beyond markets and states

I recently received the latest edition of the American Economic Review and it was quite the pleasure to read Elinor Ostrom’s Nobel lecture.  Ostrom’s work has helped us understand how people go about dealing with tragedy of the commons problems.  Through her work she finds that there are several examples where people are able to manage common property without government involvement.  Cultural and societal norms along with other rules and penalties agreed upon by those using the common property can restrict actions that will lead to better outcomes.  Really fascinating work with really cool implications.

Towards the ends she gives us the following paragraph:

Designing institutions to force (or nudge) entirely self-interested individuals to achieve better outcomes has been the major goal posited by policy analysts for governments to accomplish for much of the past half century.  Extensive empirical research leads me to argue that instead, a core goal of public policy should be to facilitate the development of institutions that bring out the best in humans.  We need to ask how diverse polycentric institutions help or hinder the innovativeness, learning, adapting, trustworthiness, levels of cooperation of participants, and the achievement of more effective, equitable, and sustainable outcomes at multiple scales.

Quite frankly, I cannot begin to tell you how refreshing reading her lecture was.  Give the entire lecture a read.  It is a draft, to read the finalized edition you, unfortunately, have to be an AEA member.

Cross posted on Trying Liberty.

evolution, social cost, and ideas to change the world.

Over at Org Theory, David Stark has an interesting piece on game theory and sociology that is self-recommending.  One of the interesting observations in the post in the first paragraph:

Some years ago, when they were little kids, my children developed a hybrid game.They’d taken their Monopoly board over to a friend’s house.  They’d remembered to bring back the board, but they’d forgotten the houses and hotels.  What to do?  So, they started to use Lego building blocks in place of the houses and hotels.  But, with the Lego pieces offering more affordances, they immediately began to construct ever more elaborate structures.  Even when the Monopoly pieces were returned, the Legos were much preferred and they played it again and again that year while they were first-graders in Budapest. Was it Monopoly? Was it Legos?  It was “Legopoly.” Over time the rules evolved away from bankrupting one’s opponents and toward attracting customers to the plastic skyscrapers that towered over the Monopoly plain. [emphasis mine]

While this is merely a story to illustrate a point I do think there is a significant amount of game theory and experimental economics work with data to back it up (see Wilson, Kimbrough, and Smith’s “Exchange, Theft, and the Social Formation of Property” for experimental).  This story illustrates quite well the possibility of what Hayek called the “spontaneous evolution” of the “rules of the game.”  When there was a change in the way of doing things, that is, when the top-down rules could no longer be followed, the children took matters into their own hands, altering the rules in a way that suited their needs.  Through this evolution came about a less aggressive game.  The game changed from trying to harm your opponent via bankrupting them to a game of cooperation and creating products that attracted others.

However, this is also a quite simplistic view of the world. In his seminal work, “The Problem of Social Cost,” Coase observed that in a world of zero, or near zero, transaction costs, it is easy for people to come to cooperative agreements and that in the real world, a world of transaction costs, it may be more difficult to get people to work together. In the story observed above, there indeed were little barriers to facilitate cooperative, innovative behavior. The only thing that existed was the incentives, that is, the probability of making themselves better off in the game.  With a probability there is also risk that it could fail.

I sometimes feel that there are not enough libertarians who understand this.  They possess utopian, or near utopian, fantasies of the world being perfect and without transaction costs.  Those who believe in liberty tend to talk past people with genuine concerns and who believe there are places in which the state has a legitimate role in providing a social safety net or protecting society from others’ actions.  By no means am I advocating for state intervention, but we must see the big picture if we want to foster the ideas we hope will change the world.

Cross posted at Trying Liberty.

do food stamps increase unemployment?

Many argue that welfare programs such as food stamp programs will often create additional unemployment.  Now, a new NBER paper shows empirical evidence supporting this claim.

