Thursday, 20 August 2009

Three ways to annoy an economist

1. Confuse causation and correlation.

Economists have to go to quite some lengths to demonstrate that their work is actually correct. Which makes it irritating that any old blogger can just write things like "Blogging dramatically increases website traffic":
Blogging is good for your business. A new study from Hubspot shows that companies that are blogging get more visitors than businesses which do not write a regular blog. Indeed, the analysis of data from more than 1,500 businesses reveals that firms which have blogs get 55% more traffic than those which do not.
Now I'm sure that firms which have full-time janitors also get more traffic than those which do not. Of course they do - the more successful a company is, the more web traffic it has, and the more likely it is to hire a janitor. Does that mean that my easiest route to increasing my web traffic is to hire a whole team of janitors?

2. Get the whole argument right except the conclusion

I promised not to mention Scott Sumner for a while but sorry, here he is. A very interesting post on China, where he is visiting right now. All well-argued right up to the last paragraph:
The most important component of living standards (once you have enough to eat) is housing... Wealth allows you to buy privacy, to get away from people you don’t like.
Actually, this isn't annoying so much as revealing. It amazes me that someone could make such a brazen assumption about other people's preferences, apparently without noticing that he was doing so.

But then, we all have prior assumptions that we bring to a conversation. A more left-wing, socially minded economist might say:
The most important component of living standards (once you have enough to eat) is housing... Wealth allows you to buy the emotional security of owning your own piece of land, a place that can't be taken away from you, a home to build and raise your family.
The data is the same; the conclusion is simply a function of the interpretation we place on the world.

Despite the fact that I share many policy conclusions with libertarian economists, some of their cultural assumptions - for instance, that the purpose of wealth is to protect you from spending time with other people - shock me every time I read them.

3. Ask him to define opportunity cost

This is an old article, but it bears another look. See if you can answer the following question. If so, you did better than 78% of professional economists.
You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50.
Take your guess before reading the writeup in the New York Times by Robert Frank and commentary on Marginal Revolution by Alex Tabarrok.

And finally, how to pleasantly surprise an economist? Hide a fascinating article under a boring and misleading headline. A piece in the New York Times titled "Supreme Court to Hear Case on Executive Pay" is nothing to do with executive pay at all.

It turns out actually to be a very interesting study in our three favourite market failures: behavioural economics, asymmetric information and principal-agency problems. These problems have been recognised by a federal court as potentially creating a rationale for regulating mutual fund fees. It's important that this work (behavioural economics in particular) is starting to be recognised as having legally effective status.

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