Switzerland just flirted with their own version of the social experiment that has already worked oh so swimmingly for the company Gravity Falls:  guaranteed outcome regardless of the performance.  Flirted but not consummated.  Swiss voters overwhelmingly rejected a proposal to grant each citizen the security of certain level of income regardless of personal station or level of responsibility or work ethic or any of those things that society wishes to incentivize with profit.

So, does this mean that Switzerland is not the social democracy that much of the rest of Europe is?   Well, that is not a safe conclusion to make.  While there seems to be a germ of common, economic sense in the average Swiss, the fact that the proposal made it up for a national referendum is worrisome.  So too are some of the explanations for why the measure was defeated by a 3-to-1 margin.

Before digging into the analysis, some words are in order to describe what that proposal actually proposed.

According to the BBC, the central notion was that each Swiss citizen would receive a stipend each month from the government in an amount of $2,500 USD for basically, well…, breathing.  In addition, for each minor child that is also sucking in air, the caregiver would receive an additional $600 USD.  (Please note that the figures cited here are rounded down from their actual values.)

Let’s take a moment to look at this.  A single person would make a gross income of $30,000 for just hanging out.  A married couple would make $60,000 for just hanging out with each other.  If they start having children then the value goes up.  A family of four would then ‘earn’ $88,000.  Not too bad.  Certainly it pales in comparison with the approximately $55,200 average net salary for a working individual (or $110,400 for a family of four) under the current rules, but then again, the recipient of the proposed windfall would not have to deal with that pesky work thing.

For those wondering if a fairer comparison would use the average gross salary, realize that about 1/3 of gross income goes to the government, whereas this ‘free money’ would also be free of taxes since it is provided by the government, who, no doubt, already took its cut – or so its supporters likely think.   The picture further tilts towards disengagement from honest work when one realizes that average incomes are always skewed towards the high end by the few very larger earners (bankers, CEOs, and entertainers).

Thankfully, the Swiss recognize that such a method is a fast way to disengage people from working.  However, it is fun to think about what would have happened if the measure had passed.

The first day after passage would find not much had changed.  The same number of Swiss would go to work as had gone the day before.  This would last until the first checks were cut, shipped, and cashed.  Then suddenly there would be more money chasing the same number of goods.  So, step one is inflation.

Now everyone is more miserable, and the hard workers would start looking around for someone to blame.  It won’t take long for some of them to act on their resentment and quit – equity theory at work.  They would lose their salary, but would have the guaranteed money to fall back on.  Now things may briefly get a bit better, as the inventory will not immediately fall, but a lesser amount of money is now chasing the same number of goods.  Thus inflation drops.  So, step two is a modest recovery.

But the recovery can’t last for very long.  For when the inventory shrinks, the number of goods will as well since there are now fewer people working.  So here comes inflation again.  Here comes more resentment by those who kept working.  And, no doubt, some more workers will drop out.

And the cycle repeats itself, with the only result being an ever-shrinking GDP and an ever-growing misery.

This pattern has been seen time-and-time again, starting with the classic story of the near failure of the Plymouth Plantation, to the case of Gravity Falls, where a minimum salary prompted some of the best and most valuable employees to up and leave.  Other cases include the Soviet Union, Zimbabwe, and like economic situations.  When the profit incentive to work is lost, so is the society as a whole.

What was really interesting were the arguments both for and against the Swiss measure as cited by the BBC.  On the pro-loafing side, the proponents claimed that

Okay, let’s think about this for a bit.  Who maintains the machines?  Perhaps other machines, which are, in turn maintained by still other machines.  Switzerland must have machines all the way down.  Oh, wait!  There must be human workers who maintain the machines.  And what about improvements?  Surely, even the fine country of Switzerland must have problems.  Perhaps the supporters of this idea might put their energies into curing cancer, or helping the poor, or… well, you get the picture.

Now, the fact that there are slackers who want a free lunch presents no surprise.  Every society has them.  The fact that they were able to mount enough effort to get this measure up to a referendum is mildly unexpected but, given Swiss law, still not shocking.  The real shock came in the governmental response.

The BBC quotes one Luzi Stamm, a supposed right-wing member of parliament, as opposing the proposal by stating

Right wing, huh?  More like right out to lunch.  This quotation is perhaps one of the stupidest things I have ever heard.  What does being on an island have to do with it?  The Pilgrims were effectively on an island and their communal economics nearly killed them.  And the Earth is the most ideal definition of an island you can get.  Isolated by space, with nobody getting on or off (except by birth and death) the planet has the most perfectly implemented closed borders.  So, following Stamm’s logic, we should all print ourselves money and, theoretically, it will all work out.

Thank goodness there are still hard working people in Switzerland with some sense in their head.  No sooner had this measure’s defeat become news than we started hearing rumors that Washington D.C. was starting to explore the possibility of the same kind of handout.  Whether the people of the nation’s capital have sense remains to be seen.

I had an occasion to visit the Republic of Korea, aka South Korea, this past month and I thought I would provide an on-the-ground style reporting of my observations and impressions and contrast these with what little is known about the Democratic People's Republic of Korea that inhabits the northern portion of this peninsula.

Before I get into details, a side-by-side comparison between South Korea, North Korea, and the United States seems appropriate for those, like me, who know very little of one or both of these north-east Asian countries. The following table contrasts geographic and economic statistics between the two countries (all information taken from the corresponding entries in Wikipedia accessible by the links provided).

Statistics being statistics, some words about them are required to set the proper context.

