The Nirvana Fallacy in Healthcare Economics

by Levi Russell

RegBlog, a great source for regulatory info, published an opinion piece about three weeks ago by Allison Hoffman. a law professor, on the potential for an Obamacare rollback by Republicans. Reading the essay, I recognized several errors of economic logic that I thought I'd point out here. I'm not an expert in this field, but I'm a firm believer that the economic way of thinking properly applied can provide much-needed clarity. As with any other post on FH, I invite others to correct me on any of the following if I miss something important.

The first two-thirds of the post is essentially an exercise in Harold Demsetz's Nirvana Fallacy. Yes, of course people could have more accurate information about treatments and could do a better job choosing good doctors. Does that mean the government should step in? Of course people are generally healthier when they don't pay the marginal cost of care; the cost/benefit calculus is skewed by the fact that the cost is near zero. Of course diseases are caused, to some degree, by things outside of our control. Does that imply the government can control those things or can necessarily make better decisions than we can?

Professor Hoffman then takes on a few individual proposals. She acknowledges that health savings accounts (HSAs) benefit some people, but complains that they are only beneficial for those with "surplus income." Her lack of a concrete example exposes the flaw in her critique. Suppose you are faced with two options for employer-provided healthcare: (1) a traditional "insurance" plan with a premium of $500 monthly and copays for doctor visits or (2) a catastrophic plan with a premium of $200 and an HSA with a contribution match up to $3,000 per year. The HSA allows you to save money for later when your monthly expenditures are lower than what you save. Comparing the two, it's trivial to point out that if I choose (2) I have $300 in "surplus income" to put into the savings account (plus the match!). Certainly some people don't have employer-provided health insurance, but the ACA was quickly making such policies tremendously expensive.

Hoffman later discusses tax credits, tax deductions, and other premium support programs proposed by Republicans. She criticizes one plan that would give a $2,100 tax credit to anyone between the ages of 35 and 50 for medical costs. Her criticism is that this credit would not cover a Bronze ACA plan which costs $4,200 per year. Assuming her figures are correct, this criticism seems empty to me. The credit would probably work well for a lot of people (especially those with low incomes) in scenario 2 above. The fact that it doesn't work with a choice-limiting, 3rd party payer program like the ACA isn't necessarily proof that the tax credit is bad. Perhaps it means choice-limiting 3rd party payer programs are inefficient.

Finally, Professor Hoffman criticizes reform proposals on the basis that the vouchers, credits, or deductions will grow at a rate at or below inflation, which is below historic rates of growth of healthcare costs. Unlike many, many other goods and services (even those produced in "non-contestable" industries), those that are heavily subsidized by the government like education and healthcare increase in cost much more rapidly than inflation. It's possible that reducing the government's role in healthcare will make that industry operate more like other industries, thus lowering costs. I'm sure there are reasons to think otherwise, but federal and state governments have had a lot of control over healthcare markets for at least 7 decades. Perhaps we should try something different.

Ag Potpourri - Feb 2017

by Levi Russell

Having recently completed a tour of the state discussing forecasts for Georgia's 4 primary meat commodities, I thought I'd put up some articles on interesting issues looking ahead for 2017.

The guys over at Agricultural Economic Insights have a great post discussing 16 questions for ag in 2017. They have another post on exchange rates which should be interesting given recent GDP and labor numbers, and recent movement in the stock market.

Scott Irwin looks at ethanol profitability for 2017.

Expect a LOT of meat on the market over the next 2 years. The beef, chicken, and pork industries are dealing with massive supplies with no relief in sight.

Finally, anti-trust continues to be a hot-button issue in proteins, most recently on the poultry side. Also, there is potential for the new administration to take action on a controversial new GIPSA rule designed to limit market power among meat processors.

Entry Regulation - Public Interest or Public Choice?

by Levi Russell

Don Boudreaux at his Cafe Hayek Blog points to a great article which comprehensively measures the effects of entry regulation - regulations associated with starting a business - that I thought I'd share.

The article does a great job explaining the three primary theoretical reasons for regulation:

1) the public interest view, which states that regulation is used by governments to correct for the many, many market failures existing in private markets

2) the public choice view, which states that regulation primarily serves politically-well-connected interest groups and that the public at large is inept to curtail these favors because of poor incentives and information problems associated with political decision making

3) another public choice view, which states that regulation benefits politicians because politicians are able to extract payments from private interests in exchange for not passing or exempting said private interests from the regulation

So what do the authors of the paper find? Here's the abstract:

We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with the public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.

The first 5 pages of the article go into a bit more depth about the three theories listed above and specifically how their analysis leads to the conclusions they draw.

Potpourri

by Levi Russell

Here I want to highlight a couple of conversations I think are interesting.

In response to this article on GMOs, Jayson Lusk (economist, Ok State) and Andrew Kniss (weed scientist, U Wyo) provide some deeper analysis on the effects of GMOs on yield and input usage.

