Sunday, March 27, 2011


On a long car journey while traveling for Spring Break, I’m listening to Three Cups of Tea by and about Greg Mortenson. He stumbled across an impoverished village in Pakistan inhabited by an ancient minority people group and decided to build them a school. Mortenson was not wealthy by any means but eventually stumbles across some donors to help him, and instead of building one school he ends up building dozens and funding little microbusiness support projects that primarily benefit women.

Here’s a guy who is not a Christian-- he seems pretty universalist-- but who, without hesitation or reservation, goes to meet the needs of total strangers. He ends up being adopted by a community of tribes, seeing his work blessed by supreme Shiia clerics in Iran, protected from a fatwa against him, and released from being kidnapped by Taliban fighters due to the purity of his cause. He changed lives, particularly those of women and girls, very dramatically and quickly in one of the harshest, most un-friendly places to Americans in the world.

He reminds me of a kid who came and spoke to our Sunday school class a couple weeks ago. He just went to Kenya on a whim. He settled in a remote mountain village teaching in a school, the only white person some had ever seen. In a few months time, he ended up being instrumental in getting supplies and more government support to that school. He loved on the kids and took them places they’d never been and bought the whole village pairs of shoes--something they’d never had before--changing their lives forever.

These people weren’t trained missionaries, nor were they sent by anybody. They just went.

If Mortenson had been a Christian, or more precisely a Southern Baptist, how would his story have been different? First, he would have had to be screened and approved by a body of people who don’t know him. Next, he would have to develop a strategy. Then he would have had to spend a long time raising both financial and prayer/moral support. Then he would have had to live in the country learning language for at least a year before beginning any major project. Then he’d have to deal with the skepticism of the locals who say “Where does his money come from? Why is he here?” Then just as he was getting a project going, he’d have had to go back to the U.S. for a year on stateside assignment (furlough). At the very first fatwa, he’d probably be evacuated never to return. I could think of some other things to make the list longer and more complicated...

There was a woman on 60 Minutes tonight who has devoted her life to helping children who have been mutilated by disasters and wars. Here’s her organization. She was at a low point in her life, was read a story about a badly mutilated Bosnian child, and has worked tirelessly ever since. She basically has begged, borrowed, and pleaded with people to provide medical help to kids who badly need it. She clearly believes in a loving God, but I doubt she would pass as an evangelical Christian. Yet, she’s been a greater ambassador for the idea of a loving God than most missionaries I know. Bringing kids (and their families) in for medical treatment is so outside-the-box for most churches and missions agencies; it just doesn’t happen.

I’m also reminded of four SBU students who spent their Spring Break trying to encourage microbusiness on an impoverished Sioux reservation in South Dakota. Two students took a road trip out there a while back, stumbled across this reservation, and decided to do something about it. They cold-called Lowes and Wal-Mart for money and supplies and were quickly given support by the companies. (I don’t know the details of their trip just yet, and may be off on some of the above) They just did it.

Mortenson is fond of saying “when your heart speaks, take good notes.”

We have good precedent for taking some well-counseled, measured thought before doing something big (Luke 14:28-30). But if you read the context around those verses, you see the reason the cost is measured is because it’s larger than what just about anyone is willing to pay. Our plans and strategies that are designed to insure success end up delaying it or preventing it altogether. In the end we have to just do it. Just try something.

All this will be on my mind.

Saturday, March 26, 2011

More on the ACA

As a follow-up to my recent post on the Affordable Care Act, a good Healthcare Reform Q&A by the good folks at PBS NewsHour. Very readable and helpful. You can see in between the lines there are some difficulties where the rubber meets the road, particularly in the state-run exchanges.

BTW-- I agree with the comments there about needing more leadership from the GOP on ideas for reforming the ACA rather than the "repeal (and replace)" rhetoric.

Book Review, Wealth of Nations Book 4

Book IV, Of Systems of Political Economy.

Smith spends much of this book examining the system of commerce and agriculture, which he takes to be the "two systems of political economy." Much of this book focuses on the gains from trade and attacks mercantilists who are obsessed with forcing the nation to export more goods than it imports from other countries. The goal of mercantilism is to import more gold and silver than other countries and Smith shows how that's not the point-- a nation's wealth and standard of living depends on its ability to produce goods and services, not on how much gold it has. Trade expands the size of the market and allows for more specialization to occur--more efficient uses of resources. It allows producers and consumers to obtain things they otherwise could not:

"The importation of gold and silver is not the principal, much less the sole benefit, which a nation derives from its foreign trade...[Trade] carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else for which there is a demand. It gives a value to their superfluities, by exchanging them for something else, which may satisfy a part of their wants and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection...[Trade] encourages them to improve its productive power, and to augment its annual produce to the utmost, and thereby to increase the real revenue and wealth of the society."

