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May 25, 2008

Comments

Robert Sharp

Part of the problem with the neo-liberal approach is simply a very narrow definition of what 'rational' means, i.e. a cost benefit analysis of every decision we make. Except for perhaps purchasing a financial product, this is actually very hard to do, and much harder for the non-economist. So its actually very sensible and rational for people to use less accurate methods to make their decisions - Rule of Thumb, and social norms, for example.

John A

Informational social influence is pretty important, at least at the margins. After all, a marketing campaign aided by churnalism in the newspapers sells one heck of a lot of Omega 3 pills (which Ben Goldacre's blog has completely torn apart).

Hearing the same message over and over does lead to you internalising it eventually, probably for sound 'economic' reasons (i.e. if everyone else seems to agree on something it's usually not worth calculating it independently yourself). Smoking hasn't been ended as a phenomenon, but attitudes have certainly been changed towards it in recent years, partially by well-marketed anti-smoking campaigns.

Tim Worstall

"Why is it that the economic paradigm doesn’t inform public health policy?"

Because the people running public health policy don't believe the economic paradigm?

Matt

Politicians do get information, but their transactions occur every two years, so we really do not see politicians rotate in and out of office fast enough to alter the aggregate intelligence of the group.

Information changes faster than they can lose elections.

kinglear

Firstly, as a Scot, I object to "Scotchman" being used in the article above. OK I know it MIGHT be a play on words sort of (Scotch=drink ) but really.
Secondly, despite what you say, politicians are incapable of doing things that are good unless they are liable to get booted out of office if they don't.Suggesting that informing people will change their habits is pure drivel - its like badly behave youths. If they got a hammering they soon wouldn't bother to be badly behaved. Give them a good talking to and they will slink away with their tails between their legs. Er, no. They will stick a knife in you.
And the number of MPs who actually understand economics and markets can probably be counted on one hand

dearieme

As a Scot, I do not object to "Scotchman" being used in the article above; I recognise it as the classical Southerner's variant of the word Scotsman, and I refuse to take umbrage at what is, I assume, a mere schoolteachers' shibboleth indoctrinated into the heads of innocent wee bairns. Carry on, Dillowbert. There's a sight too much bloody offence-taking nowadays.

Dipper

Tim W is right. This lot have no political philosophy other than they know what's best. There is no area free of their crass meddling, all of which fails because their basic model of the working class is a bunch of dimwits incapable of doing anything without a nice middle-class person leaning over their shoulder.

Teenage pregnancy is a great example. The government policy is based round the notion that teenage girls are falling pregnant out of ignorance. In fact, many teenage girls are deliberately getting pregnant because they are making rational decisions based on the expected outcomes, part of which is a goernment provided flat.

Bob B

"Because the people running public health policy don't believe the economic paradigm?"

For illumination, try the Guardian profile of the Chief Executive of the NHS:

"David Nicholson, the new chief executive of the NHS in England, took up the reins of office last week [September 2006] and set about dispelling the notion that he might provide the service with a period of consolidation and calm.

"When his appointment was announced seven weeks ago, there was a huge sense of relief among managers and clinicians that the job had gone to a person steeped in NHS values. People seemed to think that he was somehow less threatening than the two American managers on the final shortlist, who might have been expected to further commercialise healthcare delivery.

"But, in his first interview as chief executive, he has told Society Guardian that it is his NHS pedigree that has made him determined to push through reforms even faster than before. He thinks that up to 60 hospital trusts may need help to survive the pressures of change, as they lose work to primary care services operating in the community - and to specialist tertiary hospitals where the harder cases will be treated. In some cases they may have to be taken over by stronger neighbours with the management muscle to carry through the necessary changes.

"And NHS trusts in England, both weak and strong, will have to come to terms with a reconfiguration of key services that will reduce the number of hospitals offering a full A&E department, paediatrics and maternity services. . .

"Nicholson has been with the NHS for 29 years. He joined as a graduate trainee in the same year he joined the Communist party, which he then saw as the best vehicle to take forward his passionate support for the anti-apartheid struggle. He says he was not a Eurocommunist: he was among the Tankies who did not see an ideological need to distance themselves from Moscow. . . "
http://society.guardian.co.uk/interview/story/0,,1870627,00.html

Shuggy

It's *Scotsmen*, as pointed out above. Thing is, this is the second post under which this has been pointed out to you, yet you ignore it. Either you don't bother to read your own comments or you're deliberately trying to antagonise us Scotchmen - you sassenach twat.

tom s.

Chris D asks "Why is it that the economic paradigm doesn’t inform public health policy?"
And Tim W answers "Because the people running public health policy don't believe the economic paradigm?"

