Archive for April, 2009
| Dick Langlois |
One of the most interesting law-and-economics scholars out there is Amitai Aviram at the University of Illinois, whom I met at a conference a few years ago. I only just discovered his recent work on what he calls bias arbitrage, “the extraction of private benefits through actions that identify and mitigate discrepancies between objective risks and the public’s perception of the same risks.” The idea is that people often misperceive the risks of various events. This creates an entrepreneurial opportunity for someone who can benefit from manipulating those misperceptions.
In some ways, this is an elaboration of Murray Jacob Edelman’s The Symbolic Uses of Politics (1964). In Edelman’s story, the citizenry are worried about various large issues about which they have no control: the Russians, global warming, swine flu, or — Edelman’s example, as I recall — the threat of business monopolies. In most cases, these fears are exaggerated or have no basis at all in fact — like the fear of spontaneous monopolies. But politicians can advance themselves by taking symbolic steps to allay these fears — like passing the Sherman Antitrust Act. (As Tom DiLorenzo, Jack High, Tom Hazlett, and others have suggested, the Sherman Act was also about diverting attention away from the McKinley tariffs, which would indeed transfer income from consumers to producers.)
Aviram’s spin is that there can be a welfare-improving effect to this process, to the extent that, by changing people’s perceptions of the underlying risks, entrepreneurs can bring people’s assessments in line with the actual underlying risks and thus get people to behave more efficiently. One example he uses is security measures at airports. After 9/11, people overestimated the probability of highjackings and shifted away in droves from air travel and toward automobile travel, which is actually a less-safe alternative. By instituting the ceremony of airline security, the government might have persuaded people that the probability of highjackings went down — even though it probably didn’t go down and was already low anyway — and therefore got them to return to (safer) air travel, an efficient outcome even taking into account the costs of the ceremony. (If you don’t believe that the ceremonies of the Transportation Security Administration are purely symbolic — or even if you do — check out this interesting piece in the Atlantic Monthly a while back.) Aviram understands perfectly well that this process can also lead to bad outcomes: the much-discussed case of seatbelt laws making car travel less safe might be an example. Whether the placebo effect (as Aviram calls it) has good or bad effects is a case-by-case question. One might well wonder whether today, eight years almost since 9/11, it isn’t the case that airport security ceremonies actually serve to remind people of terrorist threats and therefore to raise their assessments of the probabilities (?)
I thought of all of this recently in my own local context. Because of the recession, the State government has imposed on the University a variety of purely symbolic measures to demonstrate our frugality to the voting public. At least in principle, faculty can’t travel out of state even on money that came from grants or awards. And the library and museums were recently instructed to shorten their opening hours, even though those shorter hours don’t in fact save any money.
| Peter Klein |
Mike Rozeff makes the Hayekian point that is probably obvious to the O&M community, but virtually absent from public debate:
Bernanke is just a man. He is fallible. We learned this week that he pressured Bank of America into absorbing Merrill Lynch. In doing this, he pressured the leader of Bank of America into withholding critical information from his shareholders about Merrill Lynch losses. Technically, he can be charged with conspiracy to defraud. The loans he had the FED make to AIG look far from wise. A number of his other actions are highly questionable in making various kinds of loans to questionable borrowers.
I am saying that Bernanke doesn’t actually know what he’s doing. But I am using him only as an example. He’s not special. The more important point is that no one knows how to do fiscal and monetary policy, and they never have and never will. No one. For that reason alone, which is a narrowly practical one, no one should have those powers.
| Peter Klein |
The heady dot-com days of the late 1990s brought breathy pronouncements from journalists and some academics that the “new economy” had changed all the old rules. Intellectual capital, not physical capital, is the source of value, so plant and equipment is irrelevant. Information goods are produced at zero marginal cost so firms should give away, rather than sell, their products. Profits don’t matter, only installed base counts. Managerial hierarchy is obsolete; cost curves are flat; supply-and-demand analysis is passé; even opportunity costs don’t matter anymore. The dot-com crash and subsequent shakeout brought many people back to their senses, but even today we continue to hear hyperbolic claims about the newness of the new economy.
I’d like to include some of these wildly exaggerated claims in my talk next week at the GMU/Microsoft forum. Can readers supply some quotes I can use (the more outrageous the better)? Like this:
[W]hen it comes to technology, even the most bearish analysts agree the microchip and Internet are changing almost everything in the economy.
