Eric Rasmusen’s Weblog

Imagine the following utopian economic system. Everyone is instructed to provide goods and services for other people if so doing is efficient– that is, if the cost to themselves is less than the value to the other person. Let us assume that everyone does his sincere best to comply. Thus, instead of paying for groceries, the grocer will provide the groceries he thinks efficient for free, but the customer will not take any groceries unless he thinks the value to himself is greater than the cost of production. …
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In response to an April post arguing that welfare states should not mind free trade, J. N. suggested to me that intrusive states would dislike free trade because it creates unpredictability. That is an interesting idea.

Which kinds of states need predictability? Ones with lots of planning and rigid regulations, I guess. Intrusiveness per se is not it– I don’t think a moralistic theocracy would be especially concerned about an unpredictable economy. But a state with a 5-year-plan, that uses Authority rather than Prices for coordination, would be disrupted by uncertain trade flows. Similarly, a state that uses price controls would find things not working out as planned.

This would also extend to economic growth. If economic growth involves unpredictability– say, in which sectors are gaining in employment– it would mean that having a price-based, flexible system is more important. A non-price system would be more willing to give up some growth if it could thereby get rid of some uncertainty.

I’ve forgotten how it works in Weitzman’s old RES “Prices Vs. Quantities”article works, but that might be relevant.

I recently blogged on the Trust Game or Investment Game. J. O.N. refers me to this Newsweek article on it. Some people in “behavioral economics” like to say that people are not economically rational. What I think is more correct is to say that people do try to maximize utility but 1. People make a lot of dumb mistakes, and 2. People have moral preferences as well as material ones.

Why trust someone to whose material advantage it is to take your money and return you nothing? It could be a dumb mistake– not realizing that they could take advantage of you. That’s why investment scams work. Or it could be that you are relying on the fact that most people are moral, to at least a small extent, and would feel guilty if they did not return anything to you. Sometimes the gamble will work out, sometimes it won’t.

There’s nothing in economics that says all preferences have to be for material consumption. In fact, that would be a hard position to make coherent, since what we really consume are particular sensory outputs of material objects (think of the old Kelvin Lancaster idea of utility over characteristics, used in hedonic regressions of how valuable a car is in terms of speed, acceleration, roominess, etc.) It is no more objectively rational to pay a $100 to hear some music waft across a concert hall than to pay $100 to go to the concert hall to impress someone else with my good taste, or to pay the $100 to subsidize musicians because I like them. And, getting back to mistakes, I and everyone else might have paid the $100 thinking I’d hear nice melodies but we get Schoenberg instead, and regret it.

The biggest ideas in economics are, I think, markets, incentives, and efficiency. All these apply to situations where there are mistakes and nonmaterial preferences. Raise the price of an activity, and people will do less of it is the usual rule, and a very powerful idea. That applies to all the concert examples above– if I have to pay $200 to get teh same effect (including to benefit musicians by $100), I may well decide not to go to the concert.

A reader wondered whether there really was a legal way to use marijuana medically. There is– in every state, I suppose, since the FDA has approved it. The active ingredient in marijuana, THC, is available via the prescription drug Marinol. See WordIQ. Thus, the push for “medical marijuana” is highly misleading. It is based on claims that Marinol is too expensive and that for some reason plain marijuana works better than the concentrated active ingredient.

I’ve been writing writing this weblog for over a year now, and I see that for it to achieve its original purpose of being a record of useful thoughts I had better give it some organization. If I forget what I’ve written, the record is not working, despite the idea (from Nietszche, I think, that “The reason I write down my thoughts is to rid my mind of their bothersome presence.” How, though?

Perhaps I should go over all my archives and look for good thoughts. A good project would be for me to maintain a “Top Ten Posts” list, or something like that. Will I get round to it? We’ll see. I have three papers under submission now, three more (Gratitude, Options, and Trade Reputation) to get into good shape, and three book projects that ought to be moved along. We’ll see.

I thought of an analogy for faith today that may be helpful to people who think in terms of economic models.

Imagine that you have 100 hours to devote to a project that will yield a million dollars if successful. If you devote 0 hours to the project, it will have a 10% chance of success. Spending an hour on the production side of the project, you will increase its chances of success by either 0% or 0.4%, with equal probability. Spending an hour on the marketing side of the project, you will increase its chances of success by either 0.1% or 0.2%, with equal probability.

