Some Resources for Teachers (and Students) by Russ Roberts

Cafe Hayek.

With the start of a new school year, just wanted to highlight some resources for teachers I’ve created over the years that may be of use. Please feel free to share these freely. They all are without charge and sharing is encouraged.

Ten Key Ideas–this is my page of essays at the Library of Economics and Liberty. Each essay covers a fundamental principle of economics. No background is required but even more advanced students will learn something, I hope. There are also links to additional resources related to the principles.

A Little Theory–these are the beginnings of a textbook exploring the main topics in intermediate price theory or microeconomics but again, with some effort, they can be of use to a beginner or a more advanced student. (The page also includes the links to some other stuff including the Ten Key Idea Essays and two visual essays on standard of living and the trade deficit. Topics covered in A Little Theory include supply and demand, the theory of the consumer and the theory of the competitive firm. (There’s also material on consumer surplus, producer surplus, and efficiency, material I used to teach but stopped teaching about ten years ago when I decided it wasn’t really meaningful. But that’s a minority opinion so it may be of use to you.) My approach to supply and demand is a little unusual with a strong emphasis on market forces tending toward equilibrium (a very unrealistic but surprisingly useful assumption for analyzing price controls, taxes, and subsidies). I am proudest of this short essay where I try to integrate supply and demand with Hayek’s Use of Knowledge in Society.

EconTalk–there are many podcasts that cover basic economics. Feel free to assign these to your students. Some of them come with guides that have very good discussion questions. Try the conversations with Mike Munger or my co-host, here, Don Boudreaux.

Finally, it is always a good time to revisit the Keynes-Hayek rap videos. Here for your viewing pleasure is Fight of the Century.

Alternatives to austerity

Russ Roberts.

What should you do when you find out that you can’t pay your bills? You have two choices. You can default on your obligations or you can borrow money to make up the difference. If your obligations are denominated in your own currency, then you have the option of inflation to reduce the real value of what you pay your creditors. This is a form of default. It is not complete but it is a partial reneging on your obligations.

I recently tweeted (follow me @econtalker) that sometimes reducing spending isn’t a macroeconomic strategy but something that is forced on you by reality. One response you hear to this is that reducing spending is bad for your economy when you’re in a recession. Maybe. I’m not convinced. Could be, but even if it’s true, if people don’t want to lend you money anymore or only want to lend you money at an extremely unattractive rate, that fact that your past profligacy now demands an un pleasant solution is simply an aspect of reality.

Those who oppose spending cuts when the bond market no long likes you reminds me of a metaphor I recently heard from a student at SMU when I visited the campus (and if that student reads this, please email me and remind me of your name.) He used the metaphor of a restaurant patron who discovers that he doesn’t have enough money to pay the bill. No problem. Just keep ordering more food! That way you can put off the moment of reckoning. That is not a practical solution for irresponsible customers or countries who have gone too far. Greece is in this boat. They may soon be joined by others. I hope the US gets on a different boat.

Green cronies

Russ Roberts.

Green cronies come in two flavors–the energy sector and the financial sector. Here’s the headline from the ABC News website:

Green Firms Get Fed Cash, Gives Execs Bonuses, Fail.

Just like the financial sector except in the financial sector they don’t always fail. But it’s the same deal. Use other people’s money to enrich yourself.

Here’s how the story opens:

President Obama’s Department of Energy helped finance several green energy companies that later fell into bankruptcy — but not before the firms doled out six-figure bonuses and payouts to top executives, a Center for Public Integrity and ABC News investigation found.

Take, for instance, Beacon Power Corp., the second recipient of an Energy Department loan guarantee in 2009. In March 2010, the Massachusetts energy storage company paid cash bonuses of $259,285 to three executives in part due to progress made on the $43 million energy loan, Securities and Exchange Commission records show. Last October, Beacon Power filed for Chapter 11 bankruptcy.

