Matt Nolan

Utility of the means

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Economists will often look at outcomes and associate values to things based on the outcome. Often other disciplines (namely Sociology and Anthropology) criticise our focus on outcomes, stating that we do not pay enough attention on the means of deriving those outcomes.

A post over at Stackelberg follower (love that blog name) discusses the utility he derives from shopping for a product, even a product that he may not actually buy. This made me think again about the issue of means and outcomes.

I don’t believe that economists forget about the means when describing the payoff from outcomes. The utility gained from receiving a pie (I love pies) by legitimate means will likely exceed the utility from a pie gained by killing someone. I tend to think that the means of getting to a certain point, or consuming a certain product, influences the payoff associated with the consumption of that product.

In the case that the Stackelberg follow guy showed, the consumption choice was to NOT buy the game. It might sound weird, but in that case he choose to not purchase anything and that was still some form of consumption. Now the utility associated with that consumption comes from the direct value of that consumption (having nothing) and the means to that consumption (shopping). Another way of looking at it is to change the idea of what was being consumed. In the Stackelberg follower case he choose to consume shopping rather than consume sit in the park.

As a result, I think the means to an outcome are important. However, economists do not ignore them (like some disciplines think we do) as the means to consumption influences the value of that consumption activity. Ultimately, the pie I brought and the pie I could have potentially killed for are different products, with different values, even if there is no physical difference in the pies.

What do you guys think? (assuming more than one person reads this 😉 )

jamesz

Left-wing libertarians?

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Leftie liberals tend to be in favour of government intervention in markets. They tend to claim it prevents abuse of market power by powerful firms. However, these self-proclaimed left wing economists write that

[l]abour-market flexibility, deregulation of the service industry, pension reforms and greater competition in university funding is not anti-equality. Such reforms … tend to increase productivity by basing rewards on merit rather than on being an insider. Pursuing pro-market reforms does not imply facing a trade-off between efficiency and social justice. In this sense, pro-market policies are “left wing”.

I think that they are confusing deregulation and competition. Here on this blog we are in favour of efficient competitive markets, yet often advocate regulation. The problem we see is that many markets do not generate much competition. Perhaps there are natural barriers to entry, or perhaps an incumbent has the market power to deter others from entering. In either case deregulation does not lead naturally to greater competition and one wouldn’t necessarily expect increases in efficiency when the government left the market to its own devices.

However, one can’t conclude that a market will do better when regulated simply because it is not perfectly competitive. As Alesina and Giavazzi point out, there can be perverse incentives created by government regulation that run contrary to the goals of the intervention:

The young are hired with temporary contracts which offer no social security … When the contract expires, the employer opts not to renew it, so as not to run the risk of having to convert temporary hires into permanent employees

Such cautionary examples should stop us from jumping on a bandwagon either in favour of, or opposing, regulatory intervention. There is no bullet that will solve an economy’s problems or it would have been done long ago. It is rarely possible to solve a difficult problem using sweeping generalisations as many politicians and ideologues would like to do.

Robbie Allan

All Blacks’ loss to France: Bad for families, good for the economy?

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It’s commonly believed in many countries domestic violence spikes following a loss in a major sports event. It’s easy to see why “facts” like this spread easily: they seem to stand to reason (we tend to be upset when our favourite team loses, and most people are more prone to violence when they’re upset), as well as being an implicit criticism of our obsession with sports. The problem is, these “facts” are often false.

In the US a few years ago a story did the news circuit about domestic violence increasing following Superbowl Sunday. While it’s a good story, on examination the facts seem to have been largely manufactured, and the contention is not supported by academic evidence.

In 2003 a similar story did the rounds here, originating from a study commissioned by the National Collective of Independent Women’s Refuges, and already the idea is being dragged out again as pundits of all colours weigh in on the effect of the All Blacks’ loss on the national psyche.

I haven’t been able to track down a copy of the NCIWR report, so I can’t comment on its relevance, but anecdotal evidence alone that domestic violence goes up after an All Blacks game isn’t enough. This is because All Blacks games tend to happen on the weekend, and it’s possible that domestic violence always goes up on weekends anyway. Moreover, domestic violence will fluctuate randomly from week to week, so to suggest that the All Blacks are having an effect on domestic violence, we need to be able to prove that the any increase in incidents (after adjusting day of the week, and any other known factors) is more than can be explained by random variation.

The fact is that most of the data that we see is influenced by many factors, so show that a one-off occurrence has an effect, we need to make the necessary adjustments for other known influences.

In the same way, the most recent Molesworth and Featherston newsletter goes out on a limb when it claims: “New Zealand has been dumped out of the world cup four times now. Each time, our economy has accelerated in the following quarter. We have won the world cup once – in 1987, immediately before the stockmarket crashed.”

While they’re being flippant, we can’t automatically conclude that the All Blacks are helping the New Zealand economy because the World Cup tends to be held right before Christmas, when the economy peaks anyway.

It’s often said that “there are lies, damned lies, and statistics”. Statistics aren’t bad in and of themselves, but they can be bad when they’re used wrongly. I’d prefer it if we acknowledged that there are “lies, damned lies, and bad statistics”.

