Progress Report

I’m a little behind on my reading, so this interesting article is a few days old. It describes life 100 years ago and clearly illustrates how much progress we’ve made, despite numerous wars, the Great Depression, and countless discouraging missteps. I doubt too many will ask exactly how all these marvelous changes came about. What was the enabling force? There are, of course, many components that contributed. Nevertheless, the key elements have to include relatively unrestrained capitalism and relatively modest government. I have no doubt that the next 100 years will yield even more spectacular progress, but I’m not so sure that we will be at the nexus.

Man and Nature

I certainly am glad that there are a lot of articulate smart people around. They write things I wish I had written. I found some excerpts from Freeman Dyson about the perspective for Global Warming. In brief, global warming is a small price to pay for the huge progress we’ve made against hunger, pestilence, and poverty. Hunger, pestilence, and poverty are the natural order of things: Nature’s gifts to mankind. If trying to eliminate these scourges makes me anti-Nature, then so be it.

Heart Of Economics

This article does a great job of revealing the heart of economics. Economics is about scarcity. When something is scarce, not everyone can get all of it they want. The resource is rationed. Rationing occurs in one of three ways: by money, by time, or by authority. My favorite example is gasoline prices. Usually, gasoline is rationed by price. When it gets too expensive, some people decide to use less. During the Nixon price control years, gasoline was rationed by time. You get buy gas at a good price, but you had to wait in line. Some people couldn’t afford the time, so they bought less. During World War II, gasoline was rationed by authority. You were only allowed to buy your allotment, regardless of how much you might be willing to pay or how long you might be willing to wait in line.

If you want to think through the economics of any issue of the day, whether it’s health care, global warming, highway construction, or anything else, start by thinking about how rationing will occur in it’s three forms.

Costs and Benefits

This article captures my attitude on global warming and a lot of other issues. For every problem, and every policy intended to address a problem, it makes sense to look at both the costs and the benefits. Too many policy choices involve high costs and small benefits. This is particularly tragic when there are alternatives with small costs and large benefits, although it is all too common to not examine alternatives at all.

The Economics of Health Care

This short blurb raises an interesting question. The economics of health care is quite understandable, but poorly understood. Some people no doubt object to the words “health care” and “economics” appearing in the same sentence, which just makes the problems worse. Economics is the study of how to manage scarcity. Health care is a scarce resource. Know any doctors without enough patients? If health care existed in abundance, everyone could get all they wanted.

There are two, and only two, general ways of dealing with scarcity. One is through free markets as described by classical economics. The other is through politics. All evidence strongly suggests that free market approaches produce better results in the long run. Political approaches produce all kinds of unfortunate anomalies, such as those that were referenced in the blurb that provoked my comments. Nevertheless, political approaches hold great attraction because they often do work well in the short term and give the illusion of “doing something”. But you can bet that future generations will look back and wonder why we short changed them so badly.

War With Barbados?

This story is amazing. Eventually, small flaws in logic expose themselves and get magnified until they reach serious, and sometimes hilarious, proportions.

Megan on Denmark

I am so glad that Megan has her own blog in her own name in a venue that will attract readers. Where else can you find intelligent commentary and responses like this? My favorite comment: Build a man a fire, and he’ll be warm for an hour. Set a man on fire, and he’ll be warm for the rest of his life. But seriously folks, it’s important to have sloppy thinking exposed and to ask the awkward questions, both of which Megan does well.

Mathematical Economists

There are two kinds of economists: mathematical and literary. Most are mathematical economists, but, for my money, the literary economists make a lot more sense. New there’s a convincing argument that says the mathematical economists use some deeply flawed assumptions. The argument itself is quite mathematical, but explained in a literary way. I must admit, I enjoyed using some higher math concepts I hadn’t used since college. Maybe those classes weren’t a complete waste of time!

Righteous Anger

There are few things as satisfying as righteous anger, and few which so often lead to dismal consequences. I hear this righteous anger all the time on the radio and read it constantly in the newspapers and on the Internet. Politics is too often the cause. I found a great essay on the causes, consequences, prevention, and cure.

Risk Premium

I found another good description of why the markets are doing what they’re doing, but this one offers a little economics lesson as well. But, as much as I admire Arnold Kling, I think he could have used better terminology. The “risk premium” is, as he says, composed of two parts. But I would prefer to call them the actuarial risk premium, computed actuarially, and the process risk premium. I call it “process risk” because this is the risk that the actuarial process is imperfect. As we all know, the actuarial process for sub-prime lending was badly in error, which reduces confidence in the overall risk accounting process. This raises the process risk premium and deflates prices. In some cases, the process risk is infinite, i.e. no one is willing to buy. That’s why the Fed had to open the spigot. This is the same thing Kling describes, but with different names for the two kinds of risk.

But you watch. Lots of people are losing money, but some folks are going to score big. Pay attention to Warren Buffet. He cut his teeth on insurance and actuarial risk management, so he knows when the price is out of kilter. Before it’s over, I think he’s going to be very involved in the mortgage business.