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« Broken Windows | Main | Reversed-Out »

September 30, 2003

Luck and Economics

Friedrich --

You probably won't want to miss this piece here in the Boston Globe by Matthew Miller. (Tyler Cowen points the piece out and comments on it here.) In it, Miller talks to Milton Friedman and William Bennett about the role of luck in people's lives.

I'll be curious to hear how you react. For what little it's worth, it seems to ultra-amateurish me that luck (like uncertainty) is a much-underdiscussed topic in economics. Can luck or uncertainty be modeled? Many economists seem to think they can be, but to what extent is anyone able to take them into account? Doesn't the ability to make a model presume that you have some understanding of what it is you're modeling? Yet don't the words "luck" and "uncertainty" -- like the word "inspiration" -- carry with them an acknowledgment that we don't, and probably can't, know much about them? They're elements in life that are unaccountable. And what the words represent is perhaps more a humble acceptance of this unaccountability than a specific, nailed-down meaning.

IMHO, it's certainly true one can be "more open to" rather than "less open to" luck, uncertainty and inspiration. If I didn't think that I probably wouldn't be the arty guy I am, and I certainly wouldn't be a meditator. But what does it mean, to be open in this way? What can it mean beyond "being loose, alert and responsive, and more or less resigned to the fact that you're still going to be taken by surprise anyway"?

Which reminds me of a comment J.C. once left on a posting. She was taking note of the common-experience fact that while there are jobs and fields where performance can be objectively evaluated (tournament golf and engineering, say), there are also jobs and fields where performance-evaluation is more subjective. Art, design, writing, pop music, and filmmaking would be examples of this. Her larger point was that in these latter fields, politics will tend to play a big role in how well people succeed.

In the arty-media neck of the woods where I fumble by, I'm often struck by J.C.'s point. It seems to be a fact that nearly everyone here is bright, and that nearly everyone is competent. You and I may or may not like the work of a given individual, but we'd be hard put to argue that the person isn't bright and competent. There's a standard, accepted baseline that's commonly accepted and recognized, and so might as well be thought of as "objective." But how to measure anything beyond that baseline -- any excess qualities, talents, or energies? You can't, really, or at least not in any hard-and-fast way.

By the way, one of the most eye-opening moments I've had as an arty guy came when I spent a little time doing show-business reporting in Hollywood. Hollywood, that awful town crawling with idiots and scum and no-talents, where they make so much rotten TV and so many lousy movies, right? Wrong-o. Certainly much that's produced is lousy and never finds or delights an audience. But the people I met in the business were generally very bright; many were bursting with talent and energy too. My mind reeled for a few days. So, I found myself dimly thinking, the lousiness of much TV and many movies has to be explained otherwise. Hmm.

Here's how I've come to explain the lousiness of much Hollywood product since. It's that the sex, money, drugs and ego stakes are so huge that people act nuts. It's also that the competition to get into the field -- bazillions of people would love to work in an industry that has room in it for a few thousand -- and, once there, to maintain a place, is so ferocious that it eats up much of the energy, brains and talent. There's always the essential fact that, as William Goldman said, "Nobody knows anything" -- ie., no one really knows why some shows and movies work, or how to explain why the public has taken to a given performer or genre, etc. The flukiness and uncertainties of the business, the viciousness of the competition, and the proximity of undreamed-of riches all militate against the creation of quality product.

Plus, heck: well, maybe it's also just a little harder to make a good TV show or movie than I thought it was when I was a glib youngster. A movie, after all, has all the elements of an opera: design, music, dialog, story, action, color, performing ... And no one ever said it was easy to make a good opera. Of the many thousands of operas that have been written and performed, how many have lived beyond their initial run? As a film critic who knows the business well once said to me, "The miracle isn't that so many movies are bad. The miracle is that any of them are good."

