"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner"
– Adam Smith

"Narratives compete with imperatives (general moral rules or precepts)…to persuade agents to behave in desirable ways."
– Jean Tirolehttps://t.co/YdVGjsh84U

— Noah Smith (@Noahpinion) September 22, 2018

Make of this what you will.  I think reading it as Smith underplaying morality is unfair – but reading it as economic language/narratives being used to underplay important moral arguments that may be necessary for important coordination games is fair.

When I was recently asked who my favourite economist was I named my partner, but pointed out Tirole was a close second.  I also discovered my third fav, Dixon, is on twitter.  Both Tirole and Dixon use standard economics models to explain things we observe while focusing on the types of assumptions we make and their credibility – they use models for clarity of exposition, and I love it.

He answered that they wouldn’t, and went on about something – but in truth it is because of his definition of “same” with regards to the model he was describing.  He was looking at a GE model with people with the “same” endowments and preferences – and yeah sure in that model there is no trade with highest 1:500 leverage.  But this ignores the idea of production entirely – even if we have the same preferences and same “characteristics” (in terms of the hours we are endowed with and our ability to turn those into leisure or output), the existence of a production process with specialisation implies that there is benefit from specialising and then trading.  This division of labour is pretty central to our understanding of trade, so we shouldn’t really look past it.

But it raises something important as well.  We need to describe why people are trading, and what exactly is driving that process, before we can evaluate anything.  Let’s make a quick framework that will help us do that!

Why are we trading then?

Ok, we trade for one reason – someone who has something values it less than someone who buys it [Note:  Those explanations of value in the Wikipedia article are atrocious – the description at the top is what I’m linking to].  This says nothing of the process that leads to these relative values, or the harm or benefit that trade may have on other people uninvolved in the transaction.  All it tells us is that these differences in value give the reason for trade.

If there are three of us sitting around, there are 9 chocolate bars (3 Moros, 3 Mars bars, and 3 Snickers), and we all value varying chocolate bars the same way (a Moro, Mars bar, and Snickers each give us the same level of utility, but we also have the same type of diminishing marginal utility from either) then we can think about trade.  If we are each endowed with 1 of each bar we will not trade.  If we are each endowed with 3 of one bar, then there are gains from trade – and a trade with equal bargaining power will see us go from an endowment of 3 of 1 chocolate bar to having 1 of each of the 3 chocolate bars!

Now if there is production, the existence of the division of labour suggests we can make more by focusing on only making one thing – or one element of one thing.  Given this we are paid money incomes which we can use to trade with other people specialising.  Our decision to work gives us money incomes, we then trade these money incomes for products from the firms that organised us blah blah blah.  The key thing is NOTHING here requires that people are different – instead people are doing different things because of the institutional structure of the economy alone.

How can we be different in ways that may cause trade without specialisation though?  There are three ways:

1. We have different preferences over things (goods and services, leisure, chocolate bars) – we differ in how we turn the observed products, and the endowment of hours we have which we spend on “leisure/home production”, into utility.
2. We have varying abilities to turn our time into goods and services, both in a relative sense (what am I good at making?) and an absolute sense – we differ in terms of how we turn our endowment of hours that are spent on remunerated work into products. [Note:  I state products rather than incomes, as the income we are remunerated with for producing may in turn vary from our contribution to output due to institutional structure.]
3. We vary in terms of our non-income generating and non-utility from consumption generating characteristics – what we commonly think of as “endowments”, even though our preferences and ability to work are also endowments in a sense.  Think here the wealth we start off with when we are born, or start off in a society where there is a safety net so we don’t face the risk of starvation.  However, to get that trade the endowment must vary from the set of things that the individual values … that is the example of clustered chocolate bars before.

Ok that is nice, we have extra reasons why we may observe trade.  But are patterns of trade fair?

Are patterns of trade fair?

So here we can try another framework.  Why might we get different outcomes?

1. If everyone is exactly the same and we have different outcomes, then this appears unjust.
2. If peoples preferences differ and we have different outcomes then we don’t know – if we have equal outcomes this is unjust.
3. If some people are better at making things then others and we have different outcomes then we don’t know – if we have equal outcomes then we don’t know either.

