The Level Playing Field

Some trade Economists occasionally argue in favour of a "level playing field" in international trade. What they mean is that, if foreign competitors to domestic industry receive subsidies (say, in the form of an artificially-depressed currency or tax breaks), it is a good idea for the domestic government to have institutions in place to raise the stakes sufficiently to match their actions. Such, I gather, is the idea behind the topical Export-Import Bank, much ballyhooed by the otherwise venerable Larry Summers, which offers credit to American companies looking to export their products.

Summers' tag-line for his Financial Times article reads "a failure to engage with global economic issues is a failure to mount a strong defence". The "engagement"-part is to some extent about the Export-Import Bank, and the "failure to mount a strong defence"-part recurs later when Summers likens its elimination to "unilateral disarmament". The thing is, though, that unilateral military disarmament may well be a good thing! At the very least, Summers should not treat a negatory answer as self-evident; many prominent intellectuals have outlined strong cases for pacifism.

 

But why should a playing field be level, anyway? My playing field is certainly not level enough for me to compete with, say, mechanized farmers, let alone unmechanized ones. I have neither land nor skills. Yet who wants to give me a subsidy? I am guessing what is really meant by a "level playing field" is that, if I were to take up farming, government-imposed distortions affecting comparative advantages ought to be corrected, if need be by other government-imposed distortions ("corrections").

Of course, in a way I may be able to "compete" with the farmers even absent government assistance, albeit in a rather a more indirect fashion. With my economics (and my side business), I can do my best to create higher value for certain consumers than does marginal farm output; "a good book is worth a meal", as they say. Furthermore, others' engagement in farming means that they raise my chances of success in my field, for while they still compete with me for the favour of the consumer in a world of scarcity, they could have chosen to offer much closer substitutes for my services. Since they did not, I find it somewhat easier to survive in my business. Importantly, I should think I am more able to find competitive business ventures in the absence of costly tax-financed enterprises than in the case in which I have to co-fund them.

Now speaking of costs, Summers actually says that the Export-Import Bank operates "at no cost to the government", but this must be nonsense. Are there no alternative ends for what money the government can obtain? It is true that the Bank has an incredibly low default rate at (recently) less than two per cent of lending, but this means that borrowers should tend to be creditworthy and have no problems raising money elsewhere. The low default rate is also indicative of borrowed funds being mostly in the hands of well-established firms spending resources to gain influence useful in obtaining favourable credit conditions.

If foreign companies are advantaged (by their versions of hidden subsidies from their versions of Export-Import Banks), this means that other foreign markets, operating sans these privileges, find it harder to grow. It follows that American companies are advantaged in these markets. So if my playing field may still be judged to be level with the world's best farmers as per my example above, surely the world market is a level playing field even in the presence of foreign governments' subsidising foreign industries. For a subsidy to industries in one sector is an impediment to the growth of industry in others.

The thing that changes is not the differences between competitors in terms of some being on higher levels than are others. Rather, the overall level for everyone is a bit lower due to the costly rent-seeking activities which entities like the Export-Import Bank encourages.

Brave New Auctions?

A Swedish glass manufacturer has recently held an auction in which heart rates and how much one sweats when viewing an object were measured. It then awarded the object to the person judged by these measures to "like" it the most. This news made me think of topics in my recent review of Professor Richard Layard's old book Happiness. If the goal is to maximize measurable happiness, this seems to me to be the way to go. It also seems to me to be a profoundly bad idea for whole societies to adopt (except on this small-scale and voluntary basis).

In my aforementioned review, I did not touch upon a critique of utility (as well as of happiness) due (as many other profound insights) to the late Robert Nozick, but it fits well here. The critique goes as follows: what if some person is found to have intense positive feelings about a great many things, even after already possessing a great deal of wealth? Such a person would be treated like a god in a society run by the auction's principles, exactly like the Nozickean Utility Monster.