Even though the field where I spend time is much less glamorous than Hollywood, it has its similarities. And how, in such a field, to account for why some people get farther ahead than others? Let's ignore what's meant by the word "success" for a sec. I'm a long way from the top of anything, for instance, yet I consider myself a big success because my job isn't onerous, I make an OK buck, and I have some time and energy left over at the end of the day for The Wife, friends, cultural pursuits, blogging, etc. We all define "success" in our own way (and then, let's face it, we often change our definition of success). As far as I can tell, a lot of people in my field are like me in that sense; they report to work not as part of a campaign to get to the top of the field but as part of a personal campaign to lead an agreeable and rewarding life. But, for the sake of a not-earth-shattering point here, let's ignore that, and assume that "success" means success-in-the-job-sense, ie., getting "higher up the job ladder." To what extent can it be said that the person who's at the top of the field has gotten there because she's better?

In the first place, at what can she be said to be better? At writing, editing, filming, painting, designing, or photographing? But who's to judge? Isn't it in the nature of currently-happening-culture that, once competence has been established, everyone's got the right to an opinion? So whose opinion counts? Perhaps the person's immediate boss, perhaps the business's owner, perhaps the whim of the public.

But perhaps also none of these. As far as I've been able to tell, in a field like the one I work in, the factors that most of the time explain why some people get ahead more than others have little to do with "performance" in the narrow sense, and everything to do with connections, drive, luck, and politics. Which has led me to the (probably unoriginal, but newish to me) conclusion that a job can be usefully seen as having two parts: one of them is performing the required tasks; the other is what I've come to think of as "careerizing" -- sucking up, putting out, jumping on bandwagons, etc. To get ahead, skill at (and commitment to) both are required.

How about luck and uncertainty? Well, I guess everyone's stuck contending with those.

Anyway, here's my question for today: why don't economists take more note of such factors? They aren't unimportant elements in life: as I say, in a field like mine, they often seem more important in determining "success" than does quality of performance in the narrow sense. And why don't economists show more interest in fields where performance is hard if not impossible to measure? (One of the reasons I'm such a fan of Tyler Cowen's is that he does wrestle with art and culture. He isn't afraid of them, and he isn't deterministic about them either.)

The easy answer is that such elements, and such fields, make many economists uneasy. (The really easy answer is that I don't know what I'm talking about, and that in fact tons of economists are doing just what I'm scolding them for not doing.) Judging from what I run into, many economists want to think that their theories and equations don't just provide a loose, open and sometimes useful account of how economies, fields, and businesses work -- no, they provide an explanation that's so in-depth that it gets to the mystical root of things, the one that enables accurate, crystal-ball predictions to be made. There's a kind of religious if not cult-like element to some economic thinking, in other words. Factors like the ones I've been dwelling on here violate the vision and so must be ignored or explained away or seen as trivial. Reality must be made to fit the model instead.

I say all this, of course, as someone who's gotten a lot out of wrestling with things on the Econ 101 and 102 level. Yet I'm still a little shocked that more economists don't take note of the inevitable and inescapable uncertainties, strokes of luck, and politicking that are such plain-to-everyone's-eyes, important (and even determining) factors in life as it's commonly experienced. Wouldn't it be wise for the field to make more of an effort to acknowledge life's looseness, wobbliness, and vagueness -- its inevitable chanciness and indeterminacy? Hey, if only for good p-r reasons: in refusing to take such elements into account, economists make it all-too-easy for everyone else to hate them, and to dismiss their actual contributions.

Best,

Michael

posted by Michael at September 30, 2003




Comments

Totally off the top of my head guess about why economists may not be too interested in "luck"--the system they are trying to describe is so complex, with so many variables, that it's impossible to tell what's luck and what's not yet (but could some day) be an explainable, deterministic part of the system. They may be putting off a discussion of the "luck" part until they can see how far they can go with the "causation" part.

Of course, it does make you wonder if economics isn't a similar problem to studying the behavior of gasses--looking very random at the atom-by-atom level and very deterministic looked at on a systemic level.

