A Bad Day

An old friend called. He told me he was fired by his company. I was and am still in shock.

One is never prepared for such things in life. Think of it this way. As an free market economist, you talk about how a person's separation from his job only means that other jobs might be waiting for his application..bla bla bla....It may take some time, but he would find his match anyway if he or she searches hard enough. You say all this in a cool and almost cold-blooded manner.

But now imagine this. What if that person is your best pal? your spouse? your best graduate school room mate? your brother? Can you tell him straight in the face: no problem, what you are encountering is only a transitory phenomenon, and the labor market soon or later would come up with a job to match your skills.

No, I cannot. Hence, I did not say a word to my friend when I first heard the bad news.

My role, then, I realize, is not to be an economist. I am his friend. I am only a listener.

Then it hits home to me that, may be, just may be, every economist who does not believe in free market might have similar experiences of what I have just said above. It is thus not surprising to me at all that some economists hold such skeptic views on the market. They start blaming the free market for their loved ones' plight. Their personal experiences might have clouded their view.

Adam Smith, in his Theory of Moral Sentiments, did mention something like a person is more likely to care about his little finger than the sufferings of peoples thousand and thousands of miles away. But I don't know whether he went on to examine how this could affect peoples' perception of the free market.

But here is the real puzzle: Why others who share similar experiences of what I have encountered today stick to their original free market beliefs despite the bad experiences? How could they? Can they tell their loved ones what I did not dare to say to my friend. Answer is, I don't know. But do you?

This is a really bad day.

The Pacific

Best Sentence I Have Read Today (and yes it is related to Superfreakonomics)

"Ancient Romans watched gladiators in much the same way that we read angry bloggers."

This is from Nathan Myhrvold former Chief Technology Officer at Microsoft.

The line refers to the controversies stirred up by Chapter Five of the sequel to Freakonomics, Superfreakonomics. Read more for yourself here.

I will soon write up a book review for a local paper here in Hong Kong (and yes it will be in English), hopefully soon. And yes I have read it already. My bottomline assessment: better than the last one.

Oliver Williamson, Elinor Ostrom and New Institutional Economcis

This is a piece I wrote for the Hong Kong Economic Journal. The piece would only appear on the website of the paper, not the hard copy. Tell me what you think.

And yes, I still think that Professor Steven N S Cheung has a shot at the prize.

Be Careful When You Want to Use Statistics from the UN Next Time

Read this piece from the always insightful development guru Bill Easterly.

Bottom line: International agencies make up numbers in a bid to have bigger budgets. Sad.

Paul Romer, Charter Cities and Credible Commitment

Paul Romer, yes the new growth theory guy, quit his job at Stanford in an all-out effort to promote an idea to help developing countries grow out their adject poverty. The idea is called Charter City. The bottom line is that a developing country could sign an intenational treaty with another country so that a presumably better set of institutions could be imported to a designated special economic zone in the former.

The biggest issue of course is how to resolve the credible committment problem:
That is, how to prevent the government of the developing country to renege on its promise to allow a foriegn set of institutions to be implemented on its territory.

In this interview, Paul nicely addressess this issue. The piece is interesting throughout, but I like this bit especially:

"Economists seem to think that we should propose things that are acceptable and that political systems will pursue, but that we should avoid proposing or even discussing things that are controversial or politically incorrect.

I think we’d do our jobs better if we just said what’s true without trying to be amateur politicians. "

What Masonomics is All About

This short commentary by Russ Robert provides a neat and crisp description what is so special about Masonomics.

Dick Posner = Keynesian ?!

Dick Posner wrote:

"Keynes was the greatest economist of the twentieth century."

Amazing, read more here. What is left of the Chicago School?

Best Line on Economics that I Have Read Today

"A little economics is a dangerous thing."

From MIT's emeritus professor Franklin Fisher "Diagnosing Monopoly" Quarterly Review of Economics and Business, 1979.

Cute but Irrelevant Economic Studies

"A flood of cute but irrelevant studies of issues of no conceivable economic significance has been undertaken simply because a cute but irrelevant natural experiment had been conducted."

The lament is made by LSE's Willem Buiter, read more here.

Cheung's Theorem

"The havoc that inflation or deflation would cause is negatively related to the degree of freedom individuals in an economy enjoy in choosing contractual arrangements that best fit their interests."

This is from Professor Steven N S Cheung's column (in Chinese) today. Read more here.

