In my previous post, we saw how George Akerlof’s argument can persuade us that markets fail- from the perspective of microeconomics. This brings us to the “window” of price theory, from which we can observe that instead of demonstrating the case of market failure, Akerlof is also illustrating the exact opposite in the very same paper! How can this be the case? As James Buchanan points out, different windows can direct our attention to concentrate on different aspects of the same phenomenon. By his own admission, Akerlof states that “private institutions may arise to take advantage of the potential increases in welfare which can accrue to all parties” (1970: 488). Such “counteracting institutions,” as he refers to them, are consistent with an account told by price theory, one in which a market failure represents a profit opportunity for entrepreneurs to correct for a market failure. These include, for example, guarantees, brand names, or other forms of advertising that are consistent with non-price competition. Such a window is consistent with F.A. Hayek’s understanding of the price mechanism (1945), which provides entrepreneurs high-powered incentives to act on their particularized and subjective knowledge, not vice-versa as Akerlof’s account would suggest. But as Hayek also argues, the communicative function of relative prices is predicated on non-price forms of competition, such as advertising, which serves to communicate economic knowledge about the availability of substitute goods and services, their quality, and the reputation of its sellers, thus allowing for price adjustments in a manner reflective of underlying information. As Hayek argues, “equilibrium analysis can really tell us nothing about the significance of such changes in knowledge, and it would also go far to account for the fact that pure analysis seems to have so extraordinarily little to say about institutions, such as the press, the purpose of which is to communicate knowledge. It might even explain why the preoccupation with pure analysis should so frequently create a peculiar blindness to the rôle played in real life by such institutions as advertising” (Hayek 1937, p. 53). To conclude, why, then, does Akerlof’s paper continue to be identified as an example demonstrative of “market failure”? I would argue it is because of the distinct difference in the windows that microeconomics gives us about how markets ought to work, rather than price theory giving us a window from which to see how markets actually work.     Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and a Program Director of Academic and Student Programs at the Mercatus Center at George Mason University.   Acknowledgements Special credit is due to Peter Boettke, who first provided me the idea upon which this series is based. Any remaining errors are entirely my own.   (0 COMMENTS)

I am continually amazed at the amount of nonsense that I’ve been reading on the subject of moral hazard. Here are a few examples:1.  Moral hazard played no role with SVB because the shareholders and bondholders were wiped out.  (nonsense)2.  Moral hazard isn’t an issue because average people don’t think about the safety of a bank when making deposits.  (nonsense) 3.  Moral hazard isn’t an issue because average people are unable to evaluate the risk of various banks.  (wrong) 4.  A run on bank deposits could cause a recession.   (wrong) If you see anyone making the first two arguments above, just stop reading.  They literally do not know what moral hazard is.  The fact that a business failed and the owners lost everything has no bearing on the issue of moral hazard.  Here’s Matt Levine: Schematically, a bank consists of shareholders taking $10 of their own money and $90 of depositors’ money and making some bets (home loans, business loans, bond investments, whatever) with that combined pile of money. If the bets pay off, the shareholders get the upside (the depositors just get their deposits back). If the bets lose, the shareholders lose money (the depositors get their money back before shareholders get anything). If the bets lose really big — if the bank bets $100 and ends up with $50 — then the shareholders lose all their money, but the depositors get their money back: If the bank is left with only $50, the government gives the depositors the other $40. If you are a rational bank shareholder (or, more to the point, a bank executive who owns shares and gets paid for increasing shareholder value), this structure encourages you to take risk. If you bet $100 on a coin flip and you win, the bank has $200, and the shareholders keep $110 of that, a 1,000% return. If you lose, the bank has $0, and the shareholders lose $10 of that, a -100% return. The expected value of this bet, for the shareholders, is positive. The expected value for the depositors is neutral: Either way they get their $90 back, either from the bank or from the government. The expected value for the government is negative: If the bank wins, the government gets nothing; if the bank loses, the government pays the depositors $90. But the shareholders — really the executives — are the ones who get to decide what bets to take. Deposit insurance gives bank executive an incentive to take socially excessive risks.  In some cases the risks won’t pay off.  But that doesn’t mean executives don’t have an incentive to take excessive risks.   Things didn’t pan out for SVB.  But that doesn’t mean their executives made an unwise gamble.  It’s very possible that SVB’s strategy had a very high expected payoff, and they were simply hit by bad luck (rising interest rates.)  Of course from a social perspective their decisions may have been bad, but not necessarily from a private perspective.  “Heads I win, tails part of my losses are borne by taxpayers”.  Of course I’d take more risk with those odds. And yet despite this clear explanation of how moral hazard works, Matt Levine follows a description of how SVB went bankrupt with this head scratcher: And so the question is: Is that moral hazard? Well, not for shareholders and executives and bondholders. No!  