Hey, it's John McCain time again! The Free Exchange blog has this (under the nifty headline 'Tsk-onomics'), on the familiar topic of McCain's support for the gas tax 'holiday'. Congress doesn't like it, economists don't like it, so far so familiar.
Apparently McCain's getting slammed for being rubbish at answering questions on this, and other, policies he's advocating, but let's leave that to the analysts. There's a fun exchange quoted from a George Stephanopoulos chat with McCain:
STEPHANOPOULOS: Not a single economist in the country said it’d work.
MCCAIN: Yes. And there’s no economist in the country that knows very well the low-income American who drives the furthest, in the oldest automobile, that sometimes can’t even afford to go to work.
I think it's neat that presidential candidates get chips by opposing economists, and I don't mean that as an offended economist; I think it's interesting. Anyway, is there any merit in that particular McCain quotation? Or, to paraphrase: is economics too far from the ground? Is it too esoteric to properly understand the actual, real implications of its preditions, its recommendations?
The classic case, I think, might be the globalization debate, the protectionism debate: typical economist's position might be 'trade good because it allows specialization based on comparative advantage, cheap stuff, more to go around etc'; the counter-argument could run 'trade bad, erodes localism which we like, hurts those people whose livelihood depends on those things that their country will stop producing when trade makes it cheaper to get those things from other countries'.
Now, sure, the response to the latter is usually 'yes, yes, we know some people lose out, compensate the losers', but is that particularly constructive? Are we blind to the real, tangible content of the disagreement with the 'economist's answers'? Do we splutter and get indignant with John McCain because he had bad policies, or because we don't really get the argument?
When we say 'your gas tax holiday plan sucks, aha!', we lose friends and alienate people; could we actually make economists a little cuddlier and meet McCain halfway? How can we deal with the problems he's referring to, that people feel like they're struggling to get by? We don't deal with it by ridiculing, that's for sure. There's no need to compromise if you think a gas tax holiday isn't right, so by all means make that case, but every time an economist is painted into a corner as an enemy of the prosperity of the common man, we must argue our way out double-quick, as a matter of principle and credibility.
Monday, July 28, 2008
Wednesday, July 23, 2008
Education, or, What do people do?
David Glenn in the Chronicle asks 'what explains the growing gap in wages?' The arguments covered run that the number of people going to college hasn't kept pace with the demand for skill by employers, and that the slowing of educational attainment has caused wage inequality to increase. I'm biased towards any argument for universal education, even up to the college level (whether this would really increase the level of 'skills' is another matter, but I think that's secondary), but I'm also a little skeptical that massively expanding higher education would bring down wage inequality in the way Glenn and his cited studies speculate.
First we have to worry about the usual signaling story - is college just an indicator that someone's smart rather than something that makes them smarter? - but more than that, what would people do? What do people do? The 2000 US census has this (pdf link):
Management, professional and related: 33.6%
Service: 14.9%
Sales and office: 26.7%
Farming, fishing and forestry: 0.7%
Construction, extraction and maintenance: 9.4%
Production, transportation and material moving: 14.6%
'Production occupations' on their own make up 8.5%. Now, a potted history of modern development might go something like this:
1) agriculture; we don't all have to be farmers anymore, let's start making stuff: industrial revolution
2) cheap global trade in stuff; we don't all have to make stuff anymore, let's do professional services
3) now what?
If you are even willing to entertain that kind of a story, you have to wonder what it would really mean in the labor market to hypothetically educate everyone to college level (again, I like it for its own sake; not trying to argue against education). Buying the skills angle from the Chronicle article probably means believing that if we educate everyone they can all get the kind of Wall Street/banking/consulting/legal jobs that are typical of the direction OECD economies are heading in, right? Perhaps some of the scientists can do tech research, but for a bunch of college graduates you're looking at a lot of things that don't exactly scream 'tangible production'.
That's not quite the same as the argument the Chronicle's citations are opposing, which is to say that wage inequality has gone up as demand for skilled labor has fallen; it's more to say that the whole production side of the US economy is just a whole lot different than it was when wages were more equal. We've got a chicken/egg problem: if we educated everyone, would
a) everyone, and thus the country, be more productive, and if so in what industry;
b) the wage gap close by bringing the bottom up and the top down;
c) a lot of college graduates work in unexpected places;
d) the breakdown of occupation change in some way, and if so in what way?
The last one would be very interesting, but which way would it go? Would we simply have yet more bankers and consultants, or would there be a more fundamental shift? Is it possible to get by on a smaller service sector, or would we end up with the same service sector populated by college grads?
First we have to worry about the usual signaling story - is college just an indicator that someone's smart rather than something that makes them smarter? - but more than that, what would people do? What do people do? The 2000 US census has this (pdf link):
Management, professional and related: 33.6%
Service: 14.9%
Sales and office: 26.7%
Farming, fishing and forestry: 0.7%
Construction, extraction and maintenance: 9.4%
Production, transportation and material moving: 14.6%
'Production occupations' on their own make up 8.5%. Now, a potted history of modern development might go something like this:
1) agriculture; we don't all have to be farmers anymore, let's start making stuff: industrial revolution
2) cheap global trade in stuff; we don't all have to make stuff anymore, let's do professional services
3) now what?
