A Heart Warming Story for the Entire Family

This reminds me of the Sokal hoax:

Two California teenagers who recently visited the San Francisco Museum of Modern Art were less than impressed by some of the exhibits and wondered if they could do better.

And thus a scheme was hatched: They placed a pair of eyeglasses on the floor, stood back and watched as, within minutes, visitors regarded their prank as a work of art, with some even taking photos of the fake installation.

Maybe there's hope for the yoots of today, after all.

Maybe I Will Vote

I've been retired as a voter for some time now. But the Libertarian party has actually put together a plausible ticket: Gary Johnson for President and William Weld for VP are two reasonably okay moderately competent scandal-free ex-governors who are more-or-less libertarian but not too extreme.

I realize that's not the most ringing endorsement ever, but I can see voting for them. When one of the alternative parties does something right, I'd like to support that and I might come out of voting retirement to do so.

It's not like I can write ringing endorsements for Clinton or Trump either. For example, P.J. O'Rourke has decided to vote for Clinton over Trump using the following logic: "She's wrong about absolutely everything. But she's wrong within normal parameters!" And you thought my endorsement of the Libertarians was unenthusiastic!

Another conservative, Charles Murray builds on O'Rourke's logic by stating: "Similarly, I am saying that Clinton may be unfit to be president, but she’s unfit within normal parameters. Donald Trump is unfit outside normal parameters." Also, "Donald Trump is unfit to be president in ways that apply to no other candidate of the two major political parties throughout American history."

In comparison, I think Johnson/Weld are only a tiny bit unfit and that's mostly because of lack of foreign policy experience which could be remedied by a good cabinet and some good advisors.

O'Rourke and Murray are both Establishmentarians (Murray's self-description) so they'll only consider voting for candidates from established parties.

Fortunately, I don't have any such constraint. I may still not bother to vote, but if I do, at the moment I'm leaning heavily towards Johnson/Weld.

Insurance, Coverage, and Access

In a recent discussion, to defend Obamacare, a friend of mine wrote, "About 20 million more people have healthcare now."

That statement is one of those things that is both true and not at the same time. Oh sure, perhaps 20 million more people have insurance and no doubt at least some of them have greater access to the healthcare system than they did before. But there are some other considerations.

There are three terms related to healthcare that are sometimes used interchangeably and do have some overlap but are distinctly different things: insurance, coverage, and access. "Insurance" is a policy to pay for some portion of someone's healthcare costs for which someone pays premiums on behalf of the individual. "Coverage" is a separate mechanism that will pay for some portion of someone's healthcare costs; things like Medical for the poor are the prime examples. "Access" is the ability to actual get a healthcare provider to provide healthcare to you.

To see the distinction, let's say that everybody in the world had healthcare insurance but either there were no healthcare providers or none of the healthcare providers accepted the insurance as payment. Then everybody has insurance but nobody has access.

"I worry about giving 30 million people a card and a false promise." Dr. Atul Grover, Chief Public Policy Officer American Association of Medical Colleges

Since there are almost exactly an identical number of healthcare providers per capita now as there were before Obamacare was enacted, and healthcare providers have always been pretty much fully booked, and the healthcare system at the provider level is not noticeably more efficient (and is perhaps less efficient), for each bit of healthcare that is provided to someone because of Obamacare, a corresponding bit is not, almost by definition, provided to someone else. In other words, with an equal number of booked providers per capita, total services, procedures, etc. remain constant. This one really is close to a zero sum game and is severely stressing the system:

The health care workforce is already facing a critical shortfall of health professionals over the next decade. The ACA breaks the promises of access and quality of care for all Americans by escalating the shortage and increasing the burden and stress on the already fragile system. The ACA’s attempts to address the shortage are unproven and limited in scope, and the significant financial investment will not produce results for years due to the training pipeline. With the ACA’s estimated 190 million hours of paperwork annually imposed on businesses and the health care industry, combined with shortages of workers, patients will be facing increasing wait times, limited access to providers, shortened time with caregivers, and decreased satisfaction. The health care workforce is facing increased stress and instability...

Obamacare is about playing god, literally deciding who lives and dies, since for each person access is provided, it's taken away from someone else.

Man, Those Parts Are Small!

