WWMD: What Would Malthus Do?

An article in this week's Economist discusses recent history and current trends in world population.

If you'll recall the "Logistic Equation" from precalculus or calculus, you know that certain things, such as population growth and predator-prey relationships, can be shown with a nifty formula, involving an ugly thing called the natural number "e." When graphed, this renders an s-shaped curve, or what looks like a sideways graph of tangent.

Basically, it means that populations tend to grow slowly at first, then reach a critical number that sends the species population soaring through reproduction, until environmental effects (shortage of food, disease, predators, or crowding) force members of the population out, or dead. The curve levels out and maintains what would appear to be a long-term stable number, ceteris paribus.

Numbers are still growing; but recently—it is impossible to know exactly when—an inflection point seems to have been reached. The rate of population increase began to slow. In more and more countries, women started having fewer children than the number required to keep populations stable. Four out of nine people already live in countries in which the fertility rate has dipped below the replacement rate. Last year the United Nations said it thought the world's average fertility would fall below replacement by 2025. Demographers expect the global population to peak at around 10 billion (it is now 6.5 billion) by mid-century.

I would wager this recent inflection point has something to do with the signals we are receiving from our environment. Increased income, wealth, and abundance of materials has given rise to a shift in attitudes among young professionals, whom would rather use disposable income to enjoy themselves than save for a child's college, especially when costs are rising as rapidly as their are in the knowledge economy.

Think of twentysomethings as a single workforce, the best educated there is. In Japan (see article), that workforce will shrink by a fifth in the next decade—a considerable loss of knowledge and skills... In Japan, rural areas have borne the brunt of population decline, which is so bad that one village wants to give up and turn itself into an industrial-waste dump.

Well, hardly a poor use of resources if its a choice willingly made. But it begs the question: how much does the "labor" or "human capital" part of the production function really affect the makeup of an economy?

States should not be in the business of pushing people to have babies. If women decide to spend their 20s clubbing rather than child-rearing, and their cash on handbags rather than nappies, that's up to them.

Really? That's interesting, because an article from Medical News Today discusses some of the incentives Estonia is using to entice its young females to have multiple children. From that article:

Estonia provides employed women who have children with their monthly salary, up to $1,560 monthly, over a 15-month period and unemployed women with $200 monthly.

Whatever the measures, governments tend to protect their investments in capital and infrastructure and have been known to wage war, from time to time, over resources. So why not protect human capital as well?

more people + better education = economic growth

The Market for Body Odor

I read this comic strip the other day. I found it to be humorous, and could relate to the experience. Walking out of Subway today, I noticed the polite man holding the door for me smelled like tacos. Interesting, you might say, considering Subway doesn't sell tacos.

Then it hit me... that taco smell was plain, ol' funky body odor. The classic BO.

Which got me to thinking, maybe deodorant is an under-provided good. You know, there's a positive externality in using the stuff, everyone benefits from your refreshing floral smell. Don't get me started on the enormous cultural differences that make it difficult to sit next to an international student in the movie theater...

Maybe the government should subsidize its production, tax "polluters" and make them pay to stink, or just sign it into law as mandatory to wear. Heck, this is one situation I could stand for a little statism!

Maybe similar effects exist for halitosis. Who knows?

Debunking the Obvious

In an article on the WSJ's Economics Blog, it is reported that frat boys drink more. Now this seems obvious at first glance, but being a member of a fraternity, I feel that I should voice my own opinion.

The academic chicken-or-egg question at hand is whether frat membership causes drinking, or whether frats just attract drinkers who would behave the same way without frats. The circumstantial data is telling: Surveys suggest that 64% of frat members were drunk in the past 30 days and 42% of nonmembers. “Undoubtedly, students choose to join fraternities in part because of pre-existing preferences towards behaviors that membership facilitates,” he writes.”

And, appearantly, fraternities are bad for campuses:

And the higher the fraction of college students who belong to a frat on a campus, the more heavy drinking among students who aren’t frat members.

