Steven Levitt and Stephen Dubner follow on the tremendous success they enjoyed with their initial effort, Freakonomics, by pushing the envelope beyond sumo wrestlers to hookers.
The final chapter has been the source of virtually all discussion about this book. I'd embed the hyperlinks, but I'm way too lazy. Instead of joining the plaintive cries of heresy by those who would prefer faster and more immediate action to counteract limate change, or the more reasonable queries about the facts as Levitt and Dubner present them (e.g, DeLong), I'd like to address my concern as an economist. I expect Levitt to get the economics right, even if Dubner wrote most of the chapter.
In trying to be provocative and a little cute, the authors suggest that geoengineering might be a cost-effective way to offset emissions. Maybe it is. Certainly some of its proponents are wicked smart guys (e.g., Myhrvold). Forget about the engineering problems--they are easy to solve--the underlying problem is that the climate is a public good. We can't prevent anyone on the planet from experiencing the same climate as the rest of us, and one individual does not preclude another from experienceing the climate. So the economic issue involved in forestalling global cliamte change is a public good provision problem.
Public goods are not always provided in optimal quantites by private actors (sometimes they are--lighthouses, for example) for any number of reasons. One reason that Copenhagen was such a miserable failure is that nobody figured out how to solve the strategic interaction problem inherent in the necessary multilateral action. All of Europe can preach what it wants, but if China and India head in the opposite direction, the aggregate effect will be negligible.
Again, the problem is not that we don't know how to curtail emissions--we do. We can put a price on carbon, which will provide a valuable incentive. There are a number of good ways to do this through tradable permits, taxes, or other instruments. The problem is in imposing/enforcing that price everywhere in the world when there is a strong incentive to cheat.
Pumping sulfur dioxide into the stratosphere will supposedly alter the climate and could be calibrated to just offset warming due to anthropogenic emissions. Great. But geoengineering is also a public good. Levitt and Dubner blithely ignore the issues of public good provision. Who decides where, how much, and when to pump the gas into the air? Who pays for it? What happens if someone doesn't want to pay their share?
Levitt and Dubner's basic insight is maybe there's a cheaper way to get to the objective stated in the Stern report. Fine. But their proposal in no way moves us any closer to the geoengineering solution. Albeit the relatively low price tag sugegsts that a small number of wealthy indidivudals could unilaterally affect the global climate, but who would trust them? Did anyone else get scared by SPECTRE in all of those Bond movies? After all of the schlock about thinking "freaky," or like an economist, exploring the hidden side of everything, ..., I expected more from the authors.
Monday, January 11, 2010
Tuesday, June 23, 2009
Book review: A Farewell to Alms
Ambitiously-subtitled "A Brief Economic History of the World," UC-Davis economist Gregory Clark really tries to do three things in A Farewell to Alms.
First, he attempts to define economic conditions around the world prior to the Industrial Revolution, asserting that living conditions in different countries were largely equal and consonant with the vision of physical limits to economic growth propounded by Thomas Malthus. This is a difficult problem of inference from spotty and inconsistent data, and is typified by keyhole comparisons across centuries and civilizations.
Second, Clark explores the causes of the Industrial Revolution in England and its pattern of diffusion, albeit somewhat less convincingly than the previous exploration of Malthusian economies. Taking a stab at both the where and the when of the escape from the Malthusian trap is admittedly a high bar to try to clear.
Third, the narrative searches for some explanation of the pronounced divergence in growth rates and material living standards since the Industrial Revolution that has opened a gap between developed and developing countries. Explanations focus on the relative intensities of labor and capital usage in similar industries, notably textiles. Despite more and better data, the endogeneity of growth is a difficult empirical reality.
One the whole, the book is very detailed as the weight of academic evidence on these issues is meticulously brought to bear, yet the treatment is somewhat lighter than a standard academic tome. The result is an intermediate pace that is noticeably more formal than much of the popular economics literature that seeks to "explain" globalization. For anyone accustomed to reading academic work, it moves along quite nicely.
While some gaps must necessarily appear in a book with such a broad-ranging and ambitious objective, this volume makes a reasonable pass at presenting the logic of paradigmatic economic models as applied by economic historians and scholars of institutional change and growth to the causes and results of industrialization.
First, he attempts to define economic conditions around the world prior to the Industrial Revolution, asserting that living conditions in different countries were largely equal and consonant with the vision of physical limits to economic growth propounded by Thomas Malthus. This is a difficult problem of inference from spotty and inconsistent data, and is typified by keyhole comparisons across centuries and civilizations.
Second, Clark explores the causes of the Industrial Revolution in England and its pattern of diffusion, albeit somewhat less convincingly than the previous exploration of Malthusian economies. Taking a stab at both the where and the when of the escape from the Malthusian trap is admittedly a high bar to try to clear.
Third, the narrative searches for some explanation of the pronounced divergence in growth rates and material living standards since the Industrial Revolution that has opened a gap between developed and developing countries. Explanations focus on the relative intensities of labor and capital usage in similar industries, notably textiles. Despite more and better data, the endogeneity of growth is a difficult empirical reality.
