Category Archives: Books

Best Books of 2021: Keith E. Stanovich, The Bias that Divides Us: The Science and Politics of Myside Thinking (MIT Press, 2021)

Posted on December 22, 2021 | Comments Off on Best Books of 2021: Keith E. Stanovich, The Bias that Divides Us: The Science and Politics of Myside Thinking (MIT Press, 2021)

Today’s political polarization isn’t just annoying, it’s damaging important cultural and family institutions. And tensions won’t de-escalate until people figure out the root of the problem. University of Toronto psychologist Keith Stanovich has a compelling theory about those roots in his book The Bias that Divides Us: The Science and Politics of Myside Thinking. Surprisingly, it is only partially related to the myside thinking in his subtitle. 

First, a bit of advice for readers: skip the first three chapters and go right to chapter four, which begins on page 75. The first three chapters are dense mash of definitions of terms and hair-splitting distinctions that are unimportant to Stanovich’s main argument. They also contain something of a literature review on biases, to which Stanovich and his colleagues are important and prolific contributors. This is useful to undergraduate and graduate students, but mostly useless to the lay reader. In these early chapters, Stanovich also spends more time explaining what myside bias isn’t than what it is. It would have been better to organize it the other way around.

So Stanovich is no prose stylist, and his book is poorly organized. Yet it is on my best books of the year list. Why? Because chapter four gave me the type of eureka moment I have experienced only a handful of times in my career. Stanovich’s thesis is essential for understanding the current political moment, and will also likely help shed light on future political changes. This is a book that should have a long shelf life.

Instead of asking why people hold certain beliefs, Stanovich flips the question around. What if people don’t acquire beliefs, but beliefs acquire people? Stanovich argues that beliefs are subject to the same evolutionary forces as living organisms. The idea is similar to Richard Dawkins’ selfish gene hypothesis. 

Genes are what get replicated, not individuals. So genes care more about traits that help them replicate more than about traits that benefit individual gene carriers. This is one reason why parents will sacrifice themselves to save their children, and why people care more about close relatives than strangers. Protecting the people close to you protects your genes.

As with genes, so with beliefs. Beliefs that stick around and become popular get that way because they tend to be very good at replicating themselves—whether or not the beliefs have any basis in reality, or are useful to the people that adopt them. Beliefs that exploit human psychological quirks, such as myside bias, are more likely to “succeed” in this sense, even if they are false or harmful. Those with less meme-like qualities die out or remain rare. 

Myside bias is just such a replicating tool that successful beliefs use. It is both an attack and a defense. It is form of motivated reasoning related to confirmation bias, though not quite the same thing. Where confirmation bias is just a neutral tendency that humans evolved to save cognitive effort, myside bias is purpose-driven. It is rooted in defending one set of beliefs, and attacking competing beliefs. In a way, political partisans are unknowing participants in the natural selection of ideas, and not in a good way.

Republicans and Democrats both tend to highlight evidence supporting their position on an issue, and downplay or ignore contrary evidence—and both parties do this to the same degree. One is not better than the other. Much of the literature Stanovich reviews shows little to no difference between progressives and conservatives in their susceptibility to myside bias, and little difference in other personality traits like openness, agreeableness, and so on. Classical liberals show some psychological distinctiveness from conservatives and progressives, but not very much, and consistent liberals are also relatively rare.

Stanovich mostly sticks to how his “selfish beliefs” thesis affects politics. But it has wider applications. For example, it can help explain why some religions spread, why others endure despite having few adherents, and why others never get off the ground. Religions that have an ethos of proselytizing tend to spread more widely than those that don’t—which is an obvious point, if one thinks about it. But there is a reason why most people belong in the first place to religions interested in converting people. It’s a belief-replicating strategy that works.

Other religions are less interested in spreading, yet they can still endure for millennia. This is because they have strategies of their own. One of them is to have a high cost of joining—people who work hard to gain entry tend to prize it highly, and are unlikely to give up membership (this is also why college fraternities have hazing rituals). Though this doesn’t gain many new convert, it is a potent defense for existing members against competing religions. This is also why proselytizing religions typically have low barriers to entry, and non-proselytizing religions have higher barriers.

Another strategy is to set the group apart from the rest of society through distinctive dietary requirements, appearances, language, and other cultural markers. Life in such an out-group can be tough for individuals. But leaving is also extremely costly, because society at large will likely never fully accept the defector, so relatively few people do. Bad for the person, but good for the belief.

The selfish belief thesis, and its expression through myside bias, has lots of fertile ground for researchers to explore, both in and out of politics.

Stanovich’s concluding chapter, which is also his longest, focuses on what to do about myside bias. The obvious solution to today’s political polarization is to not have a rooting interest. Praise where due, criticism where due. Do support principles; don’t support parties or politicians. The problem is that the this won’t work. Most people’s brains don’t work that way, thanks to our hunter-gatherer legacy of instinctive ingroup-outgroup thinking. Partisanship, and partisan media, are here to stay. Reformers have to fight their battle in the real world if they want to make any improvements.

One such defense mechanism Stanovich suggests is simple awareness. Just being aware that you, as a human being, suffer from myside bias, can help you look for it and do a little something to fight against it. It isn’t a perfect solution—and, spoiler alert, there isn’t one—but it’s a start.

