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Monday, June 30, 2008

New Oil Scenario; Or, "My Bad, Tyler"

Well I've been pretty smug with my fellow economist bloggers on the oil speculation issue. But I think my sweeping pronouncements before were too strong (strident?), and that it's possible for speculators to drive up spot prices, without leading to inventory buildup and without forcing oil prices to be in contango. Rather than trying to give more general rules for what can and can't happen, let me just tell a little story, and you tell me if it sounds plausible (or even true!).

The Fed has been doing CRAZY stuff trying to resuscitate the credit and real estate markets. And yet many traditional measures of irresponsible monetary policy aren't giving off warnings. (E.g. M1 and M2, long-term bond yields, CPI, and PPI.) So, to put it simplistically, where has all this new money been going?

Let's say that the Fed really is injecting hundreds of billions, and that it hits the financial big players first. Where are they going to put it? Real estate? Stocks? Bonds? Heck no, those are all terrible investments right now in the U.S., and they're not so hot in the rest of the world either.

But commodities is pretty attractive. They will always be in demand, even during recessions; it's not like you're investing in sushi restaurants in Boise. What's really nice is that the nature of your "bet" (i.e. investment) liquidates itself fairly quickly. With a stock or bond you are (in theory) betting on a stream of events well into the future, whereas you can take a position on silver in four months and not be nearly as tied down.

OK, so suppose all these hundreds of billions are bypassing the larger economy (and hence not showing up in official aggregate statistics) and going right into commodities futures.

Perhaps (mis)led by the boost in futures prices, Saudi Arabia becomes convinced that there will be a huge surge in demand for oil in, say, the latter part of 2009. So they cut current output, in order to expand their capacity in 2009.

Because of Saudi Arabia's cut in current production, the spot price of oil shoots way up. In fact, it goes up so much that backwardation is restored in the oil yield curve. I.e., even though the sudden influx of speculators with hot Fed money has caused futures prices to double (let's say), once everyone adjusts, the new equilibrium will have a spot price that doubled too.

Now because Saudi Arabia was willing to substitute oil output so much (i.e. they had originally had so much excess capacity slated for 2009), the spot price was able to rise and mute any incipient incentive to hoard physical oil. So inventory data wouldn't show any signs of this massive Fed distortion of the oil market, and as we already showed, there could be backwardation in the oil yield curve.

==========

Well gee whiz, I've gotten into this so much that I almost convinced myself. I should probably sleep a night on this one.

In any event, I looked at my inner economist and discovered that I very well may have been too flippant with Tyler Cowen. Even if it turns out not to fit the data, the above story is certainly theoretically possible.

Dang.

More Quibbling on Economists Handling the Speculation Issue

Stefan Karlsson says in this piece that we must:

Note further that commodity speculators can take both long position and short positions. This implies that commodity speculators may not in fact be contributing to higher prices. If speculators as a group have equally large long and short positions then they will have no effect on futures prices, and if they as a group have larger short positions than long positions then their speculations will in fact lower futures prices.

Now I am only picking on him because my breakthrough finally was crystallized while reading his article; there have been plenty of apologists for capitalism making this same argument. In any event, as with the claim that the futures price is the market's "best guess" of the spot price at a future date, so too I think the economists here aren't really thinking this through.

Let's say the spot price of oil right now is $140, and the futures price for June '09 delivery is $145. (I'm not bothering to look it up; I don't know what it is.)

Now some investment bankers are partying it up with some Special Ops guys. After a few lines in the bathroom, they are buds and the Special Ops guys tell them about an "accident" that is going to occur with Iranian president Abema-dinobots in May 2009.

So those guys hop on the phone and start dumping everything they've got into June 2009 oil futures. (Maybe some hedge themselves by shorting April 09 futures. But the point is, they all go long on a TON of June 09 futures.)

I think we can all agree that this influx of new demand will boost the market-clearing price of June 2009 futures. No matter how you model everybody else, surely they won't soak up an infinite amount of demand for futures contracts at the original price; people going short will need higher and higher prices to induce them to take yet bigger short positions.

Now I suppose a response could be, "Oh, but now you're involving people besides the class of pure speculators. They would suck more contracts out of oil producers and other groups who go short for hedging purposes. Karlsson was talking just about the speculators per se."

But even if the whole market hears the news, then you would still get the same movement. Some people would think the news would result in a June 2009 spot price of, say, more than $350, while others might think that's crazy, and that oil wouldn't break $300. So the first, more bullish group goes long, while the latter, less bullish (not bearish, mind you) group goes short. When all is said and done, they could be equally balanced between long and short positions.

Anyway, I probably made this post much longer than it needed to be, since its point is rather elementary. Just because there needs to be a long and a short on every futures contract, doesn't rule out the possibility that speculators can influence spot prices.

Indeed, we want speculators to be able to move spot prices. In the scenario above, we want spot oil to shoot up, and for there to be massive contango, to get get people to start stockpiling oil like crazy over the next 12 months.

One final thing: In his defense, maybe Karlsson had the following in mind. Suppose we are at an initial equilibrium, where a futures price is determined only by traditional hedgers, such as oil companies and airlines. Now a bunch of speculators come on the scene. If their activity leads to a higher futures price, then that will cause the original hedgers (the fundamental traders) to become net short, as they "export" some of their contracts to the Nation of Speculators. But that means the Nation of Speculators must be net long.

And vice versa is true: If the Nation of Speculators ends up causing a financial-world (i.e. market) futures price to be lower than it would be without trade with the speculators, then the Nation of Hedgers will import futures contracts from them at their cheaper price, and become net long. That means the Nation of Speculators is net short.

OK I guess I will give Karlsson the benefit of the doubt, and assume this is what he had in mind.

I Feel Bryan Caplan's Pain

I have been known to criticize Bryan Caplan, and in fact I have a forthcoming mises.org hatchet job, er thoughtful critique, on him. But in this post he asked a simple question regarding the ability to profit from superior knowledge if futures markets don't go out far enough. And then Tyler Cowen gave a hand-waving appeal to authority that was a non-answer.

Arnold Kling dressed up Cowen's response, but check out the comments. JPC knocks Kling on his butt, then kicks him again when Kling tries to stand back up.

What must really be frustrating for Caplan is that these answers imply that Caplan hadn't thought of such obvious "solutions." Caplan purposefully rigged his initial scenario so that these obvious techniques wouldn't work.

I feel your pain, Bryan. The experts have been blowing me off for years too. Come join me, and together we can rule the blogosphere!

The Brains Behind the Vast Right-Wing Conspiracy

The Weekly Standard has a new piece that relies very heavily on my IER report on speculators. I wonder if they will heed my policy recommendation to reduce demand by pulling the troops out of Iraq and Afghanistan?*

* The views expressed here do not necessarily reflect those of IER staff or management.

Sorry, Honey

I'm reading a very entertaining book by Walter Gratzer called Eurekas and Euphorias. It consists of quite a few, curious or amusing, short tales from the history of science. One of my favorites is about the absent-minded physicist Sir Nevill Mott. One day Mott, who had been a professor of physics in Bristol for many years, was riding the train from London to Bristol when three things struck him at at once:

1) He no longer lived or worked in Bristol, having been appointed Cavendish Professor at Cambridge;
2) He had driven to London that day; and
3) His wife had accompanied him.

Sunday, June 29, 2008

Oh, His Last Name Is Working

I kept thinking Tyler Cowen was making grammatical errors in his references to a Holbrook Working Paper, until I realized that the economist's name is Holbrook Working.

Does anyone else see the tremendous comedic possibilities? Suppose he had a son and named him Home:

============
Costello: Is Home home?

Abbot: No he's working.

Costello: I *know* he's Working. Is Working home?
============

Ahh, the misunderstandings and comedy ensue...

Booting What?

I flew on Delta from JFK to Gatwick last night, and the seat-front screens were having some difficulty. I was stunned to learn that that little screen (at least on Delta) is a (Red Hat) Linux box, as I got to watch Red Hat's re-boot sequence about a dozen times. And it was clear that my station had its own Linux copy, as I could see my seatmates version of Red Hat Linux at a different point of re-boot than mine was.

Who knew?

Saturday, June 28, 2008

Study (Guide) Break

I'm working on a study guide to Mises' Human Action. I just came across the below excerpt, and remembered why a lot of people love, and a lot of people hate, Mises:

The treatment of probability has been confused by the mathematicians. (From Chapter VI, section 2.)

Trust Daddy or Act in Self-Preservation?

Well geez another milestone. My son (3.5 years old) used to love when I would throw him up in the air. (I caught him, too.) He would honestly have wanted me to do that for an hour straight. But inasmuch as my body is not nearly as honed as my mind, I would always quit after 5 minutes.

Anyway, today we were having a good time and so I thought I'd throw him up in the air to celebrate. But now, he would lock his arms around my hands, so that I basically just swung him up and then down, like we were dancing.

I am both disappointed that he no longer trusts me with his life, and proud that he is wiser.