The fact that things didn’t work out for the executives doesn’t have any bearing on the question of whether moral hazard distorted decision-making at SVB. The second misconception above also illustrates a basic lack of understanding of moral hazard.  Yes, people don’t tend to pay attention to bank balance sheets when making decisions on where to put their money.  But that’s exactly what you’d expect to happen if moral hazard were a major problem.  People would stop caring about bank risk, and highly risky banks would understand that they could attract deposits every bit as easily as conservative, well-run banks.  Clueless depositors are not evidence of a lack of moral hazard; they are evidence that moral hazard exists. At this point people often shift their argument.  They say, “Yes, it’s unfortunate that depositors don’t discipline banks, but you certainly cannot expect average people to evaluate the safety and soundness of large complex banks.”  Really?  Are these claims also true? 1. Most average people don’t read academic papers and attend lectures at lots of universities, hence you cannot possible expect average people to know that Harvard and Stanford are better that South Dakota State and Western Michigan University. 2.  Most people are not able to evaluate the quality of carburetors, anti-lock brakes, and fuel injection mechanisms, so they couldn’t possibly be expected to know that a Mercedes is better than a Ford. 3.  Most people are not able to evaluate the quality of surgeons, so they cannot possible be expected to know that Johns Hopkins is better than Missouri Valley Hospital. Yes, modern Americans pay little or no attention to the relative safety of various banks.  Why should they?  But I assure you that back in the 1920s people cared a great deal about bank safety.  Banks knew this, and managed their balance sheets far more conservatively than do modern banks.  That’s why big city banks used to look like massive Greek temples; they had to convince depositors that they had the capital to survive hard times.  The vast majority of big banks survived the Great Depression.  US GDP in 1929 was about $100 billion and deposit losses during the Great Depression were $1.3 billion.   Today, a 50% fall in NGDP (as in 1929-33) would wipe out almost our entire banking system.  Modern bankers are far more reckless “despite” regulation.  The negative effects of deposit insurance are far more important than the positive effects of regulation. When people think about moral hazard, they often exhibit a lack of imagination.  If you read a great deal of history, you often find yourself asking, “How could people have behaved that way?  What were they thinking?”  Take an example from the 19th century.  One aristocrat insults another at a well-attended dress ball.  How would you react?  Now think about how you would react if you had been born in 1820.  You might respond to the rude comment with a challenge to a duel.  Pistols at 20 paces, 6am the following morning.  We can’t imagine living this way, because we never experienced this world. A world without deposit insurance is not that far away.  When I was 10 years old (1965), Canada had no deposit insurance and got along just fine.  People who live in that sort of world know how to behave.  They know enough to put their money in safe banks, not reckless banks.  I wish Canada had never adopted deposit insurance.  (I suppose their decision to do so represented the misguided big government liberalism of the late 1960s.) Of course, the US system is much different from the Canadian system.  Prior to FDIC, we had lots of bank failures.  This was due to the almost incredibly undiversified nature of our system, which resulted from some pretty insane branch banking restrictions.  Here’s Elmus Wicker: The number of commercial banks in the United States nearly tripled during the first two decades of the 20th century, reaching 30,000 in 1920. The vast majority of these were unit banks as required by their national and many state charters. Illinois had nearly 2,000, and Nebraska, with a population of 1.3 million, had a bank for every 1,000 residents. Failures averaged about 70 banks per annum, or one of every 300 existing banks, during those two decades. The agricultural depression of the 1920s raised the failure rate to more than 600 banks per annum, or one of 50. Failures showed few signs of abating as the decade drew to a close, and the banking system, especially in rural America, entered the Great Depression in a fragile state. LOL at Nebraska.  Given the large size of families back then, that’s roughly one bank for every 250 families! Contrary to widespread opinion, (even among many economists), the bank failures of this period did not lead to much contagion.  The only real “panic” occurred for entirely different reasons, when there was (well-justified) fear that the US would leave the gold standard.  Otherwise, lots of inefficient small banks failed and life went on. The Canadians were much smarter.  They allowed large well-diversified banks, and thus have looked on with bemusement as the US reels through one banking crisis after another.  Here’s the Financial Post: Despite investor jitters, concerns for the Big Six were limited. Unlike SVB, which catered to a niche market funding tech start-up companies, Canada’s big banks dominate their home market and are diversified across industries and business lines. “From a Canadian perspective, not only should the failure of SVB not have significant negative implications for our banks, but this crisis should actually be viewed as further vindication of the Canadian banking model, which is dominated by a few large and diversified players,” Bank of Nova Scotia analyst Meny Grauman said in a March 13 note. In the US, both left and right wing politicians favor the smaller banks.  