If you are even willing to entertain that kind of a story, you have to wonder what it would really mean in the labor market to hypothetically educate everyone to college level (again, I like it for its own sake; not trying to argue against education). Buying the skills angle from the Chronicle article probably means believing that if we educate everyone they can all get the kind of Wall Street/banking/consulting/legal jobs that are typical of the direction OECD economies are heading in, right? Perhaps some of the scientists can do tech research, but for a bunch of college graduates you're looking at a lot of things that don't exactly scream 'tangible production'.
That's not quite the same as the argument the Chronicle's citations are opposing, which is to say that wage inequality has gone up as demand for skilled labor has fallen; it's more to say that the whole production side of the US economy is just a whole lot different than it was when wages were more equal. We've got a chicken/egg problem: if we educated everyone, would
a) everyone, and thus the country, be more productive, and if so in what industry;
b) the wage gap close by bringing the bottom up and the top down;
c) a lot of college graduates work in unexpected places;
d) the breakdown of occupation change in some way, and if so in what way?
The last one would be very interesting, but which way would it go? Would we simply have yet more bankers and consultants, or would there be a more fundamental shift? Is it possible to get by on a smaller service sector, or would we end up with the same service sector populated by college grads?
Tuesday, July 22, 2008
Dinner party advice for the economist
From The Economist's Free Exchange blog, comes some dinner party advice, based on Justin Wolfers:
JUSTIN WOLFERS discusses a common problem for the economist bon vivant—people are always asking you what's going to happen to such and such economic variable. Will the economy go into recession? Will the Federal Reserve raise interest rates? Should I sell my shares in Bear Stearns?
Very true. It's no fun at all to have to admit to being an economist.
On the Venn diagram of 'what people think of when they meet someone who introduces themselves as an economist', macroeconomic stuff (inflation, unemployment) and finance (stocks, commodities, assets) are huge whopping great circles, much bigger than they are on the 'what economists do' diagram. Hence the point of this site, I suppose.
Anyway, here's some advice:
Henceforth, when asked about oil prices, simply throw out some jargon, use phrases like "short-run volatility", and then suggest that the price in three months' time, or indeed a year, will be the same as it is today.
I love it.
JUSTIN WOLFERS discusses a common problem for the economist bon vivant—people are always asking you what's going to happen to such and such economic variable. Will the economy go into recession? Will the Federal Reserve raise interest rates? Should I sell my shares in Bear Stearns?
Very true. It's no fun at all to have to admit to being an economist.
On the Venn diagram of 'what people think of when they meet someone who introduces themselves as an economist', macroeconomic stuff (inflation, unemployment) and finance (stocks, commodities, assets) are huge whopping great circles, much bigger than they are on the 'what economists do' diagram. Hence the point of this site, I suppose.
Anyway, here's some advice:
Henceforth, when asked about oil prices, simply throw out some jargon, use phrases like "short-run volatility", and then suggest that the price in three months' time, or indeed a year, will be the same as it is today.
I love it.
Saturday, July 19, 2008
Dead left
Just a quick note to strongly endorse the excellent article on Naomi Klein's "The Shock Doctrine": Dead Left by Jonathan Chait in The New Republic. There's a long deconstruction of Klein's argument. He ends with this:
What makes Klein's thesis so odd, and so awful, is that in fact there is an unlimited supply of raw material, an abundant basis in reality, for the sorts of arguments that she wants to make. The last two decades certainly have seen the global spread of absolutist free-market ideology. Many of the newest adherents of this creed are dictators who have learned that they can harness the riches of capitalism without permitting the freedoms once thought to flow automatically from it. In the United States, the power of labor unions has withered, and prosperity has increasingly come to be defined as gross domestic product or the rise of the stock market, with the actual living standards of the great mass of the population an afterthought. Corporations, which can relocate nearly anywhere around the world, have used their flexibility as a cudgel against workers, who do not enjoy the privileges of mobility. Domestic policy has aggressively sharpened income inequalities, and corporations have enjoyed unfettered influence to a degree not seen in a hundred years. And the president did start a war without paying the slightest bit of attention to the country that he would be left occupying or how its people would react.
All these things are true. And all these things are enormous outrages and significant problems. It's just that they are not the same outrage or the same problem. And Naomi Klein's relentless lumping together of all her ideological adversaries in the service of a monocausal theory of the world ultimately renders her analysis perfect nonsense.
What makes Klein's thesis so odd, and so awful, is that in fact there is an unlimited supply of raw material, an abundant basis in reality, for the sorts of arguments that she wants to make. The last two decades certainly have seen the global spread of absolutist free-market ideology. Many of the newest adherents of this creed are dictators who have learned that they can harness the riches of capitalism without permitting the freedoms once thought to flow automatically from it. In the United States, the power of labor unions has withered, and prosperity has increasingly come to be defined as gross domestic product or the rise of the stock market, with the actual living standards of the great mass of the population an afterthought. Corporations, which can relocate nearly anywhere around the world, have used their flexibility as a cudgel against workers, who do not enjoy the privileges of mobility. Domestic policy has aggressively sharpened income inequalities, and corporations have enjoyed unfettered influence to a degree not seen in a hundred years. And the president did start a war without paying the slightest bit of attention to the country that he would be left occupying or how its people would react.
