On pricing and altruism

The aftermath of the Christchurch earthquake has seen much of New Zealand pulling together to help out affected residents who are in need. It has also seen a scarcity of many essential items as supermarkets close and water is switched off. In particular, queues at petrol stations have been huge and that has prompted Eric Crampton — a Christchurch resident himself — to call for higher petrol prices. He is concerned that people with the greatest need for fuel will not get it if there is a shortage. Rather, the people most able to queue for a long time will get the limited amount of petrol and those may simply be the people with the least pressing need to be elsewhere. In summary, he is worried that the petrol will unfairly go to those who may not have the greatest need of it.

In reply, Keith Ng’s attack on economists mischaracterises the discipline and then erroneously attempts to refute Eric’s argument. First, Keith claims that higher prices won’t help those that need the petrol most. Secondly, he suggests that economists have no explanation for what’s going on in Christchurch so we probably shouldn’t listen to them anyway (at least that is what I infer from his offer of fisticuffs).

On the first point, Keith claims that the people who want petrol the most are the ones who are concerned about future supply and that they will be most willing to pay the higher prices. Regardless of the validity of his claim that’s not a good reason to keep prices low. If the hoarders are the ones who most want the petrol then why shouldn’t we put them first in line?

Keith seems to be implicitly valuing all immediate usage ahead of all future usage of the petrol; a valuation that he claims isn’t reflected in people’s willingness to pay for petrol. So either he thinks that he should be the one deciding who gets petrol, whatever people’s explicit valuation, or he thinks that it is the rich who are most likely to hoard and that they will be willing to pay the most for petrol. If it is the latter then we have a clear trade-off between equity and efficiency: people with the greatest desire for petrol would be more likely to get it if prices doubled, but it would also disproportionately go to wealthier people. Eric explicitly addresses that in his post and says that he thinks equity considerations are small in these circumstances. So, despite Keith’s claim that Eric’s a poor economist who doesn’t understand ‘waiting’ it seems that this is simply a case of differing normative judgments, which is a common theme of this blog.

On the second point, Keith claims that people in Christchurch helping each other out discredits economists’ explanations of human behaviour. I’m sure he’ll be thrilled to know that there is nothing in economic theory that suggests people should not be altruistic and value others’ wellbeing. Indeed, social preferences are a major topic of research among experimental and behavioural economists. If people care about the wellbeing of those close to them then it is perfectly rational to help them out when they’re in trouble. Economists assume that people act in their own best interests as defined by them, not as supposed by anyone else. If you think your interests involve being a good, caring community member then it would be decidedly irrational not to help others who you care about.

  • Like this.

    Price right, and if there are welfare concerns introduce transfers.

  • @Matt Nolan
    Although, as I think you’ve acknowledged previously, the difficulty of implementing short-term, targetted transfers to deal with disasters may be greater than the welfare cost of inefficient pricing.

  • Seems to me there are three main problems with Crampton’s argument:

    1. If people are behaving irrationally now (petrol hording when long run shortages are unlikely) what’s to make him think they’ll respond rationally to price signals? (i.e consume less petrol rather than focus their ire on petrol station owners, or panic buy more because they assume prices are going up because the stuff really is running out).

    2. While Crampton does attempt to address the moral objection about the impact of the price rise on the poor, his attempts don’t square with the rest of his argument. He claims that more costly fuel will only push people $20 further into debt (he must have a real small car) but either the costs will have a material impact on people’s finances or they won’t have a substantive impact on the queues – that’s how price incentives work. Or, at least, that’s how they work when people are placing a very high premium on having something, in this case petrol.

    3. It ignores flow on effects – i.e. all of a sudden it’s a lot more costly to go and help people. Which is obviously bad at a time when so many people are dependent on the help of others.

    Oh – and totally agree with rauparaha’s comment on transfers. Often a great solution but probably not for this problem, right at this moment…

  • @rauparaha

    For sure. And a private institution charging the prices has no incentive to transfer resources.

    @terence

    “If people are behaving irrationally now (petrol hording when long run shortages are unlikely) what’s to make him think they’ll respond rationally to price signals?”

