Sunday, January 26, 2014

Sunday 26th of January Links

Political Blindspot: Cop "Stops and Frisks" African American Teen, Literally Destroying His Genitals

Bloomberg: Davos Finds Inequality Its Business as Backlash Seen

Megan McArdle: The Mother of All Collective Action Problems (they mean climate change)

NPR: Computers Are the Future, but Does Everyone Need to Code?

Overcoming Bias on Evaluation Criteria

Robin Hansyn has a really good post on the influence of coalition politics on our criteria for evaluating claims made by allies and rivals.

"      Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking...
        Do you presume that your worlds aremostly dominated by politics, where different coalitions vie tosupport allies and knock rivals? Or do you see the groups you hangwith as holding themselves to higher standards? If higher standards,are they standards that outsiders can easily check on? Or do you inpractice mostly have to trust a small group of insiders to judge ifstandards are met? And if you have to trust insiders, how sure canyou be their choices aren’t mostly driven by coalition politics?     "
    Read the whole post. I am not to familiar with the basis for Robin's claim that prediction markets are a good way of cleansing discourse of political influence, but I would always approach such a claim from a position of scepticism, as I think Robin would suggest we do. Even if they were, they would sooner or later fall prey to political manipulation for that very reason  But that is not what I really want to write about now.
   The more important takeaway from this post is that interpretation and evaluation are inherently political acts. In political discourse, I am often struck by how often each faction claims to be advocating policies that are based on "objective assessment" of "facts," "logic," and "arguments," as supposed to rivals whose proposals are based on emotion, prejudice, interest, authority, or whatever. However, all "objective criteria" really means is that evaluations can be easily checked against the criteria by more or less neutral outsiders and NOT that the criteria do not favor some over others.
   Of course, this means that there is more than one way of assessing and interpreting something "objectively" and not necessarily any reason to suppose a priori that some criteria are necessarily 'better' than any others, especially in a way that did not vary with context. In other words criteria can be simultaneously 'objective' and 'relative.' This is not really to suggest, however, that we should start doubting whatever criteria we use to asses phenomena, especially if those criteria have served us well in the past. After all, we have to assess things somehow, and we cannot really believe anything without thinking that those beliefs are reasonable and that those who do not believe the same thing are somehow wrong. However, we have to keep two things in mind. First that those with whom we disagree, however ardently, probably have criteria they use to establish their beliefs that make as much sense to them as our criteria do to us. Secondly, that our choice of criteria probably has as much to do with serving our interests and maintaining our power as any commitment to "truth."
    Objectivity is a useful and worthwhile thing; it is good for others to be able to double check our assessments, but some criteria being 'objective' does not mean that it is equally applicable and useful by all people in all situations, or  that it is somehow above the fray of the power games played between individuals and factions.
Do you presume that your worlds are mostly dominated by politics, where different coalitions vie to support allies and knock rivals? Or do you see the groups you hang with as holding themselves to higher standards? If higher standards, are they standards that outsiders can easily check on? Or do you in practice mostly have to trust a small group of insiders to judge if standards are met? And if you have to trust insiders, how sure can you be their choices aren’t mostly driven by coalition politics? - See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf
Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking. - See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf
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Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking. - See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf
Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking. - See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf

Who Wants Standards?

Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking.
- See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf

Who Wants Standards?

Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking.
- See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf

Who Wants Standards?

Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking.
- See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf

Who Wants Standards?

Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking.
- See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf

Who Wants Standards?

Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking.
- See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf
Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking. - See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf
Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking. - See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf
Most of us live in worlds of conversation, like books or blogs or chats, where we tend to give many others the benefit of the doubt that they are mostly talking “in good faith.” We don’t just talk to show off or to support allies and knock rivals – we hold our selves to higher standards. But let me explain why that may often be wishful thinking. - See more at: http://www.overcomingbias.com/2014/01/who-wants-clean-standards.html#sthash.VEkEbCit.dpuf

Thursday, January 23, 2014

Emergent Economics on Methodology

Dan Gay writes:

"Thinking about methodology – how methods are selected and applied – is important when practising development economics. Economists are far too reluctant to question their underlying methodology, preferring to think of the discipline as a standardised approach rather than a toolkit or a process of enquiry using ideas from other social sciences like social and political theory. The discipline probably doesn’t carry the same scientific status as the natural sciences, and it should be a lot more modest.
Reflexivity means in part a process of critical self-examination, involving reflection on outside influences as well as the specific peculiarities of a situation. Maybe development economics itself should become more case-study based, empirical and context-orientated instead of so often applying theories based on deductive modelling?"
I would be quite interested to see some examples of the successful use of ethnographic methods to address economic questions and concerns. There seems to be a lot of suggestion in the economics world today about the potential rewards to be reaped from broadening economic methodology, but it is hard  to come across examples of economists actually doing this.

Modeled Behavior on the Minimum Wage

Adam Ozimek writes:

"The claim that “for older workers, the two effects offset one another” is only true if you count the utility of keeping a job as offsetting the disutility of not being able to find one. I am surprised how quick people are to accept this is not only a neutral development but a positive one, arguing that less turnover in the labor market is a good thing. I am more concerned that more stable but harder to get jobs is not what you want during a time of problematically high long-term unemployment."

Adam makes a good point, but there is an important counterpoint. For those who do manage to find or keep their jobs after a minimum wage hike, the jobs will not only be more stable, they will be higher paying. These pecuniary benefits might accrue completely to those workers who hold onto their jobs, but they may not. Plenty may have friends or relatives who are long term unemployed to whom they may transfer resources. If we accept that minimum wage hikes represent a tradeoff of unemployment for some versus higher wages and job security for others, should we not also accept that it is, at least in principle, possible for some of the gains to be transferred to those who lose out. Depending on the elasticity of labor demand, it may even be possible for it to be a Pareto-improvement from the workers perspective. It would be interesting to see some data on this if any exists.

Tuesday, January 21, 2014

Anthropological Observations on the Usefulness of Anthropology

Ted Fisher writes

"Social scientists, and anthropologists in particular, bring what should be a privileged perspective to public policy debates. Taking as our starting point not idealized theory (say, of rational actors) nor (hopefully) partisan moralization, anthropologists look at, and take seriously, what folks actually say and do...

Hampton's follow-up studies show that use of the public spaces in his sample has gone up over the last decades; that there are many more women in those public spaces; and that there is more, not less, social interaction going on despite the ubiquity of cell phones and other technology.
"

      Anyone with at least a little background probably knows that the relationship between economics and anthropology is generally sceptical at best. This is a shame since the two disciplines could probably learn a lot from each other.

      As Ted says ethnography is a useful tool for bridging the gap between abstract theories and concrete manifestations and economists would benefit from making use of it more. Ethnography, however, should start from a position of healthy scepticism towards how people explain themselves. It is useful to 'look at and take seriously what people say and do.' However, talk is cheap, and in the ultimate what people do should be taken more seriously.

Links January 21st 2014

Bloomberg: EU Must Contain Energy Costs or Risk 'Deindustrialization'

Al-Jazeera: "Till Death Do Us Part: US Victims of Forced Marriage"

