Author Archives: Jonathan Finegold

Quote of the Week

Piketty’s economic language and massive quantities of ingeniously gathered statistics amount to what I call a Murray Rothbard or Alan Reynolds style of argument: deploy such an array of facts and figures, dates, places, mini-biographies, and even personality sketches that, even if they scarcely add up to a coherent argument, you come across to your reader or audience as a consummate expert whose judgments command respect.

— Leland B. Yeager, “Another Perspective on Piketty.”

What Happened to Spain? #WorldCup2014

This is my amateur theory on why Spain got pummeled 1–5 by the Netherlands.

Spain’s philosophy is that the best defense is when you control the ball and the opponent doesn’t. Like Pep Guardiola says, the less time the other team has possession the less time they have to score on you. It’s a good philosophy. “Tiki-taka,” Spain’s short-pass centered possession game, gave Spain back-to-back European Championships and a World Cup; it gave Barcelona four La Ligas, two Champions Leagues, and two Copa del Reys, and countless other titles. People are quick to criticize “tiki-taka” because of the latest results (e.g. B. Munich 0–4 R. Madrid; Barcelona’s poor 2013–14 season), but maybe the criticism is misdirected.

The problem is focusing too little on how to play the game when you don’t have possession. Teams that defend well do so because they have disciplined defenses. A well ordered back line usually consists of two lines of four (or one of four and one of five,…). Spain’s defense against the Netherlands looked like a mob. Their was no organization to the defensive lines.

While it’s almost traditional that Spain’s defense to be weakly organized, compare Spain’s defending in its 2010 World Cup match against Germany,


I mean, Spain is no Atlético Madrid. But, it’s defending against Netherlands was atrocious.

I think Barcelona’s poor season is also explained, at least in part, by my theory. Something I noticed when I watched Barcelona play is their slow reaction time. Barcelona has a hard time counter-attacking, because Spanish teams can play well defensively — they can re-organize relatively quickly. Barcelona has a very slow pace of re-organization. It’s easy to catch them on the counter. When they play a team with an organized defense and a top attack, that’s when Barcelona (and Spain) get crushed.

Spain should still play a possession-focused game. This has been Spain’s most successful era in its football history. But, it can’t ignore other elements of the game. Even 70 percent possession means that the opponent is attacking for 30 percent of the game. Any strategy is going to have to figure out how to cope with defending when you don’t have possession, especially if you have a high defensive line (to reduce the playing space). Unfortunately, Spain has neglected that part of its game — I think, because Barcelona has neglected it too, and Spain plays with many Barcelona players, especially midfield and behind.

What of Spain’s chances to reach the next round? Let’s assume (1) Spain wins its next two games (and Spain is not going to have an easy time beating Chile) (2) Australia loses all three matches. It still depends on the outcome of the Chile v. Netherlands match. If Chile lose (and also lose vs. Spain), that leaves Spain second with 6 points. If Chile wins, there will be three teams with six points: Netherlands, Chile, and Spain. The current goal differences for these three are: +4, +2, –4. Spain is going to have to score a lot of goals in their next two games to have a chance of progressing, if Chile beat Netherlands. Spain is not known for scoring a lot of goals. It was good while it lasted.

Tenure as a Division of Power

A California judge recently declared tenure unconstitutional. A lot of people are rejoicing, because they think this means that bad teachers will no longer be excessively protected from being fired. While the public school system needs a remake, to put it lightly, people might be jumping the gun on tenure. It may have costs, but tenure also has benefits. The problem with public schooling isn’t tenure, anyways; the problem runs down to the roots, school administrations.

Tenure limits administration’s power on teachers. It can give teachers the independence to choose their own approach to educating their students. Sometimes it turns out badly. More often, it stops the administration from dictating the curriculum. It puts a limit on pressure placed on the teacher to change their curriculum for the worse. This element of the debate reminds me of the argument in favor of independent central banking. Some people noticed the Federal Reserve’s poor response to the recession and called for an end to central bank independence. The problem with that is a central bank directly controlled by government is one in a position to help that government at the expense of the people — such as when government uses its central bank to finance its spending. The benefits may outweigh the costs.

School administrations can be very political. I have first-hand experience through my dad, who is a high school teacher. Yes, I did let him know what most libertarians think about public schools. If it wasn’t for tenure, my dad would have probably been fired a long time ago. You might be thinking, “He probably deserved it because he was a horrible teacher.” You would be wrong. The administration pressures him to raise the grades of students who don’t do their homework, who don’t study, who fool around in class, and who generally just don’t care about their education. The administration wants to look good in front of the parents and they want their statistics to shine. These create perverse incentives. My dad is an AP Spanish teacher and to punish him they took away his AP Spanish Literature class. AP test scores in that class plummeted. The administration doesn’t always punish instructors for good reasons, they do it for very bad reasons.

