Economics Detective Radio (Garrett M. Petersen)

Today's guest is Vlad Tarko of Dickinson College. We discuss the life and work of Elinor Ostrom, the 2009 winner of the Nobel Prize in economics. Vlad is the author of Elinor Ostrom: An intellectual biography.

We discuss Elinor Ostrom's work on polycentric governance, the management of common-pool resources, and policing. We also discuss the continuing work scholars are doing in this research area, including Vlad's new book Public Governance and the Classical-Liberal Perspective: Political Economy Foundations co-authored with Paul Dragos Aligica and Pete Boettke.

Peter Leeson of George Mason University joins the podcast today to discuss his latest book, WTF?!: An Economic Tour of the Weird.

We discuss the economic reasoning behind some of history's strangest practices: ordeals that were used to determine innocence or guilt in medieval Europe, trials by battle that were used to settle land disputes in Norman England, wife auctions that happened during the Industrial Revolution, and the criminal prosecution of insects and rodents by ecclesiastical courts in Renaissance Italy.

Also check out Peter's previous book, The Invisible Hook, about the economics of pirates. You won't regret it!

My guests for this episode are Alex Nowrasteh and Andrew Forrester of the Cato Institute. Our topic is a working paper they recently published titled How Mass Immigration Affects Countries with Weak Economic Institutions: A Natural Experiment in Jordan. The abstract reads as follows:

Saddam Hussein’s unexpected 1990 invasion of Kuwait forced 300, 000 Kuwaitis of Palestinian descent to flee into Jordan. By 1991, this large exogenous population shock increased Jordan’s population by about 10 percent. Jordanian law allowed these refugees to work, live, and vote in Jordan immediately upon entry. The refugees did not bring social capital that eroded Jordan’s institutions. On the contrary, we find that Jordan’s economic institutions substantially improved in the decade after the refugees arrived. Our empirical methodology employs difference-in-differences and the synthetic control method, both of which indicate that the significant improvement in Jordanian economic institutions would not have happened to the same extent without the influx of refugees. Our case study indicates that the refugee surge was the main mechanism by which Jordan’s economic institutions improved over this time.

Does mass immigration destroy institutions? 1990s Israel as a natural experiment by Benjamin Powell, J.R. Clark and Alex Nowrasteh

Jared Rubin's interview about political power and economic growth is complementary with this one. Rubin's theory is that the rising political influence of the bourgeoisie partially caused the economic growth in Northwestern Europe in the early modern period. In Jordan in 1990, the Palestinian minority was particularly urban and bourgeois, so the massive influx of Palestinians increased the political power of the bourgeoisie, thus creating political pressure for increasing economic freedom.

Today's guest is Thomas Hazlett, former chief economist of the FCC and author of The Political Spectrum: The Tumultuous Liberation of Wireless Technology, from Herbert Hoover to the Smartphone. Perceptive listeners may recall that Ed Lopez mentioned Hazlett's work in our interview on political change.

Hazlett's work concerns the legal institutions surrounding the radio spectrum.

Popular legend has it that before the Federal Radio Commission was established in 1927, the radio spectrum was in chaos, with broadcasting stations blasting powerful signals to drown out rivals. In this fascinating and entertaining history, Thomas Winslow Hazlett, a distinguished scholar in law and economics, debunks the idea that the U.S. government stepped in to impose necessary order. Instead, regulators blocked competition at the behest of incumbent interests and, for nearly a century, have suppressed innovation while quashing out-of-the-mainstream viewpoints.

Hazlett details how spectrum officials produced a “vast wasteland” that they publicly criticized but privately protected. The story twists and turns, as farsighted visionaries—and the march of science—rise to challenge the old regime. Over decades, reforms to liberate the radio spectrum have generated explosive progress, ushering in the “smartphone revolution,” ubiquitous social media, and the amazing wireless world now emerging. Still, the author argues, the battle is not even half won.

My guest for this is Ekaterina Jardim of the University of Washington. Ekaterina is one of the authors of the new minimum wage study that has been making headlines recently, "Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle." One reason this study is so interesting is that it was funded by the City of Seattle, which is something that governments aren’t obligated or expected to do when they enact major policy changes like these minimum wage hikes.

There was a broad theoretical and empirical consensus in the 1980s that higher minimum wages have disemployment effects on the low skilled, and then Card and Krueger (1994) started a new empirical literature that found no evidence of disemployment effects.

A major problem with Card and Krueger (1994) and with many of the other studies conducted over the past quarter century was their use of proxy measures for low-skilled workers. Instead of looking at workers who actually earned less than the new minimum wage, these studies looked at groups that they knew to contain many minimum-wage workers: generally teenagers or restaurant workers. This new study does not face this limitation because Washington State requires firms to report both the hours worked and the wages of all workers.

One criticism I’m seeing a lot in response to the media coverage of this study is the fact that they had to drop multi-location firms from the sample. The reason for this is that the data only shows what firms people work for, not their location. So if a firm has locations both inside and outside Seattle, you don't know whether a given worker in that firm belongs in the treatment or the control. Still, despite this limitation, the study's sample included over 60 percent of workers in Seattle. Furthermore, the study authors surveyed employers and found that the multi-site firms that were excluded from the sample actually reported more reductions in work hours than did the firms that remained in the sample. So if anything, this omission understates rather than overstates the effect of the minimum wage increase.

One big concern people have is just how much this study's results deviate from the established literature. The authors address this by repeating their analysis using employment in the restaurant industry as a proxy for low-skilled labour. They find that using this proxy for low-skilled labour reduces the measured impact of the minimum wage to near zero, consistent with past studies that have looked only at the restaurant industry.

It seems that this apparently robust finding, replicated in study after study over the past few decades, was actually a quirk of studying the restaurant industry, which tends to substitute high-skilled labour for low-skilled labour rather than cutting total labour hours as a short-run response to minimum wage hikes.

Related Links

Kevin Grier explains the synthetic control method, which the minimum wage study uses to construct a control group.

Today I discuss one of my own papers: "Instructions" by Freeman, Kimbrough, Petersen, and Tong. This research project on experimental instructions has been ongoing for years, but it was recently conditionally accepted for publication. I tell the story of how the research came together and detail some of the results.

A survey of instruction delivery and reinforcement methods in recent laboratory experiments reveals a wide and inconsistently-reported variety of practices and limited research evaluating their effectiveness. Thus we experimentally compare how methods of delivering and reinforcing experiment instructions impact subjects' understanding and retention. We report a one-shot individual decision task in which mistakes can be unambiguously identified in behavior and find that mistakes are prevalent in our base-line treatment which uses plain, but relatively standard experimental instructions. We find combinations of reinforcement methods that can eliminate half of subjects' mistakes, and we find that we can induce a similar reduction in mistakes via enhancements to the content of instructions. Residual mistakes suggests this may be an important source of noise in experimental studies.

Today's episode features Gilles Duranton and Diego Puga on their new working paper, "Urban Growth and its Aggregate Implications." This paper builds a detailed theoretical model that includes urbanization, agglomeration economies, inter-city migration, congestion externalities, and land-use restrictions.

We develop an urban growth model where human capital spillovers foster entrepreneurship and learning in heterogeneous cities. Incumbent residents limit city expansion through planning regulations so that commuting and housing costs do not outweigh productivity gains. The model builds on strong microfoundations, matches key regularities at the city and economy-wide levels, and generates novel predictions for which we provide evidence. It can be quantified relying on few parameters, provides a basis to estimate the main ones, and remains transparent regarding its mechanisms. We examine various counterfactuals to assess quantitatively the effect of cities on economic growth and aggregate income.

Today's guest is Francisco Toro, he is the blog editor at The Caracas Chronicles, a group blog about Venezuela.

Venezuela has all the markings of a paradise. It has a lush, tropical climate and access to vast oil reserves. And yet, the Venezuelan government has run the country into the ground. As of now, all but the wealthiest Venezuelans struggle to eat. What went wrong?

It might surprise you, given Venezuela's current state, that the country was for many years a model Latin American country. Before 1989, Venezuela had a stable, two-party democracy. Its economy functioned when the price of oil was high, and it was free of much of the violence that plagued other Latin American nations. That changed in 1989 with an event known as El Caracazo.

El Caracazo refers to a series of riots that occurred in February and March of 1989, and their brutal repression by the Venezuelan army. The details surrounding El Caracazo remain deeply controversial among Venezuelans.

Before 1989, the Venezuelan economy was characterized by cronyism. Many industries were protected from competition both by tariffs on foreign goods and restrictions on entry by new firms. This arrangement could continue so long as oil prices stayed high, but with the fall of oil prices in the 1980s, the economy sunk into a malaise. The government was deeply indebted, and the incoming government tried to implement neoliberal reforms to save both the economy and the government's balance sheet.

Within weeks of the reforms, the riots that would become El Caracazo began. Here's where the controversy lies: Chavez and his supporters on the far left point to these riots as the people rising up against capitalism. But Venezuelans on the right point out that the reforms hadn't had time to take effect when the riots occurred, and therefore they were more likely a reaction against the ongoing economic malaise than the reforms.

In any case, Caracazo marked a turning point for Venezuela that would lead to the rise of socialist president Hugo Chavez, who would control the country until his death in 2013. Chavez' brand of Marxism was a throwback to the socialist regimes of the Cold War. His Venezuela was a mixed economy with very heavy restrictions on its capitalist elements. For instance, Chavez made it illegal to fire an employee for any reason. He imposed price controls throughout the economy. When oil prices were high, they propped up the rest of the economy. When they were low, the regime could borrow to paper over critical shortages. During this time, Chavez received praise from Western intellectuals on the left. Even as late as 2013, Salon was praising Chavez' "economic miracle."

In 2013, Chavez died and was succeeded by Nicolas Maduro. In 2014, the price of oil collapsed, causing Venezuela to default on its debts. The government has attempted to print its way to solvency, causing high inflation. The Chavez and Maduro regimes have kneecapped the capitalist system and replaced it with nothing. Toro argues that even Soviet-style central planning would be an improvement at this point.

There are clear pragmatic reforms Maduro could make to reduce the impact of the crisis. Yet he doesn't, and members of his government who speak out in favour of market-led reforms of any kind are summarily fired. Maduro listens to the advice of a Marxist economist named Alfredo Serrano, who is a mix between a hard-core Stalinist and a utopian campus liberal.

Yet despite the continually worsening economy, Maduro holds on to power. He also maintains the support of about a third of the population. Maduro's regime has managed to place the blame for the crisis on sabotage by a nefarious capitalist conspiracy.

Businesses that hold inventory for any length of time are at risk of having their warehouses raided and filmed as proof that the ongoing shortages are the work of capitalists hoarding goods. Maduro also scapegoats the many people who earn their livings re-selling price-controlled goods, a group that now encompasses one in six Venezuelans. As dubious as these claims are, the government controls the media and seems to have convinced a third of the population of this narrative.

What follows is an edited transcript of my discussion with Ray March about the economics of medicine and health insurance. We had a fascinating and far-reaching discussion about health care policy, both in the United States and Canada, as well as some cases of entrepreneurship in the medical sector.

This includes a slightly awkward discussion of the development of sexual pharmacology, the early experiments with nitrates and Viagra, and the, uhhh, "firmness" those drugs produce. Enjoy!

Petersen: My guest today is Ray March of Texas Tech University. Ray, welcome to Economics Detective Radio.

March: Thanks for having me.

Petersen: So our topic today is the economics of medicine. Ray's research concerns entrepreneurship and regulation in medicine. Let's start by talking about this idea of entrepreneurship in medicine.

The medical field isn't like Silicon Valley. You can't just launch a pharmaceutical company out of your parents' garage. In fact, the whole field is tightly regulated and controlled by the government both in the United States and Canada, other countries. So how do people in the medical field still manage to be entrepreneurial?

March: Entrepreneurship is fundamentally a question about how do I find resources I have now and put them towards their best use and that will help me turn a profit and therefore we have market signals. You're right to point out medicine is a much more regulated area compared to other service industries but what makes medicine entrepreneurial is that there's always a void to discover, there's always a need to find better uses and better cures or better ways to treat patients.

And because the government is usually behind the curve in terms of the advancement of science---and this is particularly true in health science and medicine---there's always opportunities for entrepreneurship. And a lot of my research explains or tries to explore what are these areas of medicine or of health just more broadly that the government is not involved in because they're not necessarily aware that this is an emerging field. And that leaves room for scientists and more broadly entrepreneurs to come and fill in gaps.

Petersen: Okay. So, when you say the government is behind the curve, a big part of that is the Food and Drug Administration, the FDA, in the United States. And of course it has its equivalent in other countries as well. So, tell me a little bit about the FDA. So, if I discovered a new drug, what kind of process would it take for me to bring it to market in the United States?

March: If you want to go through the FDA procedure usually takes between 12 and 20 years and somewhere around a billion dollars of investment. You bring it to the FDA, you go through initial screening which is "Is the drug effective?" "Can it actually do what you purport it can do?" That's phase one. Phase two is a little bit larger clinical trial so instead of 30 people you go through 1,000 people. And you have to report that it's also effective.

Then you get into safety which is what the FDA was originally intended to do was to eliminate the worry that they were going to be unsafe drugs on the market. Then you have to go through a clinical trial about typically 3,000 people to show that it doesn't hurt them. Beyond that, you've got phase four which is approval, you get your drug approved and even the drug is approved, you are not quite off the hook.

Yet you still have to have post surveillance. And post surveillance is, it's approved but if we find any problem outside on the market or we find that we didn't pick up with something in our very detailed clinical study, we find there is some kind of problem, then we can remove the drug and that typically lasts 14 to 16 years.

Petersen: Okay, so it's an extremely long process. Long and costly and we hear sort of horror stories about before there was an FDA---before there was regulation of medicine---you'd have people sell snake oil or tonics, miracle cures that really just made people sick. Doesn't it help to have a process in place to prevent the kind of things that might damage people's health?

March: Absolutely. I wouldn't deny that it's not helpful to have processes in place to weed out effective treatments from ineffective treatments. The question that I'd like to mention is who does the planning? Do we need to have the federal government with the FDA come in and say if you want to prescribe a drug legally or use a medical device legally you go through our process or does it make more sense to open it up broader and have competition? And that is where the entrepreneurs would find ways to treat elements and diseases and in effect, those are weeded out through the market process.

Petersen: Yeah so what I like in your research is that you've actually found cases of course of both kinds: of the FDA sort, of the public government regulation of drugs and also private regulation or private discovery of new uses of drugs. So, let's talk about your paper on entrepreneurship in off-label drug prescription. So, you look specifically at the off-label uses for three specific drugs: Aspirin, Viagra and---I might pronounce this wrong---Minoxidil?

March: No, perfect Minoxidil.

Petersen: Yeah, Minoxidil. Okay. So, first what is an off-label drug use? And why does it matter?

March: The off-label use of a drug is using a drug for a purpose that's not approved for by the FDA.

So, in the case of Aspirin, Aspirin is approved for pain relief or in the paper I say it's not just used for pain relief doctors also prescribe it to prevent myocardial infarction and other heart-related conditions.

So, in general, when you use a drug off-label, you are saying I'm prescribing it for use that hasn't gone through the rigors of the FDA's regulation. It hasn't gone through the four phases and the post surveillance, which in the United States is perfectly legal. But the reason that off-label becomes very important---and full disclosure, in the United States one out of four drugs is prescribed off-label, that is, one out of four pills you're taking is not for the approved FDA use---is that it allows doctors and pharmaceutical companies to be entrepreneurs, to find the best alternative use of medication, which the FDA in theory, could do, but because the process of approving drugs is so long and costly and often lags behind what medical professionals typically find 15-20 years ahead of the pace.

Petersen: Okay, but it seems contradictory that that would be legal because as you said the FDA is not just checking for safety, but for effectiveness. And if you're using Aspirin as a blood thinner, it hasn't been tested for that purpose. So isn't that a contradiction and shouldn't the FDA have some kind of interest in making sure these off-label drugs are effective?

March: So there's been put forth regulations on, or just people trying to get off-label drugs regulated so that you can't prescribe it for any use. And in some cases, there are instances where it is illegal to use a drug for off-label use. For example, if I'm a doctor, I can't prescribe you 40 Oxycontin in a bottle of liquor and then you can do physician-assisted suicide. I can't do that.

But the FDA, it does have some sort of an interest, from a public choice perspective, that they want to regulate all use of pharmaceuticals which it hasn't deemed safe. But I think this is where my research sort of comes into play here. The FDA is so far behind the curve, I don't think it's really aware of how these drugs are being prescribed.

And if we look at the case of Aspirin, Aspirin, the initial hypothesis put forth by Lawrence Craven---he was an entrepreneurial cardiologist---said that aspirin could be used to prevent heart attacks. This was in the 1940s. And a good period of 30 years went by before this really took off in the mainstream where this became a very common procedure to avoid heart attacks, or heart disease, other cardiovascular things. And the FDA only really got around to approving Aspirin in 1996---I believe this was the first year to approve it for preventative care. So, I think there is an interest on behalf of the FDA but I think it's also just the FDA is very slow. I don't think it's able to stay ahead of medicine or to regulate some of these uses.

Petersen: It's shocking to me that people would advocate to extend regulation to these off-label uses because if it's one in four pills in the United States, if you then banned those uses, wouldn't one in four patients then become sicker? Who's doing this advocating?

March: One of the key distinctions to keep in mind is keeping you safe is not helping necessarily, it's not curing you. And those are two distinct things a lot of people won't necessarily think through the implications of when they want to advocate the FDA should have more power.

Petersen: Okay, so that's one argument I've heard is that if the FDA approves a drug that then goes and poisons people and it turns out it wasn't safe after all then, it would be a huge political fiasco maybe the head of the FDA could get fired or definitely the people who were directly responsible for approving that drug. But if the FDA simply delays approving a drug and the same number of people die on account of not getting it---people whose lives would have been saved by it---then, the incentives are kind of asymmetrical. The error of omission is punished less harshly or not at all compared to the error of commission.

March: Absolutely. I mean that's the seen and the unseen. What's seen is that the FDA is keeping all these drugs going constrained or not, keeping them off the market because they want consumers to be safe and they want to run through these clinical tests again. But what you don't see is that people who are in dire situations that need this to feel better or to function or even save their lives. You don't necessarily account for that when you account for the cost of the FDA. So, it's one thing to say it's 20 years of approval and a billion dollars or 1.2 billion dollars to have the drug approved, but you also don't account for the lives that are waiting to get ahold of this drug.

Petersen: So, even though there's this huge process to sort of block, or to slow down drugs from reaching the market so that they can be tested and checked and made sure they're safe and effective. Still most drugs, when companies do develop drugs they earn most of their money in the U.S. market because of the strong patent system there. So, there's something to be said for having at least these incentives for the drug companies to develop these things and to keep technology marching along. Can you speak to some of the differences between the U.S. and other countries with respect to pharmaceutical development?

March: Well, in terms of IP---and you're absolutely right that IP is a critical component of a lot of pharmaceutical companies' balance sheets---because they're going to invest large sums of money and large sums of time. Then if they go and put their drug on the market and then a generic comes out four or five months later, then there goes the profit margin. So that's an important component of U.S. pharmaceutical companies, where certainly European and in some cases, the Canadian pharmaceutical come and try to get their stuff approved by the FDA so they can get stronger patent rights.

But a lot of that is somewhat misleading. So, for instance there's no real reason medically that you should have one drug or that one drug is necessarily going to treat a huge variety of patients. When drugs go generic, you don't see just a drug go generic and it becomes the same drug, you see generics vary in their chemical structure. This way it's not just the drug becomes cheaper because there's no patent preventing other people from making this pharmaceutical or engaging in this chemical composition, but they vary the composition so they can better suit other consumers. So, it's not necessarily the case that when drugs go generic they all become the same and just immediately the price drops. There's a better service towards the consumer market.

Petersen: Yes. So, having these patents, on the one hand, they create the incentive to develop new things but on the other hand, they take away all the benefits of market competition which includes not only lower prices but also some of these sort of marginal improvements and developments in serving more niche markets and things like that.

So, where do we see competition in the drug market? You have a paper called "The Substance of Entrepreneurship and the Entrepreneurship of Substances" which is a wonderful title by the way, do you want to talk a little bit about the entrepreneurship of substances?

March: Sure what I tried to develop, or what me and my co-authors tried to develop in that paper is you have entrepreneurial theory which takes various forms whether you look at the Kirznerian theory or Baumol's theory and we try to adapt that for what I do is the market for pharmaceuticals.

In that paper I examine off-label drug prescription too, but I try to explain how does the entire process work. So, given we have severe, very stringent regulatory structure set forth by the FDA and we have these conflicting patent rights, how is it that we actually see entrepreneurship in treating people? And off-label, one, it creates alternative uses of resources which is what entrepreneurship is in a nutshell, is find the best use for scarce means and then when they find better uses for existing drugs---so Aspirin, Minoxidil, Viagra like I talked about in my other paper---these findings get distributed through medical journals which is the system of how do we figure out which drugs are safe to treat various illnesses that we previously weren't aware of.

Pharmaceutical sales representatives are going to also play a role in doing that, but they're not supposed to disclose too much information about off-label drug prescriptions, that's another regulation. But fundamentally what you have there is a system of feedback. So, without the FDA's involvement physicians and pharmaceutical companies are able to find alternative uses for their drugs.

So, instead of Viagra being used to reduce cholesterol essentially or to reduce congestion in the heart, it's better used for sexual performance in males. And a lot of this was found in clinical trials which then got introduced in the U.S. market through voluntary tests which then became part of medical journals, which then were introduced into specialized medical journals to make sure that this information was distributed to urologists, or doctors of various disciplines and then that's how the market emerged for sexual pharmacology, which was largely an entrepreneurial act by urologists saying "We think sexual performance is not, for lack of a better word, all in your head. We actually think there's a physiological problem here and we think we can use pharmaceuticals to solve this."

Petersen: So, you're saying that the main purpose of Viagra, the one that we've all heard of, that was not its original use?

March: Oh no. Viagra was developed for heart congestion.

Petersen: Wow, I did not know that.

March: When you think of a little blue pill you think of erectile dysfunction for sexual performance, but no originally it was for---I'll tell the entire story, hope this goes to a family friendly audience---the story was this is developed in Britain, they started sending out these pills in an early clinical trial, they send them out to 30 or 100 middle-aged men, people you would think would be suspect for heart congestion and they send out the pills and they phone and they say "Okay, how is it? You feel like you have less heart palpitations? We will run your blood and we'll see what your actual congestion is."

And it didn't seem to be very effective in that, this is about halfway through a 30 day trial, and they say "Okay, well send the pills back" and then nobody sent them back.

So they were questioning "Why has nobody sent the pills back?" and they started getting reports, "Well it was actually helping with this other thing."

And then they said "Well we need to develop this drug for sexual performance. This is going to be a blockbuster."

Petersen: And before that there wasn't an interest in, or doctors were interested maybe more in saving lives. So it's almost like the market for sexual performance enhancing drugs sort of came from the consumers themselves. Before this nobody said "Hey you know what would we be great? A pill that enhances things in the bedroom." So, it's interesting. So they learned from the customers what their customers wanted.

March: Yes, in this case directly. The field of what's called sexual pharmacology---so treating sexual problems with drugs---it largely emerges in the United States originally not Britain, and it's in the 1950s. And it's a group of, I believe, is about half a dozen to twenty urologists treating urological problems.

They come to the conclusion that sexual problems are not all in your head, so it's not a psychological problem why sexual performance is not up to par, you're having these issues in the bedroom. It can actually be a physiological problem, so there's a problem with your sexual organs. And so they start experimenting with what were essentially nitrates, so things that affect blood flow and they start injecting them originally in themselves. So in the urologists' actual selves they would test that then test firmness, for lack of a better word, then they would say "Okay, we think this can help our patients we're going to prescribe these off-label."

Patients would go, they would increase their sexual performance, this starts getting out in medical journals. And then over across the ocean, you have Britain which sort of serendipitously comes across Viagra and finds out this little blue pill can actually do this too. They enter the U.S. market. So it's an international competition but it all originally starts with an entrepreneurial idea saying, "No, we think we have a better way to treat sexual dysfunction."

Petersen: Right. And yet they had to get over the idea that it was all---I don't know, this with would have been before the days when people also maybe believed strongly in mental illness because---the idea of something being "all in your head" in the age where we're all very aware that mental illness is an illness and it is related to physical things in your brain; the fact that something's all in your head doesn't mean necessarily that it's not real but this was the 50's, when maybe people philosophically didn't see things that way.

March: Right the 1950s---there was some awareness of mental illness in the 1950s---the 1950s is when you start to have anti-psychotics, it's when they start to see we can help people that have previously been institutionalized by giving them these drugs which uptake into the brain, which can help you alleviate manias and depression, or anxiety.

But the predominant theory for sexual dysfunction---it wasn't even called that back then, but what we can call for this podcast sexual dysfunction---was that this is a psychological problem so, the male couldn't perform---this is also true for females but what we were focusing on here is males---if the male couldn't perform it was some form of anxiety, so he needed to undergo psychotherapy or some kind of sexual therapy. And then he would go through that again and again until the point where he was comfortable enough performing sexually and that would somehow dissipate the problem.

But entrepreneur urologists come in and say "No." There's alternative explanations. It's not just that he has anxiety. It could be there's something actually physiologically wrong. And this is sort of a new idea because that, one, it's a whole new idea to say no the sexual performance is not always linked to your mental state or your perceived anxiety, but that we can actually treat this with injections, or with nitrates or with drugs and drugs that already exist on the market because we believe this is a blood flow problem.

They had it tested on themselves so they were pretty confident in their theory. But then to go ahead and give it to patients and then give patients the ability to self-medicate. All of this progress was a period of 20 or 25 years for them to progress to that stage to where ED can be treated---be self-treated really---without the use of psychotherapy which was inconsistently effective. And then we get to the point where you can just inject an oral tablet, that's where Viagra comes in. All of this comes about because of an entrepreneurial awareness to say "No, we don't think that the medical professional is treating this condition correctly."

Petersen: So, one thing you talk about in your paper is the idea of superfluous entrepreneurship. What is that and how has it occurred in drug markets?

March: Superfluous entrepreneurship as we go about it in this paper is the idea, given you're an entrepreneur in a regulatory state which prohibits you from discovering more effective ways to distribute goods, what happens to the goods you distribute? Are you distributing as effectively as you could without said regulation?

And one of the ones we analyze in the paper is the development of insulin. I'm sure you and your viewers are aware of what insulin is, a diabetic who can't produce his insulin or doesn't produce enough, the Type-one and Type-two, needs to inject that when he eats carbs so he can manage his blood sugar and avoid diabetic complications. So, when insulin originally hits the market we've got to go back to, I want to say the 1920s, when they first started doing animal insulin. We have pig insulin and we have bovine insulin which saved thousands of diabetics' lives at the time, but they have side effects. As you can imagine, insulin is a hormone, if you inject animal hormones in you, there's going to be some side effects.

And so by the time you get around to the 1940s we start finding ways, medical science advances enough to where we can synthetically produce human hormones, which is what modern insulin is, a human insulin. But the fear of the regulators is now that we can synthetically make hormones we don't necessarily know what are the side effects of synthetic hormones. And so in 1941 Congress passes what's literally called "The Insulin Act" which is if you're going to prescribe, or you're going to try to create a life-saving medication, which is what insulin is to diabetics, to Type-one diabetics especially, it has to go through additional rigorous testing.

So what that means is the release of human insulin on the U.S. market is delayed, so diabetics who need to receive their insulin are still taking bovine and pig insulin, which is okay but when there was a clearly better alternative being human insulin available, you end up with superfluous discovery so instead of investing time---and this is what happens in the insulin market---you invest time and effort into finding ways to reduce complications from injecting bovine insulin, or find ways to change the what's called the duration event, so how long insulin last in your bloodstream trying to find ways to manipulate that or make that better. You have a better alternative which is to immediately bring in human insulin and treat diabetics using that and that doesn't become possible in the U.S. market because of these delayed regulations. Eventually insulin does get on the market but you have a prolonged period where people are noticeably getting worse treatment than what's available.

Petersen: Right, and that's a very long period. I read in your paper they didn't approve human insulin until 1983 and did you say 1940s was when they discovered it?

March: I believe 1941 was when it was first available for clinical testing and this was all done in Germany.

Petersen: So 42 years.

March: Right, of taking animal hormones.

Petersen: Yes. So, the superfluous element of entrepreneurship is we have some kind of problem, people are willing to pay to have that problem solved. We have a cheap way of providing this subjective benefit to people, but the cheapest, best way that people would do in a free market is somehow blocked or illegal and so people entrepreneurship around regulation. Is that correct?

March: You certainly see that in illicit drug markets, but yes that's also true in some pharmaceutical markets. I want to get this drug approved in the United States. I have human insulin which is better than cow and so I want to get approved in the United States. There's a big market for diabetics in the United States but the additional regulation makes it tough. So, I can find a way to circumvent that, either bring it on the black market, the illicit drug component, or I have to say no I can't compete in the United States because it is going to take too long, I'm just going to prescribe it over here in Germany or in Asia.

And what that does, that just limits the entrepreneurial aspect of bringing better cures to market. So it's a superfluous effort you could say, marketing this drug in Asia or different countries in Europe instead of the United States. Those are all resources that could have been diverted towards something, or towards marketing the drug in the United States where you could argue it would be the highest value of use.

Petersen: Right. And in your paper you also talk about delta nine THC found in marijuana, which is a treatment for nausea. Can you talk about that? That's illegal of course because it's from marijuana.

March: That's an example where there's tons of medications out there for nausea, but the one you find in the medical marijuana derivative has been shown as particularly effective in difficult cases. So take cases where the typical forms of treatment which would normally help people---now we have more difficult cases---we're no longer allowed to prescribe these drugs we have to find synthetic uses of these drugs. So any time you take a synthetic use you're necessarily making the complications which you would face when the drug interacts with your body, they become a little bit more widespread. So you open yourself up to the treatment being less effective, but you also get more of a probability of these tail effects, where things you wouldn't necessarily see happen occur in your body.

So, you make the drug. In some cases it's less effective, but you also can potentially make it more dangerous, which is the superfluous act. I am trying to use synthetic drugs to treat cases or treat illnesses when there's a better alternative in the background. So, I'm just trying to find a new and better way to make a potentially dangerous drug safer when there are already safer drugs available.

Petersen: So a previous guest of this show, Mark Thornton, who you cite in your paper has argued that in the case of illicit drug markets, what the entrepreneurs do is to make them easier to smuggle by making them more concentrated, have a stronger effect for a smaller mass so they can be hidden in places where they're smuggled across borders or from the place they're produced to the place where they're sold. One example would of course be moonshine, so during the depression they obviously weren't selling low-alcohol-content wine because it would be so costly to smuggle that to people. They instead got the super strong moonshine and it was actually very dangerous. So, I suppose that's kind of an example of superfluous entrepreneurship, getting around the burdens placed on you, when in legal markets, of course, you don't have to always make things more concentrated and easier to smuggle because you don't have to smuggle them.

March: Right exactly. Entrepreneurship is finding---I have my product, I eventually face competition because I'm making a profit, how do I make my product better? And so when you have to change the institutional setting to where now I have a product that I'm selling but it's technically illegal to sell this product, where can I put my efforts best for us to continue making a profit?

In illicit markets it can just be the concentration, right? You mentioned the moonshine and the nine THC is another great example which is the main content of marijuana which people used to get high, you see the potency of these get much higher because that's primarily what you're trying to do is to sell the THC content to potential marijuana users. So instead of trying to find appropriate levels of THC or finding what you call niche, just accessories towards consuming marijuana which would differentiate the markets and serve consumers better, that is no longer profitable revenue and that's no longer a profitable or viable way to compete with people that are selling marijuana. Now it's how do I smuggle? How do I become a better or more active smuggler? And that's to raise the content of THC.

Petersen: Or to get people onto drugs like cocaine that are significantly more potent per weight. I guess the great point made by Thornton is that by criminalizing these things, by criminalizing milder drugs in particular, you create a market for stronger ones.

March: Right. Because that's how you compete on the margin for things like that. Yes.

Petersen: So what other kinds of entrepreneurship do you see in the United States in medicine? I've heard about people sort of getting around the medical system, joining collectives where they pay directly to their doctor, trying to get away from the sort of hybrid insurance system that you have down there.

March: That has become an alternative. And I don't know if I want to say an alternative market. But there has emerged a need for people to get outside of the larger insurance---that's the word I'm looking for---to get outside of the mainstream insurance market and to niche themselves into more specialized markets.

So, with the passage of the Affordable Care Act right now, everybody has to have health insurance or you pay a massive penalty. You've standardized insurance, which in some cases maybe there's nothing wrong in having a standardized package of insurance. When you try to blanket that over the population of the United States you leave out specialized cases.

So to give you a specific example what you see now in the market for diabetic treatment is now that insurance has become standardized to treat diabetics, you see less prescriptions written for specialized forms of insulin or insulin that acts faster or insulin that has a longer duration period. Now you see just generic insulin is being prescribed. Which is fine because the majority of diabetics are type-two diabetics and that's what they typically use, but then that leaves out cases of people with pancreatic cancer or type-one diabetics who need specialized insulin in order to better suit their individual illnesses, and you don't see that specialized treatment. So that leaves the market open for specialized insurance, or people that are going to co-ops, private alternatives where you pay into essentially a fund and 50 or so people will contribute 100 dollars a month. If one of them gets sick, they'll use the money in that fund to help this person overcome an illness they've come down with or any injury that's kept them outside of work.

I think a lot of those entrepreneurial aspects are trying to get out of standardized medicine, standardized insurance but again because all of this is more or less dictated by the government you don't have the wiggle room to compete on the margins, what you have to do is go completely outside of a highly regulated market. That's what you're seeing marginally with insurance. You don't see as much of that in medicine.

Medicine is a little more tightly controlled than insurance, even in the insurance market even today, but it's interesting. So, I think in the future there's going to emerge especially a larger market for these different forms of health insurance. It will help to treat people who have religious affiliations when they don't want to have insurance that helps to cover birth control or abortions for people that are in their group or they are pooled in the same insurance group. But also just people that aren't getting the kind of treatment they want. And this allows them to actually have health insurance for lack of a better word. I need a specialized form of treatment or I actually come down with a rare illness that the standard treatment is not going to help me with, I need to have insurance as a means to cover it and I think that's what you're seeing in the market with what you describe.

Petersen: Right. So, I live in Canada and we have single payer, which ultimately is like post-Obamacare having private insurance companies but then having everyone legally required to get the insurance and then having those insurance companies having the government dictate what they provide and require them to take on people with preexisting conditions. It's almost like just some sort of weird way of replicating single payer just while maintaining the veneer of a private system but in Canada we have single payer officially.

And there are some myths about it. So, we don't have socialized medicine per se. Doctors are not public servants but they can only accept payment from the government on your behalf, so sort of like maybe a private prison in the United States where they're kind of private but the only customer they can legally take on is the government.

March: Which you wouldn't typically describe as a market. The market is to serve the consumers.

Petersen: When the consumer is like a private contractor, serving the government. But of course we also restrict---you're not allowed to buy healthcare or medical care outside of the single payer system. There have been some court cases recently with people trying to argue for a right to do this but the typical thing to do is to cross the border to the States or fly to Southeast Asia to get your unapproved---or in order to pay for your own medicine.

And the sort of justification for this is they don't want people competing up the prices of medical services, medical goods. I guess they like their monopsony status as the only buyer of medical services. But whenever I find myself arguing against the system or saying something to the effect of "Hey this is a pure private good, why don't we let the free market provide it the way we do with our food and shelter and other things that are very important for living?" I get really smart people arguing against me and some of the things they say are "Can you point to a country with free market healthcare that works?" and I have to say "Well there isn't a country with pure free market healthcare" Singapore is 50/50 and maybe that's as close as you get.

But I guess to get to my question, why does every country intervene so strongly in medicine? What is it about medicine that that makes people really want to control it and have it centrally planned or regulated?

March: Sure. I think that's the fundamental question of health economics. Analyzed from the perspective of an economist, how much is the market able to take care of the sick or those less able to take care of themselves and how much do you need state interference or government involvement to make a successful health company or healthcare system work? The way I'd like to think about health economics if we get outside of just focusing on insurance or treatment of rare illnesses or pre-existing conditions or asymmetric information and all these complex issues that people like to point and say, "See that's where the market fails in healthcare, that's why you have to have a government."

Fundamentally what we're looking at is how do you deal with uncertainty? We have more or less ways of assessing risk, where we know your risk increases of lung disease if you smoke a cigarette as a simplified example. But how do we purely deal with uncertainty? So, I'm an insurance company and I take you on as a client, I don't know your health status. Various regulations make it impossible for me to find that out. But I don't know your health status. I don't know if in five years you're going to develop cancer, if you're going to be healthy for the next 30 or 40 years. How is it ideal with that as an insurance provider or if I'm a doctor how do I know you're going to use this pharmaceutical responsibly or how do I know that these other clinical trials I've seen where this has helped the patient with your condition is going to help you because there's heterogeneity in how people respond to things.

But fundamentally this uncertainty both in the provision of healthcare and in medical science itself, these permeate medicine. We're never fully going to be able to reduce the uncertainty. There's always going to be that element of the simple fact that we don't know. And I think that provokes the idea in a lot of people's heads that with no centralized plan we're not able to address this uncertainty. So we need to have the government come in and say health premiums need to be this or guarantee a system where even if you don't have health insurance you'll be taken care of if you need to go to the emergency room. Or if you come down with a very rare illness there will be pharmaceutical stock up in the hospital.

I just think that in general, the uncertainty drives a lot of people to look toward centralization or to develop a centralized plan to try to mitigate that. But a lot of those efforts are somewhat short sighted because when you centralize things you don't take advantage of the uncertainty aspect of anything you just put all of the decision-making power within a federal bureau, the FDA or the federal government or even the USDA to some degree. At least in the United States, I know Canada has similar governmental bodies up there.

But when you do that you divorce decision-making from the knowledge and you also divorce it from the incentive, like when we talked about what if the FDA doesn't have an incentive to release potentially dangerous drugs? Or as a pharmaceutical company if they see profits, they absolutely would, even if it is somewhat risky. So, I think the motivation primarily in why we don't see free healthcare or a free market in health insurance or competing systems of determining whether drugs are safe or effective is that there's a primary fear with people how do we address this uncertainty.

