New podcast episode with Brink Lindsey and Steven Teles about their new book The Captured Economy:

Brink Lindsey and Steven Teles argue in their new book “The Captured Economy” that the last few decades have been characterized by an increase in political rent-seeking. Focusing on the financial sector, intellectual property laws, occupational licensure, and land use, they show how legislation has been captured by special interests in ways that slow growth and increase inequality. In this episode, Lindsey and Teles discuss how these policies distort various markets and cause upward redistribution, as well as the different ways we can work to better “rent-proof” our politics.

Advertisements

Harvey Weinstein, Bill O’Reilly, Donald, and on and on and on. There can no longer be any doubt about the existence of male privilege and how it breeds sexual entitlement. Something has to change.

The obvious answer for men on the individual level is to call out instances of misogyny and loudly condemn any sexual assault within our own immediate vicinity (in addition to not being a pig). But what to do on a systemic level? A lot of the commentary coming out now casually connects misogynist culture with some notion of capitalism, but it’s not clear to me what role the American economic system plays in all this.

[Anyone who has ever read this blog knows my sympathies to the market economy, though I’ll admit it’s not perfect and there can always be productive tinkering.]

Capitalism, in most real world manifestations of the word, allocates resources based on consumers’ preferences. When inequality is such as it is in the United States, rich people’s preferences are overrepresented massively because consumption is a function of income. If the consumers’ dollar is their vote, people with more dollars have a lot more votes. Money is power and I don’t think this is up for debate. In this sense, movies will be made that reflect men’s view of the opposite gender because they write the checks for the movies to be made and have more money to spend on movie tickets. If those with more money don’t want to see football players kneeling in social protest, then the profit-maximizing action for the NFL is to make a rule disallowing kneeling during the national anthem. Essentially, a capitalist system will shake out to reflect the interests of those with money and power, even if those interests are discriminatory and completely exploitative like in the case of Harvey Weinstein. Under these scenarios, I admit, the market economy is a system that rewards and perpetuates unethical behavior. [Not all corporate behavior is done under profit-maximizing conditions, however.]

On the other hand, I’m cognizant of arguments that show the market economy as being a force for good in this debate. Money talks, but this can go both ways. Bill O’Reilly was effectively forced out from Fox News because advertisers were boycotting. They didn’t want to be associated with such a vulgar human being. Were their decisions based on ethics, or just avoiding bad PR? Either way, the boycott worked. Similarly, Harvey Weinstein was forced out from his own company and seemingly blacklisted from the entire industry. Compare this to the President: his first wife alleged marital rape, he’s had countless sexual assault allegations, and the Access Hollywood tape was a smoking gun showing what kind of person he is. But he’s still in power. He’s not the only politician or person in government to retain their position after doing terrible things. We can all choose to support companies that we think are ethical and not use our dollar votes to support unethical ones, yet we are all bound to pay taxes to the same government.

So then I wonder: Under what circumstances do market forces punish men for this behavior better than the democratic process? It’s easy to look at the very real faults of a consumer-driven market economy and see an alternate system based on public control as the antidote. But if culture is the real problem, a new economic system might not make much of a difference. In fact, high-quality legislation from the democratic process could be disappointingly ineffective if the underlying culture is so engrained. If you think of different countries around the world with less ‘capitalist’ economies, how much of an improvement is there? For European countries that boast higher female participation in corporate boardrooms or the legislature, was it because of their culture or some sort of tinkering in how their economy is structured? I’m skeptical that replacing the current US economic system with, say, a full-on Bernie Sanders system will improve much. A sexist culture will still put sexist men in charge, though often we assume the right democratic outcome weeds them out.

The economy is not always a zero-sum game. We can both be better off without it coming at the expense of someone else. But power is a zero-sum game. So the asymmetric power of men, reenforced by their asymmetric holdings of money and connections, does come at the expense of women. Closing this power gap absolutely needs to be a policy priority, but more importantly it must be a cultural priority. Market forces should be used in tandem with legislation and the democratic process; anyone suggesting only markets or only a new economic system will cause the change which we would like to see should rethink their approach.

Two oft-repeated assumptions about big companies in market economies:

  1. Corporations pursue profit by all means without regard to concerns for ethics, the environment, diversity (racial/gender/socioeconomic), and community externalities.
  2. Corporations consistently underpay minorities and women for doing the same work that white men do.

I see these as contradictory. A vast amount of literature shows that diversity at a company is good for its bottom line. Having more women and people of color in an office is good for everyone’s productivity and increases the likelihood of good ideas that are essential for keeping a company strong. Furthermore, if a company was only concerned about its bottom line, it’d only employ women and minorities (much cheaper!). The obvious reality is that companies do pursue profit, they do discriminate against women and minorities, but they engage in behavior that is not always profit-maximizing.

Consider an alternate proposition:

  • Corporations pursue profits in an environment that is constrained by the prevailing culture and ethical norms; sometimes that culture leads to discriminatory behavior and sometimes it means putting ethics over profits.

