Cost benefit analysis – don’t get over-excited

Cass Sunstein’s new book, The Cost Benefit Revolution, almost managed to achieve the opposite of its aim, which is to persuade me of the merits of ubiquitous use of this tool for assessing social welfare so beloved by economists. I’m an economist so I think CBA is pretty useful but the book’s just so Panglossian about its ability to apply objective reason to regulatory decision making. “In a nutshell, quantitative cost benefit analysis is the best available method for assessing the effects of regulation on social welfare,” he writes (his italics). Except it doesn’t. He isn’t alone in thinking this. I once said to a Very Distinguished British economist that economics needed to take social welfare far more seriously. “Oh but it already does,” he replied. “We use CBA all the time.”

But the point is – as Sunstein does sort of concede in accepting that there are what he calls Hard Cases – it ignores (and the Pareto criterion ignores too) one of the key points about social welfare, namely distribution. Whose costs and whose benefits? It also – as has always been known in the literature, reiterated recently, and always ignored in practice – is a linear approximation suitable for use to assess the net effects of small changes. It furthermore has no validity in assessing any intervention that might change the path of growth or productivity or have any non-marginal effect.

Economists do think of CBA as one of the practical contributions of the field to policy, and I’m in favour of doing the CBA exercise as a source of information about decisions. In practice, for big decisions, that’s exactly what happens. Politics takes over, not least for the distributional reasons. After all, if CBA had been in use in the 19th century, Bazalgette would never have built London 150 years worth of sewerage capacity, and we would lack the magnificent town halls of cities like Manchester and Leeds.

Elsewhere in the book, in the excellent historical sections describing the (non-partisan) spread of CBA in US government, Sunstein gives some persuasive examples of how to use CBA well. (One of the poignant sections describes how an analysis changed Ronald Reagan’s mind – a Republican president open to reason.) There are nice, classroom friendly, examples of using CBA in different domains of policy and is actually more nuanced than the general enthusiasm would suggest about how to use CBA in the context of environmental science, especially when risk attitudes and discount rates differ greatly between groups of voters. All in all, it’s worth the read for anyone interested in the role of reason in policy making. Just don’t drink the same Kool Aid.

PS Tim Harford reviewed the book today and is a bit more enthusiastic.

Share

More classics (and other novels) for economists

Yesterday I reposted my 2013 list of classic novels for economists. Commenters on the post and many people on Twitter offered other suggestions. Here they are. First, classic novels:

Balzac – Alexandre Delaigue & others mentioned Le Père Goriot (cited by Thomas Piketty) and Eugenie Grandet was recommended by Rebecca Spang (about greed, speculation and coins).

Price: £8.99
Was: £9.99

Mary Shelley’s Frankenstein (of course! how could I have omitted it. Thanks Stephen Kinsella.

From Laurent Franckx, The Count of Monte Cristo by Alexandre Dumas.

Merjin Knibbe & others pointed to Dostoyevsky’s Crime & Punishment and The Gambler, and Gogol’s Dead Souls. Also Hemingway’s The Old Man and the Sea.

Price: £5.49
Was: £6.99

On the Gogol, “The plot of this hilarious satire revolves over an attempt by the protagonist to acquire fictious collateral (dead serfs) for which money could be borrowed from the Russian state bank (in early 19th century)”, writes Juha Tarkka.

Price: £7.78
Was: £9.99

Merjin also suggested some others I hadn’t even heard of: by Heijermans, Kamertjeszonde (no translation?!). Multatuli’s Max Havelaar. Fukazawa’s The ballad of Narayama, Malot’s Sans Familie.

Price: Check on Amazon

Matt Clancy suggested The Grapes of Wrath. Of course! Another one I should have thought of, were it not for the A Level aversion therapy: hated it when forced to read it.

Nick Isles proposed Jude the Obscure. (I hate Hardy’s novels; I always want the characters to just pull themselves together.)

Zola was popular:  The Ladies’ Paradise, L’Argent. Anything by Zola is magnificent.

Trollope’s The Way We Live Now was a popular one, and again a glaring omission from the original list.

Robbie Mochrie, impressively, suggested a Jane Austen work I’ve never heard of, about “the ways in which economic activity was shifting from land use to provision of goods and services early in the industrial revolution,” Sanditon.

Cyril Ritter points to Carlo Levi’s Christ Stopped at Eboli, 1945, “For its depiction of a system that exploits poor people and keeps them poor and uninformed.”

Then there were some non-classic suggestions, which was against the rules but there were some great ideas.

I thoroughly agree with all those recommending Francis Spufford’s Red Plenty, which in effect makes the point about the formal identity under ideal conditions of decentralised general equilibrium and the centrally planned economy. But more than that it’s a cracking good read. Also Spufford’s Golden Hill and The Backroom Boys. He’s a wonderful writer.

