EEP100 - Lecture 19

Uploaded by calcommunitycontent on 09.11.2009

Alright folks let's get started. You all have a nice Halloween? Good Halloween? Yes?
No? Who still has candy leftover? You gave it all away to the kids right? Okay. Let's
get started. What was the thing? I had something about
logistics that I can't remember. So office hours today at 12:30. There's something
else I forgot. The videos are all rolling around as usual.
The syllabusÉat one point during the midterm feedback that I asked you guys
forÉmore than one person saidÉI wish we could have notes ahead of time, that was
a very common ideaÉand I already told you how hard that is, because I don't have
the notes ahead of time. And the other thing wasÉwhat are the topics going to be?
And I've been keeping the syllabus up to date, as far as the topics I'm talking about.
And when I prepare for the lecture, I look at the four words on the syllabus and
that's almost what I write on this paper. So in terms of notes ahead of time, you will
know ahead of time doing that. If you really do want to prepare for the lecture,
go to the syllabus, go to Wikipedia, look up principle agent, and read that entry.
That'll get you a start on whatever the jargon is.
That might be handy for people that do want to have some notion of what I'm going
to talk about before I talk about it. With the syllabus, I think you sent outÉis
the briefing #2, the peer grade, is due on the
8th of December. The grading will be due on the 8th of December.
That means we have toÉ Hand in.
Because the 8th of December falls in the RRR week? So do we just have to send it in by
e-mail, orÉ We have class on the 8th of December
We have class? It's a lecture but there's no new material.
So you should show up, but it will be like a
review session. And we might be dunking for apples for all I know. I know there's
going to be no new material there. I already prepared it that way before the
semester began. If youÉyou're all adultsÉif you want to show up and hand in your
grading on the peer review that's fine. If you want to walk away after, that's fine.
Does that answer your questions? Any other open questions? Stuff?
I'm going to get to the briefing grading, which is an interest to some of you, in a
minute. Any other questions not related to that?
Auction update. The auction we ranÉI had a great time spending that $2.75 last
week. Wow, it was a party. I put the videoÉthe three minutes and 45
second videoÉthat last all-pay auction on my blog, and I sent it to some people that
are more famous than me and they posted it, and now it has 4500 views since Monday.
So that was pretty cool. I was ecstatic. That might be one of the best things that
you'll learn in this class, even though it cost
some of your compadres $2.75. But I do want to you remind you that that
all pay auction is an example of one type of lobbying. And that's what I mentioned.
It's the kind where you've gotÉlike the Sacramento delta. That kind of lobbying,
where you have two groups, or three, or four groups, that are all lobbying the
politicians who are sitting there saying, oh yes. Give me your donations, and I'll
listen to you. Oh yes, give me donations; I'll listen to you. That's the all pay aspect
to it.
A much more common type of lobbying that we're all used to is when the farmer
states and the corn statesÉthey go to their senators, and they say: "Give us money
from the other citizens," and the senators say, "Here you go." That kind of lobbying
is the typically, special interest group lobbying that you're going to be discussing in
your briefing, and also the type of lobbying that is much more commonÉthat we're
much more used to seeing. It's the kind that Wall Street is doing as far as executive
compensation. We give youÉand somebody actually figured this out with the
Department of AgricultureÉwhen I think the donation is something like, if you give
$1 to a politician in campaign contributions, you get back over $100 of pork. In
terms of the transfers from the general taxpayers to those special interests.
So the reason that lobbying is so prevalent is because there's a whole bunch of
people that are making a killing off of us, the people. The biggest goal in this briefing
#1, and maybe the biggest goal in this class, is to convey to you the importance of
this and how it affects our policies. Including environmental policies, in which many
of you care about. Including oil or resource based policies. So the government as a
means of redistributing wealth, which is why we have government, can get out of
control very quickly. And there's almost an infinite number of examples of the
government getting out of control. So that's what that all pay option was not
necessarily aboutÉI mean it's not the whole idea of lobbying, but there's different
types of lobbying. There's the lobbying of one special interest group that is going
to lobby for themselves at the expense of the general population, which is the logic
of collective action, and there's the other type of lobbying, which is special interest
groups that are competing over things, right? The debate over the medical health
bill. What do they call it now? Health care reform. The debate over health care reform
has got different groups fighting with each other. You've got AARP saying that
the seniors need more money. You've got the Child ActÉsaying children need free
insurance. You've got the Northern Scandinavian Brigade saying you need a one
payer system. You've got the pharmaceutical companies saying, "We need
more money." And in the middle of this scrum of lobbyists
are all these politicians that are just sucking it up. Hopefully what emerges from
that, in a sense, is something that serves us all. But on the other hand, it might
serve a whole bunch of special interest groups and not us; that's the problem with
politics because of that monopolistic power of government.
Whatever law does finally emerge, you don't usually have an option to changeÉto go
somewhere else and not be under that law. There was something that I was reading the
other day. The director ofÉCameron? He did Titanic? And he's doing Avatar, the
new film? James Cameron? I read this profile of him, and he was applying for US
citizenship, and when Bush won the 2004 election, he voided his application, right?
So unless you can change countries, it's difficult to get away from political themes
that you don't like. So that's just a little more commentary on the importance of political
policymaking. As I mention its all auction week for me.
And I've got some stuff closing up on eBay tonight. And I'm very excited to see people
buying these watches. But the only reason that I want to tell you this isÉit's
kind of funny, actuallyÉI started these auctionsÉwho's done an auction on eBay? Who's
set a reserve price on their auction? Why did you set a reserve price?
Because I wanted at least that amount. At least that amount, right? Now let's talk
about supply and demand, right? You're the supplier. And there's other suppliers
that are competing with you, for example. Unless it's like a Picasso, right? So you're
askingÉif you say, "I want a reserve price for this much", but what if the market demand
is not there for you reserve price? You lower it based on that auction, and just
resell it, having a lower reserve. You lower the reserve. So the question actuallyÉso
what I would think about setting a reserve price isÉin a sense that's
how much you value that item to yourself. If you don't give me $20, I'd rather
keep it. That kind of item. So if you set a reserve price with that logic, that makes
a lot of sense. But I was likeÉI've got to get rid of these
watches. They're all dead in my drawer. So I set 99 cent reserve prices, or whatever,
starting prices. And now one of them is up to $36 and $34. But this is just (I think)
the strategy I use for eBay. It's kind of and interesting thing in dynamics of markets.
It's that 99 centsÉmost people are like, "Ooh, watch for 99 cents. I'll bid on
that" But if I said$ $35, where it's already at
($36) then a whole bunch of people would have never looked at that auction, right?
So it's important to kind of keep that in mind, and as far as I was concerned, it's
like the market will determine what my watch is worth. Including 99 cents.
I'm going to sell at least one for 99cents. Anyway, that's more auction stuff that's
been going on. Anything else on auctions? I can move along to the next topic. The briefing
stuff. So the briefing grading got some people a
little agitated. And I'm going to try and discuss the various issues here. But let me
start at the start, which is thatÉnumber one, we all agree that you're doing a briefing.
