The Ambrosini Critique

Davis Professor Paul Bergin’s (with Fed economist Reuven Glick) paper (pdf) on trade costs and oil prices is discussed at econbrowser.

My favorite line in the abstract: “This time-variation [in price dispersion, a measure of trade "thickness"] is difficult to explain in terms of the standard gravity equation variables common in the literature, as these tend not to vary much over time.” The gravity model estimates trade costs using distance between countries (and some other stuff)…

If so, why isn’t as well reported as the unemployment rate?

An “out-there” question: is there a measure of human capital utilization? These days isn’t this what we should really be worried about?

All else equal, we may each prefer to do what is right, but when all else is not equal we often allow other considerations to weigh against morality. After all, morality is only one of the many ends we pursue. Yes we want to be moral, but we also want other things, and we each choose as if we often care about those other things more than morality.

— Robin Hanson (uber-economist)

Sounds familiar, no?

Nor the major clients of your company. If you can help it, that is.¹

Even people that should know better don’t follow this advice.

1. Most of my portfolio is stuck in vested shares in the private company I used to work for. [↩]

When lecturing, I often let enthusiasm get the best of me. Interesting theoretical results and strange/noticeable empirical results are declared “great!” whether or not those results are normatively great things.

For example, one time I was showing my students a chart comparing child mortality to per capita income level. The data cluster very tightly around a negatively sloped line. I exclaimed, “this relationship is really great!” to which I heard gasps from my students. Red faced, I explained to students that I meant there seems to be a high correlation between income levels and child mortality and this is important because even if you don’t give a hoot about levels of GDP, you might care about the health of children and their mothers.

Ooops.

Anyway, these charts showing what’s going on in the mortgage market are great(!) in much the same way.

Of course, if there were no legal remedies against fraud, people would be more careful–but they would be too careful; they would incur high costs of self-protection. It is cheaper to punish fraud, just as it is cheaper to punish burglary than to tell people to fortify their houses.

— Judge Posner

Where is the line drawn between individual and community action to secure private property? Why is protection for burglary a public good, but protection against flood, not? Of course, protection from murder is a public good, as it should be and of course, “protection” from not being wealthy isn’t a public good. But why is insurance for large sums of money a public good, but protection from starvation not?

The line is feeling awfully arbitrarily drawn to me, atm.

The man who offered this indictment of economics,

Since the Industrial Revolution, however, we have entered a strange new world where economic theory is of little or no use in understanding differences in income across societies, or the future path of income in any specific society… Economists have no recipe to offer poor countries by which they can become rich.

i.e. economic theory (at least growth theory) is pretty worthless at its primary task, has written this review of a sociology book:

This latest work, however, illustrates why world-systems theory has found little purchase except in the most intellectually undemanding environments (including, apparently, sociology departments)… The book offers more insight into the sad state of intellectual development in sociology departments, even at such prestigious institutions as Johns Hopkins, than it does into the realities of wealth and poverty in the world economy.

I don’t think they’re going to like his tone.

UPDATE: Come to find out Clark and the rest of us economist don’t know jack. Glad we got that cleared up.

This:

This provides the core rationale of what I’ll call, for short, the ’socialist’ idea, going on to explain what I mean by it. This idea is that [wa: individual?] morality is not enough. (In wrong-headed versions of the idea, that claim is put more strongly to say that morality is irrelevant. But the stronger claim is wrong.) Morality is not enough, it is necessary but not sufficient, because the extent of possible human need may always outstrip the uncoordinated results of individual moral effort, leaving some to live lives of unrelenting misery or hardship, others to die unrescued, or what have you. The socialist idea is that we, as a community, renounce this state of affairs, that we sign up to a code according to which people do not die unrescued or live lives of penury, so far as we can help it.

(emph added)

Its pretty uncontroversial to say caring for others in need is a public good and as such is under financed in the decentralized economy.

But the absence of a discussion of implementation suggests a point of departure between Liberals and Socialists. Maybe each of us needs to be forced to care more about the community than we would otherwise, but why does that mean each of us need to be concerned with “the needs of distant strangers”? My local community overlaps with the neighbor local communities and those neighbor communities connect me to their neighbor communities. In this way, a distant stranger is connected to my community and any public goods financing my community forces on me will spill over to him. Furthermore, if the public goods problem is solved in each community, then its solved for the “distant stranger”¹.

In this way, the public goods problem, what Geras calls the socialist idea, is solved via many interconnected local communities. There is no need for a concept of global community (which is usually implied by socialists and is explicit with nationalist social democrats).

I don’t think Liberals are worried by the potential for tyranny of the local community as long as there’s free mobility between them. Should we worry, though, about the potential for a “race to the bottom” where communities compete with each other to attract members by reducing the public goods burden?

UPDATE: Another issue with the implementation of the socialist ideal that I think is interesting. Its probably true that different levels of community (e.g. city vs. state, state vs. nation) are substitutes for each other. If this is true, what do we lose by having less and less granular units of community? Are the social democrats killing local communities? Should we care?

1. If that doesn’t do it for you, then imagine all the people in the world line up in a single line. If each person scratches his neighbor’s back then everybody will get their back scratched. [↩]

This segment of the latest science bloggingheads contains an interesting definition of science. In short: theory (a collection of hypotheses) suggests places to look for data and then data, once found, doesn’t falsify but it increases or decreases confidence in particular theories.

Under this view, Ottaviano/Peri’s result decreased the confidence in a production economy where immigrants and natives are perfect substitutes. Borjas’ response, not rejecting the hypothesis of perfect substitutes, doesn’t really repair confidence in his theory. To repair confidence, he would have to demonstrate that implications of his model, that differ from the implications of the “complementarity” model, are true.

UPDATE: he goes back to this issue later in the show. The whole thing is worth watching actually.

Economists dig incentives. Ask one a question about behavior and the economist will first consider the incentives that are at work.

Economics is often chided for only caring about incentives. There are other motives, like obligations or ethics, that guide people’s behavior.

Example,

Tyler also thinks [moving to a free access system] would reduce the problems associated with getting good reviewers. Since there are few incentives for reviewing anyway, we could simply bypass reviewing and allow the attention market to decide which papers were worth something. Henry is skeptical that there is a reviewer problem to worry about. People don’t review papers because they have incentives, he thinks; they review because it is normatively appropriate to do so.

Now here’s where I make an ass out of myself. Isn’t an obligation or a norm just a type of incentive? Surely these things don’t come with an infinite cost if they’re not obliged. As such, the individual’s behavior can still be analyzed as-if he’s analyzing the cost and benefits of breaking the norm/obligation.

“Aha”, the social scientists\economists¹ respond, “but treating those things as just other types of incentives isn’t parsimonious! Its not realistic!” To which, I reply, “I have a nice Friedman article from the 50’s for you to read.”

1. That’s the set minus operator. Ain’t I clever. [↩]