One the whole, the book is very detailed as the weight of academic evidence on these issues is meticulously brought to bear, yet the treatment is somewhat lighter than a standard academic tome. The result is an intermediate pace that is noticeably more formal than much of the popular economics literature that seeks to "explain" globalization. For anyone accustomed to reading academic work, it moves along quite nicely.
While some gaps must necessarily appear in a book with such a broad-ranging and ambitious objective, this volume makes a reasonable pass at presenting the logic of paradigmatic economic models as applied by economic historians and scholars of institutional change and growth to the causes and results of industrialization.
Tuesday, April 7, 2009
Guessing game
"Now they's good timber up here too. Real good timber. It's been cut over fifteen twenty year ago and so maybe it ain't big timber yet, but looky here. While you're a laying down there in your bed at night this timber is up here growin. Yessir. And I mean that sincerely. They is real future in this property. As much future as you'll find anywheres in this valley. Maybe more. Friends, they is no limits to the possibilities on a piece of property like this. I'd buy it myself if I had any more money. And I believe you all know that ever penny I own is in real estate. And ever one I've made has been from real estate. If I had a million dollars I would have it ever cent invested in real estate within ninety days. And you all know that. They ain't no way for it to go but up. A piece of land like this here I sincere believe will give ye ten percent on your investment. And maybe more. Maybe as high as twenty percent. Your money down here in this bank won't do that for ye and you all know that. There is no sounder investment than property. Land. You all know that a dollar won't buy what it used to buy. A dollar might not be worth but fifty cents a year from now. And you all know that. But real estate is goin up, up, up." -- 1973
who?
who?
Sunday, March 8, 2009
Book Review: Here Comes Everybody
I once wrote an article about the Quincy Library Group, an unlikely group of environmentalists, loggers, and small-town residents in Northern California. I spent quite a bit of time relating how difficult and costly it was to organize this group of people--in 1997. Looking back, today the task would be much easier, thanks in large part to the proliferation of communication tools that preclude the need to book a room in the town library in order to form an organization bent on improving forest management. (What would they have named it today?)
Clay Shirky claims that "social tools" like email, text messaging, and open-source models for business and pleasure represent a revolution of historic proportion. Here Comes Everybody is his magnum opus on the topic, condensing years of writing and teaching on the topic into a well-written volume. Detailed and well-chosen examples illustrate his point: from finding a phone left in a NYC taxicab to fomenting political dissent in Belarus to finding a friend of a friend in a busy bar. The chapters address how individuals generate media instead of simply consuming it, with the result that we have a publish-then-filter model, and explores some of the implications of these developments for social networks. The book is clearly better than other (unmentioned) attempts to "explain the current communication revolution." One of the strengths of the book is its reference to a Coasean framework for organization.
Coase laid out a framework for explaining who some activity takes place in a single organized entity--a firm--and other activity takes place in a decentralized way--the market. Shirky interjects a third category--the group--that he thinks will come to play an increasingly important role in society. In fact, he spends most of the book defining and illustrating what he thinks a group is. For example, a group needs three things: a promise (idea), a tool (means), and a bargain (contract). Why is this not just a new type of organization that is particularly suited to taking advantage of power law contributions? Shirky's argument is that transaction costs incurred in organizing groups have been dramatically lowered. Agreed. According to Coase, lowering transaction costs should lead to more activity period, and more activity within the scope of the firm. The Linux work group is still a firm even though its members work for free. Perhaps what we need is a retooling of our theories of not-for-profit activity--I agree.
But what about the challenge to familiar organizations (firms) that the existence of groups poses? Shirky cites the Boston archdiocese abuse scandal, and the organization of parishioners to bring it to the forefront of public debate as an example of how "groups" undermine "firms." Given the inherent heterogeneity of "groups," ranging from Wiccan discussion groups, to networks of college friends on Facebook, to community organizations working for specific changes in managing the forest surrounding their town, this new category doesn't seem very different from firms. There are big firms and small firms. Small firms rise and fall daily; when big firms crash, it makes the network news. So too with groups. It may be that groups are the kind of firms that can easily take advantage of power law or open source architecture. That contrasts them nicely to the existing and familiar firms that our government is trying to save.
My final critique of amending the Coasean framework with the introduction of the group is it makes no relation between them and markets. Coase's theory was useful (in part) because it was parsimonious--there are firms and there are markets, both broadly defined. Shirky's observations about changes in communication having large implications in business and society are astute, but unique only in their articulateness. Shoehorning a new category into Coase's framework without relating it to one of the existing two strikes me as a bit presumptuous and intellectually unsatisfactory. As the revolution progresses, perhaps the linkage will become more clear, and Shirky will have staked an intellectual claim.