    People aren’t behaving irrationally, we might just feel that the beliefs they currently hold aren’t fully realistic – if that is the case, price signals will at least make people face the full cost of the actions they are undertaking on this basis, and ensure that those who place the highest subjective value on the good receive it.

    “but either the costs will have a material impact on people’s finances or they won’t have a substantive impact on the queues – that’s how price incentives work”

    That actually depends on the elasticity – but I do see where you are coming from.

    However, if we believe that people are hoarding on the basis of uncertainty regarding future availability (which is most realistic for the present moment) then the cost associated with purchasing this insurance is something that probably should be in the price right?

    If we think that there is an income issue here, the government could give people income. However, attacking prices directly is an indirect way of doing this.

    “It ignores flow on effects – i.e. all of a sudden it’s a lot more costly to go and help people. Which is obviously bad at a time when so many people are dependent on the help of others.”

    So at the moment people are sitting in queues instead of helping people right … I have no problem with reducing the risk of helping people, but prices here represent underlying scarcity – not setting the right price has significant issues too.

    “Oh – and totally agree with rauparaha’s comment on transfers. Often a great solution but probably not for this problem, right at this moment…”

    I agree too, especially given that, in this context, there isn’t an actual transfer occurring – so the welfare case for having the market price is weaker.

    However, even right at this moment if the government is going to DO something a transfer is superior to fiddling with prices IMO – of course it is doing neither explicitly with regards to fuel, so I’m not raising a relevant counterfactual 😀

  • Dismal Soyanz

    Although, if you think of queues as a form of rationing and the implicit additional cost (deadwight loss?) being the time waited, is this necessarily less efficient than having a higher price?

    Certainly you can’t argue about prices being a signal on the supply side.

  • Minor points first:

    * I wasn’t suggesting that Crampton doesn’t understand the concept of “waiting”, I was just disparaging the jargon of “intertemporal substitution” which, in this case, meant “waiting”.

    * I am aware of the existence of experimental and behavioural economics. I said that people stopped behaving as rational economic agents, by doing so they allocated resources better than the market could have. By market, I meant resource allocation based on price signals.

    * My main beef was with the idea that price mechanisms are a good way to tackle this problem. By implication (and quite explicitly, in the footnote), I was attacking the Austrian School. However, although I casually mocked economics jargon, I was not attacking economists in general. I think you’re being overly sensitive on that point.

  • “If the hoarders are the ones who most want the petrol then why shouldn’t we put them first in line?”

    Because allocative efficiency is not the problem. There is a very specific problem, which is that people with immediate need for petrol can’t get petrol because of the shortage, caused by hoarding.

    Having just said that I’m not attacking economists, I’d like to start attacking economists now.

    The problem appears to be obvious. The authorities (based on solid information) were confident that petrol supplies would be restored shortly and that hoarding was unnecessary and counterproductive; individuals (based on the lack of information) were fearful that petrol supplies would run out. This behaviour, based on a lack of information, leads to real world problems where people can’t access fuel.

    I’d have thought that, whatever the solution, the goal was the same: To stop people hoarding, and to ensure that people with an immediate need for petrol get it.

    I thought economics was a tool to solve real world problems, and yet the answer you’re providing is that, well, if we think about it in terms of subjective preferences, then it’s not a problem at all. Can you explain how this is useful?

  • People aren’t behaving irrationally, we might just feel that the beliefs they currently hold aren’t fully realistic – if that is the case, price signals will at least make people face the full cost of the actions they are undertaking on this basis, and ensure that those who place the highest subjective value on the good receive it.

    I don’t know: given that, apparently, they are in possession of correct information telling them that fuel won’t run out, and they’re behaving in a way that’s not in their self interest, or anyone else’s, it’s very hard to see how this is a rational response. (and, to be clear, I’m not saying it’s a bad one — I’d probably do the same). I guess it could be some form of collective action dilemma, where people are thinking fuel won’t run out unless everyone hordes it, but where they also feel they can’t trust others not to hoard, so they hoard too. But I reckon a form of nerve inspired irrationality is what’s driving the situation. I’m pretty sure that is what would be making me tick if I was there.

