Five intriguing papers I discovered this week
In what might become a recurring feature, I am going to summarise the findings of a few research papers, potentially of interest to ASI blog readers, that were either first released this week, first published this week, or first come upon by me this week.
This paper is a large meta-analysis of 168 other papers, which in turn refer to 201 different studies and experiments. They find that at least 99.9% of financial behaviour in life cannot be explained by differences in financial education, or conversely at most 0.1% of the difference in people's financial decision-making and choices is down to education interventions designed to improve their financial literacy. In the words of their abstract: "even large interventions with many hours of instruction have negligible effects on behavior 20 months or more from the time of intervention".
While other correlational studies appear to show some relationship between financial behaviour and educational schemes (i.e. one explaining more than 0.1% of the variance between individuals) they explain that this is only because those typically getting financial education already have various psychological traits associated with careful management of finances. They therefore suggest that big schemes designed to improve lifetime financial decisionmaking are futile and a waste of money; the best we can hope for is "just in time" interventions, perhaps at the point of financial transactions, that are more likely to be taken in and not forgotten.
In this paper the authors find that a substantial fraction of the male-female "gap" in STEM (Science, Technology, Engineering and Medicine) fields can be explained by the fact that women who are talented at maths tend to also have high verbal skills, skills that mathematically talented men are much more likely to lack. This means they have a wider range of choices available to them, and also possibly identify less closely with maths as part of their personality, and it is this choice not to pursue STEM further that drives the gap, rather than, for example, discrimination in the area or a perceived unfriendly atmosphere.
Liu, Huang and Wang found, reviewing 47 different experiments testing if schemes "teaching job search skills, improving self-presentation, boosting self-efficacy, encouraging proactivity, promoting goal setting, and enlisting social support" could boost the unemployed's chances of getting a job. In fact, on average those in the treatment groups—i.e. those actually subject to the intervention, and not in the control group—were 2.67 times more likely to get a job. Since the studies all used randomness of quasi-randomness to assign treatment, this suggests, they say, that schemes that develop skills and self-motivation can be effective. However, the schemes were more likely to help the young than the old, the short-term unemployed than the long-term unemployed, and job-seekers with special needs, as compared to the population at large.
4. Karwowski, M., and Lebuda, I., "Digit ratio predicts eminence of Polish actor" (Jul 2014)
In a slightly surprising study, the two authors looked at 98 Polish actors, both male and female, and compared the ratio between their second and fourth digits on their hand (a measure of prenatal testosterone exposure) and their productivity and fame. For both men and women, even controlling for age, a higher ratio predicted more pre-eminence.
5. Aisen, A., and Veiga, F. J., "How Does Political Instability Affect Economic Growth?" (Jan 2011)
In a classic example where economists do extensive research to tell us what we already know, this IMF paper from 2011 shows us how bad political instability is for economic growth. Actually, the paper is a great one because it allows us to estimate the size of the impact of different political elements on instability and then the size of instability's own impact on economic aggregates.
Their findings are highly interesting: whereas primary school enrolment has a pitifully small impact on economic growth, and the impact of investment, economic freedom and the security of property rights comes out quite small, violence, political instability and cabinet changes have substantial negative effects, as does, surprisingly, population growth. And while the most productive regions in Europe are the most ethnically diverse, in this study ethnic homogeneity is very strongly associated with growth. Of course, the conclusions of the paper—that countries should address the root causes of political instability—are much easier said than done!
Think piece: cryptocurrency gets real
ASI fellow Preston Byrne explains why bitcoin's recent problems do not mean the cryptocurrency-cum-payments-system is over. In fact, the promise of cryptography in payments and contracts is as exciting as ever.
Last week was a horrible week for Bitcoin: as "transaction malleability" (in effect, a form of distributed denial of service attack) entered the lexicon, $2.7 million of Bitcoins were stolen from Silk Road 2, Russia banned it and the App Store followed suit, the value of a single Bitcoin fell to roughly half – as against USD – as it was 14 days ago.
One could be forgiven for thinking it is "all over" for cryptocurrency; the sector is more than just Bitcoin, however, and as a whole the market tells a very different story. Slowly but surely, the one-trick crypto pony is becoming a multilateral ecosystem and one of the more interesting of these developments was the establishment of Ethereum, a project to build a platform to run smart contract protocols.
“What the hell is a smart contract?” You ask.