Private industry does a bucketload more marketing than the health department. Are Adidas clueless? I don't think so. You might as well ask "Why is it that the economic paradigm doesn't inform private enterprise?"

The answer: "Because nobody actually involved in the economy believes the economic paradigm".

Bob B

In case there's too much misunderstanding on the part of business about the lawful implications of the "economic paradigm", our government is bringing into force a whole raft of new law to protect consumers:

"A new law aimed at protecting consumers against rogue traders comes into force in the UK on Monday. For the first time in UK law there will be a duty on all businesses not to trade unfairly. . . Some 31 specific practices will now be banned, and the law's wider duty not to trade unfairly should prevent the need for a new law to cover every new scam."
http://news.bbc.co.uk/1/hi/business/7416809.stm

Local authority trading standards offices will be facing challenging new tasks to enforce this legislation and there are concerns about whether there are enough trading standards officers to police the new law.

Btw if anyone here knows what happened to the £14 millions missing from the accounts of the South Yorkshire trading standards unit, there are some senior officials up there who would dearly like to know:
http://news.bbc.co.uk/1/hi/england/south_yorkshire/5149450.stm

neal

Not sure about this, surely rational ignorance (information gathering has costs, which can be lowered through marketing) is perfectly compatible with any 21st century view of neoclassical econ?

mind you, I lose track of what people mean by neoclassical sometimes.

(and I'm not trying to defend the nanny staters one bit, of course)

Blissex

«rational ignorance (information gathering has costs, which can be lowered through marketing) is perfectly compatible with any 21st century view of neoclassical econ?»

No, because with that the whole fantastic edifice of assumptions and theorems "proving" the central verity of neoclassical economy, that the distribution of income is solely and exactly function of productivity, collapses.

But then the central verity and neoclassical Economics itself have survived reswitching and the second best theorem by simply ignoring them, so I guess that in a larger sense you may be right.

dearieme

Bloody Hell, Shuggy, can 'sassenach twat' really be punctuated as two words? Ah haudna kent.

Bob B

Re: rational ignorance:

The mainstream economics literature has long made a distinction between "informative" and "persuasive" (? misleading) advertising - Perrier water got a big sales boost from advertising which just featured the slogan: Pssst.

However, the fundamental problem for the economic paradigm constructed on the premise of the rational consumer - as elaborated in, say, Hicks's Value and Capital - is well considered in this challenging Google lecture by Prof Barry Schwartz: The Paradox of Choice:
http://video.google.com/videoplay?docid=6127548813950043200

Btw it has long been noted that demand curves don't invariably slope down - which is why, besides the arcane case of Giffen goods, some restaurants, fashionable clubs and discos allow queues to develop rather than flex prices to clear their market.

Try (Nobel laureate and Chicago economist) Gary Becker: A Note on Resturant Pricing and Other Examples of Social Influence on Price (JPE 1991) and:
http://pages.stern.nyu.edu/~wgreene/entertainmentandmedia/Noteoninterdependentdemand.pdf

Or an annex in Oz Shy: Industrial Organization (MIT press, 1996).

And Harvey Leibenstein: Bandwagon, Snob and Veblin Effects in the Theory of Consumers' Demand (QJE 1950) - reprinted in Harvey Leibenstein: Beyond Economic Man - New Foundations for Microeconomics (Harvard UP, 1980)

Bob B

Re: "But then the central verity and neoclassical Economics itself have survived reswitching and the second best theorem by simply ignoring them, so I guess that in a larger sense you may be right."

In fact, neoclassical economics has not ignored the possibility of reswitching as is demonstrated by an extensive literature (to which Arrow and Samuelson made early contributions) on the possibility of capital projects having multiple internal rates of return, notably so in realistic cases where there are substantial terminal costs (and hence negative net revenues), as with decommissioning nuclear power stations and with environmental restoration work on closing down oil fields. Unfortunately, much of the literature on multiple internal rates of return is subject to conditional access but this is one accessible example:
http://fisher.osu.edu/~butler_267/DAPapers/WP030019.pdf

As for the welfare economics literature ignoring the problem of the second best, that too is untrue as reference to IMD Little: A Critique of Welfare Economics (OUP, 2nd. ed 1957) will readily show in the extensive discussion there of the compensation tests. In recent times, discussion on prescriptive pricing for, say, public sector projects when paretian conditions are not generally met elsewhere has tended to move to Ramsay Pricing models:
http://en.wikipedia.org/wiki/Ramsey_problem

tom s.

Bob B. - this always happens in this kind of debate. Critics say "[neo-classical] economists ignore market-failure X" and defenders respond with a list of papers demonstrating that [neo-classical] economists know all about market-failure X.

Too many economists want to have their cake and eat it. They do know all about X but dismiss it as minor, and in the end they Just Really Like Markets.

