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What Went Wrong

Okay. I’ve never worked as a tech geek, so I’m speculating from ignorance here. Some of you can probably speak with more authority. Perhaps we’ll hear from the reliably acerbic and insightful Doctor Memory, who knows whereof he speaks on this subject (and several others). But to my uneducated eye, it appears that Arnold Kling has got this pretty much dead-on right: The Obamacare mess “is not a technical screw-up, and it will not be fixed by technical people. It is an organizational screw-up.”

What you had here, among other things (and almost of this is paraphrasing Kling) is:

  • A bunch of people who had never worked in the insurance business appointing themselves executive officers of the world’s largest insurance brokerage.
  • Nobody at the top with the authority to trim features as needed to keep the project manageable.
  • No mechanism for the technical staff to challenge the managers, because all of the management decisions were essentially set in stone before the technical staff — i.e. the outside contractors — came on board.
  • No clear lines of authority and acceptability.

Private enterprises frequently fail, often for one or more of these reasons. But sometimes they succeed, and that’s largely because sometimes they get this stuff right. The government, by contrast, has no mechanism for getting it right. The people at the top are not industry experts, the features are largely determined by the legislative process, which takes place with absolutely no feedback from the tech geeks who are going to have to implement it, the political system pretty much forces you to put the technical part of the project out for bid and to parcel it out among multiple contractors, eliminating any possibility of ongoing negotiation between the managers and the techies, and on top of all that, nobody’s livelihood is on the line.

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Lying Low

Faithful readers of this blog might remember the despicable antics of Senator Sheldon Whitehouse, who, in a televised hearing last June, spent eight excruciating minutes impugning the honesty of a young economist named Salim Furth — because Furth had presented actual data that contradicted a bunch of numbers Whitehouse had made up out of whole cloth. For those who need a refreseher, the entire sordid story — including Paul Krugman’s reprehensible piling-on to Whitehouse’s McCarthyite smear — is here with a follow-up here.

Well, it turns out that Senator Whitehouse is no more interested in understanding the numbers today than he was last June. Last week, the Heritage Foundation held a symposium on the effects of austerity and what the data actually show — the precise data that Whitehouse disputed. In addition to Furth, who has continued his meticulous research on the subject the speakers included illustrious scholars such as Harvard Professor Alberto Alesina. Heritage sent personal invitations to Senator Whitehouse’s staff and to the various journalists who screwed up this story by reporting Whitehouse’s made-up numbers as accurate and his smears as justified.

The result? None of them showed. Apparently Senator Whitehouse’s passionate interest in the austerity numbers tends to cool off when he can’t hog the spotlight, or might risk learning something.

Meanwhile, if you care more about this subject than Senator Whitehouse does, you might want to look at Furth’s most recent report on the subject, or at the data set he’s posted online, or at his most recent blog post calling Paul Krugman to account for misinterpreting some of these numbers.

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Questioning the Fifth Amendment

Our frequent visitor Bennett Haselton emailed me recently with a question about the Fifth Amendment, and I invited him to expand his question into a guest post. Here it is:

Questioning the Fifth Amendment

A Guest Post

by

Bennett Haselton


I have a question that has only provoked a lot of confused righteous indignation in other forums, and I wonder if TBQ readers might have more thoughtful responses, if we phrase it as a logic puzzle.

My question: I don’t see why it’s good policy to give criminal defendants a Fifth Amendment right to silence in their own trial, as opposed to giving them the same rights and obligations as third-party witnesses (who can be subpoenaed and required to answer questions).

Now obviously I’m not saying that the state should be able to torture someone until they confess to something. When I say give defendants the “same rights and obligations as third-party witnesses”, I mean:

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Six Observations

Do correct me if I’ve got any of the history wrong here:

1. It seems pretty likely that a big part of the reason why Amazon’s website works so well and Obamacare’s website works so poorly is that Obamacare, unlike Amazon, is not subject to the discipline of the market (and therefore, for example, employs coders with no equity in the enterprise).

