The visible hand in economics

Archive for the ‘Philosophy’ Category

I sometimes get asked why economists spend so much time thinking about incentives in situations which the government regulates anyway. Why do we care about what firms want to do when there’s only one course of action legally available to them? Here’s one reason why we care: the economy might operate in a far more laissez-faire fashion than a reading of the law would lead us to believe. Read the rest of this entry »


Over at Econlog Bryan Caplan asks a good question – he asks why economists who often rail against the free market will also often state that they strongly support civil liberties. Fundamentally he is asking, why do these people not support freedom to trade but do support freedom of expression.

Now I agree with Dr Caplan that economists should use the same tools to discuss civil issues as they do trade issues – any limits on civil liberties should be the result of externalities, asymmetric information on the value or relevance of ideas, or the undue power of an idea which in turn reduces social welfare (in the same way that in trade, people will rally against externalities, asymmetric information, and undue market power).

However, this does not suddenly imply that I am a stanch supporter of a completely free market – in the same way that I am not a stanch support of blanket calls to remove regulations that reduce civil liberties. Ultimately, in both cases there are trade-offs, and our ultimate goal is to maximise social welfare.

Lets discuss the “social-democrat economist’s bias” a bit more below the flap:

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Philosophy et certa links to an interesting paper by Richard Sharvy titled “Who’s to say what’s right or wrong?  People who have PHDs in philosophy, that’s who”.

At some level this makes sense – philosophers (can) specialise in the study of ethics and morality, and as a result of this training they will have a better idea of what is “right or wrong”, and why it is so, then other people.  My impression of “rightness” and “wrongness” is that it is subjective – deciding what is wrong involves making moral judgments.

As a result, if we accept this, then when forming policy it is Philosophers that should be the ones forming the subjective value judgments required to qualify what the appropriate policy is.

The job of economists is to describe – we have to objectively describe what happens to a bunch of variables in society when one of them is moved.  However, if Philosophers are the experts when in comes to value judgments – they should be the ones that place a values on different variables, so when the economists model moves it can come to some sort of conclusion.

What do you guys think?  How do other disciplines fit into the policy creation process?

Over at Econlog they mention a uncomfortable question that is asked at Instapundit:

If somebody offered us our current income tax system for the first time, would we buy it?

Now when we have defended progressive taxes on this blog we have often assumed that it is a revealed preference for society – in fact this is a favored measure we have for actually revealing (to some degree) what is optimal (here, here, can’t actually find any of the tax posts 🙂 ).

How could this work? How could we have a system that is not optimal.
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My favourite quote by Rousseau is the title of this post “men are born free, but everywhere they are in chains.

When I was a young boy of 16 I interpreted this with predetermined judgments, namely freedom is good and chains are bad. As a result my feeling was that I should try to break these “chains” and rediscover the freedom I was born with.

In this quote it seemed implicit that chains where the restrictions place on us by society (rather than the physical restrictions in nature – if we included these then freedom truly would be an illusion), while freedom was the absence of these chains.

However, as I grew older I came to realise that not all “chains” are bad and “freedom” in this sense (the absense of chains) may not be good. Read the rest of this entry »

One of the major questions I face when discussing economics is:

Why do we feel that prices are the appropriate measure for illustrating the value someone receives from a product?

Now I only have a limited understanding of welfare economics, but I am going to attempt to discuss the issue anyway 😉 . If anyone more knowledgeable would like to correct me I would be happy to hear from them.

In a micro sense this idea could be criticised insofar as one person may have a lower “willingness to pay” for a product which may stem from having a higher opportunity cost (as they have a lower wealth level then other people) rather than truly receiving less value from the consumption of the good/service. If this is the case we may feel that we should re-distribute the resource from the wealth to the poor in order to increase the level of aggregate welfare.

Now accepting this relative ranking of preferences and the given endowment in the market this could be a suboptimal situation in terms of welfare. After all, we know that the poor person values both of these goods more than the wealthy person (assuming no linkages between them) so “total satisfaction” in society will be maximized by this implicit “redistribution” resources. However, this does not make the price mechanism pointless, let me attempt to explain.

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at LAANTA has replied to my reply on his post on the problems with utilitarianism.

In this reply he states two issues that he sees with my view of utilitarianism, namely:

  1. The assumption that utilitarianism doesn’t involve assumptions between what is right and wrong is plainly false,
  2. Justice and efficiency concerns are incomparable because one is non-consequential and the other is consequential.

