Author Archives: Milo King

Empirical Problems with the Hobbesian Account

Posted on by

In two recent posts, my co-blogger Michael Tontchev has been criticizing some of the theoretical underpinnings of Hobbes’ “state of nature”. I would also note the empirical evidence against the notion that property and organization is impossible without a centralized State.

In “The First Property Rights Revolution”, Samuel Bowles and Jung-Kyoo Choi claim that individual property rights emerged thousands of years before States did (p. 1):
Hobbes’ state of nature is a valuable thought experiment, but taken as history (which Hobbes did not) it is deficient…. First, individually-held property rights in land, its produce, and other sources of people’s livelihood emerged with the domestication of plants and animals starting around 11,000 years ago, while in most cases states developed many millennia afterwards. Recognizably modern property rights existed in these newly agrarian societies without the assistance of states. Among fishing people and other sedentary foragers, individual or family-based property rights appear to have existed even before the advent of domestication.

They continue, describing the alternative mechanisms usually employed to secure property rights by pre-State humans (p. 1-2):

The second historical shortcoming of the Hobbesian account is that it is quite unlikely
that Hobbes’ state of nature ever existed. For most of our history as biologically modern humans – roughly the 100,000 years prior to the advent of agriculture – social interactions were organized without the aid of institutions even remotely resembling contemporary states or private property in land or the other sources of people’s livelihoods. They apparently did not, however, suffer the chaos of the Hobbesean [sic] state of nature. Rather, in all likelihood, beginning as early as 100,000 years ago in Africa and later in other parts of the world, these groups were organized in a manner similar to a subset of the modern mobile hunter-gatherers described in historical and ethnographic accounts, their lives regulated by social norms enforced by collective punishment of miscreants.
Indeed, much of the motivation for recognizing property norms is likely genetic, as Jeffrey Evans Stake argues in “The Property ‘Instinct’ “:
Evolutionary theory and empirical studies suggest that many animals, including humans, have a genetic predisposition to acquire and retain property. This is hardly surprising because survival is closely bound up with the acquisition of things: food, shelter, tools and territory. But the root of these general urges may also run to quite specific and detailed rules about property acquisition, retention and disposition. The great variation in property-related behaviours across species may mask some important commonalities grounded in adaptive utility. Experiments and observations in the field and laboratory suggest that the legal rules of temporal priority and possession are grounded in what were evolutionarily stable strategies in the ancestral environment. Moreover, the preferences that humans exhibit in disposing of their property on their deaths, both by dispositions made in wills and by the laws of intestacy, tend to advance reproductive success as a result of inclusive fitness pay-offs.
 
Of course, evolutionary behaviors also guide the State’s legal rules, but it is still significant that humans (and other species, for that matter) possess instincts leading them to behave with greater ingrained respect for property ownership than Hobbes might suppose they would.
 
On a similar note to Stake’s arguments, Bryan Caplan discusses Herbert Gintis’ “The Evolution of Private Property”, and notes that black markets are a significant example of property rights existing not only without government enforcement, but with active government opposition.
 
Finally, it is worth noting that Bowles is a neo-Marxian, and Gintis has Marxist leanings. One need not be a classical liberal to observe problems with the usefulness of Hobbes’ model in the real world.

Concealed Carry License Fees: The Case for Abolition

Posted on by

Currently, all states in the US offer some type of public license to carry concealed weapons (although, in practice, some states rarely grant such licenses). Licenses generally come with fees in the $50-$100 range; for exact details, see this list of state laws on the matter.

However, are concealed carry license (CCL) fees actually an efficient policy? It doesn’t seem so. The marginal cost to the issuing authority of granting a permit is essentially just the cost of paperwork, and is very close to zero. Training costs, in states with training requirements, are imposed upon the applicant, and so are not part of the marginal cost of the issuing authority.

Of course, the next concern would be the social costs and benefits of issuing concealed carry permits. The primary social costs and benefits in this case are the impacts of concealed carry laws on crime rates. There is substantial debate on this issue, sparked in large part by the Journal of Legal Studies paper “Crime, Deterrence and the Right-to-Carry Concealed Handguns” by John Lott and David Mustard, and by the various editions of Lott’s book, More Guns, Less Crime.

However, the debate over effects on crime rates is almost completely between those claiming that concealed carry reduces crime, and those who claim it has little or no effect. As noted in the paper “Trust But Verify: Lessons for the Empirical Evaluation of Law and Policy” (page 3):

There have been a total of 29 peer reviewed studies by economists and criminologists, 18 supporting the hypothesis that shall-issue laws reduce crime, 10 not finding any significant effect on crime, including the NRC report, and [Aneja, Donohue, and Zhang]’s paper, using a different model and different data, finding that right-to-carry laws temporarily increase one type of violent crime, aggravated assaults.