Money, as it were, doesn't matter:

But if money is wanted, barter will supply its place, though with a good deal of inconveniency. Buying and selling upon credit, and the different dealers compensating their credits with one another, once a-month, or once a-year, will supply it with less inconveniency. A well-regulated paper-money will supply it not only without any inconveniency, but, in some cases, with some advantages. Upon every account, therefore, the attention of government never was so unnecessarily employed, as when directed to watch over the preservation or increase of the quantity of money in any country.

But local merchants and producers don't want to face increased competition from trade, either from the neighbor across the street or the stranger on the other side of the world. So, they lobby parliament to give them a monopoly. Elected officials and kings then say they are "pro-business," as President Obama often states. "Pro-business" is anti-market and anti-consumer.

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. ..It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class, our merchants and manufacturers have been by far the principal architects. In the mercantile regulations which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it."

And so it continues today. Via Alex Tabarrok, here's a story about U.S. furniture manufacturers asking for (and receiving) payments from Chinese firms in order that those furniture manufacturers don't lobby Congress and the ITC for protection. La-Z-Boy would rather you buy the more expensive chair that is "made in America," because they pretend to be patriotic:

The laudable motive of all these regulations, is to extend our own manufactures, not by their own improvement, but by the depression of those of all our neighbours, and by putting an end, as much as possible, to the troublesome competition of such odious and disagreeable rivals. Our master manufacturers think it reasonable that they themselves should have the monopoly of the ingenuity of all their countrymen."
All anti-trade legislation, be it "buy local" campaigns or "buy American," are all intended to "beggar they neighbor." They are therefore simply nationalistic, often inherently racist, policies.

The sad thing is that most people are unaware that by restricting trade in order to "increase wealth" of the nation, you end up robbing the nation by directing capital toward means other than what would best promote the welfare of society. You limit the size of the market, the specialization, and the technological progress and higher standard of living that would otherwise occur.

When a landed nation on the contrary, oppresses, either by high duties or by prohibitions, the trade of foreign nations, it necessarily hurts its own interest in two different ways. First, by raising the price of all foreign goods, and of all sorts of manufactures, it necessarily sinks the real value of the surplus produce of its own land, with which, or, what comes to the same thing, with the price of which, it purchases those foreign goods and manufactures. Secondly, by giving a sort of monopoly of the home market to its own merchants, artificers, and manufacturers, it raises the rate of mercantile and manufacturing profit, in proportion to that of agricultural profit; and, consequently, either draws from agriculture a part of the capital which had before been employed in it, or hinders from going to it a part of what would otherwise have gone to it."
Smith is blasting not only import tariffs and quotas but also export bans and production subsidies. They always have perverse unintended consequences.

Smith also spends a good deal of Book IV examining England's trade monopoly with the American colonies. He speaks of the advantages that the American market has brought to England but also of how the restrictions harm both America and England. Smith is very sympathetic with the colonists' cries of "no taxation without representation." He warns England of a bloody war with a people he feels will eventually develop an empire similar to England. He proposes a compromise of giving the colonists representation:

it is not very probable that they will ever voluntarily submit to us; and we ought to consider, that the blood which must be shed in forcing them to do so, is, every drop of it, the blood either of those who are, or of those whom we wish to have for our fellow citizens. They are very weak who flatter themselves that, in the state to which things have come, our colonies will be easily conquered by force alone. The persons who now govern the resolutions of what they call their continental congress, feel in themselves at this moment a degree of importance which, perhaps, the greatest subjects in Europe scarce feel. From shopkeepers, trades men, and attorneys, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world."

Smith prophecies that eventually the American colonies will surpass England in economic importance, and that, if united with England, eventually the capital of the United Kingdom will justly move from London to America!

Again, Smith's main points are that:
  • Restrictions on trade are violations of "natural liberty."
  • Restrictions on trade force capital to go where it otherwise would, causing inefficiencies.
  • Restrictions on trade benefit producers at the expense of consumers. They force consumers to have fewer choices and higher prices.
  • Obsessing about the balance of trade is fruitless-- a nation's standard of living depends on its ability to produce goods and services well and not on how much gold and silver it has.
  • For economic growth and higher standard of living to occur, workers must become more productive. This occurs by having gains from specialization due to increased trade and more capital invested in equipment that will help workers become more productive.
  • Savings = Investment, so the more profit that is saved, the more that is invested resulting in more capital accumulation, productivity, and future economic growth.
Smith ends Book IV with observations from the time he spent in France with Quesnay and the Physiocrats. He makes comments on the economic system Quesnay and his followers were proposing and quotes people of the time lauding Quesnay's "tableau economique." Smith differs with Quesnay somewhat on what groups of workers are "productive" and "unproductive," but seems to agree with Quesnay on the whole.

He finished Book IV by introducing Book V, with a summation of the role of the state: National defense, protection of property rights and justice, and provision of pure public goods.

