Friday, September 30, 2005

We love sweatshops, or do we?

Being on a lefty college campus, it's fun to get to be the person who argues that sweatshops are really rather wonderful. Given the options these workers face, this is a marvelous job. If we deprive them of the privilege of working in sweatshops they would be forced to be subsistence farmers or something. So we should celebrate sweatshops.

This is a classic argument and is true in a very narrow static sense: that is, given all the existing economic constraints and normative orientations under which people live their lives, the Panglossian view is accurate. But activist types aren't arguing that this world can be better (a world with all existing economic constraints and normative orientations intact), they are arguing that there is another possible world which would be better (a world with different economic constraints and/or different normative orientations).

Activists don't dispute that given existing constraints sweatshops are fine; they are saying that there is no reason that companies should be allowed to fire union organizers (a constraint) or no reason that companies shouldn't realize that improved working conditions might actually be good for productivity (a normative orientation). In that other possible world, sweatshops would certainly be less bad than they are in this world -- and in the narrow static sense they would still be the best option for workers, and free-trade types would continue to celebrate sweatshops, not realizing that something fundamental had changed. Thus, activist types and free trade types don't really disagree about sweatshops, they are just arguing about whether we should focus attention on this world, or other possible worlds.

This continues a theme discussed here, using a move discussed here.

Physical vs. Biological Science

Richard Lewontin has a most excellent article in the New York Review of Books, which, inter alia, makes the point that
What, then, is the source of the repeated episodes of active political and social agitation against the assertions of evolutionary science? One apparent answer is that it is the expected product of fundamentalist belief, which rejects the easy compromises of liberal exegesis and insists that every word in Genesis means exactly what it says. Days are days, not eons. But there's the rub. A literal reading of Genesis tells us that it took God only three days to make the physical universe as it now exists, yet nuclear physics and astrophysics claim a very old stellar system and provide the instruments for the dating of bits and pieces of the earth and of fossils spanning hundreds of millions of years. So why aren't Kansas schools under extreme pressure to change the curriculum in physical science courses? Why should physicists be allowed to propagate, unopposed, their godless accounts of the evolution of the physical universe? Something more is at stake than a disagreement over the literal truth of biblical metaphors.

Wednesday, September 28, 2005

What's This?

Menachem's problem was this: he had more money than there were things to buy. Menachem's solution was this: rather than buy more things, he would continue to buy the things he already owned, like a man on a desert island who retells and embellishes the only joke he can remember.
-- Jonathan Safran Foer. Everything Is Illuminated, 162.

Procrastination in the library

A while back, "what do think tanks do?" was all over the (conservative) place (see here here here here here here here here here and here). I happened to be avoiding doing work in the library and looked at the August 2003 issue of "Science and Public Policy." It had a review by Dawn House of Do Think Tanks Matter? Assessing the Impact of Public Policy Institutes by Donald Abelson. Based on the review, Abelson argues that you can identify three distinct waves of think tanks:
  1. 1900-1945: The "university without students," where social scientists engaged in long-term academic research. The example is Brookings.
  2. 1945-early 1970s: Government contractors where publicly funded institutes like RAND were charged with conducting long term research responsive to national issues; and
  3. early 1970s till ?: Ideologically oriented and invested as much in repackaging and marketing as in research. The example is Heritage.
Abelson supposedly argues for a fourth possible wave: "legacy" or "vanity" think tanks devoted to advancing the ideas and legacies of key individuals. Example here is the (Richard) Nixon Center for Peace and Freedom.

Not that I'm sure this tells us much, you can certainly find exceptions to the categories -- certainly the first two models have not been entirely displaced by the third and think tanks in the third include aspects of the first two -- but still interesting.

Titling those you cite: a brief research project

As mentioned here, I wanted to figure out when the practice of titling those you cite stopped. I thought I could just go to the stacks and page through old AERs or something. Turns out, the old ones are no longer in the stacks, or have been moved elsewhere. But JSTOR is wonderful. My brief examination turns up the following two article titles which indicates that this is a poorly defined research question:
So yes: here we have two articles five years apart in which the older one uses the "modern" form and more recent one uses the "older" form. Additionally, they both refer to the same person, are both in the context of books reviews, and both maintain that style throughout the article (except in Bloom's article when he introduces Hicks as "Mr. J.R. Hicks"). I had hoped to discover the issue in which the convention changed. Apparently, I'll either have to plot ratios, or else give up. I give up.

Of historical interest: Bloom, when he published the article, was a Lieutenant in the Navy (he thanks various professors at Princeton), and thus the disclaimer is that "Opinions or assertions contained herein are the writer's own and are not to be construed as official or reflecting the views of the Navy department or the Naval Service at large."

Wednesday Night Swarthmore Blogging

Your Erdős number is the minimum number of collaborations it takes to link you with Hungarian mathematician Paul Erdős. Your Bacon number is the number of collaborations it takes to link you with Kevin Bacon (as in "Six Degrees of Kevin Bacon.") Your Erdős-Bacon number is the sum of the two. Not surprising, few have a finite Erdős-Bacon number, but the one of the two people with the lowest known is Dave Bayer '77, Swarthmore alum. He was Russell Crowe's math-writing hand in "A Beautiful Mind" and he publishes in a number of different areas of mathematics.

A Giffen Good At Last

Economists search high and low for Giffen goods because it is an interesting special case: a good for which an increase in own price leads to an increase in demand. That is, an upward sloping demand curve. Attempts have been made to find a Giffen good: supposedly potatoes in Ireland at some point in the 19th century qualified, but the evidence is sketchy. Via Tyler Cowen, a Giffen good at last!
One sex worker...explained why she no longer offered her favorite clients free sex or cheaper rates: "They pretend to be flattered, but they never come back!...There was one client I had who was so sexy, a tai-chi practitioner, and really fun to ****. Since good sex is a rare thing, I told him I'd see him for $20 (my normal rate is $250). Another guy, he was so sexy, I told him "**** for free." Both of them freaked out and never returned...They don't believe they can have no-strings-attached sex, which is why they pay. They'd rather pay than get it for free."
As prices decrease, demand decreases. Hence, a downward sloping demand curve and a Giffen good!

Banned Books

Via Kevin Drum, the ALA's list of 100 books most frequently challenged in 1990-2000. I've read 19, I think.* What's striking about the list is how, in general, the books are very high quality children's literature. You would be hard pressed to find a list of better kid's books. What makes them high quality is that they are willing to take on serious themes, or else are just sufficiently weird as to scare some people. Certainly they may disturb, but at least they take children's literature seriously as a literature.

Looking back on all the books I read as a youngster, I can't help but think how few (did any?) actually made an impression on me. I certainly loved turning the pages and seeing how the words were strung together, but the actual content? Hell, I still have trouble reading for content. Which is to say that expecting kids to be disturbed by themes in a book is, perhaps, expecting them to be much more sophisticated than many (some? a few?) of them are. And even if they prove far more intelligent than I often was and get the theme, it's unclear that it will prove particularly disturbing.

*Assuming that having read at least one member of a series counts as having read the series: this applies to Goosebumps and Harry Potter.

Coffee Economics

Impinging on my desire to screw over small farmers in Latin America, the only coffee beans I can buy at the Swarthmore Co-op are "fair trade" beans. Thus, while I hand grind my beans, I have plenty of time to contemplate the message on the "fair trade" bag (this is Equal Exchange coffee). It claims that "much of world's coffee is grown by small farmers." Why is this? Why is coffee a product that does not admit of plantations? We don't have "fair trade" oranges because oranges are grown in plantations, so there aren't producers being screwed, rather, we screw workers. To improve conditions of the workers we would have to boycott the producers, rather than just bypass the middlemen. Why is coffee produced by individual producers who have their product purchased by a middleman and then marketed, whereas other products (cocoa beans, maybe? most fruits...) have plantations that hire workers?

Understanding why would provide an interesting data point in the debates about English economic history and the putting-out system that Marglin's "What Do Bosses Do?" raise. From whence does the industrial structure arise? Is there something unique about coffee that makes it different from all other commodities? Like: you need unique knowledge of the teroir that only an individual can know? But even, say, oranges vary based on which side of the tree they were grown on, let alone which patch of soil. So that can't be it. Or, to put it another way, who benefits from having the middleman structure who wouldn't also benefit from having plantations? That is, you figure that the middlemen would own the plantations. Is it that coffee is a uniquely risky product even compared to other things like, say, oranges, which can be wiped out in a single frost? So that this is a risk shift? But that seems implausible.

Maybe this structure is true of chocolate as well. And so there is something about being a highly valuable bean that does it. I sort of suspect, though, that this has everything to do with a bit of political history in Latin America of which I am ignorant.

