Bluematter.

Friday Special comes early and in two parts this week - it's not every day that you get the richest guy in the world interviewed alongside the best manager of creative talent in the world. Yes, the former is an evil monopolist and the latter tries his best to become one, but I still think that as a society we got a pretty good deal out of both of them.

With thanks to the Big Picture for the pointer, here are the fathers of the personal computer revolution, Steve Jobs and Bill Gates:



For what it's worth, I'm writing this blog on a sleek-looking, consistently reliable, much loved 20'' imac, reverting to Windows (hey, didn't you know macs can do that?) only to run Stata.

You can catch the whole interview at All Things Digital:

Steve Jobs and Bill Gates Prologue
Steve Jobs and Bill Gates Part 1
Steve Jobs and Bill Gates Part 2
Steve Jobs and Bill Gates Part 3
Steve Jobs and Bill Gates Part 4
Steve Jobs and Bill Gates Part 5
Steve Jobs and Bill Gates Part 6
Steve Jobs and Bill Gates Part 7

Michael Hiscox, via Tyler Cowen, has a paper on 'The Mysterious Case of Female Protectionism':

The available survey evidence indicates that women in the United States, and in advanced economies more generally, are significantly more likely than men to support new restrictions on trade. Measures of the particular labor-market risks and costs associated with maternity do not appear to be related at all to the gender gap in trade preferences. We also do not find any strong evidence that gender differences in non-material values or along ideological dimensions have any affect on attitudes toward trade.

The data do clearly reveal that the gender gap exists only among college-educated respondents and is larger among older cohorts. We argue that differences in educational experience – specifically, exposure to economic ideas at the college level – appear to be most plausible explanation for gender differences in attitudes toward trade.

While I am not entirely convinced that the variables Hiscox uses to control for 'other factors' are adequate for the job at hand, the explanation he offers could potentially be part of the answer. However, I doubt either gender is blessed with an overall level of 'economic literacy' worth speaking of - thus, differences in economic education seem unlikely to be the main driving force behind the pattern we observe.

Tyler's explanation, that women tend to adopt a self-identity as a 'caring person', seems more plausible - although my hunch remains that more traditional 'economic' factors (current job insecurity and expected lifetime job insecurity, preference for risk, share in the gains from international trade) will eventually reveal themselves as the main culprits.

Hiscox also highlights a point readers of this blog will be familiar with:

The findings suggest the possibilities of a renewed theoretical and empirical focus on the role played by ideas, not just among policymakers but also among the broader electorate.

This seems to me to be one of the least researched areas in the wider field of economics. As a result, we are left trying to explain the pros and cons of different policies to a public whose concerns and biases we simply do not understand. By not knowing where the points of resistance to economic logic lie, we are unable to provide satisfactory answers to the concerns of the electorate - and because of this, the lessons of economics are often discarded as being irrelevant.

Economics is, more than anything else, the misunderstood science. And it's about time we did something about it.

...was published today.

121 countries have been ranked by their ‘absence of violence’, using metrics that combine both internal and external factors. Most people understand the absence of violence as an indicator of peace. This definition also allows for the measuring of peacefulness within, as well as between, nations.

Developed in conjunction with the Economist Intelligence Unit and the Centre for Peace and Conflict Studies at the University of Sydney, the GPI boasts an impressive list of endorsers, including our own Joseph Stiglitz.

Personally, given the difficulties involved in defining the term 'peace', I doubt the index is going to be of much use to researchers - but who knows?

This is a fascinating presentation by Hans Rosling, Professor of International Health at Sweden's Karolinska Institute and founder of Gapminder, a groundbreaking project with the aim to 'bring data to life'. The Trendalyzer free online software, as seen on the presentation, is here.

And to add an interactive element to this, before playing the video have a stab at beating the proverbial monkey and guess which country has the highest child mortality rate of each pair:

1. Sri Lanka or Turkey
2. Poland or South Korea
3. Malaysia or Russia
4. Pakistan or Vietnam
5. Thailand or South Africa

It's a well known story: increasing returns to education have been a major driver of rising income inequality in the US. And this graph from the Economist is a not-so-subtle reminder that 'returns to education' do not refer to income only.

A few posts ago, starting from the fact that non-OECD countries are for the first time in history producing more CO2 than their wealthier cousins, I wondered about the implications of global warming for free trade:

I expect another reason to be important (for the rise in CO2 emissions from non-OECD countries) and that's the migration of 'dirty industries' to the countries with the least stringent environmental standards and the lowest taxes on fossil fuels.

Can global warming in a world with widely varying taxes on CO2 emissions provide an argument against free trade? Trade is beneficial when a country has a comparative advantage in producing a certain good, but what if that advantage is borne out of differences in energy taxes? Is trade in private goods as beneficial as mainstream models suggest in the presence of global externalities?

Wikipedia has a good article, accessible to everyone, on comparative advantage. The cornerstone of trade theory and one of the most fundamental insights economics has to offer, the theory of comparative advantage powerfully demonstrates that everyone can gain from trade in the presence of different relative costs of production.

Picture a world with only two counties (let's call them USA and China) where only two goods are produced and consumed: call them 'services' and 'manufactures'. Asssume that there are no barriers to trade, so that eventually we reach an equilibrium where all gains from trade are exhausted.

Enter global warming. We now know that production of 'manufactures' also involves social costs and the free market is not efficient. The US takes immediate steps to rectify the situation and imposes a pigouvian tax on the production of manufactures. If the Chinese follow suit, the problem is solved. But what if they don't?

In the presence of taxes on US production, the relative cost of producing 'manufactures' in China goes down and production shifts away from the US to reflect the change in comparative advantage.

Under this scenario, some of the gains from trade are transferred from the US to China, as China can only emerge better off from this change in US costs of production. And the planet suffers too: with production of manufactures shifting from the US to China, the effect that a tax on the US production of manufactures has on global CO2 emissions can be as low as non-existent.

In this situation, and if the US is serious about achieving a more socially efficient outcome, it has only one option: to impose an indirect pigouvian tax on Chinese production of manufactures by introducing import duties.

In other words, to the extent that CO2 emissions are taxed at a socially inefficient level in some jurisdictions, free trade means that those that tax CO2 the least will enjoy a larger share of the gains from trade than would have been the case under a global pigouvian taxation regime. Furthermore, under a plausible set of assumptions, local taxes can be next to completely ineffective in reducing CO2 emissions, and import tarrifs and duties can lead to welfare increases in a county worried about global warming.

How long until global warming starts featuring prominently in trade negotiations?

There were a couple of interesting points raised in response to a previous post on supranational law. Here is Tim Worstall:

The German Constitutional Court (whatever it's called) has, I think, stated that where EU law calls for a breach of the German constitutional law, then it is the EU law that must be changed, not the German constitution.

On the basis that EU law is imposed by treaty, whereas the constitution is more basic than that perhaps?

Or another way of looking at it, that a treaty cannot be used to impose a breach of constitutional law: very much the problem over the Extradition Act with the US. Americans' cannot be extradited to the UK on the same basis that UKites can be to the US because the US courts take the view that said treaty violates basic constitutional protections and therefore cannot be used in the US.

I'm well aware that EU law does over ride domestic law and the question I was trying to raise is, will a UK Constitution lead to something like the German or US situation?

Any UK constitution, if there ever is one, will take its rightful place above UK law and below EU law and other international treaties the UK has signed. The German constitution is no different: Germany may try and argue against instituting a certain piece of EU legislation that goes against the German constitution or, if that's not possible, it may choose to ignore that specific piece of legislation and face the consequences of breaking EU law. There are many examples of EU countries consistently refusing to enforce certain pieces of EU legislation, and they duly pay the resulting fines as specified by the EU. An individual may choose to pay parking fines rather than use public transport, but this does not mean he is above parking law.

