Tag Archives: Economics

Murder at the Margin – Marshall Jevons

“She and her husband may simply have interdependent utility functions, like so many married couples. That’s what economists mean by ‘love’.”

One of the challenges of teaching – and learning – economics is that it asks students to think in three different ways: mathematically, in graphs, and in economic intuition. Students who are good at one may struggle with the others, or may learn well when a concept is presented in one format but not when the other two are used, but all three are important. As a result, economists like to dabble in different ways of presenting the three, trying to appeal to different types of students.

Murder at the Margin is a murder mystery written by two economics professors. The small, balding, Harvard economist Henry Spearman is on holiday when a murder is committed at his resort, and he is forced to use economic principles and careful observation to solve it. In the words of Alfred Marshall, economics is ‘the study of man in the ordinary business of life.’

I picked it up thinking it might be a useful resource for teaching economic intuition, having had it suggested by a friend. It is not exactly Pulitzer prize quality. It is, however, used frequently in teaching economics, and does a good job explaining economic concepts in clear, effective language. Speaking as an economist myself, it’s also quite funny: it’s from the 70s, so examples and prices are quite dated, and it is both intentionally and unintentionally amusing.

If you’re a student of economics, especially a high school student, I think it has some teaching value. I think most students would benefit more from something like Tim Harford’s Undercover Economist, but for students for whom that is too advanced, or for whom fiction might be more appropriate than non-fiction, it makes a good effort.

The Why Axis – Uri Gneezy and John List

“Without understanding that life is a laboratory, and that we must all learn from our discoveries, we cannot hope to make headway in crucial areas.”

Paying students for marks gives them an incentive to study. Does it also crowd out intrinsic incentives for the same, crippling students by making them unable to study when they are not immediately paid for it? If a gay couple tries to buy a car, does the dealership discriminate against them because they are inherently hostile to gays, or because they believe they can increase their profits by doing so? Should charities allow people to opt out of receiving mailings, and if so, will that increase or decrease donations?

If you are a teachers’ union, activist, or charity, you likely have strong opinions on the answer. What you may not have is any actual knowledge. Gneezy and List, two great experimental economists, argue that fundamental questions such as the best ways to educate, fight discrimination, and run businesses lie at the heart of experimentation. Without it, we cannot understand the world we live in, forced to reason by post hoc ergo propter hoc: that because things occur at the same time, one must cause the other. With experimentation, we can establish true causality, understanding how what we do affects the world around us.

To understand education better – and with the help of a $10 million dollar donation from some hedge fund managers – they have established their own schools, one focusing on teaching will-power and delaying gratification, and the other a more standard academic curriculum of reading, writing, and arithmetic. To understand discrimination, they tried having gay couples purchase cars while signalling they planned to check other dealerships, and found that discrimination disappeared; to understand charitable giving, they experiment with several different approaches, finding that having a pretty girl ask for donations and offering a lottery prize for donating are equally effective in increasing donations, but that the lottery has long term effects while the pretty girl does not. Giving people the opportunity to opt out of mailings is most effective of all, however, increasing initial donations, leaving long-term donations unchanged, and saving money on mailings.

The Why Axis is another in a stream of books by economists popularizing their work. As with many such, it is reasonably well written, and stocked full of anecdotes, stories, and examples. It is more interesting than most, however, because experiments provide particularly interesting fodder for discussion. In addition, Gneezy and List argue passionately for a more experimental way of looking at the world. Whether we are considering a new job, a new product, or a new policy, trying it out on a small scale provides information essential to avoiding blunders. To my mind, they’re definitely correct we would be better off if we experimented with different ways of doing things a bit more; in that spirit, pick up a paper or two of theirs to see if you find them interesting, and if so, the book might well be worth it.

In Our Hands – Charles Murray

“The real problem advanced societies face has nothing to do with poverty, retirement, health care, or the underclass. The real problem is how to live meaningful lives in an age of plenty and security.”

