Monday, October 31, 2005

Declining (and increasing) importance of religion

David Bernstein points ut that if Alito is confirmed, there will be a Catholic majority on the Supreme Court, with two seat held by Jews and two by Protestants. We might well congratulate ourselves on having kicked prejudice in having such a non-WASP (emphasis on P) Court, but that is a bit easy because religion isn't randomly distributed on the Court. The Catholic majority is going to be the conservative wing of the Court (Alito, Kennedy, Roberts, Scalia, and Thomas) with the non-Catholics to their left (though being Jewish doesn't exactly track degree of leftiness: Breyer is, I think -- correct me if I'm wildly misguided -- less left than Stevens). Which does not say that we no longer care about religion. Because Catholicism is such a nice predictor of conservatism, it shows that religion is serving some other purpose. I speculate that this has everything to do with Catholicism being a good signal of pro-life views. Though it would be significantly more interesting if being Catholic were a good signal of something less, well, predictable. Like: a certain intellectual style or commitment to a certain kind of conservatism that is appealing in conservative legal circles.

Marriage as a nexus of contracts

Neil the Ethical Werewolf wonders why
If a man is getting married just so he can have lots of sex with a woman who wouldn't have him otherwise, he's making a mockery of marriage and an awful decision. Do the old sexists who say these things see their marriages as long-term prostitution contracts? Is the emotion of love entirely foreign to them?
This reminds me of the as yet unwritten extension of Oliver Williamson's The Economic Institutions of Capitalism to marriage: marriage as a nexus of contracts. What is marriage but a cleaning lady/handy man, prostitute, cook and therapist? A fruitful analysis could be done of why some tasks are done within the marriage and why some are contracted out. We could examine the role of incomplete contracts (not fully specified pre-nup agreements, anyone?); the role of asset specificity (only some people could love such a person, or...), and the role of bounded rationality (who knew such and such about their spouse? How foolish was I?). Clearly a major void in the New Institutional Economics literature.

Unanticipated Shocks

Unanticipated surges of work reduce free time and hence blogging. Said shock seems to have been weathered. My mind may well have free space in the near future.

Wednesday, October 26, 2005

Chicago

If the [Calatrava] tower [in Chicago] is built -- and Carley [the developer] doesn't yet have all his financing, either -- its status as the country's tallest skyscraper will mark the first time that an apartment building has held this title. It would become a symbol of the evolution of the American city from being a center of commerce to a center of culture and entertainment. Nobody is clamoring to work in high-rises anymore, but plenty of people are willing to live in them, and the fact that the biggest and most interesting towers are being built to contain aprtments is a significant shift. It means, among other things, that we will finally see very tall buildings that are slender rather than chunky. (Calatrava's design will look like a needle in comparison to the Sears Tower). Thin towers have more light inside, and, collectively, they would create a sky line less dominated by hulking massess -- perhaps inspiring a renewed willingness to view the skyscraper in romantic terms. Calatrava is both a romantic and a rationalist, and his gift lies in his ability to find an equilibrium between these two poles.
--Paul Goldberger. The New Yorker, October 31, 2005.

Bias?

My econometrics textbook (Wooldridge 3rd edition) uses Ray Fair's election prediction model as an example. The quasi-dummy variable for party in the White House is...+1 when a Democrat is in office and -1 when a Republican is in office (not a dummy because constructing it this way saves two degrees of freedom). Bias or alphabetical order? You be the judge!

Tuesday, October 25, 2005

Bernanke

Now that one of the pre-eminent monetary theorists of his generation will be chair of the Fed, we have the possibility of discovering if economic theory is at all useful. If Bernanke turns out to be a terrible Fed chair, then we will have convincing evidence that economics cannot help us understand the world. After all, macroeconomics is the branch most alien to the common man. We can all grasp the idea of self-interest; accounting identities and such are less intuitive. So if someone who understands all that stuff incredibly well isn't a good policy-maker, it will seem like running monetary policy is rather like picking stocks. If Bernanke is good, well, Popper was useful here.

Also, Bernanke will be in the almost unique position of being able to generate data for natural experiments, or at least put his own academic ideas into practice. If he were more of an academic and less of a policy-maker, he might well do stupid things on purpose just so we could get data on the impact of bad monetary policy.

More reasons for Henry to be jealous

  • Kurt Eichenwald will speak about "Business Ethics in the Era of Enron" this Wednesday.
  • On Friday, Bob Lyke of the Congressional Research Service will speak about "Health Care Reform: Recent Tax Strategies." This talk may be sufficiently specific and of interest to me to generate blog posts.
  • Juan Cole will speak next Wednesday. Entertainingly, he is identified as a "scholar" and as a "blogger." I enjoy this diffusion of blogs. George Packer specifically mentions several blogs in the acknowledgements to his new book.

Monday, October 24, 2005

Paternalism

You often hear criticisms of government for being paternalistic. But then you read in the article about Wal-Mart's new health care plan that
Even as they commended Wal-Mart for offering a more affordable health insurance plan, some industry watchers expressed surprise that the company waited as long as it did to offer a more affordable option. "We have a health care system in this county that assumes people will be covered by their employer," said Mr. Kahn [president of the Federation of American Hospitals]. "If the biggest employer in the country isn't providing some kind of affordable and meaningful coverage, that is a problem."
Either government decides to be paternalistic, or companies choose whether or not to be paternalistic. We might reject the premise: can't people make it on their own? Why do we need paternalism? Which I ought to argue. But let us assume it. Given that we desire to have a paternalistic entity in society, do we want it to be relying on companies that are ultimately responsive to profit-motive, or government that is ultimately responsible to voters? And we have this odd moment in policy where we reject the role of government, yet still desire paternalism. Reject government and reject paternalism, but we can't reject government and still want paternalism; if we do, we are bound to be disappointed.

We might, though, question the disinteredness of Mr. Kahn's remarks, given his employer.

Bernanke to the Fed

Bush nominates Bernanke to the Fed. Score one for competence!

Friday, October 21, 2005

Farm subsidies: still bad, but other things are worse.

From Pietra Rivoli's The Travels of a T-Shirt in the Global Economy:
The subsidies to cotton farmers that have in recent years attracted so much attention are everything recent critics have charged: way too big, way too unfair, and embarrassingly hypocritical when practiced by the world's self-proclaimed free trade champion. But they are also not the whole picture.

Competing with [Texas cotton farmer] Nelson Reinsch requires a systematized method of factory cotton production. But cotton factories require capital, and profitable factories of any kind require functioning markets and both technical and basic literacy, as well as at least a semblance of the virtuous circle of institutions that support not just agriculture but broader development. At the close of the twentieth century, many poor cotton producers lacked capital, working markets, literacy, or all three. And in spite of our intuition it is far from clear that cheap labor is an advantage at all. Labor costs are low when people have no choices, and people who cannot read have no choices indeed.

Farm subsidies: bad after all.

From Pietra Rivoli's The Travels of a T-Shirt in the Global Economy:
In West Africa, cotton is a principal cash crop and export, and provides more than one-quarter of export earnings for 11 countries. While decades behind the United States in technology, productivity, and yields, because of low-priced or even free family labor, West African cotton farmers can produce cotton at a far lower cost than Texas growers. Though West Africa has many more players--18 million cotton farmers to America's 25,000--the American government's deep pockets virtuatlly assure the continued dominance of the United States.
Emphasis mine.

Perks of the job

I just received this e-mail:
I am writing to you to offer you a free preview copy of my new book, ****. I believe it will be of interest to you, and also to the readers of your blog.

Coming out in January, **** is being published by **** (part of ****). The book's premise is simple and direct: how much money will you need to be secure for the rest of your life - and, even if you're lucky enough to get to that number, will you use it to buy what really matters?

