Current music model is too expensive

The Dutch are passing a law to add $4.30 to tax every gig of data in iPods, and I guess other mp3 players. This means a $400 60G iPod will now cost $658.

Clearly this is ridiculous, but the notion of a per unit tax applied to mp3 players, and then paid back to artists based on download popularity has some benefits to it. The $4.30 per gig works out to around 0.4 cents a song (or 4 cents per 10 songs), a rate which is far lower than Apple's price of $1/song, but still way too high. Given how mp3s seem to be such poor substitutes for CDs, such a rate on downloaded songs will greatly increase overall music industry revenue (and profit, since the margins are close to 100%).

mp3s seem to make up the "long tail" of music -- it's stuff that people would never have bought but are willing to download. I understand the industry wanting to capture some of the surplus thrown off by this long tail, but the Dutch tax will simply kill the product (or encourage ppl to buy it elsewhere).

On the subject of annoying pigs...

This post by Brad DeLong raises the interesting point about what "progressive" means. Suppose that once upon a time, the top 10% in wealth of the population paid 50% of the tax burden and the rest paid the rest -- this would be called "progressive". Suppose that today, the top 10% now pay 80% of the tax burder -- would anyone claim that the current tax structure was less progressive than the past tax structure?

Brad DeLong might. He would argue that if the wealth of the top 10% increased by enough, they they may be paying a smaller % of their total wealth in tax even though they are shouldering more of the entire tax burden overall. In this case, the tax code is less progressive than it used to be because, yes, the richer are paying more, but you see it is causing them less pain than it used to.

Personally, I think of taxation in terms of efficiency (taxes should do little harm) and fairness (rich should shoulder more of the burden). Brad seems to view it in terms of retribution (rich=evil & must be punished!)

Why does US fiscal policy effect trade deficit?

The US trade deficit is an accounting construct that captured whether the US is a net importer of goods (net exporter of cash) or a net exporter of goods (net importer of cash). Now, both goods and cash are handy, so I don't see why either a trade deficit or surplus is desireable, or important. This is doubly so in America's case since the US is a closed economy, only 10% of economic activity comes from trade.

Given that it is unclear why any trade deficit is important, and the US's trade deficit in particular, I don't see why anyone wants to do anything about it, and I further fail to see why any change in the US's fiscal deficit matters to the trade deficit one way or another.

The US fiscal deficit is the cash amount the government spends in one year vs. the cash amount the government takes in that same year. This, incidently, is a meaningless figure because the government has long term obligations (e.g. social security, medicare, medicaid, possibly pensions) that far outweight the year to year inflows and outflows of money. Cash Accounting is good enough for a hot dog stand, it is not good enough for a company of any size, and it is woefully inadequate for a country.

The notion that having annual cash inflows and outflows match better will somehow make America import less stuff and export more cash is, in my mind, incoherent. The US imports stuff because other countries, through export-friendly policies, are strapping hundred dollar bills to their exports. If a Japanese DVD player looked good before, it looks *great* with a hundred dollar bill attachd to it. To refuse such largess would be irresponsible.

Similarly, the US doesn't export cash because where is it going to go? Sclerotic Europe? Corrupt Russia? Opaque China? Catatonic Japan? If any of those countries improved their conditions for economic growth, we would see money going there.

If people think the US saves too little, as I do, the prescriptions are simple.
1) Higher interest rates (this is happening).
2) Government mandated savings (such as privatized social security, and an effort is being made here).

Cutting pork spending from the federal budget, though worthy, will not do a thing about domestic savings rates. Help me here -- what am I missing?

Murdoch on Blogs

I am halfway through David Brin's Transparent Society, which is good, but not as good as I hoped. You can get all the ideas in this online post.

The book was written way back in 1999, and it's interesting to see how things have changed since then. A major theme is "accountability" and how greater reciprocal transparency can increase that accountability. In the US, the greatest forum for this seems to be blogs and the media.

