The recent Talia Jane story just made me realize we have a possible inconsistently in policy. To get you up to speed, Jane took a low-wage job in the San Francisco Bay Area, hoping to work her way up to her passion of being a social media manager for a major company. But because of rental prices, she paid 85% of per post-tax pay just for rent (!), complained about her employer paying so little, and then was fired.
But as for the inconsistency:
Illegal: paying someone below $X/hour.
Legal: paying someone ($X + $Y)/hour (Y positive) to work in a place where their discretionary income would place them in extreme poverty (e.g. 85% of post-tax on rent).
And yes, that's just an (arguably trivial) corollary of "minimum wage (and tax brackets for that matter) is not automatically cost-of-living-adjusted". But if the goal is to stop people from being taken advantage of with low job offers that hold them in poverty, that seems like a pretty big loophole.
And it's not just that -- let's say someone moves farther out to be able to afford to live there. Then they're traveling an extra N hours just to make each shift which should rightly count against their effective hourly wage.
So, food for thought: what are we really trying to optimize for here? What would the law have to look like to not just avoid these loopholes, but "carve reality at the joints" such that it's fundamentally impossible to scalably circumvent such a law?
If you keep raising the minimum wage for a locality, and people keep commuting greater distances to get that income, what have you accomplished?
A blog by Silas Barta
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Saturday, February 20, 2016
Tuesday, December 9, 2014
Our new Bitcoin eBook is up!
Phew, been a while, eh? Well, Bob Murphy and I have a new free eBook up about the economics and mechanics of Bitcoin! Check the site for it, or, if you're too lazy, just go straight to the book itself.
Saturday, November 23, 2013
Liberty vs efficiency: The real conflict
Liberty: Being free of constraints
Efficiency: Raising the state of the world as high as possible on everyone's preference ranking (or some aggregate measure thereof)
You might have heard of Amartya Sen's Liberal paradox, which purports to show that the two necessarily conflict. Of course, as I said a while back, it does no such thing; it only shows a problem with preventing people from waiving their liberties when they find it preferable to do so.
However, there is a real sense in which those two conflict, and it becomes most apparent in discussions of taxation, and how to make it better.
The conventional economist's view is that "The ideal tax system is the one that hurts efficiency the least."
But there's another view, exemplified by the Murphy article that I linked in my last post: "The ideal tax system is the one that's easiest to opt out of."
Naturally, these really do conflict. Why? Because generally speaking, if you want to levy a tax that merely transfers purchasing power to the government without also forcing people to bear other hardships, you have to do it by taxing goods with inelastic demand, like energy, as people will not respond to the tax by buying less of the good, which would indicate a reduction in efficiency.
But the harder a tax is to avoid, the harder it is to "opt-out" of!
So if you think it's good for people to be able to legally reduce government revenues by abstaining from a product at relatively little cost to themselves, then "economically efficient taxes" are no longer an unvarnished good, as they come at the direct expense of the goal of making it easier for people to change their behavior in a way that routes around taxation.
This, I think, is the true conflict between efficiency and liberty, as it doesn't hinge on confusing rights and obligations.
Efficiency: Raising the state of the world as high as possible on everyone's preference ranking (or some aggregate measure thereof)
You might have heard of Amartya Sen's Liberal paradox, which purports to show that the two necessarily conflict. Of course, as I said a while back, it does no such thing; it only shows a problem with preventing people from waiving their liberties when they find it preferable to do so.
However, there is a real sense in which those two conflict, and it becomes most apparent in discussions of taxation, and how to make it better.
The conventional economist's view is that "The ideal tax system is the one that hurts efficiency the least."
But there's another view, exemplified by the Murphy article that I linked in my last post: "The ideal tax system is the one that's easiest to opt out of."
Naturally, these really do conflict. Why? Because generally speaking, if you want to levy a tax that merely transfers purchasing power to the government without also forcing people to bear other hardships, you have to do it by taxing goods with inelastic demand, like energy, as people will not respond to the tax by buying less of the good, which would indicate a reduction in efficiency.
But the harder a tax is to avoid, the harder it is to "opt-out" of!
So if you think it's good for people to be able to legally reduce government revenues by abstaining from a product at relatively little cost to themselves, then "economically efficient taxes" are no longer an unvarnished good, as they come at the direct expense of the goal of making it easier for people to change their behavior in a way that routes around taxation.
This, I think, is the true conflict between efficiency and liberty, as it doesn't hinge on confusing rights and obligations.
Saturday, November 9, 2013
I explain tax interaction effects (because I think the experts can't)
So it turns out there's a serious argument (HT and text summary: Bob Murphy) that a "green tax shift" may be welfare-worsening rather than welfare-improving. (The green tax shift is where you cut taxes on labor and capital while raising them on environmental "bads" like CO2 emission.)
Huh? How can a tax shift off of bads and onto goods be welfare worsening? It seems the argument is somewhat subtle; even Bob Murphy dismisses clarification requests in the comments, pleading that "it’s hard to point to 'what’s driving the result' except to say, 'Adding the carbon tax drove the result.'"
Well, it's actually not that hard, but the standard expositions don't make it explicit. After reading another of Murphy's articles, it finally clicked for me, although the better explanations still hid the true mechanism in unstated assumptions. Here's how I explained it in the comments (cleaned up a bit and sourced).
****
I think I have an explanation that conveys the intuition.
Insight 1: the harm of a tax is more-than-proportional to its magnitude. (This is the assumption that the writing on this seems to assume and which I wish was made explicit here and in your article.) Mankiw gives the rule of thumb that the deadweight loss of a tax increases with the square of the tax rate. Thus why you want to raise a given amount of revenue from as “broad a base” as possible -- to lower the rate each tax has to be.
Insight 2 (most important): Because of the above, each increase in tax above the Pigovian level is more harmful than the same increase from zero.
Insight 3: Taxes on anything chase back to their original land/labor/capital factors. So a carbon tax amounts to a tax on land, labor, and capital, divided up per their relative supply/demand curve elasticities (slopes).
Given the above, the intuition becomes a lot clearer: a tax on carbon is like an income tax (with different levels for different kinds of income). Levied at the Pigovian rate, it merely cancels out the carbon harms. But if you have an additional (direct) income tax, you get a disproportionate harm for each (potentially) taxed dollar above the Pigovian level (compare to taxing from the first dollar) — *that* is the tax interaction effect.
Furthermore, since the “green tax trade” tries to raise the same revenue on a smaller base (i.e. only those income sources touching carbon), the tax rates have to be much higher than they would be if they were on all income. This then causes major welfare-harming changes in behavior, far out of proportion to the assumed harms from carbon.
****
Problem solved, right?
Well, no; Bob insists that Insight 1 is irrelevant to the argument. But I don't see how this can be; you can only get the bad "tax interaction effects" if the tax's harms are more-than-proportional to ("superlinear in") the tax rate.
If it's merely proportional, the taxes don't "interact" at all -- raising taxes by 1 percentage point (on any kind of income) does just as much additional harm, regardless of whether it's on top of a 6% existing tax, or a zero. But when it's more than proportional, then that extra point of tax is (badly) "interacting" with whatever other taxes got it to that level. This is the key insight: that having income taxes in addition to the (implicit income tax resulting from a) carbon tax means those taxes are doing more harm than they otherwise would.
Likewise, if the harm (deadweight loss) of a tax were less than proportional to (sublinear in) the rate, then they would interact in the opposite way. It would make sense to have as few distinct taxes as possible, on a small a base as possible, with as high a rate as possible -- because in that case, each additional increase in the tax rate hurts less than the previous. (Obviously, we don't live in that world!)
I note, with some irony, that this point ultimately reduces to the reasoning behind standard mainstream economist's tax advice to "lower the rates, broaden the base", a mentality Bob actually criticized in another context...
Huh? How can a tax shift off of bads and onto goods be welfare worsening? It seems the argument is somewhat subtle; even Bob Murphy dismisses clarification requests in the comments, pleading that "it’s hard to point to 'what’s driving the result' except to say, 'Adding the carbon tax drove the result.'"
Well, it's actually not that hard, but the standard expositions don't make it explicit. After reading another of Murphy's articles, it finally clicked for me, although the better explanations still hid the true mechanism in unstated assumptions. Here's how I explained it in the comments (cleaned up a bit and sourced).
****
I think I have an explanation that conveys the intuition.
Insight 1: the harm of a tax is more-than-proportional to its magnitude. (This is the assumption that the writing on this seems to assume and which I wish was made explicit here and in your article.) Mankiw gives the rule of thumb that the deadweight loss of a tax increases with the square of the tax rate. Thus why you want to raise a given amount of revenue from as “broad a base” as possible -- to lower the rate each tax has to be.
Insight 2 (most important): Because of the above, each increase in tax above the Pigovian level is more harmful than the same increase from zero.
