Science Proves That Adam Smith Was Right Over 200 Years Ago (sort of)

Adam Smith's "other" book was called The Theory of Moral Sentiments. One point he made there was that we are able to sympathize with other people by trying imagine what they are going through. Here is a key passage:

"As we have no immediate experience of what other men feel, we can form no idea of the manner in which they are affected, but by conceiving what we ourselves should feel in the like situation. Though our brother is upon the rack, as long as we ourselves are at our ease, our senses will never inform us of what he suffers. They never did, and never can, carry us beyond our own person, and it is by the imagination only that we can form any conception of what are his sensations. Neither can that faculty help us to this any other way, than by representing to us what would be our own, if we were in his case. It is the impressions of our own senses only, not those of his, which our imaginations copy. By the imagination we place ourselves in his situation, we conceive ourselves enduring all the same torments, we enter as it were into his body, and become in some measure the same person with him, and thence form some idea of his sensations, and even feel something which, though weaker in degree, is not altogether unlike them. His agonies, when they are thus brought home to ourselves, when we have thus adopted and made them our own, begin at last to affect us, and we then tremble and shudder at the thought of what he feels. For as to be in pain or distress of any kind excites the most excessive sorrow, so to conceive or to imagine that we are in it, excites some degree of the same emotion, in proportion to the vivacity or dulness of the conception."

Modern science is saying something similar now (although I am not sure if it is the same thing exactly). It was written about in a recent Wall Street Journal article called Tracing the Origins of Human Empathy. Here are some key exerpts:

"our ability to identify with another's distress -- a catalyst for compassion and charity -- has deep roots in the origin of our species"

"our brains are built to feel another's pain"

"we may be hard-wired for empathy"

"our ability to put ourselves in another's place [may be seen in] how chimpanzees and other primates console each other, prefer to share, and nurse the injured...primates are reminders of empathy's antiquity."

"Dr. de Waal contends that empathy, sympathy and compassion are traits shared by every species with a rudimentary capacity for self-awareness."

"All mammals have some degree of it, and I think the origin is in maternal care," Dr. de Waal says. "I think mammals need a mechanism like this because a female needs to be very sensitive to emotional signals that come from offspring."

"Empathy draws us into the life of another's mind. Synapses fire to marshal sensory cues, muster memories and weave intuitions that our conscious minds could never articulate. As a visceral response to others, empathy can manifest in unexpected ways -- through contagious yawning, for instance."

"people better able to identify with another's state of mind also yawn more readily in response to others."

"Emotions are contagious, too."

"empathy arises from the interaction of our oldest and newest brain structures."

"Among our synapses, we do feel another's pain as our own, these brain imaging studies show."

"we respond more readily to those with whom we already feel a bond, either through kinship, community or racial group"

This might also be related to "mirror neurons" in our brains. One exerpt from this article says:

"These data strongly suggest that the insula contains a neural population active both when an individual directly experiences disgust and when this emotion is triggered by the observation of the facial expression of others. Similar data have been obtained for felt pain and during the observation of a painful situation in which was involved another person loved by the observer. Taken together, these experiments suggest that feeling emotions is due to the activation of circuits that mediate the corresponding emotional responses."

To Arthur (Guinness, That Is)

Today, 250 years of Guinness brewing is being celebrated. So I thought I would mention that Arthur Guinness was profiled at the Heroes of Capitalism blog (unfortunately the blog is no longer active). But you can see that entry by clicking on Arthur Guinness, Hero of Capitalism.

He was also a philanthropist, which you can read about here: The Man: Arthur Guinness: Innovator, campaigner and philanthropist. Here is an exerpt:

"A renowned campaigner and social philanthropist, from the beginning Arthur Guinness ensured his business continually gave something back to his employees, the local community, and Dublin. [Something that has continued as the GUINNESS brand has expanded around the globe]. From healthcare and social benefits for employees to contributing to disaster relief projects around the world, Arthur Guinness' philanthropic legacy is something that defines the GUINNESS brand to this day and will be further enhanced and celebrated in 2009."

The Spirit Of My Favorite Economist, Joseph Schumpeter, Will Guide National Economic Policy

To read about this, go to A Vision for Innovation, Growth, and Quality Jobs by Lawrence H. Summers, head of the National Economic Counsel. Here are some brief exerpts:

"During the past two years, the ideas propounded by John Maynard Keynes have assumed greater importance than most people would have thought in the previous generation.

An important aspect of any economic expansion is the role innovation plays as an engine of economic growth. In this regard, the most important economist of the twenty-first century might actually turn out to be not [Adam] Smith or Keynes, but Joseph Schumpeter.

One of Schumpeter’s most important contributions was the emphasis he placed on the tremendous power of innovation and entrepreneurial initiative to drive growth through a process he famously characterized as "creative destruction." His work captured not only an economic truth, but also the particular source of America’s strength and dynamism."

"Why is this blog called The Dangerous Economist? Back in the early 1990s, I wrote a paper called "The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?" It compares the entrepreneur in capitalism to the hero in mythology. I was never able to get it published in an academic journal. One referee even said the idea was dangerous. I doubt much harm would have befallen the U.S. economy had this paper been published. It is now online at

Creative Destroyers

A shorter version is at

Shorter Version

If you clicked on the link about why I chose this name for my blog and then these articles and read them you would have discovered some of the things that I list below and they would have pointed you to Schumpeter.

The process whereby innovations occur was called "Creative Destruction" by Schumpeter in his bookd Capitalism, Socialism, and Democracy. "Creative Destruction" was

"The opening of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation if I may use that biological term-that incessantly revolutionizes the economic structure from with in, incessantly destroying the old one, incessantly creating the new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in" (p. 83).

In his book The Hero with a Thousand Faces, Joseph Campbell described the action of the hero with

"The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return: which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder: fabulous forces are there encountered and a decisive victory is won: the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man. "(p. 30)

Campbell (1968) also has a section called "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero" (p. 38). The connection to Schumpeter's theory of creative destruction is clear. A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. But even more to the point is the fact that the hero finds that the world "suffers from a symbolical deficiency" (p. 37) and that "the hero appears on the scene in various forms according to the changing needs of the race" (p. 38). The changing needs and the deficiency may directly correspond to the changing market conditions or the changing desires for products. The entrepreneur IS the first person to perceive the need or opportunity for market profits.

Joseph Campbell's book inspired George Lucas to make the Star Wars movies.

Free Markets vs. Regulation

There were two opposing views in the New York Times a week ago. Here are the articles

Flaw in Free Markets: Humans by Robert Frank

Where Politics Don’t Belong by Tyler Cowen

Frank argues that markets don't work the way alot of people think they do because people are not always rational. Cowen argues that regulations can do more harm than good.

Determining The Cost Of Pollution Is Hard (Which Makes Finding The Right Government Policy Hard, Too)

This past week in my principles classes I talked about areas where economists generally agree that the government needs to intervene in the economy and that the free market does not give us the best outcome (although economists will disagree about how much intervention we should have). One was the area of negative externalities, that is, things like pollution. One solution is to tax pollution (or the activities that cause them). The ideal would be to tax each unit of pollution exactly as much as the damage it causes in dollars. If each ton of steel causes $100 in environmental damage, then we should tax each ton of steel $100. There is a danger that we tax steel too much and we end up with too little steel produced.

But how do we figure out the cost of each ton of steel produced? Apparently, this may not be easy as the article Hate Calculus? Try Counting Cow Carbon shows. Here is the intro:

"Shoppers soon will be able to buy everything from meat to moccasins based on a number that purports to tell them the products' environmental impact.

Manufacturers and retailers across the globe are working to measure their products' carbon footprints for a variety of reasons, and all of the efforts have one thing in common: The results have the appearance of precision.

But all the decimal points in the world can't hide the fact that measuring carbon footprints is inexact. It is clouded by varying methodologies and definitions -- not to mention guesses."

Monopoly (The Board Game) Helped British POWs Escape During World War II

The article is Get Out of Jail Free: Monopoly's Hidden Maps. From the article:

"During World War II, as the number of British airmen held hostage behind enemy lines escalated, the country's secret service enlisted an unlikely partner in the ongoing war effort: The board game Monopoly.

It was the perfect accomplice.

Included in the items the German army allowed humanitarian groups to distribute in care packages to imprisoned soldiers, the game was too innocent to raise suspicion. But it was the ideal size for a top-secret escape kit that could help spring British POWs from German war camps.

The British secret service conspired with the U.K. manufacturer to stuff a compass, small metal tools, such as files, and, most importantly, a map, into cut-out compartments in the Monopoly board itself."