A Clarification on My Views On Oil Prices

OK I have been going nuts over the Krugman/Cowen/Kling brouhaha. My overarching complaint is that such high-caliber economists keep talking past each other because they aren't defining terms and then being consistent. So you've got, for example, Kling proving that "speculation" about the nature of the universe always determines prices, and of course anyone who subscribes to subjectivist price theory agrees with that. But naturally that's not what Krugman and Congress are talking about.

On the other hand, it does seem a bit crazy to say that oil has shot up so much in just a year, and this is all due to "fundamentals." Is that really what I'm saying?! Three points:

(1) From mid-June 2007 to mid-June 2008, fully 15% of oil's tremendous nominal price jump can be explained by the dollar's fall against the euro. So right there I just took care of 15% of the issue.

(2) China has been growing like gangbusters. Estimates vary, but people think they are accumulating diesel so that they can turn off their coal-fired power plants a month before the Olympics (to reduce air pollution). So yes that's "building inventories" but it's not for speculative price appreciation, it's because they need to physically consume it very rapidly in the near future. The larger point is, global demand for crude oil is rising. We only rule out a "fundamentals" explanation because our way of life is fairly stationary right now, but it isn't around the world.

(3) There have been all sorts of supply disruptions and faster-than-expected declines, e.g. Nigeria and Mexico, and a lot of this stuff happened fairly recently.

In conclusion, the only real wild card in this is Saudi Arabia. If they thought oil prices were going to explode in the future, then they could be producing less now, and you might call this "speculation." That's fine. But it's NOT being driven by people dabbling in the futures markets, since there has been backwardation (higher spot than futures prices) for large portions of the runup.

OK, so it is possible that there is a "speculative bubble" in oil prices, but if so it's due to producers' misjudgments, not to institutional investors throwing money after oil.

Who's to Blame?

I continue to be annoyed and perplexed that anyone takes seriously writers like Michael Moynihan at Reason who insist that "the blame" for some event is an exclusive property of a single agent. Moynihan, in critiquing Pat Buchanan's Churchill, Hitler, and the Unnecessary War, writes:

"Beyond the absurdity of implicitly blaming Churchill for the Holocaust—because that is what he is really saying when he writes 'no war, no Holocaust'..."

I declare that what Moynihan "is really saying" when he writes this is that, if Buchanan holds Churchill responsible to any degree for the Holocaust, that he is saying Hitler had nothing to do with it. And that is utter rubbish.

Any professional in science or ancient (i.e., politically uncontentious) history who took the view that "pundits" such as Moynihan do of "blame" (i.e., cause) would be laughed out of court for such simple-mindedness. That Caesar was "to blame" for the downfall of the Roman Republic does not mean that the Gracchi brothers, and Marius, and Sulla, and Pompey, and Cato, and even "social factors," were not also to blame. That a hot spell in the Caribbean is "to blame" for a hurricane does not mean that a low pressure system sweeping in from Africa is not also "to blame." This single-source concept of blame is, I suggest, a sure sign one is dealing with a political ideologue rather than a genuine historian. It is entirely coherent to hold that Churchill had some responsibility for the Holocaust -- at the least, he could have fought to get more Jews asylum in Britain! -- while still holding that Hitler is far more to blame than Churchill.

What gross, partisan stupidity these people are willing to embrace!

Krugman 3, Free Market Economists 0

I am sorry to say that I still think Krugman is crushing all of the other econowizards on speculation and oil prices. To recap very quickly: Krugman originally said that if speculators were raising prices above the level justified by "fundamentals," then clearly there would be a surplus of oil on the spot market. This is possible, but it would require somebody to be stockpiling the oil. We don't see this in the inventory data.

OK Tyler et al. come back and say, "No, it could be that producers hoard the oil in the ground, i.e. they pump less today and plan on pumping more in the future."

Then Krugman can come back and say, "Right that's possible, but even in that case you would see futures prices higher than spot prices--i.e. contango. And yet the oil market has been in backwardation for long periods during oil's runup."

Now here is where it gets ridiculous. Tyler actually said:

[W]hen risk and liquidity premia are changing, the relationship between the spot price and futures price is obscure and difficult to interpret. In particular a futures price for oil below the spot price does not refute the speculation hypothesis or even provide much evidence against it.

On MR I posted my thoughts on this technically true, but in practice ridiculous, rhetorical move:

"If you can sell oil at $140 today, or you can short a futures contract and sell it in one year at $130, what oil producer would do that? The only liquidity or risk story you could tell is that you are afraid nominal interest rates will go negative, and that roving mobs will empty your bank but not your oil field."

One last point: The context of Tyler's remark was Arnold Kling's analysis of the "option value" of keeping oil in the ground. E.g. if spot oil is $140 while the futures price for oil next year is $130, an oil producer might still keep some barrels in the ground because of the possibility of oil jumping to $150 by next year.

That's fine. But then it's not the institutional investors who are driving the price hike! In fact, by construction in this example, the people trading futures contracts are tending to dampen the amount of oil that producers store for future sale. So sure, you could say "speculation" is causing the price hike, but that is a tautology (and in fairness Kling admits this, sort of). But that's not what Krugman--or Michael Masters--means when asking, "Are speculative investors responsible for oil doubling in a year?"

(BTW if anyone hasn't been keeping up with this stuff and wants a roadmap of the exchanges, go to Tyler link above.)

Friday, June 27, 2008

Clarification on Futures Price and Market's "Best Guess"

A few posts ago I criticized economists who either explicitly or implicitly say that the futures price for a particular date is "the market's best guess" of what the spot price will be on that date. I wrote:

You can see the difference pretty easily: We can always check whether we are in backwardation, since it is a snapshot thing between spot prices right now and "the futures price" right now. But in order to see whether oil prices decrease over time, you would actually have to wait a few months and watch.

Although the above is true, it may have misled some people as to how deep my criticism was. From reading my first post, one might have thought that I was merely saying, "The futures price right now is a different thing from what the spot price in the future will end up being."

Yes that's of course true, but that's not the extent of my point. To drive this home, I should relate that back when I was trying to get a job as a "quant" on Wall Street, I read up in the relevant literature and hung out at sites like Wilmott. At that time I thought that the futures price was the market's best guess of what the spot price would be.

When I asked if this were indeed true at Wilmott in the newbie section, it actually took a few posts for me to explain what I was asking. I.e. not only is this typical economist belief false, but experts in this stuff at first didn't even understand the claim because it was so ludicrous to them.

One guy in particular gave a really simple counterexample that blew the notion to smithereens, but I can't quite remember it. In any event, try the following if I still haven't convinced you:

What exactly do we mean by saying that a person or a group of people think the "best guess" of spot oil is (say) $145 on October 1, 2008? Would that person bet his left arm that West Texas crude would literally sell for $145 and zero cents on that day?

Of course not. We don't need to get too specific about the precise nature of it, but obviously people think there is a range of plausible oil prices on that date, with some intervals being more likely than others. For the sake of argument, let's stipulate that the person views the world as Bryan Caplan does, and so he has an actual probability distribution defined over possible spot oil prices ranging from $0 to infinity.

OK so let's suppose the expectation of this distribution is $145. Therefore, in a quite defensible sense, you could say this person would give a "best guess" of $145 as the oil price on that date.

Now does it follow that a person would be willing to buy a futures contract right now for oil with a futures price of $144? Right now, the guy's expectation of the value of this contract is $1 delivered on October 1. (Actually this is for a forward contract; let's not worry about the fact that futures are marked to market periodically.)

Well sweet, the guy can buy a futures contract at no cost right now (i.e. you don't hand over money when you go long or short on a futures contract) and have an expected gain of $1 on October 1. From a certain point of view, that's an infinite rate of return! So surely in equilibrium the futures price has to be exactly equal to the market's "best guess" of the future spot price, else arbitrage. Right?

No, because we haven't accounted for the risk. If oil drops to $44, then that futures contract imposes a loss of $100. Is it so clear cut that the guy should buy the futures contract, even when his expectation of the spot price is higher than the futures price?

So now we start to see that there is a lot more to it than typical economist stories assume. Maybe if every investor were risk neutral, then arbitrage would ensure that the futures price always equaled people's expectation of the spot price at that date. (Even here, what happens if people disagree? Then it's hard to define what "the market's best guess" even is, let alone come up with a way to ensure that it matches the futures price.)

OK I hope I've made my point. People who know more on this, please correct any dumb mistakes I've made in the above.

I Assert, You Decide

I had a quick spot on Fox Business on Wednesday. Go to this link and scroll down to find it.

(BTW, it's surprisingly difficult to know when the camera is first on you, and it's hard to maintain a big smile beforehand, with people all around the studio. So that's why I have the charisma of Al Gore in the beginning.)

Order of Praise: Toddler, Relative, CPS

This is an awful/wonderful story of a 2-year-old who survived 6 days alone in the house after his mom died.

What annoyed me in the story is how everyone gushes over the Child Protective Services worker (who called police to break into the place and find the kid). But what is the big deal? The only reason the CPS worker even knew to check the house was that a concerned relative called them. And if the kid hadn't survived by eating cat food--everyone is calling it a "miracle"--then the CPS worker's approach would've led to his death!