Blogs, for all the online (and now offline) buzz they've generated, are not read by many people. But newspapers and news magazines are not read by many people either! Blogs have influence only because they are read by reporters, who in turn write regular magazines, and I don't think reporters are used to people saying that their articles are biased, uninformed, and sometimes poorly written.

Rupert Murdoch understands the influence blogs are having on media, and the changes in the media world that are coming as a result. Blogs are good at opinion (and occassionally, expert analysis), newspapers are good at gathering facts. Yet newspapers insist on embelishing facts with flabby opinions and amateur analysis, decreasing their quality. Quite frankly I have never been interested in the "are bloggers journalists?" question, mainly because I have no particular regard for journalism, but there is no question that newspapers read what bloggers are saying about them. The monopoly on ability to question and critisize is broken and is not coming back.

After the bubble

Angry Bear has a great post outlining what housing prices will do when the current bubble pops. Things to look forward to -- a 40% decline in prices in real terms ground out over 5-8 years.

The current bubble effects mostly the coasts, which encompasses about 40% of the US population. The macro effects would include 1) rising unemployment (associated with the home building and sale industriy), 2) reduction in consumer spending (which had been fueled by mortgage equity withdrawls), and 3) a dramatic increase in foreclosures. I actually think that foreclosures will begin setting the price in markets, resulting in faster pricing declines than expected.

More on Consumer Credit

A while ago I wrote that the consumer credit industry was plenty competitive, so the most likely result of tighter bankrupcy rules would be lower interest rates.

winterspeak reader CD writes in to confirm that the credit card business is competitive:

Without debating the pros and cons of the bankruptcy bill, I just want to add my two cents on competition in credit cards. To your (rhetorical) question, is the market for consumer credit competitive, the answer is a resounding yes. Look no further than the rearview mirror for evidence of this in the form of financial blow-ups in the last recession of Metris, CompuCredit, NextCard, Providian, Household International, and auto lenders Onyx and AmeriCredit, among others, all of whom underpriced and overextended credit to the most marginal of consumers, the subprime market, and paid for it with massive losses eventually. One might say competition was too fierce for their own good, as a company like Metris would willingly lend thousands of dollars to consumers with the worst FICO scores around. Underwriting discipline comes in cycles in this as in all financial products with a loss risk attached to them, and no doubt credit card underwriting is mildly less competitive now if only because lenders aren't writing as much bad business.

The aspect of the card business plagued by a lack of competition is the network/infrastructure side, as the Visa/MasterCard duopoly strangled banks' and retailers' options for partnerships for years through anti-competitive exclusivity agreements. But after the recent court rulings in favor of AmEx, Discover, etc., it will grow even more competitive when the fees that companies pay these businesses per customer charge get partly competed away.

I am sure that your reasoning is correct and that the benefits which will theoretically accrue to the card companies' pockets from the bankruptcy bill will also get competed away at some point, probably even before they are realized

Libertarian Paternalism is *not* about limiting choice

This article argues that U Chicago's Cass Sunstein and Richard Thaler's "Libertarian Paternalism" is about "limiting peoples' choices". This is false. I've spoke to Thaler about this and read the monograph he wrote with Sunstein.

"Libertarian Paternalism" is noting that people often just take whatever default choice is offered and therefore working hard to come up with good default choices. This does not limit choice because you don't need to stick with the default. But since *something* has to be the default, you might as well put effort into making it something good.

Still not agreeing

I have never read any of Robert Wright books, but I liked his old Slate article and "Non-zero" is just a plain, cool name. I also saw him speak at Chicago, and I felt he came across as being foolish and naive. That has not changed.

Wright agrees with Bush that lack of integration in the broader global economy enables countries like Saudi, N Korea, and Pakistan to be crazy terrorist producers and belligerents. But, Wright says that instead of invading them and creating democracies, the US should instead trade with them to integrate them into the global economy.