Of course, I'm out of my depth here altogether, but didn't Hayek have some interesting things to say about how economics is perched at an awkward spot between simple, law-based systems and statistical systems?

I'll be quiet now.

Posted by: Friedrich von Blowhard on September 30, 2003 2:33 PM



I have no idea about Hayek, but of course economics is all about statistical systems. I let go of a tennis ball; it drops to the ground. That's physics, that's certain, that's crystal-ball clear. No economist would ever claim that degree of certainty, and Michael's musings on mystical roots and crystal balls seems suspiciously close to setting up a straw man to me. I certainly don't know any economists like that.

Michael's gone down this route before, and I don't want to simply repeat what I said then. But basically, economics has almost nothing useful to say about one individual's decisions or future. Of course there is such a thing as luck, but for one thing it can't be modelled, and for another, it tends to cancel itself out across time and populations. Besides, any economist who went around saying tautological things like "the most successful people are those who are the best at their job" (while defining being good at your job as demonstrating an ability to rise up the ranks and be successful) wouldn't get very far.

Again, Michael, I think that you're anthropomorphising the average person a statistical construct who exists nowhere and saying "well, doesn't this person have luck and fetishes and whatnot?" The answer is no, that's not what economics is about.

Posted by: Felix on September 30, 2003 2:56 PM



Economist Brad DeLong's website recently highlighted Brad's favorite essay by uber-economist Paul Krugman. Included was a parable intended to illustrate the nature of income inequality -- but which actually addresses the issue of luck. Krugman, and presumably Brad,
seem to prefer and admire societies in which luck plays less of a role. Or, perhaps more properly stateed, in which government is expected and empowered to offset "luck" via redistributional policies of taxation and social spending.

Again over-summarizing, the claim seems to be that progressive taxation does NOT penalize one's hard work, but DOES penalize some portion of one's good luck.

I'm not sure how this is reconciled with the basic economic claim that the sure way to have less of ANY commodity is to tax it.

Posted by: Pouncer on September 30, 2003 4:02 PM



"I'm not sure how this is reconciled with the basic economic claim that the sure way to have less of ANY commodity is to tax it."

I think it's because economists find luck an inconvenience, and therefore WANT it to go away!! :) So, hell, tax it---it's perfectly logical.

I actually agree with Felix here---if economics has anything useful to tell us (and in all seriousness, I'm not sure it does) it's all "averaged out" over large groups of people over longer periods of time. (And, yes, in the long run, we're all dead...and discussing econ theories is a really boring way to spend the time we are here...)

That's why they skip over "luck." However, I am unsure that that REALLY cancels out the luck factor. Line calls in tennis are also explained this way---that they cancel each other out over the course of a match. And that, of course, is ridiculous. A bad line call on match point is far more significant than a bad line call at 15-love in the first game.

And this exists beyond the individual level, even. A country with rich natural resources is just plain "luckier" than a country which is 95% desert.

Posted by: annette on September 30, 2003 4:46 PM



Economists do address the issue of luck. It shows up a lot in principal-agent theory, as in how to design an optimal contract when the outcome depends on both the effort of the agent and luck (randomness), and the principal cannot monitor the effort of the agent directly. I was taught this at such a basic stage that it wasn't actually attributed to any one economist, it was just "this is how economics handles this."

From memory, the results are highly dependent on how risk-averse the agent is relative to the principal.

Randomness also runs all the way through finance theory, e.g. option pricing model.

The really difficult one to deal with is uncertainty. Economists distinguish between uncertainty and risk - you can assign a statistical function to risk, e.g. you roll a six-sided-die, you have a roughly 1/6 chance of getting a 6. Uncertainty you can't meaningfully assign a statistical function. Quick, what's the likelihood that aliens contact us on 22 October 2012, and what's the likelihood that they will be friendly?
(Other terms are used to distinguish between these two sorts of luck).