We've been working on a PC board for a sensor, and unlike many boards, during this prototype phase we routinely have to change parts on the board. The parts are excruciatingly tiny, especially for aging eyes. The following picture (click to enlarge) is a dime with 5 resistors on it that we had to desolder from one of the boards:

And these are the large size resistors these days! They make discrete resistors that are 1/3 the size in each dimension.

For reference, the dime has about an 18mm diameter.

(Photograph by Rick Wight [http://isleowight.com/])

"Settled"

The contribution of scientific experts to a health crisis:

Anyone who thinks it’s enough to rest an argument on “settled science” or a “scientific consensus” ought to read about John Yudkin.
...
“At best, we can conclude that the official guidelines did not achieve their objective; at worse, they led to a decades-long health catastrophe,” Leslie writes.

Nutritionists are only now grudgingly beginning to admit that their approach to nutrition guidelines could have been, well, wrong, and Yudkin’s work is only now being rediscovered.
...

So why didn’t scientists wise up sooner?

Leslie correctly points out that, despite the patina of pure objectivity, “scientific inquiry is prone to the eternal rules of human social life: deference to the charismatic, herding toward majority opinion, punishment for deviance, and intense discomfort with admitting to error.”

That’s not to say the scientific method doesn’t eventually correct these errors, but the process isn’t fast or painless.
...
 Yudkin’s plight should be a cautionary tale to anyone who thinks we should blindly follow a scientific consensus, particularly when it involves extraordinarily complex entities like the human body, or when the consensus is used to push public policies that could affect vast populations.

Then there is the consensus du jour about climate:

Authoritarianism, always latent in progressivism, is becoming explicit. Progressivism’s determination to regulate thought by regulating speech is apparent in the campaign by 16 states’ attorneys general and those of the District of Columbia and the Virgin Islands, none Republican, to criminalize skepticism about the supposedly “settled” conclusions of climate science. 

Four core tenets of progressivism are: First, history has a destination. Second, progressives uniquely discern it. (Barack Obama frequently declares things to be on or opposed to “the right side of history.”) Third, politics should be democratic but peripheral to governance, which is the responsibility of experts scientifically administering the regulatory state. Fourth, enlightened progressives should enforce limits on speech (witness IRS suppression of conservative advocacy groups) in order to prevent thinking unhelpful to history’s progressive unfolding.

Progressivism is already enforced on campuses by restrictions on speech that might produce what progressives consider retrograde intellectual diversity. Now, from the so-called party of science, a.k.a. Democrats, comes a campaign to criminalize debate about science.

...

The party of science, busy protecting science from scrutiny, has forgotten Karl Popper (1902–94), the philosopher whose The Open Society and Its Enemies warned against people incapable of distinguishing between certainty and certitude. In his essay “Science as Falsification,” Popper explains why “the criterion of a scientific status of a theory is its falsifiability, or refutability, or testability.” America’s party of science seems eager to insulate its scientific theories from the possibility of refutation.
...

These garden-variety authoritarians are eager to regulate us into conformity with the “settled” consensus du jour, whatever it is. But they are progressives, so it is for our own good.

There is nothing wrong with some boldness in believing that knowledge can be advanced by scientific inquiry.  It is however, wise to have substantial humility about the chance for error and the difficulty of error correction in such matters.  This is extremely important when it comes to using such knowledge in the field of public policy.

update: Victor Davis Hanson provides a valuable contribution in The Myth of Progress

President Obama is fond of using the phrase “the arc of the moral universe,” a line derived from Martin Luther King Jr’s longer quote, “The arc of the moral universe is long but it bends toward justice.”

King, in fact, lifted the often-used sentence from earlier Christian ministers. They, in turn, apparently borrowed the optimistic adage from its originator, Theodore Parker, a mid-nineteenth-century transcendentalist preacher. Obama also frequently favors sayings such as “the right side of history” and “the wrong side of history,” even though these Marxist nuggets refer to the supposed inevitable and morally overdue triumph of statism. Another favored presidential expression is “settled science,” as if natural inquiry always meets the end of history and becomes frozen in amber.

There is an underlying theme in these expressions of President Obama: predetermination. When expressing and implementing his views on government services, taxes, social awareness, racial relations and diversity, gay marriage, foreign policy, or global warming, the president often seeks refuge in the notion that cosmic forces both agree with him and are unimpeachable. As a consequence, further debate is futile. Sophisticates understand that finality; rubes do not.