This isn't a book about how to invest. It's about the questions that tens of millions are thinking about, but rarely talking about. It's a book people ought to look at before taking out their calculators or sitting down with a financial advisor. I hope you'll agree that it's also an enjoyable and entertaining read.

The publisher has printed a limited number of early copies for publicity purposes. If you are interested, I'd like to send you one. To find out more about **** and get a free review copy, visit this link ****.

Best Wishes,
****
I've carefully redacted any publicity-garnering information, but I'll write something when I get the book. (Or *if* I get the book, seeing as they might read this.) It sounds at least mildly interesting.

Satisficing and Open Intervals

What's the solution to this very simple game?
P1 picks some x from the open interval (0,1). The payoff to P1 is x.
Okay, so it's sort of a stupid game. In fact, there is no Nash equilibrium. That is, there is no strategy that P1 can follow such that there is no strictly better strategy available. This is easy enough to see: if P1 picks x, then (x+1)/2 is a strictly better strategy.

What would happen if this game were posed to experimental subjects? Suppose that they get to pick any value between $0 and $10, but not $0 or $10. Most subjects would just pick $9.99 without worrying about the extra fractions of a cent that could be extracted. So what's wrong? Why didn't game theory predict this? Isn't this an example of satisficing and not maximizing behavior?

The problem is that the game is misspecified. That is, the real payoff for the experimental subject is not an increasing function of how much money they receive. It's just not worth it to even say "$9.99999". So it's not that game theory doesn't make a prediction in this case. Game theory doesn't make a prediction in the game with the payoffs described as above. But if you include the, albeit very small, cost of choosing a number with a lot of digits then there can easily be a realistic solution.

Now consider a similar game in which player P1 picks some number x from (0,∞), with payoff x. That is, the player can pick a number as high as they want. There's no Nash equilibrium here, either, for the same reason. Now consider implementing this game in an experiment. (Not actually possible, but....) What would happen? How many zeros would you add if there were no restriction whatsoever?

Unfortunately this is one of those economic experiments that will never happen, artificially or naturally. But we can still think about it. Would there be a point at which you'd just stop thinking of bigger and bigger numbers? Maybe this is a game where no equilibrium is actually a prediction of confusion and indecision. But I suspect that there would be an outcome. My guess is that decreasing returns set in rather quickly and you'd probably settle for something like "10 to a billion dollars," but why not say "10 to a googol?" How would you make up your mind? Does the difference between those numbers matter?

Thursday, October 20, 2005

Give It Away Now

The New York Times story on the new Medicaid plan in Florida is a mite bit confusing. At first it seems to describe a rather good plan:
Under the waiver, Florida will establish "a maximum per year benefit limit" for each recipient and fundamentally change its role. The state will largely be a buyer rather than a manager of health care.

In an interview, Alan M. Levine, secretary of the Florida Agency for Health Care Administration, estimated that no more than 5 percent of Medicaid recipients would hit their annual limits. At that point, Mr. Levine said, "the health plan will still be responsible for providing services to the consumer, but the state's reimbursement would be limited to that amount."
If this is accurate, the State of Florida is forcing health insurance companies that enroll people to bear the downside of major medical expenses. This means that the insurance companies will only sign up if they are actually more efficient than the State of Florida thinks they are, because they are bearing large amounts of risk for probably not so good premiums. And so you might well get ultra-efficient health plans emerging, or else business would revolt and the plan would be repealed, or Florida would put more money into Medicaid.

But on the other hand there is this:
Asked whether the beneficiary would be responsible for paying costs beyond the limit, he said: "That can happen today. There are arbitrary limits and caps embedded in the state Medicaid program, limits on home health services, doctors' visits, prescription drugs."

For each beneficiary, Florida will pay a monthly premium to a private plan. Insurance plans will be allowed to limit "the amount, duration and scope" of services in ways that current law does not permit.
This contradicts (or nearly contradicts) what Alan M. Levine says because the insurance companies may not be responsible for providing care beyond the premium. They can introduce more limits on service by cutting coverage at some arbitrary point (or not covering certain procedures). This makes the plan a corporate give-away. Health insurance companies now get their hands on lots of premiums (the state will enroll you in one if you don't do so on your own), but without any downside: sure they have to provide health care, but once you get really sick and needs lots of (expensive) health care, your demand exceeds the amount, duration and scope of health care the company provides and the company no longer has anything to do with you. Those instances where you get incredibly sick are why you have health insurance, and the main business risk that health insurance companies bear. Eliminate that, and they profit.

This is really a subtle way of both cutting the scope of Medicaid coverage, and doing it in such a way that the immediate actor isn't the State of Florida, which would bear political blame, but the insurance companies which have no political responsibility because they are the actor telling you "sorry ma'am."

Certainly there is other stuff going on in the plan ("The state will deposit money into individual accounts for recipients who enroll in programs to help lose weight, stop smoking and lead healthier lives"), but that is just window dressing for a terrible idea.

Though I may have entirely mis-interpreted the article.

Why we vote

Henry excerpts the elegant mathematical example from Andrew Gelman et. al's paper on why voting is rational. The passage that jumped out at me was the following about why voting can't be all about self-interest, because the elections most clearly affecting self-interest, where self-interest should drive high turn-out, have the lowest turn-out:
Voter turnout tends to be higher in large elections—in the United States, highest for presidential elections, then congressional and state, then finally local elections tend to have the lowest turnout. Theories of voting that focus on instrumental benefits (e.g., the theory that says that voters are instrumental utility-maximizers who happen to overestimate small probabilities) would tend to predict higher turnouts in small elections. In contrast, the social-benefit theory predicts a slight increase in turnout for national elections, if the issues at stake are perceived as more important, on a per-voter level, than in local elections.
The proposition that local elections have the most impact on your self-interest is disputable. After all, federal taxes are over twice as large as state and local taxes combined (your mileage may vary by specific locality). So the self-interest rationale is somewhat consistent with higher turn-out in federal elections. Still, given all the other issues that local and state governments get involved in that the federal government doesn't (education, zoning, transportation...), the story Gelman et. al. tell is a compelling illustration of the importance of motives other than self-interest in decisions to vote.

Though there is something confusing in using notions of expected utility to explain social voting: in national elections all the issues at stake that raise the expected value of voting (and why it is rendered socially valuable to vote) would raise the importance of federal elections beyond state and local. So I think there is a hidden problem there, though this may be an artifact of fatigue and not an actual problem.

Wednesday, October 19, 2005

Writing an economics paper?

Then read these tips from Chicago's John Cochrane.
May economists falsely think of themselves as scientists who just “write up” research. We are not; we are primarily writers. Economics and finance papers are essays. Most good economists spend at least 50% of the time they put into any project on writing. For me, it’s more like 80%.

Rational Voting

Andrew Gelman cleanly and clearly convinces me that voting is rational:
For example, consider a two-candidate election with n voters. Suppose the election is anticipated to be close, and each candidate is expected to get between 47 and 53 percent of the vote (and thus the vote differential is expected to be in the range ±6%). The probability that a single vote is decisive is then about 1/(0.12n).6 So for a selfish voter, the expected utility gain from potentially swinging the outcome of the election is about B_self/(0.12n), which even for a moderately large election (e.g., n = 1 million) is minor: even if the outcome of the election is worth $10,000 to a particular voter, the expected utility gain is less than 10 cents. This point has been widely recognized (see the references at the beginning of this paper). Given that the act of voting has a nonzero cost, voter turnout is thus usually attributed to some mix of irrationality, confusion, and the direct gratifications of voting (including the performance of a civic duty); that is, a negative net cost c of the act of voting. However, these motivations do not explain observed variations in voter turnout between elections. In addition, voting is an act with large-scale consequences beyond any immediate satisfaction it gives to the voter. At the very least, many voters seem to consider their voting actions with more seriousness than other low-cost consumption decisions.

[...]