Raising Rival's Cost, Yummy Edition

According to a report in the latest edition of Businessweek:

"Rather than wait to be forced into caloric transparency, Yum! Brand is embracing it. The Louisville company, owner of KFC, Taco Bell, Pizza Hut, Long John Silvers, and A&W, has pledged to post calorie counts at its 3163 corpoate-owned locations nationwhile by 2011..."

Why Yum! Brand active attitude towards mandatory calorie disclosure, you ask.

Well, the answer is this:

"Yum is also helping to lead a lobbying effort in Washington to extend any federal law to stand-alone restaurants."

And why is this bad?

The story goes on to reveal the answer:

"The National Restaurant Assn. says calculating calories may be too costly for small restuarant owners."

In other words, Yum's lobbying effort would help raise its rivals' costs and drive them out of the businesses not because Yum is better at what it should be good at, delivering good food at lowest possible cost. But because Yum is far better in lobbying than its rivals.

The whole story is here.

Superfreakonomics

Just when you think Freakonomics is freaky enough, the authors of Freakonomics have a new book due out later this year which guarantess to freak you out more. It is called Superfreakonomics.

The publisher's page for the book is here.

Phelps on Hayek

Back in 2008, Nobel Prize winner Ed Phelps delivered a lecture on Hayek in Vienna!

Exploitation, Minimum Wage, Hong Kong

Hong Kong is contemplating to introduce minimum wage, see here.

Now, Hong Kong's economy has consistently been ranked as one of the freest economies, if not the freest economy in the world.

Economic theory tells us that the presence of competition renders it impossible for exploitation to occur. As Professor Steven N S Cheung said in his latest column:

七十多年前英国的鲁宾逊夫人（Mrs. Joan Robinson）推出雇主剥削劳工的可能性，但只可以在缺乏雇主竞争的情况下出现。 (Gary's translation: Seven decades ago, Mrs J Robinson pointed out the possibility of labor exploitation in the absence of competition among employers)

Intense competition among firms should be one of the main characteristics of a Hong Kong's free market economy. If that is the case, there should not be exploitation. And if there is no exploitation, why the government is rushing to introduce minimum wage? Something is seriously wrong here.

Economists Have No Clothes

No, I did not say that. Apparently the title of this post is the paper title of a paper Jim Buchanan delivered at a recent History of Economic Thought Conference in Richmond.

According to a brief write-up of Buchanan's presentation, this is what he said:

“Economists have been parading around, really very naked, walking around in space,” Buchanan said. “It’s time to recognize that.”

More here. The shot up top is a picture of Jimmy in action at that same conference.

Tyler Cowen vs Justin Lin

Lin wrote in this piece that small banks are good for developing economies, Cowen is reluctant to endorse Lin's view.

The gist of Cowen's argument is this:

But what if those institutions (Gary's note: big banks) start to arise naturally, from market forces, as indeed they will at some point? Should they be discouraged or shut down or somehow taxed at disproportionate rates?

Are You a Free Market Supporter? A Self-test

Question: Do you think the government should support businesses or the free market?

Yes or No?

The answer can be find in this book, and this is a recent profile of one of the authors the book. And yes he is from Chicago's Business School.

Micky Economics

Hong Kong's legislators would soon vote on whether to allow the government to convert its loans to the territory's Micky Land into equity according to this story.

What amazes me is the kind of argument that has been used to support the construction of Mickey Land in the first place and now its extension. The argument for building Micky Land, as least as it appears to me, is the following:

1. Build it (means Micky Land) first, and visitors would come!

Couple of years down the road, not that many visitors show up, the argument for extension relies on this:

2. Not that many people turn up because the park is too small. Build a larger park and visitors would come.

Amazing indeed. My sense is that if the whole enterprise is fully funded by the parent company of the local Micky Land, it would have been shut down a while ago. Amen.

Plastic Bag Charge and the Alchian-Allen Theorem

HK is slated to introduce its plastic bag charge at retail outlets starting tomorrow. Here is the story.

What interests me is whether, with a fixed charge of 50 cents per bag, and say if you are contemplating to buy just one item(suppose you need a bag for this, otherwise the constriant is not binding anyway), a customer would pick a relatively more expensive item than he or she would without the plastic bag charge. The reason for this is that the relative price of the more expensive item should fall with the introduction of the plastic bag charge.

I do not invent this line of analysis of course, this is only one application of the Alchain-Allen Theorem.