Aside from disliking the word "frat" and all its (not so) subtle connotations, this news doesn't bode well for already falling enrollment in men's organizations all across the country. I don't believe we foster that kind of atmosphere in Delta Upsilon, but I definitely have noticed a year-to-year struggle between academics and "socializing."

To those of us who pride ourselves on diversity and tolerance, any statistical paper showing a "general trend" seems to promote sometimes-harmful and self-perpetuating stereotyping.

And as for spillover effects, I suspect the results to be quite foggy, though I haven't read the actual paper.

It is refreshing to see the experts take a moment to be rational about all this:

“It would be erroneous to assume that these unconditional… differences accurately portray direct effects of fraternities.

To any parents out there: I suggest getting to know your son, his interests, hobbies, and habits as well as the ones any organization he wishes to join foster. This should be fairly easy to discern among all the polite BS during recruitment season. But of course, why should I be giving you advice? You're all intelligent people.

Altadis to be purchased by Imperial Tobacco

The Wall Street Journal just reported on its website that Altadis has agreed to be purchased by Imperial Tobacco.

This especially affects our European friends, where Imperial Tobacco will be a tobacco "giant with leading market shares in the U.K., France, Spain, Germany, &c...

Will this decrease the quality of tobaccos that just seemed to get a revival under new blenders? How do you suspect this will affect prices for tobacco in Europe and America?

The long drawn-out battle for Altadis marks perhaps the last big deal in a series of acquisitions consolidating the industry in Europe. As cigarette sales slowly decline and smokers in the major Western European markets kick the habit and younger generations avoid the products, multinational cigarette makers have bee buying one another to cut costs through economies of scale.

The author of the article seems to think it will decrease prices, if in fact, there are economies of scale still to be exploited in such a large industry.

Since Altadis also holds a 49% stake in JR Outlets (a big online seller of cigars, bigger still in North Carolina), what will this do for cigar retail, which is arguably far more sensitive to industry changes than pipes and pipe tobacco?

Let's hear your thoughts!

'Passive Citizenship' and the Role of Judicial Review

During a lecture last January, a thought occurred to me: perhaps judicial review is a major contributor to passive citizenship.

By establishing Judicial Review, the US Supreme Court effectively took the job of monitoring legislation from irritated citizens and gave it to learned lawyers. In and of itself, this may be a more efficient way of reviewing legislation, striking bad law, and keeping legislators in line.

However, "passive citizenship" is a common problem in America, which I personally categorize as a general disinterest in politics, issues "beneath" learned citizens, and debates. The latter may cause a drop in participation if one fears confrontation, offending someone, or failing to make a point (or simply making an ass of one's self).

In a country where the government takes over this role, what incentives do citizens have in participating in the political process if their vector of preferences includes risk-averse behaviors noted above.

Then does a multiparty system actually encourage debate? More views expressed publicly by politicians or celebrities may make more people feel comfortable with expressing their own views, writing their congressman, or by participating in a local peaceful protest. Power to the people.

Rational Gay Union Policy

I'm not attempting to steal JurisNaturalist's thunder, but our recent discussion of the rationality of gay union is even more important to post because we're both fairly conservative Christian men.

JN sent me an e-mail this morning about a possible paper topic. A general outline of our discussion (he might contest it was one-sided pontificating) is below.

Assumptions:

1. Heterosexual unions (hereafter referred to as "marriages") are good for society. They promote procreation, family values, sexual and mental health, and general happiness.
2. Heterosexual couples choose to enter into marriage for these reasons, and according to individual sets of tastes and preferences (often, individuals are said to display a "vector" of preferences, tradition being one common example).
3. Marriage is a private contract and subject to analogs of common contract law. Divorces, alimony, custody and more have analogs in breech of contract, reparations, and property ownership, respectively (forgive the coldness).
4. Individuals enter into contracts only when it is beneficial to both parties.
5. It has not been widely shown by credible sources that homosexual unions (hereafter referred to as "gay unions") are not afforded the same quality of life improvements set forth in step 1.
   
6. It follows that all couples, regardless of sexuality, benefit from union (steps 1 and 4 with 5).
7. As long as individuals benefit, society's welfare increases.
8. It is in the best interest of governments to sanction unions for all couples.

