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It’s the summer, so I’m an intern again. Like last year, I’m working as an engineer at a large industrial plant. At my current job and jobs before it, I have heard people mention that people view environmental concerns differently than other concerns, and that this comes from the fact that environmental compliance is usually handled by a specialized group.
With direct environmental regulations, compliance usually has to be handled by specialized group that understands the relevant regulations. For example, during the school year, when I had a large design project class, we had a specialized group that handled the environmental impacts, they had to know the regulations which the rest of us knew little about.
In industry, there seems to be a tendency for people outside of the environmetnal group tend to view the environmental group as meddling with their activities. This probably makes compliance with environmental regulations more difficult than it could be. However, as environmental policy moves towards market based solutions, industrial plant engineers and operators will take over those areas that use markets and incorporate those prices into their decision making; instead of saying “the environmental department is messing with my design!”, they will say “oh, the cost of water is really high right now.” This will reduce wasted efforts, and help the environment more cheaply.
I have been waiting hopefully for Diggs recommendation engine for some time now. Now it’s here (in beta):
The Recommendation Engine uses your past digging activity to identify what we call Diggers Like You (who you can see on the right hand nav) to suggest stories you might like.
Awesome.
I submitted a comment to the CFTC about their “Concept Release on the Appropriate Regulatory Treatment of Event Contracts.” Specifically, I addressed the American Enterprise Institute’s call for a ban on for-profit prediction market exchanges as well as restricting fees charged by such exchanges to “modest” ones (link). This is what I said:
Recently, the American Enterprise Institute and others have asked the Commodities and Futures Trading Commission to prohibit for-profit prediction market exchanges, and only allow prediction markets to charge “modest fees”. I will make the case here that both for-profit exchanges and more than “modest” may both be important for getting the most benefits from prediction markets.
One of the major benefits of prediction is that people and companies can use prediction markets’ relatively accurate and well-calibrated predictions to improve their planning. Market predictions reduce the calculation work that people and companies have to do in order to come up with predictions because they can outsource the work to prediction markets.
It would be a mistake to unnecessarily limit the areas which prediction markets are used to predict, because it is difficult to predict what areas may help people and companies improve their planning. For profit exchanges will have incentives to find as many places where such more accurate and better calibrated predictions are useful, especially in industry. Thus it would be a mistake to prohibit either for-profit exchanges or limit the fees that exchanges can charge.
Consider the following scenario:
A number of companies in some industry are interested in the information about the future price of certain products, the future of industry relevant technologies or in future demand for certain products or any number of things of that might be predicted using prediction markets.In response to this interest, a for-profit company creates a prediction market exchange for contracts about the information that those companies are interested in, and then sells access to the exchange to companies in relevant industries. The exchange company uses the revenue generated from exchange subscriptions to subsidize contracts in order to generate more accurate predictions. Employees from the companies who subscribe to the exchanges would be the market participants.
Such exchanges would be even more attractive to companies than internal prediction market exchanges because contract subsidies and the pooling of market participants in multiple companies into one market would improve the usefulness of prices significantly.
Allowing a for profit company to create such exchanges means that it will have strong incentives to make its exchange contracts the more useful to its subscribers, whereas non-profit companies will have weaker incentives to do so. Now, perhaps someone would step up and create a non-profit exchange to fill this role, but perhaps none would. This is especially likely in markets where there is little camaraderie and collusion. Non-profit exchanges will probably also get created and develop slower than for-profit exchanges. This would very bad in cases where subscriber needs change frequently, because non-profits would have trouble keeping up.
Limiting the fees that exchanges can charge is also a bad idea, because the amount by which the exchange company would need to subsidize a contract in order to achieve the desired accuracy could be large in some cases. When developing models, and collecting an analyzing data is costly, large subsidies would be needed to get people to make accurate predictions.
I do not doubt that non-profit prediction market exchanges are likely to be very valuable, especially in public policy arenas, but it would be a serious mistake limit prediction market exchanges to non-profits.
I want to argue that prediction market contracts about future prices may be quite useful for planners, even in markets where a robust futures market already exists (though not where robust options markets exist).
Prediction market contracts about prices differ from futures and options mostly in their purpose. The purpose of prediction market contracts about prices is to reveal information whereas the purpose of futures and options markets to allow arbitrage and hedging. Because the purpose of prediction market contracts is to reveal information, such markets will often exist in areas where futures and options markets do not exist, and they will frequently be subsidized.
The most general type of prediction market about prices is a price probability distribution market, which actually consists of number of different contracts. Each contract predicts the probability that the price of a certain good will fall in a certain range on a certain date. The rangers are continuous, so the prices of all the markets can be interpreted as a probability distribution for the price (as shown in the graph).
In markets where futures markets do not exist, such probability distributions are useful to planners because they capture all public knowledge and some private knowledge about future prices. Additionally, unlike expert predictions, market probabilities are generally well calibrated (events which are predicted to happen with a probability of p=.50 happen 50% of the time, and so on). This makes them much easier to rely upon than expert predictions which tend to be overconfident or underconfident. Markets also make it much easier to share information between people, even competitors.
Why might a future price distribution be useful even when there is already a futures market? The general answer is that many agents do not have utilities that are linear with the price of some goods. The futures price of a commodity should be it’s expectation (mean) price, but this not very useful for buyers who have elastic demand curves or suppliers who have elastic supply curves.
For example, consider a company considering investing in wind power in the future. They are considering buying marginal land for wind turbines which would be profitable in energy prices rise beyond a certain price. How much they should be willing to pay for such land depends on the probability that energy prices rise above that cutoff price and the expectation price given that it is above the cutoff. Thus, the land may be quite valuable, even when futures price of energy is below the cutoff but there is much uncertainty about the future price. In this case, a probability distribution over future prices is helpful because these both the probability and the expectation are easily determined from a price probability distribution (actually, I think most energy markets have active options prices from which you can get this type of information right now, so this may not be a great example).
Another example is a private bus company figuring out how big their buses should be in a city with congestion pricing. If the city’s congestion charges are very large in the future, the the company will compensate by using larger buses. Since the company’s profit is not constant with the price (the company can mitigate the impact of the price to some extent) it is useful for the company to know the probability distribution of future congestion charges.
I should have more to say about prediction market contracts about prices in the future.
Bryan Caplan does not like the Austrian concept of “radical uncertainty”. After thinking about this for a bit (I’ve been interested in uncertainty and judgment for a few months; my reading list so far is here), I have come to a view similar to Arnold Kling’s. I do think the concept of “radical uncertainty” (at least as I understand it; I have not read any Austrians on this topic) is useful, but I also think that the subjective (Bayesian) probability perspective is useful.
As I understand it, “radical uncertainty” is closely related to the idea of “unknown unknown.” An Unknown Unknown is an event that occurs but was totally outside of a person’s event space of possible outcomes. For example, if you make the decision to steal to 2nd base in a softball game and fall into a sinkhole under second base, falling into a sinkhole was an unknown unknown event. Falling into a sinkhole in that circumstance is an event which you would probably not have considered even if you had given the decision a lot of thought; it was totally out of your event space. Radical uncertainty is the uncertainty that comes from having nonexhaustive event space.