First of all, the two different values for per capita income reflect two different perspectives on income. The first is simply the ratio of dollars to population (i.e. $18.124 trillion/332,369,319 = $56,221 per capita – allowing for rounding and finite precision). The second is adjusted to reflect differences in cost of living to bring all countries to purchasing power equal to a US citizen (purchasing power parity); this explains why the values for the two entries are identical in the US column.

Second, the Gini Coefficient (which has been discussed in detail in an earlier column) is one measure of income distribution and, although it often hides important details about structural or temporal differences, is frequently used to gauge how equitably the income is distributed in a country. The values range from 0 to 100 for the index (0 to 1 for the coefficient), reflecting completely even distributions or totally inequitable ones, respectively. A correctly functioning, free market economy should have a nonzero index value somewhere below 50. Note that the index doesn’t reflect wealth simply the income distribution, so that a poor country may have a lower index than a richer one, or a smaller more homogenous population may have a smaller index than a larger, more diverse one.

Third, the Human Development Index is a composite measure of the life expectancy, educational achievement, and income distribution (Gini again) components of a society. While there seems to be some high powered thinkers behind the genesis of this index, I personally find it uninformative since the range for the top 50 countries was between 0.802 (Montenegro) to 0.944 (Norway) and high human development is considered to be 0.7 and above. Nonetheless, it is a measure that policy wonks use so it is useful to pay attention to it, even if only to refute it.

Note that it seems impossible to find a dependable Gini Index for North Korea but I’ll argue later that it can’t be very low, despite the communal economic system. Also, the HDI for North Korea is hard to swallow and seems to have been put into the Wikipedia entry based on the 1995 estimate, making it over 20 years out-of-date. It is also hard to imagine that it was ever so high, also for reasons discussed below.

I didn’t know what to expect from South Korea beyond the sorts of ‘rumors’ that any attentive citizen of the US hears – namely that they make some fine automobile lines (e.g. Hyundai and Kia) and that online video gaming is a passion and that many of the world’s best live on Red Bull and Cheetos and hang out in internet cafés looking to ‘pwn nwbs’.

After over a day of travel by car, plane, train, and taxi, I finally arrived at the city of Daejeon, which is, more or less, situated at the middle of the country. What I found was a vibrant, bustling economy with a modern infrastructure.

Several waterways slide through the city flowing north-south. One the bank of one of them is the Daejeon Convention Center surrounded by a host of tourist attractions, including a golf emporium and a performance hall.

On the other side was downtown Daejeon proper with tall buildings, wide, bustling streets.

A wonderfully architected foot bridge spanned the two banks, providing a really attractive landmark for the walker, runner, or cyclist (many, many, many of these).

Almost everywhere I went there was modernity and construction.

Sometimes the urban arrangement was brand new and well order. Sometimes it was grafted onto older slices of Korea – narrow streets, old shops, packing crates just outside. In all cases, people seemed to have enthusiasm and purpose and, most importantly, choice.

The influence of globalization was to be seen, most notably in the form of 7-11

and Dunkin Donuts

But the need for nature of green space was not ignored. Indeed, within the heart of a city was a large, well-groomed park that boasted an arboretum. A small but steady flux of people entered and left the park during the day, lingering and relaxing.

Daejeon plays host to many of the governmental entities, including the Korean Aerospace Research Institute (KARI), the country’s analog to NASA, and Statistics Korea (KOSTAT), an arm of the Ministry of Strategy and Finance, the Korean amalgam of the Bureau of Labor Statistics, Bureau of Economic Analysis and, no doubt, a bunch of other Bureaus and Agencies here in the US.

The South Korean government seems to take the promotion of economic growth, the development of high-tech infrastructure, and the health and well-being of their citizens seriously.

In contrast, the most charitable thing I can say about North Korea is that its government doesn’t. The only picture I can offer is the famous image of the Korean peninsula at night, taken from the ISS.

Note the dynamic nature of South Korea; the intense lights dotting the country with a veritable explosion of brightness surrounding Seoul. Note the substantial development even in China. It’s hard to believe that there is actually a land mass connecting the two, upon which North Korea stands. Alas, the Hermit Kingdom doesn’t provide infrastructure, or choice, or often even ample food for its population.

As I mentioned at the beginning, no reliable values for either the Gini Index nor the HDI are available. Based on an article from the Peterson Institute for International Economics entitled The Distribution of Income in North Korea there are good reasons for thinking that the income distribution is perhaps the worst in the world. To quote:

Since the HDI is a geometric mean involving the Gini Index, overall citizen health, and overall education, it isn't credible to believe that human development in the country is high. Quite the contrary, the unequal distribution of everything argues that North Korea is a land of deprivation and misery for the majority of its people.

The view from space speaks more eloquently to this fact than a mountain of statistics. It is interesting to see how, in this one picture, the spectrum from full free-market to full centrally-controlled economies plays out for the entire world to see.  Hopefully this photograph will find its way into all textbooks as a concrete lesson on the positive things that can happen when people are free to choose.

Economics is often called the dismal science.  The conventional reasoning for this nickname is that economics often tells us that we can't do something.  It is about finding the optimal way to use scarce resources, about how to make the hard choices that a society must contend with in order to decide what should should be produced and how much of it, who should produce and who should consume.  And, I suppose, there is a great deal of truth to this.

But I can't help wondering if there isn't another, equally compelling reason.