A recent Council of Economic Advisors report (summarized here in the WSJ) alleges that monopsony power (market power wielded by buyers) is a driving force in labor markets these days. David Henderson provides an in-depth critique in, so far, 3 posts here, here, and here. I'll update when the rest of the posts come out.

Klingian Philosophy of Economic Science

by Levi Russell

One of my favorite things to do in this blog is to talk about unconventional perspectives on economic theory. A great source for such unconventional views is Arnold Kling's blog. The recent Nobel Prize awarded to Oliver Hart and Bengt Holmstrom prompted Kling to write a series of posts detailing his views on economic theory, specifically about the epistemology of economics. Kling's own brand of unconventionality is especially interesting given that he received his PhD from MIT. Below I reproduce a post from last week:

A commenter writes,

So in your opinion intuition is sufficient. As long as we can tell an intuitive story about something, that is as good as proving it?

I think that “proof” is too high a standard to use in economics. If our knowledge is limited to what we can prove, then we do not know anything. I think that we have frameworks of interpretation which give us insights. This is knowledge, even if it is not as definitive or reliable as knowledge in physics or chemistry.

As an example, take factor-price equalization. The insight is that the easier it is to trade across countries, the more that factor prices will tend to converge. I think that this is an important insight. It is one of what I call the Four Forces driving social and economic trends in recent decades. (The other three are assortative mating, the shift away from manufacturing toward health care and education, and the Internet.)

Paul Samuelson proved a “factor-price equalization theorem” for a special case of two factors, two goods and two countries. However, it is very difficult, if not impossible, to extend that theorem to make it realistic, including the fact that not all industries are subject to diminishing returns. In my view, Samuelson’s theorem per se offers no insight, because it is so narrow in scope. The unprovable broader insight is what is useful.

Incidentally, I also think that factor-price equalization is hard to prove statistically. Too many other things are happening at once to be able to say definitively that factor-price equalization is having an effect, say, on unskilled workers’ wages in the U.S. and China. I believe that it is having an effect, and there are studies that support my view, but it is not provable.

In order to prove something mathematically, you have to make narrow assumptions. In physics or engineering, this often works out well. When you roll a ball down an inclined plane, ignoring friction causes only a small error in the calculation.

In economics, the factors that you leave out in order to build a mathematical model tend to be more important. As a result, the requirement to express ideas in the form of mathematical models is harmful in two ways. We waste time proving false theorems and we miss out on useful insights.

The narrow assumptions lead you to prove something which is false in the real world.. For example, the central insight of the “market for lemons” proof is that a used car market cannot work. However, once we expand the assumptions to allow for warranties, dealer reputations, mechanics’ inspections, and so on, the original theorem does not hold.

Meanwhile, there are insights that are missed because they cannot be represented in an elegant mathematical way. A lot of the insights that I offer in Specialization and Trade fall in that category.

Our goal should be to acquire knowledge. The demand for proof hurts rather than helps with that process.

Bonus: I really enjoyed this piece from the Sloan Management Review published back in 2011.

Teaser: I'll be giving my thoughts on the Baysanto merger later this week or weekend.

Some Alternative Views on the Recent Nobel

by Levi Russell

I enjoy talking about and linking to alternative, minority points of view in economics on this blog. Sometimes the views I talk about are genuinely only held by a minority, others are held by many but are under-emphasized or, in my mind slightly misunderstood.

In this case, I just want to link to some short (and one very long) posts I read about Hart and Holmstrom's Nobel. Certainly I'm happy to see the prize go to work on theory of the firm and contracts and I believe they are deserving of it. That said, here are some alternative perspectives you might not read in other outlets.

Pete Boettke has a rather long, but certainly interesting, post here.

Arnold Kling gives his thoughts in two posts here and here.

Finally, here's Peter Klein on the prize.

Remembering Ronald Coase

by Levi Russell

The third year anniversary of Ronald Coase's death was last Friday. My Facebook and Twitter were alive with remembrances of this great economist, so I thought I'd put a few articles/videos/podcasts related to Coase for FH readers.

Though Coase is most famous for his work on transaction costs, what I find most interesting about his is his unique approach to economics in general. In the opening of this video interview, Coase says "Economics has become a theory-driven subject and I believe the approach should be empirical. You study the system as it is, understand why it works the way it does, and consider what changes could be made and what effects they would have." Coase derisively referred to abstract theoretical economics as "blackboard economics." In reading his work, the reader gets the sense that Coase is looking at the behavior of real people and trying to determine the underlying causal mechanisms. This is what makes Coase a great economist.

Here's an article on Coase that gives his background and surveys his most popular work. Here's a video featuring lectures on Coase's contributions by other well-known economists.

The video I linked to above, as well as this blog post of mine featuring Deirdre McCloskey, corrects the record on "the Coase Theorem." Speaking of my blog posts, here's another one that provides a summary of one of Coase's lesser-known, but no less fantastic, papers.