The maps may have been the key. The article also said:

""It was really exciting," he said [Victor Watson, who helped make the maps]. Although it's impossible to know precisely how many prisoners escaped with the help of the hidden maps, experts estimate that about 35,000 members of the British, Commonwealth and U.S. forces who were taken prisoner during the war returned to Allied lines before the end of the war.

"We reckon that 10,000 used the Monopoly map," Watson said."

Should The United States Allow People To Sell Their Kidneys?

In one of my classes we read an article about this from the book The Economics of Public Issues. The authors suggest that we should allow this because thousands of people die every year waiting for a donor. There was a very good article about this recently in The Atlantic Monthly by Virginia Postrel called With Functioning Kidneys for All. The article is excellent, in depth and explains all the problems the system has now.

There have been some alternatives to the completely volunteer system we have had and the payment method. One involves an exchange of donated kidneys between friends of people who need a kidney transplant but who are not compatible with their friend (or relative). Here is how it would work:

"Over the past decade, however, a more promising trade has become possible. In its simplest form, known as “paired exchange,” incompatible pairs are matched. For example, a husband with type A blood wants to give a kidney to his wife, who has type B blood. Meanwhile, a mother with type B wants to donate to her son with type A. So the mother gives to the wife, and the husband gives to the son. As originally developed at Johns Hopkins, paired exchanges involved not only swaps but simultaneous surgeries, so that no one could back out."

But it can be hard to find two pairs of people where the donors match for the exchange. There can be all kinds of medical reasons why one person can't donate a kidney to another. Here is the problem:

"Bartering kidneys has the same problems as bartering anything else. What each side needs has to match perfectly. “In economics, for maybe a hundred years, people have talked about why money is important—because of the difficulties of barter. The phrase that’s come to signify that in economics is The trouble with barter is, you have to find a double coincidence of wants,” says Alvin Roth, a Harvard economist who has designed algorithms for kidney exchanges. “When you think about regular kidney exchange, what that means is, not only do we have to want your kidney; you have to want our kidney—a double coincidence of wants.” Worse, the need for simultaneous operations, requiring four operating rooms and four transplant teams, severely limits where such exchanges can be done. Paired exchange can’t significantly reduce the waiting list."

So there is another system, called "donor chains." It starts with an altruistic person donating a kidney to be used for anyone who is a match. Then a friend or relative of the recipient donates a kidney that goes into the pool of available kidneys. Then a friend or relative of the next recipient donates a kidney and so on. It helps, but it is logistically very hard and the chain can be broken. And these other methods still leave us way short on kidneys. So we still have the question of allowing payments to get more people to give up a kidney. The Economics of Public Issues mentions that Iran has had a system of payments for 20 years and seems to work well. So maybe it is worth looking into.

Update Sept. 17, 10:22 am: A poll of economists included the question "The U.S. should allow payments to organ donors and their families." Here are the results:

STRONGLY DISAGREE(1) 4.7%
DISAGREE(2) 10.9%
NEUTRAL(3)14.1%
AGREE(4) 45.3%
STRONGLY AGREE (5) 25.0%
MEAN 3.75

This is from the article The Policy Views of American Economic Association Members: The Results of a New Survey by Robert Whaples.

Are Your Friends Making You Fat?

That question was on the cover of today's New York Times magazine. The article was titled Is Happiness Catching? and was by CLIVE THOMPSON.

This article touches on somethings that have already come up in my classes this semester. One has to do with tastes and preferences. This article, although very long, gives us at least one way tastes can be formed, through friends and social networks (as I said in class, economists don't normally try to explain where tastes come from but the article does quote an economist). The other has to do with correlation (or association) vs. causality. As you will see below and in the article, there is some disagreement over whether or not the researchers found a causal link (for example, my friend getting fat caused me to get fat) or if it was just an association (or correlation) if both friends lived near a McDonalds that just opened up (one friend did not cause the other to get fat-they both got fat for the same reason). Also, my last post raised the question of why we have been getting more obese.

Social scientists Nicholas Christakis and James Fowler found that

"...good behaviors — like quitting smoking or staying slender or being happy — pass from friend to friend almost as if they were contagious viruses... [friends] influenced one another’s health just by socializing. And the same was true of bad behaviors — clusters of friends appeared to “infect” each other with obesity, unhappiness and smoking."

Here are some examples:

"A 2000 study of dorm mates at Dartmouth College by the economist Bruce Sacerdote found that they appeared to infect each other with good and bad study habits — such that a roommate with a high grade-point average would drag upward the G.P.A. of his lower-scoring roommate, and vice versa."

"When a Framingham resident (whose residents were part of a long term health study) became obese, his or her friends were 57 percent more likely to become obese, too. Even more astonishing to Christakis and Fowler was the fact that the effect didn’t stop there. In fact, it appeared to skip links. A Framingham resident was roughly 20 percent more likely to become obese if the friend of a friend became obese — even if the connecting friend didn’t put on a single pound. Indeed, a person’s risk of obesity went up about 10 percent even if a friend of a friend of a friend gained weight."

It is not just weight or obesity that can be affected this way. Drinking, smoking, how altruistic you are and how happy you are might also be due to social networks. Gender has an impact. How men and women affect each other can be different. Also, how co-workers affect you can be different from how friends or relatives affect you.

More key exerpts:

"...the simple peer-pressure explanation doesn’t work as well with happiness or obesity: we don’t often urge people around us to eat more or implore them to be happier. (In any case, simply telling someone to be happier or unhappier isn’t likely to work.) Instead, Christakis and Fowler hypothesize that these behaviors spread partly through the subconscious social signals that we pick up from those around us, which serve as cues to what is considered normal behavior."

"...[it] might be driven partly by “mirror neurons” in the brain that automatically mimic what we see in the faces of those around us — which is why looking at photographs of smiling people can itself often lift your mood. "

"...a behavior can skip links — spreading to a friend of a friend without affecting the person who connects them."

"But they theorize that people may be able to pass along a social signal without themselves acting on it. If your friends at work become obese, even if you don’t gain weight yourself, you might become more accepting of obesity as a normal state..."

"This might all be due to "evolutionary roots" "Tribal groups that were tightly connected were likely more able to pass along positive behaviors than those that weren’t.""

Not everyone agrees with the study's findings. Some scienticists say that maybe fat or happy people like to hang out together because in general, we like to be around people who are like us, so it might just be correlaton (or association), not causation. Also, it could be the environment that causes friends to get fat at the same time. Maybe they all live to close to a McDonalds that just opened up. One counter study found that if a high school student was tall, his or her friends were more likely to be tall. You can't catch height from someone else.

But Nicholas Christakis and James Fowler have an answer for that. They say other studies used a "looser" mathematical model (not sure what that means here). But they also found that if person A considered person B a friend but not vice-versa, if person B got fat, then it increased the chance of person A getting fat. But if person A got fat it did not affect the chances of person B getting fat. So if something in the environment caused one person to get fat (like a new McDonalds), it should affect both people. But it did not always do so. That means there has to be another reason. Maybe what you do is affected by what you think other people think is okay.

Should Overweight People Pay More For Health Insurance?

That is the question raised in an article from the New York Times magazine called Fat Tax by David Leonhardt. Here are the key exerpts:

"For all the miracles that modern medicine really does perform, it is not the primary determinant of most people’s health. J. Michael McGinnis, a senior scholar at the Institute of Medicine, has estimated that only 10 percent of early deaths are the result of substandard medical care. About 20 percent stem from social and physical environments, and 30 percent from genetics. The biggest contributor, at 40 percent, is behavior."

"people in their 50s are about 20 pounds heavier on average than 50-somethings were in the late 1970s."

"Obesity is different. A recent article in Health Affairs estimated its annual cost to be $147 billion and growing. That translates into $1,250 per household, mostly in taxes and insurance premiums."

"And yet it turns out that the obese already do pay something resembling their fair share of medical costs, albeit in an indirect way. Overweight workers are paid less than similarly qualified, thinner colleagues, according to research by Jay Bhattacharya and M. Kate Bundorf of Stanford. The cause isn’t entirely clear. But the size of the wage difference is roughly similar to the size of the difference in their medical costs."

"The question of personal responsibility, then, ends up being more complicated than it may seem. It’s hard to argue that Americans have collectively become more irresponsible over the last 30 years; the murder rate has plummeted, and divorce and abortion rates have fallen. And our genes certainly haven’t changed in 30 years."

"What has changed is our environment. Parents are working longer, and takeout meals have become a default dinner. Gym classes have been cut. The real price of soda has fallen 33 percent over the last three decades. The real price of fruit and vegetables has risen more than 40 percent."

Sex, Booze and Drugs

Hope that got your attention. It is actually the title of chapter 5 of the book The Economics of Public Issues. There have been some recent news items that touch on some of the issues raised in this chapter.

