Thinking, Fast and Slow

Daniel Kahneman’s new book amazes me. Not so much due to the content, though I’m sure that will blow your mind if you haven’t previously heard about it through studying behavioral economics or psychology or reading Less Wrong. It is the writing style: Kahneman is able to convey his message succinctly while making it seem intuitive and fascinating. Some academics can write tolerably well, but Kahneman seems to be on a level with those who write popularly with a living- the style of a Jonah Lehrer or Malcolm Gladwell, but no one can accuse the Nobel-prize-winning Kahneman of lacking substance.
This made me wonder if it is simply an unfair coincidence that Kahneman is great at both writing and research, or causation is at work here. True, in more abstract and mathematical fields great researchers do not seem especially likely to be great writers (Feynman aside). But to design and carry out great psychology experiments may require understanding the subject intuitively and through introspection. This kind of understanding- an intuitive understanding of everyday decision-making- may be naturally easier to share than other kinds of scientific knowledge, which use processes (say, math) or examine territories (say, subatomic particles) which are unfamiliar to most people. Kahneman says that he developed the ideas for most of his papers by talking with Amos Tversky on long walks. I suspect that this strategy leads to both good idea generation and a good, conversational writing style.

Institutionalism: Neoclassicism’s Big-Government Twin

It was not inevitable that economics would end up in anything like its current form.

In fact, even well after much of the basics of economics were developed, Institutionalism remained as a viable alternative. In the 1920′s and 1930′s, two of the four major economics graduate programs in the US (Columbia and Wisconsin) were primarily Institutionalist. The Institutionalists thought of themselves as the wave of the future, creating a more scientific economics that would displace the old.

Nowadays, of course, if modern economists think of Old Institutionalists at all, they often say something like Ronald Coase did: “American institutionalists…. had nothing to pass on except a mass of descriptive material waiting for a theory or a fire”.

So what happened? What is Institutionalism? As you might expect, it focuses on institutions. These are notoriously tricky to define, but their definition is something like “rules both explicit (like laws) and implicit (like social norms)”. Their method was to try to be empirical (focus on the real world) and try to avoid unrealistic simplifying assumptions in theories.

The best-known example of Institutional empiricism is Wesley Mitchell’s founding the National Bureau for Economic Research (now a stronghold of orthodox neoclassical economics) to collect data about business cycles. In terms of goals, Institutionalists wanted to be scientific (which nowadays we might interpret as being impartial, doing positive rather than normative work), but also to achieve social control. According to Malcolm Rutherford, “the phrase ‘social control’ became almost a mantra for the Institutionalists of the time”. Institutionalist Helen Everett said that social control was “perhaps their central organizing principle”. By “social control”, the Instituionalists meant that they wanted society generally to control business, though I can’t help but hear the phrase as meaning that Institutionalists wanted themselves to control society and business. Certainly,  as the “social control” mantra suggests, they were almost always pushing for more government rather than less.

The best-known Institutionalist is Thorstein Veblen, the author of “Theory of the Leisure Class”, after whom Veblen goods are named. Reading his work I have thought he is funny and a master of criticism and satire, but it starts to grate that all his criticism is unconstructive. Apparently other Institutionalists agreed: Rexford Tugwell said Veblen “had discredited orthodox economics and had undermined the business culture” but that “all the constructive work remained to be done”, and Wesley Mitchell started trying in 1910 to push Veblen toward more scientific and constructive work.

Some criticism proved constructive, in that it spurred others to create new and useful tools. Institutionalist economists criticized neoclassicals for not being consistent with the findings of other fields, especially psychology. This should remind you of behavioral economics today, and it sounds quite reasonable to try to be consistent, but it also reveals a possible flaw in behavioral economics: sometimes, economics is actually right and psychology is actually wrong. At least, the early-1900′s psychology the Institutionalists wanted to incorporate was behaviorism (confusingly named since its ideas are unrelated to behavioral economics). Behavioralists wanted to refer only to observable things, not unobservable states of mind. This criticism helped spur the creation of indifference curves (so we don’t refer to cardinal utility, which was thought to be unobservable), and the general economist insistence on only using revealed preference. That’s right, two of the very things heterodox critics of economics like to complain about today were actually developed to answer a previous generation of heterodox critics.

