Ideoblog

Buying the moon

There's water on the moon. Per the WSJ, "[w]ater's availability would . . . make further human exploration of the moon possible, since the water could be used to generate oxygen, as well as to make rocket fuel."

But who owns it?

This matters, because as lawyer Timothy Nelson told the WSJ blog:

Of course, getting resources from the moon will take an enormous capital investment, and the trick in setting up a treaty will be to make it feasible to get private capital involved. If you don't do that; if it's something that's overly regulated by a centralized U.N. framework, it won't work. You have to make it such that private investors could sensibly commit the funds to go ahead and do the exploitation.

Now, would you make an investment that's subject to a treaty providing

The exploration and use of the moon shall be the province of all mankind and shall be carried out for the benefit and in the interests of all countries, irrespective of their degree of economic or scientific development. Due regard shall be paid to the interests of present and future generations as well as to the need to promote higher standards of living and conditions of economic and social progress and development in accordance with the Charter of the United Nations [?]

Probably not. What would Coase do? We'll need to define property rights up there to encourage investment. But based on what?

Maybe we could get some guidance from the Man Who Sold the Moon, who bought up the parts of earth whose air rights include the moon. Of course he needed to raise a lot of money, so he had to hope his property rights theory actually worked. Bit of a jurisdictional tangle here.

Then he had to use a corporation to raise the money. Unfortunately he got squeezed out before he could make it to the moon. Maybe he should have used an uncorporation (Rise of the Uncorporation indeed).

Anyway, it's comforting to know that when we do go into outer space my books will still be relevant.

Economics and greed

Does knowledge of economics make you greedy? Here's Wang and Murnighan, Economics and Greed:

Greed is a classic topic in human development (Balot, 2001; Robertson, 2001) and it inevitably affects many of our choices and decisions. Although greed is typically viewed as uniformly negative and reprehensible, we propose that people's attitudes and opinions about greed are actually subject to change. In particular, studying economics may help legitimize and even beautify greed. Previous research shows that economics education might make people more self-interested because self-interest maximization is central to most economic models (Marwell & Ames, 1981; Frank, et al, 1993). Because greed and maximizing self-interest are sometimes difficult to separate, conceptually or empirically, we propose that studying economics may make people view greed as potentially positive and beneficial. Two complementary studies support our proposition. Study 1 shows that students who are pursuing economics view greed more positively than students who are pursuing other majors and taking other courses. Study 2 indicates that positively priming greed can significantly increase people's positive attitudes and opinions about greed.

Of course, knowledge of economics helps you see the social benefits of business activity that society may prefer to characterize as greed. Maybe everybody should get this education.

Hootie and Coase

From yesterday's WSJ comes a story about how one cranky guy shut down a garage band haven in Columbia, South Carolina called the "Sheds," once home to Hootie and the Blowfish. The storage units that housed the music were, according to the story, "far from residences, on an industrial strip bordered by two sets of railroad tracks and near fields used by the USC's athletic teams."

Clif Judy lived a half mile from the Sheds and preferred to listen to unadulterated crickets. "I don't like Hootie & the Blowfish," he says. "When they play, it sounds like they broke something." In fact, Mr. Judy's "tastes tend toward Bach and Christmas carols." He writes a lot of letters to newspapers and hands out rewards to people with neat yards. Mr. Judy called it "an issue of an old fella getting tired of listening to them, with their tattoos, down there having a good time."

There was no problem with a noise ordinance. Mr. Judy found only one other person who was bothered. She said: "I tell him I hear [the bands], but I can't say I really do." She "asked not to be identified for fear of antagonizing Mr. Judy." But Mr. Judy used his expertise from sitting on a zoning board and owning a strip mall to lodge a complaint based on inadequate wiring for electric guitars. As a result, the Sheds were shut to music.

At the same time I was reading the WSJ story, I was also reading Terry Anderson's excellent article, Donning Coase-Coloured Glasses: A Property Rights View of Natural Resource Economics. I met Terry last summer during my stimulating two week stint at PERC in Bozeman, Montana last summer.

