It Pays to be Positive?

Hong Kong will give $645 dollars to all those who accept to be tested for Covid19 and are positive. The number of cases, and deaths, are on the rise in Hong Kong but everything seems under control, given the fact Hong Kong’s population is 7.4 million. Lombardy, where I live, is the home of 10 million people and since the start of the pandemic we have had more than 180.000 cases and some 20.000 deaths.

Yet this is understandably an outcome the Hong Kong authorities want to avoid, and so they are putting in place a system that incentivizes testing in this way. We will see how it goes. Income per capita in Hong Kong is around $ 50,000. I suspect that, everywhere, higher-income people, as they tend to be more exposed to the media, are eager to test no matter what. If there is a certain reluctance in lower-income people to test, perhaps because they fear the consequences of quarantine in terms of their work and their social life, perhaps subsidies such as Hong Kong’s might well counteract this wariness (I suppose it was designed with that goal in mind).

One wonders why Western democracies didn’t try to do the same. After all, they have all distributed a staggering amount of money in the last few months. Linking some of it to testing would not have hurt – though of course if the subsidy was too high you could imagine some opportunistic behavior (including attempts to playing with the test’s results to score positive, to the extent that’s possible). I fear that’s because the testing capacity wasn’t there. Now it seems a similar approach might be enacted in Italy, too. Perhaps in the hope of saving the upcoming skiing season, the province of Bozen, in South Tyrol (a German-speaking region of Italy), has tested 70% of its population (over 350.000 people) in just a few days, with antigenic tests. People there are notoriously very law-abiding, but that’s not the same everywhere. Why should we rule out the idea that a monetary incentive could help?


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Warren Coats’s Experience with Unions

My experiences with unions have not been good. My father was a Shell Oil union member.  His union went on strike long ago when my mother was pregnant with my younger brother. After a few months on strike it was growing obvious (according to my father) that it would end soon in failure from the union perspective. The union bosses feared that my father and others would return to work before the union had formally given up. They came to our house and told my pregnant mother that it would be quite unhealthy for her if my father returned to work.

While a student at the U of C Berkeley I had taken jobs for three summers with Shell Oil, one of the perks they give their workers’ children. Two summers were [spent] roustabouting in the oil fields of Kern County, California with regular Shell employees who never spoke of labor relations with the company. Instead they talked about their families and non-work activities.  The middle of the three summers with Shell, I was assigned to the supply yard behind Shell’s Kern County headquarters. I assisted the one employee there who loaded pipes and other oil field equipment onto trucks that then delivered the equipment to the fields I had worked in the summer before. Much of the time the two of us just hung out there waiting for the next truck, very unlike digging ditches to repair leaking pipes as I had done the previous summer in 112-degree summer heat. We drove around in the small portable crane used for loading the trucks. The entire time my “companion,” an avid union member, complained about how Shell Oil was exploiting us. After a few weeks I dreaded having to be around him.

This is from Warren Coats, “Unions vs the Gig Economy,” Warren’s space, November 14, 2020.

This was not like my own experience with union workers, all of whom I liked. Maybe it was because we got a bonus for every foot we drilled, which made us very productive. I’ve written about one very positive experience here.

But Warren’s story is like many I’ve heard from people who worked in union jobs in the summer and then got out of them.

The whole thing, which is not long, is worth reading.


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Why a Vast Election Fraud is Highly Implausible

Consider a wide definition of a conspiracy as a secret plan between two parties or more to do something, legal or illegal, that hurts somebody else’s interest for the purpose of furthering their own mutual interests, conspiracies. This definition is close to the dictionary’s (“A secret plan by a group to do something unlawful or harmful”), although it focuses less on secrecy. For instance, a firm is a general conspiracy to wage competition against other firms’ interests and manages small conspiracies, only some of which are secret. Government actors are the masters of conspiracies.