A society run along these principles would neglect every individual (even if it happens to be every individual bar one) who cannot muster the same positive feelings as can the utility monster. This of course violates the dignity due to the individual and his rightfully obtained property. Imagine going shopping only to find the clerk reluctantly handing out your favourite breakfast cereal to a needy individual whom you would immediately outbid in a standard auction.

Fortunately, the chances of the emotion-based auction's principles actually being implemented as legislation are low. This is because objects are costly to produce and it plainly pays more to produce them for those most willing to pay (although a high willingness to pay would probably overlap very frequently with a great intensity of positive feeling). The system would quite palpably be commercially inferior to a vast array of alternatives, and the stationary bandits in charge of nations care a lot about commercial success.

 

HT: MR

Pricing away the Braess Paradox?

Here is an interesting "commons"-type problem: Imagine that it takes one hour to travel on Route 1 between Point A and Point B, and that the road goes via the fair town of Middlemarch (from George Eliot's eponymous novel), in a way such that the segment A-Middlemarch takes 40 minutes and Middlemarch-B takes 20 minutes if fewer than Y motorists travel on it, and 30 minutes otherwise. There is an alternate road, Route 2, which goes between Points A and B via nearby Coketown (from Charles Dickens' Hard Times), where the segment A-Coketown takes 20 minutes if fewer than Y motorists choose it and 30 minutes otherwise, and segment Coketown-B takes 40 minutes regardless. In total, there are fewer than 2Y potential motorists who could travel between Points A and B.

The individual motorist makes up his mind thusly: "If more motorists are likely to take Route 1 when I want to travel, I choose Route 2 to save on time, otherwise I choose Route 1." Since we are all individuals, the outcome is that travelling from Point A to Point B takes one hour. The situation is illustrated below (click to enlarge).

 

Now Coketown and Middlemarch are fairly close to one another, and an expressway is constructed between them which takes only five minutes to drive, so that one can combine the segments from the two routes in novel ways. What is the outcome with respect to time it takes to travel between Points A and B? The answer is that the new road, an option which nobody is forced to take, lengthens the average travel time by five minutes, from one hour to one hour and five minutes!

 

Queer as this sounds, it is perfectly logical. This is because the longest time it takes to drive the 20X-segments is 30 minutes, which is always less than the alternative, 40-minute, segments. Consequently, individuals are always better off driving on the 20X segments. Traffic on the 40-minute segments will die completely.

 

I wish I could take credit for this fun application of strategic behaviour, but it is actually a fairly well-known phenomenon referred to as the Braess Paradox, whose possibility was first proved by German mathematician Dietrich Braess and I can imagine many people have written about it before. However, since I have not seen the example in a long while, I thought I would share it here.

 

A question that remains is how common the Braess Paradox is in the real world. Notice that a properly set toll for using the Middlemarch-Coketown expressway will ameliorate the situation; the motorist then chooses, as before, between a 40-minute segment or a 20X-minute one plus the five-minute drive on the expressway, and takes the 40-minute segment if the time saved is valued at less than the toll.

 

Interestingly, if the motorist's decision happens to push the time it takes to drive the 20X-minute segment down to 20 minutes, other motorists are willing to pay much more for the expressway, since it now saves ten minutes more of their time. A high-enough toll that makes just fewer than Y motorists take the 20X-minute segments therefore seems to be optimal in this case: those motorists drive between Points A and B in 45 minutes and the other motorists in one hour. Of course, if a lower toll turns out to bring in more revenue, this situation will not arise, but it is possible. In conclusion, even more choice (so that the road's owner may charge people for using it) may lead to improved outcomes; choice in moderation (no toll but an expressway) is bad.

Happy, Pappy?

In a book brimming with interesting findings and lines of research, Professor Richard Layard of the London School of Economics sadly offers a travesty of the utilitarian case for happiness. His book, Happiness: Lessons from a New Science, is appallingly tendentious, especially on philosophy. I don't recall when I last read a case for anything that so poorly represented opposing arguments. The strange thing is that I still do not regret reading it, even though, ironically, it was far from a happy experience. I will deal with an assortment of nit-picks before I get to my substantial criticisms, which concern philosophy.