Big is viewed as bad.  Matt Yglesias is one of the few progressives that understands the value of big banks, and today he has an excellent post on the issue: America needs more giant banks The moral of Silicon Valley Bank’s collapse is that the real danger comes from the medium-sized ones How do we get to Yglesias’s utopia?  Abolish deposit insurance (he wouldn’t agree).  You’ll see a massive shift of deposits toward the larger, more diversified banks, making our system resemble the Canadian system. Most people, and even most economists, know nothing about our banking history.  They’ve never bothered to read Elmus Wicker, Larry White, George Selgin, or any of the other experts.  They get their ideas from films like “It’s a Wonderful Life.”  They view our banking system as a fragile house of cards that would collapse without FDIC.  (Funny how the Canadian house of cards avoided any major problems in the century before 1967.)  Actually, it’s a house of cards created by FDIC. The final misconception involves the effect of banking crises on the macroeconomy.  It’s true that banking crises are often associated with recessions, but not always.  Industrial production soared 57% between March and July 1933, despite many of America’s banks being shut down to check their balance sheets.  In fact, in a fiat money system causality generally goes from the business cycle to banking distress, not the other way around.  The US entered recession in December 2007.  The recession got much worse after June 2008.  The banking crisis occurred in late September 2008.   As long as the Fed adjusts monetary policy to keep expected NGDP growth at a healthy level, bank failures should have no significant impact on economic growth.  In any case, creating moral hazard doesn’t prevent banking crises, it simply pushes the problem into the future. FDR opposed deposit insurance, as he (correctly) feared it would create moral hazard.  Unfortunately, Congress refused to listen to his good advice. PS.  Some other misconceptions:  “FDIC fees are not a tax on the public.”  Yes, they are.  “We aren’t bailing out bank executives”.  No, we are not bailing out SVB executives, but we are (implicitly) bailing out their competitors. (0 COMMENTS)

In this post, I would like to contrast the price theory I previously described with “microeconomics,” which is what James Buchanan refers to as the “science of choice” (see also Buchanan 1969). In microeconomics, the logic of human choice is not a subset of economic theory, but its defining characteristic. Microeconomics, as it practiced today, is understood as an exercise of constrained maximization within which prices serve not as variables of human choice, but as constraints to which individuals passively respond like a set of marching orders. A choice-theoretic approach to economic theory is one that collapses the optimizing activity of an agent onto the conditions of general competitive equilibrium. Such a conflation implies a direct link between the rational agent and an equilibrium outcome, which is simply an aggregation that can be directly reduced to the individual “choice” of individuals. In microeconomics, where perfect competition occupies the foreground of analysis (rather than the background as in price theory), individuals are all price takers, not price makers. The irony of microeconomics, in which perfect competition is in the driver’s seat of analysis, is twofold. First, human “choice” is defined out of existence, since the optimal choice is dictated by equilibrium prices, to which individuals passively respond. Secondly, and counterintuitively, the only margin upon which individuals make decisions is in terms of price. But because competition in the active sense of the term doesn’t exist, since all the gains from trade have been exhausted, all other margins of competition are considered unnecessary or redundant, in terms of advertising, quality differences, or recognition of differences in consumer preferences (Hayek 1948, p. 96; Boudreaux 1990, p. 47). Hence, if individuals are guided by “false prices,” which are inconsistent with perfectly competitive equilibrium, a market is said to “fail” to achieve optimal conditions. Much of what I’ve said may seem to be purely a difference of degree, rather than of kind, and indeed this might be a fair conclusion, since often times the terms “price theory” and “microeconomics” are used interchangeably by economists. The difference in these different “windows” of economic theory can be best illustrated by the argument in George Akerlof’s seminal paper, “The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” (1970). This paper demonstrates how a “market failure” can arise to due asymmetric information between buyers and sellers, utilizing used car markets (as well as other markets) as an example. Without stating so explicitly, Akerlof’s argument is based on the premise that prices are analogous to a public good, in the sense of providing information that is non-rivalrous and non-excludable. Like any public good, the claim is that private markets will underprovide such a good due to free-riding. According to Akerlof, “good cars and bad cars must still sell at the same price – since it is impossible for a buyer to tell the difference between a good car and a bad car” (emphasis added; 970, p. 489). This assumption is consistent with the microeconomic “window” I outlined above, since the premise of this argument is that there is uncertainty over the quality of cars, but buyers can’t distinguish good cars from bad cars (or “lemons”) based solely on price, and hence, according to Gresham’s law, the “bad” cars tend to drive out the good cars. This is because, as Akerlof states, since both good cars and “lemons” must sell at the same price, “there is incentive for sellers to market poor quality merchandise, since the returns for good quality accrue mainly to the entire group whose statistic is affected rather