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Lamar Smith’s new bill to ensure that NSF research advances the national interest does not go far enough. Smith who is Chairman of the House Science, Space and technology committee writes:

We must set funding priorities that ensure America remains first in the global marketplace of basic research and technological innovation, while preventing misuse of Americans’ hard-earned tax dollars. Unfortunately, in the past NSF has funded too many questionable research grants – money that should have gone to projects in the national interest. For example, how does the federal government justify spending \$220,000 to study animal photos in National Geographic? Or \$50,000 to study lawsuits in Peru from 1600 – 1700? Federal research agencies have an obligation to explain to American taxpayers why their money is being used on such research instead of on more worthy projects.

To ensure that the NSF is not profligate, the bill requires that each grant award

“be accompanied by a non-technical explanation of the project’s scientific merits and how it serves the national interest.”

Why stop with the NSF? Public education consumes an even larger share of my tax dollars. Why must I support the good for nothing offspring of my neighbors who grow up to be actors, musicians and worse, number theorists? If they want their children to be artsy-fartsy pseudo intellectuals they should do it on their own dime. Would be parents should be required to submit, a grant proposal justifying their desire for children. Each successful award should be accompanied by an explanation of how their child will serve the national interest.

There are 16 republican party candidates vying for 10 slots in the first official debates to be hosted by Fox news. Disappointing is the fact that competition between TV networks has not risen to meet the challenge. MSNBC, for example,  should take the opportunity to lean in and invite the 6 who don’t make the cut to a debate on their network. Better still, for the same day and time.

According the simulations in the New York Times, Kasich, Jindal, Fiorina, Graham and Pataki will most likely not make the cut.  One of Perry, Christie and Santorum will by chance make the cut. Importantly, the alternative debate would not contain Trump. Or Cruz, who  by some accounts has not left any part of Trump’s posterior unmoistened. Spun right, MSNBC could market their alternative debate as the one for grown ups while the official one would be for the children.

To make all this work, they should invite Kasich, Jindal, Florin, Graham, Pataki, Perry, Christie and Santroum now and ask for commitments before Fox announces it selections. For the three on the bubble, it gives them the chance to say no to Fox before being barred. This may be attractive to each of them. It might cause an unraveling of the Fox debate. Which debate would Bush, for example, prefer to be a part of?

As a participant in LinkedIn, I receive, periodically, what can politely be described as blather under the heading of LinkedIn Pulse. Wired magazine, which apparently still exists, had this to say about LinkedIn Pulse:

As a LinkedIn user, the company knows you well. It knows who you are, where you work, and what you do. But it also knows who you know, what industry you’re a part of, and, in some cases, what you care about. Pulse leverages all of this data with the intention of delivering a news digest that’s tailored to your professional interests and needs.

This weeks digest, like the previous weeks, was embarrassing. For me. LinkedIn Pulse believes that I read at the middle school level, possess the social skills of a 2 year old, with no grasp of logic but brimming with a Dale Carnegie like enthusiasm for winning friends and influencing people. Here is a sampling.

First, a piece by Betsy Liu (labeled an influencer) entitled: `Do This, and You’ll Always Be the Most Popular person in the Room’. She offers 3 pieces of advice: mirror people’s words, ask questions and stop looking around the room. I’m surprised she didn’t suggest avoid breaking wind in public.

Second, was from yesterday’s man, Jack Welch and Suzie Welch on why one should fear being promoted. I think they specialize in writing for blocks of wood.

Third, an article by Jeff Haden, a ghost writer. This must explain why most business books written for the airport audience rival Brezhnev’s biography as a soporific. Haden offers 15 ways in which successful people approach life differently. Number 13 is: `They believe they’re in total control…’ Which, oddly, contradicts number 8: `They’re great at self assessment’.

Fourth, from an entrepreneur called James Altschuler, on what to do upon being sacked. Some meaningless anecdotes about what it was like to be fired followed by a list. One item on the list, is to contact people who you a grateful to, tell them so and ask how they are doing. Its important to ask sincerely. Does one not do this before being fired?

Fifth, and last, a piece by one Dr. Travis Bradberry on 6 unusual habits of unusually creative people. The use of the title `Dr.’ is a warning. It was granted by the California School of Professional Psychology. Logic, apparently, is not a requirement for graduation. Number one on the list is wake up early. I think this happens naturally to anyone over 50.