It seems to me that economists spend a lot of time proving common sense notions through methods that are sometimes scientific, sometimes mathematical, and sometimes far less rigorous than reading tea leaves.  Certainly there is value in providing a rigorous underpinning to old saws, honored adages, and accepted truisms, but much of that value is blunted by some of the most dense nomenclature that can be found in any science.

Take the familiar saying 'Too much of a good thing'.  The written attribution of this phrase falls to Shakespeare's As You Like It from around 1600.  It elegantly captures the basic idea that had long been known from antiquity and which formed a central concept in Aristotle's definition of virtue - moderation.  To almost all of Western civilization, it was manifestly obvious that too little or too much of anything, even a 'good thing', was unbalanced and harmful.

With the advent of modern economic theory, many old notions were placed in a structured framework and equipped with mathematical rigor that made their study more of a science and less of a ethical philosophy.  But it is important to note that in these cases no new content was added.  So why then did economists go out of their way to name things obscurely?  Perhaps it was because they wished to add a gravitas that reflected the rigor or perhaps it was that they just simply wanted to sound smart.  Whatever might be the reason, their 'arcane' terms have done a lot to make their discipline seem even more dismal that it really is.

In the case of 'too much of a good thing', economists use the terms total utility and marginal utility.  These clunky terms are meant to convey just what Aristotle argued - that there is a virtue in every activity where there is neither too little or too much.  In the case of utility, the thing of interest is usually a good or a service. I'll use good to mean both.

The total utility is an absolute measure of the usefulness of a good.  A consumer will not trade for or even consider a good if that consumer doesn't think that he will gain something out of such an acquisition.  This something is what is meant by utility.  The total utility of a good is difficult to define let alone measure since the worth of a good is really only understood in comparison with other goods.  Nonetheless, it is a convenient fiction for introducing a related but much more useful concept:  marginal utility.

Marginal utility is the relative gain in utility as the quantity of the acquired good increases.  It is the derivative of the total utility curve with respect to the quantity demanded/consumed.  This observation explains why it isn't terribly important to be able to assign an absolute number to the total utility.  Each total utility curve with the same marginal utility differs from the other members by a constant of integration which shifts its relative importance.  Its relative importance and rate of its change are what matters; absolute ranking being totally irrelevant.

The total utility must be positive for at least the first quantity of the good acquired since the consumer has a desire to consume it.  What happens to the total utility after that depends on the good but generally the initial rise in total utility is followed by slower growth.  Eventually, a stagnation point is reached where the total utility reaches a maximum value.  Consuming/acquiring more of the good beyond this point causes the total utility to fall as the cost of dealing with unwanted goods overwhelms the intrinsic value of the good itself.  This drop in utility reflects the added costs associated with storage of the good or with the fact that acquisition of a surplus of one good squeezes out other goods due to lack of time, money, or space.  In this regime, the consumer can be said to be having too much of a good thing.  And in this fashion, economist have re-expressed in a far less artful way what the great Bard put to paper over 150 years before Adam Smith penned The Wealth of Nations.

Often, it is believed that the marginal utility falls steadily as new goods are acquired but this need not be the case.  The following table shows the values for total and marginal utility as a function of the quantity of goods consumed for a case study in chapter 4 of Microeconomic Theory, 3rd edition by Salvatore.

Note that in practice, the marginal utility is computed from the forward first difference in the total utility - the difference between the total utility in a given row (for a given quantity) and the prior row.  This is due to the fact that quantity is often only expressed as a discrete number (would you buy a seventh of a toaster?)..  As a result, the value for the marginal utility is blank in the first row.

What is happening is easier to see graphically than in tabular form. The initial rise in total utility is a modest value of 4 as the first good is consumed.  The total utility increases more rapidly as the second and third goods are consumed and the marginal utility rises as a result.  Eventually, the total utility reaches a maximum where the marginal utility reaches zero,  Beyond that, the consumer is getting too much of a good thing.

A natural question may be springing to the reader's mind.  What kind of a good is it where getting two is much better than getting one?  There are many possible answers, but the best one is a shareable good where the value for two is far increased over the value for one because two people get to enjoy the good at the same time - say a pair of tickets to the theater to see As You Like It.

It is odd to say that I stumbled onto this topic by simply waking up one morning but that is the actual way it began.  More precisely, it began with a half-awake, half-witted attempt to listen to the morning show that my wife and I favor.  The topics include a smattering of current national politics interspersed with interesting local stories, human interest tales, and other items meant to amuse or outrage or otherwise energize the listener to a brand new day.

This particular day, only about a week ago, one of the hosts was reveling in the scientific study that concluded that paper towels in public restrooms were the best choice for hygiene.  The show was flooded with numerous callers all clearly falling into one of two camps: those for paper towels and those for hand dryers.  There seemed to be no middle ground.  Suddenly I was aware of a great and terrible debate that had been raging all around me to which I was hideous oblivious – the paper towel wars.

It seems that the argument over which method was best is so pervasive that all one needs to do is to start typing

to get a Bing's or Google's autocomplete to immediately come back with

And judging by the articles that turn up, this debate has stewed for some time and it is typically very polarizing with most people pitching their loyalty with one side (hand dyers) or the other (paper towels).  Sharp are the lines between these two camps and strong are the passionate claims that each makes about the advantages it has over the other.

