World Standards and American Exceptionalism

October 14, 2014
Posted by Jay Livingston

Today is World Standards Day. “The aim of World Standards Day is to raise awareness among regulators, industry and consumers as to the importance of standardization to the global economy.” It seems like a good idea, everyone using the same standards and measurements. It makes stuff like the Internet possible. It’s sort of like the metric system. Everything from machine parts to scientific reports made in one country can be used in any other country. Almost.

Map of countries officially not using the metric system

At least we’re in good company – Myanmar and Liberia.

The map reminded me of Ann Coulter’s rant  against soccer back during the World Cup.  It was, I hope, her attempt to be funny à la Stephen Colbert – which made her a conservative imitating a liberal imitating a conservative. The Colbert ploy allowed her to be more outrageous than usual in her xenophobia and flaunting of American exceptionalism.

The increased popularity of soccer in the US, she said, is a sign of the nation’s moral decay.” Among her supporting theses was this:

Soccer is like the metric system, which liberals also adore because it's European. . . .

Liberals get angry and tell us that the metric system is more “rational” than the measurements everyone understands. This is ridiculous. An inch is the width of a man's thumb, a foot the length of his foot, a yard the length of his belt. That's easy to visualize. How do you visualize 147.2 centimeters?

American exceptionalism is, at least in part, the idea that the rules everyone else plays by do not and should not apply to the US.  The underlying assumption is that our ways are better. It follows therefore that we should pay no attention to anything outside our shores, and the rest of the world should be like us.*

As for World Standards Day, we do celebrate it – just not today. In the US, World Standards Day will be October 23, a day when no other country will be celebrating it.

* Often mixed in with this arrogance is a resentment of foreigners who do not follow our example and do not do what we tell them to.  The Coulter and Colbert oeuvre must have many examples, but the one that comes to mind readily is Randy Newman’s “Political Science” (this version  is from 1972, when the song was new and Newman was young – or do I mean when the song was young and Newman was new?)

HT: Shankar Vedantam

Author or Economist - Greg Mankiw and the Principal-Agent Problem

October 7, 2014
Posted by Jay Livingston

Greg Mankiw regularly comes to the moral and economic defense of the very, very, very rich (here for but one example). He himself is also rich (though without the verys) thanks in part to his best-selling economics textbook.

(If you haven’t been a student for a while, that $286.36 is not a misprint.)

Planet Money recently asked why college textbooks were so expensive (the $286 for Mankiw’s 7th edition at Amazon is actually $17 less than the price on the 6th edition). Their answer: the principal-agent problem. The student (i.e., the principal)  shells out the $286, but the decision as to which book the student must buy is made by the professor (the agent). The agent need not care so much about price; it’s not his own money that’s paying for the book.

The result is that textbooks cost much more than they would in a market where students were free to make their own consumer decisions or where the agent paid attention to price.*  So Planet Money asks bluntly if a textbook author is “making more money than he should.”

It’s an economics question, and since Mankiw’s is the best selling economics textbook, Planet Money called Greg Mankiw.  But it seems that the person they reached was not Greg Mankiw the Economist. It was Greg Mankiw the Author.

Mankiw the Economist might have answered that yes, in a market that operated according to ideal principles, textbook prices would be lower. Under the current system, authors, publishers, and bookstores are getting “rents.” They are making more money than they should.

Instead, the answer came from Mankiw the Author, who justified his royalties in two ways:

1.  Hey, lots of people get away with this. It’s “not unusual” said Mankiw. When our doctor recommends a procedure, when our auto mechanic picks out the replacement parts, when our contractor buys materials – in all these areas and others, we “rely on someone else to look out for our best interest and . . . help us make an informed decision.”  The Planet Money reporter pointed out that health care, car repair, and home contracting are precisely the areas where people complain about getting screwed by their agents. So yes, it’s not unusual (as economist Tom Jones might have said, “It’s not unusual to be screwed by anyone”). But it’s still an economic and moral problem.

Mankiw does admit that “there’s a risk” that the agent will not “do due diligence.”  “But a good professor would do that.”

