Why only two dollars?

The New Yorker, May 2, 2011

Let the Sun Shine In!

We need to listen to serious arguments, even when those making them are paid hacks. We also need to know that they are paid hacks.

Trevor Swan, Unveiled

Trevor Swan (1918–1989) is an economist hero of mine. Even today's macroeconomists rely on the Solow-Swan model of 1956 to organize their thoughts on long-run economic growth. (I have never understood why Robert Solow alone was awarded the economics Nobel in 1987.) The Swan Diagram has been used by macroeconomists -- and still is, when exchange rates are not entirely flexible -- to deduce the combination of fiscal policy and exchange rate policy that is appropriate for given levels of the two big macroeconomic ailments, unemployment and inflation. Swan was also responsible for major innovations in the conduct of monetary policy as a member of the Australian Reserve Bank's monetary policy board.

For quite a while, I have been searching on the Internet for images of Trevor Swan to post on my web site on the history of economic thought, but in vain. It was easy to find photographs of virtually every economist worth listing, but there was nothing on Trevor Swan.

Recently, however, my luck has turned, thanks to Prof. Barbara Spencer of the University of British Columbia, who is Swan's daughter (as well as a great economist and one of the pioneers of strategic trade theory). I had read her paper "Trevor Swan and the Neoclassical Growth Model," co-authored with Robert Dimand, History of Political Economy, 2009, and I knew that she was Swan's daughter. I had hoped to find a photograph of Swan without having to bother her. But, when Google fell through, I finally wrote to Prof. Spencer. I am now delighted to report that she has provided me with what I had been looking for.

The black-and-white photograph of Trevor Swan above was "taken in 1950 at his office after Trevor was appointed the first Chair in Economics at the Research School of Social Sciences [at the Australian National University]. He was only 32 years old." The two color portraits of Swan below were "taken around 1983 - 1985 by the Australian Reserve Bank. Trevor was a member of the bank board responsible for setting monetary policy from 1975-85."

My great thanks to Professor Spencer.

Mr. Mummy!

This is a video profile from today's New York Times of Prof. Bob Brier of the philosophy department of the C.W. Post Campus of Long Island University. The related blog post is here.

Regulatory Relevance of the Value of a Human Life

This post is about As U.S. Agencies Put More Value on a Life, Businesses Fret by BINYAMIN APPELBAUM, a highly informative article in today's New York Times that will come in handy when I teach about public goods later this semester in my introductory microeconomics class.

There invariably are some commodities that businesses may not find profitable enough to produce and sell even though the public may really-really-really need them. This peculiarity arises when a commodity is -- jargon alert! -- non-excludable: that is, the commodity is such that those who don't want to pay for it cannot be excluded from consuming it anyway.

For example, clean air cannot be limited only to those who agree to pay for it, which is why businesses have no incentive to clean up the air we breathe. Protection from foreign enemies cannot be restricted to only those who pay for it, which is why -- Blackwater notwithstanding! -- national defense cannot be provided by private businesses. Broadcast radio and TV are also non-excludable. (Commercial broadcasters do exist, however, thanks to advertising.) The fruits of fundamental research -- think E = mc², or Boyle's Law, or the Pythagorean Theorem, or existentialism -- while essential for human progress, are non-excludable too, which is why profit-seeking businesses are unlikely to invest in such research.

So, it is up to the government to pay for the things we need that businesses won't provide.

However, just because we would benefit from a commodity does not mean that the government should provide it -- costs must also be considered. Only if the benefits exceed the costs would it make sense for the government to step into the breach.

Unfortunately, this cost-benefit analysis can be a very tricky business.

For one thing, to figure the benefits of a public good -- technically, a public good is both non-excludable and non-rival, but I will not dwell on this issue here -- it may be necessary to have a dollar measure of the value of a human life!

Take tornado sirens, a popular example of a public good in econ textbooks. They save lives by emitting a loud sound that warns people about approaching tornadoes, giving them time to reach a safe bunker somewhere. But business can't make money by building such sirens because their services are not excludable: even those who refuse to pay will end up benefiting from the existence of the siren, and, knowing this, most people will refuse to pay.

Therefore, it is up to the government to provide a tornado siren. But such sirens cost money. What if the cost was a gazzillion trillion dollars and the benefit was 2 lives saved per year? Would a siren be worth the cost? Yes, if each human life was worth at least half a gazzillion trillion dolars; no, otherwise.

In other words, for rational public policy, a government would need to have a reliable dollar measure of the value of a human life.

Moreover, as Appelbaum's article makes clear, the rational regulation of industry is also heavily reliant on the government's estimate of the dollar value of a human life. Appelbaum also provides interesting examples of the application of the value-of-life concept to the regulation of auto safety, cigarette packaging, emissions from industrial boilers, etc.

U.S. businesses have expressed alarm that federal regulators have lately raised their value-of-life estimates -- in one case to $7.9 million per human -- because the higher the estimated dollar value of a human life, the stronger the justification for a regulation that restricts what businesses may do to cut costs at the expense of the safety of the general public.

The funny thing is that although federal regulators have recently raised their value-of-life estimates, they did so after a long period of torpor during which they refused to even adjust their estimates for inflation! Moreover, even the top-end estimates of the feds are less than the $8.7 million per human figure estimated by W. Kip Viscusi, the economist who initiated this whole approach to cost-benefit analysis. Nevertheless, the business lobby sees the government regulators as unrestrained and out of control! (By the way, why has Viscusi not won the economics Nobel yet? Are you listening, Bank of Sweden?)

It was during the Jimmy Carter presidency that the use of cost-benefit analysis was enshrined into U.S. law: every regulatory proposal would thenceforth have to come armed with a cost-benefit analysis. At that time the business community had welcomed this rationalization and de-politicization of the regulatory process. Now, however, the tide has turned and the politicians are more eager than ever to suck up to big business. This is why the U.S. Chamber of Commerce is now lobbying for the return of the use of political discretion and control of the regulatory process. As Appelbaum, brilliantly and mordantly writes, "The United States Chamber of Commerce is now campaigning for Congress to assert greater control over the rule-making process, reflecting a judgment that formulas may offer less reliable protection than politicians."

So true! In a plutocracy, the golden rule is that whoever has the gold makes the rules.

January Jones on Jon Stewart: She is Funny Too!

"Collapse Into Now" by R.E.M.

R.E.M.'s new album, "Collapse Into Now," will go on sale in March. If you can't wait that long, check out below the album's first video, "Mine Smell Like Honey." I liked the video -- it's monochromatic, until the very end, when it takes you by surprise and turns into sublimely restful and clarifying color -- and I just love the song.

An alternative version that scrolls the lyrics as the song unfolds is available here. Please also check out a few other sneak peeks into the album: Oh My Heart, It Happened Today, ÜBerlin, and Discoverer.