jamesz

In praise of abstraction

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Economics seems to endure an awful lot of criticism for using models which simplify reality. I really like the analogy Free Exchange draws between economic models and geographical maps:

If a map included every detail in the geography (trees, country roads, etc.) it would be intractable, rendering it useless. Maps do give you a sense of scale and how variables relate. This facilitates your journey, but does not eliminate unforeseen diversions and the potential for accidents.

Our models are far from perfect and are constantly improving. However, it is our ability to simplify that makes the models useful. If we had to REALLY model reality we’d be neuroscientists, not economists, and have yet to contribute anything to an understanding of markets, policy or finance.

jamesz

The climate change sceptics have it right!

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Many climate change sceptics argue that the IPCC’s predictions are highly uncertain. Over at Vox, Paul Klemperer suggests that this should make us more worried, rather than reassuring us.

…[If] the models merely underestimated the uncertainty, the range of plausible outcomes is now greater, so… defences would need to be higher for us to feel safe.

Klemperer is implicitly relying on people’s risk aversion to claim that the increase in uncertainty makes us worse off. Standard economic theory is on his side here, but experimental work has shown that people are actually risk seeking when it comes to losses. Most people would rather gamble on a loss if there’s some possibility of averting it than take a small, certain penalty. That implies that the increase in uncertainty over the costs of climate change might actually make people feel better about it! Maybe the sceptics are pressing the right buttons after all.

jamesz

How to argue on the internet

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Brad Delong points to a great article by Paul Graham about arguing on the internet:

Many who respond to something disagree with it. That’s to be expected. Agreeing tends to motivate people less than disagreeing… The result is there’s a lot more disagreeing going on, especially measured by the word. That doesn’t mean people are getting angrier. The structural change in the way we communicate is enough to account for it. But though it’s not anger that’s driving the increase in disagreement, there’s a danger that the increase in disagreement will make people angrier…

You don’t have to be mean when you have a real point to make. In fact, you don’t want to. If you have something real to say, being mean just gets in the way.

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Matt Nolan

Rents and house prices – do they move together or apart?

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Rental growth has been picking up in recent months, an interesting phenomenon given that house price growth has stalled, and rents and house prices have historically moved in the same direction. Some of the reasons why rents and house prices should move in the same direction are:

  1. Rising house prices drive people out of the market, which increases demand for rental property,
  2. Rising rents drives increases demand for houses (circular I know 😛 ),
  3. They are both influenced by similar factors (GDP growth, wages),
  4. Investors care about the yield on property – if prices are rising they have to lift rents higher to maintain the yield.

Ok, well why is rental growth picking up in the face of falling house prices? The common reason provided is that people that own rental property are struggling to pay the bills (with higher interest rates), and so are forced to lift rents – however does this argument make sense. Property Management in Miami-Dade & Broward County fix honest and fair pricing.

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jamesz

It’s more than a signal

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Tyler Cowen reports that the signalling model of education is dead! Apparently new research indicates that the value of the signal accounts for no more than 28% of the cost of education. It only takes a couple of months for an employer to learn your productivity, so how can it take years of education to signal what an employer can learn in months?

Let’s not forget that education has always been about both human capital accumulation and signalling. 28% isn’t huge, but it’s significant. It certainly doesn’t kill off the signalling model, although it does suggest that it shouldn’t provide the primary motivation for getting education.

Matt Nolan

Biofuel regulation and carbon prices

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From the Hive we see that the government may be having trouble getting its mandatory biofuel regulation through parliament. Anyone that knows me will know that this makes me glad, not because I’m a climate change denialist (I’m willing to trust the experts on this one), not because I’m concerned about biofuel not having a net positive impact on carbon emissions, but because I don’t think the scheme is properly synchronized with the fact that we have a “carbon price” (through the carbon-trading scheme).

Why does setting a price for carbon mean that we don’t need to make biofuel’s mandatory? In order to explain this I’ll look at the three main criticisms I might get for this position (I’m hoping more criticisms can be added in the comments 😉 ):

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