2. A whole lot of people predicted that the Obamacare bureaucracy would not work well because it would not be subject to the discipline of the market. I’m not sure anyone pointed to the webpage as a particular point of vulnerability, but plenty of people made the general observation that large government bureaucracies don’t work well and that this was a reason to be skeptical of Obamacare.

3. Paul Krugman pooh-poohed those concerns.

4. Paul Krugman reminds us approximately 914 times per month that only a very bad person would fail to acknowledge accurate predictions of his adversaries. (It’s true that in approximately 914 of those 914 cases, the vindicated adversary is Paul Krugman. But he has indicated support for the general principle.)

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A Novel Example

Yesterday’s post on the problem with novels was initially badly garbled due to an html coding error. It’s fixed now, but since the original version managed to confuse some people, let me offer an example (which you can also find in the comments on the original post).

Light in August, which has already been written, is available for about $8. It’s worth $9 to me. If I download a copy, $9 worth of social gain is created (a $1 gain for me, and an $8 gain for the estate of William Faulkner).

Now a contemporary novelist, say Sara Gruen (to pick a very good one) comes along and realizes that with $8.50 worth of effort, she can write a book for which I’m willing to pay $10. By offering it at $8.99, she induces me to read her book instead of Faulkner’s, and clears a 49 cent profit. Total gain: $1.01 for me, and $.49 for Sara, or $1.50.

(Of course Sara Gruen does not write books just for me, but she might well expend $8500 worth of effort to write a book for 1000 people like me, whereupon all the numbers scale up.)

In other words, by writing a very good novel, Ms. Gruen reduces the social gain from my reading habits from $8 down to $1.50.

That’s exactly the sort of thing that economists generally believe should be taxed. In fact, a perfectly analogous argument constitutes the entire case for taxing polluters.

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AAGGHH!

This morning’s post on the market for novels was marked up wrong, and as a result it jumped from the middle of the first paragraph to somewhere around the fourth, probably making it pretty hard to follow. It’s fixed now.

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When a Good Novel Is A Bad Thing

Edited to add: The original version of this post was marked up wrong, causing it to jump from the middle of the first paragraph to the middle of the fourth. That presumably made it seem pretty incoherent. It’s fixed now. If it made no sense to you before, I hope you’ll give it another shot.

**************************

If you read a novel a month, then Anthony Trollope, Philip Roth and William Faulkner (my three current favorites) should be enough to get you through the next 8 years. At that point you can start in on Dostoevsky or (if your memory is like mine) go back to the beginning and it will all seem new again.

There are in the world, far too many superb novels to read in a single lifetime, which makes it pretty hard to justify writing new ones. Even the best of contemporary novelists might well be more usefully employed as, say, an exterminator.

Yet successful novelists receive great rewards that encourage them to continue writing. That’s what we call a market failure — a case where price signals have failed in their mission to direct resources (in this case the novelist’s time and effort) to their most valuable uses.

You can, for example, get the Kindle edition of Faulkner’s Absalom, Absalom! for about $8.50. For the same $8.50, you can get the Kindle edition of, say, Sarah Gruen’s Water for Elephants. Either way, you’ll read a terrific book. But if you fork over $8.50 for Gruen’s book, she and her publisher get the message that they’ve given you at least $8.50 worth of value, and they should keep it up. That’s an illusion, because it ignores all the value that was lost when you bypassed the Faulkner.

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Public Service Announcement — Instructors’ Manual

If you are an instructor using the new 9th edition of my book Price Theory and Applications, you might share my frustration at the fact that Cengage, for reasons presumably related to its ongoing bankruptcy proceedings, has still not managed to release the instructors’ manual, though its been ready for several weeks now.

