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Gary Becker has died. Long live economic imperialism!

As geopolitical tensions in Ukraine have been rising I have found myself thinking about the impact of such events on markets and economies. One thing is to understand what is actually going on and another thing is to understand the economics of such events. How are geopolitical tension or terror impacting investment and consumption decision?

Most people would tend to give ad hoc explanations for the economic and financial impact of such events. However, that would not be the way I would look at it. I would always start out by trying to understand such events and the impact of such events from a rational choice perspective. The tools economists use to understand the pricing of beer or the demand for football tickets can also – and should – be used to understand for example suicide bombings or how markets react to geopolitical tensions.

This was the key message from Nobel laureate Gary Becker who passed away on Sunday at an age of 83.

Becker was awarded the Nobel Prize in economics in 1992 “for having extended the domain of microeconomic analysis to a wide range of human behaviour and interaction, including nonmarket behaviour”.

Airport security and the Economics of discrimination

Gary Becker is one of the economists who has had the biggest influence on my thinking about the world in general – also the “nonmarket world” – so his ideas often come up when I encounter different decision making problems.

Recently I was going through security control in Copenhagen airport. In Copenhagen airport there is a special security control called something like the “Express” track. It is basically a quasi-fast track. I fundamentally think it is used to get people who are late for the their flight fast through security and for example for people in wheelchair. However, I have noticed that I often will be called over to this Express track. Last time that happened a couple of weeks ago I came to think about the concept of “statistical discrimination”.

The idea with statistical discrimination is that it can be rational for example for employers to discriminate against certain ethic groups if there is a cost of gathering information of about individuals’ skills. While Gary Becker did not come up with the theory of statistical discrimination he nonetheless was the economist to pioneer the economics of discrimination. His work on discrimination was published in his great book The Economics of Discrimination from 1971.

Becker books

So why am I so often called to the “Express” security control in Copenhagen airport? The answer is statistical discrimination. When I travel I am mostly wearing a suit and look like a seasoned business traveler. The security staff will based on my looks fast conclude that I am a seasoned traveler and know the security routine well and I therefore would not slowdown the process if they got me through there. This obviously was completely rational because I am in fact well accustomed with the security process.

As I was going through the express security control I was thinking about Gary Becker and what he taught us about using standard economic thinking (rational choice theory) to understand non-market phenomena.

Fear and the Response to Terrorism   

I consume a fair amount of working papers every month. As it happens the last working paper I read (or actually re-read) was a paper by Gary Becker (and Yona Rubinstein). The paper – “Fear and the Response to Terrorism: An Economic Analysis” (2011) – “offers a rational approach to the economics and psychology of fear”.

The reason I re-read the paper was that wanted to better understand how the increased geopolitical tensions in Ukraine might impact particularly the Central and Eastern European markets and economies.

Try to think about the geopolitical tensions while reading this part from the abstract from the paper:

“We explicitly consider both the impact of danger on emotions and the distortive effect of fear on subjective beliefs and individual choices. Yet, we also acknowledge individuals’ capacity to manage their emotions. Though costly, people can learn to control their fear and economic incentives affect the degree to which they do so. Since it does not pay back the same returns to everyone, people will differ in their reaction to impending danger … Education and the exposure to media coverage also matters. We find a large impact of suicide attacks during regular media coverage days, and almost no impact of suicide attacks when they are followed by either a holiday or a weekend, especially among the less educated families and among occasional users.”

This might help us understand why the increase in geopolitical tensions in Ukraine and Russia has had so relatively limited impact on global financial markets. Obviously there has been a marked impact on the Russian and Ukrainian markets, but while we initially saw a “fear factor” in the global stock markets this “shock” fast ebbed.

In reality there is a similarly to Becker’s original theory of discrimination, where economic agents could have a “taste” for discrimination. Hence, an employer might have a dislike for jews or blacks, but this “fear” is not for free. If the employer refuses to hire a certain individual because of his or her race or religion despite that individual is as productive as a more open-minded competitor might hire other candidates for the job then that individual. Therefore racist employers will have to pay for their racism by having to accept a lower profit.

Similar it is costly to maintain an irrational fear of geopolitical risks. This I think is pretty important in terms of understanding the impact of the Ukrainian crisis on the global markets.

Long live economic imperialism!

This is just a few examples of how Beckerian thinking is influencing my own thinking at the moment. Gary Becker made a huge impact of me when I really got into studying his research in the second half of the 1990s when I was doing research on the economics of immigration at the Danish Ministry of Economic Affairs and at the same time was teaching a course in the Economics of Immigration at the University of Copenhagen.

I will gladly admit that I am a strong proponent of economic imperialism. I strongly believe – and learned that from studying Gary Becker – that economic method (rational choice theory) can be used to understand most societal issues whether it is stock market pricing, suicide bombings, why politicians are asshats or sports. In fact the latest book to arrive in my mail from Amazon I got to today is a book – “The Numbers Game” – on how to apply economic methods to understanding football (for my American readers – that is what we call soccer in Europe).

I am sure Gary Becker would have agreed that if you want to understand for example the impact on team success by firing a coach you need to apply rational choice theory. It is not about “psychology” – it is all about rational choices.

Thank you Gary Becker for making me understand this.