All these things are true. And all these things are enormous outrages and significant problems. It's just that they are not the same outrage or the same problem. And Naomi Klein's relentless lumping together of all her ideological adversaries in the service of a monocausal theory of the world ultimately renders her analysis perfect nonsense.
Ignore the past, and it shall teach thee?
So why don't we teach much economic history anymore? An article in the Chronicle by Russell Jacoby asks this question, with similar for the history of psychology and philosophy, by wondering why Marx doesn't feature on your typical economics syllabus.
The analogy is probably to the natural sciences. Once we scientificize (is that a word?) economics, it becomes more reasonable to follow the path of the naturals - after all, the history of chemistry, for example, might be interesting, but it doesn't necessarily help you be a better chemist. Economists try to answer very specific, answerable questions: methodology becomes crucial, and while the foundation of methodology is important, it's not it. Here's what Jacoby says on the topic:
The flight from history marks economics and philosophy as well. Economics looks more and more like mathematics, in which the past vanishes. Sometimes it even looks like biopsychology. A recent issue of the American Economic Review includes numerous papers under the rubrics of "Neuroscientific Foundations of Economic Decision-Making" and "Cognitive Neuroscientific Foundations of Economic Behavior." But can we really figure out today's economic problems without considering whence they came?
Of course, my prejudice is the history of thought for its own sake is worthwhile. I want to know how economics evolved; how the foundations of the subject and a couple hundred years of thought brought us to where we are today. However: it's useful like that more to people like me with a predisposition to wonder about the philosophy of the subject than it is to those who are more interested in learning the tools to form and evaluate policy, for example. If I want to advise on school vouchers, to pluck one example, it doesn't necessarily help me to know the history of economic thought; I need to know the evidence on school vouchers. Obviously.
The 'economics as toolbox for analysis' - positivist, scientific economics - maybe doesn't need the past. Research building on research, like we do as academic economists, doesn't need the foundation of the history of thought. Seeing the evolution of the subject, and the little battles over the big issues of days gone by, might, however, make studying the subject as an undergraduate more interesting. Perhaps we could have both: the toolbox-y courses and the intellectual history, for-their-own-sake courses. Why do we need to justify the history only as something that contributes to the toolbox, especially when that might not even be true?
Maybe that's why courses in economic history or the history of economic thought are not as widely offered as you might expect. Maybe they'd be nice or interesting, but very few academic economists are historians or scholars of thought; we're scientists now. What faculty wants to teach a course so wildly unrelated to their other work, their research?
The analogy is probably to the natural sciences. Once we scientificize (is that a word?) economics, it becomes more reasonable to follow the path of the naturals - after all, the history of chemistry, for example, might be interesting, but it doesn't necessarily help you be a better chemist. Economists try to answer very specific, answerable questions: methodology becomes crucial, and while the foundation of methodology is important, it's not it. Here's what Jacoby says on the topic:
The flight from history marks economics and philosophy as well. Economics looks more and more like mathematics, in which the past vanishes. Sometimes it even looks like biopsychology. A recent issue of the American Economic Review includes numerous papers under the rubrics of "Neuroscientific Foundations of Economic Decision-Making" and "Cognitive Neuroscientific Foundations of Economic Behavior." But can we really figure out today's economic problems without considering whence they came?
Of course, my prejudice is the history of thought for its own sake is worthwhile. I want to know how economics evolved; how the foundations of the subject and a couple hundred years of thought brought us to where we are today. However: it's useful like that more to people like me with a predisposition to wonder about the philosophy of the subject than it is to those who are more interested in learning the tools to form and evaluate policy, for example. If I want to advise on school vouchers, to pluck one example, it doesn't necessarily help me to know the history of economic thought; I need to know the evidence on school vouchers. Obviously.
The 'economics as toolbox for analysis' - positivist, scientific economics - maybe doesn't need the past. Research building on research, like we do as academic economists, doesn't need the foundation of the history of thought. Seeing the evolution of the subject, and the little battles over the big issues of days gone by, might, however, make studying the subject as an undergraduate more interesting. Perhaps we could have both: the toolbox-y courses and the intellectual history, for-their-own-sake courses. Why do we need to justify the history only as something that contributes to the toolbox, especially when that might not even be true?
Maybe that's why courses in economic history or the history of economic thought are not as widely offered as you might expect. Maybe they'd be nice or interesting, but very few academic economists are historians or scholars of thought; we're scientists now. What faculty wants to teach a course so wildly unrelated to their other work, their research?
Thursday, July 17, 2008
Economists talk weird
I was going to rant a bit about "Lessons in Love, by Way of Economics" by Ben Stein from the New York Times, but, and I didn't even think this was possible, the whole thing is too ridiculous to justify it. Suffice to say it's more bad PR for the poor econ set.
One of my least favorite things about economists is that we often seem more prone to talking about normal stuff in economics-speak. You'd like an example?
