Voting, Externalities and an "Invisible" Hand?

I've been too busy lately. I've found some time to read, but precious little to blog.  So this is about a week overdue. This article (HT to Marginal Revolution) is really a wealth of opportunity. You can connect all kinds of economic concepts to voting. The author makes some excellent arguments for voting and not voting. It is the latter that are most intriguing. In some instances, the author seems to be relying on normative judgments about what is a good policy.  In other instances, the argument of common good runs up against rational self-interest.

Do you agree with the author?

Risk-Pricing, Adverse Selection and Moral Hazard

There's an entertaining article in today's edition of The Wall Street Journal that has all kinds of possibilities for the classroom. The article is about subway riders in Scandinavia who ride for free. Instead of buying tickets, they contribute to a pool that pays their fines if they get caught. They've set up a kind of "insurance" pool.

But if we think about it, we have an excellent example of adverse selection. I suspect the only ones who are paying into the pool are those who have no intention of purchasing a ticket and thus know they run the risk of being caught. Once a person has purchased the "insurance", they will likely be even less inclined to pay a fare.

So what keeps the premium from being the same as the amount of the fine? It's the likelihood or risk of being caught. If chances were 100% that you would be caught and fined, the pool would have charge a premium equal to the fine. This scheme can only work as long as enforcement by the authorities is lax enough to keep the premium less than the fare. Once the risk rises to the point where the premium costs more than the fare, it is cheaper to buy the ticket.

There is much more to this issue, as you'll see when you read the article. I'm sure you will see more possibilities. I did. But I hope you will share your ideas.

Possible Rent-Seeking? Captain Renault Is Shocked

USA Today provides this story.  This is a good time to discuss coincidence, correlation and causation.  Regardless, Captain Renault is shocked...shocked.

Origin of Moral Sentiments

A couple of days ago, Don Boudreaux at Cafe Hayek had this very interesting post linking to a recent New York Times op-ed on moral rules.

What was perhaps most interesting to Don (and to me) was that much of the recent research cited in the Times piece comes to the same conclusion Adam Smith arrived at in 1759 in The Theory of Moral Sentiments.

I've said it before on this blog and I'll repeat it, if you're teaching economics and you've only read An Inquiry into the Nature and Causes of the Wealth of Nations, you're only half-way there. If you've not read either, you owe it to yourself and your students to read both. You and your students will gain much from it.

Adam Smith & the Contemporary World

For those of you who sometimes wonder if there's anything to be learned by studying the works of the great economists, I would direct you to this piece in the Erasmus Journal of Philosophy and Economics. It's by Dr. Amartya Sen, professor of philosophy and economics at Harvard, and winner of the 1998 Nobel Prize.

Dr. Sen raises highlights a number of thought-provoking aspects of Adam Smith's work, and relates to the present day. And before you dismiss this as just another piece on The Wealth of Nations, I will again remind you that Smith also wrote The Theory of Moral Sentiments.

In the article, Dr. Sen discusses not just prudence, a virtue that Smith described as "useful to the individual"; but Smith's discussion of "qualities most useful to others" - qualities like humanity, justice, generosity, and public spirit.

Sen also discusses the ideas that other perspectives provide value by giving us insights into the choices of others without necessarily agreeing with them. "To listen to distant voices, which is part of Adam Smith's exercise of invoking 'the impartial spectator', does not require us to be respectful of every argument that may come from abroad. Willingness to consider an argument proposed elsewhere is very far from a predisposition to accept all such proposals."

I submit, in that respect, Smith may be an early pioneer in the field of institutional economics - seeking to understand what motivates others to choose as they do, whether we approve or disapprove of the choice.

The article is a bit longer than many I recommend here, but I think you will find much of value, if you are at all interested in the link between philosophy and economics, and the link between Smith and the present.

I welcome your thoughts.

Why India's Poor Are Poor?

I ran across this story on National Public Radio's Planet Money blog.

It is an interesting and compelling short human-interest piece. And it makes a good prima facie case that there is a role for manufacturing in developing economies. I don't disagree that there is. But what I found more interesting were the links to other stories at the end. What popped into my head was, "maybe there are also strong institutional reasons that the poor remain poor." If bribery is necessary for progress in an economy, how can the poor progress without the means to pay the bribes? I suspect that if bribery is so widespread, it would take a bribe to land a better-paying job in the manufacturing sector. I'm just saying....

