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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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    01/15/2011

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    To be snarky, it is neither it is a religion.

    But to read the rest of your post I see some substantial biases. First, it is far too concerned with consumption and to little with production. You are not unique in this, it is a bias in economics since the earliest days. One of the most substantive criticisms of economics, is the lack of real (as against suppositional) productive function research. Demand curves are also suppositional, but we have actually much more evidence about them. But supply issues matter (not the least of those is the resouce cost - especially over the longer term).

    Economics needs serious reform, and many well regarded economics are anything but scientific. Please, don't deny that, it puts you on the wrong side of reality.

    But yes, Brooks is an idiot. Feel free to ignore him.

    A great deal of biology, for instance, is not mathematical. That does not make it unscientific. By "art," Brooks seems to mean the production of narratives--histories. The mathematics of economics is still far short of what is needed, but to abandon the idea that anything can be measured at all in the field is to abandon economics as a critical tool. Are we then to return to the economics of the 19th century, when the powerful chose the economic narratives based on their power, to excuse their abuses? (And why is economics only the concern of the wealthy?) The rich, cruel, and powerful, and sometimes also the poor, scared, and greedy (e.g. tea partiers) badly want economics to go away, because it unsettles their moral certitudes. People like Brooks don't want their privilege and prejudices questioned. And Brooks, yet again, is here a voice for the rich, cruel, and powerful. Has he no shame? But the answer, apparently, is no. It is very hard to shame the privileged.


    I can't speak for Brooks. I can see a place for the maths - it is, after all, a routine tool in ecology, history and other social disciplines.

    BUT - to take your own argument, why assume "utility" is a property of individuals? And that it can be "summed". Why assume allocations reflect marginal revenue product? When we look around, we see issues at the level of individuals, small groups (families), large, structured groups (companies), and very large groups, and lots of behaviour that only makes sense if interpreted at the appropriate level. We see intricate, long-lasting structures that allocate rewards and shape individual's life-paths (and are shaped by them). We see brains that are literally formed by constant interaction with others, and so reflect multiple group pasts and priorities.

    Incorporating these realities would make economics much less certain, in the sense of less calculable.

    Your first point illustrates this. I am not sure who misunderstood "maximising societal health". Does it make sense to see health as an external property - which the healthy "produce" or as a state? In what sense can the very "healthy" persons "health" be weighed against the health of say 50 others? I suspect the doctors had a very different idea of health in mind.

    Your idea of economics isn't at all conducive to our continued survival as a species. It forces unnatural conditions on natural systems thereby completely distorting the true value of EVERYTHING. Money poisons absolutely. What it wants is not what we need.

    What I would be inclined to say, first, to the fatuous David Brooks, is that Economics is not, properly, a study of human nature, or even human society, but, rather, a study of a human, social problem: the economic problem of reconciling individual, material needs, wants and desires, with the organization of production to satisfy those material needs, wants and desires.

    Because it is about a material, instrumental problem, it is perfectly appropriate for Economics to emphasize and, indeed, prescribe rationality in trying to solve that problem, or judge proposed solutions to that problem, by a rational, material, and even objectively measurable standard.

    As to the math, I'm sorry to say that I have known many Economists, who knew much more of the math, than of the economics.

    If you had honestly explained the Economic theory of production to the bio-ethicists, I suspect that they would have laughed at you. You would have been like the economist in the joke about the physicist, engineer and economist shipwrecked on a desert island with only a crate of canned goods and no way to open the cans. The physicist proposed building a fire, and heating the cans till they exploded; the engineer proposed rigging ropes and pulleys in a high palm tree, and lifting the cans to the top, and then dropping them from there to a rock below, in the hope they would break open upon impact. The economist considering their proposals, thoughtfully interjected: "no, no, you've got it all wrong. The way to think about this problem is this: First, we assume a can opener . . ."

    That's the essence of the economic theory of production, the theory that output is a (mathematical) function of inputs. When you reason about re-allocating resources to improve health outcomes, that's the analysis you are using.

