If you found a wallet filled to the brim with hundred dollar bills, as well as the address and name of the person who lost it, would you return the wallet or keep it for yourself? Better yet, if you chose to return the wallet, can you can explain why that is a rational decision? In this episode of EconTalk, host Russ Roberts speaks with Michael Munger, economist, author and professor at Duke University, to answer this and other questions regarding the morality and rationality of preferences. The conversation stems from Munger’s 2019 article for the American Institute of Economic Research, “What Preferences Do You Want?” The article poses the question: Can people change their desires so they can choose the preferences that they should have? Using the article as a guide, Roberts and Munger discuss the nature of preferences and morality and how they relate to economics. Let’s hear what you have to say about morality, desires, and self-interest. Answer our questions in the prompts below, or use them to start a conversation with friends offline.   I-Munger explains that in economic theory, preferences are fixed (people don’t have preferences about preferences). Economists use economic parameters, like price and income change, to explain changes in purchases, which is the maximization paradigm. However, Munger goes on to point out that the idea that some preferences are better than others has been a big part of every aspect of social life, except economics. How does Munger explain this issue to his students? How does this relate to Montesquieu’s idea that “the justification for liberty is so that human beings can do what they ought to will?”   II- Munger and Roberts discuss the differences between law and legislation (and eventually constitution). Munger uses the example of muddy paths around a new university to explain the differences. (Munger has a more in-depth article on his muddy paths example here.) According to Munger, the new university should wait two years before putting in concrete paths so they can just fill in the paths created by the students and staff of the university. However, when it comes to buildings, the same process cannot be used. Explain how Munger uses this to illustrate the distinction between law and legislation. How does Roberts bring in the idea of constitutions?   III- Roberts explain the scenario of finding a wallet full of cash on the sidewalk. Would you return the wallet? Roberts goes on to ask what preferences we should have in this situation. Should we want to feel the shame and guilt of keeping the wallet? What if we had no conscience to indicate that keeping the wallet is wrong? What connections do you see between this example and the earlier discussion on law, legislation, and constitutions? Are there any connections to Rousseau’s phrase “inscribe the law on men’s hearts?” If so what are the connections?   IV- What did you make of Munger’s story about the woman cutting in front of him in line at the movies? Roberts clarifies that in this case, morality is not a rational choice. How is morality a constraint in this example? What other examples are used to compare morality to a constraint? Who originally used this example? According to Munger, what does the original author have to say about these ‘hardwired’ features? To what extent do you agree that self-interest and morality are hardwired in man?   (0 COMMENTS)

Recently the Wall Street Journal stated that President Biden’s July 9 executive order on competition is a “sweeping proposal to spur competition.” That raises an important question: how can a government spur competition? Economics has a lot to say about that question. The major way, which goes back to Adam Smith, is to get rid of barriers that government itself uses to block or limit competition. While the Biden executive order does mention one government barrier to competition, occupational licensing, it is vague about what should be done on that issue and passes on getting rid of most of the extensive government barriers to competition. Unfortunately, much of the order’s focus is on the danger of market concentration. It might surprise Biden and many in his administration to know that economists extensively debated the issue of market concentration in the 1960s and 1970s and that the bottom line is that market concentration is not a good measure of the presence or absence of competition. Seen from this perspective, the Biden administration’s latest proposals are a grab bag: some, fortunately, might increase competition, some would decrease competition, and some would dictate outcomes rather than letting the competitive process emerge. These are the opening paragraphs of my latest article for the Hoover Institution’s Defining Ideas. It’s “How Can the Government Spur Competition?” Defining Ideas, July 15, 2021. Another excerpt, under the subhead “The Anti-Amazon Wrath of Khan:” One person present at Biden’s signing of the executive order was Lina Khan, Biden’s new appointee as chair of the Federal Trade Commission. Not surprisingly, the FTC is featured prominently in the order and, whatever her role in writing it, Khan will have a role in implementing it. Khan made her reputation in January 2017 when, as a law student, she wrote “Amazon’s Antitrust Paradox,” a long article in the Yale Law Journal. In that article, Khan showed herself to be Learned Hand’s twenty-first-century embodiment. In page after page Khan discussed Amazon’s efforts that have brought prices down to consumers and had not, Khan admitted, resulted in fat profit margins for Amazon. She claimed in her article that Amazon’s P/E ratio was 900. It was much lower at the time of publication but, of course, there are lags between when the article is finished and when it is published. The closest I could find to 900 in the previous two years was 720 in September 2015.Let’s go with that. Khan’s reasoning is a little different from Hand’s. She argues, quite reasonably, that the stock traded at such a large multiple of current earnings because investors expected much higher earnings in the future. And, she feared, Amazon would get those earnings by setting much higher prices. In short, Khan feared that Amazon was engaging in predatory pricing—pricing low to knock out competitors and then setting prices high after they’re gone. But as of July 12, 2021, Amazon’s P/E ratio had come much closer to earth at 70.72. That’s still high, but not ridiculous. If Khan’s fears are valid, then we should see Amazon pricing not just higher than before, but higher than its competitors were pricing before Amazon competed them out of the game. We don’t. The closest Khan comes to making her case is her example of Amazon setting up Amazon Mom, discounting prices to compete with Quidsi on items like diapers, buying Quidsi, and then reducing the discounts. She approvingly quotes journalist Laura Owen’s statement that “The Amazon Mom program has become much less generous than it was when it was introduced in 2010.” But that doesn’t make her case: reduced discounts are still discounts and “less generous” is still somewhat generous. In short, prices at the end of the process were still lower than before Amazon entered. Competition 1, Predatory Pricing 0. Read the whole thing. (0 COMMENTS)

