A tall tale of market efficiency, informed choice and the quest for the right discount rate.
I’ve been reading on modern economics lately. Some authors challenge dearly held economic assumptions, others use new and radical methods. Uncommon Sense is the old-fashioned kind of economics. The kinda bad kind.
Becker and Posner curated a collection of their blog posts, each one written by one author with a commentary of the other. I did not check if the book content was directly taken from the author’s blog, or if some updates have been made. They muse on different topics, arranged by overarching themes, and they offer their economic and legal view on affairs.
Applying economic principles to affairs things are not typically appraised by economic value is a neat idea. Bring down any decision to a sum of money that the alternatives will cost or bring in, and everything gets easy. Unfortunately, it doesn’t work all the time. Here are some examples from Uncommon Sense where I believe that the authors go awry.
They never think far enough
Love is transactional, remember? Becker and Posner would like to take it one step further and define marriage purely as a contractual agreement. An agreement that could be made between more than two parties. They explicitly state that this would include both polygyny (one man with multiple women) and polyandry (one woman with multiple men). And then they go on and write their entire argument exclusively about polygynous marriages, for “historical” reasons. I am very confused by this.
Surely Becker and Posner do not propose to allow multiple partners for men only. That would be ridiculously sexist, for no apparent purpose. But when polygyny and polyandry are simultaneously legalized, we will surely have cross marriages, chain marriages, branching marriages and marriages within marriages (also known as meta marriages). Instead, completely oblivious of all the naughty, sexy implications of their proposal, the authors discuss how women would be pretty ok in a harem. This is not uncommon sense.
For them, there are no victims
One of the most detestable features of classic economic theory is that no victims are recognized. When hurricane Katrina hit New Orleans, poor people were hit disproportionally hard, because richer demographics had left the city beforehand. Reasonable persons would argue that this was because the poor people could not afford to move away, or stay at a hotel for a week, or even leave their jobs for a couple days. According to Becker and Posner, however, the cause for their hardship was entirely different: it was a dependency mindset caused by social welfare that stopped then from fleeing and compelled then to stay!
And even if poverty actually was the underlying problem, it would still be their fault, as Uncommon Sense reveals that poor people have willingly chosen poverty. They deliberately chose to ditch higher education, marketable skills and a high paying job in favor of unspecified short-term benefits. I guess they also chose to not have rich parents. Sadly, scorning poor people is not uncommon sense for many a middle-class household, but a very common practice.
So common sense does help, after all?
Both authors are proponents of capital punishment, for economic reasons: the marginal deterrence is the number of murders that do not happen after a murderer was executed, but would have happened if the same person just got a life sentence. The idea is that the execution of a murderer makes more would-be killers rethink their plans. You multiply the marginal deterrence by $7,000,000 (the agreed-on value of an average person’s life) and compare it to the social cost of executing prisoners. This social cost comprises national and international loss of reputation for being the last “civilized” country to apply the death sentence.
You know what? I’m fine with it. If killing one murderer is the only possible way to save the lives of innocent people, let’s do it. So how many lives are saved per murderer executed, how big it the marginal deterrence? Initial studies suggested around eighteen, but that number has been scaled down a lot. Now, there are studies suggesting no marginal deterrence of a death sentence over a life sentence at all.
Being killed is worse than living a life in prison, so clearly there must be some extra deterrence from executions. That’s common sense and the author’s argument. But lifelong imprisonment is already pretty bad, so murderers obviously either do not consider any consequences at all or firmly believe they won’t get caught. That’s also common sense and leads to entirely different conclusions.
We don’t know the marginal deterrence. Maybe the number is significant, maybe there is no marginal deterrence at all. Why would the authors, in a book called Uncommon Sense, suddenly trx to apply common sense? Here we have a clear lack of accurate information that completely invalidates the valuation method, and Becker and Posner should just accept that instead of backing their argument with flimsy data.
They don’t really know either…
If you can invest money at a yearly interest rate of 5%, to have 1.05€ in one year you need to invest 1€ now. So the present value of 1.05€ in the future is 1€, with the given time period and interest rate. So if you need a certain sum of money in the future, you can discount that sum (using the interest rate) to the present to calculate how much money you need to invest now. Did you know that we can treat global warming and other future catastrophes just like investments?