Let’s take his “settled science” claim first. Unfortunately equating a current preponderance of transitory scientific opinions with eternal truth is precisely the way science does not work. There are some absolute truths in science, like the laws of atomic weight, but much else is up for debate and exploration. The etiology of ulcers and the effects of sunlight on the skin are explained differently today than they were in 1980—and perhaps will be explained differently still in 2080.

Most landmark breakthroughs in any field are not the product of consensus, but the unanticipated work of lone wolves, who were once derided as feral outliers barking at the moon. Had Obama used his majority arguments for settled science against Nicolaus Copernicus, Galileo Galilei, Sir Isaac Newton, and Charles Darwin, we might believe that the earth was created 5,000 years ago, gravity did not exist, and the planets revolved around the earth.
...
 “Settle science” became a synonym for progressive dialectics. Obama never references settled science in reference to groups statistically most likely to suffer from hate crimes, or to commit acts of terrorism, or to commit felonies and murders inordinately given their numbers in the general population, or to scientific studies concerning the lack of climate impact from building the Keystone Pipeline, or the proven remedies for California drought relief through additional dams, reservoirs, and canals.
...

What does the president also mean by the “right” and “wrong” side of history, other than equating his side with “right” and thus historically, morally, and logically inevitable? But history has no such predetermined Hegelian course. Roman republicanism and classical culture were certainly on the right side of history for centuries—until life in AD 500 insidiously became far more dangerous, brutish, and materially impoverished. Beheading was supposed to be the signature of past savages, not the highlight of twenty-first-century video ads for ISIS recruitment.
...
Certainly “the arc of the moral universe” may be long, but unfortunately I’m not sure it bends in any particular direction. 
...
And we forget that technological progress can often accompany moral regress—a favorite classical topos from the early Greek poet Hesiod to the Roman elegist and satirist Horace. The gas chambers of the Holocaust were fueled by the most sophisticated cyanide-based pesticide—Zyklon B—that pathbreaking German chemists could concoct. And the crematoria of the death camps were proudly stamped with the trademark “Topf and Sons,” a benchmark of German excellence in the engineering of waste removal.

Nor is there reason to believe that the arc of history bends toward diversity, however noble the sentiment. Prosperous China, Japan, and South Korea have never shared much trust in such ethnic and racial ecumenicalism.
...
 The classical world did not believe in linear progressions, but rather in cyclical ones, often using the metaphor of human birth, aging, and death as a natural referent. Cultures and nations start out in diapers like babies and often end in them too—as do aged humans.
...
 Human nature stays constant as the material world continually transforms. People are not pawns of history or pilgrims skipping up some radiant celestial arc. Sometimes the people, ideas, and movements of the twenty-first century prove better, and sometimes far worse, than those of the past—and they will likewise again when framed against the future.

Human capacity for creativity is truly amazing but so is the willingness to embrace follies such as scientism and historicism.

Data Driven Versus Preference Driven

I'm a numbers kind of guy, so you might guess that empirical observations and results would be important to me. And they are, to some extent, in things like robotics and the hard sciences.

As far as living my life, though, I'm totally preference driven and very subjective. Here is a little analogy to help make my position clear:

I strongly dislike the color pink (this is actually true). If I'm around a lot of pink I get irritable and tend to feel claustrophobic. 

Let's say for sake of discussion, that numerous studies had been done that proved that pink was, beyond a doubt, the best color and it promoted happiness, stimulated positive brain activity, increased productivity, promoted harmony, enhanced compassion, and on and on and on. And everybody agreed that the studies were well done and the results statistically significant beyond a shadow of a doubt. Perhaps if I bothered to look at these studies, I would also agree that they were accurate. 

The first thing to consider is that I probably wouldn't even bother looking at or considering the studies. Because they wouldn't really have anything to do with me. No matter what they said, I still wouldn't like pink. It would still make me feel kinda sick and definitely irritable. So yes, I would simply ignore the data and that would mean I'm essentially ignoring this bit of reality. Why wouldn't I? 

So now let's say the government, based on the excellent scientific evidence, decides that painting the country pink is a desirable policy and it has the support of a solid majority of the voters. Pink is now everywhere; there are pink houses and pink buildings and pink cars and pink roads and pink airplanes and so forth. This pink reality has been foisted upon me and I have no choice but to live with it. So what would I do? I would, of course, do my best to ignore it. I would wear blue sunglasses whenever possible, for example. Again, I would do my best to ignore reality.