One has to do with methamphetamines. It is now getting even easier to make it yourself. Read New formula has junkies mixing their own drugs.

Another is the issue of what actually ends up in illegal narcotics. Sometimes cocaine contains rat poison. Not much you can do about that if you are a customer. You can't complain to the police. Now there is something new going into cocaine that you probably don't want. The article Tainted cocaine kills 3, sickens dozens says:

"Nearly a third of all cocaine seized in the United States is laced with a dangerous veterinary medicine — a livestock de-worming drug that might enhance cocaine's effects but has been blamed in at least three deaths and scores of serious illnesses."

And Russia is trying to get its citizens to drink less through govenment programs. It is not working well, just like prohibition in the USA during the 1920s, which was also discussed in the article. Read Russia president takes out after alcohol.

Farmers Dump Cherries And Let Them Rot

The article is Bumper Cherry Crop Turns Sour: Tons of Unharvested Fruit Rots Under Government Program to Keep Prices Stable. Farmers are destroying their cherries to reduce supply and drive up the price under an old government program. Here are the key exerpts:

"Under a Depression-era federal program designed to keep prices from plummeting, tart-cherry farmers are being told by fruit processors to leave up to 40% of their crop unharvested."

"Thanks to ideal temperatures and fewer frosts, the crop is expected to be the biggest in eight years."

"But the big harvest is coming in just as the troubled economy has exacerbated weakening demand for tart cherries."

"The tart-cherry industry operates under a government-sanctioned plan called a federal marketing order that dates to 1933. It allows farmers and processors to legally regulate supply to keep prices stable."

"Some farmers say they would like to see their cherries donated to food banks, but the cost of processing them is too expensive."

One additional point. They sometimes put cherries on reserve in bumper years like this but there is so much surplus that only a small amount is being used for that. If they did not destroy cherries, the price would fall. But the government policy says the price has to be maintained. The farmers' gain, however, means higher prices to the consumer than would occur without the policy.

Toilet Paper Shortage? Don't Worry, Communist Party (And Granma) To The Rescue!

The article is Cuba faces toilet paper shortage. Here is the intro:

"There's good news and bad news in Cuba.

The bad news: There's a shortage of toilet paper, and officials in Havana say it will not ease until the end of the year.

The good news: Day-old copies of the Communist party's newspaper Granma, a traditional substitute, are available for less than a U.S. penny. And that's six to eight full, if rough, pages per day.

Cuban officials say the shortage is the result of the global financial crisis and three devastating hurricanes last summer, which forced cuts in imports as well as domestic production because of reductions in electricity and imports of raw materials.

But CNN commentator Fareed Zakaria says that ``at the bottom of this toilet paper shortage is Cuba's continuing commitment to its bizarro world of socialist economics.''"

A socialist economy is a command economy. That is one of the three economic systems my students learn about in the first week of the semester. The other two are the market and the traditional economy. Socialist economies often have problems like this when they rely on planning. When unforseen events happen they may not be flexible enought to adjust and adapt very quickly.

To learn more about these issues, go to Robert Heilbroner's article on Socialism. Here is a key exerpt:

"Through the 1960s the Soviet economy continued to report strong overall growth—roughly twice that of the United States—but observers began to spot signs of impending trouble. One was the difficulty of specifying outputs in terms that would maximize the well-being of everyone in the economy, not merely the bonuses earned by individual factory managers for “overfulfilling” their assigned objectives. The problem was that the plan specified outputs in physical terms. One consequence was that managers maximized yardages or tonnages of output, not its quality. A famous cartoon in the satirical magazine Krokodil showed a factory manager proudly displaying his record output, a single gigantic nail suspended from a crane."

Thanks To "Tarantula" You Can't Hide Your Money From The Government Anymore

It used to be that you could put your billions of dollars in a Swiss Bank account and the U. S. government would not know about it. That meant you would pay less in taxes. But a "disgruntled former UBS [bank] employee," code named Tarantula, has helped the U. S. government find out who some of the depositers are who have accounts in Switzerland. You can read all about it in the following NY Times article: A Privileged World Begins to Give Up Its Secrets

Do Opposites Attract? Not Usually, Except Maybe When It Comes To Money

There was an intersting article in the New York Times a few weeks ago called I Say Spend. You Say No. We’re in Love. by Catherine Rampell. Here is the intro:

"Despite the old saying “opposites attract,” scholars have found that in almost every way imaginable, people tend to choose mates who look, sound and act as they do. But in the area perhaps most fraught with potential conflict — money — somehow, some way, people gravitate toward their polar opposite, a new study says. “Spendthrifts” and “tightwads” (which, as it turns out, are actual academic terms) tend to marry the other. Unfortunately, these dichotomized duos report unhappier marriages than people with more similar attitudes toward spending."

The rest of the article explains the research that has been done on this by marketing and psychology professors.

Does Evolutionary Psychology Support Joseph Campbell's Belief In The Need For A World Mythology?

The mythologist Joseph Campbell wrote a book called The Hero With A Thousand Faces which inspired George Lucas to make the Star Wars movies. Campbell often talked about the need for a new world mythology. This issue came up in a fascinating article in yesterday’s New York Times called a “A Grand Bargain Over Evolution” by Robert Wright. It discusses how “religion and science are actually compatible” because “evolutionary psychologists have developed a plausible account of the moral sense.” The part of the article that reminded me of Campbell is below. Then that is followed by quotes from him that are very similar. He died in 1987, so his remarks were very prophetic.

Here is the NY Times quote:

“Clearly, this evolutionary narrative could fit into a theology with some classic elements: a divinely imparted purpose that involves a struggle toward the good, a struggle that even leads to a kind of climax of history. Such a theology could actually abet the good, increase the chances of a happy ending. A more evolved religion could do what religion has often done in the past: use an awe-inspiring story to foster social cohesion — except this time on a global scale.

Of course, religion doesn’t have a monopoly on awe and inspiration. The story that science tells, the story of nature, is awesome, and some people get plenty of inspiration from it, without needing the religious kind. What’s more, science has its own role to play in knitting the world together. The scientific enterprise has long been on the frontiers of international community, fostering an inclusive, cosmopolitan ethic — the kind of ethic that any religion worthy of this moment in history must also foster.”

Now what Campbell had to say. From page 112 of the book An Open Life: Joseph Campbell In Conversation With Michael Toms.

Michael Toms often interviewed Campbell at KQED in San Francisco for the radio program New Dimensions. Here they discussed social fragmentation. The following two paragraphs are from Campbell.

“And there's going to be [social fragmentation] for a long time. Unfortunately, many of the new mystically motivated movements are reactionary against other peoples. We have this "Power" and that "Power" and the other "Power." These are delaying actions. People are afraid to move into the free fall of a totally new way of looking at others. So the new mythology to come must be a global mythology, and it's got to solve the problem of the in-group by showing that there's no out-group. We're all members of a society of the planet, not of one particular place, and the fact that the three main religions of the Western world-Judaism, Christianity, and Islam-can't live together in Beruit is a refutation of all three in terms of their value for the contemporary world. They're monstrous! We must begin to realize that each is saying in his own language what the other is trying to say in his. There must be brotherhood and cooperation. Because unless that comes, we're going to blow ourselves to smithereens.

Every single one of the old horizon-bound mythologies reserved love for the in-group, and aggression and denigration were reserved for the out-group. Now, something's got to break that. And when we see that picture of our planet taken from the moon, the question arises: What are we going to do with our aggression? How is it going to be absorbed into love and transmuted from gross matter to gold? I think teaching "I-thou" relationships, rather than the "I-it" relationships, which [theologian Martin] Buber spoke about, is the first step. The teaching of humanity rather than the teaching of in-group appreciations is what's important.”

I think that Campbell clearly talked about the same thing as what Robert Wright did in the Times article. He mentioned narrative and awe-inspiring story as something that could foster social cohesion. This is the mythology that Campbell discussed.

If you are wondering why an economist is discussing this, click on the link above which explains the name of this blog. It has to with entrepreneurs being like heroes from mythology. Campbell thought so, too and you can read about that at Joseph Campbell on Entrepreneurship

Two Champions Of Entrepreneurship Win The Presidential Medal Of Freedom

They are Noble Peace Prize winning economist Muhammad Yunus and the late congressman Jack Kemp. You can read about this at President Obama Names Medal of Freedom Recipients. Here are the testimonials for these two winners:

Jack Kemp
Jack Kemp, who passed away in May 2009, served as a U.S. Congressman (1971 – 1989), Secretary of Housing and Urban Development (1989 – 1993), and Republican Nominee for Vice President (1996). Prior to entering public service, Kemp was a professional football player (1957 – 1969) and led the Buffalo Bills to American Football League championships in 1964 and 1965. In Congress and as a Cabinet Secretary, Kemp was a self-described "bleeding heart conservative" who worked to encourage development in underserved urban communities. In the years leading up to his death, Kemp continued seeking new solutions, raising public attention about the challenge of poverty, and working across party lines to improve the lives of Americans and others around the world.

