Progressives are likely facing a long time in the wilderness when it comes to the Supreme Court. Beyond the anti-worker, anti-consumer, anti-voter decisions already laid down over the past decade or so, we can anticipate a conservative majority for many years to come. But watching and waiting is no strategy at all. What can we do?
economics is still not about money
Efficient outrage
Matt Damon put yet another foot in his already quite full mouth this week. In an interview with ABC, he was invited to discuss the reckoning of sexual harassment and assault in his and other industries. He decided, for some reason, to go to bat for the idea that not enough is being made of what he perceives as a gradation of harm across different manifestations of workplace misogyny. Implicit is an attack on those who would advocate swift and severe punishment for what Damon would have us believe are minor sins.
I want to make the case that textbook economic theory will firmly reject Damon’s line of reasoning. Outrage of the type that Damon describes is more than justified, it is efficient. The market and the law don’t have the tools to reckon with the full, true cost of misogyny. This market failure makes for fertile soil for institutions that force perpetrators and enablers to internalize some of those costs. Outrage-of-the-day culture invites a lot of criticism from those looking to score a cool, contrarian take, but it is smart economics.
Time versus money
Without thinking about it too hard: would you say you prefer time or money?
When we teach labor supply models, our workhorse model is a stylized constrained maximization problem in which a decision maker has to decide how many hours to work. They don’t particularly like working, but they do like to buy things, and so they have to decide where the sweet spot of that trade-off is for them, given how much they’d get paid for working and what their outside option is.
Let’s leave aside that this is a cash-centered conception of work, and that it typically assumes a distaste for work (though it doesn’t have to, since it is just coded into preferences—a good exam problem is to brainstorm plausible labor supply models with a taste for work).
What I really want to talk about is the real version of that toy model’s objective function. As economists, we write down parameterized utility functions to see what happens if the relative preference for time versus consumption goods changes. We all want to enjoy leisure time and be able to afford nice things. But where on the spectrum do you lie?
I ask the question at the top—do you prefer time or money?—to my class whenever I start teaching labor supply models. In my experience there is a genuine difference of opinion, right down the middle, between the two options. I’m more of a time person, but reasonable people could well disagree, as they say.
It’s a real difference in worldview, though. A person might think I was crazy if I did something that left money on the table, just as I might think them crazy for counting every penny. Why wouldn’t you want to get rich? Why wouldn’t you want to relax?
I sometimes wonder if one’s preference here has something to do with political preference. That old trope where everyone to the right of you is greedy and everyone to the left of you is lazy—isn’t that just relative money preference and relative time preference in action? Maybe some part of talking past each other is just the usual story from chapter 1 of microeconomics: different preferences.
“Economist”
Published today at The Upshot: What if Sociologists Had as Much Influence as Economists? by Wren McDonald. I want to pick up on a couple of points raised since they really get at things I’ve written and obsessed about a lot over the years.
I agree wholeheartedly with the article’s premise that sociology—in particular ethnography—and other academic disciplines can bring just as much or more relevant knowledge and expertise to public policy debates as economics can. I’m going to get a bit depressing in a minute here so I don’t mean this to come across as a backhanded compliment or something. I do mean it seriously. My criticisms here are directed at very small words in the article that aren’t really about the article at all, but about us, economists, and our relationship to various publics, our professional PR, our toxic guild label. On the actual content of the article, the premise, the spirit, the recommendations I am quite on board.
Alright, let’s do this.
Players’ motivations in games and “homo economicus”
I’m in the middle of reading The Moral Economy by Samuel Bowles. It’s about how explicit financial rewards and punishments can lead to bad consequences through their “crowding-out” of a person’s pro-social motivations. I’m learning a lot from the book and I would recommend it.
Rehabilitating the economist
Following up on my post Methodology, Ideology from a few days ago, I’ve started to dig in to Johanna Bockman’s Markets in the Name of Socialism: The Left-Wing Origins of Neoliberalism. It is a fascinating perspective on the history of economic thought and the sociology of economics. Importantly, it is explicitly concerned with separating the standard methodology of neoclassical economics from right-wing, capitalist ideology.
I have suffered from an unshakeable paranoia about being an economist ever since it looked like I was going to become one. To be an economist is, as I have written about a lot before, to be generally understood as someone concerned with finance, business, and money, a soulless being who sees human beings as automatons programmed to maximize their wealth. I began to feel—I still can’t shake the feeling—that we are forever condemned to this tragic, villainous role.
Trading in risk
The excellent essay aggregator The Browser linked this week to an essay by Steve Randy Waldman on the relationship between freedom and risk. It’s an interesting piece and well worth reading. I want to instead talk about the blurb that The Browser wrote to recommend it:
Learned essay on the contradictions between freedom and risk. We almost all want freedom, but few of us want to carry the risks that go with freedom. The history of finance is the history of attempts to lay off or mitigate risk: all of which are doomed to failure. The risk has to accumulate somewhere. And, as in 2008, it eventually blows up.
I know I shouldn’t take this too seriously—it is, after all, just a little hook to encourage readers to click on the link—but I think there are a couple of important things to mention.
I am extensively on record that economics is not the same thing as finance, but of course they are related. Let’s say for the moment that if we can think of economics as being about the allocation of scarce resources, we can think of finance as being about the allocation of scarce capital or money. At the core of economic theory is the idea of mutually beneficial trade: it is possible that we can trade resources and both be better off than before. More than that: a trade willingly entered into by two parties with good information on the things being traded seems almost tautologically mutually beneficial. If it doesn’t benefit both, why do it?
