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May 2016 posts

The Impartial Spectator

By Jonathan B. Wight

Econ Journal Watch
has a special issue devoted to Adam Smith’s impartial spectator. 

Here are links to articles by:

Memorial Day

By Jonathan B. Wight

It is humbling to remember those who gave the supreme sacrifice of their lives for the greater good of society.  These are military service members, fire fighters, the police, missionaries, civil rights workers, journalists, and all others who put themselves in physical danger to promote a defensible ideal in society. 

Bernard Mandeville would, of course, say that all such people really had ulterior selfish motives of seeking fame or fortune through their exploits, hence, we should not hold anyone up as exemplars of virtue.

One can imagine Adam Smith becoming red-faced at this scurrilous attack on those who demonstrate “superior” prudence:

Whether the most generous and public-spirited actions may not, in some sense, be regarded as proceeding from self-love, I shall not at present examine. The decision of this question is not, I apprehend, of any importance towards establishing the reality of virtue, since self-love may frequently be a virtuous motive of action. I shall only endeavour to show that the desire of doing what is honourable and noble, of rendering ourselves the proper objects of esteem and approbation, cannot with any propriety be called vanity….

It is the great fallacy of Dr. Mandeville's book to represent every passion as wholly vicious, which is so in any degree and in any direction. It is thus that he treats every thing as vanity which has any reference, either to what are, or to what ought to be the sentiments of others: and it is by means of this sophistry, that he establishes his favourite conclusion, that private vices are public benefits.

Donald Trump, who attacks prisoner of war hero John McCain for being a “loser” apparently has a Mandevillian view of things: there is no such thing as heroism or bravery in service of one’s country, the only thing that matters is winning. If you sacrificed but lost, your sacrifice was worthless. Is this viewpoint compatible with being commander in chief?

Let us remember those who sacrificed for us, and celebrate their virtues even in failure.

Restoring Faith in Human Nature

By Jonathan B. Wight

At the post office yesterday, a young couple dropped off a cart of 40 to 50 packages, some large, others small, some just in envelopes. They were well-known to the postmistress, and the packages were pre-paid and went immediately to the back.

Turns out the couple runs a used auto parts business, selling on eBay.  I recently came to use such a service. My wife’s twenty year old Jeep Grand Cherokee needed a climate control unit, and my mechanic said that this part was no longer being made. He recommended I go to a local salvage yard and scavenge for it.  This I did. 

What a delight!  Pay $1 to get in, then start searching.  There were lots of people there, mostly young men with tools, disassembling parts from the fields of ravaged autos.  It seemed like a hoard of ants in the grass carrying away crumbs of bread. Slowly and steadily cars were being disassembled for useful parts. The place had a strong odor of oil, the cars were on blocks, and there was a sense of urgency about the quest.

The online database gave me seven locations of where to look. The first six Jeep Grand Cherokees I found of the right vintage were missing my key part—a sign that others were in my same predicament.  The last Jeep I encountered had the part!

The only problem was, I hadn’t brought along any tools to extract it. Luckily, I was able to find a man and his girlfriend working nearby (removing a transmission from a Dodge van), and for $10 (which I discovered was the going rate), got their help to remove my part.  For a total of $30, I got a part that, had it been new, would likely have cost ten times that much.

Of course, the rest of the story is that the part never worked, and I had to take it back for a refund. I was out $10 and my time.

My next recourse was eBay, where I found the used part for about $50. This one worked.

The moral in this story is the hard work and enterprising nature of many people who scavenge our junkyards to help reuse parts that otherwise would be lost to the crusher. The salvage yard was staffed with courteous and knowledgeable people, who backed their products with a 30-day warrantee.  Because of their hard work, the environment is cleaner, jobs are created, and consumers get value for their money.

On the flip side, one could argue that we should build cars to last 500K miles, not just to throw them away after 100K. I buy that argument, but technological advances in safety are hard to retrofit into older cars. The best thing one can do to upgrade the safety of an old car is to buy good tires, since that new technology is easily transferred.  [See these tires, for example, that I recently put on my 11-year old car, with helpful advice from Consumer Reports.]

Photo credit.

Russian Billionaires

By Jonathan B. Wight

It is conventional wisdom that Russian “oligarchs” got their start in the mad rush of privatization after the fall of communism—this through a rigged bidding system for national resources. Such rent seeking is not unusual in countries going rapidly to ruin.

This month’s American Economic Review (proceedings of the 2016 meetings in San Francisco) has an interesting paper by Daniel Treisman that reviews the data on “Russian Billionaires.”

Russian billionairesWhat do we learn?  First, as shown in the diagram, the massive rise Russian billionaires actually did not start until the mid 2000s, and followed worldwide trends, at least until about 2010 when a divergence begins to appear.  The Great Recession took a heavy toll on Russian billionaires, and subsequently oil prices began to tumble in mid-2014.

