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A bunch of legendary comedians got together to make a sketch, where the punchline is: "establish a Consumer Financial Protection Agency". It's kinda a funny, but mostly because of the Darrell Hammond's imitation of Clinton making sexual innuendos, and Fred Armisen's impersonation of Barak Obama. It seems director Ron Howard was trying to find something to 'do good', so he chatted with the earnest and overeducated Elizabeth Warren, and decided consumer financial regulation was the kind of smart idea that would obviously work. After all, who's against consumer protection?

I am! This is the same government that goaded banks to lower standard to lend more to historically damaged communities, and then when those borrowers defaulted, blamed such lending on the banks. Avoiding the poor is redlining, targeting the poor is predatory, which means, whatever goes wrong can be blamed on the banks. Government always wants to have its cake and eat it too: low taxes & high spending, high growth and union-type work rules, banks lending more today and raising their capital.

The CFPA tries to do what most regulators try to do: improve efficiency, eliminate waste, consolidate regulations,simplify regulations, protect consumers, and protect jobs! It seems banks are greedy and basically uregulated, leading directly to the 2008 housing crisis. There are seven government bodies already regulating banks, highlighting how incredibly naive this proposal is. If there's a magic bullet for improving efficiency, etc., share it with existing regulators...unless you think that all the regulators have been captured by some interest group, which if true just means we are bringing in one more interest group to advocate why they should get a better deal.

More importantly, if your concern is about the irrational poor people easily duped by huckster bankers, lower prices and penalties on the poor doesn't help them, it enables them. Life has carrots and sticks, and one definition of a vice is that which generates bad outcomes in the long run. If you are constantly overdrafting your account, don't have enough money to make a 20% down payment on a property, you need better financial discipline. Helping the poor from being trapped by debt should try to minimize they amount of debt they have, say by increasing rather than lowering prices on credit cards. That would still allow emergency spending, but make people do it much less, which is a good thing.

It's like alcohol. You want to tax it sufficiently that making beer in your basement is not better (because then it will lead to illegal activity and lower quality control), but not so cheap that being a career drunk is easy (note that Cuba and the Soviet Union have very cheap booze prices--they want the populace perpetually inebriated).

One key to the housing bubble was the credit underwriting standards fell: no verification of income, no money down, etc. Basically, people got loans they could not afford. So this agency is intent on doubling down, assuming the problems before weren't because too many people had loans, but rather, bankers were greedy. Bankers want to maximize profits, but politicians want to pander via expropriation and cross-subsidizing. Which is better in the long run to an economy?

Politics is all about pandering egalitarianism, treating everyone the same regardless of their risk or behavior. As Joe Stiglitz knows, this leads to inefficiencies, because when you don't price according to cost (as reflected by higher default rates), you get more adverse selection in that the highest cost customers find the product most attractive, leading the best credits to leave, and ultimately rationing of those best credits. As Stiglitz 'proved', this is an inefficient equilibrium. But if government is running the show, such inefficiencies are all ok, because government merely adds more regulations, and so on. When the businesses fail, they almost always go out of business (unless they are really big); when government fails, it just increases its mandate's scope.

Danny Kahneman is the father of behavioral economics, and writes many interesting things. I think the implications of this school are vastly overstated, but he's a thoughtful, interesting, person.

He gave a talk at TED.org recently on experience vs. memory. His main idea is that there are two kinds of 'happiness', that which is experienced in a particular moment, and that which is remembered. The experiencing self that lives in the present, and is relevant when a doctor asks ‘does it hurt when I do this’? The remembering self is present, as when we ask ‘how was your vacation’? Happiness can be the memorizing self over time, or happiness when someone thinks about their life.

He mentions that these two aspects are very different, and lead to different objectives. The correlation between people’s experiential vs. remembered happiness is 0.5, which is why you can ask someone ‘are you happy now?’ and get no correlation with income over $60k, and ‘are you happy with your life?’, and get a significant correlation with income over $60k. It’s the difference between being happy in your life, and being happy about your life.

The difference between the two has been documented by by many experiments. For example, during a colonoscopies in the 1990’s, back when the procedure was unambiguously painful, subjects would record their pain every minute. If you think of the pain going over a bell curve over time (rising and falling symmetricall), an experience that stopped at the top of the curve would be better than one that road the curve over its entire path. Yet the remembered experience that stopped at the top would be remembered worse, because the diminution of pain at the lower ending point would make the longer experience with more total pain seem ‘better.