Another defense comes from Stanovich’s insight on page 85 that “There is no general tendency for a person to have high or low myside bias.” It instead comes with certain ideas, because myside bias allows those ideas to successfully persist and spread. This is why seemingly unrelated political stances tend to cluster together. 

For example, to take two hot-button issues on which CEI takes no position, odds are that if you know a person’s position on abortion, you probably also know their position on the Kyle Rittenhouse verdict. Those issues have nothing to do with each other, yet people’s stances on them cluster far more tightly than chance would predict. When you see unrelated issue stances cluster together like that, those issues are likely prone to strong myside-style thinking. Treat those issues with caution. 

It also helps to realize that merits often do not matter to people when they take sides on an issue. This is a difficult lesson for think tankers like myself to learn, since we make our living arguing on the merits. But as Stanovich writes on page 142, “Based on the findings of a wide range of studies, most American voters can’t articulate a principle behind their stance on a particular issue and often don’t know their stance on many issues until they hear the stance supported by their own partisan group.” Regarding a study on attitudes toward welfare policy, “It was as if the subjects did not know their position on the issue until they were told which party was supporting it.”

Another rule of thumb is that the most myside-prone issues tend to be lack a clear right or wrong. People tend not to argue about the law of gravity; they do tend to argue about outrage-of-the-moment culture war news stories, where both sides usually have something resembling a good point. The outrage comes not from the merits of the issue, which are often ambiguous, but from people using them (or are being used by their beliefs) to express their identity. Defend the in-group, attack the out-group. Again, bad for the person, but good for the belief’s replicability.

Which leads to Stanovich’s most heartfelt recommendation: the need to reject identity politics. Here he argues with a passion not seen in the earlier chapters. Most of his focus is on the insular academic world he inhabits. But it is no secret that myside beliefs have harmed the quality of research in psychology, Stanovich’s field. Various grievance studies departments survive not on the quality of their research, which tends to be poor, but by preying on peoples’ ingroup-outgroup thinking, where myside bias thrives. Rather than foster cooperation, they try to get people to compete in a zero-sum game of social status by dividing people in groups and encouraging them them to duke it out based on those group identities. This strategy does little to fight racism or pursue other worthy social goals. But as a replication strategy for myside-prone beliefs, it is brilliant. 

I’ve long thought, based on personal experience, that most people are twits when they are college age and then slowly grow out of it as they get older. So I tend to roll my eyes, rather than get outraged, when campus political correctness veers into cartoon territory. It’s mostly social signaling, not serious policy proposals. I also believe that well-intentioned efforts to be inclusive should be applauded, even if they are sometimes clumsy. They are a conscious effort to broaden people’s circle of concern beyond their in-groups, which is something everyone from Adam Smith to Stanovich himself favors.

But Stanovich has a point when he argues that campuses saturated with myside thinking can have a long-run effect on students as they move into the real world. This may be one reason why politics has become so polarized in the last decade or so—the first generation of students who grew up in stifling myside-biased campus environments is now old enough to play leading roles in business, politics, and media. 

The best solution is also long-run—reshape universities to reject identity politics and to instead encourage open, civil discussion of ideas. Discovery and growth are rarely comfortable, but they’re worth it. Getting there will be difficult and will require structural changes. These include requiring grievance studies departments to meet the same academic standards as real departments in the humanities and social sciences; depoliticizing mission statements and administrative jobs; changes to funding, hiring, and admissions practices; and, most importantly, shifting social norms in favor of civil engagement, rather than righteous shouting down. These are unlikely to come to pass anytime soon. But even small changes at the margin can have significant long-term effects. 

Readers interested in further exploring similar themes would also like two other books also published in 2021. Julia Galef’s highly readable The Scout Mindset: Why Some People See Things Clearly and Others Don’t draws a contrast between the scout mindset and the soldier mindset. Scouts search for correct information, as though they are trying to draw an accurate map. A soldier’s job is to defend something, right or wrong. Everyone is part soldier in this sense. And strong partisans are mostly soldier. Galef offers advice on how to keep the soldier mindset in its place and embrace our inner scout. 

Galef’s best recommendation is regular practice. Take the time to engage opposing ideas without anger or passion. You can dance with an idea without marrying it. Try asking tough questions about your own beliefs. If a news story plays into your ideological priors, assume it’s too good to be true unless you investigate more closely. These are learned skills that take effort, which is why most people won’t bother. But they pay off.

University College London professor Brian Klaas’ similarly readable Corruptible: Who Gets Power and How it Changes Us is also a good complement to Stanovich. Where Stanovich uses an evolutionary approach to understand ordinary people, Klaas uses an evolutionary approach to understand the powerful. He is interested in the types of people who seek power, and are successful in obtaining it. As it turns out, there is a natural selection process that favors people with undesirable personality traits in the pursuit of power. Hayek was right; the worst really do get on top. 

Klaas also offers suggestions for how to contain ambition. He correctly focuses mostly on the institutional level; for different results, we need different rules. The rules of the political game need to weed out people right at the start who want power for the wrong reasons. They need to keep a close eye on even good people in power, because power tends to corrupt. And they need to limit the damage that any one individual can do.

If time and space allow, I’ll give those books their due. They certainly belong with Stanovich’s The Bias that Divides Us on the list of best books of the year.

