Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Friday, May 30, 2008

Chaoplexity, etc

Posted by Simon Halliday | Friday, May 30, 2008 | Category: | 0 comments

As most of you know by now I am a proud supported of complexity theory in economics. There are several recent articles that you can look at on this topic:

A Brave Army of Heretics, David Warsh, Economics Principles
John Horgan on "Can Chaoplexology Save Economics?", by Barkley Rosser
Can Chaoplexity Save Economics?, by John Horgan

Hat tip to Economist's View for two of these links.

I'd also recommend Barkley Rosser's homepage for a number of papers.

A number of books, Eric Beinhocker's Origins of Wealth and one of the original sleuth style books giving coverage of the development of the Santa Fe institute is Waldrop's Complexity, give them a look if you have the time and money.

China and skills

Posted by Simon Halliday | | Category: | 0 comments

I just wanted to recommend that people take a look at this post on Marginal Revolution. I have blogged a few times about many of the eastern countries' practices in terms of managing to improve science graduation at high school and later in university. The paper on which the MR post is based reiterates how important this has become, how China has graduates soaring into the sciences and engineering and how this will impact on future innovation and China's ability to have an impact on the world economy. It is truly astounding. I just wish that the SA govt would think about it a bit more and get its grip on high school math and science.

Saturday, May 10, 2008

Stiglitz Lecture

Posted by Simon Halliday | Saturday, May 10, 2008 | Category: , , | 0 comments

Two days ago Joseph Stiglitz gave a lecture here at the University of Siena for the Workshop Benessere e Imprenditorialità. It wasn't intended solely for economists and as such was often quite superficial and cursorily dealt with some of the issues that he was trying to promote. This was quite sad for me as I have often enjoyed and appreciated what he has written in Economics and I was hoping that he might have make some more rigorous arguments for the promotion of Corporate Social Responsibility (CSR) (one of the themes of the talk) and its link to generalized welfare.

His talk covered CSR mainly in reference to three themes:

  1. Conduct in the recent credit crisis in the US and its movements worldwide

  2. The role of business in climate change and sustainability

  3. The misuse of GDP as an index for measuring welfare.

Each of these has several different implications in respect of world trade, international relations, the functioning of credit markets and so forth. I will try to comment on each of these (now and in later posts).

First, in terms of the credit crisis, there is now a fantastic amount of commentary on how this has permeated from the US into the world economy. I don't think it's particularly worthwhile for me to comment on that (check the Economist's View blog for good coverage of this and other topics). A point that he has made, which I think is particularly relevant, is that corporate social responsibility is not simply the fact that government needs to regulate companies so that they do the 'responsible' thing. It requires buy-in (yes, hand-wavey I apologize) from the companies themselves. Stiglitz gave the example of a Chinese company (which he couldn't name) asking the government to regulate the industry and suggesting specific regulations. The CEO of the company's argument was that if their company wanted to be both profitable and responsible it needed to inform government as to the types of regulation that are required. Why? Because if they are a profit-maximising company and they are competing with privately owned (unlisted firms) that don't have similar systems of reporting, etc then govt needs to insure the economy against malfeasance by these privately owned firms by regulating both privately owned and publicly owned firms. Why again? The publicly owned firms would lose competitiveness against the privately owned firms if the privately owned firms pollute, mismanage labour, etc. Hence, it is in the publicly owned firm's interests for it to promote regulations to ensure corporate social responsibility of all firms. However, this will obviously be 'tainted' by the extent to which this is in the interests of the publicly owned firms. In my mind there is a further asymmetry of information, that which exists between the publicly owned firm 'acting in govt's interests' and govt itself. Obviously the public firm wants to be competitive, in fact it would probably suggest regulation that it, as a larger and public firm could probably easily internalize, whereas the smaller private firm may not be able to. He didn't mention this and I think it warrants comment. Especially because so many private SMMEs are necessary for us to increase growth and employment generally. So yes, it is good for corporates to cooperate with govt, but govt needs to be equally sceptical of their 'input' and must, absolutely must find a way to regulate all firms in such a way that is sensitive both to the firms and to the needs of govt.