Now of course “good information” is important. For example, when you sell me a used car knowing that it is in fact a few miles away from becoming kaput, I may later be upset. Similarly, in finance, if my information on the riskiness of an asset is bad, I may be sad later, and not just in the sense of being unlucky. But the claim that “all [attempts to lay off or mitigate risk] are doomed to failure” is very peculiar. There are two problems here. The easy one first: clearly not all risks “eventually blow up”. This is the point of risk! If all risks eventually come to pass, then surely they are not risks but racing certainties.
The second problem is that where the risk goes matters. Naturally “the risk has to accumulate somewhere”; we cannot magic away risk by passing it around. But where does it end up? Can the trade of a risky asset be mutually beneficial? Yes: if you are more willing to bear the risk than I am, then you will be willing to part with more to buy that risk than I am willing to accept to sell it. You can buy that risk from me—assume it for your own—and we can both be happier. Think of unemployment insurance: for me to lose my job may be catastrophic. I will be destitute; this risk is very costly for me to bear. For an insurance company, the risk that I lose my job is trivial. The insurance company is happy to absolve me of (some of) this risk, and I am happy to pay them a premium to do so. We are both happy. Dare I even say that my freedom is enhanced when I can trade risk in this way?
So yes, the risk accumulates. But the idea behind all trade is that we might be able to send resources to the place where they are most valuable. And so it is with risk: if we can trade risk, perhaps we can have it accumulate in the hands of those to whom it will be the most bearable. While we do not eliminate the risk, we minimize the pain that is caused if the bad outcomes happen. Hey presto!
Of course there is fraud and lies and bad information, and of course some risks can aggregate into systemic kerfuffles, but let’s not throw the baby out with the bathwater. Trade in risk is not an inherently destructive activity.
Shared economics
Roger Goodell has joined the debate on the semantics of the word “economics”. Welcome, Roger! From ESPN (warning: obnoxious auto-load video alongside article) today:
Commissioner Roger Goodell wrote NFL players Thursday, outlining the league’s last proposal to the union and cautioning that “each passing day puts our game and our shared economics further at risk.”
Now what might “shared economics” mean? Of the several points of disagreement between NFL owners and players in the current conflict, one is, of course, money. I’m going to regretfully assume that the resource to which Goodell’s “economics” refers is only money. So what does he mean about that money?
Can “shared economics” mean a “shared allocation of resources”? It’s possible; the two sides can take, in some sense, shared ownership of a specific or formulaic allocation of the pot o’ gold from professional football. But this is odd. A problem (paraphrased) is that the owners want a larger cut of money off-the-top, which is different from the status quo. So the mutually agreed allocation of resources from the last CBA has thus far never been on the table.
The whole problem, of course, is in the sharing, in the allocation. It is nearly tautological that a disagreement about the allocation threatens the allocation. So that can’t be it.
Can “shared economics” mean “shared money”? This is also possible. There’s a work stoppage. In the worst case, the 2011 season is lost or curtailed and there will be a massive loss of revenue. Even in the best case, there is the fuzzier risk of alienating fans, contractual partners, and antitrust authorities, which could plausibly do the same. This seems a much likelier contender for what Goodell had in mind when he picked the word “economics” in his letter.
So to Goodell economics is a synonym for money, or revenue, or resources. This is depressing even for someone of my own view that the word “economics” is hopelessly lost to language forever. “Economics” is no more the resource than football is 22 people running around on some grass.
Christmas redux
It’s Christmas time again. Tim Harford’s on the case of that gift-giving economics article I talked about back in January, with typical accuracy:
“Waldfogel’s work is often misinterpreted as suggesting that gift-giving is pointless. That is not true. He explicitly excluded the sentimental value of gifts from his calculations, and, of course, the sentimental value is part of the purpose of giving presents.”
More than that, though; his positivist reading of the original article leads to some very sensible, common-sensical normative prescriptions:
“the economists Sara Solnick and David Hemenway have discovered that we prefer unsolicited presents to those we have specifically requested… All this points to the optimal gift-giving strategy: you need to minimise the deadweight loss while maximising the sentimental value. This suggests buying small gifts and striving for emotional resonance. Look for something inexpensive, and consider supplementing it with a letter, a photo, or time spent together.”
Prescriptions we can all relate to.
More ultimatum game ignorance
I wonder what it is about the ultimatum game that makes for journalistic error? More of the same from Emily Yoffe in Slate:
We like to think we go through life as rational beings. Much of economic theory is based on the notion that humans make rational choices (which may mean that economists don’t get out much).
“Rationality” is a model, and admits any form of behavior. It does not say how someone “should” behave.
In 1982, some economists came up with a little game to study negotiating strategies. The results showed that rationality is subservient to more powerful drives—and demonstrated why human beings so easily conclude they are being wronged. The idea of the “ultimatum game” is simple. Player A is given 20 $1 bills and told that, in order to keep any of the money, A must share it with Player B. If B accepts A’s offer, they both pocket whatever they’ve agreed to. If B rejects the offer, they both get nothing. Economists naturally expected the players to do the rational thing: A would offer the lowest possible amount—$1; and B, knowing $1 was more than zero, would accept. Ha!
This is the Nash Equilibrium of the game, if both players cared only about money. It has nothing to do with “rationality”.
In the years the game has been played, it’s been found that almost half the A’s immediately offer to split the money—an offer B’s accept. When A offers $9 or even $8, B usually says yes. But when A’s offer drops to $7, about half the B’s walk away. The lower A’s offer, the more likely the B’s are to turn their backs on a few free dollars in favor of a more satisfying outcome: punishing the person who offended their sense of fairness. This impulse is not illogical; it is essential.
Only the hypothetical economists in the article found it illogical, and they’re not real. Once more: rejection of a lowball offer in the ultimatum game is rational under the entirely realistic assumption that people care about more than money. Please stop attacking the straw economist who disagrees with that statement.
Jim Campbell 