I love Bill Clinton

So I get upset when people make silly criticisms of him:
It was almost midnight at the Manhattan sushi hotspot Nobu Fifty Seven, and Bill Clinton was briefing Elvis Costello on the future of New Orleans. "First you've got to flush the lake. Just flush it," Clinton explained. Between the low thrum of club music and the starstruck admirers jockeying for position, it was impossible to hear much more, but one thing was clear: Clinton was really enjoying himself. As several celebrities--including Jeremy Piven of HBO's "Entourage," millionaire playboy Steve Bing, and the dapper Nobu himself--hovered on the margins, Clinton talked on ... and on ... and on. A few minutes earlier, Costello had looked starstruck himself. But now, his enthusiasm seemed to be waning. In fact, as Clinton droned on, I detected a certain glaze forming behind the smartly dressed rocker's famous black-rimmed glasses.
But Brad DeLong sets him straight:
Bill Clinton, you see, likes public policy and likes to talk about it. Michael Crowley doesn't like public policy--which makes one wonder why he doesn't go and write about things that do interest him. ... [Crowley's] complaints that an ex-president is interested in governance and issues--and is actually curious about places like Lesotho and Nigeria--are self-parody. "How dare an ex-president bore me!" they say. "I know nothing about global development or foreign affairs. How dare he find them interesting!"

Tuesday, September 27, 2005

Big boxes

Wal-Mart may be culturally reprehensible (or whatever) but a Tesco is pretty nice in a city filled exclusively with small hole-in-the-wall retail outlets. (You can also see how it's bad for small businesses. Is that bad?) It's very convenient to have everything in one place even if you have to go to the city's outskirts to get there.

I think that if there were not Costcos and K-Marts in every American city it would be a lot harder to stage a resistance to Wal-Mart. Because you can be moral by not going to the Super Wal-Mart as long as there's a Super Target right next to it.

Monday, September 26, 2005

Titling those you cite

At what point did that stop? That is, in Coase (1937) when he talks about Joan Robinson he'll say things like "Mrs. Robinson" this or that, or he'll refer to Professor so and so. Now you would never see that in an academic article. You'd see the full name at first, and then just the last name. In articles from, say, the 1970s, you never see that. So when in the interval [1937,1970] did this practice change? Is it in the early 1960s as the first generation of GI Bill students become professors and so academia is no longer such a small club, taking people only from a certain social class?

This question is easily resolvable if I took the four minute walk to the journals in the library, but I'm currently lazy.

Executive compensation; or, a second time through Coase

Our task is to attempt to discover why a firm emerges at all in a specialized exchange economy. The price mechanism[...]might be superseded if the relationship which replaced it was desired for its own sake. This would be the case, for example, if some people preferred to work under the direction of some other people. Such individuals would accept less in order to work under someone, and firms would arise naturally from this. But it would appear that this cannot be a very important reason, for it would rather seem that the opposite tendency is operating if one judges from the stress normally laid on the advantage of "being one's own master." Of course, if the desire was not to be controlled but to control, to exercise power over others, then people might be willing to give up something in order to direct others; that is, they would be willing to pay others more than they could get under the price mechanism in order to be able to direct them. But this implies that those who direct pay in order to be able to do this and are not paid to direct, which is clearly not true in the majority of cases.
-- Coase, "The Nature of the Firm," pg. 390.

Four pages later...

Coase makes the claim that as costs of communcation and transportation decrease, firm size will increase at the expense of efficiency. That is: the internet is terrible, as is a shrinking world, for it encourages firms to expand too much. Or, perhaps not too much, but it pushes out the point where marginal transactions costs exceed transactions benefits. But he does seem to imply that over-all efficiency is decreased by having larger firms.

The exact quote: "Changes like the telephone and the telegraph [this is 1937, after all] which tend to reduce the cost of organising spatially will tend to increase the size of the firm." Earlier in the paragraph, he writes that
it would appear that the costs of organising and the losses through mistakes will increase with an increase in the spatial distribution of the transactions organised, in the dissimilarity of the transactions, and in the probability of changes in relevant prices. As more transactions are organised by an entrepreneur it would appear that the transactions would tend to be either different in kind or in different places. This furnishes an additional reason why efficiency will tend to decrease as the firm gets larger.

Taxes and firms; or, this is interesting (a continuing series)

Another factor that should be noted is that exchange transactions on a market and the same transactions organised within a firm are often treated differently by Governments or other bodies with regulatory powers. If we consider the operations of a sales tax, it is clear that it is a tax on market transactions and not on the same transactions organised within the firm. Now since are alternative methods of "organisation" -- by the price mechanism or by the entrepreneur -- such a regulation would bring into existence firms which otherwise would have no raison d'etre. It would furnish a reason for the emergence of a firm in a specialised exchange economy. Of course, to the extent that firms already exist, such a measure as a sales tax would merely tend to make them larger than they otherwise would be...But it is difficult to believe that it is measures such as have been mentioned in this paragraph which have brought firms into existence. Such measures would, however, tend to have this result if they did not exist for other reasons.
-- Ronald Coase, "The Nature of the Firm," Economica, 4:16 (Nov. 1937), 393.

Math Is Hard

Or at least very confusing:

Well, division can be thought of as--in fact, is--repeated subtraction. That's one way of defining what division is, just you can define multiplication to be repeated addition and exponentiation to be repeated multiplication (and taking roots to be repeated division; the cube root is the answer to: "what number can I divide this by three times to get one?").

You can see that division can be thought of repeated subtraction most clearly in long division: 50,008/14, say. First we subtract 3,000 fourteens from 50,008, and get a remainder of 8,008. Then we subtract 500 fourteens from 8,008, and get a remainder of 1,008. Then we subtract 70 fourteens from 1000, and get a remainder of 28. And then we subtract two fourteens from 28, and get zero. Voila: we have subtracted 3,000 + 500 + 70 + 2 = 3,572 fourteens from 50,008--we have divided 50,008 by 14 and gotten 3,572.

The idea that "division is repeated subtraction" is much better when a student is first confronted by division by a fraction--3/4 divided by 1/4, say--than is the alternative of "division is dividing into piles." You divide 50,008 into piles of 14 and you have 3,572 piles. But you divide 3/4 into 1/4 of a pile and... a student who thinks "division is dividing into piles" is immediately lost. By contrast, if the student starts out thinking that "division is repeated subtraction," it is easy for him or her to see what 3/4 divided by 1/4 is: how many times can you subtract 1/4 from 3/4 before you get zero? And the answer is three.

I learned addition and subtraction in a very mechanical way: here are sheets of problems, now do them! And I was spectacular at those sheets. So all of this "understanding" sort of escapes me. I could prove the equivalence of those understandings, but I'll stay with my trusty method of taking the reciprocal of the denominator and multiplying. But then, there is a reason I have no intention of ever teaching math. It's hard to make math make sense to others.

President Bush Hates Freedom

President Bush called on Americans to conserve gasoline and avoid non-essential driving today as the average national prices for retail gasoline climbed higher for the first time since they peaked over the Labor Day weekend.
--Bush Urges Conservation as Retail Gas Prices Rise.

Sunday, September 25, 2005

The status quo is something to be changed, not something that constrains us.

I read "Mountains Beyond Mountains" about Paul Farmer. A doctor, he's one of those thoroughly admirable people who has devoted his life to both trying to do good in his immediate actions (i.e. tending to patients in poor places like Haiti) and has tried to shift the status quo on what is an acceptable way to behave toward the poor and sick. He's done amazing things in Haiti, Peru, and Russia, and probably more. In particular, he has devoted a certain amount of energy to arguing that the whole notion of "appropriate technology" and sustainable development is bullshit. That the first, in the context of medicine, simply means nice medical supplies for the rich and bad medical supplies for the poor, and that the notion of sustainability, particularly when it comes to funding drugs for TB and AIDS isn't worth worrying about: get the drugs (and money to fund the purchase) however you can and you'll figure something out when the money runs out. Basically, screw any attempt to decide what's plausible, and just do what's best for your patients, regardless of the context.

The moral pull of that view is rather strong: yeah, why do we let people languish? Let's be active, and screw worries about money, the money will come. Regardless, we shouldn't embrace the idea that we have to ration supplies and what not. The status quo is something to be changed, not something that constrains us.

This last is where my economics background comes into sharp conflict with my more moral moments. Because economics, particularly when thinking about policy, is all about how, given a fixed amount, do we spend it best and most efficiently. You assume a hard budget constraint and try to maximize various objectives under that constraint. This is the perfect task for a technocrat. But at the moment that you say the status quo isn't what we have to work with, that we can, and will, shift it, you end up in a very different position: an activist one -- think Jeffrey Sachs. And there seems to be something untoward -- impolite and impractical? -- about an economist who questions the status quo: you've been given your budget constraint, now work with it.

Yet you look at the career of a Paul Farmer or Jeffrey Sachs and they've succeeded at moving the budget constraint by sheer dint of pushing and pulling and being dynamic and brilliant and bull-headed and rude. Sure they haven't moved it as much they would like, and some of the movements they think they've made have been taken back, but, nonetheless, on net there is more money going places it didn't go before. And being spent in ways that hadn't occurred to people before (this is especially true for Farmer). So the world is better off for them not having taken the budget constraint as given, a troubling thought for one devoted to the language of economics.

