The Ambrosini Critique

Line jumping. This is the reason economics — objective maximizing, incentive following rational agent-based analysis — is terrible at explaining human behavior. Some guy gets pissed off because some ass-clown cut in line and suddenly homo economicus can be thrown out the window?

I’m generally receptive to the other social sciences’ concern with norms and such, but this is just ridiculous. Economics, and its h.e. fiction, isn’t meant to explain particular cases of human behavior; economists attempt to explain whole patterns of behavior. Start with the assumption that people respond to incentives and you can get a long ways in explain those patterns.

But its not just patterns being explained. I suppose the sociologist’s observation that there’s a “don’t jump lines in particular ways in particular circumstances” norm and that norm is enforced even when its not in agents’ immediate best interests to do so constitutes a pattern. I’m tempted to say economists only look at significant patterns of behavior, but who are we to say what is significant. That said, there’s a certain scope to economic patterns that seems to be larger, in some sense, than those patterns of behavior studied in anthropology or sociology. Perhaps I’m being a little self-serving in this belief, though.

I’m also tempted to say economists, in contrast to the other social sciences, study patterns that are context independent. To do economics all you have to do is assume people follow incentives, show incentives exist and then verify the expected behavior matches that of h.e. This doesn’t seem true in the other disciplines where frame (psychology), culture (anthropology) or group context (sociology) matter a lot.

Of course, there exist norms that underpin the economy. The propensity to trade, to trust, etc allow for the existence of markets in the first place. But studying the foundations of markets doesn’t preclude the study of the markets themselves.

Chemistry is physics yet physicists don’t do chemistry. Chemist persist in their fiction of discreet atoms and they’ve done pretty good science doing so. Economists might be able to hack together some good science with their fiction too.

Shamus Young:

I’m used to cheap keyboards being cheaply made, but the one I have pictured above goes beyond simple cost-cutting. It’s a device specifically engineered to deliver a miserable and difficult experience. As a work of evil, it’s sort of admirable. As a keyboard, it makes a decent melee weapon.

So says newly minted Davis Ag Econ PhD David Zetland:

The real problem is that the price of water in California, as in most of America, has virtually nothing to do with supply and demand. Although water is distributed by public and private monopolies that could easily charge high prices, municipalities and regulators set prices that are as low as possible. Underpriced water sends the wrong signal to the people using it: It tells them not to worry about how much they use.

“But water is a necessity!” you cry? Well, sure people need to drink a couple gallons a day to live, but after that is the back yard pool really a necessity? do people in the desert really need to plant tropical flowers and trees? do golf greens need to be that green?

David’s proposal:

I propose a system where every person gets the first 75 gallons, or 1.5 bathtubs, per day for free but pays $5.60 for each 75 gallons after that. Under my system, the monthly bill for the average household of three would come to $95.

My system is designed to reduce demand rather than cover costs. Revenue paid by guzzlers would cover the costs of those who use only a small amount of water. Any leftover profits could be refunded to consumers or used to enhance the quality or quantity of the water supply.

And there’s even a pretty picture:

Theorem: With constant, positive income mobility such that any income group can transition to any other income group with positive probability, a non-zero sum increase in income inequality results in an increase in expected lifetime incomes.

Proof: Expected lifetime income is the expectation of income in each income group over a constant distribution of transition probabilities. The non-zero sum increase means some groups get richer while others stagnate or get richer, but to a lesser extent. So increasing one of the summands increases the sum. QED.

Corollary: If utility is monotone in expected lifetime income (or present value of income or present consumption with access to capital markets) and at least weak gains in income are experienced in every income group, income inequality doesn’t matter; mobility does.

I’ve ignored discounting which I think is what plays a part in the politics of redistribution. Suppose I expect to transition to the very richest income category sometime late in my life. If I discount the future enough, I won’t be able to wait to become rich and I may call for redistribution today.

Kenworthy has stopped making sense. Thoma and Talking Heads fans rejoice.

Kenworthy’s argument is that growing income inequality is bad IF intragenerational income mobility hasn’t increased too. He shows charts showing mobility hasn’t increased and then… presto… badness.

This is wrong. Totally wrong.