Abstract:

Labor supply theory makes strong predictions about how the introduction of a social welfare program impacts work effort. Although there is a large literature on the work incentive effects of AFDC and the EITC, relatively little is known about the work incentive effects of the Food Stamp Program and none of the existing literature is based on quasi-experimental methods. We use the cross-county introduction of the program in the 1960s and 1970s to estimate the impact of the program on the extensive and intensive margins of labor supply, earnings, and family cash income. Consistent with theory, we find modest reductions in employment and hours worked when food stamps are introduced. The results are larger for single-parent families.

Does this mean that the Food Stamp Program is a bad program?  That it isn’t necessary?  Not quite sure.  One could argue that some of those individuals on the program desperately need the help regardless of those who could find jobs that may be leaching off the program.  What this does tell me, however, is that the program is rather inefficient at aligning incentives.

There are ways in which some types of entitlement reforms could attempt to curb this effect.  One of these ways would be to instead of using the money as direct food stamp payments, redirect the money in a way that creates jobs–either through subsidizing a company to create jobs or just creating government jobs.  It would get those individuals on food stamps 1) off food stamps and/or 2) in the workforce.  But the question becomes, “what is this the most economically efficient use of this money?”

My preferable method of creating jobs–and arguably the most efficient way–is to allow people to keep the money taken to pay for these entitlement programs.  The money saved, invested, and spent would then be used to create jobs with far less bureaucracy involved.  People could certainly donate to charities, although this again introduces a great deal more bureaucracy.  But the bureaucracy of nonprofits is probably just as efficient, if not more so, than that of government.

Cross posted at Trying Liberty.

let’s be adults here

A letter I sent to the New York Times:

In a New York Times editorial on May 21st titled “Limits of Libertarianism” you published, “It was only government power that ended slavery and abolished Jim Crow, neither of which would have been eliminated by a purely free market”

The government abolishing Jim Crow and Slavery were incredible steps forward for our society; however, hailing these laws as miracles of government is like saying, “sorry I ran you over with my car, but now everything is okay because my bumper is no longer smashing your face.”

Immigration reduces crime…

…or evidence of Bryan Caplan’s anti-foreign bias.

Futurity.org links to a University of Colorado-Boulder study and an Arizona Republic article which seems to suggest that, at worst, immigration has led to no rise in violent crime or, at best, has actually lead a society with less violent crime.  From the UC-Boulder study:

“Cities that experienced greater growth in immigrant or new-immigrant populations between 1990 and 2000 tended to demonstrate sharper decreases in homicide and robbery,” Wadsworth writes. “The suggestion that high levels of immigration may have been partially responsible for the drop in crime during the 1990s seems plausible.”

…

Wadsworth’s research suggests that, controlling for a variety of other factors, growth in the new immigrant population was responsible, on average, for 9.3 percent of the decline in homicide rates, and that growth in total immigration was, on average, responsible for 22.2 percent of the decrease in robbery rates.

Polls have shown that sixty-one percent are in agreement with the SB 1070 legislation; however, the data seems to go against the populous fervor against immigrants the country seem to hold.

Cross posted at Trying Liberty and Students for a Free Economy.

markets facilitate cooperative behavior…

In a recent study by a couple of anthropologists, some interesting, but pretty obvious, information comes to light;

A new study co-authored by University of California, Davis, anthropologist Richard McElreath and published today in Science magazine suggests that the cooperative nature of each society is at least partly dependent upon historical forces – such as religious beliefs and the growth of market transactions.

The study also found the extent to which a society uses punishment to enforce norms increases and decreases with the number of people in the society.

Both religion and markets are institutions which people interact with other people.  They do this for a simple reason; they are better off by doing so.  When people are better off they make a conscious decision about what extent they may want to or not want to break common socially acceptable rules.

When weighing these costs the incentives are on the side of remaining cooperative among society, lest the offending individual is punished by being made worse off; not entering a trade which would have made the individual better off, aggressive retaliation, social ostracism, and so forth.  These negative incentives are why people in society coöperate.  It is part of our evolutionary design that we have become civilized members of society, not because government forces us to.

Ultimately, this is really simple theory:  1) people respond to incentives and 2) people tend to prefer being made better off.

Welcome to the blog…

This is my new blog.  Kick up your feet and make yourself feel at home… and keep an eye out for trolls…