I plan to reply to the reply of the reply under the flap 😛

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Over at the very good blog Long ago and not true anyway,

Utilitarianism leaves no place for justice at a philosophical level … (in utilitarianism) justice is there simply because it helps make us all better off; not because it is right to put wrongs to right

Given that the economic method is fundamentally utilitarian I feel that I have to say a little about this.

Read the rest of this entry »

Here I am going to discuss an issue that is way over my head – but is extremely important for the practical application of economic concepts. I am going to discuss how changes in economic policies can influence social structure.

I decided that I would attempt to write about this after reading this post. In the post the daily dissident laments the collapse of community and the movement in consumerism and its impact on individuals.

The first argument against this view is the idea of individual freedom – individuals have the right to make their own choices, and the frame of communal society alienates that right. However, it is possible to look at the idea of community while providing individuals with rights.

The most basic way to frame this problem initially is as a prisoners dilemma. Read the rest of this entry »

Many critics of economics accuse it of being an amoral pursuit. Conversely, many economists praise the amoral nature of their discipline. It is easy to think that there must be more to this argument than whether economics is morally ‘good’ or not. After all, that seems like an awfully circular and pointless argument. One might ask what characteristics people value that they feel economics lacks. How do people weigh up the characteristics that they throw in a basket termed ‘morals’? Robin Hanson suggests that perhaps, ironically, economists have many of the tools to help them weigh such factors:

Economic analysis tries to infer what people want, largely from actions, and then tries to suggest policies to get people more of what they want… Critics, however, say economic analysis is untrustworthy because it is incomplete, since wants are only one of many moral considerations. But this complaint seems to me backwards… After all, morality is only one of the many ends we pursue. Yes we want to be moral, but we also want other things, and we each choose as if we often care about those other things more than morality.

Read the rest of this entry »

Oliver Woods has used Matt’s post on the trade off between equity and efficiency to launch an attack on the separation between normative and positive economics. Matt’s busy with real economics today so it falls to me to defend his honour. Oliver claims that

…any ‘rational’ observer would see that economics and politics/society/morality are fundamentally intertwined. They’re really more or less the same thing…

There’s a very good reason why economics and politics are entirely different beasts: economists can be right (or wrong), but politicians can never be right. Read the rest of this entry »

As much as I hate link farmers, I can’t help reposting this great paragraph from the Positive Economist. It just ties in so well to the recent discussion on this blog about rationality and behavioural economics!

Behavioral economics is possibly the least revolutionary revolution ever to hit an academic discipline, because, as Scheiber is alluding to, the behavioral school is absolutely not changing or abandoning the methodology of economics. As I’ve noted before, the “perfectly rational” economic man can happily do whatever the behavioralists want him to do to be more “realistic”; it’s therefore not necessary to come up with a whole new way of modeling people.

Instead the behavioral school is writing down models of “perfectly rational, utterly self interested maximizers” who act in accordance with the behavioral evidence. That is, writing rationalization of the “irrationality” we observe. Contrast this with the traditional criticism of economic man, which is to throw up ones hands and loudly reject the whole idea of trying to predict what people will do. I prefer the behavioral way.

Yeah, what he said 🙂

Over at NZQuest, Oliver Woods claims that economics

…works around perfect conditions and universal application of models and theories developed many years ago to any economic problem, believing history, society and all sorts of other factors undermine the ‘homo economicus’, or the supposedly rational profit-driven man who thinks entirely in his own self-interest and only helps others when they can help him.

As Matt has previously addressed there is a huge difference between positive statements and normative judgments. Woods is confusing the judgments he attributes to economists with positive statements of economics. Read the rest of this entry »

Reading the titles of the last two posts (the birth rate vs the growth rate and growth forecasts and government) I realised that neither rauparaha or myself defined what ‘growth’ we were talking about. Like all economists, we took ‘Growth’ to be synonymous with growth in gross domestic product.

Could this possibly imply that economists such as rauparaha and myself have an inherent bias when discussing normative statements about welfare that points us towards pro economic growth policies – even when there is a hefty trade off in other social values. Do economists focus too strongly on technical and allocative efficiency without taking social efficiency and equity into account?
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One thing that gets to me is the fact that people from both sides of the political spectrum love to avoid costs. As economists pride themselves in discussing the opportunity cost associated with any given policy or action, we end up being attacked by both sides (Update:  Including psychologists it seems.  Dang I thought they were the one social science that understood us 😦 )

However, the way both sides attack economists is different, equally irritating but different.

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