Tyler Cowen recently linked to a George M. Constantinides study of the welfare costs of unstable consumption: I estimate welfare benefits of eliminating idiosyncratic consumption shocks unrelated to the business cycle as 47.3% of household utility and benefits of eliminating idiosyncratic shocks related to the business cycle as 3.4% of utility. Estimates of the former substantially exceed earlier ones because I distinguish between idiosyncratic shocks related/unrelated to the business cycle, estimate the negative skewness of shocks, target moments of idiosyncratic shocks from household-level CEX data, and target market moments. Benefits of eliminating aggregate shocks are 7.7% of utility. Policy should focus on insuring idiosyncratic shocks unrelated to the business cycle, such as the death of a household’s prime wage earner and job layoffs not necessarily related to recessions. That seems plausible to me.  So why do I focus on the business cycle? Although business cycles have a smaller impact on welfare, they are also much easier to address with public policy.  There are nearly costless solutions for reducing the welfare costs of business cycles, such as NGDP level targeting.  In contrast, we don’t have anywhere near as much knowledge about the best way to reduce idiosyncratic consumption volatility.  To be sure, there are programs that try to do this, such as unemployment insurance.  But it’s really hard for the government to design programs that are cost effective.  That doesn’t mean that we shouldn’t try, just that the solutions are not obvious. I’m attracted to business cycle research because it seems like a low hanging fruit.  Maybe not the biggest fruit on the tree, but the easiest one to pluck with one hand.   (0 COMMENTS)