Economists don't have much advice on uncertainty, not because it's not thought about, but because no one I've heard of has come up with anything useful to say because it's a hard problem. And it's hard to get a scientific paper published that says "I've thought a lot about this and haven't come up with anything interesting." If anyone does come up with some significant, good results about dealing with uncertainty that aren't just common-sense, I'd reckon they'd be in line for a Nobel prize one day.

Posted by: Tracy on September 30, 2003 4:55 PM



Annette - there is a fair bit of evidence from cross-country regressions that if a country has rich natural resources that's, from the point of view of increasing GDP per head, worse luck than not having them.

The question is "why are so many countries poor, despite having rich natural resources?" which may as well be turned around into "why is Australia so rich, despite having rich natural resources?"

It seems to be related to political economy, in countries with rich natural resources groups spend their time arguing about the distribution. Or stealing it. Frequently shooting someone is considered a valid debating technique. In resource-poor countries there's little to argue about so everyone just has to get on with earning a living.

Posted by: Tracy on September 30, 2003 5:03 PM



Let me toss in one possibly extraneous thought. Such concepts as "luck" and "fairness" (as in, government is expected and empowered to offset "luck" via redistributional policies of taxation and social spending) can only be evaluated with a goal in mind. And since virtually nobody (except Nietzsche) has explicitly articulated what the social goal of his policies are, this whole topic is ripe for (1) confusion and (2) hidden agendas. Different goals will produce very different ideas as to what constitutes fairness.

Posted by: Friedrich von Blowhard on September 30, 2003 5:21 PM



I forgot about expected choice theory, another part of economics. It deals with how people make decisions and people's preferences in risky situations (when the distribution of the risk is known).

Most of the interesting work relates to experimental results that actual peoples' choices differ from what a purely rational and risk-averse person would choose. For examples, people make inconsistent choices, changing what they prefer when some statistically irrelevant options are added in, people pay far more attention to small probabilities of bad outcomes than can be accounted for by a simple level of risk-aversion. There is work into developing a theory of decision-making that more accurately reflects what people do, though I don't think anyone has come up with a simple one that both reflects the main findings and can be easily plugged into a model.

Posted by: Tracy on September 30, 2003 6:35 PM



Both Milton Friedman and William Bennett said that genes matter, implying that you should choose your parents wisely, which they see as luck from an individual's standpoint. More rigorously, we can divide the genome that one has into two components: the part that comes from your parents choosing each other wisely (and their parents before them, etc.), and the purely random distribution of your parents' four sets of genes that you get at conception.

Most cultures down through history worry a lot about finding good marriage partners for their children so that they will have better grandchildren. We do too, although we are not allowed to talk about it. Parents spend fortunes sending their children to elite colleges so that they fall in socially with an elite crowd, out of whom they are likely to eventually find their mate.

Posted by: Steve Sailer on September 30, 2003 6:39 PM



"Annette - there is a fair bit of evidence from cross-country regressions that if a country has rich natural resources that's, from the point of view of increasing GDP per head, worse luck than not having them."

Perhaps---but my point was some countries have them within their borders and some do not. That is not managed by increasing or decreasing the tax rate or gov spending.

Posted by: annette on September 30, 2003 7:26 PM



The reason that luck and uncertainty are seen by some as especially challenging to orthodox econ is this: what if they aren't mere "risk," and what if at the same time they're in and of the nature of economic processes -- ie., they can't simply be ignored, yet they can't be quantified, and they can't be bundled up and set aside either. How then to deal with them? Perhaps they can be taken into account, but perhaps conventional econ concepts and frameworks aren't up to it.

The validity or nonvalidity of such questions are way above my head, but I didn't invent them, and impressive figures are making these points. More on this at the end of this comment.