Finally got around to reading the PCES report on economics education at Manchester. The Francis Urquhart  half of my dual selves was duty bound to dislike it. My Urquhart self, would urge the authors to switch subjects and find  fulfilling careers in one of the caring professions, like, personal incontinence counselor. My milquetoast self prevailed and I buckled down to read it.

The report raises two issues and its writers have made the mistake of conflating them or at least not separating them clearly enough. The first is the effectiveness with which economics is taught. The second is what is to be taught.

On the first, the report makes for depressing reading. It summarizes an economics education as dull as ice fishing. For those unfamiliar with ice fishing, it is a sport (and thats being charitable) practiced by the inhabitants of Minnesota and the remoter parts of Wisconsin. In dead of winter, one drives a large vehicle over a frozen lake. If that were insufficient to tempt fate, one then cuts a hole in the ice for the ostensible purpose of catching fish. In practice one sits around the hole drinking prodigously while trying not to fall in. Beans, flatulance and an absence of sanitation figure prominently.

On the second, the report’s authors write

Our economics education has raised one paradigm, often referred to as neoclassical economics, to the sole object of study. Alternative perspectives have been marginalised. This stifles innovation, damages creativity and suppresses constructive criticisms that are so vital for economic understanding. Furthermore, the study of ethics, politics and history are almost completely absent from the syllabus. We propose that economics cannot be understood with all these aspects excluded; the discipline must be redefined.

Exposure to history, psychology and politics? Of course, yes. Within the US system this happens naturally as a function of breadth requirements. Students are not shy about trying to reconcile what they have learnt in Psychology and what they are mastering in Economics. It makes for a lively classroom.

What about these alternative perspectives? In for a penny in for a pound, so I decided to read a paper  by Steven Keen. Keen, as far as I can gather is one of the leading lights of these alternative perspectives. The paper I read (co-authored with Russell Standish) appeared in Physica A and can be found here. If you’ve not heard of it, there is a good reason for that. Continue to ignore it. Pauli might have described it thus:

Das ist nicht nur nicht richtig, es ist nicht einmal falsch!

Reading it lowered my IQ, something I can scarce afford to do. If this is representative of what passes for alternative perspectives, the writers of the PCES should leave economics and find fulfilling careers as incontinence counselors. Finally, for those who think my description of Keen and Standish uncharitable, I refer them to the following by Chris Auld.  Stamping out ignorance is a thankless task and one is cheered to see there are some who take it on.

The urge to promote these alternative perspectives is to be found  across the Channel as well. There, a sub group of scholars and  nescafe society currently wished to form a separate group so that they may be evaluated by different norms.  Jean Tirole, in a letter to  the State secretary in charge of Higher education and Research in France, argued against this. A response can be found here.

This is not a post about academia, economics, or game theory. It is a post about life.

Today I am going to meet my French teacher for our weekly session, and I wanted to prepare an interesting topic for discussion. I pondered what can be an appropriate subject, and the words “the most gifted woman in the world” popped into my mind. Who is that woman and what did she do?
I typed “The most” in Google search bar. Auto-complete had few suggestions:
The most violent year
The most expensive car
The most expensive watch
The most dangerous game
The most beautiful woman

I went on. “The most gifted”. Auto-complete tried to read my mind:

The most gifted psychics
The most gifted child in the world
The most gifted man who ever lived

The tenth option was

The most gifted rapper in Nigeria

yet no mention of women.

Let’s continue. “The most gifted wo”. In how many ways can you complete this search? Two.

The most gifted child in the world
The most gifted person in the world

Fine, let’s add another letter. “The most gifted wom”.

Nothing. Not a single auto-completion. I beat Google. Probably everyone else know the answer and therefore nobody looked for it before me.

I am a stubborn guy. “The most gifted woman in the world”. Google is even more stubborn than me. They figured out that I mistyped my search phrase, and made few suggestions, in which the word “woman” was replaced by another boldfaced word: “child” and “person”. In fact, they thought that it is more probable that I search for “The most gifted psychics review” than for a gifted woman. Does this say something about me, about Google, or about the phrases that we search on the internet?

