The competition to see who can best cooperate with consumers

That’s a great way to view competition between businesses.

Credit David Henderson’s post on EconLog, where he is justifiably annoyed at the use of battle terms in a Wall Street Journal article to describe competition between two airlines for consumers flying to and from Seattle. Henderson thinks the author, and many like her, neglect the benefits to consumers when framing business competition as a battle.

Also, credit a commenter on his post, Julien Couvreur, for pointing to and summarizing a Don Boudreaux post about the same thing. Couvreur writes:

…economists tend to talk a lot about competition, but it is competition for cooperation (who can cooperate best with consumers). This is hardly war.


Signals v Causes: The American Nightmare?

An effective political and election strategy has been to identify the signal of the American dream (e.g. home ownership, college education, preschool) as a cause of the American dream — or the American dream itself, and then promise to make it easier for people to achieve it.

Hopefully, we are learning that this actually undermines the incentives and feedbacks that made those things signals of the American dream in the first place, turning them into nightmares.

It turns out that getting a college degree doesn’t cause the American dream. Rather, all the hard work and gumption that use to go into getting the relatively more scarce and useful college degrees of the past was truly what set those kids apart and put them on the path to prosperity and independence.

Change the college degree from a sorting out mechanism to an easy path and the college degree no longer is a reliable signal of those hard workers to employers. Then the nightmare ensues.

As this Wall Street Journal editorial describes:

A lot of these borrowers can’t generate the income to service this debt, especially when so many of them can’t get decent jobs. The left-leaning Center for Economic and Policy Research recently noted that among recent college graduates age 22-27, a full 45% were underemployed in 2013, meaning they were either unemployed or doing jobs that typically don’t require a four-year college degree.

Of course, it doesn’t help that politicians have also mucked with the incentives of the innovation economy, reducing its capacity to create job opportunities for these folks.

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A very important fact, indeed

I agree with Yuval Levin, from his EconTalk podcast, about a simple point and an important fact:

I think Conservatives today don’t often enough make the simple point: that, when it comes to economics the market system that we are advocating has been the best thing that has ever happened to the poor in human history. And has dramatically reduced extreme poverty around the world and is still doing it right now; has been the way in which the needy and the vulnerable have been lifted up. It’s worked far better than anything else we’ve every tried, far better than anything the Left has tried to do economically. And that should matter. That’s a very important fact.

I hear this point made on occasion in left/right debates by the right. I find it interesting at how quickly it gets swept under the rug by the left. It’s usually with a red herring like, “but capitalism has its problems, too.” What I find interesting is how uninterested the left is in examining this important fact.

It goes back to the Levin quote in the previous post, “…the left takes for granted a thriving economy that just comes in the background…

This very important fact, in fact, was key in dislodging my liberal thinking. Before it was pointed out to me, I too, took the thriving economy for granted.

But, when it was pointed out to me, it was eye opening. Rather than sweeping it under the rug, I went silent and thought, if that’s right, how could I be against it? Isn’t it achieving the very thing that I say I want?

Levin went on to say:

Beyond that, the kind of society we are arguing for is a society that for very solid reasons we believe is grounded in a way of life that helps advance the moral good. A way of life that helps people build the sort of lives they want. That makes government more effective at solving problems that people confront. That gives people the room to build the lives they want and protects them from the worst risks that they might confront in modern life, rather than a society that says: This is the way, and you have to do it. Which, again and again, this is how the Left approaches the life of our society: centralize, consolidate, exercise authority to push people into the right grooves.

I couldn’t help to think of this quote when I read this Wall Street Journal op-ed on the politics around the federal nutrition standards for school cafeterias.

The nutrition mandates from 2010 First Lady bill centralizes nutritional choices for school lunches to “push people into the right grooves.”

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Failing sucks, get over it

The Wall Street Journal published an adaptation of Admiral William McRaven’s commencement address to the University of Texas about life lessons learned at Navy SEAL Training that is worth a read.

Here are a couple prescient lessons.

Get over failing:

Several times a week, the instructors would line up the class and do a uniform inspection. It was exceptionally thorough. Your hat had to be perfectly starched, your uniform immaculately pressed and your belt buckle shiny and void of any smudges.

But it seemed that no matter how much effort you put into starching your hat, or pressing your uniform or polishing your belt buckle, it just wasn’t good enough. The instructors would find “something” wrong.

For failing the uniform inspection, the student had to run, fully clothed, into the surfzone and then, wet from head to toe, roll around on the beach until every part of your body was covered with sand. The effect was known as a “sugar cookie.” You stayed in that uniform the rest of the day—cold, wet and sandy.

There were many students who just couldn’t accept the fact that all their effort was in vain. That no matter how hard they tried to get the uniform right, it was unappreciated.

Those students didn’t make it through training. Those students didn’t understand the purpose of the drill. You were never going to succeed. You were never going to have a perfect uniform.

Sometimes, no matter how well you prepare or how well you perform, you still end up as a sugar cookie. It’s just the way life is sometimes.

If you want to change the world, get over being a sugar cookie and keep moving forward.