Felix, I'm talking out of ignorance here, admittedly, but perhaps not quite that much ignorance. I'm not sure that you saying "that's not what economists do because that's not what economics is" quite comes together as an explanation -- it sounds like argument-via-tautology to me. And I'm not quite sure why you contend that econ has nothing to say about the individual or the individual's experience either. Adam Smith, as I recall, had a lot to say about individuals and psychology. Hey, so did Marx, and so does Friedman. In fact, the many econ books I've read are full of sentences about individuals (here's one quickly-found example): "An investor gets greater utility from a higher return than a lower one, and a lower utility from an asset with a high standard deviation than a lower one ... What this means for the investor is that, by borrowing or lending money, she can possibly reach a higher indifference curve than is possible just with her own money." Individuals have demand curves, and indifference curves, and are said to have utility functions. As I understand it, your beloved aggregates are aggregates of utility-maximizing individuals.

Pouncer -- Thanks for pointing out the DeLong/Krugman. Are you as struck as I am by a move they make, which is to leap almost instantly from the acknowledgment of luck to a pretty specific policy recommendation? They may be right, they may be wrong, but they're also clearly doing their best to hustle us past a few points and debates, don't you think? Sigh: it's part of what makes discussing econ or politics tough, this way so many people have of failing to make the distinction between making-an-observation and making-a-recommendation.

Annette -- I think your tennis analogy is brilliant.

Tracy-- Thanks for the interesting thoughts and info. I've been given to understand that some of the assumptions behind the standard conception of risk and behind the finance field's conception of randomness are currently under some fire -- that the standard way of handling these factors has been found wanting, and that all kinds of new tools are now being brought to bear. But I should be ashamed of myself for how little I actually know here. Anything you can tell us about this?

FvB -- I wonder sometimes if the reason righties are so resistant to ceding a little on the topic of luck and uncertainty is that they fear just what Krugman and DeLong did in Pouncer's example -- a fast, hustling leap into specific policy recommendations. Ie., if you agree that this is true, then these policies necessarily follow. (Since the righties don't want the policies, they deny the truth of the observation.) Which they of course don't. They might be desirable policies, they might not be, but in any case case they don't necessarily follow. But I wonder if the time hasn't come for righties to stop trying to argue away luck and uncertainty and instead to think a bit more about how better to respond to a Krugman/DeLong-style move. Your thoughts?

Steve -- That's very shrewd, thanks. Certainly helps account for a lot of the behavior FvB and I witnessed at Our Lousy Ivy University. Come to think of it, I suspect that one of the reasons my parents pressured me to go there was in the hope that I'd make a "good" match.

Incidentally, and only for anyone who's interested: there are a few heterodox schools of economics out there. I'm nothing but an amateur and a fan, but I do know of their existence, and I do know that they're questioning some of the neoclassical basics: the idea of the rational actor, the idea of equilibrium, the use of conventional math. A few of them:

* The Austrians, who are so skeptical of aggregates and so into the role of free will and free choice that they deny that math-based aggregate analysis has any validity at all. Their idea of value is that it's super-subjective, they put an emphasis on disequilibrium (capitalism is good, in their view, not because it tends towards equilibrium but because it contends well with disequilibrium), and they try to see evolutionary processes at work in economics.
* The Post-Keynsians, who also question equilibrium, and who emphasize how much the effects of time and uncertainty throw some of the neoclassical basics out of whack.
* Behavioral economists (which I think is what Tracy was referring to), who are taking a much closer look at how people actually make decisions. Some see their discoveries as undermining econ orthodoxy, others as enhancing orthodoxy, but in any case they're certainly adding nuance to the field's conception of the individual. Daniel Kahneman, one of last year's Nobel-economics winners, is in fact a psychologist, and he's credited with helping to show that people in fact don't always behave in economically-rational ways.
* And there are people who are using evolutionary theory, and chaos theory and complexity math to try to knock a little dynamism into some of what they think of as economics' overly-static models and conceptions.