Does everyone get what I'm saying here? A concerned relative calls CPS and says, "Lisa has been very sick and I'm worried about Noah. Please check to make sure they're OK!"

And it takes Noah being with his deceased mother for six days before the authorities actually help him. The concerned relative didn't bother breaking into the house, probably figuring, "Well I called the authorities, what else is a citizen supposed to do?"

So rather than CPS saying, "Whoa, let's do an audit of this, and revise our protocols so that a kid doesn't have to miraculously survive on cat food for six days..." instead they heap praise on their worker for saving his life.

What about the cat food manufacturers? What about the cops that actually broke down the door (or whatever)? What about the phone company employees who kept the phone lines in working order to facilitate the relative's initial call?

Incidentally, if you think I'm being a jerk, re-read the article. The concerned relative called on June 16, and the boy was found on June 26. The autopsy hasn't occurred yet, but right now they say that the mother had been dead for up to six days. That means CPS had at least four days' notice before the mother died. So explain to me why we are congratulating CPS on this one?

One more clarification: I'm not saying that the CPS procedures ought to be revised. Obviously, no matter what the protocol, occasionally kids will die in cases like this, because you can't go breaking into people's houses whenever you get a phone call and the mother doesn't answer the door. (Maybe they went out to the grocery store, etc.) So my point isn't to condemn the CPS for the 6-day delay (though that does sound crazy to me), but rather to question why we are pointing to this as a great success story?!

Sorry to Have Been Away...

Our hosting service, Joyent, had a miassive bank of servers down for almost three days. Then, when they came back up, the last good backup they could find was from May 17! Luckily Blogger stores a copy of this blog as well, and I was able to re-publish.

In any case, do not host with Joyent, folks!

Wednesday, June 25, 2008

A Subtle Misconception About Futures Prices

Even many economists subscribe to the mistaken belief that the futures price at any moment represents "the market's" best guess about what the spot price will be on that future date. But this simply isn't true. If the July 30 futures price of oil is $138, that doesn't mean people in the oil business expect the spot price to be $138 on July 30. All it means is that the people going long and short in the futures contract can know that they will swap oil and money at that price. There is no corollary that their best guess is that the spot price will also be in that neighborhood.

(Actually, what I said is strictly true for a forward contract. A futures contract is marked to market periodically during its life, so that the spot and futures price really do converge at maturity. However, because their accounts will be credited or debited as spot prices move, the people exchanging the futures contract today can make their plans as if they will be exchanging oil for cash at $138 per barrel on July 30.)

Anywho, I think Arnold Kling makes this (understandable) mistake when he says:

"If oil prices are expected to decrease (backwardation)..." (From the fifth or so paragraph in this post.)

So Kling is here saying that if people in the oil market expect spot prices to fall over time, then this is the same thing as saying right now the futures price is lower than the spot price. This latter event is the definition of backwardation.

You can see the difference pretty easily: We can always check whether we are in backwardation, since it is a snapshot thing between spot prices right now and "the futures price" right now. But in order to see whether oil prices decrease over time, you would actually have to wait a few months and watch.

A Model Discussion By Krugman

I hate to say it, but I totally agreed with Paul Krugman in this piece (pdf) for econowonks when he said:

One of the problems in the debate over the role of speculation in oil prices is that hardly anyone, even among the economists, is writing down models. As a result, it’s not always clear what people are saying; and I’d argue that some of my colleagues aren’t clear on the implications of their own analysis.

I think this issue about speculators and oil prices is perfect for neoclassical models, so long as the creator is familiar with Grossman's work as collected in The Informational Role of Prices. (Incidentally, that is a wonderful book that justifies the absurdities to which formal models may be put in most cases. Another example is Lucas' model of money demand, to which I can't find a link. If you're going to do it formally, that's the way.)

Anyway, Krugman crystallizes the verbal reasoning I employed in this study, to rule out speculators from being the cause of high oil prices. Basically, the "correct" price is the one where the quantity of oil supplied by producers equals the quantity demanded by physical consumers. But if speculators come in and drive up the price, then there necessarily is a surplus of oil. The higher price encourages production and discourages consumption. Even if you think the elasticities are small, surely if oil prices are double what they "should" be (as some people just testified to Congress), then there must be a constantly growing stockpile of barrels of oil.

Krugman went beyond that argument though. He also mentions a second signature of this mechanism: Spot and futures prices would have to be in contango. This is because the process through which Goldman Sachs can induce Rex the Oil Warehouser to grow inventories, is that Goldman Sachs buys futures contracts (as an investment). This pushes up the futures price while (initially) the spot price may be unaffected. But once the futures price rises a certain amount above spot, it then becomes profitable for somebody to buy barrels at the spot price, physically store them until the futures contract matures, and then cash in the contract and the barrels. I.e. the only way the nominal rate of return in this activity can be positive, is if futures prices are higher than the spot price--actually, they have to be higher than the interest rate at the very least, because people could buy US bonds with very low risk. So to get them instead to invest in buying and storing physical barrels of oil, the implied rate of return embedded in the spot and futures price would have to be higher than the rate on Treasuries.

But, as Krugman points out, we haven't seen that either. In fact, the oil market has been in backwardation (where the spot price is higher than the futures price) for a large portion of the runup in oil prices. This is the exact opposite of what you'd see, if institutional investors were driving up oil prices by buying futures contracts.

Last point: In the original Krugman article (HT2MR, and to Pepe for tipping me off to that) intended for the lay public, Krugman strangely argues that there also wasn't a housing bubble. (At least, I think that's what he's saying. But I am hesitant to say this, since who the frick would deny that there was a housing bubble?) Anyway, for some reason Krugman is looking at rents, and since they are flat he concludes that investors weren't driving the change in house prices. (Again, I don't believe this either as I'm typing it out. But I read that Krugman paragraph several times, and it sure sounds as if he's saying there was no bubble in housing, just as there is now no bubble in oil.)

So regardless of whether I'm misunderstanding Krugman's position, I show in the IER piece linked above that we can contrast the current oil market from the housing market in the early to mid-2000s. In other words, using the hoarding approach, I don't see any buildup of oil inventories in the EIA data, but I do find a fairly strong relation between house prices and the rate of vacancy in rentals; as the Case-Shiller home price index skyrocketed, so too did the vacancy rate shoot up. This makes perfect sense: Investors are buying homes not to live in, or even rent out, but to fix up and "flip" the following year or two. If enough speculators are doing this, on average a higher fraction of the housing stock would be vacant.

I think this would have been a much easier answer than what Krugman did. If I have understood his position, then my only explanation is that (1) he foolishly believed a critic who challenged him by saying, "But the data don't show a buildup in housing!" and then (2) tried to explain why the hoarding argument doesn't apply to housing, even though it applies to oil.

Now Krugman, it does too apply to housing. And the data show it clearly. You shouldn't have believed your critic who said the data don't illustrate the hoarding argument in the housing bubble.

Two Opportunities on Murphy Books

Ilana Mercer has graciously allowed me to plug my Politically Incorrect Guide to Capitalism at her blog. If you enjoy Crash Landing but haven't yet bought my book, then I'm emailing Hans Hoppe with yet another example of a performative contradiction.

In related news, Dick Clark alerted me to this amazing arbitrage opportunity involving my earlier book, Chaos Theory: Two Essays on Market Anarchy. (For the entrepreneurially challenged--general equilibrium theorists, say--buy here and sell here.)

Don't Relax, They Still Want Another War

John Bolton thinks the Israelis might attack Iran (HT2LRC) after the election but before the inauguration. Now some people--such as the head of the IAEA--think this would turn the Middle East into a "fireball." But Bolton dismisses this wuss talk as scaremongering (not to be confused with Condoleezza Rice's talk of a "mushroom cloud" etc. regarding Saddam).

In fact, Bolton thinks that if Israel bombs Iranian nuclear facilities, the Arab world will be "pleased." Now you might think that is an erroneous prediction, but we will never know one way or the other. Bolton covers himself:

"It [the reaction] will be positive privately. I think there'll be public denunciations but no action," he said.

It occurs to me that in Bolton's worldview, if a country doesn't launch a retaliatory attack, that is equivalent to endorsement. If people aren't willing to back up their views with weapons, then those views really aren't all that important, are they?

Running Commentary on the Gospel of Luke, part 1

I am reading the gospel of Luke and thought some readers might be interested in random comments that occur to me as I go through. If you are horrified by my violation of the separation of church and libertarianism, just skip these posts. One last caveat: I am going to adopt a literalist interpretation of the Bible when I post these comments. It's not that I necessarily think every passage of the Bible should be viewed as an excerpt from a history book, but I'm no scholar in such matters and for simplicity I take the text at face value for the purposes of this commentary.

===============

In Lk 1:5-20, we learn the story of Zacharias the priest. The angel Gabriel tells him that his wife, though thought barren, will conceive a son who will turn many back to the Lord. In addition, the son (who shall be named John) will prepare the people for meeting the Lord. But because Zacharias questions how this can be possible, the angel tells him he will be mute until the predictions have been fulfilled.