Number two, we all agree that they all have to be graded. Everybody on the same
page as far as that's concerned? Now they can all have 10s, like your blogposts,
so then the problem is thatÉyou have this problem of the quality of the grader.
Who is the grader? And grading written briefings essentially
has to beÉprobably one person, and we might be able to divide it between the three
GSIsÉor the two GSIs and me. But the goal, my goal, is to have peer grading, to
have you guys grade each other. So in a sense, that's out the door because that's
my goal. And the reason it's my goal is because I want you guys not only to be writing
for each other, but also I want you to be on the flip side of that page. I want you
to think like graders. I want you to think like analysts, and critical reasoning people.
So it's not just likeÉoh I wrote that and now I'm doneÉwhat I want you to do is analyze
three other students, or three of your colleagues' papers. And then be able
to give them critical feedback. That's why you are handing a written evaluation of each
person's briefing. Is everybody clear on that right now? I thinkÉI don't know if
I set a limit on the evaluation, but let's just say that's one page also. I'm not interested
in 15 pages of why that person can't spell.
For each one. So in a sense, you'll hand in on page, and you're going to have to write
three more pages grading each others' papers, so the grading might be more work, if
you want, but more words or more pieces of paper.
What you're going to doÉwhat I suggest you're going to doÉokay hold on a second.
Now the problem is with this system of peer grading is thatÉsay you're mister nice
guyÉlike all these guys are great. That's a 10, that's a 10, that's a 10.
And you're really mean or hard. And a 2 and a 3 and a 4. We have to able to control
for the heterogeneity among graders. Now, there's different ways of doing that.
I could say you have 20 points total to distribute among the three papers; do it any
way you want. Then you might get a 10Éor what do you call itÉan 10 and a 5 and a
5Éor a 10 or a 9 or a 1. That could happen, but what I want to do is
to impose more structure on the grading. That's why I said 1st, 2nd, and 3rd,
or, more importantlyÉ9, 7, and 5 points, which is the equivalent of 1st, 2nd, and 3rd.
I don't want to give you guys the discretion of points these papers get; I'm giving
you the discretion of deciding which of the three are better relative to the other two
that you're seeing. SoÉnow some people are worriedÉwell, wait a second, what if
my amazing paper, which is what you're all going to write, goes to three people that
have no clue about how great I am, and they give me 5, 5, and 5. I get the lowest
point on each time. That, I think, is the fear of some people. And it's hard toÉthat
is actually a theoretical possibility, but it's
an actual not so likely situation. If you have
a good paper, and it goes to three people, and those three people are comparing
your paper to essentially 6 other papers (everybody understand the math here?)
thenÉyou knowÉif they decide that those six papers are all better than your great
paper, then maybe the person who's got a problem is you, as far as how great your
paper is. So in some sense, you have to be able to trust
the other students, and the fact that they have good judgment. On the other hand,
life isn't fair, and people are judging you all the time, despite the fact that though
you don't deserve it. So I'm hoping is that when there's three versions
of your paper instead of just one version of your paper out there, that, on
average, you'll get a grade that's more fair than not fair. Does that make sense?
Does anybody have a better idea of how to run this metric through? Or different
comment or different idea? The only thing I'm worried about on the grading
side of itÉwhat if you get three papers that are pretty equally close. And
one person ends up getting a 10, and the other gets a 5, when maybe there really wasn't
that much a difference. SoÉhow you decide which one. And thenÉI thoughtÉif
the grading scale wasn't like that, that you can just decide on your own if they get a
10 or a 7. Then we have to justify our writing to you and the GSIs. Then you could use that
to avoidÉthat'll give some ofÉ That's a good point. And here's what I would
suggest. What I would suggest is that if you have to split hairs or flip coins,
even, to decide between first or second place, then do that, and then write that on your
written grading. What I'm going to do when I'm looking at your written grading,
I'm going to cross correlate not only what you write, but what other people write about
each paper. It's going to be a complete nightmare for us as the graders. Oh...90 papers?
That's too much. Give me 270 papers. That's much more fun, right? So the
GSIs and I (unfortunately I'm going to enlist them in this endeavor)Ébut what we're
going to do is we're going to cross check what you say about a given paper against
what other people are saying about that given paper.
And let's say it this way. I have the ability to override my own rule if it seems like it
makes sense. I'm not a rigid idiot as far as this stuff is concerned. This is not the
DMV. So does that address your concern? I would mention that explicitly in your write
up on the paper. If you sayÉI'm giving this (whatever) first place. We'll have to
agree on a jargon. But if you sayÉI'm giving this second place, but it's really
good. It's almost justÉI would really give itÉyou can go ahead and write that in.
And make that in less than a sentence, and at the top. And then you're essentially
going for arbitration by us. And once we see the results we'll take all that stuff into
consideration as far as what to do. Another question? Yeah.
I guessÉand this would definitely be more work you, but one thing I think you could
do is to have the peer grading and also have
you and the GSIs read the papers Oh, we will be seeing everything.
Because I was thinking if your scores are factored in, like if you a 5, 7, or 10É
Oh you mean we actually score them as well, so there's a fourth score? No I'm going
to defer to your judgment on grading, but we might have some wiggle room as far as
stuff is concerned. When you hand in your grading on stuff, staple the original
behind it. I'm going to make notes because I'm going
to do the protocol here. Now the other thing is that everybody should
know that when you bring this in next Tuesday, you will bring three copies. And
you will put your last four in the upper right corner. If I get mean, then I might
reject anything that doesn't meet that criterion. Okay? Just keep that in mind.
The last four of your SID, yeah. I feel like the grading of 5, 7, and 10 is
kind of too harsh. I think the 8, 9, and 10 is still
good. It's 5, 7 and 9 by the way. A little grade
inflation already. Sorry. So it should be like 10, 9, and 8.
Yeah. Close together. Because I feel likeÉ Actually maybe like 9 _, 9.75, 10. I have
to set it somewhere. It's reasonably arbitrary. I could make it worse. It could
be 9, 6, and 3. So, in a sense, you're getting a 5 for turning in crap.
If you do better than average, then you're going to get a higher grade.
Did you say 9, 7, 5? Yeah.
So no one can get aÉ That's my wiggle room. If somebody comes in
with three 9s, then we'll probably bump it up to a 10. Or if theyÉI don't even
know. We have to grade the grading too. Is it all text, or can we put a graph on it?
If it fits in a page, you can throw a graph. You can put a one page graph if you feel
like it. Picture's a thousand words, right? And 250 words on a page. So you can go
ahead and do that. You can do as many graphs as you want. If the graders can't read
it, and they give you 5, then that's cool. ButÉyou knowÉit'sÉby the wayÉthe funny
thing isÉthere's all this kind of uproarÉoh my god the gradingÉbut likeÉthis is the
world's hardest assignment. Did anybody notice that? Okay.
So no complaints about thatÉcool! It's likeÉhey let's go to the moon! But wait a
second, what are we going to eat! Now, come on you guys, this is small potatoes.