Muhammad Yunus
Dr. Muhammad Yunus is a global leader in anti-poverty efforts, and has pioneered the use of "micro-loans" to provide credit to poor individuals without collateral. Dr. Yunus, an economist by training, founded the Grameen Bank in 1983 in his native Bangladesh to provide small, low-interest loans to the poor to help better their livelihood and communities. Despite its low interest rates and lending to poor individuals, Grameen Bank is sustainable and 98% percent of its loans are repaid – higher than other banking systems. It has spread its successful model throughout the world. Dr. Yunus received the Nobel Peace Prize in 2006 for his work.

Dr. Yunus has is own website at Muhammad Yunus.

You can read more about Jack Kemp at PRIVATE SECTOR; Coaching Entrepreneurs for Profit and Jack Kemp: A Champion of Small Business.

Paul Krugman Thinks Like A Small Child

And I mean that as a compliment. A book about how children think was reviewed in the NY Times today and it reminded me of something Krugman wrote in Slate magazine in 1997. So I wrote a letter to the Times book review editor showing the similarity. If it gets printed, I will report that here. The letter is below followed by links to the 1997 Slate article and the book review.

"I read with interest Anthony Gottlieb's review of Alison Gopnik's book "The Philosophical Baby" ("Young Philosophers," p. 9, Aug.9). What most caught my attention was the following passage: "A recurring theme of Gopnik’s is the idea that playful immersion in freely conjured hypothetical worlds is what teaches us how to make sense of the real one. She describes, for instance, how small children’s grasp of “counterfactual” situations enables them to calculate the probabilities of alternative courses of action."

By an amazing coincidence, that same Book Review issue had two reviews by Nobel Prize winning economist Paul Krugman. He wrote something very similar in Slate magazine in 1997. It was "You can't do serious economics unless you are willing to be playful. Economic theory is...is a menagerie of thought experiments--parables...you must play with those ideas in hypothetical settings. Innovative thinkers, in economics and other disciplines, often have a pronounced whimsical streak." Krugman also mentioned how some writers can take their subject "too seriously to play intellectual games. To test-drive an idea with seemingly trivial thought experiments, with hypothetical stories about simplified economies." Maybe we would all benefit from more training in this technique."

The Accidental Theorist

Young Philosophers

Pictures of Ireland

My students asked me to post pictures of my trip. But I have not gotten around to posting some of the pictures my wife took. Her nephew did take some and he posted them to his blog. So click here to see them. Warning: I appear in one of them.

Aging and Entrepreneurship (And The Coming Entrepreneurship Boom)

Below is an article I wrote that was published in the Encyclopedia of Financial Gerontology, (Lois A. Vitt and Jurg K. Siegenthaler, Editors-in-Chief, Greenwood Press, 1996). It is now called Encyclopedia of Retirement and Finance. I examined the psychology of entrepeneurship for older people through the lense of mythology and Erik Erikson's eight ages of man. My article is relevent because the Kaufman Foundation recently released a report called The Coming Entrepreneurship Boom. The report says that the aging population in the USA will actually help this boom. My article discussed how important entrepreneurship can be for people as they age, and not just for economic reasons.

Here it is:

ENTREPRENEURSHIP, the initiation and assumption of the financial risks of a business and its management. The decision to start a business is often complex. Many factors, including the need for achievement, the need for control over one's destiny, the willingness to take risks, the loss of one's job, and other forms of displacement may prompt a person to start his or her own business. While some writers see no link between age and the decision to start a new business, others have found close links. When age is a significant factor, it is often for psychological reasons.

Entrepreneurial opportunities are most likely to be pursued by people with a college education who are in their late thirties and have established careers. Age is relevant to entrepreneurship, and entrepreneurship is important for the aged. Of those who are employed at age 65 or older, 27% are self-employed (Maddox 1985). It is useful to examine the relationship between entrepreneurship and aging through the internal or psychological aspects of a person's decision to become an entrepreneur.

The Entrepreneur and Hero Compared

Joseph Campbell believed that the entrepreneur was the real hero in our society. Although he never systematically compared the entrepreneur and the hero, it is interesting to do so. Heroes and entrepreneurs are called to take part in an adventure that is a simultaneous journey of self-discovery, spiritual growth, and the personal creativity they make possible. An entrepreneur's journey closely resembles the journey of the hero in mythology as outlined in Campbell's book, The Hero 'With a Thousand Faces (1968). There is a strong similarity between the journey that

entrepreneurs take and the adventure of heroes. Entrepreneurs and heroes also have similar personality traits. Myths describe the universal human desires and conflicts we see played out in the lives of entrepreneurs. Ian MacMillan and Rita Gunther McGrath (Wall Street Journal 1992) of the Wharton School's entrepreneurial center found that entrepreneurs, no matter what country they call home, think alike. Campbell found that the basic pattern in the hero's journey is the same in every culture.

Heroes bring change. Campbell (1968) refers to the constant change in the universe as "The Cosmogonic Cycle" that "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero." This recalls Joseph Schumpeter's theory of entrepreneurship as creative destruction. A successful entrepreneur simultaneously

destroys and creates a new world, a new way of life. Henry Ford destroyed the horse and buggy age while creating the world of the automobile. Campbell's hero finds that the world "suffers from a symbolical deficiency" and "appears on the scene in various forms according to the changing needs of the race." Changing needs and deficiencies correspond to the changing market conditions or the changing desires for products. The entrepreneur is the first person to perceive changing needs. Campbell believed that people become creative when they engage in an activity, pursue a career or entrepreneurial venture, because it is what one loves to do and because it bestows on one a sense of personal importance and fulfillment. It is not the social system that dictates that it be done; rather, the drive comes from within. It is this courageous action that opens up doors and creative possibilities that did not previously exist.

Relationship of the Hero's Journey to Aging

The hero's goal is now to find a purpose in life. Campbell's and Erik Erikson's (1963) heroes are similar, because the hero's journey is a quest for personal identity that can be found in service to others or to society, or in finding and delivering a boon. During the generativity versus stagnation stage, which comes in the second half of life, in Erikson's eight ages of man, people become willing to take risks in order to be creative or make their mark upon society. Generativity involves establishing and guiding the next generation, but it also includes productivity and creativity, which, along with the willingness to take risks, are essential to entrepreneurship. For Campbell, the act of creating involves the willingness to take a risk and cross a boundary into a new domain of ideas. To be unwilling or afraid to do so is to be controlled by what he calls "the elder psychology," or the unwillingness to strike out on one's own and take risks.

The paradox, then, is that although entrepreneurship may be an important path for people to discover themselves and "do something meaningful for society" as they become older, they must resist this "elder psychology," which Campbell believes blocks risk taking, creativity, and entrepreneurship. When a person is able to champion things becoming, he or she can achieve generativity by making a significant and unique contribution to society. If one is able only to maintain the status quo, he or she will stagnate and will remain self-centered and unable to contribute to society. Almost by definition, entrepreneurs are champions of things becoming.

In counseling and advising the elderly in the area of entrepreneurial activity, it is useful to keep these insights from mythology and psychology in mind. They deal with the deepest of needs and forces in the human psyche. For an older person contemplating a new business venture, it will be helpful to recognize that it is not just the potential financial gains or losses involved that are important. The entrepreneurial act may be a life-defining and self-defining act, one with deep personal and perhaps even spiritual implications for the individual and his or her relationship with society. Entrepreneurs are often seen as having different attitudes toward risk: what a nonentrepreneur might view as a great financial risk, the entrepreneur may see as a cost of learning and adventuring. The venture is an end in itself, more than the profit. People who start new businesses in the second half of life may view risk in this way, because they feel such a strong need to define themselves and contribute to society.


References

Campbell, Joseph. 1968. The Hero With a Thousand Faces. Princeton. NJ: Princeton University Press.

Erikson, Erik H. 1963. Childhood and Society. New York: W. W. Norton.

Jung, Carl G. 1956. Symbols of Transformation. New York: Harper Torchbooks Bollingen Library.

Maddox, George L., et al. 1985. The Encyclopedia of Aging. New York: Springer.

Wall Street Journal. 1992. 6 February; A1.

Yes, You Can Have Too Many Friends

Even Bill Gates says so. Read about that at Bill Gates quits Facebook over 'too many friends'. Here are the key exerpts:

"Microsoft co-founder Bill Gates said he was forced to give up on the social networking phenomenon Facebook after too many people wanted to be his friend.