    That actually depends on the elasticity – but I do see where you are coming from.

    And given that people are currently willing to waiting for hours for petrol at present I rather suspect that demand for fuel is not going to be rather inelastic to price too.

    So at the moment people are sitting in queues instead of helping people right … I have no problem with reducing the risk of helping people, but prices here represent underlying scarcity – not setting the right price has significant issues too.

    Good point – I concede on this one 🙂

  • Having just said that I’m not attacking economists, I’d like to start attacking economists now.

    Noooo…if you do that you’ll be lobbing a missive at an incredible range of thinkers from Herb Gintis, to Samuel Bowles, to Paul Seabright, to George Akerlof, to Joseph Stiglitz, to Amartya Sen, to…. based on your argument with one public choice guy and a couple of other NZ based economists. Far be it for me to dabble in moral philosophy but that don’t seem fair.

  • Chris B

    I was thinking about this, and i have to ask the question: Why is price seen as being more indicative of value than time spent queuing? (especially with the obvious level of inequality in NZ at the moment)

    For example, from above, (paraphrasing Eric’s post): “Rather, the people most able to queue for a long time will get the limited amount of petrol and those may simply be the people with the least pressing need to be elsewhere.”
    This could easily be written: “Rather, the people most able to pay a high price will get the limited amount of petrol and those may simply be the people with the least pressing need to spend elsewhere.” (or the most money to spend)

    It seams to me that you could make many of the same criticisms about either “currency”, just with time, everyone starts with 24 hours each day, so the majority of people feel less cheated by missing out to someone who has been queuing all day than to some well healed banker in an SUV. (<– or is that a little too cliched)

  • @Chris B
    Absolutely. Queueing is just a time cost rather than a monetary cost. The problem is that time is not valid currency for most other goods so we get inefficient allocation of resources if we price one good in terms of time and others in terms of money when the two are not fungible.

  • @Keith Ng
    I’m not sure what you mean by a ‘need’ here. If people value it so highly then why isn’t their willingness to pay greater than the hoarders’? The goal, I presume, is to ensure that the people who ‘need’ petrol the most get it. Perhaps it is your judgment that people who want to use it now ‘need’ it the most. I would prefer to leave such subjective judgments about needs to the people who actually need the petrol. So then the problem becomes precisely one of efficient allocation. As we’ve pointed out, there may be equitable concerns but the problem you describe seems entirely one of efficiency.

  • Kimble

    Chris B, I can see what you are saying; hold price constant, and the time varies. Hold time constant, and the price varies.

    I think in this situation, it has been assumed the value of time has become much greater than the value of money. Or rather, the opportunity cost of spending time is far greater than the opportunity cost of spending money.

    Terence, I think people are too eager to see irrationality in the actions of others. I have taken to assuming that everyones actions ARE rational, and trying to figure out why it is so. What makes these peoples actions rational?

  • Chris B

    @rauparaha not fungible? so does that mean economic theory has disproved “Time is Money”? 🙂

    But seriously though, and moving on to @Kimble‘s comment, i think given most people’s experiences, time is the most valid currency in a natural disaster!

    I’m not surprised that many (presumably well off enough to afford the higher prices) economists value their time far more than they would the extra cost of being able to just drive straight into a petrol station – in fact i half suspect that this entire field of economics was created by an impatient economist stewing in a queue somewhere!

    So, in terms of morality (or fairness, call it what you will), i think it’s fair to say that the majority of the population find price gouging absolutely reprehensible, especially after natural disasters. Which leads me to ask the question: Why are economists so out of step with the rest of society on this issue?

  • @rauparaha
    You ask whether I think I am a better judge of needs than individuals themselves; well not me personally, but I certainly think those managing the emergency are in a much better position to assess the risk to individuals, and thus the need for hoarding.

