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"Well people may be irrational, but people who work in the government are just as irrational. Therefore their attempts to regulate will be just as flawed as the behaviour they're trying to fix."Now to be fair, Chris Dillow is clever, but he falls into the same trap here. Of course politicians and civil servants make many incorrect judgments, and have the same cognitive biases as any of us.
Tim Harford: "...[was too fascinated with] behavioural economics. But the financial system did not fail because of some psychological trait, but because it was riddled with damaging incentives"But behavioural economics is not about moralising, nor is it about blaming individuals for making mistakes in the hope that they won't make them again.
In other words, let's get over evil bankers and the belief that moralizing will change the world, and let's focus on incentives.
Obsolete and disproved Marxist and socialist thinking also remained strong within European universities, including in economics departments. Many young economists, scientifically oriented and so recognizing the superiority of free markets, found the climate intellectually stultifying [my emphasis]What fun.
City Journal is the nation’s premier urban-policy magazine, “the Bible of the new urbanism,” as London’s Daily Telegraph puts it. During the Giuliani Administration, the magazine served as an idea factory as the then-mayor revivified New York CityNot quite conclusive - after all the Giuliani administration was relatively centrist, so maybe this is just a publication which happened to spring up during those eight years.
For over 30 years, the Manhattan Institute has been an important force in shaping American political culture and developing ideas that foster economic choice and individual responsibility....Our work has won new respect for market-oriented policiesNothing wrong with that - no doubt I would agree with many of their ideas. But linguistic clues like "economic choice and individual responsibility" strongly signal a very specific set of priors which should influence our interpretation of any article, and especially comments like the first quote shown above.
It turns out that shoppers are now taking extreme measures to avoid paying that extra nickel—even schlepping groceries in their arms if they didn’t bring a backpack. The fee may drive people crazy, and the Journal may grumble about “bureaucracy,” but it actually seems to work: Stores report giving out half as many bags as they did before they started charging for them. And the reason seems to be rooted in how our brains operate...And this is why micropayments will be really hard to implement.
The first offered two tee-shirts for $30 or $19.50 each.My thoughts:
The second, right next to it offered two tee-shirts for $30, but no mention of individual price and the third rack had individual tee-shirts for $15 each.
So do the ordinary Icelandic taxpayers have a legal obligation to meet the liabilities of their collapsed deposit insurance fund? The answer to that is, to say the very least, that it seems to be very far from evident. Moreover, any British or Dutch depositors who thought their money was safe because the government of Iceland guaranteed it were mad.Whatever the merits of Martin's views - and there are bits that I might argue with technically - it is genuinely a relief to have an authority figure pronounce on the issue. It provides me with, in cognitive rather than literary terms, a moral anchor.
Do Iceland’s taxpayers have a moral obligation to pay this loan? My view is: no. The delusion that finance was the path to riches was propounded by countries that should have known far better. I cannot blame Icelanders for succumbing. I certainly do not want generations of Icelanders to bear the cost.
The final and, in truth, most important question is whether these demands are reasonable. After all, in every civilised country it has long been accepted that there is a limit to the pursuit of any debts. That is why we have introduced limited liability and abolished debtors’ prisons.
"We cannot live in a world that is not our own, in a world that is interpreted for us by others. An interpreted world is not a home. Part of the terror is to take back our own listening, to use our own voice, to see our own light." - Hildegard of Bingen (1098-1179)The ridiculousness of this almost makes me angry. How could this possibly have been said in the 12th century? It's just not remotely credible. At best it's a highly distorted translation of something in Old High German via Heidegger, Simone de Beauvoir and any number of new age Californians.
For instance, if wages are sticky it may lead to suboptimal real wage movements.The reason why we think inflation is good for solving recessions is we believe it helps to overcome wage stickiness (NGDP, Scott's preferred target, does the same but also has a useful extra effect on the incentives for, and risks of, investment).
Also it should be noted that many economists are politically neutral and are simply painted by the left. The idea that there are libertarian, conservative and leftist economists is false dichotomy (trichotomy?). The reality is that there are economists and there are left wing economists, with the left wing economists trying to paint everyone who produces work that conflicts with their ideology as being right wing.This comment is hilarious on its merits - just replace "left" with "right" and vice versa to see an equivalently absurd statement that would be equally happily accepted by a different group of people.
Still, I think it’s important that just because I think Europe does better than Americans imagine doesn’t mean that it does everything right.Can you count the nested subclauses on less than two hands?
Therefore the central questions that confront economists in cognitive sceince are not only how human beings learn and meld beliefs and preferences to reach decisions and hence the choices that underlie economic theory but also how and why do they develop theories in the face of pure uncertainty, what makes those theories spread amongst a population or die out, and why do humans believe in them and act upon them?