Petersen: So there are various elements of the uncertainty. If I'm an insurance company I might worry that the people who come buying insurance, there's an adverse selection problem so the people who come to me for insurance are going to be the people who are the least healthy or the people who expect, for some reason that maybe I can't observe, to get sick. And that means based on the fact that only people likely to get sick are coming to me, I need to charge very high premiums for my insurance. And so it's the classic market for lemons problem: The very fact that someone's selling you their used car maybe tells you that the car is a lemon. And the fact that you think it's a lemon means you won't pay very much for it, meaning that anyone who doesn't have a lemon wouldn't be willing to sell.

So, at least with that, it seems that pooling everyone into the same pool helps. But on the other hand you do lose competitiveness. So, one example I've heard is the cost of rhinoplasty---the plastic surgery to make your nose look better---since that's not paid, since governments perhaps rightly see that as it's not life-threatening, it's not important and we're not going to pay for it, you pay for it yourself. And we see that the cost of a rhinoplasty has fallen dramatically over the years. And whereas life-saving surgery, you look at healthcare and housing and I guess university tuition, those are the three big things that consistently go up in cost over the years.

Do you know a lot about the market for plastic surgery?

March: Not a whole lot. I do know that because it's not regular you have means of competing and you have essentially competition to provide you with care to make your nose look better or for facial reconstructive surgery and similar things.

I do know that a lot of cases like when you get breast augmentation you have to replace the inserts or whatever they're called. You have to replace those every set amount of years and you get routine inspections to make sure there's nothing going on with the surgical procedure, nothing wrong with the implant and all of that is done privately. So, it's interesting because getting plastic surgery is not necessarily a simple procedure. Just because the FDA is not involved in the procedure because there's not federal guidelines about when or when not you can do this procedure, how the procedure should be performed, it doesn't mean that the procedure is simple.

As you pointed out, it's not life-saving but it's still surgery and there are still risks and complications. What we typically don't hear, with the exception of maybe a few TV shows, that sort of shock people, we don't hear about these horrible things going wrong on the surgical table when people get nose jobs. And I think a lot of that has to do with because they have to compete to make sure people are happy with the outcome but they also have to make sure, again if the procedure is safe and its efficacy. You look better when you're done and nothing happens to you or receive complications, you get infections from surgeries. So you do see that a lot in the United States.

I want to go just briefly back into the adverse selection problem which I think is broadly the main argument for why you need to have government involvement in health insurance. Because you have that selection problem where only sick people want insurance and then insurance companies only want to provide really minimal standard care so you have that sort of mismatch and that would be a bad scenario for all. But to the extent that's true, it's based upon how is the insurance company is able to segment the market.

So, if you're comparatively healthier than me and you just want to have catastrophic care, so something that if you were involved in a horrible accident and nobody could have planned for it, you need to have emergency care. You pay pretty low premiums and then the deductible is higher whereas someone like me I'm a type-one diabetic who needs to have consistent care throughout their life in order to maintain their health, their premiums should be a little bit higher but then the deductible should be a little bit lower since I have to keep taking insulin.

But the problem is if they're not able to segment the market, and I think the reason they can't segment the market is because it's illegal to segment the market. What you don't have, they are two different forms of insurance. You don't have the insurance for sickly Ray me, or healthy you.

You don't have means to compete on those margins, all you have is various plans. You buy into them, you have health insurance costs go up because there's less competition and the reasons we have explained before. So a lot of what you see with the adverse selection problem is a lack of marketing and the lack of marketing stems from the fact that it's illegal to do a lot of the research that health insurance companies want to do.

Petersen: So, because deep down it seems so unfair that you could have a huge cost throughout your life just because you got sick through no fault of your own, we want people to pay the same. But then in doing so we create the adverse selection problem and it's sort of the old lady who swallowed the fly. We have to swallow the spider to eat the fly and eventually we're swallowing a single-payer healthcare system to put everyone in the same risk pool to deal with the problems that our initial minor intervention to try to make insurance more fair caused.

March: Right. So what we would end up doing in that situation is that you would have to pay premiums, I would have to pay premiums we want to equal them out because it's unfair that you should have to be subsidized me for lack of a better word. Well, that means that you end up paying more in premiums than you actually wanted health insurance, I would end up paying less because we have to even out.

More fundamentally if you want to address the fairness question---I think a lot of people do approach this from the aspect of fairness---is, one, why is it somewhat unfair for me as someone with a chronic illness to not have access to healthcare on a competitive market where I can decide which program I want, where I can assess my own risk, and where I can decide based upon my medical needs how at best to treat my illness; whereas someone like you who doesn't have a chronic illness places a completely different set of incentives? So when they pool us all they end up doing is limiting both of our choices. I think a fundamental question to ask there is which one of those is more or less fair?

Petersen: Right. So, what sort of institutional changes, big or small---obviously some things are more politically feasible than others---but what institutional changes would you like to see to improve on our system?

March: By "our" you mean the US system?

Petersen: Yes, or in the systems worldwide that have similarly been adopted for similar reasons by many different countries.

March: Sure. If we segment along the lines of there's health insurance and there's actual health products or health services.

I would primarily start with the approval of pharmaceuticals. And I say that because a significant portion of the illnesses and conditions in the United States are treated with pharmaceuticals. So, if we're able to allow competing access to approval processes, that would drastically lower the cost of drugs. If you lower the cost of drugs, health insurance becomes less vital, certainly in my situation but in a lot of people's situations who need access to pharmaceuticals. The access to insurance becomes less important because there's less of a risk that you won't be able to afford the treatment if you need it.

And I think that would push back insurance into---for lack of a better word---a more appropriate role. Insurance is supposed to be, there's a potential down the road that something bad will happen or I will develop an illness, I'll get sick, I'll break something, whatever you want to call it. I don't know if that's going to happen but if it does I want to make sure my livelihood or my standard of living continues as best it can. That's what actual insurance is. There's a chance that you could crash your car someday. And if your car is totaled you want to have repairs, you want a new car, that's why you buy car insurance. But now when we have health insurance we say "oh no health insurance covers your routine doctor, it's going to cover some aspect of your drugs if you get a prescription, it's going to cover procedures from other people in this case because everything is pooled."

But you don't see your progressive car insurance company pay for your oil change. That's a different thing. That's routine care. And I think if you reduce the cost of entry into medical devices and pharmaceuticals, so you reduce back the power of the FDA, you would naturally see health insurance go back into the proper insurance role. You could make an argument on the other way too as if you let insurance companies compete, premiums would go down. People would self-select into consuming health care products or not consuming health care products more effectively. That would drive down the cost.

But I think the primary problem here is there's a restriction of access to medical devices and to pharmaceuticals and once you allow for a market and that health insurance no longer competes on those margins it would compete on margins of trying to ascertain risk of whether that would happen or not down the road.

Petersen: So when you talk about pooling or when you talk about making approval cheaper, is that the system where two or more countries agree that a drug only needs to be approved in one of the countries to be allowed in all of them?

March: That's one method. I was thinking more along the lines of within the United States could have private companies that would give you gold and silver standards of approval for pharmaceutical X and drug Y. And then people based on that would decide, okay I want to take this drug or I want to take that one, or physicians would have more access to information based on that than waiting for the FDA to approve. That's more what I was thinking about.

On an international level that gets interesting because developing a drug in Europe and in Canada is completely different than developing that in the United States. The difference in the rigors of the approval process is what drives a lot of those conflicts but in terms of how you agree that everyone is going to come up with the same approval process method, I'm less optimistic about that because I think there's a public choice story behind it. Pharmaceutical companies want the approval process to be tough. So, like you said you can't develop pharmaceuticals in your basement despite your chemical knowledge.

I do think there's more of a hope in the future though for less emphasis on FDA approval and more for private raters or private ratings to come in and say these drugs have been shown safe or for pharmaceutical companies to interact with private laboratories or clinical testing facilities to say, okay we passed these tests, and we communicate that our product is safe without the FDA

Petersen: Right. And at the very least you could remove the effectiveness criteria from the FDA. Just say that the president or Congress could just tell the FDA, your job is just to check safety. Now if people want to take an ineffective drug, as long as it's safe they can do that.

There's the idea of right to try. Have you heard of that?

March: I have a segment of that in one of my pieces. I think that's very interesting because that's completely illegal action but you have certain states that will say okay if a drug is within phase three---that's when we start to do the safety testing with the FDA---and you say someone has an illness, they're in an insufferable pain, we know they're going to die, let's give them a shot to take this drug. And whether or not that helps or not is kind of secondary but it's a circumvention like we talked about earlier of the going around the FDA, which is a federal governing body, you are not supposed to be able circumvent that at the state level.

But you go around and you give people access to potentially life-saving medication. But me being more of a market-oriented economist, I wonder what if you did that not just for life-saving drugs but for other drugs? And granted there are risks with every single drug, basically including water has certain risks to it. But given that there are risks associated with every drug, what would emerge in a freer market where you could better ascertain the safety of these drugs or the efficacy of these drugs?

Petersen: So do you have any closing thoughts, anything we didn't mention?

March: I guess one last concluding thought with regards to health economics I just want to reiterate that health economics is fundamentally a question about which set of institutions is best able to deal with uncertainty. And uncertainty in the sense where we just don't have clearly defined answers. Who would be better able to protect the population of a country from an epidemic or who would be better able to take care of the mentally ill, which is a set of illnesses we don't know very much about, or who is better able to find alternative uses of pharmaceuticals given their potential potency to be able to help people, and the potential side effects?

And the debate is still very lively. It's to what level do we need centralization in order to answer these questions and to what level do the discovery processes of the market---for lack of a better word---how are we able to address these questions better? My research asks a question of if you don't have centralization what is the alternative? What are examples---not necessarily of entirely free health care systems---what are examples of private mechanisms working in the medical field and thus far I've found pretty convincing results that the private market is able to handle some pretty difficult situations, some pretty uncertain situations and when compared to the centralized alternative they fair fairly well.

Petersen: My guest today has been Ray March. Ray, thanks for being part of Economics Detective Radio.

March: Thanks for having me.

Today's guests are economic historians Alan Olmstead and Paul Rhode. Both of them have research related to the slave economy of the Antebellum South. Our main topic is a paper they co-authored, Cotton, slavery, and the new history of capitalism.

The "New History of Capitalism" grounds the rise of industrial capitalism on the production of raw cotton by American slaves. Recent works include Sven Beckert's Empire of Cotton, Walter Johnson's River of Dark Dreams, and Edward Baptist's The Half Has Never Been Told. All three authors mishandle historical evidence and mis-characterize important events in ways that affect their major interpretations on the nature of slavery, the workings of plantations, the importance of cotton and slavery in the broader economy, and the sources of the Industrial Revolution and world development.

We discuss the problems with the New History of Capitalism literature and some alternative hypotheses suggested by the economic history literature. In their previous work on the subject, Olmstead and Rhode show "that a succession of new cotton varieties helped propel the rise in labor productivity and southern growth" (p. 7). Ed Baptist dubiously attributes this rise in productivity to torture.

My guest today is Fabio Rojas. He is professor of sociology at Indiana University Bloomington.

Fabio is the author of three books, the first is From Black Power to Black Studies: How a Radical Social Movement Became an Academic Discipline, published in 2007. The second book, coauthored with Michael Heaney, is Party in the Street: The Antiwar Movement and the Democratic Party after 9/11, published in 2015. The third book, Theory for the Working Sociologist, was published just recently in 2017.

We begin the conversation by talking about the discipline of sociology in general. What should an undergraduate student know about sociology, and furthermore, what should other social scientists know about the field? We discuss the distinct methods that make sociology sociology.

Moving on, we discuss the relationship between activism and scholarship, particularly as it pertains to sociology but also as it pertains to black studies, the subject of Fabio's first book.

Related Links:

The Theory of Moral Sentiments

James Heckman discusses field experiments on EconTalk

Evicted: Poverty and Profit in the American City by Matt Desmond

The American Journal of Sociology

The American Sociological Review

Today's episode features Zachary Greenberg of the Foundation for Individual Rights in Education. We discuss freedom of speech, FIRE's work to protect it on college campuses, and its importance for maintaining a liberal society.

Today's guest is Scott Beyer, a columnist who writes about urban issues. He is the creator of the Market Urbanism Report.

Our discussion addresses some common concerns about housing markets. For instance, why do new luxury homes sometimes sit empty? What's the deal with Houston's land-use laws? And what can we do about the urban housing crisis?

Today's guest is Mikayla Novak (Twitter, SSRN) of the RMIT Blockchain Innovation Hub at RMIT University. Her work focuses on some innovative new and potential uses for blockchain technology.

As we all know at this point, the first use of blockchain technology was to create decentralized digital currencies like Bitcoin and Ethereum. But a blockchain is a much more general technology than this: it is a decentralized ledger that is resistant to tampering by any one individual. As such, it is a technical innovation that can allow us to coordinate activities that a lack of trust may have prevented otherwise.

Mikayla discusses institutional cryptoeconomics, an emerging field of research centered on the ways blockchain technology can improve both private and public institutions.

Links

Mikayla's Medium article on Crypto Fiscal Federalism discusses how blockchain could make the system of making government grants more transparent and efficient.

This article by Mikayla's colleagues at RMIT gives a detailed and accessible introduction to institutional cryptoeconomics.

Michael Heller joins the podcast to discuss his new book, Mine! How the Hidden Rules of Ownership Control Our Lives. This book explores the implicit social rules governing ownership. In brief, these rules are as follows:

1. Attachment ("it's mine because it's connected to something of mine")
2. Possession ("it's mine because I physically control it")
3. First-in-time ("it's mine because I was here first")
4. Labour ("it's mine because I worked for it")
5. Self-ownership ("it's mine because it came from my body")
6. Family ("it's mine because my grandfather left it to me")

We discuss these six rules with reference to many examples of how they play out in the modern world, from conflicts over airline seats to the rise and fall of Soviet communism.

Here on Economics Detective Radio, we've had many discussions about the early modern period, and the circumstances that gave rise to the modern levels of sustained economic growth that were heretofore unheard of in human history. One important question is, what was it about England and the Low Countries in the early modern period that made them the first to transition to modern-style economies? A related, and equally important question is why other times and places throughout history failed to produce an industrial revolution.

My guest today, George Tridimas, has done interesting work exploring the question of why the Greek golden age of 500-300 BCE didn't produce sustained economic growth. He gives a number of explanations, ranging from cultural and political factors to Greece's acute lack of the energy sources necessary to produce enough heat to smelt steel.

This episode of Economics Detective Radio features George Bragues, professor of business at the University of Guelph-Humber, discussing his work developing a distinctly Austrian theory of finance. While there have been forays into finance by Austrians such as Mark Skousen and Peter Boettke, Austrians have not yet fully developed a complete and distinctly Austrian theory of finance.

George names five pillars of modern finance theory: (1) The capital asset pricing model (CAPM), (2) the Black-Scholes option pricing model, (3) the efficient markets hypothesis (EMH), (4) behavioural finance, and (5) the Modigliani-Miller theorem.

CAPM is a model that derives the value of assets based on the risk-free rate and market risk, that is, risk that cannot be diversified away. The Austrian response to this model is that there is no such thing as a risk-free asset, as risk is inherent to human action. An Austrian alternative to CAPM would incorporate the Austrian theory of a natural interest rate derived from time preference.

Black-Scholes, a model for pricing options—opportunities to buy or sell at a given price at some point in the future—assumes that price movements are normally distributed. Nassim Taleb has been forceful in his critique of this assumption; in his book, The Black Swan, he argues that returns are subject to so-called Black Swan events. Statistically, this implies a fat lower tail in the distribution of returns. George holds that, given Austrians’ skepticism about mathematics, there is little hope for an Austrian option pricing model. However, pricing assets was never the role of theorists, but of entrepreneurs.

The efficient markets hypothesis, developed by Eugene Fama, holds that the market price reflects all available information. This view holds economic equilibrium to be a normal state of affairs. The Austrian view is that equilibrium is an abnormal state of affairs; the market is always tending towards equilibrium, but it rarely reaches equilibrium. Austrian theory holds that identifying misequilibriums and arbitraging them away is the role of entrepreneurs. Identifying such opportunities isn’t easy; it requires prudence, or what Mises called “understanding.” If you believe the EMH, then Warren Buffet is not an example of someone with great insight and prudence; rather, he is someone who has repeatedly won a stock-market lottery.

Behavioural finance, developed by Robert Schiller, is a theory that argues that, contra the EMH, market prices reflect psychological factors rather than the real underlying values of the assets being traded. Behavioural finance has identified so many biases that it is essentially irrefutable. For instance, the gambler’s fallacy and the clustering illusion, yield opposite predictions. If a stock price has risen repeatedly, the gambler’s fallacy would hold that it is “due” for a correction downwards, while the clustering illusion would hold that the trend must continue upwards. Behavioural economists could thus explain a movement in either direction according to their theory, making the theory untestable in principle. Austrian theory avoids such psychological theorizing. Austrians hold that you can derive sound theory from the axiom that humans act, that they use means to achieve ends. Austrians have no particular qualm with bringing psychological factors into the analysis of economic history, but they don’t see them as part of economic theory.

Modigliani-Miller is a theory of corporate finance that says that the way a firm is financed, with more debt or equity, is irrelevant to its value. M&M holds that the value of the firm is uniquely determined by its discounted stream of revenues. Austrians might contend, in contrast, that firms financed through debt are exposed to greater risk in the case that they make entrepreneurial errors.

George is working towards an “Austrian markets hypothesis,” which would hold that markets are constantly endeavoring to achieve equilibrium, but never actually succeeding. Austrians can bring a greater appreciation of understanding, prudence, practical experience, and local knowledge to finance theory. These ideas have been wrongly impugned by modern quantitative finance, which has elevated theoreticians above entrepreneurs.

Mark Thornton is a Senior Fellow at the Mises Institute. He is the author of many books, including The Economics of Prohibition (which you can access for free here), which is also the topic of this episode.

1. Does drug prohibition help stop poverty and homelessness?

The conventional wisdom on drugs is simple: you see drugs and drug abuse mixed with poverty and homelessness and it makes intuitive sense that drugs play a role in causing poverty. It seems to follow that by criminalizing drugs, you can take them out of the equation and help solve the other problems.

Mark disputes this conventional wisdom. First, the causation doesn't necessarily go from drugs to poverty. Poverty can cause people to abuse drugs and mental illness can cause both self-medication and poverty. Second, if you legalize drugs, they won't be sold on the street. Instead, they'll be sold by legitimate businesses with a particular interest in maintaining their reputation and not harming their customers. Prohibition is what creates the black market, which in turn generates violence, crime, and more potent and dangerous drugs, all of which exacerbate poverty. You can't clean up the social problems related to drugs by criminalizing them when criminalizing them is what caused many of those problems.

2. The Suburban Heroin Epidemic

Mark recently authored an article called The Legalization Cure for the Heroin Epidemic. In the article, he calls attention to the rising number of overdose deaths in the United States:

The number of drug overdoses in the US is approaching 50,000 per year. Of that number nearly 20,000 are attributed to legal pain killers, such as Oxycontin. More than 10,000 die of heroin overdoses. I believe these figures vastly underestimate the number of deaths that are related to prescription drug use.

The face of drug abuse has changed in recent decades. Rather than the homeless junkie we might picture when we think of addiction, the new addicts are middle-class people who have been over-prescribed legal opiates like such as Oxycontin and Vicodin. Doctors have been routinely prescribing these addictive opiates and many people turn to the black market rather than going cold turkey when their prescriptions expire.

The problem is that Oxycontin and Vicodin are very expensive on the black market, so many of these unintentional addicts turn to heroin as a cheaper substitute. The problem with buying black market heroin is that you don't know what you're getting. Different addicts need different doses, and you don't know what kind of dose you're getting and what it's been cut with. All it takes is one particularly strong dose to cause an accidental overdose.

3. American Foreign Policy and the Supply of Opiates

Afghanistan is the largest grower of illicit opium, and the supply has greatly increased since its invasion in 2001. The invasion destroyed the country's legitimate economy and many farmers turned to opium production. Being a huge and basically lawless country with a perfect climate for growing poppies, the global supply of opium exploded.

4. Political Lies to Support Drug Prohibition

Mark discusses the political circumstances around the prohibition of marijuana in the United States.

Marijuana prohibition went national with the passage of the Marijuana Tax Act of 1937. It too quickly changed from a measure to tax and regulate into an outright prohibition. Even hemp, the non-intoxicating form of cannabis was banned! When propaganda claiming that marijuana was deadly and caused insanity, violence, and criminal behavior was debunked (aka Reefer Madness), the "gateway theory" was born to fill the void. The gateway theory posits that while marijuana might not be addictive or dangerous, it would lead the user to try the hard drugs, such as heroin. This theory became the prevailing view in the second half of the twentieth century.

Commissioner Harry J. Anslinger made up this gateway theory on the spot when arguing for the prohibition of marijuana. Unfortunately, the argument stuck.

Recently, a quote by John Ehrlichman, Richard Nixon's domestic policy advisor (and Watergate co-conspirator) has resurfaced on the internet:

"The Nixon campaign in 1968, and the Nixon White House after that, had two enemies: the antiwar left and black people. You understand what I’m saying? We knew we couldn’t make it illegal to be either against the war or black, but by getting the public to associate the hippies with marijuana and blacks with heroin, and then criminalizing both heavily, we could disrupt those communities. We could arrest their leaders, raid their homes, break up their meetings, and vilify them night after night on the evening news. Did we know we were lying about the drugs? Of course we did."

This quote shows how drug prohibition has long be complicit with the politics of bigotry.

5. Progress Against the War on Drugs

Despite the sordid history of drug prohibition in the twentieth century, we've made slow progress towards a sane drug policy. Marijuana's many health benefits cannot be denied, and legislators are starting to take notice. Medical marijuana has been legalized in many places, and some places have even legalized it for recreational use.

Meanwhile, some jurisdictions have switched from treating drugs as a criminal issue to treating them as a medical issue. Portugal legalized all drugs in 2001. Some police chiefs have even unilaterally changed course in how they deal with addicts, offering help rather than incarceration.

We can only hope that complete legalization is just around the corner.

Today's guest is Robert H. Frank of Cornell University. Our topic is his latest book, Under the Influence: Putting Peer Pressure to Work.

Psychologists have long understood that social environments profoundly shape our behavior, sometimes for the better, often for the worse. But social influence is a two-way street—our environments are themselves products of our behavior. Under the Influence explains how to unlock the latent power of social context. It reveals how our environments encourage smoking, bullying, tax cheating, sexual predation, problem drinking, and wasteful energy use. We are building bigger houses, driving heavier cars, and engaging in a host of other activities that threaten the planet—mainly because that’s what friends and neighbors do.

In the wake of the hottest years on record, only robust measures to curb greenhouse gases promise relief from more frequent and intense storms, droughts, flooding, wildfires, and famines. Robert Frank describes how the strongest predictor of our willingness to support climate-friendly policies, install solar panels, or buy an electric car is the number of people we know who have already done so. In the face of stakes that could not be higher, the book explains how we could redirect trillions of dollars annually in support of carbon-free energy sources, all without requiring painful sacrifices from anyone.

Most of us would agree that we need to take responsibility for our own choices, but with more supportive social environments, each of us is more likely to make choices that benefit everyone. Under the Influence shows how.

Today's guest is Jeffrey Rogers Hummel of San Jose State University. He is the author of Emancipating Slaves, Enslaving Free Men: A History of the American Civil War.

This book combines a sweeping narrative of the Civil War with a bold new look at the war’s significance for American society. Professor Hummel sees the Civil War as America’s turning point: simultaneously the culmination and repudiation of the American revolution.

Links:

The Curious Task from the Institute for Liberal Studies; mentioned in the outro.

Today's guest is Peter Boettke of George Mason University and we're discussing his recent book in the Great Thinkers in Economics series: F. A. Hayek: Economics, Political Economy and Social Philosophy.

This book explores the life and work of Austrian-British economist, political economist, and social philosopher, Friedrich Hayek. Set within a context of the recent financial crisis, alongside the renewed interest in Hayek and the Hayek-Keynes debate, the book introduces the main themes of Hayek’s thought. These include the division of knowledge, the importance of rules, the problems with planning and economic management, and the role of constitutional constraints in enabling the emergence of unplanned order in the market by limiting the perverse incentives and distortions in information often associated with political discretion. Key to understanding Hayek's development as a thinker is his emphasis on the knowledge problem that economic decision makers face and how alternative institutional arrangements either hinder or assist them in overcoming that epistemic dilemma. Hayek saw order emerging from individual action and responsibility under the appropriate institutional order that itself emerges from actors discovering new and better ways to coordinate their behavior. This book will be of interest to all those keen to gain a deeper understanding of this great 20th century thinker in economics.

Note for those interested in buying the book: IF you are at a university and your university library has the Springer subscription (which most do), you can order a print-on-demand version---MyCopy---for $25, so that makes it somewhat more reasonable than the library prices. You can also get a discount flyer here.

What follows is an edited transcript of the first part of my conversation with Gret Glyer, creator of DonorSee. For the full conversation, listen to the episode.

Petersen: My guest today is Gret Glyer, he is the creator of a new app called DonorSee. Gret, welcome to Economics Detective Radio.

Glyer: Thank you for having me, Garrett. How are you?

Petersen: I am great! So, DonorSee is a charitable giving app with a very interesting twist which---we'll get to the app itself in a little bit---but first let's start with some background. Tell us a little bit about yourself and how you got involved with the nonprofit sector.

Glyer: Sure. So, I graduated from college in 2012 and immediately started working at a rental car company and did that for about a year and did really well. And I was promoted very quickly and I was told by upper management I was going to skyrocket through the ranks and that whole idea of being very successful having six or seven figure income, getting a company car, that kind of stuff, was just a depressing thought to me because I didn't want to wake up in twenty years and be really good at renting cars to people.

So I started looking at a bunch of different ways to find something more fulfilling, more around doing work that I cared about and I decided to go overseas for a year and I found an opportunity to go to Malawi, Africa. So I went over there, I spent a year as a math teacher and I really loved being over there. Teaching math wasn't exactly my vocation in life but being in a very impoverished area and being a part of helping those people, that was something that I found a lot of fulfillment and gratification in. So I spent another two years out there and then I came and I was out there, I did a whole bunch of different crowdfunding stuff and I got involved.

I started a charity and a few other things and then when I came back---about six months ago---that's when I started this new company DonorSee. It's kind of in the nonprofit sector, but I've also been telling people it's kind of like the anti-charity. There are so many negative connotations associated with what charity is, and how people understand it, and how effective it is, and how much they waste money that I almost don't want to be associated with non-profits or with charities, I'd almost rather be considered like the opposite end of the spectrum. So, in some ways it is in the nonprofit sector in some ways it's the farthest thing from it.

Petersen: Yeah, well I'm hesitant to describe it as the Tinder of charity but it's almost like that. So, you're not a tech person, you're not a computer programmer but you come from, well not charity, but from the helping others in poor countries angle. How did you get to this point where you can start a tech startup?

Glyer: Yes. So, basically, you can do anything you want as long as you have the resources to hire people who do the stuff that you can't do.

So, I came up with the idea back a year ago, actually in January, and I spent the next two months developing it and writing out a business plan for it and getting screens made to see how it would look, and what the flow would be like, and how people might use it. And then I paid a guy online who lives somewhere in Eastern Europe and he---I think it was Ukraine---and for a relatively small amount of money he made a basic very buggy first draft, like a prototype, and I used that.

And I took it to investors to show them what the app was like. And they believed in the idea, they believed in my vision for what the app could be and how it could disrupt the charity sector and so forth. And so they saw that and they decided to provide me with investment money and I was able to use that money to hire the tech people and hire a marketing team and all that kind of stuff. So, that was how I got from having no technical background to running a tech company myself.

Petersen: Yeah that's great! So many idea people are also sort of averse to hiring others. You know a lot of people have great ideas and flounder because they try to do everything themselves. I do something similar on a smaller scale, but I outsourced a lot of the things for the podcast so I can focus on the parts of it I like, the interviews, the sort of high-level thinking side and also so I can finish my Ph.D. which I promise I will eventually. And you know it's just good to hear you taking this smart approach.

Let's get into the app itself. I actually did, I went to your website and I installed the app. So if someone listening were to install the app and booted it up, what would they see?

Glyer: The app it looks most similar to---when someone opens it, it reminds most of them of Instagram when they open it up. So they open it up and then you see you can scroll through this list of pictures and descriptions underneath. I think the one thing that might look different is that each picture has a little circle at the bottom that shows the progress of how much money has been donated.

So, each picture is actually a project and that project could be providing a wheelchair for a kid in Malawi or providing hearing aids for a little girl in India or education or any number of things. And you see the picture, you see the description underneath and then you have the opportunity to donate to any of those things and the progress bar tells you how much has been donated. So, if there's 25$ left you can be the person to donate that final 25$ and get it out to that person who is usually in a very urgent or desperate situation.

They open it up, they see this list of projects and then they can pick where in the world they want to give to, what kind of project they want to give to, in what way they want to be involved and we have all sorts of different stuff from over 30 different countries. And when people give, the thing that is very---so far there's nothing special about it, this is pretty much like every other thing that you've ever heard of except for maybe it being on an app---the thing that makes us special is that when you give to one of our projects you will get relatively quickly a visual update at some point of how your money was being spent.

So, let's say you gave to that kid who needed the wheelchair. You actually get to see a picture of that boy being fitted for the wheelchair and getting his wheelchair and going out, how his life is improved because of that. Or the girl who needed hearing aids; you'll get a video of that girl hearing for the very first time. So, we provide very strong connective visual feedback on every single donation. That's what makes this different than anyone else that's out there.

Petersen: Right, and the great thing about doing it through an app is that you can get that warm fuzzy feeling in the feedback in the knowledge that you've had an impact, which is not always clear. With a lot of charities, you give them some money and it goes into their general revenue, you don't know if you actually gave that goat to that far-off person or if it went into marketing to get more money to---I mean hopefully---to buy more goats but maybe just to market some more.

And if we want to look at the distant end of the spectrum in terms of warm fuzzy feelings per dollar actually spent helping a poor person, we might look at something like Habitat for Humanity where they fly people with no building experience from the West at great expense to a poor country to build buildings that nobody wants that have to be torn down because they're so poorly built, just in order to get---I guess they pay some kind of fee---and eventually a little bit of money goes to the people in the country.

But there's just a lot more effort put into that warm fuzzy feeling. I think we as humans are a little flawed in needing it. We need that feeling in order to do good in the world. It's not enough to just abstractly know. Could you compare your charity to some of the others?

Glyer: Yes. So, I lived in Malawi for three years. So, most people have seen what charity is kind of like from the American side of things. They give five bucks to a charity and then that charity bugs them every week for the next year, asking them for more money and they never show where their money goes. And they promise they're constantly saying "Hey, we're doing all these amazing things, we're helping 10,000 kids here and 5,000 kids here," and they throw all these confusing numbers at you but they never show you anything. And they're responsible to no one.

And you can go to Charity Navigator and you can kind of see all of these percentages going here. But ultimately, you can make up all of those numbers, numerical transparency is a complete farce. So if you've ever given money to a really big charity, I'm sorry, but there's a good chance that it's been blown. There are a few charities I would highly recommend and they are doing really good work and in general that's like one in 50.

The vast majority of charities are blowing your money. I say that as someone who lived in a third world country for three years and was on the other side of the world when that money was supposedly being spent. So, I was there when the executives of these big charities were coming and staying in nice hotels, eating really nice meals. And I was there when I saw tons of shoes---I've seen in Malawi a warehouse full of shoes in boxes that were never distributed but they were reported as distributed. There's no accountability whatsoever, there's no transparency and anyone who tells you "oh, we have unprecedented transparency." Well, prove it, show us. In general, no one's doing that.

So, I think what we do differently is we really do show you visually. If you gave money to a lady who needs a sewing machine. You will get to see her using that sewing machine and there's a good chance you'll get updates months or even years down the road of how that sewing-machine has improved her life after that one-time donation because our model is just a superior model to what most charities are using.

Listen to the episode for the full conversation!

Today's guest is David Friedman of Santa Clara University. Our discussion centers around his upcoming book, Legal Systems Very Different From Ours, which you can read in draft form at his website.

David became interested in this topic when he became interested in the decentralized legal system of saga-period Iceland. This interest has since expanded into a full book covering everything from Imperial Chinese Law to the customary legal system of Somaliland in northern Somalia. We discuss some of these chapters, with a focus on Somalian, Jewish, Icelandic, and 18th-century British law. We also discuss some of the major themes of the book, such as feud law and embedded or polylegal systems.

Related links:

I. M. Lewis' book on the modern history of Somalia

The Invisible Hook by Peter Leeson (He contributed a chapter on pirate law to Legal Systems Very Different From Ours). He was also a recent guest of this show.

My guest today is Jamie Pavlik of Texas Tech University.

Jamie has done a ton of research on corruption and development. She has examined corruption in the developing world, with multiple papers examining corruption in Brazil. She has also looked at international comparisons of corruption, and corruption in the United States specifically.

We discuss her work on corruption as well as some of the statistical issues with spatial econometrics.

Today's guest on Economics Detective Radio is Nolan Gray. Nolan is a writer for Market Urbanism and the host of the recently launched Market Urbanism Podcast.

Market urbanism is the synthesis of classical liberal economics and an appreciation for urban life. Market urbanists are interested in economic issues specific to cities, such as housing affordability and urban transportation.

Nolan wrote an article titled "Reclaiming 'Redneck' Urbanism: What Urban Planners Can Learn From Trailer Parks." As Nolan points out, trailer parks are remarkable in that they achieve very high densities with just one- and two-story construction. They do so while providing remarkably low rents of between $300 and $500, or $700 to $1,100 per month to live in brand new manufactured homes. They are also interesting in that the park managers provide a form of private governance to their tenants.

A century ago, there were many kinds of low-income housing available to people of lesser means. Low-quality apartments, denser housing, and boarding houses have largely been regulated out of existence. The remarkable thing about trailer parks is that they haven't been made illegal or untenable by regulation. The one thing trailer parks don't have is a mixture of uses, but they get around this by locating close to business areas.

Cities in Europe and Japan, which didn't adopt American-style zoning, have much higher density and more mixed-use neighbourhoods. Houston, which has taken steps to de-regulate, has seen more development of this sort recently. It seems like dense, mixed-use neighbourhoods pass the market test whenever they are allowed.

Sonia Hirt, in her book Zoned in the USA, explains why city planners became focused on separating uses. When these rules were first being adopted, industry polluted much more than it does today, so there was a health justification for separating them. But there were also superstitions, such as the idea that having children close to groceries would spread disease.

William Fischel's homevoter hypothesis states that local homeowners engage in political activism to prevent development, thus protecting their home prices. They may justify their opposition to development in terms of environmentalism or preserving local character, but homeowners stand to gain or lose a significant portion of their life savings depending on the price of their homes. This makes local politics particularly hostile to new development and denser, more affordable housing.

Meanwhile, people blame everything except land use restrictions for high housing prices. Foreign buyers have been a recent scapegoat in Vancouver, which adopted a tax on foreign buyers, thus popping its housing bubble. Airbnb is also blamed for high housing costs, though its effect is certainly negligible.

While housing is important because it is many households' largest expense, inelastic housing supplies prevent people from moving for labour opportunities. Autor, Dorn, and Hanson (2016) show how many local labour markets in America never really recovered from a trade shock with China in the early 2000's. Much of this may have been due to America's inelastic housing supply. When industries like the furniture industry were outcompeted by Chinese imports, the people who owned homes in furniture-producing towns lost both their jobs and the value of their homes. With home prices elsewhere being so high, many of these people chose to spend the rest of their lives on welfare rather than moving to find work. Ed Glaeser has written more on the costs of subsidizing home ownership.

Home ownership is a bad investment. Having a single, large asset take up a large part of one's portfolio is just bad investing, particularly when that asset's value is correlated with your labour earnings. While one can hedge one's home value against futures markets based on the Case-Shiller index, but few people do this.

Errata: I accidentally referred to The Simpsons character Frank Grimes as Rick Grimes. Rick Grimes is from The Walking Dead. Also, I wrongly said that the paper on the China shock was by Angus Deaton. Somehow I mixed him up with David Autor. Same initials, just reversed?

Other Links:

Jane Jacobs as Spontaneous Order Theorist with Pierre Desrochers

The California exodus to Texas is reflected in market-based, one-way U-Haul truck rental prices

Today's episode features my conversation with Mark Blyth, co-author (with Eric Lonergan) of Angrynomics.

Why are measures of stress and anxiety on the rise when economists and politicians tell us we have never had it so good? While statistics tell us that the vast majority of people are getting steadily richer, the world most of us experience day in and day out feels increasingly uncertain, unfair, and ever more expensive. In Angrynomics, Mark Blyth and Eric Lonergan explore the rising tide of anger, sometimes righteous and useful, sometimes destructive and ill-targeted, and propose radical new solutions for an increasingly polarized and confusing world. Angrynomics is for anyone wondering, where the hell do we go from here?

In the course of our conversation, Mark mentioned a talk he gave called The Mustang and the Volvo describing the different economies of America and Europe.

What follows is an edited transcript of my conversation with Samuel Gross.

Petersen: You're listening to Economics Detective Radio. My guest today is Samuel Gross of the University of Michigan Law School. Sam, welcome to Economics Detective Radio.

Gross: Great to be here.

Petersen: So our topic for today is criminal justice, in particular, we're going to be looking at the issue of wrongful conviction. Dr. Gross was part of the establishment of the National Registry of Exonerations which has provided valuable data in this area. So let's start by talking about the registry. What is it? How was it developed? And what was your part in it?

Gross: I'm the founder of the registry. It was created because after doing work on false convictions and exonerations for half a dozen years it became clear that the only way to get any sort of systematic information on exonerations that have occurred in the United States would be to put together the wherewithal to collect that information directly because nobody else was doing it. There's no official system for gathering information on exonerations or for that matter a single legal definition of what is an exoneration. And from there this project just took off on its own and became what's now a lasting institution that's in the process of handing over to other people to run.