    But actually, I hate being dragged into this framework of analysis – yes, I could be engaging with you on how much information each participant has, their ability to assess risk, whether they are acting rationally, whether it constitutes a market failure justifying intervention, whether they are able to affect how other participants behave, what the Nash equilibrium is, and so forth… but I really don’t want to do that.

    It is intuitive that people who are hoarding and creating a shortage that wouldn’t otherwise exist, and therefore denying other people essential transportation is A Bad Thing.

    Frankly, I’m gobsmacked that I need to defend this position. I am very comfortable in making the assertion that yes, I value a person who needs immediate access to transportation getting fuel over a person who wants fuel just in case fuel supplies are not restored, when the authorities with access to information are confident that access will be restored. And yes, I am happy to assert this – and for the state for enforce this – regardless of how much they are willing to pay, because their willingness to pay is a factor of wealth as well as need, with a large dose of fear and irrationality thrown in for good measure.

    Further, I would argue that, with sufficient information, or hindsight, or certainty that others will act in a similar way, even the people who are hoarding would agree that hoarding is counterproductive.

    I am also confident that I am not the only person who thinks this. I think that this is, for the vast majority of the population, a straight-up no-brainer.

    This brings me back to my attack. You are arguing for an outcome that the vast majority of society thinks is plainly unacceptable. It is at once a normative exercise, and also entirely worthless. So what is the point of this?

  • @Keith Ng

    “But actually, I hate being dragged into this framework of analysis”

    The framework where we compare costs and benefits and try to figure out why a problem is occurring before suggesting policy recommendations? 😉

    In seriousness though, I think this discussion illustrates where the framework is essential – and that is where it comes to discussing issues of extreme scarcity.

    You are right that coming out with a policy conclusion is normative – it doesn’t even have to be that people disagree with it, reaching a conclusion requires subjective judgments.

    On that note, you appear to be stating that there is hoarding which there is. You are saying that price is not the right mechanism to prevent hoarding, because there are people in need with low incomes who will not be able to enter the market if the price was sufficient to make supply equal demand. Your view is that some of these poorer people have a higher subjective valuation on fuel than the wealthier people that are hoarding it.

    That is fine, and I don’t think rauparaha disagrees that this is a possibility. However, in order to decide what is truly relevant for policy we need to sit down and think “what is hoarding”. People are hoarding because they are currently in a situation where they feel uncertain – understandable given the aftershocks and high level of concern regarding the possibility for more quakes.

    Given this, people who like to invest in a greater amount of fuel right now and so their williingness to pay has risen. However, the capacity to supply fuel is unchanged. In this situation we know that the quantity of fuel that is sold won’t change, however a higher price reduces demand to the point where it equals supply.

    Now, even your equity concerns does this suggest we shouldn’t let prices rise? I’m not completely sure. We want to ensure that those who subjectively value fuel the most get it – however, as we can’t transfer income in a disaster situation, we can’t just use the market price and transfers. As a result, we have to put on our normative hats and think.

    Simply rationing fuel without using the price doesn’t seem like the right solution to me if we still have a situation where demand exceeds demand – if we come up with a subjective, and justifiable, level to ration fuel at we still need to allow the price to move to ensure that it goes to people who can reveal they value it the most. It is a second best solution, and a balancing act, but having the price unchanged and unable to represent value would be a poor way for any policy to move forward.

    Comment: If I’m going to add a personal comment I would note that petrol stations did not increase prices following the earthquake – so when all things are said and done, the current outcome without price changes was determined by the market. Unless we are willing to start saying there is a market failure keeping prices too low, it appears that the market mechanism is suggesting that current price levels and queuing is the appropriate allocation mechanism 😉

  • @Keith Ng
    The reason we’re having the discussion is because I don’t think your assertion that ‘hoarding is bad’ is remotely obvious. Suppose I have four days supply of food and want petrol in case the only walkable supermarket isn’t re-stocked by then. Or perhaps my parents are concerned that water is running short at their local welfare station but I have plenty and I’d like some petrol in case theirs is not replenished. Maybe some of those people who are queueing for petrol now don’t have such a need but have plenty of time because their house is in good repair yet their work is closed for the week.