...[on game theory] With small, personal exchange it pays to cooperate since the players interact repeatedly. But with impersonal exchange, to use the game theory analogy, it pays to defect. Historically it has been the creation of political and economic institutions that have altered the payoff to reward cooperation. But throughout most of history and still today in many societies the necessary institutions--particularly the political ones--are not forthcoming. It entails a fundamental restructuring of a society to create a world of impersonal exchange--a restructuring that has typically not been forthcoming. Since institutions reflect the belief system of a society then we must turn to the diverse cultural heritages of society...
While institutions structure the external environment between human beings, ideologies structure the mental "environment" thereby making predictable the choices of individuals over the range of issues relevant to the ideology. But what makes individuals susceptible to having their mental environment structured?
...[Ken Binmore] maintains that we come equipped with algorithms that not only interpret the behavioral patterns we observe in ourselves and others in terms of preference-belief systems but actively build such models into our own operating systems.
Think of the person who orders the most expensive entr[eacute]e at a restaurant, knowing that the check will be shared equally among companions.I find myself trying to pronounce the typo. Is this where the word 'entrecote' comes from?
Cornell University economist Robert Frank, working with a pair of psychologists, mailed questionnaires to college professors asking them to report the annual amount they gave to charity. Their 1993 paper reported that 9.1% of the economists gave no money at all -- more than twice as many holdouts as in any other field.Note that twice as many reported holdouts is not the same as twice as many holdouts. Many economists, I have no doubt, are proud of their lack of charitable giving and much happier to admit it in a survey than others might be.
Given their understanding of the odds of gambling, economists seldom frequent casinos, which is one reason the meeting isn't held in Las Vegas.But surely this is a perfect opportunity to take advantage of an inefficient cross-subsidy. Many hotels in Las Vegas can be got quite cheaply because the casino owners expect to make back the money on the slot machines (another example of metered price discrimination).
A decade ago, a hotel sales representative showed Mr. Siegfried a chart showing how little economists gambled compared to other people, he says.Note that the Business and Behavioural Science conference has been held in Las Vegas. So has the Western Economic Association's annual meeting. I don't know whether behaviourists or Westerners are less rational - or have a different set of exotic preferences - but clearly the rest of the economists have decided that gambling should be confined to the gold market and their job applications.
“(1) the subjective, yet socially embedded, quality of human decision making; (2) the individual’s perception of the passage of time (‘real time’); (3) the radical uncertainty of expectations; (4) the decentralization of explicit and tacit knowledge in society; (5) the dynamic market processes generated by individual action, especially entrepreneurship; (6) the function of the price system in transmitting knowledge; (7) the supplementary role of cultural norms and other cultural products (‘institutions’) in conveying knowledge; and (8) the spontaneous - that is, not centrally directed - evolution of social institutions”So the issues discussed are the right ones – but are the conclusions correct? My suspicion remains that Austrian economists start asking the right questions but often bring in some unacknowledged assumptions in deriving their results. I suspect that the original Austrians – Hayek and Schumpeter at least, and probably von Mises, were more explicit about stating their ideological assumptions than some more recent writers. And this criticism is certainly true of many other economic schools too. But either way, I remain unconvinced that all the typical conclusions flow logically from the premises.
“...inappropriateness of the capital structure (malinvestment) generated by artificially low real interest rates (that is, interest rates that are lower than the real supply of savings would allow)”The question is: does lending really require savings? Lending is about somebody spending their time now, in return for payment later (usually intermediated by a highly creditworthy institution such as a bank). There is no strict requirement for an existing stock of savings to enable this. In a simple example, three people could wash up on a desert island with no stock of wealth at all, and as long as two of them can find enough coconuts to support the third, she can get busy building a house for them to live in. This is lending with no associated savings. Rizzo mentions papers on 100% reserve banking, which implicitly acknowledges the possibility of zero reserve approach that I have described here.
“None of this implies that Hayek, Garrison or Horwitz are insensitive to the problems that would be induced by an aggregate increase in the demand to hold money (a fall in income velocity), which can accompany recessions. This ‘secondary deflation’ should be avoided by a concomitant increase in the supply of money by the relevant monetary institutions. Horwitz (2000) is the first to integrate Austrian macroeconomics with monetary disequilibrium theory to analyse deflationary processes. Nevertheless, recessions are not primarily deflationary phenomena (or at least need not be), but occasions for correction of the misdirection of resources. Some Austrians, however, argue that increases in the demand for money have significant negative consequences only in the presence of legal restraints on price flexibility (Salerno, 2003).”Good to know that the Austrians can recognise insights from other schools. However, in their view does money creation in any way impede the process of recalculation? The legal restraints argument seems unrealistic – in practice there is lots of inertia in prices and wages regardless of the law. If unemployment increases the speed of recalculation is it worth it?
