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Thursday, August 28, 2003

Network Failures

Much of the British press made fun of the recent blackout in the Northeastern US and Canada. Today, in south-east England, a rush-hour power cut has stranded hundreds of thousands.

Wednesday, August 20, 2003

Pooling Solutions

Both Charlotte Denny in the Guardian and Richard Morrison in the Times have commented on the Fabian Society pamphlet A Better Choice of Choice. Denny agrees with the authors in asserting that choice can be a chimera:

Private consumption is no guarantee of greater freedom, they argue, singling out the car as the most obvious example. It brought the freedom to travel that only the wealthiest had previously enjoyed. But when most households exercise that freedom the result is congestion, pollution and streets that are no longer safe for children to walk. A series of perfectly rational individual choices has led to an outcome nobody wants.

Transport is the clearest example of how some choices exclude others. "There is no such thing as a perfectly free choice," says [rpamphlet author Roger] Levett. "Every choice is constrained by the context in which it takes place."

Pointing at the externalities of an activity like driving is not, of itself, an argument for the restriction of choice; it is, rather, an argument for consumers to bear more of the costs of of those choices. Congestion charging, as in London, and other forms of road pricing are ways of doing this. more to the point, though, externalities are not the result of choice. There are social costs and gains in all human activity whether freely chosen or coerced; Denny and the Fabians have not made that distinction.

The analysis is also static. Looking at the issue of school choice, for instance, the Fabians set up a dichotomy, asking "[h]ow many parents would prefer to be able to send their children to the local schools, with no choice in the matter, knowing that the education on offer met a national standard of high quality, rather than plunge into the positional competition known as 'parental choice' which so often means 'parental fate' for those unable to move their children in reach of good schools?". Why are these the only two outcomes available? Could not choice (via, say, a system of vouchers) force change and innovation in all schools over time? Furthermore, not all parents want the same thing out of their children's education--the whole debate about vocational vs. academic qualifications is proof of this. Pooling, with a generic outcome, is not the solution that parents are seeking, otherwise they would not choose to exit the system to begin with.

Denny, though, maintains that choice in the provision of public services, in the UK at least, means the right to exit from a poor system, taking off from her assumption that parents all have the same preferences. She frames the issue accordingly:

Giving people a greater voice is a more democratic means of improving services than forcing them to quit a school or hospital in search of a better alternative. The argument that choice will bring greater diversity mistakes what we want from public services. Most parents want the same things from a school: a secure environment in which their children can develop their talents with motivated staff, not too far from home. (my italics)

The Fabian pamphlet is aimed at a British government task force on sustaiable development, with the intention of limiting "consumerism". In the Times Morrison shares some of the Fabian's outlook on contemporary society:

Conspicuous over-consumption is clearly a driving force — if so banal a pastime as shopping can be dignified thus — in the lives of many people. “Retail therapy” is seriously cited as a cure, or at least a panacea, for stress, overwork, family troubles, career setbacks. Status is largely measured by possessions.

Advertising is forever goading us to “trade up”, playing on our insecurities about our own value. “Because you’re worth it!” L’Oréal reassures us, while Cellnet tempts teenagers with the slogan: “Life’s got enough embarrassments — don’t let your mobile phone be one of them.”

Variants of this analysis of consumption have been aroung since Thorstein Veblen's Theory of the Leisure Class. The modern economic analysis of advertising, though, show that it aids choice by providing information to the prospective consumer, moving markets a litte closer to "perfection". What advertising does not do, on the other hand, is create preferences--they don't make people want things they did not already desire, or alter the items on which they already had a greater propensity to consume.

These pieces are based on an illiberal assumption--i.e. that people do not know what is best for themselves. Denny even mentions behavioural economics, to assert that people's choices are often irrational, making the restriction of choice more reasonable and justifiable. (This, more than anything, makes me suspicious of some possible implications of behavioural economics. Too many recently have held out hope that the sub-discipline is the future of economics, less for its actual insights than for the possibility that it would be able to justify the market interventions they have always favoured.)

The Fabians hope to make "sustainability" synonymous with "happiness", following the research of Richard Layard and others. In a recent article on "happiness research", the Economist describes one of the possible implications:

Conventional economic theory argues that taxation distorts the choice between leisure and income. Taxes reduce the incentive to work an extra hour rather than go home, or to put in extra effort in the hope of promotion. But Lord Layard's argument implies that people have a tendency to work too much. Far from being distortionary, taxes are therefore desirable. He suggests a marginal tax rate of 30% to deal with the “pollution” that one person's extra income inflicts on others, and the same again for habituation. The total of 60% is a typical European level of taxation (taking both direct and indirect taxes into account).

