bet it does.  And I cannot even define "social equity".