Falsifiability

This one goes out to Pete, who is studying philosophy of science. I'm not sure how many of you are familiar with Karl Popper, but his famous contribution to philosophy of science is the strategy of "falsifiability". Popper accepts a hypothesis as legitimate (but not necessarily correct--in fact, no hypothesis can be shown to be correct, nor false, but I digress) as long as it can be shown to be false. A famous example of a non-hypothesis would be Freudian psychology, which enjoys the ability to explain any phenomenon in one way or another.

Let's consider this bailout as a phenomenon that market economics hopes to explain. Now, it is safe to say that the economists who advised trickle-down economics and deregulation of Wall Street dating back to the 70's were basing their policies off of free market models. They assumed such policies would spur growth, but alas! The market crashes. Libertarianism has three rational possibilities...

• First, it can admit defeat. If you were a true "falsificationalist", this obvious counterexample to a hypothesis would warrant rejection.
• Second, you can attempt to explain the current dilemma as the natural result of the model of free market economics. However, you cannot go all "Freudian" on me. If you believe this example to actually support libertarianism, please provide an example that would disprove it.
• Third, you can attribute the falsification of the theory as actually a failure on the part of an auxiliary hypothesis. An auxiliary hypothesis is any supporting argument that was assumed in the testing of your main hypothesis. Again, which auxiliary hypothesis should be rejected?

I encourage you guys to read the linked article. Lastly, I was wondering if anyone had any ideas for expanding our readership. I would prefer to join forces with other up-and-coming economics blogs, expanding on our community of philosopher kings--I mean author commenters. Anyone know of any such blogs?

Freedom From Foreign Oil (Part 2: How?)

In Part 1, I discussed how “energy independence” was not a desirable goal, because it would not deliver on any of its promises. Yet, it would be near impossible to find a politician out there that was against this concept. Since these politicians do think that “energy independence” holds promise, then the next question to ask them is “how will this goal be achieved?” The answer is that short of the invention of some sort of super-battery that can store all sorts of energy, the U.S. economy will be dependent on foreign oil for the foreseeable future.

Let’s assume that the U.S. decided they would become energy independent by just banning all imports and exports of oil. Since America produces only about roughly 25% of what it consumes, the huge decrease in supply would mean an unprecedented (and I’m guessing politically unpopular) rise in U.S. oil prices. So, this eliminates that route, unless some politician is looking to have a revolution on his hands.

This means that either the U.S. is going to have to make up for that missing 75% with either less demand for oil, more oil, and/or domestic alternative energy sources. Less demand for oil cannot really be forced about the population without dramatic costs. Oil is so widely used because it is cheap and forcing a shift to other means of energy must mean a rise in cost. This would accordingly create a rise in all prices of things that were no longer permitted to use oil as an input. Billions of tax dollars have been spent to encourage conservation of energy, but oil is cheap and improving technology makes using more oil even cheaper.

As for increasing the supply of oil to make the U.S. energy independent, there is quite a bit of oil to be unearthed in the U.S., but making up for the entire 75% gap probably is not in the realm of possibilities.

The reason that oil is still used so widely is that alternative energies are not cost-effective. If oil rose (or alternative energies fell) in price enough to make it rational to switch energy sources, then alternative energies could compete. If there ever truly becomes a shortage of oil in the world, then prices of oil would rise and alternative energies would be able to compete. Until then, even the massive subsidies to nuclear power, ethanol, etc. have not been enough to bring their prices down near oil’s price.

No matter what the alternative energy one chooses, it would be extremely difficult and expensive to try and replace oil. One example of the futility of investing heavily in corn ethanol as the “miracle drug” to get us off oil is the massive amounts of farmland required to make that a possibility. If we took all the corn farmed in 2005 and made ethanol out of it, then U.S. gasoline consumption would see a 12% decrease. Now, if politicians saw this as a promising step, they could devote all the cropland in the entire country to making corn ethanol, then allocate 20% more land in addition to that and voila! There would be enough ethanol to fully replace gasoline. Of course, this would just be gasoline and not all oil. And, there would be the huge increase on worldwide corn prices as food. Plus, there would then be cries of “food independence” now that all the cropland was devoted to non-food objectives, putting us at risk of being "starved to death" by unfriendly trading partners.

Politicians have put forth goals of reducing foreign oil consumption, but complete "energy independence" does not seem possible without devastating, distortional effects on the economy.