Consider the pro paper towel camp.  Washington Post contributor Alexandra Petri minces no words (The paper towel-hand dryer wars are over) when it comes to the paper towel side.  She likens the clash between the two camps to the old feud between the Hatfields and the McCoys and claims that, at least in this case, the “correct team has won.”  Citing the 2012 Mayo Clinic study entitled The Hygienic Efficacy of Different Hand-Drying Methods: A Review of the Evidence, Petri gleefully brings ‘science’ in to support the conclusion that paper towels are the correct choice.  In her reading, hand dryers are ineffective and unhygienic and near the close of her article, she presents this gem of a paragraph

To bolster the pro-paper case even more, News Max reported a follow-on story in June of 2015 entitled Paper Towels vs Air Dryer: Which Gets Rid of More Hand Germs? Citing Dr. Philip Teirno, a professor of microbiology and pathology at the New York School of Medicine, the article concluded that paper towels offer a better alternative to hand dryers since the direct contact friction is an essential ingredient in eliminating germs from the hands after washing.

But the pro hand drying camp is not without its scientific studies, which conclude, oddly enough, that hand dryers are the correct choice.  RestroomDirect, a company specializing in the distribution of hand dryers and commercial restroom cleaning supplies asks Which is better in a commercial restroom?  Hand dryers or paper towels?  They present a strong, and no less scientific, argument that hand dryers are far more energy and resource efficient thus making them better for the environment.  Hand dryers are also far less expensive to operate meaning that businesses can put additional resources towards more important things.  To add fuel to the fire, there is also a scientific study from the University of Buffalo (Paper towels fold in study versus hand dryers 6/14/14) that concludes that paper towel dispensers are actually far more unhygienic than hand dryers.

To make matters even more confusing there is even a YouTube video that attempts to scientifically weigh in with the pros and cons of both approaches

Pros and cons.  Competing and contradictory scientific studies.  So what is a consumer to do?

This situation is representative of the classic conundrum that occurs in the market place.  The correct economic choice may be apparent if perfect knowledge were present, but consumers almost always have to make choices based on information that is far from perfect.

This lack of knowledge drives many of the hedges and securities mechanisms that decorate our day-to-day market interactions.  Uncertainty and doubt set premiums on life, car, and homeowners insurance.  Hedge funds sell guards against market downturns, sudden jumps in stock prices, and other forms of volatility.  Interest on loans are a way of protecting against future inflation and rewarding delayed gratification.

Much in our economic lives is shaped by uncertainty as to what the future holds and how to make the best choice with limited information.  We see it every day but it is rare to see it as cleanly laid out as it is in the paper towel wars.

There is no doubt about it, Elon Musk knows how to generate excitement and how to sell product.  Tesla motors recently announced plans for the relatively affordable Model 3, a much less expensive version of their famous electric car (although some beg to disagree).

One of the selling points that Musk accentuates is the notion that buying a Tesla helps save the planet.  Driving an electric car contributes to the environmental changes so desperately needed for the big blue marble.  This very claim about lifestyle is just ludicrous.

Don’t get me wrong.  I like the idea of competition in the market place and a greater number of choices available for the consumer.  And I like the idea of electric cars in general and the Tesla in particular.  What I don’t like is some of the shoddy economic thinking that drives certain people to think that the Tesla Model 3 will be the revolutionary next word in environmental stewardship.

The simple reason for this is the enduring and unassailable law of economics – everything has a cost.  This is what is known in common parlance as ‘there’s no such thing as a free lunch’.   But surely, goes the common wisdom, driving an electric car is much friendlier to the environment; it has zero emissions.

Well Frederic Bastiat would be quick to point out that such a conception is based on thinking that is only looking at what is seen.  The so-called hidden costs remain just that, hidden.  What are this hidden costs?  The generation of the electricity still comes from almost exclusively from fossil fuels.  This fact leads to two complications that may actually be serious enough to turn the notion that electric cars are contributing to the solution on its head.

The first and most benign complication is something about which I’ve written before.  The tax structures and incentives that are currently in place encourage the electric car owner to be a free rider; to use public goods without contributing his fair share.  Since the maintenance of the public roads depends on revenue almost exclusively arising from gasoline taxes, the electric car owner gets to use the roads without directly paying for the maintenance.  It is entirely possible that law makers will then have to keep gasoline prices low enough to encourage more of the conventional drivers to buy enough fuel to offset the loss.  This additional consumption has the opposite effect on the environment that what was originally intended.

The second and much more serious complication is that fossil fuels are the primary source of electrical energy in this country.  So as more electric cars find their way on the road, the use of fossils fuels will recede from the public view and become hidden behind the long lines of copper that remove us from the power plants where the chemical energy is converted into electrical.  There may even be a thermodynamic argument that shows that it is more inefficient to generate the needed energy and transmit it to the electric car than it is to simply burn gasoline in an internal combustion engine.  I don’t know one way or another – I simply know that very few talk about this hidden face.

Of course, the typical zealot who thinks only about the upside to the electric car will point out that the great and powerful Musk has a solar panel business as well and that we can all simply move to renewable energy powered by the Sun.  Unfortunately, that doesn’t work.

The table below has a modest estimate of the cost required to outfit the country with solar panels that exclusively provide the energy needs of the USA.  The amount of available solar energy is over estimated in several spots (6 hours/day is about 30% too large; 40% of total power captured is 10-20% too large).  The efficiency of the solar panels is put in the middle range of what is currently achievable and the cost is brought down by at least two orders of magnitude.  The estimate for total energy used in the US is taken as the lowest value found (about 10% low).

So even if the country were of a mind to do nothing but make solar panels, it would take over 5 years just to outfit our national needs (that means no growing crops, to manufacturing food or housing or anything else, no health care, no fun).

