Thursday, December 28, 2006

Wanted: Economics Stories

There have been a number of attempts by economists to write fiction that teaches economics, including at least one series of mysteries. None, in my opinion, works very well.

It occurred to me some time ago that a better approach might be to look for works not by economists but by good writers that happened to contain important economic ideas. So far I have only two candidates. One is a short story: "Margin of Profit" by Poul Anderson. The other is a poem, "The Peace of Dives" by Kipling. They are both excellent works of their kind and each is primarily about economics, broadly defined. The point of Poul Anderson's story is that, in order to keep people from doing things you don't want them to do, you don't have to make doing them impossible, merely unprofitable. Kipling's poem is an allegory describing how economic interdependence leads to peace.

If I had a lot more pieces of the same sort I could create a collection to be used as suplementary reading in economics courses—much more interesting and enjoyable reading than most textbooks. Unfortunately, I don't.

Hence this post. I am looking for suggestions for good works of literature—poems and cartoons also qualify—that succeed in making an important economic point.

Why Do We Give Gifts?

Economists find the widespread practice of giving gifts puzzling for a number of reasons. The most obvious one is that we generally expect individuals to know more about their own preferences than other people do. So it would seem that a gift in money, which I can use to buy whatever I most value, would almost always make more sense than a gift purchased for me. While there are exceptions, cases where the giver happens to have special knowledge that the recipient does not, it is hard to see how they can explain what we actually observe. And besides, the knowledgeable gift giver could always send me a check accompanied by a note recommending the book he would have bought for me, leaving it up to me to decide whether to acccept the recommendation.

At first glance, the idea that giving a gift shows you were willing to go to the trouble to find one seems even less persuasive--why not simply send a check equal to the value of the gift you would have bought plus the value of the time you would have spent finding it? But there are two variants on this argument that might work.

The first, which I came up with long ago, is based on Becker's analysis of the economics of altruism. If I am an altruist with regard to you it is in my interest to be well informed about your preferences in order that I can recognize situations where I have an opportunity to confer a large benefit on you at a small cost to me. It is also, via Becker's Rotten Kid Theorem, in my interest for you to know that I am an altruist with regard to you, since that makes it in your interest to act altruistically towards me--loosely speaking, because the richer I am the more I will be able to help you. For details see the relevant chapter of my webbed Price Theory text.

If I am well informed about your preferences, it is relatively inexpensive for me to find a gift you will like. Hence giving a gift you will like meets the requirement for a signal of altruism--it is cheaper to send the signal if it is true than if it is false.

This is, I think, a logically possible explanation of gift giving, but I don't find it a very convincing one. I now have a second candidate.

Suppose we accept the plausible idea that I can be modeled as two individuals in one body. The first is a short run pleasure maximizer--the me that almost always wants an ice cream cone or another potato chip. The second is a long term utility maximizer--the me that promises not to have ice cream for desert until he has lost five pounds and tries to force the first me to keep the promise.

Most of us do not face an immediate budget constraint. Spending an extra few dollars on a gift doesn't mean that I can't afford an ice cream cone today, it means I will have a few dollars fewer when I retire. The long run me cares about that, but the short run me doesn't. Spending an extra hour shopping, on the other hand, is a cost that occurs now and so counts for both versions of me.

We now have a second explanation of gift giving. By giving you a gift instead of cash, I demonstrate that the short run me as well as the long run me cares about you.

When proposing an economic theory of behavior, it is worth thinking about whether it has any testable implications. This one does. A critical assumption in the argument is that the gift giver does not face a short term budget constraint--that spending money on a gift doesn't mean going hungry to bed or having to spend an extra couple of hours shoveling snow. It follows that the giving of money instead of purchased goods ought to be more common among people who do face such a budget constraint.

Since I am by nature lazy, hence a theorist, I will leave to someone else the project of actually finding data that could be used to test the explanation I have just offered.

Friday, December 22, 2006

Global Warming: Confusing Moral and Practical Arguments

In controversies over global warming, one issue that keeps coming up is whether it is anthropogenic, whether if the world is getting warmer it is our fault. So far as I can tell, the question stated in that way is almost entirely irrelevant to the controvery; it reflects a confusion between moral and practical arguments.

Suppose the cause of global warming is not human action but changes in solar activity or some other external factor. Suppose also that the consequences of global warming will be catastrophic. Finally suppose that there is something we can do to prevent global warming, say raising the albedo of the earth with orbital mirrors, high altitude pollution, or whatever. Isn't the argument for doing it precisely the same as if we were causing the warming? Hence isn't "whose fault is it" a wholly irrelevant distraction?

Of course, the questions of causation and prevention are not unrelated. If we are causing global warming that suggests one possible way of preventing it—stop whatever we are doing that causes it. But doing that may be, indeed very likely is, enormously costly, perhaps more costly than letting global warming happen. It might even be impossible, if what we have already done is enough to cause long run catastrophe even if we don't do any more of it. And even if we are causing it and could stop doing so, there might be better solutions.

