Matt Nolan

Economists and Facebook events

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Yes, this is how a general economist analyses social situations:

An invitation is an option that can be exercised at any time before the date of the party.  The people who did not respond immediately are waiting to decide whether to exercise the option.  If she’s a true friend then this is because she has a potential conflict that would prevent her attending.  …  When she is sure there is no conflict she will say yes.

The other people are hoping for an excuse not to come.  Once they get a better offer, manage to schedule a conflicting business trip, or otherwise commit themselves, they will send their regrets.

…

Those who want to come but haven’t gotten out of their conflict give up and send their regrets. Those who hoped to get out of it but failed to come up with a believable excuse give up and accept. … So, a simple measure of how much your friends like you is the proportion of acceptances that arrive in the final days.

It isn’t that economists are ignorant of social realities – we might just spend a little too much time analysing what is going on, a reality that is obvious when you see us uncomfortably twitching around 😉

I would note that, in the case of Facebook, the situation is a little different now.  Previously you would see invites on the home page – so you had to make a conscious decision everytime you logged in (so about 24 times a day).  However, now you receive an email and don’t hear about it again until close to the date – as I get so much spam I don’t often notice events until close to the date.

So I’m sure I’ve got a valid excuse for not accepting until the last minute 😉

Update:  Eric Crampton has a great example of this.

Matt Nolan

Aimless call of the day

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From Bloomberg:

U.S. Representative Mike Pence, chairman of the House Republican Conference, said he plans to introduce a bill tomorrow that would end the Federal Reserve’s dual mandate, forcing the central bank to focus on inflation.

“It’s time for the Fed to be solely focused on price stability and not the recently announced QE2,” said the 51- year-old lawmaker.

Inflation and inflation expectations are below what the Fed considers consistent with it’s mandate to keep price growth stable.  As a result, even if the Republicans changed the mandate policy wouldn’t change.

In fact, the whole idea of a “dual mandate” is really just pleasant advertising – as the Fed believes that it can only stabilise economic activity insofar as it ensures that the inflation rate is at trend.  In essence, even with a “dual mandate” they continue to respond to demand shocks (and not respond to supply shocks) in a way that is consistent with a “single mandate” to control inflation.

Matt Nolan

In defence of neo-classical economics

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I have recently seen an increasing number of attacks on “neo-classical” economics from every section of the political spectrum.

Last week, I heard a number of commentators at the sustainable economics conference claim that neo-classical economics was:

  1. Based on falsified views of the individual,
  2. Static,
  3. Had no supply side.

Then I saw an attack on “neo-classical economics” from Roger Kerr at the Business Roundtable (and more) which seemed to imply:

  1. It ignores institutions,
  2. It ignores transaction costs,
  3. It is static.

I was surprised by these attacks.  More than surprised, I felt like the attacks were based on a straw man version of neo-classical economics – one that in many ways never existed, and if it was floating around it was during the 1950’s-1970’s when a lot of the focus was on a narrow neo-classical synthesis in macro theory.

Neo-classical economics is a term for the “core” of economic theory – primarily modern mainstream microeconomics.  I have discussed here how we get from scarcity to neo-classical economics, and I have discussed neo-classical economics in more detail here.

This “core” is different to the core in the 1970’s – as many of the fringe elements of theory have now shifted their way inside the core of economics (think game theory, endogenous growth theory, transaction cost economics).  However, this is the point, neo-classical economics has evolved and it is this modern version that is taught in universities (at least it is at Victoria) nowadays – contrary to the claims at the sustainability conference that economics hadn’t changed.

The reason I am so defensive about the definition of neo-classical economics is because people see it as the current core – which according to my definition it is.  Setting up an alternative definition of neo-classical economics and knocking it down is either equivalent to setting up a straw man to attack, or directly misleading people to make it sound like modern economists are incompetent.

Matt Nolan

Good article from Brash

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I said before that I have a few issues I will go into with the 2025 Taskforce report – but not today.  When saying that I also discussed an article from Fran O’Sullivan – I used both these things as a starting point for discussing why I felt there was a statist bias among the right in NZ.

However, Don Brash does an excellent job of taking apart O’Sullivan’s article – and although I disagree with elements of the description and framing of the Taskforce report I was wrong to put him in the statist camp if this is how he thinks.  I would also note that the savings point he mentions holds strongly for China – but I would suggest you read the article yourself.

Matt Nolan

Seeing the future and determinism

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As an economic forecaster, the idea of “seeing the future” is no doubt of interest to me.  Combined with the fact that I have compared economic forecasting to tarot card reading, it would seem that I have a prior belief that the ability to see the future exists – but in fact, I very much don’t.

In essence, my prior belief is that the future is not predetermined per see, but that there are current factors that influence future outcomes that are observable – as a result, we can use knowledge about the causal or empirical relationship between these factors to get some idea regarding what could happen and some of the risks around it.

However, in the face of genuine uncertainty I would believe we have no knowledge.  This specific view also indicates that the distinction between free will and determinism is unobservable – as there is no way to disentangle the relationship between cause and effect in a way that tells us whether there is choice, or whether the causal mechanism in itself determines the future.

Yet, a recent study that appears to show a mildly statistically significant relationship between people’s predictions of what will happen and what does happen BEFORE what occurs has been in any way determined.  In essence, there is complete uncertainty but people’s ability to judge what will happen in the face of this is greater than we would expect from chance! [ht Chris Blattman, Marginal Revolution *].

To me, this also provides a test of determinism vs free will – at least along some level of interaction.  Why?  If it is possible for people to “see the future” before it is ex-post determined then the future must in some sense exist before it appears to exist.

In the face of free will, we can still judge what will happen on the future given information, but we would not expect people to outperform chance in the face of no information.  In the face of determinism we would expect the ability to judge the future with no information would be related to the strength of the precognitive ability of the person – if, among people, this is on average greater than zero we would expect a statistically significant deviation from chance.

This is all very interesting, but I would like to see the results replicated and further testing done before I even begin to shift my posterior probability regarding such things.

Matt Nolan

Financial transactions tax: Don’t forget about incidence

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Economist’s View has again come out in favour of a financial transactions tax.

Now I believe the version of the tax that Mark Thoma supports is different from the one we hear about from the more left wing parties in New Zealand (see here and here and here) – specifically, it is supposed to only be on trade that is seen as ‘high volume speculative financial trade’ … ultimately, it is a more traditional Tobin tax, rather than the tax on all financial transactions that has been raised here.

Even so, I am convinced it is subject to the same criticism – namely that:

  1. the incidence of the tax is likely to fall in unintended places,
  2. there is no reason to think volatility will decline following the introduction of such a tax
  3. there is no reason to think that the likelihood of “exchange rate bubbles” will decline following the tax – in fact by blunting the market price it may increase the likelihood of exchange rate misalignment
  4. there may be practical difficulties with such a tax – eg tax evasion by changing the name of purchases, buy commodities as a proxy for currency etc.

In truth, a financial transactions tax appears to be an indirect means for trying to achieve any goals – while I see why we may want to increase international co-operation/discussion regarding variables that impact on other countries (tax, exchange rate policy, monetary policy) a FTT/Robin Hood tax does not appear to be a silver bullet – or even a useful policy solution.

Update: Patrick Nolan from Reform discusses this in more detail – given that there is a sizable push towards this sort of tax over in the UK.