Common Tax Misconception

A.) Windfall Profits Tax on Oil
B.) Corporate Tax
C.) Employer's Portion of FICA Tax

What do all three of these taxes on businesses have in common?

Hint: Politicians favoring these taxes would never admit to this fact.

Answer in comments section.

Paradigm Shifts

I'm reading Thomas Kuhn's "The Structure of Scientific Revolutions" for my class in philosophy of the social sciences. Kuhn's thesis is that scientific revolutions do not come from the gradual adding on of new ideas to old ideas, but by "paradigm shifts" where one paradigm (or scientific research framework) is discarded by the scientific community for the sake of a new paradigm. His major examples are Copernican astrology which replaced Ptolemaic astrology, and Einstein's physics which replaced Newtons physics. These are not just expansions of previous paradigms, but completely new ideas which came about by observing anomalies in the previous paradigms which could not be explained through the previous research framework. Kuhn believes the vast majority of normal science is "mopping up" to fit the observed world into the current paradigms, until a crisis comes about where some observation cannot fit within a given paradigm and a new one must be created.

This thesis culminates in his last chapter on progress through revolutions (notes here) where he makes the claim that just as art or Darwinian evolution go through periods of change without progress, the paradigm shifts of scientific revolutions are not progress themselves, only changes in perspective and the types of questions asked by science.

Not being very well read in the history of science myself, I was wondering if other contributors could think of anomalies which caused paradigm shifts in other scientific fields, or at least weight in on Kuhn's concept of scientific progress.

Campaign Kids

How young is too young for political involvement? This is the question I've been pondering since having Kids for Obama linked to me by a friend. There, I discovered that thanks to the Obama campaign, "For the first time in campaign history, children ages 12 and under, have a place to go and actually vote—through their voice." My immediate reaction was to ponder the silent chains that have fettered past 12-year-olds from voicing opinions in electoral politics, despite the spotlight given to their 13-year-old bretheren, but I also wonder if it is prudent to get kids hopped up on democracy as if it was a panacea for the problems of the world.

As an economist, it is hard to understand why the public tends to favor government solutions to problems over free market solutions, despite government's poor track record. I am prone to believe that if liberty was celebrated as actively as democracy, and constitutional limits over campaign promises, America's standard of living would increase dramatically. Encouraging kids to campaign teaches them nothing about government, it only instills in them a love for the state and state sponsored solutions.

Oh, and to show this is not a partisan issue, it looks like there is a Kids for McCain voting bloc mobilizing as well.

Freedom From Foreign Oil (Part 1: Why?)

Both Barack Obama and John McCain, among pretty much every other politician, are pounding their fists and calling for freedom from foreign oil, also known as “energy independence.” They claim that our addiction to oil helps to support (embolden, anyone?) both terrorists and regimes such as those in the Middle East and Venezuela. As well, U.S. citizens are having their wallets emptied out at the pump. Unfortunately, Obama and McCain employ high standards of reducing this dependence but are unable to show what these goals would achieve.

Looking at the claim of empowering the “bad guys,” there is not much evidence to be found. First off, the U.S. imports more oil from Canada and Mexico than it does any other country. Second, terrorism has and will occur no matter what the price of oil. It was down near $20 per barrel in the ‘90s, but terrorism was alive and well. Finally, even if the U.S. shifted its purchases of oil even more from the Middle East to other countries, this would not change the price of oil. The oil market is global and will be the same price no matter where the supply and demand come from.

As for Americans paying absurd prices at the pumps, we buy oil from abroad because it is cheaper than producing it ourselves. Hence, if oil imports were forced to be reduced (or were cut off entirely), then the price of gas would increase, not decrease. As well, oil still remains cheaper than any alternative fuel. So if politicians are looking to make gas cheaper, then eliminate gas taxes, allow for less-environmentally friendly types of gasoline to be used, and start drilling.

Politicians seem to ignore that oil is bought and sold in a global market. If America did get to the point where we exported more oil than we imported (the definition of energy independence), it would not affect the influence of supply disruptions abroad. If OPEC cuts production and prices increase, prices will increase for both net importers and net exporters of oil. It remains to be shown what problems energy independence would actually fix.