A lie can be half way around the world before the truth has got its boots on
This is a little story close to my heart in the day job:
"I think there is a great commercial potential on the moon," he added, citing significant reservers of helium 3, which is rare on Earth and which could be developed into a clean energy fuel ideal for nuclear fusion. The lunar soil is also rich in coveted rare earth elements: 17 chemicals in the periodic table that are in an increased demand because they are heavily used in everyday electronics. "There are a vast amount of opportunities for a wide variety of companies not only in America but across the globe," Gold insisted, emphasizing Europe and Japan, as well as the US Congress, are enthusiastic about a return to the moon.
The lunar soil may indeed be rich in rare earths: I have no idea myself but it could be. However, absolutely no one, ever, is going to try and mine rare earths on hte Moon and then return them to Earth. It simply isn't going to happen.
What I think has happened here is that people have absorbed the stories of the past few years about impending shortages of the rare earths. All that stuff about China reducing exports of these metals so vital to modern electronics. And thus there's a feeling that any deposit of them, even somewhere as inaccessible as the surface of the Moon, must be something that people would want to exploit.
The problem is in the initial story: yes, China did limit exports but that does not mean that there's any shortage of these minerals here on out little planet. Several of them, individually, are as common as copper down here. And we produce millions upon millions of tonne of that each year while we use only 140,000 tonnes of all 17 rare earths together. There's simply no long term shortage.
And there's absolutely no way therefore that anyone's going to try and mine the Moon for things that can be had down here for $10 a lb.
My major point here being that these people are apparently basing their plans about lunar mining on something that simply never will be mined up there: at least not for returning down here. And it's inevitable that if you start basing your plans on untruths then your plans are going to fail at some point.
The twelve days of state bureaucracy: 8-12
Day 8
Dearest Grandmama, eight noise abatement officers arrived saying that the noise of my neighbours' protest and the various inspectors' cars coming and going was in clear breach of official guidelines. They served me a compliance notice. I will write more tomorrow.
Day 9
Dearest Grandmama, the au pair and I made the mistake of bringing out tea and cakes in an attempt to make peace with the neighbours, it is the season of good will, after all. Now nine food safety inspectors are here, saying that out kitchen does not comply with hygiene regulations for the provision of food to the public. I will write more tomorrow.
Day 10
Dearest Grandmama, ten Home Office people broke down the door today, saying they suspected that the au pair might have been working here illegally. I've spoken to a lawyer and we hope we can get her out of the detention centre soon. We had the workmen come back to repair and repaint the front door. I will write more tomorrow.
Day 11
Dearest Grandmama, eleven EU inspectors arrived today. We convinced them the au pair was Bulgarian and therefore had a perfect right to be working here, but one of them noticed the name of the house and told us that we had to change it from Green Acres to Green Hectares. They also quizzed us on what colour the front door had been painted. I will write more tomorrow.
Day 12
Dearest Grandmama, today twelve court officers turned up to serve me with a European Arrest Warrant. We had been reported for painting the front door in a colour called Burgundy Red, Unfortunately this name breaches of EU local origin protection regulations. Anyway, I'm in prison myself now in Burgundy, and will have to sell the house, including the partridge and the pear tree, to pay my legal bills.
Still, it was a very kind gift, and at least it has taught me a lot about regulation these days. Please address any future correspondence to my lawyer.
The twelve days of state bureaucracy: 4-7
Day 4
Dearest Grandmama, four Environment Agency officers came round today and said the pear tree was unsafe as it might blow down in a gale. No gales are forecast, but they still say it has to be fenced-off or removed immediately. So we had some builders round to erect a sturdy fence. I will write more tomorrow.
Day 5
Dearest Grandmama, five traffic wardens arrived today, saying the neighbours had been complaining at the number of vehicles that had been calling. They gave tickets out to everyone parked in the street including several neighbours which only made them angrier. I will write more tomorrow.
Day 6
Dearest Grandmama, six security contractors arrived today. The traffic wardens had complained of harassment from the neighbours for giving them tickets so the local council were installing CCTV to ensure a safe working environment for the traffic wardens. I will write more tomorrow.
Day 7
Dearest Grandmama, the floodlights that the CCTV contractors installed really light up the tree and the partridge nicely, but seven of my near neighbours have organised a protest picket outside the house because they cannot sleep at night and the traffic and noise keeps them awake during the day. I will write more tomorrow.
The twelve days of state bureaucracy: 1-3
Day 1
Dearest Grandmama, we're having a lovely Christmas here at Green Acres, and thank you so much for the wonderful present we opened today, a partridge in a pear tree. I planted the tree and the partridge looks very happy perched in it. I will write more tomorrow.