Economist Mankiw would, I hope, point out that the principal-agent problem is a distortion of the market.  It puts the agent in a position of inherent conflict of economic interest, and conflicts of interest make it harder for people to be virtuous. Mankiw the Economist might even recommend a free market that does not rely on the virtue of the agent (“a good professor”). But Mankiw the Author has no problem with the current system.

2.  Hey, no big deal – it’s just a few bucks.  For students, Mankiw says, “the biggest expenditure is not money, it’s time. Giving them the best book. . .  is far more important than saving them a few dollars.” 

Mankiw the Economist might have said that those “few dollars” are excess profits. Whose pocket those dollars should wind up in is, of course, a moral question, not an economic one. But in his writing in defense of huge salaries and low taxes for CEOs and hedge-funders, Mankiw blends the moral into the economic, so it’s interesting that he omits it from his discussion of textbook prices.

The Planet Money reporters, to their credit, turned to other economists (who are not also textbook authors), and they looked at a different textbook market – high school. In college, the student is not the one who decides which book to buy, the professor is, and profs don’t have to worry about price. In any case the student is buying only one book. Not a lot of leverage there. 

But with high school texts, the school district is both decider and buyer.  Unlike the professor-as-decider (agent), the school district as decider-and-buyer (agent and principal) does care about the price. A lot. It is also buying those books by the carload, so it can exert some pressure on price.  Consequently, publishers’ profit margins on high school books are only 5-10%. On college textbooks, profits are closer to 20-25%.

I’m sure that Mankiw’s book is a very good book, and Mankiw himself sounds like a nice man. But if you want to know about who wins and who loses in the principal-agent problem, maybe your primary source of information shouldn’t be the agent.


* If the professor is the author of the book, his economic interest runs directly opposite to the interests of the student. The more money he can make the students pay for the book, the more money he makes, so we have the principal-vs.-agent problem. Some schools, including Montclair State, have policies aimed at preventing professors from making money in this way. I think it’s a New Jersey state law. I do not know if Harvard requires Mankiw to give up the royalties that come from sales to students in his courses.

Failed Prophecy and Sunk Costs

October 3, 2014
Posted by Jay Livingston

Four years ago, twenty-three economists (mostly conservative) signed a letter to Ben Bernanke warning that the Fed’s quantitative easing policy – adding billions of dollars to the economy – would be disastrous. It would “debase the currency,” create high inflation, distort financial markets, and do nothing to reduce unemployment.

Four years later, it’s clear that they were wrong (as Paul Krugman never tires of reminding us). Have they changed their beliefs?

Of course not.

Bloomberg (here) asked the letter-signers what they now thought about their prophecy.  Here’s the headline:

Fed Critics Say ’10 Letter Warning Inflation Still Right

This despite the actual low inflation.

(Click for a larger view. The original graph is here.)

I don’t know why I assume that high-level economists would be more likely than some ordinary people to change their ideas to adjust for new facts. Fifty years ago, in The Structure of Scientific Revolutions, Thomas Kuhn showed that even in areas like chemistry and physics, scientists cling to their paradigms even in the face of accumulated anomalous facts. Why should big-shot economists be any different? It also occurs to me that it’s the most eminent in a profession who will be more resistant to change.  After all, it’s the people at the top who have the greatest amount invested in their ideas – publications, reputations, consultantships, and of course ego. Economists call these “sunk costs.”

So how do they maintain their beliefs? 

Most of the 23 declined to comment; a few could not be reached (including Ronald McKinnon, who died the previous day).  Of those who responded, only one, Peter Wallison at the American Enterprise Institute, came close to saying, “My prediction was wrong.”

“All of us, I think, who signed the letter have never seen anything like what’s happened here.”

Most of the others preferred denial:

“The letter was correct as stated.” 
(David Malpass. He worked in Treasury under Reagan and Bush I)

“The letter mentioned several things . . and all have happened.” (John Taylor, Stanford)

“I think there’s plenty of inflation -- not at the checkout counter, necessarily, but on Wall Street.” (Jim Grant of “Grant’s Interest Rate Observer.” Kinda makes you wonder how closely he’s been observing interest rates.)

Then there was equivocation. After Thursday night’s debacle – Giants 8, Pirates 0, knocking Pittsburgh out of the playoffs– someone reminded me, “Hey, didn’t you tell me that the Pirates would win the World Series?”
“Yes, but I didn’t say when.”

