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?"