The movement slowly faded away after World War II, after neoclassicals proved themselves more useful in the war planning, answered some critiques of institutionalists (through the Ordinal Revolution and the Keynesian Revolution), and Samuelson and Arrow pushed ahead with their mathematics.   The Institutionalists provide an important reminder that, for better or worse, economics does not have to be the way it is and may not remain this way forever. Institutionalism was the most recent movement to pose a credible threat to orthodox economics from the outside and fail to be co-opted (the way game theory is now at the core of neoclassical economics, and behavioral economics has been appended as an asterisk), but it may not be the last.

States Rights: Learning How to Lose

I’ve been reading some of the Anti-federalst papers and was pretty quickly convinced that sticking with the Articles of Confederation would have led to better outcomes on most issues. Of course, it would probably have led to a worse outcome on one really big issue: slavery.

Race seems to have always been the bane of states rights in the US. Southern states seeking to protect slavery and Jim Crow ultimately led to major gains in federal power in general, and a major loss in credibility to “states rights”. Even if the Southern states weren’t willing to do the right thing on moral grounds, it seems they should have let this one pass simply on pragmatic grounds.

Look at how the power of the Supreme Court has grown over the past 226 years even as the power of states relative to the Federal government has faded. How has the Court accomplished this? Largely by learning when to lose. They have consistently preserved and enlarged their power over the long run by being willing to lose one today. This is how they established judicial review, fought off court-packing, and maintain a good deal of independence from Congress and the President today.’

Conversely, states fought to the death on slavery and lost much of their power, then fought hard to preserve Jim Crow and lost much remaining credibility. It will take a long time to restore the power of arguments for states rights. I hope that the recent history of state versus federal legislation on gay marriage, marijuana, and health insurance has begun to convince liberals that states rights are not so bad after all.

Why Pay Research Administrators?

I’m not actually trying to kill my employment prospects by following up a post on politics with a post on academic politics, its just a side effect of expressing despair and a poor sense of humor (last post) along with mystification (this post).
I worked in a university research office for a few months doing intern-type things, and so have benefited from universities deciding to pay the salaries of the research administrators. But I still can’t figure out why they do. When I walked into the office at my current university and saw all the cubicles, all I could think was “we could hire one more professor for each 2 of these people we fire”. Here are my best guesses so far:

Legally required Bureaucracy:
Some of this is no mystery at all: federal laws require some oversight of research on animals and human subjects. This doesn’t explain why these committees tend to enforce the regulations more strictly than is required- wouldn’t you expect regulators to be very lenient if they were employees of the company then regulate?

Funder-required Bureaucracy
Many funding agencies want the university to oversee the grant, so professors actually use it for what they said they would rather than just getting a new Lexus (or more likely, Prius). Like the federally-required bureaucracy, the intention is to be like chemotherapy: yes, it will kill some good projects, but we hope it will kill more bad ones.

“Pre-award”

The real mystery to me is why the university requires all professors to get permission from research administration when applying for grants. The last time I talked to someone in research administration, he went out of his way to tell me this would be required if I ever applied for a grant, but he never even attempted to explain why, instead only saying “its just one more hoop to jump through”. I have two theories about possible benefits:
Tracking:
The central administration of the university wants to know who is doing research and how much money they are getting. This requirement is a way for them to find out.
Paternalism:
The research administration office has enough knowledge about the grant process that they can help professors improve their chances of winning; professors don’t realize this and so must be required to work with them. This makes sense only for large funders (that the office has experience with) and new professors (who lack their own experience applying). Which suggests the real reason is:

Rent-seeking
People want to get paid, and a make-work job is better than none, so they push to expand the work of their office. Bureaucracies tend to keep expanding: “the bureaucracy is expanding to meet the needs of the expanding bureaucracy”. This is especially severe when the organization lacks outside competition forcing it to cut costs, and it is indeed very difficult to start a new university. However, this theory doesn’t explain why administrators have been so successful in expanding their jobs over the last 40 years while professors have not. This trend generally, along with its specific instantiation in research offices, continues to mystify me.