People choose mainly between memories of experiences vs. just experiences, and generally prefer the memorizing self vs. the experiencing self.

You can predictably manipulate the remembered experiences by manipulating endings. In the colonoscopy case, just remember to draw the procedure out longer, making it slightly less painful every minute, even though the procedure is functionally over. Go on a 1 week vacation instead of 2, because you will remember the experience it the same, as the memory of going to Greece is basically allocated a unit regardless of length once you go over a couple of days. This explains why people generally like having children, and find them adding to their life’s satisfaction, yet generally don’t like playing or interacting with their children.

Anyway, listen to the talk, it’s very interesting (though I just told you the main points).

The subtitle should be "why free market types are like religious fundamentalists", because he loves using the cute phrase 'market fundamentalism' the way MSNBC uses the phrase 'tea baggers'.

A nice thing about being a Nobel prize winner in economics is when you write books with the same policy recommendations, but use inconsistent arguments in each book, you still get the front table at Barnes and Noble. FreeFall makes the standard talking points you hear on AirAmerica, MoveOn.org, or Noam Chomsky:

1) every economy needs more regulation and higher taxes, especially on the rich
2) He, along with everyone who agrees with him that markets are irrational, predicted the 2008 financial crisis
3) the Community Reinvestment Act and similar government programs had absolutely nothing to do with the crisis.
4) the bubble was fueled by Greenspan's easy money from 2002-2007.

Why do we need more taxes and regulation? Well, according to Stiglitz, the rich are generally immune to incentives, probably parasitic, and generally monopolistic. Like Russian Kulaks, Jews in pre-War Germany, Indians in Uganda, the rich are impediments to growth & justice. Yet he also notes a large amount of financial innovation is to skirt taxes and regulations. I agree that many finacial innovations are focused on taxes and regulations, but that's only because these exogenous rules tend to create mutual gains from trade, and so are bad only if you think prices are wrong (ie, market participants are predictably wrong, or fail to capture externalities).

His proof that the CRA and other government housing initiative had nothing at all to do with the housing bubble, is proven thusly: AIG failed, and they didn't issue mortgages, just bought bonds and derivatives. QED. Further, subprime mortgages failed at rates similar to CRA related subprime mortgages. Yet, current law does not allow a bank to charge different prices based on race. To increase the amount of loans in historically underserved demographics--poor people--you have to lower the bar for all loans.

The old and seemingly irrational rules of thumb of having certain levels of wealth, credit score, validation of income, and downpayment, were diminished because of the fact that banks historically had low losses on mortgages, because there was little evidence of large year-over-year aggregate declines in real housing prices. Thus, for example, we went from requiring 20% down in the 1990's, to zero percent down in the bubble (now upped to 3.5% by the US's FHA). Indeed, Stiglitz himself wrote a white paper arguing that Fannie Mae's 2% capital requirement was more than adequate in 2002 (he estimated an expected loss on $1 Trillion by Fannie of only $2 Million--pre hindsight). Indeed, Fannie Mae was one of his examples of beneficial government policy in his 2002 book The Roaring Nineties. Fannie and Freddie have already cost the government $127B, and it's not done. That's 90 Nick Leesons and counting, but the nice thing about being an intellectual is you aren't accountable for for how policies that were aided and abbetted by your arguments actually worked, because if it fails, it wasn't implemented correctly (eg, Socialism didn't fail, rather, Soviet-style socialism failed).

His assertion that he called the subprime crisis is pretty weak. Look in vain for any strong statement by Stiglitz that underwriting for home lending was too easy prior to 2007, and you won't find it. He did reference an argument he made in 1992 that mortgage asset backed securities may be problematic, but this was a hedged statement, and not important enough to reassert over the subsequent 15 years.

In Stiglitz's Globalization and Its Discontents, written in 2002 just after the internet bubble, the big policy blunders where high interest rates, free markets, the 'fear of default' by lenders, and a lack of concern for the poor. He specifically mentions that Greenspan was excessively concerned with inflation during the 1990's, constraining the Clinton's ability to create economic growth. So, the easy money, lack of concern with default, and insufficient initiatives targeted to the poor, all arguments that he now asserts caused the 2008 crash, would seem to be right out of his playbook. Consistency is for non-experts, I guess.