Caveats:

1. Some members of society may receive disutility from the existence of gay unions. One might imagine an extreme conservative Christian to be extremely irked by his state's passage of such a law. In this case, social welfare decreases.
2. Some members of the gay community receive disutility from the ban or non-recognition of gay unions. One might imagine an extreme leftist progressive becoming irate over a state ban of gay marriage. In this case, social welfare also decreases.

We are left with no decision. Either banning or allowing gay union will decrease social welfare. We much measure the total welfare effect of each and compare three worlds:

1. Where gay union is allowed
2. Where gay union is banned
3. Where those receiving disutility from the permission of gay union do not exist

In the first two worlds, both containing the individual that receive disutility from permission, social welfare is not optimal. When that common factor is removed, in world 3, social welfare is optimized based on the above assumptions (thought process).

We see, then, that the market for gay union has a positive externality in that it increases total social welfare, but costs of offending idealogues are included in any individual policy decision. Following general theory of market failures and government intervention from any basic resource economics course, one sees that gay unions are underprovided. This is much in the same way that education is thought to be underprovided in Externalities in a Nutshell; however, in that article, higher than normal costs are borne by buyers but in gay unions, these costs are borne by other individuals.

It occurs to me that, by my last statement, this means the market for gay unions contains a negative externality, not a positive one. This means that the market over-provides the number of unions. However, I believe this discrepancy lies in whom one place initial rights (see Property Law or Google for some more information on "initial allocation". If anyone can find a hole in my logic, please leave a comment. If a negative externality is actually the case, the following analysis is perfectly incorrect.

The common solution, then, is that government intervene to create an environment conducive to more gay unions, either silencing or removal of the offended, or in some other way encouraging couples to enter this contract. If this means subsidizing the union, then I see potential laws being similar to current marriage laws, including tax breaks for the union, for raising children, etc.

It seems more likely, however, that the first step be allowing the unions to take place at all.

Paper Idea: The Benefits of a U.S. Multiparty System

Any well-connected reader might have noticed third-party candidate news during the last election, and I'm sure it will come up again. With movies like Man of the Year becoming more popular, the ideas of third parties and general political change are enjoyed by most of the public.

Train of thought:

1. Third parties create political dialog through special interest proposals
2. Third parties reduce polarization through increased choice (it's tough to be "in the middle" of three diverse groups)
3. Legislative debate and dialog produce ideas
4. More ideas are better than less ideas (due to increased choice)
5. Third parties encourage public debate (in homes and/or media)
6. Public opinion influences elected official behavior (perhaps principal-agent connection)
7. Ideas will be "purchased" in the market through policy
8. Only quality policy will pass the rigorous debate phase
9. Quality policy increases voter happiness, participation

Hypotheses:

1. Quality of policy after established third party participation increases.
2. Quality policy increases voter participation.

Maybe:

1. Quality policy has spillover effects: decreasing bureaucracy or its costs, increasing satisfaction, decreasing domestic unrest or terrorism, increased unemployment, efficient taxing, &c.
   

Carbon Neutral vs Carbon Optimal

We can learn two things from Prince Charles' fancy new Carbon Neutral lifestyle:

• Hippy trends are still hip, even for squares.
• It takes the wealth of a king to achieve that lifestyle

Most of us don't have the resources required to be completely carbon neutral. Perhaps carbon optimality (The Undercover Economist, Tim Harford) is a better choice? Think about it like an economist... you should only abate your own carbon usage to the point where the marginal cost of abatement is more than total marginal benefit.

Since it can be assumed that one person's abatement has a small market presence, we can assume to the total amount of abatement needed by society is greater than the individual can achieve. Therefore, stated simply:

One should abate carbon usage until they can no longer afford additional abatement. Whether subject to time or budget constraints, this is how the rational eco-minded individual will and should act.

As always, everything in moderation.

What is a supply-demand imbalance, anyway?

