Matt Nolan

Discount factors and death

/1 Comment/in , , /by

What is a discount factor? A discount factor tells us the rate of time preferences between periods of time – in other words it gives us a measure for how much “stuff” we are willing to sacrifice in the future in order to consumer now.

Economists often use “exponential discounting“. Furthermore Rauparaha has discussed how hyperbolic discounting more accurately reflecting peoples true time preference at a given point in time. However, there are other issues that influence the way people discount. The one I want to focus on today is death.

Read more

jamesz

In praise of abstraction

/in /by

Economics seems to endure an awful lot of criticism for using models which simplify reality. I really like the analogy Free Exchange draws between economic models and geographical maps:

If a map included every detail in the geography (trees, country roads, etc.) it would be intractable, rendering it useless. Maps do give you a sense of scale and how variables relate. This facilitates your journey, but does not eliminate unforeseen diversions and the potential for accidents.

Our models are far from perfect and are constantly improving. However, it is our ability to simplify that makes the models useful. If we had to REALLY model reality we’d be neuroscientists, not economists, and have yet to contribute anything to an understanding of markets, policy or finance.

Matt Nolan

Social devolution or individual freedom?

/in , , /by

Here I am going to discuss an issue that is way over my head – but is extremely important for the practical application of economic concepts. I am going to discuss how changes in economic policies can influence social structure.

I decided that I would attempt to write about this after reading this post. In the post the daily dissident laments the collapse of community and the movement in consumerism and its impact on individuals.

The first argument against this view is the idea of individual freedom – individuals have the right to make their own choices, and the frame of communal society alienates that right. However, it is possible to look at the idea of community while providing individuals with rights.

The most basic way to frame this problem initially is as a prisoners dilemma. Read more

jamesz

‘Right’ by any other name

/6 Comments/in , /by

Many critics of economics accuse it of being an amoral pursuit. Conversely, many economists praise the amoral nature of their discipline. It is easy to think that there must be more to this argument than whether economics is morally ‘good’ or not. After all, that seems like an awfully circular and pointless argument. One might ask what characteristics people value that they feel economics lacks. How do people weigh up the characteristics that they throw in a basket termed ‘morals’? Robin Hanson suggests that perhaps, ironically, economists have many of the tools to help them weigh such factors:

Economic analysis tries to infer what people want, largely from actions, and then tries to suggest policies to get people more of what they want… Critics, however, say economic analysis is untrustworthy because it is incomplete, since wants are only one of many moral considerations. But this complaint seems to me backwards… After all, morality is only one of the many ends we pursue. Yes we want to be moral, but we also want other things, and we each choose as if we often care about those other things more than morality.

Read more

jamesz

Why economists are always right… or wrong

/6 Comments/in , , /by

Oliver Woods has used Matt’s post on the trade off between equity and efficiency to launch an attack on the separation between normative and positive economics. Matt’s busy with real economics today so it falls to me to defend his honour. Oliver claims that

…any ‘rational’ observer would see that economics and politics/society/morality are fundamentally intertwined. They’re really more or less the same thing…

There’s a very good reason why economics and politics are entirely different beasts: economists can be right (or wrong), but politicians can never be right. Read more

jamesz

Marshall’s maths

/3 Comments/in /by

Bluematter quotes Alfred Marshall:

(1) Use mathematics as shorthand language, rather than as an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life (5) Burn the mathematics. (6) If you can’t succeed in 4, burn 3. This I do often.

It seems to me to be fairly good advice, but Bluematter’s not convinced that either the maths or the real world examples are useful! Let’s examine a real world example to illustrate the issue. Read more