Insight 3: Taxes on anything chase back to their original land/labor/capital factors. So a carbon tax amounts to a tax on land, labor, and capital, divided up per their relative supply/demand curve elasticities (slopes).
Given the above, the intuition becomes a lot clearer: a tax on carbon is like an income tax (with different levels for different kinds of income). Levied at the Pigovian rate, it merely cancels out the carbon harms. But if you have an additional (direct) income tax, you get a disproportionate harm for each (potentially) taxed dollar above the Pigovian level (compare to taxing from the first dollar) — *that* is the tax interaction effect.
Furthermore, since the “green tax trade” tries to raise the same revenue on a smaller base (i.e. only those income sources touching carbon), the tax rates have to be much higher than they would be if they were on all income. This then causes major welfare-harming changes in behavior, far out of proportion to the assumed harms from carbon.
****
Problem solved, right?
Well, no; Bob insists that Insight 1 is irrelevant to the argument. But I don't see how this can be; you can only get the bad "tax interaction effects" if the tax's harms are more-than-proportional to ("superlinear in") the tax rate.
If it's merely proportional, the taxes don't "interact" at all -- raising taxes by 1 percentage point (on any kind of income) does just as much additional harm, regardless of whether it's on top of a 6% existing tax, or a zero. But when it's more than proportional, then that extra point of tax is (badly) "interacting" with whatever other taxes got it to that level. This is the key insight: that having income taxes in addition to the (implicit income tax resulting from a) carbon tax means those taxes are doing more harm than they otherwise would.
Likewise, if the harm (deadweight loss) of a tax were less than proportional to (sublinear in) the rate, then they would interact in the opposite way. It would make sense to have as few distinct taxes as possible, on a small a base as possible, with as high a rate as possible -- because in that case, each additional increase in the tax rate hurts less than the previous. (Obviously, we don't live in that world!)
I note, with some irony, that this point ultimately reduces to the reasoning behind standard mainstream economist's tax advice to "lower the rates, broaden the base", a mentality Bob actually criticized in another context...
Friday, May 24, 2013
"I added your numbers, and I have no idea what they are."
So it turns out there's a thesis arguing that polynomial-time, fully homomorphic encryption is possible. (Link is to the dumbed-down -- but still journal-published -- version that mortals like me are capable of understanding.)
It's hard to understate the significance of this. This means that it's possible for you to give someone your data in encrypted form, and for them to execute arbitrary operations and give it back to you, without ever knowing what the data is. That is, they transform an input ciphertext to and output ciphertext such that when you decrypt the output, you have the answer to your query about the data, but at no point did they decrypt it or learn what was inside.
In other words: "I just calculated the sum of the numbers you gave me, but I have no idea what the sum is, nor what any of the numbers are."
If it sounds impossible, it's not because you misunderstand it, but because that kind of thing shouldn't be possible -- how can you perform arbitrary operations on data without learning something about it? Sure, maybe there are edge cases, but a rich, Turing-complete set?
It would mean that "the cloud" can ensure your privacy, while *also* doing useful operations on your data (as the author, Craig Gentry, goes at great length to emphasize).
As best I can tell from the paper, here's the trick, and the intuition why it's possible:
1) The computation must be non-deterministic -- i.e. many encrypted outputs correspond to the correct decrypted output. This is the key part that keeps the computation provider from learning about the data.
2) The output must be fixed size, so you have a sort of built-in restriction of "limit to the first n bytes of the answer".
3) It does require a blowup in the computational resources expended to get the answer. However, as noted above, it's only a polynomial blowup. And thanks to comparative advantage, it can still make sense to offload the computation to someone else, for much the same reason that it makes sense for surgeons to hire secretaries even when the surgeon can do every secretarial task faster. (Generally, when the provider's opportunity cost of performing the task is less than yours.)
4) Finally, to be fully homomorphic -- capable of doing every computation, not just a restricted set of additions and such -- the encrypted computation has to find a way around the buildup of "noise" in the computation, i.e. properties of the output that put it outside the range of what can be decrypted (due to exceeding the modulus of the operation needed to extract the output). And to do that, in turn, its operation set must be sufficient to perform its own decryption.
I'm only about halfway through the paper, but it's been really enlightening to get the intuition behind why this kind of thing can work.
It's hard to understate the significance of this. This means that it's possible for you to give someone your data in encrypted form, and for them to execute arbitrary operations and give it back to you, without ever knowing what the data is. That is, they transform an input ciphertext to and output ciphertext such that when you decrypt the output, you have the answer to your query about the data, but at no point did they decrypt it or learn what was inside.
In other words: "I just calculated the sum of the numbers you gave me, but I have no idea what the sum is, nor what any of the numbers are."
If it sounds impossible, it's not because you misunderstand it, but because that kind of thing shouldn't be possible -- how can you perform arbitrary operations on data without learning something about it? Sure, maybe there are edge cases, but a rich, Turing-complete set?
It would mean that "the cloud" can ensure your privacy, while *also* doing useful operations on your data (as the author, Craig Gentry, goes at great length to emphasize).
As best I can tell from the paper, here's the trick, and the intuition why it's possible:
1) The computation must be non-deterministic -- i.e. many encrypted outputs correspond to the correct decrypted output. This is the key part that keeps the computation provider from learning about the data.
2) The output must be fixed size, so you have a sort of built-in restriction of "limit to the first n bytes of the answer".
3) It does require a blowup in the computational resources expended to get the answer. However, as noted above, it's only a polynomial blowup. And thanks to comparative advantage, it can still make sense to offload the computation to someone else, for much the same reason that it makes sense for surgeons to hire secretaries even when the surgeon can do every secretarial task faster. (Generally, when the provider's opportunity cost of performing the task is less than yours.)
4) Finally, to be fully homomorphic -- capable of doing every computation, not just a restricted set of additions and such -- the encrypted computation has to find a way around the buildup of "noise" in the computation, i.e. properties of the output that put it outside the range of what can be decrypted (due to exceeding the modulus of the operation needed to extract the output). And to do that, in turn, its operation set must be sufficient to perform its own decryption.
I'm only about halfway through the paper, but it's been really enlightening to get the intuition behind why this kind of thing can work.
Thursday, November 1, 2012
Disaster Keynesianism -- Say something responsive for once!
Last day in Budapest for now, leaving in a few hours. But it looks like the topic of the day is the economics of Hurricane Sandy, and, as with any discussion of economics during a natural disaster, whether it will be "good for the economy".
Needless to say, this is a discussion that has happened several times already. Still, engagement with the other side's arguments is always good -- as long as you're actually, well engaging, rather than extending and reinforcing a non-responsive (or no-longer-responsive) point.
Which brings us to pseudo-contrarian Steve Landsburg's latest pseudo-contribution to the matter. He thinks he has an even more devastating critique of the "hurricanes can be good for the economy" by posing this:
Of course, this doesn't actually address the Keynesian's central point, because their claim is that normally such acts are destructive, but need not be so when there are idle resources (found after a quick search).
To make absolutely sure I'm not misunderstood, please read these caveats if you plan on responding:
- I don't agree with they Keynesian "idle resources" argument, and have said as much before.
- I realize that Keynesians (and their critics) acknowledge that there are always better ways to do economic stimulus than a natural disaster -- just employ those otherwise-would-be-disaster-response-resources to do something that's not completely wasteful.
And yet there's no mention of relevance of idle resources in Landsburg's post, or in the army of back-slappers or hangers-on that dominate the beginning of the discussion. When we finally do, it's from critics who offer surprisingly good analogies, like commenter "Brian", who compares a stagnant economy to laziness ("akrasia") in an individual:
And the defenders of the post (I guess *not* surprisingly) miss the point that of course making new windows is better than fixing broken ones, but that's not an option here. Landsburg himself does that in this comment:
Except, of course, that it does expand your options, since by supposition, policy makers won't allocate funds for public works projects that build new windows, but will gladly fund projects to restore the windows that were broken in the disaster. (To re-iterate: I disagree that such public works funding -- whether for building or fixing -- is a good idea for "helping the economy"; this is simply about appreciation of one's opponent's arguments and responsiveness thereto.)
***
My point here is that if you want a really hot one-line zinger for why the "hurricanes good for economy" meme (in its most intelligent form) is wrong, you're going to have to do a lot more than just say that destruction is bad. No -- you're going to have to show why destruction is not "better than nothing" if its effect is to put (only) idle resources to use, thus giving people the dignity of a job and practice of their skills, when you don't have the option (for e.g. political reasons) of simply employing those idle resources to build on top of existing wealth.
What's that, you say? It's hard to give a concise, fun explanation of why that thinking is wrong? Well, it should be. Two-sided political debates tend to be like that. My shortest debunking is at least this long
Can you do better? Perhaps. But it won't be by invoking the ten millionth permutation of "destruction is bad, m'k?".
Needless to say, this is a discussion that has happened several times already. Still, engagement with the other side's arguments is always good -- as long as you're actually, well engaging, rather than extending and reinforcing a non-responsive (or no-longer-responsive) point.