I did not give up and pressed “Enter”. The list that I got involved only (female) singers. Only? Almost. The tenth link was to “Support for Gifted Mothers: America Is Not a World Leader”.

I suspected that my misunderstanding with Google is due to language issues, and that the word “gifted” might refer to people’s vocal abilities, so I searched for “The most gifted man in the world”. Unfortunately I did not get any male singer. The first three pages referred me to the TV series “A Gifted Man”, number 30 pointed to King Solomon on a christian site, yet the title of number 32 was more promising: “Ten People with Unbelievable Talents”. Yes, I told myself, I finally got a proof that our world is full of chauvinism. I clicked on the link and found out that the most talented person in the list succeeded in pulling a truck with his XXXX. I did not bother to check the achievements of the other nine.

If this is the most significant accomplishment of men, no wonder auto-completion failed.

The world may be interested in the whereabouts of Vladimir Putin and whether Elton John’s boycott of Dolce and Gabbana turns out successful. Here, in the holy land, we wait for the elections to the parliament that will take place this Tuesday. The elections, which should have been an easy stroll for acting prime minister Benyamin Netanyahu, turned out to be a difficult trek.

There are 120 parliament members and two main candidates for the position of prime minister: Benyamin Netanyahu, who heads the right-wing parties, and Isaac Herzog, who heads the center-left parties. The way a government is formed is that after votes are counted and the 120 seats are divided among the parties, largely in proportion to the number of votes they got, the leader of each party recommends to the President of the state a person, which that party backs for the post of prime minister. The President then asks the person who he believes has the highest chance of creating a coalition to try and make a coalition. If that person fails, then the President asks another person to form a coalition, and so on.

Latest polls say that the parties that support Netanyahu will get about 55 seats, and the parties that support Herzog will get roughly the same number of seats. The remaining 10 seats will go to a newly formed party, headed by Moshe Kahlon, who said that he would recommend nobody to the President. Why did he say it? On the one hand, Kahlon was a parliament member of Netanyahu’s party (and a minister in Netanyahu’s government), and his voters come from the right wing. Saying that he will recommend Herzog is a death strike to his party. On the other hand, he was very critical about Netanyahu’s conduct and poses himself as “the true representative of the right wing”, and so he cannot say that he will recommend that person whom he thinks is not a good prime minister.

Who will then be the prime minister? PredictIT.com estimates at 56% the probability that Netanyahu is reelected. And if not? Then Herzog, as there is no one else.

Almost. Think of the situation from the eyes of game theory. Suppose that neither Netanyahu nor Herzog are recommended by more than half the votes. Herzog is in a bad shape: the Arab party is supposed to recommend Herzog, and polls predict that it will get about 13 seats. Traditionally the Arab parties are not invited to be part of the government: Herzog will have to make a coalition of more than 60 members excluding the Arab party; this is tough. Netanyahu is in a bad shape as well; polls predict that his party will lose quite a few seats, and if he will not be recommended by more than half the members of the parliament, he might be kicked out by his own party. So who can be the new prime minister?

I ask you to consider the swing voter, Kahlon. Since he comes from the right wing, all parties in the right wing will prefer him to Herzog. All the parties in the left wing will prefer him to Netanyahu or to any other candidate from the right wing. This is a hell of a reason not to recommend any of the two to the President.

Is my theory right? Will the swing voter use his power to become the real winner of the elections? We will have to wait a few weeks and see for ourselves.

This last week on Monday the Israeli Ministry of Communication auctioned 8 bands (each band of 5 mega-herz) for the use of fourth-generation cellular communication. The auction was interesting from a game theoretic perspective, and so I share it with the blog’s readers.

The rules of the auction are as follows:

1. The auction is conducted on the internet, and each participant sits in his office.
2. The minimum bid is 2,000,000 NIS per mega-herz (meaning 10M per band).
3. Bids must be multiples of 100,000.
4. No two bids can be the same: if a participant makes a bid that was already made by another participant, the e-system notifies the participant that his bid is illegal.

The auction is conducted in round.
In the first round:

1. Each bidder makes a bid, which consists of the number of bands it asks for and the price he is willing to pay for each mega-herz. As mentioned above, no two participants can offer the same price.
2. The e-system allocates the 8 band between the participants according to the bids: the bidder with the highest bid gets the number of bands it asked for, then the bidder with the second highest bid, and so on, until the 8 bands are exhausted.
3. Each participant is told the number of bands it was allocated.
4. The price in which the 8th band was allocated is called the threshold and posted publicly.
5. The minimum price for the next round is the threshold + 200,000 NIS.