Clay Shirky claims that "social tools" like email, text messaging, and open-source models for business and pleasure represent a revolution of historic proportion. Here Comes Everybody is his magnum opus on the topic, condensing years of writing and teaching on the topic into a well-written volume. Detailed and well-chosen examples illustrate his point: from finding a phone left in a NYC taxicab to fomenting political dissent in Belarus to finding a friend of a friend in a busy bar. The chapters address how individuals generate media instead of simply consuming it, with the result that we have a publish-then-filter model, and explores some of the implications of these developments for social networks. The book is clearly better than other (unmentioned) attempts to "explain the current communication revolution." One of the strengths of the book is its reference to a Coasean framework for organization.
Coase laid out a framework for explaining who some activity takes place in a single organized entity--a firm--and other activity takes place in a decentralized way--the market. Shirky interjects a third category--the group--that he thinks will come to play an increasingly important role in society. In fact, he spends most of the book defining and illustrating what he thinks a group is. For example, a group needs three things: a promise (idea), a tool (means), and a bargain (contract). Why is this not just a new type of organization that is particularly suited to taking advantage of power law contributions? Shirky's argument is that transaction costs incurred in organizing groups have been dramatically lowered. Agreed. According to Coase, lowering transaction costs should lead to more activity period, and more activity within the scope of the firm. The Linux work group is still a firm even though its members work for free. Perhaps what we need is a retooling of our theories of not-for-profit activity--I agree.
But what about the challenge to familiar organizations (firms) that the existence of groups poses? Shirky cites the Boston archdiocese abuse scandal, and the organization of parishioners to bring it to the forefront of public debate as an example of how "groups" undermine "firms." Given the inherent heterogeneity of "groups," ranging from Wiccan discussion groups, to networks of college friends on Facebook, to community organizations working for specific changes in managing the forest surrounding their town, this new category doesn't seem very different from firms. There are big firms and small firms. Small firms rise and fall daily; when big firms crash, it makes the network news. So too with groups. It may be that groups are the kind of firms that can easily take advantage of power law or open source architecture. That contrasts them nicely to the existing and familiar firms that our government is trying to save.
My final critique of amending the Coasean framework with the introduction of the group is it makes no relation between them and markets. Coase's theory was useful (in part) because it was parsimonious--there are firms and there are markets, both broadly defined. Shirky's observations about changes in communication having large implications in business and society are astute, but unique only in their articulateness. Shoehorning a new category into Coase's framework without relating it to one of the existing two strikes me as a bit presumptuous and intellectually unsatisfactory. As the revolution progresses, perhaps the linkage will become more clear, and Shirky will have staked an intellectual claim.
Wednesday, March 4, 2009
Book Review: A Splendid Exchange
Few recent phenomena evoke such strident reaction as "globalization." Proliferation of trade and communication changes our world in ways that may be improving in aggregate. but the distribution of benefits is far from uniform. William Bernstein laughs at the modernistic hubris associated with globalization protests, since trade has waxed and waned over centuries, and with its ebb and flow, the forces of globalization have also fluctuated. Clearly we are a flood tide (or were a few short months ago), and in A Splendid Exchange Bernstein traces the historical role that trade and its attendent forces of diversification or globalization have had during recorded history. This history focuses in the Indian Ocean trade as much as anywhere else, as first spices, then later slaves, Oriental goods, cotton, tea, and opium have been transshipped by various merchant classes--Roman, Arab, Jewish, Chinese, western Europeans, and Indians in turn.
Bernstein's point is simple. Trade is not inherently evil. It has been going on for centuries. Some globalization is clearly a good thing. Today's debate about winners and losers should be that, not a condemnation of trade and endorsement of autarky. The final chapter--"The Battle of Seattle" makes this point subtly, connecting "organized anarchists" to Chinese barbers in Mexico City in the 16th century.
The narrative necessarily skips large and potentially interesting sections of history in order to fit into a volume of salable length. But the selected episodes fit together well: ancient trade, explaining why the Europeans thought there were "Dark Ages, the economic underpinnings of the European colonial expansion, the disease effects of trade, the rise and impact of European trading empires, the tragedies of modern protectionism (which mind you, didn't necessarily cause the Great Depression), and finally the modern controversy over globalization. IN all, a useful context for debaters on both sides of the globalization issue.
Bernstein's point is simple. Trade is not inherently evil. It has been going on for centuries. Some globalization is clearly a good thing. Today's debate about winners and losers should be that, not a condemnation of trade and endorsement of autarky. The final chapter--"The Battle of Seattle" makes this point subtly, connecting "organized anarchists" to Chinese barbers in Mexico City in the 16th century.
The narrative necessarily skips large and potentially interesting sections of history in order to fit into a volume of salable length. But the selected episodes fit together well: ancient trade, explaining why the Europeans thought there were "Dark Ages, the economic underpinnings of the European colonial expansion, the disease effects of trade, the rise and impact of European trading empires, the tragedies of modern protectionism (which mind you, didn't necessarily cause the Great Depression), and finally the modern controversy over globalization. IN all, a useful context for debaters on both sides of the globalization issue.
