You are currently browsing the category archive for the ‘economics’ category.
See the notice on the Game Theory Society website.
A word that Paul Romer used in a recent piece in the Papers and Proceedings of the AER. Its inspired, no doubt, by Stephen Colbert’s notion of `truthiness’. Romer defines it as
Like mathematical theory, mathiness uses a mixture of words and symbols, but instead of making tight links, it leaves ample room for slippage between statements in natural versus formal language and between statements with theoretical as opposed to empirical content.
Romer is not the first to coin the term. Credit goes, I think, to Jordan Ellenberg. Ellenberg defined it as
…..a series of fervent gestures that gives the impression that mathematical ideas are being expressed, but doesn’t actually deliver the goods.
The recent turmoil in Baltimore and the news of Ray Fisman’s impending move to Boston University reminded me that he (along with Tim Sullivan) had penned a column for Slate on Jan 7, 2013 entitled:
In hindsight, the title seems ironic. The article itself is an excerpt from the author’s book on Organizations (in the genre pioneered by Freakanomics) and can be interpreted as illustration of Goodhart’s law. The article itself does not align perfectly with the title. Apparently, what the Baltimore PD has to teach us is what not to do as the following quote suggests:
To illustrate the double-edged sword of arrest incentives, Moskos recounts the example of a fellow officer who decided to set a record for monthly arrests. His plan: lock people up for violating bicycle regulations. At night, all bikes need a light. The officer would stop cyclists in breach of the bike light rule (which was most of them), ask for ID, and pull out his pad to write a citation. Most riders, though, were biking without ID, and since all offenses become arrestable without identification, the officer’s little scheme netted 26 arrests in a single month. A record. His sergeant was thrilled, telling Moskos, “Look, I don’t know what his motivations are. But I think it’s good. He’s locking people up, which is more than half the people in this squad.”
Having caught your eye, I direct you to an article in the April 9, 2015 edition of the Grey Lady. It discusses attempts by various countries to boost domestic birthrates. The same issue had been considered earlier by Noah Smith. There are two questions lurking here. First, what is the optimal population size for a country? If the goal was to shrink the population then a declining birth rate is not a bad thing. Suppose the goal is keep the population fixed, because, say of pension obligations. Then, one wants a replacement birth rate of roughly 2 per couple.
If the birth rate is below the target, what should one do? Interestingly, I cannot recall anyone I have asked or read who does not turn to Government interventions of various kinds. Noah Smith, for example, only discusses Government interventions before concluding one should imitate the French. If the birth rate is below what is optimal for society, why doesn’t the market take care of it? Do we have a missing market? Is this a public goods problem? (If so, then, Mankiw who is often castigated for being a selfish beast, is, in this case, an unstinting provider of public goods, see here.)
Analogies are sometimes helpful (if biology is the study of bios, life; geology is the study of geos, earth, what does that make analogy?). Farmers plant crops and after a period, the fruits of their labor are harvested and sent to market. The Farmer must anticipate what will be demanded in the future to decide what to plant now. What if she plants turnips when what is desired are parsnips? This problem is solved with a futures market for parsnips (or turnips or pork etc). Why not a futures market for babies? Those who want warm bodies in the future to support them in their dotage pay for babies now. Swiftian, I know, but interesting to consider. Once one thinks about how to implement the idea, difficulties emerge. One might, for example, be concerned with moral hazard on the part of parents. However, these same difficulties are present even with various Government subsidies.
According to the NY Times, some Californians
would have to cut their water consumption by 35 percent under the terms of a preliminary plan issued by state officials on Tuesday to meet a 25 percent mandatory statewide reduction in urban water use.
There is an obvious way to achieve this, raise the price of water. If its obvious why isn’t it the first thing California did some years back when it was clear that water was scarce? In some cases the hands of the state are tied by water rights allocated for commercial purposes, so lets focus on household consumption.