More on failing, don’t afraid of “the circus”, in fact it’s how you respond to failure that may build your success in the future:

Every day during training you were challenged with multiple physical events. Long runs, long swims, obstacle courses, hours of calisthenics—something designed to test your mettle.

Every event had standards, times that you had to meet. If you failed to meet those standards, your name was posted on a list and at the end of the day those on the list were invited to a “circus.”

A circus was two hours of additional calisthenics designed to wear you down, to break your spirit, to force you to quit. No one wanted a circus. A circus meant that for that day you didn’t measure up. A circus meant more fatigue, and more fatigue meant that the following day would be more difficult—and more circuses were likely.

But at some time during SEAL training, everyone—everyone—made the circus list. Yet an interesting thing happened to those who were constantly on the list. Over time those students, who did two hours of extra calisthenics, got stronger and stronger. The pain of the circuses built inner strength—built physical resiliency.

Life is filled with circuses. You will fail. You will likely fail often. It will be painful. It will be discouraging. At times it will test you to your very core.

But if you want to change the world, don’t be afraid of the circuses.

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Experts vs Trial and Error

Writing in the Wall Street Journal, Nina Teicholz casts doubt on the ‘conventional wisdom’ that saturated fat causes heart disease (thanks to The Pretense of Knowledge for the pointer).

Of course, Gary Taubes laid out much of the same story line in his book, Good Calories, Bad Calories. I mention it here and here.

Teicholz mentions President Eisenhower’s heart attack. She didn’t mention the additional detail that Taubes provided. His doctor cut his cholesterol intake and his cholesterol levels went up.

Teicholz, perhaps, summarizes the beginning of the Type II diabetic and obesity trends when unreliable health studies were used to guide the American diet:

As Harvard nutrition professor Mark Hegsted said in 1977, after successfully persuading the U.S. Senate to recommend Dr. Keys’s diet for the entire nation, the question wasn’t whether Americans should change their diets, but why not? Important benefits could be expected, he argued. And the risks? “None can be identified,” he said.

This is where I’ve gained much appreciation for what Nassim Taleb identified as the expert problem, as he describes here.

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The (kids) gloves are coming off?

Russ Roberts and Don Boudreaux, of Cafe Hayek, don’t know what to call their recent posts about Paul Krugman. I have a suggestion: It’s about time.

Economist Russ Roberts criticizes Krugman for his treatment of intellectual opponents, like economist Robert Barro, in this case. Roberts quotes two passages from Krugman’s own economics textbooks that support an argument that Barro makes:

Additional transfers to people with earnings below designated levels motivate less work effort by reducing the reward from working.

Yet, while Krugman said as much in his text books, in his blog post, Krugman does a poor job of characterizing this incentives-driven view of what Barro calls “regular economics”:

But if you follow right-wing talk — by which I mean not Rush Limbaugh but the Wall Street Journal and famous economists like Robert Barro — you see the notion that aid to the unemployed can create jobs dismissed as self-evidently absurd. You think that you can reduce unemployment by paying people not to work? Hahahaha!


If you read Barro’s piece, what you see is a blithe dismissal of the whole notion that economies can ever suffer from am inadequate level of “aggregate demand” — the scare quotes are his, not mine, meant to suggest that this is a silly, bizarre notion, in conflict with “regular economics.”

Not exactly. I did read Barro’s piece. He sets a good example of how to characterize opposing views, accurately and without straw-manning it like a 9-year-old who just put gum in her sister’s hair because “she deserved it”:

Keynesian economics argues that incentives and other forces in regular economics are overwhelmed, at least in recessions, by effects involving “aggregate demand.” Recipients of food stamps use their transfers to consume more. Compared to this urge, the negative effects on consumption and investment by taxpayers are viewed as weaker in magnitude, particularly when the transfers are deficit-financed.

Thus, the aggregate demand for goods rises, and businesses respond by selling more goods and then by raising production and employment. The additional wage and profit income leads to further expansions of demand and, hence, to more production and employment.

And, it wasn’t quite a ‘blithe dismissal’. It was an argument that Krugman chose to blithely dismiss himself, instead of addressing it.

So, why did Krugman describe Barro’s argument as he did? Why not simply state the argument. For example, Barro believes that the unemployment creates incentives for people not to work, something I also believe and have written in my textbooks. Where I disagree with him is that I believe during recessions, those incentive effects are overwhelmed because there are fewer jobs a lot more people who want them.

Don Boudreaux goes one further and criticizes the people who seem to relish in their own intellectual capacity to deal with Krugman’s nuances (by using bigger words than I used in the previous paragraph), while missing a larger point, that economics shouldn’t be used to justify stealing.

I did something that I rarely do. I read Krugman’s whole piece, and was reminded of why I choose not do so. Not only do I agree with the points made by Roberts and Boudreaux above, but there are other things that bug me.

Here’s a couple of those things.

1. He says of Keynes’ “discovery” of aggregate demand:

…while I’m generally against scientific pretensions, it amounted to a scientific revolution, something like plate tectonics in geology.

First, I don’t put much stock in anyone who compares economics to science. I think they will be prone to be more confident in their views than they should be, which can lead to disastrous results.