Thursday, January 22, 2009
When Poli Sci Gets Econ Envy...
They pretend that they can answer interesting questions, understand a legitimate and rigorous methodology, and then inevitably completely screw it up. Then wallow in smugness as other disciplines pile into the same trap.
Hat tip: Magua
Hat tip: Magua
Tuesday, November 18, 2008
Saturday, November 8, 2008
Fantastic
To be in a position to say what everyone wants to:
http://www.portfolio.com/views/blogs/daily-brief/2008/10/17/hedge-fund-manager-goodbye-and-f-you
http://www.portfolio.com/views/blogs/daily-brief/2008/10/17/hedge-fund-manager-goodbye-and-f-you
Sunday, October 5, 2008
Why Al Doesn't Get It
Or maybe it's just one confused NYT writer. Or maybe both have no idea what they're talking about.
From Sunday's NYT Magazine article on Kleiner Perkins (under the wry headline "Capitalism to the Rescue", an attitude that is likely to accelerate NYT's impending demise):
And when the governments of the world assign a price to carbon, [Albert Gore] added — as [Albert] believes they will within a year or two — demand for carbon-free electricity will explode.
I assign homework. Markets abet price discovery.
Governments hopefully won't be as naive (as NYT writers apparently are) to imagine they could "assign" anything that functioned like a price to carbon.
Then again, maybe some of those fantastic Russian economists are out of work and available for Albert's pet project. I simply suspect that they aren't on Kleiner Perkins' payroll. After all, that hardly sounds like capitalism.
From Sunday's NYT Magazine article on Kleiner Perkins (under the wry headline "Capitalism to the Rescue", an attitude that is likely to accelerate NYT's impending demise):
And when the governments of the world assign a price to carbon, [Albert Gore] added — as [Albert] believes they will within a year or two — demand for carbon-free electricity will explode.
I assign homework. Markets abet price discovery.
Governments hopefully won't be as naive (as NYT writers apparently are) to imagine they could "assign" anything that functioned like a price to carbon.
Then again, maybe some of those fantastic Russian economists are out of work and available for Albert's pet project. I simply suspect that they aren't on Kleiner Perkins' payroll. After all, that hardly sounds like capitalism.
Thursday, October 2, 2008
Book Review: Predictably Irrational
Synthesizing the theory of Samuelsonian economics with demonstrated but non-conforming decision tendencies is the great challenge of behavioral economics. Dan Ariely does not present a comprehensive theoretical framework for us to consider actual decision-making, but he does present a variety of research results in an informal setting that highlight particular environments in which humans tend to make decisions that are not "rational." In particular, he highlights the types of decisions in which we regularly make decisions that diverge from textbook rationality. For example, people have a hard time making decisions based on absolutes, instead relying on comparisons. Therefore the initial reference point matters a lot. Another chapter focuses on how people make different decisions when sexually aroused than they would if not. Big surprise. The effect of social and market norms, how people cheat, and the role of expectations are other chapters. The material is drawn from scholarly papers by Ariely and his colleagues, which straddle the economics and psychology literatures. As a well-written collection of many of the main experimental results in behavioral economics, the book is delightful mind candy.
Behavioralists have carved out a niche in economics, just as many other subdisciplines have. But continuing to dream up experiments that are interesting is different from formulating a testable theory of behavioral economics. The former will eventually grow pedantic, while the latter represents a major stride in improving the study of choice. Certainly there are many great minds bent to this very task. Until we can understand where and why behavior matters, and when our standard expected utility models are functional, we are distracting ourselves from the central issues of economics--choice under scarcity and uncertainty. Ariely's chapter on the hazards of distracting options should serve as adequate warning.
Behavioralists have carved out a niche in economics, just as many other subdisciplines have. But continuing to dream up experiments that are interesting is different from formulating a testable theory of behavioral economics. The former will eventually grow pedantic, while the latter represents a major stride in improving the study of choice. Certainly there are many great minds bent to this very task. Until we can understand where and why behavior matters, and when our standard expected utility models are functional, we are distracting ourselves from the central issues of economics--choice under scarcity and uncertainty. Ariely's chapter on the hazards of distracting options should serve as adequate warning.
Tuesday, September 23, 2008
Financial Bailout
Surprised though I am that other contributors to this post haven't beaten me to the punch, the prospect of massive government intervention in the financial sector is too tantalizing to pass up. I will exercise restraint only insofar as sticking to a rather esoteric academic point, albeit a very important practicial consideration. Others can pile on to those public figures unwitting enough to already be embroiled. (If only those drawing lessons had panned out--today would be a great day to be an editorial cartoonist.)