Finally, this post of mine summarizes a point by Bryan Caplan that, given his stated perspective on economic theory, I think Coase would have appreciated. It's a simple empirical observation that fundamentally challenges typical applications of standard monopoly theory.

Rent-Seeking and Regulation are Inseparable

Over at Marginal Revolution, Alex Tabarrok links to a piece by Tim Carney on a move by the Securities and Exchange Commission to continue requiring mutual fund companies to send mostly-worthless documents to their clients. I've reproduced the Marginal Revolution post below (Carney indented, Tabarrok in italics):

Five years ago, a new quirky-sounding consumer-rights group set up shop in a sleepy corner of Capitol Hill. “Consumers for Paper Options is a group of individuals and organizations who believe paper-based communications are critically important for millions of Americans,” the group explained in a press release, “especially those who are not yet part of the online community.”

This week, Consumers for Paper Options scored a big win, according to the Wall Street Journal. Securities and Exchange Commission chairman Mary Jo White has abandoned her plan to loosen rules about the need to mail paper documents to investors in mutual funds.

Mutual funds were lobbying for more freedom when it came to mailing prospectuses — those exhaustive, bulky, trash-can-bound explanations of the contents of your fund. In short, the funds wanted to be free to make electronic delivery the default, while allowing investors to insist on paper delivery. This is an obvious common-sense reform which would save whole forests of trees.

You won’t be surprised to lean that Consumers for Paper Options is funded by paper mills, timber firms and the Envelope Manufacturers Association.

What bothers me about these stories is not the rent-seeking–that is to be expected. What bothers me is that there is a law that prescribes how mutual funds must inform their customers. Why must every aspect of commercial life be governed by a gun? And this is where I expect pushback–the mutual funds will rip us off if we don’t have these laws, blah, blah, blah. Fine, believe that if you must, but then you have no cause to complain about rent seeking. You created the conditions for its existence.

The Legacies of Jim Buchanan and Elinor Ostrom

by Levi Russell

About a month ago I ran across a blog post entitled "How to start thinking like a public choice economist." Given my interest in this field of study, I read and enjoyed the post and watched the (short) video interviews. Another post entitled "Putting the action back in collective action" recently came out on the same site, so I thought I'd share them both.


If you're interested in the work of Jim Buchanan and Elinor Ostrom (Nobel Prizes in Economics in 1986 and 2009, respectively), I'd encourage you to check out the posts and videos.

Yes, Virginia, Plowing is Pollution

by Levi Russell

Obviously the title is meant to be facetious. I'm just in shock about this ruling and am concerned about the ramifications it will have for producers in the future.

Below I reproduce a short Farm Futures article that summarizes a recent court decision in California regarding the Clean Water Act. As cynical as I am, this decision did surprise me.

---

Judge Kimberly Mueller on June 10, 2016 in the U.S. Eastern District Court of California found that John Duarte, a nursery operator and wheat farmer, plowed wetlands, four to six inches deep, and therefore violated the Clean Water Act (CWA).

The Judge found Mr. Duarte, by chiseling a pasture, discharged fill material into a water (vernal pool) of the United States. Get this! The Court wrote “In sum, soil is a pollutant. And here, plaintiffs instructed [a contractor] to till and loosen soil on the property.”

This plowing, according to the Court, caused “…the material in this case soil, to move horizontally, creating furrows and ridges.” You will not believe this. 

The Court wrote, “This movement of the soil resulted in its being redeposited into waters of the United States at least in areas of the wetlands as delineated...” In sum, the Judge found that chiseling no more than a few inches of soil constituted an addition of a pollutant to a wetland.

Stunning!

The Court also evaluated whether the tractor and soil chisel plow were point sources under the CWA. The Court cited cases which found that bulldozers, backhoes, graders, tractors pulling discs and rippers can be point sources under the CWA.

The Court describes Mr. Duarte’s equipment as having 7 shanks with 24-inch spacing and each shank was 36 inches long. The Court wrote, “The equipment loosened and moved the soil horizontally, pulling the dirt out of the wetlands [vernal pools] and redepositing it there as well.” 

Vernal pools are described as meeting all three wetland parameters. They are dry the majority of time. As a result, the Court found that the equipment used to aerate the soil was a point source under the CWA.

Under the CWA there must be a discharge of a pollutant to navigable waters from a point source. Again, it is believed that to have a discharge of a pollutant, there must be an addition of the pollutant to the navigable waters. It is also believed that farming operations allegedly have an exemption under the CWA which exempts certain activities of farming and ranching from CWA permitting requirements. (The Court seems unaware that farming is considered a nonpoint source covered by section 319 of the CWA)

The CWA regulations defines farming and declares “Normal farming…activities such as plowing, seeding, cultivating, minor drainage and harvesting for the production of food, fiber and forest products,…” are not activities which are prohibited or regulated under the CWA. Plowing is also defined by EPA as meaning “…all forms of primary tillage, including moldboard, chisel or wide-blade plowing, discing, harrowing and similar physical means utilized on farm, forest or ranchland for the breaking up, cutting, turning over, or stirring of soil to prepare it for the planting of crops.”

