Last weekend, Nashville ran out of gas. This was not because of significant shortages, but because of a belief that there were significant shortages. So, people rushed to get gas. And we ran out.

This is a demonstration of sunspot equilibria, one of the items on my still- incomplete list of the five useful things I learned in macroeconomics. What if people believed that sunspots cause the populace to turn into violent beasts who, behind their smiles, “good morning”s, and “bless your heart”s, secretly plot our demise; they appear to act normal in every way but wait for their chance to attack us. In what Charles Gibson incorrectly labeled the “Bush Doctrine,” we may all contemplate preemptive self-defense by attacking first. Then, of course, sunspots did cause the populace to turn violent.

A feature of these self-fulfilling prophecies is that there are multiple equilibria; usually one very good one where we expect calm and act calmly, and another very bad one where we expect the worst and, by our reaction to it, cause it.

One simple role of government is to help coordinate the populace on the better outcome. Neither our local Nashville government, nor our presidential candidates, seem to grasp that.

Despite Nick Carr’s insistence that Greg Mankiw stop blogging to concentrate on his comparative advantage as an economic thinker, I’m glad Mankiw continues with his inefficient pursuit. From a recent entry:

If, however, beauty is correlated with income, which it is, then like height, it should be taxed, even according to the logic of utilitarianism.

Professor Mankiw, citing evidence that better looks lead to higher incomes, notes that a social planner (with commonly assumed preferences), would wish to allocate income from the rich and beautiful to the poor, less well-endowed among us. I fully expected a dismissal of the ethical consequences, in the traditional economic mold, but instead was treated to this:

Most people would reject a beauty tax as absurd, which only goes to show that that most people do not share the moral sentiments often assumed in the economic literature on optimal tax policy.

I sometimes make the mistake of raising a question with colleagues in economics and finance about the ethical implications of traditional economic assumptions. I usually receive some form of “these are just assumptions, not ethical issues” in reply, taking neither side in the debate on scientists’ social responsibility, but simply sidestepping the rhubarb.

After all, how can normative statements in the study of the allocation of scarce resources (the traditional definition of economic science) possibly have ethical implications? Who would even ponder such a thing?

As Vizzini remarked: “Have you ever heard of Plato, Aristotle, Socrates? Morons!”

I decided to combine two activities that frequently occupy my day: study of auctions for my research, and perusal of the Nashville Codes for entertainment. The section of Nashville law on auctions and auctioneers (Chapter 6.84) defines an auction as:

The offering for sale or selling of such property by the method known as “down hill selling” by which is meant first offering any article at a higher price and then offering the same at successive lower prices until a bidder is secured.

So, the elegant Dutch Auction is legally permitted. I wonder who determined that this method is “known as down hill selling.” The Dutch have yet to discover a single elevation change in Holland that can in any way be construed a “hill.”

The definition continues:

“Selling at auction” also means the offering for sale or selling of such property to the highest bidder.

And there you have the exhaustive list of market mechanisms that the Metropolitan Government of Nashville and Davidson County considers an auction.

Preferential auctions, where I might care about who wins? Procurement auctions, where the lowest bidder should be selected? Take that crazy stuff out of state!

Economic theorists are often criticized for making assumptions that conflict with what practitioners haughtily term the “real world.” Since these practitioners seem unmoved by simple, elegant models, I offer instead that the law is on our side.

Continue reading »
Dilbert 1

Denoument below the jump.

Continue reading »