From Terry's article:

Suppose there is an apartment building with two apartments. In one apartment lives a person who enjoys music and values louder and louder music * * *. [A]dditional decibels provide more value to the music lover, but the marginal value of decibels declines until it reaches zero at the maximum number of decibels that can be produced by his equipment. In the other apartment lives a person who values quiet such that fewer decibels of noise are worth more with the marginal value of quiet declining until it reaches zero with no noise.  * * *

Consider a case where there are no rules regarding noise in the apartment building and where the quiet lover moves in first. When the music lover moves in and turns his stereo up to full volume, the quiet lover will clearly have reduced value of quiet. He is likely to respond by knocking on the door of the music lover asserting a first possession right to be free of noise [citation omitted]. Assuming that he can defend this right both morally and legally and sell it, the costs are fully accounted for when the music lover compensates the quiet lover for the costs he bears or ceases producing music.

If the quiet lover cannot defend his right to quiet, there will be too much noise because the music lover is not bearing the cost of lost quiet. But * * * even this discussion requires considering Coasean transaction costs associated with defining and enforcing property rights relative to the value of the rights.

Now reverse the arrival of the dwellers so that the music lover is the first possessor of an apartment. When the quiet lover moves in, he might again knock on the door of the music lover and assert that a cost has been imposed on him. But in this case the music lover is likely to assert a right to play his music as loudly as he likes based on first possession. Assuming he can defend his right, the costs will again be fully accounted for when the quiet lover compensates the music lover for his reduced decibels or puts up with the music. If the quiet lover could force the music lover to reduce the volume without compensation; that is, the music lover cannot defend his rights, there will be too much quiet because the quiet lover is not bearing the cost of reduced decibels.

This example illustrates Coase's important realization that social costs are reciprocal. If the quiet lover has the right to be free of noise, the music lover will bear the cost of scarcity, and if the music lover has the right to music, the quiet lover will bear the cost of scarcity. How the rights are assigned will affect who bears the costs and, depending on transaction costs, may affect resource allocation and certainly will affect wealth distribution.

Even in the absence of property rights, reciprocal costs remain, but without property rights there is no way to say who is imposing costs on whom and no way to say there is an externality.

Note that in the Sheds case, both the Sheds and Mr. Judy had been there for a long time, and that the Sheds were not obviously out of place, noise-wise. It seems that property rights were unclear.

Anderson's article discusses various ways to develop the appropriate property rights, including contracting among the affected parties. He does not discuss electric codes, which clearly were not designed to deal with this problem. But of course we live in a world where regulations are so pervasive that we can expect them to create de facto property rights, intended or not.

The economics of Dr. Seuss

Really.  Miller & Watts, "Oh, the Economics You'll Find in Dr. Seuss!":

We provide a list of economic concepts and issues covered in all of the children's books published by Theodor Geisel, writing under the pen names of Dr. Seuss, Theo LeSieg, or Rosetta Stone. We discuss his treatment of the concepts and issues that appear most often and that are treated in greater depth, especially in his works for relatively older readers. We begin with a brief biography to show that much of the economic content in these works reflects Geisel's personal experiences or the major historical events of his lifetime. Some of it may also be attributable to college courses in economics that both he and his first wife completed.

My favorite economics lesson in Dr. Seuss is on agency costs (Miller & Watts categorize it under specialization), from Did I ever tell you how lucky you are?:

Oh, the jobs people work at! Out west, near Hawtch-Hawtch, there’s a Hawtch-Hawtcher Bee-Watcher. His job is to watch… is to keep both his eyes on the lazy town bee. A bee that is watched will work harder, you see.

Well…he watched and he watched. But, in spite of his watch, that bee didn’t work any harder. Not mawtch.

So then somebody said, “Our old bee-watching man just isn’t bee-watching as hard as he can. He ought to be watched by another Hawtch-Hawtcher. The thing that we need is a Bee-Watcher-Watcher.”

WELL… The Bee-Watcher Watcher watched the Bee-Watcher. He didn’t watch well. So another Hawtch-Hawtcher had to come in as a Watch-Watcher-Watcher.

And today all the Hawtchers who live in Hawtch-Hawtch are watching on Watch-Watcher-Watchering-Watch, Watch-Watching the Watcher who’s watching that bee. You’re not a Hawtch-Hawtcher. You’re lucky you see.