In his 2006 book, Making Globalization Work, Stiglitz praises Japan, Korea, and China, for their high-minded government policies and trade restrictions as an impetus for growth. Now, modern economies all have government of at least 25% of the economy, and many regulations on businesses. Any success could be a result of some governmental interference, which are many. But to be convincing, one would have to do a true cross-country comparison, and like typical theorist his idea of data is anecdote. The Asian Tigers, West Germany's Adenauer, Chile, recent ascent of Ireland are all ignored. As is the fact that China and India moved considerably towards free markets at the same time their growth rate rose, or that Japan and Korea are less regulated than most nations.

Stiglitz's two most prominent papers are papers he coauthored: "Credit Rationing in Markets with Imperfect Information", The American Economic Review (1981), and his “On the Impossibility of Informationally Efficient. Markets”, American Economic Review (1980). He has always been a theorist, not an empiricist.

Grossman and Stiglitz's "On the Impossibility of Informationally Efficient Markets" flows naturally from Grossman's work on getting information into prices, and Stiglitz's obsession with market imperfection (which came from his fawning work on Samuelson's collected works, which tended to emphasize market imperfections). I have never seen an empirical application of this paper. It's often used as a profound proof that markets aren't efficient, for those who think the relevant standard is perfection. If all information is totally transparent, symmetric, and logical, nobody trades securities with anyone, like what Stokey and Milgrom proved in their No-Trade Theorem (1982, Information, Trade and Common Knowledge, Journal of Economic Theory).

What really bothers me about the paper is its pretentiousness, as if they proved something profound. They proved something obvious. Sure the proof is hard (you solve a differential equation and there's a chi-squared distribution), but the results aren't surprising to anyone. A really neat theory should be important (in this case: maybe), succinct proof (no), and slightly surprising(not!). G&S have all these results in the paper that are really obvious, like the greater the noise, the less informative the price system will be, or the lower the utility of the uninformed, etc. Stigler and Hayek basically argued the same idea, that all the theoretical papers that assume 'perfect competition' and perfect foresight basically assume no need for the market: the data sufficient for a central planner is assumed available. Yet, economies need entrepreneurs and businessmen seizing profits precisely because relevant information is parochial and flawed. Decentralized decision-making takes advantage of decentralized information, and profits are the incentive. So, his demonstration the market perfection is never, technically, true, isn't a critique of the market, it's why many free marketers believe what they do.

In their seminal paper on credit rationing, Stiglitz and Weiss (1981) posed the question: “Why is credit rationed?”. In a perfect capital market with all information available to everyone banks give risk adjusted credits to borrowers of different types. Banks choose in a perfect competition the interest rate such that they achieve zero profits in equilibrium. Stiglitz and Weiss by contrast consider an imperfect credit market in which banks cannot observe the types of the borrowers. With two borrower types, that means that a bank does not know whether a safe or a risky borrower is applying for credit. They assume that all borrower types have the same expected return, but riskier projects offer a higher return in case of success (because of the standard debt contract that has limited upside and 100% loss downside), at the cost of a lower probability of success compared to safe projects.

At any interest rate, the expected profit is thus higher for the risky borrowers than for the safe borrowers. Therefore, the risky borrowers are willing to pay a higher interest rate and still make non-negative profit. So it would be effective for a bank to charge lower interest rates from the safe borrowers and higher interest rates from the riskier investors, but because banks lack the knowledge of the risk types, they set a common interest rate for both borrower classes, which yields zero profit. An equilibrium with credit rationing is necessary for banks give credit to both risk types at a common interest rate. Safe borrowers effectively cross subsidize risky borrowers. This is an inefficient outcome because it rations safe borrowers.

Notice this is inefficient because lenders make safe borrowers subsidize risky borrowers, because of ‘imperfect information’. Yet, banks usually do not have zero information on borrowers as Stiglitz and Weiss assume, but rather, imperfect information. Risky borrowers, via FICO scores and down payment (ie, equity investment in the collateral), pay more on average. In contrast, the major government initiatives, such as Health Care programs, charge everyone the same, which is why people don't like these programs when they aren't cross-subsidized by the non-participants (eg, Medicaid). Thus, to the extent charging everyone the same is inefficient, it is much more prevalent in government initiatives than private ones. Yet, because he proved the market is imperfect relative to perfect information, Stiglitz then merely notes this proves markets are inefficient, and thus government is better, a highly dubious inference given the way government works even when lots of information is available (ie, without a pnl objective, or better information, or less irrationality or selfishness by individuals working for the government).