In every long-term romantic situation, returns are greater when there is a monopoly.
Good grief. I mean, who is reading a bunch of aphorisms about 'love' translated into economics jargon and thinking 'awesome article'? Plus, as an added irritant, half the dodgy analogies are to finance, not economics, viz "[t]he returns on your investment should at least equal the cost of the investment" etc etc.
Who knows, maybe there could be something interesting under that title. What I hoped might crop up in an article with such a title might be something about the things people want, the monetizing of economics versus the rich motivations of life. From the tail end of the article:
Ben Franklin summed it up well. In times of stress, the three best things to have are an old dog, an old wife and ready money.
OK. It's the old "no-one ever died wishing they'd spent more time at the office" bit. Shouldn't that apply to economists too? Then why are economists so keen to spend all their time at the office by talking about normal stuff in economics jargon? That's tiresome, not fun.
One of my least favorite things about economists is that we often seem more prone to talking about normal stuff in economics-speak. You'd like an example?
In every long-term romantic situation, returns are greater when there is a monopoly.
Good grief. I mean, who is reading a bunch of aphorisms about 'love' translated into economics jargon and thinking 'awesome article'? Plus, as an added irritant, half the dodgy analogies are to finance, not economics, viz "[t]he returns on your investment should at least equal the cost of the investment" etc etc.
Who knows, maybe there could be something interesting under that title. What I hoped might crop up in an article with such a title might be something about the things people want, the monetizing of economics versus the rich motivations of life. From the tail end of the article:
Ben Franklin summed it up well. In times of stress, the three best things to have are an old dog, an old wife and ready money.
OK. It's the old "no-one ever died wishing they'd spent more time at the office" bit. Shouldn't that apply to economists too? Then why are economists so keen to spend all their time at the office by talking about normal stuff in economics jargon? That's tiresome, not fun.
Wednesday, July 16, 2008
What is a 'good'?
One very important concept in economics is 'goods'. They're one of the most fundamental building blocks of the tangible side of economics. If economics is about resource allocation, 'goods' are what the resources are being allocated towards. What is a 'good'?
It's not quite so simple as just a thing, like a TV or a sandwich; 'goods' are anything - any thing - that one can allocate resources towards that contains value for that allocator (rather confusingly, 'services' are 'goods' too, by this definition; so is something like 'charitable contributions'). Yes, we're going to have to plunge into the pool of abstraction. First of all, we have to think about time and space: is a hot coffee in the morning in winter in New England the same as a hot coffee in the afternoon at a swim-up bar in the summer in the Caribbean? Doubtful.
We have two broad strategies, as economists, for dealing with that problem. One might be to say, well, people have different preferences at different places, at different times. That's difficult to work with because we have to try and hit a moving target, so to speak, and since we can't know preferences for sure anyway we sure can't know changes in them either. A second might be to say, those two coffees are different goods. That's also difficult to work with because then it's difficult to compare things at all.
In fact, in either case it will be very difficult to generalize. On the individual level, knowing how you allocated your resources in this situation at that time doesn't help me describe what you did or predict what you'll do in the future: if I see what you did at 11a.m. on Thursday when faced with the decision of coffee versus tea, how can that help me figure out what you might do at 10a.m. on Friday when faced with the same decision. These aren't necessarily the same 'goods' at both times, and in any case, the difference might not just be the time or something else that I can measure; it might be your mood or whether you're especially tired or just feel like a nice cup of tea for some mystical reason.
Seems trivial, but raise that to the level of the market for coffee, or the global coffee industry, or the impact of consumer decisions on the American economy, and the difficulty of defining a 'good' has snowballed into modeling chaos. For example, it's impossible to properly think about the current climate in the market for oil without thinking of the market for oil in the future. Of course, in the real world, the financial world, it's well understood that things vary in space and time: that's why we have things like futures markets, which let you buy 'thing X at time Y' (which is just a special case of 'good X now', really). These things are considered separate (though connected) markets, with separate prices.
And that's just how they were treated by economists as we developed microeconomics. The definition of a good was allowed to be very, very flexible and abstract, so that these 'things' don't just vary in physicality but in time, space, functionality, and so on and so forth.
It's not just time and space, though. An example: think of a college education. Is the good being sold by universities a 'college education'? Is it a 'degree from college X'? Is it a 'college education of quality Y from college X'? The signaling model by Michael Spence wondered (and I obviously paraphrase wildly) if people would still pay for a college education if it the education was intrinsically worthless but had the value of 'signaling' that you were willing to give up four years to prove that you were great.
Should it be surprising that the cost of a college education has been rising despite there being a bigger supply of colleges? Maybe not, if our definition of the 'good' includes 'quality', perceived or actual; it's easy to build a new college, but impossible to build a new college with a reputation to rival Oxbridge or the Ivy League. The supply of that good, whatever it is, is fairly well fixed. Econ 101 is obsessed with 'supply and demand' analysis; the fact is, supply and demand analysis takes you very, very far if you're prepared to speculate properly on what a 'good' is.