Stiglitz contrasted the above Chinese example with financial corporations and their interaction with govt subsequent to the credit crisis. Thes companies are arguing, still, that they DO NOT REQUIRE MORE REGULATION! What? Are these people insane? Have they not noticed the credit-crunch? Have they not seen that (literally) millions of Americans are losing and will lose their homes on account of the speculation of these companies and yet they say they are over-regulated? Come on!Moreover, that these companies have CEOs who walk away with incredible packages at the end of the year, while the average customer is walking away without their life savings and having lost a home is incredible (more on CEO remuneration later). He comments further that companies such as Citibank, with advertising campaigns saying 'Qualified at birth', or companies sending credit card forms to fourteen year-olds, is a form of indentured labour. The companies get the individuals into debt quickly and then keep them paying back the loans for the rest of their lives. Oh yes, on the above topic, don't even let me comment on George Bush's plan to veto the house's proposition to alleviate the pain caused by the credit crisis. Once more he is funny in the head.

Stiglitz also accurately commented on two different Business School and Corporate type supposed 'movements away' from evil profit maximising. Firstly, 'shareholder value'. Well, I'm not going to go into this one again with too much detail, but maximising shareholder value does almost nothing for ensuring the long-term value of the firm because the CEO and the firm generally become far too sensitive to short term movements in the market which may have absolutely nothing to do with the activities of the individual firms. Consider the market at the moment and food shortages, a decent analogy can be found in the various reserve banks being unable to control inflation internally because of the fluctuations in food prices internationally. It would be foolish to expect the individual reserve banks to be able to curb inflation in their own countries when core inflation is up so much. Ditto shareholder value and random fluctuations in the market. Stiglitz argued that shareholder value was actually doublespeak for maximising managerial wealth. Why does he argue this? Well, the US has actually had decent economic growth in the past 9-10 years. Has the 'ordinary American' gained anything from this? No! Real wages have not increased for the average worker, the benefits of from growth in the US economy have gone almost entirely to the top 5% of income earners (or even top 1%). CEOs take away massive remuneration packages at the end of each fiscal year. Stiglitz argues (again accurately in my opinion) that this is another area that CSR needs to tackle and in which govt needs to intervene. CEOs cannot continue to be the only group to benefit from growth in the economy, assuming that there is any growth after the recession created by overly risky loans.

Ok. that's enough for now. More later on Stiglitz and some of his suggestions.

Friday, May 09, 2008

More on Antisocial Punishment

Posted by Simon Halliday | Friday, May 09, 2008 | Category: , , , | 0 comments

Subsequent to my post two days ago on the Herrmann, Thöni & Gächter paper, Simon Gächter presented some more evidence at the Faculty of Economics. Having already heard some of the stuff before I was able to think about it a bit more and to think contemplate some of the additional repercussions of the work. Moreover, because we sat there for about two hours talking about the paper and the evidence, the contributions by several individuals increased my understanding even more. Fantastic times.

Anyway, one of the things I don't think that I gave sufficient weight to previously was the way in which this evidence directly contradicts the rational actor model. To me this has become almost trivial, but in interacting with others I regularly become aware how pervasive this view still is – the view that in order for us to have coherent economic theory we cannot deviate from a rational actor model, with regular preferences that are entirely self-regarding. Individuals preferences are evidently not entirely self-regarding. There is a surfeit of evidence to show this. Moreover, that something as ephemeral as 'culture' could actually enter into the ways that individuals behave is entirely contrary to the way in which economics operates, or, I should say, assumes individual agents to operate. Thus, the evidence that I discussed which Herrmann et al. found from their experiments is rather quite exceptional. It illustrates definitively that different cultures will act differently in situations of economic cooperation.