There would also be serious environmental effects with so much solar panel manufacturing.  The chemicals and materials are far from safe (many are downright toxic) and the industrial process requires energy itself.  Clearly solar power isn’t the answer.

The energy densities needed to transform the national use from fossil fuels to clean energy are really only found in nuclear power but even that approach is not without cost and risk; even if the cost and risk were appropriately mitigated there still remains the political opposition to this energy source; an opposition that is firmly rooted in an irrational fear of a nuclear holocaust that ever far less dangerous than global warming; and this fear is, itself, deeply rooted in the same muddled thinking that leads these same people to cling to the notion that solar is the answer.

So at the end of the day, I’m all for the consumer buying a Tesla just so long as he understands that he while he may be saving money he isn’t saving the environment; that he has yet to find a way to get a free lunch.

A peculiar thing happened a few weeks ago.  On March 22^nd, thousands of JavaScript developers were faced with broken builds and failed installations due to a missing piece of code, 11 lines in length.  Much like the events in the Day the Earth Stood Still, a single superior force brought the much larger but far more primitive press of humanity to a grinding stop.   But unlike that iconic movie, the motive in the internet crisis wasn’t moral but rather economic (although there is certainly a moral aspect to this story as well – as there is in all things economic).

The timeline of events is disclosed in detail elsewhere.  The key features for the sake of this argument are simply these.   There exists a common JavaScript code repository called NPM which dubs itself as the place to “Build amazing things” and describes itself as:

One such developer, by the name of Azer Koçulu, had provided to all of humanity, 250 JavaScript Modules.  Of these, the reader must focus on only two of them.  The first was named kik, which is also the common short form name of Kik Messenger, a messaging app for smartphones.  The second, called left-pad, was the 11-line piece of code that brought much of the internet to its knees and opened lots of new horizons in the ownership of intellectual property.

As might be predicted by the common name, a clash developed between Azer and Kik’s corporate office.  The latter requested that Koçulu surrender the name of the module since they legally owned the trademark.  When he refused their less than polite request, they went to NPM to force the issue and, when NPM management complied, Koçulu unpublished all his modules.  The resulting elimination of “left-pad” broke the systems that depended on it, precipitated NPM’s unprecedented step of restoring “left-pad” (so-called un-unpublising), and launched a controversy that is likely to become a watershed event discussed for decades to come.

Now I’m not going to weigh in on the various legal points that have been raised, such as did Kik have the right to the name, did NPM have the right to give it away or to un-unpublish the “left-pad”, or did Koçulu have the right to unpublish the code in the first place.  As interesting as these questions are there is a much more interesting question.  Was “left-pad” a public good?

To appreciate this question one must first understand how economists place goods into the four categories of private, club, common-pool resources, and public.  Each good is judged in terms of two attributes:  excludability and rivalry.

A good is termed excludable if a person or entity possesses legal rights that enable them to prevent others from using it.  A good is non-excludable if no one either possess such a right or if the right is effectively non-enforceable.  The term open is synonymous with non-excludable in what follows.

A good is rivalrous if the use of the good by one entity precludes its use by all others.  A good is non-rivalrous if it can be used by many entities without harm being done to any of them.  The term shareable is synonymous with non-rivalrous in what follows.  Note that only intangible things likes ideas and concepts can be truly shareable but that in many cases some goods are so much closer to shareable than not that the idealization is useful.

The four possible combinations of excludable/open with rivalrous/shareable give the four categories of goods:

• Private good - excludable and rivalrous
• Club good – excludable and shareable
• Common-pool resource – open and rivalrous
• Public good – open and shareable

These definitions are abstract and difficult to think about so a common tool is to construct a 2x2 table with instances of each type.  Common tangible goods can be placed in such a table and on such version is

The next step is to create an analogous table for digital goods and then, using the resulting categorization, conclude in which of these cells the innocuous but vital “left-pad” module should live.

Adapting the 2x2 table to cyberspace is a bit more challenging than tangible goods precisely because of the blurred lines that exist in the digital world between ownership and right-to-use.  For example, when one buys a videogame, one is really buying the right-to-use the game on a game console and not the game itself. Unlike Monopoly, where the owner really owns the matter/hardware that goes into the game and can transform it as he sees fit, the owner of Halo really owns the ability to interact with that particular copy of the game he purchased.  The situation is further complicated by the fact that there is a fundamental difference between the embodiment of the game (the pit and blanks on the DVD, the DVD itself, the game console, etc.) and the code that makes up the game.

Nonetheless, after some thought, it is possible to come up with good examples in three of the four categories; the common-pool resource being the only one that seems to lack a digital analog.  One such instance is

The only step that remains is to determine where in this table “left-pad” finds a home.  The natural first reaction is that “left-pad” is a public good; an opinion mostly endorsed by Nadia Eghbal.  But this question isn’t really well-defined enough to answer.

Certainly, the code concept itself, taken as an abstract entity, is a public good.  Koçulu neither claimed copy-right nor did he regulate (exclude) use.  But the embodiment that he maintained on NPM was more like a club good, where for much of its life the club was everyone.  Then after the debacle with Kik, Koçulu simply redefined the club to be no one. The delicate point here being between the particular copy or instance of the code and the ownership of the code itself.

As time progresses and society, in general, and economists, in particular, have a chance to analyze the fallout from this event and others like it, I suspect that whole new modes of thought will have to be developed about who owns what in digital realm.

Klaatu barada nikto!