Saturday, September 24, 2005

Strangers with Candy

All of a sudden I am being bombarded by professors and students who are willing to give me a combination of money and candy to participate in their psychological/linguistic/what-have-you experiments. Of course I am not at Swarthmore and am not able to participate, but it's interesting that they all include this element of candy. A typical offer is $5 and a candy bar. Why not just give people the money that is used to purchase the candy? A simple economic model will tell you that a lump sum gift is better than an in-kind gift; if the subjects wanted candy they could just buy it themselves. Here are some hypotheses:
  • There is some cheaper bulk price available to the experimenters but not to the subjects. A gift of the money spent on the candy bar could, in that case, be less valuable than the candy bar itself.
  • It would take time to go buy a candy bar. Time is valuable, so by just giving the candy bar, experimenters are also giving the time it would take to purchase it.
  • Though the price of a candy bar is a, people are willing to pay up to b > a. So people value a candy bar at b, but the experimenters can purchase it at a. (Of course, so can the subjects themselves. Why haven't they already?)
  • Candy given by the experimenters has more value than the usual candy. You can carry it around and use it as a conversation piece, for example, or enjoy your candy with fellow subjects.
I think it's always better to try to find an explanation with the assumption of rationality first, and then move on if there's nothing satisfying. That may be the case here... For example, perhaps you exhibit inconsistent behavior. Given the choice between candy and money, you would choose the money. But you prefer the situation in which someone else just gives you candy to having a choice. (Though perhaps this isn't irrational, perhaps you can have rational preferences over different choice sets? Non-standard rationality?)

Friday, September 23, 2005

Public intellectuals

Prospect magazine is running a poll of top public intellectuals. One of those odd enterprises devoid of meaning but entirely fascinating. It also provides the snob value of counting the names you recognize, and the people you've read. Anyway. My selections:
  • Daniel Kahnemann;
  • Michael Walzer;
  • Amartya Sen;
  • Paul Krugman; and
  • Jeffrey Sachs.
Compare to, say, Kevin Drum, which is where I discovered it.

Keeping your eye on the ball

Henry Farrell at Crooked Timber brings our attention to this Jeffrey Gedmin piece:
Germans know [that they face a fundamental choice over their economy]. But they still love their “social-market” economy and have not yet decided whether allowing more market forces can be in tune with their values. Until now, it has been too easy for Germans to defer painful choices. The country has been doing – simply put – too well. In Berlin, a city with 19 per cent unemployment, the cafes are packed with people ­drinking over-priced café lattes, the employed and unemployed alike happily indulging themselves. Will economic circumstances soon hurt enough to give people the swift kick they apparently need?
He's not keeping his eye on the ball. The point of growth is higher living standards. In so far as drinking cafe lattes is an indicator of those standards, Germany appears to be doing pretty well. In fact he says that: they are doing well by the standard of living, but not by *his* standards. And his standards are low unemployment and high growth. These obviously aren't bad goals, usually they are very good shorthand for living standards. In this case perhaps not. But it's very silly to keep focusing on these numbers (which are just shorthand) when they are sufficiently contradicted. Unlike Henry (Farrell) I don't think this is based on some other hidden (and malevelent or self-serving) motivation, it's just the typical IMF-style economics: focus on a few things which are usually good proxies and never ever be persuaded otherwise.

Intellectual moves

A fun one is saying that something we all disagree about, we actually agree about. We've just been looking at the wrong aspect of that thing. Take this which is brilliant:
It relates to the fact that every normative theory of social arrangement that has at all stood the test of time seems to demand equality of something--something that is regarded as particularly important in that theory. The theories involved are diverse and frequently at war with each other, but they still seem to have that common feature...But what about utilitarianism? Surely utilitarians do not, in general, want the equality of total utilities enjoyed by different people...In fact, the equality that utilitarianism seeks take the form of equal treatment of human beings in the space of gains and losses of utilities. There is an insistence on equal weights on everyone's utility gains in the utilitarian objective function.
--Amartya Sen. Inequality Reexamined, 12-3.

We're all egalitarians! Who knew?

Thursday, September 22, 2005

Concrete Health

I finished reading "The Status Syndrome" by Michael Marmot. Besides being a bit fluffy at times, the book is really tremendous at demonstrating that health responds to social structure and inequality and workplace organization. For literal people like me, this is a very satisfying way of thinking about social justice and fairness: it gives me a way of talking about the deleterious effects of inequality and etc. without having to resort to abstractions like, well, justice and fairness. I can point to concrete things that go wrong when you have inequality: people have more heart attacks and life expectancy goes down, for example. In some sense, then, it provides a utilitarian way of justifying liberal policy which doesn't appeal to things like happiness, which, for an economist-type like me, is important (having a utilitarian justification for the things I believe in, and avoiding having to have happiness be that thing). And health is such a concrete category, very tangible and something everyone can agree we ought to value.

The book is good also because it is just really excellent social science: all of this concern about causality and correlation (when we observe that wealthier people are more healthy, are they wealthy because they're healthy, or...?), use of natural experiments (collapse of USSR), and then finding important implications for theory from these findings (particularly, workplace autonomy -- the amount of control you have over your daily life -- is extremely important). All in all most satisfying.

A rising tide

Even in Haiti, one of the poorest countries in the Americas, infant mortality is 68/1,000. The servant-keepers of York [in 1900] had infant mortality (94/1,000), comparable to Uganda or Equatorial Guinea today. A small amount of money, spent on public health and education, could make infant mortality lower in one of today's poor countries than it was among the rich people of York in 1900.
--Michael Marmot. "The Status Syndrome," 64-5.

Education sucks

If schools do make a difference, can they be social levelers? Not as much as we might like. If some children went to school and some did not, getting more children into school would improve their education. But with everyone in school, might more spending on education, distributed equitably, reduce social inequalities in performance on measures of educational "output" such as literacy? Regrettably not.* There is reason to believe that for a given amount of extra educational input, across the board to children of all social backgrounds, social inequalities in the outcome may increase. A moment's reflection reveals this not to be quite as surprising as first it seems. Suppose you have a new way of teaching history and teach it to everyone right across the school system. Who will benefit most? Those most ready to take advantage of a new way of learning: the middle-class kids. Spend a bit more on education and spread it equally, and you may well increase inequalities in educational performance.
--Michael Marmot. "The Status Syndrome," 223-4.

I think this may actually be one retort to complaints about poor districts where lots of money is spent and you get very little educational output, like DC. That is, yeah you spend money, but look what you are working. More broadly, it emphasizes how important are policies aimed at younger and younger kids.

*Mortimore, P., and G. Whitty. 1997. Can School Improvement Overcome the Effects of Disadvantage? London: Institute of Education.

Sports are more interesting...

If there are many different ways to be good. In the 50m dash, there is only one way to be good: speed. It's clear who is good and who is bad. But in (I think) more interesting sports, like tennis, there are many ways to be good. You can have good serves, good volleying, good net play, be quick, etc. And a good serve can mean many things: power, spin, and so on. So it's interesting to see if the guy with the fastest serve will beat the guy who's got a great two-handed backhand. Not so interesting to see if the guy who runs the 3:58 mile will beat the guy who runs the 3:55 mile.

Bayesian grading

Students' scores on tests are random variables; they are not totally accurate reflections of ability. Ability sets the mean but there is normal variation around it. But given that the test scores are the only observations that the professor gets, they are also the best estimators for the students' abilities.

But tests don't occur in a vacuum: there are problem sets, discussions, office hours, etc. So shouldn't professors use some sort of Bayesian calculation when giving out final grades? This is exactly what professors who say that "problem sets don't count unless you are right between two grades" are doing. They're willing to accept the estimator if it gives the student a solid A even if they thought she was a B student. But if the estimator is not too different from their prior, if the test score is in the A-/B+ range, they want to be able to bring it down to a B+.

It's unclear whether or not this is a good practice, since the data the professor uses to form his pre-test prior might not be a good indicator of the student's true ability, even if he thinks it is.

Mauritanian taxation

According to this week's Economist: "Mauritania was the only country in the world to raise its corporate income tax in 2004."

Legacy Costs

You hear the argument made that American automakers like Ford and GM are at a disadvantage compared to other automakers because of their massive pension costs -- legacy costs; a similar claim is made about the legacy airlines. This is almost certainly the case in some narrow, presentist way: these pension costs mean that these companies have higher total labor costs than their younger competitors.

But: what's always bothered me about this argument is that it leaves out the answer to the question: why do these companies have these legacy costs? The answer is that they bought something with them. Namely, if you guarantee someone a very nice pension, then they ought to be willing to take a lower salary during their working life (because what workers care about is their total compensation over a life time). You can think about large pension schemes as being deferred compensation from, say, 20 years ago. Which means that 20 years ago explicit labor costs were lower than they "should have" been. Hence, these companies gained an advantage -- increased their profits -- 20 years ago, only to have lower profits now.