Now what's interesting is that in Lk 1:34, Mary (Jesus' mother) basically asks Gabriel the same thing, when he informs her that she will bear a son even though she is a virgin. Yet Gabriel doesn't zip her lips, he instead gently explains to Mary that the Holy Spirit will allow this apparent miracle.

The way I look at these types of things, this apparent discrepancy serves (at least) two distinct purposes. First, there is a basic fairness about it. An older male, trained as a priest, is certainly more deserving of a rebuke than a young girl.

However, as God's actions always do, this morally correct move also had pragmatic benefits. Zacharias had to raise a very hardcore son, who would be intimately versed in Jewish law but also have the physical stamina of Rocky Balboa. Apparently, God decided to have Zacharias think about it very seriously for nine months before taking up such an important task.

In contrast, for whatever reason muteness was not appropriate to prepare Mary for bringing the son of God into the world.

One last observation: Jesus would not have had the impact that He did, were it not for the groundwork laid by John the Baptist. The Jewish people simply wouldn't have been able to process Jesus if they hadn't first been exposed to John's message.

Tuesday, June 24, 2008

Those French

My eight-year-old, Adam, and I were in Paris in April, looking out our hotel room window. Adam asks, "Daddy, what's that adult store over there?" pointing across the street. I respond, "Well, you know, they sell naughty movies and magazines, stuff like that."

"OK, but then why do they sell toys there, too?"

I shook my head and said, "The French... who can understand them? They eat frogs, and sell toys in adult stores..."

The Origins of Agency

Mises was, for some reason, reluctant to attribute agency to animals -- he called what animals do "quasi-action."

I've argued against this in the past; Stuart Kaufman offers a detailed defense of my position in his new book, Re-Inventing the Sacred, in which he offers a semiotic definition of agency that extends that concept to single-celled creatures. To be a semiotic interpreter is to possess agency -- it is to interpret a sign and then act upon that interpretation -- in fact, in a sense, the action is the interpretation. To act is the characteristic distinction between life and non-life.

Carlin Critiques US Foreign Policy

Anthony Gregory posted this over at LRC's blog. I thought Carlin was exaggerating when I first heard this in high school, but now that I am older (and wiser?) I think it's pretty accurate.

Monday, June 23, 2008

Bob, Usher; Usher, Bob

I visited my younger brother over the weekend who is getting a PhD in math. He introduced me to Usher. I had actually heard some of the artist's performances in the past, though I didn't know the artist's name.

It seems this musician has studied Rothbard. For example, he continually refers to "thugs in the club" in his poetry. I can only assume that this is a subtle reference to the employees of the US federal government, the biggest gang in the world.

Usher's economics acumen is clearly on display when he refers in a patronizing way to "Shorty," an obvious dig at economics professor and former Clinton Labor Secretary Robert Reich.

Bravo, Usher! I salute your keen insight as well as your gentlemanly discretion. Keep us guessing!

Should Peaceniks Root for McCain?

It occurs to me that if you want the US government to reduce its interference with the Middle East, then you might do well to root for a McCain victory, paradoxical as it sounds. I have two reasons for saying this:

(1) McCain will be much more able to take risks in the quest for peace. In contrast, any little thing Obama does, will be denounced by Rush Limbaugh et al. for its "weakness." I.e., only McCain can go to Iran.

(2) If things get really bad in the Middle East over the next 5 years, you don't want it blamed on "Democratic weakness." Just as those longing for fiscal conservatism should root for Obama--so that his excesses will be blamed on "liberal politicians" and not on the "conservative McCain"--by the same token, those longing for a humble foreign policy should root for McCain.

We already know that Obama won't really do anything fundamental with US troop strength in Iraq, etc., and so if your overriding concern is for American militarism to be discredited, then you should root for a McCain victory in November.

Murphy Twin Spin on Oil

Here is an Buffalo News op ed (that is a bit clunky in parts because of the editing process) on why oil prices are so high, and here is an IER study debunking Michael Masters' testimony about speculators causing price hikes.

Saudi Arabia to Pump More: I Told You So

Now I can't really know what motivates the players on the world oil market, but this is rather interesting. About a month ago the Saudis put the smack down on George Bush when he asked them to produce more. Now all of a sudden, the Saudis are promising to ramp up both current and future output from previously projected levels.

What changed? Well, it's entirely plausible that the sudden shift in US sentiment for OCS and ANWR drilling made OPEC's new profit-maximizing output level in the near-future a lot higher than it had previously been. This is exactly the mechanism I've been arguing about over at the Environmental Economics blog.

Carlin Dead at 71

George Carlin died yesterday.

I liked him more when I was younger--not sure if I changed or if he did--but George Carlin was a very influential comedian. (I can actually do a decent impression of him. Stay tuned for my Broadway opening. You scoff, but if Glenn Beck can do it, why not me?) Below is one my favorite routines. (If anyone can find the video for this one, let me know and I'll swap it in.) Warning: bad language.

Sunday, June 22, 2008

Man the Microcosmos, Part II

Did you know that humans have about 2500 transcription-factor genes, which construct the roughly 100,000 different kinds of protein that exist in our bodies, or that the number of different possible settings of those genes, if they were simple on-off switches, is 10750, compared to the 1080 particles in the known universe? (Source: Reinventing the Sacred, Stuart A. Kaufman.)

Two Zingers Regarding Oil Companies

OK, I realize I am not the most unbiased commenter on this, but c'mon, the recent talk about oil companies is just plain dumb. Even if the Democratic charges were true, then their policy recommendations would be terrible.

CHARGE #1: Oil prices are really high because oil companies are making outrageous profits.

RECOMMENDATION #1: The feds should levy a windfall profits tax on oil companies, and that will bring prices under control, ultimately providing relief at the pump to motorists.

This is crazy. If oil companies can set whatever price they want, in order to achieve a profit objective, then a new tax will just be passed on to consumers. Once you admit oil companies can't simply pass on a tax and make the same profits as before, then you are forced to admit that maybe right now they are not "manipulating" oil prices either.

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CHARGE #2: Oil companies already own leases on federal land on millions of acres that are not producing oil or natural gas.

RECOMMENDATION #2: The Republicans should not be allowed to allow oil companies to lease larger tracts of federal land that is currently under moratorium.

This is crazy. Why would oil companies be lobbying to acquire leases on property they didn't plan on developing? And OK suppose they are doing this (perhaps to lock out competitors). Then isn't this the best of all possible worlds for environmentalists?? The oil companies want the ability to send a portion of their profits to the federal government, and we are confident that they won't do any drilling. So why not take their money? The beaches are safe, right? You can't spill oil if you're not producing anything on the newly available federal lands.

BTW for a more complete response to CHARGE #2, see IER's piece and API's. This stuff is ridiculous. Oil companies are hated so much that the weakest of criticism sticks. Now even Republicans and WSJ pieces are saying things like, "A windfall profits tax is not likely to reduce prices much," as opposed to, "WHAT??! In what school of economic thought does raising taxes lead to lower prices?!"

Oh Those Kids

Clark just gave me two novel sentences, and even shot them out back-to-back. My pride was somewhat tempered by the content, though:

Fix diaper! I mean it!

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On a related note, it occurs to me that the adaptability and extraordinary good nature (or whatever you want to label it) of kids, are related. It's not that kids happen to good natured, happy go lucky, whatever, and that they also happen to be incredibly adaptable and resilient, especially considering their size and ignorance! Rather, those two things are intimately related. If we all acted like little kids (in terms of their ability to be happy in any circumstances), then we would learn the lesson of how little kids act in order to get along with people a lot bigger and smarter.

(Let me put it to you this way: When we hear of a blind guy, we worry about people taking advantage of him. But why is it that when we hear about little kids, it doesn't seem nearly as widespread a threat? I.e. even though there are isolated instances of bad stuff happening to kids, very few people would conclude "kids as a class are exploited" the way someone might reasonably infer, "the blind are exploited in this society.")

Finally, here is what I mean by adaptability in this context: If a baby is born in Paris tomorrow, and that's when I show up for a new job, in the beginning I will be a better adaptation to French society than the baby. I sorta know the language, and more important I know how humans have shaped the world, and can behavior in their institutions appropriately. The baby knows nothing of this; he or she doesn't even have bladder control.

But as time went on, that baby would become an infinitely better "French person" than I could ever become.

Saturday, June 21, 2008

Professor Callahan

is how you'll please address me from now on, as I've just been appointed adjunct professor of philosophy at Northampton Community College, where I'll be teaching "Death and Dying." If you live near Bethlehem, PA, come take my course!

Curiosity from the History of Science #17

The first modern natural philosopher to put forward a full theory of evolution, Lamarck, held that species never went extinct. The first modern natural philosopher to forward the idea that species go extinct, Cuvier, held that they did not evolve! (The Wikipedia page for Cuvier is not very accurate, by the way -- Cuvier certainly held that extinction was a fact, but did not establish it, if by that is meant "Convinced most other scientists." Nor was he a proponent of catastrophism.)