We can start to see some threads coming through if we can agree with the above statements.  Horizontal equity appears as, since everyone is exactly the same varying outcomes solely imply differential treatment by society.

With the second one things are difficult.  People actually enjoy different things and make different choices.  Some people like to work and consume, some people despise working and don’t value consumption much – these people are allowed to make different choices.  Forcing people who want to do different things to do the same thing is unjust.

The last one is where things get difficult.  We need to ask “why are some people better at making some things than others”?  Are they endowed with natural talents?  If so, they are endowed with something by luck that is giving them higher life satisfaction – is that fair?  If not is it the responsibility of government to make it fair?  If so what will happen to the behaviour of this person if we reduce the income they receive from doing that production – will they decide to work less or take more leisure?

What happens if, instead of natural talents we are talking about someone who undertook extra training, or someone who has been in the labour force longer … how do our answers change as the REASON for the difference changes!

In this last example we get a lot of the trade-offs that we argue about when discussing policy all the time – is redistribution just?  Even if it is just in terms of distribution, what about if it leads to less being produced overall?

This can lead to the argument regarding deserving vs undeserving poor – someone with a lifetime disability as compared to someone who could work but sits around playing Fifa 19.

Importantly, how do our answers change once we shift the question to why people may make a higher income from their role – is that solely the response of them creating more, or is there something to do with the institutional structure.  What happens if, as a white man, I am just paid more than a different group?

As soon as we introduce heterogeneity we find that some inequality is actually good, but we also find that types of injustices differ greatly based on the differences between people – something that is incredibly important and gets ignored when some loud mouth like me makes a statement like “replace the minimum wage with a minimum income“.  Policies have different ethical principles embedded in them, and we should be trying to ask about those when we decide what types of policies we support in a society like New Zealand.

This is why I’m an incrementalist – instead of trying to grab a measure of wellbeing and maximising it, I’d prefer we try to figure out what equity/fairness principles are relevant to people in society, and to ask what the policy trade-offs would be when trying to correct for observed injustices.  My unpopular opinion among many economists is that a lot of New Zealand’s policy settings are actually pretty good when we ask these sorts of questions … hence why incremental change rather than some type of Big Kahuna is appropriate where we are at the moment.

Although if you want to disagree with me in comments, and provide some arguments why, I’d enjoy it

Now don’t get me wrong, I am against almost everything that Trump plans to do.  I am socially liberal, his tax policies (and the sharp cuts and spending that will need to be implemented) will redistribute away from the poor, his tariffs programs will hurt the vast majority of Americans and undermine the rate of reduction in absolute poverty in other low income nations, and his lack of trust in the Federal Reserve is likely to erode independent monetary policy.  Furthermore, his divisive rhetoric and willingness to create “other” groups to blame failures on point to a dark undercurrent within the US and within his administration.

But none of these things suggest:

Still, I guess people want an answer: If the question is when markets will recover, a first-pass answer is never.

Or:

So we are very probably looking at a global recession, with no end in sight. I suppose we could get lucky somehow. But on economics, as on everything else, a terrible thing has just happened.

When these things don’t happen, it will further undermine the credibility of economists – and implicitly tell Trump supporters and opponents that ALL the costs economists had said would occur from his election do not exist!

I am especially disappointed with Krugman given that he stood against this type of argument by panic for Brexit.  And he himself was disappointed with all the economists warning of recession as:

And I worry that what we’re seeing is a case of motivated reasoning, which could end up damaging economists’ credibility.

There are real winners and losers from Brexit.  There are real winners and losers from the policies President Trump will put in place.  And a credible set of Economists would inform the public of those without recourse to panic – without a determination to panic the public into doing what the economist themselves believes is morally right.

However, for a long time economists HAVE mixed their relatively objective discipline with their own normative values, and have used the authority they had to try to push the public towards what they have believed is right.  In a classic case of “boy who cry’s wolf” economists – along with other experts – have undermined their own credibility with the public.