The problem is to distinguish good from bad conspiracies, and plausible from implausible conspiracies (or “conspiracy theories,” as specific conspiracy claims are often called). A bit of economics is especially useful to make the latter distinction.

To be engaged in by an individual, a conspiracy must promise a good likelihood of higher benefits than costs for the individual himself. If this is not true for the minimum number of conspirators required, the conspiracy will not happen. Focusing on the costs, the difference between a plausible and an implausible conspiracy is often determined by whether it is legal or illegal since an illegal conspiracy that is uncovered brings severe punishments, that is, higher costs.

There are conspiracies in any spontaneous order, in any system of individual relations without a central and effective coercive authority. Subgroups of individuals always engage in more or less secret plans to further their own interests. In the case of illegal conspiracies, the higher the expected punishments (cost of punishment times the probability it will be metered), the less frequently they will happen.

Some spontaneous order also exists in any conspiracy. Conspirators don’t necessarily act in a way that is consistent with the conspiracy. In a firm, individuals sacrifice more or less the company’s interest to further their own interests. In an army, the foot soldiers at the end of the chain of command don’t do exactly what the faraway general intended them to do (see Gordon Tullock, Bureaucracy, in The Selected Works of Gordon Tullock, edited by Charles K. Rowley, Liberty Fund, 2005).

There is also some spontaneous in illegal conspiracies. Spontaneous rules developed within groups of pirates to help further their objectives (see the work of Peter Leeson). But in some circumstances, the self-interested behavior of individual conspirators leads them to act against the conspiracy. A conspirator will rat on his co-conspirators if he thinks that the conspiracy is on the verge of being uncovered and that he can thereby reduce his own punishment. And he is even more motivated to spill the beans as he knows that his co-conspirators are equally motivated. If a co-conspirator is going to denounce me, I better denounce him first. The famous Prisoner Dilemma models such interactions.

The more numerous the conspirators need to be and the longer and more complex their plan, the less likely each one will participate, because he knows he can be betrayed by any of the others. The less likely it is that such a conspiracy will materialize.

Conspiracy hoaxes are implausible conspiracies precisely because they ignore these individual incentives. Given the decentralization and complexity of the American election system, a large election fraud—one that has some chance of changing the election result—would need much complicity, including from government actors. The government conspirators’ individual benefits in terms of future power, perks, and money can be large, but their costs, if the conspiracy is uncovered, will also be large. In a country with severe penalties for interfering with voting or tampering with ballot boxes, with a host of independent investigating authorities and judges, with a free press and a pack of Pulitzer-chasing journalists, the cost will likely be too high for any individual to engage in a vast electoral fraud.

A conspiracy to “steal” the recent presidential election is not completely impossible, but it is highly implausible. It is not more incentive-compatible than, say, Pizzagate (an imagined conspiracy of Democratic pedophiles in a DC pizzeria) or than the claim, pushed by Alex Jones, that the Sandy Hook murders did not really happen. If that is not true, the difference between the United States and banana republics would be blurred.

These explanations by incentives overlap Ockham’s razor: in explaining election results, choose the theory that is the simplest—although determining what is simpler is not always simple.

If the foregoing is true, we would expect that most if not all election conspiracies would be run by foreigners under the umbrella of their own governments. In such cases, the individual cost of being unmasked is relatively low and may well be lower than the benefits conferred by the government. That the rulers of Russia would mount a conspiracy to influence the result of an American election, especially to favor a narcissist and potential puppet, is certainly incentive-compatible, although it is not in itself proof of the conspiracy.

There is a demand for conspiracy theories, as co-blogger Scott Sumner recently argued and, in response, there is a supply of them, a supply that has dramatically increased with the reduction in its production cost. In this post, I looked at the supply side.