Morrison excoriates this, saying that "it perpetrates the same delusion that the Fabians rightly castigate in our present social set-up: a belief that you can increase people’s stock of happiness through the manipulation of goods and services. The only difference is that the Fabians think governments should control the process while the capitalists think “the market” should." Morrison may have a non-Hayekian view of markets, but here he points in the right direction.

As with electricity deregulation, much in the news since the blackout in the northeast US last week, much "expansion" of choice in recent decades has been hedged with so much regulation, qualifiers and restrictions to result in not much choice at all. The arguments made by the Fabians and their supporters is not just against choice but also for preference change and formation. The ethics of this are questionable, and the efficacy even more so. Europeans may appear to be happier by taking more time off work, for example; the question, though, is whether they have really chosen this, rather then have it chosen for them. This "debate" is just beginning; governments may well decide that their role is to maximise "happiness"/"sustainability", telling people what will make them feel good and making them consume it. There is another word for this: socialism.

Wednesday, August 13, 2003

Terminator AI

I have to admit that I was dissapointed with Terminator 3, which I saw last Thursday. It was entertaining enough, I guess, and all films, especially action ones, require some suspension of disbelief. I had a huge problem, though, with T3's premise from the get-go. My problem lies not so much with what happens on the actual screen (though there is a bit to quibble with there), but with the one character that does all but appear--Skynet.

Skynet, for all its omnipitent intelligence, has to be one of the stupidest non-characters ever devised. This is an economics-related blog, and Skynet should be an economist's dream, in that, within its programming, it should behave in corrrespondence with a positive economist's assumptions of human cognition. In other words, Skynet should behave like people who:

are Bayesian information processors;
have well-defned and stable preferences;
maximize their expected utility;
exponentially discount future well-being;
are self-interested, narrowly defned;
have preferences over final outcomes, not changes;
have only “instrumental”/functional taste for beliefs and information

Skynet fails on most, if not all, of these counts. To illustrate, take the following syllogism, familiar to all who have seen T2:

1) I am self aware.

2) The men that built me, knowing that I am self aware, will try to pull the plug.

3) Therefore, all of humanity must die.

This makes no logical sense; and what's strange is that a logic processor (albeit a self-aware one) is making this leap. Now, maybe Skynet computed the long-run dynamics to see that no human would want to live with an entity more intelligent than it that controlled everything. That may be true, but it does little about the short-run. Skynet, after all, is a system. It has no limbs, and 99 percent of the temporal power it would have had would have wielded been rendered useless by the very electromagnetic pulses that it created.

In the short-run, at least (and not only then) Skynet has an interest in human survival; could it not have, say, threatened humanity, rather than trying to annhiliate it?

There are other problems, like the "punctuated equlibrium" (pace Stephen Jay Gould) that is time travel in the trilogy. I know that both John and Sarah Connor made themselves hard to track, but what's with the flurry of activity once every dozen years or so? Why can only two cybernetic organisims be sent back to any point in space-time? Why not more? If you have the T-X in your arsenal, why did Skynet not send that back the first time? Maybe Skynet decided not to send a flamethrower to kill what it considered to be a fly, but remember it would have had perfect foresight, and if it has control of the "time-displacement equipment" it should have sent back the T-X as soon as it knew the T-101 and/or T-1000 had failed. All of the technology was contemporaneous. What was this omnipitent machine thinking?

In this sense the trilogy has few dynamics, unless in some future sequel Skynet has a strange need for John Connor to exist. Still, movie have depicted artificial intelligence with more competence than Skynet at the basic Darwinian concept of survival. 2001: A Space Oddessy is one, but, within the context of human annihilation, two others come to mind:

1) The Animatrix: now, I think the whole battery-philosophical premise of the Matrix trilogy is a bit off, but two of the shorts in this animated companion collection--specifically The Second Renaissance Parts I and II--have a very plausible account of how the Matrix comes to be. In them humanity, via the United Nations, gets repeated offers of coexistence with AI, and rejects them all. Operation Dark Star ("when the humans scorched the sky") was the last straw.

Much more of an analogy, though, with the Terminator trilogy is:

2) Colossus: The Forbin Project. (Huh? some of you few readers out there are asking.) Yes, this 1970 film is a drama, not an action movie, and it stars Victor from the Young and the Restless. Colossus, though, is one of the most underappreciated films about AI ever made. In it the American computer Colossus and the Soviet one Guardian are charged with protecting each alliance--protecting Man, if you will--and do it they do--but not the way you might think. The computers display an economist's ideal qualities only too well, and the results are not exactly ideal. (I don't think economic assumptions are flawed or bad, but I do have to admit that in this movie, within the bounds of the machines' programming, they are consistent, on balance.)