Petersen: Okay, so let's talk about the how an exoneration is defined in the registry. It's a case where someone has been convicted and then later that conviction has been overturned and presumably not just on a technicality but because the person was actually innocent---somehow managed to prove their innocence. Is that correct?

Gross: Something like that. The thing that we're interested in studying is false convictions. Convictions of people who are actually innocent. The problem is there's no way to know when that's happened directly because in cases where by assumption people have made errors, the juries and prosecutors and judges who considered the cases have made errors in deciding who is guilty and who is innocent. It would be foolhardy and presumptuous and not particularly accurate for us to believe that we're going to be better at deciding after the facts which cases involve those sorts of errors and which don't.

So, what we've done instead---instead of trying to make any judgment of our own about guilt or innocence based on whatever information we can collect from second or third or fourth hand sources---what we do instead is to consider cases, to classify cases of exonerations if they meet the following criteria: First, the defendant has to have been convicted of a crime, not just charged, the conviction has to be completely removed. That is, at the end of the process the defendant has to have no legal consequences from the original conviction which means the conviction was entirely overturned by dismissal, or by a pardon, or in a small number of cases---or by the acquittal over retrial---or in a small number of cases by one of the few procedures that are available for people who are exonerated posthumously, after they're dead. And then in addition, the process that led to that result has to include substantial evidence of innocence that was not available at the time of the original conviction.

If the case meets those criteria we include, if it doesn't we don't. Our belief is---and it's a hypothesis---is that this produces a conservative classification for actual innocence, for errors in determining guilt at trial. We know of quite a few cases of people who are very likely to be innocent who are not included by these criteria in particular. Quite a few cases of people who reach that result having the conviction entirely removed from the record without the production of new evidence of innocence. For example, cases in which the conviction was reversed and then they are dismissed want to appeal because there was insufficient evidence to convict at trial unless some other evidence comes up before the conviction is reversed don't generally count.

And our hypothesis is that we include a very small number of cases of guilty people who did meet these criteria. Although there are no doubt some, it's possible, but the process that it takes to get convictions reversed and dismissed in this manner in the United States is very difficult and as a result as far as we can tell there are not very many misclassifications of people who did prison based on the underlying crimes but meet the criteria for exoneration. That is the best we can do.

Petersen: One thing I learned from your research is that the average time it takes a wrongfully convicted person to be exonerated is 10.1 years. So it seems like the system is stacked against it.

Gross: It changes depending on the mix of exonerations we have. In the moment it's probably gone down a little bit, but that's about right. Ten years is close to the average

Petersen: Looking through the registry I noticed some interesting patterns that I wonder if you'd like to comment on. So for instance, I was surprised by how few of these exonerations were about DNA evidence. It seems like it's actually more common for a witness to recant their testimony or for other non-DNA things, but I guess looking at media or just my own intuition I would have thought that DNA would be the big factor in a lot of these.

Gross: And that's a very common misconception. I think most Americans think that exoneration is the second word of a two-word phrase that begins with the letters DNA. And that's of course, as you know, not true. DNA exonerations have always been a minority and in the past 10-15 years, they are an increasingly small minority.

The number of DNA exonerations has been relatively steady over the past 10 years, about 20 a year, and the number of not DNA exonerations has been going up rapidly. The basic reason behind this is the DNA, which can be very telling and provide extraordinary strong evidence of guilt or of innocence, is only valuable in a small range of cases. It depends on having biological trace evidence that identifies a particular person as the person who committed a crime.

That's relatively straightforward in the case of sexual assaults---rapes in particular---where the trace evidence that's left is very hard to explain except as a consequence of the crime. So if you recover semen from the body of a rape victim and it's identified by DNA as coming from a particular person and that person is not a consensual sexual partner of the victim, then you have the rapist. Assuming that rape really did occur. But if it's a question of identity, which is the case in most of the rape exonerations we know about, that tells you both who the person is if you can identify the profile---and in the case of exonerations who it is not---because DNA comes asymptotically close to being a unique identifier in that type of DNA evidence.

But that's rape cases. Some other violent crimes produce DNA evidence that is as valuable or nearly as valuable. Usually murder cases in which there's blood evidence sometimes, other types of biological trace evidence, perspiration, epithelial cells from the skin and other bodily fluids and that can identify people under circumstances where you can determine from other evidence that the biological sample that was retrieved could only have come from the person who committed the crime.

But most crimes don't have that. One of the things that's clear in the registry, for example, is that there are almost certainly many many cases of false convictions in robberies that are not exonerated because they don't have the type of evidence that's available in rape cases. And in many rape cases there aren't either, but both robberies and rape cases that resolved in exonerations overwhelmingly are cases in which the suspect was misidentified by the victim or by sometimes more than one victim. There are three to five times as many robbery cases of this sort as rape cases---maybe more than that---and they are typically cases in which errors are more likely because the victims may only get a sidelong glance at the robber whereas rape cases almost by definition require much more close contact with the perpetrator.

Nonetheless, despite the fact of the numbers suggest we have many more exonerations in robbery cases. Rape exonerations outnumber robbery exonerations by about 3-5:1. And the reason of that is because the rape cases can be exonerated by DNA but the robbery cases can't because you don't have DNA for the type of conduct that's involved in robberies. You don't have DNA that you can retrieve from threats that are made or guns that are waved or even guns that are used. And as result, those cases are not exonerated at all. Now given the huge disproportion between the cases in which DNA is valuable, and cases in which DNA is never going to play any role, it's not surprising that the great majority of exonerations don't involve DNA. But the availability of DNA in the small number of cases---comparatively small number of cases---in which it is valuable does make those cases ones in which the possibility of correcting a terrible mistake is considerably harder.

Petersen: So, you mentioned the increase in recent years in non-DNA exonerations. I was looking at the data and in 2011 there were only 73 exonerations in the Registry, but in 2015 it had more than doubled to 157. So, I wonder what's changed in recent years to make that number increase so much?

Gross: It is a general change and then there are particular---couple particular strands that stand out. The general change is that the resources that are devoted to reinvestigating cases where defendants were convicted and there are now doubts about the accuracy of the convictions are increasing year by year. And the willingness of everybody involved, the criminal defense attorneys but also more importantly prosecutors, police officers, and judges to consider the possibility that someone who was convicted is innocent has grown greatly.

They have come to recognize that mistakes happen and the more exonerations occur the more people realize that this isn't just a once-in-a-lifetime event. And that's I think the force that is behind all of the specific changes that occur.

The two strands that have made the most difference in these numbers are---in the last 10 years, I think---are, in the past four or five a proliferation of Conviction Integrity Units across the country. These are specialized units within prosecutors' offices that focus on issues having to do with erroneous convictions. And for the most part, the ones that are most effective, look at cases within the jurisdiction in which there is a possibility that the wrong person is convicted and they work to re-investigate and sometimes exonerate the people involved. They have contributed an increasing proportion of the cases that we see. And to the extent of this becomes more widespread they might someday be a majority of all exonerations.

There are something like 25,000 local prosecutorial offices in the United States. I don't have the exact count now, I will in several weeks but my guess is that by now we have something like 30 Conviction Integrity Units around the country which represents a larger proportion of the population than that would suggest because those are some of the most populous counties, but it's still a minority of all cases where the local prosecutor has any organized interest in the issue. And then there is a particular pattern that came up in one county---Harris County, Texas, where Houston is located---that contributed, I think it was 40 some exonerations last year and 40 some so far this year and 30 several years before that. And that's a back-log of cases of defendants in Harris County who pled guilty to possession of drugs and then after they pled guilty the Houston police criminal lab tested the substances they received from them to determine whether they, in fact, contained drugs and found that the material that was the basis for the conviction included no controlled substances whatever.

We ran into a number of cases as that over the years but starting in 2014 the attorney who runs the Conviction Integrity Unit in the Harris County district attorney's office noticed there was a whole bunch of these cases and they were being handled very haphazardly and put together a program to identify them all, to clear the backlog and to set up procedures for getting the defendants exonerated and they're still working through that. The thing that's interesting about those cases is that, that procedure testing drugs that were seized from people, the supposed drugs that were seized from suspects after the defendants have already pled guilty to something that as far as we know doesn't happen any place else in the country or didn't---now I think a couple of other jurisdictions have begun to do it at least occasionally---but it's just that there may out there be thousands of cases a year of defendants who pled guilty to possession of drugs when in fact they were not in possession of any illegal drugs. Although they could be exonerated by quite a simple process, it doesn't take an elaborate investigation just running the drugs through the police lab, which could be done. Except in Harris County, until the last year or two nobody's ever done that.

Petersen: That's so strange. Were they caught with a little baggie of oregano or powdered sugar and just everyone assumed it was drugs?

Gross: It's a whole lot of different things but it's a good question. In some cases, they were arrested for possession of pills that were identified by the police officer as likely or actually being a controlled substance---often Xanax---and then tested by the lab and found not to be Xanax. Sometimes ibuprofen, sometimes some other over-the-counter medications.

In some cases, they had the smallest amount of white powder. One woman who ended up in the paper had white powder on her face because she had the habit of eating flour, which some people do, eating flour mixed with water and was left with some white powder around her mouth. In cases like that, where small amounts of white powder or something else were tested, they were subjected to field tests for drugs which have become notorious in the past year or two because they are so unreliable.

Field tests for drugs are not admissible evidence in court to show that the substance involved was a controlled substance but they're considered good enough to perform the arrest. Then what happens is the defendants who were arrested on these charges show up in court three days later and if they can't make bail, which seems to be true in basically all the cases that we know about---perhaps with a few exceptions---then they're given a choice that amounts to this: Plead guilty today and you'll get some perhaps suspended sentence and go home immediately, or another week and you'll be home in three days, or something like that, or a short-end by Harris County standards where drugs sentences are three weeks or two months or something like that. Or plead not guilty and then you'll be held in jail because you can't make bail for months, after which you'll go to trial and if you are convicted, and obviously you might be because some cop and some test said you were in possession of drugs, then you'll get perhaps years in state prison.

No doubt many people refuse to plead guilty in that situation because they're innocent. But some who are innocent do plead guilty and those are the ones we find out about.

Petersen: Right. So that process of being prosecuted, even when you're innocent, can sometimes be more costly than simply pleading guilty. Especially in the small cases.

Gross: If it's a low-level charge and you are held in pretrial detention, the process can be much more costly than a conviction after trial. In Harris County you could spend six months in jail or longer. So, I've heard stories of people who spend a year or more in jail waiting for trial. If you can make bail, then that's still a heavy cost. Having a trial hanging over your head and having to come back to court repeatedly is not a walk in the park. But if you're held in jail for that period it's an extraordinary cost. It obviously disrupts your life and it may tear your family apart, you would lose your job, you may not be able to get other employment, and so on.

Petersen: So one of the things we've learned in recent years is just how easy it is for police to get people to falsely confess, or to falsely accuse someone else of a crime. In fact, I think the number was 12% of the cases in the registry were false confessions and I believe it was a majority involved witness making false accusation or committing some kind of perjury. Why do people confess to things they didn't do, first?

Gross: Well, those are two different issues false confessions and perjury or other false accusations. Although there is sometimes an overlap. I don't think I agree with the statement that it's easy to get false confessions. In some cases, no doubt it is, but the false confessions that we know about are overwhelmingly in murder cases. And as far as we can know---but the information we have is not that good---they appear to be the result of long interrogations. Long would be the ones that really stand out, sometimes they take place over days, two, three days or longer with the defendant sometimes being questioned in relays by different officers.

But even interrogations of three, four hours or five hours---which is eternity if you're being questioned unrelentingly by police officers---are fairly uncommon. This costs the police quite a bit. It involves usually more than one officer over that period of time. Certainly one officer taking off that whole period of time and a fair amount of preparation. So it's not done very much, except in homicides, and it does happen in other cases but I think two-thirds or so of the false confessions that we know about are homicides cases, maybe more than that.

What's surprising to many people---and those working in the area have gotten used to it, but still somehow surprising---is not that it's easy to get people to falsely confess, but that people will falsely confess to murders that they didn't commit, that they had nothing to do with. It seems like such an unbelievably strange and self-destructive thing to do but it happens and it happens time and time again.

And what we see in these cases and what other researchers have shown, is that it's much more likely if the suspect is in one of two general very vulnerable categories: if the suspect is a teenager, or the suspect has some type of mental disability, is intellectually disabled and mentally ill. Those two groups are, as far as we can tell, much more likely to falsely confess than other people who are subject to these interrogations. They are very far less likely to be able to resist the pressures, they're more likely to respond to authorities or more likely to believe the promises and threats that are implied if not directly made in the process of interrogation. They're more likely to become hopeless, and they're more likely to---much more likely---to not grasp the seriousness of what's going on.

One of the most common things that people hear when they talk to a suspect who falsely confessed later on and ask why did you do it is "I confessed because I wanted to go home. I just told them what they wanted to hear so they'd let me go." Which of course does not happen or "I confessed because I just couldn't stand it anymore so I told them what they wanted to hear but I didn't think anybody would believe it. How can anybody take this seriously?" And they think that because they're there and they've been experiencing this onslaught going on for a while and they imagine that anybody knows what happened would say "why would anybody take seriously what somebody says after hours of being badgered and humiliated and lied to?" But of course, the jurors and the judges hear the confession at the end typically don't know what happened but they have a confession that has the defendant's name at the bottom.

Petersen: Right. So the other thing I was asking about is the false accusation. A lot of this comes in child sex abuse cases. There's a pattern in the data.

Gross: Yes, that's correct. Child sex abuse cases are overwhelmingly the cases in which there is no DNA or other physical evidence of the sex abuse. They are typically made on the accusations. The crimes are typically made anywhere from weeks to years after they occurred, way too late to have any kind of physical evidence.

And that as far as we can tell is accurate as well as inaccurate child sex abuse accusations. The children who were victimized by adults many, perhaps the majority, probably never report the abuse at all. And those who do, everybody understands, will not necessarily do it right away. Sometimes they have to be encouraged, but that means that false accusations are very hard to detect because what do you have? You have the nine-year-old girl who says that her stepfather molested her in some way, repeatedly over the period of a year. So ending a year or more before she ever tells about this. Nobody can figure out exactly what happened or what date this occurred, where people were, whether anybody else could have observed it, etc. The details of a crime that occurred in that context are essentially impossible to recover. To defend against it using evidence of timing, or the presence of other people, is generally impossible.

It becomes a contest of credibility and that means that if somebody is motivated to lie in the situation---and we see that in the cases that result in exoneration---the defendant may well be convicted and that will be the only evidence. And there are many of these cases in the registry. And they seem to often include cases which we don't find out about until years after the exoneration took place.

Often cases got little attention in the time for exoneration. I don't think we can come up with anything like an estimate of how come, but we do know that they're not rare.

Petersen: Moving to a different topic, you co-authored a paper published in 2014 on the rate of false convictions among death row inmates. I should say, I first heard of this study when someone quoted a statistic from it, the statistic that at least 4.1% of death row inmates are innocent, and my first thought when I heard that was that it couldn't possibly be right because nobody should have the tools to measure such a thing. So I read the paper and I was impressed with the method. So could you talk a little bit about the methods you used to get to that statistic?

Gross: Well, I have to agree with your initial intuition because having worked in this area for decades, 20 years ago I would have said this is not something that can be estimated. The proportion of false convictions can't be estimated because false convictions, are by their very nature, unobserved and for the most part unobservable.

You can't just have to find whether somebody is innocent or we wouldn't have false convictions. A lot of things are unobserved. We don't know the rate, the proportion of prisoners in the prison who have been exposed to tuberculosis, but we can test that if we want to. We can test a sample. But this isn't anything you can test. So the question is "Is there any way to come up with an estimate?" And in general, it's impossible because you don't have anything like the post-conviction information that will be necessary to come up with a clue as to how frequently innocent people are convicted and for what it's worth in the United States our background criminal justice statistics on convictions in general, are so bad that a comparison of people who are convicted is nearly impossible to define.

Death sentences in the United States are just different. They're different in two ways: First, we have through the Bureau of Justice Statistics a database that tracks everybody sentenced to death in the United States with reasonable precision from the time they're sentenced until the time they're removed from death-row by execution, or by death from natural causes, or by exoneration or by the most common means which is being re-sentenced to life in prison. And second we have an extraordinarily high rate of exonerations in death-sentence cases. Hundreds of times higher than for other crimes. And the reason for that is---depending on what you're comparing it to---perhaps only 10 or 20 times higher than other murders but much higher than other felonies in general and vastly higher than misdemeanors.

And the reason for that is that someone who is under sentence of death almost always will have access to resources to reconsider the possibility that he or she is innocent that are simply unavailable to almost everybody else who has been convicted of a serious crime in the United States. They're going to be represented by attorneys with few exceptions from the time they're convicted until the time they leave death-row, their cases are all subject to review in private courts which is not generally true for other people sentenced in the United States and in almost all cases there are multiple levels of review.

The resources that are available for attorneys are much greater and probably as important as any of that, the legal system itself---and judges in particular are much more interested in considering the possibility that people who might be executed could be innocent than they are in considering the innocence of anybody else including defendants who are sent to prison without the possibility of parole---and are much more open to reconsidering cases where new evidence of innocence comes up.

So the net result is a rate of exoneration that is vastly higher than any other type of case. Which means that if you just look at the rate of exoneration and compare it to the overall number of death sentences that occurred in the time period where the convictions which produces exoneration occurred you already get quite a high number, about 2.3% if you limit yourself to cases that are old enough so that by then anybody who will be exonerated probably was exonerated. That's a paper that one of my co-authors---Barbara O'Brien---and I published several years before the one you are referring to.

So that already gets you to a number that is surprisingly high but it's still going to be an underestimate. An underestimate because that also takes into account the many cases of defendants who are sentenced to death who are innocent, who have not been exonerated. The paper you mentioned tends to deal with that by focusing on one of the features of the process of exoneration and review of the cases of defendants who were sentenced to death and that is something I already mentioned.

If you're sentenced to death in the United States chances are you will never be executed. What will probably happen is that eventually, by one means or another, your sentence will be reduced from death to life in prison and you will be taken off death row and reassign to the general prison population and then you will die in prison as too many defendants who were convicted of murder and sentenced to life in prison and not sentenced to death. When that happens, the pressure to make sure that no innocent person is executed, which is the backbone motivation for the extraordinary high level of exonerations in death cases, is removed. The defendant is no longer under threat of death and the extraordinary resources and attention that that defendant gets go away. And as a result, what you see is the death penalty exonerations that occurred are overwhelmingly in cases of people who still remain under sentence of death and are on death row. And then once the threat of execution is removed, the rate of death sentencing drops back, as far as we can tell, basically to the same rate as other murder cases.

So the question for us was is there a way to estimate from the pattern of the cases that we know about---in particular, their histories as they wend their way through this process---what the rate of exoneration would be if defendants who are sentenced to death remain under threat of death indefinitely? That is, subject to the type of searching investigation and reconsideration that's available to defendants who might still be executed.

And there is a technique for doing that, which you're very likely familiar with, and that's survival analysis. Figuring out how to do it is a somewhat complicated process but we went eventually through and that produced the estimate that you see, which is 4.1%. Obviously there's a great level of uncertainty attached to that. But it is a legitimate estimate of the rate of false convictions in that context, given the assumption the underlying rate of exonerations is a decent measure of innocence. And that requires a sensitivity analysis, which we also go through in the paper.

And that leads to, I think, a solid conclusion that this is a conservative estimate of the rate of innocence among defendants who were sentenced to death. It's the lower bound of the point estimate, but it really means something between 3.2 to 5 point something percent. It's hard to know what it means, but it's somewhere in that range of 1 in 20 to 1 in 30. Which, I have to say, I was surprised how high it was.

Petersen: So where do you see this research program going in the future?

Gross: Well, unfortunately I cannot see duplicating that type of estimate for any other categories cases because we do not have that information. We don't have the background information on the cases themselves, which is necessary to do the survival analysis. You actually have to know how many cases survived, what the trajectory of each case was through the legal system and you don't have a glimmer of that except for capital cases. And second, the exoneration rate is much lower. So you can't make the leap from the exoneration rate to the false conviction rate. It would be much more tenuous.

Our estimate at the end amounts to saying that we detected something like 40% of the innocent people who were sentenced to death in this period in the United States. The rest, the great majority of them ended up in prison---under sentence of life in prison---without the possibility of parole and will probably remain in prison until they die.

Some number of them were no doubt executed. Although it follows from the same logic that leads to this estimate, that that will not be anything like 4%. That of the 12,000 of people who've been executed, if they were being executed in proportion to the number of people who were convicted who were innocent, it would be like 50 or something like that. But since so much of the process is geared to avoiding executing innocent people and that produces such a high exoneration rate, my guess would be much lower than that. It would probably translated into execution of probably 10-20-25 of innocent people over the past 30 some years. But that's it.

Again we don't know, we can't say which cases they are. But can we do the same thing for robberies, or kidnappings, or for that matters non-capital murders? I can't imagine that.

Petersen: My guest today has been Sam Gross. Sam thanks for being part of Economics Detective Radio.

Gross: My pleasure. Take care.

This episode’s guest is Vincent Geloso, here to talk about his work on Cuban healthcare statistics. He recently released a working paper with coauthor Gilbert Berdine titled "The Paradox of Good Health and Poverty: Assessing Cuban Health Outcomes under Castro." The abstract reads as follows:

In spite of being poor and lacking in economic opportunities, the population of Cuba enjoyed significant improvements in health outcomes under the Castro regime. Many have praised the ability of the regime to overcome the barriers of poverty and economic stagnation in order to improve health outcomes. Many have also argued that efficient features of Cuba’s health policy should be imported regardless of political considerations. In this paper, we argue that these improvements are probably overestimated, but that they are real nonetheless. We also argue that some of these improvements were an integral part of health policy and could only have been realized by the use of extremely coercive institutions. While efficient at fighting certain types of diseases, coercive institutions are generally unable to generate economic growth. On the other hand, the poverty such coercive institutions engender may have actually helped improve health outcomes, providing us with a false impression of the efficacy of the health care system in Cuba.

We have a wide-ranging discussion about Cuban health statistics, what they mean and don't mean, how good health could be achieved by forcing people into healthy behaviours, and how well other Latin American countries have done in comparison to communist Cuba.

Photo credit: Eric Marshall

The minimum wage is a contentious issue among economists, and yet it enjoys near-universal support among the public. In my view, public views of the minimum wage are simply the result of a lack of careful thought by most people. Daniel Kahneman’s theory that people, when faced with a difficult question, substitute a simpler question that they can easily answer, applies particularly well in this case. People answer the question of whether they would like people to earn more when the real question is whether government should mandate higher wages (I first heard this argument from Bryan Caplan on EconLog).

A purely empirical argument for or against the minimum wage is methodologically wrong-headed because empirics do not speak for themselves. Sound theory must be the economist’s first tool in understanding the effect of a policy such as the minimum wage.

Before we can understand something like the minimum wage, we must understand the role of prices in allocating factors of production to their various uses. The price of a factor signals to entrepreneurs that that factor is scarce, that it is needed elsewhere in the economy, and that the entrepreneur who can reduce his usage of relatively more scarce factors in favour of relatively less scarce ones can earn profits, while entrepreneurs who fail to do so earn losses. I give the example of a sandwich shop during an oil boom; the high price of labour caused by the oil boom leads the sandwich shop to substitute away from labour in various ways.

The oil boom in my illustration is irrelevant to the story. The sandwich shop would adapt to an increased price of labour no matter what caused it. If the cause is a minimum wage law, the people no longer employed making sandwiches are involuntarily unemployed rather than finding employment in some other industry.

Minimum wage opponents sometimes get into trouble when they draw supply and demand curves to illustrate the impact of the price floor. The problem with this is that supply and demand diagrams come with built-in assumptions that do not hold true in the case of labour markets. Low-skilled labour is not a homogeneous quantity being sold in a centralized market. The simple supply-and-demand story does not capture all the effects of the minimum wage. For instance, firms substitute between different sorts of workers affected by the minimum wage. In addition, the other terms of employment contracts can change in response to a minimum wage law, such as training and benefits.

My guest today, Mario Macis of Johns Hopkins University, has done a number of interesting studies related to blood and organ donation, particularly the compensation of blood and organ donors. For instance, Mario and his coauthor, Nicola Lacetera, observed the effect of an incentive system that offered symbolic rewards to blood donors in a particular Italian town. They found that when prizes for frequent donation were publicly announced, people donated more blood, indicating that social image concerns are a factor in blood donation.

Through a large-scale natural field experiment with the American Red Cross, Mario and his coauthors showed that offering donors economic incentives to donate blood increases donation without increasing the fraction of ineligible donors.

Mario's more recent research deals with people's attitudes towards compensated kidney donation. Using a choice experiment, Mario and his coauthors study the determinants of Americans' views on these repugnant transactions:

Regulation and public policies are often the result of competition and compromise between different views and interests. In several cases, strongly held moral beliefs voiced by societal groups lead lawmakers to prohibit certain transactions or to prevent them from occurring through markets. However, there is limited evidence about the specific nature of the general population’s opposition to using prices in such contentious transactions. We conducted a choice experiment on a representative sample of Americans to examine preferences for legalizing payments to kidney donors. We found strong polarization, with many participants in favor or against payments regardless of potential supply gains. However, about 20% of respondents would switch to supporting payments for large enough supply gains. Preferences for compensation have strong moral foundations. Respondents especially reject direct payments by patients, which they find would violate principles of fairness. We corroborate the interpretation of our findings with the analysis of a costly decision to donate money to a foundation that supports donor compensation.

Finally, we discuss some proposed legislation that would allow limited experiments in compensating kidney donors.

In this episode, Ash Navabi discusses whether the Austrian School of Economics is a cult and the value of mathematics in economic theory. Ash is an economics student at Ryerson University.

Ash wrote an article responding to recent criticisms of the Austrian school by Keynesian bloggers Noah Smith and Paul Krugman. Krugman approvingly referenced Smith's attacks on the “hermetic system that is Austrians.” Just a week later he made the following telling comment about the economics mainstream:

"And modern academic economics is very much an interlocking set of old-boy networks; to some extent this has become even more true since the decline of the journals, with most discourse taking place via working papers long before formal publication. I used to refer to the international trade circuit as the floating crap game — the same 30 or 40 people meeting in conferences all over the world, reading and citing each others’ work; it’s the same in each sub-field. And to some extent it’s inevitable: there’s so much stuff out there, and you have to filter somehow, so you mainly read stuff by people you know and people they tell you are worth reading."

Ash was quick to point out that, by the logic of the people who deride Austrian economists as "cultish" because they interact mainly with one another, each of the "old-boy networks" Paul Krugman refers to (that is, each sub-field of mainstream economics) must also be a cult.

Gary Becker, another Nobel Laureate, referred to the Austrian school as a cult in a letter to Walter Block. Becker's definition of a cult was "a small number of dedicated followers who speak mainly to each other, and interact little with let us call them mainstream economists.” This definition is problematic, to say the least. When people hear the word "cult," they don't think of Becker's dry definition but of animal sacrifice and mass suicide. The word "cult" also implies unquestioning devotion to the cult leaders, but modern Austrians frequently criticize Mises and Hayek, in highly un-cultish fashion.

Ash also wrote an article on mathematical economics versus so-called "literary" economics. John Cochrane recently referred to non-mathematical economics as "literary," a mild slur that goes back at least as far as the 1940s when Mises responded to it in Human Action. The Austrian method is not "literary" in the sense of using airy prose and fuzzy logic, rather it uses a highly rigorous form of verbal logic to derive causal chains from the basic axioms of human action.

Mathematical economics forces economists to start their analyses from unrealistic assumptions in order to put all problems in mathematically tractable terms. However rigorous the mathematics itself is, the foundation is flawed so the conclusions are flawed.

Austrians conceive of economic theory as a descriptive science rather than a predictive one. That is, pure theory cannot tell you how the future will turn out, nor is a theory tested by its empirical predictions. An entrepreneur can have a true theory of how the economy works, and yet he can still make wrong predictions if he misjudges the actual factors at play.

Ash can be found online at the Mises Canada blog page.

Two days ago, Britain voted to leave the European Union (EU). The "leave" option won with 52 percent of the vote, leaving elites and the media frustrated with voters for choosing what they perceive to be the "wrong" option.

My guest today to discuss Brexit is Sam Bowman, Executive Director of the Adam Smith Institute.

The EU can be thought of as three things: A trade union known as the European Economic Area (or EEA), a currency union (the Euro) which Britain was never a part of, and a central regulatory body.

The EU has been around in one form or another since the 1950s. Although its primary function was always to facilitate trade among European states, its ultimate goal was to prevent Europe from falling back into the brutal wars that had consumed it during the first half of the twentieth century. The Union brought freedom of movement for goods and services and for people across member states.

This freedom of migration only became controversial after the fall of the Berlin Wall. Many poorer states in Eastern Europe joined the EU in the 1990s, creating the opportunity for large numbers of economic migrants to enter the wealthier states of Western Europe (a good thing, from my perspective!). Opposition to open migration was one motivating factor for some in the Leave campaign, but it wasn't the only factor.

Many older Brits who voted to leave did so out of a desire for national sovereignty. The most important legislative body in the EU is the European Commission, the members of which are appointed by the various states. There's a democratically elected European Parliament, but it is less influential than the Commission, having only the power to approve or reject proposals by the Commission.

The members of the Commission are appointed to specific roles. So, for instance, a Slovenian is in charge of transport policy for the entire EU, a Lithuanian is in charge of health and food safety, and a Portuguese politician is in charge of research, science, and innovation. Many in the Leave camp resented having British policy set by unelected politicians from other countries.

What's next for the UK?

While the Leave campaign may have won the referendum, they don't control policy going forward. The only thing that must occur is for Britain to exit the EU. It doesn't have to adopt any other of the Leave campaign's policy goals.

Sam argues that the best option for the UK would be to stay in the European Economic Area (EEA) and the European Free Trade Association (EFTA). This EEA option would maintain the economic benefits of free trade with the EU. This would place Britain in a similar position to Norway and Iceland, which both chose not to become EU member states while participating in the EEA. Britain could also aim for a trade agreement that is tailored to its particular needs, like that of Switzerland.

Brexit puts the EU in a bit of a bind. If they work out a favourable deal with Britain, other states might try to leave once they observe how painless it is. But if the EU adopts a punitive stance towards the UK it could send a bad signal to the other states. Just how voluntary is this club if you're punished for quitting?

Additional Links:

Sam Bowman on Twitter.

More details about the institutions of the European Union.

Today's guest is Jonathan Meer of Texas A&M. We discuss his work on the minimum wage.

The voluminous literature on minimum wages offers little consensus on the extent to which a wage floor impacts employment. For both theoretical and econometric reasons, we argue that the effect of the minimum wage should be more apparent in new employment growth than in employment levels. In addition, we conduct a simulation showing that the common practice of including state-specific time trends will attenuate the measured effects of the minimum wage on employment if the true effect is in fact on the rate of job growth. Using three separate state panels of administrative employment data, we find that the minimum wage reduces net job growth, primarily through its effect on job creation by expanding establishments. These effects are most pronounced for younger workers and in industries with a higher proportion of low-wage workers.

Today's guest is Clifford Winston of the Brookings Institution. We discuss infrastructure, particularly roads and airports, and the incentives faced by their users. Bad incentives create congestion problems that can't be solved by simply throwing more money into infrastructure; you need to fix the incentives! Clifford's work on privatization shows how it could improve incentives and reduce the costs of congestion.

Clifford argues that self-driving cars will fix some of the problems created by bad policy. We also discuss the letter grades issued for infrastructure by the American Society of Civil Engineers and what they do and don't tell us about the quality of American infrastructure.

This episode of Economics Detective Radio features Zack Hess. Zack is working on a project called “TruthCoin,” a decentralized prediction market based on the technology behind bitcoin.

Prediction markets are a highly effective way to bring together dispersed information and insight into prices that reflect the likelihood of any future event. However, recent attempts to create centralized prediction markets have been thwarted by governments under antiquarian anti-gambling laws.

Enter TruthCoin. TruthCoin is a prediction market (currently in beta) that will not depend on any central server or organization. This online market will be dispersed among all the participants and thus more difficult to shut down.

Furthermore, TruthCoin will not depend on a central arbiter. The main difficulty faced by the creators of TruthCoin is in creating incentives for human arbiters to judge the outcomes of bets correctly. The solution is for judges to be set against one another, for each judge to get a higher payoff when other judges are wrong. Then any attempted collusion between arbiters falls apart.

Zack is an anarchist, and he sees a proliferation of prediction markets as a potential end run around the political class. Prediction markets where people could bet on the outcomes of given policies could force politicians to do what the prediction markets indicate is best. If, for example, a politician proposing a war claims it will have few casualties, a prediction market in “the number of casualties given that war is declared” could contradict the politician’s claim and make the war politically impossible.

You can find Zack on github, as well as the TruthCoin project itself. There is also a TruthCoin forum.

Today's guest is Alain Bertaud, author of Order Without Design: How Markets Shape Cities. Alain discusses his extensive experience in urban planning: When he was first trained as a planner, urban planning was thought of as an offshoot of architecture. In this conception, cities are just large buildings that need to be laid out and designed by a skilled architect.

Through his experience, Alain came around to thinking of cities not as large buildings to be designed, but as markets. He argues that planners are too focused on what happens on private property and not focused enough on what happens on public streets and roadways. He argues that urban economics has many useful insights for urban planners and that economists should be integrated into urban planning teams.

The publisher's description of the book follows:

Urban planning is a craft learned through practice. Planners make rapid decisions that have an immediate impact on the ground—the width of streets, the minimum size of land parcels, the heights of buildings. The language they use to describe their objectives is qualitative—“sustainable,” “livable,” “resilient”—often with no link to measurable outcomes. Urban economics, on the other hand, is a quantitative science, based on theories, models, and empirical evidence largely developed in academic settings. In this book, the eminent urban planner Alain Bertaud argues that applying the theories of urban economics to the practice of urban planning would greatly improve both the productivity of cities and the welfare of urban citizens.

Bertaud explains that markets provide the indispensable mechanism for cities' development. He cites the experience of cities without markets for land or labor in pre-reform China and Russia; this “urban planners' dream” created inefficiencies and waste. Drawing on five decades of urban planning experience in forty cities around the world, Bertaud links cities' productivity to the size of their labor markets; argues that the design of infrastructure and markets can complement each other; examines the spatial distribution of land prices and densities; stresses the importance of mobility and affordability; and critiques the land use regulations in a number of cities that aim at redesigning existing cities instead of just trying to alleviate clear negative externalities. Bertaud concludes by describing the new role that joint teams of urban planners and economists could play to improve the way cities are managed.

Today's guest is Bob Murphy of Texas Tech University. We discuss his work on climate change and the social cost of carbon.

Bob started working on issues related to climate change when he started working with the Institute for Energy Research. We discuss the implications of the Integrated Assessment Models (IAMs) used to evaluate the impact of climate change, the pivotal role played by discount rates in evaluating any kind of climate policy, the pitfalls of carbon taxation, and the opportunities presented by geo-engineering technologies.

Here are some links to articles we mentioned in the episode:

William Nordhaus versus the United Nations on Climate Change Economics

The Case Against a U.S. Carbon Tax

The Benefits of Procrastination: The Economics of Geo-engineering

Ben Powell joins the podcast today to discuss his new book, Socialism Sucks: Two Economists Drink Their Way Through the Unfree World, coauthored with Robert Lawson.

The book is a combination of economic analysis and Anthony-Bourdain-style travel diary.

Do We Have to Say It Again? Socialism Sucks!

Apparently we do. Because today millions of Americans—young and old—are flocking to the socialist banner and chanting, “What do we want? Socialism—the economic system that has impoverished people everywhere and resulted in the deaths of tens of millions! And when do we want it? Now!”

Really?

Most people seem somehow to have missed Economics 101 and don’t understand that socialism isn’t nice, cuddly government that takes care of everything for you so that you can remain an adolescent forever. No, we’ve seen it tried over and over again with catastrophic consequences.

Luckily, two semi-sober economists have toured the socialist world so you don’t have to. And they’ve come back with this stunning report: Socialism Sucks!

Today's guest is Bryan Cutsinger of George Mason University, discussing his paper, "Seigniorage in the Civil War South."

During the U.S. Civil War, the Confederate Congress adopted three currency reforms that were intended to reduce the quantity of Treasury notes in circulation by inducing the money-holding public to exchange their notes for long-term bonds. In this paper, we examine the political factors that influenced the adoption of the reforms and their effect on the flow of seigniorage - revenue that the government derived by using the newly-printed Treasury notes to purchase the goods and services it required. We argue that the bifurcation of the Confederate Congress into two groups – those legislators that represented the Confederacy's interior and those from areas no longer under Confederate control – contributed to the adoption of the reforms. Our findings indicate that representing an area outside of the rebel government's control increased the likelihood that a legislator would support efforts to reform the currency by over 90 percent. In addition, our results indicate that the rate of monetary expansion in the South was below that which would have maximized the revenue from seigniorage. We find that the reforms reduced the flow of seigniorage by approximately 57 percent, depriving the Confederate government of much-needed revenue.

My guest today is Ryan Muldoon of the University at Buffalo. He is the author of Social Contract Theory for a Diverse World: Beyond Tolerance.

We discuss the role of perspective diversity in political philosophy, with reference to both Ryan's book and his article, Diversity and Disagreement are the Solution, Not the Problem. We relate the philosophy to political divides in the real world, such as the rise of nationalist movements in Europe.

Jimmy Morrison is an independent filmmaker who is currently directing two films: The Housing Bubble and The Bigger Bubble. The Housing Bubble deals with the history of business cycles in America, spanning from the First World War to the 2008 crash. The Bigger Bubble deals with the aftermath of the 2008 crash. These films began as a single project, but Jimmy chose to split it into two films in order to tell the full story.

The films’ website provides a synopsis:

The Bubble is coming out at a crucial time in American history. Numerous films have blamed the free market for the economic woes of the country. Uniquely, Tom Woods has teamed up with experts such as Ron Paul, Peter Schiff, Jim Rogers, Marc Faber and Doug Casey to explain the economic problems America is facing and what is needed to restore prosperity.

