The Filter^

Christmas Quiz - guess the social scientist

These are all photos of people who's work I greatly admire, have probably been discussed on The Filter^, but up until now I didn't know what they looked like. Answers below the fold.

Radical Subjectivism in Harry Potter

"Tell me one last thing," said Harry. "Is this real? Or has this been happening inside my head?"

"Of course it's happening inside your head, Harry, but why on earth should that mean that it is not real?"

-- Harry Potter and the Deathly Hallows

From Gene Callahan

Skilled workers

Here's an op-ed by Deans at Dartmouth's Tuck School of Business:

Thanks to the Employ American Workers Act (EAWA), which was folded into the stimulus bill, it's become harder for companies getting government support to hire skilled immigrants with H-1B visas -- they'll have to show they haven't laid off or plan to lay off an American from a similar occupation.

Supporters say the law will help U.S.-born workers and stimulate our economy, but this is just wrong. The economy is not of fixed size, in which more foreign-born workers necessarily mean fewer U.S. workers. Productive foreign-born workers can help create more jobs here. Keeping them out damages us.

Quite apart from their contributions to higher education, skilled immigrants have long contributed to American jobs and standards of living. They bring ideas for new technologies and new companies. And they bring connections to business opportunities abroad, stimulating exports and affiliate sales for multinational companies.

Touchet. In April The UK Border Agency announced new regulations regarding Tier 4 student visas. This makes it harder for foreign students to pursue their studies in the UK, and harder for UK institutions to accept foreign students and hire foreign faculty. Under the banner of "security" we are tightening borders and restricting migration. Aside from the ethical issues, this is counterproductive to an economy in contraction.

Elinor Ostrom, polycentricity, and anarchy

At a reading group this week we discussed the following articles:

• Ostrom, Elinor (1990) Governing the Commons, University of Cambridge Press (Chapter 1: "Reflections on the Commons")
• Ostrom, Elinor "A Polycentric Approach for Coping with Climate Change" (.pdf) World Bank Policy Research Working Paper No. 5095 (October 2009)

This was a treat for me - my dissertation committee were Pete Boettke, Richard Wagner and Paul Dragos Aligica, so I have picked up a lot of Elinor's work through osmosis. Not only the intellectual foundations of polycentricity, institutional change, and governance, but also the methodological framework for conducting fieldwork and the sociological norms of graduate study. I've never met Elinor, but in many ways I consider myself to be her student (same goes for Don Lavoie). I read 'Governing the Commons' early on in my PhD and since then have spent more time with Vincent's work (especially "The Meaning of Democracies and the Vulnerability of Democracies" - one of the richest books on political economy I've ever read). So this was a welcome excuse to cut through the secondary sources, tangential ideas, folk wisdom etc, and critically engage with her pioneering work.

I don't normally blog about reading group discussions (Chatham House etc) but I wanted to make 3 points about Ostrom's work:

Firstly, the crux of her approach is the over-simplification of the public-private nexus. Indeed "governance" is neither markets not state. However whilst governance mechanisms are antagonistic to the state (the "state" must trump decentralised institutions), there's nothing to say that they can't exist within a market order. In other words, in the same way that the absence of a price mechanism within a family unit doesn't undermine the importance of Hayekian knowledge problems (and the price system as a method to overcome this), we can have groups of people organised by non-market institutions, that still exist within a general system of private property rights. Whilst Ostrom provided telling criticisms against "privatisation" (and indeed corporatism), don't confuse this with property rights regimes (albeit informal). The crucial point is that common pool resources are exclusive, and therefore people can be excluded from depleting the resource. It's not that groups have communal property, but that they have shared private property. 

So what's the difference between the group of fishermen who agree on common rules to "govern the commons" in Alanya, Turkey, and a firm? As far as I'm concerned, a "firm" is merely an organisation of people bound by a common constitution. Ostrom is delivering a theory of organisations - and how organisations that exist within a market organise internally through non-market mechanisms. For me "Governing the Commons" is a theory of the firm (and indeed on page 25 she acknowledges that a law firm is a valid example).

Secondly, Ostrom takes as given the environmental problems that need to be solved. Indeed the key issue that creates the tragedy of the commons, prisoner's dilemmas, and the logic of collective action - is free riding. In my experience, the free rider problem can often be an effective tool to block inefficient collective action. If we present it as an unfortunate cost that prevents otherwise efficient activity from taking place, this merely begs the question - how can we deem something is efficient unless we factor in all the relavent costs? Isn't free-riding merely a cost like any other? Maybe the "tragedy of the commons" isn't such a tragedy? Whilst Ostrom is at pains to take a comparative institutional approach, maybe she doesn't go far enough. Within her framework (and this shines through in the Climate Change paper) is there a mechanism to ignore the "problem" should the costs of action begin to outweigh the benefits? The problem is taken as given, but the point of institutions is to establish what the problems really are. This is where markets are so powerful - they reconcile marginal values with opportunity costs, and thus prevent waste. If the "goal" is to reduce carbon emissions by X%, the "success" is determined in relation to this goal, as opposed to whether it's been "worth it". Markets tell us what the goals are the need solving, in this context polycentricity is a technique to solve pre-identified goals.

