Matt Nolan

The need for clarity on social capital

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I first remember seeing this paper over on Anti-dismal here.  I wanted to mention it over here as well, but forgot!  But then Vox-EU came up with a summary as well.

Social capital is associated with a host of desirable outcomes:

  • There is more trust and there are more blood donations in towns with lots of civic associations.
  • Voter turnout is higher, and financial markets work better (Guiso, Sapienza, and Zingales 2008).

A growing literature has pointed out that social capital can also have a ‘dark side’ (Field 2003):

  • The Ku Klux Klan, drug-dealers and the mafia rely on social cohesion to ensure co-operation.
  • Also, important recent work shows that civic associations can lead to the entrenchment of existing leaders, undermining the quality of governance (Acemoglu, Reed, and Robinson 2013).

Read more

Matt Nolan

Neat reddit post on Philosophy

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Via Philosophy Bro on twitter I spotted this reddit entry on professionals, and then more broadly on philosophy.  It is a neat read.

I especially enjoyed the bit right at the end:

For most philosophy students, I can tell how well they’re doing in gaining the right skills by how worried much they understand compatibilism about freedom of the will. When they are no longer worried about determinism being compatible with free will, they tend to also be good at philosophizing. For whatever reason, “How I learned to stop worrying and love the determinism” tends to be a pretty good marker.

I am not a philosopher.  I am not very good at philosophy.  I get hung up on the free will vs determinism issue (usually when talking about neuroeconomics here and here).  So this sound like a legit rule 🙂

In terms of understanding action, I am not sure the distinction is actually terribly important – in both cases, people will be following what appear to be deterministic rules.  But how we interpret those rules, and policy actions around them, has a moral element which we may value in different ways depending on whether we view the mind, and in turn how we view action as due to free will or determinism.  I think that sort of stuff sounds pretty interesting and cool, even though it is over my head 🙂

Matt Nolan

Is it production or consumption that matter? In a sense, it is neither!

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There has been a lot of ink spilled out there about whether it is production or consumption that matter.  Without production we have nothing to consume!  Without the urge to consume we wouldn’t produce anything!

People will talk about “Says Law” (supply creates its own demand), or jump around talking about Keynes or Malthus (effective demand can be too low, demand creating its own supply, underconsumption!).

This all sounds grand, and makes great soundbites as it lets us say one drives the other.  But I’m always struck by the question “who cares”.  Production, consumption, output, in our models none of this has any inherent value unless we “assume” value.  And in the world we want to make conclusions about, the inherent subjective value is something that exists that we can’t necessarily observe.

When looking at an economy as a whole, we are not a “large firm” trying to maximise output, or maximise consumption.  We are a series of individuals making choices for some reason.  Understanding the choices, how they relate to value, is the starting point of any thought.

This is the kicker.  When we turn around an apply models (either explicit or implict in our description and conclusion) we are apply our own value judgments.  If we haven’t separated them out, we will sneakingly include value judgments solely based on our own experience “because they seem natural”.  However, other individuals are inherently different beasts, rules we follow aren’t necessarily the same as the ones other follow, and the rules we have to understand the actions of a social group don’t necessarily have much relation to the true nature of those groups!

In this context, both production and consumption should be seen as a means to an end.  And we should analyse them in this context – in what ways does this impact on our view of “social value” or welfare.  This is a question we have to answer before concluding – and the assumptions involved can only be validated through the acceptance of a community, not by strict scientific measurement of value.

Overall, this is why economics is the study of trade-offs involved in scarcity, not the study of how we should allocate scarce resources.  Economists merely ask that lessons involved from our series of descriptions are taken into account when society gets together to try to discuss what they believe is “fair” and “just”.  And non-economists are merely asking economists to recognise that their framework allows description, but doesn’t give them a monopoly on understanding moral questions of value!

jamesz

Invalid opinions

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IF you follow the econ blogs in New Zealand you’ll have seen Matt and others getting pretty grumpy about the uninformed comments sometimes made in the media. That has only been exacerbated by the recent misunderstanding of quantitative easing. A philosopher writing in the Herald sums up how I think economists feel:

If “everyone’s entitled to their opinion” just means no one has the right to stop people thinking and saying whatever they want, then the statement is true, but fairly trivial. …But if “entitled to an opinion” means “entitled to have your views treated as serious candidates for the truth” then it’s pretty clearly false… [because it] implies an equal right to be heard on a matter in which only one of the two parties has the relevant expertise.

Economists are technical experts but work in a field that affects everybody’s daily lives. So, much like doctors, they have to cope with everybody thinking they’re an expert without a shred of real knowledge. And, just like in public health debates, credence is given to groups who have an opinion but no expertise. Understandably, economists get frustrated!

However, we need to be careful where we draw the line between those with expertise and those without it. Read more

Matt Nolan

Bleg: The scope of abductive reasoning in economics

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Time to ask another question.  I was wondering, how much does the form of explanation in economics appear to take the form of abductive reasoning?

Often in economics, we will observe a stylised fact.  We then have a method that can explain that fact in a myriad of ways.  We will then build a model that shows how a given cause will lead to that stylized fact, and pat ourselves on the back.  But if this is really just a form of abductive logic, and there are a myriad of ways to “explain” said stylized fact, how can we have any confidence in our description – how can we really say that we have explained anything?

Matt Nolan

Ethics and description

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In the past couple of days I’ve run into a couple of places in the internet that left we confused.

First, via Education Directions I noticed this article on the way of “valuing assets” that takes into account social value.  The claim is that:

Western accounting needs to recast the narrow, individualistic and economically bound concept of asset, claiming that much would be gained from recognising that there are things of value beyond those defined by individual property rights and economic reckoning

This seems like an aimless statement to me.  Private individuals value their asset based on issues of private value – this is hardly surprising.  Government takes into account concepts of broader “social value” when they do accounts, or look at the value of policies.  What methodological value is there from using a different word for social value to describe it?

Giving things new names doesn’t actually add value to how we describe them, unless the context is to translate these broad concepts for a cultural specific context!  In truth, it isn’t “western accounting” that needs to learn from this – if the government is trying to work out social value, then we would want to use standard western accounting methodologies with these specific cultural contexts in mind.

Now don’t get me wrong, the willingness to attack “western” accounting immediately shows that the authors want to attack an arbitrary strawman, than to credibly discuss what organisations are trying to achieve with accounting values and then asking how to transparently represent that.  And this brings me to my second link – Buddhist economics.

Contrary to the description given of “western” economics on this post, there is a focus on “social value” in mainstream economics – there is a huge focus on it.

But the very description behind Buddhist economics here is worse than that – for some reason the author of the Wikipedia page has decided that the purpose of economics is to tell people how to live their lives, rather than describing scarcity and trade-offs.  Given this, the article finds fault with economics because it dares to assume that people act in a self-interested way.

Of course, we’ve seen this ethical confusion before – a million times.  People presume that since economists are willing to discuss trade-offs we lack morals.  Now, a clear moral and ethical standpoint IS required to decide on what SHOULD be done, and what policy SHOULD be picked by government.  But everything that I keep seeing economists attacked for, and in this case accountants as well, is merely describing something.

Now does this happen because people find it hard to distinguish between description and prescription?  Or is the issue that people think economists framing of issues IS the driver of certain ethical outcomes in policy, and that our pretense of separating “description” and “prescription” is flawed?