Judging from the recent behavior of the current and prospective future administrations, Congress in all its sordid manifestations, sundry pundits of all stripes, and our central bank(ers), I'd venture that little thought has been given to the implementation of any bailout plan. Full stop. So what is the optimal way to throw $700 billion at the financial sector? Carpet-bombing Wall Street with bags of cash? Opening the "bad security" window to all comers? To all domestic comers? Targeting certain actors? (magnificant corruption/campaign contribution potential) Or should the eggheads engineer a reverse auction? Perhaps, to borrow a bit of jargon, we need to design a market for bad debt? Or we could all hearken back to our darkest days of solving mechanism design problems, and identify the social welfare function we seek to maximize. Actually, that might be a really good thing for Hank Paulson to do...
Judging from the recent behavior of the current and prospective future administrations, Congress in all its sordid manifestations, sundry pundits of all stripes, and our central bank(ers), I'd venture that little thought has been given to the implementation of any bailout plan. Full stop. So what is the optimal way to throw $700 billion at the financial sector? Carpet-bombing Wall Street with bags of cash? Opening the "bad security" window to all comers? To all domestic comers? Targeting certain actors? (magnificant corruption/campaign contribution potential) Or should the eggheads engineer a reverse auction? Perhaps, to borrow a bit of jargon, we need to design a market for bad debt? Or we could all hearken back to our darkest days of solving mechanism design problems, and identify the social welfare function we seek to maximize. Actually, that might be a really good thing for Hank Paulson to do...
Monday, September 22, 2008
Book Review: Gridlock Economy
Michael Heller coined the term “anticommons” to describe the inefficient over-allocation of property rights in post-Soviet Russia. In Gridlock Economy, he expounds in a popular setting (albeit thoroughly-referenced) on the ideas he has developed in the legal literature and elsewhere.
The seminal example of thriving sidewalk kiosks adjacent to the well-lit but empty Moscow storefronts receives an entire chapter. The reader is encouraged not to blame the thoroughly-credentialed World Bank advisors who helped create the legal labyrinth that was to blame for the underuse of the valuable storefronts (Heller for the World Bank advisors, and he, obviously, didn’t screw anything up—ignore the fact that the Russians lacked any people with a memory of capitalism, even of a Tsarist flavor, and had to rely on their Western advisors for advice in quickly establishing functional market structures under political constraints). The takeaway from that and most of the other stories is that anticommons problems are much more likely when the government tries to create new property rights from scratch, and doesn’t quite get it right. Beware PES. Sorry, experts.
The more interesting examples pertain to the cutting edge of the economy: the ultraviolet spectrum and the patenting of biomedical technologies. In the first case, the inefficient overallocation of the spectrum in the U.S. is implicated in the sub-standard quality of wireless broadband telecommunications. The second case is the crux of a debate over proprietary versus open-source research output, especially when prior work is requisite (as in the case of particular gene sequences) for further advances. Is the cure for cancer going undiscovered because researchers fear patent trolls?
The least satisfying chapter is the final one, in which Heller explores the economic history of oysters. While the common-property dimensions of the problem are apparent, and vividly illustrated in the rent dissipation of oyster wars, what is not clear is how we should think about oysters as an anticommons problem. Is it just that the Chesapeake is divided between Virginia and Maryland? Or that it took nearly two hundred years to negotiate a settlement? Prudhoe Bay took a long time to unitize, but not because of commons and bilateral monopoly problems as opposed to anticommons issues. Early in the book Heller acknowledges Buchanan and Yoon’s model of the anticommons as the theoretical analogue of the commons. However, the evidence that he presents in anecdotes throughout the book isn’t always clear about which problem has the upper hand. The spectrum and biomedical patent examples are transparent, as the spatial and legal anticommons in land. But in other cases, like oysters, it’s not so clear.
Heller’s core suggestions are well-taken. We should think about the costs of overdefining property rights in counterproductive ways. We should expand the English vocabulary in ways that word processors inject fewer squiggles under descriptors like underuse, anticommons, and overdefine. But the challenge of theoretically and empirically refining the anticommons concept remains. That said, numerous interesting research lines present themselves.
The seminal example of thriving sidewalk kiosks adjacent to the well-lit but empty Moscow storefronts receives an entire chapter. The reader is encouraged not to blame the thoroughly-credentialed World Bank advisors who helped create the legal labyrinth that was to blame for the underuse of the valuable storefronts (Heller for the World Bank advisors, and he, obviously, didn’t screw anything up—ignore the fact that the Russians lacked any people with a memory of capitalism, even of a Tsarist flavor, and had to rely on their Western advisors for advice in quickly establishing functional market structures under political constraints). The takeaway from that and most of the other stories is that anticommons problems are much more likely when the government tries to create new property rights from scratch, and doesn’t quite get it right. Beware PES. Sorry, experts.
The more interesting examples pertain to the cutting edge of the economy: the ultraviolet spectrum and the patenting of biomedical technologies. In the first case, the inefficient overallocation of the spectrum in the U.S. is implicated in the sub-standard quality of wireless broadband telecommunications. The second case is the crux of a debate over proprietary versus open-source research output, especially when prior work is requisite (as in the case of particular gene sequences) for further advances. Is the cure for cancer going undiscovered because researchers fear patent trolls?