    Of course, a minute or two of critical thought would lead to the insight that output is NOT a function of inputs. Economic theory gets past that little logical difficulty by assuming a can opener, that is by positing that "maximum" output is a function of inputs. By simply assuming that output is maximized, Economics sweeps aside as already solved all the problems of management, organization, engineering, technology. By doing so, Economics allows itself to ignore the technical and managerial challenges of organizing production, to focus itself exclusively on the problem of *allocative* efficiency. If those other sticky problems have been solved, and output is maximized, than the economic problem resolves itself to a problem of allocating inputs. Which is, of course, exactly the terms in which you addressed the problem of "maximizing societal health" -- you talked about re-allocating resources (inputs) among those already producing health, to change output. [As an aside, what Peter T said]

    If you had clarified that your frame required assuming that all the technical and managerial problems of medicine and public health were solved, so that existing productive structures were "maximizing" output in a technical sense, in order to reduce the problem to one of allocative efficiency, I dare speculate that your bio-ethicists might have been less than impressed.

    Contra David Brooks, I think Economists, in focusing on the economic problem, have good reasons to avoid the deeper muck of human nature. I am more skeptical of the neoclassical decision to parse the economic problem further, to arrive at only a consideration of allocative efficiency. You don't recover from the entailed disabilities, by later allowing that things are complex.

    The truth is that business men and engineers and medical doctors do not spend much of their days considering how to "allocate resources" in isolation from the daily struggle to solve the managerial and technical problems of production. Their common sense idea of efficiency is mostly a matter of administrative or technical efficiency, not the allocative efficiency of the Economist. In the abstract, it is a matter of bringing a production process under control, in the cybernetic sense, and reducing waste and error from there. If they are "allocating resources" at all, it is likely to be whether to make a specific sunk cost investment in reducing (future unit) costs of output. The businessman isn't going to be worried about Pareto optimality in making such an investment (or allocation); he's going to be worried about finding a business model that allows him to recover that sunk cost investment -- something the alert Economist probably knows cannot be done "in perfect competition", and therefore judges should not be done.

    Much of the real functioning of the economic world is hidden by this neoclassical parsing down to allocative efficiency. If output is already maximized, in a technical and managerial sense -- that's all settled business -- then marginal product is fully and uniquely determined. But, if we live in a world of genuine uncertainty, where technical and managerial problems are only partially and imperfectly solved, we might argue that each factor will still be paid its "marginal product", but that "marginal product" will not be uniquely determined. Rather than the marginal product determining the wage, the wage may well determine the marginal product -- and, we're in the somewhat topsy-turvy world of the efficiency wage!

    If the neoclassical delusions of, say, Clark, that marginal product is just, get blown up, it will be none too soon, imho.

    The fault is in the math, in the unsustainable (and under assumptions of genuine uncertainty, practically undefinable) assumption that technical efficiency is "maximized". What should have been a handy way to analytically distinguish allocative efficiency from managerial or technical efficiency was adopted as a crutch, and, then, became a handicap.

    Robert H. Nelson, Economics as Religion (2001)

    http://www.psupress.org/books/titles/0-271-02095-4.html

    Brooks is not entirely wrong about the current state of economics and some of the causes, but he really misses the biggest points of all. One of the best ways of dealing with uncertainty is to pay careful attention to the certainties and just be mindful of the uncertainties and maybe even a little theoretical over-reach is fine, but never ignore the certain.

    What on earth ever even made anyone think that a sustainable economic recovery could be built on a real estate asset bubble financed by loose credit. That was simply insane. Whe I took out an equity line of credit in 2004, I could have taken a fixed rate, but I chose a variable rate at prime plus zero, because I knew the bubble would burst and how the Federal Reserve would need to respond. I did not know about credit default swaps until 2006, but I saw the conventional loan rate increases lag over a year behind the Fed Rate increases that started in mid-year 2004 and knew something was hinky. That was just too much CDO/MBS originating outside of Fannie and Freddie, but it gave me clue as to why Fed Rates and prime rate did continue to rise on the back of a faux recovery through 2006. I figured out all of that just by watching basic information available to anyone and using a little common sense fundamental economic wisdom. I am only a high school graduate. Shouldn't a PhD economist be able to do at least that well?

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