In sum, Stiglitz generates the same platitudes you hear from typical far left-wing types (eg, the market is inefficient therefore dominated by government, the market leads to a race to the bottom). His arguments supporting his policy preferences are inconsistent. His Nobel prize winnung research did not, does not, forcefully prove we should always be increasing government as he assumes (he notes government gave us the internet, biotech, and ‘research and developement’ --i.e., Tang).

In this EconTalk episode, Russ Roberts interviews Nobel prizewinner and macroeconomists Edmund Phelps about macro (his main contribution was to note the Phillips curve was wrong, there is a 'natural level' of unemployment and no long run trade off between unemployment and inflation). Phelps states that macro has been very productive over the last generation.

I disagree. The main issues in macro, what is the optimal size of the government in the economy? As the size of the government in the US have grown pretty constistently over the past 100 years, with episodic upswings and downswings during major wars, suggests policy makers and voters think it has always been too small. For all the shrill excorations about market fundamentalism, and the emphasis on markets, markets have been a shrinking part of the economy. So, what is 'the fact' that needs explanation, the rise of the intellectual basis for markets, or the rise in the attractiveness of government? It seems famous, credentialed economists disagree (eg, Friedman, North, vs. Stiglitz, Krugman).

Phelps thinks we know a lot more about the economy, and by this he means, I think, that several theoretical innovations--the Phillips curve, the steady growth of money ensuring steady growth--have been proven wrong. So, some ideas have been rejected, and in that sense we know more. But there have been many innovations--overlapping generations models, dynamic programming, Hansen's generalized method of moments--have shown themselves to not really focus our efforts, but rather allows everyone to add rigor showing that some things could be true. That's hardly helpful, in that theories that explain everything explain nothing, and bad ideas are a dime a dozen (ie, developing an enthusiasm for the Phillips curve, and proving it wrong, is hardly progress).

So, we currently have debates about the value of the multiplier, where values over 1 suggest government spending is good, less than 1 means counterproductive (assuming that government and private consumption and investment have the same value, ie, the cost is the value created). Robert J. Barro--a well respected economist--suggests a value of -1.1. Joseph Stiglitz--a well respected economist--argues that the multiplier is around 2.0 (1.5 in the short run). Monetary policy currently targets a nominal GDP via the Taylor rule, an ad hoc policy that is indifferent to how much of GDP is inflation or real growth, so it reflects nothing that macro theorists have figured out, but rather, a reasonable rule of thumb. There is no consensus on why poor countries are poor (Easterly: too much top-down control; Stiglitz: too much markets, too little government spending).

I think the only thing macroeconomists have learned, is that Soviet style socialism does not generate higher growth than non-Soviet style socialism, and this fact wasn't predicted by any economic consensus, but rather, the obvious failure of the Soviet Union, and the comparison of countries like East and West Germany, or North and South Korea.

A long New Yorker piece looks at Paul Krugman, and he clearly is one of those high functioning, socially obtuse nerds one meets all the time in quantitative fields. That is, he has some amount of Asperger's, which means he has trouble seeing things from other's perspectives. Thus, everyone who disagrees with him is 1) an idiot or 2) evil. He can't imagine it otherwise.

I really loved Sowell's latest book Intellectuals and Society. As I'm a big fan of Friederich Hayek, the application of his seminal insight about how the market effectively decentralizes decision making was really enjoyable. That is, Sowell notes that intellectuals don't know the essential information of parochial time and place that is so essential. It is easy to dismiss this knowledge because it tends to be pedestrian, not elegant or sophisticated. Yet there are so many different essential facts, the sum of this simple knowledge adds up to 100 times whatever is known by intellectuals like Paul Krugman or Ezra Klein, who pontificate on their industrial policies as if such details don't matter. Intellectuals have a tendency to dismiss this because they have often been the smartest person in the room growing up, and naturally assume this greater knowledge is also present when considering health care or energy policy, but it's just one of those insights that isn't obvious because they have always gotten an A+ on their term papers, which never actually were implemented.