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Posted in Books, Philosophy, Political Animals, Psychology

Best Books of 2021: Ryan Bourne, Economics in One Virus (Cato Institute, 2021) and Caleb Fuller, There Is No Free Lunch (Freiling, 2021)

Posted on December 21, 2021 | Comments Off on Best Books of 2021: Ryan Bourne, Economics in One Virus (Cato Institute, 2021) and Caleb Fuller, There Is No Free Lunch (Freiling, 2021)

Economists are an unpopular bunch. One reason for this is that much of their job is putting parameters on people’s utopias. Spending more money on one issue people care about means spending less on other issues that someone else cares about. Neither politicians nor the public have kind words for those who remind them that tradeoffs exist. Economists, regardless of political persuasion, also tend to have different views than the general public on issues such as trade, immigration, minimum wages, and rent controls. Getting shouted down by people who have not studied the issue at hand is a feeling many economists know all too well.

This dismal reputation is undeserved for two reasons. One, the economic way of thinking is useful. It can shine light on how grocery stores work, why politicians behave the way they do, and even on feeding behavior in birds. Two, it is fun. Basic economic principles are at work, right now, almost everywhere in the real world. Looking for them, and seeing them in action, is a discovery process that provides constant “A-ha!” moments. Two of this year’s best economics books explore both of those themes in ways that anyone can understand.

Economics in One Virus: An Introduction to Economic Reasoning through COVID-19, by Cato Institute scholar Ryan Bourne, shows how applying basic economic concepts can make dealing with the pandemic easier and less contentious. Grove City College economics professor Caleb Fuller’s No Free Lunch: Six Economic Lies You’ve Been Taught And Probably Believeshows that economic reasoning is not only useful, it can be fun. Both books give clear and enjoyable explanations of basic concepts in the economist’s toolkit, in different ways.

Bourne’s Economics in One Virus is the more thorough of the two books, about 270 pages of text to Fuller’s 110. As the title implies, it focuses on current events, while Fuller’s book is more evergreen. First a bit on Bourne’s book, then we will turn to Fuller’s.

Each of the 16 chapters in Economics in One Virus focuses on a different economics concept. He gives layman-friendly explanations of tradeoffs, risk analysis, trade and specialization, and more. His application of marginal thinking to COVID-19 lockdowns and other policies is especially enlightening. It shows that politicians are not as impactful as they think they are, and gives good reason for people to be more civil to their political opponents. Bourne shows why it is perfectly reasonable to support vaccines and mask wearing, while also opposing mandates.

When COVID first hit, people started adapting right away by staying home and socially distancing. They didn’t wait for governors and presidents to tell them what to do. When some states started passing mandates and other rules a few weeks later, they had little effect at the margin. Most people were doing the right thing anyway, so lockdowns and masks mandates had little additional effect. That’s what thinking at the margin is.

People who weren’t listening to their families, friends, and colleagues probably didn’t suddenly change their mind because of something some politician said. If anything, lockdown orders and mask mandates likely caused a backlash, with some people to digging in harder against safety measures. A virus with no political views of its own became a heated political issue for no good reason, which likely resulted in more funerals than necessary.

The lessons from Bourne’s application of marginal thinking are that most people are smarter than politicians think, and that mandates and other measures have smaller effects than most people on either side of the political spectrum thinks. They are bad policy, not just on libertarian grounds, but because their effects are small, especially compared to the amount of social tension they cause. I tried but failed to articulate this point early in the pandemic, and was delighted to see Bourne do it right. That discussion alone is worth the price of admission.

Bourne’s other highlight is Chapter 13’s introduction to public choice theory, which is underserved in most popular economics books. Public choice theory, in a nutshell, says that politicians will always behave in a self-interested manner; design your political systems accordingly.

Too many people have an idealized view of politics, where things would improve if we can just pass the right bill or elect the right people this time. Government doesn’t work that way. Policies are made by the government we have, not the government we would like to have. Any well-meaning reform will have to make it past the desks of people like Mitch McConnell and Nancy Pelosi. It will be watered down, compromised, and loaded with unrelated political favors. Reformers who do not take this into account will fail.

The solution is to focus on larger political processes, not just this or that bill or regulation. We know that politicians will always have an incentive to get reelected and to grow their budgets and powers. But we also know that different rules will give different results. A well-designed political system channels politicians’ incentives in a better direction—or at least a less harmful one.

A political system that disperses political power will be freer than one that concentrates it in a king or a president. A system that makes it difficult to pass hasty “flash policy” during a crisis will be more resilient than one that lets it through. That is why we have a Senate, as well as a House of Representatives. That said, America’s recent experience with the PATRIOT Act, Dodd-Frank financial regulations, and now trillions of dollars of COVID spending bills shows that we need to improve our rules in that area. Harmful crisis legislation has happened three times already this century. Absent reform, it will happen again when the next crisis hits.

With the possible exception of the notion of tradeoffs, public choice theory is probably the most important defense the public has against politicians and populist demagogues. Bourne’s highly readable application of public choice to COVID-era policy making is an important public service.

Fuller’s There Is No Free Lunch is more about the ideas themselves than about applying them to specific issues like the pandemic. At the same time, it is more focused than Economics in One Virus. Where Bourne gives a tour of more than a dozen different concepts, Fuller’s six chapters each cover a different aspect of one idea: opportunity costs. They are each framed as myths—destruction is profit, trade is war, exchange is exploitation, and so on—which he then busts.

Early on, Fuller acknowledges his debt to the 19th century French economist Frederic Bastiat and his 20th century American successor, Henry Hazlitt. Bastiat wrote the famous parable of the broken window, which remains the classic explanation of opportunity costs.