Does it have to be within a state, or can it be with in a city, or to the university,
orÉ You can use any example of any policy situation,
any polity situation (city, state, or federal) you want to. It has to obviously
be clear to your readers. So it has to be a polity that is currently
in place? It could be a general principle on how to
fix this globally. And the reason why I gave you the world's hardest assignment is because
what has been observed many times in the past is that young folks who don't
know better come up with the best ideas. I, personally, am desperate for new ideas. So
among the 90 of you, I'm hoping that like the Nobel Prize emerges out of this essay,
and it's not going to be me collecting it. So, just keep that in mind.
So my question wasÉyou have to approach this as kind of a campaign manager, or like
is that correct? The question isÉhow do youÉso there's some
elected politician who you're giving advice to, who's going to face reelection
in less than two years. That's kind of the implicit situation, but that'sÉkeep that
in mind in terms of framing your presentation.
Okay so when I read the assignment (I read it a bunch of times) it seemed like you were
looking for somethingÉlike you had this secret solution that you're looking for?
No. It's just a really hard question?
Yeah. Okay.
"Be a nice person" is not an answer for that. You can make up a totally fictionalÉ
Yes you can. You have one page to do it. So, I mean, don't go off into fantasyland
andÉyou have 3 words left at the end to give your solution.
Don't define a new currency and a new measurement system.
Does this briefing require us to read Micromotives? Micromotives and Macrobehavior? No. I suggested
likeÉquick, read The Logic of Collective Action. You have to read it anyway,
and it really matters for this assignment. You don't have toÉdon't sit there
and say, "Works Cited, Mancur Olson." This is a briefing. Politicians don't
read books, right? They worry about briefings. So don't worry about works cited.
JustÉif you have toÉI meanÉif you actuallyÉbesides outright plagiarism, if
you take ideas, just go ahead and write through fluidly. But don't drop jargon in,
because then it will be likeÉand you, also, as graders will be like, "Jargon! I don't
get it!" I have a fourth grade education; I'm a politician.
So don't play with that. When we turn it in, are we going to be redistributing
it that day and returning itÉ Yeah, we're going to try and roll it out [in
the] same class period. I'm going to talk to my GSIs about how to do that. It could
end up being like kind of one of these musical chair circuses where we throw them
all up in the air and people grab whatever's in front of them, but I have no
idea. I'm still thinking about it in terms of
trying to randomize the redistribution. And then there's this other thing. Where someone
sent me this email and said, "Okay. What I'm going to do is I'm going to
exchange all my numbers with my friends, and then we're all going to give
each other top grades." And I was likeÉyou know there's a simpler
way to cheat than that. Wait until you see what you got, and then tell your friendsÉooh,
Facebook. You have this stuffÉand the thing isÉthe cheating is dumb.
And it's dumb because it doesn't serve you us a grader. Because when you grade, and
you gave this guy a top grade, and we look atÉ
Say that your friend sucks, for example, and they get a 5, 5 and you give them a
9Éyou're going to get nailed on your grading for not using critical reasoning. I will
be very happy to do that. And actually, I have a zero tolerance on cheating.
SoÉgiven that you guys actually care about doing a good job, and the cheating is a
waste of time because of Karma and learning, and that's why we're all here, then
what I suggest you do is you take full advantage of this opportunity as a grader to
really exercise some critical reasoning. You will learn more grading these other papers
than you probably will learn from writing them. And, as far as I'm concerned,
I've been teaching this class from the get-go as a learning situation. Not as, you
know, swallow it and spit it up on the test. Because if you walk out of the class, and
you don't learn anything, then I failed. And I want you guys to learn.
And by the way, this was inflicted on me in the high school. We had a classÉand you
guys are getting off easy. We would present our essay, and someone would stand up
and critique it in front of the class, and the rest of the class would critique it for
the rest of the hourÉtears were shed. It was
brutal. But it really taught me a lot about getting to the point. Because if you know
that someone is going to rip your stuff apart, then you better cover your ass in a
million different ways in terms of the being good in the writing.
It's not be some lazy professor or tired GSI that's going to be grading your stuff byÉI
throw it off the stairs, and the top step gets an A, and the bottom step gets an F,
okay? It's going to be people that are reading your
stuff, and they're looking for holes in your logic and your reasoning, okay? And this
is what you're learning in economics. You're learning analytical techniques. So
you needÉyeah? So is the peer grading (grading on your part)
pretty much binary? Like you do a good jobÉ
Zero, five? No. It's going to be zero to five. There will be steps in between.
Are you going to get the gradings of our briefings back?
Yeah. That's my goal. So in a senseÉwe'll distribute the grading of the briefing back,
whatever, a week later, and the grading of the second briefing back at the final.
Can we appeal the grading? You can appeal everything, right? Within one
week, in writing. And it'll be 15 pages long by the time this get's done right?
Any other questions on this? I think I've said a lot of stuff. Who is still, well I
don't even know. I don't even know how to ask it.
If you're still dissatisfied, I'm sorry, okay?
We're doing this as an experiment; hopefully you learn something from it. Oh, and
by the way. This is called double blind. Neither the reviewer, nor the writer, knows
who each other are. It's the double blindÉthat's the technology.
The next one we're going to do is going to be double blind, but it's really only going
to be single blind, because it will be you handing in your briefings, and I'm going
toÉoh sorry. Your rewritten blogposts as briefing two. And technicallyÉwell, I
think it should be fine for people who are reviewing your briefing two's to look up at
your original blogposts, and then check that against what you handed in,
potentiallyÉcomments people made. Because I think the first thing that we
mentioned that they should do is look and see what the critical values or comments
were, and if you addressed them in briefing two.
That will be single blind. You will be grading somebody's briefing two, and they
won't know who you are. And the reason that blind grading is popular is
becauseÉthen you don't have to worry about how popular you areÉas far as
feedback on people. Any other questions on this stuff?
So then the last four digits of our ID are in lieu of our name.
That's right, yeah. The last four digits in lieu of your name.
I've checked...there are no overlaps in four digit codes.
As usualÉbut if somebody has some further comment or worry or concern, send me
an e-mail on the side (it can be anonymous) and I will deal with it in whatever way I
think best. So there was a thing that I left out from
the first half of the class. Did I give you this example? Market A and
Market B? Did I show you this? And there was two different demand curves and
all that stuff? So actually, I'm just senile. So we don't have to talk about that. Next.
Baptists and bootleggers. This is relevant for the briefings. There's a tag on my
blog, and I think it was a blogpost, but I'm going to tell you about it now so you know
what it means. This was coined by a guy named Bruce Yandle,
who's a very charming good ole boy who worked inside the Reagan administration
in regulations. He's the oneÉI was talking to him a couple years ago, and I said,
"Bruce, what is up with all the subsidies?" Why don't people fight subsidies
in Washington? And he said, "You know, the thing about subsidies is that everybody
hates subsidies except for the one that goes to them."
An in a sense, that's where this word "log-rolling" has come about. Have you heard
of this world? Log-rolling is essentially the trading of favors. And I actuallyÉI'm
trying to think of the image. And I think of a lumberjack that's running
a log and spinning a log in the water. Have you ever seen one of those things? And
that sounds like log rolling to me, but it's kind of likeÉI scratch your back, you
scratch mine, and what happens is when you have any kind of political compromise,
you've got Mr. A, Mr. B, Mr. C, and Mr. D. And D wants this, and B wants that. And C
wants this, and A wants that. And then they're all likeÉI'll vote for your
thing if you vote for my thing. Right? That's trading of favors.