Ignoring Economics: Tactics for Beginners and Advanced Practitioners

President Obama called for an increase in the minimum wage to $9 in last night’s State of the Union speech. A lot of economists will take this as a personal affront, wondering how people still think this is a good idea after we explain in every MicroEcon 101 class how it will backfire and result in poor people losing their jobs and losing non-wage benefits. If you are determined to support a minimum wage, you could simply ignore all these arguments, but this beginner tactic will leave you looking ignorant.

A more advanced tactic for not having to change your mind about the minimum wage allows you to know two things instead of none. You can know the Econ 101 arguments, and also know about Card and Kreuger’s 1996 empirical study showing how the minimum wage might not affect unemployment. Pull out your pocket copy of Card and Kreuger’s paper whenever someone brings up the topic.

Be careful, though, not to take this whole “acquiring new information” thing too far. Remember that your goal isn’t to understand how the world works, but rather to keep the beliefs you started with. Don’t develop a general rule of looking at the academic literature on a subject: this would lead you to do things like read other papers about the minimum wage, but the vast majority suggest problems with it. Don’t decide that David Card and Alan Kreuger are the most trustworthy economists- this would mean you need to take their other work seriously, and then you would have to change your mind about immigration or occupational licensing. Remember, reasoning works by starting with a conclusion you like, and then looking for information that supports it. Otherwise you might have to admit you were wrong!

Obviously this is my poor attempt at a joke. More seriously, as a researcher I worry that even when people do seem to be interested in your work, it is only because it confirms their prior beliefs. Alan Kreuger is a great econometrician and managed to become an advisor to the President. This could be a great opportunity for his work to inform which policies to choose, but instead his work is either ignored or used as a decoration for policies that would be pushed anyway. So, depsair.

Marx and Dilbert, Economists

I taught Marx in my History of Thought class today and realized a few things.
One is that, about half the time I want to point a finger at Marx’s flaws, there are two fingers pointed back at the rest of economics.
For instance, Marx thought that wages would be pushed to subsistence. We could laugh at him for being wrong, but David Ricardo thought the same thing and never gets laughed at by economists. Marx thought huge firms would bump off all the little ones, but so did Schumpeter.

Marx’s writing was longer, more dense, and more mathematical that it needed to be to get the point across, and he did this partly in order to bolster his intellectual credentials so his policy and political ideas would be taken more seriously. Many modern economists do exactly the same thing.
I came up with two criticisms of Marx’s system that I think are valid, I am wondering if anyone else has read enough to know how (or if) he answered them. Most basically, he seems to be assuming that all industries exhibit increasing (or at least constant) returns to scale, which is blatantly false in the real world. Relatedly, he seems not to consider the specific inefficiencies that arise as firms get bigger: it is hard to get information about what is happening in every part of the firm and its market, and the incentives of workers and managers tend to get less and less aligned with that of the firm. This is a force pushing firms to get smaller even if the production process itself exhibits increasing returns.

This same criticism of Marx’s prediction that firms would keep growing also applies to governments trying to centrally plan: information and incentive problems will bedevil them.

On the other hand, we can partially rescue Marx in two ways on the firm size thing. One is that he got the direction of the future right even if he extrapolated too far: the next 50 years would see bigger firms and more monopolies. Also, imagine if he had been right about firm consolidation: if the efficient organization of the economy really were one huge firm, it is at least plausible that the government should heavily regulate or nationalize it.

I realized how Dilbert explains all of this. It is a classic example of how workers get alienated in big firms. But it also shows the bureaucratic forces and incentive and information problems that make big firms horribly inefficient and vulnerable to smaller competitors.