Fortunately, not too many instructors are affected, since most are still using the 8th edition (we expect most instructors to switch over starting in January, 2014). But if you are one of those instructors, please do email me (you can click on the “contact” tab at the top of this page) so I can send you copies of at least the first several chapters to hold you over until Cengage gets it act together.

(Note that this offer does not apply to students! Your email must come from a recognizable college or university address, where I can check via the web that you are currently teaching this course!)

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They Got It Right

I have no time to blog at length, but Fama, Hansen and Shiller are brilliant choices.

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Friday Followup

Tuesday’s puzzle was hard, though our commenter Bennett Haselton nailed it. In case Bennett has nothing else to work on this weekend, here’s a much harder version.

Once again, Alice, Betty and Carol each has a postive integer stamped on her forehead. They know that two of the numbers add up to the third. This dialogue ensues:

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The Compassionate Science

I’ve said this before and will say it again: Part of the reason I love economics is that economics is the compassionate science. It’s the discipline that requires us to think hard and to care about how policies affect everyone, not just the people who happen to be standing in front of us.

The response to the government shutdown has been as good an example of this as any. Nothing but a garguntuan failure of empathy can explain the chorus of voices insisting that the shutdown is a bad thing because government employees might lose their paychecks. It takes a mighty powerful set of moral blinders to care so much about the recipients of those checks and so little about the taxpayers who fund them.

It gets even uglier when that same chorus of voices responds “But the government employees are poor and the taxpayers are rich!”. Put aside the question of whether that’s true. If your goal is to transfer money to the poor, and if the poorest people you can think of are government employees, then the well of your compassion is truly dry.

Argue if you must for transferring income from the rich to the poor. But to turn that into an argument for transferring income from the taxpayers to the employees of the government, there are a couple of billion poor people you’ve got to willfully ignore.

When I blogged about this issue earlier this week, we had one commenter — a personal friend, actually, and someone I’ve been surprised and delighted to see showing up in our comments section from time to time — who broke my heart by pointing to the pain of Capitol Hill coffee shop owners who are losing business, apparently oblivious to the fact that taxpayers also visit coffee shops, and that for every dime not being spent by a DC bureaucrat, there’s an extra dime available to be spent by a Nebraska farmer or a New York cab driver. Our commenter apparently remembered to care about the guys selling coffee in DC but forgot to care about the guys selling coffee in Nebraska.

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The Sky Won’t Fall if the Ceiling Holds

Paul Krugman proffers a trademark sneer to the “default deniers” who are “asserting that the government can prioritize, so as to avoid a default on interest payments”. Not so, says Krugman, who insists that

The crucial point here is that even if they’re right about interest payments — which is unclear — the government will (a) still go into default on obligations to vendors, Social Security recipients, and so on (b) be forced into spending cuts so large as to guarantee a recession if the standoff lasts any length of time.

Well, first of all, as I wrote the last time the debt ceiling got raised, it’s easy to cover all of the interest on the national debt via spending cuts. At least to a rough approximation, you could do it by eliminating the Departments of Commerce, Agriculture and Labor, none of which should ever have existed in the first place.

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Tuesday Puzzle

Here’s a puzzle I hadn’t seen before. I’m concealing the source to discourage Googling, but will give credit where it’s due in a couple of days.

Alice, Betty and Carol each has a positive integer stamped on her forehead. They know that one of their numbers is equal to the sum of the other two. They proceed alphabetically around the table, each one either announcing her own number (if she’s managed to figure it out) or announcing that she doesn’t know it.

The game proceeds as follows:

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The Sin of Wages

How dire is a government shutdown? Respectable people have made respectable arguments on all sides of that issue. But there’s nothing respectable about the chorus of voices pointing to the pain of furloughed government employees — and pretending this is a reason to end the shutdown, whereas it’s clearly a reason to prolong it.