We know that the first tool the state reaches for is regulation. See, for example, the following memo from the California State water board. Interestingly, it begins by noting that the state is in the 4th year of a drought! Eventually, it is clear that regulation is insufficient and then, price increases are considered. In fact, the water reduction targets quoted from the NY Times above come from a report by the Governor of the state that also urges the use of
rate structures and other pricing mechanisms
to achieve reductions. Again, why is price last rather first? Is this because the state must maintain a credible reputation for not exploiting its monopoly power with water?
If one is going reduce consumption by raising prices, should it be an across the board price increase? Note that consumption is metered so the exact amount that is purchased by a household is known to the provider. The state also has access to other information: location, home size, family size and income. In principle, the state could price discriminate. Here is an example from the Irvine Ranch Water district. Each household is given an initial `allotment’ that depends on household size and area that is landscaped. Exceed the allotment and the price of water rises. For more details and the impact on consumption see the following paper. Is it obvious that this is the `correct’ mechanism?
Two articles in the March 3rd, 2015 issue of the NY Times. One by the columnist Nocera marvels at Buffet’s success and concludes that it must be due to Buffet’s genius. The second, in the business section of the same, summarizes Buffet’s annual letter that attempts to explain his success. As usual, neither considers the possibility that luck may have a role in Buffet’s success. Buffet may indeed be a Vulcan, but based on the data alone one cannot reject the possibility that luck may explain Buffet’s record. I won’t repeat the argument but will point to this paper by my colleagues (Foster & Stine) that does so.
Thom Tillis, Senator from the great state of North Carolina, was the subject of some barbs when he suggested that the health-code mandated sign that reads
“Employees must wash hands before returning to work.”
was an example of government over-regulation.
“I said that I don’t have any problem with Starbucks if they choose to opt out of this policy as long as they post a sign that says, ‘We don’t require our employees to wash their hands after leaving the restroom.’ The market will take care of that.”
Many found the sentiment ridiculous, but for the wrong reason. Tillis was not advocating the abolition of the hand washing injunction but replacing it with another that would, in his view, have the same effect. More generally, he seems to suggest the following rule: you can opt out of a regulation as long as one discloses this. If the two forms of regulation (all must follow vs. opt out but disclose) are outcome equivalent why should we prefer one to the other?
Monitoring costs are not lower; one still has to monitor those who opt out to verify they have disclosed. What constitutes disclosure? For example:
`We do not require our employees to wash their hands because they do so anyway.’
Would the following be acceptable?
“We operate a hostile work environment, but pay above above average wages to compensate for that.”
Is a question I thought as dead as a Dodo. When I came upon it in an undergraduate philosophy of science class the drums had been muffled and the mourners called. Nevertheless, there are still those who persist in resuscitating the corpse (see here for a recent example) and those, who for noble reasons, indulge them by responding.
There were, and are two good reasons for why this question should be left to rot in peace. The first is that the comparisons made to arrive at a demarcation are problematic. If Science were a country, Physics might be its capital. If one were to ask whether History is a Science, the customary thing to do is to measure the proximity of History to Science’s capital city. Why proximity to the capital and not to one of its outlying settlements like Geology and Archaeology? The second, better reason, is that the question, `is X a science?’ is of interest only if we believe that scientific knowledge should be privileged in some way. Perhaps it alone is valid and useful while nonscientific knowledge is not. If that is the case, the correct question should not be whether X is a science, but whether X produces knowledge that is valid and useful. Now we have something interesting to discuss: what constitutes useful or valid knowledge?
One might point to accurate prediction, but this alone cannot be the touchstone. How would we feel about the laws of Newtonian motion if we came upon them via regression? I suspect many of us would find such a theory to be incomplete, not least because of the concern with out of sample prediction. By the way, if you think this outlandish, I first learnt Newton’s laws by sending little carts down inclines with bits of ticker tape attached to them to so that we might, by induction, learn a linear relationship between velocity and acceleration. Truth be told, the Physics was sometimes lost in the enormous fun of racing the carts when the master’s back was turned. What if prediction is probabilistic rather than deterministic? In earlier posts on this blog you will find lengthy discussions of the problems associated with evaluating the accuracy of such predictions. I mention all this to hint at how difficult it is to pin down precisely what constitutes useful, reliable or valid knowledge.