I wonder if Wright has ever been to these countries, or bothered to learn anything about them at all. Saudi's economy is deeply integrated with the world economy -- they export almost all of their production and import almost all of their consumption. Their land is mostly populated by foreigners. All their media is imported, although it is censored at home. N Korea has chosen not to trade, which makes Wright's idea a non-started. And Pakistan, for all its flaws, is precisely as outward looking as you would expect a small nuclear armed nation next to a 1B nuclear armed giant rival next door to be.

All of these countries are well aware of the outside world. But that is precisely the problem. In fact, it is a feeling of frustration with the outside world that is at the root of their belligerance, a frustration that cannot be put to constructive use through a democratic political process so instead finds a home in aggression.

Housing, one year on

On June 21st, 2004, Brad DeLong discussed whether or not there was a housing bubble in the US.

Nearly one year later the bubble, if there is one, has yet to pop.

It's worth reading down the thread to see people debating whether current housing prices are really determined by fundamentals or if they are just plain crazy. It's interesting to note some of the wrong ideas folks have, even though their misconceptions are common and understandable.

1) People argue that prices are high in places in NYC, Boston, SF etc. because there is no where left to build. This is false because one can always build upwards. SF can become more like Boston, Boston can become more like NYC, and NYC can become more like, I don't know, Tokyo.

A restriction on higher buildings has nothing to do with "limited quantities of land" and everything to do with regulation.

2) People try to compare rental costs with housing prices on a cash flow basis and look at mortgage rates, insurance costs, closing costs, taxes, deductions, etc. None of this stuff matters. Look, calculating the cash outlays needed for buying a house is a good way to figure out how much house you can afford, but all these supplemental expenses just get factored into the price of the home the instant they were made law.

For example, suppose the government added a $100,000 transaction tax to all home purchases. I can assure you that a $500,000 house would instantly start selling for less.

Since all additional costs are factored into the price of a house, P/E (or sale to income) tells you all you need to know about bubbles.

3) The point on P/Es and interest rates is more interesting and difficult to keep straight. On the one hand, whether or not Amazon.com is a bad buy at $100 a share does not depend on how favorable your broker's financing terms are. On the other hand, since purchase price is the net present value of discounted cash flows, lower real interst rates mean that future payments are worth more than they are today so the price (and hence, price to earnings) will and should be higher than historical norms. But I don't know if there is a good reason to beleive that real interest rates are lower today than they have been in the past.

Is the market for consumer credit competitive?

Left wing people who hate and do not understand markets think the bankrupcy reform bill is bad. I do not know the details of the current bill, but neither do they. They think making bankrupcy harder is bad because it hurts consumers and helps fat cat credit card companies. The argument that tougher bankrupcy laws help consumers by lowering interest rates, and thus the cost of borrowing, does not move them because credit card companies are exploding with profits.

These things can be tested. (See this great article).

1) Are interest rates for houses, cars, and credit cards different? And are these differences in line with the ease of recovering the money in an event of default?

The answer to both these questions is yes. Mortgages are cheapest, then car loans, and finally credit car loans. This indicates 1) competition between different credit markets, 2) competition within credit markets, 3) real cost from default. Credit card companies may make money, but they are in a competitive market.

2) Are interest rates sensitive to default risk?

The came up with this device they could install in cars that would make the car stop working if the owner stopped paying his car loan (can't find link). Defaults fell, probably through some combination of disuading those who intended to default from buying those cars and creating negative consequences for owners who defaulted. Interest rates for cars with this device are lower than for cars without this device.

Marriage and Death

I have not commented on Schiavo or gay marriage, mainly because I don't have much to say.

I do think, however, that by the time I am 80, physician assisted suicide will be normal. As medicine keeps us alive for longer but does not help us become any younger, I think that death is going to become voluntary. By this I don't mean that one can choose not to die, but I think that the precise moment of death is going to occur when someone flips a switch, not when the body decides its time has come. I know that public mores are very far from this point, but just as we have had tremendous changes in public sentiment between 1950 and 2000, we will have equally tremendous changes from 2000-2050.