than to the individual seller” (1970, p. 488). Thus, without the ability to credibly signal high quality of the car, the seller who knows that a car is “good” incurs a concentrated cost, with little benefit to his credibility as a reputable seller by acting on his subjective knowledge that the car was truly of high quality. This is because, as Akerlof points out elsewhere, the “cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence” (1970, p. 495). Thus, in a market for “lemons,” dishonest car dealers can freeride on the good will on honest car dealers, given that car dealers acting as price takers generate an outcome consistent with a “market failure” to due asymmetric information over the quality of cars. Note that Akerlof’s argument is completely valid, but one that follows from a microeconomic window of how markets “fail.” This does not imply that microeconomics only illustrates market failure; it indeed illustrates the efficiency of markets under perfect competition. However, looking at markets through this window, in both cases, whether we are demonstrating that markets are optimal or suboptimal according to the conditions of perfect competition, “the  heuristic value of equilibrium is sacrificed.  By ignoring the dynamics  of  disequilibrium,  both  traditions [of market failure and market optimality] obscure  the  possibility that real-world  market institutions may have coordinative properties even in the presence  of dispersed  knowledge, pervasive  ignorance, the irreversibility  of  time,  and  changing  conditions” (emphasis original; Boettke 1997, p. 24).   Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and a Program Director of Academic and Student Programs at the Mercatus Center at George Mason University. (0 COMMENTS)

In a recent piece, Financial Times columnist Rana Foroohar eulogizes the American “regulators” who are becoming a model for European ones. I put regulators in scare quotes because what we are speaking of has little if anything to do with homeostatic or cybernetic autoregulation or with general rules of law. In reality, the bureaucrats and politicians in question are coercive controllers as Ms. Foroohar admits by invoking “criminal as well as civil penalties for violators.” Reporting of a recent American-European conference among such regulators, she writes (“America Is Toppling the EU From Its Regulatory Throne,” Financial Times, March 6, 2023): It was the energetic crop of young American regulators who were the rock stars of the event. … Team USA seemed to be thinking bigger and broader than its EU peers. FTC commissioner Rebecca Slaughter stressed that her agency was making policy based on how “people participate in the economy as whole people”, not just as consumers. The Justice Department officials in attendance made it clear they were going after entirely new areas. … American regulators … view their work not in technocratic but existential terms; a battle against the risk of corporate oligopoly which threatens liberal democracy. … Until quite recently, it was assumed that Europe would lead the way in regulating the world’s largest and most powerful corporations. That’s now shifted. Since Ms. Foroohar column was published more than one week ago, before the demise of three American banks, the implications for banking and finance are interesting. To quote Foroohar again: In bank regulation, too, Americans are taking a more aggressive tack than their European peers. The Fed vice-chair for bank supervision, Michael Barr … pointed out that the lack of bank failures since the pandemic began has less to do with financial institution strength than government backstopping of the economy. We see that when the government starts “backstopping” the economy, it cannot stop front-ruling it, as it were, since it always needs further interventions to correct the consequences of its past interventions, its own mess, notably in creating moral hazard. Europeans know something about that. It is also nearly certain that the current problems of banks partly comes from the federal government’s attempts to correct in a swoop the inflation it had generated through money creation and which it denied during all of 2021. Another factor is the historical fragility of the heavily regulated American banking system, a product of two centuries of state and federal regulation. (See also a recent post of my co-blogger Scott Sumner.) So much for the government backstopping the economy. Finally, after quoting a 1936 speech of Franklin Delano Roosevelt, Foroohar concludes: The new and more robust American regulatory response harks back to an era when power mattered more than price and politicians weren’t afraid to take on big business. That takes the cake! (C’est le bouquet, we would say in French.) Forward to the past! With due respect for the respected columnist, one wonders if, despite being a mature person, she learned economics in a woke classroom. Ignoring three centuries of economics, a field of analysis that helps think about such matters, her approach is distressingly similar to current political intuitions, for mere intuitions and superstitions is what they are. Looking a bit farther in the past than the 1960s or FDR’s progressivism, one realizes that the “era where power mattered more than price” covers millennia—a few hundred thousands of them—was when ordinary people were dirt poor and at the mercy of brutal rulers or stifling customs. The end of this ordeal came slowly. To make a long story short, we may start with the commercial city-states of the late Middle Ages, go to banking and finance at the beginning of the modern era, and finally to the Great Enrichment that followed the Industrial Revolution (see chart below for a peek). Prices finally started start replacing power. Markets replacing the tribe or Leviathan. On this, see, among other works, the delicious short book of Nobel laureate John Hicks, A Theory of Economic History (Oxford University Press, 1969—the link is to my review of the book, a poor substitute). Maddison Project. Chart reproduced from Pierre Lemieux, “A Culture of Growth,” Regulation, Summer 2018 (0 COMMENTS)