An extreme example of conspiracy theory is the one peddled by the president of an organization called Judicial Watch: “elite units of the National Guard” “fed” the ballots of several states into a quantum computer (nothing less!) and were also able, with a GPS technology and the ballots’ “ink made of corn,” to follow them; the conclusion is that Trump won reelection with “over 80%” of the legal vote (see In that particular conspiracy theory, everything is nonsense, from the beginning to the end. The criminal actions of the guardsmen and their superiors and accomplice are not incentive-compatible. Time is scarce: don’t waste yours with that sort of conspiracy theory.


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Henderson on Nobel Winners in Wall Street Journal

In its technical paper justifying the awards, the Nobel Committee points out a major problem with using taxes to fund government programs: taxation distorts. The term economists use is “deadweight loss,” a loss that is not offset by a gain to anyone. Economists have estimated that raising $1 in taxes doesn’t cost society only $1; it costs somewhere between $1.17 and $1.56. The extra 17 to 56 cents is deadweight loss. The committee notes that by auctioning off major electromagnetic assets, the federal government avoided having to tax as much.

This isn’t to say that the ideal auction is one that maximizes government revenue. One way to maximize auction revenue is for the FCC to act like a monopolist and hold spectrum off the market. But what matters most is that spectrum gets into the hands of the most-productive users. As former FCC chief economist Thomas Hazlett, now at Clemson University, and his co-author Roberto E. Muñoz of the Universidad Técnica Federico Santa María have pointed out, the gains from efficient allocation swamp the gains in government revenue. The 2017 wireless spectrum auction, for example, redirected spectrum from broadcast television to cellphone companies. If you’re reading this on a cellphone, you can thank Messrs. Milgrom and Wilson.

This is from David R. Henderson, “Thank These Nobel Laureates for Your Cellphone,” Wall Street Journal, October 12, 2020 (October 13 print edition.)

Under my contract, I’m allowed to quote 2 paragraphs from my article.  I’ll post the whole thing in 30 days.

By the way, as an economist friend pointed out on Facebook, I was one of the few to note the potential conflict of interest in Milgrom both helping design the auction and consulting to a company that bid in the auction. I responded that I wouldn’t be a good card-carrying economist if I hadn’t noted that. Economics is all about incentives. As I wrote in “Hooked on Economics,” Chapter 2 of The Joy of Freedom: An Economist’s Odyssey, I noted in all my reading of economics while a math major and then in all of my reading post-Bachelor of Science and pre-UCLA graduate school that the unifying theme was incentives.


Here’s the article on “Auctions” in David R. Henderson, ed., The Concise Encyclopedia of Economics.

HT to Alex Tabarrok and Lynne Kiesling for giving a quick read to my draft before I sent it to the Wall Street Journal. Also to my wife, Rena Henderson, for a quick edit. All of them turned it around in less than 25 minutes. Also thanks to Tom Hazlett for checking the paragraph on his findings. He did so while waiting to board a flight.


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A Partial Defense of Milton Friedman’s 1970 NYT Essay

To understand my story, you first need to understand Friedman’s basic point. Here it is in a nutshell: Managers are employees of corporations. In the decisions they make with corporate resources, they should be responsible to the corporation. That means being responsible to the stockholders, who, after all, are the corporation’s owners. The vast majority of stockholders want the corporation to, in Friedman’s words, “make as much money as possible.” Thus Friedman’s claim that the social responsibility of a corporation is to make money. Friedman was clear that he wasn’t advocating breaking the rules. He stated that the managers should conform “to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”

I learned Friedman’s point in a personal way when I was eleven. My mother had raised us to help others. I liked doing that and didn’t see it as a heavy obligation. But when I was eleven, my brother, Paul, who was fourteen, bought a cheap set of golf clubs and hired me to caddy for him. When we were on the eighth hole of a nine-hole course near our summer cottage in Minaki, Ontario, we saw a golfer hunting in the rough for his lost golf ball. I thought I should stop and help, so I did.