In this story, a young boy accidentally breaks a shop window. The townspeople hail him as an economic hero, because he has created a job for the glass repairman. He will in turn spend his money on a new suit, the clothier will spend that money on something else, and on down the line. This may sound familiar, because many politicians use similar reasoning in promoting their spending bills.

The problem is that the cheering citizens have ignored opportunity costs. They see the repairman’s new suit, but they don’t see that if the window was never broken in the first place, the shop owner could have had both the window and a new suit. Instead, he is down a window, and the economy as a whole has the same amount of new suits, not more of them. The boy caused a net loss.

Hazlitt updated Bastiat for the 20th century with his 1946 book Economics in One Lesson, which applied the broken window fallacy across a range of policy issues. Fuller’s book is a worthy, and needed, update to the Bastiat-Hazlitt tradition. It helps that Fuller is an excellent storyteller. Even veteran economists will find new material here.

As a way to show the opportunity costs of rent controls, Fuller shares a story from the economist Bertrand de Jouvenel about post-World War II Paris. Rent controls made apartments so scarce that people would stalk the elderly day after day and pounce on their rent-controlled apartments as soon as they died. Lower money prices for rent raised non-money prices, such as scarcity. Would-be renters who could have been working and earning money instead would spend their time ghoulishly tracking people waiting for them to die. In that case, human decency was a cost of rent controls.

Speaking of which, rent control also enables discrimination. When lots of people queue up for scarce apartments, landlords can choose tenants based not on price, which is set by regulations, but on their prejudices. They also tend to choose childless couples over couples with children, who will draw on the walls and break things. In New York City, basic maintenance was often neglected, because controlled rents didn’t always cover the cost. Arson rates went up, as some landlords decided to torch their own buildings rather than be legally forced to lose money. Some landlords even fled to the Caribbean and assumed new identities, as documented in Walter Block and Edgar Olsen’s edited book Rent Control: Myths and Realities, which includes several pictures of burned-out buildings. Was the destruction caused by bombs or rent control? The answers are at the end of their book.

Fuller also shares economist Steven Cheung’s story about Hong Kong landlords’ response to a rent control provision allowing for rent increases when tenants turn over. They would sometimes remove windows during monsoon season so rent-controlled tenants would move out rather than tolerate the conditions. The landlords could then charge higher rent to the next tenant.

Occupational licensing has its own opportunity costs. They benefit incumbents, who are enriched by being able to charge higher prices and keep out competitors. And many would-be workers lose career opportunities.

But what about consumers? Here Fuller uses what I call an “invisible coffins” argument. Occupational licensing is associated with measurably more electrocution deaths, blindness, and even poorer dental hygiene.

That is because those licenses can cost thousands of dollars and hundreds of hours of training to obtain. Not only does this restrict supply, but those extra costs are factored into prices; businesses pass on their costs. This raises the cost of basic maintenance services in licensed professions like electrical work and dentistry, so poorer people will sometimes just do without, try to do it themselves, or turn to gray and black markets. That means more avoidable accidents. The effect is large enough to show up in the data, as shown in studies like this one and this one.

I have only one substantive criticism of There Is No Free Lunch. Fuller says on page 69, “here it is, one more time with feeling: Let’s think with our heads, not our hearts.” I argue that it is better to think with our heads and our hearts. Yes, it’s nice that markets are efficient. And it does take thinking with our heads to see why, using the lens of opportunity costs. That’s all necessary, but it isn’t sufficient, and that’s why we need to think with our hearts, too.

The post-1800 Great Enrichment has increased ordinary people’s living standards thirtyfold. This is a historical development on par with the taming of fire or the invention of the wheel, and markets made it possible. Markets enable people to rise out of poverty. They help people live longer, healthier lives.

Markets also encourage virtue, as Virgil Storr and Ginni Choi argue in their book Are Markets Moral? Participating in markets teaches people how to cooperate, how to compete within rules, and how to trust and be trustworthy. They can use their market-generated wealth to give to charities, to support the arts and make their own art, to travel, to spend time with family, and to create opportunities to our children. Our heads show us that markets make all that possible. But we need our hearts to show us why we want those things in the first place.

Bourne’s Economics in One Virus shows how sound economic thinking can make life in the COVID era safer and less divisive, and has ideas for effective damage control against politics. Fuller’s There Is No Free Lunch shows how the simple concept of opportunity costs can help anyone gain insight into how everything, from bounties to retailing, actually works. Anyone who reads either of these books—or, better, both of them—will have both a clearer view of the world and some good ideas about how to make it better.

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Posted in Books, Economics

Review of Michael Munger, The Sharing Economy: Its Pitfalls and Promises (Institute of Economic Affairs, 2021)

Posted on November 17, 2021 | Comments Off on Review of Michael Munger, The Sharing Economy: Its Pitfalls and Promises (Institute of Economic Affairs, 2021)

Transaction costs are one of the most overlooked ideas in economics. They are also one of the most important. The lowering of transaction costs is an engine of modernity itself and key to understanding where future progress might take us. That is Duke University economist Michael Munger’s argument in his new book, The Sharing Economy: Its Pitfalls and Promises (free download from the Institute of Economic Affairs). It follows up his 2018 book, Tomorrow 3.0.