The least satisfying chapter is the final one, in which Heller explores the economic history of oysters. While the common-property dimensions of the problem are apparent, and vividly illustrated in the rent dissipation of oyster wars, what is not clear is how we should think about oysters as an anticommons problem. Is it just that the Chesapeake is divided between Virginia and Maryland? Or that it took nearly two hundred years to negotiate a settlement? Prudhoe Bay took a long time to unitize, but not because of commons and bilateral monopoly problems as opposed to anticommons issues. Early in the book Heller acknowledges Buchanan and Yoon’s model of the anticommons as the theoretical analogue of the commons. However, the evidence that he presents in anecdotes throughout the book isn’t always clear about which problem has the upper hand. The spectrum and biomedical patent examples are transparent, as the spatial and legal anticommons in land. But in other cases, like oysters, it’s not so clear.
Heller’s core suggestions are well-taken. We should think about the costs of overdefining property rights in counterproductive ways. We should expand the English vocabulary in ways that word processors inject fewer squiggles under descriptors like underuse, anticommons, and overdefine. But the challenge of theoretically and empirically refining the anticommons concept remains. That said, numerous interesting research lines present themselves.
Tuesday, September 16, 2008
Market Design: An Update?
If McMillan were updating his paper today (he died well before his time), he might add a few examples to his list. Among the highlights:
RGGI --> 9 days till the first auction!
Pending FAA slot auctions --> The FAA has finally come around to the advice of academic economists. If only Charles Schumer and the Port Authority would get out of the way...
Key Word Auctions --> Microsoft employs Susan Athey as their chief economist. This is a very big-dollar new market institution that has plenty of design elements from the academic literature.
RGGI --> 9 days till the first auction!
Pending FAA slot auctions --> The FAA has finally come around to the advice of academic economists. If only Charles Schumer and the Port Authority would get out of the way...
Key Word Auctions --> Microsoft employs Susan Athey as their chief economist. This is a very big-dollar new market institution that has plenty of design elements from the academic literature.
Monday, September 15, 2008
Market Design: worthwile reading
McMillan's proceedings paper from the 2003 meetings is still worth reading. I can't introduce the topic of market design better than McMillan does:
Herbert Stein, advisor to presidents, noted that "most of the economics that is usable for advising on public policy is about at the level of the introductory undergraduate course." My subject is the remainder of usable economics: the part that is not elementary.
McMillan reviews several instances of the economist acting as engineer (a turn of phrase that I think is properly attributed to Roth). I list them in my own order, descending roughly in the order of most-to-least designed, i.e. where economists had the most direct influence to where they had the least.
* Spectrum sales (FCC to start with; now UK and Continental Euro markets as well)
* Electricity sales (peak load pricing, etc.)
* FTC divestitures
* Treasury experiments (uniform vs. discriminatory when there is multi-unit demand)
Note here: The notion of demand-reduction is what makes the uniform format no longer truth-revealing. This was pointed out by Ausubel and Cramton in what now must be the most well cited unpublished manuscript ever. Anybody know another?
...
and the rest:
* Procurement at the Pentagon
* Privatization of British Telecoms and former Soviet economies (the whole shebang)
Herbert Stein, advisor to presidents, noted that "most of the economics that is usable for advising on public policy is about at the level of the introductory undergraduate course." My subject is the remainder of usable economics: the part that is not elementary.
McMillan reviews several instances of the economist acting as engineer (a turn of phrase that I think is properly attributed to Roth). I list them in my own order, descending roughly in the order of most-to-least designed, i.e. where economists had the most direct influence to where they had the least.
* Spectrum sales (FCC to start with; now UK and Continental Euro markets as well)
* Electricity sales (peak load pricing, etc.)
* FTC divestitures
* Treasury experiments (uniform vs. discriminatory when there is multi-unit demand)
Note here: The notion of demand-reduction is what makes the uniform format no longer truth-revealing. This was pointed out by Ausubel and Cramton in what now must be the most well cited unpublished manuscript ever. Anybody know another?
...
and the rest:
* Procurement at the Pentagon
* Privatization of British Telecoms and former Soviet economies (the whole shebang)
Monday, September 8, 2008
Book Review: The Price of Everything
While The Price of Everything is a work of fiction, its subject matter is economics and its author is an academic economist. The book was the subject of a recent podcastby author Russ Roberts as part of his regular EconTalk series. So while he chose to package his message in a fictionalized setting, the subject matter is clearly economic. In this sense he follows a path previously followed by the aptly-pseudonymed Marshall Jevons, whose economic murder-mysteries have been around for some years. I remember one of them being assigned reading in an undergraduate economics course. The fact that I remember in itself suggests that fiction may be an effective means to communicate economic ideas.