And your new gas stove. Ever since Jerry Ford’s administration, federal regulators have been trying to make, and have succeeded in making, various appliances less useful. President Trump’s people put a pause to some of that. Biden’s employees have started it going again. The latest is washing machines. They already use less water than their counterparts of 20 years ago. Biden’s regulators want to require that new washing machines use even less water. This would mean that washing your clothes will take longer and/or that your clothes will come out dirtier. Collin Anderson writes: Biden’s Energy Department last month proposed new efficiency standards for washing machines that would require new appliances to use considerably less water, all in an effort to “confront the global climate crisis.” Those mandates would force manufacturers to reduce cleaning performance to ensure their machines comply, leading industry giants such as Whirlpool said in public comments on the rule. They’ll also make the appliances more expensive and laundry day a headache—each cycle will take longer, the detergent will cost more, and in the end, the clothes will be less clean, the manufacturers say. The proposed washing machine rule marks the latest example of the administration turning to consumer regulations to advance its climate change goals. Last month, the Energy Department published an analysis of its proposed cooking appliance efficiency regulations, which it found would effectively ban half of all gas stoves on the U.S. market from being sold. The department has also proposed new efficiency standards for refrigerators, which could come into effect in 2027. “Collectively these energy efficiency actions … support President Biden’s ambitious clean energy agenda to combat the climate crisis,” the Energy Department said in February. How exactly does using less water “confront the global climate crisis?” Are his regulators even aware that the main user of water in the United States is agriculture? Allowing farmers to sell the water allocated to them rather than use it in low-value uses would make water more plentiful to us consumers. The water saved if the new regulations even achieved their stated goal would be a small fraction of one percent of the water that could be saved if farmers cut their usage by only one percent. Co-blogger Scott Sumner gives some of the data on water usage here. (0 COMMENTS)

In his 1963 Presidential Address to the Southern Economic Association, later published as “What Should Economists Do?”, James Buchanan called for “economists to modify their thought processes, to look at the same phenomena through ‘another window,’ to use Nietzsche’s appropriate metaphor. I want them to concentrate on ‘exchange’ rather than on ‘choice’” (1964, p. 217). The notion that economic theory is a “window” is a very appropriate metaphor, particularly when economists come to different conclusions from observing the same phenomenon. Thus, alternative conceptualizations of economic theory serve as different “windows” from which the economists draws different conclusions about the world, particularly how markets work. Just as Buchanan often used this metaphor from Nietzsche, I wish to adopt it here to draw an important distinction between “price theory” and “microeconomics,” which are often conflated. Although the distinction may seem to be one of semantics, in these posts I will explain and illustrate the subtle differences between the two which have important implications about what we “see” when markets operate, and the extent to which we conclude whether markets “work” or “fail.” Just as the same individual will observe different aspects of the same automobile traffic from different windows of a building, we draw different conclusions about a particular market based simply on whether we are looking from the window of “price theory” or “microeconomics.” What is the distinction between the two? As Buchanan suggested above, “price theory” is primarily about the study of how individuals pursue their separate goals through exchange, which in turn create exchange ratios (i.e. market prices) as by-products of their purposive behavior. Such market prices, in turn, guide individuals in their consumption and production decision-making. Human choice is not absent in price theory; rather, it is a necessary subset of price theory, though not sufficient, for understanding the invisible hand processes that generate social order. Nor does price theory imply that markets allocate resources instantaneously according to omniscient human actors. Rather, a price-theoretic approach to economic theory is one in which there is an indirect link between a human agent and the tendency towards equilibrium, one in which market outcomes are not directly reducible to the individuals that constitute a market. That is, prices emerge from the act of exchange between individuals engaging in open-ended choice under a world of uncertainty, but not of human design. However, once emerged, prices then become guides for future action. Thus, whether markets “work” or “fail” does not depend on the behavioral characteristics of individuals, but whether institutions secure and enforce the ability for individuals to exchange (i.e. private property). A “market failure” in this respect is not a failure of markets to “work” but a failure to establish the conditions for a market to exist, unleashing future profit opportunities to establish such conditions. Moreover, it is not enough for prices to reflect full and available information quickly, as suggested by the efficient market hypothesis; real-world market prices are not sufficient statistics to approximate an allocation of resources consistent with equilibrium. Rather, market prices must translate the tacit and dispersed knowledge of millions of individuals into publicly held information correctly (see Boettke 2012, 2018). As the famed value investor, Howard Marks, makes this point, market prices are “efficient” in “the sense of ‘speedy, quick to incorporate information,’ not ‘right’.” (2011, p. 8).  