Log rollingÑthat's the expression in politics. And that's how a lot of negotiations
get done, and compromises are made. Sometimes the bad news is that all of those
people get what they want at the expense of Mr. E. So that's sometimes why it's
critical to have a seat at the table or to have veto power, for example.
Governor Schwarzenegger, in the waterfront, has basically saidÉI'm pretty sure he's
backed off. But he said, "I will not do anything in terms of reforming California
water law unless there are dams included." Almost any economist knows that any new dams
in California are a complete waste of money. But Governor Schwarzenegger, according
to somebody that I was talking to, has got religion (meaning completely irrational
desire for dams), and he will notÉsorry about that, religious people, but
religion actually is not about rationality as far as I'm concerned. It's a belief, because
it'sÉthe difference between religion and rationality.
So he believes the dams are necessary regardless of all of the evidence, right? And
for him (a person who has veto power), he's basically sayingÉa couple weeks he
was sayingÉI'm going to veto 700 bills unless you give me dams in the water bill.
And then he backed away because I think he realized how stupid he looked.
And now the new water bill that's under negotiation that I'm following from a very
great distanceÉI'm not sure, but I think it has no dams in it.
And that, in a sense, showing how outside the perspective was. He can't bring that to
the table as a negotiating position because it's just non-tenuous. There's just not
enough support on these other groups to keep that dam item on the agenda.
So that's what log rolling refers to. Baptists and bootleggers is a much more insidious
concept that is significant in terms of the propaganda of politics.
And the analogy is a very simple one. Imagine that you're in a southern town where
the Baptists are the prevalent congregation. The Baptists tend to be very
conservative in their beliefs, and one of they're believes is that you should not be
drinking alcohol. Now this is not exactly a dry town, and what
they do is they go to the city council and they say, "It's God's will that we not
sell alcohol on Sunday." Because it's the Lord's day for the Lord's business. We shouldn't
be selling it. We can't keep people from buying it, because they buy it on a different
day, but let's not sell it. And the city council, in order to keep their political
approval ratings among the majority population of the town says, "That's a good
idea." We will ban the sale of alcohol on Sunday.
And the Baptists, who are the "Holier than thou" typeÉ
These are the angels. The angels do something that's good for us.
But then, what happens to the supply and the demand for alcohol on Sunday?
There's our demand, and there's our supply. What happens to the supply of alcohol on a
Sunday? Would there be no supply?
Would there be no supply? I'll tell you. If you want to buy this for
$2000, I'll sell it to you right now. Blackmarket.
Blackmarket. People who bought alcohol on Saturday.
There is going to be a resale market, right? But let's just say it this way. There's
going to be a shift in on the Supply curve. That's pretty obviousÉbecause you just
eliminated the retail competition. And the people that are still selling alcohol
on Sunday are the bootleggers. Bootleggers (a term from the prohibition)
are the people that don't follow the retail licensing laws.
They will sell you alcohol out of their boot, or (literally out of their boot) out of their
trunk (which is a boot in English terminology, right?)
So you can still get alcohol; and guess what happens to the price? It goes up, and all
the boozers have got to pay more. Can't you go to another city?
We're just going to make it a Baptist region. Transaction costs are huge, right? But
that's a great example. I know that you have dry counties in various
states, and you just go to the next county over. Alcohol laws are insane. They're
really amazing. Actually, about that, I think that in Alaska
there are a lot of dryÉand basically a bottle of whiskey that you can buy at the store for
$10 sells at one of those for $250. And all it does is it creates a huge incentive for
people to try and get the alcohol. YeahÉI meanÉbanning alcohol salesÉguess
whatÉblack market. Prohibition. Banning drug salesÑblack market. Drug dealers.
It just happens over and over again. Go to Scandinavia where beer costs
$10. People are like getting off the plane, going to the duty free, buying cases of beer
and bottles of vodka, and taking it home. It just channels that demand somewhere else.
Now I think there is a shift in (in terms of quantity consumed). But what's going
on with consumer surplus if we actually care? Consumer surplus is lower.
And, more importantly, there's a transfer of rents to those bootleggers. So what happens
isÉwhen city council saysÉoh my god we have to do the lord's work and save
our citizens, the bootleggers are like, "Oh boy, can't wait for that one."
Now, this example of Baptists and bootleggers happens a lot. And it doesn't happen
just for alcohol. Another example that Bruce gave that was very good is lawn
mower manufacturing and safety regulations. The lawn mower has to have an
automatic stop. It has to have a bladeÉif you get your finger near it, it stops; there's
all kinds of things you could say in the name of safety, right? To the point where the
safety features are like rocket science. Your lawn mower is more advanced than the
car parked in your driveway. Who benefits from that kind of regulation?
Whoever makes all the safety components? Whoever makes all the safety components, yes,
and which manufacturers benefit? And which manufacturers lose?
The low cost manufacturers lose because they probably don't have the ability, the
technology, to put all that inÉ The guys that are just sellingÉI meanÉ
Imagine one of those manual mowers that don't have any guards at all.
You just walk along, andÉoh my god a baby could fall in there and die! So we're
going to have to cover the mower and put a warning sign and automatic bumpers
and stuff like that. The company that has been making the same
mower for 150 years is out of business.
So the low cost competitors lose, and what happens to the consumers? How do they
do? Are they better of or worse off? Are they
safer? Maybe. Sometimes they're safer from nothing. You could have a regulation
that will keep you safe from nothing, but it's a regulation. It's the wholeÉputting
baby seats on an airplane type of thing. Now that I think about it, I think that the
baby seats on the airplane is just a stupid example of something that never happened.
It sounds too dumb to be true. I'll have to look that up.
For our briefing, we have to avoid that situation where you would please both groups.
WellÉhat you're trying to do, you're trying to maximize benefits to society, and
you're trying to go against this special interest combination. This is a typical
combination that special interests come up with. So if you can use that same
Baptists and bootleggers logic to get what you want in terms of benefitting the
public, then go for it. But usually this implies some special interest
groups. Does that answer your question? No?
I'm just confused what you mean by likeÉbenefit the average, but not the special
interest group? So you wouldn't benefit the bootleggers or the Baptists, but ratherÉ
ThisÉthe benefits to the Baptists are zero, because they don't drink booze. The
benefits to the bootleggers are large, and positive, but there's aÉthe social welfare
in terms of the whole deadweight loss triangleÉthe one we're always used to talking
aboutÉis smaller. There is a transfer of rents from consumers
to producers, first of all. There's a deadweight loss secondly, right? So I want
you, in your briefing, to talkÉto think from the prospective of consumers.
Wouldn't there be a nonmonetary event for the Baptists whereÉ
Meaning they feel better about other people not drinking? I think yes, but that falls
under the category that I'm not going to condone. If I feel good because that
person's dead, it's not exactly the kind of logic I want to pursue. Because that's what
it is. I feel good when you feel bad. So if somebody wants to drink, that's fine. If it's
drunk driving killing innocent children, then that's a different story.