Wednesday, March 23, 2011

Inefficient Markets

Via Matt Yglesias, a poignant article on the NFL's ownership rules and the fleecing of taxpayers in the cities the NFL plays in. Warning, you may find it harder to spend money on NFL merchandise or watch the games after reading the article.

PBS' Frontline will be airing a documentary titled Money and March Madness next Tuesday. A lot of juicy tidbits on this page, including:

Despite these income streams, the average Division I athletic program in 2009 ended up more than $10 million in the hole. 2005 was the last year any Division I program without a football team turned a profit.

What flows into a high profile athletic department quickly flows out through facilities' maintenance, travel, training, tutors, and coaches' salaries.

In 2009, athletic departments in NCAA-member schools spent an average $98 million. By 2020, average spending by college athletics departments is forecast to top $250 million a year, according to the Knight Commission on Intercollegiate Athletics, using NCAA data submitted by member schools over the past five years.


A Congressional Budget Office (CBO) report released in 2009 warned that the NCAA was endangering its tax-exempt status as a voluntary educational organization because of the exploding commercialization of NCAA Division I college sports. The CBO estimated that 60 to 80 percent of the money made through NCAA Division I football teams came from just commercial deals and crossed an educational line.

Tuesday, March 22, 2011

"The War in Libya and the Deficit at Home"

Good read by Derek Thompson at The Atlantic today. Here's a piece:

"The Tomahawk missiles falling on Libya, for example, cost about $700,000 each. The United States fired 110 of those missiles on Saturday, totaling $81 million. 'That's about 33 times the amount of money National Public Radio receives in grants each year from the Corporation for Public Broadcasting, which the House of Representatives also wants to de-fund in the name of austerity measures,' Abu Muqawama writes. The initial stages of the war could cost the U.S. between $400 million and $800 million, according to the Center for Strategic and Budgetary Assessments. That's almost half the controversial cuts to heating subsidies for low-income families."
I'm pretty annoyed that the Administration is going forward with the action without being forthright. Pundits on the left and right are decrying the "murkiness" of our goals. What's the end-game? Fine, we depose Qaddafi, but then what? We currently have troops engaged in actions in Iraq, Yemen (covertly), and now Libya while also fighting the losing battle in Afghanistan/Pakistan. Yet, we need to scrap domestic programs that do some good here and now? We don't mind that civilians are being massacred in Bahrain and Yemen because the Arab League says it's none of our business but happily bomb Libya because they invited us? Does it bother anyone else that France and Britain were so trigger-happy over Libya while at the same time pulling out of Iraq (Britain) and Afghanistan ASAP? Are they driven by Libyan oil or something more sinister?

I don't think the media is asking these questions hard/fast enough. I want to believe in U.S. and global economic recovery (as the market seems to) but foreign quagmires dampen my hopes considerably.

Friday, March 18, 2011

Affordable Care Act (more plainly?)

The Patient Protection and Affordable Care Act (ACA) is now 1 year old.

In the Personal Financial Planning course I teach, insurance makes up about 25% of the course. It is one of the most important things students need to plan and save for, or factor into what employer to work for. My own family's testimony about health insurance makes up an important part of my sermonizing.

I should state outright that I support the basic goals behind the Affordable Care Act (ACA), and have no problem with an individual mandate to buy insurance given that health care via insurance is how we as a nation have chosen to have the service delivered. But teaching the basic reforms that come into play between last year and 2014 expose some obvious problems in the ACA.

Insurance companies have an overall goal of normalizing the distribution of their payouts. An insurance company is aiming for a curve that looks like this:

It wants to be relatively certain what its payouts (losses) are going to be and the more people in its pool, the more normally distributed the curve, a la Stats 101. An insurance company wants to avoid a "fat tail" of high-risk customers that skew its average payouts (losses). Higher probability of payouts means higher premiums charged to everyone in the pool.

Insurance companies could previously have more room to keep the high-risk customers out of its risk pool-- they could refuse to sell insurance to people with certain pre-existing conditions: pregnancy, cancer, birth defects, etc. As of 2010, they can no longer refuse coverage to children for these issues. In 2014, all new health plans will be mandated to cover pre-existing conditions and let everyone into the pool.

If I'm a healthy person in the pool, my premiums go up as the insurance company's expected payouts go up. If I'm a low-income person in the pool, this becomes a very expensive proposition. The only thing that can offset the higher cost is if healthier people also get into the pool. But healthy people don't always want to spend money on insurance, especially if premiums are going up. So, the law mandates that in 2014 everyone has to get into the pool or else pay a fine.

However, as this Politico story explains well, the "individual mandate" isn't likely strong enough to cause a large number of healthy people into the pool.

Take my wife, for example. Insuring her privately was cheaper than enrolling her on my employer-provided coverage because we opted not to have maternity coverage (which will be mandatory starting in 2014). We pay roughly $4,000/year in premiums. In 2014, we face a choice of buying the now more-expensive insurance for her or paying a fine (either $95 or 1% of income, whichever is greater). Based on current household income, this fine would be about $475.