Lumber prices in the United States have fallen off the record high they reached in early May, but they are still far above the norm. In recent years, lumber futures have typically traded at $350–$400 per thousand board-feet, but they hit $1,670 in May, and as I write this they’re around $750. The high prices are unpleasant for the do-it-yourselfer shopping for poplar for new cabinets (just for example). They’re miserable for new homebuyers and for homeowners doing renovations. The headline-grabbing jump in U.S. home prices over the past 12 months underscores the importance of increasing the housing supply to meet burgeoning consumer demand, and high prices for a major input work against that. (For more on the current housing market, see this Econlog post.) The primary cause of the high lumber prices is a dramatic shift in both supply and demand following the onset of the COVID pandemic. Tree harvesters and lumber mills, which cut production in the wake of the 2000s building bust, cut back further in the spring of 2020 to contend with COVID and fears of another bear market for their products. Meanwhile, beginning last summer, homebound DIYers and, later, contractors bid up the lumber that was available. Another factor contributing to high U.S. lumber prices is the U.S. tariff on Canadian softwood lumber (that is, lumber from coniferous trees; think pine and fir, used for framing lumber and some types of plywood, as well as paper pulp). Current duties total about 9%, and they are set to rise to more than 18%, further crimping the supply of lumber and the provision of new housing. It’s tempting to blame both ex-president Donald Trump (whose administration imposed a 20% duty 2017, before lowering it last year) and President Joe Biden for those tariffs, but they are set and adjusted by statute, as my Cato colleague Scott Lincicome explains here. Washington has been meddling off-and-on with the import of Canadian softwood since 1982. To understand the economic harm of tariffs, consider some “textbook economics.” Figure 1 is the standard depiction of exchange in a market that has both domestic and foreign supplies of a good. Domestic demand has a downward (negative) slope reflecting the Law of Demand (the lower the price, the greater quantity will be consumed). Domestic supply SD has a positive slope reflecting the Law of Supply (the higher the price, the greater quantity will be supplied). World supply SW is depicted with zero slope under the assumption that this market is too small to affect the equilibrium world price PW, and hence world supply is de facto perfectly elastic in this market. The total quantity of the good consumed in this market at price PW is QW, of which QD is supplied by domestic producers and the rest is provided by imports. As a result, domestic consumers receive greater benefit — that is, more consumer surplus — from the competition from foreign supply.   Figure 2 is the textbook case of what happens when a tariff is applied to foreign supply. Total supply is now represented by ST, which is above SW, reflecting the tariff’s effect on price. ST’s intersection with domestic demand establishes the domestic price PT, which is higher than PW, and the quantity consumed at that price, QT, which is less than QW.   Put simply, the tariff results in less of the good being consumed by the domestic market, and consumers pay a higher price for it. Domestic producers do benefit from the tariff because they can profitably sell more of their product in the domestic market (and receive more producer surplus), as indicated by QDT. Government likewise benefits because it receives tax revenue equal to the area of the rectangle framed by ST, SW, QDT and QT. So, for domestic producers and government, the tariff is great — but not for domestic consumers, who lose a chunk of their consumer surplus—partly to the transfer of tariff revenue to the government, and partly to deadweight loss (the two triangles to the left and right of the government tax rectangle). As bad as the textbook case is, the real-world case of the softwood lumber tariff is worse. As previously noted, the tariff is a percentage of the base price, so in this market ST would have a positive slope even if SW is perfectly elastic. As a result, the tariff grows larger, and its negative effect on consumers worsens, when prices are elevated. Softwood lumber is not the only housing input affected by both COVID conditions and U.S. tariffs. Scott has put together this exhaustive — and infuriating — list. Unlike softwood lumber, some of these duties were implemented under Trump’s discretion and are being continued under Biden’s. American households have suffered through a lot over the past 18 months. The U.S. government should give them a break by dispensing with harmful tariffs. The duties on housing inputs would be a great place to start. (0 COMMENTS)

Tyler Cowen, on Marginal Revolution, linked to this very interesting interview with Eric Nelson, executive editor of Broadside Books, an imprint of HarperCollins which publishes “conservative” books (perhaps more “right wingers’” book). The whole interview is well worth reading but this quote strikes me as a perfect assessment of the intellectual world we live in: The overall culture has changed to be pro-censorship, with the belief that by limiting our ability to discuss some ideas, it will make those ideas disappear or lose value among the public—which is delusional, and that has been proven over and over. Also, there are more truly awful people that have carved out a big audience for themselves than before. These people are famous enough now to have a platform, and so their books look worth doing, financially, but 10 years ago these people would have been taking out ads in the back of the Weekly World News to get people to order their pamphlets on various snake oils. (0 COMMENTS)

Sitting in those smoke-filled back rooms, he did business with lots of people whose identities would stun a modern audience. Decades later, he still remembered many of the infamous segregationists of the age with respect, and even a kind of distant affection. People, he would say, are complicated. I once asked him what he thought of John W. Davis, the prominent lawyer who argued the other side in one of the consolidated cases known collectively as Brown v. Board of Education. Davis, the 1924 Democratic presidential candidate, is the Davis for whom the prestigious Wall Street law firm Davis Polk & Wardwell is named. He was also an old-school West Virginia gentleman — and a dyed-in-the-wool segregationist. Naturally, I assumed that the Judge would heap hellfire and damnation upon Davis’s head. I was mistaken. “John W. Davis?” Marshall said with a smile. “A good man. A great man, who just happened to believe in that segregation.” Marshall wasn’t being facetious. He was making a point, one he made over and over. To the Judge, those who disagreed with him on the most important moral issue of the 20th century in America did not thereby lose their humanity. How is that possible? Because he was able to reach across that deep moral divide and find commonalities with those on the other side. Only rarely did he see his opponents as evil; most were simply misguided. People, he knew, can be complicated. Consider Davis. He believed passionately in the cause of “states’ rights” and had an ardent faith in a Constitution interpreted according to the original understanding. But his politics didn’t always lean toward the right. He denounced the Ku Klux Klan in the 1920s when the group was powerful in the Democratic Party. He had represented West Virginia coal miners who were prosecuted for little more than protesting in violation of a court order. Right around the time of the Brown decision, during the most oppressive years of the McCarthy era, Davis worked with the estimable Lloyd Garrison to fight the order stripping the physicist Robert Oppenheimer, father of the atomic bomb, of his security clearance, because of supposed Communist sympathies. Complicated indeed. This is an excerpt from an absolutely fantastic set of reminiscences of the late Supreme Court justice Thurgood Marshall by Yale Law professor Stephen Carter. Another teaser to get you interested is Marshall’s story of how a Southern governor who believed in segregation got a hospital to start hiring black nurses. The governor told Marshall over poker, “OK, Thurgood. I’ll fix it. You won’t like the way I fix it, but I’ll fix it.” The article is Stephen L. Carter, “What Thurgood Marshall Taught Me,” New York Times Magazine, July 14, 2021. I didn’t know much about Marshall before reading this, but I came away admiring him. I’ve always liked people who follow their principles while working within the system. HT2 Josh Blackman.   (0 COMMENTS)

