Monday, August 22, 2011

quote of the day

I've been involved in some odd research this summer as part of my dissertation, studying Harvard graduates from the 1700s. Lucky for me there is never a shortage of interesting quotes about these guys. Here's a clip from a Boston newspaper, quoted in Sibley's Harvard Graduates (Vol. 15):
Last Commencement Day a Number of the Disputants were led into what some think the good old Way, i.e. the Way of Blasphemy against God. They have a strange Proverb at College, viz. That 'tis no sin to tell Lies in Latin. So it seems to be looked on as no Sin there for God to be Blasphem'd, provided he is Blasphem'd only in Latin.
No words necessary for that one!

Sunday, August 21, 2011

it takes a lifetime to learn how to paint like a child

(Subject line is a modified version of a Picasso quote.)

Economists looking for ways to tell stories in their classrooms -- stories intended to run counter to the oft-trumpted idealisms found in many mainstream textbooks -- might look to children's stories as a treasure-trove of leftist-inspired themes such as equity, fairness, and collective action.

At least, that's the message behind this article which appeared in the NY Times today by Motoko Rich, titled "Fairies, Witches and Supply and Demand" (if you have run out of your 20 articles this month, try typing the article title into a Google search or getting a service such as "NYTClean"). Rich gives many interesting examples, and all it would take is some clever adaptations in order to distill these stories into educational content for first year undergraduates.

Near the end of the article, Rich confronts the obvious question: why is it so much more difficult to find children's textbooks espousing the excitement of competition and market exchange? His answer:
By and large, the economic lessons in children’s books lean left of center. “I think the writers are not particularly sympathetic to or don’t understand how a market works,” said Gary S. Becker, the Nobel laureate who teaches economics at the University of Chicago. “It’s not easy to convey that to a child. It’s not always easy to convey it to grown-ups.”

For the most part, the economic concepts conveyed in the books reflect values like generosity and equity rather than competition. Raymond Fisman, an economist at Columbia University, said his 3-year-old daughter’s favorite books teach the importance of sharing and gift-giving, values that might not lead to the greatest wealth in the real world. But, he added, “I doubt that 3 is the age where you start teaching people the brutal economic truths of grown-up commerce.”
At first I thought -- wait a sec! I could do better than that! Not. So. Simple!

But then, after a bit of reflection on the hours I've spent glued to a Harry Potter book, or to some of my favorite games, or better yet, with my family, I came to the conclusion that No, Rich Has it Just About Right. ;)

Wednesday, August 17, 2011

supermarket economics

I was reflecting on the analogies used by economists to illustrate core ideas such as market equilibrium, consumer preference theory, as well as more advanced topics such as the equation of marginal utilities to prices in product market equilibrium, when I began to realize how artificial the supermarket analogy is. (Loosely stated, the supermarket analogy argues that a shining example of how markets work is the supermarket -- a large group of consumers congregating together in order to take part in impersonal exchanges that leave them better off than they would have been if they had to bargain individually with the farmer or manufacturer. Supermarkets therefore increase market efficiency and hence social welfare.)

One example has caught my attention as being a particularly serious example of this fallacy -- Abba Lerner's discussion on product market equilibrium in The Economics of Control. Lerner goes so far as to say that the equation of people's psychological marginal utilities of goods to the prices of those goods, represented in the standard model of market equilibrium, is one of the great achievements of mainstream economics, validating the use of the model in understanding general equilibrium in any market economy. And you can find this story of the triumph of the supermarket analogy anywhere that core economics principles are explained (even Greg Mankiw uses them in his Principles text, e.g. where he asks whether the price of turkey in a supermarket is "just" according to the principles of welfare economics).

Indeed, supermarket analogies constitute a large enough set of ammunition for mainstream economists that I would label that set "supermarket economics", for lack of a better term. (Apparently that term has been used more commonly in other contexts...)

Supermarket economics is deeply flawed because it doesn't address people's most common interactions with economics ideas in their daily lives -- the economics of work and the economics of the home or family. In fact, I would argue that supermarket economics is intentionally used by mainstream economists to mask the more relevant facets of economic life that most people deal with on an ordinary basis.

Think about it like this: even if "supermarket economics" did hold, what percentage of your day is spent in a supermarket? Now what about at work, or at home, or with friends? One of Mankiw's 10 principles states that "markets are usually a good way to coordinate economic activity". But employers don't go around to various islands in a giant market looking for the "right worker" for a particular job, nor do our parents take bids from the highest bidder to see who will be fed on any particular day. Employers plan the coordination of their workforces, and direct their workers not through market incentives but through threats or just because they command authority in the workplace. These are experiences that most of us have everyday -- before we go to the supermarket to pick up tonight's dinner.