EnerDel, maker of lithium-ion battery systems, landed a $118.5 million energy grant in August 2009. About one-and-a-half years later, Vice President Joe Biden toured a company plant in Indiana and heralded its taxpayer-supported expansion as one of the “100 Recovery Act Projects That Are Changing America.”

Two months after Biden’s visit, EnerDel corporate parent Ener1 paid $725,000 in bonuses to three executives — including $450,000 to then-CEO Charles Gassenheimer, who led Biden on the tour. This January, Ener1 filed for Chapter 11 bankruptcy protection.

How do we stop this?

Inequality and Stagnation

Russ Roberts.

There is now a widely held view that the last 10 or 20 or even 40 years have been a time of great stagnation for the average American. Yes, the overall economy has grown, but all or most or nearly all of the gains have gone to the top 1% or top 10% or top 20%.

These claims are accompanied by various data that seem to confirm the claim.

These claims conflict with casual evidence available to people over a certain age who remember the 1970′s or 1980s. We are an immensely more prosperous nation than we were back then. Our cars are nicer. Our homes are bigger. Our toys are more clever. And more people have more of them. Some things are more expensive but that is because more people have access to those things–such as health and education–they are labor intensive and we’ve driven up their price. But these kind of claims are not totally convincing, nor should they be. The fact that the world looks dramatically more prosperous may be due to cloudy vision, or bias. But they do cause you to wonder if the data that are being used to measure stagnation are not completely accurate or perhaps the data are distorted by the way they’re collected.

Don and I have both written about these issues and the data problems with the claims many times.

One source of data that people often use is median household income. It’s a good idea to use the median rather than the mean–the mean can be very misleading. For example, the mean income of Harvard graduates who studied economics is going to be very high in the year that Jeremy Lin graduated. John Elway, another econ grad, pulled up the mean dramatically for Stanford grads that year.

But there is a problem with median household income and those who use it relentlessly to grind their policy axes never mention it. The problem is that when household structure is unstable, comparing medians over time is a very poor way of assessing the progress of the typical person.

As I have written many times, rising divorce rates in the 1970′s for example, meant that the number of households in the US grew 26.7%. Population grew only 11.5%. There was an increase in the number of households as one household became two. If both people were working, that alone would likely decrease median household income. If only one of the spouses was working, it was usually the man. The former wife found herself in the labor force unexpectedly. Her income is likely to be below the median. Both of these effects create new households with incomes below the median, dragging down the median over time.

It also lowered the home ownership rate. Politicians interpreted this fall as a problem with the housing market. It had nothing to do with the housing market. It had to do with a change in the marriage market.

So I have written about this many times. I’ve never thought about the fact that an increase in the divorce rate isn’t the same for every demographic group. Here is Charles Murray’s measure of the difference between rich and poor in the divorce rate in Coming Apart (as reported by Bryan Caplan):

The Fishtown folk at the top of the graph have never attended college. The Belmont people at the bottom have at least a bachelor’s degree. On average, the Fishtown folk are poor. The Belmont folk are much richer.

If the poorest people have the highest divorce rates, the increase in households in the 1980′s and beyond are going to come from the poorest people, adding numbers of households below the median and pulling the measured median down as a pure statistical artifact. That fall in median household income tells you nothing about the health of the economic system. It’s telling you something about the health of American marriages. (The increase in college attendance over this time period softens the magnitude of the impact, btw. But it doesn’t change it.)

You can’t conclude then, that “people are getting worse off.” Or “the average person has had no gains.”

The average (or more accurately, the median) person in 2011 is not the same person who was the median 10 and 20 and 30 and 40 years ago. To figure out how people are doing over time, you have to follow the same people over time. When you do that, people are getting richer across the income distribution (though the picture for blacks is mixed) and the biggest gains go to the poor (true of both whites and blacks).

And in all of these comparisons, the data on income are corrected for inflationusing very imperfect price indices.

