A Winter’s Day

In a bleak and dreary November found me in the ‘burbs of Washington, DC. To the cognoscenti, that’s that famous place that is of course the center of the universe. I do not exaggerate.

Some days ago, the DC baseball team, the Nationals, won the World Series. That’s evidence number one. Two, it has been unseasonably cold, almost freezing, almost unheard of before Thanksgiving. That’s a portent of momentous events as well as palpable evidence of climate change. No self-respecting center of the universe would be left out of the climate change debate, and even if Greta Thunberg preferred to land by sailboat in Frank S’s New York, she sandwiched a protest visit to Washington, making the latter a competitor to the title of the Definite Place To Visit. Three, and most importantly, the Washington Post still shows up on my driveway, once a week at least, although slimmed down measurably with the advent of competing news and advertising sources online. It doesn’t matter, this competition thing, so long as we embrace the philosophy of no more driving to the shopping because of course Amazon.com not only reads your needs but also delivers in One Day Prime. Finally, for nostalgia more than anything else, there’s still The Old Ebbitt Grill; go there for the oysters and crab cakes.

There are certain perennials about the American capital. The Redskins have only the remembrances of things past (to evoke Marcel Proust, Doug Williams, and Joe Gibbs). The Washingtonian Magazine is still around, especially where you go for a haircut. Reagan National is still the airport of choice for Movers and Shakers. The traffic, yes the traffic, still competes with La-la land. The visitors still visit the White House and the great museums, of which the Smithsonian is still the best. The Kennedy Center still has free performances (at 6pm, Monday to Friday).

But there must be things that are new. As a creature of habit, I can report not much. This is due more to my inaction than anything else. But I checked around and came up with certain nuggets, if only to help guide out-of-town visitors. For the museum-hungry there’s a $1 bus called The Circulator. The Washington Monument has re-opened after closing for a renovation in 2016 (get your tickets in advance). The lure of Atlantic City has dimmed, replaced by nearby casinos in Baltimore and at the National Harbor, for the visitor who likes slots and tables. For Filipinos the restaurant scene has grown like mushrooms in a rain forest. In my neighborhood there’s a Kuya Ja’s Lechon Belly (4.5 on 473 reviews at Yelp).

What do the French say? Plus ca change, plus c’est la meme. Mao jud. I visit but not in the extremes of winter and summer; for then, there’s Dumaguete.

FIXING FACEBOOK and GOOGLE

It shouldn’t be hard.

Back in the early days of email, we worried about spam. Merchants shaped up by agreeing not to sell our addresses. Spam filters also did their thing. Email got fixed.

Today, Facebook and Google will have to agree not to spy on us. And Firefox has rolled out a ‘spy’ filter. VPNs will become standard. Those who spied on us will try not to pay under class actions, but the tort bar will not relent.

This privacy thing cuts both ways.

Pigou vs Coase, as refereed by Demsetz

This is a good summary of the Pigou vs. Coase debate on externalities. I have one comment: That the author should have brought Hayek into the picture. After all, the piece was published in 1996. What follows is a kind of executive summary.

Demsetz sees the debate on externality as one between two ideals: An ideal state (with perfect information) and an ideal market (also with perfect information and zero transaction cost). Taken to the limit, both models do not generally produce identical solutions. It is well known that the initial distribution of wealth and income affects market outcomes. Change that distribution and the economy rests somewhere else. With Pigovian state intervention, one also needs to factor in the initial distribution of wealth and income as a determinant of political process. Still, it is reasonable to imagine that both models arrive at the same end-point if they started with the same initial conditions.

Demsetz then concludes, based only on theoretical considerations, that the choice between the two models is one determined by preferences for freedom and the final (and/or initial) distribution of incomes and wealth.

Once we depart from the ideal to actual governments and markets, the choice between the two solutions would then have to take into account how much information there is (available) in the competing models, and how well they would reduce transaction cost. Here, Hayek would pronounce in favor of Coase, if only because Hayek believes that the market is more capable of ‘discovering’ such phenomena as efficient technologies and consumer preferences. Transaction cost can be seen as another form of externality, so we start to run the risk of arriving at a proverbial slippery slope.

Nonetheless, Demsetz is essentially right. Transaction cost is not at the kernel of Coase; and neither did Pigou ignore transaction cost. What was being debated was who should have the property rights to the externality, a question that economists usually avoid but one that Coase faced head on.