Here’s Megan McArdle, stating a famous old monetarist maxim: I think McArdle is 75% correct, in the sense that 3 of the 4 plausible interpretations of this ambiguous statement are true.  Here are the 4: 1.  Inflation is always a fall in the value of money.  (Tautologically true, but uninteresting.) 2.  Inflation is always caused by an increase in the money supply. (False) 3.  Periods of sustained and high rates of inflation are always caused by rapid money growth. (Probably true) 4.  Inappropriately high inflation is caused by bad monetary policy.  (True) Don Patinkin assumed that Milton Friedman had the first interpretation in mind, and criticized the claim for being tautological.  Actually, Friedman had the third interpretation in mind. In my view, policy counterfactuals are the most useful way to think about causality questions related to inflation (and NGDP growth).  If the lowest cost way of preventing high inflation is with monetary policy, then a period of high inflation can be said to be caused by inept monetary policy.  If the lowest cost method of controlling inflation is with restrictive fiscal policy, then overly stimulative fiscal policy can be said to have caused high inflation.  I believe that monetary policy is the lowest cost solution for high inflation (at least in the US). (0 COMMENTS)

David is shocked by my claim that it is alright to steal from Bill Gates to save your child’s life: If Bryan thinks it’s right to steal from Bill Gates to finance expensive cancer surgery with “a reasonably high chance of saving her life,” then that principle must apply to tens of millions of people who could have their lives saved even more cheaply by being able to get food. Think of, say, 100 million of the poorest people in India. They could ward off starvation for a year or even two with an extra $1,000. That’s $100 billion, which is enough to wipe out Bill Gates’ net worth, especially after Melinda is done with him. That seems wrong to me. How few people have to benefit from stealing  from Bill Gates to make it right to steal? 10 million? 1 million? 10? Working backward, it seems wrong to me for even one poor parent in India to steal from Bill Gates. My general position, to repeat, is that we are morally obliged to respect libertarian rights unless the consequences of doing so are very bad.  So where does David think I’m going wrong? 1. He might think that we are morally obliged to respect libertarian rights regardless of the consequences.  This seems like a crazy view.  You shouldn’t steal a dime to save the world?  Come on. 2. He might think that the consequences of stealing from Bill Gates to save your child’s life are actually very bad.  I’m open to this possibility, but let me walk through my reasoning. a) The original hypothetical only posited a single person who had to either steal from Gates or watch their child die.  Per Huemer’s general approach, I just accepted the hypothetical and ran with it.  And the consequences of this one hypothetical individual stealing do indeed seem very good on net. b) David is right that lots of people are in similar or worse positions than the parent of the child with cancer.  Wouldn’t the principle that all of them are are morally entitled to steal from Gates lead to bad consequences (i.e., destroying incentives to produce wealth, plus general chaos)?  No, because almost none of these desperate people are in a position to steal anything notable from Gates.*  If these desperate people said, “I’m hungry” and you told them, “Fortunately, it’s morally fine to steal money from Bill Gates,” they would understandably be puzzled.  “And how am I supposed to do that?!” would be the obvious reaction.  (Some could pirate Microsoft software, I guess, but very few could make much money off of this). c) You could change the hypothetical so that all of the poor people are in a position to steal from Gates, leaving societal devastation in their wake.  Then, of course, I’d revert to my anti-stealing default. d) At this point, you could demur: “While people shouldn’t steal due to the bad consequences, Bill Gates is still morally obliged to voluntarily give all of these poor people the money they need.”  I say this overstates; see Huemer’s Objection #6 to the Drowning Child hypothetical. Still shocked, David? P.S. I’m on vacation through the end of August, so expect light posting until then.   (0 COMMENTS)

