Category: Economics
Self-Deception Explain Lying Ease?
A July 30 New Scientist article (sub. rec.) on lying reports:
A succession of studies using tests like this have shown that most of us are not very good at spotting if someone is lying. Even people whose job it is to detect deception – police officers, FBI agents, therapists, judges, customs officers, and so on – perform, on average, little better than if they had taken a guess. … But a few people seem to be the exceptions that prove the rule. … In a range of studies that totalled about 14,000 people, … The researchers identified 29 “wizards” of deception detection, who are now the subject of intensive study … One of the studies, published last year, investigated women’s skills at detecting men who were pretending to have appealing attributes … a man claiming he owned the Ferrari outside, rather than admitting he had borrowed it from a friend for the night. … single women seemed to be better at detecting men who were faking good than those who were in a committed relationship. “Women have a kind of radar for deception in men, which they switch on or off, depending on the context.”
So sometimes we are bad at detecting lies because that serves our interests. Tyler taught me the centrality of self-deception in human affairs, and so I wonder: could our need to be good at believing lies explain why we are surprisingly bad at detecting lies? Are those wizards of lie detection the vanguard of a future humanity, or do they pay a high price in their relationships, finding it hard to support the lies that fill daily life?
Why no one has a good approach to animal welfare
Surely it seems reasonable to count the welfare of animals — or at least selected high-cognition animals — for something rather than nothing. But this throws moral calculations into a funk. Even if you count individual animals for very little, there are many billions of them.
Was it a good idea for humans to have settled the New World? I’ll answer yes without hesitation. But what if billions of other mammals died — in net terms — as a result? I don’t want my answer to depend on my relative weighting scheme for animal vs. human welfare. Nor would I kill a good friend to save the lives of a million cats. Or a billion cats for that matter. Yet I still wish to count cats for something positive. The Humane Society is not a waste of resources.
We might argue that the value of animal lives, as we sum them up, hits some asymptotic limit. But if that limit binds, we are back to not caring about individual cats — evaluated at the relevant margin — much more than epsilon.
It is disquieting that so many fascist thinkers have held animal welfare in high regard. Once we start counting animals in our moral theory, we too easily get used to the idea that violent conflict is an inevitable part of nature. Human vs. rat, and of course tiger vs. deer as well. How can we segregate this apparent endorsement of violence away from human-to-human affairs? Life as a secular moral thinker is difficult.
The issue of animal welfare provides the strongest available case for moral holism. It would solve many problems to evaluate states of affairs as wholes, rather than adding up, or otherwise weighting, goods and bads from the constituent parts of those wholes. But being an individualist at heart, I am reluctant to extend such holism to human affairs. And even holism must resort to additive consequentialist reasoning to address a variety of practical questions at the margin.
Alternatively, we might develop a moral theory which is neither strictly lexical nor strictly additive in terms of how it treats value. For that achievement we would have to award a Nobel Prize for moral philosophy…
The Evolution of Gambling on the Mississippi
Hanged for Accuracy
Alex posted a few weeks ago about India prohibiting competing monsoon forecasts. I came across an even more dramatic example of such thinking in Dava Sobel’s Longitude (1995:11-12):
Returning home victorious from Gibraltar after skirmishes with the French … the English fleet … discovered to their horror that they had misgauged their longitude … the Scillies became the unmarked tombstones for two thousand of Sir Clowdisley’s troops. [Admiral Sir Clowdisley] had been approached by a sailor, … who claimed to have kept his own reckoning of the fleet’s location during the whole cloudy passage. Such subversive navigation by an inferior was forbidden in the Royal Navy, as the unnamed seaman well knew. However, the danger appeared so enormous, by his calculations, that he risked his neck to make his concerns known to the officers. Admiral Shovell had the man hanged for mutiny on the spot. … In literally hundreds of instances, a vessel’s ignorance of her longitude led swiftly to her destruction.
Even though shipmates had a strong common interest in knowing their longitude, other social incentives apparently prevented them from sharing their information. As a consultant on the use of prediction markets within organizations, I’ve also noticed that managers are often surprisingly uninterested in the prospect of more accurate forecasts and more informed decisions. Could these phenomena have similar explanations?
The Wisdom of Your Crowd
Newsfutures.com pitches their prediction markets by saying “Our decision markets let you aggregate the wisdom of your crowd”, riffing on previous Marginal Revolution guest James Surowiecki‘s provocative book The Wisdom of Crowds. But it is worth noting that we often fail to use much simpler ways to draw on the wisdom of our crowds. When we make our biggest choices about careers or significant others, we rarely consult more than a few of our closest associates, and often not even them.