For example, consider the same hypothetical election as above, in which the n voters represent a jurisdiction with population N. Further suppose that 1/3 of the population are voters; that is, n/N = 1/3. If you, as a potential voter, think that the net benefit to your fellow citizens of candidate A winning the election is the equivalent of B_soc = $10 per citizen, then you are effectively giving them a total of $10N/(0.12n) = $10N/(0.12(N/3)) = $250 in expected value by voting. Voting in such a circumstance is a perfectly reasonable thing to do, regardless of population size: a small effort yields a substantial expected social gain, equivalent in some ways to giving $250 to a national charity. For example, if your discounting factor for benefits to others is a = 0.1, then your net utility gain from voting is positive as long as your cost of voting c is less than $25. In many elections with issues such as national security, global climate change, and nuclear weapons proliferation, a rational citizen could think that the superiority of his or her candidate might deliver an expected value per citizen far in excess of $10, and thus an expected return on voting far in excess of $250.
Of course the only way it isn't rational is if you only care about yourself. By and large, people also care about others.

Fun with Statistics

An oft-quoted statistic reappears in a Mahalnobis post:
William Galston, once an assistant to President Clinton, put the matter simply. To avoid poverty, do three things: finish high school, marry before having a child, and produce the child after you are 20 years old. Only 8% of people who do all three will be poor; of those who fail to do them, 79% will be poor.


Well, rereading this I realized that I have already fulfilled two of the conditions. I made it to 20 without a baby and I finished high school. If I can manage to not have a child before marriage, prosperity awaits. Not a bad deal....

Monday, October 17, 2005

More on honesty

Tom Bozzo points to this post by Dean Baker that fleshes out the argument quoted here and then much discussed in comments. Baker writes:

While we cry over this loss of expected profits, let’s ask why are we in this mess to begin with? In other words, why are we relying on patent monopolies to finance drug research? The Holy Grail in economics is that price should equal marginal cost. Yet, drug patents lead to situations where prices are hugely out of line with marginal cost, in some cases by a factor of 100 or more. Drugs are almost invariably cheap to produce; they are only expensive to consumers because of patent monopolies.

Of course patent monopolies in prescription drugs lead to all the bad things that economists warn about when prices diverge from marginal cost. The most immediate effect is the deadweight loss that results from people not getting drugs that they could afford at the competitive market price, but not at the patent protected price. And, this is not just poor people in Sub-Saharan Africa, there are tens of millions of people in the United States who do not take the optimal drug or the optimal dosage because patent protection makes it too costly.

But this is just the beginning of the distortions. Monopoly profits give drug companies incentives to undertake expensive and often deceptive marketing campaigns. The industry spends more on marketing its drugs than it does on research. In some cases this marketing has effectively amounted to kickbacks to doctors who prescribe their drugs.

Patent monopolies also provide incentives to research copycat drugs rather than breakthrough drugs. The industry’s data suggest that approximately two-thirds of its research money is spent developing copycat drugs.

Patent monopolies also encourage drug companies to conceal negative research finding, or even to lie about their research. The New York Times has run many excellent articles over the years highlighting such incidents. (Merck’s effort to conceal potentially harmful side effects from Vioxx is the latest installment on this list.)

Patent monopolies encourage the production of counterfeit drugs, which can be sold at a fraction of the price of the patented drug.

And, patent monopolies encourage drug companies to spend large amounts of money on lawyers, lobbyists, and propaganda to protect and extend their monopolies.

The $220 billion question (current U.S. spending on prescription drugs) is where are the economists? Remember, economists are people that get high blood pressure from 10 percent tariffs on shoes or pants. When Bush put a temporary tariff on steel imports that maxed out at 30 percent, economists all over the country became apoplectic. So why is the economics profession overwhelmingly silent about drug patents, which are the equivalent of tariffs of 300 percent on average, and affect a product that is much more important to our economy and our health?

We recognize that patents are a way to provide incentives for research, but where is the economic research that shows that they are the most efficient way? You won’t find it, because economists have mostly chosen to ignore the issue.(emphasis mine)


I'm not so sure about the Vioxx example, and I think he goes in the wrong direction at the start by invoking actual deviation from marginal cost: duh, we have monopoly power. The basic point is indisputable: we do not know if our current arrangement is the best possible arrangement. And economists seem not to pay sufficient attention to it.

Dubai

From Ian Parker's article about architecture in Dubai from the October 17th New Yorker:
The Dubai economy sometimes appears to be built on a northern-European reluctance to believe, when booking a holiday, that there could be such a thing as too much heat.
Of course, the economy is actually built on oil. And attempts to diversify from that oil (like 650,000 British tourists last year), are mere smokescreens; though you never know what happens over time.

It is one of those oddities of development that the Middle East would be dirt poor except for oil; and there has been a sufficient amount of money, and sufficiently centralized power, that some of the money has been usefully spent, somewhat avoiding the natural resources curse through sheer excesses of wealth.

Predictions

Henry posted this list of probable winners of the Nobel Prize in economics:
Barro, Bernheim, Card, Doug Diamond, Peter Diamond, Dixit, Fama, Feldstein, French, Goldin, Gene Grossman, Sandy Grossman, Hall, Lars Hansen, Hart, Helpman, Holmstrom, Jorgenson, Kreps, Krugman, Milgrom, Mortenson, Murphy, Myerson, Newey, Obsfeldt, Pakes, Phelps, Pissarides, Posner, Rabin, Rajan, Rogoff, Paul Romer, Sargent, Shleifer, Sutton, Thaler, Tirole, Williamson, Wilson.
Note the significant omissions: the actual winners, Aumann and Schelling. Given how seemingly comprehensive this list is, this is surprising and shows just how hard prediction is -- and how unexpected this prize was. See also this list by Matthew Kahn, which omits the actual winners as well. Did betting markets do any better?

Sunday, October 16, 2005

If economics were an honest profession...

In comments to this Marginal Revolution post Dean Baker writes
If economics were an honest profession, we would have hundreds of papers that compared the efficiency of patent financing of prescription drug research with other mechanisms (e.g. direct public financing, as with NIH, or prize funds). The basic arithmetic does not look good for patents. In the U.S., patent monopolies raise annual prescription drug expenditures by approximately $150 billion above what they would be if drugs were sold in a competitive market. For this $150 billion, the industry tells us that we get about $25 billion in research, roughly two-thirds of which goes to develop copycat drugs. In other words, we spend an additional $150 billion a year in higher drug prices to get about $9 billion in research on breakthrough drugs.

Where does the rest of the money go? The largest comnponent [sic]is the marketing campaigns that allow drug companies to maximize the value of their patent monopolies. While providing information is beneficial, providing misleading information and in some cases outright lies is not a social good. Of course, in some cases marketing includes various forms of kickbacks or bribes to doctors who prescribe certain drugs.

When it comes to trade tariffs on imported clothes or shoes, economists go nuts over intervention in a free market. But for some reason, economists don't consider patent monopolies on drugs, which can raise prices by several thousand percent above their competitive market price, a topic worth their time.
Some attack neo-classical economics because the logic of theory doesn't follow, or isn't as satisfactory as you may want (it's tautologous, basically). But Baker objects to economics here because of the topics it chooses to study. I want to believe that Baker is right, but I have yet to understand what it is that drives deep innovation: a corporate environment where you aren't supposed to "waste" resources, yet you also have to deliver measurable results every so often (because of monitoring costs) which precludes wild and wacky research; or a university or public sector environment where once you have a grant or a lab you don't have deliver measurable results (though you do if you want future grants you do), but you're allowed to be as interesting as you want. Which downside is worse: requiring a measurable product, or not requiring a product? This isn't rhetorical; I genuinely do not know what set of incentives line up best to foster creativity -- and then a product.