Suppose last year there was two possible incomes, 50% of people earn $0 and the rest earn $1. Suppose this year the possible earnings are $0 and $10 (OMG a rise in inequality!). Some proportion n of the people earning $0 last year now make $10 and some people that were earning $1 now are earning $0. Same sort of thing happens next year… inequality grows even higher so that the top earners make $100, the lowest $0 and people move between groups

Given Kenworthy’s endorsement of Friedman’s views of inequality, I assume he agrees the best measure of income inequality is inequality of lifetime earnings. So if I was earning $0 last year decade, I could expect to earn n * $10 this year decade and 2*n* (1 – n) * $100 next year decade. At n=40%, which is about the parametrization that fits the data, this would be $52 for my expected lifetime earnings.

Now here’s the point: with a constant n, i.e. a constant fraction of people moving into the high income group, increases in inequality translate to increases in my expected lifetime income. To see this, just add zeros to the high income this year decade and next and then do the math.

How could that be a bad thing?

Yes, at heart I’m a political race-horse junky, but — like my fig leaf subscription to Entertainment Weekly masking my inner celeb gossip whore — I read only good political race-horse coverage like FiveThirtyEight. Nate Silver gives great chart, you’ve never heard better statistical pillow talk and his naked wonkery ain’t bad either. In other words, I subscribe to read the articles. No really.

Anyway, I wanted to point out something Nate said that I think has broader application:

Making things candidate neutral is partially a marketing decision — I can’t imagine how much yelling and screaming there would be if I said “let’s give McCain 2 bonus points because he’s a Republican” or “let’s give Obama 2 bonus points because the economy stinks”.

In his model for predicting the outcome of the November election using a mix of polling data and historical regressions, he doesn’t have candidate specific variables. He does this so he doesn’t, or I should say his methodology doesn’t¹, appear biased.

He does this at the expense of biasing his predictions. This is because we know Democrats, for example, tend to have biased high polling numbers or the incumbent party polls poorly relative to what actually happens on election day.

Forgetting for a second that Nate seems to be throwing out variables that would improve bias in McCains favor and ignoring the fact he’s leaving out variables that favor Obama that don’t appear to be “candidate specific” (e.g. why is the health of the economy candidate specific?), I think this “unbiased appearance” bias is quite common in social sciences. Its just the ommitted variable bias where the omitted variable is purposefully omitted for “marketing” reasons.

IQ isn’t one of the Mincerian variables, for example, because it would appear biased to include it in wage regressions. This is strange given we’re just trying to figure out what causes variation in wages.

1. He’s made it pretty clear he’s supporting Obama. [↩]

Eliezer Yudkowsky is talking about one of my favorite ideas on this blog… morality as preference! and in the form of Socratic dialog no less!

Subhan: “I suggest that when the pie-requester says to you, ‘It is right for me to get some pie’, this asserts that you want the pie-requester to get a slice.”

Obert: “Why should I need to be told what I want?”

Subhan: “You take a needlessly restrictive view of wanting, Obert; I am not setting out to reduce humans to creatures of animal instinct. Your wants include those desires you label ‘moral values’, such as wanting the hungry to be fed -”

Obert: “And you see no distinction between my desire to feed the hungry, and my desire to eat all the delicious pie myself?”

Subhan: “No! They are both desires – backed by different emotions, perhaps, but both desires. To continue, the pie-requester hopes that you have a desire to feed the hungry, and so says, ‘It is right that I should get a slice of this pie’, to remind you of your own desire. We do not automatically know all the consequences of our own wants; we are not logically omniscient.”

Here’s the second part where EY says his own views don’t fit either interlocutor’s so in particular he doesn’t believe morals are merely preferences. I await, with bated breath, part three!

And then — and then! — we have Prof. Delong going after the “Walmart reduced prices of things poor people buy relative to things rich people buy and so in real terms inequality didn’t much increase in the last decade” crowd (aka Broda and Romalis). And he does so not in his usual “I’m a social democrat following marching orders” mode but in his “damn good economist” mode.

When Broda and Romalis assert that trade is causing the prices of tradeable necessities to fall rapidly, they are either (a) breaking the H-O framework in some way, or (b) implicitly asserting that capital is the scarce factor in the United States and thus the factor of production whose returns are reduced by globalization.

He then provides this theoretical paper which I take to be validation of my own dissertation topic and the Invisible College giving me a pass on my virtual oral exam.

The basic idea is that Stolper-Samualson is broken if you consider people share in the ownership of factors of production… there doesn’t have to be losers from trade if there’s extensive enough sharing of ownership. Where have you heard that before, I wonder.

Trill ass Hans ben updatn’. Check it out, yo.