The more painful the furlough, the more overpaid the worker must have been in the first place. People who are paid fair market wages don’t get nearly so upset about losing their jobs — or losing a few weeks of work — as do people who are paid more than their skills reasonably command. Of course there’s always pain associated with an unexpected disruption in your work schedule, even if when your wages are entirely reasonable. But cries of extreme pain amount to admissions that these workers have been ripping the public off for years.

Even without that observation, the pain of interrupted wages cannot by itself be a reason to restart the government, because it is exactly offset by the relief of those who pay those wages.

To make an honest argument in favor of a government operation, you’ve somehow got to point to the social benefits of that operation. In some cases that might be easy. In other cases, it’s hard but possible. But those who shirk the task completely, by focusing not on lost productivity but on lost wages, are just making themselves ludicrous.

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Correcting an Oversight

Listening to talk radio on the way into work this morning (I know, I know, there are better things to listen to, but since Sirius/XM has pretty much made the Broadway channel unlistenable —- something I’ve been meaning to blog about — I’ve been floundering around lately), I heard a gentleman complain that the government shutdown is hurting his business — because nobody’s available to issue the export licenses that he needs to ship goods abroad.

Oddly, it seems not to have occurred to this gentleman that his problem emanates not from the parts of the government that are shut down, but from the parts that aren’t. If the government were really shut down, there’d be nobody to enforce the export-license requirement in the first place.

(And just to anticipate the worst possible misreadings — yes, I am aware that in the absence of any government at all, this gentleman’s business, with its reliance on contracts and property rights, might not exist in the first place. That doesn’t change the fact that his immediate problems are being caused by too much government, not too little.)

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Animal Identification

A visitor has recently come by my neighborhood, and I’ve snapped a few pictures. What kind of creature is this? When he walks, he (or she?) looks (to me) like a coyote, but when he sits, he looks like a fox. My wife, whose graduate degree is in biology, is as stumped as I am. And they call biology a science!

Ordinarily, of course, I’d ask my government for help, but they’re shut down right now, so I’m forced to rely on the charity of my readers. Can you identify this fellow?

(More pictures under the cut.)

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Dispatches From the Front

My government’s been shut down almost 12 hours now. So far, I’m doing okay without them.

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A Curious Oversight

Got a great idea but don’t want to start a business? The Wall Street Journal offers a menu of strategies — but omits my favorite: Buy a whole lot of stock in a company that you believe could profit from your idea, and then give them the idea for free. It’s imperfect, but so’s everything else, including starting a business.

Most great enterprises require plenty of innovation, hard work and risktaking. One of the reasons capitalism works so well is that it enables the innovators, the hard workers and the risk takers to be different people, by providing institutions that allow them to coordinate their efforts. The stock market is one of those institutions. This isn’t something I’d have expected the Wall Street Journal to overlook.

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The Best Toy Ever, Reimagined

In The Big Questions, I wrote about an absolutely wonderful toy I had as a child. The Digi-Comp I was a completely mechanical computer; it ran on springs and rubber bands, and you built it yourself from a kit. You programmed it by placing little plastic cylinders (cut from drinking straws) on appropriate tabs, and you pushed a lever to run the program. The back of the computer was completely exposed, so you could watch the cylinders and straws and rubber bands push each other around — and see for yourself how those motions implemented the logic of your program and produced a result. As I wrote in The Big Questions, a child with a Digi-Comp I is a child with deep insight into what makes a computer work.

I am delighted that the Digi-Comp I is, after a 40 year hiatus, back on the market, though the modern version substitutes laminated binders board (i.e. high quality cardboard) for plastic. There is, I think, no better gift for a kid who likes computers, or likes logic, or likes knowing how things work.

Now an old friend (who shares my fond memories of this toy) writes to point me to yet another reincarnation of the DigiComp I — as a Lego project! Way cool.

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You Gotta See This

I realize that my posting frequency has fallen off over the past few weeks, and I hope things will be back to normal pretty soon. Meanwhile, to hold you over, here is something amazing:

What you’re seeing there are two flat-screen TVs being carted around by robots, all of them (the robots and the TVs) being driven by staggeringly brilliant software. Read more here.