I read this thing about the founders of MADD (mothers against drunk driving). And
she was pissed off because she said, "I founded this organization because my
daughter was killed by a drunk driver." And the people thatÉshe actually denounces
her own organization. Because they took over, and they wanted it to become prohibitionist.
She's likeÉI like drinking. I just don't like drinking and driving.
So if you're focusing on drinking and driving, don't go over drinking. Think about
the outcome. Fight the outcome. Don't fight the process that might not lead to it.
Kind of like treat the symptoms, not the disease, or the other way a round. I don't
know. It was a bad analogy. Yeah? So with the alcohol example, I'm just curious
to knowÉwhat aboutÉwhat would youÉbecause it's the same problemÉwe're
just saying they're not going to payÉ I think that the funniest thing is that the
drug dealers, especially the cartels that are
having this kind of civil war in Mexico right now, they don't want those drugs to be
legal. They're making crazy profits. I did some research on opium and heroin, and
heroinÉat the Afghan, Pakistani border, where a lot of opium and heroin comes
from, it sells for about $1000 a kilo of heroin (100% pure). It sells for $850,000
a kilo in the United States. That's a price markup, right? Drug dealers make so
much money, that they will fly a plane over the border, take the drugs out of the
plane, and leave the plane behind, because that's worth less.
So the economics of drugs is insane because of the profitability of those drugs.
That's why they also kill each other all the time.
So would you suggest to legalize all drugs? I would think that some people wouldÉ
I do, yeah. So even heroin andÉ
Legalize and regulate. Like cigarettes, and alcohol, and pharma drugs. In fact, most
of the pharma drugs suck compared to the legal drugs. When I got my surgery, they
gave me this opiate, and I was like pshÉI've got better than that.
The funny thing is in Holland, they have medical marijuana, but no one buys it,
because they get better Marijuana in coffee shops.
That brings up my next point isÉHolland, where it is legalÉthey actuallyÉat least
I heard that there'sÉWhere the other drug use
is higher too because they have a lot of problems with heroin and cocaine.
That's the gateway drug hypothesis. So the gateway drug hypothesis, which is a
little bit of a diversion, but it's one of my favorite topics, so I will indulge you.
So the gateway drug hypothesis is thatÉoh you use heroin, you use marijuana, so
marijuana leads to heroin. And other people who are clever with their analysis have
said that breast milk is also a gateway drug. Because people that use heroin also
drank breast milk. So clearly breast milk is a gateway drug.
That was a joke if you guys didn't get it. So the statistics on the marijuana use in
Holland is that there's lower population participation in marijuana in Holland than
in this countryÉsomething like 17%. My girlfriend is Dutch. And she's like, "You're
stupid you smoke dope." I'm likeÉwhatever, I'm an American.
They all go through it like the French go through drinking wine. You're drinking
wine when you're 13, and by the time you're 21, you're boring. What's up with all
these drunk people? Because the English people show up and they get drunk right?
Or they do drugs. And the Dutch and French are like "Weird". Because they never
acclimatized to using the drug. So that's the complicated thing. The gateway
drugÉthere's a counterexample to the gateway drug hypothesis which is that if you
make marijuana illegal and you have to go to a dealer to buy it, and the dealer's
like, "hey, I've got marijuana, cocaine, heroin, ecstasyÉall these other things."
And you're like good, I'm already at the mall, why don't I get everything? So making
it illegal leads to more drug use. It's complicated. But the one thing is that the
statistics on marijuana are incontrovertible. They areÉthat lower marijuana use
when it's legalized in that country. And there are obviouslyÉits almost de facto
legal in California. Anybody can get a medical card in 20 minutes. And a $100.
Anybody else questions? So there was one that was like prostitutionÉthat
was one of the examples? So people who want to limit the number of prostitutionsÉ
Make prostitution illegal, and only pimps can stay in business. Absolutely right.
Because the pimps are a very interesting category too. Another one of my favorite
topics. I have a friend that I would never recommendÉnever introduce to a girl who
I knew, because he's one of theseÉyou have these kinds of dodgy guy friends who
you just don't want your girlfriends to meetÉand he's like, "Thank god for abusive
fathers, otherwise we wouldn't have prostitutes and strippers."
So there's this really sad thing going down with that, and the psychology of
prostitution and pimps is actually very sad. It's very perverse.
I was talking to a student group the other day about going to Amsterdam. And, you
know, prostitution is legal there. And I want to the prostitution information
center. And it's like soÉ And there's these prostitutes just sitting
there, and they're like, "What do you want to know about it?" It's like an info booth.
It's likeÉoh you want to get on the Metro, or whatever. And I said, "So what are you
guys really worried about." And they're like, "Oh we're worried about
our pensions." Because they're just like workers. And it
was so bloody boring. And a lot of the prostitutes will say they don't want to deal
with pimps because pimps get a piece of the action. In fact, they getÉthis is actually
shocking. Prostitutes don't make any money at all. They
had it all over to their pimps. And the pimps will give themÉthey'll take care of
them. And that's part of the mind-fuck that goes on between prostitutes and pimps.
If they can actually go off and be independent contractors, or band together in a
cooperative, and stuff like thatÉbecause it is legal, then it's better for them. The
prostitutes, right? And I'm not even talking about female trafficking and stuff like
that, whichÉfemale trafficking is a disaster. Las Vegas has a lot of trafficked women. I
was surprisedÉnot too surprised to hear that. Prostitution is illegal in Las Vegas,
if you didn't know that. I thought it was legal there?
It's legal in the counties in Nevada that have a population of less than whatever.
Clark County has a population of more than whatever. So it's legal to goÉit's like
[inaudible] said, "It's legal to fuck, it's legal to buy things, why isn't it legal toÉ."
Whatever, right? That's another kind of Baptist and Bootlegger
thing. It's like ooh, Las Vegas! We don't have prostitution here. Let's ban it.
We'll save ourselves from it. And all the pimps are like, "Yah". Because
all the convention guysÉthey don't want to go out in the desert, right? But they come
in and a lot of the girls are trafficked. I
was told that it's one of the worst trafficking locations in the world. And that's sad.
But in social welfare, for example it would be like the prostitute?
Absolutely. If you did a Baptsist and Bootleggers on prostitution, the people that are
hurt by illegal prostitution are the prostitutes. They lose money to pimps. The
pimps inflict violence on them. Their johns can inflict violence on them.
They get a lower price because they can't offer to a competitive market. They kind
of likeÉhow much for this, how much for that? The johns clearly lose welfare because they
have a harder search mechanism. The pimps make a lot of money. And the copsÉthey
makeÉlot's of bad things. Cops getting free sex off of prostitutes is a huge
problem. It's just like rape. I think in this example, we're kind of assuming
that prostitutes want to be prostitutesÉ Totally assuming that, yes.
So what about the fact that a lot of prostitutes are not actually willingÉor they don't
actually want this career. That'sÉtrafficking basicallyÉthe girls that
are trafficked are enslaved. Any other words that you want to use. Those prostitutes
are worse off in and illegal environment because everybody is illegal.