    If it is not obvious who has the greatest need then we need to think about allocation mechanisms. As Matt pointed out, it may be that queueing is the best mechanism available but it is not obvious that prices are terrible, nor is it obvious that prices would allocate too much demand to the hoarders. I’m not suggesting that prices would be a better mechanism, I’m just saying that an argument against them founded on a dislike of hoarders is unconvincing.

    @Chris B
    I think people tend to be against high prices they have to pay and for high prices that they receive. If I believed the newspapers then all consumer goods are too expensive — except for alcohol, perhaps — but people’s wages to produce them are all too low.

  • @Chris B

    On the note of time vs price, I would keep in mind that a price is a transfer while time spent is a cost. So if the producer increased the price, the time cost would disappear and there would be a transfer of value from the consumer to the producer.

    In this context the time cost is indicative of excess demand – hence why looking at price is a nice measure. This isn’t always the case, there may be cases where it is costly to reduce the time cost – and then there is a relevant trade-off in terms of efficiency. More generally, and in this case, there is also the issue of equity – is the implied transfer fair? This is a reasonable issue to discuss ONCE we have our heads around the efficiency matter. Then we can ascertain what types of trade-offs between equity (perceived fairness in this case) and efficiency we are willing to make.

    And that is the reason why the focus falls on price first.

  • @Matt Nolan
    I have no trouble with economics being used to figure out a way to ration petrol, to reduce hoarding, or even to evaluate price rationing – it’s a good tool for all this. What I was questioning was what this thread has become: When posed with a problem like hoarding, which is widely and intuitively understood to be a problem, rauparaha is telling me that it’s not a problem at all. *That’s* the normative part I’m questioning.

    @rauparaha
    Thanks for that. I guess part of my point is that you are trying to argue for something that is deeply counterintuitive, and you have a really heavy burden of proof. Couching the argument in the language of preferences is not useful.

    You asked what I meant by “need”. Not to be facetious, but you’re not really allowed to ask that! It’s kinda your job translate the language of preferences into ideas that we would we accept as valid “needs”, not the other way around. That’s what I meant by “I hate being dragged into this framework”: I hate being forced to reduce common sense into conceptual cogs that economics can parse, just so that it can come up with answers that are not very productive at all.

    Having said that, if I really didn’t want to engage with economics, I’m obviously in the wrong place.

    So yeah, hoarding in this particular instance is bad because it’s based on poor information about the likelihood that supply will resume. Part of that information comes from other people hoarding. You can frame it in Game Theory – it makes sense to hoard when everyone else is hoarding (because hoarding creates a shortage). Yes, everyone is preference maximising in the hoarding equilibrium, but we’d prefer to be in the non-hoarding equilibrium.

    The two examples that you give were interesting. The first – with a four-day window – is covered by bad information. If you were confident that petrol supply will be restored in two, this wouldn’t be an issue. The second example is exactly what we’re interested in. Let’s say there was a 50% chance that you’d need to drive a significant distance in the next day or two. If people hoarded, everyone in this situation would fill up. If people did not hoard, only 50% of people would actually end up going, and filling up before they went. If there wasn’t enough petrol for everyone to fill up, more people would get to where they needed to go under the non-hoarding scenario.

    Is that a sufficient answer as to why hoarding is bad?

    One more thing:

    “If people value it so highly then why isn’t their willingness to pay greater than the hoarders’?”

    Income elasticity of demand! (It took me all night to remember that. Just thought I should share.)

  • @Keith Ng
    I think a lot of the substance of this discussion is masked by the language used. When we ask ‘what is a need’ or ‘what is hoarding’ what we’re saying is that they’re subjective judgments about people’s valuation of petrol. If you ‘need’ it you value it very highly. If you’re ‘hoarding’ it then you don’t value it very highly and you want to use it in the future rather than immediately. So do I think people who ‘need’ it should get it over people who ‘hoard’? Absolutely. But that only covers two of the possible scenarios.