This is all quite similar to the corporate strategy mantra of identifying your 'core competencies' and defining the industry. For example: railroads and train companies aren't 'the railroad industry', but 'the transport industry', competing with airlines and buses, and maybe even 'the food industry' if they serve food, etc etc. That leads us dangerously close to the kind of 'provider of transport services' corporate-speak euphemisms that plague so many firms, but it's pretty much the same question as how to define a good in economics.
It's not quite so simple as just a thing, like a TV or a sandwich; 'goods' are anything - any thing - that one can allocate resources towards that contains value for that allocator (rather confusingly, 'services' are 'goods' too, by this definition; so is something like 'charitable contributions'). Yes, we're going to have to plunge into the pool of abstraction. First of all, we have to think about time and space: is a hot coffee in the morning in winter in New England the same as a hot coffee in the afternoon at a swim-up bar in the summer in the Caribbean? Doubtful.
We have two broad strategies, as economists, for dealing with that problem. One might be to say, well, people have different preferences at different places, at different times. That's difficult to work with because we have to try and hit a moving target, so to speak, and since we can't know preferences for sure anyway we sure can't know changes in them either. A second might be to say, those two coffees are different goods. That's also difficult to work with because then it's difficult to compare things at all.
In fact, in either case it will be very difficult to generalize. On the individual level, knowing how you allocated your resources in this situation at that time doesn't help me describe what you did or predict what you'll do in the future: if I see what you did at 11a.m. on Thursday when faced with the decision of coffee versus tea, how can that help me figure out what you might do at 10a.m. on Friday when faced with the same decision. These aren't necessarily the same 'goods' at both times, and in any case, the difference might not just be the time or something else that I can measure; it might be your mood or whether you're especially tired or just feel like a nice cup of tea for some mystical reason.
Seems trivial, but raise that to the level of the market for coffee, or the global coffee industry, or the impact of consumer decisions on the American economy, and the difficulty of defining a 'good' has snowballed into modeling chaos. For example, it's impossible to properly think about the current climate in the market for oil without thinking of the market for oil in the future. Of course, in the real world, the financial world, it's well understood that things vary in space and time: that's why we have things like futures markets, which let you buy 'thing X at time Y' (which is just a special case of 'good X now', really). These things are considered separate (though connected) markets, with separate prices.
And that's just how they were treated by economists as we developed microeconomics. The definition of a good was allowed to be very, very flexible and abstract, so that these 'things' don't just vary in physicality but in time, space, functionality, and so on and so forth.
It's not just time and space, though. An example: think of a college education. Is the good being sold by universities a 'college education'? Is it a 'degree from college X'? Is it a 'college education of quality Y from college X'? The signaling model by Michael Spence wondered (and I obviously paraphrase wildly) if people would still pay for a college education if it the education was intrinsically worthless but had the value of 'signaling' that you were willing to give up four years to prove that you were great.
Should it be surprising that the cost of a college education has been rising despite there being a bigger supply of colleges? Maybe not, if our definition of the 'good' includes 'quality', perceived or actual; it's easy to build a new college, but impossible to build a new college with a reputation to rival Oxbridge or the Ivy League. The supply of that good, whatever it is, is fairly well fixed. Econ 101 is obsessed with 'supply and demand' analysis; the fact is, supply and demand analysis takes you very, very far if you're prepared to speculate properly on what a 'good' is.
This is all quite similar to the corporate strategy mantra of identifying your 'core competencies' and defining the industry. For example: railroads and train companies aren't 'the railroad industry', but 'the transport industry', competing with airlines and buses, and maybe even 'the food industry' if they serve food, etc etc. That leads us dangerously close to the kind of 'provider of transport services' corporate-speak euphemisms that plague so many firms, but it's pretty much the same question as how to define a good in economics.
Monday, July 7, 2008
Game theory often looks silly
From Tim Harford's blog:
"Game theorists know all about the centipede game:
One instance of the centipede game is as follows. A pile of $4 and a pile of $1 are lying on a table. Player I has two options, either to “stop” or to “continue.” If he stops, the game ends and he gets $4 while Player II gets the remaining dollar. If he continues, the two piles are doubled, to $8 and $2, and Player II is faced with a similar decision: either to take the larger pile ($8), thus ending the game and leaving the smaller pile ($2) for Player I, or to let the piles double again and let Player I decide. The game continues for at most six periods. If by then neither of the players have stopped, Player I gets $256 and Player II gets $64. Figure 1 depicts this situation. Although this game offers both players a very profitable opportunity, all standard game theoretic solution concepts predict that Player I will stop at the first opportunity, getting just $4.
Except, nobody really thinks this is the way players would behave in reality. The optimal strategy seems sociopathic; isn’t it worth playing cooperatively in the hope that the other player will do the same thing? (Unlike much real human interaction, standard game theory does not accomodate the “hope” that someone else will play suboptimally: optimal play is to be expected at all times. )"
Game theory is very clever and very useful, but often seems very naive. When it's used in economics, it's arguably the part of economics most hamstrung by the scattershot application of the "money=utility" fallacy. If you want your game theoretic result to be predictive or descriptively powerful, you must (must must) try really hard to make the payoffs reasonably accurate; in Harford's quoted example the assumption is that the players care only about cash and that, as Harford says, they aren't willing to take a shot on the other player prolonging the game. At the risk of being tautologically critical: can you read the setup of that game and not entertain the idea of waiting? I remember being taught the centipede game in David Myatt's excellent game theory course as an undergrad; he showed us the 'crazy centipede' variant, which wondered exactly that: what chance of you choosing to continue the game is enough to make me also want to continue?