Greek Debt Crisis: Institutional Factors at Work

Today’s edition of The Wall Street Journal contains a very good story  that examines the role of corruption in Greek society as a factor in that country’s current financial crisis. (Subscriber content at this writing, but plug the headline into your browser, you may find an open version.) And while things like corruption are not the sole cause, the story provides a good example of how an environment that lacks protection of property rights and encourages bribery can, over time, rob an economy of growth.

And whether or not you can find the whole article, the video and interactive graphics are very informative and were open access the last time I checked. I hope you give it a look.

Wal-Mart Effect?

A few days ago, I ran across this article from The Washington Post on Wal-Mart's impact on labor and environmental standards in China. Then yesterday, I ran across this article from The Atlantic (HT Arts & Letters Daily) on how Wal-Mart is having an impact on organic and locally grown foods.

Given the way the retailer is so often vilified, I found these to be rather enlightening and refreshing. But that's just my opinion. Please share your thoughts about the articles.

Captain Renault is Shocked

This article was in The Wall Street Journal (HT to Division of Labour) about a week ago, but I missed it. It seems a Senator supported a bank acquisition in his home state. It also seems that there was a connection between said Senator and bank management. Captain Renault and I are both shocked.

Guilt as an Institution

There are many "non-economic" choices we make every day. Yet economic thinking provides insights to these choices. And these insights help us understand what we do. That point was brought home by this article from The Chronicle of Higher Education (HT to Arts & Letters Daily).

Many of our choices are the result of feelings we have - whether they be guilt, pride, or whatever - and the feelings are, in part, the result of our socialization process as we mature. And the feelings become integrated into our beliefs. These beliefs help form the institutional structure that helps us make choices - some economic, some "non-economic". The beliefs are some of the "rules" that influence our decisions, whether it is how we act while waiting in line, as explained in the article, to how we view other social and cultural issues.

The article even redirected my thinking to Adam Smith's The Theory of Moral Sentiments and the role of his "impartial spectator."  While I don't think we can connect that role to guilt, it is possible to connect to our desire to seek approval of others, which is alluded to in the article.

I think the article can help us explore the role of beliefs as institutions, and the influence they can have on our decision-making. Please share your thoughts.

Economic Thinking and "Non-Economic" Choices

Many of us teach our students that economic thinking helps us make "non-economic" choices. What we usually mean by that is that the analytical tools we gain from understanding economics can help us make choices beyond the financial sphere.

Today's edition of The Wall Street Journal has an excellent example of applying economic reasoning to what many would consider a non-economic or even a moral choice.

This opinion piece focuses on a choice we make as "a civilization". I won't quibble about whether "civilization" or "society" is more appropriate. But the upshot is how we react to threats to our security. It is a complex issue and this article does not go as deep as it could. But it does provide a framework for discussion, using what I would call an "economic way" of thinking - posing costs and benefits for judgment.

I highly recommend it. And I look forward to your thoughts.

Economic Thinking, Economic Behavior and Free-riders

There's a superb article in today's edition of The Wall Street Journal (HT to Dr. Mark for the "heads-up"). While I'm not sure I agree that economists are generally less generous when it comes to charitable contributions, I'll admit to some of the other behaviors highlighted. How about you? Do you recognize any part of yourself in the examples?

Walk Away

Yesterday's edition of The Wall Street Journal had a front page story below the fold that was titled "American Dream 2". The article was about how some people have walked away from home ownership when mortgage balances exceeded home values. Some are now renting, sometimes larger houses with rent lower than their previous mortgage payment. This is understandable and, in itself, not that surprising.

One part of the story was particularly troubling. It mentioned people who just stop paying their mortgage, putting their money into vacations, etc. Is that ethical? The availability of funds that otherwise would be paid for housing is allowing them to spend on other things. But the losses to the banks may have to be picked up by the taxpayer. Is there an institutional basis for what they are doing? Do the existing rules in our society (both formal laws and informal beliefs) provide a basis for understanding this behavior?

Some may argue that the banks, mortgage brokers, and others were not ethical in placing them in homes they may not have been able to afford. But does one justify the other? This story has some excellent possibilities for use in economic analysis and maybe even an exam question. Give it a look.

Information Asymmetries and Exchange

I believe that "economic thinking" can be used to explain a lot of "non-economic" phenomena. This came to mind while I was listening to an episode of This American Life on my public radio station this past weekend. The episode was about mind games, and I only listened to the first two segments. What struck me was that there were social exchanges going on that were caused by deliberate information asymmetries. If this kind of deception were going on in "the marketplace", many of us would cry "fraud." We might even demand retribution, compensation, or "justice." My question for you and your students, what is our reaction in the social arena?