Saturday, October 15, 2005

Excellent discussions of game theory and rationality

First, from Mark Kleiman:
"Game theory" is a branch of mathematics usable by social scientists, not a social-scientific theory. It's a deductive account of what will happen if actors act so as to maximize their own outcomes in situations in which the outcome for each depends on the behavior of others as well as his own. It doesn't predict anything about the real world, any more than algebra predicts anything about the real world.

In order to generate predictions using game theory, you need to add some facts: about the outcomes of different combinations of actions, about what the actors want, and about their rationality (vel non). Given such assumptions, it is possible to compare the results of real-world events to game-theoretic conclusions.

When they match, then it's reasonable to think that you have correctly identified the outcomes as the players evaluate them and that the players are acting as selfishly rational actors. When they don't match, then either you've got the outcomes wrong, or the players aren't trying to act selfishly, or they're trying to act selfishly but making mistakes.

By using money as the outcome and making sure that the participants understand the situation, experimenters can narrow the question down to whether the players are trying to act selfishly. Where their behavior doesn't match game-theoretic results, as it frequently doesn't, for example, in the Ultimatum Game and Public-Goods Contribution experiments, you've got a quite powerful finding; that's why behavioral economists have made so much use of such simple experimental games. Those experiments don't make any sense without game-theoretic results as a baseline.
Right. Game theory is a knife we can use to cut up the world into bits, not necessarily an explanation of the world. If we find something that matches a game equilibrium, great. If we find something that's way off (the Centipede game, for example) we know that we need to think differently. That's exactly what behavioral economists are doing; they aren't trying to throw game theory out. You can watch an excellent lecture by Ariel Rubinstein here on this subject. Now, to John Quiggin:
The basic problems surround the kind of use that is standard in economics and related discipline, in which ‘rational’ choices are those that maximise the value of some objective function. A lot of energy has been dissipated on disputes over whether this is a normatively compelling or descriptively accurate, or whether some alternative such as ‘satisficing’ would do better.

Rather than taking sides in this dispute, I will offer the following purely mathematical claim. Given any data on any observed set of problems involving the selection of one or more choices from a set of alternatives, the observed choices can be represented as the maximisation of an appropriately specified function. To give an easy example, satisficing can be represented (rationalised) as optimising, taking calculation costs into account, or alternatively as a combination of set-valued maximisation with a selection rule based on the order in which alternatives are presented.
Contrary to say, Barry Schwartz's claims about economic rationality.

Though, John's purely mathematical claim isn't true in general. It only works for ceratin data, not every set of observed choices and alternatives can be rationalized. In particular, you need the Generalized Axiom of Revealed Preference to hold. (Sorry, I couldn't find a better link than that.)

It's hard to say...

...if Matt Yglesias is right on or not seeing the forest for the trees:
Still, it seems important to me for progressives to keep our eyes on the ball here -- helping the wretched of the earth is a good thing, and there's plenty the rich world can do to make itself helpful. [...] You don't need to "solve" Zambia's (doubtless deep-rooted and semi-intractable) problems to bring it to Chad levels of living standards. If you build a well that lets people drink clean water, they've got some clean water. Only good governance will let the people become prosperous, but clean water is a good thing to have. If you build a road, people have a road. If you let westerners buy more food and textiles produced in Africa, people could make a bit more money.
I guess so. But remember the parable of the starving man. Catching a fish for him helped for a day's food, but teaching him how to fish kept him fed for life. There are potentially *real* (though not immediately obvious) effects to "bad aid." For example, food aid can damage local agriculture by lowering prices. Do we give the aid or not? It may save lives now, but at a cost of potentially many more lives later. The problem is that we don't know very well the relation between giving the man a fish and teaching him to fish. We don't even know if he can be taught to fish.

Odd policy advice

David Wessel of the Wall Street Journal writes (link to Brad Delong's excerpt):
The time has come to stop wondering if taxes are going up and instead to ask how and for whom. It is true that if the government held the line on spending, it wouldn't need much more revenue. But there are no signs that Congress or the president will do such belt-tightening -- or that the public would tolerate it....
I find this odd coming from a conservative like David Wessel. After all, it is hard to believe that Congress or the president are willing to raise taxes, as it is hard to believe that they will reduce spending. Given two equally unlikely options, why not push for the conservative option (spending cuts)?

Voice Timbre and Status

This is just cool.

Friday, October 14, 2005

Random public policy

What is the role of randomness in public policy? Not in terms of the issues that come up, or the solutions, but in terms of using randomness in public policy.

The obvious example is in law enforcement where enforcement is random in order to reduce the costs of enforcement while keeping enforcement effective which includes things like IRS audits. In these cases, you get all kinds of debates about the appropriate underlying distributions that law enforcement should use. For example, driving while black and concerns about the IRS spending too much energy auditing the poor. But these are cases where randomness is used to reduce cost. That is, in an ideal world we would have enough resources to audit all returns, and stop all cars that are exceeding the speed limit. Instead, we economize. We recognize the first best policy as the one where everyone is examined, and the resort to randomness as a second best option. Yet there is one policy where randomness isn't a cost-saving measure, but is instead the point of the policy: a draft with a lottery.

Here we are statistically equal, but not in actuality equal. Even if across all possible worlds people are treated equally by the government, in this world people are not treated equally. Some get drafted and some do not, though all (of appropriate age) have equal odds of being drafted. The pragmatic justification for such a policy is obvious: we need more soldiers than we can get from volunteers but not as many as we get from universal conscription. Since we don't want a surplus of soldiers, a lottery is a way of getting that intermediate amount. So randomness as a first best policy seems fine. The moral justification is trickier. Is a lottery more or less fair than universal conscription?

Because we are all equal before the draft happens in both cases, they seem equally fair. And the procedure by which we are selected is equally fair. But because the outcome is not, strictly speaking, equal, we might think of it as less fair. Yet this has the same form as any situation where the process is fair, even if, like in the market, it leads to discrepant outcomes. We who focus on procedural things want to call this fair.

There are then two conclusions to be had: if randomness is a second best cost-saving measure in enforcement, the debate will be over what is the underlying distribution of breaking the law. And if randomness is a first best measure, then even though the ex post impact of the policy is unfair, because the ex ante probability of impact is fair, we should consider it fair.

Somehow I thought this would provide a way to think about statistical lives, but apparently not.

To Annoy Henry

While he may get to be in Budapest, he's missing several very cool looking conferences and talks:
  1. Two talks by Andrew Gelman of Statistical Modeling, Causal Inference, and Social Science.
  2. Two talks by Stephen Feinberg one titled "Causation and Discrimination: What Can We Learn From Statistics?" and the other titled "In Search of the Magic Lasso:The Truth About the Polygraph."
  3. Finally, a conference in honor of Bernard Saffran on Economic Theory and Public Policy featuring any number of very smart (nay genius!) people on interesting topics.

Thursday, October 13, 2005

Supply of money

The person who on the same day pays an overdue insurance premium, makes the final payment on a bank loan, and pays the final installment on a color TV, is not likely to know which of these transactions reduced the money supply of the United States of America.
-- Schelling. Micromotives and Macrobehavior, 55.

Update: So which of these transactions reduces the money supply? Because I was working backwards, see below, I got the right answer, but for very wrong reasons. Here is, I hope, a more correct explanation. There are several measures of money supply (M1, M2 and M3, for example). According to the Fed:
M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) travelers checks of nonbank issuers; (3) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (4) other checkable deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and automatic transfer service (ATS) accounts at depository institutions, credit union share draft accounts, and demand deposits at thrift institutions. Seasonally adjusted M1 is constructed by summing currency, travelers checks, demand deposits, and OCDs, each seasonally adjusted separately(emphasis mine).
Loosely, the money supply is money that can be spent. Currency that a bank holds free and clear does count. Making a payment on a bank loan reduces the money supply because the money goes from your hands (or bank account) to the bank. This currency, because it is held by a depository institution (and no one else has a claim on it), does not count in the money supply. So this reduces the money supply. Depending on who you are paying the installment to, a bank or a store, this will reduce the money supply for a similar reason. Since a store is not a depository institution, giving it money does not reduce the money supply. But since the installment plan is probably financed through a bank, same thing holds. And because an insurance company is not a depository institution, this does not reduce the money supply.

