Saturday, May 26, 2007

Kevin Drum attempts to explain economics to economists.

I must be ironic right ? I'm not suggesting that this guy with a degree in communications* from Long Beach State has a better understanding of economics than most economists am I ?

I am.

The man is a genius but makes it easy to miss this because his genius lies not only in his understanding but in his ability to make things obvious.

He argues two things that don't need to be argued.

Rational is not a synonym for good.
Is he really suggesting that economists sometimes forget that ? He is and we do.

Sometimes people make better choices about what should be done with other people's money than with their own, because when deciding whether to give their money to, say, the hard working poor, they have, uhm, a conflict of interest.

Surely the possible problem that I have a conflict of interest when I am deciding whether to keep my money or use it to help humanity can't be news to anyone ?

Sure it can. It is a shocking idea to economists.

Drum does not understand how devastating his critique is (answer totally devastating). Neither did I, until Brad DeLong explained it to me.

Imagine we care about other people but not as much as we care about ourselves (shocking thought eh well a very very radical departure from standard assumptions in economics). This means that we might care a lot about a transaction or transfer which has no effect on our consumption, leisure or wealth. I am very glad that Bill and Melinda (and Warren) gave so much money and did it in such a very intelligent way (although I still hate windows). This is what we call in the biz an "externality" and it implies that the market outcome is not efficient. I don't especially like to pay taxes. I really really like the fact that rich people pay taxes to support social welfare programs (war in Iraq ? no thank you). Both desires count to a utilitarian. It means that an outcome enforced through the coercive power of the state can make everyone happier than the free market outcome, because of the externality due to altruism.

To consider with Drum the case of Thomas Jefferson, without anything odd (dynamic inconsistency) the position as a slave owner who advocated abolition of of slavery can be perfectly rational. The slave owner might hate slavery, but not hate the enslavement of his own slaves as much as he loves living in luxury off the sweat of their brows. His ideal outcome would be to have all slaves but his own free. A rational anti slavery slave owner knows he's not going to get away with that. Second best would be abolition of slavery -- the desire to free everyone elses slaves outweighs the desire to keep his own. Third would be continued slavery. Finally the outcome he likes least would be to free his own slaves and live in relative poverty in a slave owning country.

Perfectly clear. So why is it that my "explanation" of Drum is ugly and unclear while his essay was clear and brilliant ?

update: The last sentence was not a *deliberate* parody of bad writing. I didn't write "So why was my "explanation" of Drum ugly and unclear, while his essay was clear and brilliant ?" because it is a fact that being an over wordy writer is one of the aspects of being Robert Waldmann, who tends to be wordy.

update I.5: update 1 is corrected so that it no longer claims I wrote what I wished I had written but didn't write. Alright ?

update II: Tim Haab (who is not a jerk) definitely gets Kevin Drum's point as he clearly understands the fundamental difference between a) advocating policy which causes people to internalize externalities and b) listening to kids in the back seat squabble for hours. Also he doesn't own any slaves which puts him a big one up on Thomas Jefferson.

Further commentary here and right here.

An interesting example of rational co-operative behavior which is not in the public interest is link begging, where bloggers attempt to reward other bloggers for links by linking back. Not as repulsive as self linking, but the first sometimes enables a rational egoist to trick Google, while the second is just pathetic.

Update III:

Over there in comments calmo recommends a re-rewrite, so update 1 is now

I wrote "So why was my "explanation" of Drum ug and unclear, while his essay was clear and brilliant ?" because it is a fact that being an over word writer is one of the aspects of being Robert Waldmann, who tends to be word.

he (or she) kind wrote
your perfect[] serviceable and occasional[] brilliant prose. (Works well, but could use some lubricatin libation.)[Which is so much better than 'works well but needs constant supervision and revision.' or 'works well but is gravely offended by any criticism that improvement is possible.']
emphasis added.

And why don't you just take that adjective and shove it up your adverb.

*Drum specializes in communications on the internets.

Update CLXXXVIII "one hand" deleted (ouch).