Paul had a different view: he wanted to play through and I was working for him and so I should do what he asked. We had a big argument and I finally gave in. When we got home, my brother complained to my mother that I hadn’t kept my side of the bargain. I was sure my mother would support me. She didn’t. “When Paul hired you,” she said, “you were working for him. When you’re on your own you can stop and help someone find his ball, but when you’re working for someone, he has the right to decide whether to let you.”

The lesson stung, but I ended up agreeing. That’s why the most important part of Friedman’s essay spoke to me. It’s simply wrong, when you’re working for someone, to use his resources for your ends when they don’t promote his ends. In the case with my brother, I was using my time to help others but my time was really his time: he was paying for it. In the case of corporations, managers might be using both their time and the corporation’s resources to help others even though shareholders own those resources and own the manager’s time that they are paying for.

This is from David R. Henderson, “Friedman’s Critics Miss the Mark,” Defining Ideas, September 24, 2020.

I was one of the 20 people asked to comment on passages of Friedman’s famous 1970 NY Times essay, “The Social Responsibility of Business Is to Increase Its Profits. Hoover colleague and EconTalk host Russ Roberts was another.

One of the strangest comments was by Felicia Wong. I write:

Commenter Felicia Wong, president and CEO of the Roosevelt Institute, notes that Friedman wrote when America’s “overwhelmingly white” fears were about Watts, Detroit, Vietnam, Kent State, Jackson State, and the assassinations of Martin Luther King Jr. and Robert Kennedy. Hmm. I recall that when King and Kennedy were murdered a lot of black people were upset, too, particularly by King’s murder.

I did note an irony in Friedman’s original essay though:

I’ll end by noting an ironic argument in Friedman’s essay that I don’t agree with and I wonder if even he would agree with today. Fortunately, it doesn’t undercut his case against corporate social responsibility. In stating that managers shouldn’t use corporate resources at the expense of shareholders, even for purposes that a huge percentage of us would agree are good, Friedman argued that we should leave those functions to the government. He wrote:

On the level of political principle, the imposition of taxes and the expenditure of tax proceeds are governmental functions. We have established elaborate constitutional, parliamentary, and judicial provisions to assure that taxes are imposed so far as possible in accordance with the desires of the public—after all, “taxation without representation” was one of the battle cries of the American Revolution.

That ignores what we have learned, and Friedman learned, from the “Public Choice” school of economics, led by James Buchanan and Gordon Tullock. Government’s incentives are usually perverse and we see the bad results almost daily. There’s much more hope, and I think Friedman shared that hope, for private voluntary activity.

Read the whole thing.



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O’Rourke on the Millennials and Socialism

As soon as children discover that the world isn’t nice, they want to make it nicer. And wouldn’t a world where everybody shares everything be nice? Aw … kids are so tender-hearted.

But kids are broke — so they want to make the world nicer with your money. And kids don’t have much control over things — so they want to make the world nicer through your effort. And kids are very busy being young — so it’s your time that has to be spent making the world nicer.

This is from P.J. O’Rourke, “This is why millennials adore socialism,” New York Post, September 12, 2020.

Lots of good stuff here. I do want to address one error, an error that P.J. seems to agree with “progressives” about. He writes:

That would have been in the 19th century — during America’s first “Progressive Era” — when mechanization liberated kids from onerous farm chores and child labor laws let them escape from child labor.

Actually, it wasn’t child labor laws that let them escape from child labor: it was economic growth. As people grew wealthier, parents no longer needed their children to be productive. Instead, they could support the family without their children’s income and so instead could send their kids to school. And incidentally, as E.G. West showed in Education and the State, the state in Britain was not a major funder of education and yet schooling was widespread.

It is true that child labor laws reduced child labor around the edges. But they’re an instance of what is almost a general law in economic policy. I’m using “general law” in the sense of regularity. The laws that pick up enough support are usually ones that require people to do what the majority are doing already. I believe for example, although I can’t find the source immediately, that the legislated 40-hour work week came about only after it had become standard practice.