My old, and misleading, answer, with qualification:So which one of these reduces the money supply? My tentative answer: paying off the TV reduces the supply of money, because under certain assumptions selling the TV on the installment plan extended credit. Paying it off reduces the supply of credit, which through some mechanism I've forgotten ought to reduce the supply of money. Similarly with the loan. But this is not true of the overdue insurance premium, for no good was gained by having unpaid for insurance. Though this seems rather wrong. Henry?

*It should be noted that I'm sort of working backwards here, for Schelling seems to imply that this is the correct answer, though does not state it explicitely and offers no explanation.

Amazed and maybe admire

Earlier in the year I tried to read Thomas Schelling's "Choices and Consequences." It seemed too much "well, we can identify the following costs and benefits to an issue, and if we equate them at the margin, then..." which is true, but is rather uninteresting, unless you've already thought about the issue and realize that you've missed a cost or benefit that he picks out. So I gave up. Plus, I generally dislike disjointed collections of articles for the same reason that I dislike collections of short stories: once I'm into an argument, I want to revel in the pay-off, rather than having to continuously restart. Now individual articles I like, but...

"Micromotives and Macrobehavior," however, is both a coherent book, and seems to be heading in the direction of a somewhat interesting argument. In the meantime, Schelling writes
What I asked you to be amazed at, and not necessarily to admire, is simply the enormous complexity of the entire collective system of behavior, a system that the individuals who comprise the system needn't know anything about or even be aware of. If we see pattern and order and regularity, we should withhold judgment about whether it is the pattern and order of a jungle, a slave system, or a community infested by parisitic diseases, and inquire first of all what it is that the individuals who comprise the system seem to be doing and how it is that their actions, in the large, produce the patterns we see. Then we can try to evaluate whether, at least according to what the individuals are trying to do, the resulting pattern is in some way responsive to their intentions.
--Thomas Schelling. Micromotives and Macrobehavior, pg 22.

Hungarian Tidbits

  • The name of the U.S. ambassador to Hungary is George Herbert Walker. (The name of our 41st president was George Herbert Walker Bush....) And a graduate of Yale to boot; no wonder he was appointed.
  • Avian flu was discovered in birds found in Romania. Poultry from Romania has been banned by the E.U. It hasn't been found in humans but it's a little disconcerting that it is in the area. Though perhaps Europe is better prepared than the United States.
  • The BUX index (Budapest Stock Exchange) dropped 4% today. It may have something to do with delays in euro zone accession due to unexpectedly large government deficits.

Wednesday, October 12, 2005

Game Theory

Michael Mandel (who is interesting despite the Business Week affiliation) writes:
Game theory is no doubt wonderful for telling stories. However, it flunks the main test of any scientific theory: The ability to make empirically testable predictions. In most real-life situations, many different outcomes -- from full cooperation to near-disastrous conflict -- are consistent with the game-theory version of rationality.
Okay, that's a fair criticism. Tyler Cowen responds, but I like what Russell Roberts has to say more:
Game theory generates no predictions about the real world but it is a useful way of organizing your thinking about various real-world phenomena. It's a language that helps avoid mistakes or confusion.
And I like Daniel Drezner's view even more:
[G]ame theory has the wrong name. It is a theoretical tool rather than a theory in and of itself. Because of this, Mandel is correct that it is possible to devise game-theoretic models that lead to contrasting predictions. However, the virtue of game theory is that the differences made in starting assumptions, institutional rules, and causal processes are laid bare. One can then argue about how realistic the assumptions, rules, and processes are.
Combine the two and you've got it exactly right. Game theory is not so much a theory of how people play games, or even necessarily how people should play games, but rather a way to formulate and talk about problems involving strategic interactions. Of course you can make a game with any solution, but why should that matter? You can develop lots of different models of spacetime but (presumably) only one fits reality. Mandel also writes:
Instead, the real progress in economics these days is coming not from game theory, which has been around for 60 or more years, but from the much newer fields of behavioral and experimental economics. Behavioral and experimental economics don't start with the assumption of rationality used by game theory.
But even behavioral economics is formulated largely in terms of game theory (see, for example, this Matthew Rabin paper). Of course some of the standard assumptions of game theory are dropped (rationality, common knowledge) but the framework of players, strategies and payoffs is kept. It's that framework that allows economic (and biological, and political) ideas to be phrased in a very precise manner, which is the real benefit of game theory.

Libertarian Nonsense

Anarcho-capitalist Patri Friedman writes:
Because I think that dissociation from reality is a bad thing, my suspicion is that [religion] is a net negative.
Dissociation from reality? He's an anarcho-capitalist.

Tuesday, October 11, 2005

Rabbinical Seminary and Mathematics (and other graduate programs)

Henry cites this interview with Robert Aumann (via, I believe, Marginal Revolution). Interestingly, Aumann entered college undecided between studying the Talmud and studying mathematics. Though he quickly decided on mathematics, he remains observant, and believing, to this day (his views on religion, articulated in the interview, are rather interesting, and are, I think, quite similar to mine). I know someone else, also from New York and also older, who couldn't decide between rabbinical seminary and graduate school in mathematics (he chose mathematics). And in "The Chosen," Chaim Potok's classic novel about Hasidic Jews in New York, the final act of rebellion is choosing graduate school in psychology over rabbinical seminary. Then there is my father who was going to be a rabbi until others talked sense into him.

I would imagine that there is a whole generation of Jewish academics for whom this decision was important. And that it says something important that most of them chose academia. Or maybe not.

What is game theory?

Robert Aumann:
Game theory is the study of interactions from a rational viewpoint. Even though the rationality does not have to be conscious, it is still there in the background. So we are interpreting what we see in the world from a rational viewpoint. In other words, we ask, what is best for people to do when there are other people, other decision-makers, other entities who also optimize their decisions? Game theory is optimal decision-making in the presence of others with different objectives.
Game theory is that corner of economics that seeks to determine the results of all possible interactions between rational actors. Really, it's just math: rationality and interactions are defined in terms of mathematical objects and equilibriums are solved for. So if game theory is the study of rationality, what is the rest of economics?

Aumann

There is a fascinating interview with Nobelist Bob Aumann. A quote:
What is fascinating about number theory is that it uses very deep methods to attack problems that are in some sense very "natural" and also simple to formulate. A schoolchild can understand Fermat's last theorem, but it took extremely deep methods to prove it. A schoolchild can understand what a prime number is, but understanding the distribution of prime numbers requires the theory of functions of a complex variable; it is closely related to the Riemann hypothesis, whose very formulation requires at least two or three years of university mathematics, and which remains unproved to this day. Another interesting aspect of number theory was that it was absolutely useless--pure mathematics at its purest.

In graduate school, I heard George Whitehead's excellent lectures on algebraic topology. Whitehead did not talk much about knows, but I had heard about them, and they fascinated me. Knots are like number theory: the problems are very simple to formulate, a schoolchild can understand them; and they are very natural, they have a simplicity and immediacy that is even greater than that of prime numbers or Fermat's last theorem. But it is very difficult to prove anything at all about them; it requires really deep methods of algebraic topology. And, like number theory, knot theory was totally, totally useless.

[...]

[F]ifty years later, almost to the day. It's 10 p.m., and the phone rings in my home. My grandson Yakov Rosen is on the line. Yakov is in his second year of medical school. "Grandpa," he says, "can I pick your brain? We are studying knots. I don't understand the material, and think that our lecturer doesn't understand it either. For example, could you explain to me what, exactly, are 'linking numbers'?" "Why are you studying knots?" I ask; "what do knots have to do with medicine?" "Well," says Yakov, "sometimes the DNA in a cell gets knotted up. Depending on the characteristics of the knot, this may lead to cancer. So, we have to understand knots."