Picked Nits
The case for happiness which Layard presents is insufficiently dynamic. He argues that more wealth is unlikely to make the happiest among us substantially happier, and that "we" should therefore focus our energies not on production but on softer ends, such as leisure. However, if maximal happiness is truly the goal (which I will contend below that it is not), it would make a lot more sense to move quickly now to take away a lot of unhappiness and thereby create a much-improved position into which our descendants are born. For instance, on the issue of immigration, Layard opines against it on the grounds that stable communities promote happiness. But if anyone were free to move anywhere, communities would stabilize over time, just like they stabilize within closed countries. Even if that took a couple of generations, I don't see how anyone could doubt that the "happiness" gain to the immigrants today and their descendants is vast enough to defeat any other arrangement. Similar cases could be made that more work now can help produce innovations in health care which reduce misery tomorrow.

Layard is of the respectable opinion that the marginal utility of the millionth dollar of wealth is lower for a millionaire than the marginal utility of the first dollar is for someone of less wealth, but talks about it as though it were a well-established truth. In fact, his case is rather weak. On page 51, he writes that survey research "confirms [his] belief" and for a big part of his evidence refers his readers to an online annexe on the measurability of happiness, but when I go there to look, the relevant section (p. 17) is blank, but for an annoying note reading "[TO COME.]", this on a page which was last updated in 2005. Busy decade? As I have argued before, why can it not be that a millionaire decides to try to get rich simply because the millionth dollar gives more happiness to him than even the first dollar does to persons of more conventional wealth? We are nowhere near being able to compare "happiness" across individuals and utility is yet more difficult (see below for a distinction between happiness and utility).

I am left with the impression that Layard contradicts himself when he laments the "commonplace" maximizer's fallacy of focusing too much on tomorrow while agreeing with behavioural economists in their concerns that people are insufficiently forward-looking. Are these just different groups of people? Who has the right priorities? Elsewhere, in a hapless lapse of judgement, he refers to the existence of positional goods and fashions as indicative that individuals' preferences change (p. 139), when every economist should know the ease with which one can have stable preferences which incorporate social concerns: e.g. a utility function can be written which gives utility only when consumption of some good is above average.

Before proceeding to more substantial criticisms, it is worth pointing out that those respectful of public choice will be annoyed by Layard's assertions, whenever he talks about policies with which he is in agreement, that they are in place because thoughtful politicians have realized that they increase happiness. Rather, it may be that they are in place because politicians have gained from this legislation. If they should happen to be socially valuable, that is an incidental by-product of the politicians' self-interest (of course, this is not to say that most policies are wrong-headed, only that Layard's writing will seem naïve to students of public choice).

More Substantial Critique
"Happiness", first of all, is a poorly chosen word for a concept which is to permeate a whole book. it is easy to show that many people care about other things beside happiness, and consequently that Layard's assertion that, "unlike all other goals, [that of happiness] is self-evidently good" (p. 113). In a terrific meditation on happiness, Robert Nozick, in his book The Examined Life, asks whether one is indifferent as to when one's happiness comes over a life-time of fixed length, provided that the quantity of happiness is unchanged under any stream. Many people I have asked seem not to be indifferent, which sufficiently shows that individuals care about other things beside happiness.

Now I tried to do the same thing as did Nozick with utility rather than happiness on this blog last month, but that is a lot more difficult, because utility is what our actions strive to achieve. Had Layard substituted utility for happiness, it would have been harder to argue against his thesis. But he did not, so it is not.

However, even if Layard had written about utility rather than happiness, it is still easy enough to argue against his thesis. Remarkably, he must be familiar with some famous arguments, as he briefly mentions some of them in the book, but they seem somehow not to have registered with him, for he mostly sloughs over them like trivialities. The book would not have left me with this impression had it given fairer hearing to opposing arguments. Case in point: As noted, Layard believes more happiness (or utility, as I will now call it) is self-evidently good. In a foot note on page 113, he takes care to highlight that he wants maximum "good feeling" rather than "desires" (which may result in long-run unhappiness), but then Layard must tell us what causes "good feeling". My bet is that he will pick things which are not "self-evidently good" and leave out stuff which some people feel should be in.