And, even worse, if you're trafficked, and it's illegal, and you come from another country,
and they've got your passportÉyou're already breaking the law
once, because you're an illegal migrant, and you're breaking the law twice because
you're a prostitute. So you're afraid to go to the police because you're actually doing
something that's illegal, right? This is also the problem with migrant workers.
Who benefits from illegal migrant workers? Do the workers benefit from that? Kind
of, because the workers crossed the border, or most of them. But the people who
really benefit from that are the coyotes and the people that run the labor gangs.
He basically saysÉProfessor Martin up at DavisÉhe basically says that the worst
labor crew leaders are also Mexican nationals because they know how to push these
workers within an inch of their life, which is bad for the workers.
Who else benefits? The farmers who want to pay below market wages. We are
harmed as a taxpaying population because medical claims and school claims by
people that are not paying into the tax system and are only going to emergency
when they are losing blood because they can't go for competitive medicine.
So the Baptist/bootleggers thing occurs over and over again. And people are like,
"Oh!" This is the problem. It's likeÉwe have to save such and such a population or
stop such and such a bad behavior by making it illegal. ThatÉyou've got to
rememberÉmaking it illegal doesn't mean that people will stop doing it, right?
I'm not saying murder should be made legal because it's clearly a problem. But the
alignment between cost and benefit between murderer and murder victim are much
clearer. But the Baptists and bootlegggers involve
these triangles of different groups. Does that answer this question? I think that involuntary
prostitution is a disaster. Actually I am a big fan of shooting people
who do that. I don't really meanÉa reinforcement of prostitution,
but I mean likeÉeconomic incentives.
Ah. Economic incentives. Well in that sense you would be in favor of legal
prostitution because then the girls would make more money, and they'd get out of it
sooner. There's many of themÉ It's like: "Yeah, I bought my house andÉ"
And I actually just saw a paper that just came out andÉif somebody's curious about
it, send me an e-mail. It's like 60 pages. With serious amounts of data.
And prostitutes that are being surveyed through one of these prostitute rating
websitesÉit's like Yelp for prostitutes. And they're making $250 dollars an hour as
escorts. And soÉtaking that into consideration, I hope that it's a risk/reward
relationship that they're interested in. But then there's an entire economics of
prostitution, which is quite interesting in many ways.
But don't Baptist/bootlegger issues involve property right issues, so we couldn't use
them in our paperÉ You can use them in your paper. It doesn't
necessarily involve property rights. I meanÉmaking prostitution legal is propertyÉdoes
that not meanÉ No it's notÉthat's going fromÉremember the
diagram that I said in the start of the semesterÉ
Markets, missing markets. We're talking about missing markets. We're talking
about a missing market. Because the market has been turned black.
Well you mean missing marketÉwe can identify a missing marketÉit's prettyÉ
Well what's going on with the whole Baptists/bootlegger thing is that they're taking
a market and making it missing in order to turn it into a blackmarket, in a way. I
meanÉmissing markets are more of environmental goods and stuff like that, but
going from a market to a black market is kind of like adding massive transaction
costs and making it inefficient. So we're talking really about changing the dynamics
of an existing market. I think that that's wrong. It's not missing. It's changing the
dynamics of an existing market, and increasing transactions costs.
Changing market power, that's what's really going on as far as drugs and
prostitutions and stuff like that. What you guys might be concerned about in
your briefing are missing markets, maybe, because maybe all of us should be benefiting
from environmental regulation for legislation to stop the world from warming
up. But there's a lobby from the energy companies that are allowed to sell
energy. I meanÉtheir business is selling carbon. Shut down my businessÑI lose money.
So they have an incentive to block legislation that reduces the use of carbon.
Any other questions on the Baptist/bootlegger stuff? I'll get to principle
agent. So you're trying change the behavior of consumers
by changingÉ I am not trying to change the behavior.
But it seems like the productsÉor whatever the issue isÉthey're inelasticÉ
Right. That's a good question. Are we changing the demand of consumers? When
I wrote this up, I just had the demand function sitting here. There's clearly
a shift in for demand when you make something illegal because some consumers do
not have the taste of consuming illegal goods. And on the other hand, some
of them do. Teenagers and smoking. Oh it's illegal! Can't wait to do it.
It's dubious how that's shifting demand. I'm just taking that as given, and I'm
sayingÉwe're talking about supply shifts. Because when you eliminate all the retailers,
your shiftingÉaffecting the supply, right? And just looking at that and holding
demand constant, you can make an analysis.
So for our briefings, are we supposed to be appealing to the Baptists?
I said you canÉthe Baptist/bootlegger dynamic would tend to be going against what
you're writing in favor of Doesn't everyone want to be like the good
guy? [Yeah] like I want to fight this bad thingÉif a politician does something against
that thenÉThey should be appealing to me.
You can use this mechanism. You can use this technique to advance your cause but
remember that your cause is this. You're trying to max this. So if you shift it in,
you're going the wrong direction. But the people that you're fighting against will be
trying to shift in. They will be trying to cut supply so they can benefit from it.
As the exampleÉBaptists and bootleggers, right? The businesses areÉ
Actually it's the same kind of shift. If you have carbon legislation, then you might be
shifting in, but you're increasing costs essentially through a tax or whatever. So
those people might be upset about selling less carbon. So it's the same shift in that
the special interest will be fighting against. But then there's also the distribution
inside of this pie. It is very, very common in politics. And that's
alsoÉyou can address these issuesÉany combination of issues. But your
whole goal really is how do I do something that's going to have a net benefit
on social welfare despite the interests of a special interest group?
I have a questionÉI'm not sure if it's a Baptists and Bootleggers example, but likeÉif
you have a situation where it's like an environmental legislation, like a section of the
forest is preserved due to the environmental concerns, but that eliminatesÉlike a
person introduces a population living there that needed that forestÉbut in a way it's
like bootlegging because you have got the government or the police involvedÉthen it's
likeÉyou create some form of corruption and bribery to let people use the forest or not
eat the forestÉI don't know if it's directly a Baptist and BootleggersÉ
That's a good example, and I think that fits in with the Baptists and Bootleggers
example. What happens is (this is a very common problem). You're going to have a
beautiful nature area, and you're going to haveÉand there's going to be an
indigenous population living in there. And they're going to make a national park out
of it. And they follow the US national park model, which is that no people are
allowed inside, and it has to be pristine without people. So people all move outside,
and in the worse case scenario, they are hunter-gatherers, then they have no source
of income anymore, right? They've essentiallyÉthey have no property rights. It's
been taken away by the government. And thenÉmany things can happen. One is
that they just are poorer and suffer. And another one is that they go in, and they are
now illegally doing what they used to do. But because it's not their property anymore,
they don't care about being sustainable. So they will poach animals, or they will overharvest
trees, or whatever. But the typical situation that's even worseÉis that
the army (or whoever's guarding it) will also really get into poaching, or really getting
into cutting down trees. I know this is a huge problem in Nepal. Part
of the civil war in Nepal was being fought over access to the forest and stuff
like that. Also happens in Africa a lot with all of their
national parks. We've got to keep it for the Zungus. Muzungus? The Swahili word for
white people is Muzungus, I think. Anyway. All the white people are going to
come in and pay $50 to go to such and such a safari, and all the locals are kicked
out, and their going to be likeÉmuch poorer. And all the muzungusÉbut the local
people are not benefiting. All the proceeds go to the central government. The
central government is corrupt, and you know it's this horrible cycle. So that happens
a lot in natural resources especially. It will happen with fisheries. The government
of the West African countries will sell the right to fish in the EU which has already
fished all of their seas. And they'll come in and exploit the West African fisheries.