FWIW, some of the conversations we've had here about econ remind me of some of the discussions we've had about architecture. Accept the field's own preconceptions, and you'll necessarily wind up with the kinds of buildings and neighborhoods that are being shoved down our throats these days. If on the other hand you question the orthodox preconceptions -- as people such as Jane Jacobs, Christopher Alexander, Leon Krier, and Bernard Rudofsky have -- then you might wind up with something less deterministic and more accomodating, and perhaps more human and useful too.

OK, now I'll stop trying to carry on as though I know what I'm talking about. Eager to hear corrections, tweaks, disputes, news, etc. But also eager to let it be known that these musings of mine aren't total fabrications.

Posted by: Michael Blowhard on September 30, 2003 8:11 PM



"Ballplayers are not born great. They're not born hitters or pitchers or managers, and luck isn't the big factor. No one has come up with a substitute for hard work. I've never met a great player who didn't have to work harder at learning to play ball than anything else he did."

That's from Ted William's speech he gave upon his Hall of Fame induction. To which I'd add the words of Louis Pasteur: "Chance favors the prepared mind."

Posted by: Tom on September 30, 2003 11:49 PM



Michael:

I spent a tiring 6 months of my life doing a networking full press, shopping around a screenplay. One of the most interesting things out of it was a lot of conversations I had with a retired Big Time Agent (he agented Flatliners, and various other films I'm not remembering now).

He believed that studios usually bought scripts that were quite good but then tended to screw them up before shooting through rather ham-handed attempts to make them more commercial. His points was, no one buys scripts that read like the finished movies you see. So chalk up one point in the "movies are hard to make" column, or maybe the "philistine moneybags mess 'em up" column.

But maybe this is what you'd expect from the guy who sells the scripts to the studios.

Also, as you say, "careerizing" is more important than talent, since talent is subjective and further away from the day-to-day business of getting hired. I.e., a person's probably better off being of average talent but with really exceptional hustle and sales skills, than being exceptionally talented but with average hustle. No surprise, really. "Hustle" is essentially the talent of competing for work. "Talent" is the talent of doing some artsy thing. Which talent would you rather have if you're competing for work?

You also neglect an obvious explanation for why there is is "so much rotten TV and so many lousy movies." Maybe that's what people want! Seriously, if what you're calling rotten and lousy is also highly profitable, then you're misunderstanding the business. The industry plays to the box office not the critics (no, not even genuinely unsnobbish critics with a taste for pop culture).

Posted by: alexis on October 1, 2003 2:24 AM



Michael - sorry, I'm not close enough to the fields about risk I mentioned to keep up with the cutting edge. I'm actually inclined to the Austrian school myself, though I think mathematically modelling people's incentives and decisions is a useful discipline for rigorous thinking. I am completely unconvinced on the IS-LM model however.

Be careful when you talk about the "neo-classical" model as if every (or most) economists believe it. Many people who critise economics sound like they read the first chapter of Samuelson and nothing else. Every economist I've met knows that people aren't always rational and never have perfect knowledge, we use the assumptions because they're simple and powerful and useful in a lot of situations. For example, a tax economist I know, says that if you can think of a tax loophole in the legislation, there is someone out there exploiting it. (Presumably there are some economists on the face of the planet who believe that people are always and everywhere perfectly rational, they just don't seem to be in a majority).

I also think it is very useful to start off with a presumption that people's behaviour is rational. It leads you, on encountering behaviour that looks non-rational, to ask the question "is it really, or is there some other effect going on here I should know about?". One example I read a paper on is the amount of time some Orthodox Jewish men spend studying the Torah in Israel compared to men in the same groups in New York. In Israel apparently men study into their late '30s, with severely negative impacts on their wealth generation. In New York, they study for a couple of years. The paper provided evidence that studying the Torah was a costly signal that you were committed to the religious group, and therefore brought you all the benefits of that group. In Israel, however, people doing religious studies are exempted from military service. So to prove that they were committed to the religion and not just avoiding fighting, the men had to study much longer, well past the time they were no longer liable for the military service. This implies that Israel should stop the religious exemption, and reap the economic benefits. (Please note, I am not saying that studying religion for years is stupid, or irrational, just that the difference in years spent studying between the two groups looks at first glance to not fit in with homo economius.)

