Great Blog Post on Problem with Mainstream Concept of Constant or Increasing Marginal Utility

"Thus, one cannot talk about preferences for risk independently of the real human activity that has risk as one of its attributes."

This article discusses how marginal utility and utility analysis cannot be disaggregated into risk and monetary payoff because utility analysis was devised to discuss preferences of activities (goods and services, etc.), not about preferences of singular attributes of those activities (like risk etc. which can change depending on other attributes or even depending on other activities, and therefore would make little sense to try to reduce to a static mathematical model).

Of course there are other problems even with the Austrian interpretation of static subjective utility (which arguably is the more correct since they invented it), such as the fact that even utility functions for activities can change over time, and, as mentioned in the article, mathematical utility can not be compared across people (which kind of calls into question the breadth of usefulness of utility functions to start with).

I do disagree with some statements in the post. Particularly: "....Answering such questions may be a job for psychologists, but it is not one for economists."

It's that kind of un-wholistic "I'm for me, you are for you" attitude, that we do not need anymore. Much like you can't disaggregate utility into money and risk, you cant disaggregate the study of human behavior into psychology and economics (etc.).

Planet Money Continues to be Amazing

Thank You Planet Money for delving into this issue. As usual, they let the listener draw their own conclusions - and I think most (especially younger) persons will, and hopefully they will recreate the profession.

IUPUI accepting applications for Ph.D in Economics, Fall 2010

The specialization area, and the heavily quantitative nature of the degree probably aren't my cup of tea... but for those in the Indianapolis area with strong economics and math backgrounds with interest in non-profit or health economics, here you go. Many of the teachers are exceptional - you would get a good bang for your buck here.

The N-Effect

This is a really neat study. The basic point is summed up as: "the motivation to succeed decreases as the number of [people, or, N] rises.

I can say from personal experience that strikes me as being accurate. When I used to work out at LA Fitness if it were the middle of the week and only a hand-full of people who were working out hard, I would tend to focus on them and work hard. But if I went on a busy weekend I would just do what I thought was my 'typical' workout.

This is true for classes I've been in too. In a small class of 20 or 30 people, I remember focusing on really doing my best to 'compete' with others in terms of class participation (yes, I was one of those annoying students) - because I loved the feel of 'debate' and the personal competition. Groups of us would even compare grades and we would feed off each other. But with a large lecture of 100+ students, there is little motivation to even attempt to compete/compare with so many people.

Uh Oh. Looks like the Cap and Trade Would Remain Regressive and Disproportionate (No surprise here)

US Sec. of State Clinton pledges up to $100 Billion annually to help foreign countries pay for climate change controls. "Clinton said the funding would come from a mix of public and private financing, including revenue raised from the auctioning of emission allowances under a possible U.S. cap-and-trade system still under development on Capitol Hill."

So, basically, any (or a good chunk of) government revenue raised from cap-and-trade wouldn't be filtered back to low-income Americans, or persons/geographies disproportionately affected by the cap-and-trade system. The money wouldn't even stay in the United States. A sizable chunk would go outside of the United States to poor nations - many of which have corrupt government that would more than likely waste the money or use it to further impoverish their people.

BAD policy. BAD, BAD policy.

A great textbook that I wish was more student-friendly

On a lighter note from my previous post, I recently chose my Spring-semester textbook. I decided to stay with Robert Hall and Marc Lieberman's "Macroeconomics: Principles and Applications." I chose them a few semesters ago because they seem to be a lot more thoughtful about the depth of issues than say, Mankiw. And, it is a really well-written mainstream textbook.

But, I would chose this textbook, bar none, were it not for the cluttered writing, formatting, etc. Macroeconomics in Context is amazing in that it combines mainstream economic thinking and adds in significant (but still appropriately introductory) analysis of transitional economies, environmental economics, post-Keynesian economics, and the like. In other words, it does a great job of attempting to provide a more holistic approach to economics.

But everything about the look and the feel of the text is a failure. It's verbose, the graphs are few and amateurish. In a word, I'm concerned students would be turned off and just would never read it. I hope that the people at Tufts University recognize this and clean up the text for their next edition.

In the meantime, I will continue to use portions of it in a supplemental manner.

The Classroom of Mainstream Economics

Scene: first day of first econ class

"Welcome to economics 101. By the end of this semester I hope to indoctrinate you into the cult of economics, just like my teachers indoctrinated me. But first, we must define economics.

In order to do that, you need to know some of the jargon of the trade. Does everyone know what it is to be selfish? Economics starts out recognizing that people always act for their own gains - and there is nothing wrong with that ever. Oh wait, I see a hand... what's that?... you say what about seemingly unselfish behavior and what about acts toward a common good? No No No, see I just told you economics shows us that people don't really care or need to worry about these things. See look, I'll prove it (writes a utility function on the board). See? This math equation says so. Ahem, ok, moving on....