Layard's own values are imposed when he talks about "fairness" and he argues that poor folks ought to have greater weights when policies are evaluated according to their effects on happiness. This already shows that the maximal attainment of happiness is not "self-evidently good". Relatedly, Layard sloughs off Nozick's brilliant example of the Experience Machine on the grounds that "it is a weak test case" because it is "far removed from our reality" (p. 115). All assertion and no argument. On the contrary, engaging in thought experiments of this kind is extremely rewarding. The thought experiment is that the Experience Machine will improve upon our happiness, but Layard feebly tries to change the terms ("maybe the machine could not be trusted?") rather than engage with the argument.

Later, Layard handles the issue of consequentialism really badly, claiming misunderstandings by critics of consequentialism because the action is itself factored into the consequences (pp. 119-120). By this criterion, Layard would have to argue that, in a world of racists, a judge convinced of the innocence of a differently-coloured man should still sentence him to death since failure to do so will likely result in unruliness and fatal street-violence by indignant bigots. Now some consequentialists bite the bullet and claim this is what should happen, but it is hardly uncontroversial and Layard does not even mention this consequence of his ethics. Layard must argue for the death of just one man to save others, for "[p]ublic policy has to deal with human nature as it is" (p. 153).

Conclusion
To repeat, this is a really terrible thesis set in a book of many interesting findings. Time after time, Layard lays out a poor, easily-destroyed case for opposing views, and then proceeds to the façile task of doing so. Because the negatives of this book form such a crucial part of its overall thesis, it is unavoidable that the book as a whole must be regarded as a bad one. This is unfortunate because it is also possible to greatly enjoy its many interesting presentations, such as the evolution of happiness within many countries, or its erudite exposition on anti-depressant drugs. To read this book is like searching for pearls in the Augean stables before Heracles rerouted the rivers to clean them. Some of the pearls are extremely valuable, so it will be well worth it for many people, but they should be warned, for the big thesis represents the accumulated filth of thirty years of unhemmed bovine excretory practices.

The Role of Social Science in Moral Philosophy

EconLog's wise Bryan Caplan had a few interesting thoughts on hypotheticals while I was travelling recently (here and here). Like him, I believe hypotheticals are of vital importance to understanding the world in situations in which reality is too complex for understanding to be reached in any other way. This post is to clarify one point of contention which I believe prevents sound thinking on the issue, namely when "obviously unreal" assumptions may be used in a thought experiment. In short, the assumptions must not themselves imply logical contradictions, or imply other things which make them impossible or prevent an assumed outcome from being reached.

 

Hypotheticals are to be used when they establish logically equivalent or near-equivalent scenarios in which morally (im)permissible courses of action are more easily seen. For example, if it is permissible for two consenting homosexuals to live together in a romantic relationship because they both so desire, why is it not permissible for two people to engage in a business transaction which they both desire? This example serves to isolate the aspect of consent. To argue against the implication that the business transaction should still be subject to regulation while the former should not - or that the former should be subject to the same set of regulations - requires that some aspect other than the one of consent be found which may differ between the cases.

However, hypotheticals must not violate the laws of logic or of social science (or any other established set of laws - i.e. natural laws as opposed to legislation). Just like one cannot assume that it neither rains nor does not rain (for one of them must be true), one must not assume things that are known to violate laws of science, social or natural. For example, it is not permissible to reason that, since the "dole" (or "resources") is available to anyone, all have a moral right to be fed by it sans working. This is in error because it requires that scarcity not be a feature of the world, but scarcity is an established fact of economics (and of commonsense, really). Incidentally, this is a problem with positive rights in general. Similarly, one cannot argue that prices in markets are more or less "just" (except for fraud), due to the workings of supply and demand.

