Tyler Cowen's Blog, page 309

Eliezer Yudkowsky asks about automation

From the MR comments:

http://lesswrong.com/lw/hh4/the_robots_ai_and_unemployment_antifaq/

(Tyler, have you read that?)

I don’t actually get Brynjolfsson and McAfee. I read the original book and it seemed very unoriginal and not to address at all the basic question of “Why did Ricardian reemployment work fine when agricultural jobs went from 95% to 3%, work fine when automobiles put the whole horse-and-buggy industry out of existence, work fine when women entered the workforce during WWII, and then suddenly stop working?”

The Ricardian comparison is the technology-relevant one here, and I would challenge the notion that it went fine.  Think of the machines of the industrial revolution as getting underway sometime in the 1770s or 1780s.  The big wage gains for British workers don’t really come until the 1840s.  Depending on your exact starting point, that is over fifty years of labor market problems from automation, and yes it is correct to also blame various bad laws, mobility restrictions, wars and taxes, and the like.  Even Ricardo, very much a free market economist, worried about the machinery question in his day and rightly so.  The industrial revolution was a wonderful development with huge ongoing gains, but still it did bring some very real adjustment issues.

A second point is that now we have a much more extensive network of government benefits and also regulations which increase the fixed cost of hiring labor.  Insofar as automation creates short-run adjustment problems, those problems are more likely to show up in the form of decreased labor force participation than they did in previous eras.  We are living in a time where the long-run trend is for labor force participation to fall in any case, and that was not in general the case during those earlier episodes.

You also might try to run with a “back then machines substituted for brawn, now they are substituting for brains” argument.  Maybe so, but you don’t even need to make that work to have a substantial (non-Luddite) worry.

Immigration and wages

Matt Yglesias has a good post covering new research on immigration and wages:

… [a] new study of immigration to Denmak by Mette Foget and Giovanni Peri is one of the most detailed examinations of the issue that we’ve seen and it finds that Danish workers benefit from an inflow of complementary immigrants:

Using a database that includes the universe of individuals and establishments in Denmark over the period 1991-2008 we analyze the effect of a large inflow of non-European (EU) immigrants on Danish workers. We first identify a sharp and sustained supply-driven increase in the inflow of non-EU immigrants in Denmark, beginning in 1995 and driven by a sequence of international events such as the Bosnian, Somalian and Iraqi crises. We then look at the response of occupational complexity, job upgrading and downgrading, wage and employment of natives in the short and long run. We find that the increased supply of non-EU low skilled immigrants pushed native workers to pursue more complex occupations. This reallocation happened mainly through movement across firms. Immigration increased mobility of natives across firms and across municipalities but it did not increase their probability of unemployment. We also observe a significant shift in the native labor force towards complex service industries in locations receiving more immigrants. Those mechanisms protected individual wages from immigrants competition and enhanced their wage outcomes. While the highly educated experienced wage gains already in the short-run, the gains of the less educated built up over time as they moved towards jobs that were complementary to those held by the non-EU immigrants.

Tada! A lot of people have twisted themselves into a position where this kind of result strikes them as contrarian or counterintuitive. But if you think about population dynamics in a non-immigration context you’ll see that this is the conventional wisdom. If a deadly virus killed five percent of the population of Chicago, incomes would fall not rise. Chicago isn’t populated by subsistence farmers imperiled by land scarcity. Its residents participate in a 21st century service economy where they benefit from complex complementarities and an elaborate division of labor. That’s why big cities are engines of opportunity.

Ygelsias’s analogy to cities is a good one. Bryan Caplan has another way of explaining the point, “In a society of Einsteins, Einsteins take out the garbage, scrub floors, and wash dishes.” Thus, low-skilled immigration can increase wages by allocating talent to higher productivity jobs.

Marketing the asylum

Gentrification and rising real estate prices will lead to many kinds of capital conversion.  Here is Mind Hacks:

Regular readers will know of my ongoing fascination with the fate of the old psychiatric asylums and how they’re often turned into luxury apartments with not a whisper of their previous life.

It turns out, a 2003 article in The Psychiatrist looked at exactly this in 71 former asylum care hospitals.

It’s cheekily called ‘The Executives Have Taken Over the Asylum’ and notes how almost all have been turned into luxury developments. Have a look at Table 1 for a summary.

The authors also had a look at the marketing material for these new developments and wrote a cutting commentary on how the glossy brochures deal with the institutions mixed legacies.

The estate agents want to play on the often genuinely beautiful architecture and, more oddly, the security of the sites, while papering over the fact the buildings had anything to do with mental illness.

Here is the article, here is the original 2003 piece (pdf).  Here is one summary from Chaplin and Peters:

The only reminders of the former inhabitants found by the authors at any of the 32 redeveloped sites were a memorial garden dedicated to the patients of Cell Barnes and Hill End Hospitals, St Albans, a plaque at Littlemore Hospital, Oxford, and photographs of the former Bethlem Hospital at the Imperial War Museum.

These two sentences sum it up:

Former mental hospital buildings appear to be undergoing a metamorphosis from containing the most disadvantaged and least-valued members of society to providing homes with character at a high market price. Paradoxically, asylum can now be bought in an ideal self-contained community, with security to keep society out.

For the pointer I thank a loyal MR reader.

*Scarcity: Why Having Too Little Means so Much*

That is the new book by Sendhil Mullainathan and Eldar Shafir, and as you might expect it is one of the most significant economics books of the year.  Here is their bottom line:

The poor are not just short on cash.  They are also short on bandwidth.