Note: There was a footnote marker at the end of the phrase “including the NRC report”, which corresponded with a footnote reading: “Although one member of the Council concluded that the NRC’s own results indicated that shall-issue laws reduced murder.” This refers to James Q. Wilson’s dissent in a National Research Council report on the matter; the latter did not find discernible effects on crime rates.

In fact, John Donohue, a major opponent of the Lott-Mustard hypothesis on concealed carry, said in the Chronicle of Higher Education that, “No scholars now claim that legalizing concealed weapons causes a major increase in crime”. (The link here is paywalled, but the quotation has been cited in numerous other places.)

Given all this, it appears that the social cost of issuing CCLs is either negative (if concealed carry reduces the costs of crime) or zero (if it has no effect). Furthermore, the private marginal cost of issuance is nearly zero.

And the private benefits of CCL issuance are also substantial. There are roughly 8 million active permits as of recent, and revealed preference tells us that concealed carriers value having licenses. Political lobbying for expanded carrying rights is another sign that many people value the right to carry guns.

In summary: The relatively high fees imposed on concealed carry licenses are a case of inefficient monopoly pricing, and, under a traditional welfare analysis, should be abolished or possibly even made negative to account for social benefits of concealed carrying. This also tells us that the current number of people licensed to carry guns is below the optimal level.

A Bad Argument Against Secession

Posted on by

In the United States, there have been recent calls for secession of various states, including some in the South. A common response to proposals for Southern secession is that most Southern states receive more in federal spending than their inhabitants pay in federal taxes. (For examples, see the Google search results for the phrases “secession” and “more than they pay”, “The Sanctimony of the South” by Gram Slattery, and “What seceding from the U.S. will cost you”, among many others).

The argument is that, since these states are fiscally dependent upon the federal government, they would be foolish to secede, and, according to Mr. Slattery, engaged in “sanctimonious whining” to even argue for doing so.
The problem with the argument as stated, and a significant problem at that, is that there exist other benefits and costs to secession besides those related to fiscal transfers to and from the central government. Fiscal transfers are only one issue among many, and there is good reason to think that, despite losing fiscal support from the federal government, seceding states could benefit heavily from secession. Some reasons are as follows:

  1. Tax haven status: Free from the United States federal tax system, states could choose to become tax havens for wealthy individuals and corporations. Such could offer substantial benefits to the local populations from revenues on the relatively low taxes imposed on foreigners moving in, increased local investment, and other benefits of immigration (see the item on “immigration policy”).
  2. Regulatory policy: Various businesses might wish to incorporate in the United States due to familiarity with its legal system, language, and business culture, but wish to avoid onerous regulations. States which seceded and proposed more friendly regulatory systems could benefit substanitally from foreign investment. For some, this invokes the image of smog-spewing factories located just outside the US border, but if the secession were on amicable terms, the seceding state could agree to impose some kind of Pigovian tax on pollution and remit funds to the US government as compensation for cross-border emissions.
  3. Immigration policy: Many right-leaning Southern states might impose restrictive immigration laws upon seceding. Indeed, I would not support such policies. However, seceding states could instead decide to expand legal immigration, possibly as part of a strategy to ease their fiscal burdens and repopulate dying cities. Former New York City Mayor Michael Bloomberg actually suggested that the federal government allow increased legal immigration to Detroit to encourage economic development. Seceding states could pursue such policies freely. A variety of benefits to immigrant-receiving areas exist, including windfalls in the value of developed land, increased division of labor, revenues from immigration taxes, and numerous others.
  4. Other economic and non-economic benefits of increased autonomy: The freedom to conduct “policy experiments” is quite valuable. States with residents opposed to the War on Drugs could decriminalize or legalize drugs without the fear of federal intervention. Liberal states in the Northeast could secede and impose all kinds of policies that would otherwise stand no chance against Republican opposition in Congress. Residents of seceding states might appreciate their greater individual influence over issues previously handled by a central government.
It is also worth noting that one of the states with a prominent secession movement is Vermont, which pays a fair amount more in federal taxes than it receives in spending. It would be amusing to see the anti-secessionists accuse Vermonters of greed instead of foolishness for wanting to leave!
Certainly, a host of other issues would arise, such as how to handle federal infrastructure and land, how immigration and trade between seceding states and their mother countries would work, and the possibility of mutual defense agreements, among others. But such issues have been resolved in previous secessions, including the one which created the modern United States. To merely bring up the “fiscal transfers” argument as though it ends all debate on the matter does gross injustice to an important issue.