You can’t watch the news today without hearing more calls for regulation. Deregulation is consistently the boogey man when it comes to sound bite explanations of this economic crisis. The public currently believes the government saved us during the Great Depression and that it will save us again today. America needs a simple economics lesson on this recession and Tom Woods has done just that in his book Meltdown. The Bubble successfully adapts Meltdown into a feature-length documentary.

The Bubble features interviews with numerous economists and financial analysts who actually predicted the housing crisis and recession. The people we are trusting to solve this problem claim no one saw it coming. The fact is Austrian economists predicted this recession years ago, and they are the only ones with the insight necessary to bring us out of this economic slide. This film asks them why this crisis happened, how we recover, and what America is facing.

Returning to the podcast is David Henderson of Stanford University's Hoover Institution and the Naval Postgraduate School in Monterey California.

Our topic for today is the German Economic Miracle. David wrote an article on it for the Concise Encyclopedia of Economics. The article begins as follows:

"After World War II the German economy lay in shambles. The war, along with Hitler’s scorched-earth policy, had destroyed 20 percent of all housing. Food production per capita in 1947 was only 51 percent of its level in 1938, and the official food ration set by the occupying powers varied between 1,040 and 1,550 calories per day. Industrial output in 1947 was only one-third its 1938 level. Moreover, a large percentage of Germany’s working-age men were dead. At the time, observers thought that West Germany would have to be the biggest client of the U.S. welfare state; yet, twenty years later its economy was envied by most of the world. And less than ten years after the war people already were talking about the German economic miracle.

What caused the so-called miracle? The two main factors were currency reform and the elimination of price controls, both of which happened over a period of weeks in 1948. A further factor was the reduction of marginal tax rates later in 1948 and in 1949."

We discuss the West German economy, before and after WWII, and contrast it with the East German economy. We also discuss some of the interesting figures who played roles along the way: Ludwig Erhard, Wilhelm Röpke, Konrad Adenauer, and Walter Heller.

We wrap up by discussing the Concise Encyclopedia of Economics itself, which David created and has edited since its first publication in 1993.

Today's guest on Economics Detective Radio is Anja Shortland of King's College London, discussing her new book Kidnap: Inside the Ransom Business, where she brings an economist's perspective to the shady world of the kidnapping for ransom business and to the professionals who specialize in getting hostages home safely. The book's description reads as follows:

Kidnap for ransom is a lucrative but tricky business. Millions of people live, travel, and work in areas with significant kidnap risks, yet kidnaps of foreign workers, local VIPs, and tourists are surprisingly rare and the vast majority of abductions are peacefully resolved - often for remarkably low ransoms. In fact, the market for hostages is so well ordered that the crime is insurable. This is a puzzle: ransoming a hostage is the world's most precarious trade. What would be the "right" price for your loved one - and can you avoid putting others at risk by paying it? What prevents criminals from maltreating hostages? How do you (safely) pay a ransom? And why would kidnappers release a potential future witness after receiving their money?

Kidnap: Inside the Ransom Business uncovers how a group of insurers at Lloyd's of London have solved these thorny problems for their customers. Based on interviews with industry insiders (from both sides), as well as hostage stakeholders, it uncovers an intricate and powerful private governance system ordering transactions between the legal and the criminal economies.

Today's guest is Jeremy Horpedahl of the University of Central Arkansas. Jeremy's work builds on a famous theory from Bruce Yandle's 1983 article " Bootleggers and Baptists-The Education of a Regulatory Economist." The article explored the idea that laws are often passed or defended by coalitions of economic interests (bootleggers) and moral crusaders (Baptists). Though these two groups may be quite different, as in the canonical example, policies are unlikely to succeed without support from both groups.

Jeremy's work focuses on a particular example of bootleggers and Baptists in the modern world; specifically in Arkansas. Arkansas has many dry counties, where alcohol may not be sold. Many of these dry counties are adjacent to wet counties, where liquor stores just across the county line can sell to the residents of the dry county. When there are ballot initiatives to make dry counties wet, these liquor stores have the most to lose, so they often spend hundreds of thousands of dollars to prevent the prohibition laws from going to a vote.

Historian Kyle Harper joins the show to discuss his book The Fate of Rome: Climate, Disease, and the End of an Empire. We discuss the fall of the Roman empire and the new scientific discoveries that have shed more light on its nature and causes. Kyle's work looks at the epidemics and climatic changes that hit the empire, contributing to its disintegration.

Interweaving a grand historical narrative with cutting-edge climate science and genetic discoveries, Kyle Harper traces how the fate of Rome was decided not just by emperors, soldiers, and barbarians but also by volcanic eruptions, solar cycles, climate instability, and devastating viruses and bacteria. He takes readers from Rome’s pinnacle in the second century, when the empire seemed an invincible superpower, to its unraveling by the seventh century, when Rome was politically fragmented and materially depleted. Harper describes how the Romans were resilient in the face of enormous environmental stress, until the besieged empire could no longer withstand the combined challenges of a “little ice age” and recurrent outbreaks of bubonic plague.

My guest today is Ed Conard, here to discuss his recent book, The Upside of Inequality: How Good Intentions Undermine the Middle Class. He is a visiting scholar at the American Enterprise Institute and a former managing director at Bain Capital.

His 2012 book, Unintended Consequences: Why Everything You've Been Told About the Economy Is Wrong was a New York Times bestseller. Because his business partner Mitt Romney was running for President at the time, many people expected the book to be a defense of the one percent. It wasn't, but this new book is!

We had a wide-ranging discussion that touched on inequality, immigration, entrepreneurship, finance, and housing.

What follows is an edited transcript of my interview with Alex Salter about the economics of space. The first half deals primarily with the issue of space debris, while the second half deals with the possibility of private governance in space. There's something in this episode for everyone to enjoy, so I hope you'll listen, read, and share it with your friends.

Petersen: My guest today is Alex Salter of Texas Tech University. Alex, welcome to Economics Detective Radio.

Salter: Thanks very much for having me.

Petersen: Our topic today is the economics of space. Alex has written two papers on the subject. The first is entitled, "Space Debris: A Law and Economics Analysis of the Orbital Commons." The second is, "Ordering the Cosmos: Private Law and Celestial Property Rights."

So Alex, let's start by talking about space debris. What is it and why does it matter?

Salter: So space debris is basically junk in space that no longer serves any useful purpose. So as you can imagine, since the first piece of space debris launched up in 1957---which was the rocket body from Sputnik I---a lot of orbits around the Earth, especially low Earth orbit, have become kind of cluttered with space junk. And the reason it gets cluttered is because no one has an incentive to clean it up.

It's a problem because a lot of this stuff is big enough and moving fast enough that if it strikes something like a communications satellite, it can take it out. So the probability of a collision right now that will cause serious damage is currently low, but there are a lot of worries among scientists who study the problem that as debris occasionally collides with more debris, you get a sort of snowballing effect of the clutter. So if we're going to get a handle on it, it needs to be earlier rather than later.

Petersen: I think intuitively it seems like the sky is so big and satellites are so small that we'd never have to worry about collisions. So why is that not the case?

Salter: So there's obviously quite a bit of room up there, but the problem is that some orbits are more valuable than others. In particular, geosynchronous orbit, which is I think 36 thousand kilometers above the Earth, is a really valuable place for specific satellites. And also low Earth orbit is a valuable place for specific satellites. Now, there's still a lot of room there, but it's significantly restricted. If my communications satellite is taking up a particular orbit, your satellite can't be in the same place. So there's only so much of it to go around, and again, what we're really worried about is debris colliding with something, which creates more debris, which can collide with more stuff. We're really worried that snowball effect, which is sometimes called the Kessler syndrome after the scientist who first wrote about it.

Petersen: So the odds of a single collision might be low, but given one collision, it becomes much more likely that we'll have two and three and four---a chain reaction of collisions.

Salter: Exactly. So right now the probability of collision is pretty low over the life of a satellite, for example in low Earth orbit, it's no more than one in a thousand. But conditional on getting hit, that can cause a pretty serious business disruption and economic losses, and as you said, given that one increases the likelihood of all future collisions, it's kind of like a positive feedback loop. So that can get pretty nasty pretty quick.

Petersen: Have there been any collisions in the past?

Salter: There have been many collisions in the past. I think the most notable one was actually intentional. In 2007, China performed an anti-satellite test, where it purposefully took out one of its old satellites that was no longer useful. And it created, I think, about a hundred and fifty thousand new pieces of space debris with that one anti-satellite test. So I'm not aware of any instances of grave, private sector disruptions caused by space debris collisions, but honestly unless there's some means of cleaning this stuff up or it de-orbits on its own, it really is only a matter of time.

Petersen: So, you make a distinction in the paper between access to orbit and particular orbits. Can you explain what those are?

Salter: Right. So access to orbit is basically getting your payload up into space. If you have a communications satellite, it's getting it to the orbit you want. And economically that has the characteristics of a public good. The standard definition of a public good in economics is anything that we like which is not rivalrous in consumption and non-excludable. So if I consume one more unit of it, that doesn't stop you from consuming more. And also non-excludable, the second part, means it's costly or very difficult for me to stop other people from enjoying that. So both of those characteristics fit getting a satellite into your desired orbit---going through space to get to where you want to go.

Once your satellite is in position though, a particular orbit has the properties of what we call a common-pool resource. It's rivalrous---if I have it you can't also have it---but it's also non-excludable. I can't really stop you from using it. As orthodox public finance theory will tell you, sometimes the provision of those goods, public goods and common-pool resources, are difficult because if they're non-excludable you can't stop people from enjoying the benefits and so that limits the incentive for producers to make the stuff in the first place.

Petersen: Right, so in order to prevent someone from launching a satellite into your orbit, you'd have to somehow police every potential launch site on the globe, which of course we can't do. And that's what makes it [non-excludable].

Salter: It's incredibly expensive and therefore not really feasible.

Petersen: Right, so from reading your paper I know other researchers have looked at this problem and they suggested taxing people who create space debris. So do you want to comment on that suggestion, and maybe what are the pros and cons of taking that approach?

Salter: Sure. Let me first start by saying that the case for a corrective tax here stems from the fact that we have a common-pool resources problem, or a public goods problem. Nobody owns orbit, and so nobody really has an incentive to worry about how clean it is. If I'm launching a communications satellite, I don't really worry that I'm also imposing a cost on other potential launchers with my useless rocket body. So if everyone thinks that way, then the debris problem becomes unmanageable. So there is a textbook rationale for some correction to what we call this external cost in economics. Because nobody owns orbit or access to orbit, nobody has an incentive to care for it or clean it up. At least not as much as we would like.

So the argument for a corrective tax is basically, we want to bring the private costs of polluting space more in line with the social costs of polluting space. So if you tax a polluter, someone who's contributing to space debris, you raise the expensiveness of creating debris. And as economic theory will tell you, when something gets more expensive, all else being equal, people will do less of it. That's the theoretical argument for what's called a Pigouvian or corrective tax.

The problem here---and this is not specific to space debris, this is specific to all taxes correcting external cost problems---is that you don't really know how big to make the tax in order to get to the efficient amount of pollution mitigation. And even if you did, you have to take political economy considerations into concern. Corrective taxes are not run and operated by benevolent social planners. They're typically run and operated by bureaucracies, and bureaucrats have their own incentives to which they respond. And the incentives facing politicians and bureaucrats may not be the same as incentives for contributing to social efficiency or maximal wellbeing.

Petersen: Right, so we might worry that the body that determines the tax on potentially space-junk-producing private actors might be less concerned with the externality and more concerned with their own revenue and so set the tax not at the social-welfare-maximizing point but at the revenue-maximizing point.

Salter: Right, that's one potential worry with that sort of a solution. Again I want to emphasize, though, that's in the abstract. It's still very very difficult---in fact I would even say impossible---to know what the right size of the tax should be. I think that there is an inherent knowledge problem that sometimes gets overlooked at the expense of the incentive problem that you just talked about. Both are very important, and they're related, and they complement each other in terms of the critique, but they are distinct problems. And public policy has to be able to present credible solutions to both of those problems if we're going to argue that a corrective tax would improve social welfare.

Petersen: Right, so you launch a satellite, maybe you leave a piece of large debris like a rocket body, but you also create a risk that the satellite will explode or be hit by something and create a snowball effect of more debris. It's really hard to compute the net cost because you not only need to know how likely is it to create more debris and how likely is that debris to impact something. You also need to know the value of the future satellites the debris might impact, which means forecasting the future of space and the future of the economy and all these things into the deep future. Have other researchers at least tried to tackle this problem? Are there some attempts?

Salter: There have been some attempts, and as you noted, any estimate is going to be very imprecise because there's a lot of variables moving in the background. But you could look at scientific studies that estimate the damage to useful communications satellite or other valuable space equipment from a collision can range anywhere from 20 to 200 million. That's a reasonable interval for estimating the damages if you count not just the initial collision but also the potential snowballing which can destroy other things.

And you can also look at what private companies are doing right now to get an appreciation of the magnitude of the problem. For example, if you're a communications satellite launcher you can buy insurance for your communications satellite. In 2011, market premiums for these kinds of space risks totalled about 800 million dollars. And also in 2011 there were about 600 million in claimed damages. So private actors are spending a lot to insure themselves against risks such as these and that in combination with some of the scientific studies can help build your intuition for understanding that we're talking about a lot of money here: a stream of valuable services into the future which can be risked by space debris.

Petersen: So we do have a ballpark estimate, but nothing so precise that we could set an optimal Pigouvian tax even if we had a government that was benevolent enough to try to reach that optimum. So in your paper you suggest alternatives to the Pigouvian route. In particular you suggest potential private solutions. So what private solutions are there to reduce the creation of space debris?

Salter: That's a really interesting question because the standard response that economists would give to externality problems seems impractical here. Usually when you have an externality problem, a public goods problem, the solution is to create property rights. Property rights align incentives so if we create property rights to a common pool resource, that will cause people to take better account of the effects of their behaviour on others. But how do you really create a property right to something like an orbit? Is it a specific volume of space? How big is it? Under what conditions can somebody else move through it when your satellite is not in that orbit?

I think in this case we have to take seriously the idea that creating property rights to orbit and to access to orbit is simply too costly. It's not feasible given the costs and benefits of the situation. I think the most promising way forward in this particular issue is using market mechanisms to mitigate the problem.

So in order to talk about market mechanisms I need to do a little background on international law. There's this treaty, the 1967 Outer Space Treaty, which basically says among other things that nations retain jurisdiction over the stuff they put in space. Now that's important because if debris is big enough to be tracked, we can tell more or less who made it. So if you have, for example, a piece of Chinese space debris, it's technically contrary to international law for a US organization to go up there and do anything without the Chinese' permission. So if the US wants to do something it has to take care of its own space debris. If the Chinese want to do something, they have to take care of their space debris.

Given that constraint, I think one potential is for the US government to auction off contracts to go and mitigate this stuff. Another potential is instead of auctioning off contracts to go remove it, auctioning off a contract to debris itself. One thing that's not often realized about space debris is that a lot of that stuff is valuable metal, material, that's already in orbit. The most costly part of space commerce is actually getting stuff out of Earth's gravity. So if you have debris that's currently up there that can be re-used, perhaps at a later date for in-situ manufacturing and repairs, then that's a valuable asset. Firms should be willing to pay for that. So I think we need to look at market mechanisms within particular nations to address this problem until and unless we can get a more favourable framework in international law.

Petersen: So something big like a rocket body has a lot of scrap metal that you don't have to burn fuel to get it there because it's already there. That's really interesting. So it could be a resource in itself.

But then there's the issue of much smaller debris, something that isn't a resource in itself. A paint chip or a little fragment of debris that is not useful and is more of just a pure hazard. How would you deal with that?

Salter: That's extremely difficult. I'm not sure that there is a good solution to that right now. My guess is there has to be a technological solution in the sense of just developing thicker plating for spacecraft. Because a lot of that stuff is so small that it can't be tracked, but it's still big enough that if it hits you, you're going to be in trouble. I think that the only way to really be safe against something like that is just to wait for material to get more robust. And that's obviously not going to solve the problem but it's going to mitigate it.

Petersen: It's too bad. In science fiction they would just say "raise shields" and it would be dealt with, but I guess we can't do that.

Salter: That's another imaginative technological innovation and maybe something like that will be feasible some day. There's an actual technological literature on this, of people thinking up contraptions and devices for going out and removing specifically that kind of debris, but none of them are economically feasible and I think most of them aren't even technologically feasible at this point. We just can't even make the stuff apart from economic considerations.

Petersen: So there's a future in building technology to deflect or remove tiny bits of debris from Earth orbit. I don't know if you saw the move Wall-E? It was a Pixar film.

Salter: Yeah.

Petersen: Yeah, humanity had to leave Earth because it was too full of garbage, and there's the scene where not only is Earth covered in garbage but its orbit is full of old satellites.

Salter: Right.

Petersen: The ship is just sort of pushing its way through comically. But in real life, it could really happen, but it wouldn't be so easy to just push through it. It would be flying so fast and hit you with such force that it would likely cause serious damage unless you could defend against it somehow.

Salter: Right, this stuff is moving fast. In low Earth orbit it's going about seven to eight kilometers per second. And there's about 300 thousand pieces of debris that we know about that can destroy a satellite upon impact. So obviously, even if it's small, the fact that it's moving so fast can cause you some serious problems. If we get to the point where we develop strong enough technological---not like energy shielding---but the strength of metal and the strength of materials to push through that, we're a ways off from that. I don't even think that's on the horizon.

Petersen: And of course there's the issue that if it makes the satellite heavier, then it becomes much more costly to launch it. So there's the issue of being able to make something strong enough to withstand an impact while light enough to be able to actually launch it in the first place.

Salter: Right. As always there are tradeoffs, which is precisely why economics has a valuable perspective to offer on this problem.

Petersen: So let's move on to your other paper which deals with property rights in space. It starts with a discussion of the 2015 SPACE Act, signed into law by President Obama. What can you tell me about that act?

Salter: So the SPACE Act is largely intended to guarantee that the US government will do something to protect commercial entities' property rights to celestial resources. Celestial property rights, basically. There's no specific commitment to what that protection will look like, it's more a statement of intent to encourage private sector development and exploration of space by the US government saying, "Look, we know this lack of property rights thing is a problem. We just wanted to let you know that in the event of a dispute, we are going to protect your property rights as governments are supposed to do.

The problem with that is that we get into some pretty thorny issues with international law. Again, talking about the 1967 Outer Space Treaty, which was signed by all of the current spacefaring nations, Article II of that treaty states that nation states cannot extend their territorial jurisdiction into outer space. And a lot of legal scholars think if a government is protecting private property rights, it's de facto extended its territorial jurisdiction over those rights. So if deep space industries or planetary resources, asteroid mining companies, eventually go out and claim an asteroid, and Uncle Sam says, "Yep, we'll recognize and defend your claim to that asteroid," many legal scholars say that's a de facto extension of territorial sovereignty to that asteroid, which Article II of the space treaty explicitly forbids.

So we're in a bit of a sticky situation international-law wise. At best the legal framework is unclear and at worst the 2015 SPACE Act contains provisions that are not compatible with existing international law.

Petersen: It seems like the 1967 treaty was a little bit short sighted in blocking people from owning parts of space. I guess it was during the Cold War and you can see why the Americans would not want to Soviets claiming the moon or vice versa.

So recently, Elon Musk unveiled a plan to send colonists to Mars some time during this century. And if you literally have a colony there on Mars you're going to need property rights. And to have a treaty that might be a hundred or more years old at that point blocking that, it seems like a hurdle that we'll need to clear. People could potentially just ignore the treaty once they're on Mars.

So, what kind of solutions do you see for this problem in the future?

Salter: Well I think that international law on this should be expanded and clarified on this just for clarity's sake. I don't think we need to rely on publically protected and enforced property rights to get things like space commerce or Mars colonies or all that cool science fiction stuff that actually now doesn't seem so infeasible.

If you look throughout history, there are many, many examples of legal systems that are purely private and voluntary. And they are purely voluntary because the property claims underlying that legal system are self enforcing. We don't need to rely on the state, a monopoly enforcer of social rules. We don't need to rely on the state to enforce our property rights. Given the situation we find ourselves in, I will respect your property rights because it's in my self-interest to do so and you will respect my property rights because it's in your self-interest to do so. And it seems like that's incredible. If there's no monopoly enforcer protecting things, how can we have a viable legal order? But again if we look throughout history we see lots and lots of examples of these private legal regimes.

In fact, one of them exists today. International trade law is almost entirely privately produced. International trade is almost entirely privately governed. And it's not hard to see why: there's no international super sovereign that can enforce property rights over disputes if Al is from one country and Bob is from another country. And so given that problem, traders going all the way back to the middle ages had to come up with a body of voluntary and self-enforcing law if they wanted to exchange across political boundaries. And it turns out that this law has worked out very, very well. The basics haven't changed in pretty much a thousand years and while it's being applied in newer and more interesting ways, the foundation is solid. And I think that the situation in which international traders find themselves in today---"international anarchy" because again there is no international super sovereign---closely matches the situation that commercial entities would find themselves in in doing space commerce. So I think that there's a lot of potential for existing international and commercial trade law to provide a governance framework for outer-space commerce going forward.

Petersen: Yeah, there's a quote from your paper I wanted to read, that deals with these international frameworks going back to the middle ages. It says:

Following the collapse of the Roman Empire in the West, the volume of international trade shrank considerably. The legal infrastructure provided by the Empire no longer stood, and the transition away from this order caused significant commercial disruption. By the ninth and tenth centuries, trade was recovering. Across Europe, a professional merchant class emerged and developed mechanisms to resolve disputes over property rights and contract enforcement, even when subjects were from different polities and thus no national court had jurisdiction.

So can you explain more about how that system developed, and how something that we developed here on Earth a millennium ago, how can that apply to space? They would seem to be very different settings.

Salter: So they're different settings geographically, but I think the economic and legal problem is the same: facilitating coordination and cooperation among disparate entities when there is no possibility of turning to something like a state to serve as an overarching referee and arbiter. And so the medieval law merchant, called the Lex Mercatoria, was basically a self-enforcing system of property law and the legal rules that went along with it.

And what's interesting about that is that when we think of law we normally think of a body of rules and then we talk about applying those rules in specific circumstances. This most closely works the other way. Law is created whenever international traders enter a contract. And provided that commercial instrument became widespread and actually helped traders achieve their goals---and was mutually beneficial of course---then arbitration courts overseeing merchant disputes would come to see that sort of contractual arrangement as valid. And so the arbitrator is less making law than recognizing law---a body of rules for coordinating behaviour---that actually exists.

So if I'm a trader form some country in medieval Europe and I'm trading with another guy in another country, obviously I can't turn to my king to enforce my property rights because he doesn't have jurisdiction over your country. You can't turn to your king to enforce jurisdiction. In some situations maybe Church court can act as a venue for arbitration and dispute resolution, but most of the time what they did was---if they had a dispute---they would find some neutral third-party merchant who was an expert in the area and say, "Look, we have this dispute. Here is this contract. I think I was supposed to do X, my trading partner disagrees. He thought I was supposed to do Y. Can you help us sort this out?" The arbitrator, using his expertise, would look at it and come to a decision, and for the most part they were complied with voluntarily. Because if you went to commercial arbitration in the Lex Mercatoria system and then you ignored a ruling, you would become known as a defector, as a cheater, as someone who didn't act or uphold his or her word. And international trade was a relatively small and close-knit community and so that information would get around. You'd be branded as someone as not worthy of doing business with.

And so you could cheat and get a payoff now, but you would risk that no one would trade with you in the future. So you'd be losing all future business, which is why most agreements, both for the medieval law merchant and the current law merchant---the current system of international commercial law---are actually complied with and adhered to voluntarily.

Petersen: OK, so what kind of legal disputes do you see potentially arising in space? What sort of resources might people come to have conflicts over?

Salter: Good question. I think the most obvious one, at least to me, is probably with asteroid mining companies. So if I go land on an asteroid and I want to mine it for valuable minerals, do I own the entire asteroid? Do I own just a portion of its surface? What happens if there's water underneath the asteroid and someone wants to go in and get the water while you're getting the minerals? How deep, literally geographically, down into the center of the asteroid do my property claims go? And water, once you're actually in space, is pretty valuable because it's used for making rocket fuel, essentially. And also, water is very heavy. As we discussed earlier, it's really expensive to get water into orbit. So if there's water already in space, in an asteroid, that's a valuable resource. People are going to want that. What happens if you want the minerals and I want the water? But me going to get the water creates a situation where you can't go and get the minerals. Maybe my mining operation is in the way of yours. Those are very real disputes that there are actually very real analogues of here on Earth that we're going to have to go and settle in space.

Petersen: I'm reminded of, during the California gold rush they developed an elaborate set of rules for how large a claim an individual gold miner could mine. And how you would draw the lines between different people's claims, and they established de facto courts to deal with claim jumpers. So we're thinking that California during the gold rush might as well have been outer space, it was so far from the rest of civilization. And so we're more or less thinking that something like that would occur.

Salter: Exactly. Economically, I think this situation is very closely analogous. Gold miners in California are outside of the reach of the formal US Government. They're in the metaphorical Hobbesian jungle, a state of nature with respect to each other. Orthodox theories of social cooperation says they shouldn't be able to cooperate and yet they clearly did, historically. The gold rush is a really interesting period of American history to study for that.

There's also a book by scholars Anderson and Hill called The Not So Wild, Wild West. We have this impression from Hollywood that the American frontier was a violent and lawless place, when in fact most likely the opposite was true, because people knew that they didn't have access to formal dispute resolution mechanisms offered by the US Government they had to come up with their own. And they worked relatively well.

And I think that's the situation we find ourselves in in space. There are governments "nearby" but given current international law they can't actually extend their jurisdiction into space and therefore mediate space-related disputes. Or at lease some disputes. And so we have to have space tourism companies coming to agreements with asteroid mining companies coming into agreements with communication satellite providers. There needs to be a body of voluntary and self-enforcing rules, and again I think that there are numerous historical examples you can point to that should lead us to be actually pretty optimistic about this. Private law is not just feasible but it is also desirable because it has some pretty nice consequences in terms of creating incentives for making and stewarding wealth.

Petersen: So, the nice thing about private law, you sort of alluded to it earlier but Hayek makes this distinction between law and legislation, and the nice thing is it's adaptive. When you encounter new issues and new problems you set new precedents that can change and adapt with the circumstances. That's one major advantage of private law, right?

Salter: It's important to recognize that that's not unique to private law. That also exists in the common law legal system that exists in the Anglo-American tradition. So the benefits of specifically private law---I think we're talking about private law here as opposed to some sort of common-law extension into space which again, Article II of the space treaty seems to say that's not OK. So given that, are these adaptive features of a purely private legal system good enough to facilitate social cooperation and basically get people to not fight with each other? And I think they are. It's sort of a bottom-up process for discovering rather than creating law.

There are many rules that are probably equally feasible. It's a question of finding the rules that best give individuals incentives to act in a socially responsible way. And we also want those rules to provide for orderly, quick, and low-cost dispute resolution. People are going to disagree; it's inevitable. What we want is for a legal system that is sufficiently adaptable so it can tend to specific circumstances, but also sufficiently general that individuals can form reliable expectations of their trading partners' behaviour. And as Hayek pointed out, private law is one kind of law that has that dual feature that we like so much: adaptability yet at the same time predictability.

So it's not the case that only private law can have that. That's not what I'm saying. I'm saying that private law can have that, and given current international law, that's the only ball game in town.

Petersen: So, when you said about clarifying the rules, do you feel that if the governments of the world were to say right now that, "disputes in outer space are not our jurisdiction, you're on your own," and codify that and maybe have another treaty, do you think that would hasten the development of these private mechanisms?

strong>Salter: I think it would. The private mechanisms are only going to arise as needed in a private law system. When there's no actual dispute and no actual thing being tested, there doesn't need to be a rule for overcoming one party's disputes or claims against the other.

So I personally actually not only think that private law is desirable in space just because of current international law. I would actually like to see space kept "safe" for private law. Because it has all these nice, socially beneficial properties in terms of aligning people's incentives and giving them the information they need to do good things.

And if you look at the most likely counterpart---imagine international law were amended---what's likely to happen is there would be some international governance body, a regulatory body that's given authority over space activities. And once we embrace that sort of bureaucratic regulatory solution, that comes with all sorts of political economy and public choice problems. How do the regulators get the information necessary to make good rules? What are the incentives to make good rules?

I think that several schools of economics and legal thought have shown that in this case embracing a top-down regulatory solution would actually be pretty dangerous. So I would like to see international law clarified, but I would also like to see private law prevail in space.

Petersen: Right, and if we're talking about particularly humans in space, as in the case of a Mars colony, it would seem to be undesirable to bring our baggage and our governance here to a place as distant as Mars. The people there are likely to face all sorts of their own problems. And if there was part of Mars that was governed by, say, the US Government you would almost face the same problems the Thirteen Colonies had being governed by the British. You have this vast gulf between the people who are doing the governing and the people who are being governed. So could a Mars colony function on private law?

Salter: Wow, that's a fascinating question and one that I didn't tackle in the paper. That's actually a little beyond my expertise in this area. I don't see any reason why it couldn't, simply because I don't see the economic and legal problems that potential Martian colonists would face are any different than people on the international law merchant scenario would face. Or individuals in medieval Iceland---who had their own body of voluntary and private law---face.

I think the best analogy for these sorts of situations is the economic literature for what is sometimes called "analytic anarchy." And people are sometimes scared of it because the word "anarchy" is in there. But all anarchy means in this context is we don't have recourse to a nation state to solve our disputes for us. So if we're going to get governance, we're going to have to find a way to do it ourselves. It has to be voluntary, it has to be agreeable to all parties, and it has to do a good job at facilitating social cooperation.

So how do people actually do that when they don't have access to the nation state? Which is again pretty new in human history. So if you're looking at any time prior to 1648, there's got to be some way of generating order. And if you look at history I think you have a lot of examples of proprietary communities and voluntary communities which can be models for a Martian colony. So to make a long point short, I don't see any evidence that a Martian colony cannot be purely privately governed. And I don't think we have any reasons to think so because the problems they're going to face have been faced historically and overcome by people in various times and places.

Petersen: Do you have any closing thoughts about the future of space and the role of economics in helping us achieve our goals there?

Salter: I think that economics is going to be particularly useful in helping us highlight exactly which potential problems are worth caring about and, of those problems, which ones deserve or merit public policy responses. So, for example, I don't think there's any reason to be afraid of creating a private law governing space. I'm actually encouraged by that prospect.

But that doesn't mean that domestic agencies, especially national agencies, don't have a role in making space a formidable and habitable environment. We just spent the first half an hour talking about space debris, right? And there's lots of things that US agencies can do to mitigate space debris for example. Various agencies can have a rule, and there are such rules in place now, saying if you're going to orbit a space craft you’ve got to provide for de-orbiting the debris and also de-orbiting the space craft when it's no longer useful.

So economics, and particularly the economic way of thinking, can help us identify, OK this anarchy in space problem is not actually a problem. Private law is viable, so we don't have to worry about that. Oh, space debris is a problem because we have this common pool resources problem, externality problems, and the usual solutions---taxes and or property rights---aren't feasible. So we need to find some other way, maybe harnessing market mechanisms at the margin to address these. And I think the economic perspective is going to do a good job at cautioning us at taking a top-down approach at space governance.

The temptation is huge to say, "OK, we're on the verge of major space breakthroughs. Let's sit down and write down a body of rules that's going to govern space." That's really dangerous because there's no way that you and I sitting in our armchairs can see all the eventualities or problems that people will confront in space. And so the rules that we write are almost certainly going to have little to no relationship to those problems, and therefore won't help commercial and or government actors solve those problems. So figuring out what's important and avoiding the temptation to engage in what Hayek called "The Pretense of Knowledge." Thinking that we can learn and know and plan more than we can actually do.

Petersen: My guest today has been Alex Salter. Alex, thanks for being part of Economics Detective Radio.

Salter: It's been a pleasure. Thanks again for having me.

What follows is an edited transcript of my conversation with Emily Hamilton about land use regulations' effects on affordable housing.

Petersen: My guest today is Emily Hamilton. She is a researcher at the Mercatus Center at George Mason University. Emily, thanks for being on Economics Detective Radio.

Hamilton: Thanks a lot for having me.

Petersen: So, Emily recently wrote a paper titled "How Land Use Regulation Undermines Affordable Housing" along with her co-author Sanford Ikeda. The paper is a review of many studies looking at land use restrictions and it identifies four of the most common types of land use restrictions. Those are: minimum lots sizes, minimum parking requirements, inclusionary zoning, and urban growth boundaries. So Emily, could you tell us what each of those restrictions entail?

Hamilton: Sure. So, starting off with the first, minimum lots sizes. This is probably what people most commonly associate with zoning. It's the type of Euclidian zoning that separates residential areas from businesses and then within residential areas limits the number of units that can be on any certain size of land. And this is the most common tool that makes up what is sometimes referred to as Snob Zoning, where residents lobby for larger minimum lots sizes and larger house sizes to ensure that their neighbors are people who can afford only that minimum size of housing.

Petersen: So it keeps the poor away, effectively.

Hamilton: Exactly. And then parking requirements are often used as a tool to ensure that street parking doesn't get too congested. So when cars first became common, parking was really crazy where people would just leave their car on the street, maybe double parked, or in an inconvenient situation near their destination. And obviously as driving became more and more common and that was just an untenable situation and there had to be some sort of order to where people were allowed to park. But street parking remained typically free or underpriced relative to demand. So, people began lobbying for a parking requirement that would require business owners and residential developers to provide parking that was off streets so that this underpriced street parking remained available. But that brought us to today where we often have just mass seas of parking in retail areas and residential areas, which are paper focuses on. Parking substantially contributes to the cost of housing, making it inaccessible in some neighborhoods for low income people and driving up the cost of housing for everyone who has been using the amount of parking that their developer was required to provide.

Petersen: So that's one where you can really see the original justification. And it makes sense, if you have a business and a lot of people are parking and it spills over onto the street then maybe that's an externality. And it seems reasonable for you to have to provide parking for the people who come to your business, especially if a lot of them are driving there. But we push that too far, is what I'm hearing.

Hamilton: Exactly. Yeah, it does seem reasonable but the argument in favor of parking requirements tends to ignore that business owners have every incentive to make it easy to get to their business. So, in many cases there's not necessarily an externality because the business owner providing the parking has the right incentive to provide enough to make it easy for their customers to get there. The externality really comes up when we think about street parking and Donald Shoup---probably the world's foremost expert on parking---has made the argument that pricing street parking according to demand is a real key in getting parking rules right.

Petersen: So, on to the next one. What is inclusionary zoning?

Hamilton: Inclusionary zoning is a rule that requires developers to make a certain number of units in a new development accessible to people at various income levels. Often inclusionary zoning is tied with density bonuses. So, a developer will have the choice to make a non-inclusionary project that is only allowed to have the regular amount of density that that lot is zoned for. Or, he can choose to take the inclusionary zoning density bonus which will allow him to build more units overall including the inclusionary unit and additional market-rate units. Typically, units are affordable to people who are making a certain percentage of the area median income, so people who might not have low income but who are making not enough to afford a market rate unit in their current neighborhood.

Petersen: Okay, so that's sort of forcing developers to build affordable units that they then will probably lose money on, so that they can build the market rate units that they can make money on.

Hamilton: Exactly. That's how cities make inclusionary zoning attractive to developers is by giving them that bonus that can allow them to build more market rate housing. In other cities, however, inclusionary zoning is required for all new developments so it really varies from jurisdiction to jurisdiction how it's implemented.

Petersen: So the fourth land use restriction you mention is urban growth boundaries. What are those?

Hamilton: So Oregon is the most famous example in the US of implementing an urban growth boundary. And what it is, is basically a state law that requires each city to set up a boundary around its edges, where for a certain amount of time no housing can be built outside of that boundary. And the idea is to gradually expand the city's footprint over time to allow the suburbs to expand a little further, but to restrict that suburban development using the boundary for some time period. Other examples like London's urban growth boundary I believe are permanent, so there are certain areas that can never be developed.

Petersen: So I believe we have something like this in Vancouver. We have farmland in the metro Vancouver area which---for context this area is one of the most overheated high-priced housing markets in the world---and we have this land that's just zoned for farms. And a lot of the time people don't even bother to plant crops, they're just holding the land for the day when eventually it can be rezoned into housing. So I looked it up before we went on and some of these plots are $350,000 an acre, which of course is not reflective of just how productive they are as farmland but of how productive they would be when they are eventually rezoned.

Hamilton: Exactly. Yes, very similar to Oregon's program. And a lot of empirical studies have been done on Portland's growth boundary because researchers can easily look at the block that are selling on either side of the boundary to see whether or not it's affecting land prices and several studies have found a very clear effect of the boundary in driving up the price of the land.

Petersen: And in Vancouver, the city is very reluctant to rezone. So, people are constantly applying and being denied but you know it's like winning the lottery having your bit of useless farmland rezoned to super high value housing. And people are just holding on to those dead lands in the hopes of winning that lottery which is kind of---it's a bizarre outcome.

Hamilton: It is. And urban growth boundary supporters often frame it as environmental regulation that's going to protect this open space. While encouraging people to live in more dense and transit and walkable friendly neighborhoods, but it's not as if Portland is free of other types of zoning rules. So at the same time it has this urban growth boundary it also has a lot of traditional zoning rules that limit the potential to build up while the growth boundary is limiting the potential to grow out. So it's coming from both directions.

Petersen: So, just how costly do economists think these regulations are? What kind of estimates do they have?

Hamilton: So, I think some of the most compelling estimates look at the macroeconomic effect of these rules. Because typically the most binding zoning rules are also in the most productive cities, where there's the highest level of demand for people to live. Because these are where the best jobs are as well as the best urban amenities, a lot of people want to live here. One study looking at this macroeconomic effect found that the three most productive cities which are New York, San Francisco, and San Jose---I should clarify; this is just looking at the effective growth within US---if those three cities lowered the burden of their land use regulation to that of the median American city it could result in a 9% increase in the level of US GDP. So, these rules are having just an enormous effect on economic growth. Not to mention the very substantial effect they have for individuals and making it difficult or impossible for people to afford to live in their desired location.