Though I think the consensus on these issues is wrong, we will be very lucky if all it leads to is higher taxes on the rich. I don’t think those have very much effect. The more worrisome change would be policies that follow from the view that the data on income distribution show that capitalism doesn’t work very well for the average person and that more radical change is needed. In fact, it is cronyism that doesn’t work well for the average person–the rewarding of special privileges to the politically powerful doesn’t do much for the average.

Returning to the classics

Russ Roberts.

I recently had a chance to talk with Steven Kates and he drew my attention to an essay of John Stuart Mill, Of the Influence of Consumption on Production. There really is nothing new under the sun. The obsession with consumption is just a little older than Keynes. Mill’s essay, an attack on the idea that inadequate consumption is a problem, was published in 1844. Here is how it begins:

Before the appearance of those great writers whose discoveries have given to political economy its present comparatively scientific character, the ideas universally entertained both by theorists and by practical men, on the causes of national wealth, were grounded upon certain general views, which almost all who have given any considerable attention to the subject now justly hold to be completely erroneous.

II.2
Among the mistakes which were most pernicious in their direct consequences, and tended in the greatest degree to prevent a just conception of the objects of the science, or of the test to be applied to the solution of the questions which it presents, was the immense importance attached to consumption. The great end of legislation in matters of national wealth, according to the prevalent opinion, was to create consumers. A great and rapid consumption was what the producers, of all classes and denominations, wanted, to enrich themselves and the country. This object, under the varying names of an extensive demand, a brisk circulation, a great expenditure of money, and sometimes totidem verbis a large consumption, was conceived to be the great condition of prosperity.

II.3
It is not necessary, in the present state of the science, to contest this doctrine in the most flagrantly absurd of its forms or of its applications. The utility of a large government expenditure, for the purpose of encouraging industry, is no longer maintained. Taxes are not now esteemed to be “like the dews of heaven, which return again in prolific showers.” It is no longer supposed that you benefit the producer by taking his money, provided you give it to him again in exchange for his goods. There is nothing which impresses a person of reflection with a stronger sense of the shallowness of the political reasonings of the last two centuries, than the general reception so long given to a doctrine which, if it proves anything, proves that the more you take from the pockets of the people to spend on your own pleasures, the richer they grow; that the man who steals money out of a shop, provided he expends it all again at the same shop, is a benefactor to the tradesman whom he robs, and that the same operation, repeated sufficiently often, would make the tradesman’s fortune.

II.4
In opposition to these palpable absurdities, it was triumphantly established by political economists, that consumption never needs encouragement. All which is produced is already consumed, either for the purpose of reproduction or of enjoyment. The person who saves his income is no less a consumer than he who spends it: he consumes it in a different way; it supplies food and clothing to be consumed, tools and materials to be used, by productive labourers. Consumption, therefore, already takes place to the greatest extent which the amount of production admits of; but, of the two kinds of consumption, reproductive and unproductive, the former alone adds to the national wealth, the latter impairs it. What is consumed for mere enjoyment, is gone; what is consumed for reproduction, leaves commodities of equal value, commonly with the addition of a profit. The usual effect of the attempts of government to encourage consumption, is merely to prevent saving; that is, to promote unproductive consumption at the expense of reproductive, and diminish the national wealth by the very means which were intended to increase it.

II.5
What a country wants to make it richer, is never consumption, but production.

He was on to something.

An Interview with Milton Friedman

By Russ Roberts.


Audios: First part & second part.



Extracts:

Russ Roberts: Milton, let's turn to Capitalism and Freedom. In the book, you lay out the principles of what you call liberalism. Sometimes you call it liberalism, sometimes 19th Century liberalism. Sometimes you've called it classical liberalism. And you advocate there a limited role for government in the legal and monetary system and maximal freedom and responsibility for the individual. And in that book, which was published in 1962, but based on lectures, I think, that you gave in the late 1950s—

[...]

Milton Friedman: And what's happened is that the public attitude has changed tremendously. In 1945, 1950, at the end of the war, intellectual opinion was almost wholly collectivist. Everybody was a socialist. They may not have used the term but that's what they were. However, practice was not socialist. Practice was free enterprise.