And what has filled the void?  “Common sense” and “folk economics” – concepts that do not require facts and figures, but instead offer clear narratives that help people understand the world around them quickly.  A loss of credibility by experts (both self-inflicted and due to changing communication technology), a failure for policy makers to remember that “compensating losers” is really part of any potential pareto improvement from global trade, and a willingness to confuse opinion for fact when convenient by ALL sides is what is driving political change.

The people voting for change are not stupid, their willingness to follow folk economics concepts that are false is not idiotic.  In truth our inability to persuade the public to believe our research on some of the basic trade-offs that exist in society is our own fault – due to an increasing desire for economists to act as advocate as well as adviser.  Instead of focusing on how to communicate our research more clearly to the public, our discipline has increasingly been associated with telling people they should eat less sugar, pay taxes on their fuel, and surrender a variety of their choices to government because it is in their interest – how exactly do we expect people to react when we just tell them “we know better”?

Where, as an economist, I may find many of these policy arguments persuasive, if the public doesn’t we really need to think about why – instead I often hear the argument of stupidity.  As long as we rely on that argument to protect our fragile egos, we aren’t serving anyone as economists.

A positive economic analysis is about comparing outcomes – describing what occurs and why, given shared definitions of what the key elements are, but not of how they are valued.  A normative economic analysis is about choosing from a set of outcomes – it requires valuing these elements of our analysis.

A nice example comes from income inequality measures!  A positive economic analysis of Gini coefficients would simply tell us what this statistical measure of dispersion in incomes says, and how it moves about when things change.  A normative economic analysis states that the Gini coefficient represents some underlying “social welfare function” (which embodies a series of ethical principles/assumptions) – and then asks what the “optimal” coefficient would be.  Making these ethical judgments is hard – so we have to be careful.  Furthermore, as a Gini coefficient is only a summary measure of a complicated set of trade-offs, choices, and other potentially areas of ethical principles (generally it is said Gini coefficient relate to abbreviated social welfare functions, which miss out many of the issues with regards to heterogeneity and the such that we may care about), some of these ethical assumptions may go unstated – which is why we have to be extra careful.

Confusion between economists discussing policy and many non-economists (but technical experts) discussing policy is this distinction – economists have a preference for discussing trade-offs and stating that the choice between them needs to be dealt with by further analysis.  Many non-economist experts start with a normative position (we SHOULD lower obesity, or the Gini coefficient, for example) and then work to try to “solve” from there.  This “normative economic” position is a lot more fraught, but we can’t pick an option without confronting it – in truth it requires a lot of analysis and understanding from a variety of disciplines.  Assuming it a prori is inappropriate.

This is NOT to say that normative and positive analysis are separable, and that economist’s work is value free.  James wrote a series of excellent posts on this back in the early days of TVHE (here, here, and here).  In fact, to reach a “conclusion” by definitions requires assumptions that have some value content.  However, the distinction is useful as it disciplines us to be careful with what we take from our models and to be cautious with how far we stretch results of our “ideal worlds”.

Given what “is”, it is a neat idea to ask what ethical/moral/value principals are being traded-between when we do policy.  Looking at an “optimal policy” along one moral dimension (which is what targeting a single thing, such as obesity or a Gini coefficient, is doing) is fundamentally unsound – and trying to shoe-horn other moral elements into analysis after presupposing the one is dominant is not much better.  Economists know this, we received a lot of grief when our analysis was used to start pushing the idea that each factor was payed its “marginal value” and therefore the allocation was just – turned out the authors who did go down this path were being ethically naive about policy!   The “equity-efficiency” trade-off that gets much bemoaned nowadays was simply economists reminding people that, even in an idealized state where we are all paid our marginal value, this is not the only ethical principle relevant for policy – in that way it has played an important role in focusing our questions and conditioning any advice economists give.

