Don’t get me wrong, this technological advance will make people’s lives better. But the incentives to create artificial kidneys should never have existed.
Before I tell you why, I need to lay out some terminology. In undergraduate microeconomics classes, we distinguish between the short run and the long run. The short run represents time periods during which some factors of production (usually capital) are considered fixed, while others may vary. In the long run, all factors can vary. But both the short run and the long run presume a fixed, exogenous production technology. How do we study situations where the technology itself can change? Continue reading Artificial Kidneys Would Not Have Been Created in a Free Market→
Alex Tabarrok has fascinating post about Feeding America, a large non-profit that distributes food to food banks. Feeding America used an inefficient, centrally planned system to distribute foods, which led to a lot of waste.
In 2005, however, a group of Chicago academics, including economists, worked with Feeding America to redesign the system using market principles. Today Feeding America no longer sends trucks of potatoes to food banks in Idaho and a pound of chicken is no longer treated the same as a pound of french fries. Instead food banks bid on food deliveries and the market discovers the internal market-prices that clear the system. The auction system even allows negative prices so that food banks can be “paid” to pick up food that is not highly desired–this helps Feeding America keep both its donors and donees happy.
Food banks are not bidding in dollars, however, but in a new, internal currency called shares.
In April of 2015, Frosti Sigurjonsson, Member of the Parliament of Iceland and Chairman of the Committee for Economic Affairs and Trade, made a bold proposal to end fractional reserve banking and replace it with a system he calls “sovereign money.”
Fractional reserve banking is the system under which banks create money by lending out a portion of depositors’ money, keeping only a fraction to pay out on demand. One problem with fractional reserve banking is that the mismatch between banks’ assets and liabilities leaves them exposed to bank runs and financial panics. To solve this problem, the central banks of the world function as “lenders of last resort” to save insolvent banks from going under. However, the more insidious problem with fractional reserves is that the injection of new money directly into credit markets artificially lowers interest rates and incentivizes entrepreneurs to take on longer term projects than the real savings available in the economy can sustain. Having central banks intervene to keep the cheap credit flowing does nothing to address this problem, and in fact makes it worse. Continue reading Icelandic Sovereign Money with Ash Navabi→
I’m in the second year of my PhD, and I’m working to develop a research program; hopefully one that gets me a finished dissertation as soon as possible.
I’m drawn towards studying education because (1) I have spent my entire life in schools and (2) schools are seriously, and obviously, messed up. The marginal benefit of an additional perspective on education could be very high if that perspective were to shape education reform in some way.
It’s a cliché to make fun of “soft” degrees, so I’m surprised there isn’t a large body of research on why people choose to pursue them anyways. However, there is a body of research on why people fail to treat education as an investment more generally, as detailed in the working paper “Behavioral Economics of Education: Progress and Possibilities” by Lavecchia, Liu, and Oreopoulos. To avoid typing out Lavecchia, Liu, and Oreopoulos many times, and to make it seem like I’m periodically pausing to laugh, I will refer to them as LOL.
LOL use the dichotomy of “system 1” versus “system 2” thinking. System 1 is the unconscious, mostly automatic part of our brains that says “Don’t get out of bed, it’s warm and nice here and getting to work on time isn’t so great anyways.” System 2 is the part that rationally deliberates our long-term choices and says “You need to get up and go to work because working yields the following long-term benefits: (1) wages, (2) the promise of future wages, (3)…” LOL include the obligatory footnote saying that neuroscientists dispute whether this is actually what the brain is doing, but go on using the dichotomy anyways because it’s an extremely useful way to organize our thinking about the brain even if that’s not how it literally works. Continue reading Thoughts on the Behavioural Economics of Education→
Cornelius Christian is an Assistant Professor of Economics at St. Francis Xavier University. His research concerns development economics, economic history, and the economics of conflict and violence, which is the topic of this episode of Economics Detective Radio.
