The Ambrosini Critique

Standard rationalizing models, those that have agents optimizing their own material outcomes, don’t explain all economic facts, especially those dealing with the very, very long run. This has obliged many economist to augment the standard models to include other motivations or objectives of the agents.

For example, to explain the fact that in rich countries richer people tend to have fewer children (which is opposite of the case poor countries), in addition to their desire to optimize their own income you can add the desire of parents to optimize their children’s income. These parental preferences create a trade-off between the quantity and quality of children. Parents choose to have many low-quality children to work on the farm or few high-quality children they send off to college.

Professor Clark has criticized these sorts of adjustments to the standard model, saying they represent arbitrary additions. He complains: “This should make clear that the references specified over goods and children in all these models have no function other than making a bow towards the form of maximizing over preferences in economic models. They do not somehow better explain the world they are just ways of reproducing, mathematically, observed behavior.”

Personally, in the last month I’ve seen models that include preferences for “fairness”, “equality”, “efficiency” and “reciprocity”. There was a macro seminar a couple weeks ago that used “ambiguity aversion” to explain the home portfolio bias and I’ve seen models where “beliefs” and “norms” determine payoffs. In some cases, I felt these additions to the standard model were arbitrary and ill-supported, but my main issue is with model robustness. If we add one sort of psychological or sociological motivation to the model and we get non-standard results, why shouldn’t we add all such motivations? Perhaps adding more psychology to our models would change the results further, perhaps some psychological quirks cancel out other ones.

I guess I’m saying that if economic-man is unrealistic, why isn’t economic-man plus “reciprocity” (or whatever) equally unrealistic?

In any case, The Economist blogger¹ thinks adding such preferences to the standard model is moving the science forward and that Clark is wrong to object.

I think economists should become more comfortable with non-rationalizing models.

1. who I bet has a really cool first name [↩]

“This sort of thing drives me crazy because it’s just so thoughtlessly arbitrary — intellectual empty calories.”
— Economist blogger

Actually, the whole post is worth it. He (she? it?) riffs on the idea that negative externalities should be taxed (e.g. carbon emissions) but that some things are only externalities because of previous government intervention.

Good god y’all.
What is it good for?
Absolutely nothing.
Say it again.

…

Or wait. Its good for something.

Maybe we economists should learn from those environmentalists and reframe the debate. GDP isn’t a measure of the amount of “stuff” we consume. This invokes a terrible image of an overweight American, driving their SUVs, stuffing the second pound of McDonald’s french fries down their throats (e.g. me circa six years ago).

Instead, GDP is a measure of our interconnectedness. A hundred years ago most families produced everything they consumed — food, clothes, entertainment, etc. Now most families buy those things in markets, growing measured GDP. We are all much more interdependent. As GDP grows, our community grows.

Best of all the interconnectedness has the neat side effect of making it possible for us to specialize. We each get to produce what we’re best at and most likely this means we specialize in producing those things we enjoy producing. Because each of us specializes, we each get more efficient and in the end we all create much more or much better goods and services.

Also, most of GDP growth is in services.

Growth isn’t the production of more and more stuff, its increasing reliance of people on each other.

Of the 151 blogs I read, I only visit the comment section in 4 of them (plus my friends’ blogs): MR, Crooked Timber, slashdot and Volokh Conspiracy. Its so often the case that comments degenerate into name calling or its the case that one or two crackpots dominate the whole discussion. The signal to noise ratio is just too low. What makes for the exceptions?

Tyler Cowen does a great job of encouraging good discussions. MR’s book symposium on Farewell to Alms is a good example. Almost every post teases readers to contribute and to contribute in positive ways.

Crooked Timber is just a case of the commentators (on average) being much higher quality than the contributors (on average).

I’ve written about slashdot threads before. The community is huge and the moderating system rocks. Each post produces hundreds of comments and if you wait an hour or two, you’re guaranteed a dozen or so high quality comments by really knowledgeable people.

The Volokh Conspiracy has high quality contributors (I read every word Eugene Volokh and Orin Kerr write there), but the magic is they write for a highly specialized audience (lawyers). Reading their threads is like listening in on a partner’s meeting at a law firm or a latter-day constitutional convention.

So, anyway Greg Mankiw’s comments won’t be missed.

Please feel free to comment.

I’m cranky today, but what’s with lumping in all bourgeois consumption patterns with consumption that’s “bad for the environment”? That an SVU driver drinks bottled water doesn’t automatically mean it kills baby Polar Bears.

For me “bad for the environment” should mean “has significant negative net externalities”¹. Yeah, maybe shipping Fijian tap water half way across the world uses oil, but the negative externality is in the oil-based transportation, not in the drinking of the water.

If we found a carbon-neutral way to transport the bottled water, bottled water wouldn’t be bad for the environment.

UPDATE: More on the theme: Prices will save the day.

1. This is what I mean when I say “net”. [↩]

A couple weeks ago, Delong called Mankiw a coward. That was fun.

Now Delong thinks Mankiw is being disingenuous because he reports imperfect statistics that ignore dynamic issues.

Nobody’s perfect.

The military might be overcoming some high fixed costs for us again.

Should I not worry about changing all my light bulbs then?

(h/t /.)

God damn it!

BTW, I’m really liking Rodrik’s book.

Something’s very wrong with the world when Dani Rodrik is accused of being a conservative:

I was at a conference yesterday on “Global Commerce and the National Interest” convened by Robert Kuttner and the Sloan Foundation, which brought together many of the luminaries on the left-wing of the Democratic party. I was asked to make some comments, and I organized them under the heading “What Would A Progressive Trade Agenda Look Like?” Here is a 6-point summary of my comments:

Actually his points are better summarized at MR: “My whirlwind summary is pro-trade, pro-safety net, multilateral not bilateral, better procedures, pro-immigration, progressive toward poor countries, letting poor countries determine their own economic policies, and giving democracies more trade rights than non-democracies.”

Here’s Rodrik explaining the reaction to his ideas: “At some point during the day, Jeff Madrick walked over to me and whispered “how does it feel to be a conservative?” It’s true: Richard Freeman and I both came across as rabid right-wingers.”

Who’s Tom Tancredo? Heck if I know, but apparently I should vote for him and not Barack Obama (who was my choice before the quiz). These sorts of quizzes always make me out to be some sort of fascist… I swear I’m not.

I suspect there’s a dimension missing from the analysis so that when my opinions are projected onto these one dimensional polls, I get lumped in with Mussolini. Here’s a better sense of what I’m talking about. If you you put my score and Hitler’s score on the left-right axis, you see I’m more to the right than him. Yeesh.