I would welcome your comments.

Religion as an Economic Institution

Regular readers of this blog know one of my interests is the impact of economic institutions (the rules and organizations of a system) on our decision-making. Among the effects I find most interesting are those that are rooted in what I call "informal rules." These include beliefs and personal codes of conduct that we are exposed to by family, friends and other affiliations, including any religious upbringing. They are not "formal" in the sense that they are mandated by an authoritarian organization (government) with the power to provide and enforce incentives.

Not only do these beliefs affect our decision-making, but they can impact how we view the larger world around us. To this end, they are important. And they are often slow to change.

This brings us to two articles (HT to Arts & Letters Daily) that caught my eye this morning. The first is from The American, the online journal of the American Enterprise Institute - an ideologically conservative think-tank. The other is from an ideologically more liberal newspaper, The Boston Globe.

As I read them, they both seem to conclude that societies that tend towards religious freedom (including freedom from religion) tend to be more economically successful. This reinforces one of the themes in my Global Economics class: that trade can have a positive effect on and is positively affected by the open exchange of ideas.

The studies cited in both do not imply a causal relationship, merely a correlation that indicates a need for further study. Take this excerpt from the end of The Boston Globe piece.

McCleary (a researcher at Harvard) says the lesson of their results isn't that governments should boost religion, but simply that they should recognize that it has some value, and avoid regulating it too heavily.

I would welcome your observations on these articles.

Property Rights, Trademarks, Patents and Board Games

A friend of mine uses a popular board game, Monopoly, at various points in his AP Economics course. He uses it to fill up the period after the exams, but he also uses it to discuss the rules of markets. He even has numerous versions. As a result, when this article (free at this writing) appeared in yesterday's edition of The Wall Street Journal, I was drawn into it.

It chronicles the long struggle of an economist who came up with something called Anti-Monopoly. But its value for the economics and personal finance teacher is its repeated focus on property-rights: specifically copyrights (and patents). Those are specific enforcements of property rights (some even refer to them as temporary monopolies) meant to encourage innovation. But we can have very interesting discussions about the idea.  For the institution, designed to foster innovation, can also stifle innovation.  The idea can be extended to many areas including pharmaceuticals, and technology.

I won't ruin the story for you, but there is a lot of usable information in the story that relates the concepts to an experience that many of your students are sure to have shared. And that provides a point of departure for deeper and more complex discussion.

I look forward to your comments.

Jeremy Bentham and David Hume on Health Care?

There's an interesting opinion piece in today edition of The New York Times. (HT to Greg Mankiw.)

Columnist David Brooks introduces us to two early thinkers in the realm of economics and philosophy: David Hume and Jeremy Bentham. His purpose in trying to give us an idea about these thinkers is to frame the health-care debate in what he sees as their terms. I can only presume that Mr. Brooks has read on both of these far more extensively than I have. What little I do know would question some of his characterization of Hume.

I do question his portraits, only because he seems to be taking liberties on how they both might have researched and arrived at their views. He aseems to presume that each was more representative of a given way of looking at a problem. He is certainly more comfortable in his portrayal than I would be, not having met either. I'm certain Mr. Bentham would do a thorough and detailed search of the issue. But I suspect Mr. Hume would not be as haphazard and prone to give up as Brooks portrays him. That seems counter to what I have learned about Hume.

As I said earlier, while I've not read extensively on either of these figures; I think I will try to learn more. I know Hume was a great influence on Adam Smith, and Bentham was a fried of David Ricardo and a mentor to John Stuart Mill. If you're interested in learning more, I can suggest two sites to use as starting points:

Concise Encyclopedia of Economics
Bentham
Hume

Internet Encyclopedia of Philosophy
Bentham
Hume

And, as always, I welcome any insights you may have.

What I've Been Reading - Part I

Followers of this blog know it's been an interesting summer. Despite everything, I always find time to read. I just haven't been able to put down my thoughts on the books I've read that I want to recommend. So I've got three to bring to your attention.

I finished the first book back in June. It's Saving Adam Smith by Dr. Jonathan Wight, an economics professor at the University of Richmond. I've gotten to know Dr. Wight through a number of different avenues. I'm glad that I have. His views on economics are stimulating and interesting - not always descriptors that go together.

