A Mediocre Counter-Factual

The hardest part of judging policies is the dreaded counter-factual. Basically, we want to know what would have happened if that policy didn’t happen. Unfortunately, since most policies are not done in a lab, we rarely see a true counter-factual. The minimum wage raises or it doesn’t. We only see one of the two.

Since we rarely have a counter-factual, what is someone with an interest in policy to do? Well, we do have some tools, but it can be rough.

Most of the fancy econometric tests are just trying to build this missing counter-factual. They attempted to reconstruct what would have happened under a different policy. If we have our best guess of what would have happened under a different policy (from the counter-factual), then we can start making some judgments about the relative outcomes.

As I said, this is really hard, I mean really hard, like perfect run in Mario hard.

We all struggle to find the right counter-factual. Sometimes we come quite short. In my Twitter feed, I came across a tweet and article which thinks it has the missing counter-factual. Continue reading

Well Put My Friend

The following comes from page 54 of New Directions in Austrian Economics. It’s an essay by Mario Rizzo called “Praxeology and Econometrics.”

We do not have a choice as to whether we shall make methodological decisions. Our choice, rather, is whether we shall make them explicitly, examining the various implications and subtleties of meaning, or whether we shall make them implicitly, blind to everything but technique.

We can ignore the questions about what it means to do economics. That doesn’t mean the questions and problems go away. This is our science and we should know what we are doing as scientists. We can be more clear (at least to ourselves) about what good economics involves.

Which School of Thought are YOU?

Labels aren’t always helpful in academic discourse. When they serve as short-hand, they help. If I say I am an Austrian, I can convey a lot of information in one word. Not all the information is right, but it takes time an energy to explain a full set of views.

When labels dismiss others, they hurt. People too easily dismiss those crazy X economists.

Still. This is a cool chart.

It picks which school of thought you belong to. It doesn’t help me understand my own views; I don’t need a chart for myself.

However, it puts the schools into perspective with a glance. There are multiple diverse approaches to economics. That’s a good thing. (Click to expand.)

schoolsofthought

(Update: I did not create this chart, but found it from John Aziz.)

Sometimes I take approaches to econ for granted. Not everyone sees economics as exchange. To me that’s weird. It’s good to be reminded that not everyone believes this. Besides the differences, there is plenty of overlap and possible work between the schools.

Also, while I consider myself a reader of diverse economics, this picture also reminds me that I have neglected some (possibly) good economics from behavioralists and developmentalists. I’ll take a look after finals…

In case you are wondering, I guess am a Neoclassical-Austrian-Institutionalists. It’s not too surprising, since my banner is Austrian and Chicago-school economists. Readers can guess which title comes from which row.

What kind of economist are you?

HT: @azizonomics

Economic Writing

Writing

Most economic writing hurts. The English, my goodness, is painful. It doesn’t take Deirdre McCloskey to realize this. The following quote shows my point.

Relatively, this isn’t that bad. But its competition isn’t fierce.

For example, few writers on economic methodology recognize that the activities of formulating economic models and investigating their implications are a sort of conceptual exploration. Instead, most mistakenly regard these activities as offering empirical hypotheses and assess them in terms of some philosophical model of confirmation or falsification.

This doozy comes from a JEL article by Daniel Hausman. I recommend the article. He got the ideas right, once I understood him.

To be fair Hausman writes on philosophy. It’s a rule: philosophy cannot be comprehensible to us simpletons. Nevertheless, economics and philosophy are better advanced through writing well.

It doesn’t take much. Continue reading

Trade is not War

I’m sorry the blog has been a little slow. On top of finishing up my Master’s (we turned in our thesis last week, phew) and getting ready to head back to Minnesota, I have also been working on a little book, released this summer. More on that will come. One chapter is about the benefits of exchange. Some people forget this lesson.

I had to come back to respond to a post by Neil Irwin at Upshot. It’s called “Why We’re All Crony Capitalists, Like It or Not.” It is a good read and worth an analysis by all of my readers.

While there is much to talk about in the post, I want to focus on one part. He explains why the case for shutting down the Ex-Im Bank isn’t a slam dunk:

And there’s the rub for those who want to shut down the Ex-Im Bank. It’s all well and good to assail crony capitalism and to say that taxpayers shouldn’t be subsidizing private industry. But it also would amount to unilateral disarmament on the international stage, essentially putting American exporters at a clear disadvantage compared with European and Asian competitors. (emphasis added)

Continue reading

Reforming Empirics in Econ 101

© WealthyHabit.org

I have a confession to make; I have no idea how to fix the economics profession. For people who don’t follow many economics blogs, that statement is no big deal. For people who follow many economics blogs, that statement is rare to find.

Recently, modest proposals to transform the whole economics profession have flooded to blogosphere. If you just read some newspaper accounts, you might think that economics needs a revolution along the lines of the Bolsheviks.

Those who are slightly more reserved have plans to just transform the whole economics educational system. Everyone seems to be a master designer, like the blogger who thinks Washington D.C. would work if the fools would “JUST LISTEN TO ME.” If only most economics course taught post-Keynesian/Austrian/Marxists/Behavioral economics, everything would be swell.

Now, I’m skeptical of “mainstream,” “neoclassical,” “Samuelsonian,” or whatever you want to call popular economics and will never defend every aspect of it. I would like to see reforms, such as more history of thought. The system clearly falls short of perfection, as do all human activities.

However, this does not make me confident in my own ability to understand such a complex system as the whole profession. I think I know what is wrong with others’ proposals. The system needs to change, but I don’t know how to do it. Maybe I take this stance because the critic’s job is easy. I’d like to hope I’m echoing (reportedly) H.L. Mencken

The fact that I have no remedy for all the sorrows of the world is no reason for my accepting yours. It simply supports the strong probability that yours is a fake.