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.

Two governments did not survive this week: the Swedish and the Israeli. Here, in Israel, people are interested in the effect of the coming elections on the financial market. The Marker, the most important national daily economics newspaper, published an article on this issue. The chief economist of the second largest investment house, which handles about 30 billion USD, is quoted as saying (my own translation)

“Past experience shows that most of the time, during six months after elections the stock market was at a higher level than before the elections,” emphasized Zbezinsky (the chief economist, ES). The Meitav-Dash investment house checked the performance of the TA-25 Index (the index of the largest 25 companies in the Israeli stock exchange, ES) in the last six elections. They compared the index starting from 6 months before elections up to six months after elections, and the result was that the average return is positive and equals 6%.

To support this claim, a nice graph is added:

Even without understanding Hebrew, you can see the number 25 at the title, which refers to the TA-25 index, the six colored lines in the graph, where the x-axis measures the time difference from elections (in months), and the year in which each elections took place. Does this graph support the claim of the chief economist? Is his claim relevant or interesting? Some points that came up to a non-economist like me are:

1. Six data points, this is all the guy has. And from this he concludes that “most of the time” the market increased. Well, he is right; the index increased four times and decreased only twice.
2. Election is due 17-March-2015, which means three and a half months. In particular, taking as a baseline 6 months before election is useless; this baseline is well into the past.
3. Some of the colored lines seem to fluctuate, suggesting that some external events, unrelated to elections, may have had an impact on the stock market, like the Intifada in 2001 or the consequences of the Lebanon war before the 2009 elections. It might be a good idea to check whether some of these events are expected to occur in the coming nine months and a half.
4. It will also be nice to compare the performance around elections to the performance in between elections. Maybe 6% is the usual performance of the TA-25, maybe it is usually higher, and maybe it is usually lower.

I am sure that the readers will be able to find additional points that make the chief economist statement irrelevant, while others may find points that support his statement. I shudder to the thought that this guy is in charge of some of my retirement funds.

Economists, I told my class, are the most empathetic and tolerant of people. Empathetic, as they learnt from game theory, because they strive to see the world through the eyes of others. Tolerant, because they never question anyone’s preferences. If I had the  talent I’d have broken into song with a version of `Why Can’t a Woman be More Like a Man’ :

Psychologists are irrational, that’s all there is to that!
Their heads are full of cotton, hay, and rags!
They’re nothing but exasperating, irritating,
vacillating, calculating, agitating,
Maddening and infuriating lags!

Why can’t a psychologist be more like an economist?

Back to earth with preference orderings. Avoided  the word rational to describe the restrictions placed on preference orderings, used `consistency’ instead. More neutral and conveys the idea that inconsistency makes prediction hard rather that suggesting a Wooster like IQ. Emphasized that utility functions were simply a succinct representation of consistent preferences and had no meaning beyond that.

In a bow to tradition went over the equi-marginal principle, a holdover from the days when economics students were ignorant of multivariable calculus. Won’t do that again. Should be banished from the textbooks.

Now for some meat: the income and substitution (I&S) effect. Had been warned this was tricky. `No shirt Sherlock,’ my students might say. One has to be careful about the set up.

Suppose price vector $p$ and income $I$. Before I actually purchase anything, I contemplate what I might purchase to maximize my utility. Call that $x$.
Again, before I purchase $x$, the price of good 1 rises. Again, I contemplate what I might consume. Call it $z$. The textbook discussion of the income and substitution effect is about the difference between $x$ and $z$.

As described, the agent has not purchased $x$ or $z$. Why this petty foggery? Suppose I actually purchase \$x\$ before the price increase. If the price of good 1 goes up, I can resell it. This is both a change in price and income, something not covered by the I&S effect.

The issue is resale of good 1. Thus, an example of an I&S effect using housing should distinguish between owning vs. renting. To be safe one might want to stick to consumables. To observe the income effect, we would need a consumable that sucks up a `largish’ fraction of income. A possibility is low income consumer who spends a large fraction on food.