Having just got tenure here at GMU economics, I tried to seek the wisdom of a larger crowd on my first big post-tenure project. I wrote up a paragraph on each of ten options, and emailed the set to lots of friends, family, and associates, asking for advice. 56 wrote back, and I coded each response as assigning a number from zero to one for each option. Four different ways of weighting the responses gave the same answer: writing a book on disagreement was just a bit better than writing a book on idea futures. And so that is what I will do.
No one I’ve talked to has heard of anyone doing anything similar. Why? I can think of two reasons:
- Asking widely for advice is taken as a sign of weakness and ignorance.
- Asking someone for advice on an important decision is taken by them as a signal of intimacy; ask too many people and you are an advice “slut.”
Some people did think doing this reflected badly on my character, and some were miffed when they found out how many people I had asked. So why did I do it? I feel like the father who has more children than he can afford to feed, but can not bear to be the one to choose who must go out into the cold. Like a politician afraid to make a risky decision, I choose to delegate instead.
Addendum: My original email and the numerical scores are here.
Radio Interview
I will be on 94.9 KUOW in the Seattle area this morning talking about crime, deterrence and prisons.
The quest for economies of scale
Is it disadvantageous to be a small country? Singapore seems to have done just fine. But if economies of scale matter for geographic (as opposed to legal) reasons, we might expect small countries to cluster their populations in one central location.
In the case of New Zealand, Auckland became the largest city in 1886. Since then it has grown in size relative to Christchurch, Wellington, and Dunedin. In 1951, Auckland was only 50 percent larger than Wellington. By 1996, Auckland was three times as big as either Wellington or Christchurch. The Auckland metropolitan area now accounts for about one third of the country, in either population or economic terms, and is likely to grow in relative terms. It is considered New Zealand’s major city.
The above facts are from James Belich’s Paradise Reforged: A History of New Zealanders from the 1880s to the Year 2000.
New Austrian economics blog
The writers are Chris Coyne, Peter Leeson (both formerly of the Common Knowledge blog), and now Peter Boettke, read it here. Yes, they are all linked to George Mason University, as we continue our inroads into the blogosphere…
Critical Decline?
In perusing back issues of econ journals I’ve always enjoyed the critical commentary sections. Today, however, commentary is less frequent. Writing in the latest issue of Econ Journal Watch, Coelho, De Worken-Elly III, and MCClure present some hard data on the decline. The Quarterly Journal of Economics, for example, used to prints lots of short commentary pieces but now hardly prints any.
The authors decry the decline but don’t explain it.
One explanation is that the opportunity cost of space at the top journals has increased. One hundred years ago the top journals were (more or less) the AER, JPE, and QJE, all among the top journals today. One hundred years ago the journals published about the same amount of material as they do today. Yet the number of economists today is many times that of one hundred years ago. Since more articles are competing for the same number of printed pages it follows that on the intensive margin average article quality will increase and on the extensive margin types of articles with lower value will decline. Since comments are on average of less value than original contributions it’s not surprising that they have declined over time.
At the same time as commentary has declined in the top journals, the total number of journals has increased so it’s not obvious that total commentary has declined. Indeed, don’t we now have EJW?
Ten predictions about cars for 2025
The indispensable Chris F. Masse writes me:
Drive’s top 10 sure-fire predictions for 2025
1. Diesels will account for half of all new vehicles sold.
2. CVT transmissions will outnumber manuals and automatics combined.
3. Cars will be 30 per cent lighter and physically smaller on average.
4. Average fuel consumption will be down 50 per cent per vehicle.
5. Luxury cars will offer light-refracting, colour-changing paint.
6. Visual advertising will permeate the cabin and outer skin of cars.
7. Autopilot will still be 20 years off (thankfully).
8. We’ll still be complaining about congestion and fuel prices.
9. Road safety measures will be education-based and constructive, not
punitive.
10. Some car parts will be assembled atom by atom using nanotechnology.
The Melbourne paper The Age offers more and also lists the predictions. In my view, #8 is the sure thing.
WiFi
I’m in Gulfport, MS blogging wirelessly from the airport. Dulles and Atlanta don’t have free WiFi but a lot of the smaller airports do and it’s great. According to Nicholas Kristof, the largest WiFi hotspot in the world is in Eastern Oregon where some 600 miles are covered.
