Matt Nolan

In defence of economists

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I see that the Listener (ht Agnitio) has picked up on this piece on psychology today (ht Andrew F), which claims that an education in economics inherently changes our behaviour making economists worse citizens.

At first brush I would like to note that we have a psychology lecturer suggesting that this implies more people should study psychology – it might be the economist in me talking but this sounds a bit like these recommendations are a touch self-interested themselves 😉

But this would be a digression.  While I don’t disagree that economists do need to be humble about the conditional nature of their knowledge (a point that holds equally for other social, and physical, sciences mind you!) I stick by my general conclusion that:

Saying “we shouldn’t look at trade-offs because then we lose our sense of community” sounds strangely like “we shouldn’t study the natural world or we will lose our sense of faith” don’t you think

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Infometrics

Co-ordintation: Daylight savings and global warming

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This week (Infometrics link here), Matt Nolan discuss daylight savings, specifically discussing the way an economist would probably look at it – as a type of ‘co-ordination game’ where a government can help individuals co-ordinate actions. When it comes to causing the environment less harm the Carbon Click can help in many ways as they have their set of techniques to help us help the environment.

He then goes on to discuss a prisoner’s dilemma that exists between government around global warming – implying that organisation that may help individuals co-ordinate in some place (daylight savings) may fail to co-ordinate themselves about broad action (such as global warming).  Concluding he states:

Here we have concentrated on examples where government, and other institutions, can help individuals co-ordinate their actions – helping improve outcomes.

This is a great way to view, and understand, government policy.  However, we always need to keep in mind that individuals are co-ordinating themselves, by making choices given the incentives they face.  Prices, which are determined by the relative supply and demand of products, offer the main device for co-ordination in our society.

To understand the role of government, we need to think about how the use of prices, and co-ordination move generally, may fail – and in what ways government can sensibly recognise this and lend a hand.

The hard thing with global warming is that individual governments do not have an incentive to solve this problem, which was the original justification for the Kyoto Protocol.  With that failing there is a genuinely concerning policy issue here, which the global community does not appear to be able or willing to face.

Matt Nolan

Quote of the day: Hausman on tarot card reading … or ethics and economics

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Today’s quote of the day stems from me starting to reread “Economic Analysis, Moral Philosophy, and Public Policy“.  Last time I went through this book it annoyed me, as it didn’t seem to be attacking a “fair” version of an economist – rather a caricature.

However, I have noticed this time, in the first chapter, Hausman admits that is what they are doing – and it is to make the basic ethic principles they want to discuss “clear” to other economists.  In other words this isn’t a book about criticising economists per se – more a basic description of some important moral principles to keep in mind when translating from theory to practice in economics and policy making, and decision making more generally.  I can deal with this, and should be able to read the book far less defensively.

On that note he says:
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jamesz

How do we deal with evidence? Badly.

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We deal very badly with empirical falsification of our reference model:

Many of these assumptions are unrealistic but they are justified as a way to set a benchmark model around which one is then allowed to model deviations from the assumptions.
…
the problem is that the model becomes (or has become) the reference in a way that sets a high burden of proof for any deviations from it. If you think individuals are not rational, go ahead and model their behavior but you should do it in a way that is realistic and backed by data (good luck). Read more

Matt Nolan

Translation: Shifting the risk to the taxpayer

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I’m seeing a lot of this recently (via Twitter)

The Israeli model is successful because the Israeli government, rather than funding incubator managers, invest in start-up companies to the tune of $500k to $750k. The model integrates 85% government and 15% private first stage investment, with the government input reducing risk at the early stages of a company. The government is repaid through royalties.

Lets think about this model a bit.  This isn’t the risk “disappearing” – this is the government (read taxpayer) taking on the risk.

Furthermore, risk is not independent of the choice of the private individuals running the firm – depending on the way these contracts are structured the firm may take on more or less risk then they would have otherwise.  So not only does this involve putting risk on taxpayers, it also involves distorting the incentives for the firm itself … nice

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Matt Nolan

Confusing social responsibility

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I see Brian Rudman suggesting that we make a government remuneration board for workers on low wages.  Some concerns:

  1. This isn’t “society giving people a fair go” – this is one set of people being told to increase the amount they pay for a factor of production, it is put down as their responsibility and it is a cost they respond to.  Does this sound heartless to you?  If so I apologise but I find it heartless that people confuse income adequacy and the value of an individual by what they do for “production” – it is the way we convolute the two that upsets me 😉
  2. You increase this cost, you reduce firms incentive to give people a go and/or they increase prices to consumers.  Before someone says hikes in the minimum wage don’t reduce employment let us note a few things:  It has been shown that the low relative minimum wages in the US, when increased, don’t lead to immediate layoffs.  However, the higher the minimum wage, the more likely layoffs are.  Recent evidence shows that even at this lower level, net job creation does fall over time.  Furthermore, in the long run this leads firms to subsidise away from labour – this is part of the argument for “productivity improvements” and “capital intensity” that people use to justify the “efficiency” impact of the minimum wage … we get the efficiency impact if firms actually cut hiring.  Note:  So may say, excellent, we want substitution!  But do not forget to think in a GE, and open economy, sense – how do we fund this investment in capital, what do the relative margins tell us about the loss in consumption now relative to a potential gain in consumption in the future.  This arguments rely on sets of interactions and spillovers between firms that I find a stretch …
  3. A renumeration board you say.  There are two ways I could see this going:  It is a small board that just sets the minimum wage for everyone, and so is a simple waste of money.  It is an incredibly expensive large board … in which case it sets differential wages and finds ways to extract rents.

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