United States Slips In Economic Freedom Report

The Cato Institute, partnering with the Fraser Institute of Canada, released the latest Economic Freedom of the World Annual Report. In 2000, the U.S. found itself ranked impressively in terms of a free economy, at number 2. However, with the rest of the world improving their scores, the good ol' U.S has dropped to number 8. According to Cato scholar Ian Vasquez, "The rule of law, government spending, and regulation are the areas where the United States saw the most troubling declines in its ratings this decade." With both presidential candidates talking of funding massive government programs, the Feds bailing out and nationalizing financial establishments, and increasing regulations all across the private sector, could the United States no longer be "the place to do business?"

Prisoner's Nuclear Chicken

Again, this is inspired by a conversation I had with a good friend of mine concerning his anarchist views (which he can articulate quite compellingly). Some circuitously we came to the topic of nuclear weapons, inspired by the very comical rant by Matt Damon concerning Sarah Palin. I asked him quite simply, Why do we have nuclear weapons?

I feel that it is pretty clearly established that the launch of a bomb would send the world into the Apocalypse. Even among warhawks brandishing a Manichean perspective of the world, I have trouble believing any individual can believe the hand of God is going to protect the divinely right America when it starts raining sulphur. So if we aren't going to use them, why keep them when any lapse in judgement or strategic attack could end the world?

My friend answered quite quickly, Because we don't trust that the other world powers would also abandon theirs. And I was reminded of the economics experiment conducted in my Ecological Economics course--not the one we discussed, but the one the professor tried right after. It was classic Prisoner's Dilemma, but it failed. After the class became familiar with the benefits they had foregone by not cooperating before, they realized that they could trust each other. Now I hope world leaders have some sense of this. But when the danger of defecting--not only by dropping the A-bomb but simply the risks of holding them--is so high, why do we continue to?

Market Power!

This is for those of you in Economics courses, to give you an idea of the mentality of many of your classmates. I do not want to criticize those people who have a deep misunderstanding of market force, but just alert you that, while the market may seem obvious, it is not. Let me explain the situation that occurred just the other day...

My Ecological Economics professor asked whether a policy (it doesn't matter the exact situation, but it concerned water rights in California) would encourage economic efficiency. The result of the policy made it rational for an individual living on agricultural land to sell their cheap water to cities at a profit. Of course, you can't really sell "water rights" as much as "land with water beneath it", as Daniel Day Lewis made crystal clear. But the result of this policy was farmers selling off their land to them city folk.

Of course, my class was alarmed. How, they cried, could anyone find this fair? Opportunity for profit was forcing these farmers to sell their land. They had to sell! Explained in more detail, one student (who I consider intelligent, for the record) argued that in her hometown, farmers had the same predicament, selling off their land because they weren't making enough to keep it. Another pointed out the causal agent was the market force of "demand" that basically predetermined individuals' actions.

So here's my list, and I encourage you to add to it, of common mistakes by Economics Students

• Market forces are a summary of individual actions, guided by incentives.
• Market forces themselves do not cause anything; something that causes some effect can be described as a market force. This may seem like the same thing written twice, but it is important to understand that a "market force" does not cause actions, but instead suggests them.
• Since individuals ultimately make the decision, the market has no power of its own. Refer to the first point. The stronger the incentive to make the decision, the more likely that decision is in line with public sentiment. You cannot be against a price system but for democracy.
• "Demand" is a summary of individual wants and needs. Determining who's wants and needs should be prioritized is not a question of Economics but rather of Ethics.

I had a lot of trouble finding a picture that I liked, but this cartoon from 2005 tickled me.

The Most Libertarian Candidate for President...

Here is Alex at Marginal Revolution, explaining why Obama would be the best choice for libertarian supporters. At ReasonOnline, though, Radley Balko suggests that Sarah Palin, governor of a state big on individual freedoms, might be the best choice for those seeking freedom and liberty whenever possible.

My personal view is still a bit convoluted. I agree that the Republicans probably need to go out of power for a few years - this would help them re-focus on their core values. However, the idea of an Obama Administration with a heavily Democratic Congress is still a bit scary. There is a lot of legislation that could be passed if one party has a strong majority in the legislature and controls the executive branch. As Karl Rove points out, however, Obama isn't running against Palin and shouldn't try to run against her. She will be the Vice President and no matter what her personal views are, she will not be the primary policy-maker. Even if Palin would be a strong supporter of libertarian values, as the Vice President it still wouldn't show up in many government policies. I'll be curious to see if Alex runs another segment, but it seems to me that Obama is the stronger choice for America's community of libertarians.