I very much enjoyed this long post by Jane Galt on how messing with institutions (such as marriage) can have unforseen negative consequences. The examples Jane gives, an income tax cap, welfare in general, and welfare for unmarried mothers, highlight now well meaning policy changed and eroded the key institutions it was meant to support. Nevertheless, I do not see how gay marriage changes the incentives for people to get married or not get married, so I suppose I do not care. Next step -- best friend marriage!

Taxes

Just as the government publishes how much it spends on stuff and how much it taxes, it should also publish the estimated dead weight loss of those taxes. Right now, the US burns about 25 cents to raise every dollar. Everyone should know what dead weight loss is.

Happy April 15th.

Getting mortgage tax breaks wrong

I feel dirty saying this, but Slate's economic coverage was much better when they had Paul Krugman writing columns for them. But both the coverage and Krugman have gone to seed.

Take this latest one on the home mortgage tax deducation:

But the once-modest deduction has evolved into a very large and highly inefficient rent subsidy. The deduction plainly causes distortions. People are willing to pay more for houses and buy bigger houses than they otherwise would because they can deduct the interest from their taxes. "When Americans invest the bulk of their life savings in housing, that's a redistribution of capital from the productive business sector," said Sullivan.

Slate is wrong. It is true that the tax deducation was a subsidy making homes cheaper to buy, but this was a one time event and all the benefit from that subsidy was captured by those who already owned homes. From that day, back in 1913 on, it has caused hardly any distortions to markets.

Think of it this way -- there is a house you want to buy and you're willing to pay $100,000 for it. The government passes some law that says whenever you buy a house, Uncle Sam will take $20,000 from other people and give it to you. Great!, you think, you're $20,000 richer!, but guess what -- that $100,000 house now mysteriously costs $120,000. Since you were willing to pay $100,000 when you did not have an extra $20K lying around, you are certainly willing to pay $120K now that you have the extra money, so for you things are a wash. But the house seller is now $20,000 richer, and Other People are now $20,000 poorer. Big whoop.

Similarly, if the $20,000 transfer was eliminated, that $120,000 would go back to being worth $100,000. The buyer is unaffected. The seller is is poorer. Other People are richer.

The benefit of eliminating the home mortgage deduction is the same as eliminating all deducations -- the least impoverishing taxation has a low rate levied on as wide a base as possible. Deductions leave average taxes untouched by raising marginal taxes, making them excellent wealth destroyers.

Pogue and the ick factor

Usually when I talk about copyright I do so from the economic perspective -- what IP environment creates the maximum long term public good (ie. people pay marginal cost, there is incentive to create). Generally, I'm not a fan of David Pogue, but this note does a good job of outlining the ick-factor, people's gut instincts, on what should and should not be permissible.

So, if you'll permit a little dead-horse beating, I'd like to return this week to the cheerful hornet's nest that I stirred up in my e-mail column two weeks ago, concerning copy protection of music and movies.

See, I'm a former professional musician and a current author whose books are currently circulating online in PDF form, not contributing a cent to my kids' college funds. It burns me up to think of the long days and nights I pumped into those books — and the freeloaders who are now reading them without paying.

So yes, I'm instinctively annoyed at programs like PyMusique, which lets you buy songs from the iTunes music store without any copy protection. If all people wanted to do was "liberate" their songs for their own personal use (to stream to their TiVos or Roku Soundbridges, for example), I'd be all for it. The problem is that once those songs are unprotected, the temptation for some people to upload them for online swapping will be too great to resist.

Now, I consider many of the responses on the Pogue feedback boards to be irrelevant nonsense: "Record companies make too much money anyway," "I should be able to play iTunes songs on players besides the iPod," "Musicians do it for the love of the art, not payment," etc. (Even if that's all true, none of it matters. When you buy from iTunes, you agree to abide by the terms of the purchase. If you don't like the terms, shop elsewhere; you can't just violate any law or contract whose terms you don't care for.)

Yet some of the comments were extremely thoughtful, to the extent that this black-and-white issue began looking grayer and grayer.

Here are some of the questions you posed, and my answers. As you can see, the copy-protection issue gets murkier by the moment.