And I am amused by Michael distinguishing between conventional maths and "evolutionary theory, and chaos theory and complexity math". I am all in favour of people building more complex and dynamic models. It's just one of those things that is jolly hard, and also hard to teach to students, and to use in every day life. I've worked as a forecaster, and I can speak from experience that frequently a very complex model will perform worse than a simple one. If the model gets too complex, you lose generalisability, the model will do great on the specific problem, and fall apart on anything different. Those people may come up with something, but I'd be skeptical about any particular model.

Posted by: Tracy on October 1, 2003 2:36 AM



Economist do model risk all the time, sometimes in great detail around distribution etc (option pricing) and sometimes as simple expectations (weighted averages).

They also have a tremendous amount to say about how this works in real life through behavioral economics and in theory through standard forward looking rational actors.

The parable in Krugman's article actually demonstrates how redistribution in a luck driven economy is more harmful to soceity as a whole than in an effort driven economy, although don't hold your breath to hear Paul point that out.

http://www.winterspeak.com/2003_09_01_archive.html#106475327885875377

When I first read pre-insanity Krugman's "Unequal Exchange" essay (1998) it made no sense to me. But I shrugged and moved on, because in general Krugman was so worth listening to. But his obsession with the wealth inequality between the top 0.01% and 1% has now reached such fevered heights it's best to ignore him and go back to his older, lucid pieces.

On re-reading "Unequal Exchanging" it seems that this may be where Krugman went off the deep end. He uses an analogy to model two economies and state a preference for redistribution based on those models:
[C]onsider this simple parable : there are two societies. In one everyone makes a living at some occupation-say, fishing-in which the amount people earn over the course of the year is fairly closely determined by their skill and effort. Incomes will not be equal in this society-some people are better at fishing than others, some people are willing to work harder than others, but the range of incomes will not be that wide. And there will be a sense that those who catch a lot of fish have earned their success.

In the other society, the main source of income is gold prospecting. A few find rich mother lodes and become wealthy. Others find smaller deposits, and many find themselves working very hard for very little reward. The result will be a very unequal distribution of income. Some of this will reflect effort and skill: those who are especially alert to signs of gold, or willing to put in longer hours prospecting, will on average do better than those who are not . But there will be many skilled, industrious prospectors who do not get rich and a few who become immensely so .

Surely the great majority of Americans , no matter how conservative, instinctively feel that a nation that resembles the second imaginary society is a worse place than one that resembles the first. It is also no question that our nation today is much less like the benign society of fishermen-and much more like the harsh society of prospectors-than it was a generation ago.
Krugman argues that income redistribution in a gold mining economy is "better" than in a fishing economy because the outcomes of gold prospecting are more based on luck than skill. While I sympathize with the sentiment, I would expect better logic from a first year econ undergrad. If you want people to take on risky behavior, you need to offer them greater rewards (or, if there is greater variance in expected outcomes, the expected outcome must be higher to elicit the same effort). In other words, the more risky the behavior is (or the more luck based the outcome is), the higher the rewards needs to be to compensate for the greater risk. This argues for less redistribution because taxing wins in a high-risk environment reduces effort by a far more dramatic amount than taxing wins in a low-risk environment. A winner-take-all economy, harsh as it may be, needs lower redistribution for efficiency, not higher.

The other point is that if economies go from "fishing" to "gold mining", it is because of technological change, not because of any policy. Whether or not you can fish depends on if you're close to the sea. The two economic arenas I can think of that might work like gold mining are fashion industries (driven by hits) and technology industries with large demand side positive externalities (software like Microsoft Windows). But large swathes of the economy do not remotely resemble either of these. I'm not sure if Krugman would want the government to intervene to direct technological development (once I would have assumed "no way" but now, who knows?) but throwing sand in the gears of where technology is taking us whether we like it or not seems, well, positively conservative.

http://www.winterspeak.com/2003_10_01_archive.html#106501053649361788

A couple of folks have written in asking about my recent post on Krugman's Unequal Exchange essay. I apologise for being obtuse. I'll try and do better this time.