Part of the planning process is comming up with possible events. I don’t really know how this works, but our brains certainly don’t come up with exhaustive event spaces in most circumstances, and in many cases we seem to miss important potential events. Our brains seem to use useful but flawed heuristics to generate event spaces, much the same way that our brains generate subjective probabilities.
Events outside of a person’s subjective event space are not given a probability of zero, they are simply outside of the event space. If an event was previously outside of a good Bayesian’s subjective event space, and something else suggests the possibility of the event to them, the they would then give the event a nonzero probability. From a Bayesian perspective, it doesn’t make sense to say that the person gives the event a probability of zero because all probabilities are subjective, and a person cannot give a probability to an event that has not even crossed their minds.
Even a good Bayesian, who uses evidence to update all their subjective probabilities and who is well calibrated, can still be radically uncertain for planning purposes, because they can’t always generate a relatively complete subjective event space. They can even still be radically uncertain, even if they know they are radically uncertain. When you are radically uncertain, you have to make a judgment about how complete your event space is and what the expected utility is of events outside your event space, this is often very difficult, which explains why radical uncertainty poses such a challenge. However, recognizing you are radically uncertain is the first step towards generating a more complete event space, therebye turning radical uncertainty into normal uncertainty.
My brain has a limited capacity to store knowledge. In the past, I frequently needed to think about a particular topic and remembered finding valuable resources for it, but didn’t remember enough to find them again. The internet alleviate this problem. It is easy to write stuff down on the internet, and then find it again later.
Right now I use Google Notebook. When I find information on a topic I am or might be interested in, I write it down or link to it and describe it. If I have a preexisting note I add the information there; if I don’t, I start a new one. That way, when I decide to revisit the topic, I can search and find sources that I have already come across. When I find a paper that I might want to read later, I write a note to myself, so that I can find it later if I decide to read it.
Here’s a typical note, from my “Investment” notebook:
Online banking, higher rates than capital one
offering 4.1% when capital one was at 2.96%
offshore bank maybe a little sketchyalso high CD rates for large sums 100k - 7.5%
not FDIC insured key
http://www.mlnbank.com/EN/services/saccounts.htmsome skepticism about it
http://bankdeals.blogspot.com/2005/10/research-into-millennium-bank-and-775.htm
I found some interesting information online on banking, that I thought might be useful in the future, so I wrote it down for the next time I have to make a related decision. I wish I could do this with my school-real life note taking and store it on a computer where it is searchable.
I also occasionally look though my notebooks without a specific goal in mind. I do this for a couple reasons; 1) I can correct misspellings and errors, 2) sometimes it inspires me to look to go and read something or spend time thinking about an idea I had, and 3) leafing through it helps me remember what resources I actually have in there, which is important if I don’t want to start from scratch next time
I suspect that I will stop using Google Notebook soon because Google has seemingly stopped updating the application. Google has removed the application from their menu bar in Gmail. The search feature is also somewhat limited; for example, if I search for ‘auction’ it doesn’t do the regular Google things like also searching searching for ‘auctions’.
I don’t know what software I should use. I do know that Zoho has a Notebook (though it doesn’t seem to have a search feature!), and Second Brain seems interesting (though it doesn’t seem focused around note taking), but I haven’t played around with any software for an extended period.
Do other people do this sort of thing too?
There are many ideas floating around for reforming existing institutions so that they produce significantly better outcomes. The three ideas for reforming governing institutions that I know of are Predictocracy, Futarchy, and Professional Voting; I am sure there are more, and I know there are a lot more for reforming other institutions. However, there is a noticeable lack of experimentation with type of idea. Does it make sense not to experiment? Let’s do a few back-of-the-envelope net present value calculations to see if it does or not.
Let’s say that we judge Futarchy to have a 1% chance of working. Let’s also assume that if we experimented with it now it would take 30 years for the benefits to appear, that it would save everyone in the country $100/year (a conservative guesstimate, remember this is contingent on Futarchy “working”), and that the total investment would be about $100 million (surely a massive over guesstimation). Using a discount rate of 10%/year, the Net Present Value of a $100/year stream appearing after 30 years is $57 (I did the calculations). There are 300 million people in the country so the total Net Present Value is ( 1% x $57 x 300 million ) - $100 million = $70 million. So even under these calculations, the expected benefit of researching Futarchy is massively positive. Not experimenting is huge loss.
The thing that makes this investment so good is the fact that there are a lot of people in the country. Finding an institutional reform that makes peoples lives better provides a massive public good, but costs a fixed amount to find. In these calculations I have only included the people in the country, the expected benefit is an of magnitude larger if we consider the benefits to everyone in the whole world.
I thought that Cass Sunstein’s EconTalk podcast on worse case scenarios had an interesting discussion of discount rates (this section starts at about minute 55 and it is about 9 minutes long). He argue’s that there’s a difference between discounting lives and discounting money because money has opportunity cost; you can invest money and make it grow, whereas you cannot do the same thing with lives. that we should not have a discount rate in our pure preferencesHowever, Robin Hanson dissented.
I tend to side side against discount rates in our pure preferences. Even if people act like they have discount rates in their pure preferences (note the lack of charities trying to help the future), as Hanson points out, perhaps they would if they understood how easy it is to help the future.
I have noticed something about myself in the last year or so, I fear being proven wrong. When I see some study on a topic about which I have a prior opinion, I get a light dose of fear. To give a more specific example, after I finish writing a post for this blog, I consider reading it over in order to revise it. My immediate reaction to that suggestion is to fear that my belief that I have written an eloquent post is wrong. Ironically actually discovering errors does not cause me much pain.
This seems like a clear case of confirmation bias, and being biased is bad. Bias leads to costly mistakes, like writing bad posts and making unwise investments. Luckily, I have come to recognize this feeling of fear relatively easily, and recognizing it helps me to identify when I might be prone to confirmation bias and to lookout for possible disconfirming evidence. This feeling of fear is my own special marker for confirmation bias.
When I recognize the feeling, I know that I should think carefully about my choices about what evidence to seek. I make sure not to avoid looking at evidence simply because it might force me to change my beliefs, and I often try to actively seek possible disconfirming evidence.
I am sure I don’t always notice my fear, and overcoming even light fear can be difficult, but I am glad that confirmation bias has a relatively clear marker. I don’t know if other people get this same fear emotion, but I wouldn’t be surprised if it is a general phenomena.
The Commodity Futures Trading Commission is calling for public comments on possible regulation of “Event Contracts.” As I understand it, this is good news for prediction markets; there is a lot of uncertainty about the regulatory status of prediction markets, and this seems like it would clear that up. A clear regulatory framework would pave the way for real-money prediction markets. At least, as long as event contracts are not regulated out of existence. It is my impression that this is a very good thing, so I am very excited.