The stupidity of government do-gooder regulators was really highlighted for me last weekend. My wife doesn't work, staying home with our 2 year-old Izzie. She would often go to our health club after our boys are at school, around 9 AM, where there is a childcare facility and she can have a leisurely workout. She found they needed help, and she knows people there, so she works there part time, around 4-hour shifts, while Izzie is in childcare. She enjoys the break from the kids, the adult comaraderie, and Izzie has fun playing with other kids in a room just down the hall from my wife. Yet last weekend OSHA, the US agency that 'regulates workplace safety' determined that this could not stand, because the health club's child care center was not licensed for such service (greater than 2 hours). Supposedly, they would need some extra-special licensed childcare, which would then be too expensive to the club. So, because some bureaucrat decided they would save workers from the evils of firm childcare, the health club loses out on my wife's cheap labor, my wife loses out on some quality no-kid/adult time, and Izzie loses out on playing with her snot-nosed buddies. Lose-lose-lose.

The New Republic's Alan Wolfe harshly reviewed the book, but precisely because he is the type of intellectual Sowell is criticizing. Indeed, he criticizes a couple of New Republic founders, so it surely hit home. Surely, Sowell makes generalizations that aren't always true (as if any generalization is always true), and even the really obtuse intellectuals had some neat insights, stylish prose, and witty ripostes. Yet net-net, I think Sowell is spot on. The contractor that can build houses on time and on budget, is so much more useful to society than any intellectuals with their trenchant insights on society. Yet, allowing them to interact in the market without top down direction is rarely considered optimal, as if that is like building a bridge without blueprints. It rarely occurs to them we need the government to get out of the way, as opposed to apply another top-down fix. Further, many of our big benefactors--Henry Ford, Andrew Carnegie, John D. Rockefeller--are presented as Robber Barons by intellectuals, as if they were parasites and not wealth creators. Haiti and many other countries could use those kind of people.

He's one of those lucky writer who writes books basically full time, with paid assistants, and it shows, as the book reads well with appropriate examples (I wish I had a helper for my book!).

It's common practice for FDA tests to prove their worth in 'double blind' tests: the dispenser and the recipient both don't know who gets the sugar pills, who gets the real thing. That way, one can account for the well documented placebo effect, which is that people respond positively to any putative action. But, it turns out this isn't really well captured. From the New Yorker:

But antidepressants have side effects, and sugar pills don’t. Commonly, side effects of antidepressants are tolerable things like nausea, restlessness, dry mouth, and so on. This means that a patient who experiences minor side effects can conclude that he is taking the drug, and start to feel better, and a patient who doesn’t experience side effects can conclude that she’s taking the placebo, and feel worse. On Kirsch’s calculation, the placebo effect—you believe that you are taking a pill that will make you feel better; therefore, you feel better—wipes out the statistical difference [in most psychiatric drugs].

Yikes! That seems like a major blunder. Given the FDA bureaucracy, I doubt it's going to be addressed anytime soon (ie, before I die).

The real magic of the invisible hand is based on two pillars: self interested action to motivate people, and competition. Without competition, self interest leads to monopolies and sloth, but workers compete with other workers, and companies compete with other companies, we get better workers and widgets.

So one would think that opening up states for real competition would be an obviously good idea. Yet it is highly instructive what progressives think about competition and markets, that they approve of only highly constrained competition that basically neuters it. In Minnesota, we have 3 health care providers, and they all have highly regulated choice offerings. We have 68 mandates, meaning, I am paying for things I would not otherwise pay for (osteopathy, chiropracter, port-wine stain elimination). Insurance means exchanging a certain small payment for an uncertain large payment; in this case, I'm paying for many things I'll certainly never use. If providers all have to provide identical service menus, entitling consumers all they can get from that list, this is not competition.

It's as if the state decided that food was too important for the mere market, and so gave us all food insurance. We paid a special food contribution (not a tax!), and we were all entitled to a buffet offered by 3 different private companies. The buffet has to include traditional American fare, as well as Chinese, Mexican, Italian, Korean (dog), etc.--68 mandates in all. Most people don't want all the choices they pay for, but as they don't pay when they eat most people do not notice they are paying for things they don't eat. Now, as the food budget as a percent of GDP in America grows, and Americans are not any healthier than other developed countries, people ask, hey, can I just buy what I want to eat? The government tells you 'no', that is just a race to the bottom, and your stupid, irrational inclinations will cause you to buy the medical equivalent of a pet rock.

