Shared economics

Roger Goodell has joined the debate on the semantics of the word "economics". Welcome, Roger! From ESPN (warning: obnoxious auto-load video alongside article) today:

Commissioner Roger Goodell wrote NFL players Thursday, outlining the league's last proposal to the union and cautioning that "each passing day puts our game and our shared economics further at risk."

Now what might "shared economics" mean? Of the several points of disagreement between NFL owners and players in the current conflict, one is, of course, money. I'm going to regretfully assume that the resource to which Goodell's "economics" refers is only money. So what does he mean about that money?

Can "shared economics" mean a "shared allocation of resources"? It's possible; the two sides can take, in some sense, shared ownership of a specific or formulaic allocation of the pot o' gold from professional football. But this is odd. A problem (paraphrased) is that the owners want a larger cut of money off-the-top, which is different from the status quo. So the mutually agreed allocation of resources from the last CBA has thus far never been on the table.

The whole problem, of course, is in the sharing, in the allocation. It is nearly tautological that a disagreement about the allocation threatens the allocation. So that can't be it.

Can "shared economics" mean "shared money"? This is also possible. There's a work stoppage. In the worst case, the 2011 season is lost or curtailed and there will be a massive loss of revenue. Even in the best case, there is the fuzzier risk of alienating fans, contractual partners, and antitrust authorities, which could plausibly do the same. This seems a much likelier contender for what Goodell had in mind when he picked the word "economics" in his letter.

So to Goodell economics is a synonym for money, or revenue, or resources. This is depressing even for someone of my own view that the word "economics" is hopelessly lost to language forever. "Economics" is no more the resource than football is 22 people running around on some grass.

Measurement again

From the New York Times:

During the boom years of the Bush presidency — remember them? — economic growth was an especially unreliable indicator of how most Americans were doing.

Our problem, again, is that semantically dead word 'economics'. 'Economic growth' is an especially fun one, not least because it actually refers to growth in GDP, which is something that's kind of confusing anyway. Look at this catalog of misery:

The numbers were impressive, but the gains were lopsided, benefiting executives and investors far more than hourly workers and salaried employees. Because the growth was fueled by reckless lending and borrowing, it created an illusion of wealth even as many Americans lost ground...

The government reported that the economy grew at a surprising 3.3 percent in the second quarter, while productivity (the measure of how much workers accomplish per hour) soared. Unfortunately, those bounces did not mean a rebound in the lives of most Americans.

Growth rose, but so did unemployment. Productivity surged, but wages fell. Fixing that disconnect is the central economic challenge for the next president.

Increased exports were responsible for last spring’s strong economic growth numbers. But selling more abroad has not led to more manufacturing jobs or working-class pay raises at home.

Oh my. One point is that the popular metrics - like 'growth' - clearly aren't capturing everything that's relevant, but we knew that. Another would be that it's therefore pretty odd that we continue to use the word economics when, lo, it's actually two degrees away from making sense: first, it usually means something like GDP or unemployment or productivity or something, and second, even that wouldn't actually tell a proper story. 

Yet a third point is that the title of the article is "Real Life Economy": seems like there's a bit of a trust issue developing with the metrics the media reports when they talk about 'the economy'. Economists look silly again, but was it their fault? And are we surprised?

Arguing without moving

Doesn't it sometimes seem like two arguers are actually saying the same thing in slightly different ways? The devil's in the semantics, or something, and a three-headed book review by Jonathan Derbyshire in the Guardian seems uncannily to be presenting a classic case applied to -what else? - economic man.

Here's a bit about Tim Harford's approach in "The Logic of Life":

Yet for all the demotic breeziness of their style, both writers have a serious purpose. In Harford's case, it is to defend a version of rational choice theory, which tries to explain human behaviour in terms of the maximisation of individual preferences or "utility". On this model, which Harford thinks applies more or less universally, human beings respond to trade-offs or incentives: "When the costs and benefits of something change, people change their behaviour." The important point for Harford is that those costs needn't be financial...

Proponents of rational choice theory say that to act in accordance with the cost-benefit principle is to behave "rationally" - in a distinctive (and drastically circumscribed) sense of the word. And Harford's contention is that we're much more rational than we're inclined to think. There's a "rational explanation", it seems, for more or less everything: for the shortage of eligible men in New York City, for instance, or for the evolved biological preferences of men and women.

We're again in a world where it's impossible to know exactly what drives people to make decisions, but where we can speculate that there are reasons for this or that decision, and speculate on what those reasons might be. But then here's this, in discussion of Robert Frank's "The Economic Naturalist":

One problem with this approach is that it seems to apply better to an ideal creature called Homo economicus, whose preferences are perfectly consistent, than it does to flesh-and-blood human beings... Homo economicus would never change his preference for a roast beef sandwich over chicken salad just because the waitress remembers they've also got tuna on the menu.