I was completely bowled over. Fifty years later, the "absolutely useless"--the "purest of the pure"-- is taught in the second year of medical school, and my grandson is studying it.
Another quote:
You know, sometimes people make disparaging remarks about [game theorist Oskar] Morgenstern, in particular about his contributions to game theory. One of these disparaging jokes is that Morgenstern's greatest contribution to game theory is von Neumann. So let me say, maybe that's true--but that is a tremendous contribution.
And again:
In short, I have serious doubts about behavioral economics as it is practices. Now, true behavioral economics does in fact exist; it is called empirical economics. This really is behavioral economics. In empirical economics, you go and see how people behave in real life, in situations to which they are used. Things they do every day.
More later....

Monday, October 10, 2005

Aumann and Schelling

This year's economics Nobel goes to Thomas Schelling and Robert Aumann. I've never read either, per se, but 4-5 weeks of the Advanced Microeconomics course I just took were based on their ideas. Schelling helped develop the notions of commitment, deterrence, credibility and focal points, all now fundamental concepts in game theory. Aumann, among other things, developed the theory of repeated games. (One of the oddest areas in game theory. Aumann pointed out that finitely and infinitely repeated games yield very different outcomes. In particular, infinitely repeated games can have nearly any payoff tuple as an equilibrium (the "folk" theorem) and finitely repeated games often have ridiculously unrealistic equilibria (as in the centipede game.))

Marginal Revolution has comments on both.

Tyler Cowen writes:
Both men clearly deserve the prize. I view this year's award as a welcome swing back to the philosophical, theoretical, and speculative dimensions of economics. In recent years the Committee seems to have gone out of its way to reward the scientistic approach to economics (Heckman and McFadden, for instance). All these earlier picks were good ones, but I am happy to see Schelling -- a fruitful generalist if there ever was one -- and Aumann, a deeply philosophical thinker, get the nod.


I agree that this swing (one data point makes a trend?) is welcome. The philosophical and theoretical dimensions of economics are fundamentally, I think, why I want to do economics. It's also interesting that Tyler calls Aumann (who I know little about) a deeply philosophical thinker, because he is also a deeply mathematical thinker. For example, Aumann "introduced measure theory into the analysis of economies with an infinite number of agents." That's hard. But the result says something fundamental about the nature of perfect competition. It's the ability to combine the precision of the mathematical knife with a view of what's actually important that makes a brilliant scientist.

Fortress America

Battlepanda mentioned that the U.S. embassy in London is very well-guarded. Here's the one in Budapest:



(Image courtesy of Pestiside.)

Sunday, October 09, 2005

Not So Fast...

Isaac writes:
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.
In a nutshell, firms/people/other entities have preferences (normative orientations) as to what they would like to achieve and constraints on their behavior. Isaac argues that free traders promote the policy that works best given status quo preferences and constraints while activists promote a policy that works best given some other preferences and constraints. Presumably, they also seek to change those preferences and constraints.

I'd like to suggest an alternative explanation. Every policy changes constraints. That's exactly what policy is for. Too much pollution? Establish a tax. This shifts the budget constraint for polluting firms, producing the desired effect. Abstracting from preferences for the moment, what makes up a "world," in Isaac's sense, is the set of constraints placed on its economic actors. Picking a policy, as in the debate between free traders and activists, also means picking the world you'd like to live in (or you'd like for others to live in.) I don't think it's a question of on which world each group would like to "focus," but rather in which world each group would prefer to live.

Perhaps that's not substantively different from what Isaac wrote. I do disagree with him on a couple points. The first is the implication that free traders are somehow defenders of the status quo, while activists want to change it. Most free traders don't like this world's constraints very much at all. Exactly because there is surprisingly little free trade. If we look at the major free trade debates over the last few years they've come about when trade policy, like NAFTA/CAFTA/FTAA, is about to be put into effect. In these situations it has been the free traders who want a different (less constrained) world and the activists who want to preserve the status quo. (Obviously, activists aren't really that interested in preserving the status quo. I mean to show that it's not the other way around either.)

The second point on which I disagree with Isaac has to do with what "levels" of constraints we are talking about. As an example, Isaac mentions that companies are often allowed to fire union organizers. This is a (lack of a) constraint that could be changed. These kinds of constraints can be changed with policy. But there are constraints that can't be changed, those that actually constrain policy itself. For example, there is no policy that can make the capital account and current account deficits (or surpluses) sum to a non-zero number. A bit more relevant (and less robust) example: ceteris paribus, one cannot pay a higher than market wage without inducing unemployment. Ignoring these inherent constraints is just all too much "and-a-pony!"-ism.

I think there is a bigger point, though. Given a set of constraints and normative orientations (a "world") can there be more than one outcome? Are there multiple equilibria? If so, how can you use policy to choose between them? I don't think that "...activists don't dispute that given existing constraints sweatshops are fine..." is really meaningful. Given existing constraints, this is the outcome. Whether someone thinks it is okay or not doesn't really matter. That's just how it is, in a sort of Hayekian sense.

Friday, October 07, 2005

Hayek's government

Apparently my browser just never refreshed Battlepanda's blog; I thought she just hadn't updated for a couple of weeks. But she has had some interesting things to say about Hayek:
...Hayek himself didn't believe in laissez-faire. It says so right there on page 37 of my my edition. [...] ...it would not be unreasonable to say that Hayek is probably pro state-sponsored education...
True, Hayek does imply that state action is not inherently bad, as long as it does not interfere with normal market activity. So, perhaps Hayek would support relief for victims Hurricane Katrina. But how might Hayek's benevolent state pay for it? Would he resort to random or uniform lump-sum taxes? I've never seen him actually discuss it. Given that nearly all forms of taxation are market-distorting, can we conclude that he actually doesn't want state action of any sort? If anyone has read enough Hayek to answer that question (Lawrence?), please comment.

More Nobel stuff

Steven Levitt found this list of future winners written on a blackboard at the University of Chicago:
Barro, Bernheim, Card, Doug Diamond, Peter Diamond, Dixit, Fama, Feldstein, French, Goldin, Gene Grossman, Sandy Grossman, Hall, Lars Hansen, Hart, Helpman, Holmstrom, Jorgenson, Kreps, Krugman, Milgrom, Mortenson, Murphy, Myerson, Newey, Obsfeldt, Pakes, Phelps, Pissarides, Posner, Rabin, Rajan, Rogoff, Paul Romer, Sargent, Shleifer, Sutton, Thaler, Tirole, Williamson, Wilson.
Obviously there are some important names missing: Schelling, Bhagwati, Rubinstein, and others.

I also find it ridiculously annoying that in every economics Nobel thread someone has to post a comment explaining that the Nobel prize in economics is not in fact a "real" Nobel prize because it was not included in the will of Alfred Nobel and was created many years later. So please, spare us the didactics, we get it.

Fall Break!

Fall break is almost upon me (and it will crush me :)). Per my policy of honesty, expect no blogging from me 'till Monday or Tuesday, for I'm drifting up the East Coast this weekend and then tumbling down quickly on Monday or Tuesday (back to Swarthmore). Given Henry's return, I'd anticipate continued -- and intelligent -- bloggage.

Thursday, October 06, 2005

Math major

Virginia Postrel digs up the requirements for a math major at SMU when Miers was there. Given that I learned how to think mathematically in algebra, it is a shame that algebra is not required. But at least one semester of "advanced calculus" is required, which means that she probably suffered through her share of epsilon and delta proofs, and thus did learn how to think mathematically.