So, once again, I decided to learn a little more about how economists see the world.  The basic ingredients of their studies center on two pieces: goods and services; and the transactions and behaviors whereby they are produced, traded, and consumed.  Many of my past blogs have dealt with the behavioral aspect so it seemed reasonable to ponder a bit more at just what the term ‘goods’ means (obviously expanded to include tangible items like cars and intangible items like tax preparation services).

And so off I went on a rambling intellectual walk-about through a variety of sources, both written ones, collecting dust in my home library, and virtual ones, collecting cyber-dust somewhere in the great digital repository that we all casually call the net.

I held one goal close enough to my heart that its achievement would fill me with satisfaction for a time, but far enough away that its failure would not disappoint.  I greatly want to understand how the classical economist ever embraced the clearly flawed idealization of a rational consumer/actor.  People rarely act rationally if, by rationally, we mean the narrow concept that they seek material gain as the primary, or perhaps even only, aim.  The Ultimatum Game being one of the surest refutations of that position.  Certainly I am mindful that all disciplines need approximations and idealizations to progress but at what point did the idealization cease being a model and started to become gospel was the question.  Perhaps the answer lay in how economists look at the goods people produce, trade, and consume.

I wasn’t really expecting an answer but I would have liked to have even a hint.  Alas, even a hint was too much to ask but I did learn some interesting things about goods that is worth at least a few more paragraphs.  In short, there are three categories that, with apologies to Sergio Leone, I call good, bad, and ugly goods.  Economists, of course, don’t call them that, but their categories match mine quite closely so I’ll not be shy in using my lingo interchangeably with theirs.

Good goods are what are generally termed ordinary goods by economists.  An ordinary good possesses a negatively sloped demand curve.  As the price of the good rises, there is less consumption of it as consumers seek out substitutes and alternatives.  A substitute is a good that serves the same function but costs less.  Switching out Bombay Sapphire for Beefeater is the kind of switch that economists mean by the term ‘substitution’ although they, no doubt, would never stoop so low as to buy a lesser gin.  In contrast, giving up gin and tonics permanently in favor of tea-totaling falls under the heading of ‘alternative’.  In either case, the consumer generally responds to an increase in price by changing their behavior so that they consume less when the vendor asks more.

Good goods further sub-divide into three categories called: inferior, normal (or necessary), and luxury.  This sub-categorization reflects the natural evolution in most consumers that, as their income grows, they themselves grow accustomed to better styles of living.  I borrowed this latter terminology from the divorce court lawyers who argue that their client is entitled to alimony that supports the client in the style to which the client has become accustomed.  Levity aside, each category reflects the income elasticity of demand of a good found within its bounds.  Economists define income elasticity of demand (eM) as the ratio between the percentage change in the quantity demanded to the percentage change in the household income.

As a person’s income grows his fractional change in income is positive.  If he decides that he no longer needs to eat ramen noodles every night because he now has enough money to go out for a burger from time to time, then the fractional change in ramen demand is negative.  The ratio between the two is also negative and the good is inferior.  More simply put, as a person’s income grows his need to settle for a good he would otherwise not buy diminishes.  Thus ramen is an inferior good.

Normal and luxury goods have positive elasticity, meaning that the quantity demanded typically grows as income grows.  The difference between these types of goods lies the magnitude of the elasticity.  An elasticity less than one means that changes in income do little to change the quantity of the good demanded whereas an elasticity greater than one means that a small change in income (or in a related fashion price) makes a big change in the amount demanded.  Normal goods fall into the former category (as a result they are sometimes called necessities) and luxury goods fall into the latter.  Food is typically a normal good and the consumer will buy his staples, say a gallon of milk, each week for the most part regardless of the change in price or his income.  Fine gin is regarded by many as a luxury item (although it shouldn’t be); to be bought when the price is right or the take home pay is sufficient to allow an indulgence.

In deference to any actual economists who may read this, I do want to be clear that in the last paragraph I played fast and loose and blurred the distinction between income elasticity of demand and price elasticity of demand.  They are distinct but highly-interrelated concepts, ultimately connected in a much broader definition of elasticity in personal value.  Here I am imagining something like elasticity defined as the ratio of percentage change in demand to percentage change in the percent of the household expenditure associated with buying the good.  A professional can either work that concept out in detail or prove/argue why it can’t work – it won’t change the fact that each of us weighs the demand for a good by more than the change in price or in income with all other things held constant.

Bad goods are what economists call Giffin goods. These goods defy the law of demand in that their demand curve is upward sloped.  As the price increases so too does the demand.  The big brains claim a Giffen good is typically

• an inferior good
• does not have easily available substitutes
• purchase of it must be a substantial fraction of the total household expenditure meaning that the good is purchased only due to the limited income of the household.

The oft-cited, Giffin-good, example is a staple food depended upon by the poor.  As its price rises, additional income used to buy other goods becomes slimmer and the household is forced to buy more of the cheaper but price-rising good just to be able to eat.  In the example above, if ramen increases in price, our hypothetical burger-muncher may have visit Five Guys less often because he has to sink more of his income into ramen just to have something to eat each day.  Sir Robert Giffen claims to have seen this behavior in Victorian England but certain economists assert that there is no such thing.

The ugly good is synonymous with what economists call a Veblen good.  Like the Giffen good, demand for a Veblen good rises as its price rises.  However, the rise in the demand reflects the good as a status symbol showing that the purchaser is truly a king among men in that he can afford more of what others can’t afford at all.  Conspicuous consumption, which is another name for the kind of behavior that supports a Veblen good, is featured prominently in the rather amusing first part of Chesterton’s The Queer Feet and the reader is directed here for a nice quote.