Subsequent to these experiments Gächter undertook further experiments in Switzerland and also in Russia. Once more the evidence there was anti-social punishment in Russia and the exceptional 'punishment results in cooperation' result in Switzerland. However in this set of data the sample in each of the countries was much larger than it had been in the inter-country comparisons previously. The samples covered rural and urban, mature and young. The anti-social punishment norm was pervasive in Russia, in Switzerland it was non-existent. This is astonishing. It provides evidence, once more, that conventional models in economics, i.e. the neoclassical Arrow-Debreu-Koopmans models I mention above are entirely inadequate to describe the behaviours of agents in modern day economies. I believe too that this kind of validation was necessary in order to show that their data wasn't simply quirky. Moreover, Benedikt Herrmann in personal communications, recently told me that experiments done by a colleague of his in Africa (though I hate that generalization) have had similar and particularly strong anti-social punishment results.

Moving away from these considerations, Gächter links the phenomenon of antisocial punishment to some of the (very) recent literature on 'Do-gooder derogation' (Monin, JPSP, 2008). The kind of situation where cooperators, or 'do-gooders' are sanctioned by others because these others view their behaviour as paternalistic, condescending and 'better than thou'. I haven't read Monin's paper yet, so I cannot comment on this, but my suspicion is that this may be accurate. Furthermore, when Gächter discussed indexes from Hofstede (I think) referring to individualism vs. collectivism, it was shown that those countries in which the individualism ranking was high and the collectivist ranking was low were less likely to anti-socially punish others than those in which the individualism ranking was low and the collectivist ranking was high. I think there may be a few factors endogenous to this though, as in their data their was a fairly strong correlation between lack or rule of law and lack of civic norms with the low individualism and high collectivism indices.

It would be really interesting, imho, if we could somehow manage to control for various factors and say 'this is the marginal effect of the norm'. Don't think it's at all feasible, but it would still be interesting. Would this norm (dummy?) variable be something like the controversial 'Africa Dummy'?

More on this and other topics soon.

Tuesday, May 06, 2008

Antisocial punishment, civic cooperation and legal institutions

Posted by Simon Halliday | Tuesday, May 06, 2008 | Category: , , , , , | 0 comments

Herrmann et al. Cooperation and Antisocial Punishment Today's comment (probably the last one for a while depending on time and studying) is about the (2008) paper by Benedikt Herrmann, Christian Thöni and Simon Gächter in Science.

The main thrust of the paper is to do with what the authors label as 'antisocial punishment', i.e. punishing those people who are cooperating in a public goods game with you. This is contrary to most of the literature on the subject in which punishment normally ensures that players in public goods games end up at a Pareto superior solution of cooperate (most of the time).

The authors undertook 16
sets of experiments in 15 different countries (you can see the countries in the graphs). The authors then look at some specific reasons as to why the results could indicate such strange results for the different groups in the different countries. They argue that social norms (social preferences?) could exist which would promote specific patterns of behaviour rather than others. Thus they try to use an instrument for civic cooperation in society, which might be indicative of the necessity to punish free riders in order to display that such behaviour is unacceptable. However the converse, that low civic cooperation necessarily leads to antisocial punishment is not necessarily true, but they try to test the thesis regardless. To test this hypothesis they use the World Values Survey, The second hypothesis is that strong rule of law could lead to a situation in which personal revenge punishing, or antisocial punishment would be unacceptable – 'effective, fair, impartial' legal institutions could erase the need to personal revenge punishment (this is supported by an interesting, if slightly more anecdotal article by Jared Diamond in the recent New Yorker). To test this hypothesis the authors use an law indicator provided by the World Bank. Norms of civic cooperation were important in determining punishment in ensuring cooperation, but rule of law was not significant. With respect to antisocial punishment, better norms of civic cooperation and improved rule of law would decrease the likelihood of antisocial punishment. Stating the converse – countries with poor rule of law and low norms of civic cooperation were more likely to have antisocial punishment. Anyway, taking note of these conclusions, I think it is quite cool to have a look at the graphs. The first graph is the graph indicating whether cooperation occurs when the punishment option is not allowed, i.e. this forms the control group against which the punishment group is compared.