As for the UK-US Extradition treaty, keep in mind that it was only recently ratified by the US, while the UK unilaterally chose to enforce it earlier than the Americans did. At any rate, my understanding is that the US is not flouting the treaty: it just made sure that the requirements imposed on it were in line with its constitution. If it were indeed the case that its constitution did not allow it to enforce the treaty, it would be the UK's right to refuse to honour its part of the deal too, and the treaty would no longer have any legal force.

Approaching the issue from a different angle, Dave also makes an interesting remark:

Surely no EU law is actually law in the proper sense because there is no means of enforcement, given the sovereignty of nations. Therefore, when we talk about EU law, it is in rather optimistic terms (just as we do about the UN). Surely national law precedes international treatises, just as natural law precedes national.

The EU has a variety of means of enforcement, ranging from fines to expulsion from the union itself. Of course, at any point in time any country can choose to renege on a treaty/law, but then it would have to face the consequences, whatever these are. This is also the case for lower-level authorities or individuals who may choose to break national law. From a moral point of view, you may be right: any entity can flout a law it is subject to following its own morality or, in the case of countries, legal system. But from a legal perspective, my point still stands: it is absolutely impossible for a lower-level entity to legislate in contradiction to a higher-level law.

One more quick point is in order before leaving this post. While it may seem that I am eager to pick on Tim Worstall, I have to make clear his blog is great, and I am one of his most loyal readers. I don't always agree with everything he says, but in most cases he has a good point - and a unique way of expressing it. Furthermore, his ability to maintain a high level of quality while being probably the most prolific econ-blogger around never ceases to amaze me. Tim, keep up the good work - and I will keep trying to get to the bottom of your arguments.

Or: Are private contributions offset by a greater decrease in public spending?

A reader asks me to place the claim I made in the concluding paragraph of my previous post in a formal setting in order to make clear what I meant (apologies to the readers who submitted requests for posts earlier - coming soon guys, promise). The paragraph in question is this:

'If the median voter knows that the higher the size of the deficit the more some citizens will voluntarily chip in, how do you think his decision on the size of the deficit will be affected? Yes, you conscientious citizens, you just made running a larger deficit the most appealing proposition.' This statement of course, depending on the extent my assumptions hold, can equally well apply to charitable giving, corporate social responsibility and the amount of household chores each of a group of housemates carry out.

While I am temporarily diverging from the customary style of this blog here, I have tried my best to keep this accessible to anyone with a year or two of economics education under their belts.

The simple (even simplistic) model below builds on standard models of public good provision. I examine what the equilibrium level of provision of the public good (call it 'clean air' if you like) is when it is provided both by government and the (perfectly competitive) private sector. Standard expositions of public good models focus on the equilibrium amount of the public good that would be provided by either voting or in a free market economy with no government under general conditions, while the aim here is to attempt to evaluate the implications of concurrent public provision and voluntary private purchases of the public good in a more restrictive setting.

I assume a closed economy with no growth. There is a finite number, n=3, of consumers/citizens. I label the three consumers as ‘left-wing’ (l), ‘median’ (m) and ‘right-wing’ (r). There are only two goods produced in this economy, a private good Yprv and a public good Ypub and there is no saving. For simplicity, I assume that there are no fixed costs of production and that the marginal cost of producing one unit of Yprv is the same as producing one unit of Ypub, with both being equal to one. This is not restrictive since the ‘units’ used are arbitrary. Also, there is perfect competition so that the price of goods equals their marginal cost.

Each individual has an endowment, Wi, and I further assume that there is perfect equality. One unit of this endowment can be used to produce either one unit of the public good or one unit of the private good.

Consumers are assigned simple Cobb-Douglas utility functions:

, i = l,m,r (1)


and I further assume that αi+bi = 1, αi, bi>0.

I define the median consumer/citizen simply to be the one that has the median α in the population of αi’s. Also, for ease of expression, I refer to the consumer/citizen that has a higher value of α, i.e a ceteris paribus higher preference for the public good, as being to ‘the left’ or being ‘left-wing’ and the consumer/citizen with the lower value of α as being to ‘the right’ or being ‘right-wing’.

The government provides Ypub with revenues obtained through taxation, and it selects the tax level in order to maximize the utility of the median voter.

Now, let’s suppose that the private sector is restricted to producing the private good only. The public good is provided solely by the government via taxation, which is required to be levied equally on every citizen. The level of tax (and thus the public good) is chosen to maximize the median voter’s utility.

All consumers (except the median voter) do not in any way choose their consumption bundle in this setup. The median voter (via the government) chooses the tax rate to maximize his own consumption and all other consumers simply contribute the amount of tax prescribed and spend the rest of their endowment on the private good.

Since this post is already unduly long, I will leave the equations determining the amount of the public good/taxation and each voter's utility as an exercise to the reader - for anyone interested, please email me and I will be happy to provide the answers.

To help get an intuitive feel for the results, the table below shows the values our variables take when we set w=100, αr=0.3, αm=0.5 and αl=0.7. The variable g refers to the amount of the public good purchased by the various individuals directly in the market (rather than provided by government via taxation), which in this case is zero for every consumer.

I will now turn to an alternative scenario, in which the private and the public good are both provided in a perfectly competitive environment, with consumers able to purchase goods at marginal cost. I model this as a sequential game of perfect information, in which the median voter selects the tax rate (which has to be equal for all citizens) and then all consumers decide the amount of the public good to purchase privately, on top of that provided via taxation.

Setting the values of the variables at the same level as in the previous example we have:








The tax rate, and the level of the public good, are now lower. The median voter and the ‘right-wing’ consumer are now better off, while the ‘left-wing’ consumer is worse off. In fact, even though we now have private contributions (by the ‘left-wing’ consumer) to the public good, the equilibrium amount of the public good is now lower than in the case with no voluntary contributions. Given our assumptions and perfect competition, introducing voluntary contributions increases the utility of the majority of the population but leads to a lower equilibrium amount of the public good.

This seemingly counterintuitive result makes perfect sense: knowing that the ‘left-wing’ consumer will find it beneficial to contribute more when the tax rate is lower, the median voter can gain by lowering the tax rate (and thus increasing his consumption of the private good and, incidentally, the ‘right-wing’ consumer’s consumption) and ‘free-riding’ on the ‘left-wing’ consumer’s contribution to the public good.

I have a hunch this may also help explain the pattern of charitable giving observed in the US: Americans have a very high level of private contributions per capita coupled with extremely lousy public funding of 'good causes' (look, for example, at donations for victims of the Tsunami). The relatively excess generosity of the private citizens is lower than the relative stinginess of the state compared to European countries, and America consistently comes out as a laggard when it comes to contributing to 'good causes'.

Via Mark Thoma, here's Tim Haab on his environment-ravaging weekend plans:

I'm packing up my big honkin' SUV tomorrow with my oversized family of 5 and driving 280 miles (one-way) to Lake Cumberland, Kentucky to visit with friends from Atlanta--who will be driving their oversized family of 5, 330 miles (one-way) in their big honkin' SUV. Based on the paltry gas mileage we will get--about 18 mpg--I'm figuring our family will consume about 31 gallons of gas.

At $3.50 a gallon that's $109. If we could somehow double our fuel efficiency to 36 mpg and still fit the family we would save $54 in fuel cost round trip*. For a 4.5 hour one way trip, we are paying an extra $6 per hour to drive the SUV.

So I ask myself, am I willing to pay $6 per hour to have my 3 kids separated by 2 feet each--two in the middle row, one in the back--rather than be touching each other the whole trip.