In 2016, the fine reaches its permanent maximum of $695 or 2% of income. For us, this will be roughly $950. So, a choice of an estimated $5,000-$6,000 in insurance premiums or $950 fine.
So long as we're within 250% of the federal poverty line, we will receive some tax credits to help offset the cost of premiums, but the price difference is obviously pretty huge.

Most insurance, however, is sold via employers. Employers with more than 50 employees will be required to provide insurance or pay a $2,000 per-worker penalty (after the 30th worker). But the cost of providing that coverage for workers is again, $5,000-$6,000 per worker (based on how much my own fairly large employer spends on its relatively low-risk employees). While this receives preferable tax treatment, the tax write-off may not be enough for employers to handle without reducing employees' wages to compensate-- something that would be unpopular with employees. Employers may find ways around it by either paying the fine or cutting the hours of employees so that they are no longer full-time (this is a loophole I've heard of but not investigated). The mandate is as weak on employers as it is on private citizens.

So, what choice will my wife and I make in 2014? Well, opting out of insurance for her and paying the fine would save us money only if she's perfectly healthy. We could pay for her visits in cash out of our flexible spending account (tax-free income) but that would only be up to $1,250 after 2014.

And paying cash is complicated by the fact that health care isn't an efficient market. Prices are opaque. We saw this when we were without health insurance and expecting a child. Call a hospital and ask them how much a service costs. They'll ask you "Are you an insurance company?" and if you answer "no," then they'll tell you "it's none of your business." If you call an insurance company they'll say "we don't disclose that information." If they do quote prices, you'll get a huge range of prices between hospitals and it's near impossible to compare quality. There's not an e-bay-like system for rating hospitals. If you don't have insurance you'll be quoted an enormous sum, well above cost.

So, how does this end? Not very well, I can imagine. Especially tax hikes on "Cadillac" plans and Medicare taxes on high-income earners to pay for the tax credits and subsidies. Ezra Klein has previously predicted that we'll eventually move to the McCain campaign's plan of repealing the preferable tax treatment of employer-provided insurance and everyone will receive a voucher or tax credit to purchase a private plan. But that still only works if everyone has to buy it.

Or, the government will become a monopsony ("single payer") and everyone will then be covered in a Medicare-like system... Many progressives see this as the end result, right around 2019. They're fine with potential chaos existing in ensuing years so long as we get to that point.

So, to recap:
In 2014, insurance costs are going to go way up. Insurance companies are currently trying to hold down prices to encourage as many healthy people as possible into the pool now to offset this hike later (I know this first-hand by being on the Benefits Committee of my current employer). The only way to offset those costs is if healthy people get in too, but the "individual mandate" is so weak that it doesn't appear possible. Result? We'll see, but it isn't clear to me how this doesn't become chaos.

Some links I've found helpful:
A timeline for when provisions kick in.

A detailed description of how the law affects employers.

Tuesday, March 15, 2011

Adam Smith on Japan

Via the valiant Nick Rowe (CORRECTION: Frances Woolley). From Smith's The Theory of Moral Sentiments (written before Wealth of Nations..there's more at the linked post that's less depressing):

Let us suppose that the great empire of China, with all its myriads of inhabitants, was suddenly swallowed up by an earthquake, and let us consider how a man of humanity in Europe, who had no sort of connexion with that part of the world, would be affected upon receiving intelligence of this dreadful calamity. He would, I imagine, first of all, express very strongly his sorrow for the misfortune of that unhappy people, he would make many melancholy reflections upon the precariousness of human life, and the vanity of all the labours of man, which could thus be annihilated in a moment. He would too, perhaps, if he was a man of speculation, enter into many reasonings concerning the effects which this disaster might produce upon the commerce of Europe, and the trade and business of the world in general. And when all this fine philosophy was over, when all these humane sentiments had been once fairly expressed, he would pursue his business or his pleasure, take his repose or his diversion, with the same ease and tranquillity, as if no such accident had happened. The most frivolous disaster which could befall himself would occasion a more real disturbance. If he was to lose his little finger to-morrow, he would not sleep to-night; but, provided he never saw them, he will snore with the most profound security over the ruin of a hundred millions of his brethren, and the destruction of that immense multitude seems plainly an object less interesting to him, than this paltry misfortune of his own.

Monday, March 14, 2011

"Who are you reading?"

I think I would rather die than be unable or unwilling to answer that question. If your thoughts aren't developing and being influenced by anybody, then what are they being influenced by? How are you growing? Who previously influenced your thoughts if no one does now? Is there no one that you look up to for insight? Why wouldn't you share that info?

I watched someone dodge and get annoyed with the "Who are you reading?" question from a student today; the image will haunt me the rest of the month.