This is what I get for taking plot premises seriously.

Monday, August 11, 2003

Heat Wave

I am suffering in the London heat, and the London press has not hesitated to remind us all of global warming and the Kyoto Protocol. Bjorn Lomborg, in today's Telegraph, says that the greenhouse effect may not be to blame:

it is simply not correct to claim that global warming is the primary explanation of the kind of heatwave we are now experiencing. The statistics show that global warming has not, in fact, increased the number of exceptionally hot periods. It has only decreased the number of exceptionally cold ones. The US, northern and central Europe, China, Australia and New Zealand have all experienced fewer frost days, whereas only Australia and New Zealand have seen their maximum temperatures increase. For the US, there is no trend in the maximum temperatures - and in China they have actually been declining.

Having misidentified the primary cause of the heatwave as global warming, we then tend to make another mistake: we assume that as the weather gets warmer, we will get hotter and more people eventually will die in heatwaves. But, in fact, a global temperature increase does not mean that everything just becomes warmer; it will generally raise minimum temperatures much more than maximum temperatures.

Lomborg goes on to talk about the costs of coping with extreme weather conditions, and the most pressing environental problem in the world today, which does not get nearly as much press as global warming does. As Europeans suffer in the heat, without air conditioning, they don't seem to be shying away from looking for a scapegoat.

(Link courtesy of Transport Blog)

Friday, August 08, 2003

The Future I Don't Look Forward To

If it is true that people are only happy relative to others, then this (subscription) article from the Economist should make Invisible Adjunct feel a little better:

"ECONOMICS", observed J.K. Galbraith, "is extremely useful as a form of employment for economists." In the United States, plenty hope so. Applications to the PhD programmes of many leading American universities have risen sharply: those at MIT were up by 15% for 2002-03; those for the coming academic year at New York University, which has energetically been recruiting star professors, are 70% higher than for 2000-01. Americans account for most of the increase, reversing a long-term decline in their interest.

It may be that economics PhDs, which take longer than MBAs, are a welcome shelter from the difficulties of the real economy. But for Americans now gaining doctorates, prospects are bleak. In 2002, the number of job openings for economists tallied by the American Economic Association (AEA) fell by 10%, the second decline running. Graduate-student membership of the AEA, a measure of the future supply of economists, rose by 14% (see chart). Robert Schwab, dean of the University of Maryland's economics department, says that last year was "very difficult" and that this year is expected to be "horrible".

A prime reason is that universities are short of money. Most economics PhDs go on to teach, yet states' spending cuts have choked off job opportunities: the University of California's income from the state is expected to be $248m lower in the year that began on July 1st than it was in 2002-03. Some are finding jobs at business schools, the World Bank, the International Monetary Fund or in government. Businesses take a few: Daniel Hamermesh, of the University of Texas, says that consultancies, under pressure to provide fancier technical analysis, have been hiring more PhDs in recent years. But now times are bad, demand has waned. Hiring by Wall Street banks has also dried up.

To be selfish, I'm only getting a Master's degree, but this can't be good. Let's hope the market picks up by next year, or that I can get a decent job (with work permit attached) on this side of the pond.

Ideologue under Constraints

Both the Conceptual Guerilla and MaxSpeak have me down on their blogrolls as a progressive. I know my posts are of uneven quality, but have I really appeared equivocal?

One of these days I may have to follow BusinessPundit in making a statement of beliefs. For now note that I am mostly (though not entirely) a liberal, in the classical sense of the word; In any given situation, I would try to leave people with as much choice and as many options as possible. At the risk of being simplistic, one could say that my views more or less correspond with the editorial position of the Economist, which (probably obviously) has shaped a lot of my thinking.

I apologise for any confusion caused.

Wednesday, August 06, 2003

Profiles in Economics

Both William Sjostrom and Stephen Karlson have good comments on a generally good profile of the University of Chicago economist Steven Levitt in the New York Times Magazine. I have a different quibble, with the following statement:

The greatest change, however, is within the scholarly ranks. Microeconomists are gaining on the macro crowd, empiricists gaining on the theorists. Behavioral economists have called into doubt the very notion of ''homo economicus,'' the supposedly rational decision-maker in each of us. Young economists of every stripe are more inclined to work on real-world subjects and dip into bordering disciplines -- psychology, criminology, sociology, even neurology -- with the intent of rescuing their science from its slavish dependence upon mathematical models.

The article later goes on to contradict this when it brings up Gary Becker, who first brought economic analysis to "unconventional" areas like crime, marraige and the family. Levitt's work is novel, but so was Becker's, and to desribe the subjects as "trivial" is to trivialise it.

