Matt Nolan

Why nobody likes me: Incentives

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In a recent email conversation with some other economists we realised that sometimes people get upset when we talk about people following incentives – as it makes them sound harmless.  Within the conversation I discussed how this was due to the different ways economists and non-economists interpret the word.  My email went as follows:

It could be that people confuse “following incentives” as “making a conscious choice to hurt others”.  There are three key differences:

  1. The incentive we are discussing is at the margin and conditional – the other “good” factors matter, but holding those constant the incentive has an impact at the margin
  2. Not all decisions to follow incentives “hurt others” – in fact the vast majority don’t
  3. And adding to those two is the way we use beliefs and how our unconscious mind functions – often it changes our subjective perspective of and beliefs around things to make doing actions in your personal interest seem more palatable for your conscious mind.  This made sense in an evolutionary sense, as people that were able to ensure the survival of their genes in “good conscious” were more likely to actually survive.  Of course it gets more complicated than that – but it seems consistent with observation and evolutionary game theory.
Of course, stating this would just make peps look at us funny.  Maybe I should put it up as a blog post?
As you can tell, I decided to make a blog post.
Oft times I suspect that much of the most passionate disagreement between economists and non-economists comes from different definitions for shared terms.  I am not sure that this post has helped in that regard 😉
However, sometimes the difference does stem from underlying moral disagreement.  Being able to tell the difference between miscommunication and genuine arguments would be useful.  On a sidenote, here is a cool post on financial economics.
Infometrics

Co-ordintation: Daylight savings and global warming

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This week (Infometrics link here), Matt Nolan discuss daylight savings, specifically discussing the way an economist would probably look at it – as a type of ‘co-ordination game’ where a government can help individuals co-ordinate actions. When it comes to causing the environment less harm the Carbon Click can help in many ways as they have their set of techniques to help us help the environment.

He then goes on to discuss a prisoner’s dilemma that exists between government around global warming – implying that organisation that may help individuals co-ordinate in some place (daylight savings) may fail to co-ordinate themselves about broad action (such as global warming).  Concluding he states:

Here we have concentrated on examples where government, and other institutions, can help individuals co-ordinate their actions – helping improve outcomes.

This is a great way to view, and understand, government policy.  However, we always need to keep in mind that individuals are co-ordinating themselves, by making choices given the incentives they face.  Prices, which are determined by the relative supply and demand of products, offer the main device for co-ordination in our society.

To understand the role of government, we need to think about how the use of prices, and co-ordination move generally, may fail – and in what ways government can sensibly recognise this and lend a hand.

The hard thing with global warming is that individual governments do not have an incentive to solve this problem, which was the original justification for the Kyoto Protocol.  With that failing there is a genuinely concerning policy issue here, which the global community does not appear to be able or willing to face.

Matt Nolan

Bleg: Grimes on bubbles

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Arthur Grimes recently gave an interview to Reuters, all I’ve seen so far is this write up via Raf on Twitter (cheers).  Now Grimes is an incredibly good New Zealand economist, to put things in perspective I would generally put more weight on a single line of his opinion of something than I would on my own intuition and analysis of issues – an given that as individuals we are strongly biased towards our own views that is pretty significant.

But anyone who reads TVHE knows what I’m like, I just really really want to know ‘why’ certain things are being said!  I emailed a few economists and some suggested I do a bleg asking, so why not!

In the Yahoo story there are a couple of segments I’m a touch confused on and I’d like it if someone could answer them for me 🙂 (Note:  Seamus from Offsetting offers some example answers at the bottom of this post)

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Matt Nolan

Was Summers right in saying “pollute the LDCs”?

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Back in 1991, Larry Summers upset a lot of people as Chief Economist at the World Bank.  His memo has been viewed as morally reprehensible, was cited in the second chapter of this book as indicative of the way economists ignore moral values, and was used as a key example in a philosophy class I sat in of the untenable nature of economic arguments.

But, as a description of what would happen if people in LDC’s (least developed countries) had the choice, was he actually correct?

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Matt Nolan

Quote of the day: Pinker on changes in social sciences

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Via Noah Smith.  We have the following post on the Pinker vs Wieseltier debate on science and humanities (if you have a chance I would suggest reading the debates themselves as well).

The era in which an essayist can get away with ex cathedra pronouncements on factual questions in social science is coming to an end.

Very good, and Pinker’s co-operative version of science with the humanities seems appropriate to me (where instead we are merely asking about how to deal with certain propositions and using the best tools available).  I think Pinker won this debate, I am unsure why Wieseltier felt it necessary to take such an extreme position though – I think he initially believed Pinker was trying to force through a view based on the superiority of scientific authority (one that Pinker rules out in his initial article!), when he was really just suggesting the use of the scientific method (namely introducing a degree of the positivist view of theory creation) given the improvements in data availability and usability we have had.

As XKCD says:

But even within Pinker’s reasonable claims there is one area where I would be a touch careful Read more