As is normal, we see that the groups start off cooperating, but then basically move downwards. However, what is astonishing is the disparate starting positions for the different cities and the different end positions. Normally, one would expect 'first world countries' (high civic cooperation, high legal institution quality) to have decent cooperation in general. This is not the case, for which Melbourne, Australia is the most interesting exemplar. Istanbul, Riyadh and Athens are however very near the bottom (and stay there in the second graph). Copenhagen has very high norms of cooperation, with cooperation being high in this graph and also in the second. In the second graph (where the experiment is r
un with the option to punish) we observe a massive change in behaviour for certain developed countries, again Melbourne is interesting as their behaviour has come into line with most of the other developed countries, but is not as high as Copenhagen or Boston.

which is fascinating to see when assessing the graphs side by side is that the behaviour in Minsk, Athens and Riyadh (and to a lesser extent Muscat) is almost exactly the same in the control as it is in the punishment treatment. This is quite astounding when considering the evidence that is normally offered in this literature. I think that this warrants substantial additional research. What makes the second graph particularly interesting is the variation in the final outcomes. In the first graph there was some variation (difference max-min = 7.6 units), but the shape of the curves was fairly similar for each of the societies. In the second graph there is dramatic variation in the outcomes for the different societies (difference max – min = 12.3). These are very rough, I admit - I don't have the data set, but I encourage you to read the paper for some more direct and applicable analysis of the dataset. I would also intuit that if you looked at the averages for the two groups Chengdu up to Boston against Minsk down to Athens you would get a significant difference between these groups, whether these groups deserve aggregation is something worth checking in terms of the civic cooperation and the legal institution index.

One additional comment I'd like to make is that I think that this kind of research would be especially worthwhile in both South America and Africa. The sample at hand covers groups from the US, Europe, Asia and Austalasia. It would be cool to see a couple more from the Australasia/Oceania region too, but I think there should be some experiments done in South America and Africa, as already stated. These would face additional and particular challenges, but are warranted nevertheless.

Monday, May 05, 2008

Imitation and Cooperation - should the model be spatial?

Posted by Simon Halliday | Monday, May 05, 2008 | Category: , , , , , | 0 comments

This post is a comment on the paper by Rodriguez-Sickert, Rowthorn and Guzmán (2008). It was the basis for the presentation given by Bob Rowthorn at the TECT/SOCCOP meeting.

The main theses of the paper are centred around

  1. Genetic algorithms for specific behaviours

  2. Learning algorithms again for behaviours

As is customary, it is assumed that individuals payoffs are not only a function of their own actions, but of the actions of others. Thus, if one individual is a defector and they interact with (are randomly paired with) a defector/cooperator/cooperator-punisher then their payoff is modified accordingly. The idea of 'learning' models as follows: individuals adopt the learning model of their parents, although this is open to mutation. Individuals therefore have one of three possible learning modules:

  1. Conformism (copying the most common behaviour in their tribe)

  2. Payoff-dependent imitation (copying the most profitable behaviour)

  3. Best responder (homo economicus)

Individuals use these rules in order to choose whether to adopt defection/cooperation/cooperation & punishment behaviours in the relevant interactions that they face. Implicit in these learning algorithms is the belief that access to information is costless. Individuals cannot 'hide' their type. This paper is more about the description of the prevalence of behaviours than the arguments about costliness of behaviour and of arguments about encephalization and brain size. Each of the strategies could be argued to be costly in some manner, the level of the cost is relevant in other models.