    There are also people who want it to use now that don’t need it (to use non-technical terms that you seem to prefer). Then there are people who need it tomorrow but, for some reason, can’t queue at the station tomorrow. If all four of these groups turn up at the petrol station and there’s not enough to go around then who should get the petrol? I say the people who need it should, regardless of whether they need it to use now or they need it to use tomorrow. That’s why I object to the idea of favouring people who want to use the petrol now as a general rule.

    Then the question is how best to allocate the petrol to those who want it most. That could be done through prices, queueing or rationing and the market appears to have settled on a combination of rationing and queueing.

  • @Keith Ng

    My impression was that rauparaha was against the idea that we shouldn’t use economics to understand why “hoarding” is occurring and paint policy from there. In reality we can’t say an outcome is a “problem” hence …

    “When posed with a problem like hoarding, which is widely and intuitively understood to be a problem, rauparaha is telling me that it’s not a problem at all.”

    This is the thing, we need to understand WHY hoarding is occurring using economic tools BEFORE we can make normative judgments regarding whether it is a bad thing or not.

    He was merely saying that instead of assuming it is a problem – we need to admit there is an issue there, and try to understand it. Hence why he realised the case for it being sensible, as a counterbalance.

    “I hate being forced to reduce common sense into conceptual cogs that economics can parse, just so that it can come up with answers that are not very productive at all.”

    And sorry, this statement is ridiculous. I refuse to accept arguments that are just “true” because they are – and this isn’t an economist thing, this is the general nature of logic, philosophy, and debate.

    I agree with you that it could be annoying to have to use economic language – of course, which is why we try to steer away from as much as we can. However, there is no excuse for not using a reductionist framework of some sort to ascertain what “issues” are.

  • Having said that, if I really didn’t want to engage with economics, I’m obviously in the wrong place.

    lol.

  • @rauparaha
    “I think a lot of the substance of this discussion is masked by the language used. When we ask ‘what is a need’ or ‘what is hoarding’ what we’re saying is that they’re subjective judgments about people’s valuation of petrol… That’s why I object to the idea of favouring people who want to use the petrol now as a general rule.”

    Hang on, I defined hoarding quite clearly from the start: People who purchased petrol because they were fearful that supplies would run out. You were mistaken in saying “Keith seems to be implicitly valuing all immediate usage ahead of all future usage of the petrol”. Perhaps when you were challenging my claim that hoarding is undesirable, you thought I had a much broader definition?

    But the underlying question is whether we can paternalistically dismiss certain preferences over others, right? See below.

    @Matt Nolan , it was downright irresponsible of me to just drop that common sense line without explanation!

    Consider the Experience Machine experiment. It shows we make intuitive distinctions between “real” preferences and “false” preferences. e.g. Security against unfounded fears, or drugs. This *is* axiomatic – there’s no reason for preferring “real” things. We just do.

    The whole point of reducing things to quantifiable preferences is to make them directly comparable: But they are not. We think of some preferences as more legitimate than others, even when the subjective strength of that preference is the same. This reductive process deliberately strips out our intuitive value judgements.

    Using answers from this framework to challenge those same intuitive judgements just seems futile.

  • @Keith Ng
    It’s possible that I misinterpreted you if you’re assuming that all people who are fearful of supplies running out don’t ‘need’ petrol.

    Are you suggesting that Nozick’s experiment invalidates utilitarian analyses?

  • @rauparaha
    No, but it trumps utilitarian analysis. When we identify a preference as intuitively “false”, it is a meaningful statement. Saying that people are willing to pay for it and therefore it is not “false” does not invalidate that intuition.

    It is a degree of complexity that can’t be represented when you reduce a raft of desires and motivations into units of preference. Utilitarian analysis is still useful for allocating between preferences that are “real” though.

  • @Keith Ng
    I believe that was a valid critique of early, hedonic approaches to utilitarianism but not more modern, preference-based approaches. Nozick’s point was that simple pleasure seeking is not a sufficient explanation of human action. Preferences cannot be ‘false’ in the sense that I think you mean because they are subjective and individual. Indeed, part of the reason for having preferences is that they overcome Nozick’s critique since the goal is then to satisfy preferences rather than merely experience satisfaction. It is incorrect to claim that some preferences are more legitimate than others; rather, some are stronger than others and that strength can be revealed through actions or willingness-to-pay.

