Friday, 27 June 2014

Why Would It Have Been Worse?

Art Carden is back to writing about, and linking to, interesting stuff on EconLog. Today's post contains a link to a debate between Professors Bryan Caplan and Jan Ting about whether war is ever justified. At one point, the latter claims that things would have gone worse in many, many places - and on net - throughout the world sans American intervention in World War II. Caplan asks how Ting could know this, and the answer is, of course, that he could not.
 
So the issue is whether intervention in the face of such radical ignorance could be advisable. Maybe one argument in favour of intervention is that the intervening country is relatively civilized and has an enviable standard of living and relatively good values. How could the intentions be anything but good? And maybe the threat of intervention keeps would-be fascists on better behaviour? We are still ignorance, but maybe these factors adjust the odds?
 
I think basic price theory argues for a "no" on the second question, and for a retort which spells "irrelevant" to the first one. Firstly, politicians competing for power within the foreign potential subject for intervention may well resist internal pressure (say, by interest groups or by people - Machiavelli argued that even despots must be responsive to "popular will"), but if this pressure is really for a significant change in policy, some other politician, less averse to the risk of foreign toppling, will win in a show-down with the incumbent.
 
Secondly, on the issue of whether the civilized status of the intervening armies' government matters, the intervening government is clearly more responsive to what is going on within it than elsewhere. And the point above applies here as well: within the foreign country, intervention in itself is not going to change anything as far as preferred policy goes. And as I have argued before, intervening powers may be unusually prone to failure with respect to setting up functioning institutions - which may well put the country back on its prior path anyway.
 
It seems to me that chances are that Caplan is right on this issue, but what other reasons are there to suppose that intervention might work?

Thursday, 19 June 2014

Roger Myerson's Commonsense Case for Decentralism

Over the past several years, Chicago Economics Professor Roger Myerson has blessed those around him by taking many opportunities to  discuss the numerous advantages of decentralization of political decision-making. Why does centralism lead to poor(er) performance by governments? Because it causes leaders to lack the local experience and knowledge necessary to be nationally successful (or less unsuccessful). Compare decentralized solutions to the state's management of local issues, incentives to learn about local issues will surely be greater under the former regime than under the latter one, in which conditions in any one area constitute only a small part of some pool from which rewards (rent) may be extracted.

For instance, Myerson explains the topical issue of the unruliness after the regime changes in Iraq (starting 2003) and Afghanistan (2001) by the fact that the rules instituted by the coalitions responsible for the regime changes are insufficiently decentralized. If anyone remembers Paul Bremer, he was the person in charge of the occupation of Iraq until the reconstructed constitution had been ratified, and he would not permit local politics to develop until this had happened. Other tendencies towards centralism have been seen in Afghanistan.
 
In a recent article written for the Huffington Post, Myerson applies his ideas to the recent brouhaha in the Ukraine. Myerson argues that provincial governors, the supervisors of state administration in the provinces of the Ukraine, have neither knowledge of, nor significant stake in, local conditions in their provinces, because they are appointed centrally. By contrast, locally-elected counsellors are better at determining where the winds are blowing in their provinces. This local knowledge comes in handy when Vladimir Putin gives them a ring, perhaps with promises of rewards for various pro-Russian manifestations which could potentially result in annexation. Myerson highlight's Putin's skill in manoeuvring local conditions, a likely consequence of his experiences working within the local authorities in St Petersburg, as well as with provincial relations to Moscow under Yeltsin.
 
I strongly agree with Myerson that decentralization is the best way of stabilizing the situation in the Ukraine, as well as in other unruly parts of the world. However, there are probably many ways of achieving this outcome. For instance, the nationally-appointed governors of the Ukrainian provinces mentioned above could be paid for performance in their provinces, incentivizing them to gain more local knowledge. This will not look very decentralized, because the governors are still appointed as before, but - depending on the exact design of the reward structure - the effects could be identical.
 
The question remains why states would become centralized to begin with. One explanation is that foreign interposing in national affairs is an added channel for rewards and punishments for the national leaders, which may cause them to neglect local conditions when strings are attached. I don't know, but I think this may be something for me to consider as I resume my hiatus.

Friday, 13 June 2014

Hi, It's Greg... I've Got Nothing to Say...