I will be submitting comments via e-mail (secretary@cftc.gov), and I encourage others to do the same.
The gist of my comments is going to be that I see the potential for prediction markets to help regular people, who don’t have access to a lot of data and analysis, make decisions. For example, prediction markets about the future of renewable resource technologies could help engineering students determine whether they should invest resources in learning about those technologies. Prediction markets about the economic future of specific geographic areas could help young workers decide where to move to get good jobs. Therefore, I would like to see the prediction markets relatively unlimited.
For the last few months or so, I have been eating lunch on the Ave instead of bringing food from home. The Ave is a long street two blocks over from the University of Washington campus that has a lot of restaurants on it. Many of them are quite good.
Eating on the Ave regularly led me to think about how competitive the lunch food market on the Ave is. There are a lot of restaurants, so it is pretty competitive, but it could probably more competitive. This led me wonder why Seattle is almost devoid of street vendors (there are a few downtown). This article explains it
Back in the 1970s, our fair city decided “clean streets” meant enforcing the stiffest laws in the country regulating street food vendors.
[...]
I recently called the health department to inquire about opening a French-fry cart, the importance of which became apparent to me as a teenager in Amsterdam. The hardened municipal worker on the other end of the phone informed me that if I didn’t see it on the streets, it could not be done. When I decried Seattle’s embarrassing lack of street food variety, she suggested I “move to France, where their food poisoning rate is consequently higher.”
It is unfortunate that selling food on the streets is so heavily regulated. Allowing street vendors should reduce the price of lunch foods by reducing their operating costs. Street vendors have lower operating costs since they do not have to rent expensive storefront space, although they do have to rent or buy licenses. Allowing street vendors would also have the added benefit of reducing the number of storefront restaurants, which would free up storefront space for other things. I would like to see Seattle auction off tradeable street vendor licenses. Auctioned permits would also allow easy to vendor regulation since their licenses could be revoked.
I started reading Overcoming Bias in the last few months, and Eliezer Yudkowsky has more or less convinced me that uncertainty is a property of your mind, not reality. Because of this, I really liked this passage in The Black Swan (p. 198 )
Often, in conferences when they hear me talk about uncertainty and randomness, philosophers, and sometimes mathematicians, bug me about the least relevant point, namely whether the randomness I address is “true randomness” or “deterministic chaos” that masquerades as randomness. A true random system is in fact random and does not have predictable properties. A chaotic system has entirely predictable properties, but they are hard to know.
[...]There is no functional difference in practice between the two since we will never get to make the distinction– the difference is mathematical, not practical. If I see a pregnant woman, the sex of her child is a purely random matter to me (a 50 percent chance for either sex)– but not to her doctor, who might have done an ultrasound. In practice, randomness is fundamentally incomplete information.
[...]Randomness, in the end, is just unknowledge.
I am taking Intermediate Microeconomics at school, and on the first day of class, my professor brought up the pervasiveness of preference uncertainty. I had not given preference uncertainty much thought before, but I have noticed that I am more uncertain about my own preferences than I had realized. I am frequently uncertain about my lunch preferences. Some of this uncertainty may be exaggerated because the situations in which I notice I am uncertain about are those situations where my preferences are not strong. However, I also sometimes realize that deciding to walk elsewhere to buy lunch to save money, that the decision was not even close to worth it. I don’t think I would make that mistake if I had a better grasp on my preferences .
Incidentally, I recently read Predictably Irrational (which was OK), and I noticed that many of the mistakes and biases that the book describes seem to stem, at least partially, from our uncertainty about our preferences. For example, the book discusses our tendency to ‘anchor’ to initial prices. We tend to judge prices relative to the first prices we first observed for a particular product. If we had a good understanding of our own preferences, that wouldn’t happen very frequently.
I am not sure what general implications preference uncertainty has, but it seems useful to keep it in mind when making decisions.
One of the most interesting concepts I learned from Michael Abramowicz’s Predictocracy (which I have mentioned before) is the idea of a “normative prediction market”.
The essential distinction between normal conditional prediction markets (about prediction markets in general) and normative prediction markets is that for a normal prediction market, the contract payout depends on some objective criteria, like whether Barrack Obama wins the Democratic nomination or what the unemployment rate is in 2013, but for a normative prediction market, the contract payouts depend on the the subjective judgment of a person or organization. The subjective judgment could be that acquiring that small startup was a bad idea for Google or that introducing needle exchange programs was a good idea.
The major benefit of using subjective criteria to decide prediction market contract payouts is that the market predictions are more useful because they more precisely target the questions of interest. Normative prediction markets are less biased than normal prediction markets because they do not omit important but hard to quantify effects (which seem commonplace). Normative prediction markets can also do a good job of aggregating preferences in some cases.
Uses of normative prediction markets
Normative prediction markets can potential help companies make good decisions. A manufacturing company might use a normative prediction market to predict whether some major internal change, like moving one of their manufacturing divisions overseas, would be regarded as a good idea by a judging committee in the future. The company would commit to setting up a committee in the future which would report on whether the change was a good idea. The committee would have a relatively open ended criteria but would likely consist mostly of cost benefit analysis, and prediction market participants would have to predict what factors the committee would think were important.
Normative prediction markets also have a lot of potential in public policy. For example, an executive agency or an interested non-profit could sponsor a normative prediction market to help evaluate whether it would be a good idea to implement some new type of poverty relief program. Prediction market contracts would pay out based on whether a decision judge, a randomly selected agency employee or non-profit board member, would announce that it was a good idea or announce that it was a bad idea to implement the program.
Payout rules
Different rules can be used to select the body responsible for deciding the variables that determine prediction market contract payouts. One method is to determine the payout based on a judgment made by an individual randomly selected from a defined pool. This method would be relatively cheap and the resulting market prediction should be quite stable because prediction market participants must average the expected judgments of the pool of decision makers. This averaging can be useful if one is interested in making decisions partially based on diverse preferences, not just diverse analysis.
Another method is to base the payout on a judgment made by a committee. Committees would generally give payouts with less variance than randomly selected individuals, which would make participating in the market more attractive because it would lower the risk involved. In some cases committees might also produce higher quality judgments; for example, when back and forth argumentation is important for producing good judgments. Of course, committees would also be more expensive since they involve more people and have other potential problems.
Potential problems with normative prediction markets
Shirking by decision judges is an important potential problem for normative prediction markets, because decision judges do not directly influence the final decision (since it has already been made). Thus, they will have lower incentives to make informed and well thought through decisions than traditional decision makers. This would reduce the quality of the predictions made by prediction markets.
Norms about not shirking and monitoring of decision judges could reduce shirking. However, decision judges should in general be harder than monitoring traditional decision makers because market judges do not directly change real outcomes, which eliminates one method of assessing decision quality.