Gates, the billionaire computer geek-turned-philanthropist who was honoured Saturday by India for his charity work, told an audience in New Delhi he had tried out Facebook but ended up with "10,000 people wanting to be my friends".

Gates, who remains Microsoft chairman, said he had trouble figuring out whether he "knew this person, did I not know this person"."

And

""I read a lot and some of that reading is not on a computer," he said.

Gates, who sought to drive a vision of a computer on every desk and in every home, said the information technology revolution had been "hugely beneficial" but added: "All these tools of tech waste our time if we're not careful.""

So you can use technology too much as well. Notice how he brings in costs and benefits (waste implies cost and he mentions technology as being beneficial). But the more you use something, the less beneficial it is and it can also become more costly. That is, the marginal benefit (MB) falls and the marginal cost (MC) rises. The best result is to keep adding more of something up to the point where MB = MC. I explain all of this at the following site: Allocative Efficiency. This is taken directly from notes I use in one of my lectures. Just think about friends when you read it and look at the graph. At some point, one more friend has less MB than the MC. So it means you can have too many friends because you can have too much of anything.

World's Most Expensive Fast Food (and some game theory)

You can read about it at World's Most Expensive Fast Food. Here is the opening paragraph:

"Dublin is home to Trinity College, the Guinness Storehouse and St. Stephens Green. Here, you'll also find the world's most expensive fast food. In U.S. dollars, a hamburger meal at a medium-priced establishment, as defined by consulting firm Mercer, costs a whopping $9.16."

Here are the top 5:

1. Dublin $9.16
2. Amsterdam $7.88
4. Paris $7.43
4. Brussels $7.43
5. Rome $7.30

In New York it's $5.99. One can only hope that if you are going to Dublin that the cost is worth it, that they have some attractions to see and some fun things to do. I can't see why anyone would go there at those prices:)

Update July 10: World's Most Expensive Cities To Live

This was in the "Peanuts" comic strip once. Charlie Brown is on the mound talking to himself.

Frame 1: "This guy will never be expecting a fastball..."

Frame 2: "With the bases loaded he'll be expecting a curve. But he also knows I know what he's expecting..."

Frame 3: "So if he's expecting me to pitch what I know he knows I know he knows he's expecting..."

Frame 4: "Where was I?"

Slave Redemption in Sudan (Another Dangerous Economist Classic)

In my ECON 2302 class this week we read chapter 8 of the book The Economics of Public Issues. It seeems like a good idea to buy a slave and set him or her free. But the "redeemers" have often wanted to buy large groups of slaves to redeem. This has encouraged people to capture slaves in the first place. Then it puts more money in the hands of the slave traders who buy more weapons. Some people runs scams, selling people that were not really slaves. Below are links to the three articles listed in the book's bibliography.

The False Promise of Slave Redemption

Ripping Off Slave ‘Redeemers’

Fake slaves con aid agencies in Sudanese liberation scam

The following link has links to lots of info on this issue and different views

Policy Debate: Do slave redemption programs reduce the problem of slavery?

Finally, there was a movie made in 1971 that you can read about at the Internet Movie Database called Skin Game. It was about a fake slave being sold over and over again as a scam. Here is the synopsis:

"Quincy Drew and his black friend Jason O'Rourke have pulled off every dodge known for conning a well-heeled sucker, but it wasn't until they hit on the old skin game that they started to clean up. The game is simple. Jason, though born a free man in New Jersey, poses as Quincy's slave as the pair ride through Missouri and Kansas in 1857. Quincy picks a likely mark in each town, sells Jason to him for top money and rides out of town. Then Quincy and Jason get back together on the road to another town, because if Jason can't just run off after dark, Quincy finds a way to spring him loose."

Does It Pay to Host the Olympics?

This was an article in Parade magazine today. You can read it at Does It Pay to Host the Olympics?. It can cost a city $50 million just to go through the bidding process. It is not clear that the benefits always outweighs the costs. Here is an exerpt:

"The 2004 Athens Olympics cost more than $11 billion and brought the city only about $2.8 billion in revenue. China has not released earnings from the 2008 Games in Beijing, but the $43 billion price tag shattered all Olympic records."

Montreal took 30 years to payoff the cost of the 1976 olympics. Chicago could spend up to $5 billion if they are the host of the 2012 summer olympics. Atlanta seems to have put its olympic buildings to good use.

Can Your Student Loan Get a Bailout?

To read about this go to Can Your Student Loan Get a Bailout?. The article says "About two-thirds of the 3 million or so college seniors who donned a cap and gown this year took on an average debt of $22,500 for the privilege of that diploma." The government policies on this limit payments if you're income is low and/or you work in some kind of public service.

Another Dangerous Economist Classic: Dim economy drives women to "donate" eggs for profit

Click on Dim economy drives women to donate eggs for profit to see how much money women can get for an egg.

A Dangerous Economist Classic: Can You Find Virtue by Investing in Vice?

To read this scintillating entry, go to Can You Find Virtue by Investing in Vice?

A Few Extra Pounds Might Bring Extra Years

In my face-to-face class we read a chapter about obesity in the book The Economics of Public Issues. But the article titled A Few Extra Pounds Might Bring Extra Years discusses some research that says that being underweight might be worse than being overweight. Here is an exerpt from the article:

"Compared to normal-weight people, those who were underweight were 70 percent more likely to die and those who were extremely obese were 36 percent more likely to die..."

But "that doesn't mean that people in the normal weight range should try to put on a few pounds," according to one of the researchers. Being obese means your body mass index (BMI) was 30 and above. Here is a Body Mass Index Chart based on height and weight

People Are Saving More Out Of Fear

This may be more of a macro issue, but the Wall Street Journal reported that "personal saving as a percentage of after-tax income rose to 5.7% in April, the Commerce Department said Monday, up from 4.5% in March and well above the zero savings rate reported a year earlier." The article is called Americans Get Even Thriftier as Fears Persist. People are fearful of losing their jobs, so they are saving more than they used to. Here is another exerpt from the article:

"The shift toward a higher saving rate is likely to persist even after the economy recovers, said Christopher Carroll, an economist at Johns Hopkins University who studies consumer behavior.

The low saving rate that persisted until last year was due in large part to an expansion in the availability of credit. On the heels of the financial crisis, credit availability has gone into reverse, making it more difficult for consumers to spend beyond their income.

Just as the Great Depression ushered in a shift in behavior that affected an entire generation, Mr. Carroll said this financial crisis will shock consumers into behaving differently. "People had got the sense that the world was very stable and everything was very predictable and reliable," he said. "That's a hard view to hold onto now.""

Tiger Woods Is Still The Greatest Golfer In History

Okay, he did not win the Masters or the U. S. Open this year. But what is the ultimate yardstick for measuring golfers? It is money won. Woods has been the leading money winner on the PGA tour 8 years. The only other golfer to lead for 8 different years was Jack Nicklaus. Woods's 8th year came when he was 31 years old. When Nicklaus did it for the 8th time, he was 36. So Woods beat him by five years. The next two highest totals for years leading the tour in money are Tom Watson and Ben Hogan, both tied at 5. So it really just comes down to Nicklaus and Woods. Nicklaus was the leading winner 8 times from 1964 through 1977 or 8 out of 13 years. Woods led 8 years from 1997-2007 or 8 years out of 11. So with Woods taking fewer years to do it and doing it at a much younger age, it shows he clearly has the edge. Even if he retired now, it would be a no brainer that he is the greatest.

Source: The ESPN Sports Almanac

Quirky Economic Indicators

You probably know that our economy is going through a recession. Some of my students might recall that one definition of a recession is 2 straight quarters of falling gross domestic product. A quarter is a three-month period. The definition actually uses "real" GDP, which is GDP adjusted for changing prices and is often on a per capita basis (per person). But some other things show that we are in a recession and that is where 10 Quirky Economic Indicators comes in. These other factors, like falling GDP, show that the economy is having problems. For example,

"The National Gardening Association finds that the number of households who will grow their own fruits, berries, vegetables and herbs this year is 19% higher than in 2008.

That makes 43 million gardeners in the United States this year. It's fun and relaxing, no doubt, but 54% of the respondents say the prospect of saving money on groceries motivates them to till the soil."

Other indicators are related to movies, dating and mosquito bites.

Wedding Scams Are On The Rise In China

And it's because of simple economics. Family planning policies which limited couples to one child along with a preference for boys has left a surplus of 32 million marriage aged men. So it is easier for a woman to pretend to want to marry a man. Once she receives a dowry, the scam artist can split. Men are so happy to have found a wife that they are not as careful as they should be. The price of brides has gone up and the savings rate of young men has gone up as they try to have enough money to get married. You can read all about it at It's Cold Cash, Not Cold Feet, Motivating Runaway Brides in China.