Thus, although not immediately obvious by its epithet, price theory crucially depends on the study of non-price competition. As Harold Demsetz argues, “[m]arket processes work neither instantaneously nor with full knowledge, so perfect competition hardly exhausts the many ways in which self-interest is pursued. Competing through product quality, contractual arrangements, and institutional innovation, and through tactical quickness and alertness, all become meaningful” (1982, p. 18). Price theory, properly understood, is a window from which to understand how individuals are able to learn how to cooperate with one another without command under a division of labor. Such “cooperation”, counterintuitively, is manifested in a peaceful and cooperative form of cooperation: productive specialization and exchange. Tomorrow, I will consider how this theoretical “window” compares to microeconomics.   Rosolino Candela is a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics, and a Program Director of Academic and Student Programs at the Mercatus Center at George Mason University. (0 COMMENTS)

I am no movie critic but I was, for once, greatly pleased to see “Everything, Everywhere, All At Once” showered by the Academy awards. The movie didn’t have much of a circulation in Italy and stayed in theatres very briefly, though I suppose it’ll make a comeback after the Oscars. I watched it after reading two highly positive (and entertaining reviews), Jack Butler’s on National Review and Kurt Loder’s on Reason. Writes Loder: This is a movie without an ounce of cynicism in its narrative bones. (On the other hand, those in search of timeless human truths might wish there were more here than “You have to be kind” and “We can do whatever we want, nothing matters.”) And Butler: All of this is undergirded by a genuine and heartfelt emotional core. The film explores not merely the comedic or the kinetic implications of multiple realities but also the philosophical ones. The consequences of paths not taken, the contingencies that have brought us to the moments we inhabit, how to make sense of a world that can seem to lack meaning — through the lens of the multiverse, Everything Everywhere All at Once shines a light on our own reality, raising questions about our own lives and humbly attempting to supply its own answers. Are they complete? Is the film’s moral vision totally satisfying? Maybe not, but that’s an unfair standard. The production budget was 25 million, and the movie grossed 100 million at the box-office. It is a very small production for a sci-fi/action movie. “Wakanda Forever” cost ten times as much (and grossed over 800 million). I found “Everything, Everywhere, All At Once” uplifting for two reasons. First, I watched “Doctor Strange in the Multiverse of Madness” a little before and thought nothing particularly interesting could come out of the multiverse idea, which turned out to be on a dead track, at least in the hands of Marvel’s screenwriters. Well, “Everything, Everywhere, All At Once” proved me wrong. But, second and more importantly, because I sometimes have the impression that our creativity is somehow drained: that the best Hollywood can do is scraping the barrel of Marvel’s characters, created in the 1960s or 1970s, to come up with some new movie. While there is no shortage of entertainment supplies (movies, TV series, et cetera), there is little which is new, that really goes beyond adding little touches of technology or refurbishing old stories in more contemporary fashion. I liked “Everything, Everywhere, All At Once” less than Butler and Loder (I’ve a few ounces of cynicism in my blood) but I thought it was something that shows great creative powers. I don’t want to sing the praises of David vs Goliath in movie making. Small is not always good. But to keep the flame of creativity on I suspect we need, in movie making too, brave challengers, that tend to be outsiders and hence inevitably smaller. This is a good example. (0 COMMENTS)

  Michele Gelfand, Professor of Psychology at the University of Maryland, focuses much of her time on cross-cultural psychology. She is interested in the differences among cultures and norms, and how they develop through time. In this episode, she and EconTalk host Russ Roberts engage in a timely discussion, perfect for our current situation in America: a rift between the two extremes of loose and tight cultures. Careful study done by Gelfand has shown that there exists a good balance between the two, but determining the balance is the challenge. Gelfand views this discussion in the public sphere as vital to keeping the American project going. Professor Gelfand sits down with Roberts to discuss her thoughts and her new book Rule Makers, Rule Breakers.   Questions for further thought and conversation: 1- Gelfand notes that loose cultures are really good at thinking and drafting ideas, but not necessarily at implementing them. To what extent can this idea be compared to Thomas Sowell’s concept of constrained versus unconstrained visions?   2- What types of businesses are more likely to have a tight culture? A loose culture? How does Professor Gelfand measure tightness and looseness?   3- According to Professor Gelfand, how does threat or danger act as a predictor of tightness in culture, and for what reasons?   4- Professor Gelfand argues that the type of culture is often tied into how expertise is viewed. With respect to how expertise is viewed, how do tight and loose cultures compare?   5- Russ Roberts challenges Professor Gelfand for not distinguishing between government-imposed tightness and self-imposed tightness. How does Professor Gelfand defend her position? (0 COMMENTS)