Which brings us to pseudo-contrarian Steve Landsburg's latest pseudo-contribution to the matter. He thinks he has an even more devastating critique of the "hurricanes can be good for the economy" by posing this:
ask your opponent whether it’s “good for the ants” when you put a stick down their anthill, wiggle it around and destroy their infrastructure. Go ahead and acknowledge that this can sure put a lot of ants to work.
Or, for that matter….
Ask if spilling ink on the living room rug is “good for your household’s economy” because of all the cleanup work you’ll do.
Of course, this doesn't actually address the Keynesian's central point, because their claim is that normally such acts are destructive, but need not be so when there are idle resources (found after a quick search).
To make absolutely sure I'm not misunderstood, please read these caveats if you plan on responding:
- I don't agree with they Keynesian "idle resources" argument, and have said as much before.
- I realize that Keynesians (and their critics) acknowledge that there are always better ways to do economic stimulus than a natural disaster -- just employ those otherwise-would-be-disaster-response-resources to do something that's not completely wasteful.
And yet there's no mention of relevance of idle resources in Landsburg's post, or in the army of back-slappers or hangers-on that dominate the beginning of the discussion. When we finally do, it's from critics who offer surprisingly good analogies, like commenter "Brian", who compares a stagnant economy to laziness ("akrasia") in an individual:
Suppose Billy Joe has been in bed for years. He’s overweight and unmotivated. His life appears to continue to spiral out of control as he watches reruns of every horrible show made from the 1970′s on. But when that ink falls on the floor, this finally gave him a reason to get out of bed and clean up the mess, and the mere activity of it kick started him into action of doing thins again, and even being motivated [sic]
And the defenders of the post (I guess *not* surprisingly) miss the point that of course making new windows is better than fixing broken ones, but that's not an option here. Landsburg himself does that in this comment:
... this is ridiculous, on Keynesian grounds or any other. If you believe it’s important to hire idle resources in order to “stimulate the economy”, then you don’t have to wait for a hurricane — you can hire people to build *new* bridges instead of having them rebuild old ones. The hurricane does not in any way expand your set of policy options; it only destroys stuff.
Except, of course, that it does expand your options, since by supposition, policy makers won't allocate funds for public works projects that build new windows, but will gladly fund projects to restore the windows that were broken in the disaster. (To re-iterate: I disagree that such public works funding -- whether for building or fixing -- is a good idea for "helping the economy"; this is simply about appreciation of one's opponent's arguments and responsiveness thereto.)
***
My point here is that if you want a really hot one-line zinger for why the "hurricanes good for economy" meme (in its most intelligent form) is wrong, you're going to have to do a lot more than just say that destruction is bad. No -- you're going to have to show why destruction is not "better than nothing" if its effect is to put (only) idle resources to use, thus giving people the dignity of a job and practice of their skills, when you don't have the option (for e.g. political reasons) of simply employing those idle resources to build on top of existing wealth.
What's that, you say? It's hard to give a concise, fun explanation of why that thinking is wrong? Well, it should be. Two-sided political debates tend to be like that. My shortest debunking is at least this long
Can you do better? Perhaps. But it won't be by invoking the ten millionth permutation of "destruction is bad, m'k?".
Wednesday, January 11, 2012
Mr. Ford, meet Boeing
You know how it's become a sort of cliche/folk-economics to say that "You should pay your workers enough so that they can buy the product you sell?" It's supposed to be what gave Henry Ford I his tremendous success with the Model T, and has become a staple of union bargaining.
For a recent example of this line of thought, here's none other than (former Secretary of Labor) Robert Reich arguing it, complete with reference to the Model T story.
Well, it recently occurred to me how underpaid I am. My employer modifies and sells large aircraft. No way can I afford that!!!
Did somebody say "raise"?
(This post made entirely without use of the mouse -- including for looking up and copying over links -- thanks to the use of the Firefox Pentadactyl extension. Give it a whirl!)
Addendum: To clarify, Boeing is not my employer, just a synecdoche for large aircraft manufacturers in general.
For a recent example of this line of thought, here's none other than (former Secretary of Labor) Robert Reich arguing it, complete with reference to the Model T story.
Well, it recently occurred to me how underpaid I am. My employer modifies and sells large aircraft. No way can I afford that!!!
Did somebody say "raise"?
(This post made entirely without use of the mouse -- including for looking up and copying over links -- thanks to the use of the Firefox Pentadactyl extension. Give it a whirl!)
Addendum: To clarify, Boeing is not my employer, just a synecdoche for large aircraft manufacturers in general.
Saturday, December 31, 2011
Broken Windows, Part I: The Pain of Hard Choices
This will be the first in a series where I spell out an underappreciated concept in economics and how it leads many economists astray in proposing solutions to economic problems. I figured I better get a start on it before the New Year.
Recently, I've gained some insight into the economic debates between the various camps that claim to have a solution to our current problems. In addition to tying up some loose ends regarding a century-old debate, this insight gave me a good explanation of why standard dismissals of the so-called recalculation story (in explaining recessions like the current one) are making a subtle error.
First, a high-speed recap: Way back in the 1800s, Bastiat described what is known as the "Broken Window Fallacy" to refute the prevailing economic wisdom of the age. Many believed that a vandal who broke a window could be doing the economy a favor, reasoning that the owner would have to hire a glazier to fix the window, who would have new money he could use to buy new shoes, which would give the shoemaker the chance to buy something he wanted, and so on. (Note the early shades of the "multiplier effect" argument.)
Bastiat replied, basically, that no, this doesn't quite work, because you have to account for the "unseen" loss to the window owner, who would have engaged in the exact same economic stimulation as the glazier, had the window not broken, because he would have been able to buy something he wanted -- and we'd get to keep the window, to boot!
This mention of the Broken Windows Fallacy is often brought up in response to proposed Keynesian solutions (involving government stimulus spending), where their opponents say that it makes the same error, neglecting the unseen economic activity that would go on in the absence of the government's spending.
Keynesians, in turn, reply that the Broken Window Fallacy only applies at "full employment", where there is no "crowding out" (i.e. forgone projects due to the government's use of resources for different ones). In a depressed economy, they argue, the alternative to a metaphorical broken window (along with its fixing) is not "the window owner buys something else", but rather, "the window owner hoards that money", providing no economic benefit. Therefore, breaking a window in such a case would not have an economic opportunity cost, and so could indeed be good for the economy -- though Keynesians of course admit there are much better ways to increase employment than breaking a window.
The back-and-forth goes on, of course, with each side claiming that the other's position implies or relies on an absurdity. Keynesians accuse the free-market/"Austrian" types of thinking the economy is always optimally using resources, while Austrians accuse the Keynesians of calling a hurricane "God's gift to depressions".
But here, I think, I've noticed something that tremendously clarifies the debate, and gives us insight into why economic activity does or doesn't happen, and why certain events are or aren't good. So, here goes.
*******
Let's go back to the original Bastiat thought experiment about the broken window. Ask yourself this: Why are we assuming the window will be fixed at all?
Don't misunderstand me: it's a reasonable assumption. But we have to be careful that this assumption isn't fundamentally ignoring relevant economic factors, thereby baking in a desired conclusion from the very beginning. And here, I think we have good reason to believe that's exactly what's going on.
So let's start simple: under what circumstances would it be not be reasonable to assume that the window will be fixed, (i.e. that the owner will choose to pay someone to fix it), even during a depression? That's easy: if the neighborhood (along with that building) is run-down to begin with, already littered with broken windows. A lone broken window merits a quick repair, but if it's yet-another-broken-window, why bother? (Note here the substantive similarity to the homonymous "broken window" effect!)
So here we see the crucial, unappreciated factor: the obviousness of certain production decisions. What these thought experiments -- carefully constructed to make a different point -- actually prove is the importance of being able to confidently decide what is the best use of resources. And we can step back and see the same dynamic in very different contexts.
For example, say an unemployed guy, Joe, is trying all different kinds of things to find a job, and nothing is working. Then while driving one day, makes a wrong turn and steers his car off a bridge into the river below. Not good. But there is one teensy-weensy good part: it's a lot easier to prioritize! Previously, Joe didn't know what he should do to make optimal use of his time. Now, he knows exactly what he needs to work on: avoiding death from falling into a river!
And we can step back even more and generalize further: what we are seeing is but a special case of the law of diminishing returns. Abstractly, each additional unit of satisfaction requires a greater input of factors: land, labor, capital ... and thought (sometimes called "entrepreneurial ability"). Generally, the further up you pick the fruit, the harder it is to pick the next branch up, in terms of any factor of production, including and especially thought. Conversely, if you suddenly face a sharp drop in satisfaction by being deprived of more fundamental necessities, it becomes easier to decide what to do: replace those necessities!
***
That should give you a taste of what I think is missing from discussions of the economic impact of natural disasters and inability to reach full employment. In the next entry, I'll go further to illustrate how deeply this oversight impacts the ability to perform good economic analysis.