My central point is simple but highly relevant to a critique of bourgeois economics. Supermarkets are just an idealized version of an economy: they mask some of the most important aspects of economic life for ordinary people. Standing back and looking at the different economic activities we engage in, we see that direct, impersonal exchange is not the norm.

Saturday, August 13, 2011

the art and science of financial markets

(links to image here and here)

Trying to follow the ups and downs of the stock market is difficult, but it's not a science. While traditional theories of financial markets might like to assume that it is, this cartoon illustrates a different argument for why stock prices move the way they do. Investors must make their decisions based on information about a company that is far from complete, and they also must factor in what all the other investors are thinking about where the stock is headed. If anything, this makes their decisionmaking jobs more complex than science, not less so. And in such situations, frenzies can easily break out where a few small rumors can lead to wide fluctuations in a stock's price. This volatility seems to defy any logical or scientific explanation, as the above picture clearly suggests.

NOTE: This cartoon is part of an ongoing project at Imagining History to cull cartoons and other illustrations around the web as part of the Anti-Mankiw project (making critiques of mainstream economics accessible at the introductory level). See the link below for a list of all cartoons gathered thus far here:

Thursday, August 11, 2011

or maybe because they love their land, no matter how polluted it gets

Robert Vienneau replies to my linking to a strategy videogames wikipedia article with some interesting research on the intersection of games and decision theory. Interesting stuff: I believe that people's performance in games can definitely shed light on understanding individual behavior in complex social phenomena of the "real world". But as I have argued on other occasions, I think that the actual structure of a gaming world, and the method of gamer interaction with that structure, can also be highly productive for teaching about social theory (and, as a corollary, reproducing certain political ideas).

What I'm thinking about is more abstract than saying "well, this is how people react in games to different stimuli... let's extrapolate what that tells us about economic theory!". What I'm going for is more along the lines of, "the worlds that are represented in these games are composed of certain institutions and ideas, which become socially and politically meaningful to the gamer who takes part in those worlds".

Consider the following situation which takes place in the first part of the classic RPG, Final Fantasy VII for the Sony Playstation.

Premise: A giant corporation with strong ties to a large city, Midgar, has endeavored on an environmentally damaging policy of extracting an energy source from the planet which also serves as the people's source of livelihood. To extract the energy, they have built 8 reactors in a circular fashion around the city. The city itself is composed of two tiers: an upper and lower "crust".

On the lower crust you have the slums. Then, you have a pie-like "disc" structure that separates this lower crust from the upper-area, where the corporation runs its day-to day options. (Needless to say, there are strong connections between the corporation and the city government.)

A picture of Midgar:

(click to enlarge. original link. the "slums" are located below the 8 panels you see represented in the image, where the main reactor sits in the center and serves as the corporation's HQ as well.)

Enter Barret and Cloud, who are having a conversation about the layout of the city and the problems with the corporation. Barret is part of a grassroots "terrorist" organization attempting to blow up the reactors in the name of a kind of environmental justice. Cloud has joined the group for the first mission (from which they are coming back after a successful attack on one of the reactors). The following dialogue takes place:
"The upper world... a city on a plate..."
"It's 'cuz of that &^#$# 'pizza', that people underneath are
"And the city below is full of polluted air."
"On topa that, the Reactor keeps drainin' up all the energy."

"Then why doesn't everyone move onto the plate?"

"Dunno. Probably 'cuz they ain't got no money. Or, maybe..."
"'Cuz they love their land, no matter how polluted it gets."

"I know... no one lives in the slums because they want to."
"It's like this train. It can't run anywhere except where its
rails take it."
(script thanks to this link.)

(screenshots thanks to this youtube video)

Really remarkable. I remember when I first read those lines, they really hit me like a brick. They still do, in fact. And the game is full of these types of themes and quotes, demonstrating how gaming worlds themselves can introduce the player to social nuances that many people would only consider possible to be fully expressed in a novel or some academic treatise.

Numerous other examples can be found, if you look closely: from the historically (politically, socially, culturally...) engrossing worlds of the Assassin's Creed series to the best Japanese RPGs out there, there is a lot to be learned from taking these games seriously as expressing real social themes on a surprisingly deep level.

Saturday, August 6, 2011

links of interest

Some links that you might find interesting:

You can find podcasts of the annual Tawney Lectures, sponsored by the (British) Economic History Society, here. It includes some pretty interesting talks, including Jane Humphries on child labor and Bruce M.S. Campbell on "Nature as Historical Protagonist".