Second, the author runs a series of regressions that include standard dependent variables. The largest explanatory variables that affect the number of billionaires in a country are (as expected) the size of its GDP and the size of its population. The marginal income tax rate has a small negative effect.  Surprisingly, the rule of law and market capitalization have no statistically significant effects in this model.

However, after accounting for all these variables, Russia has 33 more billionaires than can be explained by the model’s variables. This suggests that something else—the author highlights economic rents arising from political connections—is at work.

If true, this fits in line with many other countries in Africa, Asia, and Latin America, and perhaps the U.S. The moral outrage that this provokes should lead someone to write The Wealth of Nations for the modern era. At least in Brazil the President, Dilma Rousseff, has been removed for alleged corruption.  (The bad news is that those who voted against her in Congress likely have worse corruption issues.)

Tax Havens

By Jonathan B. Wight

The revelations about tax havens in Panama and elsewhere speaks to growing global inequality and the tidal wash of money that is its reflection. 

The Free to Choose Media released this video by Cato Senior Fellow Johan Norberg that attempts to refute the idea that there is anything wrong with tax havens.

The argument is that:

  1. The vast majority of participants in these tax havens are politicians, not entrepreneurs. According to Norberg, there are 5 times as many politicians revealed using these tax havens as private sector businesspeople.  I haven’t checked this fact, but it sounds plausible;
  1. These tax havens act as brakes on the heavy taxes that politicians can get away with imposing. Tax havens thus act as an incentive for cleaner governments.

This is an interesting argument, worth considering. 

But I don’t buy it.  If the goal is to clean up government, and eliminate corruption and bribery, we should make it much harder for politicians to hide their money overseas.  That means closing down secret offshore accounts.  If money is kept domestically where tribunals can seize as evidence or as fines, that is a much stronger incentive for politicians to keep their fingers out of the cookie jar.

Second, I think individual rights depend upon legitimate working states that need to be funded by taxes. The marginal tax rate in the U.S. is now quite low, compared to our go-go growth years of the 1950s and 1960s.  Hence, I don’t buy the argument that our current marginal tax rates represent a threat to economic success or creativity.

Times change, of course, and what “worked” fifty years ago may not work today.  It all depends on the alternatives, and one that is available today—the electronic tax haven—is an incentive for people to question their citizenship loyalties and responsibilities.  That is a bad thing.

Scientific Misconduct

By Jonathan B. Wight

The Review of Social Economy is out with a special issue on “Scientific Misconduct and Research Ethics in Economics.”

These papers were presented at the International Workshop on Scientific Misconduct and Research Ethics in Economics, held in Izmir, Turkey, in August 2014.

There are lots of interesting papers.  For the table of contents, see here.

One of the short comments is by Serdar Sayan, “Serving as the Referee for Your Own Paper….”, which relays the somewhat amusing tale of the author being asked to referee a paper for a respectable journal, only to discover that it was his own previously published paper!  

Sayan blames what he thinks is the growing plagiarism epidemic on the rise of global standards for academic quality—that every university has adopted Western research university standards for tenure and promotion of faculty.  And given the corrupt way that local journal editors often behave, universities are requiring pubs from foreign journals.

The implication here is that it is largely authors from developing countries who are igniting the boom in plagiarism.  I don’t know if this claim is true. I do know that in my classes it is often foreign students (but not exclusively so) who don’t seem to catch-on to my strident warnings about plagiarism. 

There is too much to gain from cheating, which is why cheating occurs.  But luckily, as Sayan notes, it is getting easier to find cheaters.  But even when found, cheaters are often not punished.

This is why I argue in “The Ethical Economist: Duty and Virtue in the Scientific Process” (in The Oxford Handbook) that we need to explicitly inculcate duty and virtue as part of the norms of our profession.  And that change of norms cannot happen if we push the standard economic model of maximizing self-interested behaviour. 

It is gratifying to see more attention to this issue. DeMartino and McCloskey have recently released The Oxford Handbook of Professional Economic Ethics (2016) which should be in every library!

Incremental Improvements

By Jonathan B. Wight

It may be because I lack the “vision thing”—the ability to peer around corners in strategic planning—that I like so much the wisdom of John Kay (see here, here, here, and here).

In his latest post he takes on visionary leadership as the fraud he thinks it is.

Grandiose plans are made for the sound bites of politicians using someone else’s money.

Most real leadership, in Kay’s view, is the art of doing modest, incremental improvements. Most of the time we don’t need Moses to lead our tribe into or out of the wilderness.  Despite Moses’ particular success, most often in public life such grandiose thinking leads to failure.

Do we need a modern equivalent of a moon landing project to galvanize public spirit, produce technological breakthroughs, and lead to economic superiority?  Such “frontier economics” may lead to a viable all electric car, a self-driving car, and other 21st century revolutions.

In contrast with grandiose plans, simply taking one more step in the right direction is not a bad way to operate, most of the time.