The idea of a negative income tax is one of the few public policies that seems to appeal to both left and right, though admittedly the left prefers the name basic income or guaranteed minimum income. In brief, the idea is that people making less than a given amount get money from the state until they are making that amount: those that make more than that get a reduced subsidy or nothing. In principle, it can then replace a diverse set of loophole-rich, easily abused welfare programs, appealing to the right; and ensures that no one in society is without a certain basic wage, appealing to the left.

Tax reform is not exactly an issue with wide appeal. In Our Hands makes the case for a negative income tax by talking not just of the cost savings but also of the social and political implications, making the book of wider interest than just to economists. Murray lays out the possibly savings from eliminated welfare programs, and argues that though a negative income tax isn’t economical yet, it will be in the next few years as costs and populations increase. By ensuring everyone has a stake in society and some source of income, he argues, it also encourages responsible citizenship and participation in the world.

He neglects some questions that seem of interest, however. Long run, some might worry that pseudo-classes defined by whether someone receives the benefit could form. The policy is also vulnerable to politics: as soon as it is created it will be subject to massive political fights which, based on the current disputes about minimum wage, will have little to no relationship to reality on either side, and keeping it to the optimal level might be difficult.

The book is unabashedly an argument from the right, and in some ways that’s the book’s greatest weakness; many on the left might also support the policy, but I’m not sure In Our Hands is the book to sell them on it. That said, for a left wing reader willing to make the effort, the book does have information and arguments for both sides. Murray’s design also has some odd parts, such as giving $5,000 to all citizens, rather than eliminating it over a certain income bracket to reduce costs. Still, an important policy, and a good way for someone without a background in tax to start thinking about some of the issues, though much more needs reading (and writing!) to reach conclusions.

Risk Savvy: How to Make Good Decisions – Gigerenzer

“The breakneck speed of technological innovation will make risk literacy as indispensable in the twenty-first century as reading and writing were in previous centuries.”

Understanding and dealing with risk is essential in almost every aspect of the modern world; medicine, transportation, education, public policy, even game shows. Most of us do pretty badly at it; despite the fact that you’re more likely to die driving 12 miles than flying from New York to Washington, we feel more worried in the airplane than on the drive to the airport. The response of policymakers has been to argue the need for experts to save us from our biases. Risk Savvy disagrees: what we need, Gigerenzer argues, is risk education. Understanding probabilities is something that can be learned, and must be if we are to function in the world.

Gerd Gigerenzer is best known for his work arguing that though it’s easy to criticize instinct and human decision making as being biased and flawed, in reality those biases actually work better than being unbiased would in the majority of situations. We aren’t broken, leaky beta versions; rather, we operate with a well-designed and effective ‘adaptive toolbox’ one that allows us to successfully navigate a wide variety of situations with considerable success and a minimum of effort.

Gigerenzer is a top academic doing very interesting work in psychology, and I think his academic work makes some great reading. Unfortunately, this book is not that. He’s oversimplified his work, and as a result it often feels like a linear combination of other pop behavioural economics books, rather than a new addition to the field. He has some great examples of his points and some great stories, but nothing new to add to them. Still, some of the facts are really good. Consider the disparate policy approaches between mad cow disease and child proofing scented lamp oil bottles, despite the fact they kill similar numbers of people, or that reading to a 8-16 month year old child boosts their performance on language tests by 7 points, while watching TV reduces it by 17 points. Not world shaking, and not illustrating anything you didn’t already know, but interesting. Still, if I were you I’d stick with some of his earlier books.

Capital in the 21st – Quotes

Having reviewed Piketty’s Capital earlier this week, I thought I’d also pass along a few choice quotes. If you haven’t read the review yet, though, I’d start there.

On his thesis

“A society structured by the hierarchy of wealth has been replaced by a society whose structure depends almost entirely on the hierarchy of labor and human capital. It is striking, for example, that many recent American TV series feature heroes and heroines laden with degrees and high-level skills, whether to cure serious maladies (House), solve mysterious crimes (Bones), or even to preside over the United States (West Wing).”

“Inequality is not necessarily bad in itself: the key question is to decide whether it is justified, whether there are reasons for it.”

“When the rate of return on capital exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the the twenty-first century) then it logically follows that inherited wealth grows faster than output and income.”