Lehman Brothers Next To Fall

I am trying to keep the focus away from traditional financial markets, but I can't help but remark up on the news that Lehman Brothers is the next financial firm to fail. The New York Times and Washington Post offer some more perspective. The sum of what I'm reading seems to suggest that most buyers are looking to the US government for a Bear Stearns-esque buyout. That was a dangerous precedent to set and I'm not convinced, as some are, that bailing out Bear was absolutely necessary.

I think the best news is that we can tie these bailouts with the Bush Administration and leave them behind come November - if the major players are fine until then, an Obama or McCain Administration can dismiss bailouts as just the policy of a predecessor.

What does everyone think of bank runs as self-fulfilling prophecies? Consumers lose confidence in a bank, which proceeds to fail, but is the biggest cause of failure the loss of consumer confidence? Their circular nature scares me. It also looms ominously over the remaining banks - the market has been unpredictable and I don't think it would take much to scare people and induce another run.

How about inducing a bank run as a form of terrorism? Anyone see that as possible? I'm going to stop before my questions become absolutely ridiculous...

Objectivity or Dogmatism

Rather than focusing on the typical market, I think I'll go in a slightly different direction--the marketplace of ideas. I had another occurrence in a non-economics course today which reminded me of an article run over at Marginal Revolution entitled "Are There Reasons to be Dogmatic". Hopefully a few of the philosophy majors I invited to the blog will be able to contribute to the following discussion...

Today, we watched a fairly innocent (and in my opinion rather balanced) documentary on the plight of the prairie dog on the Great Plains. After the film, a student--a junior environmental studies major--complained that the perspective was too "pro-prairie dog" and inquired whether we would hear the other side of the story. This rises many questions (and also a few eyebrows, given that it was fairly balanced and, considering the audience of ES majors, probably could have been much more bias), but I'd like to momentarily avoid criticizing the modern emphasis on "presenting both sides of every argument". 

Instead, I wanted to ask whether any of you believe that you have an ethical responsibility to brandish a dogmatic point of view. As an individual who has specialized in a particular science, and also studied the philosophy of science, I can likely defend both sides of any argument convincingly. However, if I took the "anti-environmental" side, I'd likely be preaching to the choir. Also, if I restrain my point of view because I know there are two sides, but my "opponent" does not because they are ignorant of one of the sides, how will the marketplace of ideas allocate decisions?

Government Takeover of Freddie Mac and Fannie Mae

The housing market is not my specialty, but this was too big a story not to mention. Treasury Secretary Paulson has announced that the Feds will be taking over the two large mortgage companies Fannie Mae and Freddie Mac. This was done to provide financial stability to the housing finance market. Yet, while this may be a temporary fix, it does not get at the heart of the problem: these two Government Sponsored Enterprises have always been nationalized in a sense. The two GSEs were able to make a private profit, but the losses were always implicitly promised to be at the expense of the taxpayer. Now, that responsibility to the taxpayer has been made explicit and official.

Through unfair protection, the government allowed for Fannie Mae and Freddie Mac to consume an enormous part of the housing mortgage market. This placed the market’s well being on two companies that had an implicit government bailout to lean on. Did no one else think this was a recipe for disaster?

The goal of the next President should be to truly privatize Fannie Mae and Freddie Mac, which means both profits and losses should be privatized. The cord between government and these two GSEs needs to be cut once and for all. Then, with true competition and a level playing field, the housing finance market may finally be able to function without the risk of repeating the current financial crisis.

The (Lack of a) Case Against Immigration

Fueled by Lou Dobbs and his army, the issue of illegal immigration has become a hot topic in American political discourse. Yet, the objective evidence does not give those who blame all the ills of the U.S. (like Global Warming and high oil prices) on illegal immigrants a leg to stand on.

First, despite what is often said, illegal immigrants have a negligible effect on U.S. wages. In most cases, these immigrants are not directly competing with American workers. The only group of workers that would see a “significant” (3-8%) wage increase from decreased immigration would be low-skill high school dropouts. If immigrants completely stopped competing with this demographic, dropouts would see an extra $25 per week.

As well, illegal immigrants have an insignificant effect on unemployment rates. The number of jobs that are taken by illegals in favor of Americans are balanced out by the jobs created by the immigrants’ demand. This leads to a net impact of near zero.

Add on to this the fact that almost all immigrants speak English very well and their descendants speak English as their primary language, marriage rates are higher and divorce rates lower among immigrants, and the descendants of immigrants are closing the educational and income gap with whites, and it appears as if Mexicans do quite a good job of assimilating to America.