The gold miner/fisher parable is actually a very standard labor economic model for talking about how greater risk demands greater return for people to take it on. Or at least, it's what we used in class at Chicago. So imagine my surprise when it's trotted out to argue that the gold mining town should have *greater* redistribution, quite opposite to it's usual moral.

The sad truth is that this is one of those times when people's intuition about what's fair is not a reliable or helpful way to think about how to organize a country. I am very sympathetic to how counterintuitive, or even repugnant, basic economics is, but Man is not at the center of the universe, and supply curves slope up, demand curves down.

The insight I would hope an economist (esp. a humane economist) would bring to a distribution discussion was that if a society, for reasons for technological change, switches from a fishing to a gold prospecting economy, the costs of redistribution are going to soar precisely when the urge to redistribute rises as the gap between rich and poor becomes wider.

That's what an economist would say (or at least take as a starting point). Krugman is an economist. He did not say that. Disingenuous? It seems so to me, which is why I don't read him any more, but you're free to differ.

Posted by: Zimran on October 1, 2003 12:17 PM



Alexis -- Funny story, and so true. Like you, I guess, I've often suspected that the closest thing to a magic formula for success (in the media and arts world anyway) was Ok-to-run-of-the-mill talent crossed with unstoppable hustle. Extreme talent, at least as I judge it, sometimes seems to doom people. Didn't Tina Brown have some great line about that, where she admitted that she was smart but not too smart, talented but not too talented? Although I suppose the case could be made that hustle and careerizing are talents too ... I've often wondered about your other point too -- could it be said that the showbiz industry is in fact doing a pretty good, or at least successful, job of creating and selling entertainment? Seems to me the yes case can be made, but so can the no case. Yes because, well, people watch 4 hours of TV a day, continue to buy magazines, and Hollywood films are what "movies" are to people worldwide. What's not effective about that? But no because most shows and films flop, and because profit margins are slim. On the other hand, the business, insane though it is, does keep rolling on, and that's kind of interesting in its own right.

Tracy -- Thanks again for more interesting and helpful info. I'll note merely that I'm a fan who's offering up some personal musings, and not anyone claiming the competence to make serious arguments.

Zimran -- I know that economists have their way of accounting for risk. My (admittedly amateurish) impression, though, is that some critics (post-Keynesians, for example) are arguing that "risk" in the economic sense isn't the same thing as real-life uncertainty and luck, and does a bad job of accounting or allowing for them. Do you think they don't have a point here? Enlightening reflections about Krugman, fish and gold, many thanks.


Posted by: Michael Blowhard on October 1, 2003 12:45 PM



Hi Michael:

Well, the 2 basic parameters used in models around luck are 1) expected return and 2) variance.

Expected return is a probability weighted mean of all potential outcomes. Variance is how close to the expected mean you can actually expect to get.
There are more things you can add, but these are the two I've seen the most.

I don't know enough (anything) about "post-keynsian" critics to address their concerns. But I also won't claim that the models are perfect representations of reality. The point about models is that they make the assumptions we cannot help but make when thinking about something explicit and consistent.

All the best,

Zimran

Posted by: Zimran on October 1, 2003 12:57 PM



!

Posted by: j.c. on October 1, 2003 1:12 PM



Individuals have demand curves, and indifference curves, and are said to have utility functions. As I understand it, your beloved aggregates are aggregates of utility-maximizing individuals.

Yes! That's exactly my point! Your beloved individuals have demand curves and indifference curves; they don't have things like, oh, names. They're constructs.

Posted by: Felix on October 1, 2003 6:47 PM



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Posted by: A Halifax Accountant on February 10, 2004 11:06 AM






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