So there you have it.  A concise, if not precise, summary of how economists categorize goods and their corresponding elasticities.   It would be an interesting follow-up to see if their analysis, papers, and books, which are goods in and of themselves, are good, bad, or ugly.

A recent death in the family has gotten me thinking about, amongst other things, free enterprise and economic liberty.  I know that that is a strange combination but it all stems from a fairly recent legal battle between an abbey of Benedictine monks and the Louisiana Board of Embalmers and Funeral Directors.  At the center of the conflict was whether or not the monks had a constitutional right to sell hand-crafted coffins as a way to raise money for the abbey.  As the dispute worked its way through the courts two things became clear.  First, the monks had a clear, constitutional right to engage in free enterprise and, second, that the state laws put in place to protect the funeral industry were a textbook example of how licensing and regulation often shields businesses from competition under the guise of protecting the public from harm.

The genesis (if you can forgive the biblical pun) of the showdown started just after Hurricane Katrina had devastated much of the gulf coast portion of Louisiana.  The Benedictine monks of St. Joseph Abbey near Covington had lost much of their timberland and looked for a new way to supplement their income.  For years, like other monastic orders, they had fashioned coffins for the burial needs of their departed brothers.  In 2007, the abbey established St Joseph’s Woodworks to sell their hand-made caskets to the public.

No sooner do they get started than the Funeral Directors slap a cease-and-desist letter in their direction citing a state law that only allows caskets to be sold to the public by a state-licensed funeral home. The letter threatened the monks with thousands of dollars in fines and prison sentences up to 180 days for noncompliance.

The monks didn’t take that lying down and, aided pro bono by the Institute for Justice, sued in Federal court to have the law overturned on the grounds that it was an unconstitutional statute designed to protect "cartel for the sale of caskets within Louisiana".

U.S. District Judge Stanwood Duval agreed with the monks and ruled the law unconstitutional. He noted in his ruling that the coffins sold by the monks were significantly less expensive than those sold at funeral homes and that

The Louisiana Board of Embalmers and Funeral Directors took their case to the 5^th Circuit Court of Appeals but to no avail.  The appeals court upheld Duval’s ruling noting in addition that regulation is aimed at restricting intrastate competition and that

The matter finally came to closure when the Supreme Court refused to hear the case, leaving the finding of the unconstitutional nature of the law in place.

For those unwilling to parse some of the legal wordsmithing in the previous two quotes a simple summary does just as well.  The courts found that the state law was not concerned with protecting the public from shoddy coffins.  Indeed, no coffin seems to be required in Louisiana – just dig a hole and plop the body in.  But the law was concerned with protecting funeral homes from in-state competition from a bunch of monastic hooligans.

Apparently coffin business is quite a market – I suppose because no one is particularly inclined to haggle when dealing with the death of a loved one.  I was curious how much caskets cost and one quick trip to internet brought me to Best Price Caskets.  Several interesting admonitions sit top and center on their website including

and

and this curious image

All the monks were trying to do was to engage their economic freedom and supply a demanded good in return for monetary compensation.  They were filling a need at a reasonable price and that competition was feared by the entrenched businesses that lobbied for the state law that protected them.

So the final question to ask ourselves is this: what other industries, through the mechanism and licensing and regulation, are pretending to protect us while really protecting themselves?  Look around, I think you’ll find more than you might, at first, expect.

There is a curious thing about the Eurozone that doesn’t get much notice but it really should.  On the surface, the Eurozone seems to be a similar economic model to the United States, but the lack of a common culture and free movement within the member countries results in barriers that can actually cause wealth transfer from poorer members to richer ones.

In the US, an individual can move freely between the states (although setting up residency is a bit harder).   Interstate purchases are open and easy, especially in the age of the internet.  Workers can move from states with declining economic prospects to those with an uptrend, resulting in the kind of demographic shifts such as the recent influx into Nebraska and Texas and corresponding exodus from California and New York.  In other words, things have a way of evening out since the barriers for trade between the states are very low (but not nonexistent – consider that many decisions made in California set standards across the other 49 states).  Very few products made in the US are distinctly branded by the state in which they were produced.  Most of us are aware that there are Florida Oranges and Idaho Potatoes but beyond that few of us know where a good is produced.

Take automobiles.  Once it was obvious which cars were produced in Detroit but now few people actually know, or care, in which state is located the manufacturing plant that birthed their car.  Likewise, few of us are conscious where most of the things we purchase originate.

The Eurozone, in contrast, is much more rigid.  The euro is the shared currency throughout the Eurozone but the mechanics of inter-zone trade works quite differently from the US experience with the dollar.  The major difference is that in the Eurozone goods, services and labor from one country are produced essentially independently from the other countries.  When one is in Germany, say in the city of Munich, one is clearly aware what products are imports (mostly clothes) and what products are German in origin (most everything else).  This is especially true in the realm of cars.  It makes no sense to talk about Pennsylvania cars as distinguished from Montana cars but it is quite natural to talk about German cars as compared to those from France, Sweden, or Italy.  In addition, French workers can’t just pick up and head for Germany any more than they could to Japan.  There are barriers – political, cultural (language in particular), legal, and bureaucratic – that really impede that kind of movement.

To see how these barriers provide a mechanism for wealth transfer, start with a simple model of international trade limited to just two countries.  Let country G stand for Germany and U for the United States.  Both countries have their own currency (gold coin denoted as D for G and greenbacks and silver denoted as U for U) and the exchange rate between the two is shown in the yellow box.  Time progresses from left to right.