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The Ballmer Legacy

I just tried to log into my Hotmail account and got a message saying that for security reasons, I have to enter a code, which will be sent to the mobile number or email address of my choice. So I typed in one of my other email addresses, they sent me a code, I entered the code, and I logged into Hotmail.

We all see the problem here, right?

I think maybe all the smart people left Microsoft in embarrassment over MSWord.

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Which Of the Following Does Not Belong?

Following in the footsteps of Jeb Bush, Alan Simpson, Erskine Bowles, James Carville, Mary Matalin, George F. Will, Tony Snow, John Bolton, Tommy Franks, Chris Wallace, Charles Krauthammer, Fred Barnes, Morton Kondracke, Christopher Hitchens, Walter Cronkite, Clarence Thomas, Queen Noor of Jordan and Milton Friedman, I will be delivering the Hatton Sumners Distinguished Lecture in Dallas this Friday. Join us if you’re free! Registration is here.

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RIP, Ronald Coase

ronald-coase1
Ronald Coase has died at the age of 102. I am therefore reposting, with minor changes, the appreciation I wrote a few years ago for his 99th birthday.

In the theory of externalities—that is, costs imposed involuntarily on others—there have been exactly two great ideas. The first, forever associated with the name of Arthur Cecil Pigou (writing about 1920) is that things tend to go badly when people can escape the costs of their own behavior. Factories pollute too much because someone other than the factory owner has to breathe the polluted air. Nineteenth century trains threw off sparks that tended to ignite the crops on neighboring farms, and the railroads ran too many of those trains because the crops belonged to someone else. Farmers keep too many unfenced rabbits when they don’t care about the lettuce farmer next door.

Pigou’s solution—and it’s often a good one—is to make sure that people do feel the costs of their actions, via taxes, fines, or liability rules that allow the victims to sue for damages. Do a dollar’s worth of damage, and you’re charged a dollar.

Pigou endorsed this policy not because it seems fair, though it does seem fair to many, but because it yields, under what he believed to be very general conditions, the optimal amounts of damage. We don’t want too much pollution, but we don’t want too little, either, given that pollution is a necessary by-product of a lot of stuff we enjoy. Pigou offered a proof—now standard fare in all the textbooks—that his policies lead to the perfect compromises, in a sense that can be made precise.

The second great idea about externalities sprang full-blown from the mind of a law professor and subsequent Nobel prize winner named Ronald Coase, who stunned the profession in 1960 by pointing out that Pigou’s argument runs both ways. If you breathe the pollution from my factory, I’m imposing a cost on you—but at the same time, you’re imposing a cost on me. After all, if you lived somewhere else, you wouldn’t be complaining about the smoke and I wouldn’t be getting punished for it.

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Rational Riddles

Many years ago, when soft pretzels were available on every street corner in downtown Philadelphia at the going price of

Ten Cents Apiece/Three for a Quarter
there was one vendor who occupied a prime location in the City Hall courtyard, and was therefore able to command a premium price. His sign read
Ten Cents Apiece/Two for a Quarter

I always thought we could explain that one away as a case of poor math skills. But now our frequent (and frequently brilliant!) commenter Thomas Bayes sends along this photo of a sign that he recently spotted at a gas station convenience store, and which I’m finding a little harder to get my head around:

Thomas reports:

I asked the person behind the counter if she could sell me one pack for $1. She said no. I asked if she would throw one of the packs away for me if I bought two. She seemed genuinely puzzled. I drive an SUV, so I wish they’d apply this scheme to the gas they sell.

Here’s your chance to get creative. Give me an explanation consistent with rational behavior and orthodox economic theory.

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Power Transmission

Robert CaroAs I work my way through Robert Caro’s monumental four-volume biography of Lyndon Johnson, I’m repeatedly astonished by Caro’s gargantuan appetite for detail on the one hand, and his near total incuriosity about the big picture on the other.

