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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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    09/08/2010

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    This is a splendid take on the issue. Posts like this are enough to justify the existence of the entire blogosphere. Thanks.

    Both Reinhardt's analysis, the above, and the works quoted therein all suffer one fundamental flaw, that there is no empirical basis to believe they accurately capture the world they purport to describe; and further, that they provide no empirically verifiable method to predict future outcomes with certainty. They are abstractions, models, purporting to describe conditions that are themselves in some cases abstractions, or incomplete or at best so difficult to pin down that the error rate would be equivalent to a random guess.

    You try to overcome this by giving one specific example in which you provide less than a handful of characteristics for two hypothetical people who are ostensibly opposite. But one can modify them or supply any number of additional characteristics and muddy the clarity you derive; if you are trying to depict the world with intellectual honesty, which is the implicit claim of Reinhardt's and your critique, you can't limit the range of data points to the ones you most like. Even more important, there are an incomprehensibly large number of possible other juxtapositions of a person A and a person B at any point in time, let alone over any period of time. However well intended, these claims are all simplistic and arbitrary abstractions of a world that is too large and diverse to be captured that way. Not to say that the assertions Reinhardt critiqued are any better.

    Then to take that foundation of really nothing empirically verifiable, and assert that it can predict and, if implemented, generate future outcomes that can be assessed accurately in advance simply replicates the problem.

    There is nothing here that can be shown to be comprehensively representationally accurate; all the purported representations of the world are abstract postulates in disguise.

    This mostly concerns your discussion of Point D earlier in the post.

    I recently have a bit about the idea of the social markets vs. financial markets. I don't think that traditional Pareto efficient outcome is entirely broken, but that we are just not considering the utility gained from transactions from social markets. A great deal more utility is gained at virtually no cost from interactions in social markets.

    Noone in reality is at point D. On the x-axis A is indeed where they are due to a lack of nutrition, health problems etc. However, person B is equally as unhappy because they are only dealing with the utlity that they can gain from the financial markets, leaving the social markets, which have a greater return on happiness to the wayside. As a result they are hanging out near the origin too, despite their wealth, and efficiency is not close to being achieved.

    The only way that a Pareto efficient outcome could occur is if person B were to investing in social capital too, possibly even by just giving some of their financial wealth to person A as a good deed.

    It's not that the curve is broken its that we are just limiting what is examined to what happens with the wallet. Human utility is far more than that.

    h_lina_k, You've described jointly produced social capital as part of the utility production process. Presumably up to some point its joint production would make both A and B better off, which means that the shape of the curve would have to be more like that in the second diagram rather than like that in the first. In other words, the shape of the first curve does not accurately capture the way in which utility/happiness is produced, which was my basic point.

    Thanks so much for your thoughtful comment (and thanks to mark and guillaumee for theirs as well).

    Maxine

    My first thought is that this is economics trying to re-invent a philosophy/sociology wheel - and coming up with something square. But snark aside:

    - the approach takes individualism for granted - which then makes "altruism" problematic. If you think "sociality" instead - that humans require other humans to develop and to function - the problem disappears (this was Aristotle's starting assumption, and it better accords with the empirical evidence).

    - you might also want to think outside the exchange/compensation frame. Old joke - rich person gives to local poor in an attempt to limit theft. They steal anyway, but leave him a note - "we don't want your bloody charity". If the rich "compensate" the poor, who has the upper hand? Is this "giving each his due" (Socrates definition of justice)?

    Happiness is, in large part, being in a socio-economic role which fits one's talents, and which accords with one's own - and others' - sense of relative worth. This does not imply equality of outcome, and focuses on the roles available as much as one the people.

    Peter, More like an effort to return us to our moral philosophy roots. :-)

    I don't think there is anything in the above (or in Rawls) that implies equality of outcome or of resources or of happiness.

    Thanks so much for your thoughtful comment.

    You lost me with that graph of A's happiness vs. B's happiness. The curve is so obviously and completely wrong that any argument from it has to be nonsense. If you consider the simple, and surprisingly common, case in which A is male and B is female, you'll find that this curve is not going to produce A' or B', any offspring limiting the term of applicabiity. If A is a store keeper and B is a customer, there is no incentive for A to sell or B to buy which puts serious limits on commerce.

    I suppose if I read more of this post I might have discovered that this graph was just a parody, but it was too much for me right there in the beginning, sort of like a discussion on hydropower with a big diagram showing water running uphill.

    I think even if we decide that the Utility of A and B are unmeasureable, a few simple heuristics will show that redistribution from a very unequal outcome will increase total utility. (Mostly
    1. Marginal Utility is a decreasing function of income
    2. A and B have roughly comparible utilities at equal levels of income.)

    So we can say with near certainty, that redistributing a marginal dollar from Bill Gates to a beggar will increase total utility.

    Avoiding any comparison at all, is an extreme right wing tactic in order to combat redistribution.

    But I wonder if maximising utility makes sense anyway, morally. The problem is that there are unrepresented parties (the future).

    The real issue here, as I see it, is the extent to which simple financial incentives influence the TECHNICAL efficiency of production. Really that is the only justification for inequality at all. Exchange (and agency facilitating such exchange) is its own incentive.

    And economists really ought to stop being so exclusively obsessed with efficiency of production and start worrying more about efficiency of consumption. Ferrari's are a very inefficient way of using metal, rubber and benzine to get rid of feckless heirs and heiresses.

    The comments to this entry are closed.

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