    Anyway, this is rather a divergence from the original topic but hopefully it inspires Matt to write one of his beloved methodology posts 🙂

  • Kimble

    “Anyway, this is rather a divergence from the original topic but hopefully it inspires Matt to write one of his beloved methodology posts…”

    Am I the only one who thinks this site is screaming out for a movie review at least once a month?

  • @Keith Ng

    “No, but it trumps utilitarian analysis. When we identify a preference as intuitively “false”, it is a meaningful statement. Saying that people are willing to pay for it and therefore it is not “false” does not invalidate that intuition.”

    The idea of a false preference is something I’ve been thinking about lately – for example we could say that people have a preference for slavery, but for some reason we don’t value it.

    Now, I think the key to understand why we feel this way about a “false preference”. Namely, in this case it could be the preference is the result of the social situation – not inherent personal value. This is fine, and in this case we could use models to describe both situations and but would need to rely on value judgments to compare them … essentially, preferences are endogenous.

    Economists recognise this, but the PREFER to look for expectations that don’t require arbitrary shifts in preferences first – as the preference explanation is always there. Does this lead to a cognitive bias amongst economists, yes … is it preferable to the alternative where EVERYTHING is based on shifting preferences, yes.

    “Anyway, this is rather a divergence from the original topic but hopefully it inspires Matt to write one of his beloved methodology posts”

    When I am not busy, any upcoming posts will be on boring NZ economy things rather than exciting methodology. One day I will though, probably when I’m drinking.

    “Am I the only one who thinks this site is screaming out for a movie review at least once a month?”

    That is a great idea, we have discussed movies in the past:

    Watchmen: http://www.tvhe.co.nz/2009/04/06/watchmen-movie-really-a-critique-of-utilitarianism/

    Avatar: http://www.tvhe.co.nz/2010/01/06/karl-du-fresnes-review-of-avatar/

    Sweeney Todd: http://www.tvhe.co.nz/2008/02/22/sweeney-todds-welfare-policy/ and http://www.tvhe.co.nz/2008/02/27/the-economics-of-mrs-lovett/

    I’m thinking a review of Black Swan could hurt …

  • @Matt Nolan
    I don’t see why you wouldn’t value repugnant preferences. It’s simply that the huge negative effects on the enslaved would vastly outweigh the preferences of the enslaver. We don’t need to resort to re-weighting preferences to achieve morally acceptable outcomes in such circumstances.

  • @rauparaha

    I agree, however I may have misrepresented what I was trying to say.

    I was trying to mention a second, related, facet of said preference – namely the idea that preferences could be “socially determined (state dependent)”. So people prefer racism because other people prefer racism – as a result, if we are in a racist state people have preference for racism, if we are in a non-racist state people have a preference against racism.

    As soon as preferences become dependent on the state of the system, it becomes clear that many of our ideas regarding the optimality of equilibrium are tenuous. However, all this tells me is that it is important to allow such holistic considerations into our framework – and to try to understand where they come from, so that we can continue to rely on reductionism/methodological individualism.

  • @Matt Nolan
    Ah, I see. I think I understand what you’re saying about preferences but I’m a little confused about how that affects optimality. As I understand it you’re saying that individuals’ preferences are influenced by the preferences held by those around them rather than some exogenous state of the world. However, concepts of efficiency take preferences as exogenous to determine the choices of agents.

    That is where I don’t think I fully understand: if preferences are a function of others’ preferences, not their actions, then can we not think of it as a two stage game. In the furst stage preferences are determined by people looking at the preferences surrounding them and converging on equilibrium preferences. In the second stage they choose how to act, given those preferences and the resulting equilibrium is optimal for that preference set, which is unaffected by the players’ actions.

    It sounds as if you’re describing the process of preference formation, which is independent of our equilibrium concepts unless you think that actions influence preferences.