A note on Walras’/Say’s Law, monetary equilibrium, and aggregate demand

Posted on by

Very often, people seem to confuse Say’s Law (or the closely related Walras’ Law) for the proposition that nominal spending doesn’t matter, or that aggregate demand shortfalls and excesses cannot occur. As I shall demonstrate, however, its clear implication is the opposite when one considers the case of money as a tradable good.

Imagine an economy in which money and goods are exchanged for each other. (Multiple different types of money can exist, although this does not change the outcome.) Many of the trades made involve money being traded for other goods. However, money is still “supplied” and “demanded” in the same sense that any other good is, and has a “price” in terms of other goods. Thus, there exist states of monetary equilibrium and disequilibrium.

Monetary disequilibrium exists when, at a given real value of the monetary unit, the the real quantity of money the public demands to hold (and is willing to purchase by selling other goods to obtain money) is not equal to the real quantity of money actually provided. As Walras’ Law implies, a shortage or surplus of money is matched by a surplus or shortage (respectively) in all other goods collectively, as measured by the market value of said surpluses and shortages.

So what, then, does monetary disequilibrium imply in terms of nominal spending? When a surplus of money is held (in real terms), there exists a shortage of other goods to be bought with money, and the public seeks to reduce its real holdings of money by increasing nominal spending of held money on goods. Such a situation is that of an excess of aggregate demand.

Conversely, when a shortage of money is held (in real terms), there exists a surplus of other goods to be bought with money, and the public seeks to increase its real holdings of money by decreasing nominal spending of held money on goods. Such a situation is that of an aggregate demand shortfall.

Walras’ and Say’s Laws concern themselves with markets in equilibrium and disequilibrium, and the fact that a shortage of good A in terms of some other good B it is traded for implies that there also exists a surplus of the good B in terms of good A. One need not reject this insight to accommodate the empirical existence of shortfalls and excesses of nominal spending. One must only consider what it is that is actually being spent.

CEO Ownership as an Indicator of Stock Performance

Posted on by

Some time ago, I was going back through old bookmarks when I found this Motley Fool piece by Alex Dumortier on stock returns and CEO ownership. He cites a 2010 paper, which seems to have been updated in May 2013 and titled CEO Ownership and Stock Market Performance, and Managerial Discretion, by Ulf Von Lilienfeld-Toal and Stefan Ruenzi.

The paper generally finds that shares of companies with higher rates of CEO ownership deliver substantial excess returns. As it notes (pages 26-27):

Nevertheless, as an alternative approach, we also examine the returns of a completely passive buy and hold long-only strategy. We consider portfolios that buy into all firms with a CEO who owns more than 10% in the first sample year and portfolios consisting of the top 10% of all firms according to managerial ownership in the first sample year, respectively, without any re-balancing in the following years. The high ownership portfolios always deliver economically large alphas amounting to between 0.84% and 1.15% per month in the value-weighted case and between 0.60% and 0.78% per month in the equal-weighted case. Overall, these results show that even a simple low-cost buy and hold long only strategy based on managerial ownership would have earned substantial abnormal returns.

Some questions I can think of:
 
  1. Most notably, contra EMH, why haven’t investors taken advantage of what seems to be a passive means of substantially outperforming the market?
  2. Why are the effects of CEO ownership strongest in industries with weak product market competition? After all, if CEO ownership increases incentives for managerial competence (or is otherwise a signal of good management), it seems that this should be more useful for firms in more competitive industries. (One possible explanation is that management is more effectively “priced in” in companies in more competitive industries, as investors view said companies as more risky and needing of scrutiny.)

Milo King’s Introduction

Posted on by

Hello, all! I am Milo King, the other author here. I am an undergraduate student majoring in economics and mathematics at the University of Maryland, College Park.

Part of the reason I (co-)created this blog as a collaborative effort was to ensure that I would actually stick to it. Otherwise, I intend to post a variety of different things here: thoughts on economic topics, interesting news items and links to other materials, and questions for readers.

My interests are more macro-oriented than Michael’s, with emphasis on monetary and financial economics. As with him (and probably a fair number of people in the field), though, I also take interest in a wide variety of other topics, including economic history, law and economics, and growth theory, and regulatory analysis.

In any case, I should have some (short-ish) posts up soon to get things going. I hope you continue to keep this blog in your reading list!