The role of government at that time was such smaller than it has since become and from 1945 on to 1980, what you had was galloping socialism. Government took over more and more control. Government spending went from about 20 percent of national income—government federal, state and local—to about 40 percent of national income until Reagan came along.

But Reagan was able to do what he did because in that 20-year period, intellectual opinion had changed. What had before been a hypothesis was now fact. You now could see what the government did and people didn't particularly like what the government did. So public attitudes about government had changed very much over that period and I think maybe Capitalism and Freedom added a little of that but I think experience was much more responsible.

[...]

Milton Friedman: The basic principles that we believe in are going to stay the same for the next thousand years. That aspect of it will never go out of date. What goes out of date are the particular applications. We still find Adam Smith's book, Wealth of Nations well worth reading even though it's published in 1776.

[...]

Russ Roberts: I know you can give us the empirical evidence. Let me ask you about another idea in Capitalism and Freedom that you later elaborated on in a Sunday New York Times magazine story in the early 1970's. You wrote there: "There is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game which is to say engages in open and free competition without deception or fraud."

[...]

Milton Friedman: The truth of the matter is that the only way anybody can make money is by producing something that people want to buy, but it can give away money without meeting that restriction.

Russ Roberts: That reminds me of one explanation for why people, I think, lean on businesses to indulge other activities besides producing products well. It's the Willie Sutton theory of why you rob banks—that's where the money is.

The Chicago City Council recently passed an ordinance requiring large retailers—mainly Wal-Mart and Target—to pay at least $10.00 an hour in wages and $3.00 an hour in benefits.

If you ask the proponents why should Wal-Mart finance a higher standard of living for their workers, why should the investors of Wal-Mart, the stockholders, and Target, be the ones that finance that, I think the answer would be "Well, they have the money."

That ignores, of course, the incentive effects that then result. They're the last people that you'd want to have finance this because it discourages them from creating jobs for low skill people. But I think that first order effect of "Well, they've got the money, they write the checks so therefore they've got the responsibility" has a huge appeal to the average person.

Milton Friedman: But it's always been true that business is not a friend of a free market.

[...]

Milton Friedman: But the real puzzle—puzzle isn't quite the right word—the real problem here is where do you find the support for free markets? If free markets weren't so damn efficient, they could never have survived because they have so many enemies and so few friends. People think of capitalism or free markets as something that obviously is supported by business. People think that if a business party is a party in politics, it will promote free market. But that's wrong. It will be in the self-interest of individual businesses to promote a tariff here and a tariff there, to promote the use of ethanol—

Russ Roberts: Special regulations for its competitor that apply just by chance to its competitors but not to itself—

Milton Friedman: That's right.

Russ Roberts: —or that they already comply with but their competitors don't happen to comply with.

Alex Tabarrok on Innovation.

By Russ Roberts.

Audio.

Extracts:

But there are exceptions, as you point out. So, you would not get rid of patents on pharmaceuticals. Why? So, pharmaceuticals are really the classic case of where the innovation-to-imitation costs are extraordinarily high. It costs about a billion dollars to create a new pharmaceutical. The first pill costs a billion dollars; the second pill costs 50 cents. So, that's a classic case where imitation costs really are low. That's the best case for patents, in a field like that. But my question is: Why does every innovation deserve or require the same 20-year patent? Why do we have a system which gives a one billion dollar pharmaceutical--where there's $1 billion in research and development costs--we give that a 20-year patent and one-click shopping gets the same 20-year patent? That makes no sense whatsoever. So, what I suggest is a more flexible system. I'd like to have a 20-year patent, maybe a 15-year patent, maybe a 3-year patent. Something like that. And then we could say: You want to apply for a 3-year patent? We are going to get this through the system quickly; we won't look at it so much. Hurdle to make the case for it smaller. Exactly. You want a 20-year patent, though: You'd better show us that you really are deserving and put some costs in there. Now, a side-note on the pharmaceuticals--I'm surprised you didn't mention this. Maybe you are just trying to be strategic. It's true it costs a billion dollars to develop a new drug; but there's a reason it costs a billion dollars. A lot of that cost is to no avail. It's replicating tests that sometimes already happened in Europe. A lot of it is the regulatory structure around the drug industry. People who are worried about drug pricing--one of the ways to solve the drug pricing problem is to remove the patent or shorten the patent. I'd like to shorten, reduce the research and development costs and the approval costs. Are you with me there? Absolutely. So, we have drug lag and even more importantly, we have drug loss. There are lots of drugs today which probably could be invented, but people know going in the costs are just too high. So, sure, I would like to see those costs come down. As a theoretical point, however, I still think that the pharmaceutical industry is the best case for a patent in that the innovation/imitation costs are very high. But there are other things we can do to bring those costs down. 