The model is based on descriptions of hunter-gatherer society available in Bowles and Choi (2007) which it uses as starting conditions for the society. There are T tribes, each of which have constant and homogeneous size N. There is migration between tribes (through exogamy) and tribes go through cycles of (ritualistic) behaviours: hunting, war, reproduction, migration and learning (individuals interact and gain the strategy of their mentor with some probability, or they 'innovate' and get a strategy that neither agent has, innovation only applies to payoff-dependent agents, not others). Personally, I think that migration should come after war and before reproduction, but I could be wrong.

Selection pressures act at two levels: the within-group level (individual agents maximising their fitness) and the group level (tribes interacting and determining which is better off). I refer you to the model for details, one detail that I mention though is the probability of a cooperator to defect, which I think is necessary. However, if there is a stochastic chance of a cooperator (or punisher) defecting, then I believe strongly that there should be a possibility of a defector mistakenly cooperating. This is for us to remain consistent with what we mean by 'mistakes', otherwise we are saying only that people who cooperate are capable of making mistakes, which I think is problematic. I don't really know how consistent this criticism is with the literature though. I am also not entirely sure of exactly how one would mistakenly cooperate, but can conceive of how one would mistakenly defect. Still not convinced though.

With respect to the inter-group interactions, the simulations that the authors run results in a baseline situation (discarding the first 50 000 years of interactions) of fairly stable percentages of the behaviours. Groups were paired randomly and do battle (the war stage). The group with fewer defectors is more likely to win than the group with more defectors (indicating the tension between within-group and between group selection). The battles are deemed to be 'massacres' with every agent in the losing tribe being 'killed' and replaced as follows: the surviving tribesman 'clone' themselves (rape of women in the previous tribe for example), then clones and remaining tribesmen intermingle to create two new tribes. One problem I have with this model is that it uses a random pairing method for interactions. I think that this is inaccurate and that in order for the model to make more realistic predictions tribes should interact on a spatial matrix and only meet tribes that are within a specific distance of themselves. This could have interesting results for the pervasiveness of specific behaviour patterns.

After the simulations, Best Responders comprise 5% of the population, Payoff-Dependent imitators comprise 20% of the population and Conformists comprise 75% of the total population. When the level of migration is increased to 50% then these percentages change, with Best Responders increasing to 40.5% of the total population, Conformists 38.5% and Payoff-Dependent imitators 19% of the population. Alternatively, holding migration constant and halving the conflict rate, the population consists of 15% Best responders, 60% Conformists and 25% Payoff-dependent imitators. Lower levels of conflict thus result in lower levels of 'cooperation'.

This paper is very interesting in my mind, mainly for the fact that it has a large number of groups (T=20) interacting over the time frame, which is quite good for this kind of work. I do think though that the spatial nature of 'real interactions' is quite crucial and that it could lead to high quality later work on the subject. I refer the reader to Bowles and Choi (2007) for similar work, dealing instead with parochial altruism. I think that a coupling of the two systems would be quite interesting, i.e. learning agents who could be parochial altruists (or altruists in other manners) and see what that might do to the simulations and to the models.

Sunday, May 04, 2008

Plant-Ant Mutualism and the Principal Agent Problem

Posted by Simon Halliday | Sunday, May 04, 2008 | Category: , , , , , | 0 comments

This first commentary will be on the paper by Edwards, Hassall, Sutherland and Y, Selection for protection in an ant-plant mutualism: host sanctions, host modularity, and the principal agent game, published in Proceedings of the Royal Society of Biology (2006) with some additional comments on the arguments Douglas Yu put forward at the TECT meeting.

The central arguments of the paper revolve around the observed facts that:

  1. mutualisms evolve from antagonistic interactions,

  2. and persist in the face of invasion by specializes parasites, and selection for cheating by the mutualists themselves.

I assess specifically the economic basis for the arguments presented by Edwards et al. and ask the reader to refer to the paper for the specific details offered on the experimental design, results, etc.