So now people tell me I'm deluded to ignore reality because reality is getting pinker and better all of the time and everything's really wonderful and thank heavens that scientists were able to prove wrong those charlatans who had the outrageous audacity to claim a few years back that blue was the better color! 

At this point, I can only hope to not be sent to the Pinko Archipelago for color behavior reconfiguration.

As most people who know me are aware, I much prefer small, very limited, non-intrusive government. This is a subjective preference and I'm not claiming there's necessarily any objective reason for my preference. I was involved in an email exchange where I think the other person was frustrated that I wouldn't engage him particularly seriously on an empirical level. He had a seemingly unending number of claims (most of them seemed kinda bogus to me) about how wonderful government is (well, at least the democrat portion of it; republicans are, of course, the root of all evil) and how government has made life oh-so-wonderful for everybody, including me.

But just like the pink story above, you could prove to me beyond a shadow of a doubt that big governments were the best thing ever, and at best, my response would be, "yeah, okay, whatever," because it doesn't really apply to me. I'm still not going to like a big, intrusive government and I still am not going to be particularly happy living under one. My solution is to just ignore it the best I can and hope that it doesn't step on me too hard. In other words, my solution is to basically ignore reality.

Delusion can be you friend.

Question About Free Trade: A Letter to Don Boudreaux

Dear Don,

I've been following your blog posts regarding free (international) trade for a decade (including the one today titled "Crying Crocodile Tears") and I'm wondering what your thoughts are regarding a number of free trade subtopics. If you had time to blog about them, I'd find that interesting and think some of your other readers would too.

Definition of  Free Trade

One thing I've never been quite sure of is your definition of free trade. Here's what I get by typing "Free Trade Definition" into Google[google]:

free trade noun

noun: free trade; modifier noun: free-trade 

1. international trade left to its natural course without tariffs, quotas, or other restrictions.

Is that the definition you have in mind when discussing free trade? The rest of this letter assumes so.

Efficiency of Tariffs

According to the definition above, Free Trade and tariffs (where a tariff is a tax) are mutually exclusive. Yet domestic economic transactions are subjected a huge number and wide variety of taxes such as sales taxes, earned income taxes, real estate taxes, estate taxes, capital gains taxes, corporate taxes, health taxes, transportation taxes, and so forth. It doesn’t appear to me that tariffs are any less legitimate than any of the other myriad types of taxes.

In addition, tariffs are a fairly efficient tax in that there are a limited number of ports where goods worth a great deal can enter the country. Compare this to an income tax where a large percentage of more than 300,000,000 individuals in the United States have to file. I’m under the impression that efficiency is why the tariff was historically used to help keep the kingdom’s coffers complete.

Given that libertarians believe that at least a minarchist government is required and even a minarchist government requires some revenue, to the extent that revenues from tariffs can replace the need for other taxes, I don't see why tariffs are any more onerous for an economy and society than any of those other taxes. To me, tariffs seem at least as legitimate and at least as efficient as of the other forms of taxation.

If a majority of the American people and its resultant bureaucracy prefer tariffs to other forms of tax, is that really so bad from an economic efficiency point of view?

Efficiency Versus Resilience

As a roboticist, I have almost a fetish for electric motors and actuators and the production thereof. While I’ve never visited their factory in China (Hong Kong area), some colleagues that have visited it describe Johnson Electric[johnson] as one of the most awesomely efficient motor production facilities in the world; in one end goes copper ore and other raw materials and out the other end comes millions of motors per day. It’s a shining example of economies of scale and efficiency. Their specialty is automotive electric motors (for power windows, for example) and they produce a significant fraction of all motors worldwide in that niche. If trade restrictions and tariffs were further reduced, no doubt they would have even a larger share of the market and be even more efficient and be able to produce and sell the motors at a somewhat lower cost.

I imagine that part of the appeal of free trade is that there would be many extremely efficient companies like Johnson Electric, each thriving in a specific niche with tremendous volumes, yet with enough competition from a handful of other companies to drive relentless innovation, quality improvement, and cost reduction.

However, there’s potentially a downside to such a scenario. What happens if something happens to Johnson Electric? What happens if there’s political unrest (war), a fire, or a natural disaster?