Update no number an update without a number

From Gmail

I thought the three of you might be interested in this comment upon Kevin's post on rational behaviour. I think he rather proves Byan's point (but then being a bleeding heart classical liberal of course I would):

http://timworstall.typepad.com/timworstall/2007/05/the_myth_of_the.html


I don't know who the other two are or if Tim Worstall thinks I am one and three like, you know, That Guy.

Worstall criticizes Drum effectively. Mostly he argues that the minimum wage should be replaced by an increased EITC . I think the efficiency costs of the minimum wage were much over estimated in early research. More recent research suggests they are actually very small. However, I certainly agree with Worstall that the EITC is a better program than the minimum wage and that voters are irrational (look who's in the White House). I also think that economic agents act irrationally in the merketplace. The argument that we should use the coercive power of the state to eliminate the externality due to altruism has nothing to do with whether the coercive mechanism is the minimum wage or taxes used to fund the EITC. In either case threats which, if it comes down to it, are enforced with violence, can make everyone happier because the will of each can never be the will of all if there are externalities.

Also note in comments

We're born with a built-in conflict between our self interest and our interest in helping the group survive. I'd write a book about it if I could ever find a publisher.
http://makethemaccountable.com/balance/

Carolyn Kay
MakeThemAccountable.com


I assume that Worstall and Kay are responding to my thoughts on the externality due to altruism and not to anything I wrote in update III, but I can't help but note that they know my URL, and that I just linked to them and that, in principle, I oppose link begging but that ... come on do I have to spell it out ?

9 comments:

Anonymous said...

Possibly, you did.

anne

Anonymous said...

Nice.

anne

Chris said...

I like the preferences ranking for Jefferson there. I'm going to remember that one.

This is why I like Robert H Frank so much (a real economist). If you factor status and rank into human decisions then economics explains even more about why people do what they do.

Anonymous said...

"The last sentence was not a *deliberate* parody of bad writing."

http://www.nytimes.com/books/98/09/20/specials/moore-writer.html

March 3, 1985

How to Become a Writer Or, Have You Earned This Cliche?
By LORRIE MOORE

First, try to be something, anything, else. A movie star/astronaut. A movie star/missionary. A movie star/kindergarten teacher. President of the World. Fail miserably. It is best if you fail at an early age - say, 14. Early, critical disillusionment is necessary so that at 15 you can write long haiku sequences about thwarted desire. It is a pond, a cherry blossom, a wind brushing against sparrow wing leaving for mountain. Count the syllables. Show it to your mom. She is tough and practical. She has a son in Vietnam and a husband who may be having an affair. She believes in wearing brown because it hides spots. She'll look briefly at your writing then back up at you with a face blank as a doughnut. She'll say: ''How about emptying the dishwasher?'' Look away. Shove the forks in the fork drawer. Accidentally break one of the freebie gas station glasses. This is the required pain and suffering. This is only for starters....

anne

Anonymous said...

Actually, the essay is terrific but I can have as much fun as I wish especially on holiday; besides, I was had worse in mind.

anne

Anonymous said...

I keep this line on the desk, write large:

''He was thinking, but she could tell he wasn't good at it.''

Lorrie Moore is a genius :)

anne

Mark Thoma said...

You beat me to it. I was just writing (probably needs editing):

Update: I think Tim Haab's post illustrates Robert's point. Individually, he has no incentive to pay for the externalities he imposes while driving an SUV. As he says,

"That's why they're called externalities. Voluntarily internalizing my own externalities would ruin my faith in rationality."

I think Tim would also support that:

"[A]n outcome enforced through the coercive power of the state can make everyone happier than the free market outcome, because of the externality."

Because as Tim has said:

"I really don't get the debate by economists between a carbon tax and marketable carbon permits. At the first level, as economists, we've won! We've convinced nearly everyone that regulation using economic incentive-based policies is a preferred approach. The squabbling amongst us over the best economic incentive-based policy can't help get one of these policies implemented."

And I assume he wouldn't support a policy that makes everyone worse off (even though Tim "Yes, I'm a jerk." However, there is debate on this point. Here too.