Few people look at the administration. Maybe this might catch your attention: Sweetwater Union High School District, in San Diego country, was recently rocked by a corruption scandal. Top school administrators were caught siphoning “gifts” received for preferring certain contractors over others. That shows how much they care about the kids.

Oftentimes schools push sports rather than academics, because that’s what some parents want — some parents couldn’t care less about their children’s education, or they think that there isn’t a trade-off when they push for funding elsewhere. Yes, many parents are negligent; you see this a lot in lower income schools (see also “Have and Have Nots“). The administration wants to look good, and this creates perverse incentives. Removing an institution that limits their ability to control  teachers risks making our schools worse off.

I am not saying teachers are saints. I oppose teacher unions. I told my dad it was ridiculous that he was protesting the reduction in his salary after the economy collapsed. He doesn’t seem to understand that if there’s less money to pay him, he might have to take a salary reduction or else risk losing a job (actually, he has seniority — tenure aside —, so it would just be a hypothetical future hire who is now unemployed). I also disagreed with his decision to oppose a recent reduction in healthcare benefits. I thought, “Great for the taxpayer.” But, actually, no. As is turns out, most of the money saved from reduced healthcare benefit was just allocated somewhere else — and definitely not towards improving the quality of the schooling, because the teachers had to fight to reduce things like classroom size, as well.

Finally, it’s worth mentioning that tenure, strictly speaking, doesn’t protect teachers from teaching poorly. Bad teachers can be fired. It might be more difficult, but that’s because the reasons for firing the teacher have to be legitimate and well documented. The thing is, the administration is so bad at doing its job that it’s negligent at the time of monitoring and documenting bad teaching. School administrations are a libertarian’s worst nightmare: extremely inefficient bureaucracies. Bad teaching is more common than it should be not because the administration has its hands tied, but because the administration is inept.

By the way, libertarians should be receptive to the notion that tenure is an institution that establishes some degree of “teacher independence.” In many cases, your favorite libertarian thinker is able to publish a constant stream of libertarian-oriented literature only because he or she has tenure. Otherwise, that person would be writing on some other topic — some topic that would keep that person employed —, at the expense of the libertarian movement. But, tenure doesn’t necessarily cause these professors to reduce the quality of their teaching. (Sometimes the worst teachers are the most liked by the administration, because they’re the ones who focus too much on their research and too little on their students. Publishing in top journals makes the school look good, though.) Oftentimes, tenure creates a positive effect on education, like the ability for a tenured professor to teach the students more on Friedrich Hayek or Robert Nozick than the curriculum normally allows for.

Blaming teachers is the easy thing to do. But, sometimes the easy way is the wrong way. Maybe the problem with public schooling runs deeper. We need to focus more on the machinery of the system, a machinery prone to corruption and waste.

Special Interests at the 2014 World Cup

After numerous deaths in football stadiums, Brazil passed a law in 2003 outlawing alcohol sales in stadiums. FIFA demanded that Brazil allow alcohol sales at the World Cup because Budweiser, a major World Cup sponsor is the “Official Beer of the FIFA World Cup”, a role it has played since 1986. In response, Brazil passed a law paving the way for alcohol sales in the World Cup, nicknamed the “Budweiser Bill”.


Healthcare Expectations

Krugman interprets evidence to show how Obamacare has been a success and has not been the job-killers Republicans said it would be. I have two three questions on his second piece of evidence,



  1. This series isn’t seasonally adjusted is it? So, it shows a growth in employment leading up to December and then a large drop in employment. And now employment is growing again as we approach summer. So, does this graph really say anything useful at all?
  2. An economist might suspect that the disemployment effect would actually materialize sooner, because surely businesses were expecting Obamacare to roll out before it actually did. Krugman knows this, but he’s still going for the weak version of the argument. Why?
  3. What if, rather than unemployment, Obamacare reduced the rate of employment growth?

The Historical Contingency of Rules and the Immutability of Economic Laws

In a lengthy online discussion on my post on the role of the division of labor within the economics profession, I saw someone make the argument that the historical contingency of rules disproves the immutability economic laws. While I don’t have an argument as to why economic laws are or aren’t timeless, I can say that the historical contingency of rules has nothing to do with the immutability of laws, because institutions and economic laws are not the same thing.