Friday, June 20, 2008

Caplan Notes Flaw in Bayesian Updating Theory

In his objection to the Austrian embrace of radical uncertainty, which Bob mentioned below, Bryan Caplan writes:

"But if people really assigned p=0 to an event, than the arrival of counter-evidence should make them think that they are delusional, not than a p=0 event has occurred."

What Caplan is relying on here is the theory of "Bayesian updating," which supposedly describes how rational thinkers change the probability they assign to a new theory in the light of new evidence. I don't want to go into the details here -- they are unimportant for my point -- but the basic idea is that you "start out" by assigning some "prior probabilities" to various theories about some phenomenon, or outcomes of some event, and then multiply those "priors" by a factor based on how much more or less likely new evidence makes the prior.

For instance, you are a late 19th century physicist, and you are evaluating how likely it is the Newtonian mechanics is the true description of matter in motion. At that time, there would have been physicists who would assign p=1 to it being true, and p=0 to it being false. At the very least, many physicists would have assigned p=0 to something as weird as quantum mechanics being true!

Now, as the years pass, you are presented with startling new evidence about black body radiation, the photoelectric effect, and so on, and with a startling new theory in addition. According to the theory of Bayesian updating, the "rational" response is just to think you must be delusional in believing you have heard this new data! You had assigned an alternative theory a prior of 0, and now no factor the new evidence recommends multiplying that prior by can ever change that initial assignment of p=0.

Of course, that is not what real scientists did at all. Instead, they assigned whole new "priors" -- they thought, "Mon Dieu, I had never considered the possibility of this theory or this evidence, and therefore I was in a state of 'radical uncertainty,' and ought to re-think everything." But allowing that maneuver thwarts the whole motive for Bayesian updating, which is to turn rational choice between theories into a formal, mechanical procedure.

Thank God scientists are not "rational" Bayesian updaters, and thank Bryan Caplan for providing a good example of why it's good that they are not.

The King Is Overthrown!

The habanero is no longer the world's hottest chile.

It Speaks for Itself

Electoral Landslide?

Right now, it looks like one for Obama.

Thursday, June 19, 2008

Jimmy Dean and Steve McQueen

My friend Julian Velard has just released a great single.

New Pubs

Anyone with access to Springer publications online can read my two forthcoming Reiview of Austrian Economics articles,"The challenge of akrasia for the theory of rational choice" and "Nassim Nicholas Taleb: The black swan: The impact of the highly improbable."

Reply to Schweiger

Matt Schweiger's intriguing post--"A Realistic Assessment of How Many 12-Year-Olds I Could Beat Up Before They Overtook Me"--is a valuable contribution to an emerging new discipline. However, I think his conclusion--namely, seven 12-year-olds--is grossly pessimistic.

Now to do a rigorous analysis, we would need to clarify our assumptions. E.g., exactly why is a group of 12-year-olds fighting me? Are they being paid? Have their parents been kidnapped and are being held hostage? Are the 12-year-olds amped up on Sunny Delight? These details matter.

Putting all of that aside, however, I think Schweiger is focusing on tactics to the detriment of strategy (or something like that) when he writes:

If it were an individual, king-of-the-mountain battle royale, I could endlessly pummel 12-year-olds without mercy. But we're assuming at least a sixth-grade education in a marginal public school as well as some exposure to kung-fu movies, so these kids would form a circle.

However, using my quick wits, I would charge one portion of the circle, landing a devastating blow on the unlucky individual, which would make the others proceed with hesitancy. One on one, I feel like I could deliver a lot of punishment to a 12-year-old. There would be one or two brave ones who would jump on my back, distracting me and thus enabling the others to attack. At best, I could fight off the two heroes on my back and maybe take out four on the ground before I was felled by fatigue and numerous kicks to my groin and shins. This would equal a grand total of seven.


My question: Why in the world would you remain inside the circle? It would make much more sense to run at the weakest pair of kids and blast through, giving at least one crushing blow in the process. Then the older protagonist could continue to swoop back for quick strikes on the weakest remaining 12-year-old standing. Of course, eventually fatigue would set in, but I am quite confident that a solid adult male in good shape could dispatch at least one dozen 12-year-olds in this fashion, and perhaps many more depending on his fitness and arm span.

(HT2 my wife for the link. It goes without saying that she has not approved this post.)

More Landsburg Is Annoying Landsburg

On Marginal Revolution, Alex Tabarrok claims empirical validation for one of Steven Landsburg's sillier ideas. In his article and then book, "More Sex Is Safer Sex," Landsburg argues that one way to reduce the spread of HIV is for "sexual conservatives" to throw on Marvin Gaye and get their game on. In the comments at MR I repeat my objections to this view.

Wednesday, June 18, 2008

Polycentrism at the Playground

In the spirit of Landsburg's book, I have been meaning to remark that at the playground, there is a spontaneous polycentrism. Parents have different rules for what is safe/permissible for their kids, and generally speaking parents allow a situation to be resolved in the home court of the offending party.

For example, today Clark decided to go up to a kid on the swings and grab him. The outraged kid (who was much bigger) was getting ready to push him away. By this point I had left the bench (where I was reading the WSJ) and yelling, "Clark! Hey, leave him alone!"

My yelling alerted the mother of the kid on the swing, and she yelled, "Jimmy, just wait a minute."

Not the Cuban Missile Crisis, I grant you. But yet another point for private law.

Rush Limbaugh Says I'm Great

...indirectly. If you go to this transcript and check the 9th moderate-to-big-sized paragraph from the bottom, you'll see he praises the Institute for Energy Research. I have to agree; those folks at IER have snatched themselves a veritable printing press on the cheap.

Now if I could only get Sean Hannity to say that the folks at IER are great Americans...

Trump Wants to Handicap His Competitors

Ethical guru and all-around nice guy Donald Trump today called for government measures to penalize oil companies. His reason? They are making too much money. His exact words:

I consider myself to be a great capitalist, but I think the oil companies have been ripping off this country and the world for a long time...I can see doing something against the oil companies. They're making numbers--nobody's ever seen numbers like this. They and OPEC and lots of people together are having a lot of fun.

Trump also explained that he was using the depression in real estate to snatch up properties that would have been "absolutely impossible to buy" just a few years ago. What a guy. I hope in so doing he doesn't have a lot of fun or make numbers that no one will ever have seen before.

But even if he does, he won't need to worry about this fan of capitalism saying the government should take his profits. I might suggest he do something about his hair though. Just admit you're balding, Donald. I did it (in high school), and so can you.

Countably Infinite

Is there a way I (or Gene perhaps) can track how many people visit this blog? Keep in mind that I am very green regarding this stuff; I don't know the difference between a unique visit / page view / etc.

Also, is there a way I can cheat to make it seem more popular than it is?

Murphy vs. Zetland, part 340

David and I are clashing over "falsifiability" in our current views regarding federal efforts to mitigate climate change. I have challenged him to specify if there is any possible unfolding of events in which he would admit, "Whoa, that guy Murphy was right about this!"

Now David understandably misunderstood me (I think). It seems he is interpreting my claim as something like, "Suppose we are overestimating climate sensitivity. Then we'll be mad that we produced too few SUVs when temperatures only rise 0.8C by 2050!"

Although I am indeed concerned about the weight that many economists are placing in the IPCC best-guess, that's not directly relevant to my challenge. I have more in mind things like: the US goes on cap and trade, and the corruption is so rampant that US emissions targets keep getting pushed back, more permits are sold during the next recession, etc. etc., such that CO2 emissions don't diverge much at all from projected "business as usual" levels.

For my part, I admitted that if there were an additional warming of 1C by 2020, then my quibbles about the climate models would be totally wrong, and I (in 2020) will be embarrassed at my Nordhaus paper. For another possibility, if US goes on cap & trade next year, and then adheres to the targets established in that original timeline, then I will also admit (when it happens) that I am being way too cynical in 2008.

But so far David has not even listed a possible universe in which he will regret his current position. That should concern him, in my opinion. Is he really as confident in AGW--and the need for the federal government to do something about it, along the lines of carbon tax or cap & trade--as he is in, say, the Pythagorean theorem?

(BTW in everyday conversation I would not be so narcissistic as to bring up every other conversation I have had during the week. But presumably some people come and check this blog because they're bored out of their minds and so I want to make it one-stop shopping for all of my online banter.)

Env-Econ: El Guapo Says, "They are funny guys!"

"Just kill one of them."

Here is a 6-year-old's drawing, which John Whitehead entitles "Environmental Policy."

More Weird Movie Conventions

1) Why do so few characters in the movies shut the door behind them after entering a house/flat? In real life, I've only seen someone fail to do this if:
a) They are unloading a vehicle into the premises; or
b) the place needs airing out for some reason.

But notice (if you haven't already) how in movies and TV shows this practice is habitual, to the extent that I'd guess the door is left open more often than it is closed. Why would this be? The reason could hardly be to avoid losing time in advancing the plot! The act of swinging the door shut can be accomplished while walking through it.