 

Update: The Dom doesn’t fail to deliver: http://www.stuff.co.nz/4229264a10.html

jamesz

Economist vs economist

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Economists are often misrepresented and misconstrued as being crazy, right-wing, free-market ideologues. However, economists themselves aren’t above painting each other in to a corner. This article about peoples’ views of economists quotes Joseph Stiglitz on Milton Friedman:

[his] belief in the perfection of market economies, on models that assumed perfect information, perfect competition, perfect risk markets… [was] never based on solid empirical and theoretical foundations.

This view is apparently held by many prominent economists. Dani Rodrik puts their views succinctly when he says

The First Fundamental Theorem of Welfare Economics is proof, in view of its long list of prerequisites, that market outcome can be improved by well-designed interventions.

Unfortunately, this interpretation is inaccurate: the First Theorem give sufficient, but not necessary, conditions for market efficiency. As Alex Tabarrok explains,

…the fact that the theorem’s conditions are not satisfied does not prove that market outcomes can be improved, even by “well-designed” interventions… We know from Vernon Smith’s work, for example, that markets can be competitive with only a handful of traders; nor do the traders have to be perfectly rational. In fact, markets can be very efficient with zero-intelligence traders.

The free-marketeers may not always be correct but it does the debate no good to misrepresent their arguments. Doing so only foments antipathy and creates rivalries which inhibit the quality of the discussion.

Matt Nolan

What a cow wants, what the economy needs

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It seems that some fine researchers in Waikato are trying to discover sets of preferences among cows. Good. I’m sure that individual cows do have a set of preferences over outcomes. However, the researchers better be careful that they don’t try to compare the value of different cows preferences, or take one cows (or a small subset of cows) set of preferences and assume that it holds over all cattle. These are mistakes that economists have made throughout time.

Economists are experts at positive judgements. Distilling the ‘facts’ and providing a framework with which to place issues of scarcity. If you want a normative judgement, such as what is the welfare function for cows, or how do we weight the importance of different cows feelings, then you have to find an expert in the field. In the case of cows, I think the appropriate expert would be a farmer. After all, who knows the nuances of a set of cows better than the farmer who raises them!

If only finding the appropriate experts was as obvious for questions about the national economy. Economists often settle for policy analysts or even themselves to provide the normative judgements around policy decisions. However, do economists and policy analysts get up at 4am most mornings to go visit the national economy? Do they spend precious time alone with the national economy, so they can really get to know it? Can policy analysts and economists identify the subtle nuisances that exist between the different individuals in the national economy?

Ultimately, if an economist wants to add apply normative judgements after setting up a given issue in the frame of scarcity, they must make sure they go out into the open air, and discover how their precious economic agents (people) are feeling. Only then can they attempt to claim that they know what the economy needs.

Matt Nolan

Infinite time and economics

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I was just looking at an interesting post from Philosophy, et cetera. They are discussing value when we have ‘infinites’. Now if we are looking at points in time with infinite resources this would be pointless for economists, as economics is the study of scarcity. If there are infinite resources, consumption is infinite and value is infinite.

However, they also discuss infinite time. Now if we have a game which is played infinitely into the future how do we decide the optimal choice of an individual? In order to work out the optimal choice of an agent economists will often discount the agents future consumption decisions. This implies that, if the ordering of preferences is expected to stay constant over time, an agent will value a unit of consumption more now than they will at any given point in the future (Ultimately it means that the game provides a finite value even though we have infinite time, as a result these values can be ranked allowing us to choose an optimum). Now exactly how we discount is constantly discussed by economists, especially since the way we commonly discount doesn’t hold true in empirical tests.

Now, even though I have spent a lot of time discussing discounting, that is not what I want to talk about. I want to talk about why and infinite horizon game or choice problem is sensible. Now you might say that no game between agents will be played for an infinite amount of time because everything has an end. However, that is not the way I see it. Infinite time is the idea of unbounded time. If we do not have a definitive end-point then we can view our game going on into infinity.

Let me explain. Ultimately, agents in a game will associated some probability to the game ending during a certain period. In this case they will either believe that their is 100% probability that the game will have ended at some set point, which acts as a boundry and so makes the game finite, or they believe that there is a probability that the game will end at each point in time, but they never associate a 100% probability to the gaming ending at a set point. In the second case we need to look at a infinite horizon game.

The discussion of discount factors is important when we go to look at a person’s choice in this way. In a sense the discount factor represents the likelihood that the game or choice problem will still be going during future periods, as well as a general preference people may have for consumption now instead of consumption tomorrow. As a result, even if we think that saying the current value of a pie in a year is greater than the current value of a pie in 10 years is silly, the fact that I place a higher value on being dead in 10 years than in one means I will value the pie in a year more (as I may never consume the pie in 10 years). Now my consumption choice may still be bounded (as I associate 100% chance of being dead at 800 😉 ). However there are cases where there may be point where a 100% probability is implied, eg the survival of a firm such as the Warehouse.

All this teaches us, is that we have to be careful that the horizon we choose to look over things makes sense, and that infinite does not mean the game or choice problem will never end, just that we are completely uncertain when it will end.