Ummm...can I get a big 'Hell Yeah'?

*For those of you wondering who will pay for the externalities I create, that's an easy one...YOU. That's why they're called externalities. Voluntarily internalizing my own externalities would ruin my faith in rationality and cause me to have to completely reinvent economics. I'm just too lazy for that right now. Yes, I'm a jerk.

First of all, a big 'Hell Yeah' for Tim. Secondly, I have to protest at his self-characterisation: he is most definitely not a jerk. You can be the most passionate advocate for the need to do more to protect the environment - Al Gore, please stand up - and still happily go on to consume ridiculous amounts of energy. (Al Gore, please refrain from sitting down)

The two are not at all inconsistent: The former is a public policy preference, while the latter relates to private preferences given public policy.

When I am asking for higher taxes on gasoline, I want them imposed on everyone, not just on me. What's the point of unilaterally deciding to cut my consumption of gas? The planet will not even notice.*

This principle is very well understood in a different, but analytically equivalent, setting: general taxation. If I am asking for higher taxes but the government instead decides to go for a tax cut, will anyone in their right mind ever blame me for not voluntarily paying more than my fair share into the public coffers? Is it hypocritical that I pay the universal 'low' rate of tax while I am the most passionate of advocates for higher rates?

* Ah, I hear you say, but what if a sizable minority of conscientious citizens (for it is a minority, otherwise it would include the all-powerful median voter) all decide to voluntarily reduce their carbon footprint? Well, that's just great: they just reduced the pressure on the not-as-conscientious median voter to do something about it by imposing a universal pigouvian tax (or other mechanism to internalise the externality).

And if that's not clear, think of my general taxation example. If the median voter knows that the higher the size of the deficit the more some citizens will voluntarily chip in, how do you think his decision on the size of the deficit will be affected? Yes, you conscientious citizens, you just made running a larger deficit the most appealing proposition.

Addendum: Again via Thoma, I have to close a linking circle and return a favour by mentioning Robert's Stochastic Thoughts:

Update II: Tim Haab (who is not a jerk) definitely gets Kevin Drum's point as he clearly understands the fundamental difference between a) advocating policy which causes people to internalize externalities and b) listening to kids in the back seat squabble for hours. Also he doesn't own any slaves which puts him a big one up on Thomas Jefferson.

Further commentary here and right here.

An interesting example of rational co-operative behavior which is not in the public interest is link begging, where bloggers attempt to reward other bloggers for links by linking back. Not as repulsive as self linking, but the first sometimes enables a rational egoist to trick Google, while the second is just pathetic.

Kevin Drum's point is this:

To consider with Drum the case of Thomas Jefferson, without anything odd (dynamic inconsistency) the position as a slave owner who advocated abolition of of slavery can be perfectly rational. The slave owner might hate slavery, but not hate the enslavement of his own slaves as much as he loves living in luxury off the sweat of their brows. His ideal outcome would be to have all slaves but his own free. A rational anti slavery slave owner knows he's not going to get away with that. Second best would be abolition of slavery -- the desire to free everyone elses slaves outweighs the desire to keep his own. Third would be continued slavery. Finally the outcome he likes least would be to free his own slaves and live in relative poverty in a slave owning country.

Before leaving this post (again), note that Drum's point is narrower that the the one made here. My argument is not only that Tim's behaviour is rational, but also that it is moral (something that cannot be said for slavery, as polution is a question of a not very well defined 'how much', while accepting slavery is a very clear 'if'). Furthermore, there is a possibility that driving a gas eating monster may actually be beneficial to the environment.

More on this counterintuitive point tomorrow, in response to a reader's request for clarification with regards to the last paragraph of my main post.

This should have made the Friday Special, but with Memorial Day weekend in the US and the Spring bank holiday in the UK I thought it shouldn't wait for another week.

Earth album is one of the best websites I've come across recently. It brings together Google Earth and Flickr, 'allowing you to explore some of the most stunning photos in the world'.

And another interesting incarnation: Earth album youtube edition with music videos from across the globe.

This graph is from the Energy Information Administration's International Energy Outlook for 2007 (full report, press release). World energy consumption is predicted to rise by somewhat more than half today's level by 2030 in the absence of policy and price changes.

The report also highlights 2004 as a landmark from an environmental point of view (see graph above):

From 2003 to 2004, carbon dioxide emissions from the non-OECD countries grew by almost 10 percent, while emissions in the OECD countries grew by less than 2 percent. The result of the large increase in non-OECD emissions was that 2004 marked the first time in history that emissions from the non-OECD exceeded those from the OECD countries. Further, because of the expectation that non-OECD countries will rely on fossil fuels to supply much of their future energy demand growth, carbon dioxide emissions from the non-OECD countries in 2030 are projected to exceed those from the OECD by 57 percent.

Strong economic growth in the developing world, especially China and India, is one of the main drivers of the changing geography of CO2 generation. I expect another reason to be important, however, and that's the migration of 'dirty industries' to the countries with the least stringent environmental standards and the lowest taxes on fossil fuels (here is a previous post on the Summers memo).

Can global warming in a world with widely varying taxes on C02 emissions provide an argument against free trade? Trade is beneficial when a country has a comparative advantage in producing a certain good, but what if that advantage is borne out of differences in energy taxes? Is trade in private goods as beneficial as mainstream models suggest in the presence of global externalities?

I'll try to get my thoughts together in a simple model - stay tuned, more on this coming up soon.

Steve Jobs and Bill Gates in private conversation

An American writes about what makes Britain great

New York under construction (pictures)

On the Art of Everything (pictures)

CIA World Factbook Ranking of countries

US violent crime trends at a glance

Snowboarding on avalanches (video)

Nuclear cooling towers demolished (pictures + video)

Nothing to do with economics I'm afraid, but here's some music to heal the soul.

Collectively known as Astic Borders, I watched these guys play a fantastic gig yesterday at the Green Note in Camden Town, London.

Follow the links for tracks by Adrian, Beth and Dana. Beth's webpage is here.

Big deal:

Google is to ban adverts for essay writing services - following claims that plagiarism is threatening the integrity of university degrees.

There have been complaints from universities about students being sold customised essays on the internet.

The advert ban from the Google search engine has been "warmly welcomed" by university authorities.

But it has angered essay writing firms which say this will unfairly punish legitimate businesses.

From next month, Google will no longer take adverts from companies which sell essays and dissertations - and the internet company has written to advertisers to tell them about the policy.

Google's forthcoming ban on adverts for "academic paper-writing services and the sale of pre-written essays, theses, and dissertations" means that essay websites join a blacklist of "unacceptable content" including adverts for weapons, prostitution, drugs, tobacco, fake documents and "miracle cures".

Don't expect much to change. I would think demand for 'academic paper-writing services' is pretty inelastic - if you are determined to cheat and are willing to 'pay' the cost of potentially getting caught, a small decrease in the amount of advertising should not do much to alter the cost-reward calculus.

Also, notice that Google only bans advertising, not search. The great advantage of Google ads, of course, is that they appear first on the list of search results - and thus have a higher probability of being selected. What Google is essentially doing is transferring advertising funds from itself to companies that specialise in helping websites 'work' Google's algorithm to achieve a top ranking in search results.

Also, almighty as it undoubtedly is, Google is by no means the only search engine around - let alone the only market for essays on demand. It is easy to be carried away given all the talk by Googlemaniacs (hooray, Google is going to conquer the world!) and Googlophobes (somebody stop them, Google is going to conquer the world) to think that all information today has to get the approval of the big G, but you would be wrong. There are other companies, and for that matter, other media too.

