Bleg: Facts and beliefs


Why is it that, in economics (compared to other disciplines), people are a lot less likely to let observed facts change their opinion on what is going on, or how the world works?  Is it because:

  1. The data is too unreliable
  2. The data requires “value statements” to make sense that cannot be separated from beliefs
  3. People invest themselves in their world view – and are unwilling to trust evidence above what makes them feel comfortable.

Answer, discuss, all that jazz.

Note:  Any answer should be consistent with the historical fact that people want to pretend right now is “different” and that we are living through “historical” times of change – after all how else can we make ourselves feel important if we don’t stress how important the times we live in are 😉

Wants, needs and production

What is a ‘want’ and what is a ‘need’? Do these things change over time and how do we provide for them? These are the issues being considered by Pablo at Kiwipolitico in a fashion that may confuse many economists. He says:

The current phase of globalised capitalism brought with it the uncoupling of production from consumption even as the “wants into needs” syndrome persists. The specific result is that, relatively speaking, global production of goods has declined while the consumption of non-productive commodities has increased. That means that there is an excess of wants with respect to needs. In fact, mass focus on obtaining a proliferation of wants has served to obscure the basics of needs.

When I read that I had no idea what it meant and I think that is because of some definitional problems. First, what are ‘wants’ and ‘needs’? To an economist the distinction is fairly meaningless because there are only ‘things that people want to varying degrees’. Of course, there are trade-offs that one must make — I can’t buy a car and a bicycle with the same $5,000 — but the things we want are not inherently different and the degree to which we want them differs between individuals.

So, when Pablo talks of ‘wants’ being converted to ‘needs’, what does he really mean? What I think he means is that, as technology advances, our incomes rise and the relative cost of purchasing complex goods drops. Consequently, more people buy them and they become ubiquitous. You don’t need the nature of goods to change for that to happen. You don’t even need peoples’ preferences to change — although that may have happened, too — for smartphones to be in every pocket, either. It is enough that the cost of manufacturing has dropped and our incomes have risen due to technological progress.

What of his contention that these smartphones are ‘unproductive consumption’? I’m a bit baffled by that because it suggests that everything we purchase should be useful for producing something else. As if enjoying our purchases were not enough in itself. Either he is suggesting he knows better than we do about what makes us happy or, more likely, I am reading too much into a poetic flourish!

Finally, he suggests that there has been a ‘decoupling of production from consumption’, which is probably the most confusing statement of all. All production is consumption – as it is either consumption now, or it is investment which translates into consumption in the future. There can be no sustained difference between production and consumption in modern, market-based economies.

Rather than railing against the way he perceives society to be, it would be helpful for Pablo to refine the problems he sees and ask why things are the way they are. Once we understand the problems we can ask whether there has been a systematic misallocation of resources that has caused these problems. At the moment it appears that these issues are being clouded by some confusion over what wants, needs, production and consumption really are.

Strawman at the centre of the discussion of economics

In an article in the Herald it is suggested that the separation of economics from moral philosophy is morally abhorrent, and as a result we should ignore what economists say about tax.

I will put the tl;dr up first:  Economic theory is “descriptive” – which in turn allows us to discuss how economic theory is actually a very useful thing for discussing these issues.  In my opinion it is important to make these trade-offs that are described transparent –  and that is all economists are trying to do.  In that context, economists don’t actually seem morally abhorrent 😀 .  Furthermore, by showing a willingness to discuss and identify trade-offs, we can find some issues and facts that seem to get slightly missed in the article 😉

Read more

A good illustration of tax incidence

Via Marginal Revolution we have seen this post from Steve Landsburg.

So what happens if the government takes Mr. Kendrick’s $84 million away? Answer: A bunch of zeros and ones get shifted around on bank computers. Mr. Kendrick goes right on pushing his cars around. And nothing else has changed.

Unless, of course, the government decides to spend some of that $84 million. Now the government consumes more goods, Mr. Kendrick consumes no fewer, so someone else must consume less. Who is that someone else? The answer depends on the details of the transactions, but the most likely answer is that when Mr. Kendrick withdraws $84 million from the bank to make his tax payment, the bank makes fewer loans, interest rates rise, and someone cancels a vacations, or postpones a car purchase, or abandons a half-built factory. Who bears the burden of the tax? The people who cancel their vacations and car purchases and factories, that’s who. Not Mr. Kendrick.

Now this is a caricature – like a lot of good economic description – but it does illustrate a point.  If we place tax on one group, be it the rich, or the “bankers”, it isn’t clear who actually faces the burden of this tax until we have a look over all the changes in choices that occur … tax incidence is key.

This is one reason why I remain against a Robin Hood tax.

Bubbles, stability, Stiglitz

As soon as you guys have read the title and saw the article I’m discussing, you are probably expected me to go off about Stiglitz – given that, although he’s a genius, his views tend to be a touch unorthodox and I’m a slave to orthodox economic theory.  But this isn’t the case.  There are a couple of things I disagree with in the article, but I actually felt what he wrote was pretty good – in fact most of it is more orthodox than many may realise.

Now, I disagree with his assertion that:

They failed to predict the crisis; standard models even said bubbles couldn’t exist — markets were efficient.

Of course, the EMH suggests that we can’t predict crisis – and doesn’t say their can’t be bubbles.  Hell, the macro text book I’ve got next to me has a great deal on where bubbles pop up in models.  Personally, I’d go as far as saying that the “popping bubble” was not the main issue at stake during the GFC – it was the break down in trust and reputational capital in the finance sector combined with a slow policy response.  But I digress.

He also states:

The ultimate objective of a central bank is to stabilize the real economy, and financial and price stability both need to be seen as instruments toward this and other ultimate objectives.

This is a little loose.  The objective the central bank is to run a fiat money system without incurring undue variability in the real economy – we want the certainty and efficiency associated with fiat money and price stability, but we want to avoid ADDING to variability in real output.  My only real disagreement here is that I still believe ensuring price stability is the best way to achieve any cyclical goals from monetary policy – when he does not believe this.

But ignore this, he has some great insight, namely:

Perhaps the major failing of some of the earlier models was that, while the attempt to incorporate micro-foundations was laudable, it was important that they be the right micro-foundations.

The discipline needs to build and develop – and recognising that helps us understand that the discipline isn’t in some magical “final state” where it can provide all knowledge.  This isn’t a critique of the discipline – it is an admission that the discipline needs to keep learning and growing.  Furthemore, it shows he still believes in reductionism – which I’m glad to hear.


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. Read more