Petersen: So, you know, San Francisco that's where Silicon Valley is. And so we think of it as a place with super high productivity---tech workers working at Google---and yet with their housing market being one of the most restricted. So not only is there the loss from the housing market itself, that you could sell a lot of housing there and that would increase GDP by itself, but also there are people living in less productive areas doing less productive jobs, who could come and work for Google. But they can't because they've been priced out of the market. Is that where most of the effect comes from?

Hamilton: That's right. Yeah, I think the effect is also certainly at that top-end of the market where we're seeing all kinds of blog posts and articles about a person making six figures at Facebook who can't afford the Bay area. So those people might choose to go live in say Denver, or Austin, or a city that still has plenty of great jobs but isn't as productive as San Francisco or San Jose. But then we also see this down the income spectrum, where people who are in the service industry, say waiting tables, could make much more in San Francisco then they can in Houston, or wherever they happen to live. But their quality of life is much better in some of less productive cities because of the cost of housing and other areas of consumption that higher real estate costs drive up.

Petersen: One thing I've heard about a lot of these Californian coastal cities---I think it was Palo Alto---where not a single member of the Palo Alto Police Department lives in Palo Alto because you just can't live there on a policeman's salary, so they all have to commute in every day and then commute out every night.

Hamilton: Yeah, and for some of these hugely important needed services it just makes the quality of life of the people in those industries so much worse than it would be if they could afford to live closer to their job.

Petersen: Right. So, to summarize the labor market mobility of the United States in general has been greatly restricted by these land use restrictions. Even though the land use restrictions are local, this has an effect on the national economy.

Hamilton: Exactly right. And we can see this in the data where income convergence across areas of the country has greatly slowed down since the 1970's when these rules really started taking off.

Petersen: You argue that the costs of these restrictions fall primarily on low-income households so can you talk through how that happens?

Hamilton: Sure. It happens in two ways. First off, you have the low income people who are living in very expensive cities and these people might have to endure very long commutes---you talked about the police officer in Palo Alto who can't live anywhere near his job. Not that police officers are low income, but just as an example that illustrates the point. Or they have to live in very substandard housing, perhaps a group house that's just crammed with people maybe even illegally, in order to afford to live anywhere near where they're working.

Petersen: Yeah, I was going to say I thought those group houses were illegal from these very same land use regulations, but I guess people get around it.

Hamilton: Yeah, a lot of US cities have rules about the number of unrelated people who can live in a house. And certainly those rules are sometimes broken. That, I think, is clear to anyone who's spent time in an expensive city. You know, people have to live in these less than ideal conditions and waste too much of their time commuting in order to make that work. But the unseen version of it is the person who lives in a low-income part of the country and would like to improve their job opportunity and quality of life by moving to somewhere more productive, but they simply can't make it work so they stay in that low-income area without meeting their working potential.

Petersen: There was a study by David Autor---I think I cited it in a previous episode and got the author name wrong but it's definitely David Autor---and it was looking at the shock, the trade shock that hit United States when it opened up trade with China in the early 2000's. And it basically showed that a lot of parts of the country just never recovered. So, if you worked in particular industries---I think the furniture industry was one that was basically wiped out---and if you worked in a town next to a furniture factory and that was your job, not only did you lose your job, you lost all the value in your home because the one industry in the town is gone. And you can't afford to move to one of the booming industries like Silicon Valley or in another part of the country because they've so greatly restricted the elasticity of their housing supply. And that's not all, Autor's paper basically just shows that it took a very long time to recover from the shock and a lot of places didn't recover at all. But I really think that housing is part of that picture if you're trying to figure out why the US economy can't respond to shocks like it used to in the 20th century. That has to be a big part of the picture.

Hamilton: Definitely. And that trend, as far as people being able to leave these depressed or economically stagnant areas, this also comes out in the income's convergence as we talked about earlier.

Petersen: So, the other part of that, I saw in your paper, was not only are poor people hurt but rich people who already own homes have seen those home prices rise. So it's affecting inequality at both ends of the spectrum, correct?

Hamilton: Right, Bill Fischel at Dartmouth has done a lot of work on why it is that people lobby so hard in favor of rules that restrict development. And he terms it as the Homevoter Hypothesis, where people who own homes have a huge amount of their wealth tied up in their home and so they are in favor of rules that protect that asset and prevent any shocks such as a huge amount of new development that could result in a decline in their homes value. I think you talked about that in your episode with Nolan Gray on trailer parks.

Petersen: Yeah, we talked about William Fischel's Homevoter Hypothesis. So the essence of that is that people vote in local elections, and they lobby to restrict the supply of housing in their neighborhood, and that increases their wealth by, you know, increasing the land values in that area. How do you deal with that when there's such an entrenched special interest everywhere to push up land prices?

Hamilton: I think that's the hugely difficult problem. And at the same time as we have the challenges with the Homevoter system that Fischel plays out, we have a lot of federal policies that encourage homeownership as not just a good community-building tool but also as an investment. So people are programmed by the federal government to see their house as an investment in spite of economic challenges that it presents. David [Schleicher]---a law professor at Yale---has done some really interesting work on ways that institutional changes could limit the activity of homeowners and lobbying against new development. One of his proposals is called a Zoning Budget. And under a zoning budget, municipalities would have to allow a certain amount of population growth each year. So, they could designate areas of a city that are going to only be home to single family homes, but within some parts of the city, they would have to allow building growth to accommodate a growing population.

Petersen: How would that be enforced, though?

Hamilton: It would have to be a state law, or perhaps a federal law, but I think much more likely a state law that would mandate that localities do that. Massachusetts recently passed a law that requires all jurisdictions within the state to allow at least some multifamily housing. So it's kind of a similar idea. The state government can set a floor on how much local government can restrict development.

Petersen: So, what I'm hearing is that different levels of government have different incentives with respect to restrictions. So, at the lowest level if I'm just in a small district or municipal area and I can restrict what my neighbors build on their property, that really affects my home price and that's the main thing that I'm going to lobby for at that level of government. But if I had to go all the way to the state government to try to push up house prices in my neighborhood, it wouldn't go so well. The state government has incentives to allow more people to live within their boundaries. Is that the gist of it?

Hamilton: Yeah, that's right. It's easy to imagine a mayor of a fancy suburban community who simply represents his constituents' views that the community already has enough people, you know, life there is good and so nothing needs to change. But, I don't think that you'd find a Governor that would say "Our state doesn't need any more people or economic growth." So the incentives are less in favor of homeowners, local homeowners, the further up you go from the local to state jurisdiction.

Petersen: Right. I guess a big issue is that the people who would like to move somewhere but live somewhere else don't get to vote in that place's elections or in their ballot measures. And so there's this group that has an interest in lower housing costs because they might move to your city or your town, if they could afford it, but they're not represented politically in that city or town and so they can't vote for more housing and lower prices. But then when you go to the whole state level and people are mobile within a state, those people do have a say or they are represented and pricing them out of the places they'd like to live really is bad for politics, bad for getting their votes.

Hamilton: Right. So the Palo Alto police officer can't vote to change Palo Alto's policies but he can vote to change California policy.

Petersen: Right, because he still lives within California. So one of the other policy recommendations I saw in your paper is tax increment local transfers or TILTs. What are they and how can they impact land use restrictions?

Hamilton: That's another idea that comes from David Schleicher and I think it's another really interesting concept. The idea behind TILT is that a new development increases the property tax base within a jurisdiction. So, if you have a neighborhood, say a block full of single family homes that is allowed to be sold to a developer in order to build a couple of large apartment buildings, each apartment is going to be less expensive than the previous single family homes, but overall the apartment buildings will contribute more to property tax. And the idea behind a TILT is that part of this tax increment---which is the difference between the new tax base and the previous smaller tax base---could be shared with neighbors to the new development to kind of buy off their support for the development. So, those people who are in some sense harmed by the new buildings, whether in terms of more traffic or a change in their neighborhood's character, also benefit from the new building financially. So they're more likely to support it.

Petersen: So economists talk about Potential Pareto Improvements, where you have a situation where some people are made better off while other people are worse off, but you could have a transfer to make everyone better off. And what I'm hearing with TILTs is you actually do that transfer, you actually pay off the losers with some of the surplus you get from the winners. So everyone can be better off when you make this overall beneficial change.

Hamilton: Exactly. And sometimes communities do use community benefit as a tool to try to get developers to share their windfall and build a new project with the neighborhood. So they might say, "you can build an apartment building here, but you also have to build a swimming pool that the whole neighborhood can use at this other location," and in a way that achieves the end goal of buying off community support for new development. But it also drives up the cost of the new housing that the developer can provide. So TILTs have the advantage of keeping the cost of building the same for the developer, but still sharing that financial windfall of the new development with a broader group of people.

Petersen: Yeah, I really like these policy recommendations. It would be so easy to just say "land use restrictions are bad, let's not have those anymore." But these really have an eye to the political structures that we currently have and towards making progress within the structure we have. So I like that approach to policy or to policy recommendations. I think economists should maybe do that more often.

Hamilton: Yeah, looking for a win-win outcome.

Petersen: The one other one that I don't think we've talked about is home equity insurance, which sounds like a business plan more than a policy proposal. But how can home equity insurance help to reduce the costs of land use restrictions?

Hamilton: That proposal also came from Bill Fischel a couple of decades ago following on his work of the Homevoters theory. He proposed the idea that the reason home owners are so opposed to new development is often because they have so much of their financial wealth tied up in this house that they're not just opposed to a loss in their investment, but even more so, opposed to risk. So they want the policies that they see will limit the variance in their home equity and he proposed home equity insurance as a financial goal that could lower this threat and provide homeowners with a minimum amount of equity that they would have regardless to the new development. I think it's a really interesting concept but it's unclear, would this be a private financial product? Obviously the market isn't currently providing it, or would it be some kind of government policy? And while I do think it's very interesting, I think that we should be somewhat leery of new government policies that promote homeownership as a financial wealth building tool.

Petersen: Well, the funny thing is that usually with insurance, if you have fire insurance you want to minimize the moral hazard of that, you don't want people to say: "Well I've got fire insurance so I don't have to worry about fires anymore." But with this, you sort of want that, you have insurance on the value of your home and then actually your goal is to make people less worried about the value of their home so that they will be okay with policies that reduce it. It's almost the opposite of what you want with insurance most of the time. In this case you want to maximize moral hazard.

Hamilton: Yeah that's a great point and I think that's why it could only be a government product.

Petersen: Right. Because if the private sector was providing home price insurance to homeowners then the company that provided the insurance would now have an incentive to lobby against upzoning the neighborhood.

Hamilton: Exactly. Yeah it would create a new a new group of NIMBYs.

Petersen: Yeah, at first I thought 'Oh great!', well this is something that we can just do, without the government. You can just get a bunch of people together, who have an interest in making cities more livable and they can provide this financial asset. But that seems like there are problems with it that are hard to overcome within the private sector. So overall do you think the tide might be turning on the NIMBYs? Are people becoming more aware of this issue and of land use restrictions and their effects on housing prices?

Hamilton: I do think awareness is growing. There's a group popping up called YIMBY which stands for "Yes In My Backyard" as opposed to the suburban NIMBY to say "Not In My Backyard" to any sort of new development. And these YIMBY groups are gaining some traction in cities like San Francisco and lobbying in favor of new development to counter the voices that oppose new development. I am somewhat pessimistic, I have to say, just because from a public choice standpoint the forces in favor of land use regulations that limit housing are so powerful. But in spite of my pessimism, I'm seeing since the time that I started working on this issue several years ago, much more coverage of the issue from all kinds of media outlets, as well as much more interest in on-the-ground politics from people who aren't in the typical homeowner category.

Petersen: Yeah, and I am hopeful too. But I often see people blame other factors for high home prices. They blame the speculators. The speculators are always the ones that are pushing up home prices. And rarely, I think, do people blame restrictions, although the YIMBY movement is a happy exception to that.

Hamilton: Yeah, I think way too often real estate developers are framed as the enemy in these debates because they're the ones who make money off building new housing. But it's really the regulations that are to blame both for the inordinate profits that developers can make in expensive cities, and for the high costs of housing.

Petersen: Do you have any closing thoughts about land use restrictions?

Hamilton: I think that it's just really important to try to spread the message about the costs that these regulations have. Not just for low-income people but for the whole country and world economic growth. That's obviously a cause that I would think everyone would be behind: creating opportunity for people to live in the most productive cities where they can contribute the most to society and to the economy.

Petersen: My guest today has been Emily Hamilton. Emily, thanks for being part of Economics Detective Radio.

Hamilton: Thanks a lot for having me.

Robin Hanson returns to the podcast to discuss his new book, The Elephant in the Brain: Hidden Motives in Everyday Life, co-authored with Kevin Simler. As the subtitle suggests, the book looks at humans' hidden motives. Robin argues that these hidden motives are much more prevalent than our conscious minds assume.

We are not conscious of the vast majority of the functions of our brains. This extends beyond the most basic things our brains do (such as commanding our hearts to beat every second or so) to many things we think of as higher-level cognitive tasks. Hanson and Simler argue that, if the brain were a corporation, the conscious mind wouldn't be the CEO but the press secretary. Most of the reasons our conscious brains give for our actions are actually ex-post rationalizations for decisions that have been made unconsciously and for reasons that aren't immediately obvious to us. As a press secretary, the conscious mind is better off not knowing if we are doing things for selfish reasons since that would make it more difficult to justify our actions to others.

Some very compelling evidence for this thesis comes from studies of people with split brains. People with severe epilepsy have sometimes been treated by severing the connections between the two halves of their brains. Researchers noticed that when one side of the brain was fed information that led to a particular action (e.g. an instruction from the researcher to "stand up") the other side would construct a reason for the action (e.g. "I was thirsty and I got up to get a drink"). If the brain were truthfully answering these questions, it would say "I don't know." However, the split-brain patients confidently gave false answers apparently without realizing they were false. Hanson argues that neurotypical minds are doing the same thing: constructing justifications for our actions even if we aren't really aware of our true underlying motives.

From the book's online description,

"The aim of this book is to confront our hidden motives directly---to track down the darker, unexamined corners of our psyches and blast them with floodlights. Then, once our minds are more clearly visible, we can work to better understand human nature: Why do people laugh? Why are artists sexy? Why do we brag about travel? Why do we prefer to speak rather than listen?"

We discuss this theory of the brain and how it applies to many areas of everyday life from medicine to body language.

The Amazon links on this page are affiliate links. If this podcast convinced you to buy a copy of The Elephant in the Brain, doing so through one of these links will provide revenue to the podcast at no additional cost to yourself.

Today's guest is Robert Krol of California State University. Our topic is a recent policy paper he wrote for The Center for Growth and Opportunity at Utah State University entitled Can we Build our way out of Urban Traffic Congestion?

This paper examines the impact of highway expansion on congestion. Because highway expansion lowers travel times, expanded highways attract additional vehicle traffic—so-called induced travel. The empirical evidence indicates that the magnitude of induced travel is economically significant. Some researchers find cases where, despite highway expansion, congestion changes very little owing to high levels of induced travel. These results suggest that costly highway expansion will increase access, which is beneficial to a community, but highway expansion is generally an inefficient solution to the high time costs of urban congestion. Instead, variable tolling of some or all lanes could manage traffic flows efficiently and reduce congestion.

Today's guest is Russ Roberts, host of the quintessential economics podcast EconTalk. (If you haven't heard EconTalk, go subscribe to it right now, because it is excellent!)

We discuss EconTalk's role in the economics profession, the things Russ has learned in the course of making it, the importance of intellectual honesty, and the enduring insights of Adam Smith.

Here's the EconTalk interview with Bryan Caplan that I mentioned in the episode. Stay tuned for my own interview with Bryan!

"The first principle is that you must not fool yourself---and you are the easiest person to fool." - Richard Feynman

In this episode, I have three guests on the show with me: Kewei Hou of Ohio State University, Chen Xue of the University of Cincinnati, and Lu Zhang of Ohio State University.

Kewei, Chen, and Lu have coauthored a paper titled "Replicating Anomalies," a large-scale replication study that re-tests hundreds of so-called "anomalies" in financial markets. An anomaly is a predictable pattern in stock returns, or stated differently, it is a deviation from the efficient markets hypothesis. Their abstract reads as follows:

The anomalies literature is infested with widespread p-hacking. We replicate the entire anomalies literature in finance and accounting by compiling a largest-to-date data library that contains 447 anomaly variables. With microcaps alleviated via New York Stock Exchange breakpoints and value-weighted returns, 286 anomalies (64%) including 95 out of 102 liquidity variables (93%) are insignificant at the conventional 5% level. Imposing the cutoff t-value of three raises the number of insignificance to 380 (85%). Even for the 161 significant anomalies, their magnitudes are often much lower than originally reported. Out of the 161, the q-factor model leaves 115 alphas insignificant (150 with t < 3). In all, capital markets are more efficient than previously recognized.

We discuss the process of replicating these anomalies, issues involving the use of equal-weighted vs value-weighted returns, and the problems of p-hacking in finance research.

Works Cited

Hamermesh, Daniel S. 2007. “Replication in Economics.” Canadian Journal of Economics 40(3):715–733.

Kewei Hou, Chen Xue, Lu Zhang; Digesting Anomalies: An Investment Approach. Rev Financ Stud 2015; 28 (3): 650-705.

Hou, Kewei and Xue, Chen and Zhang, Lu, Replicating Anomalies (June 12, 2017). Charles A. Dice Center Working Paper No. 2017-10; Fisher College of Business Working Paper No. 2017-03-010.

Other Links

The Marginal Revolution post on this paper.

Today's guest is Edward J. Lopez of Western Carolina University. We discuss his book, Madmen, Intellectuals, and Academic Scribblers: The Economic Engine of Political Change, which was co-authored with Wayne Leighton.

Does major political reform require a crisis? When do new ideas emerge in politics? How can one person make a difference?

In short: how and when does political change happen? Madmen, Intellectuals, and Academic Scribblers tackles these big questions, arguing that ideas and entrepreneurship are the key ingredients in any episode of political change. Authors Wayne A. Leighton and Edward J. López begin with the first lesson in economics — incentives matter — and artfully explain how the lesson applies throughout political life. Incentives explain why democracies often generate policies that impose net costs on society, and why these inefficient policies persist for years.

Yet beneficial reform does sometimes occur. So Madmen goes beyond incentives to offer a framework in which political change channels its way from ideas in society, through society’s shared institutions (i.e., its rules of the game) , which in turn shape incentives. This type of change is seldom easy, because new ideas for shaping the rules of the game must overcome two forces in society: widely shared beliefs and powerfully vested interests. Yet at certain political moments – perhaps during a crisis, but not always – shared beliefs and vested interests begin to weaken, and the opportunity for reform emerges. Within this framework, Madmen shows why certain inefficient policies eventually get repealed (e.g., airline rate and route regulation), while others endure (e.g., sugar subsidies and tariffs).

Links

In the course of the conversation, Ed mentions Thomas Hazlett's work on the radio spectrum and Tina Rosenberg's discussion of Iranian kidney markets on Econtalk.

This bonus episode features an interview from The Passion Economy, created by Adam Davidson of NPR's Planet Money. The clip features an interview with Coss Marte, an enterprising entrepreneur in an unorthodox business.

The economy is bananas, even scary. But some people are thriving, and we're going to figure out how. Adam Davidson, "New Yorker" writer, longtime contributor to This American Life, and the creator of NPR’s "Planet Money," unearths stories from regular people. People who have cracked the code to success in our new economic reality.

Today's guest is Stuart Ritchie, psychologist and author of Science Fictions: How Fraud, Bias, Negligence, and Hype Undermine the Search for Truth.

Science is how we understand the world. Yet failures in peer review and mistakes in statistics have rendered a shocking number of scientific studies useless – or, worse, badly misleading. Such errors have distorted our knowledge in fields as wide-ranging as medicine, physics, nutrition, education, genetics, economics, and the search for extraterrestrial life. As Science Fictions makes clear, the current system of research funding and publication not only fails to safeguard us from blunders but actively encourages bad science – with sometimes deadly consequences.

Stuart Ritchie’s own work challenging an infamous psychology experiment helped spark what is now widely known as the “replication crisis,” the realization that supposed scientific truths are often just plain wrong. Now, he reveals the very human biases, misunderstandings, and deceptions that undermine the scientific endeavor: from contamination in science labs to the secret vaults of failed studies that nobody gets to see; from outright cheating with fake data to the more common, but still ruinous, temptation to exaggerate mediocre results for a shot at scientific fame.

Yet Science Fictions is far from a counsel of despair. Rather, it’s a defense of the scientific method against the pressures and perverse incentives that lead scientists to bend the rules. By illustrating the many ways that scientists go wrong, Ritchie gives us the knowledge we need to spot dubious research and points the way to reforms that could make science trustworthy once again.

My guest today is Matthew Curtis, founder of the startup Vice Lotteries. Vice Lotteries is a new startup that aims to challenge state governments' legal monopolies over lotteries.

State lotteries are amazingly and bizarrely unethical. They drain billions of dollars out of communities, primarily poor ones. Lottery spending has increased substantially over the past decades, with the average lotto player spending $600 per year, and many spending significantly more than that.

Vice Lotteries aims to create a more ethical alternative to state lotteries, allowing people to have the fun of gambling without losing significant amounts of money. From the Vice Lotteries website:

Vice Lotteries was founded with one purpose: Allow our customers to enjoy gambling while saving money. With Vice Lotteries, you can enjoy the tremendous pleasure of tossing the dice without losing your ability to afford all the other things in life that you love.

However, it is currently illegal to run a private lottery. Before Vice Lotteries can start operating, they need to win one of the multiple lawsuits they are filing in state courts to challenge state lotteries.

The assiduous Vincent Geloso returns to the podcast to discuss his work with Rosolino Candela on lightships and their importance in economics. The abstract of their paper reads as follows:

What role does government play in the provision of public goods? Economists have used the lighthouse as an empirical example to illustrate the extent to which the private provision of public goods is possible. This inquiry, however, has neglected the private provision of lightships. We investigate the private operation of the world’s first modern lightship, established in 1731 on the banks of the Thames estuary going in and out of London. First, we show that the Nore lightship was able to operate profitably and without government enforcement in the collection of payment for lighting services. Second, we show how private efforts to build lightships were crowded out by Trinity House, the public authority responsible for the maintaining and establishing lighthouses in England and Wales. By including lightships into the broader lighthouse market, we argue that the provision of lighting services exemplifies not a market failure, but a government failure.

Economists have been using lighthouses as examples of pure public goods since at least John Stuart Mill. This modern debate on whether lighthouses really deserve their status as the archetypical example goes back to Coase (1974), who pointed out that many lighthouses in Great Britain had been privately funded through harbour fees. According to the theory of pure public goods, free riding should have destroyed this market, but it didn't. This has sparked a spirited debate about just how private those "private" lighthouses were, and whether the level of government intervention in the lighthouse market was necessary to solve the free rider problem.

Candela and Geloso's work on lightships shows that a pure private solution to the lighthouse problem actually existed historically. They detail the launching of the first lightship by the entrepreneurs David Avery and Robert Hamblin at the mouth of the Thames River in 1731, and the ways they were able to finance this apparently "public" good.

My guest for this episode is Mark Koyama of George Mason University. Our topic is a recent paper titled, "States and Economic Growth: Capacity and Constraints," which Mark coauthored with Noel Johnson.

Just recorded at great podcast with @GarrettPetersen on my work on state capacity (with @ndjohnson).

— Mark Koyama (@MarkKoyama) May 24, 2017

As stated in the paper, "state capacity describes the ability of a state to collect taxes, enforce law and order, and provide public goods." That said, state capacity does not mean big government. A state may have the power to impose rules across its territory, but it doesn't have to use that power in a tyrannical way. Another way of saying that is to say that having a high state capacity is compatible with Adam Smith's desire for "peace, easy taxes, and a tolerable administration of justice."

One metric that researchers use to measure state capacity is tax revenue per capita. But as Mark is careful to point out, a state with less state capacity can still sometimes achieve a relatively high income through tax farming. This is the practice in many pre-modern states of auctioning off the right to extract tax revenues to local elites in different regions.

We discuss the rise of modern nation-states in various regions, and why some states developed more state capacity than others going into the twentieth century. In particular, we discuss Europe's transition away from a feudal system ruled in a decentralized way by monarchs who held power based on their personal relationships with local lords. England's Glorious Revolution of 1688 allowed it to develop its state capacity earlier than other European nations, with a centralized tax system controlled by parliament.

By contrast, continental powers like the French Ancien Régime and the Hapsburg Empire were legally and fiscally fragmented, leading them to develop their state capacity much later than England.

We also discuss the development of state capacity in Asia, and why Meiji Japan was able to develop its state capacity much faster than Qing Dynasty China.

Today's guest is Robert Wright, author of The Poverty of Slavery. The New York Times' 1619 Project has prompted renewed discussions on slavery and the New History of Capitalism literature. This episode is the first in a series addressing these topics. We discuss the prevalence of slavery in the developing world today, the arguments for and against reparations, and the rent-seeking behaviour of slaveowners in the Antebellum South.

This ground-breaking book adds an economic angle to a traditionally moral argument, demonstrating that slavery has never promoted economic growth or development, neither today nor in the past. While unfree labor may be lucrative for slaveholders, its negative effects on a country’s economy, much like pollution, drag down all members of society. Tracing the history of slavery around the world, from prehistory through the US Antebellum South to the present day, Wright illustrates how slaveholders burden communities and governments with the task of maintaining the system while preventing productive individuals from participating in the economy.

Historians, economists, policymakers, and anti-slavery activists need no longer apologize for opposing the dubious benefits of unfree labor. Wright provides a valuable resource for exposing the hidden price tag of slaving to help them pitch antislavery policies as matters of both human rights and economic well-being.

This episode of the podcast features two guests, Zach and Kelly Weinersmith. Zach is the author of SMBC Comics, a popular webcomic that sometimes deals with advanced concepts in science, philosophy, economics, and other fields. Kelly is a professor in the Biosciences department of Rice University. Together they co-authored Soonish: Ten Emerging Technologies That'll Improve and/or Ruin Everything.

To quote the book's description,

In this smart and funny book, celebrated cartoonist Zach Weinersmith and noted researcher Dr. Kelly Weinersmith give us a snapshot of what's coming next--from robot swarms to nuclear fusion powered-toasters. By weaving their own research, interviews with the scientists who are making these advances happen, and Zach's trademark comics, the Weinersmiths investigate why these technologies are needed, how they would work, and what is standing in their way.

In this fun and lively conversation, we discuss some of the technologies discussed in the book: space elevators, asteroid mining, augmented reality, and programmable matter. We also discuss the tragic life of Gerald Bull, Canadian space cannon enthusiast.

Today's episode of Economics Detective Radio features a conversation with Robert Poole of the Reason Foundation. Robert is the author of Rethinking America's Highways: A 21st-Century Vision for Better Infrastructure, a book on how to fix America's infrastructure woes by changing the way roadways are funded:

Americans spend hours every day sitting in traffic. And the roads they idle on are often rough and potholed, their exits, tunnels, guardrails, and bridges in terrible disrepair. According to transportation expert Robert Poole, this congestion and deterioration are outcomes of the way America provides its highways. Our twentieth-century model overly politicizes highway investment decisions, short-changing maintenance and often investing in projects whose costs exceed their benefits.

We discuss this book, as well as Robert's recent controversial piece in Reason, "Stop Trying to Get Workers Out of Their Cars." I challenge him on the issue of upzoning and we discuss the some of the necessary conditions for a successful implementation of mass transit. Robert argues that mass transit works best in cities with a high concentration of jobs in a central business district. Without a single concentrated area that many thousands of people want to commute to and from, a mass transit system often can't get the necessary ridership to justify its cost.

Corey A. DeAngelis of the Cato Institute joins the podcast to discuss his review of the school choice research.

Is public schooling a public good, a merit good, or a demerit good? Public schooling fails both conditions specified in the standard economic definition of a public good. In order to place public schooling into one of the remaining two categories, I first assess all of the theoretical positive and negative externalities resulting from public schooling as opposed to publicly financed universal school vouchers. Then, in an original contribution to the literature, I quantify the magnitude and sign of the net externality of government schooling in the United States using the preponderance of the most rigorous scientific evidence.

We discuss this paper in addition to a recent blog post Corey wrote entitled "We Shouldn’t Need to Use Science to Grant Educational Freedom." Corey argues that we should have a strong presumption in favour of letting families choose where their kids go to school. In the academic debate on school choice, people adopt an implicit balance of evidence standard for supporting or opposing school choice. But it makes more sense to place the burden of evidence on those who seek to limit others' choices.

My guest for this episode of Economics Detective Radio is Bart Wilson of Chapman University. He is the author of many experimental economics studies. Our conversation today focuses on one particular study entitled Language and cooperation in hominin scavenging. The abstract reads as follows:

Bickerton (2009, 2014) hypothesizes that language emerged as the solution to a scavenging problem faced by proto-humans. We design a virtual world to explore how people use words to persuade others to work together for a common end. By gradually reducing the vocabularies that the participants can use, we trace the process of solving the hominin scavenging problem. Our experiment changes the way we think about social dilemmas. Instead of asking how does a group overcome the self-interest of its constituents, the question becomes, how do constituents persuade one another to work together for a common end that yields a common benefit?

You can view a video demonstration of the experimental software here. The animation is quite cute!

Derek Bickerton is the linguist whose theories Bart referenced in this episode.

What follows is an edited transcript of my conversation with Sam Hammond.

Petersen: My guest today is Sam Hammond. He's a policy analyst at the Niskanen Center. Sam, welcome to Economics Detective Radio.

Hammond: Hi!

Petersen: Our topic today is supersonic air travel.

Sam has written an article titled "Make America Boom Again" along with co-author Eli Dourado which revisits the U.S. Federal Aviation Administration's ban on supersonic flight over the United States. So Sam let's start at the very start. Let's start by talking about the history of flight. How do we get from the Wright brothers to supersonic flight?

Hammond: Well I think the most notable thing about the early history of aviation is how quickly and how rapidly we innovated. So the Wright brothers flew their initial voyage, their milestone flight in 1903 at seven miles per hour and within forty years we were already breaking the speed of sound. And actually very shortly after that not only were we breaking the speed of sound within military jets but we were on the cusp of commercializing it through the Concorde.

So, what characterizes the early history of aviation is really rapid innovation. Part of that was driven by obviously two world wars but also that trickled out and percolated into the commercial space. That brings us to today. So in the progress that we made in air speeds in the first say 40 to 50 years of manned flight, we've actually regressed since then.

Petersen: Okay, so the Concorde starts flying in I believe it's 1969 and the subject of your paper---the ban brought in by the F.A.A. on supersonic travel over the United States---comes in just four years later in 1973. So what happened in that four-year period? How did we go from rapidly advancing to banning what was at the time the latest technology?

Hammond: It really began in the 60's. Everyone was seeing the progress that was being made in supersonic aircraft. And it was widely appreciated that it was only a matter of time before it would be commercialized. And there was actually a bit of a race going on between European countries and America of who would develop the first and the best supersonic jet. Because at the time, you know, this is way before Reagan deregulated the airlines. So these were the national projects almost akin to the space race.

So in the 60's the F.A.A. and NASA began investigating whether supersonic airplanes could fly overland, because obviously they had them already in the form of military jets. And so they conducted a number of tests. One of the most important and famous tests was the test over Oklahoma City. So in 1964 the F.A.A. began a test over Oklahoma City where supersonic jets---military jets---would fly over the city eight times per day for six months continuously. And these were just regular old military jets, nothing about them was designed to mitigate the sonic boom. So eight times a day people in Oklahoma were hearing the sonic boom. It was rattling their windows. And at the end of it---at the end of the six-month period---even though about 75% of the people they asked said that they could tolerate the booms indefinitely, there were tens of thousands of complaints. And that's when the F.A.A. examined the complaints and rejected the vast majority of them as spurious. And that led to this huge public backlash.

And so that was picked up by a guy named Richard Wiggs who founded the Anti-Concorde project. So the Concorde was being developed in the 60's by a partnership between France and Britain and it sort of represented the frontier of technology---not just aviation technology but technology in total---and Richard Wiggs had this view of the environment and technology as being in conflict. So he believed that as technology advances, we lose touch with our natural environment. And he was actually one of the most innovative, maverick early environmental activists. They're commonplace today but he was actually a pioneer.

And so he took the complaints that occurred in Oklahoma City and his philosophy of environment and technology in conflict and began one of the most successful environmental NIMBY campaigns in history. He organized academics, he organized the residential associations near airports. He took out full-page ads in The New York Times. He got people to call their congress people. And so even though this was all becoming organized even before the Concorde was in use in 1973, it persuaded the F.A.A. and Congress to institute a ban on supersonic flying overland. So there is no jurisdiction over the ocean of course, so when the Concorde eventually came out it was able to fly over the ocean. This was their attempt to handicap the Concorde's success.

Petersen: It's so strange to me that the government would fly supersonic jets over one city eight times a day for six months as an experiment. I mean when you experiment, usually you have to get the consent of the people you're experimenting on and that's what I'm familiar with but it's so---

Hammond: This was a different time.

Petersen: Yes, so 1960s! To just experiment on an entire city against their will and just see what happens.

Hammond: Yeah, I mean, any student of US history knows that our toleration for human experimentation has gone down quite a bit from the 60's and 70's. And if anything, flying a supersonic plane over a city was probably one of the least egregious things that was going on at the time.

Petersen: Yeah well, tell me about sonic booms. I'm not a physicist so use small words.

Hammond: Okay. So, if you've ever seen a speedboat drive through the water, it creates a wake in its path. And the same thing happens with planes only it's air. And air is in three dimensions so there's a cone, a wave that goes past an airplane as it flies through the air displacing the air in front of it, pushing it aside. But of course the speed of sound---and we get the concept of the speed of sound because sound is moving through air and so sound can only move as fast as air can move---and so when you approach the speed of sound you're pushing the air in front of the plane. You're pushing it, basically compressing against the air that's already there and so you reach this thing called the sound barrier where upon crossing the sound barrier you produce a shock wave where the air is becoming compacted and compacted and compacted and basically it's like the waves are on top of each other. And that creates a shockwave which radiates around the airplane and will reach the ground as this loud booming noise.

Petersen: So it's not only loud---I've noticed in your paper---some people said it could break windows or damage buildings.

Hammond: Right. So a lot of this goes back to---again---the Oklahoma City experiments where the fighter jets were flown over the city eight times a day. Sonic booms are shockwaves. There is no limit to how powerful a shockwave can be. So in principle sonic booms can break windows. In practice, they are about two pounds per square foot.

This is this what the Concorde was approximately. And two pounds per square foot of air pressure is pretty weak. There were studies done in the 70's when the Concorde became active. And they found that it could do damage to old Civil War architecture and stuff like that and if you already had a window that had damage it could crack that window. But for practical purposes, buildings can withstand up to 11 pounds per square foot pressure before experiencing damage---Nasa's tested that extensively.

So nonetheless the myth propagated in part because there were people in Oklahoma who claimed that their plaster cracked or that their windows broke. And so when the F.A.A. investigated it and basically threw out most of the claims as not being credible, that caused a big backlash and also caused a huge public relations disaster for the F.A.A. and for supersonic overland more generally and created this myth that it's very easy for a sonic boom to break their window. It's just not.

Petersen: So the ban applies just over the United States. How do we know that that is what has stopped the progress of supersonic flight? After all, you'd think that there's the whole rest of the world and maybe transatlantic or transpacific flights could sustain a supersonic aviation industry?

Hammond: So, there's a lot of variables going on. First of all---as I mentioned earlier---all the supersonic projects up to this point---except the Concorde---were abject failures. The US had one called the Boeing 2707. It just never got off the ground, in fact, in the industry aerospace engineers have a term for this. It's called a "boomdoggle"---a play on boondoggle---because countries that tried to produce a supersonic jet just ended up pouring literally billions of dollars down the drain.

And you can't blame that on supersonic per se. That's a failure of central planning. I would say the same thing with the Concorde. The Concorde flew for 27 years. And at times it made money but you have to remember it was never designed with any commercial intent. It was designed to be a commercial airplane but it had no market testing. It was mostly a piece of a diplomatic or political gambit that Britain was using to try to get into the European Common Market.

And so when Kennedy proposed the 2707 as a competitor, he also didn't do market tests or see what the demand was, he looked at the Concorde which sat about 100 passengers and said we need to do better than France so let's make it 300 passengers. And instead of flying at Mach two---twice the speed of sound---let's fly at Mach three---three times the speed of sound---so it was just the one-upmanship of nations, had nothing to do with whether it was market viable.

And so the case I make is that, if you had a private sector in airplanes---which at the time we didn't really, at least in supersonic, it was all government driven---the first entry point, the natural entry point would be some kind of smaller business-jet. Because frankly if you don't know which routes are going to demand the most passengers you want to start small. You don't want to jump right to a 300-seat passenger jet. The Concorde was only 100 seats, as I said, and it routinely had trouble filling its cabin.

But the thing with business jets---and there have been about half a dozen rigorous market analyses done in the last ten years that have found there is a demand for supersonic business jets---the thing about business jets though is they fly overland about 75% of the time. You're going from regional airports to regional airports.

And so if the natural entry point to sort of begin on the supersonic learning curve, learning which routes have the most to manned is a smaller business jet, you're going to have to begin by flying overland. And then once you discover which routes will bear more people you can expand the capacity of the airplane and ultimately I think a private sector would work its way up to having a 100- to 300-seat passenger jet once it had established that the demand existed. And also big part of that is driving down costs, of course. The Concorde was the Concorde it never iterated it. The first model was the last model.

In commercial aviation more generally in subsonic aviation we've learned over time how to reduce costs. Even though we fly a slower today than we did 50 years ago, subsonic commercial airplanes are vastly more efficient and we've achieved that efficiency because we've learned over time.

Petersen: Okay, so the natural entry point is maybe carrying businessmen between New York and L.A. say, but that's illegal. And so the industry isn't able to sort of clear that hurdle. Is that basically what you're saying?