Does Hollywood have some vested interest in seeing lots of doors ajar?

2) Why does just about no one in the movies exhibit decent table manners? For instance, why does just about everyone in films keep stuffing food in their mouths and then mumbling through the mouthful while having a conversation? Certainly there are people who act that way, but if the intention is realism, then a film ought to depict other characters who don't flout that principle of dining etiquette. However, note that this is almost never the case.

Does Hollywood have some vested interest in promoting poor table manners?

Tuesday, June 17, 2008

Bryan Caplan Asks an Impossible Question

As usual, one of us econ geek bloggers asks a question, and then the other econ geek bloggers have to respond in ways that show how smart we are. I hope I am not misrepresenting him, but Bryan Caplan is basically saying, "Austrians claim you can't model the future with probability distributions. But I am still waiting for an Austrian to model the future with probability distributions to clarify their claim."

Tyler Cowen and Arnold Kling have the right instinct--namely, Caplan is being goofy--but they get into all sorts of sophisticated examples and analyses. No, the Kirznerian point is quite basic; you don't need to look at derivatives markets to see its implications.

(My own, less wise-alecky answer is in the comments on Bryan's original post. HT2 Pepe for originally alerting me to this debate.)

Inexplicable Quote of the Day

As longtime readers know, in addition to taking out the trash and refilling the soap dispensers, one of my duties at Crash Landing is to ridicule other economist bloggers when I think they've said something patently absurd. Usually I pick on Tyler Cowen (I will stop when people think I am more important than him), but today's winner is David Zetland, who said on his blog:

I am basically a free-market libertarian, but I am no fan of "unbridled" capitalism. (I've been to China).

Now I can forgive David for placing the final period outside of the parenthetical sentence, but the idea that an officially communist country is now the paragon of unbridled capitalism?

By all means, folks, tell me in the comments how in some respects Chinese businesspeople are freer than Americans. Fine. Don't tell me that China illustrates the results of pure capitalism.

Pointing to Somalia as a Rothbardian world is unfair, but at least it makes sense; David's claim is nonsense.

Man: The Amazing Microcosmos

Who knew that, as per the ad I saw last night, the very same drug that can control your twitchy leg at night can also cause an extreme urge to gamble?

Thumbs Up for Landsburg's Fair Play

(Update below.)

In the past, I have been known to criticize University of Rochester economist Steven Landsburg (one, two, and three). We can only speculate as to the source of my criticism; jealousy over Landsburg's column in Slate is surely a factor.

I am happy to report that all is forgiven, because Landsburg's Fair Play is a remarkably radical book. The subtitle is "What Your Child Can Teach You About Economics, Values, and the Meaning of Life." The format of the book is Landsburg relaying anecdotes involving his daughter, and how these lessons/conversations relate to economic principles.

In terms of fun analyses that will make an econ geek think, this book isn't as fruitful as his earlier book, The Armchair Economist. However, extreme libertarians will be pleasantly surprised at some of the positions Landsburg takes in FP.

Rather than giving an official review, I'll just reproduce some of the better quotations below:

[My daughter Cayley's] teachers have pronounced from on high that because water is valuable to others, we should be exceptionally frugal with it...[Yet] teachers rarely argue that "because building supplies are valuable to others, we ought to build fewer schools"; even more rarely do they argue that "because skilled workers are valuable in industry, we ought to have fewer teachers." (p. 26)

...The extent to which adults defer to authority is an extraordinary and mysterious thing: 535 members of the United States Congress vote to pass a measure, and, for the most part, 260 million Americans choose to obey it. Why does that happen? What strange force do these guys exert? (p. 32)

[W]hen the Justice Department prosecutes an organized crime family, I'm not sure which side to root for. Violent urban gangs are scary things. So are police forces who face no competition in the market for extortion. I don't know which is worse....The best argument I've ever seen against gun control was on a bumper sticker that said "When guns are outlawed, only the police will have guns." (p. 34)

I can understand welcoming people no matter how they get [into this country]. I can understand--though with greater difficulty--wanting to turn people away no matter how they get here. But to turn to the government for advice on who to welcome and who to reject--that is a position that is not consistent with any principle whatsoever. It is consistent only with blind exaltation of government, and the fact that Kemp was taken seriously [when he said we should lock the back door on illegal immigration in order to open the front door to legal immigration--BM] illustrates how widespread that blind exaltation must be. (p. 38)

The battle against progressive taxation will never be won by timorous politicians who argue--no matter how correctly--that high marginal tax rates retard economic growth...It will be won, if at all, as the long-run battle against slavery was won--by men and women with the insight and the courage to declare in public that progressive taxation is wrong. If people can learn to feel squeamish about stealing from a liquor store, they can learn to feel squeamish about taxing "the rich." (pp. 60-61)

Cayley has been taught that all endangered species should be preserved, but she's also been taught that the AIDS virus should be eradicated. (p. 62)

There must be some reason why schools teach safe sex but not safe crime. Perhaps they think that students are more likely to be sexually active than criminally active. Or perhaps they really believe--despite what they tell the students--that unlike crime, sex isn't always such a bad idea. If that's what they believe, I wish they'd be honest about it instead of trying to scare my daughter half to death. (p. 63)

I have frequently heard it said that those who oppose legalized abortion thereby become obligated to adopt and support unwanted children. I have never heard it said that those who oppose capital punishment thereby become obligated to house convicted murderers for the duration of their life sentence. (p. 64)

When Bob Dole resigned from the U.S. Senate, he combined a clarion call for smaller government with a list of his proudest legislative accomplishments, every one of which had increased both the size and the scope of the government. (p. 65)

So when somebody tells you that the government should spend more on welfare (or AIDS research, or student loans, or strategic missile defenses), there's one litmus test question that will determine whether he's fallen prey to the Grandfather Fallacy: Ask him how much the government currently does spend in that area. If he doesn't know the current level, how can he possibly know whether it's too low or too high? (p. 82)

Jim Crow was (among other things) a barrier to trade between the races. And economists know that barriers to trade are generally detrimental to both populations. Whites who were discouraged from serving black customers, or patronizing black businesses, or hiring black workers, or working for black employers, were victims of Jim Crow, just as their black counterparts were. To argue otherwise would be bad economics. It would also be racist. Jim Crow prevented blacks from dealing with whites, and it also prevented whites from dealing with blacks. Who would want to argue that being denied the right to trade with white people is a form of oppression, but being denied the right to trade with black people is no big deal? (pp. 131-132)


UPDATE: I should clarify that Fair Play is actually old; it came out in 1997. I just stumbled across it in the library the other day.

My Bad Impression of Gene

Dang, I was going to try to beat Gene to the punch and spin this latest revelation in a way to show just how innoble Ron Paul is. But I'm having trouble. I can't see how discouraging a write-in vote is the proper play for a megalomaniac.

I admit I'm being sarcastic above, but I really am trying to think of how a RP hater would spin this.

Ah, I've got it! Ron Paul doesn't want to jeopardize donations by getting a paltry sum of write-in votes. This way, he can continue the fiction that there is actually a large group of people supporting him, the better to bilk the smaller group that support him.

(Again, to clarify for newcomers to this blog: I am having a dispute, bordering on an argument, with another blogger here over whether we should think good or ill of the Ron Paul campaign and now "movement." So I am being "funny" by criticizing everything RP does or says before my colleague can do so.)

Monday, June 16, 2008

Murphy Answers Silas On Cap &Trade

Silas (aka Person) has been keeping me honest regarding my cap & trade op ed. He first criticized the piece on the Mises blog, and now more recently has carried his concerns over to the discussion of my critique (pdf) of Nordhaus.

(BTW, even if you don't really care about my arguments with Silas, you might want to glance at the thread at Aguanomics. I am having trouble getting beyond first base with David Zetland, if you view a home run as changing the other's mind. Any suggestions [posted here on Crash Landing] as to how I can approach from a different angle are welcome.)

Rather than try to quote and respond--which would get very tedious--I'll just point interested readers to the links above to see Silas' concerns in his own words. Below I offer some general responses:

FIRST and most important: The cap & trade bill recently discussed, as well as any cap & trade bill that will be proposed in any remotely plausible future, will not be "a market solution" for any reasonable meaning attached to that phrase. Such a bill will quite obviously distort markets grossly.

SECOND, I concede that there is a sense in which Silas is right. I was assuming (for the sake of argument) that the climate science in the IPCC is correct, and yet I still claimed that cap & trade was no more a market solution than if the government sold people permits giving them the legal right to sneeze. This may have led some readers to conclude that I was saying the very nature of the situation rendered carbon permits as illegitimate property titles, the price of which could not possibly correspond to genuine economic scarcity.

However, as Silas correctly notes, if James Hansen and the guys at RaalClimate are right, then CO2 emissions affect others just as conventional pollution does. If one agrees that one can have property rights to a clean stream etc., then in principle one could have a property right to the atmosphere and this could spawn a market in which the right to inject CO2 into this property is sold.