First, an overview of what institutions are. Institutions can be defined as ‘the rules of the game.’ These are constraints on our ability to choose, because we conform to, or follow, them. These rules are important, because they help us overcome ‘inconveniences,’ or aspects of the world that hold us back. For example, the Royal Navy implemented a rule requiring their naval commanders to attack the foe on contact, because prior to the 19th century, it was difficult for them to monitor their officers’ when these were at sea. This rule was enforced by ordering different logs to be kept by different people, often with opposed interests. These logs could be inspected when the ship arrived to port, and captains found avoiding their responsibilities were punished. The Royal Navy had altered the rules of the game to improve its ability to coordinate with its assets at sea.

Another example of an institution are the various methods salespersons use to build a reputation. Certain markets are burdened by the fact that buyers find it difficult to distinguish between similar goods of different quality. Taking advantage of an asymmetry in information, some sellers will put their worse quality goods on the market, because they know buyers have difficulty in telling between different qualities. You might buy a 2002 Honda Civic on Craigslist thinking it runs fine, only for the engine to die two months later (actually, it happened to a friend — although his was one of those Oldsmobile 88s). Consumers eventually learn, lower their expectations of the quality of the average car, which is analogous to shifting the demand curve to the left. This lowers prices, and the process can continue until the market implodes.

It pays sellers within certain industries to distinguish between each other, and especially to build a reputation for trustworthiness. While the used car market still most certainly sucks, nowadays we have things like CARFAX and many sellers are willing to have your mechanic look at the car (although, not all of them — the ones looking to rip you off definitely aren’t, thus the purpose of signalling). Reputation spreads by word-of-mouth, and many customers have preferred sellers whom can be trusted. By changing the rules of the game, markets can often get around obstacles, helping agents coordinate between each other (such as buyers and sellers of used cars).

Many, if not all, institutions, or rules, are historically contingent. The impediments to monitoring naval warfare changed between centuries. Direct and immediate communication made certain rules obsolete. New limitations may require new rules. The anti-ship missile was invented in the middle of the 20th century, and it required a change in world navies’ rules. Fleets had to fight in a different way to win.

The historical contingency argument is not saying that the rules work differently depending on what period of time we’re in, it’s claiming that the relevance of rules changes. ‘Slavery is legal/illegal’ meant the same thing to Hammurabi as it does to you. It’s just that ‘slavery is legal’ was, thank goodness, replaced with ‘slavery is illegal.’ The implication is that the rules’ causal mechanisms are immutable.

How do rules differ from ‘economic laws’? Let’s assume, for the sake of argument, that there are such things as economic laws. One such law could be that of time preference: people prefer X now rather than later, unless they’re compensated. Suppose minimum required compensation is Y, and there is a natural rate of interest equal to (X+Y)/X. This hypothetical law also states that if real world markets have their interest below the natural rate, they will eventually suffer from mass business failure. If the market rate is above the natural rate, there are unused savings. Either way, the result is discoordination. That’s the law.

But, what use is that law to anyone, really? How do we know what the natural rate is? A perfectly coordinated market would have an equilibrium rate of interest (or equilibrium rates, if also considering differences in liquidity). But, markets are not perfectly coordinated. Assets are often overpriced. Ask someone who bought a home before 2007. Other asset are undervalued. There are people who make profits buying undervalued stock. Our estimates of the value of different goods/assets are always off, because society suffers from a knowledge problem. Humans act on imperfect and asymmetric knowledge, and this causes discoordination. Early cavemen may prefer to kill one another, because each one isn’t sure whether the other guy is friendly. We have to develop rules to overcome this limitation.

Humans develop rules that can be followed to gain trust. This makes cooperation attractive, because we can be sure that others will actually cooperate. Much like how the Royal Navy developed rules to work around a knowledge problem of its own, not being able to actually directly control (or track) its assets on the seas. Principal–Agent problems are knowledge problems, and we develop rules to help us get around them. Even if there are immutable laws, historically contingent rules are still absolutely necessary, because these immutable laws don’t speak to humankind’s limited knowledge on how the world works.

What matters most is that saying ‘rules are historically contingent’ is not the same thing as saying that ‘the same rule works differently depending on the year.’ Rules are necessary because our understanding of the world is imperfect, and they help us coordinate despite our cognitive limitations. Rules are historically contingent, because the state of our knowledge is always changing.

Instrumentally Rational People Will Not Follow Social Rules

Instrumentalists such as Gauthier tried to show that the best way to achieve our ends is to reason ourelves into being the sorts of instrumental reasoners who do not reason about the best way to achieve our ends. Although I have shown why this project comes to naught, the core idea needs to be explored: rule-based, cooperative, reasoning is best for us, and it tells us not to always decide on the grounds what is best for us. As Brian Skyrms has demonstrated so well, although rationality cannot explain this uniquely human characteristic, an evolutionary account can do so. Rationality, we have seen, must be a respecter of modularity and dominance reasoning, but evolution is not. Evolution can select strategy T on the grounds that those employing T outperform those who do not employ T in terms of who well they achieve their goals and yet T constitutes an instruction to those employing it not to perform some acts that would achieve their goals. The important lesson that Skyrms has taught us is that evolutionary selection can do for us what our reason cannot.