In addition, the Mexican immigration rate is actually lower than the immigration rate of ethnic groups in the past (i.e. Irish immigrants in the mid-1800s, German immigrants in the mid to late-1800s).

And just to deliver the final blows to the anti-immigration crowd, areas seeing the heaviest rate of immigration are actually seeing a decrease in violence.

In summary, immigrants don’t lower American wages, don’t lead to more unemployment, they share American values of the English language, family, and hard work, they are coming here at a lower rate than past ethnic immigrants, and they commit fewer crimes than natives. So, why was it that we don’t want to allow more immigration?

Classroom Economics

Today I had a pretty interesting Ecological Economics course. The theme of the session was "Market Failure", though it was more of an introduction to the idea rather than a full expose. We started with a pretty simple experiment designed to show Tragedy of the Commons. Briefly the game went as follows...

• Each player receives four cards (all the number card but one of each suit) and over the course of fifteen rounds you would submit two of those cards, which were returned to you at the end of that round. No one was allowed to speak before or during the experiment, so strategies were individualized. For each red card you kept, you scored "four points" in the first five rounds, and two points in each round after that. Also, for every red card that was submitted, the entire group (thirteen of us in all) received one point. So, if everyone submits two red cards (thereby keeping two black), each person in the group would receive twenty-six points for that round.

That only other quirk was that after the tenth round we were allowed a three-minute period to communicate. Can anyone guess what was said during those three minutes? The only hint that I'll give you was that the most red cards submitted before that communication period was fourteen. The highest possible score up until that point was nineteen, given that you kept your two cards when they were worth four points on the round that eleven cards were submitted.

Voluntary Government

My very creative and anarchist professor Peter T. Leeson talked about condominium associations as voluntary governments yesterday. He said that government is force, and unjust in the sense that we never signed a constitutional agreement with the American government, yet the IRS takes our money and does many things that don't directly benefit us. He then presented his condominium association, with the association fee he hates but agreed to when he signed his contract as an example of voluntary government.

But is this a distinction without a difference? Leeson talked of how condominium fees go only to condo improvements, where taxes provide numerous government services he never asked for. But a road built on the far-side of a condo complex seems about as useful to a near-side resident as a bridge to nowhere.

Leeson also mentioned that the "if you don't like it, move" argument does not imply consent to government because it places the burden on people simply for living where they are born. But certainly a son who grows up in a condo and then inherits it from his parents would likewise be expected to pay the condominium fees unless he sold his childhood home to move somewhere else.

Further, what about people who immigrate? Consider a person from the Alaskan tundra, unknown to the IRS, living in complete negative liberty. If he finds himself tired with wilderness life and wishing to move to New York, would his migration imply consent? Could his choice to move be viewed as a constitutional moment where he agrees to pay local, state and federal taxes?

It seems to me like real difference between the federal government and a condominium association is simply their size. It is easier to opt out of a condo than a country which is why the association fees seem voluntary and American taxes involuntary.

Steady-State?

Now, macroeconomics is not my expertise, so this one is really for the rest of you to handle. But it is in reference to some macroeconomic literature pertaining to ecological economics written by Herman E. Daly all the way back in a 2005 issue of Scientific American. Here are the quotes of interest...

But the facts are plain and uncontestable: the biosphere is finite, nongrowing, closed (except for the constant input of solar energy), and constrained by the laws of thermodynamics. Any subsystem, such as the economy, must at some point cease growing and adapt itself to a dynamic equilibrium, something like a steady state.

The article referenced John Stuart Mill's theories concerning a stationary state, and I'm hoping someone can enlighten me regarding those thoughts. A bit further is what I consider Daly's most quotable quote...

Because establishing and maintaining a sustainable economy entails an enormous change of mind and heart by economists, politicians and voters, one might well be tempted to declare such a project would be impossible. By the alternative to a sustainable economy, an ever growing economy, is biophysically impossible. In choosing between tackling a political impossibility and a biophysical impossibility, I would judge the latter the more impossible and take my chances with the former.

I think Daly may be setting up a false dichotomy, as his separation of growth and development makes his argument unnecessarily argumentative. Wealth as sought by economic growth should be achievable through economic development, since the throughput won't inevitably remain entropy-neutral. Still, this has it's own assumption: Can production add value to total capital without depleting natural resources?

Illustration Credited to Matt Collins from the article discussed.