What are transaction costs? As the name implies, they are things that get in the way of making transactions. Think of them as economic friction. Things like waiting in line, searching for a product, comparing prices, driving to and from a store, or resetting another forgotten website password. Transaction costs often cannot be measured in money, but they are still part of the price of everything we buy. A good economist knows, money is not everything.

Countless beneficial transactions never happen because the time and hassle required outweigh the benefits. Successful entrepreneurs can make these lost transactions come to life just by lowering their attendant transaction costs. In a way, they succeed by making the invisible visible. Along the way, they can create new industries, revolutionize existing industries, and topple old ones. Transaction costs are the hidden engine of Joseph Schumpeter’s creative destruction.

Munger’s dissertation advisor was the Nobel laureate Douglass North, one of the pioneers of transaction cost economics, along with other laureates such as Ronald Coase and Oliver Williamson. Munger likes to tell a story about North explaining that, while there are endless questions to ask in economics, many of them have the same answer: transaction costs. Over the years, North’s advice has proved useful to countless graduate students in search of thesis topics. As The Sharing Economy shows, there remains plenty of uncharted territory. Today’s graduate students should take note—as should experienced scholars.

How do transaction costs apply to the new sharing economy? Broken down to fundamentals, Uber doesn’t sell taxi rides or food delivery. It sells access to a platform that drastically lowers transaction costs for some services. The product is the platform. Yes, people use it to buy and sell taxi rides and food delivery, but they could use that type of platform for almost anything.

This is why a lot of sharing economy startups describe themselves as the Uber or the Airbnb for this or that service. They’re selling transaction cost savings, not whatever product or service appears in their marketing materials.

Every transaction requires what Munger calls the three Ts: triangulation, transfer, and trust. Sharing platforms can solve the three Ts quickly and cheaply:

  • Triangulation means coordinating everyone involved in the transaction. In a food delivery transaction, those are the customer, the restaurant, and the delivery driver. Until recently, solving this coordination problem was so difficult that most restaurants did not offer delivery at all. And the ones that did had to hire their own drivers to work exclusively for them. Unless business was both brisk and consistent, this was a risky proposition. Today, sharing platforms can solve triangulation problems in seconds. As a result, restaurants that might not be able to afford full-time delivery staff can now share drivers with other businesses and earn additional sales, while customers gain additional choices.
  • Transfer means making sure everyone gets paid. Uber, for example, has all parties’ payment info stored in the app. It automatically charges customers the right amount, pays restaurants and drivers, and handles tips. That is far easier than in the old days of cash, checks, or reading out your credit card number over the phone.
  • Trust is all parties having confidence that everything will go as it should. This is what ratings systems contribute. Riders can avoid drivers with low ratings and drivers can avoid problem customers. They can do this in seconds just by glancing at their ratings. On the other side of the coin, high ratings can be lucrative for vendors, giving them a greater incentive to keep customers happy than a traditional cab driver. And keeping that five-star rating can encourage more civil behavior from customers. It doesn’t pay to be a Karen.

Sharing economy platforms solve the three Ts so quickly and easily that millions of transactions that would never have happened a decade ago are now routine. This, for Munger, is a reason for optimism. Similar platforms could emerge for all kinds of goods. In fact, they probably are doing so right now in a dorm room or a garage somewhere.

Tools that spend nearly all of their time in storage could be rented out, for example. Other possibilities include office equipment, professional-grade audio and video equipment, and designer clothing. Some of these ideas might be successful. Others might be duds. People will likely find out soon enough.

Munger believes the low-transaction cost sharing economy could transform manufacturing as we know it. Factories would make far fewer goods, and what they do make would tend to be professional grade and more durable. A drill that spends 30 years in someone’s garage might get a couple hours of use over its entire lifespan, but if it’s shared, it will get far more use on a wider variety of tasks. It will need to be more solidly built and easily repaired.

That is one reason why the sharing economy has costs, as well as benefits. Both words in the phrase “creative destruction” are important. Just because the benefits outweigh the costs doesn’t mean costs do not exist. Manufacturing jobs have already declined by about a third since their 1979 peak, from about 18 million workers to about 12 million. If sharing platforms become popular for a lot of goods, that decline will be deeper and steeper. At the same time, the higher-grade goods still being made might require more skills or more automation to make, displacing less skilled workers.

Other jobs would open up in warehousing and delivery, and likely in other sectors. Munger doesn’t know what these might be, and neither does anyone else. Some of these jobs might not be appealing, might not pay as well, or may not work with some workers’ family responsibilities or other personal situations.

On the other hand, the size of the labor force has stayed remarkably consistent relative to population  throughout America’s transition from agriculture to industry, and from industry to services. While the inability to predict the future is scary, that’s no reason to keep things as they are. As Munger says on page 89, “Platforms are disruptive, but outlawing disruption has never worked.”

Transaction Costs and a Policy Revolution

As transaction cost reductions transform the economy, they also transform public policy. The problem is that public policy usually takes long to catch up. Regulations classify many workers as either employees or contractors, and treat them differently. Employee status comes with certain rules for minimum wages, benefits, and working conditions, while the rules for contractors are generally looser. It is also a false dichotomy that poorly fits workers’ needs.

If an accountant uses a platform like Taskrabbit to work for several clients, is she an employee of any of them? Does she count as Taskrabbit’s employee because it handles her payments or is she a customer who pays to access its platform? Does it matter if she commutes to an office or works from home? What if she’d rather choose her own health insurance or retirement plan? My colleague Iain Murray explored this question in his 2016 CEI paper “Punching the Clock on a Smartphone App.”