This article from the Instutional Economics blog is intriguing. I generally like the argument against gold bugs that any commodity could just as easily serve as a comparison, and therefore gold is nothing special when compared to paper notes. What is interesting is the following statement:

"Commodities are becoming more expensive in terms of a broad-range of currencies because of supply-demand imbalances in the global markets where commodity prices are determined."

Fair enough. But what exactly is an "imbalance?" Furthermore, why is it that we only complain about supply-demand imbalances when things are going bad. Who is to say that the problem wasn't with the decades-long depression in the price of gold/other commodities?

Health Care is Messier than You Think

I was reading this article, from today's New York Times, wondering why the heck skyrocketing health care costs are blamed on insurance. Is it the lack of insurance? Is it the overhead? Is there some kind of incentive problem I'm missing?

The article suggests that rising health care costs are caused by an expansion of insurance coverage, not the usually cited lack of coverage. It seems to me that the costs of treating those without insurance (and those that will not pay) is more palatable to the public, but less of a problem than expanded insurance coverage.

Why? Increasing insurance coverage increases incentives for hospitals to do risky, costly (but highly profitable) procedures. The lumbar fusion cited in this story is an excellent example. The problem is, I think, that we've hit some kind of inelasticity... that is, as coverage becomes (slowly) more available, costs increase disproportianately so that those still without insurance "can't afford treatment," and hence our current dilemma.

Follow Up: Have I Found the Liberal Economists

Wall Street also posted today in their "Informed Reader" section a short blurb about heterodox economists.

"The so-called heterodox economists question some of Adam Smith's conclusions that "markets, private property and minimal government will achieve maximum welfare," says heterodox economist David Ruccio of the University of Notre Dame. Beyond that, heterodox economists have a wide variety of positions, ranging from those who question whether humans are as rational as neoclassical economists assume to those who argue that an unequal distribution of power affects how markets work."

The article goes on to describe how their research is ignored, their ideas are gaining momentum, social mores are changing, &c. which leads me to believe that these are, in fact, the missing link--liberal economists.

But, does this logic force conservatism into the mainstream?

Unchecked College Liberalism: Two Sides of the Spectrum

Aside from being checkered with vulgarity and generally littered with poorly-thought-out punditry, I felt the recent article in my college newspaper needed a rational response.

Click on the title of this post to view "The Strobino File" by Tanner Kroeger.

My response to the editor:

Dear Sirs:

Moderate points of view are not sexy enough for local media, and they’re not sexy enough for a college paper.

Your article printed Friday on Mr. Dante Strobino prompted me to respond, not because its necessarily controversial, but because it embodies so much of what I think has gone wrong with college liberals in the past 30 years. Firstly, hats off to Mr. Strobino for having an opinion. That’s more than you’ll get out of most students here. Also, I’d like to point out that we can agree on more than one point, though I doubt that will earn me any points as a less evil “white man.”

People like Mr. Strobino serially disregard rational thought. The average citizen does not spit shibboleths nor espouse catchy hippy slogans. However, democracy is paramount only when we produce active, informed citizens. We fail on both counts and our governments run unchecked by citizens. Think about before you complain about the courts.

Remember, “the cops, the courts, and the banks” have built the society and institutions you so freely use to your own advantage. That is inherently where any counter-cultural movement falls apart. Those truly committed end up playing fiddle on the street and giving the finger to the “white man.” The others get married, have kids, suck it up and make a career. And they live far more comfortably that way.

In any case, Mr. Strobino, your opinion matters most to me because I don’t agree with it. You generate controversy and good social dialog arises from controversy. Through the opposite ends of the spectrum, heated, active political debate can bring to light the sobriety and virtue of the moderate point of view. Let’s have lunch and it; I’m sure we’ll both be enlightened.

Sincere thanks:
Jeff Horn
Senior, Economics

Externalities in a Nutshell (Are Shells a Negative Externality?)

A recent exchange, which proves that economists answer questions with at least twice as many words as necessary.

