1. Introduction. Adam Smith is recognised in The Wealth of Nations as a proponent of self-interested behavior. Recently Ashraf et al (2005) have argued that, in Theory of Moral Sentiments, (TMS), Smith reveals himself to be an observor who anticipated much of modern behavioral economics. He also provided leads that modern economists can take up as a research agenda. These classroom notes (based on Ashraf et al. (2005)) explore these ideas. Comments are very welcome.
In TMS Smith adopted a ‘dual-process’ view of a human’s psychological perspective similar to that used in modern behavioral economics and neuroscience. The view is of an ‘impartial spectator’ who looks at individual behavior from the perspective of an outsider and also from the viewpoint of the ‘passions’ including emotions, fear, anger, sex and hunger drives as well as motivational factors such as pain. In terms of modern neuroscience, behavioral outcomes are a consequence of judgments made by different sections of the brain. The key elements involve the prefrontal cortex (the area just behind one’s forehead), which is concerned with planning and behavioral inhibition and the limbic system (located below the cerebral cortex) which is responsible for emotions and the way people feel.
Thus, to Smith, while much of human behavior was under the influence of the passions these passions could be moderated by an internal ‘voice of reason’, the ‘impartial spectator’, who allowed one to see one's own feelings and the pulls of immediate gratification from the perspective of an external observer.
In the area of self-control and self-governance, the ‘impartial spectator’ takes the form of long-term self-interest. Thus a potential drug user might think ‘I won’t snort that cocaine because it may lead me to do it tomorrow and so on, creating a long-term problem’. Here there is a conflict between passions and the impartial spectator. The conflict is important when studying savings decisions, since savings is exactly a decision to delay immediate gratification for a long-term interest, to stay the voice of a short-term pull for the voice of the ‘impartial spectator’.
For social interactions, the ‘impartial spectator’ allows us to see things from another's perspective and not to be blinded by our own needs.
2. Smith on Behavioral Economics. TMS contains numerous insights on the way the ‘impartial spectator’ and the passions interact to determine various choices with a paradoxical character.
Loss Aversion. In TMS (p.176-177) Smith argued that ‘Pain …is, in almost all cases, a more pungent sensation than the opposite and correspondent pleasure’. 200 years later Kahneman and Tversky (1979) called this loss aversion. Furthermore, brain imagining studies show that gains and losses are processed in different ways (O’Dougherty et al (2001). This can mean that opportunity costs will be weighted less heavily than out-of-pocket costs.
Impulsiveness and Self-Control. TMS (1759, p. 273) viewed the passions as essentially myopic. For the ‘impartial spectator’, in contrast, ‘the pleasure which we are to enjoy a week hence, or a year hence, is just as interesting as that which we are able to enjoy this moment’ (p. 272). These views correspond closely to what is now termed quasi-hyperbolic discounting where extra weight is placed on current rewards but, thereafter, consumptions are discounted at ‘moderate; exponentially declining rates (Laibson (1997)). Moreover, both Smith’s views, and the hyperbolic discounting hypothesis, are supported by neuroscience: The prospects of immediate rewards activate the limbic parts of the brain while longer-term issues are evaluated in the pre-frontal cortex (McClure et al. (2004)).
Overconfidence. Smith recognized optimism biases with most people being excessively optimistic (having an ‘overwhelming conceit’) about their prospects for rewards and understating chances of loss. Such views are replicated in modern behavioural economics into research on mergers and business failures and can be derived from evolutionary considerations (Postelwaite & Compte (2005)). Smith also understood that his claims regarding optimism applied only to those in ‘tolerable health and spirits’ the view also advanced in recent research suggesting, that optimism biases do not arise for the ‘clinically depressed’ (Taylor and Brown (1994)).
Altruism. At various points in TMS, Smith saw altruism as an important though fickle passion. Sometimes sympathy falls short of what is appropriate. Thus Smith noted that Europeans might undervalue the human costs of a catastrophic earthquake in China. Sometimes Smith saw sympathy as excessive, as for example, when we feel sympathy for the dead who themselves experience nothing.
These views are replicated in modern thinking. When people are controlled by their passions one might expect to see both callousness and extreme generosity. In addition altruism may be greater towards a ‘identified victim’ than a statistically equally probable though unknown victim (Small & Loewenstein (2003)). Also, when people know something about people the amount they tend to give increases, but has greater variance. This suggests greater sympathy when knowledge is obtained but also more snap judgments about who deserves (Bohnet & Frey (1999)).
Smith claimed this variability would be reduced by the ‘impartial spectator’ who would act to exert more discrimination in establishing a case for altruism.
Fairness. Smith saw altruism as an erratic force but ‘fairness’ as having a more reliable civilizing role. Fairness was an intrinsic human emotion that was the source of ideas about justice. Contemporary research suggests that fairness is an important emotion even in non-human primates (Brosnan & de Waal (2002)). The ‘impartial spectator’ or the ‘man within’ would internalize other people’s sense of fairness. Acting without respect to the ‘sacred’ rules of justice would lead to an individual being subject to the ‘contempt and indignation’ of others. Indeed:
‘There is no commonly honest man who does not more dread the inward disgrace of such an action, the indelible stain which it would for ever stamp upon his own mind, than the greatest external calamity which, without any fault of his own, could possibly befal him; and who does not inwardly feel the truth of that great stoical maxim, that for one man to deprive another unjustly of any thing, or unjustly to promote his own advantage by the loss or disadvantage of another, is more contrary to nature, than death, than poverty, than pain, than all the misfortunes which can affect him, either in his body, or in his external circumstances’. (TMS, p. 138)
Trust. For Smith transactions required a mix of concern for fairness (reinforced by fear of negative appraisal by the ‘impartial spectator’), altruism and trust to facilitate initial gains-from-trade in situation where agents had not previously traded. For example moral values can drive voluntary exchange rather than violence when two agents meet for the first time and exchange is an option. Smith believed that trust and a concern for fairness, were vital for the functioning of a market economy. Trust and reciprocity were foundations for the early beginnings of the market, allowing reciprocal gift exchange to emerge, and leading to trade.
One might think that the need for trust and trustworthiness diminishes as a market develops, but if anything the opposite is true. For example we trust managers to carry out the interests of shareholders. While we can build contracts to align manager incentives with those of shareholders we are never able to completely contract on all the things we care about and want to enforce. Implicitly, then, we hold a belief that managers have internalized the values we care about, and trust them to act on those, particularly when they might come in conflict with their own interests.
There are similarly other professions where individuals are entrusted to serve, like doctors, teachers, auditors, but cannot be monitored fully. We rely on individual professionalism and honor (or ‘enlightened self interest’) to carry out their occupations.
Across organizations, in the marketplace, factors like brand reputation and warranties help facilitate transactions without requiring complete trust. Within organizations, the issue of trust and trustworthiness, of employees to their bosses, of managers to each other and to shareholders, becomes even more important, and even more difficult to replace by market forces or better incentives and contracts.
Moreover there are costs of breaking trust and of risking reputation. The costs of sacrificing ethical standards of conduct are much larger than any individual might imagine, precisely because they decrease trust and affect organizational and market functioning as a whole
These insights are demonstrated in modern experimental economics where positive reciprocity can create trust even where there are moral hazard reasons for supposing it should not arise (see Camerer (2003, chapter 2)). In addition trust has been shown in numerous surveys to be correlated with economic growth (Knack and Kiefer (1997)) while anthropology surveys suggest the sharing is more equal in ultimatum games conducted in market-based economies (Henrich et al (2004)).
Materialism and Happiness. In TMS Smith argued that economic development was driven by the illusion that material wealth would bring about permanently greater happiness. Equally personal catastrophes (such as loss of a limb) were not seen by Smith has inducing permanent unhappiness since people adapt to circumstances. He saw both pain and pleasure as transient phenomena. In particular the anticipation of status from wealth was much better than the realization.
Contemporary research supports these views. Frederick & Loewenstein (1977) review various studies showing that ongoing health and wealth issues have little impact on subjectively perceived happiness. Moreover people generally believe, as Smith recognized, that pleasure and pain will actually last longer than it does (Loewenstein et al (2003)).
Smith also believed that while the accumulation of great wealth deceives the rich by not bringing them welfare gains, it would, generate overall economic development and by an ‘invisible hand’ (TMS (p. 184)) advantage the poor.
‘It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for’. (TMS, p.184).
Thus cross-sectional differences in income will bring about only small changes in happiness because the rich dissipate increased wealth on trinkets while the distribution of necessities is more equal.
3. Smith’s Unexploited Ideas. Smith’s TMS provides promising leads for future research. They isolate four ideas.
Desires to be Well-Regarded by Posterity. While modern economists have considered bequest motives, Smith in TMS (p. 115-116 ) was more also concerned with people’s desire to maintain a reputation during the period where they are dead even at the expense of their welfare while alive.
‘Men have voluntarily thrown away life to acquire after death a renown which they could no longer enjoy. Their imagination, in the mean time, anticipated that fame which was in future times to be bestowed upon them. Those applauses which they were never to hear rung in their ears; the thoughts of that admiration, whose effects they were never to feel, played about their hearts, banished from their breasts the strongest of all natural fears, and transported them to perform actions which seem almost beyond the reach of human nature. But in point of reality there is surely no great difference between that approbation which is not to be bestowed till we can no longer enjoy it, and that which, indeed, is never to be bestowed, but which would be bestowed, if the world was ever made to understand properly the real circumstances of our behaviour.’ (op cit).
Negative Reactions to Being Misjudged. Smith recognizes that people care not only about outcomes but the source of outcomes. In particular they derive strong disutility from an ‘unmerited reproach’ (TMS, p. 121).
‘Unmerited reproach, however, is frequently capable of mortifying very severely even men of more than ordinary constancy. Men of the most ordinary constancy, indeed, easily learn to despise those foolish tales which are so frequently circulated in society, and which, from their own absurdity and falsehood, never fail to die away in the course of a few weeks, or of a few days. But an innocent man, though of more than ordinary constancy, is often, not only shocked, but most severely mortified by the serious, though false, imputation of a crime; especially when that imputation happens unfortunately to be supported by some circumstances which give it an air of probability. He is humbled to find that any body should think so meanly of his character as to suppose him capable of being guilty of it.’ (op cit).
Contemporary research confirms that procedural fairness in legal proceedings is important as well as outcomes (Lind & Tyler (1988)). While the probability of suing for wrongful dismissal is correlated with a workers belief that the dismissal was unjust (Lind et al. (2000)).
Thus people react negatively to being misjudged presumably has strong implications for principal and agent analysis if a principal understates the effort by an agent.
Mistaken Beliefs in the Objectivity of Tastes. People do have different tastes based on culture and experience but typically underestimate such determinants and wrongly suppose such preferences are objective.
‘Few men have so much experience and acquaintance with the different modes which have obtained in remote ages and nations, as to be thoroughly reconciled to them, or to judge with impartiality between them, and what takes place in their own age and country. Few men therefore are willing to allow, that custom or fashion have much influence upon their judgments concerning what is beautiful, or otherwise, in the productions of any of those arts; but imagine, that all the rules, which they think ought to be observed in each of them, are founded upon reason and nature, not upon habit or prejudice. A very little attention, however, may convince them of the contrary, and satisfy them, that the influence of custom and fashion over dress and furniture, is not more absolute than over architecture, poetry, and music’. (TMS, p.195)
Ross & Ward (1996) refer to the propensity of people to see their beliefs as more widely shared than they are as naïve realism. Naïve realism has implications for gift-giving, negotiations, principal agent problems and so on. It can also lead to cultural conflict. For example, Australians see Japanese consumption of whales as barbarism.
Sympathy for the Great and Rich. Finally, while there is a prevalent sympathy to sympathize with those less fortunate there is also a propensity to sympathise with the great and the rich:
‘When we consider the condition of the great, in those delusive colours in which the imagination is apt to paint it. it seems to be almost the abstract idea of a perfect and happy state. It is the very state which, in all our waking dreams and idle reveries, we had sketched out to ourselves as the final object of all our desires. We feel, therefore, a peculiar sympathy with the satisfaction of those who are in it. We favour all their inclinations, and forward all their wishes. What pity, we think, that any thing should spoil and corrupt so agreeable a situation! We could even wish them immortal; and it seems hard to us, that death should at last put an end to such perfect enjoyment. It is cruel, we think, in Nature to compel them from their exalted stations to that humble, but hospitable home, which she has provided for all her children. Great King, live for ever! is the compliment, which, after the manner of eastern adulation, we should readily make them, if experience did not teach us its absurdity. Every calamity that befals them, every injury that is done them, excites in the breast of the spectator ten times more compassion and resentment than he would have felt, had the same things happened to other men. It is the misfortunes of Kings only which afford the proper subjects for tragedy. They resemble, in this respect, the misfortunes of lovers. Those two situations are the chief which interest us upon the theatre; because, in spite of all that reason and experience can tell us to the contrary, the prejudices of the imagination attach to these two states a happiness superior to any other. To disturb, or to put an end to such perfect enjoyment, seems to be the most atrocious of all injuries. The traitor who conspires against the life of his monarch, is thought a greater monster than any other murderer. All the innocent blood that was shed in the civil wars, provoked less indignation than the death of Charles I. A stranger to human nature, who saw the indifference of men about the misery of their inferiors, and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine, that pain must be more agonizing, and the convulsions of death more terrible to persons of higher rank, than to those of meaner stations’. (TMS, p. 51-52).
The fascination with the lives, deaths and clothing of celebrities is an instance of this. Smith saw it as a moral mistake but one that is necessary to maintain the stability of an elitist social structure:
‘This disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments. That wealth and greatness are often regarded with the respect and admiration which are due only to wisdom and virtue; and that the contempt, of which vice and folly are the only proper objects, is often most unjustly bestowed upon poverty and weakness, has been the complaint of moralists in all ages’. (TMS, p61-62).
Thus while people suppose that average citizens don’t seek to tax the wealthy at very high rates because they expect to become rich themselves it might also be that they also target the welfare of the rich
4. Final Remarks. Economics has had success as a field of scientific inquiry because it's been able to develop tractable models with strong predictive capacity; in other words, it simplifies the complex phenomena of human decision-making, interaction, and exchange into its barest form and makes predictions based on those. This has meant that economists have often had to sacrifice realism for tractability. Only recently has the field of economics advanced enough to have the tools to reincorporate the factors that Smith and others had always felt were important in human interaction: our caring about each other and about fairness, our difficulties with aligning our long-term interests with short-term pulls and so on.
Smith’s economic actors are realistic human beings. They have emotional and more rational sides to their character. They weigh out-of-pocket costs more than opportunity costs, have self-control problems and are overconfident. They have erratic attitudes of sympathy but are more consistently concerned with rationality and fairness.
References.
N. Ashraf, C.F. Camerer & G. Lowenstein, ‘Adam Smith, Behavioral Economist’, Journal of Economic Perspectives, 19, 5, 2005, 131-145.
I. Bohnet & B. Frey, ‘The Sound of Silence in Prisoner’s Dilemma and Dictator Games’, Journal of Economic Behavior and Organization, 38, 1, 1999, 43-57.
S.F. Brosnan & F.B. M. de Waal, ‘A Proximate Perspective on Reciprocal Altruism’, Human Nature, 13, 1, 2002, 129-152.
C.F. Camerer, Behavioral Game Theory: Experiments on Strategic Interaction, Princeton University Press, Princeton, 2003.
S. Frederick & G. Loewenstein, ‘Hedonic Adaptation’ in D. Kahneman, E. Diener & N. Schwarz (eds), Well-Being: The Foundations of Hedonic Psychology, Russell Sage Foundation Press, New York, 1999, 302-329.
J. Heinrich, R. Boyd, S. Bowles, H. Gintis, E. Fehr & C. Camerer, Foundations of Human Sociality,: Ethnography and Experiments in 15 Small-Scale Societies, Oxford University Press, Oxford, 2004.
D. Kahneman & A. Tversky, ‘Prospect Theory: An Analysis of Decision Under Uncertainty’, Econometrica, 47, 2, 1979, 263-291.
S. Knack & P. Keifer, ‘Does Social Capital Have an Economic Payoff? A Cross-Country Investigation’, Quarterly Journal of Economics, 112, 4, 1997, 1251-1288.
D. Laibson, ‘Golden Eggs and Hyperbolic Discounting’, Quarterly Journal of Economics, 112:4, 1997, 443-477.
E. A. Lind & T.R. Tyler, The Social Psychology of Procedural Justice, Plenum Press, New York, 1988.
E.A. Lind, J. Greenberg, K. Scott & T. Welchans, ‘The Winding Road from Employee to Complainant: Situational and Psychological Determinants of Wrongful-Termination Claims’, Administrative Science Quarterly, 45, 3, 2000, 557-590.
G. Loewenstein, T. O’Donoghue & M. Rabin, ‘Projection Bias in Predicting Future Utility’, Quarterly Journal of Economics, 118, 2003, 1209-1248.
S. McClure, D. Laibson, G. Loewenstein& J. Cohen, ‘Separate Neural Systems Value Intermediate and Delayed Monetary Rewards’, Science, 304:5695, 2004, 503-507.
J. O’Doherty, M.L. Kringelbach, E.T. Rolls, J. Hornal & C. Andrews, ‘Abstract Reward and Punishment Representations in the Human Orbitofrontal Cortex’, Nature Neuroscience, 4, 1, 2001, 95-102.
A. Postlewaite & O. Compte, ‘Confidence Enhanced Performance’, American Economic Review, 94, 5, 2005, 1536-1557.
L. Ross & A. Ward, ‘Naïve Realism in Everyday Life: Implications for Social Conflict and Misunderstanding’ in T. Brown, E. Reed & E. Turiel (eds), Values and Knowledge, Lawrence Erbaum Associates, Mahwah, N.J. 1996, 103-136.
D.A. Small & G. Loewenstein, ‘Helping a Victim or Helping the Victim’, Journal of Risk and Uncertainty, 26, 1, 2003, 5-16.
A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, R.H. Campbell & A.S. Skinner (eds) Liberty Fund, Indianapolis, 1776 [1981]. Available online at http://www.econlib.org/library/Smith/smMS.html.
A. Smith, The Theory of Moral Sentiments, D.D. Raphael & A.L. Macfie (eds) Liberty Fund, Indianapolis, 1759 [1981]. Available online at http://www.econlib.org/library/Smith/smMS.html.
S.E. Taylor & J.D. Brown, ‘Positive Illusions and Well-Being Revisited: Separating Fact from Fiction’, Psychological Bulletin, 116, 1994, 21-27.
Monday, June 19, 2006
Saturday, June 17, 2006
Life & other contingencies
I’ve been out of town for the last few days. I went to Sydney to visit a relative who has had a serious health scare. The scare alarmed me because I care about this person.
A concern that occurred to me while visiting came from awareness that my particular concerns for this person – or indeed, at the other end of the spectrum, for being joyful about the prospects of a new life – are only a drop in the ocean of events – there are lots of deaths and births out there. This is quite apart from the fact that eventually, as a non-believing atheist, I will face mortality concerns myself and eventually drift off into the universe as a finite set of unguided molecules – in my view, increasing entropy denies the possibility of Nietzsche’s eternal recurrence so, regrettably, these molecules won’t get together again.
Today there are 6,522,735,778 humans on the planet – if you really want to be fastidiously up-to-date go here. Population is growing by 130,860,569 births annually and depleting by the 56,579,396 deaths - even with demographic transitions, population is still surging ahead with twice as many babies born as people dying. In total, 74,281,173 extra humans are added net annually. To be specific these figures mean about 4.1 births per second, 1.8 deaths so 2.4 net extra people per second. (I include the estimates to the last person not because I have any respect for such spurious accuracy but because I might be the 6,522,735,778th!).
These are stunning large numbers. More than two September 11 attacks worth of deaths every hour and more than a holocaust of Jews each six weeks. Yet we do attach significance to particular deaths and take our own lives and those close to us seriously. Will I get that promotion? Will Pamela Brown go on a date with me?
My nihilistic thoughts will disintegrate as my current depression concerning this ill relative subsides. I will reintegrate as a functioning, nonreflective human who sets aside adolescent existential concerns, brushes his teeth and gets on with the biggest act of all.
You are right! It hasn’t been a great couple of days.
A concern that occurred to me while visiting came from awareness that my particular concerns for this person – or indeed, at the other end of the spectrum, for being joyful about the prospects of a new life – are only a drop in the ocean of events – there are lots of deaths and births out there. This is quite apart from the fact that eventually, as a non-believing atheist, I will face mortality concerns myself and eventually drift off into the universe as a finite set of unguided molecules – in my view, increasing entropy denies the possibility of Nietzsche’s eternal recurrence so, regrettably, these molecules won’t get together again.
Today there are 6,522,735,778 humans on the planet – if you really want to be fastidiously up-to-date go here. Population is growing by 130,860,569 births annually and depleting by the 56,579,396 deaths - even with demographic transitions, population is still surging ahead with twice as many babies born as people dying. In total, 74,281,173 extra humans are added net annually. To be specific these figures mean about 4.1 births per second, 1.8 deaths so 2.4 net extra people per second. (I include the estimates to the last person not because I have any respect for such spurious accuracy but because I might be the 6,522,735,778th!).
These are stunning large numbers. More than two September 11 attacks worth of deaths every hour and more than a holocaust of Jews each six weeks. Yet we do attach significance to particular deaths and take our own lives and those close to us seriously. Will I get that promotion? Will Pamela Brown go on a date with me?
My nihilistic thoughts will disintegrate as my current depression concerning this ill relative subsides. I will reintegrate as a functioning, nonreflective human who sets aside adolescent existential concerns, brushes his teeth and gets on with the biggest act of all.
You are right! It hasn’t been a great couple of days.
Hooray for the Wikipedia
Information is a public good which should optimally not be priced for use. I am a big fan of the Wikipedia and use it all the time. I use it as an online encylopedia and, sometimes, simply as a dictionary.
I always keep my eye open for nonsense on it but, for the most part, find it a valuable and self-critical resource that openly flaunts its own imperfections and limitations. This NY Times article argues that the community of about 1000 young individuals comprising the bulk of the Wikipedia contributors, will enjoy less freedom to modify content in the future. Maybe this is essential to guard against Wikipedia vandals but I hope it does not deflate the idealism of the dedicated Wikipedia workers - the problem itself reflects the strength and value of the Wikipedia.
I always keep my eye open for nonsense on it but, for the most part, find it a valuable and self-critical resource that openly flaunts its own imperfections and limitations. This NY Times article argues that the community of about 1000 young individuals comprising the bulk of the Wikipedia contributors, will enjoy less freedom to modify content in the future. Maybe this is essential to guard against Wikipedia vandals but I hope it does not deflate the idealism of the dedicated Wikipedia workers - the problem itself reflects the strength and value of the Wikipedia.
Friday, June 16, 2006
Abu Bakar Bashir
Bali was God's will: Bashir
Let us hope that the release of this hateful, venomous hypocrite who applauds killing innocents while proclaiming the virtues of a religion does not damage the fragile relations between Indonesia and Australia. It is worth repeating, given the emotions being stirred at present, that most Indonesians - and most Muslims - find the rantings of Bashir as disgusting as will the relatives of those who died in Bali.
Prime Minister Howard is applying the right kinds of pressures with respect to Bashir but sending out confusing signals with the proposal to process asylum seekers offshore.
We need to find the right balance - to recognise the difficulties President Yudhoyono faces - but to be an independent voice of reason that does not display Keatingesque subservient adulation.
Let us hope that the release of this hateful, venomous hypocrite who applauds killing innocents while proclaiming the virtues of a religion does not damage the fragile relations between Indonesia and Australia. It is worth repeating, given the emotions being stirred at present, that most Indonesians - and most Muslims - find the rantings of Bashir as disgusting as will the relatives of those who died in Bali.
Prime Minister Howard is applying the right kinds of pressures with respect to Bashir but sending out confusing signals with the proposal to process asylum seekers offshore.
We need to find the right balance - to recognise the difficulties President Yudhoyono faces - but to be an independent voice of reason that does not display Keatingesque subservient adulation.
Thursday, June 15, 2006
Sleep
I have a long-standing interest in sleep and have posted on it before. I was pleased recently to find the website of the Australian Sleep Association. The ASA is a group of medical practitioners and researchers concerned with sleep problems. As an economist I am interested in the 2004 study by Access Economics, ‘Wake Up Australia, The Value of Healthy Sleep’ which is posted here. I was also interested in the Fatigue and Transportation report there. Fatigue is an occupational health and safety issue, a major cause of traffic accidents and fatalities and a major health problem.
The Australian provided a good overview of the issues and provided some summary statistics on the cost of sleep disorders to the Australian economy from the Access Economics report:
- Sleep disorders cost the Australian economy $10.3 billion.
- 1.2 million Australians suffer from sleep disorders.
- 10% of work accidents are attributable to sleep disorders.
- 7.6% of non-work vehicle work accidents are attributable to sleep disorders.
- Cost of treating sleep disorders is $2.7 billion.
- Cost of treating sleep-related depression $100 million.
- Cost of lost production from sleep-related absenteeism and low productivity $79 million.
- Lost earnings from job losses due to sleep disorders $1.57 billion.
- Annual cost of sleep disorders per capita $310.
- Annual cost of sleep disorders a sufferer, $5175.
We are also acting as if we are a nation of tired people with rapidly growing sales of caffeine and guarana-enriched soft drinks as well as use of more harmful stimulant drugs such as ice.
What is interesting are the connections between untreated sleep apnoea, obesity, high blood pressure and heart disease. For example, there is clear evidence that among young people sleep deprivation increases insulin resistance, the condition that leads to Type 2 diabetes. Among infants there are developmental problems associated with poor sleep. The major risk factor for apnoea is definitely obesity. About 2 out of 3 people with diabetes die from heart disease or stroke. And about 2 out of 3 people with diabetes have high blood pressure.
Diabetes has reached pandemic proportions in Australia as have obesity and sleep problems. They combine to be potent killers through their effects in driving heart disease and stroke. The message seems to be try not to be obese by watching your energy intake and doing sufficient exercise. And try to get a good night’s sleep. If you don’t sleep well visit your doctor and find out what is happening.
Wednesday, June 14, 2006
Bloomsday
James Joyce's novel Ulysses describes the minutiae of a day in the life of Dublin, June 16, 1904. This Friday Bloomsday (after the main character Leopold Bloom) is celebrated around the world as the anniversary of that imagined day. Many cross the world to enjoy the day in Dublin itself but, if you can't do that, celebrations are in Melbourne here and Sydney here.
An attractive justification of this annual 'Ode to Joyce' is in today's Australian - with emphasis is on Joyce's early writings - Dubliners and Portrait of the Artist as a Young Man.
I have been interested in Joyce for the few years and posted on the subject when I opened this blog. I have never been able to understand anything of Finnegans Wake but listen to Ulysses regularly via the Jim Norton spoken-word CDs. And listening to CDs is about all I'll get to do this Bloomsday as I have a ***** meeting to attend most of Friday. The concept of opportunity cost is appropriate here. I'll try to make it to Melbourne's Bloomsday that evening.
An attractive justification of this annual 'Ode to Joyce' is in today's Australian - with emphasis is on Joyce's early writings - Dubliners and Portrait of the Artist as a Young Man.
I have been interested in Joyce for the few years and posted on the subject when I opened this blog. I have never been able to understand anything of Finnegans Wake but listen to Ulysses regularly via the Jim Norton spoken-word CDs. And listening to CDs is about all I'll get to do this Bloomsday as I have a ***** meeting to attend most of Friday. The concept of opportunity cost is appropriate here. I'll try to make it to Melbourne's Bloomsday that evening.
Papers for dope fiends
Our ARC project, Harm Minimisation Policies and the Economics of Controlling Illicit Drug Use put three new papers on its website today:
Harry Clarke & Svetlana Danilkina, Talking Rationally About Rational Addiction.
Suren Basov & Svetlana Danilkina, A Theory of Boundedly Rational Addiction
Lee Smith, The Australian Heroin Drought
Comments are welcome here or direct to the authors.
Harry Clarke & Svetlana Danilkina, Talking Rationally About Rational Addiction.
Suren Basov & Svetlana Danilkina, A Theory of Boundedly Rational Addiction
Lee Smith, The Australian Heroin Drought
Comments are welcome here or direct to the authors.
Thoughts on Harry Harlow
The Four Corners show ‘Monkey Love’ on Monday night left me thinking again about the issue of animal rights and welfare. The program focused on the work of the American research psychologist, Harry Harlow, who performed controversial experiments on rhesus monkeys in an animal laboratory. Because monkeys could experience the emotions that humans feel, Harlow believed we could better understand how to raise human children by looking at how baby monkeys responded to alternative approaches to upbringing – this was superior to insights based on ‘rat-driven’ psychology since rats did not have these human capabilities.
Early experiments involved separating infant monkeys from their mother and providing surrogate ‘wire’ or ‘soft-cloth’ mothers. The infants preferred the soft-cloth mothers even though the wire mothers had the food supply. Harlow concluded that infants need ‘contact comfort’ as well as milk. He also experimented by placing baby monkeys in new or even frightening environments – those monkeys with a ‘soft cloth’ mother adapted better to such environments and having this sense of security even emboldened them to explore such environments.
Harlow’s work was useful in suggesting to human parents that physical contact (‘hugging’, ‘security’) were as important as providing food. It also promoted the role of motherhood and maternal love and nurturing. These precepts seem obvious today but this was not so in the 1940s and 1950s where the conventional wisdom was not to turn infants (particularly male infants) into ‘sooks’ or ‘sissies’ by comforting them if they cried or were unhappy. The experiments carried by Harlow to demonstrate these points clearly had damaging psychological and social consequences for the young monkeys – they seemed callously cruel - but there was a social payoff for humans in terms of better understanding the upbringing of children. .
But as Harlow continued his work he himself became subject to person problems. His first marriage collapsed and he became an alcoholic. He suffered depression, extreme 'status anxiety' and embarked on a new series of almost sinister experiments. The Four Corners program notes summarise the main idea:
Harlow at times seemed almost to hate the animals he was experimenting on. ‘The only thing I care about is whether a monkey will turn out a property I can publish. I don't have any love for them. I never have. I don't really like animals. I despise cats. I hate dogs. How could you love monkeys?’ Indeed Harlow’s bizarre later experiments, that explored the depths of depression in animals by ‘breaking their hearts’, occurred while Harlow himself was severely depressed. One positive feature of these ghastly experiments is that they led to the animal liberation movement in the US and to thinking of ethical issues involved in human interactions with animals.
These ethical issues remind me of classical paradoxes in utilitarianism. Assuming that primates do experience pain in the way that humans do and that they have moral rights to be protected from the deliberate inflicting of pain, is it reasonable to make them suffer so that humans can derive what is claimed to be a great benefit? Primates are selected for these experiments because they react as humans might – they feel the same types of physical and emotional pains as humans.
From the viewpoint of pain and suffering inflicted, it is impossible morally to distinguish the case for using primates in such experiments rather than humans. Putting it even more starkly the moral problem here is close to the ‘ticking bomb’ problem – do humans have the right to torture a small group of humans to provide information that will provide great benefits such as preventing mass deaths due to a terrorist attack?
I was disturbed by Harry Harlow’s experiments though I recognise that child-rearers learnt a lot from them. I am not convinced that many of the insights were not rather obvious – that social animals, like monkeys, become psychotic when placed in a ‘pit of despair’ for two years is unsurprising. I also just empathise with the sufferings of these sentient beings. I am also disturbed by the bland approach that some psychologists take to the work of Harlow – consider this or this for example.
Finally, I was interested in the portrayal of Harlow as an aggressive, entrepreneurial, academic who was embarrassed by his own Jewish-sounding name and so changed it (he wasn’t Jewish). While preaching the value of motherhood and the love of children, he showed very little of it to his own children. His hatred of feminists and animal rights supporters became pathological and his collapse into alcoholism, depression and Parkinson’s Disease was a tragic conclusion to a strained and difficult life. His biography is Love at Goon Park: Harry Harlow and the Science of Affection. I ordered it today.
Early experiments involved separating infant monkeys from their mother and providing surrogate ‘wire’ or ‘soft-cloth’ mothers. The infants preferred the soft-cloth mothers even though the wire mothers had the food supply. Harlow concluded that infants need ‘contact comfort’ as well as milk. He also experimented by placing baby monkeys in new or even frightening environments – those monkeys with a ‘soft cloth’ mother adapted better to such environments and having this sense of security even emboldened them to explore such environments.
Harlow’s work was useful in suggesting to human parents that physical contact (‘hugging’, ‘security’) were as important as providing food. It also promoted the role of motherhood and maternal love and nurturing. These precepts seem obvious today but this was not so in the 1940s and 1950s where the conventional wisdom was not to turn infants (particularly male infants) into ‘sooks’ or ‘sissies’ by comforting them if they cried or were unhappy. The experiments carried by Harlow to demonstrate these points clearly had damaging psychological and social consequences for the young monkeys – they seemed callously cruel - but there was a social payoff for humans in terms of better understanding the upbringing of children. .
But as Harlow continued his work he himself became subject to person problems. His first marriage collapsed and he became an alcoholic. He suffered depression, extreme 'status anxiety' and embarked on a new series of almost sinister experiments. The Four Corners program notes summarise the main idea:
‘On Harlow’s ‘Rape Rack’, disturbed female monkeys were forced to breed against their will. In his ‘Pit of Despair’, baby monkeys were left in total darkness for up to two years. With his ‘Iron Maiden’, infant monkeys were drawn to a placid surrogate mother that began suddenly to tear at their flesh.
Why? Bizarrely, it was all done in the name of love. Harlow was on a quest to understand the nature of love, especially the unique bond between mother and baby. Harlow believed that to understand the heart, he first had to break it.
Harlow’s defenders say that he brought love into science, and warmth into the way we parent our children; and that he influenced crucial policies that operate in today’s child welfare and birthing sectors.
But did he have to go to such extremes with his experiments? What are the limits to a scientist’s right to hurt animals? Was the animals’ suffering worth the knowledge we gained about raising children today?’
Harlow at times seemed almost to hate the animals he was experimenting on. ‘The only thing I care about is whether a monkey will turn out a property I can publish. I don't have any love for them. I never have. I don't really like animals. I despise cats. I hate dogs. How could you love monkeys?’ Indeed Harlow’s bizarre later experiments, that explored the depths of depression in animals by ‘breaking their hearts’, occurred while Harlow himself was severely depressed. One positive feature of these ghastly experiments is that they led to the animal liberation movement in the US and to thinking of ethical issues involved in human interactions with animals.
These ethical issues remind me of classical paradoxes in utilitarianism. Assuming that primates do experience pain in the way that humans do and that they have moral rights to be protected from the deliberate inflicting of pain, is it reasonable to make them suffer so that humans can derive what is claimed to be a great benefit? Primates are selected for these experiments because they react as humans might – they feel the same types of physical and emotional pains as humans.
From the viewpoint of pain and suffering inflicted, it is impossible morally to distinguish the case for using primates in such experiments rather than humans. Putting it even more starkly the moral problem here is close to the ‘ticking bomb’ problem – do humans have the right to torture a small group of humans to provide information that will provide great benefits such as preventing mass deaths due to a terrorist attack?
I was disturbed by Harry Harlow’s experiments though I recognise that child-rearers learnt a lot from them. I am not convinced that many of the insights were not rather obvious – that social animals, like monkeys, become psychotic when placed in a ‘pit of despair’ for two years is unsurprising. I also just empathise with the sufferings of these sentient beings. I am also disturbed by the bland approach that some psychologists take to the work of Harlow – consider this or this for example.
Finally, I was interested in the portrayal of Harlow as an aggressive, entrepreneurial, academic who was embarrassed by his own Jewish-sounding name and so changed it (he wasn’t Jewish). While preaching the value of motherhood and the love of children, he showed very little of it to his own children. His hatred of feminists and animal rights supporters became pathological and his collapse into alcoholism, depression and Parkinson’s Disease was a tragic conclusion to a strained and difficult life. His biography is Love at Goon Park: Harry Harlow and the Science of Affection. I ordered it today.
Beazley flops again
The leftwing online newsletter Crikey got it at least partially right for once:
Kim Beazley is acting like a 'leader', according to the spruikers of his weekend announcement that a Labor government would abolish Australian Workplace Agreements (AWAs). The Opposition Leader argues that AWAs have reduced working conditions and flexibility, and increased productivity is best achieved through collective agreements.
Really? But what about people (including Labor voters) who want their own personalised industrial agreements? And what about the flexibility all companies need in a volatile and globalised economy? And in pandering to the trade union arm of the ALP is Beazley likely to attract the voters of the growing army of once-traditional Labor voters who are now contractors or members of the entrepreneurial working class? Kim Beazley is right to attack the harsh excesses of the Work Choices laws. He's right to argue for changes to protect workers' basic rights and wages. But if he thinks that abolishing all AWAs is the right policy solution, which also happens to be good Labor politics, he's likely to find himself wrong on both counts. Which will raise even more questions about his own employment arrangements and workplace
conditions.
Tuesday, June 13, 2006
Mid-week review
I've been a bit slack with posts recently because of a generalised laziness that has crept over me - probably related to the rather cold weather in Melbourne recently - and also simply because earning a living has regrettably intruded again into my life. I am not teaching at present but the first law of any bureaucracy is that bureaucratic tasks rise to fill any half-empty time interval and I have been mega-busy.
I am interested that most of my readers seem to log onto this site during working hours Monday to Friday so I assume that some of you are slacking off too. Tut. Tut. But great minds think alike!
I am completing work on the economics of obesity and of alcohol for conferences later this year. The work drags a bit when generalised laziness takes over. But it is going OK.
The weather really drives me crazy. Its the worst aspect of living in a beautiful city like Melbourne. I prefer extreme heat to moderate cold.
I hope you are dealing with the cold better than I am and welcome your comments here on your week. I am also interested in your ideas on the optimal degree of sloth and of being industrious. What is a good balance assuming you have some choice?
And, if you can work that one out could you try to think about something that troubles my ornithological mind: Why don't birds get pregnant?
I am interested that most of my readers seem to log onto this site during working hours Monday to Friday so I assume that some of you are slacking off too. Tut. Tut. But great minds think alike!
I am completing work on the economics of obesity and of alcohol for conferences later this year. The work drags a bit when generalised laziness takes over. But it is going OK.
The weather really drives me crazy. Its the worst aspect of living in a beautiful city like Melbourne. I prefer extreme heat to moderate cold.
I hope you are dealing with the cold better than I am and welcome your comments here on your week. I am also interested in your ideas on the optimal degree of sloth and of being industrious. What is a good balance assuming you have some choice?
And, if you can work that one out could you try to think about something that troubles my ornithological mind: Why don't birds get pregnant?
Monday, June 12, 2006
FRB of NY online research
The Federal Reserve Bank of New York are one of many groups that are making economics readings for University educators available online. These articles are clearly exposited and accessible for a wide range of audiences. Examples are given below:
Popular Course Readings
What Drives Productivity Growth?Kevin J. Stiroh
The Economics of Currency Crises and Contagion:An IntroductionPaolo Pesenti & Cédric Tille
Viewing the Current Account as a Capital InflowMatthew Higgins & Thomas Klitgaard
Inflation Targeting: Lessons from Four CountriesFrederic S. Mishkin & Adam S. Posen
The Yield Curve as a Predictor of U.S. RecessionsArturo Estrella & Frederic S. Mishkin
Recent Articles of Interest
Two articles on the gains from trade:
U.S. Jobs Gained and Lost through Trade: A Net MeasureErica L. Groshen, Bart Hobijn & Margaret M. McConnell
Are We Underestimating the Gains from Globalizationfor the United States?Christian Broda & David Weinstein
Two articles on housing prices:
Assessing High House Prices: Bubbles, Fundamentals,and MisperceptionsCharles Himmelberg, Christopher Mayer & Todd Sinai
Are Home Prices the Next "Bubble"?Jonathan McCarthy & Richard W. Peach.
Definitely worth a look. One can also search for relevant articles by course type. Their mathematical complexity is indicated.
Popular Course Readings
What Drives Productivity Growth?Kevin J. Stiroh
The Economics of Currency Crises and Contagion:An IntroductionPaolo Pesenti & Cédric Tille
Viewing the Current Account as a Capital InflowMatthew Higgins & Thomas Klitgaard
Inflation Targeting: Lessons from Four CountriesFrederic S. Mishkin & Adam S. Posen
The Yield Curve as a Predictor of U.S. RecessionsArturo Estrella & Frederic S. Mishkin
Recent Articles of Interest
Two articles on the gains from trade:
U.S. Jobs Gained and Lost through Trade: A Net MeasureErica L. Groshen, Bart Hobijn & Margaret M. McConnell
Are We Underestimating the Gains from Globalizationfor the United States?Christian Broda & David Weinstein
Two articles on housing prices:
Assessing High House Prices: Bubbles, Fundamentals,and MisperceptionsCharles Himmelberg, Christopher Mayer & Todd Sinai
Are Home Prices the Next "Bubble"?Jonathan McCarthy & Richard W. Peach.
Definitely worth a look. One can also search for relevant articles by course type. Their mathematical complexity is indicated.
Sports mad Melbourne
I am not a sports fanatic or mad-keen Australian Football League fan. This often leaves me out of lunchtime conversations here in the sports capital of Australia (and perhaps the world) Melbourne.
You must experience the Melbournian routine of lunchtime postmortems on the AFL Monday-Wednesday and forecasts of forthcoming matches, Thursday-Friday, to appreciate what I am saying.
Melbourne’s reputation for its bizarre weather is deserved – each season of the year in one-day – but the domination of its cultural life by sport madness has to be experienced to be believed.
I am not really anti-sports and not a member of Keith Dunstan’s AFL (Anti-Football League) - although I could be – you don’t have to dislike the game - just be generally disinterested in it. Indeed, I do watch live an occasional game of AFL football – sometimes Essendon, sometimes Collingwood . I just cannot manufacture the sustained enthusiasm of the fanatics.
These thoughts about sport occur today because after 31 years and 11 months Australia’s soccer team (the Socceroos) are competing tonight in the 2006 World Cup. In a coup SBS Television are screening the matches – the Australia/Japan match this evening at 10-30 pm. The diminutive Japanese warriors are already playing a ‘dirty tricks’ campaign, claiming the Aussie Socceroos play ‘rough’. They are also complaining of height differentials – the little Japanese buggers are only 179 cms high compared to the more statuesque Aussie heights of 184 cms. – the Aussie coach Guus Hiddink sees these claims as strategic moves to influence the Egyptian referee. Given that the differential is only 5 cms we should offer our little comrades platform boots.
If you believe one tipster our chance of winning the WC final is 180:1 or about the same as throwing three sixes in a row with a dice. If you bet with Centrebet today you will get $81 for a $1 outlay which suggests, if you believe the tipster, that Aussie punters are a bunch of dummies. Centrebet was also (at 1pm) paying $2-30 for an Australian win tonight and $3-20 for a Japanese win so the Aussies are clear favorites.
Will I watch tonight? Probably – it’s the first soccer game I will have watched in more than a year so it has novelty value. But, no I won’t become a fanatical supporter of the Socceroos even if they do Nippon through to the finals. By the way, via Andrew Leigh, here at Rank and File is a good run down on the game of soccer from the viewpoint of an AFL supporter.
You must experience the Melbournian routine of lunchtime postmortems on the AFL Monday-Wednesday and forecasts of forthcoming matches, Thursday-Friday, to appreciate what I am saying.
Melbourne’s reputation for its bizarre weather is deserved – each season of the year in one-day – but the domination of its cultural life by sport madness has to be experienced to be believed.
I am not really anti-sports and not a member of Keith Dunstan’s AFL (Anti-Football League) - although I could be – you don’t have to dislike the game - just be generally disinterested in it. Indeed, I do watch live an occasional game of AFL football – sometimes Essendon, sometimes Collingwood . I just cannot manufacture the sustained enthusiasm of the fanatics.
These thoughts about sport occur today because after 31 years and 11 months Australia’s soccer team (the Socceroos) are competing tonight in the 2006 World Cup. In a coup SBS Television are screening the matches – the Australia/Japan match this evening at 10-30 pm. The diminutive Japanese warriors are already playing a ‘dirty tricks’ campaign, claiming the Aussie Socceroos play ‘rough’. They are also complaining of height differentials – the little Japanese buggers are only 179 cms high compared to the more statuesque Aussie heights of 184 cms. – the Aussie coach Guus Hiddink sees these claims as strategic moves to influence the Egyptian referee. Given that the differential is only 5 cms we should offer our little comrades platform boots.
If you believe one tipster our chance of winning the WC final is 180:1 or about the same as throwing three sixes in a row with a dice. If you bet with Centrebet today you will get $81 for a $1 outlay which suggests, if you believe the tipster, that Aussie punters are a bunch of dummies. Centrebet was also (at 1pm) paying $2-30 for an Australian win tonight and $3-20 for a Japanese win so the Aussies are clear favorites.
Will I watch tonight? Probably – it’s the first soccer game I will have watched in more than a year so it has novelty value. But, no I won’t become a fanatical supporter of the Socceroos even if they do Nippon through to the finals. By the way, via Andrew Leigh, here at Rank and File is a good run down on the game of soccer from the viewpoint of an AFL supporter.
Sunday, June 11, 2006
Record low unemployment
Even with the qualification that the basis for measuring unemployment has changed over the years, the fall in the Australian unemployment rate to a 30-year low is a considerable achievement – 4.9% measured unemployed, while still high, is indeed ‘a beautiful number’. An extra 56,000 people won work in May and the overall workforce participation rate increased.
Several lessons can be learnt. (i) To reduce unemployment to this level we have not needed lavish government-funded job creation schemes of the type funded by Labor in the early 1990s. (ii) The decline in trade union power has not hurt workers – they have never been better-off in terms iof wages or employment levels. (iii) The new WorkChoice laws can be expected to further eliminate the constraints that inhibit the ability of employers and employees to arrange mutually beneficial wage-output deals, thereby further reducing unemployment.
For economists the myth of a natural rate of unemployment that would need to be maintained in the long-run to prevent excess demand and consequent inflation can be finally discarded. It is good to see that the RBA’s Governor Macfarlane rejects it - it is not based on solid economic theory or post-war economic history and it promotes unwarranted policy pessimism in addressing unemployment issues. For most of the 1950s and 1960s Australian unemployment was below 2% - it was a scandal for the Whitlam Government in 1974 to have it rise to 3%!
We still have unemployment doomsayers. Indeed it is amazing how the fall in unemployment is pounced on by the press as bad news - interest rates will have to rise , the economy risks overheating and so on. Others see the decline in unemployment as due to the commodities export boom – this is not supported by the facts - the biggest decline was in the relatively resource-poor state of NSW.
The significant residual problem is the 712,000 people on the Disability Support Pension and those on single parenting payments. While 1.8 million jobs have been created by the Coalition since 1996, non-dole social welfare receipients have increased by about 60,000. Again some are treating the high level of DSP as a type of giant fudge of the unemployment outcome – it isn’t – but these people need to be encouraged back into the workforce with both ‘sticks’ and ‘carrots’.
Tax reforms that reduce the effective marginal tax rates of up to 60 per cent that apply to people when they switch from receiving social security to joining the workforce. These high marginal tax rates provide disincentives to work and it should be a simple matter to redesign benefit schedules so that extra work is possible while higher levels of benefit are retained. This redesign comes comes to a negative income tax – a low enough very basic level of benefits is provided to ‘non-shirkers’ (nor surfies who elect a non-working lifestyle) with extra earned income always then always being subject to non-punitive loss of benefits and taxes.
Job subsidy schemes are likely to outperform work-for-the-dole schemes which should mainly be directed towards the hard core residual ‘work shirkers’. But the major way of reducing unemployment will be via retraining schemes which help our workforce to adapt to a changing economic structure and to technological unemployment.
The challenge is to reduce unemployment much further.
Several lessons can be learnt. (i) To reduce unemployment to this level we have not needed lavish government-funded job creation schemes of the type funded by Labor in the early 1990s. (ii) The decline in trade union power has not hurt workers – they have never been better-off in terms iof wages or employment levels. (iii) The new WorkChoice laws can be expected to further eliminate the constraints that inhibit the ability of employers and employees to arrange mutually beneficial wage-output deals, thereby further reducing unemployment.
For economists the myth of a natural rate of unemployment that would need to be maintained in the long-run to prevent excess demand and consequent inflation can be finally discarded. It is good to see that the RBA’s Governor Macfarlane rejects it - it is not based on solid economic theory or post-war economic history and it promotes unwarranted policy pessimism in addressing unemployment issues. For most of the 1950s and 1960s Australian unemployment was below 2% - it was a scandal for the Whitlam Government in 1974 to have it rise to 3%!
We still have unemployment doomsayers. Indeed it is amazing how the fall in unemployment is pounced on by the press as bad news - interest rates will have to rise , the economy risks overheating and so on. Others see the decline in unemployment as due to the commodities export boom – this is not supported by the facts - the biggest decline was in the relatively resource-poor state of NSW.
The significant residual problem is the 712,000 people on the Disability Support Pension and those on single parenting payments. While 1.8 million jobs have been created by the Coalition since 1996, non-dole social welfare receipients have increased by about 60,000. Again some are treating the high level of DSP as a type of giant fudge of the unemployment outcome – it isn’t – but these people need to be encouraged back into the workforce with both ‘sticks’ and ‘carrots’.
Tax reforms that reduce the effective marginal tax rates of up to 60 per cent that apply to people when they switch from receiving social security to joining the workforce. These high marginal tax rates provide disincentives to work and it should be a simple matter to redesign benefit schedules so that extra work is possible while higher levels of benefit are retained. This redesign comes comes to a negative income tax – a low enough very basic level of benefits is provided to ‘non-shirkers’ (nor surfies who elect a non-working lifestyle) with extra earned income always then always being subject to non-punitive loss of benefits and taxes.
Job subsidy schemes are likely to outperform work-for-the-dole schemes which should mainly be directed towards the hard core residual ‘work shirkers’. But the major way of reducing unemployment will be via retraining schemes which help our workforce to adapt to a changing economic structure and to technological unemployment.
The challenge is to reduce unemployment much further.
Saturday, June 10, 2006
What I have been reading
I greatly enjoyed Cameron S. Redfern’s, Landscape With Animals, Penguin, 2006. Redfern is the pseudonym for the Melbourne writer Sonya Hartnett, an award-winning author of titles for children and young adults.
This book, in the tradition of Nikki Gemmell’s, The Bride Stripped Bare, is an honest view of a woman's experience of sex in a relationship where she, as a free, predatory ‘animal’ woman, successfully hunts down and captures a ‘decent’ married man who feels anguish and guilt. That the capture is incomplete, anonymous and confined largely to her ‘rooms’ intensifies the sexual focus. The pair have a strong sexual attraction bond that competes with the inadequacies and pathos of the affair. Indeed, Helen Elliot in The Australian saw the relentless obsession of the book with sex as part of its plot. ‘Obsession grinds down to dreariness in the end. Perhaps this should be required reading for those contemplating an affair. Or even a technical manual for the sexually timid.’
I found the female viewpoint on sex presented here articulate particularly in the way that it projects and interpolates views of the male partner. Most of the erotic literature I enjoy is written from a male perspective with male projections of female views. The range of things that don’t get discussed (or which are just difficult to elucidate) in sexual and emotional relationships gets narrowed by this book. It is perceptive in terms of interpreting erotic and other aspects of human relationships.
The Age reviewer Peter Craven, pompously described this book as a: ‘Mills & Boon for lubricious lay-abouts. It will no doubt stiffen a fair number of people who want to grovel in the odd prurient daydream, but not much more’. I disagree and also disagree that I am one of Craven’s ‘lubricious lay-abouts’. This novel is very erotic and might stiffen a few members. But it is good writing, full of insight and intelligence.
The only other erotic literature authored by females that I have read are the sadomasochistic novels by Pauline Reage, The Story of O and Anne Rice's, The Claiming of Sleeping Beauty. The latter seemed to lack any depth - it just provided reasons for describing cruel and degrading beatings of women. The former provided better-written versions of the same.
This book, in the tradition of Nikki Gemmell’s, The Bride Stripped Bare, is an honest view of a woman's experience of sex in a relationship where she, as a free, predatory ‘animal’ woman, successfully hunts down and captures a ‘decent’ married man who feels anguish and guilt. That the capture is incomplete, anonymous and confined largely to her ‘rooms’ intensifies the sexual focus. The pair have a strong sexual attraction bond that competes with the inadequacies and pathos of the affair. Indeed, Helen Elliot in The Australian saw the relentless obsession of the book with sex as part of its plot. ‘Obsession grinds down to dreariness in the end. Perhaps this should be required reading for those contemplating an affair. Or even a technical manual for the sexually timid.’
I found the female viewpoint on sex presented here articulate particularly in the way that it projects and interpolates views of the male partner. Most of the erotic literature I enjoy is written from a male perspective with male projections of female views. The range of things that don’t get discussed (or which are just difficult to elucidate) in sexual and emotional relationships gets narrowed by this book. It is perceptive in terms of interpreting erotic and other aspects of human relationships.
The Age reviewer Peter Craven, pompously described this book as a: ‘Mills & Boon for lubricious lay-abouts. It will no doubt stiffen a fair number of people who want to grovel in the odd prurient daydream, but not much more’. I disagree and also disagree that I am one of Craven’s ‘lubricious lay-abouts’. This novel is very erotic and might stiffen a few members. But it is good writing, full of insight and intelligence.
The only other erotic literature authored by females that I have read are the sadomasochistic novels by Pauline Reage, The Story of O and Anne Rice's, The Claiming of Sleeping Beauty. The latter seemed to lack any depth - it just provided reasons for describing cruel and degrading beatings of women. The former provided better-written versions of the same.
More on the Melbourne model.
I posted last week on the major reforms of university educatiion being initiated at the University of Melbourne. Professional degrees will follow more broadly-based liberal arts degrees. This is consistent with US liberal arts programs and the Bologna model - the agreement among European nations that a three year undergraduate program followed by a two-year masters degree or three-year doctoral program – will become the European standard by 2010. I am surprised at the lack of discussion of these issues generally in Australia. Today's Saturday Age is a useful exception.
Maybe Simon Marginson is exaggerating a little but I think not by that much in calling the Melbourne move:
'the most radical change in higher education in Australia since its foundation university, Sydney, was formed in 1850'.
One criticism is that it will foster more full-fee paying education, cut student intakes and become more elite-based. There will however be an expansion of its program of providing subsidised places for less advantaged students particularly in graduate programs. Properly implemented and with appropriate public support these moves should not make Melbourne more elitist.
Some bright students who know initially what they want to do will switch to dedicated undergraduate programs at other universities. But graduate students from these other universities will plausibly also switch to Melbourne so it is difficult to determine the net effect.
Moreover, given the high status of Melbourne other universities may be tempted to follow the model. University of Western Australia is said to be examining the case. Probably not the other universities in Melbourne who will be eagerly looking for advantage from the Melbourne move.
Other information: Professor Peter Dougherty makes undistinguished remarks here. The University of Melbourne's websites contain much administrative babble concerning the 'triple helix' of excellence and so on - the general intent of the approach is here. A progress report on implementing the Bologna model in Europe is here.
Maybe Simon Marginson is exaggerating a little but I think not by that much in calling the Melbourne move:
'the most radical change in higher education in Australia since its foundation university, Sydney, was formed in 1850'.
One criticism is that it will foster more full-fee paying education, cut student intakes and become more elite-based. There will however be an expansion of its program of providing subsidised places for less advantaged students particularly in graduate programs. Properly implemented and with appropriate public support these moves should not make Melbourne more elitist.
Some bright students who know initially what they want to do will switch to dedicated undergraduate programs at other universities. But graduate students from these other universities will plausibly also switch to Melbourne so it is difficult to determine the net effect.
Moreover, given the high status of Melbourne other universities may be tempted to follow the model. University of Western Australia is said to be examining the case. Probably not the other universities in Melbourne who will be eagerly looking for advantage from the Melbourne move.
Other information: Professor Peter Dougherty makes undistinguished remarks here. The University of Melbourne's websites contain much administrative babble concerning the 'triple helix' of excellence and so on - the general intent of the approach is here. A progress report on implementing the Bologna model in Europe is here.
Friday, June 09, 2006
Thinking about alcohol policies
I have been thinking generally about the policy case for intervening in alcoholic drink markets and the form that such interventions should take.
To be clear I am not a wowser who opposes drinking alcohol – to the contrary I enjoy consuming alcohol for its taste and effects. Consuming alcohol is typically a social, recreational activity and is one relaxing way of dealing with the pressures of the day. For most people using alcohol in this way is relatively harmless. In short I start from the premise that alcohol consumption provides net benefits to most adults who drink.
Moreover, alcohol is a drug that, for adults, is generally legal to consume and socially accepted. It is also consumed by a significant proportion of the population in diverse settings.
But the consumption of alcohol has costs particularly when consumed at high levels or when consumed in a risky way. Alcohol consumption has seriously harmful physical and mental health effects, can lead to anti-social and even dangerous behavior such as drink-driving or violence.
Moreover there are in fact a myriad of government policies that have been devised to regulate and restrict the terms under which alcohol is purchased and consumed.
Medical and Non-Economic Approaches to Policy
Much of the community focus on alcohol consumption looks at the adverse health and neuro-psychiatric consequences of drinking alcohol. There is particular concern with excessive drinking either when this occurs on a regular basis or episodically and with alcoholic dependence. There is often also concern with social problems associated with drinking, in the workplace and in the home, with violent crime and intentional cause of injuries associated with drinking and with drinking on inappropriate occasions such prior to driving a vehicle. Particular concern is directed at levels of drinking among youth.
There is no question that this work is of overwhelming value but it does raise a few basic questions. Identifying that problems are associated with the consumption of alcohol does not, in itself, suggest how these problems are to be addressed. There is some advantage to attempting to value, in dollars, the various problems that do arise and using economic theory to help with the task of designing policy.
As a simple example of this one can note that in Australia, attaching costs to different types of substance abuse problems shows that, in terms of social costs, the consumption of alcohol and nicotine vastly dominate the costs of consuming so-called illicit drugs.
In addition use of economic theory can help in the task of policy design. Simply to recognize that consumption of a substance causes social harms does not in itself suggest ways of addressing or reducing such harms.
Rationale for Intervention
From a liberal economic viewpoint it seems to me there are four main pillars on which control of alcohol consumption might be considered. The first three of these are ‘market failure’ reasons for limiting in some way the consumption of alcohol while the fourth is a real politic reason.
1. Information. Efficiency in market exchange requires that the purchaser of a product understands fully the characteristics of that product. With respect to alcohol the issue of whether consumers understand that ethyl alcohol is a neurotoxin (it destroys brain cells) and in fact has very few (if any) health benefits. It is unclear whether consumers understand the genetic basis for alcohol self-control problems.
The information difficulties are compounded by advertising and promotion of alcohol which links consumption to sporting and social prowess. There is strong evidence that such advertising has very strong effects on consumption particularly for youth.
Finally, there might be particular age, ethnic or socio-economic groups in the community that have poorer information than other groups.
The failure to provide good information about the negative consequences of drinking alcohol can be regarded as a form of market failure since information is a public good. Markets will develop that promote the consumption of alcohol since this benefits particular industry groups but there are no such private incentives to provide information that presents the negative consequences of consumption.
To be clear I am not a wowser who opposes drinking alcohol – to the contrary I enjoy consuming alcohol for its taste and effects. Consuming alcohol is typically a social, recreational activity and is one relaxing way of dealing with the pressures of the day. For most people using alcohol in this way is relatively harmless. In short I start from the premise that alcohol consumption provides net benefits to most adults who drink.
Moreover, alcohol is a drug that, for adults, is generally legal to consume and socially accepted. It is also consumed by a significant proportion of the population in diverse settings.
But the consumption of alcohol has costs particularly when consumed at high levels or when consumed in a risky way. Alcohol consumption has seriously harmful physical and mental health effects, can lead to anti-social and even dangerous behavior such as drink-driving or violence.
Moreover there are in fact a myriad of government policies that have been devised to regulate and restrict the terms under which alcohol is purchased and consumed.
Medical and Non-Economic Approaches to Policy
Much of the community focus on alcohol consumption looks at the adverse health and neuro-psychiatric consequences of drinking alcohol. There is particular concern with excessive drinking either when this occurs on a regular basis or episodically and with alcoholic dependence. There is often also concern with social problems associated with drinking, in the workplace and in the home, with violent crime and intentional cause of injuries associated with drinking and with drinking on inappropriate occasions such prior to driving a vehicle. Particular concern is directed at levels of drinking among youth.
There is no question that this work is of overwhelming value but it does raise a few basic questions. Identifying that problems are associated with the consumption of alcohol does not, in itself, suggest how these problems are to be addressed. There is some advantage to attempting to value, in dollars, the various problems that do arise and using economic theory to help with the task of designing policy.
As a simple example of this one can note that in Australia, attaching costs to different types of substance abuse problems shows that, in terms of social costs, the consumption of alcohol and nicotine vastly dominate the costs of consuming so-called illicit drugs.
In addition use of economic theory can help in the task of policy design. Simply to recognize that consumption of a substance causes social harms does not in itself suggest ways of addressing or reducing such harms.
Rationale for Intervention
From a liberal economic viewpoint it seems to me there are four main pillars on which control of alcohol consumption might be considered. The first three of these are ‘market failure’ reasons for limiting in some way the consumption of alcohol while the fourth is a real politic reason.
1. Information. Efficiency in market exchange requires that the purchaser of a product understands fully the characteristics of that product. With respect to alcohol the issue of whether consumers understand that ethyl alcohol is a neurotoxin (it destroys brain cells) and in fact has very few (if any) health benefits. It is unclear whether consumers understand the genetic basis for alcohol self-control problems.
The information difficulties are compounded by advertising and promotion of alcohol which links consumption to sporting and social prowess. There is strong evidence that such advertising has very strong effects on consumption particularly for youth.
Finally, there might be particular age, ethnic or socio-economic groups in the community that have poorer information than other groups.
The failure to provide good information about the negative consequences of drinking alcohol can be regarded as a form of market failure since information is a public good. Markets will develop that promote the consumption of alcohol since this benefits particular industry groups but there are no such private incentives to provide information that presents the negative consequences of consumption.
On the other hand there is some evidence that some young people overestimate some risks associated with alcohol consumption - particularly the risks of becoming alcoholic. This overestimation leads to less drinking than would occur were the risks accurately perceived. The same result has been observed with respect to smoking - smokers tend to overestimate the adverse health consequences of smoking.
2. Self-control issues. Alcohol consumption can be addictive and people may have problems curtailing their consumption. There are high levels of alcoholism in the community and evidence that people take efforts and expend resources trying to control their alcohol consumption.
Self-control problems can be triggered or initiated by impulsive behavior and those who do have persistent problems controlling their alcohol consumption may have demands reignited by advertising and other cues.
There may be particular issues of self-control among young drinkers who have high impulsiveness and those with a particular genetic predisposition.
3. Externalities. Alcohol consumption creates private costs for individuals and more general social costs for those close to alcohol consumers and the broader community. Drink driving is a serious cause of traffic accidents and violent behavior by those intoxicated is a serious issue in the broader community.
Other alcohol-linked externalities include fetal alcohol syndrome
In addition in countries like Australia with a publicly-funded national health scheme the medical costs of alcohol consumption are nor borne only privately by the individual. Above-average medical costs will be met partly from the public purse. For this reason alone there can be a public interest in restricting use of alcohol.
4. Paternalism. Finally although it does not at all fit into the liberal, ‘market failure’ category of reasons for intervention in alcoholic beverage markets it must be admitted that there are strong moral and emotional arguments against excessive alcohol consumption. Some would oppose certain levels of alcohol consumption even if well-informed consumers without self-control problems did bear all the costs of their consumption.
This could result in alcohol taxes being set above their externality-correcting levels to reduce alcohol consumption. It could also motivate public health campaigns to be launched to decrease alcohol consumption not because external costs are being generated but simply because reduced alcohol consumption is a social objective.
For the most part I do not consider such arguments since they do not take one far in considering a rationale for policy – alcohol consumption is opposed because it is opposed. On the other hand paternalism might be a useful descriptive way of understanding some actual government regulatory policies that do operate.
Policy Interventions
Given the ‘market-failure’ reasons for seeking to restrict alcohol consumption what are the policy options for regulating alcohol use?
1. Information-related policies. The public sector may need to intervene to provide accurate information about some of the negative consequences of consuming alcohol and to restrict advertising that emphasizes inaccurately optimistic positive consequences of consumption.
The negative consequences of alcohol consumption include information on self-control issues and on genetic information that might suggest possible future problems.
A difficulty here is that there might be disagreement about the health consequences of consuming alcohol. The debate over the possible health benefits of consuming alcohol in reducing heart disease is a case in point. Apart from providing accurate information on health consequences there is also then a case for investing in the provision of improved knowledge on the health consequences of consumption.
In addition as mentioned the case for warning people of the health risks of alcohol consumption is weak if people already exaggerate those risks.
2. Self-control policies. Policies for improving self-control include helping to demonstrate that alcoholism can be a consequence of recurrent drinking and for providing means for individuals to improve their self-control by promoting such things as personal rules or heuristics that consumers can use to control their drinking behavior. In particular problems with alcohol consumption primarily stem from excessive consumption so that personal rules relating to the number of standard drinks one consumes per week, alcohol-free days per week or in some cases the pursuit of abstinence can be useful. These are primarily information policy issues.
Self-control can also be improved by restricting the availability of alcohol in various ways – by limiting the availability of alcohol outlets, by restricting trading hours and by limiting the promotion of advertising that might trigger cues to drink.
For particular age groups who are prone to excessive alcohol consumption there can be outright bans on consumption. Minimum age laws or restriction of the availability of alcohol to people with particular ethnicities such as Australian aborigines in particular locations are candidate policies.
With respect to drink-driving issues the installation of ignition interlock devices can be understood as a technique improving the judgment of drinkers about their abilkity to safely drive.
Finally those with self-control problems should be made aware of the existence of help groups such as Alcoholics Anonymous.
3. Externality policies. Economists tend to focus on externalities as a primary source of social costs in relation to substance abuse. The most standard economic prescription is to levy a tax which captures the extent of the external costs.
It is important to be clear on the issues here since they are not straightforward.
Externalities such as drink-driving induced accidents cannot be dealt with by a simple tax directed toward alcohol consumption since the externality here stems from the combined activities of drinking and driving. Moreover we know that the probability of an accident given a certain level of alcohol consumption increases with age. Inevitably highway patrols and booze buses are used to detect drink driving with alcohol-involved driving being penalized by fines and penalties rather than taxes on alcohol consumption.
It is only if alcohol-related externalities are related to the overall level of a population’s alcohol consumption (the ‘populational health’ view) that simple tax policies make sense. The standard economic prescription in this situation to remove these costs is to levy a Pigovian tax which raises the price of alcohol consumption to leave a level of consumption where marginal private benefits equal marginal social costs. This is widely-regarded as one of the most useful policies for reducing alcohol-related social costs.
Determining the size of this tax depends on assessing the scale of the unpaid for social costs and how these are linked to consumption at the margin. It also depends on the elasticity of demand of consuming alcohol – the more responsive demand is to the tax the smaller the tax can be. Price elasticity estimates of -0.3, -0.4 and -1.3 are reasonable for Australian beer, wine and spirit consumption respectively. For alcoholic beverages as a whole an estimated price elasticity is -0.6 suggesting that a 10% increase in price would cause a 6% reduction in consumption.
Clearly if the social costs are related to the alcohol content of drinks then it should be designed to reflect this fact – it should be a volumetric tax related to the alcohol content of particular types of alcoholic beverage and not an ad valorem excise levied on the value of the alcoholic products sold. Light beer is already taxed at a lower rate than full-strength beer in accord with this volumetric principle.
There are two reservations with respect to this very standard tax prescription and these are to some extent interlinked.
First note that the approach optimizes the overall social advantage but will have different effects on different groups. If a minority of alcohol consumers has very inelastic demands because they have self-control issues with respect to alcohol consumption then their consumption might need to be exposed to very high taxes if it is to be curtailed. Such taxes will impose heavy burdens on those who consume at moderate levels and who do not impose significant social costs. On the other hand setting lower taxes to cater for those imposing low social costs will leave the behavior of those who impose big social costs largely unchanged while significantly reducing their real incomes. If high alcohol consumers are the socially disadvantaged this can be a problem in itself. While gainers from effectively taxing alcohol can in principle compensate loses this type of compensation is very difficult to engineer in practice so that distributional issues limit the case for such taxes.
Second, note that using volumetric taxes to penalize low-value high-alcohol products might cause unfavorable substitutions towards other intoxicants or drugs. A widespread intoxicant in some aboriginal communities is petrol-sniffing. There might be incentives to shift towards such drugs, or other illicit substances if low cost high alcohol beverages become more expensive. This is a ‘second-best’ constraint on the tax that might be set here that reflects the fact that substitute intoxicants cannot readily be taxed.
Whether taxes on alcohol will make people substitute towards alternative drugs depends on whether alcohol and the drug are substitutes or complements in consumption. If they are complements increasing the price of alcohol will reduce alternative drug consumption. If they are substitutes such taxes will increase it.
Finally, many suggest a case for dedicating a proportion of alcohol taxes (hypothecation) to targeted and well-evaluated alcohol programs including programs to advise of the negative effects of consuming alcohol. The motivation is presumably that such revenues reflect the extent of social costs that alcohol creates. This may or may not be true since social damages may or may not be proportional to total community consumption. But this philosophy is in any event not sound since the investment in such programs depends on their effectiveness not only the damages alcohol inflicts. To take an extreme case if such programs had low effectiveness then little should be allocated even if alcohol’s social costs are large. The function of taxes on alcohol is primarily to signal the correct social costs alcohol consumers are imposing at the margin. Their revenue-yielding function is secondary.
This is a draft of a paper on the economics of alcohol policy for non-economists. Comments are welcome.
Hamsters - like humans - gain weight under stress
Lee Smith sent me this interesting argument.
Syrian hamsters provide a model for human obesity research because they eat more and gain weight when exposed to stress and, like humans, add fat to their abdomens - visceral fat. Visceral fat is unhealthy because it affects internal organs and is associated with diabetes, cancer and other illnesses. Researchers can use hamsters to help determine if drugs can block stress-induced obesity by blocking release of hormones that kick off physiological responses causing obesity.
Syrian hamsters provide a model for human obesity research because they eat more and gain weight when exposed to stress and, like humans, add fat to their abdomens - visceral fat. Visceral fat is unhealthy because it affects internal organs and is associated with diabetes, cancer and other illnesses. Researchers can use hamsters to help determine if drugs can block stress-induced obesity by blocking release of hormones that kick off physiological responses causing obesity.
Thursday, June 08, 2006
Multiplex wins I think
In relation to my earlier post on the Multiplex dispute with Cleveland Bridge - Multiplex wins. It was seeking ₤45 million from CB but will now seek a ‘negotiated settlement’ whatever that means. But 80% of all of Multiplex’s costs were awarded against CB. And CB’s claims against Multiplex have been rejected – these sought an extra ₤32 million which limits Multiplex’s overall losses on the project.
According to yesterday’s AFR (subscription required) Multiplex is now likely to pursue damages from Wembley Stadium Group of up to ₤150 million.
Multiplex’s share price rose yesterday – it’s the first good news it has had in quite a while. The future for Multiplex UK looks quite a bit brighter than it did. Multiplex’s share price yesterday was $3-46 off a low of $2-66. It has risen 16 cents since the announcement. A good recovery punt?
We have an honours student writing a thesis on this topic in my Department. It really deserves a PhD dissertation. A fascinating business case study. Any takers?
According to yesterday’s AFR (subscription required) Multiplex is now likely to pursue damages from Wembley Stadium Group of up to ₤150 million.
Multiplex’s share price rose yesterday – it’s the first good news it has had in quite a while. The future for Multiplex UK looks quite a bit brighter than it did. Multiplex’s share price yesterday was $3-46 off a low of $2-66. It has risen 16 cents since the announcement. A good recovery punt?
We have an honours student writing a thesis on this topic in my Department. It really deserves a PhD dissertation. A fascinating business case study. Any takers?
Wednesday, June 07, 2006
Mid-week review
I have finished undergraduate teaching for a few weeks and enjoying the comparative freedom of doing my own research.
I hope you too had a good week. How's life treating you?
As usual too I welcome your comments on my blog.
I hope you too had a good week. How's life treating you?
As usual too I welcome your comments on my blog.
Capitalism & society
The Berkeley Electronic Press have launched a new journal Capitalism and Society. It looks interesting. The first issue comprises the following articles and commentary by Professor Robert Solow, drawn from a session at the Center's Inaugural Conference.
I list the papers from the first issue and abridged abstracts:
Gilles Saint-Paul, 'Will Limited Needs Kill Capitalism?' http://www.bepress.com/cas/vol1/iss1/art4
Unorthodox views of capitalism can be derived if monopolistic competition is coupled with the assumption that utility derived from consuming individual goods is bounded. This can rationalise productivity so high that many people are saturated with goods and productivity growth reducing the real wage with benefits from growth being appropriated by symbol manipulators. Depending on levels of product diversity and physical productivity, globalization may harm poorer workers in LDCs, rather than unskilled workers in developed countries.
Philippe Aghion 'Interaction Effects in the Relationship Between Growth and Finance'
http://www.bepress.com/cgi/siteview.cgi/cas/vol1/iss1/art2
Interacting financial development with initial income, macroeconomic volatility and policy variables, can improve our understanding of convergence and divergence across countries, and also restore the significance of correlations between growth and volatility and therefore between growth and macropolicy, even when controlling for country fixed effects or when eliminating countries with extreme policies or bad institutions.
Amar Bhidé (2006) 'How Novelty Aversion Affects Financing Options'
http://www.bepress.com/cgi/siteview.cgi/cas/vol1/iss1/art1
Entrepreneurs may undertake bad projects because they unwittingly rely on defective or incomplete information to estimate the returns. Investors' concerns about such misjudgements are low when the entrepreneurs' knowledge about their projects has been well calibrated. But if the novelty of the project (or some other unusual circumstance) makes calibration impossible, investors may reject the entrepreneur's funding request. This 'novelty aversion' effect helps explain why ventures that are initially self-financed can subsequently attract outside financing without any decrease in standard 'incentive' or moral hazard problems. It also provides new insights about the differences in the investment preference and procedures of individual 'angel' investors, venture capital partnerships and large public companies.
Bob Solow, makes entertaining comments on the three papers http://www.bepress.com/cgi/siteview.cgi/cas/vol1/iss1/art3
I list the papers from the first issue and abridged abstracts:
Gilles Saint-Paul, 'Will Limited Needs Kill Capitalism?' http://www.bepress.com/cas/vol1/iss1/art4
Unorthodox views of capitalism can be derived if monopolistic competition is coupled with the assumption that utility derived from consuming individual goods is bounded. This can rationalise productivity so high that many people are saturated with goods and productivity growth reducing the real wage with benefits from growth being appropriated by symbol manipulators. Depending on levels of product diversity and physical productivity, globalization may harm poorer workers in LDCs, rather than unskilled workers in developed countries.
Philippe Aghion 'Interaction Effects in the Relationship Between Growth and Finance'
http://www.bepress.com/cgi/siteview.cgi/cas/vol1/iss1/art2
Interacting financial development with initial income, macroeconomic volatility and policy variables, can improve our understanding of convergence and divergence across countries, and also restore the significance of correlations between growth and volatility and therefore between growth and macropolicy, even when controlling for country fixed effects or when eliminating countries with extreme policies or bad institutions.
Amar Bhidé (2006) 'How Novelty Aversion Affects Financing Options'
http://www.bepress.com/cgi/siteview.cgi/cas/vol1/iss1/art1
Entrepreneurs may undertake bad projects because they unwittingly rely on defective or incomplete information to estimate the returns. Investors' concerns about such misjudgements are low when the entrepreneurs' knowledge about their projects has been well calibrated. But if the novelty of the project (or some other unusual circumstance) makes calibration impossible, investors may reject the entrepreneur's funding request. This 'novelty aversion' effect helps explain why ventures that are initially self-financed can subsequently attract outside financing without any decrease in standard 'incentive' or moral hazard problems. It also provides new insights about the differences in the investment preference and procedures of individual 'angel' investors, venture capital partnerships and large public companies.
Bob Solow, makes entertaining comments on the three papers http://www.bepress.com/cgi/siteview.cgi/cas/vol1/iss1/art3
Tuesday, June 06, 2006
I'll stop being a slob
I've got to stop being a slob who does little physical exercise on the grounds that he is too busy with family and work. Our PM John Howard does his morning exercise every day and he is also a family man who runs a country. My duties are zilch compared to his.
And my duties are much less than the seven, superfit, senior business executives interviewed in today's Australian Financial Review ('Well-preserved at the top of the ladder') (subscription only) who eat well, have low cholesterol, exercise each day and who stresslessly run vast corporate empires beyond the scale of Harry Clarke Pty Ltd. Their healthy lifestyle allows them to deal with stress and perform at 100% capacity.
The thought of them all eating their muesli, sleeping peacefully for long periods, singing their Hare Krishna chants and jogging merrily through city blocks on their way to multi-million dollar salaries makes me want to throw up.
For example, Qantas CEO Geoff Dixon is 66 years old, weighs 69kgm, has brilliant blood pressure, gets up each morning at 5am to walk or run and to do exercises at the local beach and then heads off to negotiate Air Service Agreements with Lower Congo Bongoland. And this is no fad - Geoff has been doing this exercise program for 33 years. Geoff Dixon you make me sick.
Really sick. And the reason I feel sick is that I know I should emulate you but I don't. Its a self-control issue. Perhaps successful businesspeople have a selfish streak of egoism that I lack - that's a convenient thought. But, in any event, with respect to exercise, I make excuses or at best stick to short-term programs of intensive physical exertion. For the 14,600th time I resolve to change my ways. I will. No, I really will this time.
And my duties are much less than the seven, superfit, senior business executives interviewed in today's Australian Financial Review ('Well-preserved at the top of the ladder') (subscription only) who eat well, have low cholesterol, exercise each day and who stresslessly run vast corporate empires beyond the scale of Harry Clarke Pty Ltd. Their healthy lifestyle allows them to deal with stress and perform at 100% capacity.
The thought of them all eating their muesli, sleeping peacefully for long periods, singing their Hare Krishna chants and jogging merrily through city blocks on their way to multi-million dollar salaries makes me want to throw up.
For example, Qantas CEO Geoff Dixon is 66 years old, weighs 69kgm, has brilliant blood pressure, gets up each morning at 5am to walk or run and to do exercises at the local beach and then heads off to negotiate Air Service Agreements with Lower Congo Bongoland. And this is no fad - Geoff has been doing this exercise program for 33 years. Geoff Dixon you make me sick.
Really sick. And the reason I feel sick is that I know I should emulate you but I don't. Its a self-control issue. Perhaps successful businesspeople have a selfish streak of egoism that I lack - that's a convenient thought. But, in any event, with respect to exercise, I make excuses or at best stick to short-term programs of intensive physical exertion. For the 14,600th time I resolve to change my ways. I will. No, I really will this time.
UniMelb & the liberal arts model
The long-announced move by the University of Melbourne into a more graduate-oriented institution is one of the most interesting in recent Australian university history. Its endorsement by Education Minister Bishop guarantees the move will go though.
The university will offer six general education degrees (including arts, science and commerce) and follow that up with specialist professional graduate programs.
This is something like the 'liberal arts' approach in many US universities which is now also being pursued in Europe. Generally I think it is a sensible move for higher education in Australia and probably good for my own university.
Melbourne will cut its undergraduate intake by 10,000 over the next decade.
I am very interested in reader views on this move.
The university will offer six general education degrees (including arts, science and commerce) and follow that up with specialist professional graduate programs.
This is something like the 'liberal arts' approach in many US universities which is now also being pursued in Europe. Generally I think it is a sensible move for higher education in Australia and probably good for my own university.
Melbourne will cut its undergraduate intake by 10,000 over the next decade.
I am very interested in reader views on this move.
Monday, June 05, 2006
Ignore prejudice & consider the nuclear option
I have already put the case for Australia to re-consider its nuclear power options and criticized Labor Party policy. My fear was really that the opposition would use the nuclear debate to attempt to bury the coalition by engaging in a hysterical debate that would leave the benefits of nuclear power unexamined. The case for nuclear power is, indeed, not clear cut – there are enormous environmental benefits from switching to nuclear power by substituting a miniscule level of nuclear waste for the virtual elimination of greenhouse gas emissions – but, yes, nuclear is very capital cost expensive.
The predicted hysteria from the Australian Labor Party was initiated today with a scare campaign launched by Kim Beazley (an intelligent man who should know better) and the Queen of the Populist Left, my hopeless local member, Jenny Macklin. ‘Where are the facilities to be located?’ they scream in a pathetic duet, ‘come clean’ Mr. Howard.
People who behave in this dishonest, cynical way should not be considered as an alternative Australian Government. Moreover, it looks like Labor Party’s stupidity on this issue will determine a degree of self-destruction anyway. It is a pity that we lack a responsible and capable opposition in this country. There are issues to debate but populist hysteria won’t help.
John Howard has faced up to probable flack and put the interests of Australia first in instigating the needed inquiry.
The predicted hysteria from the Australian Labor Party was initiated today with a scare campaign launched by Kim Beazley (an intelligent man who should know better) and the Queen of the Populist Left, my hopeless local member, Jenny Macklin. ‘Where are the facilities to be located?’ they scream in a pathetic duet, ‘come clean’ Mr. Howard.
People who behave in this dishonest, cynical way should not be considered as an alternative Australian Government. Moreover, it looks like Labor Party’s stupidity on this issue will determine a degree of self-destruction anyway. It is a pity that we lack a responsible and capable opposition in this country. There are issues to debate but populist hysteria won’t help.
John Howard has faced up to probable flack and put the interests of Australia first in instigating the needed inquiry.
Drug deaths
What kills heroin addicts? It has long been known that it is older, more experienced heroin users who die through heroin use rather than new users. This is important since so-called ‘overdose’ deaths are the major way intravenous drug users kill themselves around the world and hence are the major social cost of illicit drug use.
The story used to be that polydrug use was most common among older, experienced heroin users who used heroin in conjunction with alcohol and benzodiazepines. This suggested that the term heroin ‘overdose’ was a misnomer - deaths were in fact due to the synergistic effects of these other drugs on the respiratory depressant effects of heroin. Then even normal heroin doses could prove fatal.
In the newspapers this morning the higher incidence of death among older injecting heroin users (the press release is here) is re-attributed to the fact that older heroin users have damaged livers which are unable to metabolise heroin. It is unclear that it is the heroin use itself that is liver-destroying rather than the spread of hepatitis through injecting equipment but still it is the wonky livers that seem to cause many of the deaths.
One thing that surprised me about the polydrug theory was that overdose deaths fell off so rapidly in the wake of the so-called heroin drought of 2001. I would have though that polydrug substitutions, with the limited amount of heroin that was around, would have induced a spate of overdose deaths. In fact the number of fatal overdoses fell from 968 in 1999 to 306 in 2001. This evidence is more consistent with the wonky liver theory than polydrug theory.
The story used to be that polydrug use was most common among older, experienced heroin users who used heroin in conjunction with alcohol and benzodiazepines. This suggested that the term heroin ‘overdose’ was a misnomer - deaths were in fact due to the synergistic effects of these other drugs on the respiratory depressant effects of heroin. Then even normal heroin doses could prove fatal.
In the newspapers this morning the higher incidence of death among older injecting heroin users (the press release is here) is re-attributed to the fact that older heroin users have damaged livers which are unable to metabolise heroin. It is unclear that it is the heroin use itself that is liver-destroying rather than the spread of hepatitis through injecting equipment but still it is the wonky livers that seem to cause many of the deaths.
One thing that surprised me about the polydrug theory was that overdose deaths fell off so rapidly in the wake of the so-called heroin drought of 2001. I would have though that polydrug substitutions, with the limited amount of heroin that was around, would have induced a spate of overdose deaths. In fact the number of fatal overdoses fell from 968 in 1999 to 306 in 2001. This evidence is more consistent with the wonky liver theory than polydrug theory.
Sunday, June 04, 2006
Exciting learning
From Crooked Timber I learnt of these University of California at Berkeley microeconomics lectures available in mp3 format. They are presented by Gordon Rausser and supplemented with lecture powerpoints, a course syllabus, problem sets, past exams – the lot.
I listened to a couple of them today- they are good. Rausser, an agricultural economist, makes abstract theory specific and he engages his audience – listening has pedagogic value.
This technology will revolutionalise teaching in universities over the next decade. Video casts are even better (the visual plus verbal package arrives as a single input) and presentations on purchased DVD will become more common.
Moreover, this trend is a positive not a threat. Instructors can learn to improve presentation skills and students gain access to the best brains in a discipline (there are 30 courses broadcast from Berkeley and a Special Events archive here could keep you thinking for a year).
The US takes much flack these days and, because it is an open society, is good at criticizing itself. But in many areas – economics for certain – US universities are leading the world in teaching and research.
Digression: I got diverted from writing this post by listening to a delightful poetry session by one of my favorite ‘beat’ poets, Lawrence Ferlinghetti, who made a Lunch Poems presentation available in the Special Events archive. Ferlinghetti is 85 years old – he doesn’t sound it - these poems are about love, astronomy, politics and ecology. Much fun, much pathos and some San Franciscan beat nostalgia. I particularly enjoyed an engaging tribute to Ezra Pound and Ferlinghetti's history of flight. Take 45 minutes and listen.
Speakers in the same series of Special Events include Daniel Ellsberg, Robert Reich, Bill Clinton and George Soros.
I listened to a couple of them today- they are good. Rausser, an agricultural economist, makes abstract theory specific and he engages his audience – listening has pedagogic value.
This technology will revolutionalise teaching in universities over the next decade. Video casts are even better (the visual plus verbal package arrives as a single input) and presentations on purchased DVD will become more common.
Moreover, this trend is a positive not a threat. Instructors can learn to improve presentation skills and students gain access to the best brains in a discipline (there are 30 courses broadcast from Berkeley and a Special Events archive here could keep you thinking for a year).
The US takes much flack these days and, because it is an open society, is good at criticizing itself. But in many areas – economics for certain – US universities are leading the world in teaching and research.
Digression: I got diverted from writing this post by listening to a delightful poetry session by one of my favorite ‘beat’ poets, Lawrence Ferlinghetti, who made a Lunch Poems presentation available in the Special Events archive. Ferlinghetti is 85 years old – he doesn’t sound it - these poems are about love, astronomy, politics and ecology. Much fun, much pathos and some San Franciscan beat nostalgia. I particularly enjoyed an engaging tribute to Ezra Pound and Ferlinghetti's history of flight. Take 45 minutes and listen.
Speakers in the same series of Special Events include Daniel Ellsberg, Robert Reich, Bill Clinton and George Soros.
Saturday, June 03, 2006
Garnaut is wrong: Supply effects will weaken the commodity price boom
Economics shows that large and unexpected increases in demand will strongly increase prices for commodities in inelastic demand. However sustained price increases will induce firms to employ more inputs to produce more so that, longer-term, prices will be moderated by increased production.
With respect to commodities, such as mineral products and fossil fuels, supply can be increased by increasing production from existing mine sites and by exploring for new ones.
Recent evidence from Geoscience Australia shows that exploration efforts in Australia are experiencing explosive growth in the face of the current commodity price boom. Over 2004/2005 mineral exploration spending in Australia rose 31% to a bit more than $1 billion. Of this 39% was spent exploring for new deposits.
Around the world spending rose 38% to US$5 billion. 59% of mineral exploration effort occurred in Western Australia - though it rose in all states except Victoria.
Much of the expenditure is for gold ($391 million) but significasnt amounts were spent on base metals exploration and iron ore.
The efforts have resulted in significant new resource discoveries. As the Treasurer Peter Costello has pointed out such successes will take the edge off the commodities price boom and sink the short-sighted views of Ross Garnaut and others who suggests that because of the new 'China factor' this boom will last for decades. It won't. Moreover the boom will end even if Stephen Roach and others are wrong in identifying current commodity price trends as a bubble which will be eventually pricked by moderating commodity demands in China.
With respect to commodities, such as mineral products and fossil fuels, supply can be increased by increasing production from existing mine sites and by exploring for new ones.
Recent evidence from Geoscience Australia shows that exploration efforts in Australia are experiencing explosive growth in the face of the current commodity price boom. Over 2004/2005 mineral exploration spending in Australia rose 31% to a bit more than $1 billion. Of this 39% was spent exploring for new deposits.
Around the world spending rose 38% to US$5 billion. 59% of mineral exploration effort occurred in Western Australia - though it rose in all states except Victoria.
Much of the expenditure is for gold ($391 million) but significasnt amounts were spent on base metals exploration and iron ore.
The efforts have resulted in significant new resource discoveries. As the Treasurer Peter Costello has pointed out such successes will take the edge off the commodities price boom and sink the short-sighted views of Ross Garnaut and others who suggests that because of the new 'China factor' this boom will last for decades. It won't. Moreover the boom will end even if Stephen Roach and others are wrong in identifying current commodity price trends as a bubble which will be eventually pricked by moderating commodity demands in China.
Friday, June 02, 2006
Risk and the macroeconomy
The RBA's Deputy Governor Glenn Stevens has written an interesting, readable survey on the thesis that the global economy has become less risky. Will this improved stability self-destruct?
Developed economies have become less volatile than they have been in the past. The standard deviation of real GDP has halved in the US and more than halved in Australia since the 1950s. The standard deviation of inflation has dropped dramatically over the past 50 years in OECD countries. This reduced risk has even spread to emerging markets where, for example, credit ratings have improved significantly.
Since the probability of default rises during economic downturns the increased macroeconomic stability must reduce the individual risks businesses face though, in fact, there is little systematic evidence of a decline in equity market variability.
Stevens asks whether this apparently benign state of affairs can last. The interesting question he poses is whether the stability that has developed will self-destruct:
Developed economies have become less volatile than they have been in the past. The standard deviation of real GDP has halved in the US and more than halved in Australia since the 1950s. The standard deviation of inflation has dropped dramatically over the past 50 years in OECD countries. This reduced risk has even spread to emerging markets where, for example, credit ratings have improved significantly.
Since the probability of default rises during economic downturns the increased macroeconomic stability must reduce the individual risks businesses face though, in fact, there is little systematic evidence of a decline in equity market variability.
Stevens asks whether this apparently benign state of affairs can last. The interesting question he poses is whether the stability that has developed will self-destruct:
‘… might not the behaviour of borrowers, lenders, investors and price setters, in response to perceived lower risk, itself work to increase the probability of instability in future? This…is the question posed about the tendency of households ...to take on much more debt. In enjoying – rationally, based on lengthening experience – the opportunities afforded by a more stable macroeconomic environment and a more complete and liquid set of capital markets, are they in the process gradually impairing the very resilience to economic shocks which helped to produce the stability…?...Stevens closes with unconventional remarks on ‘global imbalances’. He sees the risks here as stemming from wrong conclusions about structural problems countries face not the imbalances per se. This might lead to protectionism flourishing which would be really damaging.
...Questions could well extend – once again – to some corporate entities….given the re-emergence of leveraged buy-outs, which leave the cash-flow positions of the corporations more precariously balanced. At least here there is, admittedly, more historical experience as a guide to likely subsequent behaviour.
….considerable sums of money have been risked over recent years in various manifestations of the search for yield, which depended on a degree of stability and predictability in global short-term interest rates that was unlikely – even with a more stable macroeconomy – to last for a long time...
There are also some challenging questions associated with the very rapid growth seen in credit derivative markets in recent years. Generally speaking, this should be promoting the more efficient pricing of credit risk and helping to shift it away from its intrinsic origin in businesses and their bankers to a broader set of holders who really want it. From the perspective of economic and financial stability, such a trend is to be welcomed. … the amount of leverage that can be embedded in such products is a potential source of trouble. There is also considerable uncertainty about whether, under conditions of stress, liquidity in these markets will be such as to allow risk-holders to manage their positions’.
Fertility rises
Treasurer Peter Costello points out that ABS figures show births in Australia in 2005 were the highest since 1992. In 2005, there were 261,400 births, a 2.4% increase on 2004 but, most importantly, not a decrease - as has been the case since about 1960. Population aging and falling fertility are policy concerns that have been addressed by pro-natalist policies including:
In the May 2004 Budget Costello encouraged people to have 'One for mum, one for dad, and one for the country'. At least some families have done this.
- The baby bonus introduced in July 2004;
- Substantial increases in family benefits;
- Provision of extra childcare places;
- Encouragement of flexible family-friendly work practices.
In the May 2004 Budget Costello encouraged people to have 'One for mum, one for dad, and one for the country'. At least some families have done this.
Thursday, June 01, 2006
Weighing the pig
'You don't fatten a pig by weighing it', one of my colleagues remarked while we were meeting to discuss how to improve research performance by monitoring indices, accumulating statistics and holding more meetings in the future to do the same.
While it has a germ of truth, this cliche is literally wrong since you can fatten a pig by weighing it. Just design an incentive contract that rewards the agent who cares for the pig, and weigh the pig to verify that the agent has done his or her job. But the cliche points to the transaction costs of planning and carrying that could be diverted into time spent doing research.
Most working in universities accept managerial transactions costs but question whether they have become excessive. Most that I encounter - whether they are research stars or teachers or administrators - work hard. Of course the image in the community is the opposite - but it is a largely false image.
Schemes to promote research that involve rewards and penalties in a situation where there isn't any slack can create deadweight losses in the whole system. They waste time that could be devoted to productive activities. They waste resources in an overstretched system.
This is a winge but I have spent a lot of recent past at meetings - I could have done better things. Preparing my Nobel Prize Acceptance email (not a lot of work - just 'yes') or blogging. Or yes, doing some serious research rather than thinking of ways to get others to do it.
While it has a germ of truth, this cliche is literally wrong since you can fatten a pig by weighing it. Just design an incentive contract that rewards the agent who cares for the pig, and weigh the pig to verify that the agent has done his or her job. But the cliche points to the transaction costs of planning and carrying that could be diverted into time spent doing research.
Most working in universities accept managerial transactions costs but question whether they have become excessive. Most that I encounter - whether they are research stars or teachers or administrators - work hard. Of course the image in the community is the opposite - but it is a largely false image.
Schemes to promote research that involve rewards and penalties in a situation where there isn't any slack can create deadweight losses in the whole system. They waste time that could be devoted to productive activities. They waste resources in an overstretched system.
This is a winge but I have spent a lot of recent past at meetings - I could have done better things. Preparing my Nobel Prize Acceptance email (not a lot of work - just 'yes') or blogging. Or yes, doing some serious research rather than thinking of ways to get others to do it.
Grogblog
Russel Degnan at Knotted Paths plans a meeting of bloggers at:
Friday June 16th, 6:30 pm Lincoln Hotel Carlton (cnr Queensberry and Cardigan St.)
Meals available at the pub and generally good.
I'll try to go if I am in town.
Friday June 16th, 6:30 pm Lincoln Hotel Carlton (cnr Queensberry and Cardigan St.)
Meals available at the pub and generally good.
I'll try to go if I am in town.
Wednesday, May 31, 2006
Where is Yossarian?
On the Becker-Posner blog.
Posner establishes a sound role for the privatisation of military force in Iraq but worries this might be used for political purposes to understate the death toll. He also believes private soldiers might be more inclined to run amok because there is less authority over them than members of the regular publicly-supplied army.
Becker - yeah you can almost guess it, sees Posner's view as fine but claims that Posner overstates the problems of a private military because competition among firms for a role in Iraq will help guarantee employment of private soldiers who will not be inclined to run amok.
And profit-seeking, self-interested behaviour will again drive the social advantage.
Posner establishes a sound role for the privatisation of military force in Iraq but worries this might be used for political purposes to understate the death toll. He also believes private soldiers might be more inclined to run amok because there is less authority over them than members of the regular publicly-supplied army.
Becker - yeah you can almost guess it, sees Posner's view as fine but claims that Posner overstates the problems of a private military because competition among firms for a role in Iraq will help guarantee employment of private soldiers who will not be inclined to run amok.
And profit-seeking, self-interested behaviour will again drive the social advantage.
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