Day 2
Dearest Grandmama, after I planted the tree, two animal welfare inspectors came round. They wanted to know if you were licensed to trade in game. And apparently just keeping the partridge in a tree would break all sorts of animal welfare rules, so I had to buy a proper bird house for it. I will write more tomorrow.
Day 3
Dearest Grandmama, after I erected the bird house for the partridge, three building inspectors came round saying I needed planning permission. They have given me until Twelfth Night to demolish the bird house, or they will come and bulldoze it. Still, I will have the tree, even if I have nowhere to keep the partridge, so thank you again. I will write more tomorrow.
Libertarian film screening of V for Vendetta
Tom Stringer has arranged a really fun Monday evening outing on Monday November 4th. It's a showing of the movie "V for Vendetta" at the Bowler Bar and Pub in Clarkenwell. The screening starts at 7, but people can arrive from 6pm onwards and there'll be plenty of time to chat with fellow libertarians. There's an amply stocked bar and what's more there is a free drink for every attendee courtesy of EzyOrder when you arrive (all you need to do is download their app onto your smartphones).
Why we've finally joined Google+
We've set up an Adam Smith Institute page on Google+, and — more importantly — a Google+ community for libertarians and classical liberals (and fellow-travellers) to share and discuss ideas and articles they find interesting.
To be honest, I've always been pretty sceptical about Google+. Though I think the functionality is superior to Facebook, it's not better enough to entice people to use it instead. And we have so many fans on Facebook and Twitter that I've always been wary about splitting the audience too much.
So why the change of heart? Two reasons. One, we've wanted to set up a forum for liberty-minded people in the UK to talk about things online for a while. Message boards are unwieldy, and the other social media sites aren't very good at allowing people other than page managers or prominent Tweeters to start discussions that go out to larger audiences. Google+'s communities are remarkably bottom-up: if you want to start a conversation about something in the group, you can.
The second reason is the thing I'm most excited about. Google+'s Hangouts functionality is superb. Hangouts allow us to broadcast live video conversations between up to eight users, with chat contributions from anyone else who wants to take part. The Real Asset Company has done this to great effect. I'm hoping that, if there's enough interest, we can start doing regular online conversations with all sorts of people who it wouldn't be easy to bring to events at the Institute, broadcasting to all the people who can't make it to those events.
If there's anyone you think we should ask to 'Hangout' with, let me know in the comments and we'll see what we can do. In the meantime, join the Google+ community and let's try to get the ball rolling.
ASI launches The Entrepreneurs Network
Today, sees the launch of The Entrepreneurs Network – a new think tank supported by the Adam Smith Institute. The Entrepreneurs Network is a think tank designed to bring entrepreneurs to the forefront of political discourse and help make Britain the best place to start a business.
The Entrepreneurs Network will produce research outlining the benefits of easing unnecessary burdens upon enterprise; host high-profile events to bridge the gap between the aspirations of the entrepreneurial community and policy makers; and represent and champion entrepreneurs, making the case for a more entrepreneurial society.
The best way to stay in tough with what The Entrepreneurs Network is doing is to sig up to the fortnightly Entrepreneurs Bulletin. This will give you:
- A digest of the latest government proposals and how they could impact your business;
- An update of what is going on in entrepreneurial communities across the country;
- The chance to share your views on entrepreneurship;
- Invitations to Network events;
- Opportunities to represent your business and the Network in the media.
Please visit the website to find out more, sign up for the bulletin and contact us with your thoughts on this new think tank.
The life and legacy of Ronald Coase
Yesterday, at the age of 103, one of the greatest minds of our time, Nobel prize winner and emeritus professor at University of Chicago Law School Ronald Coase passed away.
His contributions to and influence on economic science are of monumental importance. His groundbreaking research has set the stage for a joint field of law and economics, and has also influenced the new institutional revolution in addition to a number of other fields and areas of research in economic theory.
It would be unfair to say he only made two major contributions since both of these (written 23 years apart from one another) not only won him the Nobel prize, but have continued to influence the economic science ever since. The first was his 1937 paper The Nature of the Firm where he introduced the concept of transaction costs in microeconomic analysis. He believed that firms exist because they economize on transaction costs - costs like market entry, acquiring information, managing a company, bargaining, etc. If these individual transactions can be reduced into fewer transactions by organizing a hierarchical body, then entrepreneurs will form firms. With microeconomic theory at the time focusing only on production and transportation costs, Coase's inclusion of transaction costs was a breath of fresh air into economics. However, in 2009 Coase said he was surprised how much The Nature of the Firm was being cited since it was "little more than an undergraduate essay".