“One of the most important possible obstacles to recovery from recessions may be in the behaviour of ‘big players’. These are agents whose discretionary behaviour, insulated from the normal discipline of profit and loss, can significantly affect the course of economic effects (Koppl and Mramor, 2003; Koppl, 2002; Koppl and Yeager, 1996). Thus, discretionary behaviour on the part of monetary authorities (in the United States, the Fed), fiscal policy makers (Congress or the Executive), or even in some cases private monopolists, can increase uncertainty faced by most economic agents (‘small players’).”This is a useful insight. However does it really just apply to ‘big players’ or is there something broader? For example if small private players have an inertia within a certain market or group of customers (due to brand loyalty, personal connections or lack of information about alternatives) do they become effectively a big player? Or if an unprofitable shop continues to play out their business model due to sunk costs (thus gaining an effective capital subsidy over new players), either because of a cognitive/emotional attachment to their investment or the transaction costs of reallocating resources, is this any different from a government thus acting? Is it an ideological position which leads Austrians to be more concerned about government action than the economically inefficient actions of private individuals and firms? This may be the key distinction between the Austrian and Keynesian views.
"...changes in the riskiness of investment decisions are linked to the ‘old Austrian’ concern with the degree of futurity or roundaboutness in investments. For example, in Cowen’s analysis, an increase in the acceptable level of risk will encourage undertaking more longer-term investments (as well as, of course, investments of any given length with more uncertain yields). These can be both investments in durable capital goods (that is, investments with a continuous flow of payoffs over a long period of time) and investments with a long period of gestation before the ultimate output is produced. Cowen associates less risky (‘safe’) investments with consumption and shorter-term investments.
Cowen’s analysis is more general than the traditional ABCT because it allows many factors besides a fall in real interest rates to generate a lengthening of the capital structure. These include exogenous risk-preference shifts, increases in savings, easing financial constraints, and reductions in uncertainty (so as to reduce ‘waiting’ for acceptable investment opportunities). Any of these changes can generate an increase in the riskiness of investment. None of these changes must necessarily cause a cyclical boom and bust, but they might do so. "This seems a valid point. In a world where people criticise insufficient investment and excessive risk aversion, it highlights some of the deeper factors which might explain or contradict these ideas. It also hints at the asymmetric nature of risks – there are downside risks with one probability distribution, and upside risks with another. The way to treat each of these may be quite different; the patterns of each call for different investment and lending patterns, different relationships to past and future assets perhaps.
“Free-banking advocates argue that bank profit maximization, under sound institutional constraints, will lead banks to expand or contract deposits or currency pari passu with changes in the demand for money. Banks will receive signals about the demand for (their) money as their reserves expand or contract.”Can it be demonstrated that, under market conditions, this process generates a stable equilibrium? Or is an increase in demand for money amplified by changes in reserves, the valuation of bank money and deposits (and the bankruptcy of banks?) The answer is not obvious. If it is stable, and if reserves and pricing can fluidly adjust to correct such problems, does this lead to either:
“Even better, eschewing the excessively constraining categories of necessity and sufficiency, we might say that the serendipity of discovery favours the searching mind.”This is the kind of rhetoric that makes me worry about the Austrian mindset. Most people see necessity and sufficiency as simple logical constructs, not “excessively constraining categories”. It is indeed clear that there can be statistical correlations without strict necessity or sufficiency (one could count this in the domain of fuzzy logic or else provide a more detailed description of the causal chain). In the case being discussed, it is surely true that searching increases the probability of discovery without guaranteeing it. This can be stated in a less suspect way without describing logic as “constraining”.
“In most Austrian treatments entrepreneurial discovery is important because it drives the market process.”This also in the entrepreneurship chapter: which is an interesting one, but it’s not clear where the concept fits into the broader theory. At any rate it does not feel like a distinction between Austrian, Keynesian or neoclassical theory, all of which are impacted broadly in the same way by entrepreneurship. Perhaps the Austrian model recognises an explicit externality cost of government action or recession-fighting policies in their inhibiting effect on enterprise; if so, it seems to offer no way to quantify it and thus determine the welfare-maximising amount of policy.
“...a theory of entrepreneurial judgment. This theory makes entrepreneurship inseparable from asset ownership. The entrepreneur’s judgement is about the control of heterogeneous capital assets under conditions of radical uncertainty”This seems rather old-fashioned. Entrepreneurship surely is not primarily about control of assets; unless one considers the human capital of the entrepreneur and her employees as assets, but the formulation above specifically mentions capital assets. As before, this doesn’t feel like an important criticism as the subject seems tangential.