• "Is it a violation when I borrow CD's or DVD's from my local library?"

Clearly not.

• "What if I borrow a CD from the library and then rip the songs onto my iPod?"

I'm guessing that's illegal, too.

• "What if I buy a DVD and want to copy it for myself in the event the original gets damaged?"

Well, that's illegal, too — but it shouldn't be. If you bought it, shouldn't you be able to do what you like with it?

• "I have a significant vinyl collection (2000+ LP's). I've already paid the artist, I've already paid the record company. In fact, I have cassettes of some of that music — I have even had 8-track duplicates. How many formats/versions am I expected to buy? I see nothing wrong with downloading a copy of a song I own that someone else has already ripped from vinyl. I could do it at home, but why bother?"

Gulp... I see your logic. And similarly:

• "I duplicate Blockbuster's DVD's for a very good reason: Over the years, I've bought thousands of dollars' worth of movies on VHS tapes. Why should I have to buy all new ones on DVD, just because the industry forced a format change on us?"

Does seem pretty offensive, I agree.

• "It's perfectly legal for me to record a movie off of HBO on my set-top DVD burner for my collection. So why is it illegal for me to make a copy of a friend's DVD?"

I — I don't know.

• "I have 200 cassette tapes I made from my vinyl LP's so I could play them in my car. Am I supposed to be losing sleep over the royalties 'lost' to those artists and record companies?"

I don't think so.

• "The argument that music and art will suffer if free file-sharing is permitted HAS NEVER BEEN SUPPORTED by any facts."

This may well be true. In fact, I read that in Australia, CD sales have actually INCREASED in the era of file-swapping. That gives more weight to the argument that sampling songs online makes people more inclined to buy the albums, as well as to the argument that the U.S. recording industry owes its annual CD sales decline to other factors (such as, "Everyone's finally done re-buying CD's of their favorite old tapes and records").

So yes, I see validity to all of these arguments.

And yet I still can't go as far as, "SHARE FREELY AND BE MERRY!" (which was the closing comment of the "HAS NEVER BEEN SUPPORTED by any facts" guy).

The solution, of course, would be to make all music and video freely copy-able for personal use. But how do you stop people from exploiting that in an effort to get around paying for the stuff to begin with?

I'm not the first person to be snagged on these thorny questions, of course. A recent Times article points out that the Supreme Court justices are hashing through precisely these issues in a case that pits Hollywood movie studios against Grokster, a file-sharing network.

But, you know. Supreme Court, Schmupreme Court. What do YOU think?

I've lifted the article root and branch, probably breaking copyright laws to do it. *Yawn*. I don't think David will mind though.

Your children are not the same as other people's grandparents

Marginal Revolution and Gary Burtless seem to believe that the aging population will have little net effect on working people's ability to support non working people because both old people and young people are dependent on working people, and an aging population means the burden from young dependents goes down while the burden from old dependents goes up -- net net it could all end up being a wash.

I think this is bogus, for simple reasons that should be clear to any economist.

1) Most of the transfer from working people to young dependents is via parents taking care of and educating their children. This is clearly consumption and investment by the parents because 1) they want to have and take care of children (even if kids are a pain sometimes) and 2) educating a child is pure investment in human capital, good for the parent if they anticipate being looked after in their old age and good for society because it now has a skilled worker.

2) Most of the transfer from working people to old dependents is via social security and medicare taxes, ie. money is going from your pocket to give other people consumption. This is a tax, and therefore has all the wealth destroying, growth curdling effects of all taxes through dead weight loss. I will work harder to earn more money to send my child to a better school, but I will not work harder to pay more in social security to give to old people I do not know. Moreover, this is a very high tax so the dead weight loss effect is likely to be very large.

If worker's dependent burden shifts from their children to other people's parents the effect will not be benign or cancel out even if the numbers do. The harm that comes from transfers is the growth destroying dead weight loss that comes with them, destruction which is evident in the highly retarded economies of high-tax Europe. In addition, such a shift signals a large reduction in investment and a large increase in consumption, which does not bode well for the economy going forward.