Google is trying to recover it's 'Do no evil' image, tarnished after its recent foray in China, by generating some hype from nothing; I expect its advertising revenues from 'academic paper-writing services' to be some negligible part of the total. An empty gesture, and an over-enthusiastic response.

Little known fact: The Greek Constitution makes it illegal for any business to refuse to serve a customer with the ability to pay. Companies are restricted to operating on a commercial basis, and are not allowed to run their own social policy.

I wonder where true libertarians stand on this - I would be grateful if readers could share their thoughts on the comments section or via email.

A reader provides me with more evidence on the inefficiency of the human mind's random object generator.

Ask someone to perform some simple mental arithmetic (how much is 16+25? How much is 48 divided by four?) and then ask them to name a vegetable.

I've tried this on seven people so far today, and the answer was always the same: 'carrot'.

The Maspro Denkoh electronics corporation was selling its $20 million collection of Picassos and Van Goghs, but the director could not decide whether Sotheby's or Christie's should have the privilege of auctioning them.

So he announced that the deal would go to the winner of a single round of scissors, paper, stone - the children's game that relies on quick fire hand gestures, where stone beats scissors, scissors beat paper, and paper beats stone.

Sotheby's reluctantly accepted this as a 50/50 game of chance, but Christie's asked the experts, Flora and Alice, 11-year-old daughters of the company's director of Impressionist and modern art, and aficionados of the game.

They explained their strategy:

1. Stone is the one that "feels" the strongest
2. Therefore a novice will expect their opponent to go for stone, and will go for paper to beat stone
3. Therefore go for scissors first

Sure enough, the novices at Sotheby's went for paper, and Christie's scissors got them an enormously lucrative cut.

This took place back in 2005. (The excellent BBC News article also offers winning tips for Monopoly, Connect Four, Draughts, Othello/Reversi and Scrabble)

Graham Walker, via Andrew Gelman, provides a comprehensive list of winning strategies. For example:

When playing with someone who is not experienced at [Rock, Paper, Scissors], look out for double runs or in other words, the same throw twice. When this happens you can safely eliminate that throw and guarantee yourself at worst a stalemate in the next game. So, when you see a two-Scissor run, you know their next move will be Rock or Paper, so Paper is your best move. Why does this work? People hate being predictable and the perceived hallmark of predictability is to come out with the same throw three times in row.

Walker also offers an explanation as to why these tricks actually work:

Humans, try as they might, are terrible at trying to be random, in fact often humans in trying to approximate randomness become quite predictable. So knowing that there is always something motivating your opponent's actions, there are a couple of tricks and techniques that you can use to tip the balance in your favour.

I also have my own contribution to the literature on the inability of humans to act randomly. Ask someone to hide their hand behind their back and pick a random number of fingers. You would think that you would then have a 16.7% chance (not 20% - zero is a number too) of guessing the number right. However, that's not quite true. Zero and five are practically never chosen, while four or one will only emerge if you are asking someone who has tried this numerous times in the past. So, in most cases, you are only left to choose between two and three - a 50% chance of getting it right. And you can do even better than that: Most people's first instinct is to go for two, while if you allow them a few more seconds of thinking time they will revert to three - as one of my victims once explained, 'three is more difficult to guess'.

Addendum: A loyal reader (usually a reliable source) informs me of another trick: ask someone to come up with a number between 1 and 10, and most people will go for seven. According to the same source, this almost always works with girls, with guys being a tad bit less predictable.

Also, it's not only humans that occasionally have trouble with generating random numbers. Tyler Cowen recently posted a piece on Benford's Law, the tendency of many data series (such as the length of rivers) to include a surprisingly high number of entries beginning with the number 1.

Is rationality really optimal?

Economists love 'rationality': it makes for simpler models. Wikipedia offers the following definition of perfect rationality (the sort usually attributed to agents in economic models):

In economics and game theory, the participants are sometimes considered to have perfect rationality: that is, they always act in a rational way, and are capable of arbitrarily complex deductions towards that end. That is to say, they will always be capable of thinking through all possible outcomes and choosing the best possible thing to do.

Since rationality means agents will always choose the best possible thing to do, economists are not unreasonable in assuming it should be prevalent in any population that has been subject to a sufficiently long evolutionary process. Take a perfectly competitive market: The 'rational' companies survive, the ones that make production decisions according to the position of the stars will eventually vanish.

This, however, is not always the case; in a large number of situations, irrationality will lead to a superior outcome. In those cases, the 'evolutionary' argument for rationality falls apart.

Think of 'The Battle of the Sexes'. Dave and Pepy are dating. Dave likes bowling, Pepy likes ballet. Dave strongly prefers going bowling with Pepy to watching ballet with her, while Pepy's preferences go the other way round. Neither will enjoy going out at all if they are on their own.

If both Dave and Pepy are rational, they will as much as possible end up going to the same place: their nights will sometimes involve bowling and other times ballet. But now assume that Pepy is irrational and always chooses to go to the ballet regardless of what Dave does. Irrational Pepy achieves a superior outcome: she spends every night with Dave, while never having to set foot at the bowling alley.

Of course, Pepy does not really need to be irrational: a mere credible commitment to acting irrationally would do. Life, however, is a continuous stream of game theoretical situations as the one described above, during which a reputation is established. The sure-fire way to commit to act irrationally is to actually be irrational, at least to some extent.

Think of all the times you didn't punish your four month old baby for waking you up in the middle of the night. By virtue of being a baby, and so clearly irrational, it is allowed to go on asking for attention whenever it feels like without punishment.

If you are a dictator with potential access to weapons of mass destruction, it helps to have a reputation for being mad. It is difficult to commit to carrying out a nuclear strike if your country is invaded - if your goal is to protect yourself and national interests, such a strategy would be counterproductive. But what if you are mad? Your commitment becomes credible, and your adversaries would never dare invade in the first place.

While the above examples may appear to be quite particular, situations like these arise constantly. In a world where the imperfectly rational individual is rewarded over the large number of games that constitute life, it would be wrong to expect evolution to eventually produce the perfectly rational agents inhabiting economic models.

Mark Buchanan, via Andrew Gelman, provides another example of ignorance breeding evil (O Socrates, were you ever wrong?):

Later this month – or it could be next month – a group of three judicial “wise men” in the Netherlands should finally settle the fate of a very unlucky woman named Lucia de Berk. A 45-year-old nurse, de Berk is currently in a Dutch prison, serving a life sentence for murder and attempted murder. The “wise men” – an advisory judicial committee known formally as the Posthumus II Commission – are reconsidering the legitimacy of her conviction four years ago.

Lucia is in prison, it seems, mostly because of human susceptibility to mathematical error – and our collective weakness for rushing to conclusions as a single-minded herd.

When a court first convicted her, the evidence seemed compelling. Following a tip-off from hospital administrators, investigators looked into a series of “suspicious” deaths or near deaths in hospital wards where de Berk had worked from 1999 to 2001, and they found that Lucia had been physically present when many of them took place. A statistical expert calculated that the odds were only 1 in 342 million that it could have been mere coincidence.

Open and shut case, right? Maybe not. A number of Dutch scientists now argue convincingly that the figure cited was incorrect and, worse, irrelevant to the proceedings, which were in addition plagued by numerous other problems.

For one, it seems that the investigators weren’t as careful as they might have been in collecting their data. When they went back, sifting through hospital records looking for suspicious cases, they classified at least some events as suspicious only after they realized that Lucia had been present. So the numbers that emerged were naturally stacked against her.

Mathematician Richard Gill of the University of Leiden, in the Netherlands, and others who have redone the statistical analysis to sort out this problem and others suggest that a more accurate number is something like 1 in 50, and that it could be as low as 1 in 5.