BBC: Edward Snowden Nominated as Rector of Glasgow University

Grist: Get Ready for More Extreme El Ninos

Tuesday, January 14, 2014

The Uses, Meanings, and Limitations of Finance

      When discussing economic affairs, it is not uncommon for people to distinguish between the "real economy" and the "financial economy." The difference seems obvious enough; the financial economy is the economy of banks, hedge funds, stockbrokers etc. while the real economy contains everything else. That is not too bad as a starting point for a definition, but it does not really explain what the difference is and it leaves a lot of unclear cases, for example are insurance companies part of the financial sector or not?
      This in turn contributes to widespread, and probably not entirely accidental, public ignorance of and alienation from the financial industry. Ignorance and alienation that was useful enough for motivating the Occupy movement, but which ultimately leaves people mystified by finance. This mystification only serves to cement the power of financiers, because even their most vocal critics and most dependant customers (often enough the same people) do not have a good understanding of what financiers do, or even what finance really is. One sees this reflected in discourse about "complex financial instruments" like derivatives and credit default swaps that "almost no one really understands." This despite the fact that futures and options (the most common kind of derivatives) as well the infamous credit default swaps are actually relatively straightforward financial instruments, even if their specific contractual details can become somewhat technical.
      In an interview last year, Robert Schiller (recent winner of the economics non-Nobel prize), said the following in an interview:

When you think ‘finance’, most people think ‘make money’, ‘get rich’, you should instead think ‘financing activities’, things that people do together that are important to them, achieving goals that are shared by groups of people, financing activities is what it is all about. And the underlying problem is that just about anything that we think is important to do can’t be done by one person. You needs groups of people and you need resources, various things that are produced in other countries that would be inputs to your activities. And the organization generally has to last for years and years to achieve the goal. So it has to have some kind of continuity of support from people and resources, and that support is called ‘financing’; so that is what it is all about.
     This illustrates well the intended function of the financial industry to wider society, but it also, importantly, illustrates the wide variety of forms finance can take. As Schiller suggests, almost anything worth doing will require many different quantities and qualities of resources, often enough more resources than the people who would do it have at that particular moment, let alone what they might need in an unforseen eventuality. Fortunately, at that same time there are probably people somewhere  with more resources than they need for what they wish to pursue then. If those in the second group could lend their surplus to those in the first group and receive a cut, everyone could be better off (assuming the activities are as successful as its participants imagine, and  no one unexpectedly comes to need their resources back early).
     Of course, it is rarely so simple that the resources are simply transferred and, hopefully, eventually returned. More likely in a modern economy is that those with resources to spare do not know those short of resources let alone trust them with potentially large amounts of their wealth. Even if they did, they may very well lack the time or knowledge to realistically assess whether or not the proposed projects are likely to be worth the risk and temporary sacrifice. Enter the role of financiers, individuals who make it their living to find those with extra resources and borrow from them and lend these resources to those who need them. Since they intend on a share of the profits and support many ventures regularly, they can spend the time and money necessary to investigate opportunities and decide if they are worth the time and the risk. They pay those they borrow from and charge those to whom they lend. The (hopefully positive) difference or "spread" pays the costs of their searching.
      I want to be careful not to overstate the point and be precisely clear about what I am saying; accordingly I think it is important to emphasize two caveats. Firstly, there are many possible institutions that can be set up to do this, and there really is no reason to think that the financial industry we have today is necessarily the most effective or desirable way of achieving this end. Considering the recent financial crisis, its economic aftermath, and that little seems to have changed in response, I think it is hardly unreasonable to critically examine whether or not our social-financial machinery is really adequate, while remaining conscious that there are reasons for its existence beyond mere greed.
     Secondly, despite its media and national accounting prominence, the investment of surplus resources into financial instruments will be amongst the last places many will find it reasonable to direct accumulated resources. What do I mean by this?
       If surplus resources are taken to mean any resources above ones present level of consumption, then is nearly tautological that the rich will tend to have more resources and therefore have more available to invest, unless consumption increases one to one with income (it doesn't). More importantly, remember that the goal of finance is to redistribute extra resources between parties that do not necessarily know, care about, or trust each other. There are plenty of things of things that individuals, both alone and organized with others, will find reasonable to do with extra resources, before they see fit to make them available to strangers, even if the institutions set up to facilitate this are adequate. For example, in Poor Economics Abhijit Banerjee and Esther Duflo suggest that one of the most important ways that poor people save is spending extra time and money on DIY home improvements and construction. Considering that many of the individuals they discuss actually start living in their houses before they are completely built, it is simply inaccurate to suggest that their low rates of financial savings are because of meer myopia (or, to use more polite technical terminology, a high time-discount rate). While they may lack surpluses upon surpluses of resources to invest in many financial savings instruments; this does not  mean that they are not making considerable tradeoffs of time and money in the present in order to reap the returns later, i.e. saving. Education is another important example of this kind of non-financial investment.
       These investments are too often ignored when tabulating national accounts. If an individual is lucky their actual money spent on tools and materials may, at least, be counted as expenditure on consumer durables, even if its classification as "consumption" is questionable. The heart of the problem is that saving via financial instruments, is not the same thing as saving, i.e. making investments now for future payoffs. It is not entirely untrue to say that financial institutions help people allocate their savings, but it is important to understand that they represent a much larger share of some peoples savings than others, in particular those people lucky enough to have enough wealth to have already maxed out the savings options in their own immediate environment. While having an adequately developed financial infrastructure is useful, it is only relevant to a certain lucky few.
          We must keep all of this in mind when we seek to analyze, develop, and organize social economies.