Numbers game

Update – See also these links on Gary Becker:

Greg Mankiw: Very Sad News

Peter Lewin: Gary Becker: A Personal Appreciation

David Henderson: Gary Becker, RIP

Bloomberg: Gary Becker, Who Applied Economics to Social Study, Dies at 83

Reuters: Nobel-Winning Economist Gary Becker Dies at 83

Chicago Tribune: Nobel-prize winning economist Gary Becker dead at 83

Fox News: Gary Becker, University of Chicago Economics Nobel Laurete, Dies at Age 83

Peter Boettke: Gary Becker (1930-2014) — An Economist for the Ages

Mario Rizzo: Gary Becker (1930 – 2014): Through My Austrian Window

Russ Robert/Café Hayek: Gary Becker, RIP

 

 

 

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Papers about money, regime uncertainty and efficient religions

I have the best wife in the world and she has been extremely understanding about my odd idea to start blogging, but there is one thing she is not too happy about and that is that I tend to leave printed copies of working papers scatted around our house. I must admit that I hate reading working papers on our iPad. I want the paper version, but I also read quite a few working papers and print out even more papers. So that creates quite a paper trail in our house…

But some of the working papers also end up in my bag. The content of my bag today might inspire some of my readers:

“Monetary Policy and Japan’s Liquidity Trap” by Lars E. O. Svensson and “Theoretical Analysis Regarding a Zero Lower Bound on Nominal Interest Rate” by Bennett T. McCallum.

These two papers I printed out when I was writting my recent post on Czech monetary policy. It is obvious that the Czech central bank is struggling with how to ease monetary policy when interest rates are close to zero. We can only hope that the Czech central bankers read papers like this – then they would be in no doubt how to get out of the deflationary trap. Frankly speaking I didn’t read the papers this week as I have read both papers a number of times before, but I still think that both papers are extremely important and I would hope central bankers around the world would study Svensson’s and McCallum’s work.

“Regime Uncertainty – Why the Great Depression Lasted So Long and Why Prosperity Resumed after the War” – by Robert Higgs.

My regular readers will know that I believe that the key problem in both the US and the European economies is overly tight monetary policy. However, that does not change the fact that I am extremely fascinated by Robert Higgs’ concept “Regime Uncertainty”. Higgs’ idea is that uncertainty about the regulatory framework in the economy will impact investment activity and therefore reduce growth. While I think that we primarily have a demand problem in the US and Europe I also think that regime uncertainty is a highly relevant concept. Unlike for example Steve Horwitz I don’t think that regime uncertainty can explain the slow recovery in the US economy. As I see it regime uncertainty as defined by Higgs is a supply side phenomena. Therefore, we should expect a high level of regime uncertainty to lower real GDP growth AND increase inflation. That is certainly not what we have in the US or in the euro zone today. However, there are certainly countries in the world where I would say regime uncertainty play a dominant role in the present economic situation and where tight monetary policy is not the key story. My two favourite examples of this are South Africa and Hungary. I would also point to regime uncertainty as being extremely important in countries like Venezuela and Argentina – and obviously in Iran. The last three countries are also very clear examples of a supply side collapse combined with extremely easy monetary policy.

Furthermore, we should remember that tight monetary policy in itself can lead to regime uncertainty. Just think about Greece. Extremely tight monetary conditions have lead to a economic collapse that have given rise to populist and extremist political forces and the outlook for economic policy in Greece is extremely uncertain. Or remember the 1930s where tight monetary conditions led to increased protectionism and generally interventionist policies around the world – for example the horrible National Industrial Recovery Act (NIRA) in the US.

I have read Higg’s paper before, but hope to re-read it in the coming week (when I will be traveling a lot) as I plan to write something about the economic situation in Hungary from the perspective of regime uncertain. I have written a bit about that topic before.

“World Hyperinflations” by Steve Hanke and Nicholas Krus.

I have written about this paper before and I have now come around to read the paper. It is excellent and gives a very good overview of historical hyperinflations. There is a strong connection to Higgs’ concept of regime uncertainty. It is probably not a coincidence that the countries in the world where inflation is getting out of control are also countries with extreme regime uncertainty – again just think about Argentina, Venezuela and Iran.

“Morality and Monopoly: The Constitutional political economy of religious rules” by Gary Anderson and Robert Tollison.

This blog is about monetary policy issues and that is what I spend my time writing about, but I do certainly have other interests. There is no doubt that I am an economic imperialist and I do think that economics can explain most social phenomena – including religion. My recent trip to Provo, Utah inspired me to think about religion again or more specifically I got intrigued how the Church of Jesus Chris Latter day Saints (LDS) – the Mormons – has become so extremely successful. When I say successful I mean how the LDS have grown from being a couple of hundreds members back in the 1840s to having millions of practicing members today – including potentially the next US president. My hypothesis is that religion can be an extremely efficient mechanism by which to solve collective goods problems. In Anderson’s and Tollison’s paper they have a similar discussion.

If religion is an mechanism to solve collective goods problems then the most successful religions – at least those which compete in an unregulated and competitive market for religions – will be those religions that solve these collective goods problems in the most efficient way. My rather uneducated view is that the LDS has been so successful because it has been able to solve collective goods problems in a relatively efficient way. Just think about when the Mormons came to Utah in the late 1840s. At that time there was effectively no government in Utah – it was essentially an anarchic society. Government is an mechanism to solve collective goods problems, but with no government you have to solve these problems in another way. Religion provides such mechanism and I believe that this is what the LDS did when the pioneers arrived in Utah.

So if I was going to write a book about LDS from an economic perspective I think I would have to call it “LDS – the efficient religion”. But hey I am not going to do that because I don’t really know much about religion and especially not about Mormonism. Maybe it is good that we are in the midst of the Great Recession – otherwise I might write about the economics and religion or why I prefer to drive with taxi drivers who don’t wear seat belts.

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Update: David Friedman has kindly reminded me of Larry Iannaccone’s work on economics of religion. I am well aware of Larry’s work and he is undoubtedly the greatest authority on the economics of religion and he is president of the Association for the Study of Religion, Economics and Culture. Larry’s paper “Introduction to the Economics of Religion” is an excellent introduction to the topic.

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