Talking about the significance for economics of human sociality.
http://www.econtalk.org/arnold-kling-on-morality-culture-and-tribalism/
Category Archives: Economic education and methods
Kling on post-industrial economics
The opening paragraph of my essay on post-industrial economics.
Over the past several decades, our economy has come to be driven less by tangible inputs and outputs and more by intangible factors. As workers and consumers, we have become much more specialized than was the case 150 years ago, when the conceptual framework of modern economics was developed. Yet most mainstream economists have not properly acknowledged this transformation, remaining committed to models and concepts that served to explain an economy that no longer exists. Understanding the world we now inhabit will require letting go of many established methods, and acknowledging the complexity of an economy that responds to new, and still evolving, strategies and incentives.
Truly experimental firms
by John List, on corporate social responsibility.
My initial inclination is: firm does a good thing; worker reciprocates to firm by working harder; and the world is a better place. Everyone’s better off. But what this suggests is that there’s something deeper on the psychological side, that it’s not just triggering this reciprocity from workers. C.S.R. is also triggering something deeper, which the researchers in this area call moral licensing.
Pointer from Tyler Cowen. Read the whole transcript, to see the research method. He actually starts firms and hires workers in order to do controlled experiments.
Investment, tax cuts, and politics
Whose blog do you want to believe?
1. Mark Thoma points to a NYT story with the headline Investment Boom From Trump’s Tax Cut Has Yet to Appear. It says,
Data on the gross domestic product, released Friday, showed that business investment grew at a 6.1 percent annual clip during the first three months of 2018, down from 7.2 percent during the first quarter last year. Excluding oil and gas investment, which is particularly volatile, the investment pace grew slightly over the past year.
2. Tyler Cowen points to a Bloomberg column by Lu Wang with the headline Trump Tax Windfall Going to Capex Way Faster Than Stock Buybacks.
Among the 130 companies in the S&P 500 that have reported results in this earnings season, capital spending increased by 39 percent, the fastest rate in seven years, data compiled by UBS AG show. Meanwhile, returns to shareholders are growing at a much slower pace, with net buybacks rising 16 percent. Dividends saw an 11 percent boost.
I like both bloggers, but in this case I fault each for showing only his preferred side of the story.
I think that this also shows that it is difficult to trust economic analysis on politically salient topics.
Human beings are social
The essay is a very concise reply to the often-made criticism of economics and markets that human beings are social.
At a large scale, tribal solidarity does not suffice. We do not know how to coordinate to deliver the goods and services that we enjoy without using market prices. We do not know how to motivate people to choose occupations that serve the needs of the larger community except through self-interest.
Because the essay is concise, read the whole thing.
Estimating consumers’ surplus from information goods
Erik Brynjolfsson, Avi Gannamaneni, and Felix Eggers have a paper on the topic. From the abstract:
We explore the potential of massive online choice experiments to measure consumers’ willingness to accept compensation for losing access to various digital goods and thereby estimate the consumer surplus generated from these goods. We test the robustness of the approach and benchmark it against established methods, including incentive compatible choice experiments that require participants to give up Facebook for a certain period in exchange for compensation. The proposed choice experiments show convergent validity and are massively scalable. Our results indicate that digital goods have created large gains in well-being that are missed by conventional measures of GDP and productivity.
Pointer from Tyler Cowen.
Based on their powerpoint, I gather that the method is something like this.
1. Ask a user of, say, Facebook how much they would need to be paid to give it up for a month.
2. If they say they would give it up for $25, tell them to do it.
3. If after a month they have not used it, give them $25.
The methods that they use are really interesting, but I have doubts about the approach. I think dollars are too abstract. I would like to see a lot of “give up X or give up Y” choices offered. The authors do some of this and apparently it confirms their findings.
The values that the authors get are really high. If the median Facebook user gets over $40 a month in value from it, then Facebook is leaving a fortune on the table by not having a subscription service. Yes, they have to be careful that charging a subscription price could drive some customers away, lowering the value of the service to other customers, but the “freemium” model could be used to address that. That is, let anyone join for free, but give more privileges to subscribers.
Finally, note that if I pay less for Google Maps and other digital services than I would be willing to pay, I also pay more for my smart phone, home Internet connection, and wireless service provider than I would if all I were getting were just plain phone service. In other words, some of the “consumer’s surplus” from digital goods goes to Verizon and Apple as revenue, not to consumers.
Complex vs. Complicated
When I was a graduate student in economics in the late 1970s, we were trained as if the economy is complicated, but not complex. We were told that if we learned enough mathematics and statistics and applied these tools, then eventually we could predict and control economic outcomes.
In fact, economic behavior is complex. There are too many causal factors, feedback loops, non-linear effects, and unprecedented phenomena involved to enable economists to control the economy precisely and reliably.
Please read the whole essay before commenting.
Complicated vs. Complex
a complicated system is defined by a finite and bounded (unchanging) set of possible dynamic states, while a complex system is defined by an infinite and unbounded (growing, evolving) set of possible dynamic states.
. . .In the case of complication, the optimal choice is to become an “expert”. That is, to grasp the whole of the system such that one can make precise predictions about how it will respond to inputs.
In the case of complexity, the optimal choice goes in a very different direction: to become responsive. Because complex systems change, and by definition change unexpectedly, the only “best” approach is to seek to maximize your agentic capacity in general. In complication, one specializes. In complexity, one becomes more generally capable.
I found this distinction to be interesting. I would argue that mainstream economists treat economic problems as complicated, to be mastered by the expert. Those of us who lean toward Austrian heterodoxy treat economic problems as complex, best dealt with by adaptation.
I recommend the entire essay. His theme is the challenge that social media poses for human culture. As you know, this topic interests me a great deal.
The game-playing society
During the industrial era, the key word was systematic. Factories and assembly lines turned production into a system. We invented the discipline of political economy, which analyzed the capitalist system. From Leon Walras in the 19th century to the Congressional Budget Office today, economists have used systems of equations as a way of interpreting the economy.
. . .I claim that we are entering the era of games, in which the key words are scorekeeping and strategy.
The main idea in the essay is, if valid, really profound. Whole books have been written about less. Read the essay twice, and then see what happens if you look contemporary phenomena and try to view them through the “era of games” lens.
Inter-generational mean reversion
Tyler Cowen, among many others, is intrigued by a study by Raj Chetty and others showing downward mobility of black males.
My view, which I came to in the process of reading Gregory Clark’s study of long-term heritability of income, is that inter-generational income has a large heritable component and a large random component. Over several generations, the random component washes out. But for the difference across a single generation, the random component matters.
This model suggests that when someone’s income is far above (below) the heritable component, it will revert to the mean. Children will do worse than parents who have enjoyed a positive shock and they will do better than parents who have suffered a negative shock.
If the shocks to income were normally distributed, then mean reversion would not produce any systematic pattern of children falling below parents or rising above them. So you would not expect the Chetty result in that case.
But what if the random component is not normally distributed? Suppose that what you observe in one generation are a few really large shocks on the up side, with a lot of smaller negative shocks on the down side. The next generation will then have some apparent big losers and a lot of apparent small winners. Depending on how you sort the data (Chetty appears to be looking at measures of income based on rank rather than absolute level), Chetty’s result could be an artifact of the random component. It might be that if he were to measure incomes three or four generations apart, the apparent downward mobility would disappear.