Back in the late 1970s, economists began exploring the “time inconsistency problem” in monetary policy. In the long run, we are better off if central bankers maintain a low inflation rate (or NGDP growth rate.) But in the short run, the economy may do better with a more expansionary policy. The negative consequences of that expansionary policy will be mostly borne by future policymakers.It turns out that the time inconsistency problem in central banking is somewhat overrated. Central banks often succeed in keeping inflation low for long periods of time (but not recently.)In fact, the time inconsistency problem is far worse for banking regulation. Political and economic managers like President Biden, Janet Yellen, and Jay Powell would very strongly prefer that a financial crisis not occur on their watch.There’s a common but understandable misconception that there is a sort of tradeoff involving financial stability and moral hazard. People assume that we can have financial stability with moral hazard, or we can have financial instability with a regime free of moral hazard. I cannot emphasize enough that this is a false assumption! Policies that lead to moral hazard (government deposit insurance, TBTF, bailouts, etc.), cause more financial instability in the long run.  There’s no trade-off to exploit here.  We don’t buy a more stable financial system with bailouts.  We encourage more risk taking.  So then why does the federal government keep bailing out financial actors that made bad decisions? Here’s where the time inconsistency problem comes into play.  While bailouts make for a more unstable financial system by encouraging ever-greater risk taking, in the short run they do reduce financial instability.  And it seems as though President Biden, Janet Yellen, Jay Powell and the other key policymakers favor steps that would make for less financial instability over the next 5 years, even if they would make for more financial instability over the next 50 years. PS.  While the media has focused on SVB, the much bigger outrage is the Fed’s new facility to bail out all banks that made bad decisions.  You bought risky long-term bonds with short-term deposits?  Don’t worry; the Fed’s got your back: This is one of the darkest days in US financial history—a breathtaking expansion of moral hazard.  Younger readers should brace themselves for much worse in the decades ahead.  We are sowing the seeds of future financial crises. PS.  I highly recommend reading Peter Conti-Brown’s tweets on this affair.  Here’s one example: (0 COMMENTS)

On February 9, the Wall Street Journal reported a “victory” for intellectual Property (IP) rights, with the subhead: “Case Seen as test of how a company can exercise its IP rights against virtual assets.” Okay, we kind of get that: This is about assets that exist in cyberspace. The French luxury brand, Hermès International SA, had gone to federal court in Manhattan to sue an “entrepreneur and artist,” Mason Rothschild, and won modest damages ($133,000)—but “the legal principle was large.” The court upheld Hermès right to the “Birkin” trademark in cyberspace. The story quoted Felicia Boyd, an attorney with Norton Rose Fulbright LLP, as saying that brands like Hermès had sought clarity on the their legal rights “as virtual reality expands.” In this case?  Their legal rights regarding non-fungible tokens (NFT) that can be “transferred to digital worlds in the metaverse.” The concept of IP has been repeatedly expanded and redefined. Readers once read stories about “property rights” in the airwaves, including rights to specific frequencies. David Henderson writes in “How the Electronic Spectrum Became Politicized: We learn how Hoover’s decision [not to enforce property rights to the airwaves] started a path leading to government control that is still with us today. [Thomas Winslow] Hazlett shows that the FCC has, for over 80 years, set itself up as a central planner, creating the usual problems that central planning creates. The planners are in the dark about the best uses of the electromagnetic spectrum, but that hasn’t stopped them from planning. Hazlett shows how FCC regulation slowed FM radio, cable television, and cellular phones by decades, destroying many hundreds of billions of dollars of value. And, as a bonus, FCC regulation reduced free speech on radio and TV, something that still exists today. The same confusion could engulf cyberspace. That is why the decision in favor of Hermès may qualify as “landmark,” the first trial ever of the NFT/intellectual property nexus. So, what are nonfungible assets (NFTs)? On the blockchain—a  online distributed ledger with the same version on the computer of every participant so all transactions and exchanges are known to very participant—“tokens” have been currency. The prime example is Bitcoin, but there are legion others. These tokens, created by “mining” under a strictly defined set of rules, are used to pay for goods, settle contracts, pay debts, and can be exchanged for other tokens or national currencies at a rate reset continuously on exchanges like Coinbase. There is a huge market for these cryptocurrencies, establishing their value at any given moment. An innovation introduced to the blockchain has been non-fungible tokens (NFTs). As just explained, blockchain tokens like Bitcoin are fungible—that is, exchangeable at a known rate for other tokens or for national currencies. NFTs are not fungible; they are unique. In some cases, they represent ownership of “things” and the blockchain makes it possible to give each a unique, unduplicatable identifier. They can be a digital “chit” for a piece of real estate or a share in a company or collectibles. The advantage is that this property can be exchanged without a broker, or a commission, online. NTFs also can be valuable and collectible in themselves. An artist creates a certain digital image, an “artwork,” in the form of an NTF. Each instance