January 14th Links

Duke University begins a masters program in Economics and Computation (Hat Tip to Turnings Invisible Hand)

Portland had zero bicycle fatalities in 2013

Analysis suggests NSA surveillance has little effect preventing terrorist attacks

Demolitions of affordable housing accelerate as rent rises and poor's income stagnates

Monday, January 13, 2014

      Megan McArdle has a post about the economics of marriage, titled "Marriage Makes You Rich and Stupid." A fair bit of it is just a restating of the fairly well understood economic benefits of marriage (i.e. household economies of scale and non-rival consumption). However, what is particularly interesting about her take on it, is her argument that marriage makes us, in effect, less capable individuals

      I used to know where I kept my batteries and old documents. But when we got married, my husband, who is much tidier than I am, took over organizing the house. Now, unless it’s a piece of my clothing or kitchen equipment, I have no idea where we keep anything. And while I’m pretty sure I used to be able to put up shelves, now all I know how to do is ask my husband to do it.
        On the other hand, he has no idea how much money we have, or in what accounts. And he can’t do the grocery shopping, because he doesn’t know what we consume. Individually, we are less competent to survive on our own. But collectively, we eat better, and we have a tidier house and better-managed finances. And our shelves don’t fall down so often.

       Of course, this is really just a re-stating of the consequences of the division of labor in the context of a household. I have chosen to use this as the first post for this blog for a few reasons, but one in particular; I think it reflects an important theme that I intend to return to throughout the postings, namely it discusses both the benefits and the costs of the division of labor using a readily accessible example.
       For reasons long understood in economics. The division of labor as well as the whole apparatus of exchange, market or otherwise, that comes with it does make us wealthier. It is important to acknowledge, however, that these gains come with a cost. In the case of Megan's example it is of skills lost by her and her husbands increased reliance on each other (I suppose a technical term for it would be human capital displacement).
       Of course, it is entirely possible that the costs are outweighed by the benefits, as presumably they are in the case of Megan and her husband otherwise they probably would be maintaining separate residences and bank accounts. However, it is important to ensure that we minimize these costs as much as possible as we pursue the benefits, thereby enriching ourselves even further.
      In Megan' s case, though I do not pretend to tell her how to run her house, I suppose the best way they could do that is with effective and regular communication between her and her husband about what they are doing, how they are doing it, and why they are doing it.  This way each of them is aware of conditions and decisions that have important material consequences for each of them, and therefore exercise more control over them, even if they are not personally acting upon them. It also forces each of them to maintain at least enough understanding of the tasks to be able to communicate with each other, minimizing the skill loss she refers to. Again, this is just an pedagogical example, I have no intention of suggesting that Megan fails to run her house effectively.
      The beginning of Megan's post also has a good example (originally sourced from Matt Yglesias) of the use of data to mislead by relying on calculation methodologies that remain unstated, even if those methods make a lot of sense in their own right.