All the fishermenÑout of work. But instead of going out three kilometers to fish,
they have to go out 50. So they're spending all this fuel going back and forth,
and they can't even eat. And all their fish are going on a fish processing
ship to go to fish and chips. And the governments are taking the money for their
permits, and not giving it to the people (which is their natural wealth) because they're
buying corporate jets and Swiss bank accounts.
It's just horrible, it drives me crazy. So let's say that this is our issue for the
briefing, the politician will essentially try
helping the indigenous? That's what our goal would be?
In a sense, yes. What you would want to do is you would want to doÉif it's a status
quo situation, then you might want to maintain it against the special group that
wants to log the forest, for example. Or, you might want to sayÉhow can we
monetize this forest? This is a very big topic in carbon (in the climate change,
right?) how can we monetize the forest? And you might say, "WellÉwhy don't we
give all of these guys property rights so they can collect the money from the forest
not getting cut down? But then you're going to be fighting against the constituency
that's going to want to eliminate those owners and turn it into a managed reserved
that's going to get clear-cut. And there'll be fraudulent certificates that are sold,
and all kinds of crap. I mean, in a sense, there's
unlimited material in the news right now about how almost every kind ofÉa lot of these
failures are coming back to this, essentially, special interest dynamic.
But aren't the Native Americans a special interest group. Why aren't they a special
interest group? Well they were, but they got destroyed in
many different ways. But let's just say we take this situation
where they're living in the National Park, and
there's a company trying to log it, or you try to block off the are or keep it for them
without destroying the national park. So you're benefiting the native American at the
expense of the logging company, at the expense of the consumer, who would have
cheaper goods if the logging company increased the supply after logging.
Who owns the national park? It's government property.
Why are the natives living on government property. Well, I meanÉeverything is government property.
I'm living on government property. Ah. Okay. Start over; we're back to ground
zero where the government controls everything, and there's some special interest
group called Native Americans who want to live there (what you're saying)
Right. So we have to fight against this special interest
group. What I'm saying is how do we act in this situation
without benefiting some special interest group? Everyone's a special interest
group. Ah. How do youÉyeahÉbroadly defined.
My questions was more likeÉcould you give me a definition of special interest group
so I have a better idea of what I'mÉ
Here's a good question. Let's look at the dynamic of this for a second. Let's look at
what's going on. We won't use this. Let's say thatÉthis is the sum total of social
welfare just nowÉunder status quo conditions. Now let's say thatÉyou can go one of two
ways. You could either go over here as a policy that destroys overall welfare but distributes
a lot of it to special interest groups. In a sense likeÉoh, let's clear-cut
the forest. The clear-cut forest is worth a
lot less than the alternative policy, which is to monetize that forest.
And a special interest piece of that pie (let's make it smaller)
The special interests are getting a small piece of a much larger pie. And this is us.
So its okay to benefit a special interest group as long as society benefits more than
the special interest groups. In a sense, it's okay to benefit a special
interest group as long as overall benefits are
greater. So what you want is you want to get to this kind ofÉ
So we're not going to shoot all our special interest groups because that's kind of like
shooting ourselves, right? Everybody's a special interest in some way. People are
out there lobbying for school feesÑspecial interest group.
So what we want is we want the pie to get bigger, period. And we want the share of
wealth that goes to us (we the people). We want that share of wealth to be greater.
So maximize social welfare, and maximize distribution to the general public.
Special interest groups will always be around. They might beÉbut the thing is the
special groups will clearly fight against this because why? Why would special
interests fight against this? They're not getting much out of theÉ
That's right. They're getting more goodies out of this one. They don't give a shift
about everybody else. That's the whole US Sugar Policy is to do exactly like that. We
pay double or triple the world price for sugar. And it helps those little special
interests, and it harms all of us to the tune of only $1 a year.
But a dollar per American is $300 million going to the thousands of people living in
Florida and Louisiana. And destroy the bijou, by the way.
Going back to the readings, Olson's reading? Olson's talking about the first smaller pie.
And Ostrom is talking about the biggerÉis thatÉ
Lynn Ostrom is talking about how do we get to this kinds of situations through
dealing with those collective action types of dynamics. If you want, Mancur Olson is
kind of like of the pessimist. Like oh my god, everything's going to fall into a
disaster. And he's been proven right a million times, right?
But Lynn Ostrom is kind of like the optimist. It's likeÉwell lookÉwe don't have to go
that way, right? If you know Lynn Ostrom, you thinkÉthe only thing you can do is
privatize everything. But she's like into community management. But I mentioned
in the briefing explicitly. You cannot wait for the community to involve. Because
some of Lynn Ostrom's prescriptionsÉnot prescriptionsÉthe stuff that she studies
takes years to evolve, right? You're talking about an election cycle. You can't wake
up and care about everybody. And you can't evolve a whole bunch of social norms
or new religions or whatever. So back to this example, wouldn't it be a
larger benefit for like the public, perhaps, to
use the forest for production andÉ It might.
Because it could benefit consumers, and so then they pay less than the price forÉ
Unless all the wood gets sent to Japan. The world. It could. The value of the
standing forest these days tends to be higher than the cut forest. We haven't done a
lot of dynamics of natural resources, but the future tends to matter.
I feel likeÉeven though it would give more benefit to consumers and what not in the
short run, I think the long run the costs are a lot greater. And especially with like
the environment more than anything is like a capped
resource. You can't go past a certain amount. Because then all the forests wouldÉ
That's fine. Take the long run into consideration. I want you to consider long term
social welfare, which is longer than an election cycle. Otherwise we'd chop
everything down every two years, right? This is more of a general question for special
interest groupsÉso is the general theory that special interest groups are interested
in getting the bigger share in absolute terms, or are they interested in getting a
bigger share than anybody else becauseÉI guess that's not so rational. That's notÉsome
people might prefer to have $80 and everybody else have $60, rather than everybody
having $100. Right. Those are two different dynamics. The
one that we're talking about is having an absolutely bigger share. This is this one
here. But when you look at people and their psychology
of positioning themselves, it's fairly well established that when you give
people a choice between this and this, they will prefer this. It's troublesome but
it's human. Which for the special interest group, in that
case, would still prefer the smaller circle where they get _, even though they haveÉ
Right. So both of those dynamics are in concert in that situation. And that's okay.
you can use those turbo powered incentives if you want to.
Okay so my question is with the "and still get elected" part. So are you assuming that,
by benefiting the average citizen, which is a bigger population than the special interest
groups, that you will get reelected because you're benefiting them, or that you're just
going to pick those special interests groups off, and there's all this corruption going
on,a and they won't be realÉ When I talk about elections, you have to consider
the dynamics of reelection, which are essentially driven by money.