Hammond: Yeah, I mean if you have a 12-person business jet. First of all, it's difficult to get a jet that small to have the range to even go across the ocean. You know you wouldn't necessarily being going from coast to coast in a small business jet right away. You might be going from New York to Houston, or something like that. The point is that you don't know. You don't know which routes are going to bear fruit, a priori.

The Concorde flew between France and Britain and the U.S., but It also had roots into the Caribbean and lot of those routes have ended up being canceled in the 80's in part because they just kept losing money, but it was because they had tried to plan it all out a priori, as if they could just deduce which routes would make money.

I don't trust that model. I think you have to begin by building something small that you know will meet demand and then expanding from that. And the most important part about this is there's open a confluence of technology in just the last 20 years. I have no illusions that supersonic business jets would have been a thing, say, in 1990. I think a lot of this is a recent phenomenon that's why supersonic overland is an idea whose time has come. There's just been such a breakthrough in technology, in reducing the intensity of sonic booms. And that has been really the biggest hurdle is getting the intensity of sonic booms to a level where people will tolerate it.

Petersen: Right. So it seems like the F.A.A., when they banned supersonic flight, the concern was noise but they banned speed as sort of a proxy for noise. But what you're saying is that's a bad proxy you can have the speed without the noise.

Hammond: Exactly. So it was an overreaction. What we advocate in our paper and at supersonicmyths.com is to replace the ban with a reasonable noise standard. Subsonic airplanes already adhere to a variety of noise standards, noise rules. If the issue is really noise---and we believe the issue is basically noise---the F.A.A. should just set a noise standard, say, 80 decibels, something like that, that would be like a lawnmower going by your house. And then let the market try to get below that line. The F.A.A. stance right now is that it will set a noise rule once it sees a supersonic airplane demonstrate that it can go below the noise that it finds acceptable. But it has never stated what it will find acceptable. So it's a sort of reverse order of operations where the F.A.A. wants to hear something that is quiet enough before telling us what is quiet enough.

Petersen: And if you're Boeing and you're going to invest millions of dollars building an aircraft that does 80 decibels and the F.A.A. says 'not quiet enough' you're out millions of dollars.

Hammond: That's right. And so today the biggest and really only large quiet supersonic project is still within NASA. NASA has been working on quiet supersonic technology pretty much continuously since the mid 80's under a variety of different project titles. And they're the only ones who are able to do it because it's federal money. They have no skin in the game. They do use contracts with, say, Lockheed. But those are still federal contracts. We would like to see more competition in this space.

NASA is firm in its belief that a quiet supersonic jet is possible as early as 2020. How much sooner would we have gotten to that if we had the private sector involved?

Petersen: Almost certainly much sooner. If we look at private space companies like Space X, they're an order of magnitude cheaper than NASA. They're much more efficient and able to launch rockets into space for a fraction of the cost that NASA has. So, maybe if we use that as our model, then however much NASA has spent on developing supersonic, divide that by ten and maybe that's what the private sector might cost.

Hammond: Could very well be. The other thing is that, even today, NASA's effort is directed at the big passenger jets. And part of that is out of this democratic aspiration. They're the government, so they're trying to build something that the everyman could ride. But it's pretty common in new technologies for the early additions or for the early adopters to be of a sort of luxury class.

You can think about Tesla's business model where they begin with a roadster and a luxury car---which is really only affordable to millionaires and the very wealthy---with the game plan that they're going to have a low volume high profit or high revenue car and reinvest those profits back into developing cheaper and cheaper versions until they get to a mass market version.

We argue that that's exactly how the supersonic learning curve probably works as well. You want to begin with business jets which will of course be a luxury flying supersonic getting from New York to L.A. in two hours instead of five or six. It is worth it to some people. But those early models will of course be expensive. It will be expensive to ride not just because it's new technology and we haven't figured out how to drive down costs, but because a lower capacity means you're dividing the cost by fewer people. But over time those companies can reinvest, build bigger designs and drive down costs until you get to the point where virtually anyone can afford it.

The company Boom, which is developing a supersonic jet for over the ocean, is projecting to drive their costs down to about $5,000 a ticket to go across the Atlantic, which is on par with business-class and first-class tickets. So they're projecting that for their own costs. It could very well be the case that that technology and that those cost estimates are probably similar for first models in the over-land market as well. And that's a far cry from the Concorde which cost about $20,000 per flight. So going from $20,000 a ticket to $5,000, that's what this one company is projecting and it's only their first model.

Petersen: Right. So if something like Tesla cars or cell phones had to get permission through the political process when they were being developed, then maybe someone in the 90's would have said "Why should we allow cell phones if only rich people are going to use them?" And in the 90's they might have been right. But of course now we all have cell phones, and I guess what you're saying is in the 2020s or the 2030s we might all be flying at supersonic speeds when we go on our vacation.

Hammond: I believe that. Elon Musk, in his Hyperloop paper, discusses the most efficient way of getting from point A to point B. And he argues in that paper---it's sort of an offhand comment he makes---but he suspects that for any city pair that's over 900 miles apart the most efficient way of getting from that city to the other city is supersonic.

Petersen: So that's most pairs of big cities.

Hammond: Not just most pairs of big cities but the average flight distance, not from where the passenger is starting to where he's going, but the average takeoff to landing for a passenger plane is about 900 miles. So that suggests that if that is an efficient distance for supersonic, the average flight could be flown efficiently at supersonic.

Petersen: One issue that your paper goes into is that some people have alleged that supersonic aircraft---because they fly very high---might damage the ozone layer. Is there anything to that?

Hammond: I won't say there's nothing to it, but it's been vastly overstated. I'll put it that way. This goes back again to the Concorde and the early environmental movement's objections to it. At the time the understanding of atmospheric science was very very poor compared to today and there were concerns that because the emissions from an aircraft include nitrogen oxides---which are a class of molecules that will bind with oxygen in the atmosphere to destroy ozone---that because the Concorde flew so close to the stratosphere---which is where the ozone layer begins---that these emissions could lead to the depletion of ozone.

That's been rejected. The most alarmist versions of it were rejected. In the 70's people were claiming that if the Concorde or a fleet of Concordes were permitted to fly that we'd see catastrophic ozone collapse. That did not come to fruition obviously, the Concorde flew for 27 years. More recent studies now that we have large models of the atmosphere, simulated models of the atmosphere, have determined that a supersonic aircraft flying within 50 to 60,000 feet should in theory be ozone neutral. The reason is because there's actually this countervailing effect where a little bit lower in the atmosphere the nitrogen oxides actually produce ozone, and a little bit above in the stratosphere it depletes ozone. And if you're flying right on that line they roughly cancel out.

Petersen: Okay. There were some fears in the 80's and 90's of other things we're doing seriously damaging the ozone layer. But was that a much larger threat than supersonic flight?

Hammond: Well it was just a different sort of threat. There are different emissions in aerosols and so forth, CFCs. But out of the concern for the ozone in the 90's we got the Montreal Protocol and the Montreal Protocol is an international agreement to control the emissions of things that will deplete ozone and as supersonic makes its comeback, they will have to be fully compliant with those protocols.

I still recommend that going forward there should be more research into this. Even since the Concorde retired, we have better models of the atmosphere and I'm sure there's actually teams that NASA and MIT that are studying this right now.

Petersen: It can't hurt to look into it. But it seems like once something is banned or, you know, once the government sort of gets its hands on it and says "we're not so sure about this" we become incredibly risk-averse, we look at every possible downside and ignore the huge upside of just having a whole other industry and all that consumer surplus that you get from having an entire market that wasn't there before.

Hammond: What I would say is the state of knowledge right now with respect to supersonic and ozone is well established enough to not worry. The catastrophic versions of the concerns have been utterly rejected. Even the more modest versions of it are called into question by the fact that, there seems to be this band around the around 60,000 to 50,000 feet where supersonic emissions are ozone neutral. There, of course, should be more study but we don't have to wait for those studies. The studies we already have are sufficient to suggest that we shouldn't be waiting for more data. We already have enough data to begin today.

Petersen: It seems like there are two models of innovation. At one extreme end is the development of new drugs, where we have years upon years of vetting and studies and you have to comply with many requirements before you can get your new drug on the market and it costs billions of dollars. Adds a lot to the price of developing new medicine. And then there's the other model where somebody just makes something and we start using it. And maybe we worry about the implications, but by the time anyone thinks that "hey maybe this is a bad idea" it's already been universally adopted.

So something like Facebook, where we were all already on Facebook before people started complaining "Hey what if this is ruining our social interactions or something?"

Hammond: Or maybe all the fake news sites. Destroying democracy.

Petersen: Yeah that's topical right? Facebook is now worried about its role as one of the main places young people get their news, or a lot of people get their news, and some things go viral that are not true or and might be misleading and might affect, say, the outcome of elections.

Hammond: Apropos of Facebook and that topic, myths and misconceptions and viral falsehoods and urban legends, those are not new phenomena. That's why I had to create supersonicmyths.com. Because around supersonic, there's just a lot of misconception because there are a lot of people who think they're experts on the Concorde and think that the Concorde proves that supersonic is not economically viable. But they don't really understand that well.

Petersen: Right and you could use the same sort of logic to say, "Look how costly the moon landing was. It's clearly impossible at that cost for any kind of space tourism or space commerce to be economically viable." But the issue is that the moon landing was very very expensive, but it was run by the U.S. government which tends to make all its activities very expensive. A future space tourism company might be much much cheaper and we just don't know until we see it, how much cheaper.

Hammond: So I guess I should just comment a little bit on what the new technologies are that have made supersonic overland viable. And they really break down to three: first engines---jet engines---have become a way more powerful, way more efficient. They're way more capable in every way. So, the Concorde used an afterburner on its engine, which means upon takeoff it basically dumped kerosene and lit it on fire and that's why if you watch old videos of the Concorde taking off you see this trail of black smoke coming up behind it. That's the afterburner. Incredibly fuel inefficient, you're just burning fuel. This is what it needed at the time to get the extra boost, to get into the air, because it had to climb to 60,000 feet---which takes quite a bit of energy.

Today we have vastly superior engines. In fact, most subsonic aircraft, most passenger planes that you would fly in any consumer flight are capable of going supersonic. They have a top speed which is subsonic but if you put them in overdrive you can go supersonic and in fact, the company I mentioned earlier---Boom---is using off-the-shelf engines to reach its max speed.

Second is carbon fiber. So, the shape and the aerodynamics of shape matter a whole lot to supersonic and supersonic overland. The way we reduce booms is by affecting or altering the airfoil around the airplane. So, essentially you can use the shape of the airplane to modify the waves and smooth the waves out. So you don't have this like sudden shock and sudden dip. Instead, you have sort of this gradual rise and fall. And mostly when the human ear detects loudness what it's detecting is suddenness. So you can dramatically reduce the perception of loudness by modifying that airwave and you do that by modifying shape. Most planes are constructed of aluminum, which you can shape reasonably, but not nearly as much as carbon fiber and carbon fiber has become basically a commodity in recent years. It means basically any shape you want is incredibly cheap and incredibly strong.

The third and final, probably most important thing is the power of computers and computer simulation. So prior to the early 2000s, I would say, when what's called computational fluid dynamics was really coming up. These are computational simulations of how fluids waters and airs move around shapes. That requires a lot of computing power which we've only recently achieved. Prior to that,

if you want to design and test a prototype for a supersonic aircraft you would have to literally build a model and rent a wind tunnel, and then you'd have to have instruments try to imperfectly measure how the wind is moving around the aircraft. That is incredibly costly. So, computer simulation has really democratized. Some of the researchers who've done work on this are just grad students. They have software engineering expertise and they construct algorithms that will search through the space of all possible aircraft designs and try to find the one shape that reduces the sonic boom the best. And then because we have carbon fiber we can go and pour that shape and have the exact shape we want.

Petersen: So it used to be, not only did you need the air tunnel but you had to---if you wanted to test 100 wing shapes---you had to physically build 100 wings. Now you tell a computer "here's 100 wing shapes," hit compile, come back the next morning and you have your simulated sound profiles?

Hammond: It's actually even cooler than that. Instead you tell the program what you're looking for, and what you're looking for is a shape that will reduce the sonic boom to whatever level you're aiming for. Basically you give it an objective and then instead of trying to design 100 designs and let it test 100 designs, you give it an objective and then it searches through literally hundreds of thousands of designs that it evolves on its own. Some of these algorithms are genetic in nature, so they evolve like biology evolves and they try to go down paths and try to find exactly what shape reduces or hits the objective. And you can have multiple objectives. You can even include the objective of low sonic boom, but you can also have that tempered by the objective of efficiency---fuel efficiency.

Shape and size obviously you'd want to put into the objective function. We don't want this airplane to be ten miles long. It happened to be the case that the longer, more slender aircraft cut through the air better but a computer doesn't know on its own that a ten-mile long airplane is not feasible. So you basically give it multiple objectives and you hit play and you let the algorithm do its work. And it can literally iterate through hundreds and hundreds of thousands of designs.

Petersen: And this is achievable by grad students just with software that is available, or you can get on a grad student budget?

Hammond: Well, I imagine these are big research projects. They have university backing and industry does that too. But it's a single fixed cost instead of a repeated variable cost of having to rent a wind tunnel every single time you want to test.

Petersen: So it sounds like despite the fact that there's been a supersonic ban and despite the fact that there is no supersonic industry, or no supersonic commercial flights going on in the world today, we still had advancement, but it's been mostly on the technology side, on the theoretical side. What we haven't seen is actual supersonic flights and testing the water, testing the market. I saw in your paper that you go through some estimates of the potential size of the supersonic market. Do you want to talk through some of those?

Hammond: Sure. There has been by my count seven market analyses. Most of them from the mid-2000s till today. The estimates range from 180 supersonic business jets to over 600. So, these are companies like Gulfstream Aerospace, which is a leading business-jet manufacturer. They've done actually two or three of these market analyses. And they foresee up to 350 units for just themselves. So 350 business jets that they could produce over ten years. That is quite a demand.

Petersen: And they're looking at things like whose opportunity cost of their time is high enough that they would pay maybe a few thousand extra dollars, maybe several thousand in order to save a few hours. And right now there are C.E.O.s, there are wealthy people who maybe live in the United Arab Emirates but want to commute to New York and right now that means sitting on a plane for---gosh I don't even know---it would be like 15 hours or something. If it could be six hours, for most of us, we might prefer to sit on a plane longer and pay significantly less. But if your time's really valuable, if you run a multi-million-dollar company, it really can be worth it to save some of your time, even at a high cost.

Hammond: Of course it's possible if you had supersonic overland to leave New York and go to London and then come back to New York on the same day. There are people who would love to do that. I think what gets missed in this it's not just about going faster for its own sake. This makes the world smaller, it makes you rethink travel. So in addition to these American analyses, there have also been some surveys. One survey did a survey of business jet operators and importantly they asked them to basically state an estimate from zero to 100 what the likelihood is that they would buy a supersonic business jet if they could. When they asked that under the condition that there is still an overland ban the number was zero, so zero percent of people. The average person said that there was zero chance they'd buy a supersonic business jet if they can't fly overland but in the case that the ban is lifted, that number jumps to 50%. So half of the businesses that were surveyed would see a chance.

Petersen: That's further evidence that it's not just that supersonic is unviable, it's that this legal restriction is in a very important market which is flying over the United States. That's what's killing the supersonic industry.

One other the thing I saw on your website was, you talk about the tradeoff between noise and fuel efficiency in the context of airport noise restrictions. Could you tell me, how does that tradeoff work?

Hammond: I think that one of the biggest barriers to the F.A.A. is the issue of airport noise. The F.A.A. has worked with I.K.O. and I.K.O is the UN's body who deals with aviation standards. They've worked for literally decades to try to ramp up the stringency of noise around airports and they're pretty proud of what they've accomplished. If you live near an airport today it's a much quieter experience than it would have been 20, 30, even 40 years ago.

But this comes with a tradeoff. The way aircraft reduce noise is they have a bypass ratio. So at the extreme, you have a turbo-jet, which means all the air passes through the jet and then you have jets which bypass air around the jet. So, you have the jet in the center and that's what's pushing, propelling the plane forward. But then you also bypass air around the jet to basically insulate the noise. But that comes with a tradeoff. So the more air you bypass, the quieter it will be, but also the more fuel and the less thrust you get. And it happens with supersonic because you're going from sea level to 60,000 feet potentially, you actually have to really take off at a steep angle and you have to push up. You have to really get up high, basically, and so you could make the argument that we should tolerate slightly lower airport noise standards for supersonic at first, so they can use lower bypass ratio engines and therefore less fuel when they're making their incline.

Petersen: So there's another paper from Mercatus, also written by your co-author Eli Dourado, and that one talks about the number of airport noise complaints that come from a really small concentrated number of households. I found that very funny.

Just how concentrated are the airline airport noise complaints?

Hammond: Let me say first that what we recommend for airport noise standards is stage three noise standards, which are what we currently use. So, currently if you live near an airport and you see a plane taking off and you can hear it slightly, that's the stage three noise standard. We're advocating that supersonic abide by that noise standard. That noise standard is being phased out for stage four and later stage five, which will be even stricter. So we're not saying anything like "Oh we should let planes be super noisy," we're saying "let supersonic planes be as noisy as the ones that we currently have taking off, and just give them a bit of a window before they're phased into these newer, more stringent noise standards that are coming down the pipeline."

Eli's work with Raymond Russell, they found an amazing data set that includes records of who is making noise complaints, airport noise complaints. And they have them by airport and the astonishing thing they find is that these airports are getting sometimes tens of thousands of noise complaints every year but when they drill down into the data, it is just a handful of people making all the complaints.

So a few examples. I live near Ronald Reagan Washington National Airport and in 2015 they had 8,760 noise complaints. Two individuals at one D.C. residents accounted for 6,852 of those complaints. So, two people in one building accounted for 78% of the complaints. They have a report called "Airport Noise NIMBYism: An Empirical Investigation" where they go through all the airports that have this data and they find evidence of the sort of concentration of complainers at every single airport. So, it's a pretty surprising thing and I think it's important to get this information out there because as we know from when the Concorde was banned overland, residents’ associations are a pretty powerful group to mobilize in opposition to something like this, and Congress people have the perception that---like San Francisco in 2015 had almost 900,000 those complaints to San Francisco International Airport. These are constituents, we want to reduce noise this is obviously something they care about. But in fact, in San Francisco's case, only 53 individuals accounted for 25,000 of the complaints. And those 25,000 were all during a single month---the month of October---which meant that the average person was making 477 calls per person. So, 30 days in a month, that's a lot of calls every single day. And this is San Francisco so wouldn't surprise me if there were some enterprising software developers who figured out a way to make complaints automatically.

Petersen: So robot calls. It might be crazy people calling in a complaint every single time they hear an airplane, or it might be clever people robotically calling in a complaint every time there's an airplane. Except that I guess they didn't anticipate that someone would notice that all these calls were coming from the same location which kind of undermines their objective which would be to reduce noise in those areas.

Of course, if you bought your house after the airport was already there making noise then economics says that that noise should already be priced into the value of the house. The person who loses is the person whose house is next to an empty lot and then the government announces "Hey we're going to build an airport here." You'd expect the change in home prices to happen immediately when that's announced and then every following owner has already accepted that cost and they've had cheaper real estate prices as a result. So, if you buy a house next to the airport and then try to pressure the airport to make less noise you're sort of trying to boost your property value when you already paid a discounted rate. You are already compensated for accepting that noise.

Hammond: And not only that. But when people have done rigorous cost-benefit analyses of U.S. aviation noise standards and they consistently find that the costs of making airplanes less efficient on takeoff is greater than alternatives which include creative land use policies, like building in barriers that block sound near communities and stuff like that. So, if you have a community living very close to an airport, one alternative is to set global standards which say airplanes are to fly less efficiently and make less noise, or you build a wall. You build up a barrier or some insulation to protect the community from the noise. But the main point of this study that Eli and Raymond did---which by the way, if I remember this correct, is Mercatus's most downloaded paper in history---the main point is that we shouldn't be basing innovation policy, particularly something that can have very high impact, on a few crazy people and enterprising robot callers.

Petersen: People who are affected by having less efficient aircraft, having slower aircraft, more expensive air travel just so outnumber the small number of people who live near airports. And you could get them all double-ply windows and help make their houses more soundproof. Probably much cheaper than hamstringing the entire airline industry.

Hammond: Absolutely. I just want to recapitulate some things. Supersonic overland is today feasible. It can be economical, there are companies chomping at the bit to try to develop something that will be quiet and affordable. The only thing standing in their way is the F.A.A. and a public perception that the Concorde proved that supersonic is not viable. The F.A.A. could act today, it could issue a noise standard and allow developers to shoot for that standard. Even if a bill is passed today, what the F.A.A. wants to do is coordinate internationally with I.K.O. and I.K.O. is the UN body that---it's not a regulator---sets standards.

The F.A.A. has a prominent role in guiding us towards standards, but it's an incredibly slow process. I.K.O meets every three years. If the F.A.A. were told to remove the ban tomorrow and they wanted to coordinate internationally, would mean we have to wait about three years. I.K.O. is meeting this year, obviously they're not going to talk about it this year---the agenda is all set. So they're going to be talking about it three years from now and then they'll be finalizing those rules three years from then. And then the F.A.A. will take those rules, propagate them globally and then we will have another two or three year regulating period where there's a notice and comment and everything else.

So we're talking about ten years just to change this stupid ban that is obsolete and I think that speaks to a more fundamental problem in U.S. policy and regulation, which is, we create these massive bottlenecks. And it's no surprise that it happens to an idea that is such a no-brainer, like creating a noise rule for supersonic instead of a ban. You can find other examples in every other industry of every other emerging technology, where there are these obsolete rules that are getting in the way of better, more efficient, more affordable, faster technology. And even if they can be rolled out tomorrow, have to go through at times a decadal process of approval. So, I think it's no wonder that productivity innovation seems to be at a historical low.

Petersen: My guest today has been Sam Hammond. Sam, thanks for being part of Economics Detective Radio.

Hammond: Thank you.

Cornelius Christian is an Assistant Professor of Economics at St. Francis Xavier University. His research concerns development economics, economic history, and the economics of conflict and violence, which is the topic of this episode of Economics Detective Radio.

Cornelius' paper "Lynchings, Labour, and Cotton in the US South" deals with violence against black people in the post-reconstruction South. Historians have hypothesized that there was an economic motive to lynchings, noting that more of them occurred when cotton prices were low. Black and white workers competed with one another in the agricultural labour market. Cornelius' findings indicate that lynchings were used by white labourers to scare black workers out of the labour market, thus raising their own wages. He finds that lynchings happen in the wake of economic shocks when agricultural wages are low. He also finds that, when lynchings occur in a given area, black people tend to migrate out of the area and agricultural wages rise for the remaining white workers.

In "Economic shocks and unrest in French West Africa," Cornelius and his coauthor James Fenske show that, while economic shocks matter as a cause of civil unrest, the institutional context matters. During French West Africa's colonial era, there were oppressive poll taxes that had to be paid regardless of crop yields. When negative economic shocks occurred, either because of low world prices for agricultural goods or poor rainfall, farmers were not able to pay these taxes and engaged in riots and political violence. In the post-colonial era, the poll taxes no longer exist and political violence no longer follows negative economic shocks.

Cornelius references recent research linking droughts during the Mexican Revolution to insurgency in particular areas. Areas that had particularly bad droughts during the Mexican Revolution produced larger uprisings, and that in turn affected the political and economic fates of these areas up to the present day. He also references Bruckner and Ciccone's 2011 Econometrica paper, "Rain and the Democratic Window of Opportunity," which shows that democratic change frequently occurs in the wake of negative economic shocks in Sub-Saharan Africa. Bruckner and Ciccone are testing Acemoglu and Robinson's (2001) thesis in "A Theory of Political Transitions."

We discuss the fall of the Soviet Union and some research showing that East Germans still expect the state to do more for them than West Germans. However, the younger generation's attitude is more similar to those of West Germans.

Cornelius' most recent research deals with witch trials in early modern Scotland. Unlike the other cases of violence he's looked at, witch trials happened more after positive economic shocks rather than negative ones. The reason, Cornelius discovered, was because early modern Scots cared a great deal that the proper legal procedures were followed in each witch trial. These procedures were costly, and so people could only afford to try and execute a witch when times were good. Witch trials are, essentially, luxury goods.

The common thread in Cornelius' research is that context matters. There's no one thing that causes violence in all times and places; it depends on the institutional context. In the post-reconstruction South, colonial West Africa, and revolutionary Mexico, negative economic shocks led to violence. However, this was not the case in post-colonial West Africa and early modern Scotland. History is not deterministic, so to understand history we need to understand the incentives faced by the individuals of a given time and place.

In this episode, Nathan Smith discusses the economics and history of migration and migration restrictions. Nathan is an Assistant Professor of Business Administration: Finance and Economics at Fresno Pacific University and regular blogger at Open Borders: The Case.

We start the episode by discussing the economic impacts of Nathan’s own migration to Fresno. Students gain, as he adds to the supply of economics professors, other economists might lose from his competition in labour markets, people looking for parking near the University might lose, as he slightly reduces the supply of available parking spaces, and property owners gain from his demand for housing. In general, anyone Nathan transacts with gains from the transaction, while those who he competes with may suffer some slight loss.

The big slogan among open borders advocates is that a significant reduction in migration restrictions could “double world GDP.” Nathan’s own most recent estimates show about a 91% increase world GDP, mainly because people would move from places where they can earn very little (e.g. places with dysfunctional institutions) to places where they can earn quite a bit more (e.g. places with well-functioning  institutions, complementary factors of production, highly developed networks of specialization and exchange, etc.). There are complementarities between human capital and unskilled labour. For instance, great managers are more productive when there are many workers to manage, and the workers are more productive where there are great managers.

Nathan’s estimates indicate that as much as 44% of the world’s population could migrate under open borders. This may seem high, but even conservative estimates would put the number of migrants in the billions. While migration would be hard for the first few migrants, diaspora effects would start to make the process smoother and more desirable. In the 19^th century, when international migration was less restricted and more common, migrants would form communities within their new countries: there would be a Polish neighbourhood, an Irish neighbourhood, an Italian neighbourhood, etc. These diaspora communities would function as gateways to the new culture, giving people a place to settle while they adjusted to the language and culture of their new country.

Today, with the exception of migration within the EU, there are no countries with open borders. While migration is somewhat easier for high-skilled workers, there are still many barriers. People call high-skilled migration “brain drain,” but that is really a perverse way of characterizing it. Are workers’ “brains” their countries’ property? Are they to be kept as forced labourers for their countries’ benefit? In addition, the idea of brain drain is empirically questionable. If getting high skills is a ticket to a better life in a different country, the possibility of migrating increases the incentive to gain high skills, thus offsetting the loss of those who eventually emigrate.

When people can migrate, or “vote with their feet,” this puts competitive pressure on governments. For instance, governments’ ability to institute very progressive taxation is curtailed by high earners’ ability to move elsewhere. That the Soviets had to build a Berlin Wall to keep their citizens from leaving shows that the possibility of exit was threatening to the Soviet government.

Some restrictionists compare immigrants to the Visigoths in the Western Roman Empire. That is a poor analogy to modern migration, as the Visigoths migrated as a complete political entity.

Not only do immigrants assimilate into the existing industries, they are disproportionately entrepreneurial, founding new industries wherever they go. Nikola Tesla, Andrew Carnegie, Sergey Brin, and Elon Musk were all immigrants. During the era of open borders, many of the innovations (such as Henry Ford’s assembly line) were designed to be complementary with all the low-skilled labour made available by migrants. Much of our modern technological development is focused on economizing on low-skilled labour, but low-skilled labour is only artificially scarce in wealthy countries. Many basic tasks that high earners do for themselves could be contracted out to low-skilled migrants. Childcare, for instance, could be very inexpensive under open borders; skilled parents would not need to leave the workforce to raise their children.

Nathan sees hope for more open borders in the future. Migration restrictions are contrary to people’s consciences, which makes them difficult to enforce. This may slowly erode the restrictions. Furthermore, Christian churches are essentially supportive of open borders. There is hope for the world in moving towards open borders, but it will require moral will.

Nathan Smith can be found online at Open Borders: The Case.

Today's guest is Kyle Coates and our topic is pro wrestling and the intellectual property problems that arise from it. So prepare to be amazed as we BODY SLAM this topic, or something.

Who owns a wrestler's name, gimmick, and persona? Kyle was inspired to do research in this area when he heard about a legal dispute between the wrestlers Jeff and Matt Hardy and the wrestling network TNA. The Hardys changed networks and wanted to continue using a gimmick they had developed while performing for TNA.

We discuss some of the lawsuits and disputes that have occurred in the pro wrestling sphere, and how to courts have treated these issues. And yes, we answer the most important question: If Dwayne "The Rock" Johnson runs for President, will he be able to use Rock puns in his campaign ads? Listen to the episode to learn the answer!

Today's guest is Arvind Panagariya of Columbia University. We discuss his book, Free Trade and Prosperity: How Openness Helps Developing Countries Grow Richer and Combat Poverty.

Free Trade and Prosperity offers the first full-scale defense of pro-free-trade policies with developing countries at its center. Arvind Panagariya, a professor at Columbia University and former top economic advisor to the government of India, supplies a historically informed analysis of many longstanding but flawed arguments for protection. He starts with an insightful overview of the positive case for free trade, and then closely examines the various contentions of protectionists. One protectionist argument is that "infant" industries need time to grow and become competitive, and thus should be sheltered. Other arguments are that emerging markets are especially prone to coordination failures, they are in need of diversification of their production structures, and they suffer from market imperfections. The panoply of protectionist arguments, including those for import substitution industrialization, fails when subject to close logical and empirical scrutiny.

Today's guest is Thibault Schrepel of the University of Utrecht. We discuss his work on the relationship between blockchain technology, which allows for the decentralization of firms and organizations, and anti-trust law. Here's a quote from his article on the topic:

But in the end, one question arises as follows: is blockchain the death of antitrust law? Should it be? Answering them today is not easy as blockchain is still prone to drastic evolution, but some initial answers are to be provided nonetheless. In order to do so, this paper proceeds in three parts. The first details how unilateral practices can be implemented on blockchain and further establish a risk map. The second part focuses on the challenges for enforcers and presents a new theory entitled “regulatory infiltration." The last part questions the legitimacy of competition law in the face of this technology - the "blockchain antitrust paradox" - and the need to decentralize competition authorities.

Today's guest is Martin Gurri (Twitter, blog), author of The Revolt of the Public. We discuss his book, which deals with the impact of information technology on political trends and populism.

In the words of economist and scholar Arnold Kling, “Martin Gurri saw it coming.” Technology has categorically reversed the information balance of power between the public and the elites who manage the great hierarchical institutions of the industrial age—government, political parties, the media. The Revolt of the Public tells the story of how insurgencies, enabled by digital devices and a vast information sphere, have mobilized millions of ordinary people around the world. Originally published in 2014, this updated edition of The Revolt of the Public includes an extensive analysis of Donald Trump’s improbable rise to the presidency and the electoral triumphs of “Brexit” and concludes with a speculative look forward, pondering whether the current elite class can bring about a reformation of the democratic process, and whether new organizing principles, adapted to a digital world, can arise out of the present political turbulence.

Today's guest is Steve Horwitz, he is the Charles A. Dana Professor and Chair of the economics department at St. Lawrence University.

Steve recently wrote an article titled, "Make Babies, and Don't Let the Greens Guilt Trip You about It." This was a response to an argument made by the bioethicist Travis Rieder, who was recently profiled by NPR. Rieder argues that it is immoral to have children because of the burden additional humans place on the Earth, in particular because of the risk of catastrophic climate change. Here's how that NPR piece put his argument:

"Back at James Madison University, Travis Rieder explains a PowerPoint graph that seems to offer hope. Bringing down global fertility by just half a child per woman 'could be the thing that saves us,' he says. He cites a study from 2010 that looked at the impact of demographic change on global carbon emissions. It found that slowing population growth could eliminate one-fifth to one-quarter of all the carbon emissions that need to be cut by midcentury to avoid that potentially catastrophic tipping point."

The problem with this sort of reasoning is that it views human beings as consumers and not as producers and innovators. Humans are able to contribute to the division of labour and to come up with ideas. That division of labour allows everyone to become more productive.

Rieder's ideas echo those of Thomas Robert Malthus, and he is wrong for much the same reasons. Malthus anticipated a world where the diminishing returns in agriculture and exponential population growth would lead humanity to subsistence in a few generations. As Malthus predicted, populations did skyrocket, but contra Malthus, people got significantly richer too. What happened?

Innovation happened. Along with that innovation, and contributing to it, was a finer division of labour created by population growth. As Adam Smith wrote, "the division of labour is limited by the extent of the market."

Humans create resources, not by violating thermodynamics, but by discovering better ways to satisfy our needs with the physical matter that exists. Resources are subjective. To a farmer 500 years ago, striking oil was a nuisance. It would ruin his crops and destroy the value of his land. Yet today, the very same oil is a valuable resource because we've discovered how to make it useful. Julian Simon challenged the idea that we're running out of resources, declaring human innovation to be "the ultimate resource."

Rieder and other environmentalists are different from Malthus in that they worry not about more people eating too much food but about them releasing too much carbon. A lot of this comes down to our estimate of the social cost of carbon. Rieder sees this cost as being so high, it outstrips all other concerns. He expects apocalyptic changes in the Earth's climate within twenty years.

Economists are not climate scientists, we aren't trained to be able to perform our own studies on the relationship between carbon emissions and global climate. But what we can do is look at the bulk of the published research. The two things we could say about this to someone like Rieder are, first, that he seems to have based his arguments on the absolute highest estimates of the climate impact of carbon, where a reasonable person might have looked at the median estimates. And second, people who have performed meta-analyses of this literature have found evidence of publication bias towards finding a larger impact, meaning the best estimate would be somewhat below the median estimate once we correct for publication bias. If the kind of climate change Rieder sees coming in twenty years is really more like two hundred years away, it changes the argument a lot.

With the costs of climate change so far out in the future, and the costs of abatement concentrated on the present, our cost-benefit analysis needs to account for the discount factors in such long time spans. The projects that have to be sacrificed today to abate climate change over the next couple centuries have their own benefits that need to be weighed against the costs of releasing greenhouse gasses into the atmosphere. It all comes down to opportunity cost.

Other links:

Progress Does Not Depend on Geniuses

Against Fossil Fuel Divestment with Pierre Desrochers

Today's guest is Akin Unver of Kadir Has University. He uses geospatial data to study political events such as the attempted coup in Turkey in 2016.

The coup was an attempt by certain rogue elements of the Turkish armed forces to oust President Erdogan. However, unlike past coups in 1960, 1971, 1980, and 1997, the Turkish people documented and coordinated their opposition to it on social media in real time, leaving a rich record of events as they unfolded.

Akin's research, which was featured in an extensive and detailed article for Foreign Affairs, shows how, when, and where the opposition to the coup occurred. He shows, for instance, the importance of mosque networks in coordinating resistance. And while the media put a lot of importance on Erdogan's personal appeals through FaceTime and Twitter in galvanizing support, the data show that resistance started organically almost as soon as the coup began, hours before Erdogan appeared on television to rally support.

The discussion delves deep into specific details of the coup and the resistance, while also touching on other areas of Akin's research. Towards the end, we discuss the technical side of working with geospatial data.

My guest today is Roman Yampolskiy, computer scientist and AI safety researcher. He is the author of multiple books, including Artificial Superintelligence: A Futuristic Approach. He is also the editor of the forthcoming volume Artificial Intelligence Safety and Security, featuring contributions from many leading AI safety researchers.

We discuss the nature of AI risk, the state of the current research on the topic, and some of the more and less promising lines of research.

What follows is an edited transcript of my conversation with Maxime Bernier. If you like his ideas, I encourage you to go to his website to learn more about them.

Petersen: You're listening to Economics Detective Radio. Before we start let me give a quick disclaimer that although today's guest is a politician this show is nonpartisan and doesn't endorse any particular candidate for office. My guest and I are also Canadian so we'll be talking about some Canada-specific issues. I know I have an international audience but sometimes it's fun to learn about what's going on in other countries. So I hope you'll listen nonetheless. And now on to the episode.

My guest today is Maxime Bernier, he is the Member of Parliament for Beauce, Quebec and a contender for the Conservative Party leadership race. Maxime, welcome to Economics Detective Radio.

Bernier: Thank you very much for having me.

Petersen: So, our topic today will be Canada's economy and its economic policy. There's a lot to get to on this topic but let's start with the positive. The Fraser Institute's Economic Freedom of the World Index ranks Canada as the fifth freest country in the world, actually tied for fifth. We're well ahead of our neighbors, the Americans, who come in at number 16. So, to start our discussion, Maxime, what is Canada doing right with respect to its economic policy?

Bernier: First of all, I think that this was the ranking that the Fraser Institute did a year ago, if I remember very well, and at that time we had a balanced budget when we were in government and also we were successful in lowering taxes for every Canadian. And I think that's a key when you speak about more freedom you must also have less government and a limited government in Ottawa. And I think that was the goal of the Conservative government when we were in government.

And also we have a lot of free trade. That's very important. We signed free-trade agreements with I think, if my memory is good, 45 countries. So, when you have more free trade like that, Canadians are able to buy goods from every country and they are able to also export products. So, that's helping also.

More free trade, less government, lower taxes and I think that's a big reason why we are there now.

Petersen: Yeah, there's a pretty general economic freedom, and you mentioned that that ranking came out last year and we have had a change of government recently so let's see if we can keep our high position.

But let's move on to some specific areas where we're not so free. Let's start with telecommunications. Canadians have some of the most expensive cell phone bills in the world. You personally did some work in deregulating the telecommunications sector when you were Industry Minister in 2006-2007. Can you talk a little bit about the changes that happened then and where we are now?

Bernier: Yeah, at that time we wanted to deregulate the telecom industry, mostly the regulation that was imposed by the CRTC. We were successful in doing that, and afterwards I think we had a little bit more competition in Canada in telecom.