This is a reference to a classic "behavioral" result; but, then again, says who? It's of course possible to rationalize anything, as the behavioral school well knows when it invariably goes on to try to write down a model of a decision maker who would display these or other preferences. Aren't we still in a Harford world, where we can identify a potential justification for any superficially weird-looking decision? I don't see any difference between these "behavioral" results and this:

Frank's book, meanwhile, is based on an assignment he gave to students taking his introductory course in economics at Cornell University. The students were asked to pose and answer a question about observed events or behaviour, and what they came up with certainly wasn't the staple fare of Economics 101: why did kamikaze pilots wear helmets, they asked. Why is coyness often considered an attractive attribute? Why do women endure the discomfort of high heels?

All these phenomena obey what Frank calls "economic logic", the fundamental law of which is the cost-benefit principle. This says that an action ought to be taken only when the extra benefit that accrues from taking it outweighs the extra cost. So when a woman decides to squeeze her feet into a pair of stilettos, for example, she has weighed the benefit of being "more likely to attract favourable notice", as Frank somewhat coyly puts it, against the costs of discomfort.

Finally we get Stephen Marglin's "The Dismal Science" (uh oh):

Marglin argues that to think about people as always rationally calculating their self-interest is at odds with the way non-economists think about people... And you don't have to agree with Marglin that the way of life of the Amish people of Pennsylvania is the best counter-example to that to think there's something drastically wrong with it.

That kind of reasoning is an F. First of all, self-interest does not equal concern only for my own material outcome: I can, like, perhaps, the Amish people appropriated as an example, be self-interestedly concerned with my peers. I absolutely cannot believe that anyone finds it difficult to fit the behavior of someone who, for example, donates to charity into a utilitarian model of the kind economists use every day. Yet these are the examples we come up with to try to "disprove" the "rationality" of "economic man"?

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.

Confession

From the department of weird: "Fewer confessions and new sins", from BBC News. Apparently the Catholic Church has made up some new sins.

"The Catechism of the Catholic Church states that "immediately after death the souls of those who die in a state of mortal sin descend into Hell". The new mortal sins were listed by Archbishop Gianfranco Girotti at the end of a week-long training seminar in Rome for priests."

So here they are:

"Environmental pollution
Genetic manipulation
Accumulating excessive wealth
Inflicting poverty
Drug trafficking and consumption
Morally debatable experiments
Violation of fundamental rights of human nature"

I'm trying not to blaspheme here, but what a minefield. Let's try to ignore from the start the problem that all the things that they're trying to avoid here are covered by the good ol' seven deadlies. Right off the bat, "morally debatable experiments" is semantically identical to "experiments", so science is a sin. At least "genetic manipulation" fits with the ethos of the Church. I have no idea how one "inflicts poverty". Define "drug". Define "rights". Define "excessive". Ugh.

Anyway, the economics-related point here is that this made me think of the "value of income" stuff from yesterday. Is it OK to "accumulate excess wealth" if you use it to alleviate poverty, or are we to be banned from accumulating wealth altogether? Is the Church guilty of ignoring the righteous consequences of an expansion in the amount of stuff to go around? If we can't do productive stuff, will that "inflict poverty"? I feel like this in an implicit damnation of capitalism, but the moral judgment of capitalism - just like the moral judgment of socialism, anarchism or indeed anything - is not that easy.

I actually think it makes it worse that this comes from an obviously traditional institution. It's great that there are forces out there trying to promote social awareness and conscience, but that list is ridiculous. Give me pride, envy, gluttony, lust, anger, greed and sloth, and stop trying to be trendy.

Measurement

Just after talking about the euphemistic use of "economy" yesterday, I found an even better one here:

"Nearly all Italians drink bottled water rather than the piped stuff. The industry is worth an estimated 3.2bn euros (£2.38bn) a year to the Italian economy."

It would be very refreshing if they'd just say "GDP", since that's what they mean. That wouldn't make it any less understandable either, because "economy" is equally vacuous. Let's play the show and tell game again: what does the quotation mean?

It can't mean that "if no bottled water was sold, people would spend 3.2bn euros less" - I'm sure they'd find another way to spend it. It can't mean "worth 3.2bn euros a year to the Italian resource allocation", because that's not a sentence. It can't mean that "Italian workers/producers would get 3.2bn less in wages/payments a year", because I'm sure that they could do something else besides produce bottled water.

My best guess is "the Italian bottled water industry makes sales worth 3.2bn every year". Why, oh why, can't the reporter simply say that? It's not remotely the same thing as any of the other suggestions I just made, yet I guess they're all technically possibilities if we read "economy" as "system of production and consumption" or something like that. If I want to be really obnoxious I could ask whether the reporter has measured every consequence of the hypothetical disappearance of the Italian bottled water industry to come up with his figure.

More to the point, let's forget about the absurdity of the quotation in itself and ask why the "worth" of any effect on the "economy" measured in money? This screams a confusion of metric and quality, a cardinal sin of positive science; even if I could get an accurate figure for the effect of something on "Gross Domestic Product", I still think "worth" is too loaded a term.