We, including many economists, sometimes forget what is economic growth in a normative sense, that is, what we should count as “good” economic growth. Economic growth does not consist in producing more of this or that good (or service). It does not even necessarily consist in producing a larger quantity of all goods. Nor does it consist in producing the largest value of goods calculated by weighing the quantities produced with any set of prices. To have any normative (moral) significance, to be evaluated as good or not good, economic growth requires more than that. It is not surprising that, in order to say something about the goodness of economic growth, we need some moral criteria. The evaluation of any policy or social situation ultimately requires the same. This is what nearly a century of “new welfare economics” and several decades of “social choice theory” should have taught economists. (I reviewed some aspects of this idea in a 2006 Independent Review article, “Social Welfare, State Intervention, and Value Judgments.”) Define economic growth as increasing consumption and wealth; and wealth as future (discounted) consumption, which will flow from capital such as machines, factories, office buildings, cars, or houses. Nothing original in that. But is consumption anything that some political authority wants people to consume? At least if our moral criterion is individualist, consumption is instead what individuals themselves want to consume. And there is no other way to measure what individuals want, given the scarcity and cost of things, than by observing the demand they express on free markets. This leads an economist to refine his definition of economic growth as the increase in the total consumption of goods and services by all individuals, calculated by weighting the quantities by the prices determined on free markets. (Adding up apples and oranges is impossible without weighing factors.) Together with supply and cost, market demand determines the relative prices of different things given the preferences of all individuals. When they are determined by supply and demand on free markets, prices lend normative significance to the value of the total consumption. This does not measure the elusive concept of total welfare but it is as close an indicator as we can get. The implications of this idea are deeper than it appears at first sight (which is one reason why economic theory is useful), and a short post cannot do justice to all the related problems. But it is difficult to develop or discuss any non-arbitrary concept of economic growth without considering this starting point. “Non-arbitrary” means grounded in the preferences and consent of all individuals as when we adopt the individualist moral criterion of classical liberalism and libertarianism. To see how this makes sense, consider the polar opposite: economic growth as the increase of the production and consumption of what is deemed to be worth more by some dictator or by some group of experts or by some elected assembly or by some mob. In such a case, economic growth has no more normative foundation than, say, the rate of growth of the wealth of Louis XIV’s family (and court). Here is a numerical example. Assume an economy with only two goods: apples and oranges. Further assume that every individual in that society prefers apples to oranges, except those in Louis XIV’s household and court. Louis XIV (or his faithful Finance Minister, Jean-Baptiste Colbert) determines that an apple is worth one denier (a unit of currency at the time); and an orange, two deniers. He orders that, in year 1, 1000 apples be produced for his subjects and 500 oranges for his household and court, for a total “value” of 2,000 deniers ([1000 X 1] + [500 X 2]. In year 2, the king succeeds in increasing the volume of oranges produced by 10% while the production of apples remains the same, for a total production “value” of 2100 deniers ([1000 X 1] + [550 X 2]). The rate of economic growth has thus been 5%. In our individualist perspective, this number has no normative value at all. In an individualist and classical-liberal perspective, as opposed to an absolute-monarchist perspective or an absolute-majoritarian perspective or any other dictatorial or collectivist system, the morally desirable rate of economic growth corresponds to the growth of what individuals want to consume weighed by the prices that they themselves contribute to determine on free markets according to their own preferences. (1 COMMENTS)

Americans drove nearly 96 percent as many miles in May 2021 as in the same month in 2019, indicating a return to normalcy. Transit ridership, however, was only 42 percent of pre‐​pandemic levels, which is making transit agencies desperate to justify their future existence and the subsidies they depend on to keep running. This is from Randal O’Toole, “Transit’s Dead End,” Cato.org, July 13, 2021. But does that mean that governments are reducing their subsidies to mass transit? Guess again. O’Toole points out the basic problem with mass transit in the United States, almost all of which is run by, or heavily subsidized by, governments: Transit’s real problem is that it is operating a nineteenth‐​century business model in twenty‐​first century cities. In 1890, when American cities were rapidly installing electric streetcars, most urban jobs were downtown and the streetcar lines radiated away from downtown hubs to bring people to work. Today, only about 8 percent of jobs are in downtowns, and large urban areas such as Los Angeles or Houston have numerous job centers with as many and often more jobs than the traditional downtowns. Yet, in most urban areas, transit still has a hub‐​and‐​spoke system centered around the central city downtown. Demographer Wendell Cox’s analysis of census data show that, before the pandemic, transit carried about 40 percent of downtown commuters to work, but typically carried only about 5 percent of commuters to other major job centers.       (0 COMMENTS)