The second was his 1960 paper The Problem of Social Cost, widely considered to be the seminal contribution to the joint field of law and economics. It is from this paper that the Coase theorem was later developed (it was Stigler who actually coined the phrase "Coase theorem"). In The Problem of Social Cost, Coase examines how a cost imposed on society by an individual firm (an externality such as pollution) can be solved by mutual negotiation and consent if transaction costs are zero and if property rights are well-defined. This idea was subject to vast misinterpretation, which Coase tried to clear up in his subsequent interviews and texts. Regarding the theorem, he later stated: “All it says is that the people will use resources in the way that produces the most value, that’s all ... I still think it’s an obvious point. You wouldn't think there was a need for a Coase Theorem, really.”
The path to greatness
Born in a London suburb, he received his BA from the London School of Economics in 1932 and was a member of staff at LSE from 1935 until 1951 (the same time Hayek was there). During his student times he spent a year in the US as a travelling scholar, where he studied the American automobile industry. It was from this experience that he formed ideas for The Nature of the Firm. For Coase, becoming an economist was pure luck, as he himself admitted, since he wasn't interested in economics until he met Sir Arnold Plant on his final year who introduced him to Adam Smith's invisible hand and explained the coordination mechanism of the price system to him.
It is also interesting that, at the time, Coase was more of a socialist, wondering why people thought Lenin was wrong to posit that a government can be centrally run in the same manner a big firms like Ford or General Motors (Lenin used the Deutsche Post to make his point). In answering this question, he developed a crucial insight about why firms are formed. Even though firms are like centrally planned economies, they are dissimilar to governments in that they are formed by people's voluntary choices, and are governed by the price mechanism. The cost of using the market induces people to make the choice of forming a firm to lower this cost, which leads to the most efficient production processes taking place within a firm: not a government.
During WWII, he worked for the Central Statistical Office of the War Cabinet in London, an experience he cherished as he saw how large organizations tend to operate. He left LSE in 1951 first to join the University of Buffalo, and then the University of Virginia in 1958 (James Buchanan and Gordon Tullock were there at the time). While working in Virginia, he studied the Federal Communication Commission's allocation of radio frequencies.
In his 1959 article, he suggested that the Commission should sell the frequencies to the highest bidders in order to solve the externality problem. It is here where he first suggested that with well-defined property rights, radio frequencies could be allocated in the market just like any other good. It wasn't until 1994 that his suggestions were actually implemented. What is interesting about this article is that he presented it to a group of economists from the University of Chicago (including Nobel prize winners George Stigler and Milton Friedman) trying to persuade them that if property rights were properly defined market actors would yield an efficient solution. George Stigler recollects on that night:
“We strongly objected to this heresy. Milton Friedman did most of the talking, as usual. He also did much of the thinking, as usual. In the course of two hours of argument, the vote went from 21 against and one for Coase to 21 for Coase. What an exhilarating event! I lamented afterward that we had not had the clairvoyance to tape it.”
It was from this anecdote that The Problem of Social Cost was written. Coase was hired by the University of Chicago in 1964. In 1965 he became the editor of the Journal of Law and Economics, a position he occupied until 1982. It is believed that his leadership was partly responsible for the journal achieving its influential status. Coase himself said that he used the journal to create a new subject, which he was successful at: not to mention that in this process he influenced the creation of many others.
Oliver Williamson and Douglas North (both Nobel prize winners) on several occasions single out Coase as their major influence behind the new institutional revolution. In 1991, Coase received a Nobel prize in economics "for his discovery and clarification of the significance of transaction costs and property rights for the institutional structure and functioning of the economy."
As with many great economists, Coase was active and fully engaged in his work until the very last day. (Elinor Ostrom graded PhD papers on her deathbed, and Paul Samuelson wrote op-eds just a few weeks before he passed away.) In his last years, he shifted his attention to China, which culminated in a co-authored book in 2011 (at the age of 101) entitled How China Became Capitalist (with Nina Wang). In the book, the authors claim that the Chinese transition wasn't because of deliberate actions of the communist party, but small, marginal changes in society. They dubbed China the product of human action, but not human design, as "China became capitalist while it was trying to modernize socialism". Not since Milton Friedman was there a more respected Western economist in China.