I find the answer to these questions disconcerting. Examples indicate to me that moderate natural disasters cause significant supply chain disruptions. For example, the 2007 Niigata earthquake [niigata] caused a significant supply chain disruption [farber]:

By now everyone has heard of the M6.8 earthquake up in Niigata last week, a couple of hours north of Tokyo by shinkansen.  [...]

One small company in Niigata, Riken (no relation to the research lab with a similar English name, I'm sure) makes 60% of the piston O rings used by *all* of the car manufacturers in Japan.  Their plant was badly damaged.

Japan's auto makers, of course, are famed for their "just in time" supply chain management. [...]

Toyota was forced to idle at least 27 plants, Daihatsu four, Honda and other manufacturers several each.  Toyota is still shut down, as of this writing (Monday, a week after the quake), and has an output loss of 46,000 cars or more.

A 6.8 magnitude earthquake is not a huge natural disaster, especially not for Japan. In fact, this was merely the warm up for the Tohoku quake four years later which caused the tsunami that in turn caused the well publicized Fukushima Daiichi nuclear disaster [fukushima]. What was less publicized was that “[l]ocated in the disaster region and adversely affected by these forces are a number of manufacturing facilities which are integral to the global motor vehicle supply chain” [canis] and that “it took three months for Toyota to recover to its pre-earthquake production level.” [matsuo]

You’d think that Toyota would learn to second source most or all of their supply chain and they do for the most part. But even those companies that are using second sources may be fooling themselves. Second sources might possibly mitigate supply chain disruptions if something catastrophic should happen to Johnson Electric, currently supplying approximately 15% of their niche. But if freer international trade enabled Johnson Electric to double their market share of their niche, it would take months for other suppliers to ramp up to cover for the shortfall due to Johnson Electric’s hypothetical absence.

In most dynamic systems, efficiency is in conflict with resilience and robustness. Redundancy leads to resilience and robustness but is antithetical to efficiency. Those economic ecosystems that utilize Johnson Electric are probably quite efficient, but there’s potentially fragility as well.

Is the fragility worth the little bit of extra efficiency? How much extra efficiency is there or would there be if trade restrictions were further reduced?

Scale and Free Trade

Clearly, trade has many benefits and limiting it too much can have serious downsides. As your co-blogger Russ Roberts seems to fond of pointing out, “[s]elf-sufficiency is the road to poverty.” [roberts]

However, it seems to me that the incremental advantages of trade diminish as the scale increases. Two people trading with each other are much better off than each doing everything for himself, 100 people are better off trading together rather than just 2 at time, a million are better off than 100, etc., but it seems that the incremental gains slow down with each increase in order of magnitude of people trading and it may even break down at some point. Sure, perhaps it's better to have 160 different brands of shampoo rather than the current 80 most popular brands [brandes], but it doesn't seem like those sorts of advantages are overwhelmingly important.

Consider the approximately half billion people in the North America Free Trade Area (NAFTA). It contains labor from first and third world countries, at least some of nearly all natural resources required for any economy, and extensive diversity of people and geography. I think that NAFTA and the trade that occurs within it is a good thing and very beneficial for the countries that are members. 

How beneficial is the additional trade with countries outside of NAFTA for those within NAFTA? Is that even quantifiable?

Chaos and Trade

As we expand beyond NAFTA, I wonder if the adverse effects of the chaotic nature of trade begin to overwhelm the benefits of specialization and economies of scale provided by trade. The chaotic nature seems to me like a waterbed with baffling: without baffling, I jump in and the waves eject my wife onto the floor; yet with baffling, the bed still readily adapts without disturbing my wife's sleep.

A description of the chaotic nature of markets is provided by Professor David Ruelle in his book Chance and Chaos[ruelle]:

A standard piece of economics wisdom is that suppressing economic barriers and establishing a free market makes everybody better off.  Suppose that country A and country B both produce toothbrushes and toothpaste for local use.  Suppose also that the climate of country A allows toothbrushes to be grown and harvested more profitably than in country B, but that country B has rich mines of excellent toothpaste.  Then, if a free market is established, country A will produce cheap toothbrushes, and country B cheap toothpaste, which they will sell to each other for everybody's benefit.  More generally, the economists show (under certain assumptions) that a free market economy will provide the producers of various commodities with an equilibrium that will somehow optimize their well-being.  But, as we have seen, the complicated system obtained by coupling together various local economies is not unlikely to have a complicated, chaotic time evolution rather than settling down to a convenient equilibrium.  (Technically, the economists allow an equilibrium to be a time-dependent state, but not to have an unpredictable future.) Coming back to countries A and B, we see that linking their economies together, and with those of countries C, D, etc., may produce wild economic oscillations that will damage the toothbrush and toothpaste industry.  And thus be responsible for countless cavities.  