A question from a friend:

Positive externalities, such as education or advances in technology - do they precipitate government intervention in order for the market to reach equilibrium? It seems a bit counter-intuitive that advances in technology would produce a surplus rather than a shift in the supply curve. (pardon me if I manage to mince my terms - I'm in only my first econ course)

My response:

Yes, it does seem counterintuitive. Let me explain negative externalities first, without a graph, if it's possible!

Let's say pollution is a negative externality. It is an externality because its total cost to society is not realized by the producers (i.e. they don't have to pay to pollute). In fact, the people that often pay for pollution are the people that breathe the polluted air or those that have to treat the polluted water. This makes the plant's profits artificially high, so they produce too much (at least more than they would if they had to pay for pollution).

Now think about positive externalities. Both education and advances in technology produce positive side effects. Because people often can't say how much better off they are because you are smarter, they don't realize the benefits. That is to say, if you are smarter or have a good technology, most people won't even realize that you are improving their life, much less quantify how much they'd be willing to pay for you to use that tech/knowledge (this is how we determine how much the benefit is worth). Since people don't realize how much they benefit, and remembering that a negative externality causes overproduction, it should be easy to see that in the case of education, people will not allocate enough money/resources to achieve optimal education for the society.

So yes, governments can intervene to help the market reach what we call "social equilibrium." In the case of pollution, they can tax the plant for CO2 emissions or create a tradeable permit scheme (which has benefits we'll discuss another time). In the case of education, the government can subsidize public education to make it more widely available. In one case, the government taxes, in the other, it pays out. If we were all smart enough (i.e. omniscient) we could effectively allocate all resources, and government taxing and spending would be a wash.

To you last point, yes, technology and education do shift the supply curve to the right--everyone gets to consume more at a lower price! But because they are positive externalities, we don't all benefit as much as we could if we had more tech or knowledge. Very fascinating stuff. If you still wanna chat about it, let me know!

From Epiphany to Paradox

We're a social animal. That means we more or less operate in societies. It increases our wealth and well-being, diversity of diet and thought, exchange of ideas. Societies facilitate the most tremendous gift we have, when viewed secularly--communication.

Yet we toil against one another. Our greed hides in social interaction only to remanifest itself in national identities. Nations, economically speaking, are macroed micros. Its a collective, in a mild sense, and acts as one.

Our cooperative societies form anti-cooperative nations.

We are simultaneously the most cooperative and self-destructive animal on the planet.

Your Risk Free Trial

No, this isn't spam. Clicking on the title will take you to Economist.com, where you may receive a message similar to the following:

"Try The Economist for 4-weeks, risk-free!"

The magazine is called The Economist. They should know better than to advertise something as risk free.

By subscribing, I run the risk of forgetting to unsubscribe, in which case I'm charged for a full year. And I'm risk averse.

Because I'm rational.

And because I already have a subscription. That is all.

Etymological Moment

Manufacture

Hypothesis: manu-facture; manu coming from manual, or hand and facture coming from factor (or inputs).

Econ-spin: labor (manu) + capital (factors) = product

Actual etymology: from Latin manus or "hand" and Latin facere or "to make"

To make with one's hands.

An Extension of Unions

So, Nathan was nice enough to point out that all the great economists say that unions are OK. That's fine, I don't care. In my current area of study, unions depress pay and fundamentally stifle the quality of the supply of labor. (Don't be verbose...)

For instance, in education, unions serve to create across-the-board equally scheduled pay based on tenure. Simultaneously, they advocate iron-clad job security, and even in states that do not have unions, the State does a good job of securing even pay and iron-clad security. This prevents us from paying people for their merit and firing the ones not worth paying.

The abolition of unions would increase wages for those better-suited for teaching and put some not-as-well-suited out of a job (but they don't need to be teaching our kids anyway). In other words (and this is important):

It would more-efficiently allocate wages.

As the science of economics seeks study the maximization of wealth through the efficient allocation of resources, this seems like a good step for policy-makers to take.

The extension of the argument, as suggested by Nathan: "The existence of unions, though beneficial in the short run, is ultimately detrimental to the individual." Brilliant! And almost Keynsian. But I won't tell any of your libby friends. Hush, hush.