On ideology

“I was vaccinated for life against the conventional but lazy rhetoric of anticapitalism, some of which simply ignored the historic failure of Communism and much of which turned its back on the intellectual means necessary to push beyond it.”

“Both the antimarket and the antistate camps are partly correct: new instruments are needed to regain control over a financial capitalism that has run amok, and at the same time the tax and transfer systems that are the heart of the modern social state are in constant need of reform and modernization, because they have achieved a level of complexity that makes them difficult to understand and threatens to undermind their social and economic efficiency.”

Interesting Facts

“There is no historical example of a country at the world technological frontier whose growth in per capita output exceeded 1.5 percent over a lengthy period of time.”

“Billionaires today own roughly 1.5 percent of the world’s total wealth, and sovereign wealth funds own another 1.5 percent.”

“Capital is a better indicator of the contributive capacity of very wealthy individuals than is income.”

Capital in the 21st Century – Thomas Piketty

“The overall conclusion of this study is that a market economy based on private property, if left to itself, contains powerful forces of convergence, associated in particular with the diffusion of knowledge and skills; but it also contains powerful forces of divergence, which are potentially threatening to democratic societies and to the values of social justice on which they are based.”

This is a longer review than I normally write, so I thought I’d summarize takeaways first (who has the time to read long reviews with all those cat videos?)

Overall very good: lots of interesting information on wealth and income inequality.
Before world wars, inequality was from wealth inequality; now, it comes from income inequality. Rise of the supermanager.
Policy analysis weak – hasn’t really considered other options or read the literature. Still, capital tax may be good idea: can replace the common and unfair real estate tax. WIsh he had discussed a consumption tax.
Long run, the only cure to inequality is better education.
No big surprises: basically just fleshes out ideas that most people would have believed true intuitively, if without data.

Piketty’s work has been ridiculously popular: for a 600 page economics treatise to outsell fiction on Amazon.com is amazing to me, particularly given that it wasn’t very popular in France, where it was first published. Still, any book that can manage that is worth a read.

Piketty argues that because the interest on capital (r) is larger than the growth rate of the economy (g), capital ends up growing faster than the economy. Over time, therefore, capital owners own a larger and larger share of the whole pie, which leads to inequality. Though there are compensating factors, like the diffusion of knowledge and skills, without comprehensive educational policies and redistributive taxation, this inequality can grow to extreme levels. He uses income tax and estate tax information to study wealth and income inequalities over the past 200 years, finding high inequality pre world wars, low inequality after world wars, and increasing inequality today, though unlike before the wars, it is largely due to income inequality, not wealth inequality (managers with high salaries, not landowners).

His fundamental insight, as anyone who has read a review will know, is the fact that r > g. I think that’s true, and it does have the effects he describes, but speaking as an economist it’s also not surprising. Interest rates on capital are relatively high partly because people are impatient and aren’t good at saving, at least judging by their ability to save for retirement. If society lowers the return on capital, people will save less, and I’m not sure that’s a good thing either, something Piketty doesn’t consider. Still, he’s right that increasing inequality can be a source of stress for society, and it’s definitely an important subject for study.

The book is divided into a section analyzing the data, a section predicting future trends, and a section discussing policy. The first section is excellent; the Financial Times has raised some problems with his data work, but by and large I think it’s well done and the results are unchallenged. Lots of interesting information. The second section has the bad habit of making a prediction then immediately disavowing it as a guess, which is common but I think a bit disingenuous.

The third section I found very weak. The policies he supports may well be good ones, and I think there are good arguments for a capital tax, since most countries have a property tax and that’s basically just a capital tax that’s very unfair to the middle class. It’s clear this is not an area Piketty has thought about much, though, and his discussion of education policy is pretty shallow. Dismissing a consumption tax based on total spending, which is often a popular policy, he rejects it in a single line as never having been done, before advocating a global capital tax that has also never been done before. Long run, as he points out, it appears the only cure to inequality is better education and better skills transfer, and I think almost everyone, left or right, would support that.