A graphical example of "tipping" points in a chaotic system is shown by the bifurcations in the following graph:

The system is perfect stable for r less than 3, enabling a false sense of security and ability to predict the system response for other values.  By r = 3.6, the system has become completely unstable and unpredictable with rapid further increases in instability as r increases from there.

There are many real-world physical examples of this such as turbulent versus laminar flow of a fluid in a pipe where linear increases of pump pressure lead to more-or-less linear increases in flow rate until a certain flow rate is hit, after which the flow becomes turbulent and massive increases in pump pressure give little or no increase in flow rate. Eventually the pipe will burst from the pressure.

What are the effects of chaos and complexity on Patterns of Sustainable Specialization and Trade [kling] as scale increases?

Winners and Losers From Free Trade

In the previous sections I have questioned whether or not free trade is even beneficial in aggregate, especially when considering resilience and mitigating the risk of huge supply chain bottlenecks. There is no doubt that some people are better positioned to take advantage of, or at least weather, the effects of free trade. This subtopic is more political than economic, in fact it's a hugely contentious area in the political arena, but whatever light economics can shed on this would still be helpful.

Because it's such a contentious topic, I could compile a list of a thousand references of various politicians, bureaucrats, and even economists who lament the damage to various groups due to free trade. I'll just list a couple of recent ones.

Charles Murray describes the damage to working class men during the last half century[murray]:

During the same half-century, American corporations exported millions of manufacturing jobs, which were among the best-paying working-class jobs. They were and are predominantly men’s jobs. In both 1968 and 2015, 70% of manufacturing jobs were held by males. 

During the same half-century, the federal government allowed the immigration, legal and illegal, of tens of millions of competitors for the remaining working-class jobs. Apart from agriculture, many of those jobs involve the construction trades or crafts. They too were and are predominantly men’s jobs: 77% in 1968 and 84% in 2015.

A recent paper by Autor, Dorn, and Hanson examines the effect of large changes in trade, focusing on trade with China. Here are some excerpts [dorn]

“Employment has certainly fallen in U.S. industries more exposed to import competition. But so too has overall employment in the local labor markets in which these industries were concentrated.”

“Without question, a worker’s position in the wage distribution is indicative of her exposure to import competition. In response to a given trade shock, a lower-wage employee experiences larger proportionate reductions in annual and lifetime earnings, a diminished ability to exit a job before an adverse shock hits, and a greater likelihood of exiting the labor market, relative to her higher-wage coworker. Yet the intensity of action along other margins of adjustment means that we will misrepresent the welfare impacts of trade shocks unless we also account for a worker’s local labor market, initial industry of employment, and starting employer.”

“Labor-market adjustment to trade shocks is stunningly slow, with local labor-force participation rates remaining depressed and local unemployment rates remaining elevated for a full decade or more after a shock commences.” While damage to various people in various groups in various regions is not necessarily enough to call for restrictions on free trade, it's also not possible to ignore the political unrest, social ramifications, and potential violence caused by these effects."

There is little more dangerous to a societal order than substantial groups of people who feel that they have little left to lose.

How does one trade of the aggregate economic gains (if any) of free trade with the (alleged) fact that regions and groups have been and will remain devasted? Is any of this quantifiable? In other words, can I know that the likelihood of me losing my job is at least offset by my children being better off due to free trade?

Knowledge and Free Trade

The local knowledge problem is described as follows[hayek]:

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

At least some of the argument about need for dispersed knowledge and action thereon has to do with actual local conditions, the “place” part of “time and place.” When a great deal of production has to do with agricultural, extracting energy from the earth, mining, and even manufacturing to some extent, local knowledge is critical for both efficiency and innovation. For example, I work with lettuce growers, and they plant a different lettuce hybrid seed each week to best match the expected weather conditions for that specific 12-week growing period for that batch of lettuce in that specific field. You can't get much more "time and place" specific than that.

But with much of the United States ecomomy having evolved to services, information, and knowledge, a great deal of the “place” part has been eliminated. Knowledge can move anywhere, often not requiring people to move with it, and often nearly instantaneous.

