Thoughts on end-of-semester lectures (Part 1)

At the end of the semester, I like to make a splash with students. For example, in my intermediate microeconomics course I put together a fun lecture. We have some laughs talking about models. We talk Rolling Stones songs like “you can’t always get what you want” (budget constraints) as well as Queen songs like “I want it all” (monotonicity).

We wax philosophical with Robert Frost’s “The Road Not Taken” about opportunity cost. We reiterate that the arguments in utility functions can be a richer set of desires than food and shelter. As Adam Smith says, “Man naturally desires not only to be loved, but to be lovely.” We emphasize that our models are simplified because good models try to get to the heart of the matter.

Sometimes models are dangerous. Like the “monkey illusion” we become so distracted we miss the heart of the matter. One prime example is how Samuelson continued to update the projection about when the USSR would surpass the US economy (check this out for more info) or Easterly’s depiction of the World Bank notion that if you build it, growth will come.

We discuss the importance of models, how they organize our thinking, the dangers of being too wed to a model but also the importance of empirical testing. We use MobLab in class to test our models as I’ve written about here. But, MobLab can’t give us an empirical test of all the important questions. We have to look elsewhere, out in the world to find evidence. One of my favorite examples of this are cross-border comparisons like East and West Germany, North and South Korea, Haiti and the Dominican Republic, etc.

I remind students that incentives matter. Economic institutions influence the costs and benefits of human action. When costs and benefits change, we expect for behavior to change. Throughout the semester we learned to formalize these ideas and they are not without consequence. As this New York Times piece discusses the work of Amartya Sen,

“Nature causes floods and droughts, but most societies have found ways to get food to those afflicted most of the time. Human folly causes famine, which occurs when those ways are blocked. Amartya Sen, a Harvard economist, argued that there has never been a serious famine in a country — even an impoverished one — with a democratic government and a free press. The press acts as a warning system and the pressures of democracy dissuade rulers from famine-producing policies.”

While economics is fun, interesting, and can be light-hearted, economics can also be deadly serious. The stakes of economic illiteracy are enormous.

Next week we go on to Part 2 where I pivot from this section of the end-of-semester talk to the applications of economic ideas to the everyday life of students.

School Attendance as State Capacity

Who knows what state capacity was 150 years ago? After all, DMV jokes are only a little out of date. There is a lot of richness and specificity to state capacity. That’s why we can’t look at an identical law in two different places or times and assume that their enforcement and evasion are the same.

Interested readers can see my previous post for a figure that illustrates the timing of compulsory education legislation across US states. The effects on literacy were a bit ambiguous. The explanation might be that effective enforcement by the various states might have differed (substantially). The figure below illustrates the average rates of attendance by age and census year.

Just as an increasing number of states began to enact compulsory school attendance, we can see that school attendance rates rose over time. But we can’t tell from the figure whether attendance laws caused or were merely coincident with increasing attendance.

One hint is to group the people by whether their state had compulsory attendance laws on the books. See the figure below.

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The Luck (?) of the Irish

Poor Ireland. Long oppressed by the Brits. Losing 25% of their population in the Great Famine due to both deaths and emigration. Today, there are possibly 10 times as many Irish Americans as there are residents of Ireland. There are as many Irish Canadians as there are residents of Ireland.

Poor Ireland.

And indeed, Ireland used to be literally very poor, at least in an economic sense. In 1960, their GDP per capita was about half of the United Kingdom. As recently as 1990, they were still only at about 70% of the United Kingdom and the rest of Western Europe. That’s all according to the latest Maddison database figures, which are probably as close to accurate as we can find. But after 1990, we probably shouldn’t use those figures, for reasons peculiar to Ireland.

Today? Ireland is much wealthier. But how much wealthier? It’s tricky. Ireland’s GDP is inflated significantly due to a lot of foreign investment. And possibly some tax evasion/avoidance. You see, Ireland is a tax haven. It has one of the lowest corporate tax rates in the world. That means we have to interpret the data with care, but only because it is such a great place to invest.

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New Dead Sea Cave Finds: Scrolls, 10,500-year Old Basket, Lice Comb, etc.

The original 1947-48 finds of scrolls in caves near the Dead Sea were a huge sensation. Preserved by the aridity of that region in the southwestern part of Israel, these scrolls dated back to around 100 B.C.-100 A.D.  They included Hebrew texts of much of the Old Testament, which were about a thousand years older than previously known Hebrew Old Testament manuscripts. There were also other writings peculiar to the Jewish community that lived near those caves, which gave new insights into the religious and social currents of that day.

The last of those manuscript finds by scholars was in 1961. Since then, there has been only trickle of artifacts from looters who have dug up items to sell, but with no proper historical context. In the last few years, the Israel Antiquities Authority (IAA) has mounted an exhaustive survey of every nook, cranny, and hole in that Judean Desert area, in order to forestall further loss of ancient artifacts. The IAA has now announced some finds from that survey. They include further Bible texts (in Greek), the oldest known woven basket (10,500 years old), and a 6,000 year old mummified skeleton of a child, covered with a cloth. The searchers also found arrow and spear tips, coins, sandals and even lice combs, all from the time of the Bar Kochba revolt (133-135 A.D.).