Some of the letter-signers used this same tactic, and just about as convincingly.

“Note that word ‘risk.’ And note the absence of a date.” (Niall Ferguson, Harvard)

“Inflation could come . . .” (Amity Shlaes, Calvin Coolidge Memorial Foundation)

The 1954 sociology classic When Prophecy Fails describes a group built around a prediction that the world would soon be destroyed and that they, the believers, would be saved by flying saucers from outer space.  When it didn’t happen, they too faced the problem of cognitive dissonance – dissonance between belief and fact.* But because they had been very specific about what would happen and when it would happen, they could not very well use the  denial and equivocation favored by the economists. Instead, they first by claimed that what had averted the disaster was their own faith. By meeting and planning and believing so strongly in their extraterrestrial rescuers, they had literally saved the world. The economists, by contrast, could not claim that their warnings saved us from inflation, for their warning – their predictions and prescriptions – had been ignored by Fed. So instead they argue that there actually is, or will be, serious inflation.

The other tactic that the millenarian group seized on was to start proselytizing – trying to convert others and to bring new members into the fold.  For the conservative economists, this tactic is practically a given, but it is not necessarily a change.  They had already been spreading their faith, as professors and as advisors (to policy makers, political candidates, wealthy investors, et al.). They haven’t necessarily redoubled their efforts, but the evidence has not given them pause.  They continue to publish and sell their unreconstructed views to as wide an audience as possible.

That’s the curious thing about cognitive dissonance. The goal is to reduce the dissonance, and it really doesn’t matter how.  Of course, you could change your ideas, but letting go of long and deeply held ideas when the facts no longer co-operate is difficult. Apparently it’s easier to change the facts (by denial, equivocation, etc.). Or, equally effective in reducing the dissonance, you can convince others that you are right. That validation is just as effective as a friendly set of facts, especially if it comes from powerful and important people and comes with rewards both social and financial.

* This blog has had previous posts on cognitive dissonance:
  • You loudly preach the dangers of vaccine. Then it turns out that the one scientific paper supporting your views used faked data. Do you change your beliefs? (here)
  • You rail against “gun-free zones” as evil and dangerous. Then your son smuggles a .357 into his officially gun-free university dorm, making his room considerably less gun-free. He uses the gun to commit suicide. Do you change your beliefs? (here)
  • You predict that the Republicans will win the presidential elections because they’ve secretly rigged the electronic voting machines in key states. When the Democrat wins those states, do you change your beliefs? (here)

Social Capital and Social Values

October 1, 2014
Posted by Jay Livingston

In the previous post, I offered data showing that among professional footballers, wide receivers and cornerbacks, compared with other positions, were more likely to have been arrested. By coincidence, shortly after posting that I listened to a recent interview on WNYC’s “Death, Sex, Money”  (here) with former cornerback Dominique Foxworth. Googling Foxworth led me to an April 2014 video from the Harvard Business School. Given the representation – two cornerbacks, one wide receiver, and a running back – I figured that the famous HBS case method was now including cases involving sociopaths. 

Here is a brief excerpt. The speaker is cornerback and media-certified thug* Richard Sherman.

So it turns out the athletes are there not as examples of social pathology but for their particular expertise on social capital, though the discussion winds through many other topics. The other panelists along with cornerbacks Sherman and Foxworth are wide receiver Larry Fitzgerald, and running back Arian Foster. They are bright, informative, and frequently funny. If you have an hour, listen to the whole thing.

If you watch from the beginning, you will also hear the moderator’s introduction of the panel members, which is worth noting for what it says about HBS values. In addition to listing some statistics about their athletic records, Prof. Elberse is careful to specify how much money each of them is making.  In the football stadium, what matters most is the final score. At the Harvard Business School it’s income. What’s surprising is not the implicit value itself; it’s that Prof. Elberse makes it so blatant.**


* In the wake of his comments after the most recent Superbowl, Sherman was widely labeled a “thug.” The word was used about him at least 600 times on television. For more, go here, or just Google “Richard Sherman thug” and check out any of the 112,000 pages.

** For more on money as the ultimate value, and how this value emerges in ordinary conversation, see this earlier post.