Introduced externalities. The usual examples, pollution, good manners and flatulance. However, I also emphasized an externality we had dealt with all semester: when I buy a particular Picasso it prevents you from doing so, exerting a negative externality on you. I did this to point out that the problem with externalities is not their existence, but whether they are `priced’ into the market or not. For many of the examples of goods and services that we discussed in class, the externality is priced in and we get the efficient allocation.
What happens when the externality is not `priced in’? The hoary example of two firms, one upstream from the other with the upstream firm releasing a pollutant into the river (That lowers its costs but raises the costs of the downstream firm) was introduced and we went through the possibilities: regulation, taxation, merger/ nationalization and tradeable property rights.
Discussed pros and cons of each. Property rights (i.e. Coase), consumed a larger portion of the time; how would you define them, how would one ensure a perfectly competitive market in the trade of such rights? Nudged them towards the question of whether one can construct a perfectly competitive market for any property right.
To fix ideas, asked them to consider how a competitive market for the right to emit carbon might work. Factories can, at some expense lower carbon emissions. We each of us value a reduction in carbon (but not necessarily identically). Suppose we hand out permits to factories (recall, Coase says initial allocation of property rights is irrelevant) and have people buy the permits up to reduce carbon. Assuming carbon reduction is a public good (non-excludable and non-rivalrous), we have a classic public goods problem. Strategic behavior kills the market.
Some discussion of whether reducing carbon is a public good. The air we breathe (there are oxygen tanks)? Fireworks? Education? National Defense? Wanted to highlight that nailing down an example that fit the definition perfectly was hard. There are `degrees’. Had thought that Education would generate more of a discussion given the media attention it receives, it did not.
Concluded with an in depth discussion of electricity markets as it provides a wonderful vehicle to discuss efficiency, externalities as well as entry and exit in one package. It also provides a backdoor way into a discussion of net neutrality that seemed to generate some interest. As an aside I asked them whether perfectly competitively markets paid agents what they were worth? How should one measure an agents economic worth? Nudged them towards marginal product. Gave an example where Walrasian prices did not give each agent his marginal product (where the core does not contain the Vickrey outcome). So, was Michael Jordan overpaid or underpaid?
With respect to entry and exit I showed that the zero profit condition many had seen in earlier econ classes did not produce efficient outcomes. The textbook treatment assumes all potential entrants have the same technologies. What if the entrants have different technologies? For example, solar vs coal. Do we get the efficient mix of technologies? Assuming a competitive market that sets the Walrasian price for power, I showed them examples where we do not get the efficient mix of technologies.
An unintentionally amusing missive by Marion Fourcade, Etienne Ollion and Yann Algan’s discovers that the Economics profession is a self perpetuating oligarchy. This is as shocking as the discovery of gambling in Casablanca. Economists are human and respond to incentives just as others do (see the Zingales piece that makes this point). Are other disciplines free of such oligarchies? Or is the complaint that the Economist’s oligarchy is just order of magnitudes more efficient than other disciplines?
The abstract lists three points the authors wish to make.
1) We begin by documenting the relative insularity of economics, using bibliometric data.
A former colleague of mine once classified disciplines as sources (of ideas) and sinks (absorbers of them). One could just as well as describe the bibliometric data as showing that Economics is a source of ideas while other social sciences are sinks. if one really wanted to put the boot in, perhaps the sinks should be called back holes, ones from which no good idea ever escapes.
2) Next we analyze the tight management of the field from the top down, which gives economics its characteristic hierarchical structure.
Economists can be likened to the Borg, which are described by Wikipedia as follows:
“….. the Borg force other species into their collective and connect them to “the hive mind”; the act is called assimilation and entails violence, abductions, and injections of microscopic machines called nanoprobes.”
3) Economists also distinguish themselves from other social scientists through their much better material situation (many teach in business schools, have external consulting activities), their more individualist worldviews, and in the confidence they have in their discipline’s ability to fix the world’s problems.
If the authors had known of this recent paper in Science they could have explained all this by pointing out that Economists are wheat people and other social scientists are rice people.