Second, why make this analogy if he really is “generally against scientific pretensions.” Just not in this case? Aggregate demand is lone example in economics where scientific pretensions is warranted?

Something else bugs me. Krugman writes:

Think, for example, about the Great Recession and its aftermath. Regular economics says that economies should normally get richer each year, as their work force and capital stock grow, and technology advances. But after 2007 the United States and other advanced countries suddenly went into reverse, becoming poorer instead of richer, and for an extended period too [pointing to a chart of declining GDP in the recession].

Does regular economics say that economies should get richer every year? Maybe. I haven’t heard that one.

Is GDP a measure of wealth? I thought it was a measure of economic activity. Can’t GDP decline and wealth still go up? If Bill makes $100,000 a year and has $1 million in Apple stock, does his wealth go down if his salary declines to $90,000? Not necessarily. It depends on how much he spends, doesn’t it? If he spends $80,000 a year, his wealth can still grow after the decline in his salary, no?

Perhaps I’m mistaken in my understanding of GDP. If so, please correct me. But, if not, it seems that Krugman’s language is unnecessarily sloppy here for a Nobel economist.

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Help, please

In the Wall Street Journal, David Laband, chairman of economics at the Georgia Institute of Technology, describes a recent experience of his at the airport as a lesson in economics.

Bad weather had created a bad circumstance for six people. Snow caused them to arrive late at the airport, too late for cabs, in those conditions, to come pick them up. The six passengers faced spending a night at the airport, but another passenger with a car offered to take them to their destination for $25 each. The gladly accepted.

Laband writes:

There are those who argue that this unscrupulous individual took “unfair” advantage of these travelers in distress by charging them at all. Critics would say that he was a heartless “price-gouger.” Really? The fact is, no one was offering to provide private transport for the stranded passengers at no charge. For that matter, the real price-gougers—government-regulated taxi companies—were nowhere in evidence.

I found this article interesting for a few reasons.

First, it describes a topic of conversation I’ve had frequently with friends and family, so it’s familiar territory. Yet, not quite. This is a little different because the conversation is usually about high prices in disaster areas. This wasn’t quite a disaster area, nor were the people unable to pay. Even the fee itself was lower than normal, I imagine. But, I like this particular circumstance because it doesn’t have the typical emotional loading as disaster situations.

Second, I still found myself being uneasy that the ‘savior’, as Laband describes him, took money. Even though it was less than a typical cab fare, even though the six passengers gladly paid him, even though the guy was going out of his way to help and the six passengers certainly faced a rather uncomfortable night.

Why did I feel uneasy about it?  And, if I felt uneasy about it, I can certainly see why the people I’ve discussed such situations do as well.

But, what is it? I can’t quite put my finger on it. Especially considering that Laband correctly describes real price-gougers as the government-regulated taxi companies.

Why I am more willing to accept their price-gouging behavior and less willing to accept this private guy’s actions?

If someone gave me a ride home in a similar situation, I’d want to pay them — at least ‘buy them a nice dinner’, which is about $25.

I don’t think I should be uneasy. I agree with Laband’s logic. All parties came out ahead. It enhanced social welfare.

But what’s the difference between ‘buying them a nice dinner’ and paying $25? Is it that he asked for the money?

Any thoughts?

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We win with markets

Paul Rubin made a great point in his Wall Street Journal op-ed (thanks to Don Boudreaux, Cafe Hayek, for pointing to it).

Economists should point out that what makes markets thrive is cooperation, while competition plays a supporting role. This might help the perception of markets. As an example:

…we might say that a poor person has been outcompeted in the market. Or we might say that a poor person cannot successfully cooperate with others because he lacks valuable skills and has little to sell.

Again, the words matter because viewing the circumstance in terms of competition could lead to penalizing those who are viewed as outcompeting him, even though they did nothing wrong. It might even lead to banning certain terms in transactions—with minimum-wage laws, for instance—that make it even more difficult for the poor person to cooperate. The cooperative metaphor, by contrast, would suggest that the solution is increasing the skills of the poor person, giving him something to sell on the market.

Unfortunately, Rubin would still need to convince many other economists that minimum wage laws make it more difficult for the poor person to cooperate.

More good stuff from Cochrane on health care

I recommend reading John Cochrane’s op-ed in today’s Wall Street Journal, What to do when Obamacare unravels. It’s a great follow-up to my health care reforms.

Here are a couple quotes from Cochrane’s piece that addresses some common concerns over non-government medicine.

What about the homeless guy who has a heart attack? Yes, there must be private and government-provided charity care for the very poor. What if people don’t get enough checkups? Send them vouchers. To solve these problems we do not need a federal takeover of health care and insurance for you, me, and every American.

And (emphasis mine)…

No other country has a free health market, you may object. The rest of the world is closer to single payer, and spends less.

Sure. We can have a single government-run airline too. We can ban FedEx and UPS, and have a single-payer post office. We can have government-run telephones and TV. Thirty years ago every other country had all of these, and worthies said that markets couldn’t work for travel, package delivery, the “natural monopoly” of telephones and TV. Until we tried it. That the rest of the world spends less just shows how dysfunctional our current system is, not how a free market would work.