Finally, everyone should check out Joan Robinson’s hilariously condescending letter poking fun at Marxists (but not Marx) and explaining model-based thinking. Excerpt:

“When I say I understand Marx better than you, I don’t mean to say that I know the text better than you do. If you start throwing quotations at me you will have me baffled in no time. In fact, I refuse to play before you begin.

What I mean is that I have Marx in my bones and you have him in your mouth… suppose we each want to recall some tricky point in Capital, for instance the schema at the end of Volume II. What do you do? You take down the volume and look it up. What do I do? I take the back of an envelope and work it out.”

Imagine she is talking about grad school here:

“They had no time to think about the big question, or even to remember that there was a big question, because they had to keep their noses right down to the grindstone, working out the theory of the price of a cup of tea.”

Economics and the Environment: Social Science Denialism

Perhaps you have seen the following photo making the rounds and accumulating likes on Facebook.

My guess is that people like it because it gives some arguments for their belief that we should be closer to the “Environment” side of “Economy vs Environment” than we currently are. I would say this conclusion is at least reasonable (if not definitely correct), but that most arguments made for it are wrong, and that people should hesitate more to accept bad arguments in support of a pre-existing conclusion.

What are all claims packed into these four short sentences?

1) Unchangeable things are better / higher status / deserve more respect. Things we invented are less important and should be changed.

I don’t know if anyone really believes this when it is stated in its general form like this. I’m sure you can think of many invented things (penicillin, the Internet) you like better than many non-invented things (Lampreys, malaria). You probably have a neutral feeling about most physical constants (speed of light), often wish changeable things would stay the same (how happy we are in this wonderful moment), and perhaps even wish things would move from seeming unchangeable to changeable (all people get old and sick and die).

2) Since we invented the economy, there are no economic laws analogous to physical laws.

Invented-ness has nothing to do with it. Imagine saying that since we invented cars, they don’t need to obey the laws of physics. He just gets through explaining that our biological human nature is unchangeable, then implies there are no economic laws, that all economic interactions are changeable. Well, economic laws come from human nature. Some go even deeper: the law of demand emerges from rational agents with budget constraints (monkeys can qualify, or even computer programs with randomly generated preferences). Game theory is widely used by biologists and ecologists to describe the economic behavior of animals.

3) People sicken and die from ignoring biological laws, but not economic ones

Human lifespans more than doubled with the advent of the modern economy [if you haven't seen the Hans Rosling video linked there, watch it now, it is way more informative than reading this]. Attempts to form communes while ignoring economic incentives have caused great sickness and death from the 1600′s US to 20th century Russia and China.

4) Environmentalism and Economic Prosperity are Opposed

There is a lot of truth to this; in many areas the tradeoff exists: shale oil vs clean water, jungle vs farmland, saving eagles or Africans. But economic science and environmental science agree more than you might think. Part of this is because people associate economic prosperity with GDP, but what economists actually want to maximize is people’s happiness, and we know that this comes both from GDP and a nice environment. Another part is that economists agree the world is over-polluted due to externalities, and spend time coming up with potential solutions.

What bothers me more besides the specific wrong claims (and the attempt to lower the status of economics) is how quickly the very people who complain about “science denialism” will themselves engage in “social science denialism”, insisting their own armchair analyses of the costs, benefits and tradeoffs of environmental policies must be right as if there were no experts working on the problem. More broadly, it bothers me how readily people will ignore bad arguments from “their side”. As Yvain eloquently put it in another context:

The problem is that screwed-up ethics, no matter how much they save your skin in the immediate problem, are going to stick around. If [Suzuki] pushes bad philosophy, many of [his] readers are going to accept them because arguments are soldiers and we all have to stand up for [the environment]. And then we’re going to end up with a cohort of very politically active people whose zealous opinions on subtle moral questions are based on what argument allowed a blogger to sound most indignant fifteen years ago.