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    Maxine's Essays

    • 21st Century Regress
      Sometimes it seems like the world is going to hell and there's absolutely nothing a girl economist can do about it.
    • What Exactly Are We Crowding Out?
      The current economic downturn isn't a random draw of a black ball from an urn containing white balls and black balls. There's no sampling distribution. Very specific policies and actions landed us here. Now we must decide not only what policies need to be put in place to prevent it happening again, but also what policies would best drive us out of the ditch faster and sustainably.
    • I Wish It Were Only Butter
      We should be giving up some butter if we must. We should not give up education or health investment (or infrastructure or the environment (hello, BP). They may be the only legacies of any value that we pass on to our children and grandchildren.
    • Rational Health Investment?
      The obvious "market solution" is to improve the long run return on investments in health among the disadvantaged through meaningful and effective publicly funded education. The obvious short run "market solution" is to reduce the costs of investment and the shadow price of health for the disadvantaged by providing health insurance cover and reduced out-of-pocket costs.
    • The Socrates Parameter
      To the extent that our limbic systems respond to such engineering by over-riding the judgment of our frontal lobe and to the extent that our frontal lobe is deprived of the information it requires to make a rationally self-interested judgment, we are not only pigs and fools, we are slaves.
    • The Economic Rewards of Virtue
      If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max.
    • The Market for Morals
      Markets then are places where more is exchanged than goods and services, labor and product, credit, and interest. They are places where we also develop the personal virtues of temperance and prudence and the social virtues of benevolence and justice. When they function well, they produce trust, loyalty, and sympathy among those who trade there.
    • Post-Modern Applied Economics: It’s the Error Term, Stupid
      Maxine believes it’s time to refocus attention and discussion on the error term. It is often where much of the action is in our models. It is where unexpectedly catastrophic events dwell resulting in fat tails. It is where our animal spirits manifest and cause us to do the right thing or the wrong thing or the thing everyone else is doing rather than the self-interested, fully-informed rational thing. It is where God and miracles and chance dwell.
    • Intergenerational Win-Win: Health Insurance, Education, Environment, Infrastructure
      So when we’re talking about fiscal stimulus packages and we’re borrowing from our grandchildren to finance them, we should be thinking about how to use stimulus monies to create value for those grandchildren AND stimulate our economy.
    • Short-term Private Payoffs, Long-term Social Costs
      The real health reform discussion, the one we should be having, is “What must we do to create a health system that is both efficient and fair?” The answer will almost certainly include relegating the private sector to markets where market forces or regulation are effective at aligning short-term private incentives and goals with long-term societal interests. If such markets are scarce or non-existent in health, then the private health sector will be of limited value.
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    05/01/2010

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    Feed You can follow this conversation by subscribing to the comment feed for this post.

    I usually ask before reposting things, and I should have asked you, but I I hadn't posted anything for awhile, got in a hurry, and forgot.

    I was going to offer to cut it down if you'd rather not have the post echoed, or even remove it altogether, but now I can't seem to find an email.

    Anyway, apologies for not checking first.

    Somehow it seems to me this has gotten turned around.

    The defining characteristic of the “pig satisfied” is that his intellect is circumscribed; he is content because his imagination cannot reach beyond his circumstances. The human being dissatisfied is not better off because she cannot achieve the same pleasures as the pig, which indeed she can (and in which, at times, she may choose to indulge); but because she can envision far greater pleasures, many of which will forever elude her grasp.

    When you write, “All policy solutions aimed at remedying or minimizing the divergence of preferences from utility will necessarily involve ‘paternalism’ to a greater or lesser extent,” I’m left with a picture that reminds me of the pigs much more than the human beings. Wise people will educate, regulate and “nudge” us until our “preferences” (what the ordinary person foolishly thinks is valuable) are aligned with “utility” (what the wise have determined is truly valuable).

    I’m not at all convinced this utility/preferences dichotomy represents anything of significance, except perhaps a (possibly unwitting) Trojan horse within which to hide a nasty form of elitism.

    In contrast to my previous comment, let me offer an example of something I think is relevant.

    Suppose Burger King creates and airs a television commercial which I, like many other people, see; and suppose, as a result, I have a craving for a Whopper, which leads me to walk down the street to the nearest Burger King and buy one.

    Did I satisfy a preference or maximize utility? Who cares? Certainly, once the commercial led me to prefer walking down the street, purchasing and having a Whopper to sitting in front of the TV without a Whopper, the Whopper gained some new utility (or my current state had more dis-utility, if you prefer).

    But what about the overall picture? Burger King used scarce resources (the labor of the people who wrote and made the commercial and the air time to present it) to raise aggregate demand for still more scarce resources (Whoppers). In what sense is this possibly “efficient” or a system-wide good (or even neutral) thing?

    Note that this doesn’t depend on any judgement as to whether a Whopper is “good for you”; it simply notes that it is in some actors’ best interests to consume scarce goods (and hence incur an opportunity cost) solely to create a demand for more scarce goods (rather than to satisfy any of people’s many existing needs and wants, which might or might not be represented as demand).

    Isn’t that practically the definition of “moral hazard”? Yet no one seems to think much about the absurdity of a system the structure of which encourages, and the day-to-day operation of which depends upon, manufacturing demand while needs and wants that require no synthesis go unfulfilled.

    I suggest this as just one example of the network of perverse incentives that support our modern economic systems. Like the bankers and analysts who thought nothing of the mess they were making because it was a commonplace — the rest of us recognize CDOs and CDSs and what have you as absurdities only because they are novel to us, so we see them in light of what we now know happened — advertising doesn’t appear absurd to us because we are used to it. Step back a moment and it’s a bizarre thing to which to devote a major sector of the economy. I’m pretty sure that by itself it could overthrow just about any attempt to describe the economy as “maximizing utility.”

    "If individual virtue tempers our "piggy" desires and conditions our choices to something that is both individually and socially better, then the economic rewards of virtue as embodied in and promoted by societal norms and institutions are far greater than we have ever suspected. As economists, we would do well to recognize this when we teach U max."

    Who is the "we" here? Western consumers? Is this about a particular population, or are you talking about humanity as a whole?

    This is a bit confused. Mill claims that there is a way to rank actions according to normative criteria--that the best action is the action that maximizes pleasure. Preference satisfaction utilitarians also claim that we can rank actions on normative grounds--the best action is the action that maximizes preference satisfaction. The difference is that for utilitarians like Mill, utility refers to an objective state of the world independent of our preferences rather than what we happen to prefer(the pig and Socrates bit is actually about the how to compare pleasure across different beings--not utility v. preferences). For example, we often prefer to know the truth about whether our spouse is faithful, even when knowing it will bring us unhappiness.

    The assumption that is made by economists is that (at least in large groups), people tend to perform actions that maximize their utility--however it is defined. Thus, it is not correct that the problematic assumption is whether preferences map onto utility. Rather, it is whether actions map onto preference satisfaction or pleasure.

    There is another issue as well. The claim that humans are rational actors doesn't mean that they will do the actions that will maximize pleasure/preference satisfaction for everyone. Rather, it only means that they will do the action that will maximize their own pleasure/preference satisfaction. While free market economists are historically most associated with this claim, there is no reason in principle why they should be the only ones to do so. It is obviously possible that you might think that people acting as rational actors can lead to states of affairs that do not maximize total utility.

    The comments to this entry are closed.

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