More seriously still – and here’s where the human mind really begins to struggle – the court, and pretty much everyone else involved in the case, appears to have committed a serious but subtle error of logic known as the prosecutor’s fallacy.

The big number reported to the court was an estimate (possibly greatly inflated) of the chance that so many suspicious events could have occured with Lucia present if she was in fact innocent. Mathematically speaking, however, this just isn’t at all the same as the chance that Lucia is innocent, given the evidence, which is what the court really wants to know.

To see why, suppose that police pick up a suspect and match his or her DNA to evidence collected at a crime scene. Suppose that the likelihood of a match, purely by chance, is only 1 in 10,000. Is this also the chance that they are innocent? It’s easy to make this leap, but you shouldn’t.

Here’s why. Suppose the city in which the person lives has 500,000 adult inhabitants. Given the 1 in 10,000 likelihood of a random DNA match, you’d expect that about 50 people in the city would have DNA that also matches the sample. So the suspect is only 1 of 50 people who could have been at the crime scene. Based on the DNA evidence only, the person is almost certainly innocent, not certainly guilty.

This kind of error is so subtle that the untrained human mind doesn’t deal with it very well, and worse yet, usually cannot even recognize its own inability to do so. Unfortunately, this leads to serious consequences, as the case of Lucia de Berk illustrates. Worse yet, our strong illusion of certainty in such matters can also lead to the systematic suppression of doubt, another shortcoming of the de Berk case.

Of course, the de Berk case is hardly an isolated example of statistical error in the courtroom. In a famous case in the United Kingdom a few years ago, Sally Clark was found guilty of killing her two infants, largely on the basis of testimony given by Roy Meadows, a physician who told the court that the chance that the two both could have died from Sudden Infant Death Syndrome (SIDS) was only 1 in 73 million. Meadows arrived at this number by squaring the estimated probability for one such death, which is an elementary mistake. Because SIDS may well have genetic links, the chance that a mother who already had one child die from SIDS would have a second one may be considerably higher.

Here, too, the prosecutor’s fallacy seems to have loomed large, as the likelihood of two SIDS deaths, whatever the number, is not the chance that the mother is guilty, though the court may have interpreted it as such.

Even our powerful intuitive belief that “common sense” is a reliable guide can be extremely dangerous. In Sally Clark’s first appeal, statistician Philip Dawid of University College London was called as an expert witness, but judges and lawyers ultimately decided not to take his advice, as the statistical matters in question were not, they decided, “rocket science.” The conviction was upheld on this appeal (although it was subsequently overturned).In ordinary usage, “common sense” is taken to be something of value. Albert Einstein had a less charitable view. “Common sense,” he wrote, “is nothing more than a deposit of prejudices laid down by the mind before you reach age 18.”

By the way, Statistical Modeling, Causal Inference and Social Science is one of the best blogs around and a personal favourite. An absolute treasure chest of knowledge and insightful commentary, it is highly recommended to anyone with more than a passing interest in statistics and econometrics.

I am appalled - and it's not just China:

The level of state-led censorship of the net is growing around the world, a stury of so-called internet filtering by the Open Net Initiative suggests.

The study of thousands of websites across 120 Internet Service Providers found 25 of 41 countries showed evidence of content filtering.

I think there is a way round this problem, and it should only take a few lines of html and a little bit of public pressure. If you are as pissed off as I am with censorship, please read on:

We develop a 'widget' - a few lines of code anyone can attach to their website - that appears as a small button on the host webpage. When, say, a Chinese user clicks on it, she gets access to a 'mini-browser' from where she can navigate the net - but with a twist. Instead of surfing directly, her actions provide information to the host website instead, which then updates itself to include the information the user has been looking for. It will be slower than browsing directly, and it is perhaps best if the cached information is restricted to text to reduce pressure on the host server. But a user operating behind a firewall can get access to information that is banned, all the while never allowing the censorship software to realise which websites she is accessing.

Here is an example. The Coca Cola website can be freely accessed in China. BBC news cannot. So now, the Coca Cola website has an additional button that when clicked opens up a different page with pseudo-web browser functionality. The Chinese user can type http://news.bbc.co.uk and the Coca Cola server scans the text and links from the BBC website and makes it part of the Coke website pseudo-browser page. At no step in this process is the firewall aware the user is getting information from a banned website, as all the time she is tuned in the allowed Coke website.

Now, while the spiders cannot see what happens within the Coke website, they can definitely spot that a webpage has the widget. And here's where public pressure comes in: A company or organisation that refuses to include it on their webpage is clearly standing for censorship. That way, every website host, company or organisation has to take sides: either for or against free speech. As soon as a few prominent backers emerge, trying to remain on the side of the censors will become increasintly unprofitable. And China will have to accept all the information on the net - or live with none of it.

Anyone who thinks this could work and would like to be involved, step forward - and please pass this on.

Managua, a city of two million where the streets have no name

Efficient tranport, in pictures

Ever wondered what the computer thinks when playing chess?

Sequel: What to do if you have a small appartment, loads of coins and time to spare (video)

From Modern Drunkard Magazine, the 86 rules of boozing

Very funny ads (videos)

From Steven Levitt's Freakonomics blog:

Adoptive Parents May Also Face the Decision to 'Abort': On my first trip to adopt in China, I happened to sit at a table next to another adopting couple from the United States. They were older, with no prior children, and had been assigned a three- or four-year-old girl. They seemed like very nice people. The child that was assigned to them was very headstrong. She did not want to go with her adoptive parents and proceeded to throw tantrums, screaming, throwing things and spitting on and punching them for several days. They decided they couldn’t go through with it, and the girl was returned to the orphanage. My understanding is that she would not be eligible for adoption (at least, not internationally) in the future.

The next day, the couple told me, another three-year-old was brought over from an orphanage. The first thing she did when she met them was say, in English, ”I love you, Mommy. I love you, Daddy.” The person who had transported the child from the orphanage had taught her the words. She had no idea what she was saying, but it didn’t matter. Needless to say, this little girl went home with them to New Jersey.

Almost seven years have passed since I shared breakfast with that New Jersey couple, yet I think about them often, and when I do, my eyes always fill with tears. I think about the little girl, now ten, living in a Chinese orphanage never knowing the life she missed. Should a three-year-old be punished for being attached to her caretakers in the orphanage? What if the New Jersey couple had just held out a little longer? Mostly, though, I think about how the second child learned those words in the cab, and how different her life is now because that first child put up such a fight.

Steven also links to a story in the New York Times with a different ending:

We had set our hearts on adopting a baby girl from China years before [...] We embarked on a process, lasting months, of preparing our application and opening our life to scrutiny until one day we had a picture of our daughter on our refrigerator. Fourteen months after deciding to adopt, we were in China. [...]

A CT scan confirmed that there had been a tumor that someone, somewhere, had removed. It had been a sloppy job; [...] and as Natalie grew her condition would worsen, eventually leaving her paralyzed from the waist down. Control over her bladder and bowels would go, too; this had already begun, as indicated by her loose sphincter.

Yet how could we leave her? Had I given birth to a child with these conditions, I wouldn’t have left her in the hospital. Though a friend would later say, “Well, that’s different,” it wasn’t to me.

I pictured myself boarding the plane with some faceless replacement child and then explaining to friends and family that she wasn’t Natalie, that we had left Natalie in China because she was too damaged, that the deal had been a healthy baby and she wasn’t.

How would I face myself? How would I ever forget? I would always wonder what happened to Natalie.

I knew this was my test, my life’s worth distilled into a moment. I was shaking my head “No” before they finished explaining. We didn’t want another baby, I told them. We wanted our baby, the one sleeping right over there. “She’s our daughter,” I said. “We love her.”