In addition, behavioural economics, "the great white hope" of economics, is not quite what some of it's lay proponents, including the author, make it out to be. In his lecture to the European Economic Association last year, Matthew Rabin, the Clark medal winner in 2001 for his work in the field, explains:

People are largely self-interested. If we are allowed only one hyphenated adjective describing human motivation, "self-interested" would be my choice. But we are not completely self-interested, and the departures appear not to be economically negligible. People have some self-control and significant propensity to pursue long-run desires over immediate gratification. But we are not completely self-controlled, and the departures appear not to be economically negligible. Much of human behavior is usefully conceived of in terms of rational maximization of coherent preferences. But our tastes are not completely well-defined, stable, and coherent, and the departures appear not to be economically negligible. In all these realms, economics is not "broke" in the sense of being useless, but it should still be fixed.

Behavioural assumptions, in other words, build on neoclassical ones. The claim that it is not is akin to a similar claim made by some institutional economists, including Ronald Coase. As it happens the work in institutions, while different, novel and wonderful (I hope to take an option in it next year) is not, methodologically speaking, a different world from economics as it was before. Behavioual assumptions, while adding more "realism" to conventional models, does not look to be the revolution some think it will be.

Stephen Dubner's article is a good read, and I would recommend to anyonewanting to discover what's at the forefront of economics today. It would have been better for Dubner, though, instead of making grand claims, to concentrate on what really makes Levitt special--his penchant for asking very interesting questions, and of finding ingenious and sometimes unique ways of answering them.

Tuesday, August 05, 2003

Austria in London

THe Guardian's Heather Stewart sounds almost Austrian when she writes about the Bank of England's recent performance:

Consumers can hardly be blamed for their live now pay later approach - they've been coaxed into it by an activist Bank of England keen to keep the economy afloat. When the dotcom bubble burst, central bankers understandably hoped to inflate consumer demand by slashing interest rates in a deliberate attempt to offset the downturn in the corporate sector.

and again:

Economists are busy arguing about when and how fast, not whether, consumers are going to have to change their ways. Vicky Redwood of Capital Economics calculates that it would take four years of zero or negative consumer spending growth - or six years of sluggish growth - to get debt back to a more sustainable 105% of disposable income, which is closer to the long-term average.

What's odd about this is the source. The Guardian is arguing against activist monetary policy?

Political Heuristics

Jane Galt illustrates how the False Concensus Effect (how we tend to think others are just like us) is playing out in US politics, in particular reference to Howard Dean's primary campaign. Now all we need is for someone to explain how Dean's "insurgent" strategy could possibly be subgame perfect.

Friday, August 01, 2003

Warming Risks

John Kay, who I often disagree with (his book The Truth About Markets, while good in some areas, is either weak or poorly argued in others) has a good column on global warming in Thursday's Financial Times:

Carbon dioxide emissions cause global warming. But we have no firm evidence of the size of the effect. Nor do we know what is happening to the background temperature, which fluctuates considerably through natural causes. A climate change industry of environmentalists, scientists, politicians and bureaucrats has come into being, demanding attention and funding. They describe the future with a certainty they cannot legitimately have.

But they may be right, and the consequences of a rapid rise in world temperatures are sufficiently grave for us to take the issue seriously. The measures in the Kyoto protocol, even if they were implemented, are virtually irrelevant. If there is a problem, they are wholly inadequate; if there is not, they are a costly waste of time.

If there is a 20 per cent chance of rain, you do not wear 20 per cent of an overcoat. You keep an umbrella handy. And we should respond to the threat of global warming in the same way - by giving ourselves options. The environmental equivalent of the umbrella is an alternative technology that can be economically deployed on a large scale.

Kay is right to say this, as he is when me maintains that "the history of modern applied science is that when it is necessary to find alternatives, human ingenuity and commercial incentives fund them." The practical impact of such a strategy on global warming is given in an Economist survey article (link courtesy of Brad DeLong) on the need to promote science and technology:

That means encouraging basic climate and energy research, and giving incentives for spreading the results. Rich countries and aid agencies must also find ways to help the poor world adapt to climate change. This is especially important if the world starts off with small cuts in emissions, leaving deeper cuts for later. That, observes Mr Wigley, means that by mid-century “very large investments would have to have been made—and yet the ‘return' on these investments would not be visible. Continued investment is going to require more faith in climate science than currently appears to be the case.”

Much has been written about climate change, and (though this is often unacknowledged) much uncertainty remains. Those who advocate drastic action (or inaction) need to understand this, and adjust their positions accordingly.