Case in point: We get almost 40 densely packed pages on the appropriations (eventually totaling $25 million) for the Marshall Ford Dam and another 30 or so on what a dramatic change the dam (and the electricity it brought) made in the lives of Texas Hill Country farm families. But unless I overlooked it, we’re never told how many of those farm families were affected — and are thus left with absolutely no basis for thinking about whether this dam was a good investment.

At another point, we’re told of a $1.8 million expenditure to bring electric lines to 2892 Hill Country farms. (This is, of course, over and above the cost of the dam, which presumably benefited many more than just these 2892.) This time, thankfully, we are at least told how many families are affected. But since the expenditure comes to $622 per family in a time and place when one dollar a day was a good wage, where there was no running water and very little communication with the outside world, and where the soil was bad and getting worse, this raises the question of whether that $622 could have been better spent relocating that family to a better place. (All the moreso if we top off that $622 with the family’s pro rata share of the dam cost.) Caro never even acknowledges the question, pausing simply to celebrate the benefits of electricity, which, he seems to imply, were great and therefore (!) justified the expenditures.

Well, there are two ways you can get the benefits of electricity. The electricity can come to you, or you can go to it. Sometimes one way is better; sometimes the other. When conditions are as Caro describes them — with the land essentially worn out, starvation rampant, and everyone too poor to get a fresh start in, say, Austin — there’s a pretty good likelihood that the guy who could have helped you move, but instead spends a bundle to bring you an electric line, has something other than your best interests at heart.

I’m not far enough along to be sure of this, but after a little peeking ahead, it’s beginning to look like this is how Caro’s going to treat the Great Society also — hundreds of pages on the details of the legislation, hundreds more on the good it (allegedly) did, and not a single inquiry into how much more good somebody could have done with expenditures of that magnitude.

And then there’s this passage, which I feel compelled to assure you I am not making up:

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Turtles All the Way Up

If you’re the sort of person who reads this blog, there’s a good chance you’re already familiar with John Conway‘s Game of Life. In case you’re not, here’s the executive summary:

Start with an infinite checkerboard. Color some squares black and others white. From here on, the game plays itself. Any white square with exactly two or three white neighbors stays white. All other white squares turn black. Any black square with exactly three white neighbors turns white. All other black cells stay black. Repeat.

The goal is to choose an initial coloring that yields interesting behavior, like a snail that crawls across the page.

But here’s the coolest one ever — the Game of Life plays the Game of Life:

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Sun Burned

This is a picture of Jeffrey Punton, from my hometown of Rochester, New York, standing in front of the solar panels that he installed at a cost of about $42,500. He figures that over the long term, they’ll save him maybe $8000 to $10,000 in power bills. But he’ll only lose a few thousand dollars on the deal, thanks to about $30,000 in government subsidies — in other words, thanks to those of you who pay taxes. He keeps the panels up as a conversation-starter so he can educate people about how little sense these subsidies make.

The story is here.

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P.S.

In yesterday’s post, I claimed to have refuted Richard Dawkins’s claim that everything complex must have emerged from something simple by citing the natural numbers, which are provably highly complex (in a very precise sense) yet did not emerge from something simple. Numerous commenters suggested that I’d been unfair to Dawkins, because he’d surely meant his claim to apply only to biological processes.

Here is a quote from Dawkins’s book “The God Delusion”:

Time and again, my theologian friends returned to the point that there had to be a reason why there is something rather than nothing. There must have been a first cause of everything, and we might as well give it the name God. Yes, I siaid, but it must have been simple and therefore, whatever else we call it, God is not an appropriate name….The first cause that we seek must have been the simple basis for a self-bootstrapping crane which eventually raised the world as we know it into its present existence.