So we have 3 buffets but the same menus, no out-of-pocket spending, and no real competition. This is what progressives think of as 'the market'. They convince themselves things will get better if they have even more top-down control (single payer) because then they could implement technological and logistic innovations (cutting out the darn middle man) that will lower costs, all the while keeping health care employment levels and compensation rates the same. One might be tempted to say, it can't get worse than the status quo, but that what the Russians said in 1917, and boy were they wrong.

Steve Levitt's Freakonomics bestseller highlighted that many quirky phenomenon can be analyzed using economic reasoning, or really, assuming individuals are self interested, and applying statistics and logic to that. Many people find this application of 'economics' much more interesting than applying such logic to widgets or muni bonds, so why not just get all those cost and indifference curves in price/quantity space out of economics textbooks, and replace with sexy pictures and fun sex trivia? One could then see economic lessons on Spike TV, right after Manswers. After all, sex is an object of exchange just like any other commodity, but a lot more fun for college-aged students to contemplate.

For example, Charlotte Allen's article on the New Dating Game, and Lori Gottlieb's book on why women should settle rather than become spinsters, brought forth a lot of 'Freakonomic' issues around dating, sex and marriage, and generated considerable blog buzz (see Robin Hansen, Slate, Jezebel). Writing about these matters is always sure to get people excited, because these are issues people feel they understand pretty well, so people who disagree are way wrong! This got me thinking about the fun book, Mathematics and Sex, which is good nerd porn. Consider the application of economic models to the following issues:

Asset pricing: Choosing a young man for a long-term mate means evaluating his future value; you don't want a young hottie who won't age well. Hot Chippendale dancers with low intelligence aren't good buys. But then, if you want to get the next billionaire, should you try to find the next Bill Gates or Warren Buffet? These are true nerds, and at 18 they weren’t attractive to most women (Buffet writes candidly about his social ineptness as a young man). So, should women glom on to nerds? Well, it could be that nerds have a higher top return, but lower average return, so this isn't optimal even abstracting from their obviously lower current value. Fads based on conspicuous successes can alter the value of current young men. Perhaps your dad was a prior bubble (eg, he was good at 'the hustle').

Labor Economics: A lot of labor issues are about cartels: monopsonies, such as one-firm towns as when mining companies employed a plurality of people in a town, or monopolies as when unions prevent companies from negotiating with individual employees. Historically men have dominated women in the sense of having more political and monetary power, so, why not have all women form a cartel, as in Lysistrata, withholding sex to get men to be nicer? The problem is this is not robust to defection. One woman, presumably an opportunistic woman of lower quality (eg, a "2"), could offer sex to a high quality man and thus snag a top male. Once this happens, the coalition falls like a house of cards. Indeed, Milton Friedman predicted that the OPEC oil cartel would eventually fail because such cartels are inherently fragile.

Game Theory: Thomas Schelling highlighted the benefits of being irrational, because if you convince other countries you will blow the world up if they launch an atomic bomb at you, you actually deter their use of the bomb. Committing to an irrational response, is rational. In a similar way, prudish mores about sex can make everyone in society better off, because without stigma and shame of having sex outside a pair-bond, there's massive sexual inequality and lower parental investment. Consider that monogamy is good for beta or omega males, because that keeps alpha males with only one female. But if sexual morality becomes unpopular, serial monogamy (aka one-night stands) will be a dominant strategy for those with the highest value, because they can. Those with the most to gain from such activity will do it most, further eroding the quaint stigma attached to casual sex, encouraging more of it. Those with low value will try to have casual sex to signal they have higher value, leading to an equilibrium like when Charlton Heston comes down from the mountain with the 10 commandments and it's the best frat party ever (soon ruined by a vengeful God, and as always the people who didn't rush are very envious). Charlotte Adam's piece on the New Dating Game basically suggests this is what is happening, leading to alpha males having many partners, omega males left out, and women of all qualities tolerating philandering men who aren't there to raise the kids (aka, 'restoring primate-style hypergamy').

