jamesz

It’s the stupid, stupid

/15 Comments/in /by

I get it: economists aren’t cool. It’s fashionable to complain about them without understanding the first thing about the discipline. Ordinarily that sort of thing is easy to ignore. But sometimes, though very rarely, it produces that special sort of stupid that you can’t help but cherish! Today is one of those beautiful days and we can thank Ross Gittins for providing it.

His lengthy rant, which I don’t recommend ploughing through, accuses economists of being idiots for not solving all the world’s problems before they happened. So far, so dull. The good part comes when he tells us his solution to all the stupid economists:

She was Elinor Ostrom, a professor of political science at Indiana University, who devoted much of her career to combing the world looking for examples where people had developed ways of regulating their use of common resources without resort to either private property rights or government intervention.
…
For her pains, Ostrom, who died last month, was awarded the Nobel prize in economics in 2009, the first woman so honoured.

Whoah, hold up there, the solution to all the dumb economists is… more economics?! Yes, apparently what we need are more Nobel prize-winning economists, drawing on their cross-disciplinary expertise to make the world a better place. Not the solution I was expecting but I can’t say I disagree!

HT: Bernard Hickey.

jamesz

A nobel and quotable scholar

/4 Comments/in /by

Great quotes from Daniel Kahneman. Very worthwhile clicking through and skimming over.

Many people now say they knew a financial crisis was coming, but they didn’t really. After a crisis we tell ourselves we understand why it happened and maintain the illusion that the world is understandable. In fact, we should accept the world is incomprehensible much of the time.

Matt Nolan

A summary of credit creation

/in , /by

This post on VoxEU gives a neat summary of the credit creation process, and the ways that collateral chains have had an impact on the process.

I’m not going to reiterate the post – as it is concise, and if you are interested it would be a good idea to go and read it.  However, what I will say is that this is akin to the standard view of credit markets – essentially at a given point in time assets and liabilities match across the market, but the more convoluted the chain, the more vulnerable financial markets are to an uncompensated change in asset prices.

jamesz

Samsung and Google vs Apple: the war heats up

/1 Comment/in /by

In the ongoing patent battle between the Android suppliers and Apple:

Apple has been granted a preliminary injunction banning sales of the Samsung Galaxy Nexus smartphone in the United States… just two days after a similar injunction banning sales of Samsung’s Galaxy Tab 10.1 tablet.

A large contribution to the academic literature on technology patents has been made by Bessen and Hunt. On the subject of companies with large patent portfolios they say:

[E]xtensive competition in patents, rather than inventions, may occur if firms rely on similar technologies and the cost of assembling large portfolios is not very high. In such an environment, firms may compete to tax each others’ inventions—for example, by demanding royalties—and, in the process, reduce their competitors’ incentive to engage in R&D.

The outcome of patent litigation and licensing agreements often depends on the size of the firm’s patent portfolio. This creates an incentive for firms to build larger patent portfolios, especially when their rivals focus on patents as a competitive strategy. Economists sometimes describe this type of environment as a prisoner’s dilemma. All firms would be better off if they did not act in this way, but each firm would be worse off if it did not respond to a surge in patenting by their rivals. Under these circumstances, firms may find themselves competing in court, rather than in the marketplace.

It seems that has come to pass even for companies that are considered among the most innovative.

Matt Nolan

Clarifying my question on habits

/6 Comments/in , , /by

I was glad that James discussed a bunch of the literature that uses habits and habit persistence yesterday.  I have run into the idea of habit persistence in consumption before while doing macroeconomic modeling, and it was good to see him bring it back to the observed phenomenon of reference dependence in individuals – as I stated, I wasn’t looking for ideas of how to model it directly, more an understanding of “what a habit is in the choice theoretic context”.

Reference dependence does explain a lot of the “why” I was looking for, as does “limited cognitive capacity”.  I think we still need to ask exactly how these processes work though.

And that is why reference dependence does not quite fully cover it off for me – undoubtedly because I am being fussy.  And this comes back to the logic behind why I decided to suggest “a choice of investment in a stock of habit” rather than just suggesting “that habits are described by a state variable that is a function of past action”.

What I really want to know is three-fold:

  1. What is the initial endowment of human habits,
  2. Can choices now relate to habits in the future in a purposeful way,
  3. The Lucas critique – but applied to habits.

Treating a habit like a preference (which is what much of the literature implicitly does) might be sufficient – but I do not believe so.  And that is because I think that many people “choose” to build habits and rules of thumb explicitly, given the underlying endowments and social situation around them.

This is a very important issue when we actually come to look at policy, for example:

  1. If habit formation adjusts to monetary policy settings that assume it, and we have put it in as a constant (eg rule of thumb consumer) then our settings will be inappropriate.
  2. In terms of time inconsistency, the development of habits can be seen as investment into an optimal “time consistent” path to improve outcomes.

My question isn’t “do habits exist” or “do we model habits”.  It is “are we currently modeling the development of habits in a way that is consistent with methodological individualism – that is consistent with individuals that make choice”.  Merely assuming an exogenous preference, doesn’t do this.

jamesz

Does libertarianism apply to animals, too?

/22 Comments/in /by

Frances Woolley at Worthwhile Canadian initiative:

An average dog might prefer, say, chocolate over dry kibble. Yet an average dog owner has no qualms about ignoring the dog’s preferences and feeding the dog kibble over chocolate. Chocolate can kill a dog.

In the same way, an average human might prefer, say, soft drinks over water. Excessive soft drink consumption leads to a variety of health problems, such as increased risk of diabetes. Yet any attempt to encourage people to consume water rather than soft drinks through, for example, soda taxes, or bans on super-size soft drinks, is extremely controversial.

Why is it acceptable to limit animals’ choices, but not humans’?

Any economists who find this inherently daft might want to revisit Singer’s work on the subject from a utilitarian perspective.