But this only happens because companies don't really believe in Ricardian equivalence for their own books: they didn't put away the implicit savings to pay for the pension fund 20 years out. There is Federal law about guaranteeing pensions -- and the Pensions Benefit Corporation, or whatever, which insures pensions -- but apparently it isn't sufficiently rigorous, which it probably oughtn't be. We're all about leaving companies with a bit of discretion (to extend the macro. language to the firm: a bit of deficit spending might occasionally be in order), but if they have that discretion, they should bear the blame when they misuse it. And this is one such case: firms didn't put away enough money in their pension funds x number of years ago because x number of years ago they wanted higher profits. Don't feel sorry for them and their disadvantage: they screwed up.

Now the problem here is that a corporation is really just a collection of individuals who we happen to care about in the abstract, which makes the situation rather more complicated. Plus, you could argue that those generous pensions were part of a different kind of capitalism which, perhaps, we like more than this current incarnation of capitalism. So we shouldn't be objecting to those arrangement. In any case, I'm very confused.

Wednesday, September 21, 2005

Does "economist" mean something different in Britain?

At the BBC's "Who Runs Your World?" game you can pick a team of 11 "leaders", "thinkers", and "economists" to run the world. But the first "economists" listed are Rupert Murdoch, Bill Gates, Richard Branson, and George Soros. This makes me think that "economist" means "businessman" in Britain (witness my cultural ignorance) but they also list Joseph Stiglitz and Steven Levitt (bona fide economists). Does the conflation of economics and business seriously bother anyone else?

By the way, my list has Bill Clinton, Joe Stiglitz, the Dalai Lama, Amartya Sen, Hernando de Soto, Alan Greenspan, Nelson Mandela, Steve Levitt, Barack Obama, Arnold Schwarzenegger and Tiger Woods. You can see I was struggling. But officially I think this is ridiculous.

Kevin Murphy...

...has won a MacArthur genius grant. Steven Levitt has some wonderful words about him:
It is hard to know where to start when describing Kevin. His early mentor Finis Welch describes how one day, when Kevin was an undergraduate, he introduced himself to Welch and asked Welch what he was working on. When Professor Welch described it, Kevin pointed out a fundamental flaw in the argument. Welch recalls that he scribbled down what Kevin was saying, only half understanding it, and it took him a few days to work out that Kevin was completely right. That wasn't an isolated incident. Rarely do I leave Kevin's office without myself having accumulated a set of scribbles that take days for me to sort out. And I have been asked for a sheet of paper by a Nobel Laureate trying to capture Kevin's thoughts during a hallway conversation.
He is who we all aspire to be, but can you really aspire to be a genius? Probably not.

Only ten economists have won the grant and Murphy is only the second John Bates Clark Award winner to win. (The other was Matthew Rabin...so the 2001 and 2003 winners of the Clark Award have won a MacArthur...is Levitt next?)

Useless Markets

A market is useless if it provides no incentive for its participants to operate in an efficient manner. Consider the "sports player" markets that Tyler Cowen just blogged about:
ProTrade, which opened for business yesterday, will treat professional athletes like stocks to be bought and sold, initially in a theoretical currency. Cash prizes will be awarded to the most successful investors.
Real stock markets work (sort of) because people expect stocks to have actual payouts correlated to some aspect of the actual company, namely profit. Stocks have a fundamental value, the present discounted value of expected dividends. People are induced to try to figure out what that value is (or the distribution of expected values) and trade the stock to that level. Real income is made or lost based on it.

But stocks in made-up exchanges like the Hollywood Stock Exchange don't have any sort of incentive structure. Let's say you buy a share of "Johnny Depp." So what? The first problem is that you're not using real money so your incentive to find the truly valuable "stocks" is significantly reduced already. They do have cash prizes for those who make the highest "returns," but there is a bigger problem that makes this pointless. The bigger problem is that the value of each security is based entirely upon what you think you can sell it for in the future. That is, if a security has value it is because of a rational expectations bubble. There is no fundamental reason why "Johnny Depp" should be worth more than "Keanu Reeves."

Useful are the new weather derivatives markets. Betting on weather seems a little silly, but if you are heavily invested in Florida oranges you can place bets against a hurricane in that area. Betting on two events that are correlated in an exactly negative way reduces risk without reducing reward.

Tuesday, September 20, 2005

Historians and Economists

[R]ather we diverge on issues of social and political remedy. [Marglin] is an economic theorist, and to theorists what is conceivable is possible. I am an historian, and historians tend to be disenchanted by the record of human experience. We are suspicious of promises...The bigger the promise, the more suspicious we get.
--David Landes. "What Do Bosses Really Do?" Journal of Economic History, 46:3, 622-3.

Accidents

There is nothing in the character of a previous event or decision -- the choice of one path rather than another -- that implies reversibility. Even an accident changes the future irremediably.
--David Landes. "What Do Bosses Really Do?" Journal of Economic History, 46:3, 622.

English Snobbery

Taking the bus from Haverford back to Swarthmore, I was roped into directing a representative of Oxford University to the study abroad office. Wanting to get in my little bout of "how special am I" I asked her where she was from. "St Edmund's Hall."
"No, where do you live in Oxford?"
"Twenty miles north: Chipping-on-Norton."
"Oh, I grew up partially in Oxford, East Oxford, on Aston Street."
"What years?" she asked.
"1986-1992."
"We were practically neighbors! I lived on Henley Street from 1990-1 when I was at Magdalen College."
"How funny. Sadly, as you can hear, I've lost my accent: I learned english with an East Oxford accent."
"Hmmph. Or not so sadly [that you've lost that horrid lower middle class accent]."

She spoke with a very posh accent, not quite the Queen's English (it's very hard to be that plummy), but something close. This is the first time anyone has ever shot down my lament of losing my English accent. When I joke that I learned the "Queen's English," my American friends don't think to wonder if I really had such a plummy accent. I think I'd be a lot better off in the U.S. if I had kept that English accent -- even a lower middle class accent, because Americans are such hopeless anglophiles (as am I, sort of). But in England, apparently, my American accent would hide my class background, giving me a hope of fitting in among more high and mighty folk.

Monday, September 19, 2005

Practical and Statistical Significance

I first read Deirdre McCloskey almost two years ago arguing that economists were too focused on statistical significance at the expense of practical significance. Oh the glories of econometrics! Now I actually sort of know what she's talking about.

When you run a regression, you set up a null hypothesis: typically that the coefficient on the variable is 0. You then compute a statistic to see if you can reject the null (ratio of the estimated coefficient to the standard error of that coefficient), and embrace the hypothesis that the variable has effect in one direction or another. But really that isn't enough: sure we might be able to say that we "reject the null at the five percent level," but that doesn't tell us if the effect is really worth talking about -- does it have any practical significance. As in the textbook*, you might find that the total number of employees has a statistically significant relationship (at the five percent level) with participation rate in a 401(k), but the effect is really rather small: like an increase in firm size of 10,000 means that the participation rate falls 1.3 percent. Sure it matters, but does it have any practical significance?

Economic theory is excellent at predicting that something will have an effect, but to learn something from econometrics it needs to tell you first whether an observed effect is likely to be an artifact of the data or not, and then you need to figure out whether that effect is "important" in some sense. Or at least that's what McCloskey has been arguing all these years.

It plays nicely into what Henry and I always return to: this sense that everyone agrees that lots of things happen in the world (having welfare reduces incentives to work; cutting welfare hurts many families) but people disagree whether these things are importance. That is, we agree that things are statistically significant (there is an effect which is highly likely not to be an artifact of the data), but we disagree on whether the effect is practically significant. So many ways to say the same thing!

All McCloskey is asking is for economists to be more attentive to the size of the effects, rather than just trying to get a statistically significant result. Now you might say: it's the economists job to figure out everything that can impact things, and the policy maker can weigh whether a given effect is large enough to alter or reinforce their views. To which I'm not sure there is a good response.

Regardless, this is exciting for it's something I've wanted to understand for some time.

*Wooldridge, "Introduction to Econometrics" (3rd edition), pg. 142-3.

One Man's Pork

Is another man's bike path, apparently. I was browsing Porkbusters and noted that the only pork they can find in Madison is spending on bike paths*. The argument -- "Wisconsin. Cold. Bike/pedestrian path - bad idea and unused for a large portion of the year" -- is really rather terrible. The paths are heavily used when there is no ice or snow on the ground (April - November) and when there is ice and snow some still use them: for biking (the hard core) and skiing and such. Plus, when they are used they are both recreational and commuter -- both things conservatives should like: facilitating the battle of the bulge in a personal responsibility kind of way, and reducing consumption of oil. And it gives kids somewhere safe to bike (and roadies like myself ways to terrorize the general populace).

The bigger objection is the class issue: that you are spending money on a fundamentally middle class (and rich) pursuit. I bike on the Southwest bike path in Madison. On the south side of Madison, inside the Beltline it is middle class and up; outside the Beltline poor it is poor (and black). Before the Beltline, you see lots of kids with a parent riding with them. Past the Beltline, you see equally young kids messing around in the grass next to the path -- something they could have done (and did do) on the old train tracks. Clearly there is a value-added for the middle class (who couldn't bike on the train tracks), and no value for the poor. But then, no conservative would want to pull out that argument.