Thursday, March 10, 2011

Book Review, Wealth of Nations Book 3

(Note: I don't yet see a way share all of my highlighted Kindle passages with the public. But one nice thing about the Kindle is that Amazon stores all of my notes/highlights so that I can see them and paste relevant ones here. It also allows me to tweet notes via 3G for free, and do some basic web browsing for free via 3G on about a dozen common websites. Nice!).

Wealth of Nations turned 235 years old this week. Timely because ABC World News has been running a nightly series titled "Made in America," where a couple nights ago Diane Sawyer openly applauded socialist Independent Bernie Sanders for pushing legislation through Congress that would require our national museums to buy only American-made souvenirs for the gift shop. I would argue that the legislation is profoundly un-American.

"But the great object of the political economy of every country, is to increase the riches and power of that country. It ought, therefore, to give no preference nor superior encouragement to the foreign trade of consumption above the home trade, nor to the carrying trade above either of the other two...It ought neither to force nor to allure into either of those two channels a greater share of the capital of the country, than what would naturally flow into them of its own accord."

The core principle of WoN is that trade is good, and that we shouldn't impede gains from trade. As the people posted this week:
"[Smith's] greatest breakthrough was the realisation that we do not have to grow or make things in order to increase our wealth. We can also increase it by simply exchanging things. If you have something I want and I have something you want, we are both better off by swapping it. And that is the foundation of market exchange and trade, and of the specialisation that makes our production and exchange system so spectacularly efficient, creating and spreading benefit throughout the world."
Sawyer and ABC's series is inherently nationalistic and racist. I suppose she was scared by what she saw in China last year and feels we should put as many of them out of jobs and back in rural poverty as possible. And she wants Congress to force capital into manufacturing rather than service because apparently she believes centuries of American economic development have clearly been mistaken and somehow lowered our living standards. She should read Wealth of Nations (or retire, or better yet-- BOTH) to find out that by trying to save the nation by "buying American" she'll end up moving it further backwards. (Or read some other 20th century history)

Book 3 of WoN focuses on the development of European cities after the fall of the Roman Empire. I find that Rodney Stark got a lot of his info on this period from WoN. The growth of cities is what eventually eliminated the monarch + lord/serf system and, eventually, established representative democracy and this chapter explains:

"In countries such as France and England, where the authority of the sovereign, though frequently very low, never was destroyed altogether... [Cities] became, however, so considerable, that the sovereign could impose no tax upon them, besides the stated farm-rent of the town, without their own consent. They were, therefore, called upon to send deputies to the general assembly of the states of the kingdom, where they might join with the clergy and the barons in granting, upon urgent occasions, some extraordinary aid to the king...Hence the origin of the representation of burghs in the states-general of all great monarchies in Europe."

Further, the growth of cities led to better development of the countryside around them. How? Smith:
First, by affording a great and ready market for the rude produce of the country, they gave encouragement to its cultivation and further improvement...
2. Secondly, the wealth acquired by the inhabitants of cities was frequently employed in purchasing such lands as were to be sold, of which a great part would frequently be uncultivated. Merchants are commonly ambitious of becoming country gentlemen, and, when they do, they are generally the best of all improvers...
3. Thirdly, and lastly, commerce and manufactures gradually introduced order and good government, and with them the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors.

Ed Glaeser probably includes this in his new book about cities, but I don't know.

Toward the end of the book, Smith purports that dynasties die out as the wealth is diluted due to competition:

"It does not, perhaps, relate to the present subject, but I cannot help remarking it, that very old families, such as have possessed some considerable estate from father to son for many successive generations, are very rare in commercial countries."

And he ends with this ominous note, echoing the previous book:

The ordinary revolutions of war and government easily dry up the sources of that wealth which arises from commerce only."

I don't know if Adam Smith was a pacifist, but he certainly comes across as one. Odd that political conservatives who pay homage to Smith tend to be defense/war hawks. I'd definitely like to see more conservatives making Smith's arguments against defense spending and war.

Books II and III are pretty short. The first three books of WoN make up less than 50% of WoN.

Wednesday, March 09, 2011

Just pay them...

Ten years ago, I hated and vilified anyone who suggested college athletes should be paid. Whatever argument or feeling you have against paying that immediately springs to your mind were the same arguments that were in my mind. "You're ruining the game..."

A lot changes in ten years. As my series last year on the NCAA illustrates, there is not a lot of empirical evidence that the NCAA's structure is welfare-enhancing for universities or society.

Just paying athletes like you would other value-adding university employees makes perfect sense. I will argue that it's more ethical and would lead to more efficient use of resources. There have been several articles this past week (for example) that further flesh out this issue. All of the problems and allegations would be solved by just paying the players what they're worth. Suspending athletes for selling their jerseys, prizes, etc. -- their private property-- is ridiculous and unethical (the athletics departments make millions off their jerseys and identities).