That said, Ostrom does go some way to the identification of problems. On page 31 she has an excellent section where she lists issues that need to be recognised so that global efforts provide "solutions" rather than "hot air". These are recognising:

• Climate change is complex
• The challenge of acquiring information is changing rapidly
• A wide diversity of policies can enable opportunism
• The danger of linking funds for policy experiments with funds for policy monitoring
• All policies involve trial and error

Again though, the above assume the existence of "the problem".

Thirdly, her main point in the Climate Change paper is that:

building such a commitment, and the trust that others are also taking responsibility, can be more effectively undertaken in small- to medium-scale governance units that are linked through information networks and monitoring at all levels

The breakdown of the Copenhagen meetings underlines this point about scale. For Ostrom, localising the framing of the problem makes it more likely that you'll solve the global problem. This is a fascinating insight. Telling everyone that every time you drive your car you add to global warming encourages free riding, as people (rationally) respond by thinking "it doesn't matter what I do". By putting it in a global context we compare our individual actions to the aggregate emissions of "China", so it's no surprise we are fatalists. Ostrom points to campaigns that tell individuals how much carbon they've produced, and ranks that against their neighbours. Although she doesn't commit herself to actually supporting such policies, it frames the problem in terms of individual action and utilises relative status and behavioural insights. Ultimately it's counter productive to convince me that I should change my human nature and care more about "the planet" than my own self-interest. You're more likely to get a result if you convince me why it's in my own self-interest to adapt my behaviour. And yes, this is an argument in favour of carbon taxes.

(As an aside the weakness of a polycentric approach is that it's easy to point out historically why failures are due to an absence of polycentricity, it's a lot harder to advocate policies going forward. When the punchline is "institutions matter" it's almost impossible to convert this into a practical plan that's any more detailed than "facilitation".)

Finally, the real strength of Ostrom's approach is the latent anarchy. In 'Governing the Commons' she refers to the enforcement mechanism that prevents outsiders from depleting the common pool resource: "the few infractions that have occurred have been handles easily by the fishers at the local coffeehouse" (p.20). It reminds me of 'Dirt Music', where those who break the norm of not fishing during darkness are ostracized from the community to the point where the gains from extra fish are offset by the losses accrued from a breakdown in social relations. You can see clearly the relevance of the work of Pete Leeson in all of this. Rather than play along with the hierarchical relationship between participants and enforcers, the self-governance means that even if you have an external enforcement agency (i.e. a "state") they need the consent of the governed. Probably the best example of this I've seen recently is Bunny Colvin's speech in Series 3 of The Wire. Watch that example of "a great moment of civic compromise" - that is polycentricity!

Jimmy's Food Factory

Oh dear. Here's another TV programme I wanted to blog about, but it's now unavailable to watch. Most cookery shows are by professional chefs with expensive capital equipment making things you cannot hope to replicate at home. The thing I loved about this programme was that it came across as genuine discovery.

In this programme Jimmy tries to copy some of the methods food companies use to preserve food to make it safe to eat weeks, months or even years after it is produced. Why do peas have to be frozen within hours of picking and why is factory freezing quicker than home freezing? Jimmy also attempts to suck all the water out of strawberries so they can be added to a box of breakfast cereal.

As expected, the above questions came across as a somewhat regrettable facet of modernity. The notion that we buy frozen peas instead of fresh ones, or tinned vegetables is usually seen as an inferior choice based on expedience and cost. What 'Jimmy' did - majestically - was attempt to strip such industrial techniques down to their primary function (e.g. to preserve) and attempt to replicate them inside his own kitchen. Hence he uses several different methods to "freeze" a pea, before establishing which works the best. It then becomes apparent that such techniques have massive scale efficiencies, and to some extent can only be undertaken on a large scale. This was a cookery show that cannot take place in a kitchen. It proved that without industry, we don't eat.

With shades of "I, Pencil" we realise that when we actually look at a final consumer product - a tin of baked beans - the complexity that goes into its production is staggering. For each "experiment", he then goes to a factory to witness the techniques employed on an industrial scale. He sees how a rogue tin of beans is fitted with a thermometer to pass through the production chain and validate that each tin is being cooked at the right temperature. He witnesses the level of quality control engaged in the production of mass market microwaveable curries, demonstrating that what's likely to kill you when done at home can - through the miracle of the division of labour - can nourish millions.