So if you do something that benefits every American to the tune (say you're running
for President, or whatever.) Every American is benefitting to the tune of $5.
And then the logic of collective actionÉ And then there's a special interest group,
and they're getting five million dollars per person. And you think about the problem with
election, which is essentially fundraising, and getting everybody to even
notice that they're $5 better off. Let alone donate that money to you.
Hey, let's just share it, give me one dollar. So then there's a problem ofÉwhich Olson
discussesÉwhich isÉin the special interest groupsÉnot only do they get more
money, but they can coordinate to move that moneyÉthat wall of money.
It might be smaller in total (in fact, by definition, it's almost smaller in total).
So they might haveÉsay that all Americans have 300
million in benefits, and the special interests have 20 million in benefits. And
they can kick in 10 to the politicians (to the opposition right?).
And the otherÉall the Americans kick in only 5, then this politician will beat this
politician here. And that's our politician.
Unfortunately, right? So you got to get this guy reelected. And this is a very, very
common dynamic as well. Basically you get themÉyou give them more
money. And that's what you come up with. How do I
get them more money? How do I get them reelected?
They can get reelected through any means except for likeÉdeclaring dictatorship.
Does that answer your question? This is a very common problem in politics. Even if
elections are not fixed, which are a different problem.
It seems like a lot of the dynamics of reelections depends a lot on special interest
groups, soÉbutÉin this problem, we're supposed to not benefit special interest groups.
This is Berkeley; we're going to change the world. Think big, think pictures.
With the policy, what if I know I'm going to be benefiting them in the long run. Like
one unitÉin ten years the all pay auction will be different. But will I still get reelected
with that? If they read you're briefing and do what you
say, they will get reelected. That's your job.
To convince the public that it's worth it now?
Right. And you can use any legal maneuver as far as I'm concerned. Any rhetorical
maneuver. Doing the right thing is not really a rhetorical maneuver, but you can try
it. I'm going to move along for a minute and keep
going on principle agent stuff, which is all related to the same topic.
I just wanted to discuss microfinance. So microfinance: who's heard of that concept
before? Who's heard of Mohammed Yunos? Winner of the peace prize? Deserving
winner of the peace prize? Maybe Obama should win it in 10 years. But anywayÉ
Yunus is a guy from Bangladesh who ironically was an economist who won the
peace price. And his whole idea was called microfinance. And it just means small.
And basically what he thought of a long time ago was like isÉwow look at all of
these small entrepreneurs. I bet they could use a loan to increase their business.
Because theyÉtheir capital is starved. Another person who's big on the whole
starvation thing is a guy named Hernando de Soto from Peru. And Yunus saidÉif
I've got a lady who's got a kiosk who's selling biscuits and cooking oil, if I give her
$20, she can potentially double up her inventory and double her profits, and pay
back the $20. So I will finance her with a little microfinance. I'll give her $20.
So the problem with a loan like that is that you create (essentially) a principle agent
relationship. You've got the borrower, and the borrower is going to have 2 issues as
far as the lender is concerned. What are those two issues? Jargon?
Moral hazard. What's the other one? Adverse selection, right? So we have problems
with adverse selection and moral hazard.
And when you're giving somebody a $20 loan, do you have time to go and talk to
that people's people and figure out if they're a good businessperson? do you have
time to monitor them and make sure they're booking all their profits appropriately?
Yes or no? No.
No. The transactions cost of making that loan
is too high. You might be making $2, and in order to do a proper evaluation and monitoring,
it might cost you $20. You don't even make any money to lose your capital.
So the Grameen bank, which is the bank that Yunus started, figured out how to solve
that problem. Does anybody know? He loans in groups of five, so when they're
organizing in a group they're accountable to each other
A group. Yes, go ahead. So that they're accountable to each other.
Because it's like you have community values where you have a tiny community where the
women don't want toÉbecause it's like if one person doesn't payÉthe rest of the groupÉ
So let's stop there and go over what happens. So what Grameen bank did, is they (and I'm
not sure if they were the first, but they are the most famous for this) is they do what's
called group lending. And it turns out that this idea is a very old idea. There's
thisÉin some cultures what happens is you'll get ten of your friends together, and
every month everybody puts in $10. And every 10 months, you get the $120. It's kind
of a forced saving scheme. So you're essentially getting liquidity (each person)
by turns. Because it turns out that $10 a month is not nearly as handy as having $120
all at once. Group lending works in a slightly different
way. You get 5 people that are jointly liable for the loan. And the key is that these
five people are self-selected. So if you want a loan for the Grameen bank, you sayÉI'm
here with four of my friends. All of us are going to apply for this loan. And all
of us are going to guarantee repayment of this loan.
And we know that if we do not repay this loan, we know that we will not get another
loan (ever) from this bank. So what happens when you haveÉwhat happens as far as
adverse selection is concerned? How does this fix adverse selection? Think
about if you, yourself, were in this situation. Who would you go to the bank with
if you were getting a loan? The people you trust the most. Are you going to go with
your deadbeat friend who forgot to pay you back 4 weeks in a row for the bar tab?
No. They're still your friend, but they're not going to get a loan with you.
So this fixes the problem of adverse selection. And then what happens in terms of
repaying that loan? Your friends will pressure you to pay back
the loan? Your friends will kill you. The loan officer
can't kill you, but your friends can. So I'm sure they're going to be likeÉyou knowÉI'm
sure there's like a Facebook app called "pay me back" right?
So they've got moral hazard taken care of because the friends are all monitoring
each other. If you've got that little kiosk, and you're taking every other thing of oil
home, and all you're friends are likeÉwell it looks like their selling a lot of oil,
and you're like, "No, I'm just making a lot of
French fries. Boy they're yummy. Thank god you pledged your money on my French fry
eating." Your friends are going to get on your ass.
So these are the two key components of group lending. It did not hurt that YunusÉthe
Grameen bankÉemphasized this loan to women.
As is true almost all the time in development economics, trusting women is a much
smarter idea than trusting men. Because the menÉthey get the moneyÉthey're like,
"Oh! Party! Let's go drinking!" Right? The women are likeÉthey have to take care
of the kids, themselves, and all that kind of stuff. So the big one was the group lending.
The secondary benefit is running these loans to groups of women. They don't
discriminate based on gender. But they targeted women. And it turns out that phase
IIÉthe Grameen bank is actuallyÉ It's not the people who need loansÉit turns
out they actually need a place to save their money. They need banks.
And in some cultures they need to save the money because if there is money there, it
belongs to all of us. It's like way worse communism than what we have in this
country, right? If you go to a typical American family, and
it's likeÉmother and dad are thereÉit's like, "Oh, you've got $20. Give me your money."
Right? And the kid's like, "No way, that's my money! It's my bank account!" or
whatever. But in these other countries that have more communal traditions, where
all's share and share alike, it becomes very difficult to save money if your cousins
keep running by and raiding the cash box. Let's stop there. And see you guys on
Thursday. Office hours right now.