One normative prediction market feature that could be either harmful or beneficial is that decision judges are likely to give much higher weight to higher order principles and ideology than traditional decision makers. Because decision judges who determine the contract payouts do not determine the decision that was actually made, if they care about other prediction market outcomes in the future, they have an incentive influence how market participants perceive the average decision judgment in order to shift that average in the direction they favor. This may include giving more more extreme judgments than they really prefer.
Consider a situation where the government uses a normative prediction market to decide how much it should spend on a new social programs. The prediction market decision judges are randomly drawn from body of liberals and conservatives. For a particular decision, if a liberal decision judge (a judge who’s spending judgments are generally higher than the mean of the group’s judgments) is selected, then they have an incentive to try to move the group’s mean judgment upward as much as they can by announcing a very high spending amount, even if that amount is higher than the amount they would choose if they were the actual decision maker. The reverse would be true when conservative decision judges are selected.
Strong norms pushing people towards giving genuine preferences would mitigate this effect somewhat.
The beneficial aspect potential of this effect is that decisions judges would generally be less tempted than traditional decision makers to trade off reduced rule of law or other high order principles for better immediate outcomes.
Abramowicz emphasizes this second potential, but on net, I think this effect would be more harmful than beneficial.
Over all, I think normative prediction markets are a very cool idea. They definitely deserve experimentation, and I suspect that they will eventually be used to make many types of decisions.
Links: Abramowiczs description of normative prediction markets
Bryan Caplan asks whether statistical discrimination prevents good products from being adopted by retailers
[I]magine this hypothetical. Suppose you have a genuinely new and improved t.v. which would be profitable to manufacture if you had a serious order from Best Buy. What could you do to get Best Buy to start carrying it? How would you even get Best Buy’s buyer to take your calls? Could statistical discrimination (most people like you are too useless even to talk to) keep a good idea off the market for good?
The solution to this problem seems simple: retailers should charge a submission fee to review products for which there is little information. This would weed out people who are not confident in their own products and cover the cost of reviewing products that are not eventually accepted.
In the case of books (which Bryan mentions), a $300 submission fee would certainly cover the cost of having a competent person research whether the book should go in the store. This function could probably even be outsourced to a separate company. I am surprised that booksellers do not already do similar things. Am I missing something? Or do retailers already do this?
Will Wilkinson has a great bloggingheads.tv interview with Dan Ariely, author of Predictably Irrational: The Hidden Forces That Shape Our Decisions, which is about behavioral economics and the effects of human irrationality. Listening to the interview convinced me to read the book. Ariely also has a blog, but I have not found it very interesting.
One segment (”Throwing away the keys to your own chastity belt” starting around minute 42) I found particularly interesting was the section where Ariely discusses procrastination, and specifically one mechanism to get students to procrastinate less. Ariely mentions a teacher for a class which has three papers which will not be graded until the end of the quarter. However, the teacher offers the students the ability to pre-commit to turning the papers in on dates of their choosing. Students who turn in their papers after their dates loose points for each day late they turn their paper in. Students who are completely ‘rational’ would choose dates at the very end of the quarter, but work on their papers throughout the quarter none-the-less. Unlike these students, real students, who are well aware of their inclination to procrastinate, would choose dates which are somewhat spaced out, in order to motivate themselves to work on their papers in a timely manner and thus produce higher quality work and expose themselves to less stress.
I think this is a wonderful idea. I struggle with procrastination, and I know a lot of bright students who also struggle with procrastination to some extent. Thus, I appreciate teachers who give weekly quizzes and mandatory homework, because they help me time my review of class material appropriately. This scheme would do something similar.
One potential problem is see with this scheme is that it might be a bit time consuming to administer. Keeping track of students’ individual due dates and when they actually turned them in could consume a many hours of a teacher’s time if they had to do it all manually. Luckily, it also seems like it would be fairly easy to automate. A software program could take students due dates and their actual turn in dates, and compute the loss of points for all students. The teacher would simply need to pass around a form in the beginning of the class for students to assign themselves due dates, and enter those into the program. Then as the students turn in their assignments, the teacher would enter in when each paper was received, and the program would generate point losses for every student at the end of the quarter. The system could also be set up to send out personalized e-mail reminders to the students.
I am reading Predictocracy, and I particularly liked this sentence (p. 66)
The value of experimentation accrues largely to the public , not the individual business, and businesses will hesitate to subsidize these experiments [...]
Abramowicz is talking about experimentation with prediction market, but it seems to me that this applies to experimentation with institutions in general. Businesses that experiment with new institutions can create large social benefits when such experimentation is successful and others copy them. However, such businesses bear all of the costs and risks associated with such experimentation but reap only a fraction of the reward, so we should expect such experimentation to be under-provided.
To some extent, relatively forgiving bankruptcy law should encourage private individuals to produce such experimentation. The government can also directly produce some experimentation by funding basic social research into topics like prediction markets. Sadly, there doesn’t seem to be a good way to subsidize useful experimentation with institutions.
I am reading Predictocracy: Market Mechanisms for Public and Private Decision by Michael Abramowicz, about how prediction markets can be used for decision making in various places. Since I talk about governance mechanisms a lot on this blog, I intend to review the book later on.
In the mean time, here is a series of posts that Abramowicz did for The Volokh Conspiracy on prediction markets which I found pretty interesting. It includes some good-back-and-forth with Robin Hanson about Futarchy vs. Predictocracy (which I have discussed before).
I have discussed the theory that the passage of the 17th Amendment was a serious blow to federalism on this blog before, and I have been supportive of the argument. Although I have not seen an explicit public choice theory for why the indirect election of senators institutionally encourages federalism, the implicit logic is obvious enough: rationally self-interested state legislators, interested in their own power and influence, jealously guard and work to expand the power of state the legislatures by voting for national legislators who defer to the states as much as possible.
Initially, I found this mechanism very convincing, and I thought that the passage of the 17th Amendment explained essentially all of the decline of Federalism in the US since 1917, but I have changed my mind, and I want to explain why.
Rational self-interest does not imply that the indirect election of national legislators strongly encourages federalism because of vote dilution. Like voters, state legislators have only a very small impact on the outcome of the vote and therefore only a very small impact on their own welfare. This means that even though legislators are rationally self-interested, their political action, like that of voters, will be largely sociotropic (perceived “good” or welfare maximizing).
Because legislators face weak incentives to protect the power of state legislatures, they are likely to follow voter preferences in this domain, even if they are weak, and it may be the case that voters increasingly want more involvement from the national government. Communication and transportation technologies continually get better, which makes the world “smaller,” and I would guess that this makes people think on a more geographically broad level. People also increasingly have a national identify instead of a state level identity, before the union of the states, people often identified with their state, but now most people identify with their country; few people are more loyal to their state than the nation. This may lead people to think of national level instead of the state level as the appropriate level for politics to take place and therefore lead to less federalism. If this is the case, it would lead to reduced federalism no mater the method used to elect the national legislature. Riker’s (1955) account of the passage of the 17th Amendment seems to support the idea that direct election is inherently popular. Before the passage of the 17th Amendment, many states passed laws requiring the legislature to elect the candidate who won the popular vote in the state, in response to the growing trend of state legislators being forced to campaign primarily on who they would vote for for national senate instead of what they would accomplish in state.
However, there are some potential mechanisms that could motivate state legislators to actively protect the power of the state legislatures.
Indirect election of the national legislature could still systemically encourage federalism if people are biased in certain ways. For example, if people are generally cognitively biased towards accepting ideas which are perceived as in their self or group interest, then legislators will have a skewed perception of what is “good for society.” This will lead state legislators will elect national legislators that favor stronger state legislative power than if they legislators were unbiased.
Indirect election of the national legislature might encourage federalism relative to direct election of the national legislature if state legislators have biased cost/benefit information. For example, state legislators have only the viewpoint and experience of state legislators, so they will be far more aware of the costs and benefits to the state legislatures of proposed structural changes than the costs and benefits to the national government. This would lead state legislators to make decisions based about what they support at the national level largely on what the costs and benefits would be to state legislatures. I am aware of a little empirical support for this proposition: some evidence suggests that people avoid gaining information about the impact of their potential choices on others.
In addition, direct election may actively encourage the transfer of political power from the state legislatures to the national legislature because of the incentives that directly elected legislators have in their attempt to appeal to voters. Directly elected legislators (whether they are national or state) have incentives to expand the control of their legislature both “down” into areas already covered by state bodies and “out” into areas not currently regulated. Legislators have an incentive to work to expand the power of the legislature into new areas in order to claim credit for working to resolve real or perceived problems. This incentive will operate even when those areas are already controlled by the state legislatures because voters are generally ignorant of their own state laws. For example: national legislative candidates in a directly elected system might successfully tout their support for stronger national gun laws, even though the states already good gun laws. This would appeal to voters who think that strong gun laws are a good idea that are ignorant of gun laws in their own state.
Under indirect election, however, national legislators do not have the same incentives to expand the power of their legislature “down” and “out” because, state legislators will generally be far more informed about what issues state law already covers and more often realize that the national legislature does not have any advantage in solving the problem over them. Moreover, while state legislators do have similar incentives to expand both “up” into areas regulated by the national legislature and “out” into unregulated areas, the political system usually prohibits them from expanding upward, taking over areas filled by the national government.
I can’t really comment on whether these mechanisms are true or not, because, while they seem intuitively appealing to me, they mostly are empirical questions for psychology, and I have very little knowledge of the relevant literature.
Overall, It seems to me that there are good reasons to suspect that the 17th Amendment eliminated significant forces in favor of federalism, and that, more generally, the indirect election scheme encourages power sharing between national and state governments. There also seem to be few reasons to believe that indirect election of the national legislature would be a bad political institution. However, the 17th Amendment was probably not an all-important force preserving federalism. Therefore, I think that indirect election of the national legislature is overall a good idea. Unfortunately, it seems that it is a challenge to preserve institutional features like indirect elections, even if they have positive effects, when they can be replaced by popular alternatives. If through some magic, the 17th Amendment were repealed, I doubt that it would stay that way for very long because direct election is popular. While indirect election of the national legislature seems like a moderately good feature of a political system, I have trouble seeing it as a permanent one in normal political systems.
A few days ago, I linked to a paper on Voter Ignorance by Ilya Somin. There are a few points in it that I would like to talk about:
1) Here is Somin talking about retrospective voting (p. 15)
The retrospective-voting argument does, however, possess a kernel of truth. As Fiorina puts it, retrospective voting can impose a kind of “rough justice” on political leaders who have failed badly. If a policy failure is large, highly visible, and easily attributable to a particular set of leaders, it is certainly likely that they will be voted out of office, as the elections of 1932, 1952, 1968, and 1980 suggest. Moreover, the bigger the failure, the less likely it is that the opposing party’s performance will be worse. The ability of voters to punish large and obvious policy failures by incumbents is one of the major advantages of democracy over dictatorship.
This is how I think about it too. Democracy in general gives politicians a weak but significant incentive to work for good policy, because while voters are quite ignorant about politics, they are not completely ignorant; they do generally know when politicians have done an especially poor job. Unfortunately democracy also gives politicians a host of other incentives that aren’t so great.
2) Somin argues that even altruistically motivated voters are rationally ignorant because the chance that they affect the election is vanishingly small. However, as Gelman and others show, altruistically motivated voters do have an incentive to show up to vote, and extending their logic, also to be informed. What Somin forgets is that while the chance that a particular voter changes the outcome of the election is minuscule when the voting population is large, when the voting population at large, the social welfare effects are also large. Moreover, the chance that a voter decides the election and the size of the welfare effect are inversely proportional to eachother, so that when we calculate expected altruistic utility of voting, it is constant.
However, I don’t think that Gelman’s analysis is quite right either because voters aren’t interested in being altruistic per se, they are interested in the psychological rewards of feeling altruistic, and that feeling doesn’t heavily depend on how informed the voter is. I should say that while it seems intuitively obvious to me that the rewarding altruistic feeling from behaving altruistically doesn’t heavily depend on how informed a voter is, I don’t have a good explanation for why that would be the case. I suspect there’s some sort of cognitive bias at work here.
Over at The Volokh Conspiracy, Ilya Somin has a series of four posts on rational political ignorance (the first one is here, and it links to the rest at the bottom) and discuses why it exists and why it is important.
In his last post on the topic, he mentions his 2004 paper covering some recent empirical evidence for rational ignorance, which I find especially interesting because I had been searching for such a survey without much success.
Consider two ways for an individual to arrive at their policy preferences. First, an individual can consider inherent goodness or badness of a policy. For example, an individual can consider banning drugs to be good because it is inherently good to prohibit people for using drugs. I’ll call this method Specific Value evaluation. Alternatively, an individual can consider the results of a (rough) utilitarian calculus. For example, an individual can consider banning drugs to be good because they judge that it will improve overall human welfare by reducing suffering because of drugs. I’ll call this method Utilitarian Evaluation.
Here is my question: Would a person who was required to learn a lot about a certain policy rely more on a utilitarian evaluation of the policy than on judgments about inherent goodness or badness of the policy than a person who was not required to learn about the policy?
My intuition is that yes, greater information leads to judgments based more on Utilitarian evaluation than on Specific Value evaluation, because Specific Values are not values themselves but simply very simplistic Utilitarian evaluations. If this is the case, then the thought that prohibiting drug use is inherently good is simply a way of expressing the thought that prohibiting drug would very obviously improve human welfare. However, I am not very sure about this.
I am interested in this because I am curious about what sort of politics Professional Voting would lead to. I obviously hope that greater information leads people to make more utilitarian judgments, because my own preferences are quite utilitarian.
If anyone could point me to relevant research, I would be very grateful.
Your brain doesn’t treat words as logical definitions with no empirical consequences, and so neither should you. The mere act of creating a word can cause your mind to allocate a category, and thereby trigger unconscious inferences of similarity. Or block inferences of similarity; if I create two labels I can get your mind to allocate two categories. Notice how I said “you” and “your brain” as if they were different things?
I am sure that I have been guilty of ignoring this in the past, probably even on this blog.
In a comment on my article on Professional Voting, Robin Hanson questions how well the Election Council in a Professional Voting system would work
The obvious question is how well can ordinary voters monitor whether the Electoral Council members are choosing neutral fair test questions.
I have thought about how low levels of monitoring by ordinary voters (due to rational ignorance) would affect the effectiveness of the Electoral Council, and I have concluded that low monitoring levels would not affect Electoral Council effectiveness very much at all. To a large extent, voters do not need to monitor the Electoral Council members in order to give them incentives to do their job well because those incentives are inherent to the job.
Essentially, the only non-monetary rewards more readily available to Electoral Council members than to other people would be small level fame and the ability to pursue sociotropic goals (ideological or otherwise) for example, getting the minimum wage raised. Electoral Council members would have little opportunity to be corrupt or wield direct power, because the Electoral Council would not control very much public money nor control powerful government functions. Because Electoral Council positions have a comparative compensation advantage in providing the opportunity to persue sociotropic goals and because sociotropic motivation is quite strong for some people, sociotropic motivation would be especially strong among Electoral Council members because they would self select for being highly sociotropically motivated (I discuss this logic here). Therefore, we should expect Electoral Council members to act mostly to maximize the monetary rewards of being reelected as well as maximize how much they advance some set of sociotropic goals.
The only way to pursue sociotropic goals as an Electoral Council member, however, would be to influence the arguments and facts that voters learn by influencing the questions that appear on the political knowledge test that the Electoral Council would administer. For a Council member to advance their set of sociotropic goals as much as possible, they must ensure that the questions on the test cover the most convincing arguments and facts supporting their sociotropic goals, and to ensure that those questions measure how much individual knows about such arguments as accurately as possible. Luckly, this is exactly the job of the Electoral Council.
Working to include biased questions on the test would not further the influence of individual Electoral Council members because biased questions are very easy to work around. For example, including the question “Are you a Democrat?”, on the political knowledge test would not help Democrats, because non-Democrats can easily claim to be Democrats. Furthermore, even if such biased questions did help the factions which included them, other factions would strongly resist such questions because they would be percieved as unfair. Attempts to include questions biased in favor of specific demographics would be almost totally muted by the weighting of the final voting result by the demographic survey.
One potential problem would occur if the primary cause of disagreement between electoral council members is differences in values and not about what arguments and facts are most true. In this case, Electoral Council members, may devote significant energy towards preventing questions focusing on strong arguments supporting policies which they oppose from appearing on political knowledge test, instead of towards including questions focusing on strong arguments supporting policies which they support. This would obviously be a bad outcome.
This is an interesting potential problem because it means that we should actually prefer Electoral Council members to be be relatively biased towards believing arguments and facts that support what they support and against believing arguments and facts which do not support what they support. However, monitoring of Electoral Council members by ordinary voters (however little of it there is) and Electoral Council members valuation of honesty in general should reduce Electoral Council member’s efforts to keep legitimate arguments that opposing factions support from being covered by the political knowledge test. Additionally, this would not be a potential problem for Professional Voting as a corporate governance institution, because Electoral Council members would value profit almost exclusively and homogeneously, so disagreements would only exist about which arguments are persuasive.
Intrade is apparently starting to include contracts on the future of aggregate economic measures (e.g. GDP growth rate or unemployment rate changes) conditional on political outcomes (e.g. Hillary gets elected) at the suggestion of a research initiative of the Westminster Business School; such conditional prediction market contracts are central to Futarchy. Now, perhaps, we will be able to see if prediction markets can make good predictions about these topics, though they may be too thin to reveal much information.
Looking at the contract prices and volumes on Intrade (Markets->Politics->Impact of Next Pres.) right now, the markets look pretty thin, but perhaps eventually they will have significant impacts on elections.
A month or two ago, I was talking to Chris, and he brought up the idea of a government based on prediction markets. At the time, I dismissed the idea as unworkable, but now I have come across Robin Hanson’s more in depth development of the idea, which he calls ‘Futarchy,’ so I have given the idea some more thought. Hanson summarizes his idea,
In futarchy, democracy would continue to say what we want, but betting markets would now say how to get it. That is, elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare. The basic rule of government would be:
When a betting market clearly estimates that a proposed policy would increase expected national welfare, that proposal becomes law.
Futarchy is intended to be ideologically neutral; it could result in anything from an extreme socialism to an extreme minarchy, depending on what voters say they want, and on what speculators think would get it for them.
Subsidized betting markets would trade idea futures to determine what the results of certain policies will be. I envision the political body used to define the overall measure of welfare as a lot like the Electoral Council I have discussed for Professional Voting, a proportionally elected body which relies on logrolling to make create efficient outcomes. Proportional elections are important in both Futarchy and Professional Voting because the values and perspective of the median voter are unlikely to be the same values and perspective generated by logrolling between parties representing all voters.
I have not finished reading and digesting Hanson’s in-depth paper on Futarchy, but I wanted to offer my initial thoughts. While, I should first say that I am probably biased against this idea because, the way Hanson proposes it, it would be a substitute for my own idea for making democracy produce better outcomes, Professional Voting.
Here are my initial concerns with Futarchy:
- Some goals are procedural, and therefore not measurable, i.e. the Rule of Law.
- I suspect that it would be very difficult to create an overall measure of welfare that includes basically everything that people care about, no doubt there could be good numerical measures of a lot of what people care about but not everything or close to everything that people care about.
- Even though my own values are utilitarian, I strongly doubt that most peoples values are; I suspect that most people’s values are based on ‘fairness’ and other process based concepts, and policies which try to maximize an overall measure of welfare (which would presumably be a state function) would not be very good at furthering those values.
Ideas futures seem most promising to me as an aid to Professional Voting; good policy-futures markets would provide a lot of valuable information to professional voters and elected officials responsible to them about which policies are most likely to further specific goals. Such information could improve the decision making process tremendously, even if the decision of which policies to implement and how were left up to the discretion of the professionally elected legislative body. But perhaps this is just my bias for favoring my own idea.
Still, I would like to see both Futarchy and Professional Voting tried in experimental and small scale governance settings. I think Futarchy, in particular, would work well for making corporate governance decisions because there is essentially one dimension (stock price) on which to evaluate the quality of decisions. I think Futarchy could largely solve principal-agent problems corporate governance experience due to rationally ignorant stock holders. Internal corporate ideas futures could ask, for example, whether replacing the current CEO would boost the stock price, which would give the CEO a very strong incentive to be a good agent for stock holders.
Such experiments would let us evaluate whether and under what circumstances Professional Voting and Futarchy generate better outcomes that more traditional democracy.
David Park at The Monkey Cage points to an article by Maria Petrova on a model of democracy where the rich bribe the media into misinforming The Poor about the costs and benefits of redistribution so that The Poor favor less redistribution than they would otherwise (link to paper). Petrova’s theory is seriously flawed because she inappropriately uses self-interest as a group motivation. Petrova writes (italics mine):
Unequal societies may have a low level of redistribution because the median voter may misperceive her self-interest as a result of an information campaign by the rich. Higher inequality in the economy implies more incentive for the rich to manipulate the preferences of voters and to use the power of the media to advocate a lower level of taxation. The influence of the rich on the media is one reason why income inequality leads to political inequality, and why policy outcomes are more responsive to the preferences of the rich than to those of the poor.
Petrova abuses the word ‘incentive’ here. The word ‘incentive’ is generally used to refer to individual incentives, or at least incentives for social units that act largely as single entities such as individual corporations, and to use it to mean something else at best poor word choice. ‘The Rich’ is a class of people, not an individual person, and to assume that The Rich act as a cohesive unit, without at least attempting to provide an explanation for why this would be so or providing solid evidence that it is so, is appallingly bad social science; the theory of groups demolishes any presumption of such solidarity, especially when, as Petrova explicitly assumes, group action requires that people bear real costs. This assumption on page 7, for example, cries out for an explanation
The rich can offer a bribe to the newspaper [the media in her model]. I assume that the members of the high-income group divide expenditures on this bribe equally. (p. 7)
Petrova never discusses how The Rich are able to coordinate their bribe or how they are able to enforce cost sharing, and it seems unlikely that they would be able to do so.
The only place where Petrova seems aware of fact that The Rich is a set of individuals with their own calculus is in her conclusion when she notes ways in which her model might be extended:
Then, not all the rich can be organized as a group attempting to influence the media; some of them might stand aside.
But this seems more like splitting The Rich into two cohesive units than recognizing that The Rich have individual incentives.
I do not mean to say that effects which encourage collective action cannot not exist; they could; perhaps institutional arrangements or human psychology encourage the Rich to act in their collective self-interest (I would actually be extremely interested in explanations focusing on psychology, especially those grounded in empirics), but such explanations are essential to her theory and would clearly be controversial, so neglecting to discuss them is a serious oversight.
I will probably be posting about the overuse of ’self interest’ in positive theories about politics more frequently in the future.
Lately, I have been more aggressive about managing my finances. One tool I think would be useful for doing so is to get historical data from my bank of my account balances, deposits, withdrawals and other similar information in a format easy to paste into Excel. That way I could graph trends in my spending, income and total wealth and calculate other aggregate variables.
Such data could help me make better decisions in a number of ways. For example, if I always had a lot of money in my checking account (which pays lower interest than my savings account), graphing my average checking account balance would be useful because I could save money by making sure to keep more money in my savings account instead of my checking account. It would also be quite useful to be able to easily put fairly precise dollar amounts on my total income and total spending, and the ability to monitor trends in my spending on fuel could help me make decisions about my future car decisions.
I was somewhat surprise and disappointed to learn that my bank does not provide a way to get such data. I doubt creating the feature would be very difficult, and I doubt that I would be the only person who would find such data useful. I am not sure why they don’t offer it.
Lee Siegleman at The Monkey Cage notes some research which indicates that the best predictors of which graduate economics students finish their dissertation are a student’s level of math preparation and a student’s research motivation (abstract link). I have stated that I am considering perusing an economics graduate degree, so I will self-servingly note that I have both a high level of math under my belt (from engineering) and strong motivation to do research.
Michael Munger gives an intro to the theory of the firm, which answers the question “If markets are so great, why are there firms?”
This is a topic I’ve been interested in exploring for a whole, but I am not sure what the best resource is. The Nature of the Firm seems like a relatively good resource, but it appears to be largely a collection of essays by Coase and others. I am suspicious of primary sources as resources for learning. It seems doubtful that even after quite a long time and significant theoretical developments the original essays would be the best at explaining the concepts. I would prefer a book which has more synthesis and empirical evaluation of the different theories of the firm.
The Coyote Blog via CopyOwner points to this CRM Buyer article about “gray market piracy.” “Gray market piracy” is where companies in poor places, where copyright using products are sold cheaply, export the copyright using products back into rich countries to profit from the price differential. Both Coyote and CopyOwner bemoan the fact that the article calls these exporters “pirates.” CopyOwner is right to point out that gray market exporters are not legally pirates, the article says as much, but that does not mean it would be a bad idea to make reimportation of copyright using products illegal or restricted. The net effect of such a law would be to give copyright holders an improved ability to discriminate geographically, and I want to present what I think is a strong argument for why better geographic price discrimination would be good.
I should mention that I do not blindly advocate stronger copyrights; Chris and I both agree that current copyright term lengths seem far too long. Chris has noted some work by Rufus Pollock which calculated the socially optimum copyright term length to be 14 years, which is far shorter that the current term length of 70 years after the death of the author. Copyrights, and intellectual property in general, should be a means to induce the production of socially valuable ideas and not an end in themselves. But production of socially valuable ideas is not enough, in order to improve human welfare, they must be used a lot, and that is why we should consider how improved geographic price discrimination by copyright holders may harm or improve general welfare.
Improved price discrimination could be welfare improving by increasing the quantity of copyright using products consumed by the public. When monopolies, like copyright holders, cannot price discriminate perfectly, they price their goods socially suboptimally, because maximizing their profits involves high prices and limited supply. Better price discrimination allows monopolistic firms to make more money by selling to more people.
Some copyright holders do currently have some ability to discriminate geographically, charging high prices in rich regions and lower prices in poorer regions. For example, DVD region codes make DVDs work in some countries (I am not clear on how the use of region codes is enforced for DVD players, perhaps the patent holder of some critical DVD technology requires the use of region codes as a precondition for using DVD reading technology in DVD players). This allows DVD manufacturers to sell their products for different prices in different regions. In the case of DVDs, this price ability might disappear, because region codes have come under legal attack.
Improved geographic price discrimination abilities for copyright holders would allow them to sell copyright using products to people in poorer countries at lower prices without damaging their profit from selling in rich countries, creating an incentive for copyright holders to sell more copyright using products in poor countries. Reduced geographic price discrimination abilities for copyright holders, due to technological change or legal change (in the case of region codes), would mean that selling copyright using products to people in poorer countries at lower prices than in rich countries would reduce their net profit because of price arbitrage, creating an incentive for copyright holders to sell fewer copyright using products in poor countries. Copyright using products are generally free of negative externalities, so virtually any increase in the quantity consumed should be regarded as a welfare improvement and reductions in the quantity consumed should be regarded as welfare reductions, so allowing greater price discrimination should be welfare improving since more copyright using products would be consumed.
Although my libertarian sensibilities biases me against it, I think there is a strong argument to be made for restricting the reimportation of copyright using products, but more study of the welfare effects would definitely be a good idea.
Because voters know very little about the details of candidates’ ideology and issue positions, they use a candidate’s family affiliation with a popular political leader as an information shortcut. Voters could instead analyze each candidates’ qualifications and ideology in detail (though, as Bhutto noted, that may be impossible for those who are illiterate or poorly educated). However, rational ignorance ensures that most of them have neither the time nor the incentive to do so. Bhutto herself, of course, rose to power in Pakistan in large part because voters associated her with her father, a popular politician who had been executed by a military dictator in 1979.
He also argues that this advantage also means they will be less competent on average then other politicians, presumably because there is a smaller population of politicians with familial name recognition. This also suggests that in elections where the electorate is more uninformed, familial name recognition should be more of an advantage. I would be interested to see a study try to support this empirically.
Update: Discussion in the comments.
Mark Thoma lists three different reasons for market intervention,
[1] Some types of government intervention - weights and measures, disclosure requirements, truth in advertising, safety requirements, etc., are intended to make markets work more efficiently by creating conditions that better approximate competitive ideals. The debate over health care can be cast in this light, i.e. as a debate about how best to solve a market failure that prevents broader coverage at lower prices.
[2] As second type of intervention redistributes income ex-post, i.e. after the market process has occurred, often through taxation and spending programs. In an economy with significant market failures that cause an inequitable distribution of income and wealth, ex-post redistribution may be justified to redress the imbalances caused by the market failures (and to create equal opportunity).
Thus, the first two types of intervention occur due to market failures, in the first case the intervention is to correct the failures and improve market efficiency, and in the second case the intervention redistributes income ex-post to make-up for inequities caused by existing market failures.
[3] There is also a third possibility, intervening when markets are working reasonably well. Here, the assumption is that even well-functioning markets can produce inequitable outcomes and hence ex-post redistribution is required. Unlike the first type of intervention which corrects market failures, this type of intervention often leaves markets functioning less efficiently. Much of the objection to government intervention is made on this basis.
He goes on to say that he thinks that reason #2 is the most compelling reason for wealth redistribution and that reason #3, redistribution for redistribution’s sake, is relatively unimportant. I disagree. I disagree partly because I do not see certain markets as failing in ways that systemically harm specific groups to a great extent, but I mostly I disagree because my values are utilitarian and Thoma’s are not (apparently). I consider inequality among outcomes to be the most compelling reason for redistribution of goods. If we can give people large benefits at low costs to other people, we should do so. It is important to remember that the outcomes of perfectly competitive market processes are not moral judgments. People who have highly valued skills and are rewarded for it by market processes are not more “deserving” than people who don’t.
I don’t mean to say that identifying market failures is not a worthwhile task. If certain market failures mean that the labor market rewards some labor skills substantially less than if the labor market did not have those failures, it suggests that correcting those failures could be a low cost way to make workers lives better. If lack of access to credit due to some market failure seriously harms the poor, working around such a market failure may be a good idea, but my motivation for doing so would not be that the poor are not fairly rewarded by the market, but simply to make people’s lives better.
I also don’t mean to say that perfectly distributed income is the ideal; it is important to consider revealed preferences. Other things equal, if one person works harder than another, it likely means that they value the rewards of working more than the other person; leisure and other things which are hard to measure are consumption goods just like material goods. When making judgments about the appropriate amount of redistribution, it is also important to pay attention to how redistribution affects economic growth, because redistribution now may come at a high cost for the future, and this is important even though the future will be significantly richer than us.
I recognize that my utilitarian view is probably a minority view. I think most people probably give much more weight to fairness concerns than to utilitarian concerns.
I clearly do not share Sandy Levinson’s judgment about what the biggest flaws in the American political system are, Levinson sees democracy as a much better method for making decisions than I do, but I do agree with Levinson when he argues that we shouldn’t give disproportionate political power to small states.
I would also like to point out that people vote generally altruistically, so we shouldn’t expect raw greed to motivate people in large states to take advantage of people in small states through the political process. This is especially true because people no longer strongly identify with their state, so are less likely to favor the interests of the people in their own state over the interests of people in other states. Certainly some demographics have tried to take advantage of other demographics through the political process, but it is not motivated by greed.
The concept of rational voter ignorance has been around since the 50’s. The reality of rational voter ignorance seems obvious to me, but I have been searching for a good source of strong evidence for broad voter ignorance, a paper or survey that I can point people who doubt voter ignorance to. Several papers that I have run across mention that voter ignorance is well documented, but they do not cite anything, and I have been unable to find any survey paper that specifically focuses on the extent of voter ignorance. There are also several papers I have run across that note significant policy preference shifts when voters become more informed (like this and this), which this implies voter ignorance, but I would like a paper specifically focused on the extent of voter ignorance.
Does anyone know of such papers?
In the past, I have advocated both Direct Representation, a form of proportional representation, and the institutional protection of federalism by having state governments at least partially elect the national government, as was the case in the U.S. before the 17th Amendment. How these two institutional features might fit together is not immediately obvious, but the solution is relatively simple:
At the state level, each population elects it’s representatives (parties) in the normal Directly Representative way. At the national level, Direct Representation elections are also held normally except the votes are cast by all the individual state parties using the votes they have been delegated instead of by voters in each of the states. In this way, both the state and national legislatures remain Directly Representative, and the national legislature remains representative of the state governments.
In a nice post at Angry Bear, Spencer argues that higher prices are not needed to attract additional supply in disaster areas. I am not sure if Spencer advocates anti-gouging laws, but I would like to discuss how his reasoning affects whether anti-gouging laws are a good idea.
Spencer’s argument is essentially that short term supply curves are quite flat for individual stores even in disaster areas, because stores like Wal-Mart and Target have flexible supply contracts which let them buy more than they normally do at the same price and because supplies can be inexpensively redirected from other stores around the country (see Spencer’s very enlightening comments for a more in depth explanation and his earlier post for some anecdotal evidence).
This logic does not support anti-gouging laws, though, because it fails to explain why prices might rise in the first place; if supply curves are quite flat, as he claims, then even large demand increases should not lead to significantly higher prices. One possible reason for rising prices (I don’t have any evidence on whether disasters induce significantly higher prices any longer) is that stores have temporary effective local monopolies during disasters. During a disaster, the value of time goes up considerably because people have to attend to the damage done to their lives. Transportation costs can also increase considerably. This means that in many cases, it is much more expensive to go to stores besides the most local store. This means that the local store has a significant price advantage to other stores and can charge a correspondingly higher price. This logic does imply that price controls (in the form of anti-gouging laws) could be a good policy.
But perhaps stores are sufficiently close together that even consumer transportation cost changes are relatively unimportant, so that the price premium stores command are very low. I would be very interested to learn whether the ease of getting additional supplies to disaster area stores makes disaster induced price increases disappear altogether, even in the absence of anti-gouging laws. If disaster time price increases continue to occur, perhaps stores do have a significant temporary monopoly. If this is the case, anti-gouging laws, even though they are very blunt instruments, could potentially be good policies.