Whether when you think of capital you think of landed aristocracy, as the French Piketty does, or of Bill Gates, as I suspect a lot of North Americans do, may play a role in how you feel about the book. In the end, I think the power of Marx’s original Capital is that it provides a new way of thinking about the world. I didn’t find Piketty managed the same: perhaps it’s because I’m an economist, but most of what he said I would have assumed to be true. I also find anyone that introduces mathematical identities (like 2+2=4, things that are defined to be true) as “fundamental laws of capitalism” to be a little pretentious for my taste, but that definitely doesn’t relate to the overall quality of the book. It’s well worth a read, and thinking about inequality and its solutions is definitely an important issue.

You can see the Amazon reviews here.

The Economic Consequences of the Peace – John Maynard Keynes

“The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable – abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe.”

Keynes wrote the Economic Consequences in 1919, and it played a critical role in turning public opinion against the Treaty of Versailles as too harsh and unfair to Germany. In it, he argues that France’s desire to punish Germany and unwillingness to raise taxes to pay for the war has led to reparations wildly beyond Germany’s ability to pay, and worries about the future of Europe after a crippling peace treaty and continuing instability.

Keynes is fun to read because he’s ridiculously clever, and this book is no exception. He’s witty, he’s insightful, and he’s entertaining. Conveniently, history has also judged him right, with the punitive terms of the Versailles Treaty contributing to the outbreak of World War 2. Being Keynes, though, he also had opinions on a wide variety of other topics.

On History

“The great events of history are often due to secular changes in the growth of population and other fundamental economic causes, which, escaping by their gradual character the notice of contemporary observers, are attributed to the follies of statesmen or the fanaticism of atheists.

On Poverty and Inequality

“Men will not always die quietly, for starvation, which brings to some lethargy and a helpless despair, drives other temperaments to the nervous instability of hysteria and to a mad despair. And these in their distress may overturn the remnants of organization, and submerge civilization itself in their attempts to satisfy desperately the overwhelming needs of the individual.”

“Then a man shakes himself, and the bonds of custom are loosed. The power of ideas is sovereign, and he listens to whatever instruction of hope, illusion, or revenge is carried to him on the air.”

On inflation

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.”

On the Modern World

“The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep…The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life.”

Scarcity – Sendhil Mullainathan and Eldar Shafir

“Scarcity captures our attention, and this provides a narrow benefit: we do a better job of managing pressing needs. But more broadly, it costs us: we neglect other concerns, and we become less effective in the rest of life.”

Angry Birds, the game in which you lob birds at obstacles, has been phenomenally popular. Angry blueberries, a game created by the authors in which you lob blueberries at obstacles, has been somewhat less popular, but shows an interest result. Some players are given three blueberries per round, others six. People with more blueberries do better, of course, but they do a lot worse per blueberry!

Scarcity, the authors say, focuses the mind. We have finite mental capacity, and when we are forced to focus it, we do much better on that task, but much worse on every other task. They worry that the modern obsession with time management and efficiency makes time a scarce resource. That may help us schedule, but makes us sloppy in other areas, and vulnerable to any sort of unexpected demand on our time: something comes up, and it ripples through our entire week, making everything stressful. A little more slack in our schedule isn’t just wasted time a management consultant can help us fill: it’s a shock absorber, making our work schedule antifragile.

As with most good behavioural books, it does have a lot of fun studies though: pill bottles that beep and then send text messages when they haven’t been opened that day, gift cards for savings, and others. In the end, I’m not sure the book tells us anything any other behavioural economics book doesn’t. Introducing scarcity, though it makes for nice sound bites, doesn’t really add much to the analysis, despite their hard work attempting to use it to explain things.

If your bookshelf is looking scarce, however, you can get a copy here!

Flashboys – Michael Lewis

“The world clings to its old mental picture of the stock market because it’s comforting; because it’s so hard to draw a picture of what has replaced it; and because the few people able to draw it for you have no interest in doing so.”