Gamasutra is a videogame blog, but really so much more. It includes many fact-based and opinion articles addressing the cutting edge-issues in gaming such as social games and the impact of independent developers on the industry.

My Favorite Wikipedia article right now is on strategy video games, which is a real excellent exhaustive list of the different possibilities, including tactical/strategic breakdowns and hybrids. Very cool!

Is Islam compatible with capitalism? A unique discussion of this old question (in general, "is religion compatible with growth?") using the modern Turkish businesspeople from the Anatolian region as an example.

Friday, August 5, 2011

assume a can opener

N. Gregory Mankiw on why economists might stick to the rational actor assumption even in the face of behavioral economics findings showing that individuals are systematically irrational (pg. 497, Principles 4e):
[E]conomists are themselves are not rational maximizers. Like most people, they are overconfident, and they are reluctant to change their minds. Their choice among alternative theories of human behavior may exhibit excessive inertia. Moreover, economists may be content with a theory that is not perfect but is good enough. The model of rational man may be a the theory of choice for a satisficing social scientist.
And here, to dunk your head in the water, is Jim Crotty on The Realism of Assumptions Does Matter (start at around 4:40 for the relevant discussion):

Thursday, August 4, 2011

success (and failure) in the textbook industry

One of the more fascinating stories in the history of economics textbooks is the persistence of McConnell and Brue's book. McConnell wrote the first edition of his text in 1960 (Brue joined later) and it is still one of the top-selling econ textbooks on the market! It overtook Samuelson in sales figures in 1975 and has maintained a solid presence ever since. How is this possible, and what does it teach us about the future of Mankiw's text?

Such a question cannot be divorced from political, economic, and social context. This may seem obvious, but there are really two sources of change in the textbook market. One is internal: having to do with the dynamics of the market itself, as well as the content and style of the existing texts. If you hear Mankiw or some other orthodox economist talking about why particular texts are successful, they will most likely turn to this flavor of explanation because it tells a story of individualist success and ingenuity in the market -- how textbook writers come up with excellent new ways of presenting economics research in a consumable fashion to first year undergraduate students. People arguing the "internal" view often lack a perspective on why long-term trends and changes in those trends occur.

The second source of change is external: having to do with the social forces alluded to above. (Does a better job of explaining the long swings in a market.) Philosophers and others thinking about the progress of the discipline from the outside are more likely to talk about these sources, but they are just as important (if not more so) than the internal ones. Did the success of Samuelson have anything to do with his commitment to a consumable distillation of the Keynesian mainstream of the time? Most certainly. Did it have something to do with the way he treated the Soviet model and radical economic alternatives? You bet.

So the funny thing is, McConnell always kept in line with social context. For example, in all editions of the text he has included sections at the end of each chapter titled "The Last Word", which included critiques of, say, the mainstream treatment of monopolies by Paul Sweezy. The point was to present economics as having more than one side, to treat that idea carefully, and leave it open to the student to discuss (maybe in class?) the merits of each side.

McConnell and Brue maintained these "Last Words" throughout their textbook, mainly because they were an effective way of presenting an opinionated argument that, in some way, reemphasized the core theme of the chapter. (Samuelson and Mankiw have something like it as well, for a similar reason; it's an effective tool!) But where the earlier editions of "Last Word" had something like a critique of the main theme of each chapter, by the 1980s and certainly by the late 1990s, the editions' "Last Words" were geared more towards an opinionated affirmation of the underlying theme. For example, a chapter on the pure competition model has a "Last Word" on how pure competition maximizes consumer surplus, demonstrating the welfare properties of the pure competition model in a one-page summary of the chapter.

In short, while Samuelson had kept some Keynesian grounding to his text, McConnell and Brue were able to adjust the focus depending on how the majority of economists changed their views.

What does this mean for Mankiw? As I noted earlier, the key invention for Mankiw was the reorganization of welfare economics. This reorganization is a political project in the sense that it "glosses over" key details of the arguments needed for welfare economics to actually make sense. It allows clear applications to the world of public policy. But still, it is, at its core, a right-center book in a world where the mainstream is beginning to shift slowly but surely. As soon as a (mainstream) book comes along that represents economics with more of a political economy focus, more behavioral economics focus, and a better emphasis on the logic (rather than the rhetoric) of core models, Mankiw's position will be in jeopardy.

As a result, I suspect that very soon we will see the downfall of Mankiw's Principles text. But, more on that in another post.