Roberts' point is that decentralized systems can give rise to emergent order. Through the character if Ruth Lieber, Stanford provost and professor of economics, he lays out the case for the efficiency of prices as system of conveying information. This argument closely follows Hayek's 1945 AER article that everyone should read at least twice. The plot follows two elite Stanford athletes (who are, of course, madly in love with one another, and who apparently are so good that they needn't practice or travel to competition as much as I remember or one would suspect) as they are introduced to and eventually won over by the advantages of market interactions as advocated by the charismatic Lieber.
Roberts scores points on two fronts. First, his underlying point is of course an excellent one. Today smart people around the world are constantly arguing for intervention for one thing or another without fully recognizing the advantages of the decentralized market. That is, change for the sake of change, not change because we can actually expect to improve on the current outcome. Second, he manages to do this in far less verbose fashion than other authors; for example Ayn Rand, who can and does address this topic, would attempt it in no less than 350 pages. See Atlas Shrugged.
That said, while fiction proves a useful vehicle to Roberts, as a piece of literature I am reminded of an English prof who taught possibly the most instructive class that I took in college. I believe that he would have described the structure (and details) of the narrative as "putrid." I agree. This is not good fiction, let alone literature. However, to harp about the tree and miss the forest is a tragedy in this case, since part of the emergent systems argument is based on the advanatges of specialization. Roberts is a full professor of economics at George Mason. If his calling were as a novelist, his life likely would have played out differently.
Roberts' point is that decentralized systems can give rise to emergent order. Through the character if Ruth Lieber, Stanford provost and professor of economics, he lays out the case for the efficiency of prices as system of conveying information. This argument closely follows Hayek's 1945 AER article that everyone should read at least twice. The plot follows two elite Stanford athletes (who are, of course, madly in love with one another, and who apparently are so good that they needn't practice or travel to competition as much as I remember or one would suspect) as they are introduced to and eventually won over by the advantages of market interactions as advocated by the charismatic Lieber.
Roberts scores points on two fronts. First, his underlying point is of course an excellent one. Today smart people around the world are constantly arguing for intervention for one thing or another without fully recognizing the advantages of the decentralized market. That is, change for the sake of change, not change because we can actually expect to improve on the current outcome. Second, he manages to do this in far less verbose fashion than other authors; for example Ayn Rand, who can and does address this topic, would attempt it in no less than 350 pages. See Atlas Shrugged.
That said, while fiction proves a useful vehicle to Roberts, as a piece of literature I am reminded of an English prof who taught possibly the most instructive class that I took in college. I believe that he would have described the structure (and details) of the narrative as "putrid." I agree. This is not good fiction, let alone literature. However, to harp about the tree and miss the forest is a tragedy in this case, since part of the emergent systems argument is based on the advanatges of specialization. Roberts is a full professor of economics at George Mason. If his calling were as a novelist, his life likely would have played out differently.
Saturday, August 2, 2008
Book Review: Origins of Virtue
Matt Ridley's entertaining panorama of life on Earth boasts a variegated cast of charcaters ranging from desert seedharvest ants to bottlenose dolphins, Polynesian island communities to Petra, and Prince Peter Kropotkin to Robert Frank. The thrust of the book is that individualism is innate and selected for in nature. Even though we sometimes observe apparently altruistic behavior, Ridley argues that this is typically of a "selfish gene" type, in which individuals sacrifice themselves or their intersts for those of close relatives. Without socially-oriented bahvior, we might fear that societies are threatened. However, stunning relationships that benefit both parties arise despite the apparent lack of coordination and competition between individuals. Economists deal with such relationships often enough to have a special name for them--markets. Ridley argues that cabals among groups of chimpanzees and dolphins are little different in an evolutionary sense from groups of humans who cooperate in order to trade. But trade is not the last of it--Ridley also explores connections to conflict and ecology.
At times the connections are a bit abrupt, although the worst of these come in the final chapter which is advertised as drawing sudden and rash conclusions. Ridley does largely resist the urge to force connections to demonstrate his underlying point. He lets the evidence speak for itself. The book holds up well (it was first published in 1997). Ridley is working on a new project that elaborates on how humans have managed progress over the course of history. I saw him present a seminar on the material for the new book, which promises to be just as entertaining and thought-provoking as The Origins of Virtue.
At times the connections are a bit abrupt, although the worst of these come in the final chapter which is advertised as drawing sudden and rash conclusions. Ridley does largely resist the urge to force connections to demonstrate his underlying point. He lets the evidence speak for itself. The book holds up well (it was first published in 1997). Ridley is working on a new project that elaborates on how humans have managed progress over the course of history. I saw him present a seminar on the material for the new book, which promises to be just as entertaining and thought-provoking as The Origins of Virtue.
Sunday, March 23, 2008
Book Review: Discover Your Inner Economist
Tyler Cowen's contribution to the recent spate of pop economics books that started with Steven Levitt's Freakonomics is these best of the bunch. The dangling carrot on the dustjacket symbolizes Cowen's view of economics: incentives matter. While other of these books pose interesting conundrums to the layman and professional economist alike and do much to put a sexier shine on the field than many practitioners are able to do (remember the worst economics class you ever took, including graduate school), none is able to constructively challenge doctrinaire economic thinking and connect with the intuition that all people have--their "inner economist."