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Consumption as Inflation Hedge

The emerging market in digital art as nonfungible tokens is the strongest signal of expected inflation I’ve seen to date.

Let’s back up.

Digital art is being sold as nonfungible tokens (NFTs). Is this a bubble? Don’t know. Is this art? Don’t care. Is a piece of digital art as an NFT harder easier or harder to duplicate? I imagine it is easier for the artist, but they have an incentive not to issue duplicates, because doing so erodes the market value of all future digital art NFTs the producer might issue. Is a piece of digital art as NFT harder to duplicate for a forger? I imagine so. The NFT as both art and artists signature is certainly harder to duplicate than traditional media and penmanship. Which is to say we have little reason to worry about the value of a piece of art being inflated away by the artist or criminal forgers.

Now that’s interesting.

The general rule of thumb is that the more consumption value a good offers, the worse it will perform, on average, as an investment. Art, baseball cards, comic books, vinyl records, memorabilia, homes – these are all generally inferior to equities as investments. It stands to reason, though I certainly haven’t checked, that the same logic applies to hedging against inflation as well. Precious metals, while less fun, should offer a superior hedge against inflation than art, particular in relation to art by living artists, where the supply is anything but fixed.

In this regard, however, NFTs are a bit of a game changer. The supply of any given Beeple NFT is fixed forever at one, and there is as yet no reason to believe otherwise. Storage and security costs approach zero, which is something that can’t be said about a 20-foot tall metallic balloon dog. The consumption value is subjective and I’ll leave it to market auctions to suss that out. The inflationary hedge value, however – in this manner NFTs may be an game-changing innovation for prominent living artists, allowing them to capture rents from the value they create that has previously eluded them prior to shedding their mortal coil.

The bond market isn’t giving unambiguous signals of inflationary pressures yet, but signs are creeping in, and among those signs I include seemingly rabid excitement for mixing cultural-status consumption with cryptocurrency-enabled hedges against the prospect of what would be the first real wave of inflation we’ve seen in 40 years.

Which is a long winded way of saying I’m not rooting for inflation, but I’d also be happy to sell my mint-condition complete set of 1987 Fleer baseball cards if you’re looking to hedge your portfolio.

Power Drill Versus Python 3.9

I wrote this Complaint on Wednesday:

Consider the power drill. I learned how to use one when I was a child. I have one today that I occasionally bring out for home repair projects. It works just the way it did when I was 8 years old, and I expect nothing to change. There is something nice about tools that function the way they worked the last time you pulled them out of the basement.

Consider programming a web app. Two years ago, I created a web app that I will refer to as Buchanan2. This week I wanted to create a new web app, called Buchanan3. I thought, if I’m lucky, I can use Buchanan2 code as a scaffold upon which to build Buchanan3 in a matter of hours.

To build Buchanan2, I used ToolA and ToolB and Python-based coding. When I opened up ToolA, I got a message that Old ToolA would be deleting next month, so I better upgrade to New ToolA. Ok. I upgraded, hoping it wouldn’t break Buchanan2. Then I opened up ToolB, and it was worse in the sense that more had changed. Also, Buchanan2 had been build using Old Python. New ToolA will not tolerate Old Python. I must figure out how to upgrade to New Python. I fear that Buchanan2 will break if I make all these changes.

While navigating all the changes and upgrades, I fight to stay on the free tier of ToolB, since I already pay for ToolA.

I spent hours searching through documentation. Maybe I could have worked faster. The flesh rebels against this labyrinth, as you would flee a room when the fire alarm sounds. Suddenly, I was on Twitter, and then I was in the kitchen getting snacks.

These situations make me very frustrated, but not hopeless. I have faith that if I bang my head against the desk enough times, and read one more message board reply, that Buchanan3 will work. It has to work. It will work, eventually. I hate New Python, and New ToolB, and anyone who would force me to learn new things all over again. Yet, in this fashion, I somehow got Buchanan2 to work, years ago.

I will keep at it, as a reluctant irritable self-taught programmer.

Today is Sunday. Since writing that, I have progressed and I feel much better. One thing that helped was getting on the lowest paid tier of Tool B and writing an email directly to the creator of Tool B. He wrote back quickly and helped me see my user error. If I’m lucky, Buchanan3 will be working within 2 weeks.

This situation reminds of research by David Deming and Kadeem Noray of Harvard. They find that recent STEM graduates make more money than their peers who picked softer subjects to study in college. Demin and Noray suggest that technical skills become obsolete in a matter of years and thus the wage premium for studying STEM in college declines over the first decade of working life.

My experience is just one anecdote, but there is no way that my college education a decade ago could have exactly prepared me for New Python, New ToolA and New ToolB. Those tools didn’t exist back then.