The kicker to me is that 'game theoretic predictions' are overwhelmingly often not as successful for the players as alternative strategies, even when we're just measuring 'success' in the same cash-payoff terms as the theory. This is just what Harford goes on to describe:
But Ignacio Palacios-Huerta (best known to Undercover Economist readers as discovering that strikers and goalkeepers play optimal strategies in penalty-taking) and Oscar Volij gave the centipede game to skilled chess players. They found that the chess players were far more likely to play optimally; grandmasters always played optimally and took the $4. Hyper-rationality can be a disadvantage. (Or did the experiment discover something else: that chess grandmasters are sociopaths?) Palacios-Huerta and Volij don’t speculate. My guess is that they have discovered something about the rationality rather than morality or empathy of chess players, but I may be wrong.
It really does just beg for the 'behavioral economics' explosion: if predictions aren't great, and in any case are less profitable than reality, we're up the creek without a paddle or a boat.
"Game theorists know all about the centipede game:
One instance of the centipede game is as follows. A pile of $4 and a pile of $1 are lying on a table. Player I has two options, either to “stop” or to “continue.” If he stops, the game ends and he gets $4 while Player II gets the remaining dollar. If he continues, the two piles are doubled, to $8 and $2, and Player II is faced with a similar decision: either to take the larger pile ($8), thus ending the game and leaving the smaller pile ($2) for Player I, or to let the piles double again and let Player I decide. The game continues for at most six periods. If by then neither of the players have stopped, Player I gets $256 and Player II gets $64. Figure 1 depicts this situation. Although this game offers both players a very profitable opportunity, all standard game theoretic solution concepts predict that Player I will stop at the first opportunity, getting just $4.
Except, nobody really thinks this is the way players would behave in reality. The optimal strategy seems sociopathic; isn’t it worth playing cooperatively in the hope that the other player will do the same thing? (Unlike much real human interaction, standard game theory does not accomodate the “hope” that someone else will play suboptimally: optimal play is to be expected at all times. )"
Game theory is very clever and very useful, but often seems very naive. When it's used in economics, it's arguably the part of economics most hamstrung by the scattershot application of the "money=utility" fallacy. If you want your game theoretic result to be predictive or descriptively powerful, you must (must must) try really hard to make the payoffs reasonably accurate; in Harford's quoted example the assumption is that the players care only about cash and that, as Harford says, they aren't willing to take a shot on the other player prolonging the game. At the risk of being tautologically critical: can you read the setup of that game and not entertain the idea of waiting? I remember being taught the centipede game in David Myatt's excellent game theory course as an undergrad; he showed us the 'crazy centipede' variant, which wondered exactly that: what chance of you choosing to continue the game is enough to make me also want to continue?
The kicker to me is that 'game theoretic predictions' are overwhelmingly often not as successful for the players as alternative strategies, even when we're just measuring 'success' in the same cash-payoff terms as the theory. This is just what Harford goes on to describe:
But Ignacio Palacios-Huerta (best known to Undercover Economist readers as discovering that strikers and goalkeepers play optimal strategies in penalty-taking) and Oscar Volij gave the centipede game to skilled chess players. They found that the chess players were far more likely to play optimally; grandmasters always played optimally and took the $4. Hyper-rationality can be a disadvantage. (Or did the experiment discover something else: that chess grandmasters are sociopaths?) Palacios-Huerta and Volij don’t speculate. My guess is that they have discovered something about the rationality rather than morality or empathy of chess players, but I may be wrong.
It really does just beg for the 'behavioral economics' explosion: if predictions aren't great, and in any case are less profitable than reality, we're up the creek without a paddle or a boat.
Friday, July 4, 2008
Classifying economics: humanity or science?
How should the discipline of economics be classified within academia - does it belong to the arts, sciences, social sciences, humanities? A wonderful article called 'The Burden of the Humanities' by Wilfred McClay in the Wilson Quarterly got me thinking about that this morning.
Even if we go by something so simple as what degrees are offered in departments of economics there doesn't seem to be much consensus. While the Bachelor of Arts remains perhaps the most common undergraduate degree in economics, the Bachelor of Science isn't unheard of; indeed, the London School of Economics, one of the most recognizable schools for the subject, awards the BSc. At Oxford University, the undergraduate degree is the BA, but at postgraduate level the MSc - is this a good reflection of the journey up the hill of science, math and statistics that we economists make on the course of our study? If so, why do so many North American universities - NYU, Yale, Brown, Toronto, etc etc - award the MA as a postgraduate degree (albeit in the US usually as a consolation prize for those abandoning the PhD)? What about something like Economics and Finance? Is that more BSc-ish than just economics?