Dani Rodrik has a great post on this about at http://rodrik.typepad.com/dani_rodriks_weblog/2007/08/why-do-economis.html

Bob B

Tom:

C'mon. Even Adam Smith had hazy notions of market failure and a rationale for state intervention with this:

"The third and last duty of the sovereign or commonwealth is that of erecting and maintaining those public institutions and those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain."
Wealth of Nations (1776), Bk 5, Chp 1, Pt 3.

Marshall devised and discussed the term external (dis)economies although Pigou largely pioneered a systematic discussion of divergences between social and private costs and benefits with: The Economics of Welfare, which came out early last century. Since then the literature has burgeoned, especially since WW2. An early post-war survey paper on market failure by Francis Bator sets the scene and an analytical frame. At no time does the paper suggest the issues are insignificant:
http://instruct1.cit.cornell.edu/courses/econ335/out/bator_qje.pdf

IMO the best intro to the theory is Ralph Turvey: On Divergences between Social Cost and Private Cost (Economica 1963), which is reprinted in several places but is available online only via conditional access.

The practical spinoff from the theoretical work has been the vast literature on, and widespread application of, cost-benefit analysis:
http://en.wikipedia.org/wiki/Cost-benefit_analysis

In case anyone has the delusion that there is an inevitable ideological bias, Alan Walter, who was Mrs Thatcher's personal economic adviser, largely pioneered the under-pinning work for road pricing: Track Costs and Motor Taxation, Journal of Industrial Economics (1954), The Theory and Measurement of Private and Social Cost of Highway Congestion, Econometrica (1961), and The Economics of Road User Charges (John Hopkins University Press, 1969)
http://financecommission.dot.gov/Documents/Background%20Documents/Lindsey%20DoEconomists%20ROC%20on%20road%20pricing.pdf

kinglear

dearieme and other putative Scots.
PLEASE can we get this right.
You are a Scot, or Scottish, or a Scotsman ( or woman).
You are NOT a Scotchman - unless, as I tried to point out you drink Scotch ( a whisky, NOT whiskey which is Irish), in which case you are a Scotch-man.
How would the English like it if they were referred to as Englandmen? Mind you, they don't have a national drink ( except, I suppose, warm flat beer)and WE have a second National drink - Irn Bru ( Made in Scotland from Girders.)

Blissex

Bob. B.: But of course there have been economists that have done work on reswitching and the implications of the second best theorem. But I would not call them neoclassical: the distinguishing characteristic of those is that they believe in Arrow-Debreu-Lucas, and its consequences, in particular the central verity of neoclassical economics that the distribution of income is a mathematical consequence of productivity.

The problem is that reswitching and second best completely invalidate or make irrelevant the whole of neoclassical economics, and in particular the whole of the Arrow-Debreu-Lucas model, which is a (knowingly dishonest) joke.

Hey, even Greg Mankiw has published papers on sticky prices (the menu effect), but when it comes to policy he continues to support his arguments with trite lies based on Arrow-Debreu-Lucas like the Law of Demand and Supply and the employment-destroying effect of minimum wages and the distortionary effect of progressive taxation.

Sure, some neoclassical economists are in part intelligent people who don't believe their own propaganda, but when it matters, the inconvenient demolition of the core model of neoclassical economics and its relevance are astutely ignored and the usual knowing lies are peddled as gold.

Blissex

«"[neo-classical] economists ignore market-failure X" and defenders respond with a list of papers demonstrating that [neo-classical] economists know all about market-failure X.
Too many economists want to have their cake and eat it. They do know all about X but dismiss it as minor, and in the end they Just Really Like Markets.»

This is a wildly inaccurate misrepresentation. The argument about reswitching and second best theorem are not about minor market failures and minor impacts on the neoclassical results.

The argument about reswitching is that even without market failures, the neoclassical model is simply and completely wrong (as well as mathematically inconsistent) and no valid conclusions whatsoever can be derived from it.

The argument about the second best theorem is that even if the neoclassical model were not simply and completely wrong even given ideal conditions, any departure from ideal conditions, no matter how minor, makes the neoclassical model's conclusions completely inapplicable.

Both of these well known points are simply ignored by neoclassical economists because they would be career-limiting, and then they frame astutely the discussion in terms of "minor market failures" and you have fallen for it.

Blissex

«The argument about reswitching and second best theorem are not about minor market failures and minor impacts on the neoclassical results.»

To add to this: both reswitching and second best theorem are *neoclassical* results. That is, they are based on neoclassical assumptions and methods, including perfectly free markets, general equilibrium, no dynamics, ... (admittedly there is a slightly different flavour for reswitching).