Retailer Support for Consumer to Consumer

I was not going to post about consumer-to-consumer markets again, but one of my favorite brands has just set up a re-sale site.

M.M. LaFleur is what would happen if I moved to New York City and started a fashion company along with clones of myself, knowing that my consumers are me as a corporate lawyer. I have bought a few pieces from them that I like and wear to work. Even though I don’t plan to buy from them again soon, I enjoy getting their promotional emails.

I’m not a cynic, not when it comes to M.M. LaFleur or re-using consumer goods. I like that they are giving people a chance to reduce waste by getting unwanted clothes to new users. What they are doing is also good business. M.M. LaFleur is making it easier to clear out your closet and offering to pay you in credits to buy new stuff from them.

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Rationality and economics

Lately I have been thinking a lot about rationality and economics. In my Economics of the Family and Religion course I exhort students to take the approach, “crazy is lazy”. Like archeologists that brush away the dust from artifacts we should brush away the dust of human decision-making and find the rationality. This is especially useful when it comes to understanding observed patterns in religious practice across time and space. You don’t get very far with, “people are nuts”.

Humans make decisions on purpose. They weigh the costs and benefits of an action and make the choice that seems best to them given their available opportunities. Some students have struggled to integrate this message with their other classes. At FSU we have a deep bench of experimental and behavioral economists so there are ample opportunities for students to see courses with a more psychological approach.

In one famous study, Khaneman and Tversky manipulate whether there is a positive or negative frame on a treatment for a deadly disease. In the positive frame, there was a 33 percent chance that treatment could save the 600 people with the deadly disease. In the negative frame, there was a 66 percent chance the treatment could kill the 600 people with the deadly disease. Notice that both of those probabilities result in 200 people being saved. However, people were far more favorable to the positive frame (72%) compared to the negative frame (22%).

Then there are numerous other behavioral economics findings about seemingly small things that impact the decisions people make. For example, in research about bidding behavior psychologists Dan Ariely and Drazen Prelec and economist George Loewenstein passed out sheets of paper and had students write the last two digits of their social security number (SSN) at the top before they placed a bid for each item on a sheet. Students with SSN in the top 20 percent of the distribution bid 216 to 346 percent higher for the items compared to those with SSN in the bottom 20 percent.

We could go on. In the face of those kind of results, it is no wonder that students pause to reflect about how these findings fit into the larger corpus of economics. Are they useful observations to the extent they help us improve the predictions of our models? Are they damning demonstrations that cut out the heart of the economic approach?

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Reading Literacy Data

The story that I’ve heard is this:

            In the US, we care about education. We believe that all people should receive one, regardless of their family status. Therefore, states provide education directly.

There you have it. We provide education in the US so that everyone gets a more fair shake at education. We might disagree about the purpose of an education. Maybe it’s for improved job prospects, for a more informed citizenry, or for more unified values and experiences. One socially awkward answer is that state schools are, in part, a childcare service that permit parents to work. Except for these couple of reasons, school provision and compulsory education should, at the very least, increase literacy. That’s a low bar.

Given the above reasoning states began to pass compulsory school legislation. Massachusetts was first in 1852. Followed by DC and Vermont in the 1860s. Thirteen more adopted compulsory education legislation by 1880. By the year 1900, most states had compulsory schooling legislation on the books that was applicable to at least some age groups. See the figure. Thus, did the US achieve more equality, so goes the story.

The reasoning behind the story is sound. Without education of some sort, people will surely have less human capital. The vulnerability of the reasoning is that formal schooling is not the only form of education. A person who doesn’t attend school may help a parent at work or have a private tutor – or simply grow in a milieu of thoughtful exposure. Therefore, requiring that a child attend school may not improve human capital by a degree greater than what the child would have been doing otherwise. That’s an empirical matter.

The figure below illustrate the data for ‘white’ people and illustrates literacy between the ages of 20 and 30. Why that interval? At the lower end, we don’t have literacy data for people under the age of 20 in 1850 & 1860. On the higher end, any effects of compulsory schooling will only affect those who were children and subject to the law – older people are immune to compulsory schooling legislation.

The graph illustrates that state literacy rates were rising throughout the period. The main exception is 1870. Maybe the demands of the civil war caused children to work at home or otherwise and forego schooling. So the increase from 1870 to 1880 is more of a catch-up to a previous trend than anything else. While it’s true that several states passed compulsory schooling laws in the 1870s, that doesn’t explain the widespread literacy improvements across most states.

After 1860, we can examine the younger people who were subject to the schooling laws. The figure below for people ages 10-20 tells a similar story to the one above.

My biased reading of the data is that initial compulsory schooling laws had at least an ambiguous effect on the overall trend of improving literacy. I’ll delve deeper in future posts.

PS – The literacy data is from IPUMS.

PPS – The compulsory schooling law dates are allegedly from “Department of Education, National Center for Educational Statistics, Digest of Education Statistics, 2004.” But I couldn’t find the original source. Kudos to anyone in the comments who can find it.