What should you do? You should spend all 100 hours on production, for an expected 40% increase in the probability of success, compared to 15% for marketing. You should resist the temptation to “split the difference” and spend some time on production and some time on marketing. You may be wrong– and production time may be completely useless– but you need to make that leap of faith.

The same goes for religious faith. I have my life to spend on attaining The Good. If I just avoid thinking about Big Things, I might still succeed. If I think a little, I will realize there are certain paths which are most likely to help. Christianity has, perhaps, a 0% or a 40% chance of being correct. Atheistic hedonism has, perhaps, a 10% or 20% chance of success. I must make a decision, though, and compromise is not a sign of wisdom. Rather, I should be willing to be brave, and put my efforts where my mind directs them (and heart– if my heart is helpful), even knowing that I cannot be sure of what is true. That, indeed, is the key reason for faith: that lack of certainty should not paralyze us, and in the case of the Big Things, reason will not take us anywhere near Certainty.

I’m coming to be more sympathetic to the view that we economists have had a bad influence on political thought with our emphasis on prosperity and efficiency as opposed to freedom and virtue. The end is happiness, I will grant, but material prosperity is only a part of that. In fact, it is a shrinking part: as we get more prosperous, efficiency considerations become less important relative to other things. We are such a rich country now that we can afford to lose some material efficiency if we can thereby gain freedom and virtue. …
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I just read “Are Economists More Selfish than Other ‘Social’ Scientists?” by David Laband and Richard Beil (Public Choice, 1999, 100: 85-101). They looked at lying by members of the American Economic Association, the American Sociological Association, and the American Political Science Association. Each association has higher dues for members with higher incomes, so if you lie and say your income is low, you save on your dues. Laband and Beil surveyed members about their incomes, and then compared the income distribution to what members reported when paying their dues. Page 96 has the result: in the category of incomes above $50,000, it seems that 26% of political scientists underpay dues (15.3/60.6 from Table 2), 33% of economists, and 50% of sociologists. More economists earn high incomes, so the actual numbers of cheating high-income economists and sociologists look about the same. But the sociologists also have more cheating of middle-income members saying they are in the low-income bracket. Laband and Beil have a clever single summary statistic: an estimate of the percentage of dues not collected because of cheating. The amount lost by cheating is 7% for the economists, 9% for the political scientists, and 22% for the sociologists. The implication seems to be that studying economics or politics does not make people more selfish or dishonest, but sociology is bad for one’s morals.

There’s been some comment about how in the third Presidential debate last night, then John Kerry was asked about his wife he talked about his mother instead (and her worry that he might lose his integrity if he ran for President). Another response from him could have been, “Which wife? I’ve had two.” I find it interesting that nobody comments on Kerry’s first wife, Julia Thorne Kerry, the mother of his two daughters, except to note that she, like Theresa Heinz, was immensely wealthy. The first Mrs. Kerry is quite bitter about his annulment of their marriage, as I’ve
posted on before. If the honesty and fidelity of a President is important, and his willingness to stick to a task when the going gets tough, and his responsibility to children even when it inconveniences him, the circumstances of that divorce are relevant. Maybe knowing more facts would exonerate Kerry. Reagan, after all, was divorced, but it seems he was the wronged party. But as with the military records that Kerry won’t sign a Form 180 to release, when we get no information, it’s reasonable to deduce that the information would not reflect well on Kerry.

At the Midwest Law and Economics conference this weekend I learned about “the Dewey Ballantine Case”, Prudential Ins. Co. of Am. v. Dewey Ballantine, Bushby, Palmer & Wood, 80 N.Y.2d 377 (1992). It is an example of a serious typo– or boobytrap– in a large commercial contract, one that I might have used in my article, “Explaining Incomplete Contracts as the Result of Contract-Reading Costs.” Here is what happened. Mr. Gilmartin, a lawyer from the Dewey Ballantine law firm representing U.S. Lines, wrote a letter for Prudential to assure Prudential that the documents were all in order.