It’s tempting to think that our decision was validated by the fact that everything turned out O.K. But for me that’s not the point. Our decision was right because she was our daughter and we loved her.

Natalie, the 'headstrong' child assigned to the New Jersey couple and the two other, nameless, children of these stories all deserve a loving home, as do the myriad other children languishing in orphanages around the world. No words can capture the magnitude of this tragedy.

The 'morally right' decision for the adoptive parents is in no way to stick to the child the Chinese authorities initially picked for them, neither is choosing a different child an 'abortion'. The maths, unfortunately, are relentless: two children get to travel to the United States, and two children are left behind. How are the moral implications altered because of some Chinese bureaucrat's initial allocation decision?

As a species, we are probably not unique in caring for 'our own' more than we do about strangers, even when we are talking about children and 'our own' is determined by nothing more than a picture on the refrigerator. This is the way we are, but it is not a moral characteristic we should be proud of.

Steven Levitt talks about the tragedy of having to take a decision that, whichever way it goes, will leave a child in misery. He does not condemn the New Jersey couple.

But the NYT columnist does. And she is wrong.

Following the announcement of Tony Blair's resignation, newspapers have been filled with pages upon pages discussing his 'legacy' on public services, on foreign relations and on the economy. One of the things invariably mentioned is Britain's decision not to be a founding member of the European Monetary Union, the group of countries that abandoned their currencies and joined the Euro.

Given the current mood to reflect on the events and decisions of the Blair decade, I can't help but bring up an issue that struck me as inexplicably absent from public debate at the time.

Picture a group of friends getting together to start a new company. They have an ambitious business plan ready and they invite you to join them as an equal partner, taking the same risks and being entitled to the same rewards. As an investor, you evaluate the proposition, gauge whether the potential benefits outweigh the risks and make your decision. So far so good: if Bill Gates and his gang had approached you back in 1976, you would have to think long and hard as to whether their profit potential outweighed the risks of investing in an upstart with the ambition to revolutionize an industry still in its infancy.

Now picture a slightly different scenario: here are the same friends, with the same business proposition. This time, however, you are allowed to join whenever you want on the exact same terms as on the original offer. Would any investor bet on an upstart when, without losing out on potential returns, she can wait and see whether it turns out to be a disaster? If a spotty Bill Gates had given you the option to buy Microsoft shares at 1976 prices at any point in time you liked, making the right investment decision would be no trouble at all. You would have essentially been given the opportunity to avoid facing the significant early risks for free.

The EMU project was unprecedented, and many pundits today forget the very real fears at the time that the project would turn out to be a disaster. As with a business upstart making waves in unchartered territory, the risks of forging a monetary union between countries with widely differing public finance profiles and monetary policy needs are significant. Things turned out well - but it could have been very different.

The way I see it, Britain never really faced a tough choice. There was no penalty for late entry into the Euro, no sticks to force the UK, Denmark and Sweden to stand up and face the music if they wanted to have a share in future success. The decision to avoid facing the risks of a grand monetary experiment was right, but no-one seemed to point out the real reason why.

From BBC News:

In 2002, he sparked anger across the Muslim world by calling the Prophet Muhammad a "terrorist". He later apologised.

Shortly after the 11 September 2001 attacks, he said that gays, atheists, civil-rights activists and legal abortions in the US had angered God and "helped this happen".

In 1999, he denounced the BBC TV children's show The Teletubbies, because he believed one character, Tinky Winky, was homosexual.

Rest in peace. Comments are closed.

Google 'recycling' and what you get is a series of articles quoting scary statistics about the amount of waste we generate every year, tips for more effective recycling and calls to join the 'green revolution'. Combine recycling with almost every other search term you can think of ('recycling statistics', 'recycling facts') and you still get pretty much the same picture.

There is, however, a unique combination that will yield quite different results: 'recycling costs'.

Recycling is expensive. Even without taking into account the demands it places on people's time (a valuable resource), I think it is fair to say that most recycling programmes are loss making operations. While I could go on and on naming one local authority after another, the fact that private recycling operations are nowhere to be seen - with very few exceptions - neatly settles the argument.

When you read about a recycling programme 'paying for itself', what you see in effect is a covert tax on residents. When you see a recycling programme losing money, what you are witnessing is a public subsidy to the tree-hugger in all of us.

All the while, and completely discounting current welfare ('financial') considerations, it is at best debatable that recycling lives up to its purported raison d'etre - saving the planet. The environmental costs of recycling may well be far in excess of simply dumping waste. Extra trucks are needed on the road to collect the recycled bins, pumping tons of CO2 into the atmosphere. For many materials, the environmental cost of the energy used in recycling them is more than the environmental cost of simply tapping on nature's reserve to replace them.

Since the consumption of virgin materials or energy is not priced at marginal social cost, it is impossible to say with certainty whether a specific recycling operation is good for the environment simply by looking at the profit and loss account. For most materials, however, the available evidence seem to suggest that recycling is like shooting ourselves in the foot, all the while feeling we are doing the planet a great service.

Addendum: While looking at recycling, I came across this Wired article about GPI Atlantic's costing of the recycling programme in Nova Scotia. The headline finding was that Nova Scotia saved 'anywhere from $25 million to $125 million a year'. Here's more:

Simply adding up the costs of recycling and the revenue generated from sales of recycled materials would show that the program cost the province $18 million a year more than just throwing trash into landfills.

To get an accurate picture of the real value of Nova Scotia's recycling and composting program, the report considered a number of factors, including [...] the direct and indirect value generated from new employment in the recycling sector.

I assume that the recycling programme hired only chronically unempoyed, or even better, unemployable people - and I hereby petition the government to extend this beneficial policy and hire loads more in loss making public enterprises at subsidised wages. The direct and indirect value generated from employment of this type is surely worth it.

Richard Feynman was an American physicist known for expanding the theory of quantum electrodynamics, the physics of the superfluidity of supercooled liquid helium, and particle theory. He was also famous as an unscrupulous prankster. He was a proud amateur painter and bongo player. For his work on quantum electrodynamics, Feynman was a joint recipient of the Nobel Prize in Physics in 1965.

He assisted in the development of the atomic bomb and was a member of the panel that investigated the Space Shuttle Challenger disaster. In addition to his work in theoretical physics, Feynman is credited with the concept and early exploration of quantum computing, and publicly envisioning nanotechnology, creation of devices at the molecular scale.

As well as being an inspirational lecturer, bongo player, notorious practical joker, and decipherer of Maya hieroglyphs, Richard Feynman was regarded as an eccentric and a free spirit. He liked to pursue multiple seemingly independent paths, such as biology, art, percussion, and lock picking. Freeman Dyson once wrote that Feynman as "half-genius, half-buffoon", but later revised this to "all-genius, all-buffoon".

This is from Richard Feynman's entry in Wikipedia. The part that I find of most interest, however, is this:

He [...] eventually chose to work at the California Institute of Technology at Pasadena, California, despite being offered a position near Princeton, at the Institute for Advanced Study (which included such distinguished faculty members as Albert Einstein). Feynman rejected the Institute on the grounds that there were no teaching duties. Feynman found his students to be a source of inspiration and, during uncreative times, comfort. He felt that if he could not be creative, at least he could teach.

Feynman is sometimes called the "Great Explainer"; he took great care when explaining topics to his students, making it a moral point not to make a topic arcane, but instead accessible to others. His principle was that if a topic could not be explained in a freshman lecture, it was not yet fully understood.

Reading about Feynman, I remembered having seen similar sentiments expressed by someone closer to home. The following excerpt is from Robert Solow's Nobel acceptance speech:

I estimate that if I had neglected the students, I could have written 25 percent more scientific papers. The choice was easy to make and I do not regret it.