Any non-tendentious conservative arguments against bike paths?

*If it's in Madison, which it is, it's Tammy Baldwin in the 2nd and not Petri in the 6th, but I quibble.

Update: The obvious objection is that this is an appropriate function for city, county or state governments and not the federal government. Which is fair, to a point. It is the city which has identified the need, and the federal government is just helping fund the project. I've always understood federalism to be about how local governments know best what to do, not necessarily that they have access to the money to do the best things. But then local taxation is maybe more accountable than federal taxation?

Ricardian Equivalence as a Normative Proposal

Battlepanda brings up Ricardian equivalence as a normative proposal:
Jacob at Everybody's Illusion say that if you have a cow with the deficit and its impact on future generations, simply work out your share of the deficit and square that money away as treasury bonds. Gift the money to your kids with the understanding that it is for repaying the deficit when it finally gets called in. Since the money you put away will be the same money that you would pay if taxes were raised tomorrow to pay for the deficit, surely it's six-of-one/half dozen of the other. Sounds good, right?
Well, as someone wise once said (though I can't remember whom), economic models have two lives: once as positive models, and if that doesn't work, as normative models. That is, economic models deal with rational agents who do what is best for themselves. If people turn out not to act like that, then maybe they *should* be acting like that. Ricardian equivalence is once example. It's totally useless at describing actual consumption behavior, but perhaps people should act in a way consistent with it. After all if taxes *must* be raised to pay off the debt, then you'd want to smooth your consumption, presumably.

Haven't posted in a while...

...but I'm not too out of it to criticize Matt Yglesias a bit. In particular, he writes
People really like to toss allegations of hypocrisy around because it's a kind of short-cut method of avoiding discussions of substance.
Okay, agreed.
Life is just like that sometimes. Advocates of policy change are typically arguing for new policies precisely because the behavior they would like to see people engage in doesn't make sense under the status quo. Thus, there's no reason to think advocates of new policies have incurred an obligation to just start acting as if the new policy were in place.
I think Matt is making the (very common) mistake of thinking that there is some conflict between altruism and utility maximization, but the opposite way that most people make the mistake. Most people think that the two are incompatible, thus utility maximization is not a good model. Or, that people shouldn't be "maximizers." Whatever, maximization can certainly include an element of altruism. Yglesias takes it to mean that people shouldn't be altruistic, they should do what is in their self-interest despite whatever social goals they value.

But certainly that's not true. If you think driving SUVs is bad enough to expend energy to get a law passed disincentivizing SUVs, certainly you can give them up yourself? One would think that you wouldn't want to drive them at all. Matt's argument seems to imply that if killing someone were in your narrow self-interest it would be okay as long as the incentives were right. We can still hold people morally accountable, even if they maximize utility.

Friday, September 16, 2005

Class Economics

What to do in these situations?

A CLASS is offered by two professors. Students are allowed to select between the two, but one is preferred to the other by all students. Assuming students only care about the professor (and not, say, class size) it's Pareto optimal for all the students to take the class with the good professor. Then what do you do with bad professors?

THERE'S ALSO a sort of public good problem. That is, no one wants the bad professor to realize his badness by having no one show up to his class. But no one is willing to show up to make him feel better, they'd rather free ride on those who are most altruistic.

A CLASS will be cancelled if its enrollment falls below three; there are three people in the class. A person's choice to drop the class then has strong negative externalities, the other two are not able to take the class. Then should we subsidize the third student's choice to take the class? Do we pay them cash to stay in the class? Is there a Coasian solution? Could the other two students negotiate a deal in which they pay the third student to take the class?

Thursday, September 15, 2005

Should I Tell The People?

If I know that there will be no blogging at a site, I am wont to stop visiting that site. Normally I remember when they have re-commenced blogging, but sometimes I simply stop visiting. On the other hand, if I am not aware that the blogger will be on hiatus, then I keep on visiting in the expectation of new material. At some point, you'd think, I'd become sufficiently annoyed at the lack of new material to stop visiting. I'd increase my subjective probability of the blogger never posting again, and, perhaps, stop visiting. Meanwhile, I visit.

What is the optimal strategy from a hit-hungry blogger taking a break? Do you tell the people, in which case they might lose the habit of visiting you, or do you leave them in ignorance, in which case they might become pissed off at you -- though they continue to rack up hits?

On the theory that more information is better (and that it doesn't matter because I a) don't have readers and b) I have a co-blogger), this is a long way of saying that I'm off to home sweet home for the weekend. Not for this, but my sister's wedding. Expect no blogging. Though expectations are frequently confounded.

Can't buy more work

Assume an economy with perfectly functioning labor markets. Assume that all workers have backward bending labor supply curves and that all workers are at the point of maximum labor supply. Then any change in wages will lead to less total labor being supplied*. Thus, employers would find themselves in the odd situation of being utterly incapable of buying more labor.

This by way of Stephen Marglin "What Do Bosses Do?" The argument there is, I think, that the move to the factory system was a way of forcing workers to work more than they wanted to. Under cottage industry, workers could choose continuously along their labor supply curves and hence employers couldn't buy as much labor as they wanted; in a factory system, workers either had no work, or worked more than they wanted. Hence, employers were able to buy more work.

*If wages go up, workers feel wealthier and since leisure is a normal good and they are at the point of maximum labor supply, their income effect dominates the substitution effect; if wages go down, workers feel poorer, and so leisure has a lower shadow price, and the substitution effect dominates the income effect.

Young men killing each other

This suggests that there is something predictable about the state of young manhood that leads to violent behavior. There is, however, an important question of the scale. In England and Wales the peak homicide rate is one-thirtieth of the Chicago rate: 30 per million in the population compared to 900.

The universality of the age sex pattern of homicide -- young men killing each other -- is a basic tenet of evolutionary psychology. Where such universal patterns are seen, we are likely to be looking at an evolved characteristic of the species, in this case a tendency for young men to be aggressive. But what that evolved tendency leads to depends on the environment: the social conditions. It is likely that the environment of Chicago is either one that brings out this aggressive tendency and/or provides the means for this tendency to be translated into homicide.
--Michael Marmot, "The Status Syndrome," pg. 34.

Public Transportation in Budapest

Public transportation in Budapest operates in the following manner. One obtains a ticket for the form of transportation one plans to use (tram, trolley, bus or metro) and one has the ticket stamped (by machine) upon boarding said form of transportation. Sometimes, a conductor will come through the passenger area and ask to see one's ticket. If one does not have a ticket then one is fined 2000ft ($10). But one's ticket is not checked on every ride: I have only been checked once in one week's fairly heavy use (I did not have a ticket.) One can also purchase a multipass for 6250ft (~$30) which allows one month's unlimited use of all public transportation (which I did soon after getting fined.)

This system is in contrast with, say, Boston, where if one does not purchase a pass (passes are not available for all forms of transportation and are fairly expensive) one must purchase a ticket for each ride when boarding. That is, if one does not have a ticket one cannot ride public transportation. In Budapest the choice to purchase a ticket or not must be made under the uncertain prospect of getting checked or not. Which system is better? In order to get people to purchase tickets, they must make it such that conductors check tickets enough so the cost of purchasing tickets is less than the expected cost of riding without. Assuming the choice between the two systems is profit-neutral, which is better?

I'll say Boston because it prevents risk-lovers from free-riding.

Income and Substitution

I'm experiencing the income and substitution effects here in Budapest. There are more things to do here (like homework) than there were in Cambridge, so I am using the internet (and blogging) less. On the other hand, my real income has increased since many things are much cheaper here. As a result, I am eating much better than I did this summer.

More dilettantism

[F]or people above a threshold of material well-being, another kind of well-being is central. Autonomy -- how much control you have over your life -- and the opportunities you have for full social engagement and participation are crucial for health, well-being, and longevity. It is inequality in these that plays a big part in producing the social gradient in health. Degrees of control and participation underlie the status syndrome.
--Sir Michael Marmot, "The Status Syndrome," pg. 2.

Randomness

Like others, I just finished reading Fooled By Randomness. Taleb argues that when we talk about risk and uncertainty we forget the Knightian distinction that uncertainty is unquantifiable and fundamentally unknowable, and we should remember that. Or else! This means that it is impossible to get an accurate, or sensical, prediction of the future. He's direct and entertaining. Not sure how much I learned, for since taking probability in high school I've been convinced of the value of conditional and probabilistic thinking, but it was still fun.

Wednesday, September 14, 2005

Normative economics* is like religion without the aesthetics.

--Nassim Nicholas Taleb, "Fooled By Randomness," pg. 174.

*Where normative is the claim that economic theory represents an attempt to describe how things ought to be: it's prescriptive.

I want to do that...