Maybe I'll add it anyway...

Caro said...

We're born with a built-in conflict between our self interest and our interest in helping the group survive. I'd write a book about it if I could ever find a publisher.
http://makethemaccountable.com/balance/

Carolyn Kay
MakeThemAccountable.com

anon/portly said...

"I must be ironic right ? I'm not suggesting that this guy with a degree in communications* from Long Beach State has a better understanding of economics than most economists am I ?

I am."

I left a long and wandering comment at Thoma's site, but I'd like to point out why you're completely wrong in your assessment of Drum - he's not "explaining economics to economists," he's just getting things wrong.

Drum says:

"Jefferson wanted slavery banned because he understood that individuals often lack the willpower to do individually what they know is right. Sometimes it takes the power of community action to force ourselves to do good things that we can't (or won't) do on our own."

Drum is saying that owning slaves is rational for the individual, but "in the voting booth, sometimes the better angels of our natures take wing for a moment and persuade us" to vote for things that are good, as opposed to rational.

Step away from slavery for a moment and consider global warming. If an individual reduces their energy usage, there is no significant impact. If everyone collectively reduces their energy usage, everyone is better off. It is not to the "good" that we appeal when (or if) we ask people to vote for collective energy-use restrictions, it is to the "rational" or to self-interest. There would be no good reason to vote for collective energy-use restrictions if they didn't make us better off, because the individual actions that lead to global warming (driving an SUV, say) are not inherently immoral.

But slavery is very different. Most people would say that slavery has a moral dimension that is lacking in something like energy use: (1) owning a slave is wrong regardless of its collective implications, and (2) its ban would be a good idea even if it made us individually or collectively worse off in a strict financial sense.

Jefferson's preferences, in order, seemed to have been: (1) no one gets to own slaves, (2) everyone gets to own slaves and TJ keeps his, and (3) everyone gets to own slaves and TJ doesn't keep his. Drum says that Jefferson was "too weak-willed to forego" the benefits of owning slaves and that "Jefferson wanted slavery banned because he understood that individuals often lack the willpower to do individually what they know is right," but perhaps these suggestions about Jefferson's inner nature are simply Drum's invention and perhaps a better argument could be constructed by replacing the term "willpower" with the term "incentives."

Consider the relationship between outcomes (1) ("no one gets to own slaves") and (3) ("everyone gets to own slaves and TJ doesn't keep his") mentioned above. If Jefferson was made equally bad off, financially, with both outcomes, then Drum might have a point about Jefferson's willpower. But if the fact of his competitors having to free their slaves also meant that Jefferson was better off financially with (1) than with (3), then Jefferson's preferences appear to acquire a tint of self-interest.

I think Drum wants to use Jefferson's preferences as an example of how the market forces us to be "competitive, selfish, meanspirited, and xenophobic," but
I see no reason to assume that Jefferson's preference for (1) over (3) isn't reflecting the exact same degree of self-interested behavior as his preference for (2) over (3). What the market isn't doing is preventing us from expressing selflessness and generosity and altruism, what it's doing is preventing us from expressing collective action.

If Jefferson felt slavery was wrong but kept them anyway, then either (1) his decision was based on its effects on others, i.e. the market was forcing him to be selfless and generous and overlook his own desires; or else (2) he was simply a hypocrite, no better than (my example at Thoma's) the "Reverend Billy Bob Swagger and his Jeffersonian 'stop me please' argument to ban internet porn."

Drum seems to be suggesting that somehow when we express our preferences collectively we are better people than we express our preferences individually, i.e. in the "competitive, selfish, meanspirited, and xenophobic" marketplace. "In the voting booth, sometimes the better angels of our natures take wing for a moment and persuade us to try to make ourselves into better people." But we may choose collectively to vote for things that Drum find morally uplifting, or vote for things that Drum finds shameful. When we vote we are expressing the *same* preferences, not different ones, it's just that we have available collective outcomes unattainable by market mechanisms. Drum is wrong to think that we are (or should be) less self-interested in the voting booth than in the marketplace.