The Court found that Mr. Duarte’s activities did not meet the exemption EPA has provided for farming. The Court believed that the land being aerated by Mr. Duarte had not been land used for farming activities but for the grazing of animals. (Grazing or pasturing of animals apparently is not an agricultural activity!) The Court believed the farming operation which could be exempted had ceased to operate as a farm, and that Mr. Duarte was engaging in new agricultural activities. 

Legal complications

The case is extremely complicated from a legal standpoint where Mr. Duarte sued the Army Corps of Engineers (Corps) claiming the Corps had violated his 5th Amendment right to due process and his 1st Amendment right against retaliatory prosecution. According to the opinion, there were two rounds of motions to dismiss significant evidentiary objections and objections over what constituted hearsay. The U.S. Department of Justice filed a counterclaim against Mr. Duarte using the CWA and won.

Basically the case says plowing can be a polluting activity particularly in areas that can be identified as vernal pools, vernal swales, seasonal wetlands, seasonal swales and areas where there may be intermittent and ephemeral drainages.

Mr. Duarte had purchased the land in order to plant winter wheat. He had been very careful in hiring consultants to identify any wetlands. Apparently what he did was insufficient according to Judge Mueller, an Obama appointee, who served as a City Councilwoman in Sacramento. In addition she has worked as a U.S. Magistrate Judge but appears to have no experience in agriculture. It shows!  It is indeed surprising that an attempt to grow wheat on approximately 450 acres results in the violation of the CWA.

Specialization and Trade - A Reintroduction to Economics

That's the tile of Arnold Kling's newest book. It's published by the Cato Institute and is available in e-book format on Amazon for a mere $3.19. You can also download a PDF copy here free. Arnold Kling is an MIT trained economist who spent the bulk of his professional economic career at the Federal Reserve and Freddie Mac. Kling's blog, one of the best on the web in my opinion, is always thought-provoking. As the title of his blog suggests, he makes every effort to understand and fairly state the positions of those with whom he disagrees.

I read a couple of blurbs about the book last week and have only just finished the first chapter. So, rather than write a review, I'll reproduce a section of the Introduction that gives a short description of each chapter. Kling certainly has a unique perspective and I suspect I'll learn a lot from this relatively short book.

“Filling in Frameworks” wrestles with the misconception that economics is a science. This section looks at the difficulties that economists face in trying to adopt scientific methods. I suggest that economics differs from the natural sciences in that we have to rely much less on verifiable hypotheses and much more on hard-to-verify interpretative frameworks. Economic analysis is a challenge, because judging interpretive frameworks is actually harder than verifying scientific hypotheses. 

“Machine as Metaphor” attacks the misconception held by many economists and embodied in many textbooks that the economy can be analyzed like a machine. This section looks at a widely used but misguided approach to economic analysis, treating it as if it were engineering. The economic engineers are stuck in a mindset that grew out of the Second World War, a conflict that was dominated by airplanes, tanks, and other machines. Their approach fails to take account of the many nonmechanistic aspects of the economy. 

“Instructions and Incentives” deals with the misconception that economic activity is directed by planners. This section explains that although people within a firm are guided to tasks through instruction from managers, the economy as a whole is not coordinated that way. Instead, the price system functions as the coordination mechanism. 

“Choices and Commands” is concerned with the misconceptions held by socialists and others who disparage the market system. This section explains why a decentralized price system can work better than a centralized command system. Central planning faces an information problem, an incentive problem, and an innovation problem. 

“Specialization and Sustainability” exposes the misconception that we must undertake extraordinary efforts in order to conserve specific resources. This section explains how the price system guides the economy toward sustainable use of resources. In contrast, individuals who attempt to override the price system through their individual choices or by imposing government regulations can easily miscalculate the costs of their actions. 

“Trade and Trust” addresses the misconception among some libertarians that the institutional infrastructure needed to support specialization and trade is minimal. Instead, this section suggests that for specialization to thrive, societies must reward and punish people according to whether they play by rules that facilitate specialization and trade. A variety of cultural norms, civic organizations, and government institutions serve this purpose, but each of those institutions has its drawbacks. 

“Finance and Fluctuations” deals with the misconceptions about finance that are common among economists, who often fail to appreciate the process of financial intermediation. This section looks at the special role played by financial intermediaries in enabling specialization. Intermediation is particularly dependent on trust, and as that trust ebbs and flows, the financial sector can amplify fluctuations in the economy’s ability to create patterns of sustainable specialization and trade. 