Tyler Cowen says there are four problems that need tackling. Oddly, two of the four are things which I've devoted some intellectual energy to trying to understand:
2. A good health care plan that is practical, not too far from politically feasible, and applies competition to lower costs and improve service quality. It must be incentive-compatible, yet at the same time it can't be seen as heartless and simply letting people die. That probably rules out "cut health care spending in half and have everyone eat better and exercise more," otherwise an appealing option.
[...]
4. How can Africa actually develop? Don't beg the question by listing the needed outputs -- such as markets, democracy, or the rule of law -- as the inputs of your policy recommendation.
He says the similarity is that "All relate to how a centralized sphere of control should respond to a decentralized abuse of incentives, or how we can stop those decentralized abuses in the first place. " True, and something that hadn't occured to me.

I'd been thinking more in the universe of moral significance of the issues, and that they are issues where economics in and of itself isn't enough to answer the questions: you need ideas from more disciplines to get traction. Another fundamental similarity is that the more you know the more confused you are, a rather distressing circumstance for I like to think that knowledge is empowering and not confusing. Though I had a math professor who claimed that math is all about clearly understanding your confusions, and if you know precisely how you are confused, then you can begin resolving it.

Monday, September 12, 2005

Steaks and hospitals

It is interesting to note that the United States government currently assumes more responsibility for informing consumers about the quality of steaks they buy than about the quality of hospitals or physicians they use.
--Fuchs, "The Health Economy," pg. 28.

I Like Victor Fuchs

According to one definition, an economist is "a person who sees something that works in practice and wonders if it will work in theory." My view is somewhat different. Once a problem or a puzzle engages my attention, I may use economic theory as a starting point, but then usually move rapidly to an examination of data through statistical analysis and through observation and reflection on the behavior of individuals and institutions. Economic theory helps to frame the questions and to identify the variables that are likely to be of interest; useful answers to the questions only emerge, if at all, from a close study of the particular phenomenon.
--Victor Fuchs, "The Health Economy," pg. 1-2.

Sunday, September 11, 2005

Basically right, but totally wrong

...is a state of affairs unique in intellectual endeavours to a mathematical proof. You can have the right idea of how to prove something, but get a few (minor) details wrong which renders the thing totally wrong. You are basically right, because if you fix those, then the proof is not basically right, but totally right. Yet until you do that, the proof is totally wrong. In no other discipline is one so consistently so close yet so far away.

Predictability

What does this say? The New York Times Magazine promises a story on "two small literary-intellectual magazines try to make a different kind of big noise" and I immediately know them? Obviously, n+1 and The Believer (though the title tips you off to the second). If they've reached me (and the New York Times Magazine), aren't they past being condescended to? And I was sort of hoping to come across magazines I hadn't heard of, oh well.

Update: If you go to the n+1 website and look at subscriptions, you'll notice an interesting subscription structure: $16 for one year; $28 for two years; and $150 for a lifetime. Crudely, this implies that if you expect the magazine to last for more than 10 years, you should buy a life-time subscription.

More precisely, the implied discount rate is 25 percent a year ($16 for the first year; if you buy the second year simultaneously, you pay $12 more: hence a difference of 4 and 4/16 is 1/4). At that implied discount rate you'd never receive $150 in value; in fact, the present discounted value of receiving the magazine for an infinite amount of time at that discount rate is $60. You'd need an implied discount rate of 10.666 percent to have even a present discounted value of $150 over an infinite amount of time. Thus proving that the structure more represents that you'd buy a lifetime subscription to give them some extra cash than to make a truly rational decision.

This, however, falls apart because your discount rate is probably far lower than 25 percent. The structure then really shows that they want to encourage you to subscribe for a longer amount of time, to gain cash now.

Far-flung places

You're either very cosmopolitan, or a junior in college, if in a twenty-four hour period you've received e-mails from Uganda, France, Hungary, and Lebanon.

Lump sum taxes are interesting

Economic theory tells us that, if given the choice, you should always choose a lump sum tax over a per unit tax (assuming they raise identical amounts of revenue). The argument is that a per unit tax distorts the "true" price of a good, whereas a lump sum tax does not. Then the puzzle is: how do you assess this lump sum tax? Turns out, you have to do it after the fact and randomly, so people's behavior won't be changed by the prospect of having to pay the tax. That is, income tax is a per unit tax; if you instituted a lump sum income tax, the taxing body would randomly draw names of people who would have to pay random amounts of tax. I'm not sure if the amount could vary by income (for if it did, then people with higher income would, in theory, change their behavior to reflect the possibility of being randomly taxed in that higher bracket[Henry?]). This is obviously totally impractical, but it would have an interesting side effect: because you don't know if you are to be taxed that year (or how much you would be taxed if you were taxed), you would have to have access to capital in order to be able to pay the possible (and possibly enormous) tax. This means either more interesting credit instruments, or people start saving more. So either/or/or both, a lump sum income tax could raise savings rates, introduce new instruments in the credit market, and push more people into bankruptcy (who didn't save and didn't have access to credit). Fascinating.

Update: Henry makes an excellent point:
Very interesting about the effects of such a random tax. What I think would happen is that some sort of tax insurance would arise under a random-person-lump-sum-tax regime. There would be no adverse selection or moral hazard, just perfectly lovely risk sharing. The result being that everyone would pay the same amount anyway and perhaps a bit more to cover administrative costs.
It should be said that everyone would be everyone on average. Because people's tax liability would be dis-associated from their income, you'd do away with progressive taxation.

Greenspan on Education

As long as we are discussing the subjects of over- and under-education I think it's worthwhile to note Alan Greenspan's well-informed position on the subject. Many are arguing that the populous has too many BAs and too much BS. But consider the paths of wages for high school graduates and college graduates: they have diverged significantly since 1970. That is, the premium an employer will pay for a college education has been rising and keeps rising. The standard explanation for this is that technological development since 1970 has been biased in favor of those more educated. Indeed this is the reason that more and more 18-year-olds decide to go to college, the pay is better that way. This view suggests that the demand for college-educated labor, or at least technically-skilled labor, keeps expanding. In this case why should we be encouraging fewer people to go to college?

Greenspan's point is that this is a result of a major failure of America's education system. I don't know that this should be interpreted to mean that more and more people should go to college. Perhaps it just means that high schools should provide education much more suited to technology-intensive fields. But it does suggest that the blue-collar revolution that Paul Krugman predicts may be illusory (though you do see gardeners making very large sums of money) and also that there is something about a college education that keeps getting more and more valuable.

Perhaps that value is its usefulness as a signaling device. On the subject of signaling, which has also been discussed, I would just note one thing. As Isaac says, education-as-signaling is inefficient:
Given the amount of expense involved in all this unnecessary (from a purely economic point of view) education,
In the standard Spence model of signaling there are no human capital effects and nobody likes education. So it's "wasteful," but the signaling equilibrium with education is better than the pooling equilibrium where no one educates since everyone is paid their marginal product. It's a second-best world, but expenditures on education are not necessarily wasteful in so far as they help achieve a signaling equilibrium.

Saturday, September 10, 2005

Intelligence tests and education

Ross Douthat at the American Scene writes:
Letting employers use intelligence tests, on the other hand, probably would diminish the importance of the B.A., at least on the margins - but I'm very skeptical that most Americans would cotton to the idea of de-emphasizing the resume and re-emphasizing tests, even if doing so would actually increase social mobility.
This is precisely the wrong way to think about education in the labor market: education is not used as a signal to select just for intelligence, it is a signal to select for intelligence and non-cognitive skills. A certain amount of intelligence may be necessary to achieve a given level of education, but it means something more to have achieved that level of education. Thus you could substitute education for intelligence tests (as has been done), but you cannot substitute intelligence tests for education.

Universities do not admit based solely on SAT scores* or IQ scores, at a minimum they also look at GPA. And GPA is not perfectly correlated with intelligence, it is also a function of a student's ability to work. Thus, a university that selects for high SAT and high GPA, is selecting for intelligent and hard working people, which is a subset of intelligent people. So intelligence tests are not perfect substitutes for looking at education.

Further, there is the classic Heckman conclusion that people with only a high school education have higher earnings than those with just a GED, even though they would seem to have the same intelligence (they could complete work at roughly equivalent levels). People who graduated from high school had the non-cognitive skills to stick through high school and do all the work, which is a valuable skill in the workplace; an equally intelligent high school drop out did not have those skills.

For university to stop being such a useful signal, employers would have to figure out an equally good signal of those non-cognitive skills that a university degree demonstrates. As I claimed in an earlier post this is desirable but I don't see how it happens, though I think it will.

*Though in my experience SAT scores don't really track intelligence, for one can easily study for it: my scores on PSATs and the SAT ranged by about 200 points from testing cold to testing having studied, and this wasn't about learning vocabulary or something, it was simply understanding what kinds of mistakes I tended to make.

Update: A very smart comment at The American Scene:
Credentials are not used only to determine who is hired by an organization, they are used to justify why an individual is hired. The reasons for this are both internal and external to the organization. Internally, credentials are used as cya by the hirer. If a manager hires an individual who does not have the minimum qualifications for a position, and that employee screws up, the manager is in a bad position - having to justify the hiring of a person the manager's bosses will see as unqualified (because they will look only at the file). In a world of limited resources and time, the bosses will see that the manager did not hire someone with the minimum qualifications for the organization - and the hiring manager suffers the consequences. The external considerations deal with public policy and perception (and are also cya related, of course). If a white employee is hired with less stellar creds than a black employee, for example, tha hiring organization could be in trouble. The appearance of nepotism is another consideration, especially in a publicly traded company.