I have been doing some travelling recently and will do some more of it in a short while, so blogging will be more sporadic than usual over the next few weeks or so. I may write the occasional post, but the frequency will surely not reach "semi daily". I think I have made 46 posts before this one since I started this blog in March, so if anyone feels inclined to read some of those while I am adding to them at a much-reduced pace, I may help out by highlighting a few of them:
  • From March, here is some puzzling evidence on death rates and human capital. In brief, more valuable skills should mean more incentives to improve and maintain one's health, which I believe is generally true empirically, but performers of British chart-toppers still have higher death rates at practically every age than do Brits in general. Why might that be?
  • And why, given political competition, do the worst atrocities seem to happen in countries led by parties with totalitarian-sounding names?
  • On the topic of questions, what is wrong with Hayek's The Road to Serfdom? This book, by the way, celebrates its 70th anniversary this year.
  • A post about women's market incomes relative to those of men within their households. I discuss a well-written paper and suggest an alternative interpretation of its findings.
  • Here, I question the power of ideas.
  • I talked about building fa├žades and externalities in early May.
  • A critique of Rawls, original with me as far as I can tell (so caveat emptor!)
  • I don't say anything of particular interest here, but I feel compelled to mention again the tragedy which befell the science of economics when my hero Professor Gary Becker passed away. His passing still makes me feel empty. I remembered him here and here.
These are just some posts to which my thoughts have drifted back on occasion, not my "top ten", though I hope they will amuse nonetheless. Happy reading!

Thursday, 12 June 2014

The FIFA World Cup and the Poverty of Many Brazilians

Today is the start of the FIFA World Cup, held in Brazil. I will likely watch a game or two, but I don't know that much about the subject. Many economists have offered their predictions (e.g., here and here). NYT's 'The Upshot' has an extensive poll about people's attitudes towards the "beautiful game", which shows sympathies across nations (unsurprisingly, Argentinians want England to do poorly). Me, I won't offer any predictions at all. I do note, however, that Ladbrokes have Brazil as their favourite to win the lot, likely beating Argentina in the final. For higher odds, "dark-horse" teams with plenty of youth like Belgium and England might be worth betting on.

But the main point of this blog post is the discussion about Brazil hosting a costly event while many Brazilians live under highly unenviable material circumstances. Recent protestors have campaigned against spending money on building stadia rather than on housing. I don't know who's spending the money, which I would argue is extremely relevant to the issue. If it is private individuals, then I do not see any problem with building stadia rather than handing out alms; although the latter would of course be a very nice thing to do, the moral principle that one should not spend money on one's self because others can be helped cannot be maintained in a world of insatiable wants. Individuals can help others if they want to, but forcing them to do so is a breach of their sovereignty, their dignity, and their sense of being in control of themselves.

However, from the fact that the President of Brazil, Dilma Rousseff, has defended the World Cup, I surmise that it is really the Brazilian government which are constructing stadia. If there is to be a government, it should arguably spend tax-payers' money on socially useful projects. So then maybe the protestors have a point. By the argument made above, maybe the government should not have any money to begin with, but once the "damage has been made" the money might as well be spent wisely.

In this case, I do not see how the protestors' point is any less valid when applied to welfare payments to citizens of rich countries. After all, assuming away concerns about disincentive effects to work from transfer payments, those recipients are relatively well-off and not kept from abject squalor by hand-outs from the state. If this money were instead directed to the poor folks of the favelas (and again, if the disincentive effects to work are assumed away), a far greater success of poverty alleviation would have been achieved.

It may be objected that transfer payments going abroad only drain the nation's economy, but why should the calculus of altruism be restricted to nations? The loss to one "nation" is outweighed by the benefits to another. As long as the greatest wants are satisfied first, this means global gains of vast proportions, indeed. The fact that governments palpably do not work along these lines suggest to me some deep underlying problems in the mechanics of politics.

Of course, rather than sending money to Brazilians (and before them Haitians, Malawians and many, many poor people of other nations), rich countries could do something for which there is precedent, namely open their borders to these poor individuals. Food for thought while watching the games.