“Policy in Practice” corrects the misconception that diagnosis and treatment of “market failure” is straightforward. This section looks at challenges facing economists and policymakers trying to use the theory of market failure. The example I use is housing finance policy during the run-up to the financial crisis of 2008. The policy process was overwhelmed by the complexity of the specialization that emerged in housing finance. Moreover, the basic thrust of policy was determined by interest-group influence. The lesson is that a very large gap exists between the economic theory of public goods and the practical execution of policy. 

“Macroeconomics and Misgivings” argues that it is a misconception, albeit one that is well entrenched in the minds of both professional economists and the general public, to think of the economy as an engine with spending as its gas pedal. This section presents an alternative to the mainstream Keynesian and monetarist traditions. I argue that fluctuations in employment arise from changes in the patterns of specialization and trade. Discovering new patterns of sustainable specialization and trade is more complex and subtle and less mechanical than what is assumed by the Keynesian and monetarist traditions.

More Mercatus Center Research on State Tax Reform

by Levi Russell

In a previous post I shared a comparison of the results of tax reform in Utah and Kansas. That comparison was part of a broader analysis of reform efforts in 5 states: Kansas, Michigan, North Carolina, Rhode Island, and Utah. The report provides a detailed analysis of reform efforts and draws some general conclusions about how reform should be implemented.

The  authors generally report good news for the states in terms of government fiscal health. Kansas is an exception. Here's one of the "common trends" identified in the report:

The most effective tax reforms seem to be those that both lower the rates of taxation and simultaneously broaden the scope of activities that are taxed. Such reforms improve the efficiency, convenience, and transparency of a tax system.

 This is the opposite of what Kansas has done. Unlike North Carolina, Kansas politicians failed to couple the tax reform effort with orderly spending cuts. Further, as the report notes, Kansas narrowed its tax base in a distortionary way:

Kansas also made the decision to exempt “pass-through” profits from corporate taxation; that is, business income that is taxed on individual business owners’ tax returns. While this lowers the tax burden on businesses, it creates distortions in the way business owners choose to classify their operations. Moreover, it is inequitable because it disproportionately benefits high earners and creates an unfair playing field among businesses.

There has certainly been a lot of media coverage of Kansas' state government budget information. Another Mercatus paper compares state government fiscal situation data from all 50 states and Puerto Rico in 2014. Kansas is 27th of the 51 states/territories examined. This doesn't sound consistent with the dominant narrative in the media.

How has the reform effort affected the private economies in these states? Below is a graph of private GDP indices for the five states listed above, the US as a whole, and two other states that are, to put it mildly, in big trouble fiscally: California and Illinois. It's tough to draw any general conclusions. Michigan, Utah and California are all doing quite well relative to the US as a whole. Michigan and Utah have had significant tax and spending reductions; California hasn't. Illinois, Kansas, North Carolina, and Rhode Island are all lagging relative to the US as a whole. Kansas and Illinois had pretty flat growth from 2012 to early 2014, but have picked up recently. Kansas in particular seems to be catching up to the US as a whole. North Carolina has been catching up at a feverish pace.


Quantity Index for Real Private State GDP - BEA

click image to enlarge

Yet another Mercatus paper provides a short review of the literature on the relationship between state tax policy and the economic health of the state. Here's the relevant paragraph:

Research finds that higher state taxes are generally associated with lower economic performance. There is somewhat weaker evidence that state and local taxes can significantly reduce income growth within a state, particularly when the revenues raised are devoted to transfer payments. More recent research corroborates this finding in relation to net investment and employment. However, when additional tax revenue is used to improve the quality of public goods and services, economic growth may increase. When looking at business activity more broadly, more comprehensive reviews of the literature find higher taxes to be associated with less economic growth. They also find this relationship to be stronger within metropolitan areas than across metropolitan areas, which means that local taxes have a larger effect on economic growth when it is less costly for firms and taxpayers to relocate to avoid the tax.

I Can't Put Enough Scare Quotes Around "Free Market"

by Levi Russell

Earlier this month I read a couple of fantastic posts over at the Coordination Problem blog. The common thread between the two posts is that the "free market" moniker given to many individual economists and schools of thought is really about the conclusions reached through rigorous analysis of real-world institutions, not about any sort of ideological assumption.

The first is a lengthy post by Peter Boettke. Boettke lays out his perspective of the "economic way of thinking" and describes how it's used to analyze the real world:

From my perspective there is a core of the economic way of thinking that can be traced from Adam Smith to Vernon Smith and that deals with basic ideas about human rationality, human sociability, and the coordination of activity through time.  Incentives, Information, and Innovation are part of this core as they derive from the even more primordial ideas of property, prices, and profit/loss accounting.  We live in a world of scarcity, scarcity implies that we face trade-offs, that means we must negotiate those trade-offs and we hope to do so in the most effective way possible, to achieve that we need aids to the human mind, those aids come in the form of high powered incentives and clear signals so we may engaged in the economic calculus.  One of the many implications that follows is that demand curves will slope downward and supply curves will slope upward.  The shape and the magnitude of the effects that follows are empirical matters and is largely determined by the array of substitutes available to economic decision makers.  But the essential logic holds from a style of reasoning that attempts to derive the invisible hand theorem from the rational choice postulate via institutional analysis.  Hume's principles of stability of possession, transference by consent, and the keeping of promises -- in other words, property, contract and consent -- provides that institutional infrastructure within which the human pursuit of individual betterment is channeled in commercial life into publicly desirable outcomes (e.g., wealth creation and generalized prosperity; the least advantaged are made better off).  Again, property, prices and profit/loss gives economic actors high powered incentives and informational signals to allocate resources, time and effort to the most highly valued use, and the constant feedback on whether those decisions are the right ones and the incentives and information to constantly adapt and adjust to improve in the decision calculus. 

This basic economic calculus applies to all human endeavors, and when we find ourselves outside of the realm of the market sphere of monetary calculation, the question for the analyst is what institutions will serve the same function in terms of incentives, information and innovation that property, prices and profit/loss served in the marketplace.  Does electoral politics possess those institutional proxies?  Does the bureaucratic organization of public administration? How about the philanthropic entities in the non-profit sector?  This would be an implication of the economic way of thinking -- how do people weigh the marginal costs/marginal benefits of decisions in the different contexts of human interaction? 

Nothing about what I have said is "libertarian" or "free market", but it is economics.  Consider, for example, a report that was on NPR this morning as part of a series that is being developed on Politics in Real Life as the campaign season moves from primaries to the main event in 2016 -- it was on Paid Family Leave.  Again, the economist in me kicks in while hearing the story -- not the libertarian or free market, but economists.  Thus, I want to think about Means-Ends and the logical consequences of the various proposed means to obtain the desired end, and I want to learn from as much empirically as one can from historically analogous policy experience.  I empathize with the Ends sought and do not question them in the least, my concern is solely with whether the proposed means would achieve the ends sought and at what cost.  This requires recognizing that Paid Family Leave will have its impact on the labor market, and also one must think about the impact on the least advantaged in the labor market -- not the most advantaged, because the tragedy that motivates our initial concern is not the impact on the most privileged in the work force, but the least advantaged -- in economic jargon, the marginal employee.

 Boettke concludes:

But what if, I ask, the very social ills we see before us are due not to malfeasance but due to the logic of individual decision making within the institutional context so reorganized.  The same style of reasoning that explains why individuals pursuing their self-interest can produce publicly desirable outcomes such as productive specialization and peaceful social cooperation within a specific institutional context also explains why that pursuit of self-interest in other institutional contexts results in social tragedies and social tensions. 

That is ECONOMICS, not "libertarian" nor even "free market", but just ECONOMICS pursued persistently and consistently.  And unless we get away from the habit of labeling folks and arguments in order to pigeon hole and disregard our intellectual cultural will continue to fail to understand what is causing the social ills that plague us, let alone encourage creative thinking about how to address these social ills.  That would be tragic on so many dimensions.

The whole post is certainly worth a read.

Another much shorter post by Steve Horwitz also fits into this same theme.

I have been thinking a lot about the misunderstandings of Hayek's "The Use of Knowledge in Society" essay. Below I offer what I think is a quick summary of his argument that stresses both the importance of private property and the price system as jointly necessary for economic coordination.

1. Knowledge IS decentralized in that each of us has our own personal knowledge of time and place (and that is often tacit).

2. Therefore, planning and control over resources SHOULD BE decentralized so that people can take advantage of those forms of knowledge.

3. HOWEVER, decentralization of control over resources (what Hayek calls "several property") is necessary BUT NOT SUFFICIENT for social coordination.

4. Effective decentralized planning also requires that people have access, in some form, to the bits of knowledge that other people have so that they can form better plans and have better feedback as to the success and failure of those plans.

5. Providing that knowledge is the primary function of the price system. Prices serve as knowledge surrogates to enable people's individual knowledge and "fields of vision" to sufficiently overlap so that our plans get COORDINATED. 

6. In other words: decentralized control over resources is NECESSARY BUT NOT SUFFICIENT for a functioning economy. Such decentralization requires some process that actually ensures that separately made decisions are, to a significant degree, based on as much knowledge as possible so that economic coordination can be achieved. That is what the price system enables us to do. [EDIT: and the prices in question are not, and need not be, equilibrium prices.]

Decentralized decision making without a price system will produce very little coordination and prosperity. Centralized decision making will render a price system useless for economic coordination.

The fact of decentralized knowledge requires that an economy capable of producing increased prosperity for all has both decentralized decision-making (private/several property) and a price system to coordinate those decisions.

The GMO Knowledge Gap

GAINESVILLE, Fla. --- While consumers are aware of genetically modified crops and food, their knowledge level is limited and often at odds with the facts, according to a newly published study by a University of Florida researcher.