If the last point is not clear, here is another example: Some might reason that it is permissible to fend off threatening individuals such as armed robbers by use of force even though resultant stray bullets may hit innocent persons, and that, by analogy, it is permissible to join the cause of some freedom fighter and use force - which could spill over unto innocent civilians - in order to remove a (sufficiently) bloodthirsty tyrant. However, as I have argued many times before on this blog (see, for instance, here, here or here, but here for some doubts), it may be a fact of social science that political outcomes are fairly robust because maximizing leaders tend to be sensitive to the underlying conditions of the political jurisdiction and are therefore required to pursue a particular set of policies. If so, the reasoning by analogy is false: joining the revolution is not permissible because nothing comes out of the revolution except more of the same and endangering innocent civilians is thus the only effect of the action.

Sometimes, there is no knowledge about whether the premises of hypothetical examples violate laws or not, and sometimes - as in the aforementioned example - the evidence is a little short of conclusive. Here, an example is offered by John Rawls' innovative Theory of Justice, which asks us to imagine ourselves behind a veil of ignorance where we do not know which position we are to take in society. I would say that we do not choose into which circumstances we are born (which maybe comes sufficiently close to Rawls' premises), but, on the other hand, perhaps the reincarnationists are right and those circumstances are rewards or punishments for what we did in previous lives (though maybe one did not choose before the first life?)? Or maybe we were "spirits" but forgot about it at birth?

One may wonder what happens to hypotheticals if social science becomes so advanced that its laws expand to include (almost) any social phenomenon. I believe such developments will never reach a stage in which accurate predictions can be made, but if society were found to function deterministically, no hypotheticals regarding society-wide phenomena would be allowed. However, hypotheticals would and should still be used to inform individuals of their morally optimal behaviour.

The Impotence of Words

It is intriguing that the noble Daniel Klein is pursuing a quest to reclaim the original, anti- rather than pro-government, use of the word "liberal", but he annoys me when he says, in an interview, that the word is "powerful". What evidence is there for this proposition? It is used in the original sense, or in a sense somewhat close to the original one, in countries like France and Sweden, whereas in the US it has, of course, acquired in many ways the opposite meaning. To define "liberal" as pro-welfare state is profoundly illogical to me and I wish Klein luck in his endeavour, but since France and Sweden are arguably quite a bit less liberal (in the classical sense) than the US, why would Klein claim the word is "powerful"? It has not made its original users more market orientated.

Casual evidence from other contexts suggests to me that words mean very little, indeed. In some countries, such as Finland and Iran, the dominant language does not distinguish between the sexes in its pronouns. H. L. Mencken's wonderful The American Language tells me (in a footnote on p. 175) that the third-person pronoun hesh was suggested in America around a hundred years ago to mean "he or she" in everyday usage. It evidently never took off, but that is how Finnish and Farsi work. So one way of estimating the effect of words on society is to look at how the gender-neutrality of pronouns might result in differences in how men and women behave in these countries compared to comparable ones. If language impacts how one views the world - as claimed by the Sapir-Whorf hypothesis - men and women speaking Farsi and Finnish should behave differently than those speaking, say, English or French.

I strongly doubt the differences are significant here, if they exist at all; for instance, while women make up a high 40 per cent of the members of the Finnish parliament, the corresponding figure for Sweden is almost 45 per cent. Wikigender reports that the share of female members of corporate boards is also lower in Finland than it is in Sweden. Now there are certainly also studies indicating that gendered pronouns do influence how people think. However, to the best of my knowledge, the studies which support the Sapir-Whorf hypothesis are of the variety that they ask subjects to read a text in which the gendered pronoun is prominent, then ask about career prospects, alternatively ask whether a man or a woman comes to mind.

Frankly, I cannot see why anyone would take these things too seriously. They offer some evidence, but it is very weak. If the image of a man, rather than that of a woman, comes to mind when using the pronoun "he" generically, and this has lasting consequences for one's attitudes or career choices or anything else of actual substance, then I believe one is so deficient in ability to reflect and make important life decisions that one simply does not exist; I cannot believe any human is that stupid. I hasten to add that this is far from my field and readers familiar with more evidence than this are welcome to contribute in the comments.