— Gerald Gaus, The Order of Public Reason (Cambridge: Cambridge University Press, 2011), pp. 104–105.

The Skyrms book Gaus is citing is Evolution of the Social Contract.

Note that Gaus writes that “rule-based, cooperative, reasoning” is a “uniquely human characteristic.” I think he’s mentioned that another time since the above excerpt, except he admits that there may be a few other animals who also evolve social rules. Actually, most animals probably follow social rules, and we’re just not aware of them.

A few months ago, I went to the La Brea Tar Pits, in Los Angeles. There is an underground field of asphaltum, which seeps up through the ground. You can see small puddles of this stuff at the La Brea museum, as it bubbles and evaporates into the air. This has been happening for tens of thousands of years. The museum collects fossils from animals who were trapped in these puddles, or small lakes, of liquid petroleum. The theory is that animals lower on the pecking order would get stuck in the tar, attracting predators. These, in turn, would rush into these tar pits, and get stuck themselves — the heavier the animal is, the more difficult it is to get out.

The museum has quite a few saber-toothed cats,* including a full skeleton on display. I took a guided tour, and when we got to display the guide starting discussing several social welfare instincts groups of these cats would have. I had actually made a comment, in passing, to someone who came with me on the tour about how injured animals must have lived horribly, because they most likely died. Not so, apparently. The guide told us that saber-toothed cats would tend to their wounded, sharing their hunted food with them, and caring for them.

Why would a predator which survives on strength and agility to hunt for its prey care for weak links? Doesn’t that bring down the group as a whole? Well, injuries happened fairly often. She, the tour guide, told us about an injury to the cat’s spine, because they would jump on the backs of larger prey and these would shake violently — this was common. Prey often fought back. And, a dead cat is worth less to your group than an injured cat, especially if you can nurse the latter back to full health. No doubt, groups that could maintain a full strength membership survived over those which allowed their members to gradually die off. Thus, saber-toothed cats adopted evolutionary social rules, just like humans do.

What I wonder is if some saber-toothed cats were frustrated that their hard earned income was being re-distributed to what they saw as a bunch of lazy cats who just didn’t want to work.


* My memory isn’t 100 percent, so if the animal I have in mind isn’t the saber-toothed cat it’s okay, because the important part of this post is the general point being made.

Perverse Incentive of Armament Procurement?

There are internal economies of scale when average unit costs fall as production increases. One reason this might happen is because it might allow the firm’s workforce to specialize further, increasing their productivity. Businesses with high fixed costs, like research, development, and testing, are also typically enjoy returns to scale. Industries with internal returns to scale are characterized by relatively few and large firms. The armaments industry — e.g. Lockheed Martin, General Dynamics, Northrop Grumman, BAE, Raytheon, et cetera — is one such industry.

The single largest consumer of weapons, especially military-grade arms and vehicles, are national governments. Only select countries, for example, are allowed to field M1 Abrams tanks. Like a good deal of government projects, armament development programs are typically very expensive, and suffer excessive overruns. The F-35 is approximately $160 million over budget. The RAH-66 Commanche consumed $6.9 billion before being canceled. The V-22 Osprey ended up costing 2068% more than originally projected. Yea, military procurement is extremely inefficient. (Actually, for a scientific look into the relationship between the U.S. government and weapons manufacturers, see Arms, Politics, and the Economy, edited by Robert Higgs.)

Longer periods of research and development, more prototypes, testing, and other pre-production steps mean higher fixed costs. Internal economies of scale not only mean that more production will lower average cost per unit, but it also means greater profits for the firm — that high fixed cost is spread over a greater number of units of output. As long as marginal costs are below average costs, there is a strong incentive to keep producing.

For a firm looking to sell their weapon system to the U.S. government, they have to persuade the latter to buy it. If selling more equates with making a higher profit, there will be some amount of money the company will be willing to spend on lobbying. The greater the amount of output necessary to reach “minimum efficient scale” (where average costs are lowest — at some point, marginal costs will pass long-run average cost, and the latter will begin to increase again), the more sales the firm will want to persuade the government to make. The higher the fixed costs, which include budget overruns, the more the contractor will want to sell, the more it will lobby.

Cost overruns are a good signal for waste. When waste attracts more waste, which in this case is buying more military equipment, we call this a perverse incentive. Is the process I sketch out here one such way this manifest itself in the real world?