This means that if the higher-ups at a corporation come from a culture that gives them implicit bias towards men, white people, or those that went to their alma mater, hiring decisions will be made that reflect those biases even when it is against the self-interest of the company. At the same time, culture can also influence business decisions that put ethics over profits. Price-gouging during a natural disaster, for example, might not happen (even if profit-maximizing) because cultural norms shun such behavior.

Essentially, prudence is not the only thing guiding human behavior, even if economic models often suggest so. What’s interesting to me is the overlap of people who a) attack the utility-maximizing framework of mainstream economics as being oversimplified; and b) say that people in a “capitalist” economy are purely self-interested.

 

 

Three new podcast episodes, starting with most recent:

  1. 2002 Nobel Laureate Vernon Smith talks about his work in experimental economics and how Adam Smith’s Theory of Moral Sentiments influenced his work.
  2. Dan Hirschman of Brown University discusses “stylized facts” and their role in the process that takes ideas from academia to public policy, specifically inequality.
  3. Nell Compernolle of the University of Michigan tells the migration story of Nepalese men and its impact on marital attitudes.

Lots more episodes coming soon, hopefully. If you know anyone that would be interested in being interviewed, let me know!

New podcast episode finally out. I interviewed Carson about The Ethics of Locavorism. Essentially, the question is: if we want to be ethical consumers, should locavorism be a priority in our consumption habits? I won’t spoil the answer, but we examine the case for locavorism through the environmental lens, economic lens, and trying to foster communities. Find the RSS feed here, iTunes here.

I’m currently reading Bourgeois Equality, Deirde McCloskey’s final installment in a trilogy. I have a lot of thoughts that will be for another day, but for now a quick observation…

Among the many ideas and arguments brought up in the trilogy, McCloskey criticizes modern-day economic thought as relying only on one of the seven principal virtues: prudence. Ethical philosophers and psychologists throughout time have recognized that human behavior is (and should be) guided not just by prudence (“rational self-interest”) but also by temperance, justice, courage, love, faith, and hope. Adam Smith, in Theory of Moral Sentiments, argued wonderfully about how human behavior guided only by any one of the four cardinal virtues (the first three plus prudence) was unreasonable and unethical. More to the point, mainstream economic analysis today is both incomplete and unreasonable to reduce all human behavior down to a rational utility maximization.

What dawned on me is how the economics discipline today is full of people worshipping this prudence-only mindset. I think the causation works both ways. On the one hand, individuals who themselves see problem-solving and behavior as largely rational calculated decisions will be disproportionately drawn to economics…because the framework they are going to be working with jives better with their own approach to life. On the other hand, students who study economics often start to shape their approach to life problems and policy decisions as if human behavior is only understood through prudence. After studying economics for a couple years, I recognize that I started to oversimplify behavioral analysis and ethics as “well, yeah, it’s in their self-interest.”

To non-economists the following parable may seem absurd, but to me at the time it sounded oddly sensical: the girlfriend of a roommate was visiting for the weekend; the roommate without the girlfriend felt this was a burden on his space and lifestyle, so he did some Coasean bargaining to allow this roommate’s girlfriend to visit and stay with them. They worked out some monetary deal to make the visit an agreeable event. Since they were sharing a room, the girlfriend visit meant the single roommate would have to sleep on the couch. What a drag! (For the record: I was not directly involved in this situation)

Another quick bit of evidence can be seen in experimental economics. Some experiments, like the dictator game or ultimatum game, are meant to isolate how altruistic humans can be in different scenarios when money is involved. Non-economists demonstrate more charity and altruism, even when the experiments are anonymous and no “self-interest” can be ascertained from their behavior. Undergraduate economics students, on the other hand, follow more closely to what “maximize utility” models would predict. Basically, they know the models. They know how they’re “supposed” to act. In a sense, they have shifted their decisions to emphasize prudence more than the other virtues. Like I said, the causation can work both ways, but I doubt that roommate would have engaged in some Coasean bargaining absent learning about the concept in economics classes. No society that I know of imposes a norm of private bargaining in such a household situation.

This reality unfortunately reinforces itself. Prudence-driven individuals are more likely to go into economics, economics is more likely to draw people towards a more prudence-based approach, and the discipline ends up staying focused on prudence only. People who are so aghast at the idea of rational self-interest being the sole driver of human behavior stop after Intro to Micro and go into other disciplines. In addition, the credibility of the subject to outsiders diminishes. On some levels, this is a fair decrease in credibility. In others, it means non-economists wrongly dismiss economic realities of scarcity and the laws of supply and demand when they shouldn’t.

Many left-leaning urbanists* try to prevent the perceived injustices from gentrification through an unrealistic combination of goals and means.

The trilemma that many city-dwelling progressives face in urban policy comes down to wanting three things that cannot simultaneously exist: 1) Maintenance of city charm via restrictions on building and construction; 2) Affordability; 3) Maintenance of existing neighborhood ‘character’ and demographic identity.