Before you go making snide remarks about SMU's math department in the 1960s, realize that math instruction at the college level has become considerably more harder over the years. I read somewhere some Swat alum from the 1960s saying that he was a math major, but that it didn't compare at all to what is required of math majors now. And, well, not to snobby, but SMU is no...

Cairo Calling

I haven't posted much in the last week because I spent the weekend in Cairo, Egypt, just a short hop from my temporary home in Budapest. I had lots of interesting experiences and I hope to post about the economics thereof in the next week or so.

For now, I'll just say that I shared Isaac's Senegalese experience of a lack of small change. The Egyptian currency is the pound (not the British one). The "cent" equivalent is the piastre. (There are 25 and 50 piastre bills as well as a number of different coins.) My friend who had been in Egypt for a few weeks said that she had only seen three coins since she arrived. Nearly all transactions use bills and usually the 1, 5, and 10 denominations. Thus, the 1-, 5-, and 10-pound bills are typically in very poor condition: beaten up, torn, smudged. But 100- and 50-pound bills (the only kinds you can get from ATMs) are pristine. On the last day I did get some new 1s and did I ever hate to part with them. But the cleaning woman must get tipped....

Why doesn't the government just issue more bills of the lower denominations?

Wolfowitz

This Wall Street Journal "interview" with World Bank president Paul Wolfowitz highlights his idealism. If there's one thing you can say about Wolfowitz, it's that he's an idealist, particularly when it comes to spreading democracy. (I thought his school of foreign policy thought called itself "realism"?) Anyway, an interesting read.

Yglesias on College for All

Matt weighs in:
Take any given poor kid, and you could give that kid a real boost in life by putting him through college. But he gets that boost precisely because a large number of people don't go to college, so he winds up having a competitive advantage in the labor market. If everyone went to college, then the mere fact of having a bachelor's degree wouldn't count for anything. Instead, the advantage would either go to the people who got into the most selective colleges (incidentally, check out my friend Matt Quirk's excellent article on how more-and-more schools are rigging the financial aid game to make it harder for poor kids to get in) or else you'd see advanced degrees become the "new college," separating the economic elite from the rest.

That would still be worth doing if you thought there was some reason that improving everyone's educational credentials would lift living standards overall, but there's little reason to think that. Already, the reverse seems to be true and lots of job categories are (informally) reserved for college graduates as a screening device even though doing the job doesn't actually require anything that's taught in college.
Isaac has blogged about this before, so I'll try not to repeat him. (Though it seems to me that there were more than just that one post, but I seem incapable of finding them!) odd thing is that last December Yglesias wrote:
David Adesnik asks an interesting question -- what if we did something good and liberal and made obtaining a college degree near-universal? By and large, I think this would be an excellent thing for many of the reasons David cites. This would have a dynamic effect on the sort of jobs that exist in America and allow a larger proportion of the population to have better jobs.
But now he has come around to the hard-nosed tough-minded liberal view (which is always the more fun view to have, anyway.)

If the signaling model of education is more important (than the human capital model), then a plan to put everyone in college would be bad for a couple reasons. One is that, in such a model, no one likes education. It's just that the smart kids dislike it a bit less than the not-so-smart kids. In a signaling equilibrium, some people have chosen not to educate because the benefit of a higher-paying job is not as great as the cost of actually going to college. (Note that it may not be that some people just don't like college, but it is very expensive in terms of direct and opportunity costs.) A better reason is that removing the signaling function of education would remove any benefit to education whatsoever.

Okay, so there is some benefit to education. It builds human capital. (You can formulate signaling models to incorporate human capital and you get basically the same results as the unaugmented signaling models.) Or does it? Certainly, I will emerge from four years at Swarthmore with lots of new knowledge. (Mostly, pretty arcane math. We learn all the useful stuff in the first year.) How many jobs does that new knowledge make me more productive at doing? Not many, but it does make me more productive at the job I want to do. But random person doesn't care about that job. College isn't going to make random person care about that job. Moreover, we don't really need more people doing that job. So maybe random person will take the government up on its offer of four more years of education (maybe it'll be compulsory?), but if they then go do something uncorrelated, that's a waste of money.

There are always arguments to make that the kinds of jobs people want and will be available will change but I think that's all too much second-order thinking. The first-order effect is that people who go into jobs that don't require a liberal arts education will have one. Now, more easily available *technical* education is something that could have a very good effect. As Alan Greenspan has argued, the reason that low-skill and high-skill wages have diverged is that not enough labor has moved from low-skill jobs to high-skill jobs. But expanding your usual college education won't do much about that.

The Ice Storm

The Ice Storm by Rick Moody is good, in so far as you also liked the first novel of his college room-mate (The Virgin Suicides by Jeffrey Eugenides). Which is to say that it really isn't particularly good. Well-done and elegant, but lacking in the satisfaction of a) a full plot b) fantastic writing or c) tremendous insight into, well, anything, that would make it something more than an entertaining distraction. We do get a nice neighborhood drama set in the 1970s, and we do see the tensions of the trickle-down of the sexual revolution into upper middle class professional homes. And a bit of adolescent unhappiness manifested largely through excessive drug use. But how many novels does one have to read about people trying, and largely failing, to find themselves through sex and drugs? Especially when the novel is so contrived in setting and climax: during an ice storm (get it? they are people coping with a lack of feeling, or iciness), climaxing in (and here comes a spoiler) someone basically freezing to death (get it?). Unlike The Virgin Suicides which attained a degree of formal innovation by presenting a narrative of adolescent despair from the perspective of the boys who lived on the street, and who thus have limited information of the adolescent angst of the sisters, The Ice Storm relies on the hackneyed device of multiple perspectives, though the voices barely vary (do they at all?) between the different characters.

In a different critical vein, I enjoyed the occasional use of probability and economics. At one point Moody is describing the spread of "key parties" across the northeast and writes
Maybe the first key party first touched suburban ground on Long Island...it might have landed in New Jersey...or it might have emerged in Westchester...Or maybe even California...Whatever its true origin, or its distribution (its Poisson distribution), west to east, south to north, it undeniably appeared in Fairfield County in the early seventies. (109-110)
Notice the use of "Poisson distribution." The most important thing about the Poisson distribution, besides having identical variance and expected value and being good for modeling only low probability events, is its memoryless property. That is, the probability of the event occurring at a given moment in time, or in a given place, is identical regardless of what has happened in the past (or elsewhere). Which is, perhaps, the exact opposite of what Moody is wanting to say. He clearly thinks that Fairfield County acquired key parties at random, but conditional on it having been elsewhere. That is, it obviously first emerged somewhere else -- and could have only come from somewhere else -- which is not consistent with its distribution being Poisson: it would have to have an equal probability of emerging anywhere. Plus, arguably, in the moment he is discussing key parties were perhaps not a rare occurrence. All of which is to say: it is altogether weird for Moody to have invoked precise mathematical terminology when clearly all he knows is that the thing existed, and has no clue what it actually is (or maybe he just likes fish).

The economics shows up at a party:
The laissez-faire stuff was really traveling around the room. Several feet away, by the mantel, Bobby Haskell, normally a guy who concentrated on paddle tennis to the exclusion of all other forms of conversation, was proposing that unions were a kind of labor monopoly, just an antitrust problem in the arena of labor.

These Friedman arias swooped around one another like the diverging themes of a duet, until Hood began to experience the opera of economics....Friedman's beloved money supply, new housing starts, durable goods, factory inventories, auto sales...each had its thrill of victory, its agony of defeat...America rose and fell on the melody of New Canaan's songs of the economy. Songs sung by a Jewish economist and mimicked by WASPs who would have thought twice before playing golf with the guy.(128-9)
Nothing academically wrong there, and rather well-written.