[...]

You are looking for evidence of how innovation has been reduced in highly innovative fields. But these highly innovative fields--the Internet and smart phones and so forth--they've been innovative not because of these patents but despite them. And I think the situation is becoming worse in these fields. So, what we are seeing right not is firms like Google and Microsoft buying up these patent arsenals. And they are not doing it because they need access to those technologies. They are doing it because another firm can't sue them and prevent them from innovating. Well, what's bad about that? What's bad about that--I call this the Mutually Assured Destruction--and mutually assured destruction I think was not the greatest way to maintain peace. Probably not the greatest way to maintain innovation either. And I think what the real problem of this idea of innovation through strength--we will be able to innovation because we have this patent arsenal behind us--is that small firms don't have that. So, we are seeing a kind of Intellectual Property (IP) feudalism. We are seeing these very big companies get ahold of these arsenals so nobody can attack them. But that means the small firms can't attack them either. Small firms are being crushed. And what do we know about really disruptive creative disruption? That often comes from the small firms. So, I am worried that we are going to see--yes, you can get innovation if it's from big Google, but what about the little google, the google of 20 years ago, the next google? Which doesn't exist because it can't have the legal department, at its small size, that its competitors have. So, the innovation we are not seeing, that's the invisible innovation. We are not seeing it; we can't look for where it is. 

[...]

Any other ideas? Would you stop some things from being patented at all? The remarkable thing is that the extension of patents to software and semi-conductors and business methods and the broadening of the interpretation of these patents has been almost all judge-driven. This is actually not legislation so much. It's judges. Judges have decided to interpret these patents in these broad ways. And they don't have to do that. The law hasn't actually changed that much. I talk a little in the book about Thomas Edison and the light bulb, and there actually was a previous patent. Sawyer and Mann had patented to make the incandescent filament. Any fibrous or textile material. And Edison came along, and he tried 5000 different materials before he hit on the one--it happened to be bamboo, and not just any bamboo but bamboo that he had dispatched a man to Japan to find the right bamboo. So he had gone through all of these different types of materials and yet Sawyer and Mann sued him and said: We have a patent on any fibrous material. And the court looked at that and they said, this is crazy. You can't give such a broad patent. Sawyer and Mann didn't actually investigate all 5000 of these. And if we were to give such a broad patent, this would actually discourage innovation. So, they said no to the Sawyer-Mann patent and let Edison go ahead. We could do more of that today. The trouble today is we have not done what the judges did in the Sawyer and Mann case. We've said: You can get a patent on any fibrous material, analogously in many other fields. We've given these broad patents. And that actually discourages people from doing the real work of implementing, of creating a product. Now you can just patent an idea. It's like a science fiction author can patent ideas; long before they are every even possible to be implemented you can patent the idea. Even before it's technologically possible. And that has actually discouraged innovation. 

[...]