Supply/Demand curve elasticities: Men's demand for sex more inelastic, in that they need sex more than women. Just look at the sex frequency of gays vs. lesbians, and you see that men prefer more sex than women. One reason may be that a sex act implies a much higher probability of orgasm for men than women, so if the present value of sex is the expected orgasmic payoff, it’s strictly higher for men. In any case, women can extract compensation from men in return for sex, because the person with the higher elasticity has the market power. Ergo, men have to bring more to the transaction than their bodies, they have to pay for dates, open doors, put the toilet seat down, etc. Indeed, on a day-to-day basis, a woman's lower sexual desire negates a man’s physical or monetary advantage, which is why most women are at least co-equals in their relationships.

Public Choice Theory: median voter theory suggests that candidates merge to slightly different takes on the median position. However, when political issues are considered multidimensional rather than single dimensional, an agenda setter could start at any point in the issue space and, by strategically selecting issues end up at any other point in the issue space, so that there is no unique and stable outcome. Arrow's Impossibility Theorem highlights that there is no way a multidimensional person can be unambiguously ranked, in that there is always some arbitrariness how you weigh, say, personality vs. physical attractiveness, or within looks, face vs body, or within a face, skin tone vs symmetry (eg, there are many important dimensions). So one clear implication is to emphasize, like Maureen Dowd, your best attributes as best for everyone, and pooh-pooh the status quo preferences that highlight the Beyonce's and their male equivalents as vulgar, uneducated and short sighted.

Search Theory: Date 37 men. That is a sample of men who reveal a desire to match with you. You want to maximize your mate’s quality. This is the optimal stopping problem, or secretary problem, because you sequentially select from a sample of a population, and at some time have to settle down to enjoy the benefits of that person (eg, you eventually want to ‘use’ the secretary/mate), and you can’t go back (always pathetic, ‘hey, remember me? It turns out I was wrong and you are the best I can do. Want to go out again?’). A practical solution that is near optimal is to lock on to your next partner that is better than best of the original 37, which presumably increases the odds of finding your best match from 1% to 37%(that seems like a lot to me, but hey, he proved it). That's probably near your best match given your type.

Pooling vs. Separating Equilibria: in a pooling equilibrium, the good and bad apples are mixed together, so you price them as the average. This leads to breakdown in markets, because no one will sell good apples if they are assumed half-good. Quality signals will be costly, because otherwise they lead to pooling equilibrium. One thing men want is fertility, which is correlated with attributes like waist-to-hip ratios (optimally 0.69—heh—for women, 0.92 for men), clear skin, white sclera, and women’s magazines often highlight ways for middle aged women to enhance these attributes. One thing women want in men is money, so they find men with BMWs more attractive than men in Dodge Neons (indeed, women have a higher frequency of orgasm with higher wealth men).

Obviously, one could come up with enough examples and applications to replace Mankiw with something much more salacious and of interest to the mass of 18-21 year olds learning economics. It's not as if the application of economics to the study of GDP and employment has elevated the nature of political debates over the past 100 years.

From the Chronicle of Higher Education:

The social sciences are easier than the natural sciences, according to second graders.

Adults more or less agree. A study published in the Journal of Experimental Psychology took a look at which disciplines children and adults thought were the most difficult to learn. For the most part, people of all ages think psychology is easy and physics is hard. That bias begins early and changes some, but not much, the older we get.

One of the most interesting things we learned in Artificial Intelligence is that what we consider hard, like chess and multiplication, is easy for a computer. What we consider easy--like recognizing emotions on faces, or visually distinguishing between a dog and a cat--a computer finds quite difficult. What is hard for us, is only because we know the right answer, and know how difficult it is to do the logic in our head. Most thoughts we take for granted are really quite complex, yet because we can't even begin to write down how we do it, we do not realize it.

The social sciences are much harder than the physical sciences or math, in that our progress has been much slower here than in these areas. An educated man knows a lot more math or physics than a child or hunter-gatherer; he does not know much more about what causes business cycles. Figuring out why Haiti is so poor, or how interest rates affect investment, is really difficult. However, it is easy for someone to articulate an answer to hard social issues that is not obviously wrong, which makes it easy to think one knows the answer. A wrong math or physics answer, is clearly wrong, and if you have worked with people who knows something quantitative you learn quite quickly how ignorant you are in that area.

Don't confuse the inability to falsify with having figured something out. It generally means you just don't know what you don't know.