In 2009, a 300 million dollar secret fiber optic line was built, so secret that workers were kept in small groups and prevented from meeting, so secret they were never told the purpose of the line or where it was going, so secret they were asked to report anyone asking questions or digging near the line. Many thought they were on a top secret government project. In truth, they were building a line from New Jersey to Chicago that would shave 1.5 milliseconds off the time data takes to flow between the two points, bringing it down to 13 milliseconds, a privilege for which banks and traders were asked to pay as much as 10 million dollars apiece. It takes, by the way, 100 milliseconds to blink your eyes.

Michael Lewis is one of my favourite financial authors: I think his coverage of the financial crisis in The Big Short was masterful, quite possibly the best book on the subject, and he’s also well known for Liar’s Poker and Moneyball. He uses individual stories to explain complex issues, and in Flashboys, he describes the new world of stock markets, a world in which the markets are black boxes in high security buildings in New Jersey and Chicago, and it’s worth millions of dollars to have your computer two feet closer to that box. Every inch counts when signals only go at 186,000 miles per second. It’s also a world with predators and prey, and Lewis is sharply critical of many of the predators, especially dark pools and high frequency traders, those who trade in a millisecond time frame.

The book has been controversial: in essence, one side argues that though high frequency trading is not implicitly bad, many of the strategies used are essentially robbery: they gather more information than others and then use their advantage to take money that would otherwise have gone to the investor. On the other side, as an ex-Goldman Sachs employee I spoke with a few days ago argued, supporters suggest that such traders play the same role traders have always played, helping bring together sellers and buyers and adding liquidity to the market. Where Lewis is weakest, in justice, is that as with any story he needs a villain, and high frequency takes the role. In truth, however, many of the problems are systematic, and a systemic change is needed, as indeed one of the protagonists attempts to do by setting up his own, fair, stock exchange.

I personally tend to find the mugging side of things more apt, but that’s up the reader. Regardless of what you decide, I can recommend Flashboys as a phenomenal way to understand the modern stock market. Lewis has made a subject few of us understand clear and entertaining, and for anyone interested in flash crashes, hedge funds, algorithmic trading, or just the financial world in general, it’s essential reading. It’s a book on finance that sold 130,000 copies in its first week, is already being turned into a film, and has spawned thousands of articles, interviews, and responses. I highly recommend it.

You can get a copy here, or just read the Amazon reviews.

The Economic Naturalist – Robert H Frank

“Mathematical formalism has been an enormously important source of intellectual progress in economics, but it has not proved an effective vehicle for introducing newcomers to our subject.”

The Economic Naturalist is one of the many pop-economics books out there, perhaps the most famous of which is Freakonomics. It’s one of the ones I haven’t read though, so I thought I’d pick it up, and I was pleasantly surprised. Frank used to instruct his students each year to find a seeming puzzle in the world and explain it with economics, the best of which have been collected here. If somewhat basic, it is at least entertaining.

Frank opens by worrying that economics students rarely remember what they are taught: associating economics with math and diagrams, they can’t actually apply it to the real world. Seeing as how this is a current subject of debate in the profession (see the Economist), I can hardly argue. Econ provides basic concepts of considerable value, and if students don’t leave with some understanding of opportunity cost, comparative advantage, etc., then I’m not sure it matters how good they are at calculus.

The entire book, then, is questions asked by his students and answers in response to them, often based on the original essay the student wrote. Questions vary from why drive-through ATMs have braille on them (cheaper not to produce different ATMs for drive-throughs ) to why milk is sold in square containers and pop in round ones (milk requires refrigerated shelf space, and so needs to be packed on shelves as efficiently as possible: pop is carbonated, and round shapes are more solid).

The essays are fun and in some cases enlightening, and are organized around key economic concepts, to illustrate their application in the real world. After the first half or so though, it all gets a bit wearing. To be fair, I suspect that’s because I already know the concepts; for a newcomer in the field, it might be considerably more entertaining. Still, I’m not sure it competes with the like of Tim Harford’s Undercover Economist, or Freakonomics for that matter. An entertaining read, but I think I’d rather read more about economics education directly. For those with less background in economics though, it might be a fun introduction to the field.

You can get a copy here (or in the UK or Canada). Or, just sign up for the Subtle Illumination email list and get social science delivered to your door!