This is not a spam blog. I teach economics at San Antonio College in San Antonio, Texas. Click here to see my home page from by school.

Miley Cyrus vs. The Ticket Scalpers

You can read about it at Going 'Paperless' to Thwart Scalpers.

Here is how it works:

"The technology, which Ticketmaster tested last year, is meant to make seats impossible to sell or transfer because they can be redeemed only at the concert, using the credit card with which they were bought. The plan has scalpers and resale sites crying foul.

Tickets for the concerts by Ms. Cyrus, the star of Walt Disney Co.'s popular "Hannah Montana" TV series, will cost $39.50 to $79.50, plus fees. When purchasers arrive at the concert, their credit card will be swiped with a handheld scanner that will print out a "seat locator.""

I guess a scalper could simply walk outside with the seat locator and sell them. But then it makes the scalper's job pretty hard. Maybe for some reason this is not possible anyway.

I never had a problem with scalpers. They would wait in line to buy tickets and then sell them to the highest bidder. You don't have to buy them from scalpers if you don't want to. They perform a service by waiting in the ticket line so you don't have to. Of course, these days computers are used to buy the tickets and scalpers might have automated programs to buy them. But that still saves you the time and trouble of trying to be first in line on the computer.

I don't understand why performers just don't charge a higher price to begin with. Then scalpers would not be an issue. With higher prices you would not have to have people waiting in line to buy tickets or trying to be the first online. People only turn to scalpers because they did not want to wait in line or waited and still did not get tickets (or tried to buy them online when they first came available and still did not get them). If you charge a price that is below equilibrium you create a shortage and shortages cause lines.

Another Journalist Misunderstands Supply And Demand

The article is Oil Is Plentiful, Demand Weak. Why Are Gas Prices Going Up? by VIVIENNE WALT. Here is the opening paragraph which illustrates the problem:

"Storage tankers across the globe may be brimming with oil that no one is buying because of the global economic downturn, but the traditional laws of supply and demand don't always apply to oil prices. Drivers have faced rising prices at the gas pump in recent months, as investors and oil-producing countries hoard supplies in anticipation of a global economic recovery later this year."

Actually, the "traditional laws of supply and demand" do apply. Price is determined by the intersection of supply and demand curves (or lines). But those curves can shift to the right (an increase) or to the left (decrease). One factor that causes a shift is "expectation of future price." Most, if not all, introductory textbooks have this factor. If sellers expect the price of their good will go up in the future (like if there is going to be an economic recovery), then they reduce the amount they offer for sale today. So the supply curve moves to the left and price rises. This is exactly what we teach in principles of economics courses. The graph below illustrates this:



Now the article does discuss the role that OPEC plays. Certainly when cartels are present, and they act like a monopoly, price will be higher. But the basic textbooks predict that, too.

Wall Street Journal Book Review Is Wrong About The Beard Thesis

It was in a review of David S. Brown's book Beyond the Frontier. (April 29). Here is the link:

A Heartland View of History.

Here is the relevant passage:

"The big idea in Beard's (Charles Beard) masterwork, "An Economic Interpretation of the Constitution of the United States" (1913), was that the Founding Fathers were, in his words, "with a few exceptions, immediately, directly, and personally interested in, and derived economic advantage from, the establishment of the new system." At first violently attacked, his thesis came to be widely accepted in the 1930s. "By introducing the idea that self-interest influenced the framers," Mr. Brown writes, "Beard forced students of the American past to consider the Constitution as an economic rather than a merely legal, let alone divinely inspired, text." Nevertheless, Beard's thesis was thoroughly demolished in the 1950s by the Texas-born historian Forrest McDonald and several other scholars -- an accomplishment that Mr. Brown, strangely, neglects to mention. Mr. McDonald argued, for instance, that on close examination, there was "virtually no correlation" between the Framers' actual economic interests and their votes at the Constitutional Convention."

But more recent scholarship (mainly by economist Robert McGuire, whom we will hear from below) using modern statistical techniques supports the Beard thesis. The WSJ actually had a book review which said something similar a few years ago. I wrote a letter to the editor explaining what McGuire had done and that he had published research in many top journals (not to mention a book). But the WSJ did not print it.

McGuire's book is called To Form a More Perfect Union: A New Economic Interpretation of the United States Constitution. New York: Oxford University Press, 2003. xii +395 pp. $24.95 (hardback), ISBN: 0-19-513970-4.

It has received some good reviews which you can read
here and here and here.

McGuire has published several articles on this in The American Economic Review and the Journal of Economic History over the last 20 years. His findings are summarized in his book. To truly understand the data (and the voting behavior of convention delegates), McGuire used a multivariate statistical approach. This allows us to see that slave owners truly were less likely to favor the Constitution than merchants. Simple tallies of votes are not sophisticated enough. All other factors must be held constant when trying to discover the true relationship between two variables.

Here is what professor McGuire wrote to me in an email:

"... an economic interpretation that supports Beard in the broad general sense that economic interests mattered (not necessarily all of Beard's specifics mattered as he claimed) has been the prevailing view among economic historians for nearly three decades. ... these studies used the data that McDonald collected (as well as a host of other data on economic and ideological interests); but these are data that McDonald did not formally analyze in his book according to any modern standard. ... a likely reason that I and others have been ignored by traditional historians is because of the general nature of their methodology; it is quantitative and statistical. (See my reference to John Murray's essay below.) (Farley Grubb has several papers on bankers' rent seeking and the monetary powers included in the Constitution and Heckelman and Dougherty have a couple or so papers that re-examine my work).

McDonald himself never said that economic intetrests did not matter at all; he said they did not matter along Beard's specific dichotomy of realty versus personalty and that the specific interests of the founders could not be aligned on one side of an issue with other specific interests on another side. He felt the interests were too varied and dispersed across supporters and opponents of the Constitution so that patterns could not be indicated. Moreover, McDonald has really been misinterpreted by most of his own supporters to claim that economic interets did NOT matter at all.

John Murray, University of Toledo, ...tried to explain why historians have ignored my work, basically arguing that traditional historians ignore economic historians unless they are forced to pay attention because of a media/publicity
blitz."

Who Was Alex P. Keaton's Favorite Economist? Milton Friedman

Click on the following video link to find out:

Who Was Alex P. Keaton's Favorite Economist?

You will only have to watch a few minutes to find out. It is from the 1980s sitcom "Family Ties." Michael J. Fox played Alex Keaton. In this episode he tells another character that Milton Friedman was his favorite economist.

A Public Health Announcement

Just in case you con't know, that is actor Tony Shalhoub, who plays the obsessive-compulsive detective "Adrian Monk" on the USA Network. He really has not said anything publicly (that I know of) about the swine flu.

How Much Does It Cost To Raise A Child?

I don't know since I don't have any kids. But this article, How much does it really cost to have a baby? has some numbers. Here is one exerpt:

"According to the U.S. Department of Agriculture, families who make more than $74,900 a year will spend an average of $289,380 per child over 18 years (this does not take into account college savings). In one year, the average parents spend $4,300 in child care, an additional $1,525 in food, and $2,900 on a bigger home."

That all sounds like alot of money. Some of my students are parents. I am curious to see if you have anything to say about this issue.

Male sex hormone may affect stock trades

This was actually a post from about a year ago. But it follows up on the last post about genes affecting investment decisions. The extra credit question on this week's quiz was "name a gene that affects investment decisions." Someone answered testosterone. Not a bad guess, but it is a hormone.

That is the name of an article you can read here. Here is an excerpt:

"Coates and Joe Herbert studied male financial traders in London, taking saliva samples in the morning and evening. They found that levels of two hormones, testosterone and cortisol, affected traders.

Those with higher levels of testosterone in the morning were more likely to make an unusually big profit that day, the researchers found. Testosterone, best known as the male sex hormone, affects aggression, confidence and risk-taking. Cortisol is tied to uncertainty, novelty and unpredictability, "which pretty much describes a trader's life," Coates said in a telephone interview.

Coates and Herbert's study comes less than two weeks after U.S. researchers reported that young men shown erotic pictures were more likely to make a larger financial gamble than if they were shown a picture of something scary, such as a snake, or something neutral, such as a stapler."

Is Your Investing Personality in Your DNA?

That was the title of a WSJ article that you can read by clicking here.

Here are some key exerpts:

"Consider the FAAH gene. Roughly 25% of people with European ancestry carry the 385A allele of this gene. That tends to damp their brains' fear circuitry and to intensify their brains' reaction to the prospect of making money. Or take the DRD2 gene. Some 20% of Caucasians have an allele that can make them respond more intensely to gambles, even when no skill is involved."

