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.

Wednesday, September 22, 2010

Beer Distibutors Lobby Against Legalization of Marijuana

Posted by Simon Halliday | Wednesday, September 22, 2010 | Category: , | 0 comments

In a fantastic display of the power of availability of substitutes, we're witnessing the opposition to legalization of marijuana in California by California Beer and Beverage Distributors.  Proposition 19, which proposes the legalization of marijuana in California, has various groups lobbying against it.  The main group funding the opposition to the proposition is the California Police Chiefs Association.  That makes sense to me for political economy reasons (if I am a policeman, and I know that one of the sources of me having a job is drug crime, if drug possession is no longer a crime, then I am less likely to have a job in the future, therefore I campaign against the legalization of drugs to ensure myself a job), but not moral ones (marijuana doesn't have any 'worse' effects than alcohol, in fact it's less addictive, and legalizing marijuana would decrease certain drug-related crimes, which are often racially/ethnically correlated).

Anyway, the California Beer and Beverage Distributors face a similar problem economic problem.  If marijuana is legalized, then the the price of marijuana is likely to decrease because of increased (legal) supply.  Let's assume that marijuana is a substitute for beer. If the price of a substitute decreases, this implies that the good that has the higher price is going to take a hit to its demand - its demand decreases.  Consequently, at the same supply of beer, the price for beer will be lower than it was before the price for the substitute decreased.  At this new, lower price, some firms may exit the market because they cannot cover costs.  If firms exit the market, then the supply must decrease.  If the supply decreases, then there is less beer for beer distributors to distribute, that is, the demand for beer distribution decreases.  If the demand for beer distribution decreases, then at a given supply the price for beer distribution must decrease (a new, lower, equilibrium price obtains).  At this price some beer distributors may not be able to cover their costs.  Some of the distributors will have to exit the market.  Consequently, beer distributors will pay now to ensure that a proposition that jeopardises their future profitability does not get passed! Economics in action.

How might this all change if beer and marijuana were complements rather than substitutes? Well, in that case the opposite would hold.  Demand for beer would increase with legalization of marijuana (as consumption of marijuana increased, so would consumption of beer).  Consequently, there might be an increase in demand for beer distribution, which, at a given supply of beer distribution, would imply a higher price for beer distribution and greater profitability.

So it all rests on whether beer and marijuana are substitutes or complements.  It appears as though the beer distributors have a strong reason to believe that they are substitutes, else they wouldn't be paying to try to oppose the legalization of marijuana.  I think this is a fantastic, entertaining and easily teachable use of basic economics principles and price theory.  I've made a few simplifying assumptions along the way, but the explanation still helps us to understand the behaviour of the beer distributors.

Images sourced from Morguefile.com from users ruskyskytrain and MindExpansi0n.

Monday, September 20, 2010

Do we need a new Economics Principles Course?

Posted by Simon Halliday | Monday, September 20, 2010 | Category: , , | 1 comments

Principles of Economics (7th Edition)Stephen Kinsella sends us to a post on economics education by Paul Gregory, author of an Economic Principles text since the 80s, which is now in its seventh edition.  Gregory tells us in the post that "There is no need for a new Economics 101. What we have experienced over the past two years is nothing new. There is nothing unexpected that has happened. Events however should serve as “teachable moments." I think that he's right about some stuff, wrong about others and, more problematically, behaves inconsistently in his approach to different theories.  

First, I agree that Gregory's post is useful in telling us what is wrong with current policy, that is, that some of the theories that economists in the current US administration have about consumers and firms' preferences and behaviour have been falsified.  This is good theory.  However, Gregory then takes the behaviour of firms and consumers as confirming evidence of alternative theories. This is a bad theory.  You can't apply falsifiability to some theories and then use the data you used to falsify those theories as confirming evidence for theories that you prefer.  I could, equivalently, have found falsifying evidence for the theories that he proposes and confirming evidence for the theories that he argues are falsified.  This is bad economics and bad philosophy. I'd be differently inclined were he to take a Bayesian position and say that the evidence alters our priors about the theories that we have and that we should adjust our expectations and our probabilities accordingly, but he doesn't.  Consequently, I would have been more interested had Gregory said, 'These are Keynesian hypotheses that have been falsified' and 'These are Neoclassical hypotheses that have been falsified.' Then he could have said, 'Here are hypotheses (Neoclassical/Keynesian or otherwise) that have not (yet) been falsified.' I suppose he could have put in his comments about the behaviour of the theories in his text at this juncture, but he should have also looked for falsifying evidence of those theories.