Recently, I've gained some insight into the economic debates between the various camps that claim to have a solution to our current problems. In addition to tying up some loose ends regarding a century-old debate, this insight gave me a good explanation of why standard dismissals of the so-called recalculation story (in explaining recessions like the current one) are making a subtle error.
First, a high-speed recap: Way back in the 1800s, Bastiat described what is known as the "Broken Window Fallacy" to refute the prevailing economic wisdom of the age. Many believed that a vandal who broke a window could be doing the economy a favor, reasoning that the owner would have to hire a glazier to fix the window, who would have new money he could use to buy new shoes, which would give the shoemaker the chance to buy something he wanted, and so on. (Note the early shades of the "multiplier effect" argument.)
Bastiat replied, basically, that no, this doesn't quite work, because you have to account for the "unseen" loss to the window owner, who would have engaged in the exact same economic stimulation as the glazier, had the window not broken, because he would have been able to buy something he wanted -- and we'd get to keep the window, to boot!
This mention of the Broken Windows Fallacy is often brought up in response to proposed Keynesian solutions (involving government stimulus spending), where their opponents say that it makes the same error, neglecting the unseen economic activity that would go on in the absence of the government's spending.
Keynesians, in turn, reply that the Broken Window Fallacy only applies at "full employment", where there is no "crowding out" (i.e. forgone projects due to the government's use of resources for different ones). In a depressed economy, they argue, the alternative to a metaphorical broken window (along with its fixing) is not "the window owner buys something else", but rather, "the window owner hoards that money", providing no economic benefit. Therefore, breaking a window in such a case would not have an economic opportunity cost, and so could indeed be good for the economy -- though Keynesians of course admit there are much better ways to increase employment than breaking a window.
The back-and-forth goes on, of course, with each side claiming that the other's position implies or relies on an absurdity. Keynesians accuse the free-market/"Austrian" types of thinking the economy is always optimally using resources, while Austrians accuse the Keynesians of calling a hurricane "God's gift to depressions".
But here, I think, I've noticed something that tremendously clarifies the debate, and gives us insight into why economic activity does or doesn't happen, and why certain events are or aren't good. So, here goes.
*******
Let's go back to the original Bastiat thought experiment about the broken window. Ask yourself this: Why are we assuming the window will be fixed at all?
Don't misunderstand me: it's a reasonable assumption. But we have to be careful that this assumption isn't fundamentally ignoring relevant economic factors, thereby baking in a desired conclusion from the very beginning. And here, I think we have good reason to believe that's exactly what's going on.
So let's start simple: under what circumstances would it be not be reasonable to assume that the window will be fixed, (i.e. that the owner will choose to pay someone to fix it), even during a depression? That's easy: if the neighborhood (along with that building) is run-down to begin with, already littered with broken windows. A lone broken window merits a quick repair, but if it's yet-another-broken-window, why bother? (Note here the substantive similarity to the homonymous "broken window" effect!)
So here we see the crucial, unappreciated factor: the obviousness of certain production decisions. What these thought experiments -- carefully constructed to make a different point -- actually prove is the importance of being able to confidently decide what is the best use of resources. And we can step back and see the same dynamic in very different contexts.
For example, say an unemployed guy, Joe, is trying all different kinds of things to find a job, and nothing is working. Then while driving one day, makes a wrong turn and steers his car off a bridge into the river below. Not good. But there is one teensy-weensy good part: it's a lot easier to prioritize! Previously, Joe didn't know what he should do to make optimal use of his time. Now, he knows exactly what he needs to work on: avoiding death from falling into a river!
And we can step back even more and generalize further: what we are seeing is but a special case of the law of diminishing returns. Abstractly, each additional unit of satisfaction requires a greater input of factors: land, labor, capital ... and thought (sometimes called "entrepreneurial ability"). Generally, the further up you pick the fruit, the harder it is to pick the next branch up, in terms of any factor of production, including and especially thought. Conversely, if you suddenly face a sharp drop in satisfaction by being deprived of more fundamental necessities, it becomes easier to decide what to do: replace those necessities!
***
That should give you a taste of what I think is missing from discussions of the economic impact of natural disasters and inability to reach full employment. In the next entry, I'll go further to illustrate how deeply this oversight impacts the ability to perform good economic analysis.
Friday, October 21, 2011
You know you're an economist when ...
... you find yourself needing to cite “Buchanan 1973″ when claiming that gangs want to do “too many” drive-by shootings.
In addition, the Mexican Mafia regulates drive-by shootings…because any particular street gang only suffers a portion of the increased attention of law enforcement from drive-by shootings, each street gang has an incentive to do too-many (Buchanan 1973).
Thursday, October 13, 2011
Setting the signaling model of education straight(er?)
Note: free business suggestion below.
You might have heard about the so-called "Signaling model of eduction", promoted by Bryan Caplan at GMU (among others!), and it's something I find plausible.
First, some background: The problem is to explain why people who get a college education are more able to get jobs, and better paying ones. The traditional explanation is that colleges provide you with knowledge skills that allow you to be more productive. (This has always seemed suspicious to those of us who have remarked, throughout our education, that "I'm never gonna use this stuff" ... and been mostly right.)
The signaling model, in contrast, says that completion of college simply reveals your possession of good traits for hiring that you already had before, but could not convincingly claim to have until you completed college, since a college degree indicates some combination of intelligence, willingness to do boring stuff that doesn't make sense, and capacity to be indoctrinated into and conform with a group (I'm simplifying a bit). These things are hard to test in a job interview, or, in the case of intelligence, usually illegal to test for.
A few years ago, I pointed out (HT: Bob Murphy [1]) that one usefully testable implication of the signaling model is that you should be able to earn big profits by running a business that provides high school graduates with the same "signals of good qualities" that a college provides, but at significantly lower (monetary) cost to them, simply by "cutting out the fat" -- all the stuff that doesn't help to signal the student's ability. You would just set up some school that filters students by IQ, and then puts them through hell, gives them difficult assignments, poor living conditions, etc. No way an unemployable person could survive through that kind of regimen, right?
So there's your idea: you make students just as employable, but they don't have to take on nearly as much debt.
Interesting caveat: in one discussion of my idea, someone mentioned that this business model is already in widespread use: specifically, the military! Let's go through the checklist:
- Cheaper than college? Check. (Heck, in terms of money, they pay you!)
- Enforces indoctrination and unquestioning following of direction? Check! [2]
- Selects for people who are willing to give a lot to a big organization? Check.
- Employers regard service therein as equivalent to college experience? Check (usually).
- Gives experience doing boring tasks because you were told to? Check.
- Generally puts you through hell? Check.
Wait, this can't be right, can it? This comparison fails in that the military doesn't filter people based on an IQ test! Hah!
Not so fast -- they've got that one covered: in the US, it's called the ASVAB, which determines whether you can get in, and then which branch, role, or officer status you're eligible for. (My mom used to pass on her dad's remark that, "the army'll take anyone who can crawl there, but not the Coast Guard! An exaggeration, of course, though the branches do have different score cutoffs.) The ASVAB is, in content, an IQ test.
Now, if you can provide a better value than the military (say, to people who don't want to possibly be put in harm's way), here's your business idea!
[1] Yes, a hat tip for pointing me to my own post,.
[2] Note: this isn't always a bad thing. As Eliezer Yudkowsky put it in that article:
You might have heard about the so-called "Signaling model of eduction", promoted by Bryan Caplan at GMU (among others!), and it's something I find plausible.
First, some background: The problem is to explain why people who get a college education are more able to get jobs, and better paying ones. The traditional explanation is that colleges provide you with knowledge skills that allow you to be more productive. (This has always seemed suspicious to those of us who have remarked, throughout our education, that "I'm never gonna use this stuff" ... and been mostly right.)
The signaling model, in contrast, says that completion of college simply reveals your possession of good traits for hiring that you already had before, but could not convincingly claim to have until you completed college, since a college degree indicates some combination of intelligence, willingness to do boring stuff that doesn't make sense, and capacity to be indoctrinated into and conform with a group (I'm simplifying a bit). These things are hard to test in a job interview, or, in the case of intelligence, usually illegal to test for.
A few years ago, I pointed out (HT: Bob Murphy [1]) that one usefully testable implication of the signaling model is that you should be able to earn big profits by running a business that provides high school graduates with the same "signals of good qualities" that a college provides, but at significantly lower (monetary) cost to them, simply by "cutting out the fat" -- all the stuff that doesn't help to signal the student's ability. You would just set up some school that filters students by IQ, and then puts them through hell, gives them difficult assignments, poor living conditions, etc. No way an unemployable person could survive through that kind of regimen, right?
So there's your idea: you make students just as employable, but they don't have to take on nearly as much debt.
Interesting caveat: in one discussion of my idea, someone mentioned that this business model is already in widespread use: specifically, the military! Let's go through the checklist:
- Cheaper than college? Check. (Heck, in terms of money, they pay you!)