Dismantling the foundations of capitalism: the Chrysler haircut

Over centuries the US has built the greatest capitalist system in the world. Though capitalists make lots of mistakes, but they have strong incentives to fix these mistakes, and will do so as long as the underlying structure remains sound.

But over recent weeks, the Obama administration has been dismantling this structure out of short-term political expedience: let’s get nice headlines, cover that pig with lipstick, and damn the long-term consequences. It’s the kind of short-term thinking that hedge funds have been accused of. But even if hedge funds were inclined in this direction, they don't have the powers the federal government can wield.

More specifically, what business needs is a clear idea of what the rules are when investors put their money at risk, and full disclosure of these risks. Government’s job in our capital markets is to follow and enforce the rules, including those on disclosure. If these conditions aren’t met, risks and the costs of capital rise and investment declines. Worse, resources are allocated to the bribers, favor-seekers and cheaters rather than the builders and suppliers of productive assets.

I’m going to consider examples of what’s been happening over the last few weeks, beginning here with the Chrysler haircut. 

First some background. Firms raise money by promising certain terms to their creditors. Equity holders take more risk and get more reward. Secured lenders take the least risk because they have rights to specific company assets. But these rules are inconvenient for a government that has different priorities about who should get what in a high-profile US company like Chrysler. The UAW wants some of what the secured lenders are contractually entitled to. The Obama administration, in addition to having been elected with key labor support, finds it politically expedient to get union support for the deal by extracting benefits from secured lenders. Specifically, the government wanted the lenders to settle for a third of what they were owed while labor got half. The lenders can agree to modify their rights, but they don’t particularly want to.

Against that background, the President calls the lenders “speculators” who were “refusing to sacrifice like everyone else” and who wanted “to hold out for the prospect of an unjustified taxpayer-funded bailout.”

These words distort reality. It’s the banks that are getting the bailouts. The hedge funds just wanted what they had paid for. They have not gotten bailed out. Moreover, the “sacrifice” Obama is calling for is, by another name, a breach of fiduciary duty by the managers to their investors.

At one level these are just words. But keep in mind that Congress is as we speak considering regulating hedge funds, that tax changes are in the air, and that executive branch lately has been wielding some awesome powers.

The President’s remarks elicited an angry, and perhaps courageous, response from Clifford S. Asness, managing partner of AQR Capital Management, which is not involved in Chrysler. Asness pointed out in an open letter that when “hedge funds, pension funds, mutual funds, and individuals, including very sweet grandmothers, lend their money they expect to get it back.” Bankruptcy law has certain procedures and protections, set forth in “rules of the game lenders know before they lend. . . . [W]ithout this recovery process nobody would lend to risky borrowers. Asness points out that investment managers are not allowed to “give away their clients’ money to share in the “sacrifice”.” When they do this, “they are stealing” – including from pension funds. “Shaking down lenders for the benefit of political donors is recycled corruption and abuse of power."

Maybe you don’t feel sorry for the hedge funds and their investors. But consider what else Asness has to say:

Let’s also mention only in passing the irony of this same President begging hedge funds to borrow more to purchase other troubled securities. That he expects them to do so when he has already shown what happens if they ask for their money to be repaid fairly would be amusing if not so dangerous. That hedge funds might not participate in these programs because of fear of getting sucked into some toxic demagoguery that ends in arbitrary punishment for trying to work with the Treasury is distressing. Some useful programs, like those designed to help finance consumer loans, won’t work because of this irresponsible hectoring.

The bottom line is that the rapidly increasing power of government over recent months entails a rapidly increasing opportunity for abuse, a toxic entanglement of government with business, and an accelerating loss of confidence in markets just when we most need this confidence.

Regulators and Redskins

From Coffey, McLaughlin & Tollison:

We examine the correlation between federal government activity and the performance of the D.C. area's National Football League team, the Washington Redskins. We find a significantly positive, non-spurious, and robust correlation between the Redskins' winning percentage and the amount of federal government bureaucratic activity as measured by the number of pages in the Federal Register. Because the Redskins' performance is prototypically exogenous, we give this surprising result a causal interpretation. Drawing upon public choice theory and behavioral economics, we provide a plausible explanation for the causal mechanism: bureaucrats must make "logrolling" deals in order to expand their regulatory power, and a winning football team acts as a commonly shared source of joyous optimism to lubricate such negotiations. We do not find the same correlation when examining Congressional activity, which we attribute to legislator loyalty to their home state's team(s).