For example, getting the dishes washed is not a problem best solved by paying one's kids or significant other. Instead, it is probably best tackled by giving the victim/washer incentives other than monetary. Cowen recognizes that homo economicus maximizes in multiple dimensions simultaneously--we respond to both strong and weak incentives, some of which affect our earnings, but many others that don't. Art, literature, culture, vanity, and most importantly, control are central topics in the book. There are a lot of ways to control your life without paying everyone to do what you want--in fact, that strategy is unlikely to yield the results you desire. The notion of a person who only cares about one thing, money (or a person all of whose cares can be translated into money), is rejected by Cowen. He appeals to the humanity of his reader, who knows this intuitively, but who may still want to figure out how to get a waitress to optimize a dining experience in a restaurant or reward his dentist for her great service. It is no surprise that Cowen's insights on gustatory pursuits are excellent. He even gives some tips on home cooking.
Like other books in the genre, Cowen's offers wonderful antecdotes for the prospective economics teacher. His treatment of complex issues is thorough but understandable. While the conclusion is weak by comparison, the perspective of a very capable practitioner outside the mainstream of economics lends a stimulating perspective on choice and scarcity to all readers.
For example, getting the dishes washed is not a problem best solved by paying one's kids or significant other. Instead, it is probably best tackled by giving the victim/washer incentives other than monetary. Cowen recognizes that homo economicus maximizes in multiple dimensions simultaneously--we respond to both strong and weak incentives, some of which affect our earnings, but many others that don't. Art, literature, culture, vanity, and most importantly, control are central topics in the book. There are a lot of ways to control your life without paying everyone to do what you want--in fact, that strategy is unlikely to yield the results you desire. The notion of a person who only cares about one thing, money (or a person all of whose cares can be translated into money), is rejected by Cowen. He appeals to the humanity of his reader, who knows this intuitively, but who may still want to figure out how to get a waitress to optimize a dining experience in a restaurant or reward his dentist for her great service. It is no surprise that Cowen's insights on gustatory pursuits are excellent. He even gives some tips on home cooking.
Like other books in the genre, Cowen's offers wonderful antecdotes for the prospective economics teacher. His treatment of complex issues is thorough but understandable. While the conclusion is weak by comparison, the perspective of a very capable practitioner outside the mainstream of economics lends a stimulating perspective on choice and scarcity to all readers.
Wednesday, March 19, 2008
Beer in the fridge, eh?
Denise Young's Energy Policy piece about the social costs of second refrigerators in Canada has spurred plenty of public interest by varied outlets, ranging from the CBC to Bob and Doug MacKenzie. She has three points:
- Some Canadians choose to keep old refrigerators when they buy a new one
- Old refrigerators tend to be less energy-efficient than new ones, sometimes dramatically
- Policies that target energy-efficient appliance use have room for improvement.
Canadians demand refrigeration (or perhaps warmth in much of the Great White North) for any number of reasons. Perhaps they need to store game meat, or increase capacity to capitalize on buying in bulk at warehouse stores, or to reduce resupply trip costs. Demeaning the demand for refrigeration doesn't seem like a valid strategy--if refrigerators are of a size that is inadequate for all refrigeration demands (perhaps because larger fridges increase transport costs prohibitively), why shouldn't someone have more than one? Perhaps the cost of refrigerators is such that most people are unable or unwilling to buy them two at a time. The paper dismisses the demand for refrigeration by assumption. The paper adopts a viewpoint of substantial cold beer reserves as a superfluous luxury indulged in by people callous to the impacts of their actions. My guess is that price elasticity estimates of beer demand are fairly low (but perhaps sensitive to income). While the paper does a fine job of estimating the total costs of additional use of older, inefficient refrigerators, it does not speak at all on the demand, and therefore the pertinent societal tradeoff. Perhaps we should engage in a study of the external costs associated with second televisions. Obviously anyone who keeps the old set in the shop to tune into the hockey game is an irresponsible Canadian (but perhaps not if they watch David Suzuki).
The paper is interesting and a little cute. But it misses the point that optimal tradeoffs depend on both costs and benefits, and deriding benefits a priori isn't productive.
Thursday, March 6, 2008
Cognitive Connection
http://www.businessgreen.com/business-green/news/2211278/report-urges-government
Tuesday, March 4, 2008
Game Theory as Tool
This story reminds me of a tenet of practical game theory: your best response should take into account the mistakes you believe your opponent will make. Fixed-points likely played no role in the analysis that lead Britain to employ an astrologer during the war, but this is an example of game theory, to be sure. Since Hitler consulted an astrologer, so did Britain, to discover what Hitler was likely to do. I love it.
http://www.news.com.au/story/0,23599,23317116-38200,00.html
http://www.news.com.au/story/0,23599,23317116-38200,00.html
Subscribe to:
Posts (Atom)