If we know how much a catastrophe will cost at a certain point in the future, we can discount that sum to get the value in today’s money. Than, this amount can be saved or invested to pay catastrophe relieve in the future. The only problem remaining is that we do not know how much a future catastrophe would cost, when it will happen and what a meaningful discount rate would be. Interest accrual or discounting works with compound interest (the interest accrued in a year will increase the capital from which the interest of the next year is calculated) and is very sensitive to changes of the parameters. Let’s assume the cost of a catastrophe 100 years in the future can be somewhat accurately estimated to be one trillion euros. The present value with a discount rate of 2% is 140 million euros, with 3% the present value is only 50 million euros. But the rate might be a lot higher or lower, or even negative, and we don’t know future rates, obviously. And if the catastrophe doesn’t politely wait for 100 years but already occurs after 30, we won’t have nearly enough money anyway.
The problem of this strategy is that it requires continuity. Would you expect the circumstances to stay constant for a hundred years? Would you trust future politicians to not touch the catastrophe savings fund to fix whatever short-term problems will get them reelected? I would not.
Preparing for global warming would be a dead investment without visible returns for a very long time (if a catastrophe is averted, there will never be an obvious return). Spending money on social benefits, research and education may have greater returns than saving for a catastrophe. And it’s exactly the thing we were doing anyway, so we’ll just go on. That’s just common sense.
Poor people should think of others first
The Homo economicus is the perfectly rational and egotistical actor in old-fashioned economics. If everybody behaves that way, the total outcome is maximized for everyone.
Imagine you’re some dirt-poor guy or gal working three jobs. Would you support a higher minimum wage? Becker and Posner say that you should categorically oppose any minimum wage, because it may force employers to reduce the workforce, lowering overall welfare.
To the immense surprise of absolutely nobody except some economists, most poor people prefer to think of their private benefit first and tend to support minimum wages. Personally, I find it unfair that rich folk can go about whatever they want, while poor people are expected to take one for the team and accept lower wages to help the overall economy.
By the way, do you remember when the minimum wage was introduced, and unemployment reached an all-time high as employers crumbled or fled the area? It’s just common sense, after all. And do you remember how nothing like that happened, at all?
Uncommon sense at it’s best
To end on a high note, I really enjoyed the author’s take on doping in professional sports. There is little controversy to keep it banned, but economists prefer an economic reason for everything…
Doping has benefits (increased performance) that exceed its initial costs, so it is perfectly rational for an athlete to do some substance abuse. With some individuals doping, however, there is an increased pressure on competing athletes to also do it. Soon after, everybody will be on performance-enhancing drugs, and doping will lose its benefit (as everybody is on the same relative level as before again) while still incurring costs (it is both expensive and unhealthy).
This is a nice example how something can be both perfectly reasonable for every individual, but still completely irrational for a group at the same time. This is truly uncommon sense.
Take all those morals, stress, pride, love and status and condense everything into money, then just compare the money numbers of everything. How much money will change your political views? What amount will make you accept the Injustice in the world? Like it happened with goods and services long ago, money is used as unit of measure for anything from emotions to habits to vague social concepts like civility. And like goods and services, the money value of not invading neighboring countries is hard to assess, and the result may not be meaningful in any sense.
A human life has a projected value of $7Mio. There are people in the world that could pay that sum literally out of their pocket. What does that mean?
Economics is not the most empiric field of study. Whenever economists speak, just don’t forget something that economic research always comes with huge concessions and limitations. Especially all theories that postulate an efficient market took a blow during the economic crisis. Economic theories in general are comically bad at predicting actual human behavior. If a theory does not allow predictions concerning its subject matter, then the theory is wrong. All economic theories are wrong, and they must be. Imagine someone published an accurate theory of how markets work. People would use it to get an edge, this changing the way markets work.
There are two aspects to Uncommon Sense. Two renown and reputable educators present their combined lifelong knowledge of economics applied to problems from everyday life. And two well-tenured old white men tell other people how to live their lives by reducing it to a number that cannot be calculated objectively in most cases. It surely was an interesting, controversial and educating read. Sometimes I was furious how stupid and ignorant the reasoning is, sometimes a clever insight amazed me.
At the end of the day it was pretty ok, if a bit annoying.
- Everything has a money value, and those can be compared
- The free market will solve everything
Gary S. Becker was a highly productive american economist of the Chicago shool, and was awarded the Nobel Memorial Prize for his work on social economics. Richard A. Posner is the most cited legal scholar of the 20th century and served as judge on the United States Court of Appeals in Chicago. Together they ran the Becker-Posner Blog, where they discussed economical and legal topics. The blog is discontinued but still available.
University of Chicago Press, November 1, 2009