More Price Gouging

Isaac has a good post on price gouging. In particular it's very important to note that Dave Hoffman's "...the regulations - when publicized appropriately - have the same information forcing effect as higher prices themselves..." is just plain wrong. It relies on a very optimistic view of human nature. A more realistic view of human nature would argue that if people don't have any incentive to reduce gas consumption, it won't happen. Isaac mentions Talcott Parsons, but Hayek is the expositor of this idea that comes to my mind. I must nitpick Isaac a little bit:
Letting prices rise will prevent some people from getting supplies of that good (and it will be poor people who are screwed)...
I wouldn't say that anyone is *prevented* from getting supplies of the good. Even if gas or water is $20 per gallon you can still get some amount of gas or water. What does happen is that people *choose* to purchase less because the cost of gas or water has risen and there are better alternative uses for their income.

Many people also point out, as Isaac does, that the it is the poor who get screwed in these situations. Well yes, but the poor *always* get screwed. Being poor is equivalent to having fewer choices available to you. You may not be able to get out of New Orleans, for example. Higher gas prices is just one of many ways in which the poor get screwed every single day. But if we really care about poverty (and I hope we do) there are far better and less wasteful ways of helping poor people than price gouging laws.

Apologies

I'm sorry for the paucity of blogging lately (by me), I'm still getting settled into my new environ. But rest assured I'll soon be back on the horse once routine begins and we get some decent internet access.

Friday, September 09, 2005

Mauritania Liberalizes Transportation!

Apparently, the new Mauritanian government is ending the quasi-monopoly in the transportation sector. The press release doesn't really say how the sector is currently organized or how it will be re-organized, but, you know, you take what you can get.

In other Mauritanian news, the minister of oil is visiting Singapore this week to inspect an oil tanker equipped with modern analytical equipment which is undergoing maintenance and will store and analyze the first oil extracted from the Chinguiti field (comes online in 2006!). The field was discovered by an Australian prospecting firm, Woodside, in 2002.

Education and social mobility

Chris Bertram makes a normative argument for reducing the importance of college education in the labor market. He argues that requiring college education for certain jobs which obviously don't require a college education introduces unnecessary roadblocks to social mobility. And, further, could be considered a waste. This dove-tails nicely with some economic claims about higher education.

First, economists recognize that for many professions a college education isn't necessary, but that college serves as a "signalling device" to select qualified job applicants: a college education is a useful shorthand for knowing that a person has a set of desirable skills, though a college education isn't necessary to have those skills. Given the amount of expense involved in all this unnecessary (from a purely economic point of view) education, you would predict that over time there would be some institutional change to reduce the importance of education -- though the dynamic path is unclear, for a similar argument applies to, say, racial discrimination. Though this is contingent on employers finding a method of equal expense and effectiveness of selecting employees which doesn't rely on the signal of college education. Given imperfect information and all, I don't see it.

Second, as Paul Krugman argued, over the next century blue collar professions (skilled manual labor) will account for increasing percentages of our economy. And higher education as currently structured does not teach those skills. If Krugman's prediction is right, then you would expect more people opting for vocational schools over university, or vocational schools in addition to university, which provides one mechanism for a dynamic path where you see decreasing university enrollments. In that case, universities would return to their 19th century function as repositiories for the children of the wealthy to become cultured and network.

The two together, then, say that Bertram may well see his wishes come true, though for reasons adjacent to those he states.

Thursday, September 08, 2005

Price gouging again

Dave Hoffman argues:
In civil emergencies, markets don't work to clear information in rational ways. Even high prices will not serve to reduce demand for, say, water and gasoline, over the short term if folks think their lives are going to depend on having such commodities nearby. Price gouging regulations do two things to reduce panic and regulate demand. First, they increase trust in market transactions (an SEC-like role) and thus will act to reduce "panic demand" in emergencies without increasing price. Second, the regulations - when publicized appropriately - have the same information forcing effect as higher prices themselves, teaching people that there are supply interruptions and they should change their use patterns until conditions improve. In both ways, price gouging regulations use norms and soft-economics to accomplish market stabilization in a more satisfactory way than the market would, if left to its own devices.
David concurs.

The problem here is that there is a conflation between things that build what Talcott Parsons, following Halevy, I think, calls "natural identity of interests" in the market economy, and what you need to resolve the immediate crisis. I agree that building trust in markets and etc. is a good thing. If people trust in market norms and believe that market outcomes are just and fair, then you can have a functioning economy (and society). But if you are really in a situation of genuine shortage, then telling someone that they should reduce usage doesn't mean they will. You actually have to do something to make them reduce their usage. And the most guaranteed way is to change prices (or this may cause them to totally disregard norms and resort to theft). If theft doesn't occur, then you can tell the following story (posted in comments at the Debate Link and Prawfs Blawg):
You are confronted with a problem: given a fixed and (insufficient) amount of a commodity, how am I to distribute it? Letting prices rise will prevent some people from getting supplies of that good (and it will be poor people who are screwed), but then they will be forced to look for close substitutes or alternative means to the same end. This effectively increases the amount of gas and water available. If you simply fix prices, people devote their energy to being first in line, but this doesn't actually change anything about the fact that you have a shortage. So the shortage will remain. On net, then, you have less of the good if you fix prices than if you let prices float.

You have a dramatic shortage and you want people's creative energy devoted to finding alternative sources rather than getting in line first.
This argument is unsatisfactory in that it relies on "human ingenuity," which is the weapon of last resort for an economist: if nothing else, markets are better than alternatives because they align incentives to harness "human ingenuity," whatever that is. But even though its unsatisfactory, that line of argument has a plausibility that pulling out lines about "telling people to want different things" doesn't have, especially when you have already stipulated that having these commodities is perceived to be a matter of life and death.

The Kids, The Kids!

Henry says
Stripping the issue down to its basics, liberals think that most of a person's well-being is determined by luck, conservatives think that most of a person's well-being is determined by choice[...]But this is just an empirical argument. You could design a study to see who was correct[...] The normative arguments are essentially correct, it's just the positive, empirical arguments that are called into question.
The conservative position is, to put it mildly, insane. This is because of childhood. A person's well-being is conditional on many things that happened when they were children: a child doesn't choose the values of the family in which they grow up, the exposure to culture, the exposure to discipline and etc. Any skill or value that a person has at 18 came about because of their childhood experiences -- experiences for which they are not responsible. They are responsible neither for nature nor for nurture. Others made and shaped them to be the person they are at 18.

At some point individual choice enters, but you reach that age with inputs entirely external to your will. I'm not going to go all determinist on you: certainly people can and do decide to be different than the person they were "raised to be." But any political theory which says that people are who they are solely by choice, that people are responsible for the abilities and talents they have at age 18, that luck in your up-bringing and genes doesn't place a significant role, is misguided.

If we as a society are committed to the idea that each person should have the possibility of succeeding or failing on their own merits, then policies that go to ensuring equal opportunity -- universal access to quality education, in particular -- seem so very defensible. David Schraub argues that the recognition of the importance of childhood to life outcome may not convince people that luck matters:
I've seen a lot of studies which show how a parent's income correlates to their child's future income, which would indicate that being born poorer has some effect on one's future life chances. But one can easily imagine the conservative responses: that if it is bad habits which make someone poor, then it is likely that they will transmit these negative values to their children, thus insuring they'll be poor. Or perhaps they'll make a genetic argument--successful people tend to marry other successful people, and are more likely to conceive successful children. Both of these explanations would absolve society of its accountability and shift the blame back on to the poor and their families.
He is right that it may not convince conservatives that society is to blame. But it doesn't really matter who we blame. What matters is that we recognize that a person's position and skills at a crucial life moment were determined largely externally to them. Luck played a role. Which the conservative position recognizes. Liberals and conservatives are in agreement that luck matters in childhood. So we should do something about this recognition. I don't really know what it would require, but certainly far more than we currently do.

If I were a better person, this post would be in the context of a deep knowledge of the writings of Harry Brighouse (who blogs at Crooked Timber). But I was raised poorly and have bad genes, and hence do not have sufficient discipline to read (a lot of) political philosophy for fun.

Wednesday, September 07, 2005

Comment Spam

I've added word verification to comments for we seem to be getting a fair amount of comment spam.

The neo-liberal devil

The devil turns out -- not surprisingly -- to be well-funded. And, even, to have interesting projects. I've worked on World Bank sponsored projects: one about informality and another about educational attainment and I'll soon work on an IMF funded project about the Dutch Disease and inflation vs. real exchange rate targeting. Selling out is fun.