A buddy of mine still at Chicago was chatting with a recent Bates medal winner (not Levitt) about what the most important economic principal was, and my friend said "dead weight loss". The Bates winner had never heard of this, which shocked both me and him. I guess that dead weight loss is only taught at Chicago these days, and the whole notion that people respond to incentives has become passe to other economists.

Laughing, but not proudly

It's very funny to see Sony fail, fail, and fail again at the mp3 player market. After sticking with proprietary formats (for both media and file) for ever, I thought they had finally got it when they said their mp3 players would, in fact, start playing mp3s. But I was wrong -- Sony misses again! (via /.)

Inheritance, IQ, and the generations

I highly recommend this pdf article that discusses the discovery of IQ gains over time. The fact is that IQ has been increasing at a fairly dramatic rate within a given population over time.

What conclusions must we draw about previous generations? Did most of them suffer from mental retardation? Jensen (1981, p. 65) emphasized the limitations of those with low IQ. He noted that someone with a Wechsler IQ of 75 or below may be a keen baseball fan and yet be vague about the rules, unsure of how many players make up a team, unable to name the teams his or her home team plays. How reasonable is it to assume that 70% of late 19th century Britons could not, even if it were their chief interest, understand the rules of cricket?

In essence, IQ gains have been so dramatic that many people born 100 or more years ago would be considered mentally retarded by today's standards, according to their IQ score.

It is completely unclear what this means for IQ, cognitive ability through the generations, and what this tells us about comparing IQ between different groups (e.g. Whites today vs Blacks today, Whites today vs. Whites 60 years ago etc.) The author explores several possibilities, but at heart the mystery remains.

At the end of the article, the author considers where meritocracy stands in a world where there are systematic conginitive differences between races based on genes. Quite obviously, a meritocratic world where people are only rewarded according to their cognitive abilities would consign those races with lower average cognitive abilities to (on average) less wealth, status etc, even if environmental factors were controlled for. The notion of lesser races being perennially poorer is icky in the extreme, so the author comes down against meritocracy and for the standard communitarian utopia "in which the appreciation of beauty, the pursuit of truth, craft skills, being fit, companionship, family feeling, and so forth really counted for more than having above average income and possessions." Personally, I loved the inclusion of "craft skills" and the suggestion that shaping wet clay with bare hands is more virtuous than, say, calculating taxes, developing corporate strategy, or performing an MRI (I presume).

What I thought most naive about the analysis was:

The case against meritocracy can be put psychologically: (a) The abolition of materialist-elitist values is a prerequisite for the abolition of inequality and privilege; (b) the persistence of materialist-elitist values is a prerequisite for class stratification based on wealth and status; (c) therefore, a class-stratified meritocracy is impossible.

To defend the first proposition, the major barrier to abolition of inequality and privilege is greed and status seeking. Progressive taxation, redistribution of wealth, death duties, welfare, public job creation, publicly funded health care and education, all founder on the rocks of the love of money in one's own pocket, the lust for status superior to one's fellows, the desire to confer advantage for
these things on one's family.

The evils listed, desire for wealth, status, and caring for ones family, are at the very core of our humanity. The idea that these can be engineered out is preposterous. Attempts to engineer this out have resulted in the deaths of millions and the impoverishment of, quite literally, billions more. The question should be given humanity's desire for wealth, status, and caring for ones family, what is the best way to engineer society so these impulses result in constructive ends, not destructive ends. (via Statistical Modelling).

Insulation vs Catastrophic Coverage

Arnold makes the point nicely when he says that people prefer healthcare coverage that insulates them from the cost of their illnesses when they really ought to prefer catastrophic healthcare coverage that only kicks in if something goes seriously wrong.

He argues that this is irrational, and perhaps this irrationality stems from people disowning their illness, from them feeling that this illness is not really theirs and therefore they should not have to pay for it.