Philippines vs China

WHY WE WON

It seems that we can boil down the legal conclusion of the arbitral ruling as based on only two key questions.

One, what is an island? A rock is not an island. So there. Even if China builds up a rock, it still cannot become an island. It may be a feeler island, but still that’s not an island in the legal contemplation of international law. UNCLOS says that artificial islands are not properly islands. (Otherwise, any oil rig can claim to be an island!)

And there’s the economics of islands. Under UNCLOS (Art. 121(3)), only natural formations that can sustain economic life on its own, can have maritime zones, such as an Exclusive Economic Zone (EEZ).

Two, what is an archipelagic state? It is one composed of many islands. PH is archipelagic. China is not. It appears that China conceded its status as a coastal (non-archipelagic) state when it signed the UNCLOS because the UNCLOS classifies countries in only two ways — archipelagic or coastal. The Tribunal ruling, in para. 573, categorically restates that China is a coastal state.

The answers to these two questions determine the EEZ, which is 200 miles from the coastline of a non-archipelagic state; and 200 miles from the archipelagic baseline of an archipelagic state. The baseline is a point-to-point boundary that encompasses or includes the islands of an archipelagic state.

An outlying island in the South China Sea, even if it could be claimed as territory of China, cannot result in an expanded EEZ based on archipelagic baselines because China is not an archipelagic state. (Consider the following related question: Can the US consider the waters between Hawaii and Los Angeles as “internal waters” using the archipelagic baseline approach? The answer is in the negative because, like China, the US is not an archipelago.)

The EEZ of an outlying island is 200 miles around that island because such an island is treated like any other land territory (Art. 121(2)). The EEZ cannot extend beyond the 200 miles (beyond this, there would be continental shelf (something else) or open international waters (high seas)). And an EEZ could be delimited if competing EEZ’s from other nearby states exist.

The ruling states that the disputed territories are not at all islands, and therefore cannot provide China an EEZ. Practically all the major disputed territories are inside the EEZ of the Philippines because it is an archipelagic state. Therefore, even ‘rocks’ can be useful to the Philippines, if they are located within the EEZ based on the archipelagic baselines of the Philippines. These useful rocks include Scarborough Shoal, Second Thomas Shoal, Johnson Reef, McKennan Reef, Hughes Reef, and Mischief Reef. Some of the disputed rocks are outsize the EEZ of the Philippines.

An important caveat is that territory and sovereignty are matters of international law not subject to the UNCLOS. Nonetheless, disputes relating to the EEZ are pointedly the subject of the UNCLOS.

WHY IT MATTERS

EEZ means maritime zones (not necessarily territory in the usual ‘conquest’ or ‘historic’ sense) that we can, under international law and UNCLOS, consider as usable only by us. We can, by negotiation, lease or allow others to use the EEZ, but the extent to which the Philippine Executive can do this is governed by the 1987 Constitution.

NB: The map of PH EEZ is from Wikipedia.

PH EEZ Screen Shot 2016-07-14 at 2.07.29 PM

 

How are money and inflation institutions?

The macro textbooks usually say that inflation comes from the supply of money. In a regime of fiat monies, central banks “compete” at providing stable money. However, some central banks’ hands are tied by their governments’ desire to use the inflation tax. If you don’t trust the local money, you can always switch to foreign exchange, gold, or even Bitcoin.

But if money is what folks accept as such, its devaluation must also come from folks collectively thinking that the central bank intends to print more.  Its rise in purchasing power can also come from holders thinking of it as a “safe” money.

Veblen once defined institutions as collective habits of thought (at p.107).  That means that to predict inflation, one must anticipate the price expectations and strategies of buyers and sellers of money. Today, cash is king, so that it makes sense to see low or even negative inflation and interest rates.

This means that the macro textbooks don’t have the full story. Inflation is also a story of institutions in the sense of Veblen.

How economists approach history

If only to inspire economics students to study history, and how to apply economics to solve historical puzzles, here’s an example of a very interesting study.

In this work, Douglas Allen and Peter Leeson explain the economics of warfare in the medieval ages, focusing on the technologies of the long bow versus the short bow.

Perhaps, perhaps, one can conclude that major human endeavors, including war and struggles for power, are drivers of innovation.  This echoes the idea of ‘creative destruction’ from Josef Schumpeter.