Current regulations don’t have good answers to these questions. And laws like California’s AB5 gig worker law and the proposed PRO Act at the federal level would entrench the legacy labor law model even further. All this is because some entrepreneurs thought of a way to use smartphone apps to reduce transaction costs.

In the age of COVID, sharing platforms have made it easier for workers to avoid public transportation and crowded offices. When COVID subsides, many workers will still prefer to avoid commutes and offices in favor of more pleasant surroundings like home offices, coffee shops, or smaller shared offices—which some sharing platforms offer. Regulators should think carefully before they take those options away.

Antitrust policy is in the middle of its own revolution, thanks in part to transaction costs. Sharing platforms are just another version of the old make-or-buy decision. If a company needs legal help, does it use in-house counsel or hire an outside attorney? Should a firm employ its own custodian or hire a cleaning service? The answer depends on transaction costs. If it’s cheaper to do something yourself, do that. If transacting with someone else costs less, do that. The answer is different for every company—and can change over time within a company. Sharing platforms and their lower transaction costs provide new possible answers to this age-old problem.

As of this writing, the leading food delivery platforms are DoorDash, UberEats, and GrubHub. They could buy out smaller competitors or merge with each other in the coming years, which might result in antitrust action. It shouldn’t, and transaction costs explain why.

A restaurant that wants to offer delivery has a make-or-buy decision to make. Does it hire its own driver or outsource to a sharing platform? It will go with whichever has lower transaction costs. This provides a built-in competitive check on sharing platforms that will never go away—even if one sharing platform monopolizes the entire market. If its fees cost more than the restaurant hiring its own drivers, then restaurants will opt for the latter. Several restaurants in the same city could even band together and jointly hire a driver—if regulations allow them.

The reason people use sharing platforms in the first place is because their transaction costs are lower than the alternatives. And the alternative of doing something in-house will never go away. Sharing platforms do not have market power, and never will.

Sharing platforms also do not restrain trade, which is another threshold for antitrust enforcement. They enable new trades that would never have happened otherwise, because they lower transaction costs. Before sharing apps, food delivery options in most places were limited to pizza and Chinese. Now, everyone from McDonald’s to mom-and-pop diners offer delivery. Some restaurants, such as Panda Express, are even attempting to undercut sharing platforms by creating their own app-based ordering services to avoid platforms’ fees.

Transaction Costs and the Moral Economy

Contrary to popular belief, morals are an integral part of economics. One of the discipline’s founding works, after all, is Adam Smith’s Theory of Moral Sentiments. Man is an animal that trades, to paraphrase from Smith’s other great work, The Wealth of Nations. People want to exchange, cooperate, and compete. It is our nature. But transaction costs get in the way of our nature, because they get in the way of trade.

Economists Virgil Storr and Ginni Choi, of the Mercatus Center at George Mason University, argue in their book Do Markets Corrupt Our Morals? that markets are moral playgrounds. When people enter those playgrounds, they learn how to trust and earn trust. They learn to keep their word and be polite—the late, great Steve Horwitz delighted in the “double thank you” that accompanies most transactions. People on the playground learn that the best way to get something you value is to give others things they value even more.

These are skills that take practice and repetition to develop. Transaction costs raise the cost of this moral practice. And when something costs more, people consume less of it.

If the goal is an open, civil society, then transaction cost reduction should be an important priority. Sharing economy platforms have the potential to do exactly that on a massive scale. At the same time, they are just another chapter in a long story, and hardly the final one.

Munger, by taking Douglass North’s advice, has used an old and overlooked tool to better understand new technologies and emerging economic changes. Sharing platforms have already changed the way people take cab rides, order food, and go on vacation. In the coming years, they could reshape the manufacturing sector, office culture, and even urban design, if traditional offices and downtowns continue to fall out of favor.

Transaction costs can also lead to fresh insights about labor regulations, antitrust, and other areas of public policy, as well as the overlooked symbiosis of markets and morality. Though The Sharing Economy is geared to a British audience, American readers will still get far more value from this freely downloadable book than they spend in transaction costs. While this admittedly sets a low bar, I intend it as high praise. I could not recommend this book more highly.

Download The Sharing Economy for free from IEA’s website here.

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Posted in Antitrust, Books, Competition, Economics, Technology, The Market Process

Peter the Great’s Tax Policy Innovations

Posted on October 19, 2021 | Comments Off on Peter the Great’s Tax Policy Innovations

From p. 401 of Peter K. Massie’s 1980 biography, Peter the Great: His Life and World:

The Tsar’s demands for money were insatiable. In one attempt to uncover new sources of income, Peter in 1708 created a service of revenue officers, men whose duty it was to devise new ways of taxing the people. Called by the foreign name “fiscals,” they were commanded “to sit and make income for the Sovereign Lord.” The leader and most successful was Alexis Kurbatov, the former serf of Boris Sheremetev who had already attracted Peter’s attention with his proposal for requiring that government-stamped paper be used for all legal documents. Under Kurbatov and his ingenious, fervently hated colleagues, new taxes were levied on a wide range of human activities. There was a tax on births, on marriages, on funerals, and on the registration of wills. There was a tax on wheat and tallow. Horses were taxed, and horse hides and horse collars. There was a hat tax and a tax on the wearing of leather boots. The beard tax was systematized and enforced, and a tax on mustaches was added. Ten percent was collected from all cab fares. Houses in Moscow were taxed, and beehives throughout Russia. There was a bed tax, a bath tax, and inn tax, a tax on kitchen chimneys and on the firewood that burned in them. Nuts, melons, cucumbers were taxed. There was even a tax on drinking water.