However, this also means I can’t post on things I find cool.  So I’ll just give you some links

1. Greg Mankiw mentions the harm principle and economics.  “First do no harm” is a good principle for us to hold when considering policy, I agree.
2. Details do matter though, via Mark Thoma and also a piece by John Aziz. My view of this in general would be that the “harm” comes from a “change” in policy from an “initial position” – how do we define this initial position such that something counts as change?  If we define it solely as “now” then we are simply conservative, if we define it as some “ideal type” that we believe is “natural for the social system”, we are trading in ideologies.  Applying the harm principle starts to get tricky! [Note:  In the comments to the recent Hand posts (here, here) there has been further discussion of this]
3. Tim Harford, Chris Dillow, and Noah Smith all discuss behavioural economics – plenty of interesting points in there if people want to think about choice, its relation to trade-offs, and its relation to policy.
4. From Mark Thoma again, the misuse of theoretical models.  Given my interest in methodology I’m certainly interested in reading this (what they establish as the ‘should’ how they find what ‘is’ in modeling) – I’m sure you all feel the same way
5. And because I have to put up something about inequality here is Lane Kenworthy.  The US example is an interesting one, but I would almost think that lower growth in the low and middle parts of the income distribution is itself defined as higher inequality – it is almost tautological to say one caused the other.  The magnitude of the gap over there tells us that it is an issue worth looking into though!

I hope that I didn’t give the impression in my last post that Mankiw actually likes philosophy.  If anything, he sounds rather negative.  Economists drawing on philosophy when making policy advice is apparently a “dirty little secret”.  The point seems to be that making a case for a policy will involve value judgements, often on disputed value judgements about distribution. 

Hey, I get it.  Just about any substantive policy would help some people but harm others.  So how does Mankiw propose to avoid the need to call in some philosophy?  His proposed principle is, …. hang on, I had it a minute ago … “[f]irst do no harm”.  Eh?  Didn’t he just say that government policies pretty much always harm someone?

I guess I must be getting the wrong end of the stick.  Perhaps I am failing to distinguish tasty and sweet-smelling type 1 harms from those nasty type 2 harms.  Or something.  He does give us a couple of hints about what it is all supposed to mean.  But I really think we could ask for some more clarity about the normative foundations of his perspective.  You know, like doing a bit of philosophy.

Greg Mankiw has an article in the New York Times.  It is notable for making explicit reference to literature in normative philosophy.  Does this mean that he has been doing some homework?  Some of his earlier forays into philosophical territory didn’t show much evidence that he was aware of work in that discipline.  Some philosophically literate readers weren’t very charitable about the sophistication of what he came up with.  “Low quality freelance philosophy done by people with PhDs in economics” according to Matt Yglegias.  A “laughably sophomoric attempt at political philosophy” according to Chris Bertram.

After he finishes his homework, perhaps we can look forward to some better freelance philosophy.

I’ll be honest, a lot of people out there talking about “let’s tackle inequality” aren’t actually interested in social justice, policy, the poor, or anything that matters – they are interested in looking cool to their friends and fitting into their “in-group”.  Running into these people and trying to discuss policy trade-offs is about as much fun as when, after breaking my leg, my teacher at primary school kept lifting me up to try to get me to stand because “it didn’t look broken” (Note:  She was a lovely teacher, it was just a particularly sore experience).  Here is the opener of his piece:

I’m tired of arguing about inequality. It’s frustrating. It’s unproductive. Nobody is really interested in the analytical arbitrariness and moral insidiousness of measuring intra-national economic inequality. Nobody is really interested in the fact that multiple mechanisms–some good, same bad, some neutral–can produce the same level of measured inequality, rendering the level of inequality, taken in isolation, completely useless as a barometer of social or economic justice. Nobody really cares. Because many different combinations of causes can produce the same level of inequality, it’s not so clear that high inequality, as such, can reliably cause anything. The consequences of inequality depend on the mechanisms driving inequality. Nobody cares.

Now, there is some disagreement from me here.  It is not nobody.  Most people do care.  Most people are interested in justice and fairness, but do not have the time or inclination to spend thousands of hours learning about definitions and subtleties in these things.  Will (and myself) mainly hear from people who actually don’t care – and just want attention, or want to be a future politician or unbearable rock star, but a significant majority of the public do care and want it described to them in a way they can trust.

This is why I agree with my own tweet:

Brilliant post http://t.co/bbPO1apmIs, via @MargRev. However, it is still important to keep engaging to inform those who are undecided.