Continue reading

What the heck is economics?

What the heck is economics? Wait, is this a philosophy post? Why are we opening up with such a question?

It turns out that the answer to this simple question determines what you will believe are insights, goals, and benefits of studying economics. However, Jacob Viner´s quip that “economics is what economists do” is not satisfying enough. We need to figure out what economics is, before we can use it to improve our lives. That is ultimately the goal. It is not just for the entertainment of a few people with fancy degrees.

The Study of Wealth

For many years, economics was consider the study of “wealth and wealth creation”. Adam Smith´s monumental work has the title The Wealth of Nations. Now wealth is a noble thing to study. When given the choice between more wealth and less wealth, people choose more wealth. Studying how people and therefore nations become wealthy will greatly help improve people´s lives. If I can learn how to make people wealthy, I will gladly learn.

This framework helped improve societies and led to many insights. Adam Smith and his followers showed that wealth is not measured in amount of gold or money that sits in a vault, but goods and services that actually improve lives. Wealth and money are not the same thing. Boom, one insight from economics. A society shouldn´t increase the amount of gold, but increase the amount of goods.

The classical framework, through the work of David Ricardo, also showed the benefits of trade, a principal called comparative advantage. Even if Lebron James is a great chimney sweep (do they still exist?) it does not make sense for him to climb up the fireplace. People are better off if Lebron sticks to basketball and advertisements and he lets someone else sweep his chimney.

As useful as this is, it is terribly narrow. There is more to life than wealth. If economics is going to help us, it has to be about more than wealth. Economics is not finance, accounting, or personal investing. Econ has more to offer. Thank goodness the discipline has developed. Continue reading

Supply AND Demand, not Supply or Demand

If you think hedge fund managers or lawyers earn “too much money,” one possible solution is to argue for MORE hedge fund managers or lawyers. Sound counter-intuitive? It doesn’t if you follow the logic of supply and demand.

One of the basic principles of economics is that both supply and demand determine prices and quantity exchanged. It doesn’t matter how many mud pies I produce, if no one wants them, the price is zero. Similarly, if only one dude in Scotland makes the whisky I love, I’ll have to pay more than I would for Seagrams.

I thought of this basic insight when I saw multiple tweets on my feed about the difference between the top hedge fund managers’ earnings and kindergarten teachers. The most frequent source was a Vox.com article from Matt Yglesias.

The news once again is that it’s good to be a successful hedge fund manager: the top 25 earned a collective $21.1 billion this year…

How does that look in context? Well, it’s about 0.13 percent of total national income for 2013 being earned by something like 0.00000008 percent of the American population. Another way of looking at it is that this is about 2.5 times the income of every kindergarten teacher in the country combined. (links in original)

Knowing much of Matt’s writing makes it hard for me not to read into what he is trying to say. In another post, he is more clear of his opinion. Here, however, I will try to deal with the above quote at face value. Presented with this information, what can we learn? Continue reading

The Gary Becker Method

The econ blogosphere is blowing up (rightfully so) with articles, tributes, and obituaries to the late Nobel Laureate Gary Becker. Prof. Becker passed away on Saturday at the age of 83.

While I don’t have any anecdotes about Becker like Russ Roberts or Steven Levitt, I do want to highlight some thoughts on Gary Becker’s method. After all, the blog’s title comes from a Kirzner book on method. Over the past few days, a few posts, mostly from Austrians who love talking about this stuff, have discussed Becker’s work with an emphasis on this.

What was the Becker method?

Most people have stressed Becker’s application of economic reasoning to traditionally non-economic areas of inquiry. Becker saw economics as a method of inquiry about human decision-making. Economics was not just the study of markets. This was the focus of Becker’s Nobel lecture “The Economic Way of Looking at Life“-

Unlike Marxian analysis, the economic approach I refer to does not assume that individuals are motivated solely by selfishness or gain. It is a method of analysis, not an assumption about particular motivations. Along with others, I have tried to pry economists away from narrow assumptions about self interest. Behavior is driven by a much richer set of values and preferences.

The analysis assumes that individuals maximize welfare as they conceive it, whether they be selfish, altruistic, loyal, spiteful, or masochistic. Their behavior is forward-looking, and it is also consistent over time. In particular, they try as best they can to anticipate the uncertain consequences of their actions. Forward-looking behavior, however, may still be rooted in the past, for the past can exert a long shadow on attitudes and values. Continue reading

Article of the Week

Every economics blogger has a “Quote of the Day/Week/whatever.” I do my slightly-off impression with my series “Well Put My Friend.” (I know its pretentious to assume any of the economic giants I quote are my friends, but it’s an expression from my youth that I like.)

Now I’m introducing a different idea, an article of the week. Every Monday, I will post an interesting/important/silly/fun economic article that I think people will enjoy. The articles will usually be shorter and accessible to laypeople. I’ll give my little pitch, but I urge others to at least glance through the article. Sometimes you need to read the original.

This week’s article-

Production, Information Costs, and Economic Organization by Armen Alchian and Harold Demsetz (1972)

In this classic AER article, Alchian and Demsetz elaborate and point out some problems with Coase‘s theory of the firm. For Coase, the firm is an attempted to limit transaction costs. Sometimes it is tough to trade on markets and a collectivized command-based system is better.

Alchian and Demsetz agree to a certain extent, but believe the theory is incomplete. For the authors, the reason for a firm is more obvious. Two people, working together, can sometimes do things that two people could never do separately. This seems obvious, but all great economic ideas do, after someone else elaborates them.

However, in team work, there is an incentive to “shirk.” If my rewards do not just depend on what I do but what my partner is doing, I’m going to try to slack and free-ride off of him. The firm is one, partial, solution to this problem.

Check out the article for more details!