OK try not to get lost folks, for it gets a bit subtle at this point. I am claiming that whether we take the situation as it is, OR if we imagine a truly free society built on libertarian principles, then in EITHER CASE there would not be anything resembling a market for the right to shoot CO2 into the atmosphere. Hence, both in practice and in theory, I stand behind my claim that cap & trade is not a market solution. Even in an idealized market setting, no such mechanism would evolve (I claim). In the remainder of this post I'll try to explain this latter claim.

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Why Cap & Trade for CO2 Would Probably Not Arise in a Free World

Although Silas is right that it is theoretically possible to imagine a completely voluntary system yielding a version of cap & trade, I don't think it would ever evolve in any plausible scenario, without governments creating it through fiat. To put it simply, this method of slicing up property rights bundles seems like a very inefficient method to deal with the (stipulated) externality.

For an analogy, we can imagine ecologists lobbying the federal government back before barbed wire. They explain the tragedy of the commons, and the concerned federal officials then institute a massive program of coating the grasslands with agents who monitor cow movements. They keep sophisticated records of whose cattle entered which piece of land. At the end of each month, the records are run through a central processing agency and then each rancher is sent a bill telling him how many cow-boundary-crossing slips need to be turned over to the government, not to the landowners. Depending on the lushness of the grass, the government charges a higher or lower price for issuing the permits. (I.e. the price is higher when the grass has been severely overgrazed and needs to be given a break.)

So the government can go ahead and implement that scheme. In that case, there is much less incentive for anyone to adopt barbed wire, since the government will just adjust the price of its permits in order to continue extracting large rents from the ranchers. There will never be much surplus left to fund payments to landowners. Thus the "market solution"--after all, the feds aren't nationalizing the cows or land, and ranchers can decide where to steer their cattle--will have largely displaced the true market solution, and the government will seize a much larger share of output, permanently into the future.

I hope it is clear how this situation is analogous to the situation with CO2 and climate change.

OK possible alternatives? Insurance companies could pay major emitters to adopt less carbon-intensive techniques. Public education campaigns would bring consumer pressure to bear on emitters. Depending on the severity of the situation, insurance companies and philanthropic organizations could spend dozens of billions of dollars on giant space mirrors, pumping aerosols into the atmosphere, and other geoengineering techniques, at least to buy time.

Under any reasonable scenario, I think focused, voluntary efforts coming from companies that actually stand to make or lose trillions of dollars would be far more effective than world governments throwing around tax dollars and unfunded mandates. What is particularly absurd is that if governments ever actually "won" the war against climate change, they would lose a huge chunk of their power. Does anyone expect the government to declare victory in the wars on drugs, poverty, or terror anytime soon?

The types of private efforts I have mentioned above would, in my opinion, be far more likely than the evolution of permits to CO2 emissions that would need to be enforced on a worldwide scale. That is simply too costly to monitor and enforce, in my opinion. Surely a different legal mechanism would evolve to deal with this stipulated threat.

Cap & trade is not a market solution.

Pacifist to the Rescue!

This story is awful; apparently some guy traveling with a toddler got out of the truck and beat the child to death before police intervened and fatally shot the guy.

I don't know how old the other motorists were who "tried to help out"; at least one couple was elderly so presumably they couldn't do anything. I would like to think that if I saw a guy doing that I would either tackle him or grab the kid and run. I don't think it would take the cops showing up to stop it.

Two More Giants Fall

It's been a bad week for libertarianism. First Gene exposed the Ron Paul campaign for the fraud that it was--just a cynical ploy to raise money from gullible lovers of freedom.

And to my horror I discovered today--I am an investigative journalist--that Cato and Reason are similarly corrupt.

Is there no one who will fight for liberty for free? After all, if free market economics teaches us anything, it is that voluntary flows of money are a sign of perfidy.

Be sure to see the Reason photo of a collapsing building with the caption, "Shaking Up Washington." You bet they've been doing that, since their founding in 1968!

P.S. For those who have stumbled onto this blog as a newcomer, I should explain that I am being completely sarcastic. I am defending Ron Paul against (what are in my opinion) silly criticisms leveled by others at this blog. I am not criticizing Cato and Reason for asking for money.

Saturday, June 14, 2008

McArdle and Mankiw on Regulation

Megan McArdle asks some good questions in this piece, but I think she too easily dismisses Greg Mankiw's great question. In response to a top Obama economic advisor saying this:

"If you can borrow money from the U.S. taxpayer at a moment of crisis, that is a very sacred insurance policy underwritten by the U.S. taxpayer," said Mr. Goolsbee in an interview last week with Dow Jones Newswires. "We have the right to oversee anyone who is accessing that insurance policy."...

Mankiw asked this:

Here's a question for Austan: Can an investment bank avoid such regulation if it promises never to use the discount window? Or is this insurance-regulation combo a mandate?

McArdle dismisses that great question by saying the bailout isn't to help the bank in question, but "the system" and so no bank can promise not to need a bailout in the future.

But why not? Why can't banks opt out of the Fed's protective cocoon, and then everyone else knows this and acts accordingly? If you don't want to get stuck being the counterparty to a failing bank, then only invest with banks that opt into the new regulated-but-eligible-for-bailout system.

Of course even with this escape hatch, the existence of the new option would be terrible, since the government could sweeten the taxpayer money+oversight mix in order to get banks to sign up. But still, I think banks should be given the option of entering into this new "beneficial" relationship with the government.

If investors are too stupid to decide the best place for their money--i.e. the less regulated versus the more regulated investment banks--then let's drop the farce and have the government direct all savings and investments.

The Perfect Storm

I just endured a preview of Rob Schneider in The Hot Chick. I'm amazed that the combined density of the lead actor's stupidity with that of the script did not suck everyone who worked on the movie through a black hole and into another universe.

Why Rent Control Is Bad for California

I explain here.

Thursday, June 12, 2008

Do Scientific Explanations Compete with Religious Explanations?

It is often imagined, by partisans of both science and religion, that those two domains are in rivalry for providing the "best" explanations of the nature of the world in which we find ourselves. If there is a valid scientific explanation for, say, the origin of life on Earth, then any religious understanding of the topic is rendered superfluous. The consequence is that many people who appreciate the accomplishments of science conceive religion to be merely an impediment to scientific progress, while numerous religious folk feel compelled to reject the possibility of scientific explanations in some realm that they see as intimately tied to their beliefs.

The idea behind this supposed conflict is that "God" serves as a kind of default causal mechanism invoked to explain anything not yet understood scientifically. Thus, if current science has no explanation for the existence of living creatures, then that is seen -- superstitiously, according to one camp, or faithfully, according to the other -- as evidence that there is still "room" for God in our world view. And, if scientific advances should conquer that problem, then it is hoped or feared that the territory plausibly claimed by religion will be reduced by just the area now newly occupied by science.

I suggest that both sides in this battle are profoundly mistaken about the relation of religious and scientific "explanations," in that those two modes of human understanding are categorically differentiated from each other, to the extant that "explanation" does not even mean the same thing in one mode as it does in the other.

I will attempt to clarify my contention through illustration. Consider the (highly improbable) case of a society lacking even the most rudimentary scientific explanations of anything whatsoever. Everything that happens is seen as merely a brute fact, accepted as just an instance of "the way things are." That complete absence of scientific thinking leaves entirely undetermined the religious attitude of that society: the members might view these simply given conditions as representing an entirely arbitrary state of affairs that just happens to be what faces them, or as resulting from the design/will/intention/self-expression of some divine power at their source.

Now, let's imagine these people hit upon the notion of natural regularities that govern the course of what previously seemed to be totally contingent, particular goings-on in the world. Perhaps they recognize that not only did that apple and that rock and that stick fall to the earth when dropped, but that that there is a general tendency for any heavy object to do so. Of what relevance is the emergence of this first glimmering of scientific awareness to making a choice between the two fundamental religious attitudes described above? None at all, I contend: It is true that the choice has been shifted to a different level, but its essence is unaltered. Now, the question is whether the general law that heavy things will fall towards the earth when unencumbered just happens to be the way things are, or does it arise in accordance with some greater order perceived as "sacred" in nature.

If you have grasped the irrelevance of scientific progress to the central religious issue in this primitive case, it should be obvious that, however far science travels beyond that first baby step, its findings cannot possibly substitute for religious understanding or adjudicate between the primary and opposed answers to the question of God.

This post is, of course, an extended statement of a view I have expressed less fully in a few earlier posts on this blog, for instance, in noting that Zeus was not a really piss-poor attempt at a scientific explanation of thunder, but a poetic representation of the sense of awe and the presence of a greater power that one can experience when faced with an intense thunderstorm.

Nothing in the above musings is intended to convince a sceptic that his negative conclusion on the "God issue" is mistaken. Rather, I have tried to show that the issue cannot be resolved by scientific progress, since both positions regarding it are compatible with any and all scientific findings. I hope I have opened the minds of at least a few of the many atheists whom I respect and admire to the possibility that religious faith does not represent an attempt to ignore the findings of science or a rejection of rational inquiry, but is, instead, a different conception of the essential character of the stage upon which science and reason play their parts, a conception that cannot be dismissed by quoting the lines that those actors speak.