Email me with your questions or observations, and I'll do my best to provide intelligent commentary on this blog. I promise to do 10 on-request posts, in the order I receive them.

Anything economics related is fair game, and I will also consider other topics.

Tim Worstall, a top British blogger and frequent visitor here, makes a mistake:

There's also an interesting thought: given that EU law takes precendence over UK law, just what use is such a constitution [i.e. a written constitution for the UK]? I think it is only Germany which has said that, actually, no, whatever the EU might think, the German Constitution is the primary law in that country and where there is a conflict, the EU law loses. Would we do the same?

The answer is no. No European Union country would - including the Germans - and the reason is simple: they can't. If it was possible for a country to flout supra-national (in this case EU) law at will, what would be the point of talking about supranational law in the first place?

This principle is well understood in almost every other context where it applies. The City of London has no power to repeal income tax legislation imposed by the national government. If it could, having a national government would be redundant: any local authority or individual who didn't like a particular law would institute their own. A 'law' that's worth the name has to be binding for all the parties it applies to, and so it's impossible for state law to take precedence over federal law, local law to supercede national law and so on.

The extent to which this seemingly simple point is misunderstood in the context of the European Union is a source of constant astonishment for me. I don't think a similar misunderstanding arises in the US regarding state and federal law - and my American readers can correct me on this.

The moral of the story? The European Union is a continuing communications disaster; and European citizens are not particularly bothered advocating mathematical impossibilities.

Voters won't understand the case for reforming a particular policy unless it can be expressed in a single sentence. The 'intellectual elite' and most policy makers can handle two sentences. Good economists manage up to four.

This is real-time reporting, live from the trenches.

I am watching the Eurovision song contest - for the benefit of my international readers, this is an annual pan-European 'kitsch-fest' - the BBC's words - where countries rate each other for the year's best song. For my European readers - what's wrong with me, I know. Blame tradition and peer pressure.

I have an anthropological observation with economic implications to make here, and Eurovision (as well as the recent movie Borat) will act as evidence.

Have you noticed that the poorer the country, the further behind fashion is lagging? I am at a loss to explain it. It's not that fashion is simply different, it is that it seems like a $10,000 lower GDP per capita is associated with fashion lagging five years behind. Latvia's fashion is Austria's fashion 10 years ago.

To call on my primary evidence, you can't mistake a Eurovision song for any other, as the competition seems to attract a very particular kind of entry. Eurovision is sure kitsch, but the most striking thing is that it is somewhat old-fashioned kitsch. Not as old-fashioned as in Kazakhstan, and not as trendy kitsch as in the UK. And I'm talking about both clothes and music here.

It's not that old-fashioned clothes, or old-fashioned music for that matter, are cheaper to make - fashion doesn't work this way. A communist past won't do as an explanation either - this is a global phenomenon. The only thing I can possibly think of is limited exposure to television and international hit shows such as 'Friends'. But why do poorer countries get access to the old international hit shows then? And at any rate, even if this could form part of an explanation in the case of Kazakhstan, it can't account for Romania.

Any thoughts or ideas, please email me at bluematterblog-at-gmail.com; comments, as always, are also open.

Mark Harrison has a thought provoking piece on staff and student attitudes towards free trade at Warwick, a leading economics department in the UK. The results are striking, if not entirely unexpected. Loosely speaking, they can be seen to reflect the difference in opinion between professional economists and an intelligent, generally privileged subset of the population with a keen interest, and some experience, in economics.

Harrison asked first-year undergraduates and academic staff to state whether they agreed with six propositions about trade:

1. Industries can be classed as essential or inessential, or ranked in order of national priority
2. When competition takes place in international markets, some countries gain and some countries lose
3. Exports are a gain to each country, and imports are a loss
4. A sign of a country’s economic strength is the scale on which it attracts capital from the rest of the world
5. Import taxes and restrictions, and export subsidies, add to a country’s total employment
6. Actions that are undertaken for profit or self–interest are morally questionable for that very reason.

His results?

“Pop mercantilism” has majority support among first–year students: more than three fifths would agree that industries or activities may be ranked in terms of their importance to society, and that some countries lose from taking part in international trade.

Staff opinion was most divided on the questions whether or not some countries lose by taking part in trade, and whether or not a capital account deficit may indicate relative economic strength, but even here the dissenters were in a small minority. No member of staff would agree that the pursuit of self–interest is immoral per se.

The gap between student and staff attitudes is widest on the propositions that industries or activities may be ranked in terms of their importance to society (staff and student respondents disagreed in the ratio 86% to 21%), and that a country may lose from trade (64% to 29%).

While this study took place back in 2000, I doubt much has changed since then. This brings me to what has been a recurring theme on this blog: People, including the 'intellectual elite' at Warwick or Harvard, have trouble understanding the fundamental lessons of economics.

Economists now have a solid grasp of how the social world works and what steps we need to take to improve it. Unfortunately, we are not nearly as good at telling why some ideas fail to filter through to voters and policy makers.

Understanding public perceptions of economics and loosely branded 'economic policy' is a vastly under-researched area, and many academic economists seem to have taken science's definition as 'disinterested study' too close to heart. While I agree that in many cases reform runs into vested interests, it is usually economic illiteracy that allows these very interests to make a persuasive, if in reality flawed, case to voters and policy makers.

If our aim is not only to understand the world but also to make it better, we need to take a step back and redirect some of our energies away from understanding and towards explaining. And to do this we first need to grasp what the public biases are, why they are so persistent in the face of mounting evidence - and, most importantly, what we can do to overcome them.

Update: Bryan Caplan, via Alex Tabarrok, makes a similar, narrower argument about anti-market bias.

Greg Mankiw reports:

"There is no such thing as a free lunch" is as good a slogan as any I know. Whenever I hear someone propose a reform and suggest that it does not involve any costs, my first reaction is to think that they aren't being honest. Life is full of hard tradeoffs. If you think otherwise, you probably haven't thought enough.

I see some students being lulled into free lunch thinking when discussing raising wages of low-income workers at Harvard. Even putting aside any possible adverse side effects of above-equilibrium wages, advocates of higher wages need to confront the real question of limited resources. If Harvard is to raise wages above the going market levels, the money to pay those wages has to come from somewhere, such as higher tuition, less financial aid, or fewer faculty. Saying "Harvard has a large endowment" is not an answer--the endowment represents future spending on items the university values.

If Harvard students can't get it, what hope is there for mere mortals?

Top 5 most dangerous roads in the world

Meet an Inmate - Lonely Attractive Inmates in the USA Seek Penpals

This is Spa-rta!, sign edition

Sudan's 1-milion-web-page goat wife dies

World's Top 100 Most livable cities

Zidane's headbutt through different eyes

People of Indigenous Cultures photograph collection

Astounding images

Stasi secrets revealed through technology

A feast for the eyes: the Ferrari Aurea Berlinetta

Zunzun.com: 'Here you can curve and surface fit your 2D and 3D data online with a rich set of error histograms, error plots, curve plots, surface plots, contour plots, VRML, and source code'

From The Economist:

Australia's pre-election budget gave away A$31.5 billion ($26 billion) in tax cuts, increased spending across the board—and still accumulated a A$10 billion fiscal surplus. The government is miles behind in the opinion polls.

Quite a trick to pull, and you must be wondering why there's no applause from the audience. Blame adaptive expectations in a country growing for 16 years in a row.

Tony Blair just announced he is to stand down as Prime Minister on 27 June, moving out of Downing Street after ten years in power.

Much will be said and written about him, about his character and charisma and his decision to align Britain with the US and invade Iraq. But here I'm more interested in commenting on what I see as his defining characteristic as a policy maker.