Paying players a salary would lead to:
1. A more transparent price mechanism. Boosters and fans could more accurately see where their money was going.
2. A more efficient market featuring more competition and people responding to incentives.
3. Better resource allocation. There would be much more transparency about revenue and costs as AD's competed for donor cash. There would be much more creativity in how the money would be used.
4. More freedom for the athletes to live like free human beings than like cattle with no rights.
5. Less paranoia among coaches, fans, etc. The current world where it's assumed everyone cheats doesn't make anyone very happy.

I doubt I will watch or care much about March Madness about this year.

Mistakes were made...

Tyler Cowen has some thought-provoking posts up today:
1. Common mistakes of right-wing and market-oriented economists?
2. Common mistakes of left-wing economists?

In the last four or five years I have worked very hard to avoid or repent of the Ten Mistakes of "right-wing, market-oriented" economists that Dr. Cowen lists (and keep in mind he is libertarian-leaning). In some cases that means I have been judged/labeled a "liberal" because some people don't believe that anything on Cowen's list is a "mistake." I, likewise, am condescending and judgmental in the opposite direction-- but probably more so. And I use posts like Cowen's to puff myself up and further justify my judgmental attitude.

Sunday, March 06, 2011

Book Review, Wealth of Nations Book 2

(Continuing from Book One) Book Two of WoN focuses on the role of money and banking in the economy, with particularly interesting stories from Scotland. I found this book to be much more fun and quotable than I had expected.

Ekelund and Hebert describe Book Two as "problematic," focusing on Smith's "unfortunate" use of terminology that divides workers into "productive" and "unproductive" groupings. We would call service sector workers as "unproductive," and Smith lumped his own profession--teaching--into the "unproductive" category. If you produce something, like a play, that expires as soon as it is finished, instead of something, like furniture, that exists on into the future then you're "unproductive." It's easy to understand the label, so I don't find it so problematic-- he's not making a judgment about laziness.

But perhaps this is where Marx (and later, Lenin) got his basic emphasis on manufacturing being the only important part of the economy.

"Productive" workers produce things that potentially add to the capital stock. A worker that manufactures a machine has contributed to the future wealth of his country. Smith contrasts this with "unproductive" government workers that perform services or defend the country militarily:
"The labour of some of the most respectable orders in the society is, like that of menial servants, unproductive of any value...The sovereign, for example, with all the officers both of justice and war who serve under him, the whole army and navy, are unproductive labourers."

This leads to a wonderful critique of the government. "Crowding out" is modernly considered to be a phenomenon of government borrowing driving up interest rates making it more expensive for firms to borrow for capital accumulation. Increases in our government's current deficit are justified on the basis of interest rates not (yet) rising. Smith simply sees increases in the government's sector as being more devotion of resources to unproductive uses-- diminishing future capital accumulation and wealth.
"Great nations are never impoverished by private, though they sometimes are by public prodigality and misconduct. The whole, or almost the whole public revenue is, in most countries, employed in maintaining unproductive hands. Such are the people who compose a numerous and splendid court, a great ecclesiastical establishment, great fleets and armies, who in time of peace produce nothing, and in time of war acquire nothing which can compensate the expense of maintaining them, even while the war lasts. Such people, as they themselves produce nothing, are all maintained by the produce of other men's labour. When multiplied, therefore, to an unnecessary number, they may in a particular year consume so great a share of this produce, as not to leave a sufficiency for maintaining the productive labourers, who should reproduce it next year. The next year's produce, therefore, will be less than that of the foregoing; and if the same disorder should continue, that of the third year will be still less than that of the second."

As Mitch Daniels critiqued President Obama's speech at the University of Michigan for more students to forgo private enterprise and work for the government (ie: at the expense of the taxpaying entrepreneurs), "The host can only stand so many parasites."

As such, Smith makes a good point about wars as destructive enterprises. Government consumes the produce of private enterprise in such a way that it does not get replaced:
"But had not those wars given this particular direction to so large a capital, the greater part of it would naturally have been employed in maintaining productive hands, whose labour would have replaced, with a profit, the whole value of their consumption."

Nonetheless, the stream of private enterprise finds a way around government obstruction:
"But though the profusion of government must undoubtedly have retarded the natural progress of England towards wealth and improvement, it has not been able to stop it. The annual produce of its land and labour is undoubtedly much greater at present than it was either at the Restoration or at the Revolution."

But much of Book Two is related simply to banking. First, fractional reserve banking allows more commerce and capital accumulation to take place than would have otherwise:
The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of waggon-way through the air, enable the country to convert, as it were, a great part of its highways into good pastures, and corn fields, and thereby to increase, very considerably, the annual produce of its land and labour."