I’ll go into a little more detail on all three before proceeding:

  1. San Francisco maintains its charm by having short historic buildings that don’t give the feeling of congestion or block the sunlight. Paris keeps that cutesy feeling by not allowing building above the Eiffel Tower in the bulk of the city. If either of these cities became dominated by tall/ugly/modern condominiums, residents and visitors wouldn’t enjoy them as much.
  2. People from all ends of the socioeconomic spectrum should be allowed to access the amazing advantages cities have to offer, from jobs to ideas to cultural experiences.
  3. Neighborhoods that have served particular groups (ethnic, religious, socioeconomic) should be protected from an invasion of yuppies that threaten the existing neighborhood character because of their ability to pay much higher rents and shift demand to different business establishments.

So let’s start with the premise that policy should generally make a neighborhood safer, more beautiful to walk through, and easier to get around. Or at least, if these things happen we shouldn’t stop them. The desirability to live there will increase. An increase in desirability means an increase in demand. If this is not met with an increase in the supply of places to live or work, rents and property values will go up. This is supply and demand, and those laws have not been repealed.

Policies that maintain bullet point 1 take the form of construction regulations, height restrictions, and Floor Area Ratio laws. No one wants a billboard, casino, or ugly condo blocking a great view of the Washington Monument. Shorter buildings allow more sunlight, fresher air, better vibes. Historic buildings look nicer. So almost all cities put in place limits on the type and height of construction. The whole point of these laws is to make it harder to build. Often their stated intention is often to just give oversight to the process so that the community has a voice in what’s being built. But it’s fair to say that these are more restrictive than just a typical paperwork formality. As San Francisco has exploded in popularity, supply has not kept up. So what would we expect to happen to price?

Bullet point 2 is a goal all cities should aim for. Cities are tremendous sources of ideas, culture, and professional opportunities that everyone should have access to. When rents and property prices are too high, only those who start off with a high income can afford to access the amazing parts of cities. Social mobility decreases, productivity suffers, and innovation declines. People now settle to live in places they can most afford, not in places where they are most productive. This is bad.

Bullet point 3 is one of the trickier parts to maintain. The character of a neighborhood – including its desirability and hence property prices – do not stay static over time. The Upper East Side is oddly becoming one of the more affordable Manhattan neighborhoods below 95th street while Chelsea is solidifying its spot as one of the most expensive. 40 years ago? The roles were switched. Should policies really be focused on stopping the unpredictable dynamism of city culture? What if SoHo was legislated to stay as a garment district or the Meatpacking District as a meatpacking district? Everyone seems to want the mom-and-pop sandwich shop that’s been there for a hundred years over the boring chain, but who’s to say laws should determine which preferences should prevail?

What about rent control? The flaws in these policies are well-documented, so I’ll just give a quick rundown. Just as price controls caused long lines at gas stations in the 70s, rent control’s main effect is to cause a shortage of housing. Those that are lucky enough to get in rent-controlled buildings are drastically outnumbered by those that do not. Cities like Stockholm or Copenhagen that have a decent amount of rent control can have waiting lists of up to eight years (!) – of course, that’s unless you know the right person or are politically connected. Rent control pushes the air in the balloon to the other side of the balloon. The remaining properties become even more in demand and more unaffordable. In addition, rent control can incentivize building owners to sell on the buyers’ market rather than the renters’ market. When this happens, the supply of housing available for rent goes even further down. Rent control has also been proven to lead to inefficiently maintained buildings – landlords will only keep the apartments up to the quality the price determines they should.

What I want to scream from the rooftops to those disappointed with the results: do you expect these neighborhoods to stay exactly as they are forever and always, with affordability staying the same? If a neighborhood ‘improves,’ why do you think it will not get more expensive unless you allow for more building? No one wants a casino, billboard, or ugly condo in their backyard. But peeps gotta live somewhere!

The unfortunate political equilibrium is that those with any political voice in cities are the ones who already live there. They want to keep their property prices high, their views undistorted, and their neighborhoods just as they are. They are fine with change, and would never call themselves that dirty word ‘conservative,’ but they’d rather it be Not In My BackYard. The large swath of people who would love access to the Bay Area’s treasure trove of ideas, cultural capital, and jobs don’t vote on the laws in those towns because they don’t live there.

I’ll state the obvious admission that I am the white yuppy people say is ‘the problem’ when it comes to gentrification. I know that when I talk about neighborhoods changing, I am much more likely to be the beneficiary than the person kicked out. But I still stick to my guns that city-dwellers need to accept a) things change, and not always in a way that is immediately pleasing; b) as the benefits of living in a city continue to increase WE NEED TO BUILD MORE.

 

*For the record, regardless of whether people identify as left- or right-leaning, I think the majority of people living in cities engage in NIMBYism and want to keep their settings the way they are. It’s just kind of human nature. I chose to pick on ‘progressives’ here because they especially emphasize the desire to stop gentrification and increase housing affordability.