Saving Adam Smith is a novel about economics and moral philosophy. And while you may initially wonder what the connection is, I direct you to the title. Most people know that Adam Smith is the father of modern economics. Most of them may even know the title of the work that earned him that title, An Inquiry into the Nature and Causes of the Wealth of Nations (WN). Fewer of that group may know that he was also a professor of philosophy; and that his major work in that field, The Theory of Moral Sentiments (TMS), was the work in which Smith took the most pride. But how does that work to make a novel? I can say "wonderfully."

The two main characters are an economics teacher at a small college, working to finish his dissertation; and an immigrant truck mechanic in Virginia who channels Adam Smith. They work their way cross country with some interesting experiences. But the value of the book lies less in the plot than in the way Wight brings together the ideas in Smith's two great works. The result is that we begin to see the popular view of Smith's capitalism for what it is - incomplete. By treating Smith's works as complements, Wight shows us what capitalism can be when tempered with moral understanding. And at various points, we see how the larger Smith - the Smith not bound by one work - offered insights into "new" areas of economic research.

I was particularly struck by this quote from WN, which seems to presage much of current happiness research:

Every man is rich or poor according to the degree to which he can afford the necessities, conveniences, and amusements of life. But that same richness, that same poverty has no essential corollary with his happiness.

Combine it with this passage from TMS and we have a foundation for classroom discussion about a variety of economic topics from choice and consequences to utility to income distribution to the role of government and policy:

Happiness consists in tranquility...What can be added to the happiness of the man who is in health, who is out of debt, and has a clear conscience? To one in this situation, all accessions of fortune may properly be said to be superfluous...Do they imagine that their stomach is better, or their sleep sounder in a palace than in a cottage? The contrary has been so often observed, and, indeed, is so very obvious...

The book is full of such opportunities, each presented in a context that clarifies Smith's meaning.

This is worth your effort if, for no other reason, you would like to deepen your understanding of Smith. But if you are seeking a text to augment your regular class readings in an enjoyable way while providing a platform for discussion through the semester, you may want to consider it. Additionally, if you're looking for a foundation for a summer reading list for next year's students, this would be a light and yet thought-provoking addition.

I welcome your comments.

Ticket Prices and the Boss

Back when I was first teaching, some of my students were enamored with a singer they only referred to as “the Boss.” After some time, I learned who they spoke of and came to appreciate why they spoke of him so highly. I even managed to get tickets to the “Born in the U.S.A.” tour when it was in Detroit (Pontiac Silverdome to be exact). But that's another story. However, as I’ve aged and as Bruce aged, our tastes diverged.

Come this morning, and I find a couple stories about the pricing and availability of concert tickets, and “the Boss” is the hook for both of them. The first was on NJ.com (HT to Mark Perry at Carpe Diem). The second I found when I got to one of The Wall Street Journal’s blogs.

It seems that one of the reasons it’s hard to score the best seats at a concert is that the artists typically hold some back for “family and friends.” Also, other contacts in the business (producers, label execs, etc.) have access to tickets ahead of the crowd – professional courtesy we might call it. And let’s face it, it’s not unlike athletes getting tickets for family and friends for “big games.” I wouldn’t be surprised if it’s part of the compensation package for some artists or athletes or whatever. But a question occurred to me, and I’d like to hear your thoughts.

Is there much difference in what goes on with tickets in the entertainment/sports industry from some of the scandals we've learned of in the financial industry? To me, it’s similar to insider trading. Pulling a quantity of tickets from the pool is bound to affect the market price. And it seems to me it’s not unlike skimming the best off the top for people on the inside. That seems similar to a Ponzi scheme. I’d love to hear some other views. After all, I believe in markets, but I think markets need to be fair. I don't see a problem with paying top dollar for tickets if the tickets are fairly available. And scalping seems to be about finding the true price of the service. But keeping them from the market seems different. Is it just accruing extra value due to time utility? Or is it a lack of transparency? There are a lot of ways to go with this, I think.

By the way, there are a couple of interesting podcasts on scalping at the EconTalk website. This one links to a discussion between host Russ Roberts and Duke economist Mike Munger. This second one is Russ Roberts talking to a scalper, a merchandiser, and even the police about scalping. They're both good and they both help stir the water.

This post references the following Keystone Economic Principles:
8. Quantity and quality of available resources impact living standards.
and
9. Prices are determined by the market forces of supply and demand… and are constantly changing.

Game Theory

I suspect many of you don't teach game theory. But for those who might like to introduce the idea, this is a great video to introduce the "prisoners' dilemma". (HT to Greg Mankiw.)

This post relates to the following Keystone Economic Principles:
1. We all make choices.
3. All choices have consequences.
and
5. Incentives produce “predictable” responses.