Marginal Revolution

How should we price the "public option" for dogs?

David, a loyal MR reader, asks:

Why do I have to make an appointment, wait in line, fill out a slew of paperwork, and pay $70 to adopt a dog that otherwise would likely have been euthanized (at the taxpayers' expense), and yet bringing your very own human child into the world takes nothing more than a few shots of tequila or a broken condom?

I am not suggesting that we stand at a first-best equilibrium, but I can think of one reason for this apparent pricing anomaly.  If dogs were free (or if dog ownership required only that you show up with a fresh condom), too many people would experiment with owning dogs and then abandon them to the public commons.  The $70, or whatever it costs, screens for serious dog owners, as does the paperwork requirement.  

So should the price of kids be changed?  I would suggest that for most women bringing a child into the world (much less raising it) requires more than "a few shots of tequila or a broken condom".  That too screens for serious mothers to some extent.  If we raised the price of kids, as we could do easily with tax law and EITC reforms, we'd have fewer kids in the world.  If we raised the price of adopting dogs, there would be more do-it-at-home puppy production and more dogs.  Neither population change strikes me as an especially desirable outcome and thus we have what we have.

The rising fortunes of John Geanakoplos

It is a front-page WSJ article, read it here.  Excerpt:

In a 2000 academic paper, Mr. Geanakoplos offered a theory. He said that when banks set margins very low, lending more against a given amount of collateral, they have a powerful effect on a specific group of investors. These are buyers, whether hedge funds or aspiring homeowners, who for various reasons place a higher value on a given type of collateral. He called them "natural buyers."

Using large amounts of borrowed money, or leverage, these buyers push up prices to extreme levels. Because those prices are far above what would make sense for investors using less borrowed money, they violate the idea of efficient markets. But if a jolt of bad news makes lenders uncertain about the immediate future, they raise margins, forcing the leveraged optimists to sell. That triggers a downward spiral as falling prices and rising margins reinforce one another. Banks can stifle the economy as they become wary of lending under any circumstances.

I thank Daniel Lippman for the pointer.

Ayn Rand

With two new biographies being covered in all the major newspapers, The Daily Show, and elsewhere, Ayn Rand is in the news.  Yet all of the reviews that I have seen have focused on her personal life rather than her ideas.  Nearly five years ago Tyler and I both wrote on Rand's ideas on the occasion of the 100th anniversary of her birth.  It seems like a good time to reprise.  Here is my post with links.

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Here, on the 100th anniversary of her birth, are some thoughts on Ayn Rand.  See also Tyler's post and Bryan Caplan's excellent series (links.)

It used to be commonly said that “Until Robinson Crusoe is joined by Friday there is no need for ethics on a desert island.” Rand replied that it was on a desert island that ethics was most needed because on a desert island you cannot free ride on the virtues of others; if you are to survive you must yourself exercise the virtues of rationality, independence, and productiveness. As her reply indicates, Rand was an exponent of virtue ethics, the Greek/Aristotelian idea that ethics is about how one should live. Indeed, although she does not get much credit, Rand is the most prominent and lucid, contemporary exponent of virtue ethics.

I think Rand’s version of virtue ethics is compelling because it is explicitly modern – where the recent literature still sometimes seems to focus on the virtues required of a Greek olive grower, Rand’s virtue ethics is post industrial-revolution, a virtue ethics for the capitalist world.

If ethics is about the virtuous man then politics is about the social requirements for the virtuous man to exist (the modern literature lags behind Rand in connecting ethics and politics). One can understand Rand’s novels as an extended disquisition on virtue ethics and the political and social requirements necessary to practice such an ethics. In particular, she argued that rights, a legal concept creating a protected sphere for independent action, were a necessary condition to live a life of virtue.

One need not buy Rand’s deductive argument that laissez-faire capitalism is the sine-qua-non of ethical action to appreciate her insights connecting the good man and good woman with the good society. Relatedly, I do think that Rand was absolutely right to say that capitalism requires a moral defense.  Moreover, the only plausible defense must involve the virtue of selfishness. It is all too obvious that capitalism promotes and rewards self-interest and, Mandeville nothwithstanding, no defense which simply excuses this fact will succeed.

Rand’s language hasn’t done much to advance her case and indeed it has obscured areas where her insights are now widely accepted. Today, for example, you can find many books attacking the evil of altruism. Surprised? Of course, the books don’t use those terms, instead they call it the problem of codependency (or some other such). Relatedly, it’s no accident that Hillary Clinton was once an avid Randian (recall her political career started with Barry Goldwater) because Rand is an important feminist. Rand’s portrayal of strong, independent, intelligent women is coming to be recognized as a landmark in fiction but in addition Rand’s attacks on self-sacrifice have special meaning in a culture that has long used the “caring ethic” to bind women to the service of others.

Of weaknesses there are many, most of which flow from the combination of Rand as philosopher, novelist and powerful personality. John Galt, for example, is but one instantiation of the Randian/Aristotelian virtue ethic, an instantiation which was created for a particular aesthetic purpose by a particular person. Too often both Rand and her detractors have taken the instantiation for the class thereby limiting the vision.

Yemen fact of the day

...the market price of water has quadrupled in the past four years, pushing more and more people to drill illegally into rapidly receding aquifers.

Here is the longer (and fascinating) story.  Basically the country is running out of water.  The article focuses on the fact that half of the Yemeni water supply goes to grow an addictive drug called qat.  Here is more:

...in the late 1960s, motorized drills began to proliferate, allowing farmers and villagers to pump water from underground aquifers much faster than it could be replaced through natural processes. The number of drills has only grown since they were outlawed in 2002.

Despite the destructive effects of qat, the Yemeni government supports it, through diesel subsidies, loans and customs exemptions, Mr. Eryani said. It is illegal to import qat, and powerful growers known here as the “qat mafia” have threatened to shoot down any planes bringing in cheaper qat from abroad.

If you have never visited Yemen, and would consider such a trip, I urge you to do so.  The option value component of waiting for better times is dwindling rapidly.  I should add that:

1. The country cannot afford much desalination, and

2. The real problem with desalination is often pumping the "clean" water uphill and that is a major issue in mountainous Yemen.

Does being sad, or complaining, make you smarter?

I have yet to read this study but I found the summary intriguing:

Bad moods can actually be good for you, with an Australian study finding that being sad makes people less gullible, improves their ability to judge others and also boosts memory.

The study, authored by psychology professor Joseph Forgas at the University of New South Wales, showed that people in a negative mood were more critical of, and paid more attention to, their surroundings than happier people, who were more likely to believe anything they were told.

"Whereas positive mood seems to promote creativity, flexibility, cooperation, and reliance on mental shortcuts, negative moods trigger more attentive, careful thinking paying greater attention to the external world," Forgas wrote.

"Our research suggests that sadness ... promotes information processing strategies best suited to dealing with more demanding situations."

Furthermore:

The study also found that sad people were better at stating their case through written arguments, which Forgas said showed that a "mildly negative mood may actually promote a more concrete, accommodative and ultimately more successful communication style."

I thank Claire Hill for the pointer.

So all you sad people can cheer up now.  Or not.