Whether this is a comment on football, politics or economists I leave to readers to discern.

What I wish the President hadn't said

Yesterday I suggested that hope for our economy lies in the "incredible creativity that has been unleashed on the world by our vibrant economic system."

In that vein I wish the President last night had told Congress something like this:

The weight of this crisis will not determine the destiny of this nation. The answers to our problems don’t lie beyond our reach. They exist in our laboratories and universities; in our fields and our factories; in the imaginations of our entrepreneurs and the pride of the hardest-working people on Earth. Those qualities that have made America the greatest force of progress and prosperity in human history we still possess in ample measure. What is required now is for this country to pull together, confront boldly the challenges we face, and take responsibility for our future once more.

Oh, wait. He did say that.

The problem, as discussed by Holman Jenkins, is that he went on (and on) to talk about a lot of other stuff that no longer makes sense, if it ever did, particularly including (in Jenkins' words) “rais[ing] taxes on small business, on investment, and on the incomes of the most productive job creators.” In other words, not harnessing our creative efforts but dissipating them in stuff that no longer makes sense, if it ever did.

The President is going to have to decide soon enough which part of his speech he really believes.

A corrective rant

Well, since every story you read now is about how bad things are, I thought I would offer a corrective: “We live in an amazing, amazing world, and it's wasted on the crappiest generation of spoiled idiots."

Now let's apply this to our current economic situation.  Inventions like airplanes, the internet, and internet in airplances result from the incredible creativity that has been unleashed on the world by our vibrant economic system. Bill Gates made a lot more money for the rest of the world than he did for himself.  There's potentially a lot more where that came from. How can we predict what's next?

And yet mostly what we hear is about the greed of business people and how our infinitely wise government leaders will get us out of our current situation by nationalizing and regulating everything, including incentives.  Our leaders are so wise that they can predict the deficit out to 2019, as the President did a couple of days ago. Who predicted the current world in 1999?

While I have no data to support this, I suggest that one of the things the market is suffering from right now is what I would call the "hopelessness of audacity."  I would prefer from our leaders less audacity and more hope.

Dreier, scorpion fish and the theory of the firm

The WSJ’s long front-page story about Marc Dreier depicts him as a high-rolling risk-taker who ate still-living California scorpion fishes impaled on sticks.

So what does this have to do with the theory of the firm? As I’ve discussed, Dreier LLP was a sole proprietorship (though its specific form was in some doubt). This means that he got all the profits (though he did share revenues). As the sole profit-sharer, Dreier had a strong incentive to get maximum value out of the firm’s resources. So it would seem that agency costs were not a problem. That’s why the firm's lawyers were content to delegate all management power to Dreier.

The problem is that while Dreier had strong incentives to coordinate the firm’s team (I refer to the "team production" theory of Alchian & Demsetz, Production, Information Costs, and Economic Organization, 62 Am. Econ. Rev. 777 (1972)) and not shirk, he evidently lacked the ability to coordinate himself. And, of course, since Dreier was the sole owner-manager, nobody else in the firm had the incentive to keep his impulses in check.

The lesson here is that no organizational form is guaranteed immune from human nature.

Do incentives matter?

From today's WSJ:

Even as Japan faces a sharp recession, civil servants are opting out of career-advancing exams and information-technology workers are flocking to headhunters to switch to less-demanding careers. A study this year by the consulting firm Towers Perrin found just 3% of Japanese workers say they're putting their full effort into their jobs -- the lowest of 18 countries surveyed. * * * Employment experts have begun to call these workers hodo-hodo zoku, or the "so-so folks." They say these workers, mostly in their 20s and early 30s, are sapping Japan's international competitiveness at a time when the aging country must raise its productivity to keep the economy growing.

The article doesn't offer much of an explanation for the phenomenon, except this:

getting a promotion no longer means getting such a big pay raise. The wage difference between managerial and rank-and-file positions has shrunk over the past decade as companies cut compensation amid restructuring. In 2005, division managers were paid about 2.2 times the rank-and-file worker, down from about 2.7 times in 1985.