Second, economics recognizes that there are scarce resources, and that the best way to allocate these resources is to let selfish people trade them in a market. These markets always function perfectly and in doing so, create the most efficient system possible.

That brings us to our second term: 'efficiency'. You see class, 'efficiency' is a necessary result of the indoctrination I'm teaching you today. Because selfish people are allowed to own property, and because they are allowed to freely trade in a market, society's gains are maximized. Imagine one of these markets was baking pies. Efficiency is basically giving society as much of that pie as possible.

Yes? You have another question... what's that you say? What about if you are a person that wants a piece of pie and can't afford it? No No No. You aren't understanding right. Economics doesn't have anything to say about equity or fairness or things that Europeans care about, economics talks about important things, like making sure we don't just have a blueberry pie, we have blueberry pie with lots of whipped cream. That's what's important here. See, because the more pie we have, we could, if we wanted to, allocate some of the leftover scraps to this poor person. But I kinda like whipped cream alot, so...., luckily for her economics tells us not to worry!

...Anyway, these irrational questions are making me get off topic. I need to get back to the indoctrination. But incidentally, that reminds me of one more term we need to understand: 'rationality'. Economics assumes that everyone is rational and that everyone has well-defined preferences and acts in their own best interest. ...You have another question? What if people's preferences change frequently over time or are different in different situations? I can see you really are going to need a hand in this class.... Your question is a non starter! You see, rationality and having a complete set of information --- these are just simplifying assumptions so that these awesome math equations (stare longingly) I just drew on the board can reveal to us their secrets! See, look!

If we didn't make these assumptions, I wouldn't be able to teach economics. If I wasn't able to teach economics, I wouldn't be able to indoctrinate you. Were I not able to indoctrinate you, then you won't be able to be an intelligent person - and if you aren't able to be an intelligent person, then you won't be able to indoctrinate the next generation! Do you understand now Garth?"

Do you understand now?

An Example of Band-Aid Analysis

Economics predicts Tiger Woods will play more golf than ever before.

Tiger Woods announces indefinite time off 'work'

But hey, that's the kind of predictive power you get when you ignore dumb stuff like, you know, human emotion.

On Economists and Band-Aids

I would like to attempt to answer Mike's charge (which I agree with) that economists tend to apply simplistic band-aid-like solutions to complex problems. I would argue that a carbon tax is one such overly simple solutions: Is there a social cost to pollution? "Tax it!" say (some)economists. Is there a social benefit to health care? "Subsidize it!" say (some) economists.

Of course the reason many economists are attracted to simple solutions is because 'simple' is the only course of actions their mathematical models allow. When you try to box your science into modelling all behavior as a system of digits, then the only answers you can provide will consist of the same system of digits. It is this failure of the science to incorporate a more holistic method of analysis that begets the simplicity - and why all mainstream economic analysis needs to be tempered with reality checks.

Why We Need Health Care Reform - A Real Example

I recently underwent a major surgery which I knew was going to be a huge cost (to somebody). I didn't know if it was going to be $1,000, $10,000 or $100,000. This is because, unlike most every other good or service in our mixed economy, health care does not operate via posted prices. Costs are guesstimated by consumers and are often not even in play in consumer decision-making. In that sense, there is no true 'market'.

One of the downsides I have personally experienced regarding our system is the huge amount of waste (monetary, labor, and natural resource-wise). I went to a hospital for one singular surgery. Since then (so far!) I've received 7 separate notices from my insurance company and about 5 unique bills all related to sub-costs I incurred from my overall visit. I got one anesthesia bill, one diagnostics bill, one consult bill, one surgeon bill... the lack of communication and consolidation of services, in such a technological age, is ridiculous.

Yesterday, I received my surgeon bill in the mail (post-insurance payout):

So from an original cost of about $17,000.00, I have to pay less than $800. If I didn't have this insurance, like 20+ million Americans I would either be provided this service for free - thereby skyrocketing the premiums of those that do have insurance and that do pay into the system, or, I would not even attempt to seek this service knowing I wouldn't be able to afford it, and I would be dead in a few years.

In a modern, advanced, society, neither scenarios should be ok. Everyone who is not classified as 'poor' that complain about the short-term increased government spending or marginal potential increases in short-term premiums... you should feel ashamed. I'm thankful that I am paying pennies on the dollar for my healthcare. I recognize the more people that pay into the system the better. I recognize that millions don't have the luxury of health. I don't mind my government investing in fixing a system that is broken. I don't mind if my taxes and/or premiums rise a little in the short-run, because I know I am helping millions of fellow Americans get something that they need to live. Besides, premiums will surely fall in the long-run as we bring others into the system, and as we actually create market exchanges, and as we begin to pay down long-term debt.

So, if you don't like particular aspects of the health care bills (I certainly take issue with parts as well), fine.... I recommend you do what I do and view these bills as a starting point of dialog. We need to pass a starting point so that we can fix the major problems. The tweaks can be done later.

Revised Modeling of State Economic Forecasting Changes...

...Nothing.