A SIDE NOTE: In discussing what constitutes an explanation, it is interesting to note that one of the most esteemed achievements in the entire history of science, Newton's theory of gravity, did not actually provide any explanation of gravity at all, at least not in a scientific sense. In lieu of offering an answer as to why an apple fell to the earth, he presented a quantitative law giving the rate at which it did so, a substitution for which he was roundly criticized by the followers of Descartes, who accused him of regressing to the "occult" and unscientific form of natural philosophy prevalent in the Middle Ages. However, Newton did have a personal preference for explaining why gravity operated as it did: he suggested that Spirit pervades the realm of matter, and imbues all material objects with mutual attraction. Ouch!

The Five Clocks

I commend to your attention a rare and unusual book, The Five Clocks, by Martin Joos (Harcourt, Brace, NY, 1961). It is rare: if you aren't connected to a good university library strong in linguistics--which many, perhaps all, of you are--you will need an interlibrary loan or a rare book dealer. It is unusual: Martin grew up on a cow farm in Wisconson, and consequently went on to a degree in Electrical Engineering. He served at Bletchly Hall in WWII (I learned most of what I know of cryptanalysis from him. I also learned about the bistability of a long chain hanging over two posts and lots of other catenary facts, and lots, lots else from him.) He ended up at U. Wisc. and finally U. Toronto. teaching linguistics. He wrote much about English, but his favorite language was Middle High German, for which he assembled a wonderful reader. He was, I think, sorely distressed by almost everyone's ghastly mispronounciation of MHG, about which one man, however dedicated, could do so little for the world at large. He was my father's best friend, and wrote a fine and unusually intimate obituary for the journal Language upon my father's death in 1965. They wasted(?) incalculable hours writing long letters to each other in cipher--sometimes quite complex ciphers, e.g., bi- or triliteral substitution followed by elaborate transposition. With only one exception, each eventually cracked the other's cipher. (My father wrote Martin in enciphered IPA phonetic transcription; Martin eventually wrote back that he knew its cleartext basis was phonetic, not English as spelled, but he couldn't break it.) (Oh, and I can't resist: at a cocktail party in Austin, Texas in 1961, Martin told me, hanging on his every word, and anyone else who would listen, the story of 19-kana-nigori, a WWII Japanese naval code. I noticed A. A. Hill, ex-Navy and also in codes, go white. Obviously 19-kana-nigori had never been declassified. Martin either didn't know or didn't care. Since he knew everything, I hold with the latter.) And the book? It's about spoken English style. Sometimes drily and punctiliously academic (that's so Martin) and sometimes fancifully fictional (Martin) and sometimes both. Do read it.

Pair Share IV

Remember Pair Share? It carries over seamlessly to triples. Let T be the set of all triples (m,n,p) such that mnp = m+n+p. (Digressing: notice that these triples are not sets, since if two numbers are the same, we can't let them fall together; also, they are not ordered triples or 3-vectors, since we don't distinguish between (m,n,p) and (m,p,n), etc. I believe that the technical term for this intermediate kind of entity is "bag.")(0,0,0) is in there, of course, but so is (1,2,3). Cool!

Most pairs (m,n) allow one (m,n,p) in T, but not all. Can you find (m,n) that doesn't allow any (m,n,p)? Answer: (1,1) is a good choice (of very many). 1 x 1 x p = p; 1+1+p = p+2.

Can you generate all and only the integer triples in T? Are there finitely or infinitely many of them? Answer: relying on analogy with the case of pairs, you might be tempted to bite me--er, no, I mean, you might be tempted to answer "finitely many." But triples have a dimension that pairs lack: every (-n,0,n) qualifies: the answer is "infinitely many."

The question of whether the aggregate resultants (i.e., mnp = m+n+p) are finite or infinite in number is slightly harder.

Wednesday, June 11, 2008

I'm Voting Republican

The Roman Revolution: Tradition Fails to Save the Republic

Interested in what the history of Rome says about constitutionalism and about ideological politics? From my recent work on my doctoral thesis:

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Here, we will examine how the Roman reliance on tradition fared during the period commonly known as the ‘Roman Revolution’, typically conceived as covering the years between the tribunate of Tiberius Gracchus in 133 BCE and the Battle of Actium in 31 BCE. The term ‘revolution’ must be understood as being used here in a idiosyncratic way. As Garrett Fagan notes, the Roman Revolution was not a planned event, like the Russian Revolution. Nor did it take place in a brief, dramatic coup. What’s more, many of the ‘revolutionary’ actions making it up were not even, strictly speaking, illegal—due to the traditional character of the Roman constitution they consisted, instead, of technically legal but unprecedented acts that flouted that tradition.

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On ideological politics:

The actions of the Optimates in this period and the gulf between the intended and the actual effects of those actions provide examples of a defect that Oakeshott argued was inherently present in any instance of ideological politics. The ideologue has pledged his full allegiance to an abstract conception of the ideal polity, and as a consequence regards any acceptation of deviations from that ideal, other than as a stepping stone along the shortest path to his utopia, as an unprincipled compromise between virtue and vice. Thus, the ideologue is contemptuous of attempts by more practical and modest political actors to comprehend the actual political circumstances of their particular place and time so as to pursue those improvements to present conditions that are realistically achievable. In the words of Oakeshott, the ideologue finds ‘the intricacy of the world of time and contingency so unmanageable that he is bewitched by the offer of a quick escape into the bogus eternity of an ideology’ (1991 [1962]: 34). Although the ideological purist flaunts his ‘unwillingness to compromise his principles’ as evidence of his moral superiority over the political pragmatist, in fact it is evidence that he has failed to grasp the ethical truth that an action, however laudable the intentions behind it, is lacking in virtue to whatever extent the agent undertaking it has neglected to give prudent consideration to its probable outcome in the real world, rather than merely his own fanciful wishes for what his action will bring about.

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Read more.

Tuesday, June 10, 2008

Tom Woods Interviews Me

I already knew that Tom Woods could sell more books than me, but in this radio interview (mp3) Tom shows off his superior radio guy voice as well. Tom hosts his show "Shock to the System" at 2pm EST every Tuesday, which you can hear live at Revolution Broadcasting.

Despite the Ron Paul connection ("Revolution" isn't referring to a Beatles song), I graciously tell the listeners to buy Gene's book near the end of the interview.

"It's Been Standing So Long That....

it's pretty unlikely to fall down now!"

That's another odd piece of reasoning I hear frequently -- I just ran across it this morning in a work of fiction, in reference to a house, but I've also had it said to me personally, regarding other engineered works. Of course, everything has "been standing" until the very day it falls, so this almost predicts nothing will ever fall. And, of course, everything collapses eventually, so it would be more accurate to say, "This is getting closer to the day it will collapse every minute!"

I think the intuition is that, "If it's stood this long, it was built well." Now, it's true that if a bridge has held up for 80 years, that means it was engineered well enough to stand for 80 years! But the jury is entirely out, based on that fact, as to whether it was good enough engineering to keep it up for 80 years and 1 day. You could, of course, inspect the bridge and see if it's still sound, but that is exactly what this old saw is meant to discourage -- in fact, that was the exact situation in which I once heard it used:

"I should get this wall looked at."

"Nah, it's held up this long -- it's not gonna fall now!"

Monday, June 09, 2008

"It's So Expensive That...

no one wants to live there!"

Or so my protagonist on a bulleting board told me. He was trying to demonstrate how much better Dallas was than Brooklyn. (Hey, I know it's a stupid debate, but he was trolling a UConn board saying how Connecticut was the "armpit of the country," and I got sucked in.) I cited the much higher crime rates in Dallas than in NYC, and also the much higher real estate prices in Brooklyn. He jumped on that, and said that was another reason Brooklyn was worse.

This was weird, because, of course, it's actually the very best evidence that Brooklyn is more desirable than Dallas -- people will pay a lot more to live here! Of course, if you could get everything that you desire in a city in Dallas, then the low price makes it a better option, just as not being able to tell the difference between Boone's Farms and Dom Perignon makes Boone's Farm a better bargain--but certainly not a better wine.

And that's one thing funny about those magazine surveys of "The best places to live" -- you don't need a magazine, you just need to see which ones are the most expensive.

Pair Share III

Remember Pair Share? It carries over seamlessly to triples. Let T be the set of all triples (m,n,p) such that mnp = m+n+p. (Digressing: notice that these triples are not sets, since if two numbers are the same, we can't let them fall together; also, they are not ordered triples or 3-vectors, since we don't distinguish between (m,n,p) and (m,p,n), etc. I believe that the technical term for this intermediate kind of entity is "bag.")

(0,0,0) is in there, of course, but so is (1,2,3). Cool! Most pairs (m,n) allow one (m,n,p) in T, but not all. Can you find (m,n) that doesn't allow any (m,n,p)?

Can you generate all and only the integer triples in T? Are there finitely or infinitely many of them?