For an example, imagine giving both rich and poor an intelligence test with this question:

Imagine that your car has some trouble, which requires a $300 service.  Your auto insurance will cover half the cost.  You need to decide whether to go ahead and get the car fixed, or take a chance and hope that it lasts for a while longer.  How would you go about making such a decision?  Financially, would it be an easy or a difficult decision for you to make?

In their answers to that question, we are told, rich and poor look equally smart.  Now run the same question with different groups, but change the first sentence to this:

Imagine that your car has some trouble, which requires an expensive $3000 service.

All of a sudden the poorer individuals did much worse in response to this question and the authors claim this result has been replicated repeatedly.  Control studies suggest it is not about the number being larger per se, but rather that the poor individuals see this as a more stressful decision, which lowers their measured fluid intelligence.

Overall I find this all very intriguing, but would like to have a better sense of how this fits in with other results about the relative rigidity of IQ.  I also worry about tests where there is an exogenous increase in stressfulness, to which test participants must submit.  There are various ways that an examiner could stress me out, but part of one’s smarts, whether at high income levels or low, is exercising some control over matching your talents to the environment.

Here is a good review of the book by Oliver Burkeman.  By the way, Alex Tabarrok and MR make a cameo appearance on p.103.

Addendum: Here is Alex on their work.

Assorted links

1. A new and not very trustworthy proposal for the funding of science.

2. Latvian restaurant markets in everything (you know this place has too many beautiful women).

3. “Are you ready for the post-college SAT?”

4. A new IMF paper on the volatility of capital flows.

5. There is no great stagnation (cuddle mattress).

6. Tim Harford’s new and very good book is now out in the UK.

A Test of Dominant Assurance Contracts

The free rider problem is a challenge to the market provision of public goods. In my paper on dominant assurance contracts I use game theory to show how some public goods can be produced by markets using a special contract. In an assurance contract people pledge to fund a public good if and only if enough others pledge to fund the public good. Assurance contracts were not well known when I began to write on this topic but have now become common due to organizations like Groupon and Kickstarter which work on this principle (indeed, I have been credited with the ideas behind Groupon although sadly for my bank account I don’t think that claim would stand in a court of law). Since no money is paid unless the total pledges are high enough to fund the public good, assurance contracts remove the fear that your contribution will be wasted if other people fail to contribute. However, if you don’t believe that others will pledge there is no reason for you to pledge and if you don’t pledge others have no reason to pledge either so your beliefs will turn out to be accurate. With even low transaction costs the no pledge equilibrium seems quite likely.

What a dominant assurance contract adds is that the entrepreneur agreeing to produce the public good if k or more pledge also agrees that if fewer than k pledge he will pay a prize to those who did pledge. Pledging is now a no-lose proposition–if enough people pledge you get the public good and if not enough pledge you get the prize. A contract like this makes it a dominant strategy to pledge and so the public good is funded. (See the paper for details).

Recently Jameson Quinn tried the idea out with a campaign on Quora. The public good was to contribute to The Center for Election Science. Each pledger agreed to give $60 to the Center if 20 or more similarly pledged and Jameson agreed that if fewer than 20 pledged he would give each person who did pledge $5 and they would have to pay nothing. (This is the essence, Jameson actually modified the dominant assurance contract to offer slightly different terms at 19 and over 20. He has some interesting ideas on this score, see the post for details). So what happened?

Success! It was a nail-biter as the final 3 pledges came in only in the last half hour. Remarkably, the lure of $5 for nothing helped to produce a public good which the pledgers all wanted but might not have produced had the incentive to free ride not been counteracted.

Kickstarter has made assurance contracts familiar, perhaps the next evolution of funding mechanisms will do the same for dominant assurance contracts.

In equilibrium, they pay him to listen to their ads, or how to strike back at The Man

The bottom line is this:

Because he works from home, Mr Beaumont has been able to increase his revenue by keeping cold callers talking – asking for more details about their services.

And it works this way:

A man targeted by marketing companies is making money from cold calls with his own premium-rate phone number.

In November 2011 Lee Beaumont paid £10 plus VAT to set up his personal 0871 line – so to call him now costs 10p, from which he receives 7p.

The Leeds businessman told BBC Radio 4′s You and Yours programme that the premium line had so far made £300.

…Once he had set up the 0871 line, every time a bank, gas or electricity supplier asked him for his details online, he submitted it as his contact number.

He added he was “very honest” and the companies did ask why he had a premium number.

He told the programme he replied: “Because I’m getting annoyed with PPI phone calls when I’m trying to watch Coronation Street so I’d rather make 10p a minute.”

He said almost all of the companies he dealt with were happy to use it and if they refused he asked them to email.

The full story is here, and for the pointer I thank Michael Rosenwald.

South Korea fact of the day

 In 2011, the average age of a first marriage for South Korean women hit 29.14, up from 24.8 in 1990; for men it jumped to 31.8 from 27.9 in 1990. The birthrate sunk to 1.15 children per woman, the lowest among the world’s most developed countries.

The full story, about matchmaking in South Korea, is here.

Assorted links

1. The very real returns to education.

2. The signs for the new Swiss drive-in brothels.

3. Do military interventions reduce the killing of civilians in civil wars?

4. Where middle class jobs are vanishing the most rapidly.

5. .

6. Why hold cows and buffaloes?

*The Second Machine Age*

The authors are Erik Brynjolfsson and Andrew McAfee, and the subtitle is Work, Progress and Prosperity in a Time of Brilliant Technologies.

It is due out January 2014, self-recommending, and it is likely to be the best and most important economics book of the forthcoming year.