Some people have brains that "crave the immediate gratification of a quick profit. "Controlling this kind of impulsive response to reward," says Dr. Hariri, "is crucial to success in many aspects of life" -- like investing, where impatience often lowers returns.

"Perhaps 20% of the variation in risk-taking among individuals is genetically determined; the rest comes from our upbringing, experience, education and training."

"But during scary times like these, says Dr. Hariri, "environmental stresses can play a critical role in unmasking any underlying biases determined by your genes." In other words, bear markets give nature the upper hand."

Layoffs May Be More Costly Than The Alternative

There is an interesting article called Layoffs not an option for some businesses. You might think that all a company has to do is layoff workers when the recessions hits. There may be good reasons to limit layoffs:

-when the economy picks up again, your company will be ready to ramp up production

-you can freeze hiring or cut seasonal workers

-you can cut or freeze salaries

-cut pension payments

-cut back on hours

-you have to train new workers you hire later on

-you avoid severance cots

-layoffs can hurt morale

-workers you hire later on may cost more

How Many Home Runs Would Babe Ruth Have Hit If Baseball Had Been Integrated In His Era?

To see the answer click here. And yes, economics is involved! In case you don't know, before 1947, all major league baseball players were white (there had been a few native Americans and light skinned hispanics, but not many). Ruth held the career HR record with 714 until Hank Aaron broke it in 1974. But since Ruth never had to face pretty much anything but white guys, there must have been some good pitchers he did not have to face. Had he faced more good pitchers, perhaps he would have hit fewer HRs. How many fewer is what I discuss at the above link.

My Favorite Economist Is Joseph Schumpeter

A student emailed me the correct answer tonight. It was Michelle Garza of the internet microeconomics course. Congratulations! She did a good job of following the hints. Recall the hint: "It will be "safe" to search for the answer even if you thought it might not be."

What is the opposite of being safe? It is dangerous and this blog is called "The Dangerous Economist?" Why is it called that? I have a link that explains why. Here is what it says:

"Why is this blog called The Dangerous Economist? Back in the early 1990s, I wrote a paper called "The Creative-Destroyers: Are Entrepreneurs Mythological Heroes?" It compares the entrepreneur in capitalism to the hero in mythology. I was never able to get it published in an academic journal. One referee even said the idea was dangerous. I doubt much harm would have befallen the U.S. economy had this paper been published. It is now online at

Creative Destroyers

A shorter version is at

Shorter Version

If you clicked on the link about why I chose this name for my blog and then these articles and read them you would have discovered some of the things that I list below and they would have pointed you to Schumpeter.

The process whereby innovations occur was called "Creative Destruction" by Schumpeter in his bookd Capitalism, Socialism, and Democracy. "Creative Destruction" was

"The opening of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation if I may use that biological term-that incessantly revolutionizes the economic structure from with in, incessantly destroying the old one, incessantly creating the new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in" (p. 83).

In his book The Hero with a Thousand Faces, Joseph Campbell described the action of the hero with

"The standard path of the mythological adventure of the hero is a magnification of the formula represented in the rites of passage: separation-initiation-return: which might be named the nuclear unit of the monomyth. A hero ventures forth from the world of common day into a region of supernatural wonder: fabulous forces are there encountered and a decisive victory is won: the hero comes back from this mysterious adventure with the power to bestow boons on his fellow man. "(p. 30)

Campbell (1968) also has a section called "The Cosmogonic Cycle" which "unrolls the great vision of the creation and destruction of the world which is vouchsafed as revelation to the successful hero" (p. 38). The connection to Schumpeter's theory of creative destruction is clear. A successful entrepreneur simultaneously destroys and creates a new world, or at least a new way of life. Henry Ford, for example, destroyed the horse and buggy age while creating the age of the automobile. But even more to the point is the fact that the hero finds that the world "suffers from a symbolical deficiency" (p. 37) and that "the hero appears on the scene in various forms according to the changing needs of the race" (p. 38). The changing needs and the deficiency may directly correspond to the changing market conditions or the changing desires for products. The entrepreneur IS the first person to perceive the need or opportunity for market profits.

Joseph Campbell's book inspired George Lucas to make the Star Wars movies.

Obama To Pitch For The White Sox

April first 2009 will go down in history. Click White Sox Sign Obama For Left-handed Bullpen Support to read all about it.

The Ranger (The San Antonio College Newspaper) Quotes My Second Favorite Economist

The article is Students fear recession will affect education. My second favorite economist is the guy who says:

"If you save $4,000 a year for 40 years and earn an annual rate of return of 8 percent, you will have a million dollars."

So, you might wonder, if this guy is only my second favorite economist, who is my favorite? Hint: it is not Adam Smith, Milton Friedman, John Maynard Keynes, Simon Kuznets, Martin Feldstein, Skidelsky or even Dambisa Moyo (but she is third, for rather obvious reasons).

The first student to email me the correct answer (who is Cy's favorite economist) will get 5 points added to your next test. I will allow you to get 4 tries. After 4, you're done. Another hint: It will be "safe" to search for the answer even if you thought it might not be.

South Park Tackles The Economy

There is an episode called "Margaritaville" which you can watch if you go to

http://www.southparkstudios.com/

It is about the current economic problems. Click on where it says Margaritaville. It is very funny and creative. If any of my students think they see anything in the episode that reminds you of what you have learned this semester, I would like to get your comments. Also, the father of one of the creators of South Park is an economics professor.

Hat Tip: Eddika Shestko

Do You Always Learn More From Failure Than Success?

Try googling:

"learn more from failure than success"

and you get over 1,000 hits. But the New York Times Sunday business section had an article called Try, Try Again, or Maybe Not. It discusses research that calls this idea into question. Here is the intro:

"IF at first you don’t succeed, it doesn’t matter that you tried. That seems to be the message of a working paper prepared recently by a team at Harvard Business School. The study found that when it comes to venture-backed entrepreneurship, the only experience that counts is success."

Here is another key passage:

"The study looked at several thousand venture-capital-backed companies from 1986 to 2003.

Professor Gompers and his co-authors Anna Kovner, Josh Lerner and David S. Scharfstein found that first-time entrepreneurs who received venture capital funding had a 22 percent chance of success. Success was defined as going public or filing to go public; Professor Gompers says the results were similar when using other measures, like acquisition or merger.

Already-successful entrepreneurs were far more likely to succeed again: their success rate for later venture-backed companies was 34 percent. But entrepreneurs whose companies had been liquidated or gone bankrupt had almost the same follow-on success rate as the first-timers: 23 percent.

In other words, trying and failing bought the entrepreneurs nothing — it was as if they never tried. Or, as Professor Gompers puts it, “for the average entrepreneur who failed, no learning happened.”"

What Economists Say About "March Madness"

The first article is March Madness It Is, Economically by ANDREW ZIMBALIST. Does all the money from the NCAA basketball tournament help the schools? No:

"Amid this cornucopia, the schools themselves are usually the losers. According to the NCAA's latest Revenues and Expenses report, in 2005-06 the median Division I men's basketball team generated revenue of $480,000 and had operating costs of $1.33 million, yielding a net operating loss of $850,000. If capital expenses and full university overhead were included, these results would be even more dismal."

But the coaches do well:

"In 2005-06, the head coaches of the 65 Division I teams in Madness had an average maximum compensation of $959,486, with the top paid coach earning a guaranteed salary of $2.1 million and a maximum salary of $3.4 million. Equally startling, the average compensation of these 65 coaches is double or more that of the typical university president."

But if your school has a winning sports team, doesn't that mean more applications? Maybe, but:

"Not surprisingly, those high-schoolers who apply to a college because it has a good basketball team do not tend to score high in the SATs or in class rank. As a result, basketball success may temporarily drive up applications, but it does not raise the quality of the student body."

The other article is The Real March Madness by RICHARD VEDDER and MATTHEW DENHART. One thing they mention is that the student-athletes get very little of the revenue they generate in the form of scholarships. Then:

"If all of that money from ticket sales and television rights isn't going to student-athletes, where does it end up? In 2006, salaries for coaches and administrators accounted for nearly 32% of total athletic-department expenses."

It is true that some students go to the pros and make big money. But

"Of course, for the students who go on to the pros, putting off their financial bonanza won't be a big deal. But most college athletes do not make the pros. They may not even end up with the basic skills necessary to succeed in other workplaces, since only a minority of student-athletes in major sports even graduate (25% in top-ranked University of Connecticut men's basketball, for example). Long practices and missed classes make it difficult to succeed academically. A recent study funded by the Andrew W. Mellon Foundation shows the academic performance of athletes is lower than non-athletes even at Division III schools."

Housing And The Financial Crisis

Economist Mark Thoma gives a good overview of all the factors that came together to create the financial crisis with Who's the Villain in the Crisis? Of course, housing is part of the story and it makes me think of what my wife and I have encountered over the last several years while looking for a house (we rent an apartment now).