But we didn't have time to also abolish the restriction on foreign investment in telecommunication. And so I think that would be the next step to take to have a bit more competition. And so that's why in my program I have a very strong platform about deregulating and also abolishing the prohibition on foreign investment in telecom and also in the aviation sector. So like that, corporations from outside Canada will be able to invest here in telecom and that will help Canadian consumers, who will have more choices and lower prices. But it was the deregulation that we did---that I did when I was Industry Minister---that was the first part of the deregulation. So now we must go ahead with abolishing the prohibition on foreign investment in telecom.

Petersen: Right. The vast majority of Canadians live right on the border with the United States and if you just step across the border suddenly you can buy a data plan for much less. One thing I was struck by when visiting the United States was that people just watch YouTube videos when they're on their mobile data. And you don't see that in Canada because it's so incredibly expensive. So, I wouldn't be surprised if we allow the American companies to sell to us if we wouldn't get exactly the same plan they're getting which would be great.

Bernier: Yes, I just want to add that Verizon, I think they wanted to come to Canada but they were not able to. They had created a Canadian corporation and all that and at the end, they decided not to come to Canada like their operations in the US. So, I think that will be a big step if we are successful in abolishing the restriction on foreign investments. That would make a difference for Canadian consumers.

Petersen: So, we have a similar issue with the airlines. It's very, very expensive to make a domestic flight within Canada, for instance, flying Vancouver to Toronto is about twice as much as flying L.A. to New York even though they are similar distances. So, do you want to comment on that situation? We only have the two airlines West-Jet and Air Canada. Could that be similarly fixed?

Bernier: Yes, you're absolutely right. If you want to fly from Canada to another country it is still competitive, but if you want to fly in Canada, inside the country, from example Montreal to Toronto, or other cities like that, it is very expensive. Because, like you said, we have only two main carriers in Canada: West-Jet and Air Canada. And we don't have like other countries a low-cost carrier.

So, we need to have one and I know that some business entrepreneurs want to create one low-cost carrier but their funding, their capital it's coming from the U.S. and from U.K. And you still have the same things in aviation, we have a restriction on foreign investment coming from other countries. So, that's why we must abolish that and like that we'll have a low-cost carrier and that will compete against Air Canada and West-Jet. That adds more competition, more choice and at the end lower prices.

So, I know that the Federal Government and the Minister of Transport, they're looking at it right now because these entrepreneurs want to create that corporation, a low-cost carrier. And they're ready for that. They're looking at it right now so, I hope they will abolish that but I'm not so sure. This is why for me, I have a platform that is based on more freedom and less government and it will be always good for Canadians. That is why I'm pushing that very hard, I wrote to the Minister about that to be sure that they will abolish foreign restriction in the investment in the aviation sector.

I don't know if they will do it but if not I will do it when I will be the leader of the party and Prime Minister.

Petersen: Yes, I hope you succeed in that. This one is a particularly important one because if airfare is expensive then more people drive and driving is statistically much more dangerous. So, you have more highway fatalities. I personally drove over 1,200 kilometers to visit family over Christmas. So, I'd really love to have an option to fly cheaply but it's just out of reach at our current airfare prices.

We also have a problem here in Canada, a similar related problem with cartels. We tend to create cartels in a lot of industries and we have one set of policies called Supply Management that applies to poultry, dairy products, even maple syrup (which is very quintessentially Canadian) keeping these prices artificially high. So, could you talk a bit about Supply Management for those who maybe haven't heard of it?

Bernier: Yes, Supply Management it is a legal cartel for dairy, poultry and eggs and the like. The producers on the Supply Management are able to fix high prices for these products and they are fixing the production also. That's why it's a cartel, they're fixing the production for the Canadian market and they are fixing the price, every year they increase the price of these products.

So, I am the only candidate for the leadership of the Conservative Party of Canada and also the only member of Parliament who's speaking for Canadian consumers and that wants them to save $2.6 billion every year. Because that's the cost of keeping that cartel and for a family the cost is $500 every year. I want them to be able to buy poultry, eggs, and milk from other countries---they want to export that---but because we have tariffs at the border of 300% on products coming from other countries to be sure that the dairy producer in Canada will be able to fix high prices for their products.

So, for me, if you believe in a free market you must abolish that and I don't want to do work for 19,000 farmers that are on Supply Management, I want to work with 35 million Canadians. And I think that's the most important for me and actually, the farmers just represent 10% of the farmers and all the other farmers in Canada, like the beef producers and all the other farmers are not on the Supply Management, they are operating in a free market. So, it is not fair and to be fair we need to abolish that but because as a special interest group they are very powerful and they're very well connected with the politicians, they were able to keep that privilege for a very long time and I think now it's time to speak for Canadian consumers and that's what I'm doing so I hope to be successful with that.

Petersen: Ironically Facebook has been serving me advertisements from the Canadian milk producers and their tagline or slogan is Canadian milk is worth crying over, or spilt Canadian milk is worth crying over, or something like that. And the irony is that if they supply too much milk, because of Supply Management they actually have to dump it to keep the price high. So it is really just wasting perfectly good milk and poultry.

Bernier: Yes. If they produce too much they cannot export their surplus because it's a subsidized milk. So that's why it's bad for them. They are producing good products, good milk, good dairy, good poultry, and eggs and I want them to be able to export their products to other countries and right now on Supply Management they can't because they have the responsibility and the obligation to produce only for the Canadian market.

Petersen: You mentioned the 300% border tariff on U.S. dairy. I think in the U.S. they have a different policy where they actually subsidize it and keep the price artificially low. But we had this strange situation a few years back where Canadian pizzerias were smuggling in black market mozzarella over the border and got caught. You shouldn't have to smuggle mozzarella cheese. If we had a free market, there would just be one price for mozzarella cheese and you wouldn't get a benefit by smuggling it.

You mentioned that you're really the only one calling for an end to this Supply Management policy and yet our Prime Minister for almost a decade, Stephen Harper, has a Master's degree in economics. He must have known that this policy was not good for Canadians. And most of the MPs are smart people, they must realize it, but is it as simple as the cartels themselves just making big donations and buying protection for this policy?

Bernier: First of all, you're right, when we were in government that was the policy of our government to keep that cartel, that Supply Management system. All the members of the Conservative Party of Canada voted in 2004 in a convention to protect these farmers and after that when we were in government in 2006-2007, that was the policy of the government, and that was the policy of the government until the end, until 2015.

And I think that at that time we didn't want to displease the cartel and that special interest group. And I tried to fight for that on the cabinet table but I wasn't successful. Most importantly, I think now I'm able to do it and I will ask---if I'm the leader of the Conservative Party---I will ask the members to decide on that and to review their policy statement that they did more than 12 years ago, and I hope the members will abolish that and they will believe in a free market also for producers on Supply Management.

Petersen: Have the supply managed industries been pushing back against you? Have they been taking out ads or funding your opponents? How are they trying to protect their cartel status?

Bernier: For sure. It's an important cartel in Quebec and in Ontario, they want to do everything for Maxime Bernier to not be elected. And so I think they are buying memberships to vote for the leadership of our party to be able to vote because, as you know, you need to be a member.

If you want to be a member and support my candidacy you can go on my website www.maximebernier.com and you'll be able to become a member for only $15. But, yes, the dairy producers are working to be sure that I won't be elected.

But there's more Canadians than dairy producers. So, I'm working hard to be sure to be successful because they want to keep their privilege and we'll see what will happen. And it's easy for them because I'm the only candidate who wants to abolish that and speaking for Canadian consumers, so they can vote for all the other candidates and they will have somebody who will support their special interest.

Petersen: I hope you succeed. And you're right there are more Canadians than supply managed firms or farmers that benefit from this particular policy. But you have this issue of the cost being dispersed and so although there are fewer farmers who benefit from the cartel and from Supply Management there may be a lot more motivated per capita. So, I hope you can succeed in getting over that, sort of, public choice hurdle. But my cynicism kind of says that it's an uphill battle.

Bernier: Absolutely. But also, I must say that the other farmers that are not on Supply Management, they have a huge interest also for that cartel to be abolished because it's not fair for them. Each time Canada is negotiating a free trade agreement with another country they have access, for example, Canadian beef will have access to the other country's market, but they won't have the full access because we're not giving full access to their milk, poultry, and eggs. So at the end, they are paying a little bit for that and they don't have the access that they would have otherwise. And they understand that. So the other farmers that are not on Supply Management have the interest to be sure that we have all these steps that can counterbalance the special interest group.

Petersen: I wonder about that because if beef and poultry are substitutes then you would think that the beef producers would want their competitor to have higher prices than they do so people would maybe buy more beef. But there is the issue of the international agreements.

You've called for the privatization of Canada Post and the removal of its monopoly on letter mail. That's another area where Canadians pay more, not just for letters but also parcels shipping to and from and within Canada is much more expensive than it is in the United States and other places. So could you talk about what the legal status of Canada Post is and what both parcel shipping and regular mail are, what the legal status of both of those is?

Bernier: Yes, you're absolutely right. Canada Post is a state-owned enterprise and I think in 2017 we must do like other countries and privatized that. They are charging at a huge cost because they are not competitive, they have huge expenses and they're not so efficient.

So, my thinking about that is, these are not services that Canadians need to be delivered by a government entity. We have a private sector for delivery and I think that it is not an essential service for Canadians any more. And they are using Canada Post less and less with emails and all that, and so we must do like in Belgium, like in U.K., like in France and privatized it.

Also, they're charging very high prices for their products. So, if we have more competition, that will help and at the end that's the solution. But they want to keep that and for me if you want to speak for Canadian consumers you must go ahead and do that reform, that's my proposal.

Petersen: Yes, it's such a big issue because in other countries that have much cheaper shipping, people are opened up to the whole global marketplace, you don't have to go to your local store to buy any particular good, you can buy it online and have it shipped to you. But for Canadians, you're adding $10-$15 to the price and so Canadians aren't really online buying things nearly as much as, for instance, our neighbors the Americans.

And when Canadians want to run online businesses and maybe ship things to other people to stay competitive they often have to drive across the border and ship from the United States because it is just so much cheaper.

And Canada Post has a legal monopoly on letter mail which is a little bit odd. Why should one particular government entity have the legal right to ship our mail? It's kind of an odd historical anomaly that we could be rid of.

Bernier: And you have to think the price also. It's not a free market. It is them who are fixing the price because, like you said, they have a legal monopoly. That's what I want to do, I want to be sure that we can have competition there.

Petersen: You've also called for reducing trade restrictions within Canada. This is one of those things that is so odd, is that we're one country, ten provinces, but we restrict many goods from being shipped within our own country across borders. So for instance alcohol. If you have a craft brewery or a winery in British Columbia it's very hard to ship it to even Alberta right next door. Can you talk about some of the internal trade restrictions that we have in Canada?

Bernier: Yes. We have a lot of them in these kinds of industries, but for me it is a bit of a shame that after 150 years we don't have an economy of exchange in Canada, because that was the goal of the Fathers of our Constitution. The fathers of our country, they wanted to have an economic union and we don't have that because of some restrictions, legislation, and regulation by provinces.

So, my goal is to be sure that we'll have an economic union. And to do that, it's against the Constitution and so I want to be sure to have a team in Ottawa of civil servants that will look at all the regulations and the legislations that are imposed by provinces and to bring provinces in front of the court when they don't respect the Constitution. Nobody has had the courage to do that and I think it's time to do it. And that will be the only solution because I cannot change the legislation or regulation at the provincial level and at the federal level we must respect the Constitution.

But I can assure Canadians that we'll do everything for the provinces to respect the Constitution. That's why we're going to bring the province in front of the court and the court will decide if it's constitutional or not. And I think it won't be because it's clear in the Constitution that we must be able to sell and buy goods from any province in Canada. That would be the solution. Because if you ask the provinces to do that, they have the problem and they cannot find the solution. So, that's why every year you have a meeting with the premier at the provincial level and they're saying, you know, we will abolish trade barriers and all that and it is not happening.

And they're the problem and they're not able to do that. They want to protect their own little market it is not good for Canadians, so we must do something at the federal level and that's what I want to do. I want to do a strong analysis of every regulation, legislation that provinces are imposing, legislations that are against free trade and after that bring them in court and the court will decide. And in the end I'm sure it will be unconstitutional and maybe when you do that, in five years after that, you have a real economic union in Canada like the fathers of our Constitution wanted.

Petersen: Yes. One wonders what is even the point of having a country if you're not going to have at least free trade within your borders? That seems to be the main benefit of all confederating and joining into one country instead of being 10 smaller countries.

Do you have any concluding thoughts, anything we didn't cover that you'd like to say?

Bernier: First of all I want to thank you for giving me that opportunity to speak with your people and if they want to know a little a bit more about our economic policy, they can go on my website www.maximebernier.com. Everything is there and I'm very proud of our platform. It's a platform that is based on individual freedom, personal responsibility, respect, and fairness and it is a platform that is based on real conservative values and the values of Western Civilization. So, if people like that they can become a member and they can vote for the leadership. I appreciate that you gave me this opportunity and maybe another time we can go on and speak about other economic issues.

Petersen: My guest today has been Maxime Bernier. Maxime, thanks for being part of Economics Detective Radio.

Bernier: Thank you very much and have a nice day.

Anton Howes returns to the podcast to discuss his new book, Arts and Minds: How the Royal Society of Arts Changed a Nation.

From its beginnings in a coffee house in the mid-eighteenth century, the Royal Society for the Encouragement of Arts, Manufactures and Commerce has tried to improve British life in every way imaginable. It has sought to influence how Britons work, how they are educated, the music they listen to, the food they eat, the items in their homes, and even how they remember their own history. Arts and Minds is the remarkable story of an institution unlike any other—a society for the improvement of everything and anything.

Drawing on exclusive access to a wealth of rare papers and artefacts from the Society’s own archives, Anton Howes shows how this vibrant and singularly ambitious organisation has evolved and adapted, constantly having to reinvent itself to keep in step with changing times. The Society has served as a platform for Victorian utilitarian reformers, purchased and restored an entire village, encouraged the planting of more than sixty million trees, and sought technological alternatives to child labour. But this is more than just a story about unusual public initiatives. It is an engaging and authoritative history of almost three centuries of social reform and competing visions of a better world—the Society’s members have been drawn from across the political spectrum, including Adam Smith, Edmund Burke, and Karl Marx.

Informative and entertaining, Arts and Minds reveals how a society of public-spirited individuals tried to make their country a better place, and draws vital lessons from their triumphs and failures for all would-be reformers today.

Kevin Erdmann of the Mercatus Center returns to the podcast to discuss his new book, Shut Out: How a Housing Shortage Caused the Great Recession and Crippled Our Economy. From the publisher's website:

The United States suffers from a shortage of well-placed homes. This was true even at the peak of the housing boom in 2005. Using a broad array of evidence on housing inflation, income, migration, homeownership trends, and international comparisons, Shut Out demonstrates that high home prices have been largely caused by the constrained housing supply in a handful of magnet cities leading the new economy.

The same phenomenon is occurring in leading countries across the globe. Gentrifying cities have become exclusionary bastions in the new postindustrial economy. The US housing bubble that peaked in 2005 is more accurately described as a refugee crisis than a credit bubble. Surging demand for limited urban housing triggered a spike of migration away from the magnet cities among households with moderate and lower incomes who could no longer afford to remain, causing a brief contagion of high prices in the cities where the migrants moved.

Links:

My previous interview with Kevin, from 2017

Kevin's policy brief for Mercatus, arguing that housing was undersupplied during the so-called "housing bubble"

Kevin's blog, Idiosyncratic Whisk

My guest today is Lyman Stone. He is an agriculture economist for the USDA, but our topic for this episode is his popular writing about migration. He blogs at In a State of Migration on Medium and co-hosts the podcast Migration Nation.

We discuss the history of migration restrictions in the United States, the economic impact of migration between and within nations, and the relationship between falling fertility and immigration.

The Great Baby Bust of 2017

"Economics and Emigration: Trillion-Dollar Bills on the Sidewalk?" by Michael A. Clemens (2011)

"Does Mass Immigration Destroy Institutions? 1990s Israel as a Natural Experiment" by Benjamin Powell, J.R. Clark, and Alex Nowrasteh (2017)

Phil Magness returns to the show to discuss his work on slavery and capitalism, particularly as it relates to the New History of Capitalism (NHC) and the New York Times' 1619 project. Phil recently wrote an article entitled, "How the 1619 Project Rehabilitates the 'King Cotton' Thesis." In it, he argues that the NHC has unwittingly adopted the same untenable economic arguments made by slaveowners in the antebellum South: that slave-picked cotton was "king" in the sense of being absolutely indispensable for the global economy during the industrial revolution.

[T]he economic reasoning behind King Cotton has undergone a surprising — perhaps unwitting — rehabilitation through a modern genre of scholarly works known as the new history of capitalism (NHC). While NHC historians reject the pro-slavery thrust of Wigfall and Hammond’s bluster, they recast slave-produced cotton as "not just as an integral part of American capitalism, but . . . its very essence," to quote Harvard’s Sven Beckert. Cornell historian Ed Baptist goes even further, describing slavery as the indispensable causal driver behind America’s wealth today. Cotton production, he contends, was "absolutely necessary" for the Western world to break the "10,000-year Malthusian cycle of agriculture."

And this same NHC literature provides the scholarly foundation of the ballyhooed New York Times' 1619 Project — specifically, its foray into the economics of slavery. Guided by this rehabilitated version of King Cotton, Princeton sociologist Matthew Desmond enlists the horrors of the plantation system to launch a blistering attack on modern American capitalism.

Desmond projects slavery's legacy onto a litany of tropes about rising inequality, the decline of labor-union power, environmental destruction, and the 2008 financial crisis. The intended message is clear: Modern capitalism carries with it the stain of slavery, and its putative excesses are proof of its continued brutality. It follows that only by abandoning the free market and embracing political redistribution will we ever atone for this tainted inheritance.

Mark Thornton returns to the podcast to discuss his new book The Skyscraper Curse (available digitally for free). The book discusses the connection between record-setting skyscrapers and economic recessions. Here's an excerpt from the book's introduction:

The Skyscraper Index expresses the strange relationship between the building of the world’s tallest skyscraper and the onset of a major economic crisis. This relationship only came to light in 1999 when research analyst Andrew Lawrence published a report noting the odd connection between record-height buildings and noteworthy economic crises — that is, the skyscraper curse, a relationship that dated back nearly a century. Without a theory to support it, journalists largely dismissed Lawrence’s report as the fun story of the day.

Mark relates these skyscrapers to the Austrian Business Cycle Theory (ABCT). He shows how record-setting skyscrapers and recessions can be caused by a common factor: excessively cheap credit. We discuss this theory in the interview.

This episode of Economics Detective Radio features Pierre Desrochers discussing the life and work of Jane Jacobs. Jacobs, born Jane Butzner, was a thinker and activist who wrote about cities. She spent her early career as a business journalist. When she started writing about urban renewal, she recognized the policy for the disaster it was. Jacobs became a voice for the general dissatisfaction with a policy that would bulldoze whole neighbourhoods, relocating the inhabitants into new buildings preferred by urban planning reformers and political elites.

The editors of Fortune Magazine invited Jacobs to write a piece about downtowns. Her piece, “Downtowns are for People” became the magazine’s most-discussed article. She developed the ideas in that article into her first and most famous book, The Death and Life of Great American Cities. The book launched her as a minor celebrity.

In New York City, she successfully opposed initiatives to “renew” Greenwich Village. She also opposed a plan that would have cut a highway through SoHo, Chinatown, and Little Italy. Eventually she found herself opposing the Vietnam War, and, fearing that one of her sons would be drafted, moved to Toronto.

Jacobs’ most important contributions to economics came in her second book, The Economy of Cities. Jacobs is essentially a spontaneous order theorist, though she never used that term. Her concept of entrepreneurship is particularly rich and dynamic. Unlike most economists (even Austrians) she has no urge to talk about how entrepreneurship leads us closer to equilibrium.

Her largest influence on the mainstream economics literature is the so-called “Jacobs externality.” Jacobs suggested that innovation would often come from outsiders to a given industry, so having many diverse industries clustered in a small geographic area would lead to innovation. The alternative thesis, associated with Alfred Marshall and later Paul Romer, holds that when a region specializes in a particular industry it allows knowledge spillovers to occur between similar firms. There has been significant empirical research to try to resolve these two opposing views, with Jacobs often coming out the winner.

Pierre can be found online at his academic website.

Today's guest is Jamin Speer of the University of Memphis. We discuss his paper, "Are Changes of Major Major Changes? The Roles of Grades, Gender, and Preferences in College Major Switching" co-authored with Carmen Astorne-Figari.

The choice of college major is a key stage in the career search, and over a third of college students switch majors at least once. We provide the first comprehensive analysis of major switching, looking at the patterns of switching in both academic and non-academic dimensions. Low grades signal academic mismatch and predict switching majors - and the lower the grades, the larger the switch in terms of course content. Surprisingly, these switches do not improve students’ grades. When students switch majors, they switch to majors that "look like them": females to female-heavy majors, and so on. Lower-ability women flee competitive majors at high rates, while men and higher-ability women are undeterred. Women are far more likely to leave STEM fields for majors that are less competitive – but still somewhat science-intensive – suggesting that leaving STEM may be more about fleeing the "culture" of STEM majors than fleeing science and math.

Links

Jamin's Twitter thread about the paper

Niederle and Vesterlund's paper on gender differences in competitiveness

Neal's paper on job mobility featuring the following quote mentioned in the episode:

"To the extent that college provides an opportunity for premarket search over potential careers, this result [of fewer career changes among college graduates] is to be expected." (p. 250)

My guest on this episode is Shruti Rajagopalan of the State University of New York's Purchase College.

We discuss Shruti's work on constitutional political economy as it relates to India. We start by talking about the Indian constitution. India got its independence in 1947 and ratified a constitution shortly after in 1949. Interestingly, it is the most amended constitution in the world. Shruti argues "that the formal institutions of socialist planning were fundamentally incompatible with the constraints imposed by the Indian Constitution."

We go on to discuss Shruti's work on the Bhopal gas tragedy, which demonstrates some of the failings of India's institutions. The Bhopal gas tragedy was a man-made disaster in 1984 where mishandling of dangerous chemicals by the company Union Carbide resulted in thousands of deaths and hundreds of thousands of non-fatal injuries among the public. The Indian government mismanaged the legal cases against Union Carbide, resulting in no payout to the people affected by the disaster.

Today, Josh Hendrickson joins the show to discuss his paper, "U.S. Maritime Policy and Economic Efficiency." The paper discusses the controversial Jones Act, and how it (and similar policies) were designed to maintain a sovereign merchant marine for use in times of war. Te abstract reads as follows:

Critics argue that maritime policy is protectionist legislation that restricts competition and reduces economic efficiency. In this paper, I argue the contrary. I begin with the premise that the primary role of the state is to provide national defense. A country must be able to protect its wealth, and therefore its capital, from plunder and/or destruction. This implies that a sufficient level of defense spending is increasing in the capital stock. An efficient solution is to tax capital to finance defense. Nonetheless, there is reason to believe that capital devoted to shipping imposes a lower marginal defense cost than other forms of capital because ships can be used as a naval auxiliary. If so, then one would expect that the optimal tax rate on shipbuilding and the merchant marine would be lower than other capital-intensive firms. Put differently, maritime subsidies during peacetime can be understood as the result of a Coaseian bargain in which the government compensates shipbuilders and the merchant marine during peacetime in exchange for their services during wartime. I argue that the history of U.S. maritime policy is broadly consistent with my theory. I conclude by discussing the current state of the merchant marine and maritime policy.

What follows is an edited transcript of my conversation with Vincent Geloso.

Petersen: My guest today is Vincent Geloso of the Free Market Institute at Texas Tech University. Vincent, welcome to Economics Detective Radio.

Geloso: It's a pleasure to be here.

Petersen: So the paper we'll be discussing today is titled "A U-curve of Inequality? Measuring Inequality in the Interwar Period" which Vincent has co-authored with John Moore and Phillips Schlosser. The paper casts doubt on the claim from, most notably, Thomas Piketty and others that inequality fell from the 1920s to the 1960s and rose thereafter. So, Vincent let's start by discussing the inequality literature prior to this paper. What is this U-curve and where did it come from?

Geloso: The U-curve is probably the most important stylized fact we have now in the debate over inequality and the idea is that, if you look at the twentieth century, there's a high point of inequality in the 1910s, 1920s and then from the 1930s onwards up to 1970s, it falls dramatically to very low levels and re-increases thereafter, returning to 1920s-like levels of inequality. So the U-curve is the story of inequality in the twentieth century. It's mostly a U.S. story because for other countries it looks less like the U-curve than an inverted J. So it's higher in the 1920s, it still falls like in the U.S. but really increases much more modestly than the United States in places like Sweden, or France, or Canada. But the general story is that there was a high level of inequality at the beginning of the century well up to the mid-second-half of the twentieth century and it re-increased in the latter years and then we have been on a surge since then.

Petersen: So, a lot of this is coming from Thomas Piketty, who of course wrote the surprising bestseller "Capital in the Twenty-First Century." Could you talk a little bit about where his data came from?

Geloso: Okay, by the way, this is where there's a failing on my part which I think I always find funny; an anecdote to tell about Piketty. I'm originally from Quebec, so I am a French-Canadian, I speak fluent French. His work started coming out in French first and I initially started to write elements of the paper we're discussing today back when it was only in French. And then I told myself, "There's no point, it's only a French book, nobody reads French. What's the point of writing a paper about a book that no one will read?" Biggest mistake of my career, I guess, not writing that paper before.

But anyways, besides that, his entire argument is based largely on his most influential paper---which I think was published in 2003 in the Quarterly Journal of Economics---which was using tax data. So, the records, the fiscal statistics to create measurements of income inequality in the United States and the advantage of that is that since the income tax started in 1910s you've got a long, long period of measurement of income inequality with the same source.

So it's a great advantage because a lot of the people before like Kuznets, like others had to use residual estimates, different sources, they were amalgamating different sources together and it was always a problem because you couldn't create one homogeneous time-series of inequality. You could get a rough idea and there's a few papers---for those who read economic history stuff---there was a paper by Lindert and Williamson in the 70s in research in economic history and you can see their first graph in that paper was a series of different measures of inequality. They were all pointing to the general similar shaped curve but they were all from massively different statistics, different sources. So one was the 50:10 ratio of earnings, another one was a measure of income, the other was wages and they are all different measures, they are not perfect.

You can get a good idea, a rough idea but you cannot have a continuous time estimate which is what Piketty innovated by using the tax-wealth with Emmanuel Saez, recreating this long continuous trend in data from 1917 to the modern day. And they keep updating it regularly to include the new data on a yearly basis.

Petersen: So tell me about tax avoidance. How does that affect things?

Geloso: Okay, this is where the existing data that all the different sources had---Piketty made advancement. Rather than having variance across different sources, he was eliminating that variance. But there's still an issue of variance within a source. So it's not because you have used a homogenous source that the quality of the data contained within the source is consistent. There's actually quite a lot of variance in data quality because of the way the tax system was done.

So a lot of the debate today for the data for today has been---has there been such a large increase in inequality as Piketty and Saez and Atkinson and others have been pointing out? And the reason for that was largely because, as Alan Reynolds, as Joel Slemrod, and a few others have pointed out, the tax changes of the 1980s were so large that people shifted the way they reported income. They changed the way they reported tax liability. What used to be classified as corporate income became classified as individual income, and so you get an artificial increase because of a way the tax system has changed. And this is why a lot of people say, as soon as you correct for the effect of changes in tax reporting behavior, you actually get a much more modest increase of inequality.

But that's from 1980 to today with a massive tax change in the 1980s. If you go back further in time, to the interwar period the tax changes are much more dramatic. In 1913, the tax rate was 7%, went up to 15% in 1916 to 73% until 1921, went back down to 24% by 1929, went back up to 79% by 1939. Imagine, that's a lot of movements in the way taxes will affect behavior and it will affect reporting behavior. So, will you report, will you be as honest as you would be when you're filing taxes at 79%, as you are when you're filing taxes at 24%? So you're getting---because of these massive changes in tax regimes that are happening over very short periods of time---these massive changes affect the quality of the data set that Piketty is using for the left side of his U-curve.

The left side of the U-curve is probably inaccurate to a very high level because of tax avoidance, and this is where the economists in general failed to talk to historians because there's a few papers out there that did measure---especially in the Journal of Economic History---that did measure changes in reporting. So changes in tax avoidance occur basically to a large level by the top incomes, as Gene Smiley argues in the Journal of Economic History, for example, which Piketty has never cited neither Saez, neither anyone in the debate. And he did corrections, so he checked: Okay, when a tax rate went down from 73% to 24%, did people change their reporting behavior? Did more rich people start to report incomes? And the answer is 'yes.'

And as soon as he started doing corrections for that to control the "artificialness"---if that's a word---of the tax changes on affecting the level of inequality, he actually finds that the 1920s have a much lower level of inequality because of the reduction in tax rates and there was very little upward trend, especially when we're comparing with the Piketty, with the Mark Frank data, with the Kuznets data and it shows that as soon as you adjust for tax avoidance the left side of the U-curve flattens dramatically and it looks more like an L---an inverted L---or a J, but it doesn't look at all like a U-curve and that's just tax avoidance for the 1920s. The increases in the 1930s in tax rates would have had the opposite effect where people would have reported less income.

So, the level of inequality in the 1920s is overestimated in Piketty and it's underestimated for the 1930s. So you're kind of flattening the entire interwar period as soon as you consider the one issue of tax avoidance. And there are estimates out there in the Essays in Economic and Business History by Gene Smiley and Richard Keehn. Smiley's article in the JEH, which has been ignored in the literature, but which did check that people at the top of the income distribution are generally very sensitive to changes in tax regime in the way they report their tax liability.

Petersen: So, today they would do that by maybe registering---having their money in the Cayman Islands or Ireland or the Isle of Man, their tax shelters abroad. Was the avoidance different in the 1920s? I expect it would be harder to enforce taxes given that the income tax was so new and there were all these changes and they didn't have electronic records, or how did it work?

Geloso: You're thinking of avoidance in a very negative term which is the illegal part, which is what has somewhat permeated the public debate and I have this reflex myself. I think of avoidance always in that way. But avoidance is sometimes just planning your taxes, your sources of income, differently. One example would be---and it's not really applicable to our case---parents can put their kids on company payroll because it's cheaper dollar for dollar relative to giving them an allowance from after-tax personal income.

So, people can change their behavior in their way to get money, in the way they report their income. So you can pass corporate income as a personal income or personal income as corporate income. You can deduct expenses one way or another. And one way or another it comes to affecting the quality of the data set. And it does matter, because if you look at the 1980s when there was a rapid change in the income tax rate, which was much more important a change than the change in the corporate tax rate, it led people to change the type of incorporation they were in, so they became S corporations, so corporations that were not subjected necessarily to the corporate income tax. So, it affected the way people reported, classified their income and it appears artificially the income inequality statistics.

The 1920s' equivalent was municipal bonds. Municipal bonds were assets that delivered incomes but they were not subjected to taxes so this was like a tax shelter that was completely legal and that rich people used in dramatic amount to reduce their tax liability. So, when people think of tax avoidance it's generally this idea that people just reorganized their classification of income to make sure they have the smallest liability possible and in a situation like that, what you get is a much different level and trend of inequality because of the changes in tax regimes that induce changes in tax reporting behavior.

Petersen: So is Piketty not adjusting for this at all? He's just taking the tax data at face value?

Geloso: He's trying some stuff but he gets a lot of the tax history quite wrong and what alerted us to this is that Gene Smiley's paper, which is not in an obscure journal, it's in the Journal of Economic History which is considered a top tier journal in the profession of economics---it's not AER, it's not QJE, but it is a very respectable journal. And Smiley's article is also very cited. There's a large number of citations of that paper and Piketty just ignores it. And you skim through his book and the discussion is always brushed aside and these effects of changes in tax regimes is always minimized as if it was not important.

But tax avoidance is only like a fraction of the problem, because if you look, there's another issue that's much more dramatic than tax avoidance. Alone the issue of tax avoidance, if you take Smiley's stuff, changes the narrative dramatically but that's just our first shot in this debate with me, John, and Philip. It's our first shot, the second shot is that filing requirements were nowhere close to what they are like today. And actually this is something funny, the idea of Piketty is that you can create a series assuming tax compliance for a country that was founded on a tax revolt which is---for a historian---kind of a weird assumption built in the way he does his history part. And if you look at it, one of the example is that you look at the changes in wages of people---wages for unskilled workers, wages for mining workers, for agricultural workers---they do not evolve at all like his bottom 90% of income behaves, it behaves actually very differently.

So, in our paper we show that the quality of what's at the bottom of the income distribution is dramatically different, so wages go up much faster than the income of the bottom 90%. And this is wages.

So, you think what, maybe hours are going down? No they're not in the 1920s and 30s---well in the 30's they're going down---but in 1920s hours are actually staying stable and in some industries are actually slightly increasing. So you should not see what Piketty's data suggest, which is that there was stagnation in the income of the bottom 90%. There was declining unemployment, there was rising wages and hours remaining relatively stable.

It's impossible to reconcile these facts with those of Piketty without considering that there might be problems in the way people filed their taxes. And this is where the entire thing breaks down and you look at, for example, the number of tax filers that were actually there. And you look at that as a percentage of the American population, up to the 1930s---so until the Second World War---there's never more than 6 or seven 7 percent of population that files in tax reports.

Petersen: And you'd expect it to be the wealthier people too, who are filing right? Because you have people below a certain income, they don't file income tax, right?

Geloso: Exactly. This wouldn't be a problem if your distribution of people behaved equal to the distribution of the general population and the movements were the same. It wouldn't be a problem. The thing is when you look at the number of adjusted tax returns which is what Piketty and other people like Estelle Sommeiller or Mark Frank do. They try to re-correct this issue of a very small number of tax reports that were actually filed in and they get an idea---and this is figured too, I think, in our paper. There's a steady upward trend in the number of adjusted tax units but when you look at the actual number of tax units it moves so much. It goes up and down and it doubles in the span of two years, then it reduces by half in the span of another two years and these are such large movements in the number of tax units that it's hard to see that this might be a representative sample of the American population.

Differences in reports and such changes in our reporting---and the number of reports I should say---suggest that there is actually a problem in the quality of the data. And this is where we're saying that if you combine this with the observation that wages were increasing, unemployment was falling, and that hours were more or less stable, and that you add this fact of the massive changes in tax returns, you can easily question the quality of the data from the 1920s and the 1930s.

This is where we're coming in and we're saying, no, the people who reported taxes were very volatile. They were rich people who reacted to changes in income taxes. Lower income individuals also were very much tax resisters. There's an entire story told by David Beito. I think it's with University North Carolina Press. He has a book on tax resistance in the United States during the 1920s and 30s and there's actually a large documentation of anti-tax leagues that have massive memberships of common individuals who are resisting filing taxes at that time.

So it's quite plausible to say that, if there's such a difference in wages, in hours, in unemployment what they and these massive changes in the number of tax returns filed, it suggests that probably the poor people just didn't file in their taxes. So, any movement at the bottom of the distribution does not exist according to Piketty's data. But there were movements at the bottom. There were people who moved from poor Kansas to Illinois. They were still in the bottom 90% but by moving from farming Kansas to Chicago to work in a garment industry, they get a gain in income but that is not captured in Piketty's data because it's highly likely that poor individuals tended to file fewer tax returns and were probably more hostile to filing them, and the rich were just reacting to changes in tax regimes. So, the tax filing requirements would actually lower the level of inequality overall from the 1920s and 1930s.

So, the tax avoidance issue would change the trend and the issue of tax filing requirements would drop the level because we're not capturing bottom incomes properly. So you're changing the U-curve progressively as each of our critiques is embedded in the argument you actually progressively bring down the left side of the U-curve and it looks more and more like a J, or an L, or a hockey stick.

Petersen: I remember in 2012 Mitt Romney got in trouble for pointing out that 47% of the population doesn't pay income tax. So if Mitt Romney were running for president in the 1920s, I guess he would have said something like 94% of people are not filing and paying income taxes. Is that right?

Geloso: Exactly. That would be a very accurate. Well it's 94% of people. The taxes were based on households, but still 6% and then later on after the Second World War it jumped above 40%. So there's a massive change not only in tax regimes in terms of rates, but filing requirement regimes, which will also change the tax behavior of individuals. And not only that, this is something that actually, it was buried in a footnote of Smiley's article which is---still I will point out not cited by Saez and Piketty---but it's so rigorous and it contains so many pieces of information that are crucial.

Until 1938 public sector employees were not mandated to file in taxes. This is an unknown fact. Until 1938 they did not have to file in taxes. So this is actually a very very big factor. So in terms of wage earners, so not everyone, it excludes farmers, but all wage earners, 12% of them were government workers. This is a substantial share of the workforce and not only that, their earnings are slightly above the rest of the workforce and the increase in their earnings is above those of the other workers in the United States in that period. But they're just not considered in the tax distribution. So until the public salary Act of 1939---which was debated in the Senate in 1938-1939, the 1.2 million federal employees---this is a large number---were drawing large wages and they're just not included in the statistics based on tax data.

This has a massive impact on the level of inequality. Public workers were not in the top 1%, they were not the richest, they were not poor and they were earning much more over time. I'm not trying to debate whether it was efficient government spending or if they were paid at actually providing public goods that people actually did want. But set that issue aside, they had higher wages than the average representative of a sizeable share of the workforce and their wages increased much more importantly than other ones.

So you're affecting the trend. You're affecting the level and you add this other issue and then look again, imagine the U-curve in your head. Tax avoidance, it changed the trend. It made it less, it made it much lower in the 1920s than it was. It increased it relative to the Piketty data in the 1930s. The entire level then is reduced by adjusting for tax filing problems and then if you tried to adjust the issue of public sector employees who didn't have to file in their taxes you drop the level again, so it's looking less and less like a U-curve than what Piketty claims.

So, we haven't made all these adjustments, we're just stating facts that should be known in the inequality debate. Our goal is later on to test each of our points. We're sending such a large number of criticisms that there's bound to be one that sticks in terms of the data quality. Because these are such huge data quality that it effects a major stylized fact about inequality: the U-curve. If today we believe that the U-curve---there's a debate over whether or not there's been such a large increase---everybody agrees that there's been an increase, but there's a massive debate over how big this increase is today.

