Friday, May 28, 2010

Conspiracy Theories and Logic of Collective Action

Recently, I received an e-mail forward that claimed that 9/11 was a conspiracy hatched by the US government and its agencies. It urged me to follow a link that had irrevocable evidence to the fact. I prudently deleted the email, and did not follow the link. However, I think understanding economics and the power of incentives leads me to dismiss any such conspiracy theories. If we look at the number of scandals that have been breaking out in recent years, it is far fetched to believe that a large group of people can keep their mouth shut for long periods of time. Mancur Olson argued in the Logic of Collective Action that unless the number of individuals was small, or there was coercive force, a group of individuals cannot be persuaded to act in their collective interest. Assuming, a conspiracy as big as 9/11 would have involved hundreds of people, I do not think it would be possible to swear them all to an oath of secrecy. I do not think so many citizens would be willing to kill thousands of their own. Yes! There are individual murderers, but its beyond imagination that so many American citizens would want their own dead. Even with genocide and terrorism it is a targeted population outside the social group of the attacker, and we may say that some of the prejudices that individuals held are fuelled by a persuasive leader. However, 9/11 affected a diverse group of people of different nationalities (primarily US citizens), ethnicities, religions, and trades. Even if some of the people involved in the conspiracy had a general prejudice I doubt that hundreds or even dozens of people would have held similar beliefs. Logically, to me, it does not seem possible that 9/11 was a conspiracy hatched by someone in the US government against their own citizens. It was a terrorist attack hatched by some fanatics. 

Thursday, May 27, 2010

EPIC Recession

"EPIC RECESSION: Prelude to Global Depression" is the name of the new book by Dr.Jack Rasmus. I had the opportunity to listen to his talk about the book yesterday. I have not had a chance to read the book yet, but here are some of my observations from the seminar presentation. Dr. Rasmus's conclusion is that similar to the recession in 1907 and the Great Depression, the current recession as well was driven by increases in the money sector without commensurate increases in the real sector. He has a good historical section where he discussed the shift in economic research from the causes of the Great Depression to the solutions to it. He highlighted that Keynes's earlier research was on the causes of the Great Depression. He also mentioned that Irving Fisher discussed at length the speculatory causes of the recession and subsequent depression. However, I was disappointed that there was no mention of F.A.Hayek, who had published Monetary Theory and the Trade Cycle in 1933. My understanding is that F.A.Hayek, and others who have expanded on the Austrian Business Cycle Theory have an existing explanation for these credit expansion lead recessions. In addition, I believe there was some kind of debate between Hayek and Keynes around that time. Hopefully, some of that stuff is in the book and did not make it to the presentation. His explanation was very reminiscent of the Austrian Business Cycle Theory, even though he did not use the title to identify it as such. I do not agree with his solutions of increased fiscal expenditure to move out of the current crisis. Especially, some of his recommendation on nationalising consumer credit markets and re-unionising private sector work force would only lead to long-term economic crisis in my opinion. His solutions aside, I think the credit expansion explanation of economic crises would be an interesting addition to existing literature. I am looking forward to reading the book. 

Thursday, May 20, 2010

Priorities: Opportunity Costs

My friend recently found out (quite by accident) that the apartment complex he lived in has stopped their nightly Security Patrol of the grounds due to cost cutting measures. Their apartment is in a pretty safe neighbourhood but recently they had begun to notice strange men in the compound late in the evening and decided to complain to the management, and that is when they found out that the security patrol had been stopped. My friend was indignant that they were not informed about the security patrol. Moreover, he complained to me that the apartment management was simply fattening their profits by removing essential services. It made him angrier still that the apartment complex was spending money to dig up and rebuild a perfectly good pool side. 
While I agree with him that the apartment management should have informed the residents about cancelling the Security Patrol, and I personally would prefer the Security Patrol over renovations to the pool, I am not sure his economic reasoning is entirely correct. The apartment management may be cash strapped and unable to pay a recurring amount every month to the Security Agency; however,  they may still have funds to perform one time modifications to the pool area. Since the management does not guarantee any security, and the lease states that renters are responsible for their belongings, I am not sure they could be held liable. Besides, other residents may have shown a preference for a better pool area. 
My friend, nevertheless acted exactly how consumers respond in a market: he put in his notice to vacate and is moving to a gated community. His priorities are security, and he responded to the situation aptly. For him, the opportunity cost of the extra rent he would pay (33% higher than earlier) in the gated community is less than that of not having a security patrol. This is another example of consumers in the market constantly take decisions based on their opportunity costs, only we call it priorities instead of opportunity costs. 

Monday, May 17, 2010

Zone based growth

My current research is on zone based growth in developing countries. This policy is extremely popular among politicians and bureaucrats, especially in India. The rhetoric uses examples from China to Taiwan to South Korea to show successful these policies can be. I am not so sure it can be as huge a success in India as the government departments want us to believe. Just as an extension, I looked at some studies on enterprise zone policies in the US. The results are mixed at best. I think, the enterprise zone policy can be compared to earlier zones in India. Both policies were meant to improve the conditions of regions with low growth and high unemployment. Some official reports on enterprise zones also state that their employment creation potential has been low. It just leads me to believe that it is not an easy task to firstly identify which regions have the potential to succeed and which do not, and secondly what kinds of businesses will flourish in these areas. More importantly, these policies cannot simply be transferred from one region to another. It would be good for the Central and State level politicians and bureaucrats in India to realise this quickly and just let growth happen zone or otherwise. 

Tuesday, May 11, 2010

Lie to Me and Public Choice

I have been watching the TV series Lie to Me (Season 1) recently and was pleasantly surprised to see that script writers seem to understand public choice. Most crime shows these days have elements to show the fight against terrorism, pedophiles being apprehended and such items where the government and its agents are the heros. Lie to Me is different. The investigating agency is a private company founded by one man who has studied facial expressions for decades and can solve crimes by telling if the person he is talking to is lying. The most interesting part to me is not how he solves the crimes, but who gets implicated in the end. In at least two episodes, they reveal corrupt bureaucrats and politicians who caused people to die. 
The bureaucrat in the immigration office uses his power to grant Visa extensions to aliens and uses them in an illegal surrogacy racket. One of the characters talks about how long and expensive formal surrogacy procedures are which is why she chose the cheaper side-market. That I think is a wonderful explanation of how well-intended regulations go awry all the time. In another episode, the Mayor of the city anonymously bribes the city engineer to clear a site without inspecting for Methane under the building site which leads to an explosion killing some people. Her reasoning was that she needed the factory to be built to bring in jobs to the town where several people were unemployed. Here again we see a person in power, pushing her own agenda not only with the bribe to forgo inspection of the site, but through licensing and zoning laws. She admits that she used the latter two methods to force the company to hire more people than they needed. 
I am skeptical about claims of lie detection using facial expressions, because I think there are too many personal variables that cannot be objectively measured; however, this series (at least as far as I have seen it) understands Economics and more importantly Public Choice better than other TV series I have seen. I already have a few ideas to use some of these clips in my classroom exercises when I teach Public Choice.