However, excessive issue of bank notes puts banks, and the entire economic system, at risk of a bank run. The scene Smith recounts has been repeated often through the centuries. What will curb the risk-taking by banks? Competition among the banks:
The late multiplication of banking companies in both parts of the united kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the public. It obliges all of them to be more circumspect in their conduct... This free competition, too, obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the public, the freer and more general the competition, it will always be the more so."

While Smith bemoans price ceilings in general, he seems oddly to maintain that some government-mandated interest rate ceiling is necessary:
If the legal rate of interest in Great Britain, for example, was fixed so high as eight or ten per cent. the greater part of the money which was to be lent, would be lent to prodigals and projectors, who alone would be willing to give this high interest. Sober people, who will give for the use of money no more than a part of what they are likely to make by the use of it, would not venture into the competition. A great part of the capital of the country would thus be kept out of the hands which were most likely to make a profitable and advantageous use of it, and thrown into those which were most likely to waste and destroy it."

That is a very problematic statement contradicting the earlier statement about free competition and contradicts his statements on the harm of other price ceilings.

Smith discusses a situation in the U.K. a lot like our recent financial crisis vis-a-vis the repo market. Apparently, borrowers either kept rolling over their debts to one another, or they repaid their debts simply by taking on more debt from third parties. Once it became clear one person couldn't repay, the system collapsed and banks failed. The Bank of England played some role in bailing out banks, at great expense to the government.

Austrian-school economists take issue with this statement:
The quantity of money, on the contrary, must in every country naturally increase as the value of the annual produce increases. The value of the consumable goods annually circulated within the society being greater, will require a greater quantity of money to circulate them."

They would argue that no increase be necessary, simply allow deflation to happen...less money chasing more goods. They also dislike the fact that Smith apparently ignores the monopoly that the government has in producing currency.

Smith discusses how interest rates have fallen in Europe over the previous century. He argues, correctly, that it can't be because the quantity of gold/silver have increased. But he doesn't argue this in the way someone would today-- if nominal interest rates are falling either expected inflation is falling or the real rate is falling (perhaps due to an increase in saving). Smith's own argument is kind of odd and unconvincing, IMO, not worth posting here.

Onto Book 3.

Saturday, March 05, 2011

Reading Adam Smith

A commenter on my Wealth of Nations Book I post asked if I knew of any helpful commentaries or historical overviews. A while back I found A History of Economic Theory and Method by Ekelund and Hebert for $3 on a clearance rack. It is a textbook designed to be a systematic approach to building the history of economic thought. It details the Physiocrats that Smith drew from, and has one chapter on what they believe are Smith's unique contributions.

Much of their focus is on Book I, explaining Smith's labor theory of value and trying to flesh out his various thoughts on capital accumulation. They claim that most economists have never attempted reading WoN, surprise surprise.

From an aside in their text, I learned that when Smith retired from his teaching post he became a customs official for several years, responsible for implementing the tariffs and quotas on trade which he railed against. Apparently he did his duty well, putting duty and self-interest above his own beliefs (ie: he didn't try to sabotage the welfare-harming customs system). Interesting.

I'm reading WoN on my Kindle DX, which I no longer have buyer's remorse about. It has greatly sped up my reading time and it allows me to highlight and make notes. Those are archived on my Amazon website, which allows me to easily turn them into essay questions and blog posts.

Friday, March 04, 2011

A little bit of me...

This Slate piece on the NPR listeners who write complaint letters by Farhad Manjoo is great. This sentence could have been written by me:

"I'm 32, but I generally share the sensibilities of folks much older than myself—I watch NewsHour and go to bed at 9:30—so I'm used to encountering people who frown on anything produced after 1981."

That's basically me. Also, I see where Manjoo is coming from but often agree with the letter-writers. I am the critical news snob that he hates. But, I value NPR because of the variety of stories they will cover. If Justin Beiber is chronicled on NPR, then I say "Well, it must be worth chronicling." My snobbishness comes out when I don't like how NPR slants a story.

The radio in the car I commute in broke several months ago, which means I have to steal my wife's car to listen to NPR.

Tuesday, March 01, 2011

Book Review, Wealth of Nations Book 1

As part of an independent study a student is doing under me, I'm obligated to read through Adam Smith's An Inquiry into the Nature and Causes of the Wealth of Nations (1776). WoN is divided into five books, the first of which is over 25% of the total volume. My thoughts on Book I:

First, WoN is Smith's decades-long observations of the world around him. He has tediously researched and recorded various historical prices of objects, down to the last penny. The attention to detail is what makes the book so long. It'd be nice to read it with a commentary to know whether his observations were accurate and held up. Some of his recorded hearsay about places he'd never been to-- China, America, Industan, Tartary -- are clearly more legend than fact.