Perhaps the best description of Coase as a person, as well as of the essence of his work, was summarized by Gary Becker: "Coase didn't say a lot, but I began to realize that every time he did say something, it was really profound."
Misinterpreting the Coase theorem
The simplest interpretation of the Coase theorem is that individuals can resolve their disputes in their best interests without the need for government intervention, assuming no transaction or bargaining costs are involved. However, since transaction costs do indeed exist, there is a need for government to lower these costs via an efficient institutional design and properly defined property rights. In other words, courts and efficient institutions are necessary to solve disputes: but not laws that for example prevent smoking, or Pigouvian taxation of externalities like pollution. The right to create social costs like pollution or smoking would simply end up in the hands of those who value it the most.
Consider the following example that Coase himself has noted. A confectioner has machines that shake the office of a nearby doctor when operating, thus preventing him from performing delicate examinations. The answer, Coase would say, is not to enforce a government regulation to put the confectioner out of business. If the value of the machines to the confectioner is higher than the harm imposed on the doctor then there is scope for a mutually beneficial agreement of a payment (compensation) from the confectioner to the doctor for using the machine. It works the other way around as well - if the doctor's work is valued more than the confectioner's, he can make payments to the confectioner to stop production during his work. Another example is a factory whose pollution imposes costs on a dry cleaning business, but whose profits are much higher than that of the dry cleaner. If the factory owner values his production more than what the dry cleaner values his, he can simply pay him the cost he's imposing onto him.
Coase wasn't trying to describe a perfect world without transaction costs (he actually resented such inapplicable economic analysis), but rather make it clear what the role of transaction costs is in designing the institutions of an economic system. The theorem is actually a great showcase of the real world - a world full of transactions, bargaining and choices that are not only constrained by budgets, but by the design of an institutional system within which these choices are made. It is the real world where the Coase theorem has found many of its applications. An example I always think of is the hunting of elephants in Kenya and Botswana. While poaching was banned in Kenya to save elephants from extinction, in Botswana local farmers were given property rights to elephant herds. The ownership of elephant herds would incentivise the farmers to preserve their long term value. As a result in Kenya, which applied the ban on hunting, since the 1970s the amount of elephants has dropped from 140,000 to only 16,000 today, while in Botswana their number has grown from 20,000 to 68,000.
Apart from the externalities problem, Coase also had a few things to say about public goods. In his 1974 paper "The Lighthouse in Economics" he challenged the classical a priori view that a lighthouse is a typical example of a public good that cannot be provided by the private sector at a profit. He showed that in 19th century Britain, all lighthouses were privately provided and charged ships for their use as they entered a port.
The legacy
Finally, from the Institute bearing his name (), a closing point:
"Coase was critical of economics for being static and preoccupied with formalizing concepts that date back to Adam Smith. He believed that the goal of economists should be to change fundamentally the way we look at a problem. This goal was part of the inspiration behind the Ronald Coase Institute, which a group of scholars formed with Ronald Coase in 2000 to assist young scholars whose research has the potential to help transform their economies. Coase’s support for these young scholars was an act of generosity illustrative of a lifetime of scholarly generosity and confidence in the power of ideas. Ronald Coase himself was an outstanding example of an economist who changed fundamentally the way we think about problems, and the impact of his ideas continues strong today."
Here is a list of some of his most notable writings (a full list of publications can be found here):
- 1937: "The Nature of the Firm." Economica 4 (November): 386–405.
- 1938: "Business Organization and the Accountant." Reprinted in James M. Buchanan and G. F. Thirlby, eds., L.S.E. Essays on Cost. London: Weidenfeld and Nicolson, 1973.
- 1959: "The Federal Communications Commission." Journal of Law and Economics 2 (October): 1–40.
- 1960: "The Problem of Social Cost." Journal of Law and Economics 3 (October): 1–44.
- 1972: "Durability and Monopoly." Journal of Law and Economics 15 (1) : 143-149.
- 1974: "The Lighthouse in Economics." Journal of Law and Economics 17 (2): 357–376.
- 1992: "The Institutional Structure of Production." American Economic Review 82(4): 713-719. (Nobel Prize lecture)
And these two books that reprint some of his most important work:
- 1988: The Firm, the Market, and the Law. University of Chicago Press, Chicago.
- 1994: Essays on Economics and Economists. University of Chicago Press, Chicago.