… Gilmartin, at the specific direction of U.S. Lines, thereafter drafted and delivered an opinion letter to Prudential. The opinion letter contained an assurance that the mortgage documents that were to be recorded in connection with the debt restructuring, and which, incidentally, had been prepared by other counsel, represented “legal, valid and binding” obligations of U.S. Lines. Moreover, according to Gilmartin’s letter, neither federal nor state law would interfere “with the practical realization of the benefits of the security intended to be provided” by those documents. Prudential ultimately accepted Gilmartin’s opinion letter as satisfactory, and permitted the recording of those mortgage documents. Prudential later learned that one of the recorded documents erroneously stated the outstanding balance of the first preferred fleet mortgage securing the debt as $92,885, rather than the correct sum of $92,885,000. As a result, Prudential suffered significant losses when U.S. Lines subsequently filed for bankruptcy.

Leaving out the 000 looks to me like an unintentional mistake rather than a trick. Notice that in the end, Prudential lost out not to U.S. Lines,but to its other creditors– though U.S. Lines would have benefited if it had pointed out to later creditors that it didn’t owe much to Prudential.

At any rate, Prudential couldn’t collect much from U.S. Lines, and went after Gilmartin instead, on the theory that he had misled them. The law gets complicated at that point (Gilmartin wasn’t Prudential’s lawyer!). Here’s what the court decided:

In sum, a duty of care was owed to Prudential in these circumstances, and the facts do not prove a breach of that duty. In preparing the opinion letter, Gilmartin represented that it took the particular procedural measures, as discussed above, in investigating and substantiating the mortgage documents in question. After taking those measures, Gilmartin made certain general assurances to Prudential in the opinion letter. Those assurances did not set forth a specific dollar amount as securing the debt. It was agreed that the letter was to be in a form satisfactory to Prudential, which condition was satisfied when Prudential accepted the letter containing no more than general assurances.

That seems reasonable. Gilmartin missed something in the documents, but the court decided it was not so sloppy a job he did as to justify holding him liable for his mistake.

In June I praised Kazuo Ishiguro’s 1989 novel, The Remains of the Day, which is about butler Stevens who pridefully sacrifices all for dignity and for doing his little bit, as a butler, to bring about world peace by serving the peacemakers. The problem is that the peacemakers turn out to be the appeasers of the 1930’s, people entirely mistaken whose efforts are worse than useless, and with them Stevens’s life.

A similarly elegant, sad, and perceptive book is his 1986 An Artist of the Floating World. Here, the protagonist is a Japanese artist who rebelled against his teacher’s partying and paintings of actors and geishas (”the Floating World”) to instead use painting to advance political progress and the reform of Japanese national spirit. The book is set in 1948, though, when the artist, his wife dead in a bombing raid and his son dead as a soldier, sees that his idealistic fascism (if that is the right word for the 1930’s militarists in Japan) was a mistake. He manages, however, to rise above his pride and to confess that he was mistaken. It is a novel about the conflict between generations, and the struggle– so often unsuccessful– of men to do something significant with their lives, and to make the best of failure.

“…if we’d seen things a little more clearly, then the likes of you and me, Matsuda– who knows? — we may have done some real good. We had much energy and courage once. …

But then I for one never saw things too clearly. A narrow artist’s perspective, as you say. Why, even now, I find it hard to think of the world extending much beyond this city…

We at least acted on what we believed and did our utmost. It’s just that in the end we turned out to be ordinary men. Ordinary men with no special gifts of insight. It was simply our misfortune to have been ordinary men during such times.” (p. 199, last chapter).

Such a book is good for teaching humility, and some sympathy, perhaps, for the modern Hollywood artists who are trying to advance evil causes. It takes great talent to write a sympathetically critical book about such a man.

I just heard a good presentation by James Cox of Arizona on his experimental work trying to figure out exactly how altruism works. The basic game in this literature is the Trust Game, one version of which goes as follows:

There are two subjects, a Sender and a Responder. Each is given $10.

The Sender can keep his entire $10 or send X to the Responder. If he sends X, then it is tripled for the Responder, who receives 3X.

The Responder then can keep his entire pile of money, or send Y back to the Sender.

The game is played only once. The Sender and Responder do not meet face to face, and it is best if the experiment is done double-blind, meaning that the researcher does not find out who sent what (and possibly shame them). All the rules are common information for all the subjects.

If people follow the simplest “homo economicus” behavior, the Sender sends nothing to the Responder. A pure altruist or a utilitarian Sender would send his entire $10, since it would turn into $30 for the Responder.