A big chunk of the gulf between theoretical economics and empirical testing of real-world relationships is the metrics we use. Our abstractions work (or can, or should work) in a world where we measure outcomes agnostically: if you care about this. Theoretical economists can play in imaginary worlds all day, exploring the "relationships" between fundamentally unmeasurable things under their assumptions. On the other hand, some imaginary concept like "utility" is singularly useless if we want to actually talk about the real world. Empirical economists must deal with this problem somehow: if you want to talk about the effect of this measurable thing on that measurable thing you must explicitly ignore the intangible (like, perhaps, satisfaction).

Then what conclusions can we draw? This affects that, but not how "good" it is. This is, again, the reason why economics can never be a technocratic prescription of what "should" be done; we simply have no real-world metric to answer the question, and our theoretical metrics are unobservable. It's the power and beauty of the science - we don't have the answers. Is someone pretending to? Just for fun, I Googled "what's wrong with GDP". When our metrics are the sole determinant of policy, of course the metric - and, by extension, economics - comes under intense attack.

Now that's all well and good until we get to economics teaching, practice and discussion which ignores this important conclusion. I don't deny the challenge of constant vigilance to make sure student, reader, researcher know that we're dealing with only what we can measure, but nothing short of a commitment to acknowledge the limitations of measurement at every turn will be enough to dispel the notion that the science of economics can tell us what to do.

Euphemisms

It's just semantics, but I wish there was an easy solution to the problem of using the word "economics" as a euphemism for real stuff. How unusual would it be for this story on General Motors' headache-inducing losses to expire without a use of the word "economics" or "economy"? There's actually only one:

"But the worsening economy in the United States led to higher fourth-quarter losses in the region: $1.1 billion, compared to $30 million in 2006."

What does that mean? Does it mean "people are losing their jobs"? "There might be inflation going on"? "People are defaulting on their mortgages"? Seriously, if it means anything in itself, I don't know what it is. I even looked up the word "economy", and I think the definition that's being implied is "the system or range of economic activity in a country, region, or community": almost a perfect tautology.

That old writer's maxim "show, don't tell" should be, in my ideal world, applied to every use of the phrase "worsening economy", "economic trends", "the economy", and all the others you can think of. They're empty on two levels: structurally there's the reflexive definition, but more importantly in a news story designed to inform, it obscures whatever the actual thing is.

Here's another example:

"The Bank of England cut UK interest rates last week to 5.25% from 5.5% in an attempt to prevent a major slowdown in the economy."

What does "major slowdown in the economy" mean? More unemployment? Less money for the common man? So help me, GDP? It surely can't mean a "slowdown in the allocation of resources", because that's not a sentence. Show, don't tell. Actually, the second example actually might be a step up from the first because it has the slightly less loaded "slowdown" rather than "worsening". Don't tell me how to feel when whatever you're talking about happening happens!

Economics or finance?

From a fun baseball story about a minor league player selling shares in his career:

"Newsom has decided to use that economics degree he got from Tufts, and along with two friends he's started a new company called Real Sports Investments. It's a company that allows baseball fans to invest in minor league baseball players by purchasing shares of the player."

Being from Britain, it reminds me of those human interest stories you sometimes read about a father laying a bet that their son will one day play soccer for England (here's merely the first example I got from Google). More to the point, how is Newsom's economics degree helpful?

The short answer is not at all. The study of economics isn't "business", or management, or whatever you call the skills and knowledge that would be useful in setting up or running a company. It also isn't finance, so it can't help him understand how a stock market works.

What's the difference between economics and finance? A good starting point might be this, from Brian Hollar:

"Finance typically focuses on maximization of wealth. Economics focuses on the optimization of subjectively valued goals. Conceived of in this way, finance is a specialized subset of economics."

That gives the correct impression that finance is the one that's interested in the study of the management of money and assets. I might go further and say that finance is arguably vocational; I don't think economics courses hold a great deal of value for aspiring investment bankers (perhaps one of the commonest misconceptions held by undergraduate economics concentrators) - finance courses are the ones that will teach them how asset markets work. Economics, being more of a method than a body of knowledge, is not really vocational at all, even though students of economics will certainly develop other applicable skills like data analysis, applied math and writing. Economics probably uses optimization rather than "focusing" on it.

Just to complicate matters, the unfortunately named field of "financial economics" is, as the name might suggest, something of an intersection of the two. Financial economics is the application of the economic method to the particular case of the trade in money and assets like stocks and bonds: how do financial markets and the trade of assets affect the allocation of resources? How does the financial system affect the decisions made by people, companies, governments? Financial economics, being part of economics rather than finance, fits Hollar's definition of "optimization of subjectively valued goals"; it's again a descriptive tool rather than practical training or a recommendation of a course of action.

Finance and economics are terms often used interchangeably in the press. I think the best illustration is the word "socioeconomic", which to my mind really means "sociofinancial" - what's your social status, and how much money do you have? If we start using "economic" to mean the amount of resources a person has at their disposal, the nuance of the word as signifying the allocation of resources is obscured.

I always wondered why The Economist magazine has a composite section for "Finance & Economics". It might be worth emphasizing the distinction between these two concepts a little more cleanly. In an ideal world we might even have a third word: economics for the economic method, finance for asset markets and a shiny new one to talk about the "world economy". What does "America's weakening economy" really mean?