It often seems to me that this globalization of knowledge has almost turned Hayek's knowledge problem on its head. Instead of having an advantage of local knowledge, no individual or local group is able to have an adequate grasp of the competing activities of everyone else around the world, even in a relatively small niche. As a result, no individual or small group can compete without investment risk that's enormous compared with a few decades ago.

I have personally experienced this sort of effect. I may have a high degree of confidence that I'm the only one working on a certain innovation in robotics in a given region, but I'm unable to predict the status of this innovation world wide. Investors, however, want to know if there's a chance they'll be blindsided by some competing group in India, or Israel, or Ireland, or Italy, etc. and if so, will be far less likely to invest. This is exacerbated by the fact that if I'm even nanosecond later than other groups in filing relevant patents, my investors can be out of millions of dollars with no chance to be able to recover from their losses.

As the chaotic effects due to scale increase, investment risk also increases. It's easier to get investment for a venture that can provide a positive ROI and an exit strategy in a short time frame than for ventures that have a longer time horizon. This is partly inherent in the risk assessment and its effect on the subjective discount rate used in Net Present Value calculations which penalize longer time horizons. However, a substantial part of the risk analysis takes the chaotic nature of markets into account coupled with the limited visibility into global activities.

I think that part of slowing of worldwide investment and your colleague Tyler Cowen's Great Stagnation [cowen] are partly due to this sort of phenomenon. There's a lot money sitting, doing nothing, with nobody willing to pull the trigger to invest that money, because that money will be wasted if competing entities are working on the same thing. There are a huge and unlimited number of ventures that can be undertaken, but the risk of doing so due to globalization is astronomical relative to a few decades ago.

Might this new version of the knowledge problem be mitigated by reducing free trade?

Simple Alternative to Free Trade

I'm well aware that putting any sort of trade in the hands of governments and bureaucrats is not without substantial risk due to forces explained by Public Choice Theory[pct] and other factors. Nonetheless, international trade is already in the hands of governments and I think that simplifying government involvement, yet not completely freeing trade, is potentially a tenable approach.

As a result, I would propose an across the board tariff regime for goods and services coming into NAFTA. I'm not sure what the tariff rate would be and a horde of economists would need to figure that out, but for sake of argument, assume 15%. There would be no other regulations beyond security and military necessity (not allowing importation of nuclear weapons, for example).

This tariff would provide the "baffling" to dampen chaotic behavior of trade. At the same time, any area that truly has a local competitive advantage would still be able to trade with other areas and that would keep trading channels open. Industries would have companies in each of the areas to provide resilience against war and disaster. Knowledge and innovations could still be shared.

Even if none of the benefits above are true, there's not really a large economic downside. The revenue from tariffs would simply offset the revenues from other taxes and those lower other taxes would themselves lead to additional investment and innovation.

Are there other major downsides from an economic perspective? If so, what are those downsides and how big are they?

Summary

There are a number of issues in various subtopics of free trade that leave me far from convinced that global free trade is a great idea. I understand that "But Freedom!!!!" is a reply that you might respond with to any of the questions above regarding free trade, and I'm not unsympathetic to that response, but that is not an economic argument.

The main purpose of this email is to hopefully stimulate you to write about these subtopics on your blog in the future from an economic perspective. I would find it interesting and I think some of your other readers will as well.

Thanks,
Bret

References

[canis] http://www.fas.org/sgp/crs/misc/R41831.pdf

[cowen] http://www.amazon.com/Great-Stagnation-Low-Hanging-Eventually-eSpecial-ebook/dp/B004H0M8QS/ref=sr_1_3?s=digital-text&ie=UTF8&qid=1461494631&sr=1-3&keywords=tyler+cowen

[dorn] http://www.ddorn.net/papers/Autor-Dorn-Hanson-ChinaShock.pdf

[farber] http://seclists.org/interesting-people/2007/Jul/123

[fukushima] https://en.wikipedia.org/wiki/Fukushima_Daiichi_nuclear_disaster

[google] https://www.google.com/webhp?sourceid=chrome-instant&ion=1&espv=2&ie=UTF-8#q=free+trade+definition

[hayek] https://en.wikipedia.org/wiki/Local_knowledge_problem

Friedrich A. Hayek, "The Use of Knowledge", American Economic Review. XXXV, No. 4. pp. 519-30 (1945).