Concerning Global Warming More Generally

I should add that I am taking no position here on the other usual questions about global warming. I do not know if it is happening, although it seems likely enough. I do not know if, if it is happening, it is due to human action, although that again seems a plausible enough guess. And it is not all clear to me that, if it happens, it will be a bad thing, let alone a catastrophe.

The crucial fact for me is that the more persuasive predictions of bad effects are well into the future; at one point the estimate was a sea level rise of half a meter to a meter over the next century. In my view, the next century is sufficiently uncertain so that it makes little sense to take expensive precautions against risks that far off. By the time the risk arrives, if it arrives, we may have already wiped outselves out in some other way. If we have not wiped ourselves out, our lives may have changed in a way that eliminates or even reverses the problem; communting via virtual reality produces little CO2. If we are still around and the problem is still around, we are likely to have a level of technology and wealth that will make possible a range of solutions well beyond what we are currently considering.

All of these are reasons why I think a persuasive case for doing something about global warming requires evidence, not yet available, of serious negative effects in the fairly near future. But that conclusion does not depend on whether whatever is happening to the climate is or is not our fault.

Tuesday, December 12, 2006

Dishonest Words

Consider first the case of "homophobia." In current usage, it is applied to any negative view of homsexuals or homosexuality, whatever its source. Thus, for instance, someone who is opposed to homosexual activity because his minister told him that the bible says it is wicked would routinely be labelled homophobic.

A phobia is an irrational fear. It is occasionally argued that the source of negative views of homosexuality is the fear that one might have homosexual inclinations, but it is a considerable stretch to claim that source for all negative views. It seems obvious that some people are opposed to homsexuality because they think their religion condemns it, some because they think it has bad consequences, and some for any of a variety of other reasons. Labelling all of them "homophobic" is a way of (falsely) implying a single cause for the conclusion--and, by doing so, attempting to stigmatize all those who hold it and dismiss all possible reasons they might have.

A second example is the term "racism." In a recent exchange here, Mike Huben referred to "racist science" in a context where it meant "(hypothetically) correct scientific research that demonstrated the existence of differences among the races" (if this is not a fair summary, I expect Mike to correct it). That was a striking definition of the way "racist" is used to mean, not "hating or despising other people because of their race" but "holding beliefs on racial subjects other than those of the person using the word." Again, that usage is an implicit argument and a dishonest one, since the implication again is that the only possible reasons for disagreeing with the speaker's views on the subject are bad ones.

The pattern is not limited to people whose politics I disagree with. Libertarians do the same thing. In our context, the question is how to label people who disagree with libertarian views, on particular subjects or more generally. The two popular choices are "statist" and "collectivist."

Both are wrong. There are lots of reasons why someone might favor the draft, or minimum wage laws, or price controls, or the war on drugs. Worship of the state is no doubt one possible reason, but certainly not the only one. Belief that what really matters is the collective and not the individual is one possible reason but not the only one. Each of those views could readily be held by someone who agreed on the whole with libertarians about values, outcomes they wanted, but disagreed about the consequences of particular policies. Most obviously, someone might favor the draft because he believed it was necessary in order to defend the U.S., and want to defend the U.S. precisely because he was in favor of freedom and thought the U.S. was much freer now than it would be if someone else conquered it.

In each of these cases, the pattern is the same. We have a conclusion that might be reached for any of a variety of reasons. Someone who wants to attack the conclusion does it by picking one reason he considers particularly unattractive and indefensible, using that reason to label the conclusion, and thus (dishonestly) implying that anyone holding the conclusion does it for that reason.

Friday, December 01, 2006

Lieberman for President?

Difficult as it may be to believe, I think I have come up with a scenario for the next election that nobody else has suggested.

Consider Senator Lieberman's qualifications for the Democratic nomination.

1. He is a long term senator and an (admittedly unsuccessful) vice presidential candidate.

2. In the most recent election, he demonstrated an ability to attract Republican votes unmatched, so far as I know, by any non-Republican candidate in recent history. Connecticut is not, it is true, a Republican state. But holding the Republican candidate for senate to 10% of the vote is still a striking accomplishment.

3. Odd though it may seem in the light of the religious conflicts of past centuries, his status as a deeply believing Jew probably makes him more attractive to the Republicans' religious hard core than any other Democrat.

It is true that Lieberman's support for the Iraq war looks, at this point, like a liability. It is less clear if that will still be true in a year or two, with the Democratic majority in Congress having to share the problems associated with that particular mess and the blame for whichever bad outcomes they support—no good outcomes being available. And there is the argument that someone with a record of support for the war is best placed to get us out of it, as Nixon was best positioned to abandon U.S. hostility to communist China.

One minor objection that might be raised to Lieberman's nomination is that he is not, at the moment, a Democrat. The obvious response is that that was not his choice; it was the Democrats who rejected Lieberman in the primaries, not Lieberman who rejected them. If the party now wishes to kiss and make up, there is no reason he should object. And they are, after all, currently counting on him to provide the crucial vote required to maintain their status as the majority party in the senate.

Which raises another and still more interesting, if even less probable, scenario. The Democrats are not the only party in search of a presidential candidate.

But I don't think I will explore that one today.