Last year, Brandon McFadden, an assistant professor of food and resource economics at the UF Institute of Food and Agricultural ‌Sciences, published a study that showed scientific facts scarcely change consumers’ impressions of genetically modified food and other organisms.

Consumer polls are often cited in policy debates about genetically modified food labeling. This is especially true when discussing whether food that is genetically modified should carry mandatory labels, McFadden said. In conducting their current study, McFadden and his colleague, Jayson Lusk, an agricultural economics professor at Oklahoma State University, wanted to know what data supported consumers’ beliefs about genetically modified food and gain a better understanding of preferences for a mandatory label.

So he conducted the survey to better understand what consumers know about biotechnology, breeding techniques and label preferences for GM foods.

Researchers used an online survey of 1,004 participants that asked questions to measure consumers’ knowledge of genetically modified food and organisms. Some of those questions tried to determine objective knowledge of genetically modified organisms, while others aimed to find out consumers’ beliefs about genetically modified foods and crops.

The results led McFadden to conclude that consumers do not know as much about the facts of genetically modified food and crops as ‌they think they do.

Of those sampled, 84 percent supported a mandatory label for food containing genetically modified ingredients. However, 80 percent also supported a mandatory label for food containing DNA, which would result in labeling almost all food.

“Our research indicates that the term ‘GM’ may imply to consumers that genetic modification alters the genetic structure of an organism, while other breeding techniques do not,” McFadden said.

As participants answered questions designed to measure their knowledge of scientific data on genetic modification, respondents seemed to change their statements about the safety of genetically modified foods, McFadden said.

The study is published in the Federation of American Societies for Experimental Biology Journal.

Last Modified: Mon, 23 May 2016 10:36:46 EDT

Do cities make us more productive?

by Levi Russell

I came across this blog post late last week and thought I'd share it. In the post, the author (a geographer) presents the typical case that city density is positively correlated with productivity. This is thought to be due to "agglomeration externalities" which are "the benefits that firms obtain by locating near each other."

The author presents some statistics showing a positive correlation between productivity and city size or density. Part of the problem of establishing a causal link between density and productivity is that once you dig into the data to figure out exactly who gets more productive in denser places, it tends to be only people who are highly skilled with "nonroutineized work." His second critique is that we don't know how density drives productivity. He gives this task to economists.

He then mentions some policy problems and alludes to an issue I've often thought about when taking courses on urban and regional economics. Do we need to reign in urban sprawl? If density doesn't actually drive productivity, is sprawl really that bad? What about technology that allows a lot of people to telecommute effectively?

I found the post thought-provoking and it has some interesting data. Let me know what you think!

Does Houston have Zoning Laws?

by Levi Russell

Since 2013 I've done plenty of driving in the major Texas cities: Houston, Dallas, San Antonio, and Austin. Doing so always reminds me of the land use portion of my transportation and urban economics course back in college. My professor brought up Houston and its status as one of the few major cities in the US without any zoning regulation. The funny thing is, Houston looks a lot like all the other cities in Texas: big and sprawley. I came across a Rice University blog post from last year about that very issue.

It turns out that Houston has plenty of zoning laws that simply aren't called "zoning laws." Specifically, the author notes that Houston has deed restrictions, density regulations, tax increment reinvestment zones, zoning laws around its 3 major airports (thanks to federal laws), buffering ordinances, historic preservation, and lot size regulation. So there you have it: a popular myth busted in one short blog post. I recommend you read the whole thing.

The author laments that there is no "comprehensive plan" to this de facto zoning regulation. As you might expect, I'm skeptical that such a comprehensive plan would solve the problems Houstonians (?) face. City planners have to wrestle with much the same problem politicians and bureaucrats face when trying to impose a top-down order on a complex system like a city.

This brings to mind a site I heard about recently on a Cato Institute podcast called The Antiplanner. On the site, run by independent scholar Randal O'Toole, there are no shortage of posts providing counterargument to the typical justifications for urban planning, public transportation, and other such topics. I like to point out websites that oppose the conventional wisdom and O'Toole does a fantastic job. Here, here, and here are some recent posts I found interesting.

Just to be sure there's an ag component in this post, I recommend Virginia farmer Joel Salatin's book "Everything I want to do is Illegal" which chronicles some of the practical problems of land use regulation from the first-hand perspective of a farmer and this Farmer Hayek post from last year for something more academic.

Behavioral Public Choice - A Literature Review

Bryan Caplan recently posted about a fantastic West Virginia Law Review article that provides a lengthy discussion of the intersection of public choice (the application of economics to politics) and behavioral economics (the application of psychology to economics). 