[johnson] https://en.wikipedia.org/wiki/Johnson_Electric

[kling] http://arnoldkling.com/essays/papers/PSSTCap.pdf

[matsuo] http://www.sciencedirect.com/science/article/pii/S0925527314002278

[niigata] http://www.japantimes.co.jp/news/2007/07/17/national/powerful-earthquake-slams-niigata

[pct] https://en.wikipedia.org/wiki/Public_choice

[roberts] http://cafehayek.com/2009/04/gifted-in-nepal.html

[ruelle] http://www.amazon.com/Chance-Chaos-David-Ruelle/dp/0691021007/ref=sr_1_1?ie=UTF8&qid=1397157389&sr=8-1&keywords=chance+and+chaos+ruelle

Weapons of Math Destruction

I assumed this was a hoax, but it still hasn't showed up on snopes.com, so maybe not:

Guido Menzio, an economist at the University of Pennsylvania, was pulled off of an American Airlines regional jet from Philadelphia to Syracuse because he was doing math.

Yes, no doubt he was a member of the notorious al-Gebra organization, known to terrorize school students the world over!

Hard to Find a Positive Take

My 16-year-old daughter and I had the following conversation the other day:

Daughter: I tend to like boys who are dorks.

Me: Oh? Why is that?

Daughter: I'm not sure, but I read that if a girl has a good relationship with her father, she tends to seek out boys who are like him.

Oy! So either she thinks we have a good relationship and I'm a dork or she thinks we don't have a good relationship ... and she might still think I'm a dork. :-(

The joys of children!

Political Considerations of Free Trade

by Peter

I think Bret has done a super job with his analysis, particularly in raising questions of diminishing returns and challenging the article of faith among free-marketers that if one trade agreement is good, two must be better and so on. But I'm really not qualified to critique his analysis and I wonder whether it's even possible to disprove or prove his points empirically, because the trade economy doesn't stand in isolation from general economic issues. However, the political zeitgeist is not favourable and it strikes me that the poobahs of both parties are scrambling to defend it and not very successfully.

It's pretty clear from the primaries that we're seeing a revolt of both protectionism and nativism that is blowing up the GOP and fracturing the Dems. A lot of it is based on nostalgia and romantic thinking, but there is no doubt it is born of economic turbulence, distress and pessimism in the bottom half. I don't buy the leftist argument that the general public yearns for economic equality, but I do believe it is essential to maintain equality of opportunity, a level playing field, etc. When the promise of free markets becomes associated with Wall Street corruption (too big to fail and too big to indict), factories fleeing to Mexico and Asia, massive unpayable student debt, an inexplicable decline in investment and a ho-hum response to job losses and other economic distress, there is going to be a political reaction that won't be assuaged by economic theory, dreamy fantasies of 19th century limited government or appeals to what the Founders thought.

Obviously Trump is rocking the GOP with his heresies, but the Dem establishment is in tough straits too. In some ways, Trump and Sanders have more in common than they do with their opponents (starting with bases of angry white men). Thomas Frank's criticisms of the Dems as the party of wealthy liberal urban professionals who have abandoned working people and become preoccupied with environmental and identity issues ("Sorry you lost your job. Maybe you and your family should move to Idaho. Now let's talk about degendered bathrooms.") are worth reading, even if his prescriptions aren't.

It's always worried me how easy it is for doctrinaire free-marketers and libertarians to wash their hands of responsibility for the losers in their winners and losers game. Even the perception of who they are is malleable. Earlier this winter, pundits across the spectrum expressed some degree of sympathy for Trump's supporters, characterizing them as honest working people trying to juggle two low paying jobs while covering medical and educational expenses for their families. The American Dream was leaving them behind. As Trump rolled on and the GOP panicked, that changed. Kevin Williamson for the National Review, who I normally like, led the reaction with a mean-spirited depiction of the typical Trump supporter as an Oxycontin-addled trailer park racist living on a fraudulent disability claim. He kicked the American dream in the privates and wasn't worth defending. If that's the best the GOP can do, no wonder Trump's winning.

So, free trade raises the cui bono question and whether an American worker is entitled to priority over foreign workers. But that question is being asked in a broader context of to what degree we are our brothers' keepers. If conservatives don't get their act together to come up with an appealing answer, we may face a very destructive period of leftist inspired protectionism and autarchy, and it won't matter much to the electorate that those have almost always been recipes for economic stagnation.