The essential points are the following, there are species of plants that have ant symbionts which populate the domatia that are produced by the plant. These domatia produce relevant benefits to the symbiont ant. Symbiont ants protect the plant from herbivory by investing in protection (a sunk cost), and thus maintain access to the domatia. Ants that seem not to protect the plant from herbivory (approx 10% of the ants that inhabit this specific plant species) that are found not to patrol (through some signal) will lose the benefit of the domatia. The argument is that this interaction is one that is customary to the principal-agent literature: there are two types of agents cooperators (protectors) and defectors (cheaters/non-patrollers). The idea is that the plant (the principal) will design a contract so that it can read the signals of the agents in order to know whether the agent is abiding by the contract. If the agent does not abide by the contract it is punished by the removal of the domatia on the branch that it did not protect.

Crucially, we must note several factors that affect how the ant-agents behave and how the plant-principals act. The plant-principals signal their success by the number of domatia that they produce for the ants. The ant-agents signal their successful defence by ensuring that herbivory does not occur. In the context of the experiment, herbivory was simulated by cutting off leaves in the area where the ants patrolled the branches. These branches would then die off if a certain number of leaves were cut off (leaves cut = 4), but not for a certain lower number of leaves removed (leaves cut = 2). This would indicate that only 'gross misconduct/laxity' by the ants (i.e. something similar to the complete lack of protection offered by the one ant species) would result in domatia mortality.

The study found that a certain pertinent level of domatia (d=23) was the level at which selection between cooperators and defectors would be ambivalent. However, if the number of domatia exceeded this level then it is likely that protectors would be selected. This seems to be coherent with the data as the average number of domatia on the plants was 28 in the site under inspection. Consider this as a wage problem in the principal-agent setting. The principal needs to set some optimal wage in order for the agent to maximise their output. Moreover, the wage can act as a selection tool, reading the signals that are sent by the respective agents.

I believe that the paper offers a really high quality and interesting application of economic insights to the world of biology. Edwards et al. correctly assert that modelling mutualism as a market structure would be erroneous on account of the information asymmetries that would be present in such a market and the inability for the mutualists to have a 'complete contract' (me imputing economics to what they are saying). Thus the use of the principal-agent problem as a descriptive technique is almost certainly more accurate than that progressed by Noë and Hammerstein (1994) for markets in mutualisms. The economics that Edwards et al. use seems intuitively applied and theoretically well-grounded. Douglas Yu is currently moving this work forward by looking at other plant-ant mutualisms, as well as at fig wasp-fig tree mutualisms. The paper on that topic is currently a work in progress, but I look forward to its results, especially because of the fact that 'abscising' (cutting off) of figs in which excess oviposition has occurred does not seem to be a general pattern (if I recall his talk accurately).

Next Few Posts

Posted by Simon Halliday | | Category: | 0 comments

As my previous post said, I was at a conference (actually a work group meeting) in Barcelona for TECT. TECT is centred around the The Evolution of Cooperative Trade. The group of which I was de facto a part because of Sam Bowles is called SOCCOP, which is again to do with the evolution of social and cooperative norms.

Over the next while I'll be spending some time blogging about the papers presented. I don't have the expertise to comment rigorously on all the topics as it was an interdisciplinary meeting. I will inevitably have my 'economic hat' on during the analysis.

The papers I'll be talking about are all available here. Most likely I'll have the first one up some time later today and the rest as I manage to read them while studying. I read some before the conference and will dredge up my notes on them too. As a point of foreshadowing, the presentations I enjoyed the most were probably the following:
Douglas Yu on the evolution of mutualisms (ant-plant, wasp-fig tree, etc)
Sam Bowles and Sung-Ha Hwang on Social Preferences and Public Economics
Bob Rowthorn on Slow Learners and Conformism
Simon Gaechter and Benedikt Herrmann on Evolution of Cooperative Punishment

There were several others that were really good, but these appealed to me personally the most. I may spend more time on them than the others.