Here's a segment of the introduction sans footnotes:

Behavioral public choice is both an extension of and a reaction to behavioral economics and its counterpart in legal scholarship, behavioral law and economics. Psychologists and behavioral economists have documented imperfections in human reasoning, including mental limitations and cognitive and emotional biases. Their research challenges the rational actor model of conventional economics, especially the idea that individuals acting in a free market can make optimal decisions without the government's assistance. Behavioral economists and legal scholars in the behavioral law and economics movement have used this research to justify paternalistic government interventions, including cigarette taxes and consumer protection laws, that are intended to save people from their own irrational choices. 

Because of their focus on market participants and paternalism, most behavioral economists and behavioral law and economics scholars ignore the possibility that irrationality also increases the risk of government failure. Behavioral public choice addresses that oversight by extending the findings of behavioral economics to
the political realm.  

A key insight of behavioral public choice is that people have less incentive to behave rationally in their capacity as political actors than in their capacity as market actors. 

Another law and economics article entitled "Nudging in an Evolving Marketplace: How Markets Improve Their Own Choice Architecture" tackles a similar topic. Here's the abstract:

Behavioral economics claims to have identified certain systematic biases in human decision-making with the implied assumption — sometimes leading to an explicit policy proposal — that these biases can only be corrected through centralized planning. While the appropriateness of policy corrections to perceived biases remains an open debate, far less attention has focused on the role markets already play in “nudging” consumers toward more mutually beneficial outcomes. We describe a process by which markets evolve over time to satisfy consumer preferences — or risk failure and removal from the marketplace. By organizing our understanding of markets in this dynamic, evolutionary sense, we expose a basic logic that dominates market transactions as they occur in practice; that is, the mechanisms that ultimately survive market competition tend to compensate for, limit, or otherwise reduce the incidence of bias. We explore empirical evidence for this argument in the market for consumer financial products.

This brings to mind a few previous posts of mine on market dynamics and monopoly. You can read them here, here, and here.

Productivity and Stagnation from an Engineer's Perspective

Tyler Cowen's famous book "The Great Stagnation" has been the subject of a lot of conversation in the econ blogosphere. Cowen and others point to stagnant total factor productivity and income growth among large segments of the population as evidence that something is very wrong with the economy these days.

Those on the other side of the debate point to the inability of TFP and income statistics to account for changes in the quality of goods over time and the dramatic benefits we all get from things like the internet.

This post tackles the issue from an engineering perspective. The author has a whole slew of charts and graphs on everything from information technology and solar power to steam generators and jets. It's definitely worth a look!

Potpourri

House Ag Committee chair Conaway comments on the state of the ag economy.

Don Boudreaux corrects Paul Krugman on the definition of a public good.

Bryan Caplan blogs about an interesting article by Niclas Berggen on the pro-govt bias of behavioral economists. Berggen's results:

Our main findings are that 20.7% of all articles in behavioral economics in the ten journals contain a policy recommendation and that 95.5% of these do not contain any analysis at all of the rationality or cognitive ability of policymakers. In fact, only two of the 67 articles in behavioral economics with a policy recommendation contain an assumption or analysis of policymakers of the same kind as that applied to economic decision-makers. In the remaining 65 articles, policy recommendations are proffered anyway.

Taxes as Social Engineering

Cornell economist Robert Frank recently appeared on probably the best economics podcast on the web, EconTalk. Frank was there to discuss his recent book on the role of luck in successful folks' lives. The conversation was interesting and Frank certainly has a unique perspective. He makes some clever observations but I wasn't convinced of his conclusions. I encourage Farmer Hayek readers to listen to the podcast and check out the comments here and here for some good counterpoints to Frank's positions if you're interested.

Instead of taking Frank's comments head on, I want to discuss what seems like a background assumption he makes. Frank's overall point is that since luck (specifically good luck) plays an under-appreciated role in our success, we should favor higher taxes on the wealthy. This would provide additional funds to beleaguered governments which he asserts are low on funds for infrastructure. More importantly, though, it would ensure that the wealthy would spend less money on things that don't make "anybody any happier."

Frank provides almost nothing in terms of evidence of his claims other than his own personal experiences (see the comments linked above), but even assuming he's correct about the particular facts he lays out, there's a more fundamental problem. It might very well be that declining quality of public infrastructure has more to do with simple mismanagement of resources, rather than a lack of tax revenue. Hayek's work implies that government planners are less effective at directing resources than decentralized owners of "several property" because the former simply can't gather the necessary information to plan efficiently. (see here, page 85) Much of the information necessary for an orderly economy is tacit and ever-changing such that any amount of computing power is insufficient to create the sort of plan Frank seems to believe we need.

To be clear, it's not that markets are perfect, simply that they are more likely to be better than centralized decision makers at allocating scarce resources. The knowledge required to do so is dispersed and tacit, As Hayek puts it:

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess.

I can't resist a couple of final points. Though Frank disputes it, it's pretty clear that taxes on the wealthy do affect their choice of location (here and here). Frank uses a Rawlsian ethic that is quite common in business ethics courses. However, it's not altogether obvious that Rawls' ideas can be used to justify the policies Frank favors.