Wednesday, 11 June 2014

Tolstoy on Conflict and The Individual

I have been reading some of Leo Tolstoy's short stories and novellas lately. The beginning of the short story The Raid channels Gordon Tullock's work on military tactics (with Geoffrey Brennan) as well as on revolutionary movements, asking "under the influence of what feeling one soldier kills another". Tolstoy goes on to explain how being a soldier often implies great risks to one's life, and that rage is a poor reason to join the army, since it can hardly be sustained over the course of a military campaign. Tolstoy also posits that the killing of fellow men in war serves no purpose, an idea which likely comes from his pacifism, but is left unanalysed.
 
Enter Gordon Tullock and methodological individualism. Joining a revolutionary movement or taking part in a military campaign is highly unlikely to affect which side is victorious, so from the individual's point of view, one is essentially producing a public good for those cheering on the side one joins. There is nothing explicitly pacifist about this idea, although it seems to fit Tolstoy's position quite neatly. So why do individuals choose to join the military or a revolutionary movement?
 
One potential explanation is that they are offered private benefits for doing so (as opposed to the public goods which may come out of the successful toppling of a cruel regime). I am blissfully lacking any personal experience with army life, but it seems conceivable to me that volunteers are not made to march in the front lines and may be promoted (to safer positions) more easily than are conscripted soldiers.
 
In support of this thesis may be said that during the Winter War of 1939-1940, in which many non-Finns, Swedes in particular, volunteered on the side of Finland against the Soviet Union, the death rate for Finns was a little above seven per cent, while that of the foreign volunteers was less than half a per cent (according to Wikipedia's 'Winter War' article: see the box in the top left corner, as well as the section 'Foreign Volunteers'). There are several other interesting conflicts from which similar evidence may be obtained. For instance, there were many foreign volunteers in the Spanish Civil War. If anyone has good numbers on related conflicts, or even interesting anecdotes, I am all ears.
 
Going back to The Raid, Tolstoy talks about an apparent indifference amongst soldiers to their possible impending demise. There is even some joy expressed at the prospect of fighting, and those who are not involved appear glum. Tolstoy (who, incidentally, fought in the Crimean War)  does not say this, but maybe these instances reflect strategies by conscripts to show valour to officers and increase their chances of promotion? This does not reflect attitudes by characters in other books by Tolstoy (for instance, remember Petya Rostov in War and Peace?), but maybe it does a better job at reflecting reality?

Tuesday, 10 June 2014

Who Wants More Utility?

As an academic economist, I tend to believe in theories which presuppose maximizing behaviour. If an individual desires something and has a chance of getting it at a price low enough to justify the cost, rationality demands that he chooses to get it. Advances in behavioural economics may well come to upset these beliefs of mine, but so far they have not significantly done so. That is really a different story, however, for the purpose of this blog post is to challenge the idea of utility maximization from a different point of view.
 
Suppose that your lifetime utility is 100. This utility is distributed in a way such that you will live for two finite periods, Period 1 and Period 2, and have the same utility every day of each period. Under one scenario, imagine that daily utility is the same for both periods. Under another scenario, imagine that daily utility during Period 1 is negative, say a million "disutils", and that daily utility during Period 2 is high enough to reach the same total over the course of your life (i.e. 100). If people truly maximize utility, there is no reason for anyone to prefer one scenario over the other, yet I have a feeling many people would not be indifferent about which life they want to live.

Here is another thought experiment: total utility over the course of a life is, say, 50, but one life is finite and the other is infinite (so utility at each moment is likely very small though it could of course be positive, or utility at some moments could be zero or negative, pick your favourite). Now some people would naturally want to live forever (I know I do) and consequently derive utility purely from that prospect. But if lifetime utility is really the same, these people are compensated for dying. Economists do not say that money measures everything; they say that anything measures anything since anything translates into utility. So arguably utility-maximizers should be indifferent also between these scenarios (at least those who somehow do not wish to live forever, if there really is no way of compensating certain people for dying).

Maybe people would actually be indifferent between all of these choices of lives. Any proposition on the topic is untestable. At least I cannot think of any test. The trouble is that once we think of some reason to prefer one scenario over another, what we really say is that that aspect which we prefer gives us utility, but then it should be possible to compensate for the loss of said utility by more utility in the other scenario, which the present Gedanken experiment does. Rational choice is therefore a "closed" system. While I strongly believe it is closed in useful ways, I find it sufficiently plausible that people would not be indifferent between the presented scenarios, and that maybe something other than utility counts.