A point I want to make about education, by the way, is: There's probably no other area where we can have as much as an opportunity to increase innovation and growth than in education. Think about it this way: Almost all U.S. workers will go through the U.S. education system. Not all, but almost all. So, think about if we improved our education system tomorrow. Well, at first we are only going to get a small gain because only the new workers will come in under the new system. But as we get more and more workers coming in under the improved system, that means that we have 100 million people educated a little bit better. We are talking about trillions of dollars of potential gains there. So there's no other place, bottleneck, where we can have as much influence on the U.S. economy or society as the U.S. education system, because it's where all of our workers are going to be channeled at some point, through that system. So a small change there means a big change over the next 40 years. That sounds good; I'm not sure that's true. A lot of what we learn in life, we don't learn in a classroom, and so I'm not sure how--I think there are many ways in which they will become more productive and skilled, and we figure those ways out. And we sometimes do that in spite of our education. And sometimes our education is what allows us to do it. I think it's fascinating--you think about your education and mine--we logged a lot of hours in the economics classroom as undergrads and graduate students. And we learned a lot there. We learned a huge amount. But I'm amazed at how much I've learned since then. You could argue that's what helped me learn how to learn. Certainly there was a basic framework there. But we're in a really narrow technical field. Somebody who goes through the standard K-12 educational system and then goes on to study, it doesn't matter what it is, in college--I just have a feeling a lot of what they learn comes afterwards anyway. Maybe we ought to be shortening the whole process and getting people out into the world at an earlier age. If they were mature enough. Maybe. I think there's some truth to that for college for sure. For K-12, I think it's going to be more important. I would say you are right--people like you and I who have alternative sources of education, our parents, family, friends, peer group. All of these things are working in our advantage. But for a lot of kids in high school, they don't have those other factors working in their advantage. So the one we can really move, the one lever we have, we need to do everything we can to shift that lever. I totally agree.

[...]

[H]igh-skilled immigration I think is such an obvious, such a completely clear thing to do, that it's shocking that we haven't done it already. It's literally easier to win the lottery than it is for a person of advanced and high skills to get a visa into the United States; and what I mean by that is we give out more visas in the lottery program--random allocation--than we do to these people of extraordinary ability. Now that's insane. How can you have a system like that, where you just randomly give out visas and there's more of them than you give to people of extraordinary ability? That's crazy. We need to cut back on regulation and we need to think about it as not simply thinking about regulation as each regulation comes up. We need to think about pebbles in the stream. We need to think about what happens when you accrete, what happens when these things build up. I would like to see us change our mindset from the warfare-welfare state towards innovation.

Krugman, Keynes, and war. Russ Roberts

Krugman writes:

First things first: Military spending does create jobs when the economy is depressed. Indeed, much of the evidence that Keynesian economics works comes from tracking the effects of past military buildups. Some liberals dislike this conclusion, but economics isn’t a morality play: spending on things you don’t like is still spending, and more spending would create more jobs.

Interesting that Valerie Ramey’s work that concentrates on military build-ups (because they are reliably exogenous) often finds a multiplier that is less than one, meaning that government spending crowds out private spending rather than spurring it on. Barro and Redlick’s work is similar. Where is the evidence that military spending stimulates the private sector? What does Krugman have in mind?

As the Hayek character in The Fight of the Century says in response to the claim that WWII ended the Great Depression:

Wow. One data point and you’re jumping for joy
The last time I checked, wars only destroy
There was no multiplier, consumption just shrank
As we used scarce resources for every new tank

Pretty perverse to call that prosperity
Rationed meat, rationed butter… a life of austerity
When that war spending ended your friends cried disaster
Yet the economy thrived and grew faster

Read original post in Cafe Hayek. 

The Great Stagnation in the UK. Russ Roberts

Rise in real earnings % 1978-2008 (male full-time)
Medical practitioners	153
Judges, barristers, solicitors	114
Secondary school teachers	67
Quantity surveyors	65
Accountants	60
Welfare/social workers	60
Median (mid-point of sample)	57
Electrical and electronic engineers	55
Bricklayers	37
Architects; town planners	36
Mechanical engineers	34
Skilled motor mechanics	34
Carpenters and joiners	30
Plasterers	30
Toolmakers/toolfitters	21
Heavy goods vehicle drivers	19
Bus and coach drivers	11
Sheet metal workers	8
Bakers	-1
Packers, bottlers, fillers, canners	-3
Fork lift truck drivers	-5

So the median (worker? occupation?) grew a measly 57 percent in real terms over 30 years. That’s 2% per year. That’s a crisis? That requires radically transforming society? They’re even crazier across the pond than we are here.