I agree with Arnold that people are irrational when it comes to thinking about healthcare, and that part of this irrationality expresses itself as a preference for insulation coverage over catastrophic coverage. I've certainly felt the urge, to pick the healthcare plan that covers the most stuff when having to make that decision.

I think that people think of themselves as healthy by default, and so discount anything that keeps them healthy (I'm healthy already, why would I need that?) and exagerate the cost of taking on unhealthiness (I'm not going to take that vaccine because it might make me sick!). This comes from the famous behavioral economics experiment that demonstrates how individuals have a very low willingness to pay for a vaccine, but demand a very high price to be exposed to an illness of similar risk, say in a medical trial. In this view, catastrophic coverage may be undervalued because you're never going to get sick, but insulation coverage is valued because you'll be taken care of just in case something does happen.

Two Lessons Needed

Brad is not a fan of Hazlett's "Economics in One Easy Lesson". This is because

It is a limited book because at least half its pages hint that the works of John Maynard Keynes are an abomination without ever grappling with the Keynesian argument... We all know that the market system is an amazing decentralized social planning and allocation mechanism if externalities are small, if returns to scale are in general diminishing, if we are happy with the distribution of wealth and the concommitant distribution of economic power it gives rise to, and if Say's Law holds--if supply does indeed create its own demand, and we don't have to worry about large-scale unemployment and deep depressions.

The Keynesian argument -- "things are wrong because people are irrational so the government should step in and make things right" -- is instinctively well understood by people. People see wrongness all around them and are eager to call on authority to intervene and "do what's right". The Classical argument, that there are second order costs and effects, is not understood by people and this is what Hazlett's book explains, and explains very well.

Brad should wander around the mean streets of Berkeley and ask people if breaking windows increases employment or not. Keynes would say "yes" (or at least "sometimes") and Hazlett would say "no". I wonder what Brad would think it's most important to educate people about once this survey on economic literacy was done. (More on Marginal Revolution).

Best Econ Book Ever!

Longtime winterspeak reader LS points me to Henry Hazlitt's book Economics in One Easy Lesson, online and for free (as in beer). This is the first book I recommend to non-economists who want to know why trade doesn't destroy jobs and hurricanes don't create them. First publised in 1946, it answers the same questions people ask today. Recommended.

Chimps and Baboons

I read this great piece somewhere about how baboons were smart enough to form small hunting groups, but still so dumb that the excitement of the hunt made them forget they were supposed to cooperate and they began attacking each other instead. The net result was that baboons had more success hunting alone than they did in teams.

Chimpanzees on the other hand often formed groups of young males that had been ousted from their troop for some reason or another. These bands would systematically attack other groups, slaughtering all the males and children, and taking the women for themselves. Intelligence and cooperation are effective, but not benign.

In a similar mode, I very much enjoyed Sageman's analysis of the sociological factors that lead to the narrow phenomenon of Al Qaeda, and the broader phenomenan of Islamism. He states some interesting facts, quite contrary to the usual conceptions of terrorists:

Most people think that terrorism comes from poverty, broken families, ignorance, immaturity, lack of family or occupational responsibilities, weak minds susceptible to brainwashing - the sociopath, the criminals, the religious fanatic, or, in this country, some believe they’re just plain evil.

Taking these perceived root causes in turn, three quarters of my sample came from the upper or middle class. The vast majority—90 percent—came from caring, intact families. Sixty-three percent had gone to college, as compared with the 5-6 percent that’s usual for the third world. These are the best and brightest of their societies in many ways.

Al Qaeda’s members are not the Palestinian fourteen-year- olds we see on the news, but join the jihad at the average age of 26. Three-quarters were professionals or semi- professionals... quite surprisingly very few had any background in religion. The natural sciences predominate.

Far from having no family or job responsibilities, 73 percent were married and the vast majority had children. Those who were not married were usually too young to be married. Only 13 percent were madrassa-trained and most of them come from what I call the Southeast Asian sample, the Jemaah Islamiyya(JI).