Second, his claim that 'Nothing unexpected has happened' (emphasis on expected, that is in anticipation) is outright rubbish.  Many (most) economists did not expect what happened.  We can use economic theory to explain it in hindsight, but saying it was expected by those who learned from textbooks such as his is rather outrageous. They (we) did not expect it, did not anticipate it, and subsequently have bungled much of the management of it. In the future we shall be able to use the data from the crisis and the subsequent policy interventions to create a better understanding of extant theories, but the point would be to do so in a methodologically consistent and coherent manner.

Third, and nevertheless, he makes good points about the teaching of moral hazard, uncertainty and information asymmetry.  I strongly advocate teaching these ideas in economic principles courses and I suspect that we should give them more weight than ever before.  In fact, we should do almost all of our teaching in the understanding that information is almost never perfectly symmetrical, on the contrary it is almost always imperfect.  What would this do to our economics principles course if we assumed that imperfect information was the norm and not the exception.  Well, I would argue that, in opposition to Gregory, we would need a new Economics 101 and that, consequently, we could coherently take the past few years a 'teachable moment' in the understanding that economists themselves are victims of imperfect information and are not exempt from their own theories.    

Saturday, September 11, 2010

Tech & Pop Culture in Teaching Econ

Posted by Simon Halliday | Saturday, September 11, 2010 | Category: , , | 3 comments

On Thursday I gave a presentation at the School of Economics at the University of Cape Town about incorporating pop culture and better use of technology into your teaching.  I've been trying to experiment with various things in my teaching recently and I plan to experiment more in the future.




The talk began with a discussion of whether I think we should use slides or not.  I think we can (not necessarily should) use slides, but that they need to be of a very high quality and that they need to be designed with specific goals in mind.  For this, I discussed people like Edward Tufte, Garr Reynolds, Larry Lessig and I used Hans Rosling as someone who uses both analog and digital presentation props well, and from whom I think we can learn as instructors of economics.  I proceeded to discuss some useful databases that are out there and to which people can contribute: Movies for Econ and Music for Econ.  An example: I recently took it upon myself to use music videos in my lecture slides and tutorials and based questions and examples on these music videos (you'll see two of them in the presentation).  I moved on to look at various resources that are out there, both proprietary software that I use (Screenflow in Mac OS) and internet repositories for creative commons or shared products, e.g. compfight.com for CC images, or Teaching Resources for Undergraduate Economics (TRUE) for economics. 

I also began to broach the topic of the challenges that I've faced in trying to innovate.  For example, the costs of bandwidth in South Africa force the university to adopt a 'Campus Internet Quota' (CIQ).  Because of the CIQ, students on campus are allowed approximately 200MB per month of external internet access.  Consequently, after I had uploaded my videos to Vimeo I was contacted by students staying in campus residences who said that they could not access the videos because they were too big and they'd exceeded their CIQs (the videos range from 80-120MB depending on the content).  This resulted in me having to work out work-arounds.  It was an education.

I concluded the discussion by bringing up 'open content' generally and the University of Cape Town's own attempts to move toward open content.  There are many examples of researchers and teachers trying to open up teaching and research: academicearth.org, MIT open courseware, etc.  I hope I can contribute in my small way as I go forward. 

There are all kinds of things I didn't get around to discussing: blogs, twitter, using an RSS feed (which is still a foreign concept for some), prezi.  I hope to write something more official on this topic using my experiences as a case study and I hope that I can make some more general points in the article.  We'll see what comes of it.

The presentation was received well by the members of the audience.  Many of the staff had not seen me present before or thought about this stuff became readily engaged and hope to look at a lot of this stuff in the future.  The problems are, obviously, the large fixed costs of getting to know the resources out there and the incentive problems that an academic faces when choosing whether to dedicate time to research or to teaching (with its attendant preparation).  I hoped to convince them that the spillovers, once you've incurred the initial high fixed costs, are valuable and will improve your presenting as you go forward in your career.  We've yet to see whether I'll be a case in support of this argument or not. 

h/t Stephen Kinsella for getting me to think more deeply about these topics and suggesting readings that got me onto this whole push for improved teaching and use of technology (or abandoning slideware entirely).   
h/t Lara Skelly who is the economics librarian at UCT.  She's done (and is doing) all kinds of good work and updating me on information and additional resources for open content, creative commons in teaching, and more.