Do we belong to the humanities or to science? This question is obviously closely tied to the ethos of economics teaching, especially the positivist teaching method and the quantification of the discipline. If your economics education focuses on the political, moral, philosophical, historical, intellectual parts of economics, it sounds more like the humanities. If it focuses on the mathematical, statistical, empirical, experimental, computational parts, it sounds more like science, or at the very least, 'social' science. Maybe since there's no 'standard' blend of these two categories in an economics degree it's right that we don't know which degree is more appropriate; all I know is that the scientific categories are much, much more prevalent in the content of US undergraduate economics education than the humanities categories.
McClay's essay talks about the defining characteristics of humanities, borrowing first from the National Endowment for the Humanities definition which allows the humanities to include, among other things:
"those aspects of social sciences which have humanistic content and employ humanistic methods..."
This would seem to allow economics into the party, since it is closely concerned with human behavior, especially microeconomics which is obsessed with how people make choices and decisions. Or is it? Historically, macroeconomics has often relied on a characterization of a country as a big machine, to ask how, for example, exchange rates interact with interest rates, or whatever. There has to be a human element buried somewhere, unlike in the natural sciences, but it's not the focus. McClay addresses just this point:
"But this can be stated more directly. The distinctive task of the humanities, unlike the natural sciences and social sciences, is to grasp human things in human terms, without converting or reducing them to something else: not to physical laws, mechanical systems, biological drives, psychological disorders, social structures, and so on. The humanities attempt to understand the human condition from the inside, as it were, treating the human person as subject as well as object, agent as well as acted-upon."
You could plausibly argue that the history of economic thought has been a reduction of the human to something else; this is valuable because it allows us to abstract from the uncertain world of how people behave into a place where we might be able to draw plausible, tangible conclusions, but just as it's taken the discipline into a place of backlash where 'behavioral economics' wants to recover a keen interest in the way humans operate, it might have carried away much claim we had to be part of the humanities. Of course this also implies that a bunch of the psychological-type economics that's so very popular at the moment might arguably be 'humanities', but that probably overstates the case, since psychology itself isn't usually considered as such.
McClay argues further about the tendency towards science and away from the humanities:
"For many Americans... [the humanities go] against the grain. After all, we like to think of ourselves as a practical people. We don’t spend our lives chasing fluffy abstractions. We don’t dwell on the past. We ask hard headed questions such as Where does that get you? How can you solve this problem? What’s the payoff? If you’re so smart, we demand, why aren’t you rich?"
There's a strong similarity between this line of argument and the tendency towards science within economics itself, and perhaps all the same questions apply there. If I imagine arguing that we should have more normative content in economics courses, I immediately imagine being challenged, 'where does that get you?', 'what's the payoff?'. Plus, as a nice bonus, 'why aren't you rich?' could, in another context, be a very pithy summation of the boneheadedness of economists towards the normative metrics of happiness or success.
The weird paradox, however, is that, to this eye, the practical value of the majority of economics research is very difficult to find; I know science for its own sake is still science, pushing the bounds of knowledge etc etc, and I know the charge can be leveled at any subject, but still, for better or worse, 'what's the payoff?' is a question we could rightfully ask in response to any claim of economics to be a science.
And what do we lose when we drop the humanistic from economics? McClay says:
"For you can’t really appreciate the statuary of our country—our political and social and economic institutions—or know the value of American liberty and prosperity, or intelligently assess America’s virtues and vices against the standard of human history and human possibility, unless you pay the price of learning the stories."
This is certainly true of the abandonment of economic history and the history of economic thought as fields of study in so many departments of economics. If we can argue for economics as science or as humanity, why have we dropped all humanistic study of it? Won't we lose the 'stories', the lessons of the past, the normative context, the ability to critically evaluate the scientific results that we might be able to squeak out of our modeling and empirical analysis?
Finally, McClay ends discussing the role of the humanities in contributing to the attainment of 'happiness' or satisfaction in life.
"...the lure of a pleasure-swaddled posthumanity may be the particular form of that temptation to which the Western liberal democracies of the 21st century are especially prone.
One of those things left behind may, ironically, be happiness itself, since the very possibility of human happiness is inseparable from the struggles and sufferings and displacements experienced by our restless, complex, and incomplete human natures. Our tradition teaches that very lesson in a hundred texts and a thousand ways, for those who have been shown how to see and hear it."
In the context of the study of economics, can't we make a similar argument? It's not just that economics may have contributed heavily to the 'happiness as goal' business, or to the wedding of income, GDP and money to 'wellbeing'; By abandoning the humanistic in the teaching of our subject, don't we neglect to show the next generation how to see and hear the humanistic as it relates to the organization of our economies, our world? Economics is not a technocracy. We need to understand its humanistic foundations if we are to wield its tools and arguments as experts.
Even if we go by something so simple as what degrees are offered in departments of economics there doesn't seem to be much consensus. While the Bachelor of Arts remains perhaps the most common undergraduate degree in economics, the Bachelor of Science isn't unheard of; indeed, the London School of Economics, one of the most recognizable schools for the subject, awards the BSc. At Oxford University, the undergraduate degree is the BA, but at postgraduate level the MSc - is this a good reflection of the journey up the hill of science, math and statistics that we economists make on the course of our study? If so, why do so many North American universities - NYU, Yale, Brown, Toronto, etc etc - award the MA as a postgraduate degree (albeit in the US usually as a consolation prize for those abandoning the PhD)? What about something like Economics and Finance? Is that more BSc-ish than just economics?