Another good excerpt:

Intellectuals like Marxism because Marx makes economics simple — the rich get their money from the poor. (How the rich manage this, since the poor by definition don’t have any money, is beyond me. But never mind.)

This excerpt reminds me of a great paragraph from Paul Krugman’s 1990 book The Age of Diminished Expectations that I used in the first edition of The Concise Encyclopedia of Economics, in a sidebar on the article “Distribution of Income” by Frank Levy:

One reason that action to limit growing income inequality in the United States is difficult is that the growth in inequality is not a simple picture. Old-line leftists, if there are any left, would like to make it a single story—the rich becoming richer by exploiting the poor. But that’s just not a reasonable picture of America in the 1980s. For one thing, most of our very poor don’t work, which makes it hard to exploit them. For another, the poor had so little to start with that the dollar value of the gains of the rich dwarfs that of the losses of the poor. (In constant dollars, the increase in per family income among the top tenth of the population in the 1980s was about a dozen times as large as the decline among the bottom tenth.)

The O’Rourke piece is excerpted from P.J. O’Rourke, A Cry from the Far Middle, 2020.


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The Future of Space is (or Should Be) Private

NASA recently announced that the Space Launch System (SLS), its next-generation rocket, will cost significantly more than originally anticipated. In a recent announcement, NASA confirmed that the rocket was expected to cost $9.1 billion, and the ground system for mission support $2.4 billion. That’s a 33% increase over estimated costs in 2017!

In contrast, the private sector has performed phenomenally in lowering launch costs. Between 1970 and 2000, the cost of getting to space was about $18,500 per kilogram. When SpaceX came onto the scene, however, things started to improve. The private launch provider has significantly reduced the costs of accessing space: By 2019, using its Falcon 9 rocket, costs had fallen to $2,720 per kilogram. Due to SpaceX’s innovations in reusable rockets, experts say launch costs might fall below $1,000 per kilogram in as little as five to ten years. The opportunity this presents for space exploration and development is exciting.

This is from Alexander W. Salter and David R. Henderson, “For-Profit Companies Must be the Backbone of the New Space Age,” American Institute for Economic Research, September 5, 2020. Alex is turning into an excellent op/ed writer and co-author.

Read the whole thing, which is short.

A personal reminiscence:

In the fall of 2012, I taught, as I did every fall between 2002 and 2015, an economics class in our distance learning Executive MBA course at the Naval Postgraduate School. It’s the only economics course the students got in the curriculum and so my course was approximately 8 3-hour lectures in microeconomics and 3 3-hour lectures in macro. The students were typically at Navy bases around the country. This time, though, I had 5 civilian students at NASA’s Johnson Space Center in Houston.

I could tell from the start that this was a special group. They were involved from the getgo.

Whenever I had 5 or more students at a location, I made a trip sometime during the quarter to that location and broadcast from there to the other locations. So in October I went to Houston.

The students were even better than I had expected. I’ve taught well over 2,000 students in my career and probably closer to 3,000 and I don’t remember a lot of names. But I remember all 5 names: George Gafka, Jose Garcia, Lara Kearney, Brad Niese, and Joe Williams.

Typically when I finished a class at a remote location we would quickly go out to a restaurant. This time was different. They wanted to hang around and talk about the material we had just covered plus other things they were wondering about economics. We didn’t leave for a restaurant until half an hour later when an exasperated janitor kicked us out of the room.

At the restaurant, I decided to risk my good will by suggesting that, in light of everything I had taught them about incentives and residual claimants, a better alternative to NASA would be private space exploration. Brad Niese, the most junior of the 5, said immediately, “That makes sense.” We had a good and spirited discussion. I’m not sure I convinced the other 4 but none of them seemed to think it was a crazy idea.

I was one of the two toughest graders, out of about 60 professors and lecturers at the NPS Graduate School of Business and Public Policy. All 5 earned an A, the highest grade one can earn at NPS.