There are, of course, some studies in economics which look at attitudes and language. Guido Tabellini has claimed that usage of the second-person singular pronoun, rather than the plural, to address others, as well as capitalization of the word "I", are related to levels of respect, and a recent article in the Journal of Law and Economics links gendered pronouns to lower levels of maternity leave, but it seems to be sensitive to the inclusion or absence of just one or two countries, and neither of these articles includes - as far as I can recall - very many countries.

Some words begin to take on a pejorative meaning, such as nigger, cracker, kike and red-skin. Those may be powerful (although whether decent folks should avoid them is another issue - their using them might conceivably destroy their evil power?), but in these cases other words take on the original meaning of the pejoratives, so that what is really meant can still be expressed. I like the word liberal in its original sense and wish Klein and associates every bit of luck as I tend to use liberal to mean "small government". However, I would like to see some good evidence that the word is really as powerful as Klein claimed.

 

HT: Econlog's David R. Henderson

The 1964 Civil Rights Act

Today marks the 50th anniversary of the Civil Rights Act of 1964, a piece of legislation which ended discriminatory procedures for voting applications and made it illegal for local (i.e. state and municipal) governments, and agencies receiving federal funds, to deny access to public facilities because of race and to use race as a criterion for employment, respectively. A lot of what ended the Jim Crow laws was in this act. The act also granted positive rights such as racial segregation in schools and places of work, content with which some people will legitimately take issue (e.g. "why not just abolish mandatory discrimination rather than also mandate specific hiring practices"?).

I don't expect any respected and coherent philosophy or social science to deplore the greater ease of voting (except insofar as poor people may be less informed about policy and blacks are poorer than are whites, and except also for the possibility that voting may not actually change policy outcomes) and the greater possibilities for blacks to use public resources. While I do not personally care about my right to vote, the end of any mandatory discrimination is certainly something I celebrate. As noted, one may take issue with remaining bits of the Act.

However, if one compares the Black-White income gap over time, one finds that it was closing much faster during the several years leading up to the Act than it was during the several years after its implementation. Why this is so is a great puzzle. Alas, I have no link to data, but I believe Census statistics will back me up if anyone cares to search for sources. The aforementioned mandated hiring practices may absolutely encourage tokenism, and labour-market nonsense such as minimum wage legislation will hurt blacks disproportionately more than they hurt whites. However, I know of no really good explanation for the dismal performance of African Americans. (The minimum wage was introduced in 1933 as part of the Recovery Act and so is not immediately connected to the income gap, but I believe it reached its historical all-time high in constant dollars in the late 1960's and remained quite high long thereafter, which is why I include it among "small" explanations.)

These trends suggest to me that the Act could not have been an important step towards race equality. What gargantuan affliction would have happened to the black population of the US that was prevented because of the Act? If anything, its being passed in a democracy is indicative that at least popular opinion may have become friendlier to the racial minority. A great calamity would have had to have been avoided, because absent that, surely progress should have sped up rather than slowed down.

Not knowing what caused the slow-down in progress, I am also at a loss to suggest remedies. Not that one should expect groups to have similar outcomes, but I have never seen anything to suggest to me that blacks should have any inherent incapacity to do as well as do whites. The best I can do is to continue to favour abolition of minimum wage legislation and special favours directed to blacks, and to support market competition. Another thing to do is to legalize the drug trade, which is presently ensuring the imprisonment of many, many blacks while denying individuals the right to do what they want to themselves.

Those suggestions are mostly in a classical liberal direction. One authoritarian measure which would surely work if it were ever implemented is the enforcement of interracial marriages and production of "mixed" children. That way, there would no longer be any distinguishing features between races and consequently no more income gap. However, equality would only be achieved rather slowly as many non-mixed persons would take a long time to die off. If I am right about the unpalatability of many parts of the Civil Rights Act of 1964, maybe this could be a proper Act for this year?