Do we belong to the humanities or to science? This question is obviously closely tied to the ethos of economics teaching, especially the positivist teaching method and the quantification of the discipline. If your economics education focuses on the political, moral, philosophical, historical, intellectual parts of economics, it sounds more like the humanities. If it focuses on the mathematical, statistical, empirical, experimental, computational parts, it sounds more like science, or at the very least, 'social' science. Maybe since there's no 'standard' blend of these two categories in an economics degree it's right that we don't know which degree is more appropriate; all I know is that the scientific categories are much, much more prevalent in the content of US undergraduate economics education than the humanities categories.
McClay's essay talks about the defining characteristics of humanities, borrowing first from the National Endowment for the Humanities definition which allows the humanities to include, among other things:
"those aspects of social sciences which have humanistic content and employ humanistic methods..."
This would seem to allow economics into the party, since it is closely concerned with human behavior, especially microeconomics which is obsessed with how people make choices and decisions. Or is it? Historically, macroeconomics has often relied on a characterization of a country as a big machine, to ask how, for example, exchange rates interact with interest rates, or whatever. There has to be a human element buried somewhere, unlike in the natural sciences, but it's not the focus. McClay addresses just this point:
"But this can be stated more directly. The distinctive task of the humanities, unlike the natural sciences and social sciences, is to grasp human things in human terms, without converting or reducing them to something else: not to physical laws, mechanical systems, biological drives, psychological disorders, social structures, and so on. The humanities attempt to understand the human condition from the inside, as it were, treating the human person as subject as well as object, agent as well as acted-upon."
You could plausibly argue that the history of economic thought has been a reduction of the human to something else; this is valuable because it allows us to abstract from the uncertain world of how people behave into a place where we might be able to draw plausible, tangible conclusions, but just as it's taken the discipline into a place of backlash where 'behavioral economics' wants to recover a keen interest in the way humans operate, it might have carried away much claim we had to be part of the humanities. Of course this also implies that a bunch of the psychological-type economics that's so very popular at the moment might arguably be 'humanities', but that probably overstates the case, since psychology itself isn't usually considered as such.
McClay argues further about the tendency towards science and away from the humanities:
"For many Americans... [the humanities go] against the grain. After all, we like to think of ourselves as a practical people. We don’t spend our lives chasing fluffy abstractions. We don’t dwell on the past. We ask hard headed questions such as Where does that get you? How can you solve this problem? What’s the payoff? If you’re so smart, we demand, why aren’t you rich?"
There's a strong similarity between this line of argument and the tendency towards science within economics itself, and perhaps all the same questions apply there. If I imagine arguing that we should have more normative content in economics courses, I immediately imagine being challenged, 'where does that get you?', 'what's the payoff?'. Plus, as a nice bonus, 'why aren't you rich?' could, in another context, be a very pithy summation of the boneheadedness of economists towards the normative metrics of happiness or success.
The weird paradox, however, is that, to this eye, the practical value of the majority of economics research is very difficult to find; I know science for its own sake is still science, pushing the bounds of knowledge etc etc, and I know the charge can be leveled at any subject, but still, for better or worse, 'what's the payoff?' is a question we could rightfully ask in response to any claim of economics to be a science.
And what do we lose when we drop the humanistic from economics? McClay says:
"For you can’t really appreciate the statuary of our country—our political and social and economic institutions—or know the value of American liberty and prosperity, or intelligently assess America’s virtues and vices against the standard of human history and human possibility, unless you pay the price of learning the stories."
This is certainly true of the abandonment of economic history and the history of economic thought as fields of study in so many departments of economics. If we can argue for economics as science or as humanity, why have we dropped all humanistic study of it? Won't we lose the 'stories', the lessons of the past, the normative context, the ability to critically evaluate the scientific results that we might be able to squeak out of our modeling and empirical analysis?
Finally, McClay ends discussing the role of the humanities in contributing to the attainment of 'happiness' or satisfaction in life.
"...the lure of a pleasure-swaddled posthumanity may be the particular form of that temptation to which the Western liberal democracies of the 21st century are especially prone.
One of those things left behind may, ironically, be happiness itself, since the very possibility of human happiness is inseparable from the struggles and sufferings and displacements experienced by our restless, complex, and incomplete human natures. Our tradition teaches that very lesson in a hundred texts and a thousand ways, for those who have been shown how to see and hear it."
In the context of the study of economics, can't we make a similar argument? It's not just that economics may have contributed heavily to the 'happiness as goal' business, or to the wedding of income, GDP and money to 'wellbeing'; By abandoning the humanistic in the teaching of our subject, don't we neglect to show the next generation how to see and hear the humanistic as it relates to the organization of our economies, our world? Economics is not a technocracy. We need to understand its humanistic foundations if we are to wield its tools and arguments as experts.
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