Money also came from an increasing number of state monopolies. This arrangement, whereby the state took control of the production and sale of a commodity, setting any price it wished, was applied to alcohol, resin, tar, fish, oil, chalk, potash, rhubarb, dice, chessmen, playing cards, and the skins of Siberian foxes, ermines, and sables. The flax monopoly granted to English merchants was taken back by the Russian government. The tobacco monopoly given by Peter to Lord Carmathen in England in 1698 was abolished. The solid-oak coffins in which wealthy Moscovites elegantly spent eternity were taken over by the state and then sold at four times the original price. Of all the monopolies, however, the one most profitable to the government and most oppressive to the people was the monopoly on salt. Established by decree in 1705, it fixed the price at twice the cost to the government. Peasants who could not afford the higher price often sickened and died.

And from p. 402:

No matter how much the people struggled, Peter’s taxes and monopolies still did not bring in enough. The first Treasury balance sheet, published in 1710, showed a revenue of 3,026,128 rubles and expenses of 3,834,418 rubles, leaving a deficit of over 808,000 rubles. This money went overwhelmingly for war.

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Posted in Books, Economics, History, International, Taxation

John Stuart Mill on the Limits of Economics

Posted on September 16, 2021 | Comments Off on John Stuart Mill on the Limits of Economics

We must never forget that the truths of political economy are truths only in the rough: they have the certainty, but not the precision, of exact science.

-John Stuart Mill, Principles of Political Economy, Book 2, chapter XVI.4, p. 422.

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Posted in Books, Certainty, Economics, Great Thinkers, Philosophy

John Stuart Mill on Lawyers

Posted on September 15, 2021 | Comments Off on John Stuart Mill on Lawyers

The exorbitantly-paid profession of lawyers, so far as their work is not created by defects in the law, of their own contriving, are required and supported principally by the dishonesty of mankind.

-John Stuart Mill, Principles of Political Economy, Book 1, chapter VII.5, p. 110.

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Posted in Books, Economics, Great Thinkers, Law, Public Choice

Fighting Bias and Misinformation, from Pierre Bayle’s 17th Century to the Social Media Age

Posted on September 2, 2021 | Comments Off on Fighting Bias and Misinformation, from Pierre Bayle’s 17th Century to the Social Media Age

Many people insist that media bias and misinformation are getting worse in the social media age, and we need to do something about it. Depending on whether one leans Democratic or Republican, tech companies are either not doing enough to stop right-wing misinformation from spreading, or are censoring legitimate conservative content. Some conservatives feel so aggrieved they are even pushing to revive the fairness doctrine, which they used to oppose.

Bias and misinformation are impossible to measure, which puts a rather obvious damper on peoples’ certainty about them. Ironically, this is at least partially because of the human brain’s built-in biases, such as recency bias, availability bias, and pessimistic bias. In fact, media bias and misinformation are nothing new, and have likely gotten neither better nor worse over time.

These problems have been around so long that the 17th century philosopher Pierre Bayle wrote in an issue of his 1680s periodical Nouvelles de la République des Lettres (News from the Republic of Letters):

“History is dished up very much like meat. Each nation and religion takes the same raw facts and dresses them in a sauce of its own taste, and each reader finds them true or false according to whether they agree or disagree with his prejudices.”

More than 300 years later, this holds up well. And it’s not just with history. People also put their own tastes on current events. Different people take identical facts and prepare them differently, usually in line with whatever their ideological priors are.

Just being aware that everyone does this can go a long way toward minimizing the harmful effects of bias and misinformation. Beyond awareness, there are also many simple, low-effort actions one can take, some of which Bayle might endorse if he were alive today:

  • Avoid cable news channels. They do not inform people, so much as get them riled up. People who feel outraged click on more articles, keep the TV on, and generate more ad revenue. Outlets encourage this by framing news stories as us-vs.-them struggles first, and only secondarily by presenting information. These are two very different things! Learn to tell them apart. If you find yourself getting outraged over something a personality figure from the other political party said, or about the culture war story of the day, that’s usually a good sign that you’re getting riled up rather than informed. There are better uses for your time, and for your blood pressure.
  • Purge low-quality sources from your social media feeds (or abstain entirely). Use those mute and block buttons on people who post low-quality content that does not add value to your feed. That’s your space, and you can curate it however you want. If someone’s posts are mostly outrage stories, your social media feed will likely be both more enjoyable and more informative if they are not part of it. Spend some real-life time with that person instead, which will likely elicit better social etiquette. People are more considerate of others when they are face to face rather than venting their spleen, alone, into a keyboard.
  • Put a little effort into statistical literacy, and be skeptical of too-good-to-be-true stories that appeal to your ideological priors. Arming yourself with the right tools is as easy as picking up a layman-friendly book or two. Financial Times columnist and BBC presenter (and friend of CEI) Tim Harford’s latest book, The Data Detective, is an excellent guide that is also a delight to read. I also recommend Hans Rosling’s Factfulness, which I reviewed earlier on this blog. Jonathan Rauch’s new book The Constitution of Knowledge has a lot wisdom, which he also shared earlier this year at a CEI online event. My colleague Iain Murray strongly recommends his old boss’ book, David Murray, Joel Schwartz, and S. Robert Lichter’s It Ain’t Necessarily So: How the Media Remake Our Picture of Reality. Reading a chapter a day from any of these books is a far better use of 30 minutes than getting outraged over Tucker Carlson or Rachel Maddow’s latest rant.
  • Keep an eye on the longer arcs of history, not just today’s ephemera. Elizabeth Nolan Brown’s recent Reason article “40 Ways Things Are Getting Better” is one example of journalism that gets this. There are plenty of reasons for short-term pessimism; that keep groups like CEI busy. But there is also a strong case for long-run optimism. Both can simultaneously be true, as CEI founder Fred Smith captured in his “Despairing Optimist” letters. Matt Ridley’s The Rational Optimist and his new book How Innovation Works, for which he also did a CEI event, are immensely helpful for seeing the big picture.