- Enforces indoctrination and unquestioning following of direction? Check! [2]
- Selects for people who are willing to give a lot to a big organization? Check.
- Employers regard service therein as equivalent to college experience? Check (usually).
- Gives experience doing boring tasks because you were told to? Check.
- Generally puts you through hell? Check.
Wait, this can't be right, can it? This comparison fails in that the military doesn't filter people based on an IQ test! Hah!
Not so fast -- they've got that one covered: in the US, it's called the ASVAB, which determines whether you can get in, and then which branch, role, or officer status you're eligible for. (My mom used to pass on her dad's remark that, "the army'll take anyone who can crawl there, but not the Coast Guard! An exaggeration, of course, though the branches do have different score cutoffs.) The ASVAB is, in content, an IQ test.
Now, if you can provide a better value than the military (say, to people who don't want to possibly be put in harm's way), here's your business idea!
[1] Yes, a hat tip for pointing me to my own post,.
[2] Note: this isn't always a bad thing. As Eliezer Yudkowsky put it in that article:
Let's say we have two groups of soldiers. In group 1, the privates are ignorant of tactics and strategy; only the sergeants know anything about tactics and only the officers know anything about strategy. In group 2, everyone at all levels knows all about tactics and strategy.
Should we expect group 1 to defeat group 2, because group 1 will follow orders, while everyone in group 2 comes up with better ideas than whatever orders they were given?
In this case I have to question how much group 2 really understands about military theory, because it is an elementary proposition that an uncoordinated mob gets slaughtered.
Saturday, July 16, 2011
Bitcoin overview: proofs and common knowledge
In previous posts, I gave an explanation of the cryptographic building blocks of Bitcoin. Now I'll give a more "big picture" overview of how the overall system works. As before, I expect this to be easier to follow than the explanations I had to read to get to my current level of understanding.
Let's start from the general problems that a decentralized, anonymous (or pseudonymous) currency system has to solve. The most fundamental problem, is that of achieving "common knowledge" of the currency ownership. Specifically, everyone has to know not only who is the valid owner of any currency unit (so as to prevent double-spends); they must also know that everyone else knows the same answer. And they must know that you know that they know (and so on) this information. (This level of knowledge is known in the literature as common knowledge, but with the definition I just gave, not the conventional one.)
In other words, it's not enough that I know the current ownership status of any coin; I must count on others agreeing with me and knowing I agree with them. If you could accomplish this, you could get everyone to use and depend on the same record, thereby resolving disagreements about who is the current owner of what -- without trusting any one person. It is this problem that required the "key" innovation behind Bitcoin, as it has normally needed a trusted authority to solve it.
So what is this key innovation to solving that problem? The first insight is that it's possible to prove how many computing cycles were spent working on something. And with a system that implements such a "proof protocol", you can have a transaction record that provably has a certain number of past computing cycles spent on it. Then, you just need most of the users of a system to agree that they'll "go along with" whatever transaction record has the most computing cycles spent on it. Then, you know what the "real" global ledger is -- and you can trust that everyone else is using it too! (And they can trust that you're using it, etc.)
And there you have it: proof of ownership, without a central authority.
With that problem and solution in mind, a lot of the complexity of Bitcoin starts to make sense.
Remember how I had previously mentioned that bitcoins are initially doled out based on who can solve complex mathematical problem? Well, that math problem doesn't just exist to get initial bitcoins widely distributed -- that's not even the most important function of the problem. The main purpose, rather, is to prove that the the largest number of computer cycles were spent on a given transaction record. You see, if you start from the last known solution (which itself has the transaction record up to a point in time), you are starting from a record with, so far, the biggest number of cycles spent on it. (And the Bitcoin protocol specifies that you should start from the biggest one, though its in your own interest, as you will see.)
If you publish an "update" -- the previous ledger plus more recent transaction -- with the next solution, then the other users know that your purported ledger has all the cycles you spent on it plus all the cumulative cycles spent up to the last solution. Therefore, if you want to claim credit for the latest solution (entitling you to the 50 BTC bounty), you should start from the ledger in the latest solution.
So, let's step back and summarize. Here is a simplified version of what goes on in the Bitcoin network:
1) Whenever users want to transfer their bitcoins over to someone else, they broadcast a message describing the transfer and sign it with their private key.
2) Whenever a user receives a message indicating a transfer, they first check that the signature is valid (see previous post on digital signatures), and that the address doesn't spend more than the latest "confirmed" ledger shows it as having. If it checks out, they keep the message and propagate it to others.
3) All users wishing to claim the reward for a solution (aka "miners") bundle up all transactions they know of (i.e., new ones plus those in the latest confirmed ledger), and convert it into a math problem unique to that transaction set. They then work on solving that problem.
4) When someone finds a solution, they broadcast it, with their bundle of known transactions (new latest ledger), to all other users. Like with individual transactions, anyone who receives one of these checks it, and if valid, broadcasts it to others.
5) Miners who receive a new valid solution quit their current search for a solution, then take the latest ledger as definitive. Again, as in 3), they bundle up new transactions they hear of, add them to this new ledger, and try to solve a new math problem unique to the new transaction set, and the process begins anew.
In practice, sometimes different users will simultaneously find a solution, or solutions will propagate through different parts of the network at different speed. So miners will typically hold on to the 4-5 last latest ledgers, in case one of them is extended and becomes definitive. Users, for their part, will wait for several new ledger solutions before accepting their transaction is firmly in the network.
Oh, and as for the relevant jargon? A new solution, with its bundle of old and new transactions, is called a block. The complete transaction record, with each solution along the way, showing how the build off of each other, is called the block chain -- because each block "chains" off a previous ledger.
Now, I'm leaving out a lot of details, but I hope that explains the overall system and the different roles played. In the future, I'll go into more detail on:
- How you prove you spent X computing cycles on something.
- How you prevent situations where miners constantly find solutions at the same time.
- How you minimize storage requirements for the transaction record.
- How overlapping solutions get resolved.
- And much more.
Let's start from the general problems that a decentralized, anonymous (or pseudonymous) currency system has to solve. The most fundamental problem, is that of achieving "common knowledge" of the currency ownership. Specifically, everyone has to know not only who is the valid owner of any currency unit (so as to prevent double-spends); they must also know that everyone else knows the same answer. And they must know that you know that they know (and so on) this information. (This level of knowledge is known in the literature as common knowledge, but with the definition I just gave, not the conventional one.)
In other words, it's not enough that I know the current ownership status of any coin; I must count on others agreeing with me and knowing I agree with them. If you could accomplish this, you could get everyone to use and depend on the same record, thereby resolving disagreements about who is the current owner of what -- without trusting any one person. It is this problem that required the "key" innovation behind Bitcoin, as it has normally needed a trusted authority to solve it.
So what is this key innovation to solving that problem? The first insight is that it's possible to prove how many computing cycles were spent working on something. And with a system that implements such a "proof protocol", you can have a transaction record that provably has a certain number of past computing cycles spent on it. Then, you just need most of the users of a system to agree that they'll "go along with" whatever transaction record has the most computing cycles spent on it. Then, you know what the "real" global ledger is -- and you can trust that everyone else is using it too! (And they can trust that you're using it, etc.)
And there you have it: proof of ownership, without a central authority.
With that problem and solution in mind, a lot of the complexity of Bitcoin starts to make sense.
Remember how I had previously mentioned that bitcoins are initially doled out based on who can solve complex mathematical problem? Well, that math problem doesn't just exist to get initial bitcoins widely distributed -- that's not even the most important function of the problem. The main purpose, rather, is to prove that the the largest number of computer cycles were spent on a given transaction record. You see, if you start from the last known solution (which itself has the transaction record up to a point in time), you are starting from a record with, so far, the biggest number of cycles spent on it. (And the Bitcoin protocol specifies that you should start from the biggest one, though its in your own interest, as you will see.)
If you publish an "update" -- the previous ledger plus more recent transaction -- with the next solution, then the other users know that your purported ledger has all the cycles you spent on it plus all the cumulative cycles spent up to the last solution. Therefore, if you want to claim credit for the latest solution (entitling you to the 50 BTC bounty), you should start from the ledger in the latest solution.
So, let's step back and summarize. Here is a simplified version of what goes on in the Bitcoin network:
1) Whenever users want to transfer their bitcoins over to someone else, they broadcast a message describing the transfer and sign it with their private key.
2) Whenever a user receives a message indicating a transfer, they first check that the signature is valid (see previous post on digital signatures), and that the address doesn't spend more than the latest "confirmed" ledger shows it as having. If it checks out, they keep the message and propagate it to others.
3) All users wishing to claim the reward for a solution (aka "miners") bundle up all transactions they know of (i.e., new ones plus those in the latest confirmed ledger), and convert it into a math problem unique to that transaction set. They then work on solving that problem.