It always ended up that once we figured in a down payment of about 20%, that our monthly payment, including the mortgage, fees, taxes (maybe condo fees in those cases), etc. would be $300 (or more) a month than our rent. And the house that we looked at would not be as nice as our apartment, maybe it would be a little smaller and required some work. Then there would be a lawn to mow. Sometimes the backyard was just dirt that would turn to mud when it rains.

Some people say that if you buy a house "you build up equity." So? That only does you any good if later on take out a home equity loan (some owners have been borrowing against their equity or the value of their homes for consumption spending-I don't know how much this went on but less is going on now since the price of houses has fallen). Even if you can sell your house at a profit years later, you then have to find another place to live. If you buy another house, then it eats up your profit (unless you are lucky enough to find an under priced house or are just plain good at finding bargains). You could move back to an apartment and enjoy spending the profit, but you are right back where you started.

Also remember that if you are spending alot less on an apartment over the years, then you are also building up money due to compound interest, just like building up equity in your house. There was never any guarantee that home values would continue to rise so you had no guarantee that housing would be a better investment than putting the money in, say, a retirement account.

Then you could say, "at least you have a house, it is a place to live." But so is an apartment. And recall that the houses my wife and I looked at were not so great. Our rent was much less than what our monthly house payments would have been. I have had extra money taken out of my paycheck for my retirement account. So in that way, I have been building up equity.

And the strange thing is that housing prices did not rise as much in San Antonio as they did in other parts of the country. The discrepancies between buying a house and renting an apartment would have been bigger elsewhere, meaning they made less economic sense. It seems like we all should have been able to figure out something was terribly wrong. Maybe some peopled did, but not many of us.

This site shows that the vacancy rates for apartments were high and still rising when the crisis hit Housing Vacancies and Homeownership. Homeowners can deduct their interest payments from their tax returns and government sponsored entities like Fannie Mae make it easier to buy houses. One reason given for this has been that homeowners are better citizens and more community minded so that there are positive externalities from owning homes. But it might not have been a good idea to push so many people into home ownership. Maybe people who liked to buy and own houses in the past were good citizens and community minded. It is not clear that owning a house made them that way.

Two Items: Jay Leno And Arthur Guinness

In honor of St. Patrick's Day, the Heroes of Capitalism blog has an entry on Arthur Guinness, founder of the Guinnes brewing company. A true hero, indeed! They mention that "Guinness signed a 9000-year lease in 1759 with St. James Gate Brewery for an annual rent of £45."

Now to Jay Leno. He is doing a free show in Detroit. He mainly wanted it to be for people who have lost their jobs. So free tickets were given away. But some of them are getting sold on eBay, reportedly for as much as $800. Leno does not like this, which you can read about in Leno: Take tickets for free show off eBay. He doesn't want people making money off the idea. But an unemployed worker might be better off with $800 than going to see Leno's show. I don't think Leno should object to that. Either way, unemployed workers are helped.

But Leno brought this on himself. People only had to say they were unemployed to get the tickets. Since we know that there is no such thing as a free lunch, there is the possibility that some people who are not unemployed got tickets for the sole purpose of selling them. Maybe Leno should have required proof of being unemployed, but still let people sell them. Let the unemployed worker choose what makes him or her better off, money or Leno's show. Leno also could have charged for a show in Detroit and tell everyone he was going to donate the money to the poor or unemployed. A benefit show.

Harvard professor Greg Mankiw also addresses this issue with Jay Leno disses the free market.

Update: EBay Halts Sale of Free Leno Tickets

Prohibited Goods Easily Got Into Texas Prisons

To read all about it, go to Prison contraband was booming trade, an article in today's Express-News. Guards smuggle in items for the prisoners and if they get caught they usually face mimimal penalties. What are some of the items that prisoners can get there hands on?

"Knives and drugs, cell phones and smokeless tobacco. Even McDonald's hamburgers. Texas prisons were a virtual bazaar of prohibited and illicit goods smuggled in by guards and correctional employees who rarely faced the harshest punishment possible when caught, according to a San Antonio Express-News review."

It seems that it is hard to stop markets from forming when people want something, even prisoners. It may be hard for the state to punish the guards too much since their salaries are low. If you fired all the guards who broke the rules, you might not have enough. The article also mentions that at a low pay, the guards are tempted to make a little extra cash helping the prisoners. What do you have to lose but a low paying job. And again, the penalties are not that severe if you do get caught. Friends or relatives of the prisoners often contact the guards to get the trades and sales going.

Update: Another article states:

"For months, perhaps longer, the Montague County Jail was "Animal House" meets Mayberry. Inside the small brick building across from the courthouse, inmates had the run of the place, having sex with their jailer girlfriends, bringing in recliners, taking drugs and chatting on cell phones supplied by friends or guards, according to authorities. They also disabled some of the surveillance cameras and made weapons out of nails."

Go to Texas jail was an Animal House, authorities say.

When Will the Recession Be Over?

To find out what 11 experts said last week in the NY Times go to When Will the Recession Be Over?. The experts include economics professors (one Nobel prize winner) and private sector executives. Here is the one from Alan Blinder (all entries are about this link):

"It Can’t Last Forever

HERE’S the hard truth: Nobody knows when this recession will end. Economic forecasting is a dark art, and predicting when recessions begin and end is its weakest link. That said, my best guess is that growth will return in the fourth quarter of this year. Why?

First, recessions don’t last forever. If the economy continues to slide through the third quarter, as I anticipate it will, this will be the longest American recession since World War II. Housing must hit bottom at some point. For several years now, declining expenditures on homebuilding have subtracted roughly a percentage point from gross domestic product growth. The change from minus 1 percent to (at least) zero will add a full point to growth. Auto sales are also not likely to keep falling at recent rates. Second, Washington’s large economic stimulus should add more than 5 percent to real gross domestic product over two years.

Third, the price of oil plummeted from a peak of around $145 a barrel last summer to around $40 a barrel today. Since the $145 price was fleeting, let’s call the “true” decline from $100 to $40, which means the bill Americans pay for imported oil fell by about $300 billion dollars a year.

But here’s the rub. My forecast assumes that no other (big) shoes will drop. Sad to say, shoes have been dropping like rain.

Alan S. Blinder is a professor of economics and public affairs at Princeton and a former vice chairman of the Federal Reserve."

Slave Redemption in Sudan

In my ECON 1301 class this week we read chapter 8 of the book The Economics of Public Issues. It seeems like a good idea to buy a slave and set him or her free. But the "redeemers" have often wanted to buy large groups of slaves to redeem. This has encouraged people to capture slaves in the first place. Then it puts more money in the hands of the slave traders who buy more weapons. Some people runs scams, selling people that were not really slaves. Below are links to the three articles listed in the book's bibliography.

The False Promise of Slave Redemption

Ripping Off Slave ‘Redeemers’

Fake slaves con aid agencies in Sudanese liberation scam

The following link has links to lots of info on this issue and different views

Policy Debate: Do slave redemption programs reduce the problem of slavery?

Finally, there was a movie made in 1971 that you can read about at the Internet Movie Database called Skin Game. It was about a fake slave being sold over and over again as a scam. Here is the synopsis:

"Quincy Drew and his black friend Jason O'Rourke have pulled off every dodge known for conning a well-heeled sucker, but it wasn't until they hit on the old skin game that they started to clean up. The game is simple. Jason, though born a free man in New Jersey, poses as Quincy's slave as the pair ride through Missouri and Kansas in 1857. Quincy picks a likely mark in each town, sells Jason to him for top money and rides out of town. Then Quincy and Jason get back together on the road to another town, because if Jason can't just run off after dark, Quincy finds a way to spring him loose."

A Video of My Lecture On Entrepreneurs As Heroes

I gave a talk in 2007 at Pepperdine University called "Who Says Entrepreneurs Are Heroes?" You can watch it if you click here. It was part of the HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL. You can also watch it by clicking on the arrow in the picture below. I come on after a short introduction by Elliot McGucken, who put the conference together. After about the 2 minute introduction I come on and it lasts about 18 minutes. You can read a text version of this at Who Says Entrepreneurs Are Heroes?




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Yes, The Most Profitable Industry Involves Drilling (But Not The One That You Would Expect)

To see the list of the most profitable industries in the last 12 months, go to Sageworks. Here is the list. Notice that some of them are medical or legal. Those industries have a very important barrier to entry, a license. This is something that comes up in my micro class and my ECON 1301 class. Insurance is there and in many states there are lots of costly regulations that act as a barrier. Mining might involve either big start up costs or control over a natural resource. Barriers to entry keep out new competitors, allowing the existing firms to keep their above average profit rates.