Tony Blair the policy maker was, first and foremost, a reasonable man. He is, of course, a lawyer with no economics traning. But when it came to schools and hospitals he understood the importance of expanding choice and putting the right incentives in place. Time and again, he showed he had a deep grasp of both the power and limitations of markets, and he was not afraid to drive the point home in the face of stiff ideological opposition. His domestic agenda was driven by a sound understanding of economics, not by cranky ideas, politics or a desire to please vested interests.

Keynes once said:

Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.

Such a charge could never have been waged against Tony Blair.

This is for 2005, via Newmark's Door. An excellent idea, and a classy execution.

I'll have a crack at producing my own for 2007 soon, so stay tuned.

A new paper by Wolfers and Price, covered in the New York Times, has been causing quite a stir recently. In short:

A coming paper by a University of Pennsylvania professor and a Cornell University graduate student says that, during the 13 seasons from 1991 through 2004, white referees called fouls at a greater rate against black players than against white players.

Justin Wolfers, an assistant professor of business and public policy at the Wharton School, and Joseph Price, a Cornell graduate student in economics, found a corresponding bias in which black officials called fouls more frequently against white players, though that tendency was not as strong.

This is a great piece of work, and the evidence presented is very convincing. However, I still have some doubts as to whether racial discrimination per se is indeed the driving force behind the results presented.

Consider these three facts:

First of all, interpreting the rules of the game is to some extent subjective, a truth every sports fan is familiar with. How much of a push constitutes a foul? How aggressive must a player get before having to be disciplined? How important is intention to foul?

Secondly, black and white players have different playing styles. This is not only due to physical characteristics and body types but also due to the different environments where black and white players learn to play basketball.

Finally, this also goes for the referees and their perception of what constitutes foul play.

Combining the above, it's very likely black referees grew up learning to interpret the rules of the game amongst a majority of black players, and so came to tolerate some 'black' playing behaviour that a white referee would not view so favourably - and vice versa. If this is indeed the case, the results in the Wolfers and Price paper could be driven by this fairly innocuous, colour-blind factor - the authors' research design does not allow us to distinguish between these two hypotheses.

So could this be a valid claim? I have my own anecdotal evidence to back the case. I am usually watching the football World Cup (soccer to my American readers) with an English friend of mine. Now, the Greek game is generally quite unspectacular and with a strong defensive element, while the English tend to play much more open and technical football. In many instances when calling a foul is not a clear cut decision (and there are many moments like this in a typical game), we often find ourselves disagreeing. Since this has happened quite a lot of times by now, I think I've spotted a pattern: I am generally way more lenient on players that tend to play strong defence, pushing and generally torturing their opponents, while he will be more forgiving of, say, unfriendly strikers trying to make their way into a defensive opponent's area.

And while it may be sport fan's paranoia, I think this is replicated in the field. My perception is that an Italian referee officiating a Greece v England game will generally be more 'friendly' to Greece than a Brazilian referee in charge of the same game. This has nothing to do with the Italians preferring mousaka to fois gras, but it has a lot to do with perception of the rules of the game and the environment in which this is developed.

Addendum: Despite the objections above, I still think there is a good chance the paper might showcase exactly what it says on the box. To see why, try the Implicit Association Test (thanks to Andrew Leigh for the link).

Or cheap to produce, immensely useful inventions that hold the promise of making the life of the poor much, much better. Now, that's social responsibility I can relate to.

Click here for an excellent slideshow published in the International Herald Tribune - my favourites are 4, 6 and 7 (number 6 for personal reasons too)

The main reason I'm posting this is that I love the graph - it does a great job in providing an overview and packing a lot of information in a single page (here, requires flash).

I'm also wondering whether there's any hope for the equivalent of the efficient market hypothesis in politics. If Bush's approval rating is anything to go by, forget it.

Along with a number of eminent economists, I was shocked to read that Alan Blinder thinks there is something fundamentally different between trade in tangible goods and offshoring. In a widely discussed article in Foreign Affairs (Economist's view collects many of the stories), Alan seems to challenge economic orthodoxy on one of the few issues dominated by one-handed economists:

Free Trade's Great, but Offshoring Rattles Me, by Alan S. Blinder, Commentary, Washington Post: I'm a free trader down to my toes. ... Yet lately, I'm being treated as a heretic by many of my fellow economists. Why? Because I have stuck my neck out and predicted that the offshoring of service jobs from rich countries ... to poor countries such as India may pose major problems for tens of millions of American workers over the coming decades. In fact, I think offshoring may be the biggest political issue in economics for a generation.

When I say this, many of my fellow free-traders react with a mixture of disbelief, pity and hostility. Blinder, have you lost your mind? (Answer: I think not.) Have you forgotten about the basic economic gains from international trade? (Answer: No.) Are you advocating some form of protectionism? (Answer: No !) Aren't you giving aid and comfort to the enemies of free trade? (Answer: No, I'm trying to save free trade from itself.)

I don't think Alan Blinder has lost his mind. However I do believe he has trouble expressing his thoughts in a clear and coherent manner.

Here's my take on Alan's objections. With trade in tangible goods, the short-run pain of adjustment is confined to a relatively small number of sectors. Now, the 'short-run' pain is not negligible: As Keynes has made clear, in the long-run we are all dead, and on top of that the long-run does not vote to change trade policy. But people who benefit from cheap Chinese goods do, and despite the general mess that is trade negotiations real advances are being made. Rich countries benefit from cheaper goods and millions in poor countries are able to not only feed their families but also look towards a brighter future.

So why is offshoring different? In pure economic terms, it's most definitely not. But with off-shoring there is now potential short-run pain for '30-40m US workers'. Yes, the majority of people will eventually benefit from offshoring, the same way they do from free trade in tangibles. But for the moment, you have a very large constituency of people rattled by the very thought of easing restrictions, sceptical of any move to liberalise in fear their job might be next.

That's what I think Alan is really worried about: farmers and steel workers can be overriden, but an electorate whose jobs are all up for grabs will express their worries about the future in the voting booth. Building a robust social safety net and getting the right incentives in place to move the workforce away from 'off-shorable' jobs is in many respects wise advice: it removes the potential for future short-term pain as the employment map in developed countries changes; and in doing so it goes a long way towards 'saving free trade from itself'.

Addendum: A more general point is in order here. Most economic advice stemming from academic papers is directed towards a benevolent, non-generational discounting dictator. There's a natural reason for this: it's the simplest case. However, if economists harbour any desire to affect policy they better start taking the political economy of reform more seriously. An economic policy that will eventually bestow everyone with mythical weatlh, improve the weather and make the national team win the World Cup is no good if it's going to lose you the next election.

I'm late to post today, but I have a good excuse. Lecturefox.com has a series of links to lectures in video, audio or text format from leading universities.

Lecturefox is a free service. You can find high-quality classes from universities all over the world. We collect without exception lectures from official universities, and we have a special interest in lectures from the faculties computer science, mathematics and physics. In the category faculty-mix you can find miscellaneous lectures from other departments like electrical engineering, chemistry, biology, psychology, economics, history and philosophy.

I have to admit it's a bit light on the economics so far, but for narrow-minded economists there are some great stuff on maths & stats, psychology and social trends to feed the mind.

If you are aware of similar resources, I would be grateful if you could post a comment or email me.

Coming to you soon, real soon. And it will mean that the computer I'll be writing this blog on two years from now will turn out to be much cheaper than its cost of production.

What is it that gets me so excited? Stories like this:

More than 250,000 PS3 owners have enrolled their console in the Folding@HoME project which uses it to study the shapes proteins assume.

And, even more, stories like this: