Tag Archives: Landsburg

Replies to Interfluidity

4 Replies

Steve Randy Waldman, aka Interfluidity, is wicked smart. So it was with mild trepidation that I read Nicholas Weininger’s request:

I’d like to see your take on Interfluidity’s posts about inflation-averse influencers, flights to safety, wealth as a positional good for insurance purposes, and the effects thereof on productivity. Relevant links:

http://www.interfluidity.com/v2/3487.html
https://plus.google.com/112482032780181267192/posts/5ATAa1ckps9
http://www.interfluidity.com/v2/3212.html

Alright, let’s see what I can do.

On inflation-averse influencers, I agree with a lot of the post. I’d quibble with the assumption that our current recession is 100% demand-driven. I favor NGDP targeting, and I think our problems would be less acute if we had more monetary stimulus, but I still think a lot of our problems are structural. NGDP targeting is not going to bring back the 90s.

That quibble aside, I think Waldman is totally right that we have a public choice problem. The way I think about it is that there is a public choice curve.

Superimpose the public choice curve over a dynamic AS/AD diagram, properly situated, and you will see why we are stuck. The public choice curve is meant to bolster the argument that recession is ultimately what the polity chooses, but keep in mind also one encouraging and one discouraging thought. The encouraging one is that having a polity that places a ceiling on the rate of inflation it will tolerate is actually an achievement when compared to the alternative. I lived in Brazil in the early 1980s, and while I was too young to really understand the value of money, I remember dropping a few million cruzeiros on a pack of gum. We might rightly call our current public choice curve inverted because there is an inflation ceiling rather than an inflation floor, which is much more common. Again, this is not to deny that we should have more monetary stimulus now.

The most discouraging part of the public choice curve is the bound on growth. There is a lot that a moderately-enlightened dictator could do to increase the growth rate of the economy from the supply side. I wish that people would get as incensed over the political failure on the supply side as they do on the demand side.

On the other post on the insurance value of wealth, I really disagree, not with the proposition that wealth is a kind of insurance for the wealthy, but that this has a significant real effect on employment. I think Waldman elides differences between the real and financial sector and between long and short runs.

Let’s say that Scrooge McDuck goes to his bank, withdraws his billions in $100 bills and puts them in a vault somewhere, as insurance against some improbable bad event. Aside from this, he spends only enough to keep himself alive. What are the real effects of McDuck’s insurance “purchase”? Putting aside any short-run distortions, all he is doing is leaving more real resources for everyone else to consume. Because the money in his vault is not circulating, it has no real long-run effect, at least not to a first approximation. Waldman needs to find some way to reconcile his argument, at least in the long run, with Steve Landsburg’s point about misers.

If you want to say, “OK, the insurance function of wealth does not distort the real economy in the long run, but it has an effect in the short run,” you still have a lot of work to do. First, Waldman needs to walk back the article I referred to in the first half of this post, in which he argues that depression is a choice. Assuming, arguendo, that the wealthy disrupt the circular flow of payments somehow with their insurance demands, why can’t monetary policy fix that? On top of this, I’m not sure that the comparative statics of anything we might plausibly consider insurance work out: you would expect wealthy people to “buy insurance” during good times and “collect a payout” during bad times. But isn’t the problem the reverse, that we observe hoarding in bad times? Finally, inequality is procyclical, so it’s not as if recessions are caused by sudden outbreaks of inequality.

I’m totally willing to consider the possibility that inequality adversely affects the real economy; indeed, I share the sense that most economists probably have that a highly unequal society likely has something wrong with it. I guess I am just an inequality traditionalist who thinks more in terms of plutocracy, unholy alliances between business and government, and standard public choice. While I’m not persuaded by Interfluidity’s account of the inequality-unemployment channel, I’d be eager to read other economists discussing this question.

Building a Better Utility Monster

9 Replies

Back in March, Tyler Cowen encouraged bloggers to list the books that most influenced them. I didn’t think I could come up with a list that was a) plausible and b) would make me look cool, so I did not participate. But I enjoyed reading other people’s lists, and I noted, along with Steve Landsburg, that Derek Parfit’s Reasons and Persons seemed to be the most frequently cited book. Vowing that I will be prepared the next time the influential books meme comes around, I got a copy, which I finished this evening.

I found the book interesting throughout, but Part III on personal identity really stood out. I found it exhilarating and metaphysically challenging. I have spent the last couple weeks badgering my friends incessantly about corpus callosotomy (split-brain surgery), which results in two separate streams of consciousness.

The parts of the book that challenge classical utilitarianism are also interesting (though perhaps a little repetitive at times). The standard counterexample to utilitarianism is Nozick’s utility monster. This is a creature that, in economic jargon, has increasing marginal utility of wealth. If at least one utility monster exists, then the optimal utilitarian distribution of wealth is for one utility monster to have all the wealth. This is supposed to be abhorrant, but the standard reply, of course, is that no such creature exists, or is even imaginable. Utilitarians can bite this bullet with no real-world consequences.

Parfit tries to create a utility monster that is imaginable. His utility monster takes the form of the Repugnant Conclusion:

For any possible population of at least ten billion people, all with a very high quality of life, there must be some much larger imaginable population whose existence, if other things are equal, would be better, even though its members have lives that are barely worth living.

In classical utilitarian terms, a gazillion Muzak-and-potatoes lives are better than ten billion high quality lives. Parfit spends most of Part IV trying to avoid the Repugnant Conclusion. I think Cowen resolves the issue with his Ideal Participant construct, and in any case, a gazillion lives is scarcely more imaginable than the utility monster.

[Caution: untrained philosopher. Proceed at your own risk.]

Can we come up with a better utility monster? I propose, as an imaginable, realistic challenge to utilitarianism: abortion. I think the utilitarian position on abortion has implications that no one—whether pro-life, pro-choice, or ambivalent—would accept.

Let’s start with some assumptions. First, assume that the unwanted fetus will grow into a person who has a life well worth living. This life will be marginally worse if it is born to a 14-year old mother than if it is born to an older, economically-established mother. Whether or not the fetus is aborted, the mother will also have a life worth living. At least in some cases, this life will be somewhat worse if she gives birth to the child, though in all cases her reduction in utility from giving birth is less than the gain in utility to the born child. Assume also that no one is substantially harmed by the existence of any of these people.

Under these assumptions, isn’t the utility-maximizing outcome for the mother to always give birth to the child? No. It depends on how many children the mother is otherwise planning to have, or whether the child is a marginal or inframarginal child. If we suppose that a woman is planning to have two children in her life, and she gets pregnant with one of them at age 14, the utility-maximizing outcome would be for her to abort the child and then have two children when she is ready for them. She and the children she does have will have better lives than she and the children she does not have would have had. However, if a woman is planning to have two children in her life, has them, and then becomes pregnant for a third time, the utility-maximizing outcome would be for her to give birth to the child. This third person will not otherwise be replaced later on by someone else who will have as much or more utility.

To sum up, under utilitarianism, the abortion of inframarginal pregnancies is permissible, but the abortion of marginal pregnancies is not. Pro-lifers would not accept that the abortion of inframarginal pregnancies is permissible. Pro-choicers would not accept that abortion is impermissible in the case of marginal pregnancies. But the oddest result comes if we contrast a woman who is planning to have two children with a woman who is not planning to have any. Suppose they both get pregnant at age 14. It is permissible for the woman who wants children to have an abortion, but it is impermissible for the woman who does not want children to have an abortion. This seems like it would conflict with everyone’s intuitions.

Does my example work? Can you find an acceptable utilitarian solution to this dilemma?

Is Counterfeiting Wrong?

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Steve Landsburg was at GMU yesterday, giving a talk about his recent book, The Big Questions. His premise is that economics has a lot to contribute to philosophy, and in each of his chapters he addresses a different Big Question from the perspective of an economist/mathematician.

I haven’t read the book, but during the seminar my colleague Will Luther drew attention to this passage from page 171:

Is it okay to steal? Certainly not, and I’ve already told you why: The time and effort you spend stealing things is time and effort you could spend producing things instead. Theft leaves the world poorer than it could have been.

Is it okay to counterfeit? Certainly not, because counterfeiting is stealing. The time and effort you spend producing a phony dollar bill entitles you to a Hostess cupcake or a bus ride or a Blockbuster video rental without adding anything to the world’s stock of food, transportation, or entertainment. The cupcake you eat is made of flour and sugar that someone else could have eaten.

In case it is not obvious, Landsburg’s standard of morality is economic (Kaldor-Hicks) efficiency. “Certainly not” is a strong statement, and Will, who has done some interesting work on the subject of counterfeiting, asked some insightful probing questions. I asked a follow-up question: “Is it okay to counterfeit if the central bank is not being sufficiently expansionary?”

Landsburg looked at me skeptically. “Are you going to keep the seigniorage?” he asked. “Sure. That’s just a distributional question,” I replied. Landsburg thought for a second, smiled, and very graciously admitted he did not have an answer.

It was a fun exchange, but now I wish I had pushed even harder. In my question, the central bank is the first mover and makes an error. As the counterfeiter, all I am doing is correcting the central bank’s error. Let us instead analyze the situation in which the central bank is the second mover and never makes errors.

Suppose that the central bank is planning to undertake the optimal action of increasing the money supply by $200. I am a counterfeiter, and I print up $100 and spend it. The central bank detects that there is an extra $100 in the economy and expands the money supply by $100 instead of $200. The optimal money supply is still produced, leaving efficiency unchanged.

The obvious reply is that the central bank is more efficient at printing money than I am. It already has the Bureau of Engraving and Printing, which is a sunk cost. I have to invest in resources to produce realistic-looking bills, and those resources could go to more productive purposes.

However, there is a reply to the obvious reply. The inefficiency of my printing setup is more than made up for by the extra efficiency with which I spend the seigniorage. The marginal dollar of government spending is spent very wastefully, producing less than a dollar’s worth of output. In fact, I would argue that the marginal dollar produces negative output in the form of enforcing ill-conceived regulations and upholding government-sponsored cartels. If this is the case, then counterfeiting is efficiency-improving.

Despite my small quarrel with the book, it really is self-recommending. Landsburg is a brilliant and fascinating guy. This was my second encounter with him, and it reinforced my recollection that he is also super-nice. You can find his blog here.

Update: Landsburg blogs about the issue here.