Driving along the road here, I used my laptop to get
e-mail and download video – and you can do that while cruising at 70
miles per hour, mile after mile after mile, at a transmission speed
several times as fast as a T-1 line. (Note: it’s preferable to do this
with someone else driving.)
Cool! Now if only they could solve the problem of long-life batt
The Australian housing bubble and the soft landing
[Australia] kept on raising [interest] rates the next year, and officials talked loudly about the threat of housing prices getting too high. The most populous Australian state even imposed a special tax on investment properties to discourage real-estate speculation. By 2004, the market peaked after more than two years of 14% or greater annual growth. The most recent data suggest Australia’s home prices have changed little over the past year, and have fallen slightly in the two biggest cities, Sydney and Melbourne.
…on the whole the nation’s economy is healthy. Unemployment is close to a 30-year low and incomes continue to rise. The Australian Stock Exchange hit a high in mid-June. Many economists and home buyers alike believe a reservoir of demand will help avoid a sudden crash in home prices.
That is from The Wall Street Journal, 14 July 2005. I have noticed that even a middling quality home, an hour outside of Sydney, can be listed at U.S. $600,000 or higher.
New Blog: Private Development
Tim Harford, who recently guest blogged on Marginal Revolution, is now blogging regularly at a new project of the World Bank, The private sector development blog. The blog also features Pablo Halkyard who was "born in Brazil …raised in the Himalayas, grew up in Washington, studied in Lima, has a British passport,
though claims to be Chilean." An ideal pair to write on development!
Here is a post from Tim.
[Regarding] Nancy Birdsall, Dani Rodrik and Arvind Subramanian’s piece from July/August Foreign Affairs (now syndicated to the New York Times).
It does sprawl a bit but there are more useful ideas in there than in a
bookshelf full of the worthy stuff we development types produce. For
instance:For
every leader who demands a bribe, there is usually a multinational
company or a Western official offering to pay it. For every pile of
illicit wealth, there is usually a European or American financial
institution providing a safe haven for the spoils.So:
…categorize
certain regimes as corrupt or "odious." Companies that deal with such
regimes would risk losing their claims to repayment if later on a
lawful government decided to default on the debt passed down by its
unlawful predecessor.Also:
Even
small relaxations of work-visa restrictions generate large income gains
for workers from poor countries (as well as for the world economy).
What is especially appealing is that the gains in income go directly to
the workers, rather than through imperfect distribution channels (as
with trade in goods) or through governments (as with aid).
Why are companies seeking higher profit margins?
This is one of the great unresolved questions in the economic
history of America in the twentieth century. There are, broadly
speaking, three interpretations of what went on:The first is the interpretation of a whole bunch of finance
economists starting from Adolf Berle and Gardiner Means writing in the
1930s, and including my brother-in-law Paul Mahoney. It is that a whole
bunch of changes in corporate law and financial practice in the early
twentieth century culminating in the New Deal shifted a great deal of
practical power away from "owners" and to "managers." Shareholders
collected their dividends, yes. On those rare occasions where companies
wanted to issue more stock managers were very solicitous of shareholder
concerns, yes. But most of the time managers did what they wanted,
chose their own successors, and set corporate policy with not that much
attention to maximizing company stock prices either in the short run or
the long run. And shareholders couldn’t do much of anything about that:
it was simply too costly and too hard to stage a successful proxy fight
to throw out the incumbent managers at the company annual meeting.Now this does not mean that shareholders were "exploited." Managers
did care about the level of dividends and the price of the stock–it
was a big loss of face at the country club to report poor financial
numbers. But managers cared about other things as well–being pillars
of their community, indulging in natural benevolence toward their
subordinates, and avoiding nasty headlines in the local press, among
others.
Now if you’re a finance economist, you see this system as
"inefficient": companies are wasting a lot of money by employing too
many people in jobs that are cushier than they have to be, and while
this is good for the workers of the company it also raises costs and
prices, and so the gains to workers are outweighed by the losses to
shareholders (who collect lower dividends) and consumers (who pay
higher prices). If you’re John Kenneth Galbraith, you see this
technostructure–this technocratic corporate elite of managerial
capitalism–as broadly a good thing, because managers are interested in
the fundamentals of production and human relations rather than in
prettying up their numbers for Wall Street road shows.In any event, this system comes to an end in the 1980s as Wall
Street figures out how to successfully undertake hostile takeovers, and
as the threat of being subject to a hostile takeover pushes even those
managers who would have been very happy under the old system to pay
more attention to the bottom line as a way of boosting current stock
prices and making the benefits to outsiders’ undertaking a hostile
takeover much less.That’s the first interpretation (in its two flavors).