Notice that none of these strategies involve government regulating political speech. They are all ideas that you and I can implement right now; change begins at home. Ultimately, individuals hold power over bias and misinformation, not the other way around. We should learn to use that power wisely, and not delegate it away to Washington, where it will get politicized and misused. It takes some effort, which is why many people don’t bother. But the payoff is worth it.

Pierre Bayle had a good sense of this dynamic. He was an important bridge figure between the Scientific Revolution and the Enlightenment—which means he helped to inspire modernity as we know it. He emphasized the virtues of tolerance and skepticism by individuals, in part because he was forced into exile from his native France over his religious beliefs. He settled in the more tolerant Netherlands, where he produced works in astronomy, philosophy, religion, literature, and even produced the Dictionnaire Historique et Critique (Historical and Critical Dictionary), an early encyclopedia that predated Denis Diderot’s more famous 1751 Encyclopédie by 60 years. France’s outrage-induced loss was the Netherlands’ gain, and ours.

We live in better times. But the lessons Bayle took from his day’s outrage culture are still useful in dealing with today’s excesses. Times change, but people are people, wherever you go. That is mostly to the good—though as we see in the news and on social media, not entirely. There is always reason for optimism, if we know how to look for and act on it.

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Posted in Books, Free Speech, Great Thinkers, History, Media, Philosophy

Different Attitudes Towards Life

Posted on June 11, 2021 | Comments Off on Different Attitudes Towards Life

In today’s polarized discourse, there is a stark difference between thinkers who spend most of their time being for something, and those who spend most of their time being against something. One attitude is healthier than the other, and is more likely to lead towards truth, and is likelier to succeed in persuading others and getting its policies enacted.

Think of it as the difference between between favoring liberalism, openness, and dynamism on one hand; and owning the libs or the cons, depending on one’s tribal affiliation, on the other.

Which makes this passage from near the end of Evelyn Waugh’s 1943 novel Brideshead Revisited especially poignant (p. 383 of the Back Bay Books edition):

I said to the doctor, who was with us daily: “He’s got a wonderful will to live, hasn’t he?”

“Would you put it like that? I should say a great fear of death.”

“Is there a difference?”

“Oh dear, yes. He doesn’t derive any strength from his fear, you know. It’s wearing him out.”

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Posted in Argumentation, Books, Literature, Philosophy

Partisan Reasoning and Evolution

Posted on May 28, 2021 | Comments Off on Partisan Reasoning and Evolution

From p. 32 of Jonathan Rauch’s forthcoming book The Constitution of Knowledge:

Think of it this way: humans are equipped with some of evolution’s finest mental circuitry to protect us from changing our minds when doing so might alienate us from our group. We have hundreds of thousands of years of practice at believeing whatever will keep us in good standing with our tribe, even if that requires denying, discounting, rationalizing, misperceiving, and ignoring the evidence in front of our nose.

This explains much of modern politics, and is one reason I highly recommend avoiding cable news. Some of the talking heads’ performance routines are impressive. But they are seeking peer approval, not truth or understanding.

CEI is hosting Rauch for a book forum on June 9. You can register here.

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Posted in Books, Free Speech, Political Animals, Psychology

Science, Openness, and Peace

Posted on May 12, 2021 | Comments Off on Science, Openness, and Peace

From pp. 352-353 of Richard Holmes’ immensely enjoyable history of science in the early Romantic period, The Age of Wonder:

On 2 November [the British chemist and forefather of anesthesia Humphry] Davy received the Prix Napoléon (worth 6,000 livres) from the Institut de France in Paris. He knew that accepting the award might be unpopular in wartime England, but followed [British scientist and explorer Joseph] Banks’ line at the Royal Society that science should be above national conflicts. He told [tanner and essayist] Tom Poole: ‘Some people say I ought not to accept this prize; and there have been foolish paragraphs in the papers to that effect; but if the two countries or governments are at war, the men of science are not. That would, indeed, be a civil war of the worst description: we should rather, through the instrumentality of men of science, soften the asperities of national hostility.’

Montesquieu’s doux commerce thesis is that trade promotes peace and prevents war. Here, Humphry Davy, who is not as famous as he should be in the history of science, makes the same argument for science. When ideas and discoveries cross borders, it is less likely that soldiers will. This is an important point in today’s political climate of growing nationalism.

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Posted in Books, History, International