I could provide additional quotes, but this one should suffice. Dawkins believes, unless I have misunderstood him completely, that he has a quite general argument, not tied in any way to biology (because the above quote, for example, has nothing to do with biology) to establish that complex structures must have simple causes. That argument, whatever it might be, cannot be correct because the natural numbers stand as a counterexample.

If Dawkins, or any of his defenders, wants to respond that his argument is not intended to apply to the natural numbers, it becomes incumbent on them to point to a hypothesis which is actually used in the argument which would rule out such an application. Absent such a hypothesis, the argument must be erroneous.

I claim to have explained in The Big Questions exactly how the first cause of our Universe could be a mathematical structure that is far more complex than the Universe itself; of course others, like Max Tegmark, have demonstrated this possibility in far more detail than I have. Whether or not Tegmark and I are correct in our beliefs, I claim we’ve at least demonstrated that (as far as we can tell) those beliefs could be true, which, once again, refutes Dawkins’s position.

An argument that leads to flat-out wrong conclusions cannot be a correct argument, even if some of its implications turn out to be true. So I stand by what I said both yesterday and in The Big Questions : Dawkins’s position fails for exactly the same reason that Michael Behe’s does — we have an explicit example that shows that complexity requires neither a simpler antecedent nor a designer.

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False ID

Bob Murphy, always my favorite theist, posts a defense of Intelligent Design theory, or at least an attack on its attackers, who, he claims, have largely failed to grasp what the ID theorists, such as Michael Behe, are claiming:

Behe is fine with the proposition that if we had a camera and a time machine, we could go observe the first cell on earth as it reproduced and yielded offspring. There would be nothing magical in these operations; they would obey the laws of physics, chemistry, and biology. The cells would further divide and so on, and then over billions of years there would be mutations and the environment would favor some of the mutants over their kin, such that natural selection over time would yield the bacterial flagellum and the human nervous system.

Yet Behe’s point is that when you look at what this process spits out at the end, you can’t deny that a guiding intelligence must be involved somehow.

(Emphasis added.)

Perhaps Bob has forgotten that I disposed of this argument in Chapter 4 of The Big Questions , with a single counterexample that refutes both Behe and his polar opposite Richard Dawkins in one fell swoop. Let’s recall their positions, stated as simply as possible:

Behe: Irreducible complexity requires an intelligent designer.

Dawkins: Irreducible complexity requires evolution. (This is Dawkins’s stated position in his book The God Delusion.)

Landsburg: The natural numbers are irreducibly complex, moreso (by any reasonable definition) than anything in biology. But the natural numbers were not designed and did not evolve, so Behe and Dawkins are both wrong.

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Destruction Paper

It’s well understood that if you see the world through sufficiently Keynesian eyes, you might welcome a destructive hurricane or the threat of an alien invasion (together with the frantic spending it would stimulate) as just the ticket to lift the economy out of a recession.

What seems to have been largely overlooked is that even in a thoroughly non-Keynesian world where markets work perfectly (or as perfectly as they can in the presence of a distortionary income tax), and recessions cure themselves, we might still want that hurricane.

Or, because we can’t always call forth hurricanes when we need them, we might want our government to simulate their effects by diverting funds from useful to destructive spending projects — or just occasionally showing up at people’s houses and trashing their furniture.

Here’s why: Hurricanes make us collectively poorer. When we’re poorer, we work more. When we work more, the government collects additional income tax revenue. But — taking total government spending as given — the government can’t continue to collect additional revenue forever; sooner or later it must lower tax rates. (This assumes we’re on the good side of the Laffer curve, where the way to collect less revenue is to lower rates, not raise them.) When tax rates fall, labor markets work more efficiently. So much so, in fact, that the efficiency gains can more than compensate for the initial destruction.

I only realized this recently, and it surprised me (along with several others I showed it to) enough that I wrote it up as a short paper. (Update: A more recent version of the paper is here.) I also looked back through my blog archives to see how badly I’d gotten this wrong in the past.

Continue reading ‘Destruction Paper’

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