So, they were educated and successful. They were also not crazy

So they are as healthy as the general population. I didn’t find many personality disorders, which makes sense in that people who are antisocial usually don’t cooperate well enough with others to join groups. This is a well-organized type of terrorism: these men are not like Unabomber Ted Kaczynski, loners off planning in the woods. Loners are weeded out early on... You could almost say that those least likely to cause harm individually are most likely to do so collectively.

So, maybe they were fueled by religious hatred? Maybe not

At the time they joined jihad, the terrorists were not very religious. They only became religious once they joined the jihad. Seventy percent of my sample joined the jihad while they were living in another country from where they grew up. Eighty percent were, in some way, totally excluded from the society they lived in. Sixty-eight percent either had preexisting friendships with people already in the jihad or were part of a group of friends who collectively joined the jihad together... The Khadr family from Toronto is typical: the father, Ahmed Saeed Khadr, who had a computer engineering degree from Ottawa and was killed in Pakistan in October 2003, got his five sons involved: all of them trained in al Qaeda camps and one has been held for killing a U.S. medic. Their mother is involved in financing the group

What then, provided the catalyst?

They also seem to have clustered around ten mosques worldwide that generated about 50 percent of my sample. If you add the two institutions in Indonesia, twelve institutions generated 60 percent of my sample. So, you’re talking about a very select, small group of people. This is not as widespread as people think.

When they became homesick, they did what anyone would and tried to congregate with people like themselves, whom they would find at mosques. So they drifted towards the mosque, not because they were religious, but because they were seeking friends. They moved in together in apartments, in order to share the rent and also to eat together - they were mostly halal, those who observed the Muslim dietary laws, similar in some respects to the kosher laws of Judaism. Some argue that such laws help to bind a group together since observing them is something very difficult and more easily done in a group. A micro-culture develops that strengthens and absorbs the participants as a unit. This is a halal theory of terrorism, if you like.

These cliques, often in the vicinity of mosques that had a militant script advocating violence to overthrow the corrupt regimes, transformed alienated young Muslims into terrorists. It’s all really group dynamics. You cannot understand the 9/11 type of terrorism from individual characteristics. The suicide bombers in Spain are another perfect example. Seven terrorists sharing an apartment and one saying “Tonight we’re all going to go, guys.” You can’t betray your friends, and so you go along. Individually, they probably would not have done it.

So what lead to Islamism? Smarts, lonliness, and peer pressure? In particular, I think the observation that crazy loners have a limited ability to do damage because they cannot coordinate with others is very sharp. Coordinated activity can achieve much more than an individual acting alone, and nuts cannot work in conjunction with others. A good criminal organization looks for the same qualities as a good employer: trustworthiness, predictability, and concientiousnous.

The notion of human capital, that some people are more productive than others, and that people can act to increase (or decrease) their productivity, can make people uncomfortable but it's an important way to understand group dynamics. Global Guerillas posits people as autonomous, disciplined, and able, but in fact people respond to their social environment, have average will power, and need to learn and develop skills. Global Guerrillas mocks any attack on an enemy stronghold as being useless because "an octopus has no spine" ie. scatter them in one place and they will just regroup in another. But this is not true. Counter-terrorism measures since 9/11 have dramatically reduced Islamist terrorists ability to act and to build capital, reducing them to small bands of angry young men.

In order to really sustain your motivation to do terrorism, you need the reinforcement of group dynamics. You need reinforcement from your family, your friends. This social movement was dependent on volunteers, and there are huge gaps worldwide on those volunteers. One of the gaps is the United States. This is one of two reasons we have not had a major terrorist operation in the United States since 9/11. The other is that we are far more vigilant. We have actually made coming to the U.S. far more difficult for potential terrorists since 2001.

Scattering terrorist works by reducing the group feedback dynamics neccessary to maintain their motivation.

So in 2004, Al Qaeda has new leadership. In a way today’s operatives are far more aggressive and senseless than the earlier leaders. The whole network is held together by the vision of creating the Salafi state. A fuzzy, idea-based network really requires an idea-based solution. The war of ideas is very important and this is one we haven’t really started to engage yet.