4) When someone finds a solution, they broadcast it, with their bundle of known transactions (new latest ledger), to all other users. Like with individual transactions, anyone who receives one of these checks it, and if valid, broadcasts it to others.
5) Miners who receive a new valid solution quit their current search for a solution, then take the latest ledger as definitive. Again, as in 3), they bundle up new transactions they hear of, add them to this new ledger, and try to solve a new math problem unique to the new transaction set, and the process begins anew.
In practice, sometimes different users will simultaneously find a solution, or solutions will propagate through different parts of the network at different speed. So miners will typically hold on to the 4-5 last latest ledgers, in case one of them is extended and becomes definitive. Users, for their part, will wait for several new ledger solutions before accepting their transaction is firmly in the network.
Oh, and as for the relevant jargon? A new solution, with its bundle of old and new transactions, is called a block. The complete transaction record, with each solution along the way, showing how the build off of each other, is called the block chain -- because each block "chains" off a previous ledger.
Now, I'm leaving out a lot of details, but I hope that explains the overall system and the different roles played. In the future, I'll go into more detail on:
- How you prove you spent X computing cycles on something.
- How you prevent situations where miners constantly find solutions at the same time.
- How you minimize storage requirements for the transaction record.
- How overlapping solutions get resolved.
- And much more.
Tuesday, October 26, 2010
So, what economic idea *is* hard to popularize?
In my last post, I ridiculed the idea that the Arrow Impossibility Theorem is somehow underappreciated. Do I have an answer to Tyler Cowen's request for a hard-to-popularize result in economics, then?
Yes, I do: the Put-Call Parity Theorem, and I gave my attempt at explaining it herea while back. It's important because it reminds us that markets can phrase the same transaction in several different ways, making it hard to ban particular ones. This forces you to think carefully about exactly what kind of transaction you want to prohibit when you say that e.g. options trading, fractional reserve banking, etc. should be illegal.
Yes, I do: the Put-Call Parity Theorem, and I gave my attempt at explaining it herea while back. It's important because it reminds us that markets can phrase the same transaction in several different ways, making it hard to ban particular ones. This forces you to think carefully about exactly what kind of transaction you want to prohibit when you say that e.g. options trading, fractional reserve banking, etc. should be illegal.
Setting Arrow's Impossibility Theorem Straight
Okay, by now, you might have noticed the econ blogosphere cooing over how awesome and insightful and useful the Arrow Impossibility Theorem is: Here, here, here, here, and here (in random order).
Um, to put it mildly ... no.
First, a summary of the theorem: let's say you want to convert individual preference rankings over outcomes into a social preference ranking that faithfully reflects these individual preferences as best as possible (i.e., create a voting system). You place a few "obvious" constraints on it that it voting system should meet, and it turns out -- you can't! Boo hoo, democracy sucks. (Well, in many senses, it does ... just not for this reason.)
This issue was discussed almost exactly one year ago on LessWrong. Long story short, the result has much less practical application than you might think. The requirements it asks of an aggregation system are far too strict. For one thing, the "determinism" requirement rules out the use of randomized tie-breakers. Keep in mind, there's always the possibility of some hopeless tangle involving a preference ordering like:
Person 1: A > B > C
Person 2: B > C > A
Person 3: C > A > B
Such preferences are completely intransitive, so no method of aggregation has any hope of being faithful. Normal people react to this by saying, "Okay, in the occasional pathological case, just use some tie-breaker that's not slanted in favor of any option -- in the end, it all averages out, so no problem". But Arrow's Theorem throws up its abstract arms and says, "Gosh, how hopeless. You can never satisfactorily aggregate preferences. Look how insightful I am!"
Needless to say, "We are not impressed."
It gets better though. "Black Belt Bayesian" makes the point that the "independence of irrelevant alternatives" (IIA) requirement is undesirable in the first place. (IIA means basically, if you remove some option, it should not change the aggregated ordering of the remaining options.) Why is it undesirable? Because so-called "irrelevant alternatives" aren't. Rather, they give evidence about the relative _strengths_ of preferences and therefore SHOULD affect the aggregated preference ordering!
Why was the econ blogosphere talking about Arrow's Theorem in the first place? Because someone had asked about underappreciated ideas in economics. Well, I think it's clear by now that this one doesn't suffer from a lack of deserved appreciation.
But what's even worse is that Amartya Sen's celebrated Liberal Paradox is viewed as a corrolary to the Arrow Theorem, and is just as ridiculous. It basically says you can't *both* respect people's rights *and* achieve Pareto optimality. Now, how do you imagine that works out? Well, you cheat by equating rights with obligations -- that is, you eliminate the possibility of people waiving a right when it's infringement would make everyone -- everyone -- weakly better off.
But who cares about that case? Not me. The very reason that rights allow for Pareto-optimality is because people can trade them as necessary when they find welfare-improving opportunities! If you equate "property rights in a specific apple" with "the obligation never to trade the apple away" ... well, you kinda throw a kink in all that.
As I said a year ago, if a transaction really is Pareto-efficient, then rights won't get in the way, because the relevant parties will waive the relevant rights! (Epic tongue-twister, too.)
Reassuringly, the folks on the opposite end of the ideological spectrum from me come to the same conclusion.
So are we set straight now?
Um, to put it mildly ... no.
First, a summary of the theorem: let's say you want to convert individual preference rankings over outcomes into a social preference ranking that faithfully reflects these individual preferences as best as possible (i.e., create a voting system). You place a few "obvious" constraints on it that it voting system should meet, and it turns out -- you can't! Boo hoo, democracy sucks. (Well, in many senses, it does ... just not for this reason.)
This issue was discussed almost exactly one year ago on LessWrong. Long story short, the result has much less practical application than you might think. The requirements it asks of an aggregation system are far too strict. For one thing, the "determinism" requirement rules out the use of randomized tie-breakers. Keep in mind, there's always the possibility of some hopeless tangle involving a preference ordering like:
Person 1: A > B > C
Person 2: B > C > A
Person 3: C > A > B
Such preferences are completely intransitive, so no method of aggregation has any hope of being faithful. Normal people react to this by saying, "Okay, in the occasional pathological case, just use some tie-breaker that's not slanted in favor of any option -- in the end, it all averages out, so no problem". But Arrow's Theorem throws up its abstract arms and says, "Gosh, how hopeless. You can never satisfactorily aggregate preferences. Look how insightful I am!"
Needless to say, "We are not impressed."
It gets better though. "Black Belt Bayesian" makes the point that the "independence of irrelevant alternatives" (IIA) requirement is undesirable in the first place. (IIA means basically, if you remove some option, it should not change the aggregated ordering of the remaining options.) Why is it undesirable? Because so-called "irrelevant alternatives" aren't. Rather, they give evidence about the relative _strengths_ of preferences and therefore SHOULD affect the aggregated preference ordering!
Why was the econ blogosphere talking about Arrow's Theorem in the first place? Because someone had asked about underappreciated ideas in economics. Well, I think it's clear by now that this one doesn't suffer from a lack of deserved appreciation.
But what's even worse is that Amartya Sen's celebrated Liberal Paradox is viewed as a corrolary to the Arrow Theorem, and is just as ridiculous. It basically says you can't *both* respect people's rights *and* achieve Pareto optimality. Now, how do you imagine that works out? Well, you cheat by equating rights with obligations -- that is, you eliminate the possibility of people waiving a right when it's infringement would make everyone -- everyone -- weakly better off.
But who cares about that case? Not me. The very reason that rights allow for Pareto-optimality is because people can trade them as necessary when they find welfare-improving opportunities! If you equate "property rights in a specific apple" with "the obligation never to trade the apple away" ... well, you kinda throw a kink in all that.
As I said a year ago, if a transaction really is Pareto-efficient, then rights won't get in the way, because the relevant parties will waive the relevant rights! (Epic tongue-twister, too.)
Reassuringly, the folks on the opposite end of the ideological spectrum from me come to the same conclusion.
So are we set straight now?
Wednesday, August 4, 2010
Setting spending straight: Now, we're getting somewhere
Setting spending straight: Now, we're getting somewhere
As you might have noticed, I'm quite confounded by the arguments for stimulus, especially monetary stimulus.
In discussing the issue on Less Wrong, I've argued that once you expand out what the economics jargon, it's not even clear that stimulus arguments even claim to be accomplishing something good. And that such schemes are justified with reasoning that would just as wellprove it beneficial to do clearly absurd things, showing a misuse of the term "the economy".
This suggested to me a serious case of lost purpose, where one's policy justifications have become completely disconnected from the original reasoning.
Well, now I've found someone willing to engage these issues: John Salvatier of Good Morning, Economics. He's not Scott Sumner, but he does advocate the same things, and knows his way around the topic.
If you're interested, take a look at our ongoing exchange on the basis for stimulus (and this shorter thread).
As you might have noticed, I'm quite confounded by the arguments for stimulus, especially monetary stimulus.