Sunday, 8 June 2014

E. Glen Weyl on Price Theory

One of the young hot-shots of economics in recent years is E. Glen Weyl of the University of Chicago. He and I are terribly unlike each other in the way that he has a stellar career whereas my eminence is yet to be recognized, but on the other hand, he and I are very much alike in the sense that we were both incredibly lucky to have several opportunities to speak to the late Gary Becker, whose untimely death about a month ago, I am sure, left a deep hole in the hearts of everyone fortunate enough to have met him. Professor Weyl shows his appreciation of Professor Becker in a new paper attempting a summary of price theory, which, from the abstract, he defines as follows:
[...] a methodological approach that derives low-dimensional "prices" sufficient to characterize simple allocative problems in complex economies.
What Professor Weyl does in the paper is to describe the development of price theory as defined above. The paper is a good one, but I will nevertheless only discuss one disagreement I have with it. My disagreement is that Professor Weyl has too structural a vision for the future of price theory, arguing that Price Theory can adopt parts of the structuralist method. Me, I do not believe its future lies in many theoretical developments, but rather in new applications of it, theoretical as well as empirical.
 
"Structure" means that the economist imposes substantial and fairly detailed theory on the issue under analysis. If he does empirical work, he might assume that, say, the Median Voter Theorem is true and in consequence impose the one-dimensional restriction on public opinion surveys. This requires some sort of "scoring system" for locating individuals on the left-right axis, so that being for more provisions to the navy has a certain score and being anti-gay is associated with another one. This example will obviously become intractable and unwieldy; most structuralists would shy away from this sort of work (though note that the resultant model may turn out to be "true"), but it is, I believe, what a strucuralist hell-bent on really getting at a problem involving public opinions and political economy must resort to doing.
 
Not all structure is this scary. For instance, one may safely assume that firms maximize profits and use this assumption in one's theoretical or empirical work. However, I believe most economists have something much more involved in mind when they think of "structure". The appeal of "structure" can, I believe, be traced back to the following proposition. Economists, structuralists or not, face one ugly fact: good ideas are really scarce. What Gary Becker could do theoretically required next to no messy assumptions (only "clean" "structure" in agreement with very basic propositions in economic theory), but no-one has come up with nearly as great theoretical ideas as did Professor Becker. To work on more established ideas then requires some semblance of progress, which leads the structuralists to impose progressively messier requirements in order to get as progressively less valuable "insights". I believe this is one reason behind the crazy mathematics frequently demanded at doctoral programmes in economics in the past five decades or so. If one does not work this way, one must have novel and original ideas, or write fewer papers. Hence the appeal of "structure".
 
By contrast, Price Theory the way I think of it simply means, and should continue to mean, that people respond to incentives in a consistent way, both synchronically and diachronically. I agree completely with Professor Weyl's remark that price theory is "low-dimentional". Price Theory and General Equilibrium Theory are not really "enemies", but Price Theory is focused on understanding the real world and thereby lends itself to partial-equilibrium analyses. There are many things about the details of how people respond to incentives which we do not know, but rather than trying to impose messy assumptions I believe properly-practised Price Theory should rest on developing clean empirical approaches (in addition to continued theoretical treatments of new issues), often in the form of so-called field experiments, which highlight simple variations plausibly resultant from simple differences in treatment.
 
To flesh out this last remark, consider the most important breakthroughs in theoretical and empirical economics in the past few decades. Did the empirical advances rely on imposing heavy theory? The foremost practitioners are, I estimate, mainly people who come up with clever ways of obtaining insights from easily-interptretable real-world phenomena (e.g. Levitt and Donohue's abortion and crime paper). The same thing may be said for theoretical advances. Profit-maximization is rarely questioned these days, but all kinds of rationales as to why it is false were offered before Armen Alchian showed by evolutionary analogy that firms survive better if they fail less at maximizing profit, assuming only a fairly stable environment ("market"). A Price Theory which continues to rely on simple mechanisms and clever ways of obtaining evidence will probably produce fewer papers than one which (partly) approaches structuralism, but its papers will be more impactful and last longer. Or are the most important "structural" breakthroughs really even nearly as celebrated as the more classic price theory papers?

(HT: MarginalRevolution's Tyler Cowen)