Regardless of how we view food, the programme was a surprising testament to industrial production. Yes, it'd be lovely if we could all afford to do our shopping at our local farm shops and not have to bother dealing with foreign people... In the real world - a world of scarcity, and a world of poverty, a world of trade - the programme demonstrated the level of cooperation required to make a single tin of beans, and the scale of investment that we, as consumers, rely upon to deliver our food. It was an awesome reminder of the power of capitalism.

2010-11 Koch Associate Program

From an email:

The Koch Associate Program is a challenging job opportunity for professionals who are passionate about free-market ideas and want to become more effective at advancing liberty throughout their careers. During the year-long program, each Associate works in a full-time, paid position with a market-oriented think tank, policy institute, or grassroots organization; while also receiving valuable management training in a seminar setting one day out of each week at the Charles G. Koch Charitable Foundation. For more information, visit www.cgkfoundation.org/associate-program.

I've had the pleasure of giving talks to the KAP and am continually amazed by how they combine such managerial professionalism with sound principles. This is an excellent program so spread the word.

Public sector pay cuts

I did an interview with someone from The Sunday Times recently, on the subject of public sector pay cuts. The conversation turned to a basic point about the necessity of using salaries as a communication device - to signal and reward value creation. Generally speaking, I was trying to avoid passing judgment on what pay levels *should* be, and concentrate instead on why it's important salaries are free from arbitrary constraints.

That said, I did a little background research on the effects of public sector pay cuts, and saw the following:

• IMF tends to favour downsizing rather than pay cuts because the latter are temporary measures to cut public spending. In the grand scheme of things pay cuts aren't going to be enough - there needs to be a reduction in the size of the public sector
• The NHS has seen increases in pay (especially since 2004) and productivity has declined (each 30% increase in funding from 2001-2005 led to only a 20% increase in outputs). Therefore we can anticipate that pay cuts may actually increase productivity
• One of the most successful public finance reconstructions of recent years, Canada, didn't make across-the-board pay cuts
• In Eastern Europe during the transition process those countries that kept public expenditure high tended to suffer higher inflation, reducing their revenues

Given the above, I struggle to see the logic of the arguments in favour of across-the-board cuts. It's not long term, and it won't raise a lot of money. Bizarre.

Looking for nude photos of Tiger Woods?

You won't find them on Sunday. But you can use the internet to read an insightful economist's take on this bizarre story:

It's easy to condemn the ethics of, say, ESPN for relying on tabloid reports, but there's clearly consumer demand for tabloid gossip about well-known celebrities. The economic question here is, Why should ESPN pay expensive writers like Rick Reilly ($2 million per year) and Bill Simmons ($1 million per year) to pontificate about a subject where the cheap tabloid reporters are at least three steps ahead of the actual story? Where's the value in paying a premium for writers who do little original reporting and contribute primarily to self-sustaining hype?

via blog.mises.org

As with most stories of this sort, I had no intention of blogging about it. But then I noticed a spike in Filter^ viewing stats, mostly for this page. The wonderful article is an excuse to see whether the above title will make this the most viewed Filter^ page ever...

Unintended consequences of reducing corporate pay

 A couple of thoughts written in January 2008, languishing in the 'drafts' folder...

• If companies anticipate a future rise in taxation, it makes sense to bring anticipated future bonuses forward, before the rise comes into effect. This could lead to a vicious circle, where high bonuses begets threats of tax rises, which produces high bonuses
• Salaries reflect many aspects of productivity, and one that is often forgotten is "compensating wage differentials" - pecuniary rewards to offset undesirable aspects of the job. Consequently the greater the stigma and public derision attached to a job, the more we'd expect (i) the wage rate to rise; (ii) or else an adverse selection issue, where only those who don't mind stigma want the job. Either way, the more that newspapers demonise "fat cats", the more they have to be paid, and the more likely that unsavoury people want the job

I was interviewed by The Sunday Times yesterday on the public sector pay cuts, and my main argument was that it's economically illiterate to make across-the-board pay decisions. If someone's worth more than £150k a year, pay them. The problem is that in the public sector generally, it's harder to establish someone's "market rate" (by definition). I also made the point that compensation comes in many forms, and salary is a transparent way to entice employees. If you take away the ability to pay large salaries, you'll (i) channel compensation into other forms (e.g. a nicer car, offices, or status quo); and (ii) make it harder to see who's performing well. I'd like my students to know how much I get paid to direct their studies - that way they can judge whether I'm good value.

The ultimate scarce resource

These days we hear a lot about an "end" to scarcity. Perhaps it's the fact that Keynes (.pdf) is back in fashion, mostly it's the result of technology shifts that release unlimited processing power. We'll never escape from scarcity, for several obvious reasons, but the main one is that the ultimate scarce resource is time. At least it's not. We have enough time. What we lack is attention. What I often refer to as "cognitive capacity". Being able to multi-task makes no difference, we can't prioritise everything. We make choices at the margin. There isn't an infinite number of plates we can keep spinning.