Read full.

Fuente: Francisco Capella.

What we’ve learned about Obama (and power) by Russ Roberts

Cambien Obama por Zapatero y el artículo es válido igualmente.

Quién iba a pensar que el gobierno presidido por Zapatero iba a vender bombas de racimo a Gadafi hasta 2007, y ahora apoyar una guerra contra Libia, en vez de promover la alianza de civilizaciones, o justificar el asesinato de Osama bin Laden.

What we’ve learned about Obama (and power) by Russ Roberts. (En español)

Go back to the campaign of 2008, McCain (remember him?) and Obama. Suppose in the middle of the campaign, someone returned from the future and told you that by 2011, the President of the United States will have kept Guantanamo Bay open, launched a war against Libya, and crossed covertly into an ally’s territory to assassinate Bin Laden. Who would you think that would be? McCain or Obama?

Couldn’t be Obama. The man who was repulsed by American exceptionalism, who pledged to close Guantanamo Bay, the man who said the way to deal with bad guys is to talk to them, not attack them.

What happened?

Three possibilities come to mind. The first is that politicians on the campaign trail lie and dissemble. They need to motivate their base, craft an image, and so on.

The second possibility comes from a CIA economist who told me in the middle of the 2008 campaign that when Obama becomes President, he’ll know what Bush knows (meaning horrific and frightening classified information) and he’ll do the same thing as Bush.

The third possibility is that when you get into power, you change. It’s fun to play video games with real lives. You can’t help yourself. It’s easy to convince yourself (given that classified information) that you have no choice.

I think it’s a mix of two and three. I think Obama the candidate really thought he would be different. President Obama is not so different.

Dyson on Economics by Russ Roberts

I’m interviewing Freeman Dyson tomorrow for EconTalk. Here is what he says about climate change.

When I listen to the public debates about climate change, I am impressed by the enormous gaps in our knowledge, the sparseness of our observations and the superficiality of our theories. Many of the basic processes of planetary ecology are poorly understood. They must be better understood before we can reach an accurate diagnosis of the present condition of our planet. When we are trying to take care of a planet, just as when we are taking care of a human patient, diseases must be diagnosed before they can be cured. We need to observe and measure what is going on in the biosphere, rather than relying on computer models.

Replace “climate change” with “macroeconomics.” Same problem.

Why inequality is a red herring by Russ Roberts

Inequality is a red herring. Or maybe a poisonous herring. It is the symptom, not a disease, and misunderstanding it leads to bad medicine. Here is Alex Tabarrok on what he and others call Winner-Take-All economics:

J.K. Rowling is the first author in the history of the world to earn a billion dollars. I do not disparage Rowling when I say that talent is not the explanation for her monetary success. Homer, Shakespeare and Tolkien all earned much less. Why? Consider Homer, he told great stories but he could earn no more in a night than say 50 people might pay for an evening’s entertainment. Shakespeare did a little better. The Globe theater could hold 3000 and unlike Homer, Shakespeare didn’t have to be at the theater to earn. Shakespeare’s words were leveraged.

Tolkien’s words were leveraged further. By selling books Tolkien could sell to hundreds of thousands, even millions of buyers in a year – more than have ever seen a Shakespeare play in 400 years. And books were cheaper to produce than actors which meant that Tolkien could earn a greater share of the revenues than did Shakespeare (Shakespeare incidentally also owned shares in the Globe.)

Rowling has the leverage of the book but also the movie, the video game, and the toy. And globalization, both economic and cultural, means that Rowling’s words, images, and products are translated, transmitted and transported everywhere – this is the real magic of Ha-li Bo-te.

Rowling’s success brings with it inequality. Time is limited and people want to read the same books that their friends are reading so book publishing has a winner-take all component. Thus, greater leverage brings greater inequality. The average writer’s income hasn’t gone up much in the past thirty years but today, for the first time ever, a handful of writers can be multi-millionaires and even billionaires. The top pulls away from the median.

The same forces that have generated greater inequality in writing – the leveraging of intellect, the declining importance of physical labor in the production of value, cultural and economic globalization – are at work throughout the economy. Thus, if you really want to understand inequality today you must first understand Harry Potter.

This is actually an old post of Alex’s. He dredged it up to respond to an observation by Ezra Klein:

The top 1 percent, for instance, has gone from capturing about 8 percent of the national income to 18 percent. But there’s no obvious skills differential between workers in the top 1 percent and the workers directly beneath them. It’s not like hedge fund managers are the only guys able to use Excel.

Alex’s point is that excellence gets leveraged. Taleb makes the same point between the 14 minute mark and the 25th minute of this podcast. I think he writes about it in the Black Swan.

That’s why focusing on inequality per se is so poisonous. Would the world be a better place if JK Rowling hadn’t dared to write the Harry Potter series–if she’d given up and waited on tables instead of risking so much? Would the world be a better place if Sergey Brin and Larry Page had never created Google? Would the world be a better place without LeBron James? All of these people create inequality. They also make the world a better place.

Klein might be right about some of the high returns of finance. So let’s get rid of the policies that make their returns high but not socially productive. But inequality is not the problem.

My only quibble with Alex is that it’s not really a winner-take-all world. It’s more of a winner-take-lots kind of world. If LeBron James had decided to be a social worker, yes, someone else (Kobe, maybe) would be considered the best player alive and that person would get some extra rents for being the best. But LeBron’s grace (and sometimes lack of it off the court) is unique. The creator of the best search engine gets lots of rents but that creates tremendous opportunities for so many others. JK Rowling’s success opened the door to many other fantasy series (Pendragon for one) that would have been less successful. People still enjoy the second best fantasy series. And some disagree that Harry Potter is the best.

Health insurance for the elderly? by Russ Roberts‏

Blroll commenting on this post, writes:

How or why would private insurance companies insure anyone over the age of 65? I think any system private or governmental would require younger participants to support retirees.

I’ve heard this point made many times and it’s half or maybe a quarter right. Private insurance for old people in the absence of government intervention is unlikely. The reason is that old people are likely to get sick. The premiums that would make coverage profitable would probably be very high. Would people pay that premium? Probably not. The point of insurance is to insure against the unexpected. You are willing to pay a premium, literally, to avoid a large unpredictable expense. But no one wants to pay a premium for an expected, predictable expense. And when you’re old, getting sick is predictable and expected. So when you’re old, you’d be unlikely to buy private insurance.

[EDIT: Should have made it clear (as some commenters have correctly pointed out), that I meant private insurance that pays for everything, lifesaving (bypass surgery) and the simply pleasant (a better knee). Yes, even old people might want catastrophic coverage, but that too would be very expensive because it is likely. But as I point out in the next paragraph, it's the health care that's the issue, not the insurance. Health care is going to cost the elderly more. That is the problem not some problem in the insurance market. The expense of health care for the elderly is made worse by the fact that EVERYTHING is paid for by someone else other than the consumer and not just care that is most valued.]

But it isn’t health insurance that keeps you healthy. It’s health care. Would old people be able to buy health care? Sure. It just wouldn’t be free. That would be unpleasant in some dimensions, but pleasant in others. One of the benefits would be that health care would be cheaper because some procedures would be skipped. Another would be not forcing others to pay for your health care. For people who are poor or whose families are poor, we might expect to see private charity or even government assistance such as medicaid. But universal health insurance for the elderly, rich or poor, is a bad idea.