Pursuit of Truthiness

my gut tells me I know economics

Posts Tagged ‘Economics

Pope Francis and Economics: A Partial Reconciliation

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It is always easiest to evaluate the views of others by fitting them into pre-existing categories. When Pope Francis released his first encyclical, Evangelii Gaudium, many people pegged him as saying “left-wing economics good, free markets bad”. This lead to celebrations on the left and denunciations on the right. Some thought him to be showing ignorance of, or even Pope Paul V vs Galileo style hostility to, economic science.

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After actually reading much of the encyclical, I found it much more nuanced. In particular, the Pope seems to be deeply ambivalent about the welfare state, warning of those who exploit the poor for their own political interest. He would much prefer that people earn a living through work:

“Welfare projects, which meet certain urgent needs, should be considered merely temporary responses”

“it is through free, creative, participatory and mutually supportive labour that human beings express and enhance the dignity of their lives”

Of course, he does want these workers to be earning a “just wage”. While many readers will assume this implies a government-mandated minimum wage, Francis doesn’t go there; one could just as well expect that he is encouraging just wages through increased human capital, tax credits, employer generosity, or something else.

He is generally supportive of private property and business:

“The private ownership of goods is justified by the need to protect and increase them, so that they can better serve the common good”

“Business is a vocation, and a noble vocation, provided that those engaged in it see themselves challenged by a greater meaning in life; this will enable them truly to serve the common good by striving to increase the goods of this world and to make them more accessible to all.”

Like many on the left, the Pope is worried about inequality. But his reason for worry isn’t really about the distribution of material goods, so much as the social distance that economic inequality can create:

“the worst discrimination which the poor suffer is the lack of
spiritual care”

“No one must say that they cannot be close to the poor because their own
lifestyle demands more attention to other areas. This is an excuse commonly heard
in academic, business or professional, and even ecclesial circles”

For those worried about his Argentine background:

“I am far from proposing an irresponsible populism.”

He concedes a role for science in figuring out how best to do all this, though it does sound like he wants to make economics oikonomia again:

“Economy, as the very word indicates, should be the art of achieving a fitting management of our common home, which is the world as a whole.”

In any hundred page document, it can be too easy to cherry-pick quotes. Indeed this is what I have done here, if only to balance the much larger number of pieces that cherry-picked the quotes that seem to be from another side. But real people are usually more complex than a one-dimensional political spectrum.

Written by James Bailey

April 15, 2016 at 4:56 pm

Just the Economics of Contraception Mandates

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Today the Supreme Court ruled that closely held corporations like Hobby Lobby cannot be compelled to cover contraception as part of their health insurance. Most people will interpret this decision in terms of respect and status- they like it because they think it shows respect for religious beliefs, or dislike it because they think it lowers the status of women.

 

If you are one of the people for whom politics is more about policy than status (there are dozens of us!), you will probably find these papers by me and RomneyCare/ACA architect Jonathan Gruber enlightening. Rather than insisting that the decision should make you happy or outraged, I will leave it to you to connect the dots on what these papers mean for contraception mandates as policy.

Written by James Bailey

June 30, 2014 at 3:57 pm

How is Regulation like a Snake-Eating Gorilla?

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People as diverse as Alfred Marshall, Thorstein Veblen, Freidrich Hayek, and Russ Roberts have said that economists try to be physicists when the subject really has more in common with biology. But while people have said this since at least the 1800’s, there are only a couple areas where biology and economics have blended- game theory, evolutionary economics, agent-based computational economics, and some shared statistical techniques. We are still, for the most part, aspiring physicists.

 
While the actual physics-lite techniques we use work well enough, I think biology is a much better source of metaphors to describe the economy. One I don’t recall having heard before is invasive species. Suppose a new invasive species enters an ecosystem, leading to bad results for the native species. People clamor for the government to “do something”. So the government releases a new invasive species in order to take out the old one. This does not go as planned. In an episode of the Simpsons (possibly discussed in Homer Economicus, which I still need to read), Springfield is threatened by invasive bird-eating Bolivian tree lizards. Principal Skinner suggests that the problem can be solved by importing a new invasive species, Chinese Needle Snakes, to eat the tree lizards. But what about the new Chinese Needle Snake infestation? Simple, just bring in snake-eating gorillas….

 
This is a great way of describing the unintended consequences of regulation. The government sees some problem out there in the economy, like expensive housing. In order to “do something” and try to solve the problem, they come up with a solution like rent control, without thinking of how their “solution” could end up being worse than the original problem (by reducing the quantity and quality of housing supplied by the market). Rather than admitting their mistake and reversing course, they act by introducing another solution into the market ecosystem to try to correct the problems stemming from their first “solution”- like requiring rooms to stay available for rent if they were ever rented out. Then developers are even more reluctant to take the risk of building new housing, or investing in the improvement of current apartments. A few more “solutions”, and we are well on our way to snake-eating gorillas terrorizing the countryside.

Written by James Bailey

June 4, 2014 at 12:15 pm

Against Talent

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Innate talent really does determine a huge portion of how good we are at various tasks. But for the most part we are better off ignoring this fact.

 

There is a large innate component to intelligence, but kids deciding it is cool to succeed in class effortlessly based off of smarts leads to big wastes of potential later on. The problem is that your innate ability, or talent, is unchangeable by definition. But the amount and type of effort you spend on something is under your control.

 

I’ve been thinking that if I want to become excellent at ultimate Frisbee, it would have to be as a handler rather than a cutter, because cutters can benefit enormously from the innate talent of height and high sprint speed*. But of course, in addition the innate components, a huge amount of being a good cutter is about deliberate practice. In fact, this dominates to such an extent that some of the very best deep threats have no height advantage at all. My wife can beat people deep all day, despite being 5 inches shorter than me and a bit slower. In the NFL, we have the examples of 5’6’’ wide receivers like Wes Welker becoming stars. When I say I can’t be a great cutter because I lack the height and sprint speed, it is just an excuse for my current mediocrity- one that holds me back from putting in the effort necessary to get better.

 

I just attended the American Economic Association’s conference on teaching. I have thought that I will never be a truly great teacher because I lack natural charisma and extroversion. But two people who seem to be truly great teachers, Dirk Mateer and Kenneth Elzinga, insisted at the conference that they are naturally introverted nerds too, and that they got to be as good as they are through practice and a constant focus on how they can become better. Elzinga said that his college speech professor told him to provide updates on how close he was to the end of the talk, “in order to give hope to the audience”; and that no one else received the same advice, implying he was the worst in the class. But despite a complete lack of natural speaking talent, he became a great teacher through outworking and out-thinking other professors. My favorite example of something no one else would think of, or put in the effort to do if they did think of it, is that he writes a personal letter to every student who fails his class- in his intro to economics classes of 1000 students. The fact that you lack talent- or have lots of talent- should not be used as an excuse for failing to put in the hard work and hard thinking needed to become the best you can be.

 

*(you can infer that sprint speed probably has a huge genetic component by the fact that of the 76 people who have ever run the 100m in less than 10 seconds, 72 were of West African descent)

Written by James Bailey

May 30, 2014 at 11:16 pm

Ignoring Economics: Tactics for Beginners and Advanced Practitioners

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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.

Written by James Bailey

February 13, 2013 at 1:22 pm

Marx and Dilbert, Economists

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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.”

Written by James Bailey

February 4, 2013 at 9:36 am

Economics and the Environment: Social Science Denialism

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

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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.

Written by James Bailey

January 15, 2013 at 2:37 pm