In discussing the issue on Less Wrong, I've argued that once you expand out what the economics jargon, it's not even clear that stimulus arguments even claim to be accomplishing something good. And that such schemes are justified with reasoning that would just as wellprove it beneficial to do clearly absurd things, showing a misuse of the term "the economy".
This suggested to me a serious case of lost purpose, where one's policy justifications have become completely disconnected from the original reasoning.
Well, now I've found someone willing to engage these issues: John Salvatier of Good Morning, Economics. He's not Scott Sumner, but he does advocate the same things, and knows his way around the topic.
If you're interested, take a look at our ongoing exchange on the basis for stimulus (and this shorter thread).
Sunday, July 11, 2010
Setting monetary stimulus straight
In light of my recent link to Gennady Stolyarov's post about the gloomy future of the economy (especially for young people), I thought it would be a good idea to put it against the backdrop of mainstream economics and the "experts'" solutions.
A characteristic post is this one by the relatively libertarian Scott Sumner. Like pretty much every day, his idea is for the Federal Reserve to do a "monetary stimulus" by injecting money into the economy to prop up nominal GDP. (Yes, nominal GDP -- you know, the one that doesn't mean anything until you adjust it to real GDP and even then commits you to a easily-abused framework.) This, it would do by various mechanisms, all of which aim to "get banks lending". Stop paying interest on reserves, buy more of banks' (junky) securities, rapidly debase the currency ("quantitative easing") so they have to loan or else hold worthless cash, etc.
In frustration at such a stupid policy, I made this sarcastic comment on that post:
And to my utter surprise, Sumner replied:
Note: the smiley was in recognition of my sarcasm, not to indicate he's changed his mind.
So, Sumner realizes exactly what he's asking for, and still thinks it's a good idea. But since it apparently isn't obvious to everyone what's wrong with such a policy, I thought I'd spell it out clearly for once:
Banks aren't lending (in sufficient numbers). Mainstream economists want to prod them into lending. But why won't they lend in the first place? Because they don't expect the future loan payments to justify the loan. Now, when you grip them so tightly that they have to, for some reason or another, make these loans, have you changed the factors causing banks to believe loans won't be paid? No, you haven't. So, the loans will just throw money after wasteful projects, destroying output and making everyone poorer.
Note: even if you -- quite reasonably -- care about unemployed workers, and you dismiss this concern about wastefulness on the grounds that, "hey, at least it will lift off the joblessness albatross for so many families", that still wouldn't make such policies a good idea. The wastefulness means that reality will eventually rear its head and force these projects to be abandoned. Then, all the new skills workers could have developed while working on sustainable projects that satisfy actual demand, instead don't get developed, and whatever they did do has just retooled them for a useless activity, leaving them even worse off. Doesn't sound too compassionate to me ...
But let's say I'm wrong about that. Let's put aside, for the moment, our skepticism about economists' claims that the same policy that forces banks to lend, also causes these loans to work out and get repaid, making them not such stupid loans to begin with. Even then, you're still causing inefficient activities to happen that cause workers and investors to dig themselves deeper on unsustainable activities.
Looking back, one has to wonder how economists ever came to the consensus that making ultra-underpriced loans to clumsy, inflexible banks could ever possibly be a good idea. My suspicion is that it is a kind of Goodhart phenomenon: at the time these economic models were created, the metrics economists cared about did serve as good proxies for general economic health. But as they were targeted by policy, they lost their value as indicators.
Furthermore, economists failed to continually ground their concept of a "good economy" in what is meant by the term in common parlance. They don't keep checking back to see whether their policies would mean that people get the best combination of work, leisure, and consumption (all broadly defined). No: if an improvement doesn't show up as a cash exchange, it doesn't matter. If people aren't spending enough, then obviously that's hurting the economy and they should spend more.
You would almost think the economy is some god that demands sacrifices, given the way economists talk, rather than a characterization of our collective ability to satisfy wants.
So please, understand my anger when I read about how young people have all of their options cut off by the earlier generation, how they can't save or invest because of how much will be taken to make up for the failures of poorly run enterprises, how genuinely productive ventures are quashed by an outdated mentality of how the world should work ... and then Scott Sumner swings in to tell us that the best way to improve "the economy" is with ridiculously underpriced loans from newly-printed money to aging, inefficient companies that just wasted trillions of dollars destroying our productive capacity.
Advice for economists: Ask whether, not why.
-Don't ask, "What can we do to increase aggregate demand?"
Ask, "Why should we increase aggregate demand?"
-Don't ask, "What can we do to keep people from saving so much?"
Ask, "Why does 'the economy' so crucially depend on people not saving, and why do I care about the health of the 'economy' in that sense?"
-Don't ask, "What can we do to get (traditionally measured) output back up?"
Ask, "Why is it necessary for that measure of output to go up? Would it be so terrible for people to produce less, if that's what they really want, based on honest assessments of the future?"
Get the picture?
A characteristic post is this one by the relatively libertarian Scott Sumner. Like pretty much every day, his idea is for the Federal Reserve to do a "monetary stimulus" by injecting money into the economy to prop up nominal GDP. (Yes, nominal GDP -- you know, the one that doesn't mean anything until you adjust it to real GDP and even then commits you to a easily-abused framework.) This, it would do by various mechanisms, all of which aim to "get banks lending". Stop paying interest on reserves, buy more of banks' (junky) securities, rapidly debase the currency ("quantitative easing") so they have to loan or else hold worthless cash, etc.
In frustration at such a stupid policy, I made this sarcastic comment on that post:
Yes, the economy will definitely collapse if the Fed doesn’t print up more money to make shoddy loans for purchases people don’t want, and it’s a shame that folks at the Fed are stopping Bernanke from such a wise action.
And to my utter surprise, Sumner replied:
Silas. I agree. :-)
Note: the smiley was in recognition of my sarcasm, not to indicate he's changed his mind.
So, Sumner realizes exactly what he's asking for, and still thinks it's a good idea. But since it apparently isn't obvious to everyone what's wrong with such a policy, I thought I'd spell it out clearly for once:
Banks aren't lending (in sufficient numbers). Mainstream economists want to prod them into lending. But why won't they lend in the first place? Because they don't expect the future loan payments to justify the loan. Now, when you grip them so tightly that they have to, for some reason or another, make these loans, have you changed the factors causing banks to believe loans won't be paid? No, you haven't. So, the loans will just throw money after wasteful projects, destroying output and making everyone poorer.
Note: even if you -- quite reasonably -- care about unemployed workers, and you dismiss this concern about wastefulness on the grounds that, "hey, at least it will lift off the joblessness albatross for so many families", that still wouldn't make such policies a good idea. The wastefulness means that reality will eventually rear its head and force these projects to be abandoned. Then, all the new skills workers could have developed while working on sustainable projects that satisfy actual demand, instead don't get developed, and whatever they did do has just retooled them for a useless activity, leaving them even worse off. Doesn't sound too compassionate to me ...
But let's say I'm wrong about that. Let's put aside, for the moment, our skepticism about economists' claims that the same policy that forces banks to lend, also causes these loans to work out and get repaid, making them not such stupid loans to begin with. Even then, you're still causing inefficient activities to happen that cause workers and investors to dig themselves deeper on unsustainable activities.
Looking back, one has to wonder how economists ever came to the consensus that making ultra-underpriced loans to clumsy, inflexible banks could ever possibly be a good idea. My suspicion is that it is a kind of Goodhart phenomenon: at the time these economic models were created, the metrics economists cared about did serve as good proxies for general economic health. But as they were targeted by policy, they lost their value as indicators.
Furthermore, economists failed to continually ground their concept of a "good economy" in what is meant by the term in common parlance. They don't keep checking back to see whether their policies would mean that people get the best combination of work, leisure, and consumption (all broadly defined). No: if an improvement doesn't show up as a cash exchange, it doesn't matter. If people aren't spending enough, then obviously that's hurting the economy and they should spend more.
You would almost think the economy is some god that demands sacrifices, given the way economists talk, rather than a characterization of our collective ability to satisfy wants.
So please, understand my anger when I read about how young people have all of their options cut off by the earlier generation, how they can't save or invest because of how much will be taken to make up for the failures of poorly run enterprises, how genuinely productive ventures are quashed by an outdated mentality of how the world should work ... and then Scott Sumner swings in to tell us that the best way to improve "the economy" is with ridiculously underpriced loans from newly-printed money to aging, inefficient companies that just wasted trillions of dollars destroying our productive capacity.
Advice for economists: Ask whether, not why.
-Don't ask, "What can we do to increase aggregate demand?"
Ask, "Why should we increase aggregate demand?"
-Don't ask, "What can we do to keep people from saving so much?"
Ask, "Why does 'the economy' so crucially depend on people not saving, and why do I care about the health of the 'economy' in that sense?"
-Don't ask, "What can we do to get (traditionally measured) output back up?"