of the image is a unique token, a digitally defined concrete that no one can duplicate. Even if there are thousands that look the same. What the artist sued  by Hermès created is called a “MetaBerkin.” NTFs began in a small way in 2014 with a design tokenized by Kevin McKoy on a blockchain. Every blockchain and every token is created to conform with a standard. The most popular and powerful standard is Ethereum, which specifies all rules and requirements of a blockchain, including, for example, transfer of ownership and confirmation of transactions. With this foundation, by 2021, a group of NFTs by a digital artist, Beeple, sold for more than $69 million—at that time, the most expensive digital art ever sold. The artwork sold was a collage of Beeple’s own work. Subsequently, tokens of the work of photographers, sports celebrity art, trading cards, ownership in virtual worlds (want to own an avatar?), art, other collectibles, domain names, and music all were tokenized—made into unique property, registered, and verified on a blockchain ledger. NFTs became a hot business. Hermès sued Mason Rothchild for using the image of the Hermès Birkin handbag, released in 1986 and today a symbol of luxury with a price tag beginning at $12,000 but in some case as high as $200,000. It is an icon of luxury spending. Mr. Rothchild transferred an identifiable but cartoonish version of the Berkin image to an NFT. To own this NFT meant that you owned one unique image of a Birkin handbag called the MetaBerkin. Rothchild launched a frenzied marketing campaign, raised financial backing, and sold some 100 hundred MetaBirkins. The first few sold for about $500, but their value soared, and they began to sell for the same price as the real Birkin handbags. (It is not within the scope of this article to speculate on the motives of buyers of these NFT artworks.) Hermès argued in court that Mr. Rothchild was profiting unlawfully from the brand-recognition of Birkin—in effect, selling the company’s trademarked product in the virtual marketplace. And undercutting the company’s potential market if it did enter the virtual marketplace. Bloomberg reports that Hermès filed suit when a survey “found a net confusion rate of 18.7 percent among potential NFT buyers.” Mr. Rothchild and his attorneys disputed the accuracy of the survey but argued, above all, that Mr. Rothchild is an artist creating work protected by the First Amendment to the U.S. Constitution. His work is protected as free expression, they claimed, making a socially significant statement about “conspicuous consumption.” During the trial, Mr. Rothschild’s attorneys argued that the brand’s trademark rights didn’t apply to his series of MetaBirkins just as trademark rights did not apply to the artworks of Andy Warhol, who depicted consumer products. Commenting on the jury’s decision, Rothchild’s attorney, Rhett Millsaps, lamented: “Great day for big brands. Terrible day for artists and the First Amendment.” He went on to say that big Hermès is picking on individual artists. Mr. Rothschild called the jury’s decision the result of a broken justice system, vowing: “This is far from over.” In fact, however, companies such as Nike and Miramax LLC are doing or planning the same thing as Mr. Rothchild: to create NFTs of their products to market just as the MetaBirkin “art” is marketed. Except they view it as marketing a different version of their trademarked product, not creating art. Hermès told the jury that it does not yet sell NFTs but has been developing plans to do so and MetaBirkins harmed its ability to break into the market. If Mr. Rothchild had won, said one IP attorney, Maurico Uribe, with the firm of Knobbe Martens, there would have been significant disruptions in IP law. In other words, it would have been open season for “artists” using brand images and company reputations to sell high-priced digital “knockoffs” of their products online. Did Mr. Rothchild incorporate the Hermès Birkin image into his “digital art” to make a point about conspicuous consumption? And only incidentally because of the huge bucks involved in selling “virtual” ownership of a Birkin bag? Hermes attorneys cited emails Mr. Rothchild sent to potential backer saying “We’re sitting on a potential goldmine.” The blockchain can create “virtual assets” but if their market value depends on the market value of brands created and promoted by companies in the real world, then the value of intellectual property created by Hermès or any other company is being stolen. The issue at trial became the “blurred line” between the right to artistic expression under the First Amendment and property rights. The jury decided that the issue was property. To turn to philosophy for a moment, “artistic or intellectual rights” do not trump property rights. That is a false premise based on the mind-body dichotomy. The complexity, and the blurred lines, arose because the alleged artistic creation was in cyberspace, and sold on a blockchain. The did not seem to baffle the jury, however, which decided that the monetary value of what the artist sold had been created by Hermès. The decision seems an initial promising victory for intellectual property rights in a new era of complexity introduced by new technology. But either juries will have to draw new “bright lines” for intellectual property in virtual reality or Congress will barge in as always. It is a fond hope that Congress will take the approach of clarifying the application of property rights instead of creating a new field of government regulation so that bureaucrats can call the shots. Walter Donway is an author and writer with more than a dozen books available on Amazon and an editor of the e-zine Savvy Street. He was program officer or director at two leading New York City foundations in the healthcare field: The Commonwealth Fund and the Dana Foundation. He has published almost two dozen articles in the Blockchain Healthcare Review. (0 COMMENTS)