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Armen Alchian and Bill Meckling on Goals and Incentives

And the men of Kharkov and Karachi are not different from the men of Kalamazoo. The specific objects of wealth and power may differ between Kalamazoo and Kharkov. But if Kalamazoo teems with thieves and brigands while Karachi is serenely industrious, the explanation lies not in differences in goals. Differences in goals will not explain differences in the way individuals pursue those goals.

This is from William H. Meckling and Armen A. Alchian, “Incentives in the United States,” American Economic Review 50 (May 1960): 55-61, reprinted in The Collected Works of Armen A. Alchian, Vol. 2, Property Rights and Economic Behavior.

I’ve been working on a chapter on Alchian and property rights in a short book on the UCLA School. (Steve Globerman, a fellow UCLAer, and I are writing it for the Fraser Institute.)

So I’ve been going though the Collected Works volume published by Liberty Fund.

So what does explain differences in the way people pursue their goals. The answer is in the title of their piece: incentives.





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Teaching Responsibility

Someone on Facebook recently asked people to tell the most important thing they learned from their father. Here’s the one I came up with and it was really 2 things I learned.

From an early age, I was told by my father that none of my possessions was as important as my life and so if there were ever a case where I needed to save my life by giving up one or some of my possessions, it was worth it.

I ended up applying that lesson early.

I lived in a small town of 1,200 people in rural Manitoba. One day, when I was about 7, I was walking home with a friend from school. To do so, we had to cross a railroad track. This particular day, for some reason, we were crossing in the middle of the train yard and not where there was a street crossing.

We were involved in our conversation and my friend was slightly ahead of me. I happened to look up and see a box car coming toward me at about 10 mph and it was about 15 feet from me. I was on the track with my bicycle. I didn’t even hesitate; I dropped the bike on the track and ran ahead to where my friend was. The whole back of the bicycle was crushed and I retrieved it and carried it the few remaining blocks home.

When I got home, I told my father what had happened. He congratulated me for using my brain.

Here’s what he didn’t do: offer to pay to get me a new bike. Our family didn’t have a lot of slack in the budget but my sense was that even if we had been substantially wealthier, he wouldn’t have paid. He wanted me to learn responsibility.

I went to a local bike repair place and sold the good front wheel to the guy for $7.50. That would go toward a new bike that was priced at about $40. So I started saving for a new bike.

A few months later, my father came back from the town fair where he had run into the local guy who had been on top of the box car moving it to a different part of the rail yard. The buy had felt bad about what had happened and offered my dad $10 toward a new bike. My dad told me that he had turned him down because it wasn’t the guy’s fault.

When my dad told me this, I was furious and I argued with him. But he made the point that I, not the guy, was responsible for what had happened. I saw his point and became less furious. By the next day, I wasn’t furious at all.

How I got a new bike within a few months is an interesting story in itself, but not closely related to the lessons I learned.

I learned about the value of my life and about the importance of taking responsibility.



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Do 10 Economists Constitute a Majority?


Given the massive shrinkage in the number of jobs available during the first months of the pandemic, most economists don’t think that the $600 bonus kept many people from returning to work.

So writes Christian Britschgi in “San Francisco Judge Rules Drivers With Ride-Sharing Companies Are Employees. Uber Warns It’ll Have To Raise Prices By as Much as 111 Percent,” Reason Hit and Run, August 11, 2020.

When I read Britschgi’s statement, I was shocked. Normally, when the government pays millions of people more to stay unemployed than to return to work, most economists would expect a large percentage of those workers not to return to work.

So what is Britschgi’s basis for concluding that most economists don’t think that’s true? It turns out, as the link in the quote above shows, that the reference is to a study done by 10 scholars at Yale. It’s not clear that all of them are economists, because their titles are not given. But let’s assume they are. When there are well over 10,000 economists in the United States, 10 is not a majority.

I’m not commenting on the study itself. I still haven’t read it. I’m simply criticizing Britschgi’s statement, based on the views of 9 economists, about what most economists believe.


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