Ironically, the true neoclassical economists, those who have derived the correct results from the neoclassical model, are those who don't pretend to ignore reswitching and the second best theorem, which are very solid neoclassical results.

Blissex

«"[neo-classical] economists ignore market-failure X" and defenders respond with a list of papers demonstrating that [neo-classical] economists know all about market-failure X.
Too many economists want to have their cake and eat it. They do know all about X but dismiss it as minor, and in the end they Just Really Like Markets.»

As another irony, the economics used by those who do make money out of markets is not all neoclassical: the sort of economics effectively taught in business schools is extremely anti-neoclassical and pragmatic, because it is based on the observation of irrationality, disequilibrium, dynamic movements, and how to profit from all that.

The fraudulent preachers from the Department of Economics are paid well for their tendentious homilies, while the even better paid guys next door from the Business School teach in their Marketing and Investing and Labour courses exactly the opposite; even more ironically much of Business School teaching is applied Leninism, with a bit of Marxism thrown in (of course not as seen from the point of view of the losers).

Bob B

I'm not inclined to leave an impression of being a last ditch defender of the neoclassical paradigm - indeed, some of its arch proponents, like the late Frank Hahn, were among its most effective (and best informed) critics. IMO the trouble with many attacks on the paradigm is that these originate from critics who evidently aren't any too familiar with the extent of the mainstream economics literature. OTOH John Sutton: Marshall's Tendencies - What can economists know? (MIT Press) is an engaging and fruitful critical assessment of the mainstream neoclassical economic model from a highly regarded practitioner of an alternative paradigm.

Rather than just junking the neoclassical paradigm completely and leaving economists with nothing to say about how markets function to allocate resources, it seems to me that a more productive line of attack comes from what is (rather misleadingly) termed: Industrial Organization theory:
http://en.wikipedia.org/wiki/Industrial_organization

The recommended reading in the Wikipedia entry is likely to prove somewhat daunting for any who come to the subject entirely fresh - for them, a better basic starting point is Luis Cabral: Introduction to Industrial Organization (MIT Press). The usual point of departure is with Cournot's duopoly model and Bertrand's critique of it.

Another illuminating tack comes from games theorists - starting with the extensive literature on the prisoners' dilemma.

Bob B

There are many real-world issues where the neoclassical paradigm has fundamental problems long before we get to arcane and essentially peripheral matters, such as the switching controversy and the second best problem.

I've already discussed several above here but, most curiously, those fundamental problems seldom feature in the issues raised by critics of the paradigm. Another, while I think on it, is the outcome of what is known as the Hawthorne experiments of the late 1920s through the 1930s of which is is a handy summary:
http://www.telelavoro.rassegna.it/fad/socorg03/l4/Elton%20Mayo-Hawthorne.htm

For starters, note there the significance of the work group in decisions about work practices which runs directly counter to the basic premise in the neoclassic paradigm of atomistic individual decisions.

Btw for John Sutton on his alternative paradigm, try here:
http://personal.lse.ac.uk/sutton/market_structure_theory_evidence.pdf

TomJ

I do wish the Scotch would get off their high horses on this one; the use of the term is obviously a fairly light-hearted dig at the affectation, dating from the 18 century, against the English word. If the word Scotch was good enough for Rabbie Burns ("The appelation of a Scotch Bard, is by far my highest pride; to continue to deserve it is my most exalted ambition" - http://www.robertburns.org/encyclopedia/NationalBardScotlands.676.shtml ; "Apropos, is not the Scotch phrase Auld lang syne exceedingly expressive? There is an old song and tune which has often thrilled through my soul. You know I am an enthusiast in old Scotch songs" - http://www.robertburns.org/encyclopedia/AuldLangSyne.5.shtml ), is it not good enough for the rest of us?

dkg-I need a graduate job

I'm a believer in the Economics theory that says that "people are - at least in matters that are important to them - as rational and well-informed as they need to be. They know excess drinking has costs;...They get bladdered because they believe the benefits of doing so outweigh these costs. Even addicts make this trade-off. If you want people to drink less, therefore, you should either raise the costs of doing so or somehow reduce the benefits."

If you believe that we are the makers of our own destiny, and we are responsible for our actions, then the Economic factor is paramount. I think that a lack of accountabiliy is the number one reason that we would rather believe in "The marketing approach." This approach allows us to do what we do best...blame the other guy. I have been looking hard for a decent graduate trainee position that will allow me to make a decent income whilst gaining some experience, because the task hasn't been easy, it would be better for my mentality to blame my substandard education (some people think US education is such in the grand scheme of things) or to blame the lack of help from the graduate career center. However, if I take responsibility I will automatically try harder as I don't want to be a disappointment to myself.
Enoung of my ranting, Economic over Marketing approach, anyday.

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