Update: When I started working on a World Bank project, I remember explaining to skeptical friends that, well, the World Bank isn't as bad as the IMF. So at least I'm not that evil: its more intellectually flexible, World Bank people mock IMF people for their narrowness and etc. So now what do I have left by way of self-justification? Well, I'll hang on the thread that this is a project premised on the idea that the IMF has been wrong, and, hey look, the IMF is funding (and even publishing) people critical of it. Isn't that what we want in an international organization? Yet my moral downfall continues...

Notes from London

  • Note to self: if I am ever an unskilled worker who is easily replaced, don't go on strike. The Gate Gourmet folks are still protesting their firing by the runways here at Heathrow.
  • If I change all my money into forints I will probably come out ahead since the forints are tied to the Euro and the dollar is depreciating. Yet I'm not going to do that.
  • Windows won't let me change my clock to 24-hour time. Why?!


UPDATE: So the Gate Gourmet strikers are perhaps doing something since they were the reason I didn't get a meal on my LON-BUD flight. Very luckily, I went to Burger King right before the flight, which was the cheapest food in Heathrow but still expensive. I changed $20 into a little more than £9 and the "Whopper meal" was £5.78. Which means it cost around $12. Oh well, money seems meaningless in such situations. I also can't figure out if that was the exchange people ripping me off, the fact that the dollar is worthless, or exorbitant airport pricing.

Monday, September 05, 2005

Talk About Breadth

We all know Stephen Dubner as the co-author of Freakonomics from which we might infer that he is a cold-hearted man, interested in the defined truths of social science, or minimally soul-free straight journalism. Turns out, he is also the author of a well-received memoir about his religious journey: raised by devout Catholic parents, he learned (fully realized) that they were both Brooklyn Jews who had converted to Catholicism; this started his discovery of what we non-practicing Jews call "cultural Judaism." It certainly is rare to write a book like that and a book like "Freakonomics."

Delong v. Anthropology, pt. II

See the latest Jared Diamond nay-saying on Savage Minds and Delong's response.

UPDATE: DeLong picks up on my seemingly innocent comment. ;-)

I think Alex is wrong...

On the subject of a decrease in the gas tax, Alex Tabarrok writes:
Ask the man on the street what will happen to the price of gas if the gas tax is lifted and he will reply that the price will fall by the amount of the tax. [...] Does the lifting of the tax change the demand for gasoline? No. Does it change the physical supply? No. [...] Since neither supply nor demand change neither does the price. What does change is that with the tax the government collects the revenues, with the "tax relief" the suppliers of gasoline collect the (former) revenues. Either way, no gain to the consumer.
And his example supporting this claim:
Suppose there is an auction for a pearl. The person with the highest demand is willing to pay $5000 the person with the next highest demand is willing to pay $4999. The winner must pay a tax of $1000 to the government.

With the tax the two bidders bid until the price reaches $4000 at $4000 (note that $3999+$1000 tax= net of $4999) the low bidder drops out and the high bidder wins. Total price to the high bidder is $5000, $4000 to the seller and $1000 to the government.

Now with no tax a price of $4000 leaves two bidders in the ring so the price must rise higher. In fact, the price must now rise to $5000 to get the second bidder to drop out. Final price to the high bidder is $5000 - the seller gets $1000 more in revenues and the government gets nothing.
This example is misleading because it assumes a totally inelastic supply. The seller is going to sell one pearl and only one pearl no matter what the final price is. So in that case, Alex is absolutely correct. But in the gasoline market I don't think that supply is totally inelastic. It's not hard to work out what happens if supply is somewhat elastic (or if it's not) with your usual Ec 1 supply and demand curves. When the tax is eliminated, buyers pay a lower price, sellers pay a higher price, and quantity sold (bought) increases. This is because, sans tax, buyers are willing to pay a higher price to sellers. Because of higher prices, some sellers decide to reenter the market (or current sellers expand their intensive margins) and so quantity increases. This lowers prices a bit. But Alex could be right if in the very short run gas supply is inelastic. And he is certainly right that the effect is not what the man of the street expects, there should be a price decrease but not by the amount of the tax.

The Best For First

A year and a half ago I read The Right Stuff and loved it: here was vivid, clever and insightful writing. What more could you want? So I acquired most of the rest of the ouevre of Tom Wolfe hoping for a replication of that experience. Having just completed Radical Chic and Mau-Mauing the Flak Catchers I've read all but three books he's published (Mauve Gloves, Clutter and Vine, In Our Time, and The Purple Decade). But, but, while rest of his stuff is fun to read (even I Am Charlotte Simmons), it somehow lacks that extra spark that made "The Right Stuff" so fantastic.

In "The Right Stuff" Wolfe actually tries to understand a part of society and why it functions that way, whereas everywhere else he uses his immense knowledge simply to poke fun. Its good social satire, so far as social satire goes, but finally unsatisfying because all he tries to understand are people's pretentions and self-presentation.

The surface is fun and can be funny. But you are always left wanting more: at some point it ceases to be entertaining to discover that in many walks of life people are obsessed with trying to maintain an appropriate facade (a point Erving Goffman made in a less entertaining manner). "The Right Stuff" went beyond that to try to explain how and why a given facade came to be considered appropriate. Too bad I saved the best for first.

Sunday, September 04, 2005

How government determines supply of coins and currency

"A government's monetary authority sets prices; the public chooses quantities. The monetary authority sets the prices by offering to convert unlimited quantities of different denominations of currency and coins at fixed exchange rates (e.g., the U.S. government stands ready to buy or sell a quarterr for five nickels). With an eye toward controlling an overall index of the price of goods and services, the monetary authority also sets the total quantity of government currency and coins (the supply of "base money") but it does not choose its composition across denominations."
--pg. XVII, Thomas Sargent and Francois Velde, The Big Problem of Small Change.

I don't understand why in a poor country like Senegal there is a constant problem of lack of small change. This is apparently widespread and perhaps derives from something to do with limited access to banks; alternatively, it is a fact that every bill I had in Senegal was printed in 2003, so maybe the above described system isn't the system used in Senegal (the cfa zone) to determine the composition of coins and currency and the system in use is screwy. I don't know.

Foreign Aid for Katrina

Among others, the most impressive:

Qatar: $100,000,000

Sri Lanka: $25,000 (a lot for a country with GDP per capita of $4,000)

Cuba: 1,100 doctors (but from what I have heard, U.S. officials have *ignored* their offer)

Why won't empirical study solve policy issues?

Kash defines liberalism:
So if I had to encapsulate in a few words why I describe myself as a liberal, I would simply say this: I believe in bad luck. I think that a huge number of the forces that affect most people's lives are outside of their control - the parents that they were born to, the quality of their local educational opportunities, the management of the company that they happen to work for, the fortunes of the city or town in which they happen to live, or the industry in which they happen to find work - and that individuals who suffer from a bad family, poor education, being laid off, or a hurricaine, should not be left to live with the consequences of their plain bad luck without help from society at large.
That's certainly a fair characterization of the liberal ideology. But isn't the basic issue here - "a huge number of the forces that affect most people's lives are outside of their control" - empirically resolvable? Perhaps not as a whole, but in pieces. I think there are two pieces to be puzzle that have to be resolved separately.

Stripping the issue down to its basics, liberals think that most of a person's well-being is determined by luck, conservatives think that most of a person's well-being is determined by choice. The welfare debate reflects this. Liberals argue that people on welfare are there only due to circumstance. Conservatives argue that people on welfare are there because they have chosen not to try hard. But this is just an empirical argument. You could design a study to see who was correct. I think that if the liberals are right, welfare should exist out of compassion for those who were simply unlucky. If the conservatives are right, welfare shouldn't exist because it reduces the incentive to expend effort. The normative arguments are essentially correct, it's just the positive, empirical arguments that are called into question.

Likely, there are people on welfare for both reasons. This would necessitate some sort of system that could sort out the types of people. That could be very hard. The point is, we don't want to distort any of the natural incentives that govern decision-making while helping those who, purely by luck, became immiserated. But almost all issues have some mix of luck and choice and so the normative issues are also very difficult. Even the relief after Hurricane Katrina has fallen into this sort of debate. Some say that people should have realized they were living in a potential deathtrap. But nearly all decisions, like the decision about where to live, are made under uncertainty. Conversely, nearly all events have some element of choice, even Katrina. Consider the problem of people building in hurricane-prone areas, collecting on insurance and rebuilding each year after the house is blown away. That is so clearly wrong while sending help to New Orleans is so clearly right.

How do we know where the line should be drawn? Whenever you are bailing someone out there is always an element of moral hazard. Yet it is impossible to be morally ignorant and not help those in need. So we have a tough normative issue in addition to a separate empirical issue. To the degree that liberals and conservatives agree on where to draw the normative line (and I think that degree is high), empirical study could seemingly solve most debates.

But in practice, it doesn't. Why? We can think of ideology as a sort of Bayesian prior. If I'm liberal it's going to take a mountain of evidence to convince me that there are "welfare queens," but if I'm conservative it'll just take a few anecdotes. To sum up: you could explain different policy choices between parties by assuming that one or other other is irrational and the other rational, or you could assume both are rational but have different objective functions (drawing the line differently), but all you really need is that the parties have different priors or initial beliefs.