Wednesday, October 05, 2005

Economics News

News about the discipline, that is:
  • Columbia Economics is making a push for the top eight with ten new hires this year. I think it's much better to have eight top departments of roughly equal stature than five. It's also interesting because NYU recently made a similar push (including the hire of Tom Sargent), but Columbia is also in New York and is starting with a better department (Bhagwati, Stiglitz, Sachs). I find this kind of academic give and take incredibly entertaining...

    By the way, this bit at the end of the article:
    Consider the case of a recent Nobel Prize winner from the University of Chicago who has been actively pursued by Columbia. He is a brilliant researcher and, despite his age (he’s 61), continues to be one of the most prolific economists around. But, as one senior economist at a top-five school puts it, "He is one of those guys best appreciated from a distance—personally, he is very much a menace."
    refers to Jim Heckman. (Just do the math.)
  • Speaking of Nobel prizes, this year's is about to be awarded. The website claims that the decision will be released no earlier than October 10. Who will it be?

Miers' Constancy: Assessing Our Prior

The New York Times:
"I know her well enough to be able to say that she's not going to change, that 20 years from now she'll be the same person with the same philosophy that she is today," Mr. Bush said.
The New York Times:
[In 1989] Ms. Miers, born Roman Catholic, became an evangelical Christian and began identifying more with Republicans than with the Democrats who had long held sway over Texas politics. She joined the missions committee of her church, which is against legalized abortion, and friends and colleagues say she rarely looked back at her past as a Democrat.
Given that in the last twenty years she's switched religion and party, who's to say that in the next twenty years she won't switch religion and party again? What faith should be placed in Bush's assurances that she will be the same person in twenty years? Given someone who has already done that switch once, we would anticipate a significantly higher probability of them doing it again than one who has never switched. Right?

Looks like I got lucky...

The forint has depreciated significantly against the dollar since I arrive in Hungary. When I first withdrew money (at an ATM that automatically exchanges currencies) the rate was 194.6 forints to the dollar. Yesterday, the rate was 206.9 forints to the dollar. I've also been checking Google periodically to confirm my observation. So in some sense, I am about 6% richer than I was a few weeks ago.

Uhh... what?

In a new MTV production, Jeffrey Sachs shows Angelina Jolie around impoverished Africa. Does he want to be taken seriously or not?

Tuesday, October 04, 2005

Miers

Reading the conservative reaction to Miers is rather odd. In particular, all the talk of unqualified is simply misguided. She stood out in her academic environment: she both made law review and clerked for a federal district court judge. She ended up a partner at a major law firm (though people disagree on how distinguished that firm is). She was hired as White House counsel. She majored in math (the crucial part).

Jack Balkin nails her heritage:
In the days to come, we are likely to get a lot of allegations that Miers is unqualified for the job. Don't be fooled. Sure, she didn't go to a fancy law school (neither did the second Justice Harlan, by the way). But in her own way she's just as qualified as lots of other people who have sat on the Court. She may not be qualified in the way that legal academics like myself might like, and not in the way that movement conservatives would like, but she fits a familiar stereotype of Supreme Court Justice-- the business lawyer with powerful connections.
All the talk of cronyism is perhaps heartfelt, but surely not the underlying reason for the objection. Certainly appearances of cronyism are troubling at this historical moment, but over the long-haul that isn't the problem with Miers and her outlook. Republicans of a certain brand wanted Scalia/Thomas, which means either a social conservative of a particular vein, or leaning towards libertarian. What they seem to have gotten in Roberts and now Miers are business conservatives: overlapping, but not identical breeds. More ideologically committed to arcane matters of regulation and property than hot-button social issues.

I doubt that the conservative outrage will last. Meanwhile, it serves to remind us of the fundamental fragility of the Republican coalition: there is no natural identity of interests between business conservatives and social conservatives (and definitely not libertarians), except for the recurrence (or insinuation) of that ever so vague word: conservative.

More on business at Brad Plumer; more on math at Althouse.

Inappropriate blogging*

The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk: the notion that the future is more than a whim of the gods and that men and women are not passive before nature. Until human beings discovered a way across that boundary, the future was a mirror of the past or the murky domain of oracles and southsayers who held a monopoly over knowledge of anticipated events.
--Peter Bernstein. Against the Gods, pg. 1.

*Considering that today is the Jewish new year and I'm neither at services nor refraining from reading books with titles like "Against the Gods."

Monday, October 03, 2005

Life sentences

Wouldn't it be sort of depressing to be appointed to the Supreme Court at age 60 and know that rather than taking a much deserved retirement at 65, you'll be expected to work a (moderately) demanding, and certainly stressful (having to look on top of things in oral arguments) job until you die? Sure the power and glory are great, but because of political pressures, you're being denied a retirement, and even denied the chance to just relax.

Statistical significance; or how descriptive dictionaries screw up (social) science

Somewhere early in the development of thise general idea [of hypothesis, significance, testing], the word significant came to be used to indicate that the probability was low enough for rejection. Data became significant if they could be used to reject a proposed distribution. The word was used in its late-nineteenth-century English meaning, which is simply that the computation signified or showed something. As the English language entered the twentieth century, the word significant began to take on other meanings, until it developed its currents meaning, implying something very important. Statistical analysis still uses the word significant to indicate a very low probability computed under the hypothesis being tested. In that context, the word has an exact mathematical meaning. Unfortunately, those who use statistical analysis often treat a significant test statistic as implying something closer to the modern meaning of the word.
David Salsburg, pg. 98.

Sunday, October 02, 2005

Fun with statistics

What remains of the Pearsonian revolution is the idea that the "things" of science are not the observables but the mathematical distribution functions that describe the probabilities associated with observations. Today, medical investigations use subtle mathematical models of distributions to determine the possible effects of treatments on long-term survival. Sociologists and economists use mathematical distributions to describe the behavior of human society. In the form of quantum mechanics, physicists use mathematical distributions to describe subatomic particles. No aspect of science has escaped the revolution. Some scientists claim that the use of probability distributions is a temporary stopgap and that, eventually, we will be able to find a way to return to the determinism of nineteenth-century science. Einstein's famous dictum that he did not believe that the Almighty plays dice with the universe is an example of that view. Others believe that nature is fundamentally random and that the only reality lies in distribution functions. Regardless of one's underlying philosophy, the fact remains that Pearson's ideas about distribution functions and parameters [moments] came to dominate twentieth-century science and stand triumphant on the threshold of the twenty-first century.
David Salsburg. The Lady Tasting Tea: How Statistics Revolutionized Science In The Twentieth Century, pg. 24.

Krugman for Senate!

Paul Krugman for Senate:I'm going to believe that Jon Corzine will win the governor's race in New Jersey. But who should be the Senator? There is one outstanding resident of New Jersey who has both demonstrated intellectual saavy, and now partisan political chops in getting the word out to the public: Paul Krugman.

If progressives want to take the mantle of "the party of ideas." This would be a sure fire way to do it: appoint Krugman to the seat that Corzine, knock on wood, will be vacating when he becomes governor.

Via Michael Froomkin.

Saturday, October 01, 2005

Mauritanian news

  • At least 39 people have died from cholera in the capital city, Nouakchott. At least 2000 other cases have been reported.
  • L'Intelligent reports that one reason for the August 3rd coup was dissatisfaction among the military with being given an impossible task: tracking down an Algerian sponsored group into Mali which had attacked a border outpost. For some reason, and despite some American logistical aid, the army was incapable of doing so. And was thus unsatisfied with the government and looking for the ideal moment to overthrow such an impossible government.
  • The American government has given Mauritania goods valued at $145,000 to try to mitigate the impact of an expected drought (things like, trucks and pesticides).
  • Finally, a rainstorm flooded Kaédi, a village on the border with Senegal whose population is 400 families, or several thousand people.

Dilettantism

Someone came here searching for "dilettantism," for which we are the fourth (fourth!) hit on Google solely because of this. Let this be a lesson of some sort.