Ask, "Why is it necessary for that measure of output to go up? Would it be so terrible for people to produce less, if that's what they really want, based on honest assessments of the future?"
Get the picture?
Saturday, July 10, 2010
Setting the future economy straight
Gennady Stolyarov II does it much better than I can in a guest post on Bob Murphy's blog.
My summary: young people are f'ed. New and existing laws, along with entrenched norms, make it effectively impossible for them to succeed through standard education and career paths. Success has become decoupled from merit, and the upcoming generation will be barred from home-ownership, even if they're responsible. A constellation of irresponsible financial policies by the government shifts most of the cost of government to these young people through ever-growing inflation, taxes, and one-size-fits-all laws. The only answer is for the new generation to break from traditional norms and bypass the standard dinosaur institutions, using new technologies -- mainly the internet -- to meet their economic needs, without the waste and inefficiency that has crept into the system over time.
Lots of thoughts I've had, but put together with rigor I have yet to match on the issue.
My summary: young people are f'ed. New and existing laws, along with entrenched norms, make it effectively impossible for them to succeed through standard education and career paths. Success has become decoupled from merit, and the upcoming generation will be barred from home-ownership, even if they're responsible. A constellation of irresponsible financial policies by the government shifts most of the cost of government to these young people through ever-growing inflation, taxes, and one-size-fits-all laws. The only answer is for the new generation to break from traditional norms and bypass the standard dinosaur institutions, using new technologies -- mainly the internet -- to meet their economic needs, without the waste and inefficiency that has crept into the system over time.
Lots of thoughts I've had, but put together with rigor I have yet to match on the issue.
Monday, January 4, 2010
Mixing economics, thermodynamics, and heterogeneity
... or METH, as some call it. And if you want some more drug innuendo, read on.
On Brad DeLong's blog, a commentator named "MJ" deftly applies insights from thermodynamics to the issue of heterogeneity of goods in economics:
I can vouch for that as showing a good understanding of entropy, and it gives a good perspective for viewing economics:
1) An efficient economy produces as little net entropy as possible: the entropy it generates (destruction of heterogeneity) should be offset by the entropy it destroys in organizing inputs for their uniquely optimal roles.
2) A sign of inefficiency is when economic actors destroy distinctions (like in MJ's example of very different tranches and borrowers being made indistinguishable) without making a corresponding useful distinction or organization.
Definitely some issues worth fleshing out. I know I've seen papers that try to view economics from a thermodynamic perspective, but they invariably have me rolling my eyes.
On Brad DeLong's blog, a commentator named "MJ" deftly applies insights from thermodynamics to the issue of heterogeneity of goods in economics:
What would statistical mechanics be without a quantitative model of heterogeneous vs. homogeneous distributions? Such a statistical mechanics would miss a few subtle but crucial concepts. Such as entropy.
Note how the negentropic development of increasingly heterogeneous capital allocations over the past decade was accomplished through entropy production: bundling good with bad, compromising tranches, etc... Goldman Sachs made a killing, basically, off of knowingly producing entropy. The entropy production, of course (2nd law), far exceeded the negentropy production of their wealth aggregation- as reflected in the order of magnitude between financial industry's gains and the over all loss.
We're now learning Fannie and Freddie also engaged in entropy production, obscuring the distinction between scores over and under 660.
I can vouch for that as showing a good understanding of entropy, and it gives a good perspective for viewing economics:
1) An efficient economy produces as little net entropy as possible: the entropy it generates (destruction of heterogeneity) should be offset by the entropy it destroys in organizing inputs for their uniquely optimal roles.
2) A sign of inefficiency is when economic actors destroy distinctions (like in MJ's example of very different tranches and borrowers being made indistinguishable) without making a corresponding useful distinction or organization.
Definitely some issues worth fleshing out. I know I've seen papers that try to view economics from a thermodynamic perspective, but they invariably have me rolling my eyes.
Friday, October 30, 2009
Sarcasm, applied properly
In case you've been living in a cave for the past few weeks -- or rely on the mainstream media for your news -- you've probably heard about climate scientist Joe Romm's expose of the shoddy work on global warming in the new book SuperFreakonomics by Levitt and Dubner. (Excellent compilation of the discussion in the blogosphere and some mainstream publications.)
Long story short, it's like the kerfuffle a while back between me and Bob Murphy about his own, um, imprecise commentary on global warming, except that the mistakes by Levitt and Dubner were much bigger, they got called on their shoddiness by a lot more people, and they continued to dig themselves much deeper that Bob ever tried to. To top it off, they deliberately misrepresented one of their experts (Ken Caldeira added the quote you see to his web page in contradiction of a position attributed to him in the book after he found out what was in it.)
(Note: this isn't about "rah rah let's cut carbon emissions" vs. "those durn whiny hippies". Regardless of your opinion on the issue, Levitt and Dubner's handling was extremely shoddy, and exactly the kind of thing that neither side should want, even and especially if you agree with their policy positions.)
With that in mind, take a look at this post on the Freakonomics blog, where Levitt complains that he's unfairly portrayed, in his university's alumni magazine, as someone not tackling the "big questions" and who's ruining economics.
Yep, this is one of those times when only Silas-grade sarcasm will do. Here's what I posted:
Needless to say, the comment didn't make it through moderation.
By the way, it's my birthday today! Wish me a happy 28th if you haven't already!
Long story short, it's like the kerfuffle a while back between me and Bob Murphy about his own, um, imprecise commentary on global warming, except that the mistakes by Levitt and Dubner were much bigger, they got called on their shoddiness by a lot more people, and they continued to dig themselves much deeper that Bob ever tried to. To top it off, they deliberately misrepresented one of their experts (Ken Caldeira added the quote you see to his web page in contradiction of a position attributed to him in the book after he found out what was in it.)
(Note: this isn't about "rah rah let's cut carbon emissions" vs. "those durn whiny hippies". Regardless of your opinion on the issue, Levitt and Dubner's handling was extremely shoddy, and exactly the kind of thing that neither side should want, even and especially if you agree with their policy positions.)
With that in mind, take a look at this post on the Freakonomics blog, where Levitt complains that he's unfairly portrayed, in his university's alumni magazine, as someone not tackling the "big questions" and who's ruining economics.
Yep, this is one of those times when only Silas-grade sarcasm will do. Here's what I posted:
Well, it's a good thing you've moved on from sumo-wrestling into important issues like global warming, where you've carefully researched the issue, accurately represented expert opinion, and presented an even-handed, informative discussion of the issue that helps sustain the University of Chicago's excellent reputation.
Needless to say, the comment didn't make it through moderation.
By the way, it's my birthday today! Wish me a happy 28th if you haven't already!
Friday, October 9, 2009
Paul Krugman actually allows criticism on his blog!
I had heard bad things about Keynesian economist Paul Krugman not allowing comments on his blog that are too critical, but that turned out not to be an issue. In a recent post he argues that the gold standard is obviously flawed because economic recovery during the Great Depression was highly correlated with going off the gold standard. Nevertheless, my usual criticism of this point got approved for others to see. It's this comment, which I'll repost here:
****
I’ve known about this correlation for a while, but I think it’s misleading, regardless of the merits of a gold standard.
Think about it this way: at the time, people expected their money to be convertible at a specific rate into gold. “Going off the gold standard” is therefore a roundabout way of saying “robbing people of their wealth”, because it amounts to expropriation of their gold holdings.
So this correlation (between going off the gold standard and recovery) reduces to the observation that “when times are bad, taking rich people’s stuff and redistributing it can making things look a lot better in the short term” … which isn’t so impressive when you look at it that way.
The real question is, *discounting* for the usual effects of looting the rich, did it make the economy better off than it would have been without such capricious, revolution-like activity?
****
I’ve known about this correlation for a while, but I think it’s misleading, regardless of the merits of a gold standard.
Think about it this way: at the time, people expected their money to be convertible at a specific rate into gold. “Going off the gold standard” is therefore a roundabout way of saying “robbing people of their wealth”, because it amounts to expropriation of their gold holdings.
So this correlation (between going off the gold standard and recovery) reduces to the observation that “when times are bad, taking rich people’s stuff and redistributing it can making things look a lot better in the short term” … which isn’t so impressive when you look at it that way.
The real question is, *discounting* for the usual effects of looting the rich, did it make the economy better off than it would have been without such capricious, revolution-like activity?
Tuesday, May 12, 2009
Spot the common professional economists' error
From James Hamilton:
If you can't wait for me to give you the answer, just go to the link and find my link. Well, I don't give it there either.
Anyway, all I can say is, if you make this kind of error at the beginning, don't expect me to put a lot of faith in your analysis...
When academic economists talk about inflation, we often think in terms of a single-good economy in which the concept refers unambiguously to an increase in the dollar price of that good.
If you can't wait for me to give you the answer, just go to the link and find my link. Well, I don't give it there either.
Anyway, all I can say is, if you make this kind of error at the beginning, don't expect me to put a lot of faith in your analysis...
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