Cornelius’ paper “Lynchings, Labour, and Cotton in the US South” deals with violence against black people in the post-reconstruction South. Historians have hypothesized that there was an economic motive to lynchings, noting that more of them occurred when cotton prices were low. Black and white workers competed with one another in the agricultural labour market. Cornelius’ findings indicate that lynchings were used by white labourers to scare black workers out of the labour market, thus raising their own wages. He finds that lynchings happen in the wake of economic shocks when agricultural wages are low. He also finds that, when lynchings occur in a given area, black people tend to migrate out of the area and agricultural wages rise for the remaining white workers. Continue reading Violence, Lynchings, Civil War, and Witch Trials with Cornelius Christian→
I’ve read a lot of LessWrong recently, and I learned about a particular paradox known as Newcomb’s problem. In the problem, an alien superintelligence called Omega presents you with a choice. He gives you two boxes, box A and box B. He puts $1000 in box A and either $0 or $1,000,000 in box B. You can then choose whether to take both boxes or just box B, but the catch is that Omega will only put $1,000,000 in B if he predicts that you will only take B. And given that Omega is able to perfectly predict the future, everyone who chooses only B will get $1,000,000 while everyone who chooses both will get $1000.
The maddening thing about this problem is that, as you sit puzzling over whether to take both boxes, the monetary amounts have already been decided and placed in the boxes. There’s either $1000 or $1,001,000 sitting in front of you, and so it would seem that taking both would be weakly better than taking only one. And yet, everyone who takes only one gets $999,000 more than everyone who takes both. How could it be that the “right” answer gives less money than the “wrong” answer? Continue reading Newcomb’s Problem and Order in Game Theory→
There’s a tradition at least as old as Kant of investigating philosophical dilemmas by appealing to our intuitions about extreme cases. Kant, remember, proposed that it was always wrong to lie. A contemporary of his, Benjamin Constant, made the following objection: suppose a murderer is at the door and wants to know where your friend is so he can murder her. If you say nothing, the murderer will get angry and kill you; if you tell the truth he will find and kill your friend; if you lie, he will go on a wild goose chase and give you time to call the police. Lying doesn’t sound so immoral now, does it?
This is a great way of doing philosophy, but reading it, I realized I had heard it before. I’ve heard this sort of argument in the context of policy debates.
Here’s a particularly striking example (h/t to Jason Brennan):
Unlike the case of the door-to-door murderer, which is a deliberately fanciful way of examining a broader moral truth, this is a policy proposal made on the basis of a fanciful scenario. The argumentation goes like this:
In an unlikely scenario, economic system A would allow bad outcome X
Therefore, abolish A (and substitute it with another system, such as B)
There are a lot of errors packed into this line of thinking. What if bad outcome X happens under both systems? What if changing systems just substitutes bad outcome Y for X? What this fails to do is compare the relevant alternatives. Is the implicit claim that under socialism, nobody would ever starve? Millions of Soviet citizens beg to differ. Continue reading The Trolley Car Approach to Public Policy→
…or How I Learned to Stop Worrying and Love Inequality.
David R. Henderson is a research fellow at Stanford University’s Hoover Institution, and a professor of economics at the Graduate School of Business and Public Policy, Naval Postgraduate School, in Monterey, California.
Thomas Piketty’s Capital in the 21st Century managed to do something unprecedented among equation-dense economic tomes, it became the #1 selling book on Amazon.com. The book tapped in to a hot topic among politicians and the general public: the high (and possibly rising) wealth and income shares of the top 1%. However, David points out that although the book was a best-seller, it wasn’t actually a best-reader. Amazon logs the sentences people highlight, and the top five most-highlighted sentences in Capital all appear in the first 26 pages. It seems that, at least among kindle readers, most people didn’t make it past the introduction. It appears that people buy the book to back up the views they already hold. Continue reading Income and Wealth Inequality with David R. Henderson→
What sounds more difficult to you, figuring out supply and demand, or accurately measuring the Earth’s circumference? It must be supply and demand, because Eratosthenes figured out the other one two thousand years before anyone really managed any progress on that supply-and-demand stuff.
So now that we’ve established that supply and demand is much harder than accurately measuring the Earth’s circumference, we should ask ourselves why it is so. If you don’t know how Eratosthenes managed it, try thinking for a moment about how you might go about accurately measuring the Earth’s circumference with only the tools available in Ancient Egypt. Hint: you can compute the circumference of a sphere with the arc length and angle between two points. Continue reading Economics and the Cognitive Minefield→
Garrett M. Petersen's blog about markets, institutions, and ideas.