The second interpretation is one that has been pushed by Larry
Summers and Andrei Shleifer. It notes that organizations run on
patterns of long-term trust and confidence, and that it is devastating
to an organization’s effectiveness for those at the top to break the
established implicit long-run bargains that the organization runs on.
Under this interpretation, the paternalistic-employer-and-civic-booster
model of the American corporation that dominated the first post-WWII
decades was an effective and efficient system of corporate
organization. Come the hostile takeover, however, the corporate raiders
can replace the old management that had made and kept the implicit
long-run bargains with new managers who have no attachment to them, and
are willing to do the bidding of the shareholders and the takeover
artists. This "breach of trust" moves us to a system of corporate
organization that is less efficient and effective for society as a
whole–workers who don’t trust their bosses won’t spend time learning
things that are important if you work for this particular company but
not in the larger job market, firms won’t invest in the community in an
attempt to make it a place where workers would like to stay, et cetera.
But this new form does expropriate a lot of the value of the firm that
was shared with workers-as-stakeholders, and transfer the value to the
bosses and the shareholders.There is also a third interpretation: that the coming of the Volcker
disinflation, the dominance of central bankers, and the elevation of
price stability over full employment as a goal of governance was bound
to weaken American workers’ power enough to make the Kodak model
clearly less profitable than the more "Hard Times" alternative.I find that I’m 30% a finance economist, 20% a Galbraithian, 20% a
follower of the Summers-Shleifer "breach of trust", and 30% a believer
that the high unemployment of the Volcker disinflation was the key in
its shift of power away from workers.You will observe that I give 0% weight to the hypothesis that it was
a shift in culture–a rise in the belief that managers had "primary
responsibility to the shareholders"–that was responsible for the very
real change that you ask about. This is a professional deformation: for
27 years I have been trained to look first at changes in technologies,
resources, institutions, forms of organization, and incentives, and
only after all of these have failed to give answers to throw up my
hands and disappear in a "blaze of amateur sociology."
How much of a difference did this shift–whatever caused
it–actually make? Here’s a graph from the National Income and Product
Accounts: net operating surplus of private enterprises as a share of
net domestic income. It shows (a) a large and steep fall in the rate of
profit at the end of the 1960s, (b) a partial jump back up in the
1980s. So figure that these changes in the 1980s, whatever caused them,
look to have boosted profits by about three percent of total income.
I will classify myself as 60% a finance economist, 5% a Galbraithian, 20% for "breach of trust," 5% to the Volcker disinflation, and 10% I will assign to "cultural change." The advent of information technology matters as well, but arguably this falls under "finance economist."
Underrated economists, a continuing series
Adam Smith was not the only classical economist to understand economies of scale. Edward Gibbon Wakefield had a well-worked out theory of the benefits of geographic clustering, along with a recipe for reform: force people to cluster together.
South Australia was a theory before it became a place. The theory owed most to the choice of place to Captain Charles Sturt. The gestation of the settlement in the seven years before the first colonists landed involved a blend of idealism and philanthropy, commercial speculation, comprise and muddle. The initial impetus of ideas came from Wakefield, whose theory of ‘systematic colonisation’ offered a partial solution to the perplexing economic and social conditions of Britain at the time. Wakefield’s views were not new, but he expressed them persuasively and they were well propagated by Robert Gouger who visited Wakefield in London’s Newgate Gaol in 1829 and discussed his theory of colonisation. In essence, ‘systematic colonisation’ required that all land should be sold at or above a fixed price and the proceeds should be used to provide free passage for a carefully selected labour force consisting of the young adult poor. The pace of emigration should depend on the volume of land sales, and a large degree of self government should be granted to the colonists in matters of land sales, emigration and revenue. As no convicts were to be admitted, no garrison troops would be needed; above all, such a colony should ‘be respectable’ and self-supporting.
The notion of concentration of settlement was added to the stock of theoretical ideals by an eighty year old radical political philosopher, Jeremy Bentham. He argued that the settlement should be founded on an entirely new principle entitled the vicinity-maximising-or-dispersion-preventing principle.
Read more here, and yes I am in Melbourne now. To this day most Australians live on the southeast coast. Here is material on Wakefield and New Zealand. Bentham is also much underrated, but that is for another day…