"The Austrian approach to market processes is distinctive in a number of respects...First, markets are in process and not continually in equilibrium...Second, market processes are not instantaneous but take time. In the passage of time (‘real time’), knowledge changes...Third, market processes take place in the context of radical uncertainty. This is to be distinguished from risk, in which all of the possibilities are known with objective probabilities...the fourth feature of market processes: they are relatively indeterminate...The fifth, and final, feature of market processes is the communication of decentralized or scattered knowledge. Markets enable individuals to act on more knowledge than they can ever hope to possess explicitly. They can do this through entrepreneurially produced market prices and through nonprice manifestations of market behaviour."These all seem like useful insights but are hardly unique to Austrian theory. The recognition of non-equilibrium dynamics is very important but its mere acknowledgement provides only a limitation on standard theory, and no explanatory or predictive power.
“spontaneous order...‘the results of human action but not of human design’... is an organic or emergent form of coordination that manifests itself in social institutions, some organizations and clusters of individual plans”Once again, a useful insight but is there any real analysis behind it? Ironically, this area has much in common with the work of recent Nobel-winner Elinor Ostrom, perhaps ideologically as far from Austrian economics as any mainstream economist.
"[in the area of] law and economics...The field’s uniquely Austrian features consist of attention to (1) the process of law and state intervention in markets; (2) the need for relatively stable law in a world of external change; (3) the influence of decentralized knowledge on the character and limits of law; and (4) the privatization of some of the basic functions of the state."The discussion of (1) focuses on unintended consequences of regulation and wealth redistribution. Once again, good topics but the analysis may be incomplete.
(2) discusses " the legal framework and its adaptability...the level of abstraction of the relevant rules...Whitman shows that an intermediate level of abstraction is optimal from the perspective of generating rules with predictable consequences...Rizzo (1980a, 1980b, 1985) and Roy Cordato (2007) both criticize the cost-benefit framework in many conceptions of negligence law because it produces legal decisions that lack predictability to those for whom the particular law is relevant... The economic data upon which efficient legal decisions are to be made are often unavailable, complex or transient."A valuable insight and (though I haven’t read the cited papers) potentially a powerful philosophical building block. Again there’s a way to represent this potential economic inefficiency as an externality...the cost imposed on future economic agents by additional uncertainty in the legal outcomes of their decisions. But this is an aside. Is there a way to price this externality or uncertainty? Rizzo argues for a “set of rules” rather than a standard, but in principle one of the rules could be “carry out a cost-benefit analysis based on the best available estimates of costs and benefits”. Is there a way to determine the concreteness or abstractness of a given rule?
“Block argues that the Coasian cost-benefit approach effectively abolishes property rights”Again without having read the paper, I’m surprised because I think of Coase as the ultimate defender of property rights. Coase doesn’t argue that legal structures should be chosen according to costs and benefits, but that whichever definition of property rights is chosen, private individuals will trade according to their own personal cost and benefits and an efficient outcome will occur.
“The decentralization of factual knowledge is a critically important factor limiting the feasibility of many forms of intervention... Using the internal standards of three major ethical approaches - utilitarianism, natural law and Kantianism - Rizzo argues that the factual knowledge needed to determine just what the moral course of action is in concrete cases is not available to the paternalist.”Of course that must be true in many cases...but is it always? At the extreme, there are cases where an individual clearly does not have the capacity to choose in their own interest: a 5-year-old child or a person in a coma. In other cases, an individual might explicitly opt into letting someone else make a decision on their behalf: a defendant in a criminal trial may ask their attorney to choose the right argument for them, or a buyer of a pension plan may ask their adviser to choose on their behalf. And somewhere in between, there are open questions such as: should the default for organ donation be opt-in or opt-out; should a defendant, whose mental state cannot be evaluated by the police officers treating them, be opted into receiving legal representation if they refuse to answer police questions about it? The pragmatic question must be about determining where the boundaries lie between these cases; it seems unhelpful to deny that there is a valid question to ask.
“Most economic analysis proceeds on the assumption that the state exercises at least its minimum functions: that is, provision of protection, enforcement of property rights and contracts, and the adjudication of disputes. Nevertheless some economists...have argued that privatization of at least some of these functions is feasible and desirable... Powell and Stringham (forthcoming) survey a surprisingly large extant literature on the economics of a stateless society.”Certainly an interesting area, and I’d be interested to read that Powell and Stringham paper. But is this an integrated and necessary consequence of basic Austrian principles, or is it another ideological add-on? To be fair, this point can certainly be seen as a corollary of the “spontaneous order” principle described earlier. I’d be fascinated to see a good marginal analysis – drawing on Ostrom, Caplan and Benson, say – of the right place to draw lines between state and non-state power.
It is written by Leigh Caldwell (email me at firstname.lastname@example.org).
My other blog is Pricing Revolution, specifically around innovative pricing models and advice on how businesses can set their prices.