Now suppose the good that is being traded is cars; G has cars it wants to sell to people in U.  At the initial time, the exchange rate favors G, as its currency is undervalued compared to U, and G promptly ships some number of cars to U.  Upon arrival in U, the cars make their way to a dealership where a citizen of U, call him C, purchases one.  C pays for the car with U currency and happily drives away completely unconcerned with how the money makes its way back to G; that isn’t C’s problem.  G’s agents in the U have to deal with that.  They do so by finding someone willing to buy Us for Ds.  Since the supply of Ds in the exchange market goes up, there is a upward pressure on the value of Us compared to Ds and soon the exchange rate reflects that by adjusting the buying power of G, compared with U, down to parity.  This floating currency exchange serves to naturally limit the number of cars that G can sell in U and an equilibrium results.

Next, expand the model so that G is part of a larger economic entity comprised of itself and H (H stand here for Greece – either because H comes after G or because Hellenic is an adjective used for ancient Greece; the reader is free to decide for himself).  Also suppose the H has no goods to trade with U at all.

Now suppose the same situation occurs in this new model as occurred in the old.  G has cars to sell and U has people wanting to purchase them.  H is a complete bystander in the first leg of the transaction, having no goods to ship to U.  However, H plays a pivotal role when the currency exchange occurs after the purchase.  Since there is a larger supply of U, as H has a supply in addition to G, there is less of a mismatch on the exchange market and less of an upward pressure on D (or downward on U).  Simply put there are now fewer Ds chasing Us in a relative sense.  It takes longer for an equilibrium to set and during this time, H’s purchasing power is remains low.

So although there is no direct exchange of either currency or products between them, H effectively transfers wealth to G in the form of better export conditions for G and poorer import conditions for H.  The poorer H is, the more pronounced is the drag it produces on the upward trend in D, the longer it takes to reach equilibrium and the more wealth is transferred.  If people could move freely between H and G, then a mechanism would exist to equilibrate faster and more citizens of H would share in G’s windfall.  In some real sense, it's like U is robbing H to pay G.

Although these models are highly simplified, they reasonably capture the essence of some of the tricky situations that result with import/exports and currency exchanges.  Several interesting articles exist (a nice one can be found here) on similar situations during the Nixon presidency that ushered in the end of the Bretton Woods System.  But that is a story for another day.

A while back I wrote on the Ultimatum Game, an experiment in the psychology of behavior in the marketplace which showed that people rarely act purely in their material self-interest.  More often, they balance the possibility of material gain against the other, less tangible or intangible factors, such as self-esteem and pride.

The premise of the game is that two people are put into the situation where they stand to both benefit materially by splitting a sum of money between them.  The catch is that the details of the split can’t be negotiated.  One person is granted the authority to propose a split (e.g. 50-50, 90-10, etc.) and the other is granted the authority to either accept or reject the proposal.  Acceptance nets both parties the agreed-upon sums.  Rejection makes both parties walk away empty-handed.  Classical economic theory predicts that the deal is accepted in all cases where the second party stands to receive something in the way of a split – that is to say when the split is anything other than 100-0.  Real experiments with real people suggest that splits far from equitable (i.e., 50-50) have little chance of succeeding despite the fact that the second person stands to walk away with a material gain.

One of the criticisms leveled against the outcome and analysis of the Ultimatum Game is that the stakes may be too low to really make a difference.  After all, the argument goes, most of the real world experiments are done with sums like $100, which is, relatively-speaking, chump-change.  Economists and psychologists have attempted to address this critique by normalizing the results by offering the same sums in different economic scenarios, like the third world, where $100 has significantly more buying power than in the US.  Nonetheless, the critique that the game hasn’t really been played for high stakes is a valid concern.  Perhaps there is a mind-bogglingly large sum for which even a 90-10 split will be always accepted.

Well, Shankar Vedantam, of NPR, ties the Ultimatum Game to one of the biggest stakes out there – the negotiations on climate change.  The report, entitled The Psychological Dimension Behind Climate Negotiations, aired on NPR the week of Nov. 24, 2015.  In it, Vedantam argues that the same psychology seen in the Ultimatum Game explains why countries with the most to lose by adverse climate change may actually walk away from a deal that benefits them.

To back up this claim, Vedantam called upon the expert testimony of David Victor, a professor in the School of Global Policy and Strategy at UC San Diego and the director of the UCSD Laboratory on International Law and Regulation.  Victor, who has published extensively on the politics of climate change, had this to say about the interplay of gain and fairness

In other words, despite the fact that each of these negotiators represents millions of people, and that they are, ostensibly, rational professionals, they are still human beings who value fairness over material rationality.  In fact, according to studies cited in the report, professionals may actually value fairness more, especially when negotiating with other professionals.

That may be true, but I suspect that the answer is closer to a point touched upon by Vedantam himself later in his report, although he muddled up the thinking.  Said he, when asked about the fairness component of the climate-change negotiations

A careful reading of the above quote can actually lead to a different interpretation.  Perhaps the ‘poor countries’ (developing countries) recognize a greater rational self-interest in continuing to industrialize than in limiting their growth in order to limit their carbon emissions. Unlike the Ultimatum Game, where the outcome is clear cut – walk away with some cash or no cash – the situation in climate negotiations is quite different. The developing countries must decide between two options, each with both a gain and a loss.  So it is entirely possible that they have a rational reason for refusing a deal that benefits them in one sphere but harms them in another.