Sunday, September 05, 2010

Disagreeing with Jonah Lehrer

Posted by Simon Halliday | Sunday, September 05, 2010 | Category: , , | 3 comments

Jonah Lehrer recently wrote about the identifiable victim effect. In the piece he talks about the work of Paul Slovic and identifiable victims. I appreciate the work that Slovic has done. I have met and interacted with some of Slovic's co-authors and think the work is great. The idea behind identifiable victim bias is that people respond differently when they see one 'identifiable' victim rather than a bunch of statistics indicating the 'true' depths of poverty. For example, people give £3.50 in the one case and less than half that in the other. Lehrer says the following about the different reactions that people have:

"Of course, this is a deeply irrational reaction. We are much less interested in helping a victim – we only want to help the victim. (This bias is known as the identifiable victim effect, since it suggests that we react much more strongly when the victim can be specified.) Why do we this? Because human charity is ultimately rooted in our compassionate feelings, and not in some rational, utilitarian calculations. We are not Vulcans."
But, Lehrer's claim that it's 'irrational' for us to respond in one way to an emotive stimulus and another to an intellectual one is false. Again, this abuses the idea of 'rationality'. What Lehrer is actually saying is that people behave in a way that he interprets as inconsistent, and thus irrational. I would argue, instead, that the behaviour is not inconsistent. That is, in an agent's preference rankings they will (or may, depending on the agent) consistently prefer - and rank higher - cases in which they can identify victims rather than observe the statistics of a problem. This can be a consistent response. It just seems as though Lehrer wants to project a certain kind of value on what an individual's ranking should be and, because he thinks its inconsistent, infer it is irrational. Were it inconsistent for all agents at all times, it would display irrational behaviour.

He then goes on to examine a new paper in which some people are 'less irrational' than others. That is, some people who tend to be 'more analytical' also tend not to 'fall victim to' the identifiable victim bias. OK, we're getting somewhere. What this says to me, instead, is that people who value analysis are going to approach and rank their preferences in such a way that they would like their emotional and analytical selves to be consistent. That is their preference rankings mirror the correlate of tendency to analyse. What Lehrer does not say is that both groups could be rational and satisfying preference functions that are indeed consistent, but that he does not know what those preference sets are. If we accepted this, and measured at the level of the population, we might be able to infer what those preference sets are from the behaviours that people display, rather than labelling one group as rational and the other as not.

The problem here is one of identification. That is, can we identify at the level of the individual ex ante and without additional information what a given individual will rank higher? No, we can't. We need their preferences to be revealed by their behaviour. OK. Once we have data, though, might we be able to list the probabilities with which an individual's preferences might fall into one class or another? Yes. In fact, I'd say that would be progress. Admitting the possibility of agents with heterogeneous preference sets, that is, people who rank things differently, and therefore rank their responses to things like statistics and identifiable victims differently, is a step toward improving the behavioural sciences. The point is the idea of rationality is non-tautologous as long as we have accurate descriptions of the classes of preferences that individuals might have. If I understand the problem accurately, then this is indeed what many researchers are trying to consider when it comes to other-regarding and self-regarding preferences. Some agents seem to display other-regarding preferences. Other agents seem to display self-regarding preferences. Given no knowledge about an individual we cannot say with certainty which kind of preferences they have. But, as more data mounts, we should be able to say that individuals with certain kinds of characteristics are more likely to display a certain set of preferences given a certain set of conditions. We could then provide probabilities with which a given individual about whom we have limited information will display one set of preferences or another. Rationally. Similarly, once we have better and more comprehensive data about how states affect behaviour, then we can improve our understanding of state-based and endogenous preferences (see Bowles's (2006) book Microeconomics: Institutions, Behavior and Evolution for a decent summary of these ideas).

To me, that is more interesting than identifiable victim bias being 'irrational'. I must also leave this post with a caveat: I do not believe people are fully rational. Moreover, I feel studying psychology can improve our understanding of agents in the settings that they are accustomed to and to understanding proximate motives for behaviour (see Greg Mankiw's NYT column from today where he urges students to study psych, along with one or two other subjects).  But I also think that inaccurate commentary on what rationality is and means does not help us to improve the behavioural sciences. Moreover, I think a proper understanding of rationality and its applications in the behavioural sciences serves to improve them rather than impoverish them (consistent, for example, with this recent post at Crooked Timber).