— Greg Ip, WSJ, 18 January 2000
One curious aspect of the Network Economy would astound a citizen living in 1897: The very best gets cheaper each year. This rule of thumb is so ingrained in our contemporary lifestyle that we bank on it without marveling at it. But marvel we should, because this paradox is a major engine of the new economy. . . . Through most of the industrial age, consumers experienced slight improvements in quality for slight increases in price. But the arrival of the microprocessor flipped the price equation. In the information age, consumers quickly came to count on drastically superior quality for less price over time. The price and quality curves diverge so dramatically that it sometimes seems as if the better something is, the cheaper it will cost.
— Kevin Kelly, New Rules for the New Economy, 1998
Once a marketing gimmick, free has emerged as a full-fledged economy. . . . The rise of “freeconomics” is being driven by the underlying technologies that power the Web. Just as Moore’s law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping even faster. Which is to say, the trend lines that determine the cost of doing business online all point the same way: to zero.
— Chris Anderson, Wired, February 2008
Why have [stock] exchanges at all? Certainly not to help investors. Exchanges are at last being exposed as anachronisms, sustained by inertia and by the desire of incumbents, with help from regulators, to keep raking in monopoly rents. But the curtain is coming down.
— James Glassman, WSJ, 8 May 2000
I’m sure there are much more colorful statements (i.e., straw men for me to knock down) out there. Any suggestions?
| Peter Klein |
From Gene Fama:
George Soros claims (in his op-ed in the Wall Street Journal) that the Efficient Market Hypothesis is invalid, because prices in financial markets “always provide a biased view of the future, and that distortions of prices in financial markets may affect the underlying reality.” Thoughts?
EFF: All the evidence I know says that market predictions are unbiased. It’s understandable, however, that hedge fund managers are immune to this evidence since it’s a threat to their existence.
| Peter Klein |
As ResumeBear reminds its readers:
It may not seem important to you now, but what you post and share online could come back to haunt you someday when you least expect it. Everything on the internet can be archived, which means it is also searchable. Your online profiles might be just for friends now, but later on, your online content might keep you from getting that scholarship, the job of your dreams or even prevent you from running for public office.
Think before you post — especially before you post to social networking sites or blogs.
Wait a minute, I blog, don’t I?
| Peter Klein |
When doing my dissertation research long, long ago I was influenced by an edited volume called Knights, Raiders, and Targets: The Impact of the Hostile Takeover (Oxford University Press, 1988). It collected the proceedings of a 1985 Columbia Law School conference that must have been terrific. The authors include Robert Shiller, John Coffee, Mel Eisenberg, Oliver Williamson, David Ravenscraft and F. M. Scherer (previewing results of their important 1987 book), Richard Roll, Michael Bradley, and Gregg Jarrell, among others, with several contributions appearing in a comments-and-replies format. I just learned that one of the editors, Louis Lowenstein of Columbia Law, passed away this month. I’m not familiar with his best-known book, What’s Wrong With Wall Street: Short-Term Gain and the Individual Shareholder (1988). Apparently it proposes a tax on short-term trading profits to reward buy-and-hold investors, which doesn’t sound great to me.
| Peter Klein |
Like other boring professors, I try to liven up my lectures and after-dinner speeches with a few jokes. Naturally, this effort is plagued by radical uncertainty. And of course I steal the jokes. Indeed, I maintain a computer file of one-liners and funny stories — none original — for possible future use. Then again, as Fabio notes, many stand-up comedians are known as prodigious copiers. Milton Berle once said another comedian made him laugh so hard, “I nearly dropped my pencil.”
Good thing I’m not a professional comedian. According to this paper by Dotan Oliar and Christopher Jon Sprigman, the community of stand-up comedians is characterized by strong social norms that take the place of formal rules in enforcing “ownership” of jokes. A complex system of norms has emerged over the last half-century that “regulates issues such as authorship, ownership, transfer of rights, exceptions to informal ownership claims and the imposition of sanctions on norms violators. Under the norms system, the level of investment in original material has increased substantially.” Presumably the community of professional comedians satisfies the Ellickson requirements of being a small, well-defined, close-knit group. Lucky for me I’m not in it. (HT: orgtheory commentator Johann.)