Imagine how crucial it would be to correctly debate the level of inequality and the trend of the left side of the U-curve. And if we're having all these debates with all the survey data, all the census data, all the private big data stuff that we have out there for the modern era and we still have high level of uncertainty, imagine anything with all the points I've mentioned for the interwar period, the left side of the U-curve. Everything seems to indicate that's probably much lower. I'm not saying there's not a U-curve, maybe it looks like a ball, a very modest ball, or there's a slight decrease, there's a slight increase, but it's not Piketty's U-curve, it's not the same stylized fact. And it changes the narrative we should have about inequality.

Petersen: Yeah, I'll never forget one experience I had. It was the original Occupy movement and I went down to see the protests going on in Victoria B.C. where I was at the time and one guy just had a big sign where he had printed off a graph. You know, an inequality graph of the 1% versus the 99% from Piketty and Saez. I'm not sure if it went all the way back to the 1920s but really, that's sort of a very clear sign that these debates are expanding beyond academia and having a big effect on the public and their perception of the world we live in, the ideal policies that we should be pursuing. A big part of the U-curve narrative is to say look at how successful the policies in the 40s and 50s were at reducing inequality and of course if we do away with this U-curve then maybe those policies, all they did was bring more people into the data set.

Geloso: Yes, and it changes who reports in the data set. I know Phil Magness, who is joining our team with me and John Moore and Bill Schlosser. Phil Magness has been working on showing that a lot of the changes in our tax regime actually just mimic the entire movement of the income share of the top 1%. It follows what share of taxes they're asked to pay and it leads to changes in reporting and basically it's a story of tax regimes and it changes the entire narrative.

But what I find much more depressing---and this is a depressing fact---if just one of our criticisms lands and sticks, the U-curve doesn't look like a U. Let's say it looks like a J. So there's a mid-point in the 1920s and we've been increasing since then at a relatively high rate since the 1970s. So it fell from 1920 to 1970 and then it re-increased.

If you look at what caused the leveling from 1920 to 1970, a lot of it has nothing to do with state intervention, with the efforts at redistribution. There's probably a sizable share of it that has to do with that. But there's also a sizable, and probably the larger share, that comes from poor regions catching up with rich regions. If you look at for example the history of inequality in the United States you would see that if you decompose the variance---so what caused the inequality---for most of American history a large share of inequality was caused by differences between states rather than differences between individuals.

One way to see it, and I'm making a caricature here to get the point across, but you could have the same shape of distribution in income in Kansas and New York. But since the average in New York is much higher than in Kansas, you average the two in, you get a much higher level of inequality, so you can get like a Gini coefficient for the two of them of .4 but in each of them individually taken the level inequality is like .2. And this is what happens for most of US history. There are massive gaps between regions rather than gaps between skills, between levels, so Mississippi is poorer than New York for a long period of time. But in the 40s, 50s, 60s, 70s this gap basically volatilized, it began to disappear.

One of the massive story of the twentieth century---some economists are aware---is this massiveness of convergence between regions. So the South gets richer. Poor black people move from poor states in the South where they're sharecroppers, they move to the North where they become wage earners in garment factories, in manufacturing and their earnings grow dramatically. So there's a massive convergence during that period. But, if you think about it for a second, it means that the gap between regions and the gap between races is actually a big driver in the leveling part of the U-curve, but that has nothing to do with tax redistribution. It has nothing to do with this.

So, as soon as we integrate our criticism into the tax data, and we show that the U-curve looks less and less like a U, the left side of it makes it look less and less like a U. And you consider these two economic history facts that I've just mentioned, it's incredibly depressing to consider in the inequality narrative, to say well a lot of it is just stuff that would have happened anyways. There would have been a decline in inequality regardless of how much the state intervened to redistribute income because there was this convergence. And not only that, the leveling of inequality was not as great as we say it was. So it changes the entire story.

We have inequality and how to address the issue and, not only that, I will point out that across the same period the one thing that goes up relatively steadily is government spending to GDP. If you were to account for all our criticism and then consider which part of inequality was reduced by government redistribution, it becomes more and more depressing because it seems like the effect is much smaller than people believe.

This is where we're trying to disentangle all these elements to tell the correct story of inequality in the United States and it starts with getting the shape of inequality right. But look at the story I have just told you. As soon as we make this small change of properly assessing things, the entire narrative we have then changes. And this is why it's a dramatic fact to get right and which is why we're somewhat disappointed with Piketty's stuff because he's not making the right level of methodological discussion.

Petersen: Right. Piketty uses his narrative to push for large-scale taxes and redistribution.

Geloso: Yes. I'm not saying that what he does is bad. It was a massive improvement relative to what was there before. But his story has flaws, and these flaws tend to support his narrative. We point out the flaws that would support a different narrative, that point out that probably inequality is not as high as we say. It probably would have fallen up in the 1970s because of very natural forces and if you think about the fact that since the 1970s there's been a slight divergence---so, imagine the leveling of inequality between regions in the United States. The divergence fell until the 1970s, but it has increased modestly since then because of regulation on housing, things that limit mobility across states that the depress income growth in some areas.

So you end up with a slight divergence since then and it is caused by states. It's not caused by anything that the government is doing. It's really an issue of very regionalized factors and each time you consider each of these nuances in, the narrative changes. And it changes dramatically against the story Piketty's telling and it shows that the flaws are biased in favor of the conclusion he supported.

Petersen: Right. And I know Phil Magness has really criticized him on this, that he makes a lot of decisions where you could go one way or the other and they always seem to turn out his way. Which is maybe a coincidence, or maybe it's not really the best way to do social science.

You point out that there were big price differentials between regions so how does that play into the regional inequality story?

Geloso: So, we're basing our discussion on this part of a longer series of papers where each of the points we've discussed will basically be one paper in itself. Here we're just stating this entire case for skepticism, then we'll see how big the impact is. Regardless, even if they're all minor, they will all change the narrative. And prices, regional price differences are an issue in that.

So, when you compare nominal income across a country you are getting an idea of inequality but---you will agree with me. So, you're in Vancouver. I'm originally from Montreal. If I give you a dollar income in Vancouver and I give myself a one-dollar income in Montreal you think that dollar will go as far in Vancouver as it does in Montreal?

Petersen: I think it probably won't.

Geloso: Exactly. So you would expect that regional price differences will affect the level of inequality. And there's actually a lot of people that do that. Each time you make controls for the level of price differences, you actually find that the level of inequality falls modestly. But it falls.

But the thing is, the price differences that we have today between Vancouver to Montreal or between New York and the region of Mississippi are not at all what these gaps used to be in 1920 or in 1925. In 1925 the gaps would have been much, much, much larger and from 1925 to the 1940s there's been a convergence of prices across regions. So for the first 50 years, roughly, of the twentieth century you get a convergence of prices across regions. So if you just took nominal income without correcting for regional price differences, you would get a massive drop in inequality.

However, if you were to correct for an increasingly smaller mistake because, if you think about it, if the wage gaps used to be on average 25% in 1890, let's say, and they used to be 5% in 1950, the error is decreasing over time. So you're getting the level off by a smaller and smaller quantity over time. So it means that the trend changes. The smaller your measurement error caused by regional price differences falls, the less pronounced the fall in inequality becomes. So you get a massive drop in inequality as measured by nominal income, which is not what it is when you correct the regional price differences, so you put this in real dollars adjusted for purchasing power parity.

And not only that, the errors caused by regional prices actually also follow a U-curve. So the errors that would be caused by price level differences across regions declined up to 1950 but since then they've re-increased. So if before you're getting a lower and lower trend---a lower trend by a diminishing amount of error---that means the right side of the curve, that means the increasing disparity in prices across regions since 1950. It means that you're actually increasing nominal prices using nominal income across the country. You will underestimate the increase in inequality since then.

So there are actually massive measurement errors caused by this issue of regional prices. When I say massive, I shouldn't say massive because it's dishonest but it affects both the level and the trends. So it affects the shape of the curve and remember we're making all these criticisms to the U-curve story piece by piece. Each one of them has a small prickly effect on the shape of the curve. As soon as one or more starts sticking---and they're all documented otherwise for other periods---not prior interwar period, not a sufficiently as we'd wish to, which is why we're doing this project of massive data collection.

It changes the narrative, changes the story, changes the way the curve looks and it's not much of a U-curve anymore and the proper measurements get you a very different story of the evolution of inequality. And that different story forces you to change interpretations and solutions and the entire structure of the debate must change to reflect the higher level of precision that is required for that debate.

Petersen: So. I'm trying to think of why these prices between regions might fall in the first half of the twentieth century and rise thereafter. I suppose a lot of it would be real estate, housing?

Geloso: Exactly. So housing markets in the U.S. are more or less freer in the first half of the twentieth century than they are today. So most prices, if you can trade a good across borders it will arbitrage out price differences minus transport, right? So if goods are movable more or less as well, and you find it for food, for TVs, for durable goods, you tend to find that there's actually still convergence.

But housing, you can't really move a house. There's actually movable houses but they're not a massive share of the market. So you'd expect less ability---and I'm saying this as a euphemism---but you'd expect less ability for arbitrage with housing. The only way you can do arbitrage for housing is by moving around.

So I am in Mississippi and I see super high wages in New York. I move from Mississippi to New York. So in Mississippi there's one more housing unit available and in New York there's one less housing unit available. I've driven up housing prices in New York and I've got higher wages but housing is a little more expensive in New York and then it falls in the region where I left in terms of housing, so that real wages in that region converged. So there's a convergence in real wages by people moving around.

The problem now is that, there is very, very, very little ability to move around in the United States because zoning restrictions actually make it harder for people to come and exploit the productivity of large cities like New York. So it prevents this convergence in real terms across regions.

So a large part of the increase in inequality needs to be corrected for regional price differences, which is the argument about housing. And this is where it's probably that the soundest part of our argument is that the Rognlie papers that attack Piketty state that a large part of inequality was driven by rents towards housing, so the fact that income derives from housing is increasing importantly as a share of total income and has nothing to do with capital itself. It's really the artificial restrictions on housing.

And this is largely the problem the inability of people to move to where wages are the most important. This changes the narrative. So that's why the story of regionally correcting price differences is crucial and it's rarely done over a long time series data set. But given the evolution of prices in the United States since 1900, it will affect the trend dramatically.

It will affect the level, the shape, and this is not integrated in the argument. And this is why we're saying in this paper, each time you make a correction to get a higher level of precision, it's getting more and more plausible that the curve of inequality doesn't look like a U, it looks probably like an L, probably like a J, but not a U. So the early period of the twentieth century is not as high as people have claimed and there's probably been an increase since the 1970s. Not as much as some would claim, but the increase seems to have happened. The U-curve is probably just fictional. It is the result of poor controls or variations in equality of the taxes.

Petersen: We've discussed the housing issue on other episodes of this podcast but it's sort of a one-two punch to inequality, where the people who, you know, maybe have bought a house in the San Francisco Bay area in the 1980s, have seen the value of that house skyrocket. And so of course that would contribute to the upper end of that wealth distribution. And the people who live in Mississippi and might like to move to the San Francisco Bay area and work for Google, can't afford to do it because of the extremely high price of rent there. So, that's reducing mobility and exacerbating these regional differences and also directly increasing the wealth of people who own homes who are, of course, already on the wealthier side.

Geloso: Yes, in a static term, correcting for price differences across region. So if you were to take a picture of the economy right now and you make a picture of inequality based only on nominal incomes across the country---just using U.S. dollars---you'll get a higher level than if you correct for regional price differences.

However, it's quite likely that if you were to make a movie of how inequality evolved, the housing restrictions---and this is a comment that's outside our paper and it's just something I think it's worth commenting on---if you make it so that it's impossible to move from low-income Mississippi to high-income California, you're going to make sure that inequality stays high and probably increases.

If, let's say, there's a shock to international trade and Mississippi area tended to be manufacturing and people can't move from manufacturing to higher productivity jobs in San Francisco. So in dynamic terms, housing restrictions by preventing mobility prevent a strong equalizing source of income. So in static terms you get the level wrong, but in a dynamic term you're preventing the powerful force of mobility across the country---and this is something I like to point out---if you look for example, you bring someone from Italy to Canada in 1890, his income increased 300% as soon as he got to Canada. He was much richer the minute he set foot in Canada. You probably increased inequality in Canada---I don't know about if you decrease it or increase it in Italy---but when you move that guy away, you probably reduce global inequality. So by moving people to where the incomes are higher you level off inequality.

In the United States it's the same narrative, you prevent this equalizing force from working through housing restrictions and making adjustments for---this is beyond the scope of our own research---but making adjustments for the increasing restrictiveness of housing that prevents mobility, you will probably get a large part of increasing inequality in the United States or even in England, which is also a situation like that, and in France, is not the result of terrible market forces responding to terrible government policies.

Petersen: My guest today has been Vincent Geloso. Vincent thanks for being part of Economics Detective Radio.

Geloso: It was a pleasure.

Andrea Matranga of the New Economics School in Moscow joins the podcast with a fascinating question: Why did humans adopt agriculture in the times and places they did? His research paper, The Ant and the Grasshopper: Seasonality and the Invention of Agriculture, offers a potential solution. Here's the abstract:

During the Neolithic Revolution, seven populations independently invented agriculture. In this paper, I argue that this innovation was a response to a large increase in climatic seasonality. Hunter-gatherers in the most affected regions became sedentary in order to store food and smooth their consumption. I present a model capturing the key incentives for adopting agriculture, and I test the resulting predictions against a global panel dataset of climate conditions and Neolithic adoption dates. I find that invention and adoption were both systematically more likely in places with higher seasonality. The findings of this paper imply that seasonality patterns 10,000 years ago were amongst the major determinants of the present day global distribution of crop productivities, ethnic groups, cultural traditions, and political institutions.

Figure 2 in the paper illustrates the locations and times of the adoption of agriculture:

Andrea looks at both these adoption dates and the rapidity of the spread of agriculture from these locations and compares them to the climatic seasonality of those locations, finding a strong connection between seasonality and adoption of agriculture. He argues that the need to store food caused people to become sedentary as opposed to nomadic, and once they were sedentary the opportunity cost of farming was greatly reduced.

Today's guest is Leah Boustan of Princeton University. Our discussion centers around her recent working paper, "The Effects of Immigration on the Economy: Lessons from the 1920s Border Closure."

In the 1920s, the United States substantially reduced immigrant entry by imposing country-specific quotas. We compare local labor markets with more or less exposure to the national quotas due to differences in initial immigrant settlement. A puzzle emerges: the earnings of existing US-born workers declined after the border closure, despite the loss of immigrant labor supply. We find that more skilled US-born workers – along with unrestricted immigrants from Mexico and Canada – moved into affected urban areas, completely replacing European immigrants. By contrast, the loss of immigrant workers encouraged farmers to shift toward capital-intensive agriculture and discouraged entry from unrestricted workers.

We also discuss her broader body of work on the age of mass migration. At the peak of this era, the United States had a foreign-born population of 15%. Today, after a century of restricted immigration, the United States foreign-born population has only just returned to 15%.

It's a fascinating discussion with special relevance to today's debates about immigration.

My guest for this episode is Bryan Caplan of George Mason University. We discuss his latest book, The Case Against Education: Why the Education System Is a Waste of Time and Money, in which he argues that the social value of education is negative.

This may seem paradoxical, given that more educated individuals tend to earn more than less educated individuals. This can be explained in two ways: First, people who get more education were likely more skilled in the first place; in other words, there is a selection effect. Second, people who are already skilled can use education to demonstrate their skill to employers; economists call this signalling.

Signalling plays an important role in Bryan's understanding of the education system. He sees the causal effect of education on income as being 80 percent signalling and 20 percent learning. Most signalling models view signalling as negative sum: signals are costly, and to the extent that they help educated workers by pushing their resumes to the top of the pile, they harm uneducated workers by relegating their resumes to the trash bin. If everyone gets educated, then no one has a better chance of finding a job, but they bear the costs of many years and thousands of dollars of education.

Bryan draws on evidence from many different research areas to support his case, from economic research on the Sheepskin effect and comparisons between individual and national effects of education, to educational psychology research on "learning how to learn." We had an excellent conversation and I hope you will enjoy listening to it.

Today's guest is Nina Roussille of UC Berkeley and we discuss her working paper, The central role of the ask gap in gender pay inequality.

The gender ask gap measures the extent to which women ask for lower salaries than comparable men. This paper studies the role of the ask gap in generating wage inequality using novel data from Hired.com, a leading online recruitment platform for full time engineering jobs in the United States. To use the platform, job candidates must post an ask salary, stating how much they want to make in their next job. Firms then apply to candidates by offering a bid salary they are willing to pay the candidate. If the candidate is hired, final salary is recorded. After adjusting for resume characteristics, the ask gap is 3.3%, the bid gap is 2.4% and the gap in final offers is 1.8%. Remarkably, further controlling for the ask salary explains all of the gender gaps in bid and final salary on the platform. To estimate the market-level effects of an increase in women’s ask salary, I exploit a sudden change in how candidates were prompted to provide their ask salary. For a subset of candidates, in mid-2018, the answer box used to solicit the ask salary went from an empty field to a pre-filled entry with the median salary on the platform for a similar candidate. Comparing candidates creating a profile before and after the feature change, I find that this change drove the ask gap and the bid gap to zero. In addition, women received the same number of bids before and after the change, suggesting they face little penalty for demanding wages comparable to men.

Related links:

During the conversation, Nina mentions Sheryl Sandberg's Lean In: Women, Work, and the Will to Lead. Among other things, encourages women to negotiate higher salaries, a strategy Nina's research would support.

A key difference between Austrian economics and the neoclassical-mathematical economics developed in the mid-twentieth century by Paul Samuelson and others is the assumption by the latter that people are essentially omniscient. What neoclassical economists call "rationality" effectively means omniscience. When the agents in neoclassical models face any uncertainty, the uncertainty is always fully understood in advance; for instance, a stock's value tomorrow might be drawn from a normal distribution with a known mean and variance. Without the assumption of omniscience, the Austrian school faces the important question of how people can make economic decisions in a complex, uncertain world.

Ludwig von Mises' answer (see his 1920 essay, Economic Calculation in the Socialist Commonwealth) was that capitalist entrepreneurs calculate in monetary terms. That is, they use the prices of the immediate past as their starting data, and attempt to direct factors of production in such a way as to maximize the spread between costs and revenues. If their predictions of price changes are good, they earn profits. If their predictions are bad, they earn losses. Thus, their direction of scarce resources is subject to immediate and consequential feedback allowing a selective process for only the best entrepreneurial forecasting methods. Without monetary exchange and prices, the problem of directing factors of production to their highest uses becomes intractable.

An interesting thing about Mises' calculation argument is that it does not only relate to socialism, but to free, capitalist societies also. Mises states that, "Economic goods only have part in this system [of monetary calculation] in proportion to the extent to which they may be exchanged for money." Thus, when a good cannot be exchanged for money, for any reason, it is subject to a Misesian calculation problem.

One type of capital good that I have identified as facing a calculation problem is education. The present value of an education is nowhere represented as a market price. The rental rate of the education is represented in the price spread between educated and uneducated labour, but the present value of the education is not a price because the education itself cannot be exchanged.

The present value of the education would correspond to the expected discounted stream of income generated by the education, but this income is not represented in prices until years after the education is complete. Thus, students cannot use monetary calculation to allocate their time, funds, and efforts to being educated. They cannot refer to the present value price of the education in their initial estimation of the education's value, nor can they refer to that price to evaluate their decisions in real time.

In my view, the way to introduce economic rationality to education is to have a well-functioning market in student debt. Student debt can be priced in the market, and can thus be efficiently allocated according to monetary calculation. The value of a student loan is related to the value of the student's education. To the extent that the availability of credit can affect people's educational choices, lenders will be able to steer the allocation of resources towards more productive lines of education.

The student loan markets are not healthy, however, because of decades of government interventions intended to increase the availability of credit for students.

Garrett M. Petersen is an economics PhD student at Simon Fraser University. You can find him online at the economics detective blog.

Fabio Rojas returns to the podcast to discuss his work researching social media. He has three main papers on the subject. The first is "More Tweets, More Votes: Social Media as a Quantitative Indicator of Political Behavior," which shows how Twitter activity predicted the outcomes of the 2010 and 2012 US congressional elections. The second is "The social media response to Black Lives Matter: how Twitter users interact with Black Lives Matter through hashtag use" which tracks the spread of the #BlackLivesMatter movement through social media. The third is "Twitter’s Glass Ceiling: The Effect of Perceived Gender on Online Visibility" which shows how Twitter users treat each other differently based on how they perceive each other's gender.

We discuss these three papers and more on this episode of Economics Detective Radio.

Bryan Caplan and Zach Weinersmith both return to the podcast to discuss their new, non-fiction graphic novel, Open Borders: The Science and Ethics of Immigration.

American policy-makers have long been locked in a heated battle over whether, how many, and what kind of immigrants to allow to live and work in the country. Those in favor of welcoming more immigrants often cite humanitarian reasons, while those in favor of more restrictive laws argue the need to protect native citizens.

But economist Bryan Caplan adds a new, compelling perspective to the immigration debate: He argues that opening all borders could eliminate absolute poverty worldwide and usher in a booming worldwide economy—greatly benefiting humanity.

With a clear and conversational tone, exhaustive research, and vibrant illustrations by Zach Weinersmith, Open Borders makes the case for unrestricted immigration easy to follow and hard to deny.

Related episodes:

Emerging technologies with Zach and Kelly Weinersmith

The case against education with Bryan Caplan

Refugee waves, mass immigration, and Jordan with Alex Nowrasteh and Andrew Forrester

Social media, elections, and gender with Fabio Rojas

Sociology and social science with Fabio Rojas

My guest today is Kevin Erdmann, he blogs about economics and finance at Idiosyncratic Whisk.

Kevin has written a ton about housing, as evidenced by the titles of his blog posts. A recent one is labeled Housing: Part 239. This series is part of a larger book project that Kevin is publically drafting on his blog.

We discuss the housing bubble of the 2000s and the post-2008 housing market. I took my first undergraduate economics class in 2008, just as the financial crisis was beginning, so there's never been a time in my economics career when people weren't talking about this. And yet, I still have so much to learn!

Kevin makes an interesting distinction between "open-access cities" and "closed-access cities." Closed-access cities are places like San Francisco, New York, and San Jose that have restricted their housing supplies. Open-access cities are places like Houston and Phoenix with more elastic housing supplies. We talk about these factors and how they relate to the housing boom and bust, liquidity, and central bank policy.

Kevin points out that supply side restrictions on housing construction are necessary for demand-side factors to cause housing bubbles. That's because in a market with an elastic housing supply, more demand doesn't result in higher prices, it just causes more homes to be built.

Related links:

Liquidity is a Public Good

Credit supply, housing supply, and financial crises

Algorithms, Algorithmic Discrimination, and Autonomous Vehicles with Caleb Watney

Today's guest is Caleb Watney of the R Street Institute. In our conversation, we discuss algorithms, particularly with respect to their role in judicial decision making. Later in the conversation, we discuss the algorithms that will one day replace ape brains as the primary controllers of our cars.

Caleb wrote a Cato Unbound essay in response to an article by Cathy O'Neil. O'Neil, a mathematician, argues that algorithms could potentially lead us astray. Her book Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy has sounded the alarm about the potential harms of an over-reliance on algorithms.

In Caleb's view, O'Neil has pushed too far in the anti-algorithm direction. He points out that private companies have used algorithms to generate amazing innovations. Government is a different story:

"The most compelling concerns about the improper use of AI and algorithms stem primarily from government use of these technologies. Indeed, all the tangible examples of harm O’Neil cites in her essay are the result of poor incentives and structures designed by government. Namely, hiring models at a public teaching hospital, teacher value-added models, recidivism risk models, and Centrelink’s tax-fraud detection model. The poor results of these kinds of interactions, in which governments purchase algorithms from private developers, could be viewed primarily as a failure of the government procurement process. Government contracting creates opportunities for rent-seeking, and the process doesn’t benefit from the same kinds of feedback loops that are ubiquitous in private markets. So it should be no surprise that governments end up with inferior technology."

We discuss the merits and demerits of algorithms, how different private and public incentives interact with algorithms, and the difficulties in creating algorithms that can be fair and transparent. Caleb's ultimate solution for many of the problems associated with algorithms used by the government is for those algorithms to be open source in order to foster public scrutiny of their processes and outcomes.

During the conversation, Caleb alludes to this paper by Kleinberg, Mullainathan, and Raghavan, which shows that there are three competing definitions of algorithmic fairness that cannot all be achieved simultaneously.

This episode features Anton Howes of Brown University. He is a historian of innovation, and in this conversation we discuss his work on the explosion of innovation that occurred in Britain between 1551 and 1851. You can check out his Medium blog for some of the articles we discuss.

Anton has collected a data set of over 1,000 British innovators who worked during this period. He has documented their education, their experience, and their relationships with one another. Some of the interesting patterns that emerge in his data are the large fraction of innovators who developed technologies in industries outside of their areas of expertise, as well as the high degree of interconnectedness between innovators.

Innovation, it seems, is a mindset; one that can be spread from person to person like a contagion. As far as Anton can tell, this mindset seems to have spread from Italy and the Low Countries during the Renaissance and taken hold in Britain to usher in its Industrial Revolution. With his view of innovation as a mindset, Anton's work complement's Deirdre McCloskey's work on the origins of modern economic growth.

Our conversation concludes with stories about some particularly interesting innovators, some of whom were also pirates!

Today's guest on Economics Detective Radio is Chuck Marohn, founder and president of Strong Towns.

Strong Towns is a non-profit that seeks to reform America from the ground up, starting with its towns and cities. It aims to promote healthy local economies by improving local governance.

The Growth Ponzi Scheme

Chuck began recognizing the problems in America's towns and cities when he was working as a civil engineer. He recounts a story of working in a little city in central Minnesota in the late 1990s. The city had a 300-foot pipe that had cracked, allowing ground water to leak in and overflow their treatment facility. Chuck proposed a $300,000 solution to fix the pipe. However, this was a tiny town with an annual budget of $85,000. So Chuck went to higher levels of government (the federal government, the USDA, etc.) to find someone to fund the project. They all said, "This feels like maintenance. We don't have money for maintenance, so you need to pay for this yourself." Since the feds would only fund expansion projects, Chuck devised a plan: He would propose the largest expansion project he could, then repair the pipe as part of the expansion. This wasn't so much deviousness on his part as it was standard practice in his profession. He designed a couple miles of new pipe, doubled their treatment facility, and as part of that he included repairs for the old pipe. This new project cost $2.6 million.

Everyone was happy about this project. The grant agencies were happy. The legislators issued glowing press releases and held a big ribbon cutting. Chuck got a big bonus from his company. The city was ecstatic. The only lingering problem was that this tiny city that couldn't afford to maintain 300 feet of pipe would now be left with a few miles more pipe and a larger treatment facility.

This is an example of one part of what Chuck calls the Growth Ponzi Scheme. This is when cities and towns expand in ways they can't maintain without further expansion.

There's a political reason why things like this happen. Building new infrastructure is very politically appealing. You can build a new highway and name it after a prominent politician, you can have a big ribbon-cutting ceremony, and you can get all sorts of good press for the project. Maintenance is less sexy; you close down a lane of some existing highway, delay everyone's commute, and then you don't have a ribbon-cutting or positive press for all the potholes you filled in. That's why higher levels of government have been paying for big projects and passing off the responsibility for maintaining them to local governments. These local governments become insolvent when the revenue from the initial big project runs out and the maintenance expenses come due.

This process leads to a form of development where the local tax base is not sufficient to pay for the infrastructure that supports it. When the expansion can't go on any longer, the infrastructure crumbles, the affluent people leave, and the community ends up locked in poverty.

What's Wrong with Big Box Stores?

Embracing this form of unsustainable growth has made our cities less dense and walkable. Instead we have heavily subsidized driving as a means of getting everywhere. One consequence of this has been the rise of big box stores.

The public debate on big box stores tends to miss the mark. The left says big box stores crowd out local businesses, which is true. The right says they pass the market test, offering lower prices and thus improving poor people's standard of living, which is also true.

What both miss is that these big box stores only pass the market test because they don't bear the costs of the infrastructure needed to support them. By subsidizing infrastructure, and by building our cities to be spread out and unwalkable, we make bringing groceries to the people unviable. Instead, the people drive to where groceries are.

In addition to the rise of big box stores, we've seen the demise of small town living. While small towns still exist, they used to have enough small businesses, shops, and grocers to allow a full and comfortable life without leaving the town. Today, small town life consists of driving to the regional hub, perhaps multiple times every week, to get many of your necessities.

What's Wrong with Hastings Street?

Chuck coined the term "STROAD" to push back against the interchangeable use of the terms "street" and "road."

A street is where value lives. Homes and businesses locate themselves along streets so that they can be connected to rest of the transportation network, but the street itself features narrow lanes, low speed limits, and good sidewalks because it's designed more for pedestrians and less for vehicles.

Roads, by contrast, are not meant to be valuable locations in themselves; they are optimized for transporting large volumes of traffic over long distances. They feature wider lanes and faster speed limits.

STROADs are an unhappy blend of both elements. Wide lanes and low speeds make them bad for both pedestrians and drivers. One example of a STROAD is Hastings Street in Vancouver, which tries to be a major thoroughfare for thousands of commuters during rush hour, while still catering to the many businesses along its ten-kilometer span.

Because of its high volume of traffic and many stop lights, motorists can expect to average just twenty kilometers an hour on their commutes to downtown Vancouver.

Gentrification as Part of an Organic System

Chuck wrote an article titled "The Gentrification Paradox," in which he argues that gentrification was actually a healthy part of urban development in the pre-automobile age:

The pre-automobile development pattern was an organic process. It was both incremental and complex... Gentrification – investment followed by displacement – was part of the natural order of things and, as with any organic system, it had a positive role in making things work for everyone.

Before the twentieth century, cities would gradually grow and change over time. But we've used zoning laws to turn our neighbourhoods into unchanging time capsules. Cities used to be antifragile, to borrow a term from Nassim Taleb.

In the past, poorer people would buy property on the outskirts of town, on which they would live and run small businesses. Over time, as the city grew, these outskirts would gradually come to be incorporated into the urban ecosystem. These properties would become more valuable and they would grow with the community, perhaps adding a second storey and expanding the business.

You couldn't do this today. Building codes and zoning laws make any new development into a million-dollar endeavor. People with very little capital can't start with a small property and gradually increase its value over time. This makes the modern form of urban development much less equitable than it was in the past.

In this episode, James Caton discusses the classical and inter-war gold standards. James is an economics PhD student at George Mason University.

Gold has many qualities that make it an ideal money: It is valuable, scarce, divisible, and easy to transport. It is also easy to verify the value of a given amount of gold: The Old Testament references weights and scales being used to measure gold. Ancient people could verify the purity of the gold by observing its water displacement.

Before 1870, only Great Britain was on a gold standard, while gold, silver, and other metals would circulate freely alongside one another throughout the rest of Europe. The classical gold standard began in the wake of the Franco-Prussian War, when the victorious Germany demonetized silver in favour of gold and the rest of Western Europe followed suit (see Caton on the deflation that resulted from the demonetization of silver). America converted to the gold standard in 1879 upon redeeming the Civil War greenbacks for gold.

The classical gold standard operated as a fixed exchange rate regime. As England was the center of global finance, the Bank of England held a privileged position whereby other central banks would follow the Bank of England to keep their currencies constant against the Pound Sterling (see Eichengreen and Bordo). This was the case until the First World War.

Europe's governments suspended the convertibility of their currencies into gold during the First World War. These governments created a great deal of inflation to finance the war, but they were reluctant to devalue their exchange rates after the war had ended. They wanted to return to their pre-war exchange rates.

At this point, the Fed did something crazy: It slashed the US money stock by over 40%, increasing demand for gold, and causing a general deflation. Before 1925, as gold flowed into the United States, the Fed did not increase the monetary base in tandem with the increasing gold stock, thus sterilizing the gold inflows' influence on prices. After 1925, when Europe returned to the gold standard, the Federal Reserve did increase the monetary base alongside the gold stock. The typical Austrian narrative about the Great Depression (see Robbins and Rothbard) blames the Fed for the 1920s inflation that created an unsustainable boom resulting in the eventual crash that became the Great Depression. However, James disagrees with the blame put on the Fed in this story, as the ratio between the base money stock and the gold stock was fairly constant from 1925 to 1929.

From 1925, the Bank of England was acting as Europe's central bank, holding most of Europe's gold. This was politically unpalatable for the French, who began hoarding gold in 1927, devaluing the Franc and causing gold to flow into France (see Irwin). Between 1927 and 1932, France went from holding 7% to 27% of the world's monetary gold. The resulting deflation exacerbated the Great Depression.

The Bank of England went off gold in 1931, sounding the death knell for the international gold standard. FDR devalued the dollar and outlawed private ownership of gold in 1933, ending what was left of the gold standard. Although this mitigated the ongoing institutional collapse in the American banking sector, the Great Depression continued on until after the Second World War.

See also: Irwin and Rustici on the Smoot-Hawley Tariff.

James can be found online at his blog, Money, Markets, and Misperceptions, and at the George Mason University website.

In this episode, Glen Whitman discusses Economics of the Undead: Vampires, Zombies, and the Dismal Science, a book he co-edited with James Dow. Glen is an economics professor at California State University and, unlike most academic economists, he moonlights as a TV writer. He first wrote for the TV show Fringe and now writes for the soccer spy drama, Matador.

The book’s website provides the following description:

“Whether preparing us for economic recovery after the zombie apocalypse, analyzing vampire investment strategies, or illuminating the market forces that affect vampire-human romances, Economics of the Undead: Zombies, Vampires, and the Dismal Science gives both seasoned economists and layman readers something to sink their teeth into.

Undead creatures have terrified villagers and popular audiences for centuries, but when analyzed closely, their behaviors and stories—however farfetched—mirror our own in surprising ways. The essays collected in this book are as humorous as they are thoughtful, as culturally relevant as they are economically sound, and provide an accessible link between a popular culture phenomenon and the key concepts necessary to building one’s understanding of economic systems large and small. It is the first book to combine economics with our society’s fascination with the undead, and is an invaluable resource for those looking to learn economic fundamentals in a fun and innovative way.”

Among the topics covered in the discussion are helpful hints such as how to meet the vampire man of your dreams, to choose what to bring on your trek across the zombie-infested wastelands you once called home, and to rebuild civilization after the undead apocalypse.

Human capital will be particularly helpful in the zombie apocalypse; it has immense value and goes wherever you go. Doctors are often depicted among the survivors of the zombie apocalypse, possibly because survivor groups would rather recruit a doctor than kill him. There’s an analogy to pirates, who would press valuable seamen like surgeons or carpenters into service rather than killing them (for more pirate economics, check out Peter Leeson’s The Invisible Hook).

Among the more unexpected chapters of the book is “Killing Time: Dracula and Social Discoordination,” by Hollis Robbins. Robbins connects the infamous Transylvanian villain’s ability to distort his victims’ senses of time to date- and time-keeping standards that some nations had adopted while others had not at the time the book was written.

You can find Glen online at econundead.com where he posts about the latest in undead economics news or on twitter as @glenwhitman.

Today's guest is Michael McCullough of the University of California, San Diego. We are discussing his book The Kindness of Strangers: How a Selfish Ape Invented a New Moral Code.

How did humans, a species of self-centered apes, come to care about others? Since Darwin, scientists have tried to answer this question using evolutionary theory. In The Kindness of Strangers, psychologist Michael E. McCullough shows why they have failed and offers a new explanation instead. From the moment nomadic humans first settled down until the aftermath of the Second World War, our species has confronted repeated crises that we could only survive by changing our behavior. As McCullough argues, these choices weren’t enabled by an evolved moral sense, but with moral invention — driven not by evolution’s dictates but by reason.

Today's challenges — climate change, mass migration, nationalism — are some of humanity’s greatest yet. In revealing how past crises shaped the foundations of human concern, The Kindness of Strangers offers clues for how we can adapt our moral thinking to survive these challenges as well.

My guest on this episode is Kevin B. Grier of the University of Oklahoma.

Our topic for today is a paper Kevin wrote on the economic consequences of Hugo Chavez along with coauthor Norman Maynard.

I had Francisco Toro on the show last year to discuss Venezuela's economic history, so you can listen to that episode if you want a refresher on Chavez. For this episode, our main topic is the empirical method Kevin used to quantify Chavez' effect on Venezuela: synthetic control.

Synthetic control is a relatively new empirical technique. It grew out of an older technique called difference in differences (or diff-in-diff). Diff-in-diff is simple and intuitive: Given two statistics with parallel trends, we can compare their changes before and after some intervention affecting only one of them to see the effect of the intervention. So for instance, if you wanted to know the effect of Seattle's minimum wage increase, you could compare the employment trend among low-skilled workers in Seattle to the same trend in Portland. Then assuming Seattle and Portland would have had similar trends if not for the minimum wage hike, we say the difference between the employment growth in the two cities is attributable to the minimum wage hike.

But what if Seattle and Portland don't have similar trends? What if there's no labour market similar enough to Seattle's to provide a valid comparison? That's where synthetic control comes in. Seattle might not be like Portland, but it might be like a weighted average of Portland, San Francisco, and several counties just outside Seattle. We could construct this weighted average and call it a synthetic Seattle; it is designed to mimic the dynamics of Seattle's labour market before the minimum wage hike. Then if the synthetic Seattle deviates from the real Seattle after the wage hike, we can attribute that difference to the hike.

This is what Kevin has done to study the impact of Hugo Chavez on Venezuela. Listen to the episode to find out his results!

My guest for this episode is Scott Cunningham of Baylor University. We discuss his work on the decriminalization of indoor sex work and on the impact of Craigslist's erotic services page on violence against women.

The working paper on Craigslist generated a lot of media attention, with articles at Huffington Post and ThinkProgress. The most quoted statistic is that "Craigslist erotic services reduced the female homicide rate by 17.4 percent." We discuss this statistic, its possible causes, and whether or not it is implausibly large.

Here's Lynn Arditi's article on the accidental decriminalization of prostitution in Rhode Island.

Scott mentions John Snow, the scientist who first discovered that cholera was spread by contaminated water sources. Here's the first video in a series on him.