  • @rauparaha

    Actions define what state of the world we are in, and if some preferences only exist in that state it is possible that society may have multiple “parteo ranked” equilibrium that are all locally stable.

    However, I agree that we actually need to explain the idea of preference development, and how preferences can stem from social states – rather than just relying on them as an ad hoc explanation for behaviour.

    This is part of the reason neuroeconomics excites me – it gives us a more objective measure of action sure, but using time series neurological information we can get an idea of development regarding social preferences. Now I am nervous about this being used for too much in the way of policy relevant behaviour of course – but the idea, and being able to conceptualise elements of behaviour that economists have had to ignore (but have known were relevant since the time of Smith) is exciting.

    What makes me especially nervous about neuroeconomics though is what has happened with neuroscience – an increasing view of “determinism” above “free-will” even though the distinction is unobservable. I have written on this before though, so no need to bring it up here.

  • raf

    @Matt Nolan

    maybe you’d like to review “Inside Job 🙂

  • @Matt Nolan
    I think I understand the idea of the ranked equilibria but my concern is that the multiplicity iof equilibria is an artifact of the modelling. Are ‘social states’ just a crude proxy for the development of preferences or is there some real basis for thinking that aggregate outcomes influence our preferences? If it is the former then why would we expect actions to (indirectly, through the state variable) affect preferences? Perhaps we think that actions influence our immediate circle of acquaintances and that changes our preferences; I’m not sure why it would be but I agree that it needs some explanation.

  • @rauparaha

    I imagine the impact on preferences would take a lot longer.

    For example, we would agree that moral issues involve an individual preference for morality. However, what we view as morally appropriate is an artifact of the society we are in. As a result, the “whole” has an impact on what the individual values. These preferences are dependent on the state of the world as it is, and as it has been – and thinking about how they evolve is useful.

    Other social sciences no doubt spend more time on these issues – as I have said economists focus on explanations that do not involve varying preferences, and I think this focus has served us well in developing our discipline.

    However, using the strong objective framework of economics to provide a framework to “fit” these ideas regarding preferences in is also useful.

    When Keith describes false preferences he is discussing a normative judgment regarding the value a person places on a preference against how he thinks policy makers should value it. Now on one level I disagree with this, however on another level – if we can describe the preference as state dependent and show that the eqm without this preference is superior we have something.

    Now, I think it is important to frame it this way because it FORCES us to show our implicit assumptions regarding what this “false” preference is … we can’t just say it is an undeniable truth, we have to honestly admit our assumptions. That makes it possible for us to analyse our own argument, and for other people to state if they find our case compelling.

    Often people will tell me that people are reacting to “real” preferences, preferences are “made up” by advertisers. However, unless they are willing to sit down and put it in a reducible framework, which can be criticised and discussed, I find this sort of logic unappealing.

    What is my point here in summary? The economic method can come up with any conclusion – but the way it frames a situation, and forces us to admit our assumptions, is where its strength comes from.

  • @raf

    Give me a reason to watch it I guess 😉

  • @Matt Nolan
    We should all watch it when @agnitio is in town and liveblog our commentary 😉

  • @Matt Nolan
    “…the way it frames a situation, and forces us to admit our assumptions, is where its strength comes from.”

    I swear I’ve heard that before!

  • @rauparaha

    Live blog commentary FTW.

    @rauparaha

    I believe its one of the first sentences you hear from me EVERY time we meet up. I realise that you already know this – I just repeat it to remind myself 😉

  • I should install a twitter app for the blog and then there can be live tweets appearing in the sidebar:)

  • @rauparaha
    @Matt Nolan

    Um… (awkward silence) … was that thread about slavery?

    Kidding! But I totally don’t have the surplus brainjuice to follow this. So, thank you gentlemen and good bye. It’s been a weird pleasure of sorts.

  • But I totally don’t have the surplus brainjuice to follow this.

    This is how I feel every time I meet up with those two, haha.

  • @agnitio

    As the most qualified of all of us, you are full of it Agnitio 😉