In practice, some Senders send nothing, and most send a few dollars, and a few send all $10. Most Responders respond with a fraction (often half) of the value they received, but some respond with nothing. On average, Senders don’t get back as much as they send, but they are close to breaking even.

This is relevant to the thinking I’ve been doing on the subject of Gratitude, which Professor Cox calls Positive Reciprocity in this context. He is very interested not just in the Responder, though, but also in the Sender, who needs what is conventionally called “Trust” that the Responder will be properly grateful.

Summer 2004 posts by Jay Caruso and Josh Claybourn express their opposition to the Family Marriage Act as Christian libertarians. That bill is not the best example to use, though, since it involves lots of federal issues. Even someone who believes in criminalizing homosexuality might oppose a federal bill forbidding homosexual marriage, on the grounds that marriage is matter for state legislatures, not the federal government.

So let us use a different example– an extreme one, to sharpen the issues. What should the Christian position be on whether there should be a state law forbidding a parent from killing his children? Is such a law legitimate, or is it an undue intrusion on people’s rights?
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How do you figure out how much consumers might pay for a new product? I came across a good idea yesterday in a paper by George Geis, though it is not new with him. The problem is that if you simply ask people for the greatest price, P, they will pay, they will not think hard enough, and you will get an inaccurate estimate of their maximum value, V. Or, if you offer to sell it to them for some price P and they accept, all you know is that V>P, but not V exactly.

So here is another idea. Tell the person to give you a price P that equals their value, V, and tell them what will happen next. What will happen next is that you randomly pick a price, R, for the product. If P>R, they may buy the product at price R. If P

This mechanism is truthtelling-- the person's best strategy is to choose P=V. If they choose lower, they might miss their chance to buy the product at a price they'd like-- maybe R>P but R

I think you could also run this with slightly different rules, saying that they MUST buy at R if RV. That might be a better idea, since my original rules (which might be different from what Geis had–I forget) would make a very high P an easy strategy that would keep all the consumer’s options open.

My blogging will be light this couple of days, since I’m busy with a conference. I’m presenting a paper on gratitude– on what response people should have to unrequested favors. I think there are three basic scenarios to consider:

1. Purely altruistic favors. These will be given even if totally unrecognized.

2. Purely selfish favors. These are given only if some material compensation is expected.

3. Semi-altruistic favors. These are given in the expectation of receiving the goodwill or esteem of the recipient.
More another time.

I just saw an op-ed by John Lott, “Gunning for Cheney”, which says….
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“Divorce, Chilean Style: Now, It Will Be Legal But Not Exactly Easy” says the Wall Street Journal of October 5, 2004. Here are details:…
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I just invented a card game that my 4-year-old and 5-year-old want to play over and over. They named it “Acebay”, to remind themselves that an ace is better even than a King. Here are the rules. The dealer shuffles, and someone else cuts. Then the dealer deals 4 cards to each of the 3 players, dealing them one by one going clockwise, and the players look at their cards, but keep them secret. The player to the left of the dealer starts by putting out one card, and then each of the other players puts out a card. The highest card wins the trick, with the Joker being even higher than an ace. In case of ties, a coin is flipped to decide the winner. The winner starts the next round. At the end, the overall winner is whoever took the most tricks.

The game does have some strategy to it, but though I find it tedious, my girls love it. It is their first card game, and they find just dealing the cards challenging. My 5-year-old has caught on to the idea of strategic play, but my 4-year-old asks me which card she should play next. The game is a good way to learn numbers, since one can count the symbols on the cards to see who has the biggest card and wins.

I think I’ll repeat this old entry, since I’ve updated it:

UPDATE, OCTOBER 4: See also Joanne Jacobs and The City Journal “In Defense of
Memorization” by Michael Knox Beran, to which Pete DaDalt kindly drew my attention. By the way, we haven’t gotten round to memorizing any poems– kindergarten and preschool have somehow displaced it. By the time I figure out how to raise children, mine will be grown! That’s why tradition would be helpful; it’s hard to roll your own. …
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Alas, the spammers have defeated me. Even with the MT-Blacklist software, the number of spam comments is so overwhelming that I see I won’t be able to notice legitimate comments if I use the comment forms. I’d like feedback, though, so if you have something you’d like me to post, just email me at erasmusen@yahoo.com and say I can post it, and I’ll put it at the end of my weblog entry.