My extension to his: "Yes, and unions are ultimately detrimental to society. As it is unfair to the individual, it is unfair to all collectively: the ones working for a depressed wage may be better suited for and earn more in another position, or at the very least will consume less of our resources; the ones not working in whatever position (teacher in my above example) may now have another option that replaces their first or even second choice of a career, changing the whole set of opportunity costs the individual weighs in the efficient allocation of his own fiscal or human capital."

A Note on Unions

If I dislike unions so much (and I do), would I join one? Hell, yes! Elaborate, you say... Fine, but I'm going to do what an economist does best and assume (and forgive the following jargon):

A1) Institutionalized collective bargaining does not increase efficiency in a labor market that can be treated as a commodity market. That is to say more elaborately, for quality-undifferentiated labor or unskilled labor, the labor may be assumed to be readily available and treatable as a classic commodity--only efficiently allocated when fully exposed to the the functions of a free market (given constant transportation costs).

A2) Unions exist and I can only talk about not-having-them in my theoretical econ-world.

The existence of unions works against labor market efficiencies and causes a total loss to society. However, it would be unwise for me not to exploit the system for personal gain. Therefore, a fallacy of composition occurs and Smith's invisible hand slaps us around a little bit.

Now for my crack-pot pet theory for the day (see previous post): labor unions are a byproduct of market failures and themselves failures of the organized labor market. Therefore, governments should protect me, nay all of society, from myself by banning unions. This will increase welfare, or at least keep me from hurting others due to my inability to comprehend the consequences of my actions of the inability to make the best decision for society as a whole due to imperfect information.

Note on Economic Fame

What does it take to make a good economist? Or at least a famous one?

Great economic insight, sometimes at par with contemporaries, sometimes exceptional ability... and one crack-pot theory to set yourself apart from the pack.

Seriously, Rothbard has a knack for explaining things with exquisite analogies. But his stance on currency? *Gag*

And Friedman, so wise, so omniscient in the field. Heralder and harbinger of the greatest truths of 20th century economics, and all at least 10 years before we all started believing him. But his stance on the Fed? I mean, he had to have read SOMETHING good about it!

Keynes gave me reason to participate in the electoral process. He showed that governments do matter, as the largest consumer in an economy. But I just can't touch EVERY market failure as a justification of his theories. There is a natural limit to how much government one can stand. Someone ask Pinochet... oh, never mind.

Oh, and Nash? Well, I guess you can be right about EVERYTHING. But not everyone has his unique grasp on reality.

Cheating: Jobs and Relationships

Without going into too much detail, please take the following scenario:

1. Policemen need to be honest.
2. The nature of their work exposes them to bribes: opportunities to "cheat."
3. Their decision to cheat relies partly on the probability of getting caught, the amount of the bribe, and some sense of satisfaction (with themselves, their ethics, their job, etc.).
4. Many less will cheat with a higher salary, but bribes may just become bigger to compensate.
5. So, they may be kept from cheating by keeping a significant portion of their compensation out of their pockets until their entire career can be "certified" clean; that is, give a good pension to the deserving, good cop.

Now, it may not seem natural at first, but taking the scenario of a spouse, or commited one into account:

1. Spouses need to be honest. Love one another. Be trustworthy. All that jazz.
2. The nature of being a social animal exposes them to plenty of opportunities to "cheat." Define that however you wish.
3. Their decision to cheat relies partly on the probability of getting caught, the reward for cheating (the attractiveness of the individual, their attentiveness, their gifts, etc.), and some sense of satisfaction (with themselves, their ethics, their relationship, etc.).
4. Many less will cheat with a better looking mate, a higher combined income, better emotional security... but barring it all they may just cheat with an even further attractive mate. In the end, its all about morals. Why else would super-celebs cheat?
   
5. So, then, what keeps one from cheating? A significant portion of compensation must be kept until after a clean record can be proven. Since gifts, income, and even beauty don't make much sense here, I am left an appearantly logical conclusion: give good couples a great reward. God will give us good "pensions" for displaying His love and commitment in our human endeavours on Earth.