WoN is read differently by everyone. People wearing Adam Smith neckties during the Reagan administration held Smith up as a free-market ideologue who we should somehow use as a guide for public policy. The Adam Smith Institute aspires to be Europe's finest conservative economic thinktank. Modern-day leftists hold up "Adam Smith's principles" as some sort of efficient-market dogma that needs to be critiqued. Gavin Kennedy has written a book on Smith and maintains the helpful blog "Adam Smith's Lost Legacy" where he corrects and debunks certain things written about Smith in the modern media.
Revered (conservative) Austrian economist Murray Rothbard wrote this essay on "The Adam Smith Myth,"(emphases mine)
Adam Smith (1723–90) is a mystery in a puzzle wrapped in an enigma...The mystery of Adam Smith, then, is the immense gap between a monstrously overinflated reputation and the dismal reality. But the problem is worse than that; for it is not just that Smith's Wealth of Nations has had a terribly overblown reputation from his day to ours. The problem is that the Wealth of Nations was somehow able to blind all men, economists and laymen alike, to the very knowledge that other economists, let alone better ones, had existed and written before 1776. The Wealth of Nations exerted such a colossal impact on the world that all knowledge of previous economists was blotted out, hence Smith's reputation as Founding Father. The historical problem is this: how could this phenomenon have taken place with a book so derivative, so deeply flawed, so much less worthy than its predecessors?
So, I'm enjoying reading through a book held up as historically enormously important but obviously quite flawed.

Book I contains the passages most-quoted by Smith. The pin factory and division of labor, how individuals pursuing own self-interest lead to mutual benefit, to name a couple examples. It also contains the beginnings of his "labor theory of value," (wikipedia) which was later expounded upon by Ricardo and Marx:
"The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people."

What I enjoyed most was Smith's elucidation of the principles still taught in Econ 101. Students could just as well read several chapters of Book 1 in place of a Principles textbook, all we've done is add some visual tools to help explain it over the years. For example, Smith's "natural price," which we would now call equilibrium price, moves with changes in supply and demand and the actual price is always tending towards the "natural." You can see the Marshallian supply and demand curves even though it's 100 years before Marshall drew them on the chalkboard. You can also see the basics of the decisions firms make in production-- fixed costs and variable costs are defined the same way. National income accounting is also introduced, aggregate income is the sum of wages, rent, and profit.

Adam Smith also lived in a much more regulated world than we live in today. Price ceilings were quite common, as were outright export bans and other trade restrictions. Guilds flourished in places like France, that limited how many people could work in an industry as well as the workers' methods of production. Perhaps the strength of his book is the critique of these interventions, pointing out how much better off society would be without them.

A couple passages on my Kindle that stand out on their own:
"No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, clothed, and lodged."

I believe, that the work done by freemen comes cheaper in the end than that performed by slaves. It is found to do so even at Boston, New-York, and Philadelphia, where the wages of common labour are so very high."

A few things that one does not expect to find:

Smith's observation of sticky wages:
The high price of provisions during these ten years past, has not, in many parts of the kingdom, been accompanied with any sensible rise in the money price of labour."

(The context of this quote is Smith's observation that workers must be earning wages above subsistence. Otherwise, when the price of things they subsist on rise they'd be asking for a raise.)

Smith also argues that inflation in the U.K. seen over the previous century was not caused by an increase in the supply of money but rather by the increase in the wealth of the nation-- as wealth increases, people's demand for things increase
. He purports that an increase in the money supply is necessary to facilitate trade in the face of an increase in output:

"When, on the contrary, the wealth of any country increases, when the annual produce of its labour becomes gradually greater and greater, a greater quantity of coin becomes necessary in order to circulate a greater quantity of commodities: and the people, as they can afford it, as they have more commodities to give for it, will naturally purchase a greater and a greater quantity of plate."

I've read more than a few "Adam Smith was wrong" comments on this part. He does talk about how industrialization leads to lower prices and an increase in output, but says that as a country develops and produces more, wages and prices rise. (An increase in output without an increase in money causes a decrease in prices, every unit of money becomes more valuable.) An increase in currency in circulation is not a result of an increase in supply from mines in America but as a result of the U.K.'s increase in wealth.

(Note: Smith does do a digression on the value of silver coinage and inflation. He points out that as long as governments have been borrowing money, they've been repaying the sum by reducing the amount of silver in coinage-- inflating away their debts).

Smith also purports that workers' wages decline as a country's rate of economic growth slows-ie: rapidly-growing countries have high wages, slow-growing countries have low wages. This is problematic. (China currently has 10% annual RGDP growth and much lower average wages than the U.S., where growth is 2-3% .)

Plenty of other problems and contradictions, I'm sure. Many of the basics hold up well, others do not. What I am lacking is an understanding of what Smith is "plagiarizing" as Rothbard says, and what are his own original thoughts. This exercise has so far been a reminder that people are flawed and their points of view limited; viewing someone's work as an object to be dogmatically defended or vilified is unhelpful. Glean what we think/know to be true and accept the flaws as they are.

I will continue next time with Book 2, which deals with money and banking.