— TVHE (@TVHE) February 1, 2014

In this way, we aren’t trying to convince the narrow minded, self righteous, egotists that they are misrepresenting matters – that is a fool’s errand.  Often we are solely making these arguments, and publicly describing these ideas and data, in order to help inform (and maybe persuade) the large number of individuals who are interested in how these measures and representations of reality confirm to their own view of social justice – it is about how we communicate these ideas for public consumption and critique.

I have talked to a myriad of people who, once you explain why statistical measures of “inequality” are not the same as the human concept of “inequality as injustice” nod and agree that this is sensible, and that we should really be targeting “need” and “opportunity” rather than “outcomes”.  It can be hard, as politicians and their fans have co-opted words like inequality, need, and opportunity and turned them into things they are not.  This saddens me, but also makes me realise that – in my tiny little corner of the internet I should make sure I define these terms (and test myself by making sure I actually can) and leave them open to scrutiny.

This is what Will does with blogging, this is what I attempt to do with blogging, and it is what I hope even more social scientists out there will do with blogging.

1. A review by Brian Scott, where he points out that many of the defined “needs” required to get this wage are in fact not things some people in society would put in their defined “minimum” – this raises an interesting question of “what is poverty”, something we will lightly touch on here on Monday
2. An analysis from Treasury based on their arithmetic microsimulation model (Taxwell).  This essentially says “if the change in the minimum wage caused NO change in behaviour, who are the people who would see their income increase”.  So this DOES NOT rely on any employment effects or the such (although they will occur in New Zealand, given how high this would push the minimum wage relative to the average wage) – and it shows that most of the benefit in this optimistic scenario does not go to the group the Living Wage campaign wants targeted.

Now some may say that this is a suggestion to businesses, not a demand for policy.  That is fine – I remember working at the Warehouse and being paid a bit more for that role as part of their desire to build a “community” among staff.  And it was good.  But if it is just a request for firms to consider, why keep yelling at politicians?

Furthermore, part of the “gain” comes from non-pecuniary elements of the firm (the “community” bit from the Warehouse I worked in) and from the wage being “relatively” higher.  As a result, we have to be a touch careful appealing to “x-inefficiency” as a driver of improved outcomes when many of these structural elements are not being considered

A broader point though, when I first heard of the Living Wage I had a non-economist rant against it.  If we care about a minimum standard in this way, why do we only want people who are employed to get it?  What is the minimum standard?  Why is the minimum standard as a “reservation” level for someone different from the minimum standard we think employers should pay for someone to work?

Now my answers to these questions bring me to a “minimum income” concept.  This isn’t necessarily correct.  They could be answered in a specific way that justifies a Living Wage.  Or we may instead believe there is a lot of scope on efficiency lines.  But the conversation needs to be had with evidence around the existence of trade-offs and a clear conception of the principles of fairness involved – factors that are obfuscated in the rallying cry to make someone else pay someone else more in order to make ourselves feel moral

Note:  I’ll normally throw in a bunch of links to things I’ve thrown up on TVHE in these sorts of posts, but I found the posts on this issue over at Offsetting Behaviour more interesting and informative than anything I’ve written.  I hope Eric doesn’t mind me linking to a bundle of his posts

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

Over the past 20 years, significant numbers of people have been moved out of absolute poverty by a strong push to industrialise in countries such as China.  By taking on these manufactured industries, there has been a change in the relative price of different types of goods and services – such that developed countries have focused on services (and New Zealand, as greener machinery like this CNC plasma systems, on clothing- but with a climbing terms of trade).  In the same way the ‘centre of manufacturing’ has shifted towards developing Asia, so has pollution.

By ramping up manufacturing activity and pollution, these countries have effectively said “we think we were relatively under polluted (given the benefit of the output that occurs during the pollution process), as a result we’ve decided to switch to a situation with higher material standards of living and higher pollution.

By creating “import competition” (ht awesome post on the Economist) and having manufacturing output and ‘jobs’ go from the US to China, we are essentially going through the very process Summers was discussing – the process that he suggested would be in the LDC’s interest.  The “morally reprehensible” arguments of Summers actually represent the situation and what is favoured by groups within those countries.

Does this suggest that everyone has given Summers a bit of a hard time?