Price: £8.48
Was: £10.99
Price: £5.58
Was: £8.99

Jacques Crémer recommended The Godfather, Mario Puzo, on game theory.

Price: £5.99
Was: £8.99

Others in this category:

China Miéville, Embassytown

Price: £4.23
Was: £9.99

Michael Crichton’s Rising Sun (international capital flows)

Price: £8.99
Was: £9.99

Asimov’s Foundation series

Dune

Bonfire of the Vanities, Tom Wolfe

Price: £6.06
Was: £10.99

David Lodge’s Nice Work

Price: £8.46
Was: £8.99

 

 

Share

Classics for Economists

Courtesy of Elizabeth Baldwin at Oxford, I was reminded of a list of classic novels economists should read, something I posted here a few years ago. I had forgotten about it, and must immodestly say it’s a great list. Here it is again, below.

However, it could be better. Even in my own cultural tradition, I haven’t read the great Russian authors on the whole. Which of those are particularly economics-relevant? I hate Henry James and Dickens (school aversion therapy) but accept novels like Little Dorrit could count. What about African, Indian, Chinese classics? Should modern classics be added, Vonnegut’s Player Piano, say? Suggestions please.

The 2013 list:

Nostromo, Joseph Conrad: the heart of colonialism

Germinal, Emile Zola: the fuel of the Industrial Revolution – coal and human life

Price: £7.33
Was: £8.99

North and South or Mary Barton, Mrs Gaskell: the social effects of industrialisation with a special eye on women. Mary Barton is set in my home city, Manchester.

The Master and Margarita, Mikhail Bulgakov: the murderous insanity of Soviet dictatorship – Professor Woland, Game Theorist? I’ve only just read this, having seen the truly, madly, deeply brilliant Theatre de Complicite staging earlier this year.

Price: £6.45
Was: £7.99

The Charterhouse of Palma, Stendhal: pre-unification Italy and European politics

The Leopard, Giuseppe de Lampedusa: The Risorgimento, and modernity.

The Whirlpool, George Gissing: in fact anything by Gissing – as he summed it up, “Not enough money,” in Britain’s newly industrialising cities

Price: £8.49

Middlemarch, George Eliot (or again, pretty much anything by her): astute political and psychological analysis of 19th century social change. Bonnets and frocks without the saccharine.

Roxana, Daniel Defoe: the economic status of women, by one of the unsung feminist heroes, who was also a famous economic journalist in his day.

We, Yevgeny Zamyatin: collectivism, conformity – the dark side of the early 20th century. Another recent discovery, courtesy of Nick Reynolds.

Price: £8.99

Les Miserables, Victor Hugo: need I say anything? I even loved the recent musical movie version

Price: £9.46
Was: £12.99

My Antonia and O Pioneers, Willa Cather: the harsh life of the American frontier, and the strength of women.

The Great Gatsby, F Scott Fitzgerald: the Roaring 20s in a glamorous nutshell. I haven’t yet seen the new Baz Luhrmann movie version.

The Ragged Trousered Philanthropists, Robert Tressel: not the greatest literature but a novel that still speaks to working people struggling for money.

Castle Rackrent, Maria Edgeworth: She was contemporary with Jane Austen, but lived a lot longer.

Share

My damp Scandinavian view of the world

It’s the last full day of our holiday in Sweden and the weather has turned a bit wet, so in between the detective novels (the latest – Jill Paton Walsh’s Dorothy Sayers update, Thrones, Dominations) I read Robert Peston’s WTF. It’s as well-informed and full of insight about the present state of the world as you’d expect from such a distinguished journalist (although written in a slightly matey style which didn’t appeal to me). The book is mainly about Brexity UK – with a brilliant chapter on our last general election and the respective characters of Mrs May and Mr Corbyn – though it touches on parallel trends in Trumpland. I agree with his diagnosis that the issues contributing to the anti-establishment anger date back well before the financial crisis, to the deindustrialisation of the 80s and 90s, and the chasm between London/SE and the rest of the country. The book’s fundamental point is that the economy stopped working for an ever-growing number of voters, vast numbers of whom have seen no significant rise in living standards for well over a decade, and even longer for too many.

Interestingly, in the light of the current fashion for saying the big economic problem is all about concentration and the exploitation of market power, Peston instead pins the blame for a dclining labour share of national income on the Reagan-Thatcher-led attack on union power from the mid-70s on. The press reports of the Jackson Hole discussions this year noted that debate there focused on the issue of concentration. When I expressed some doubt on Twitter that this was anything other than a US phenomenon (as the UK labour share looked from eyeballing an ONS chart to have been fairly stable), a couple of replies insisted I was wrong (one arguing I was looking at the wrong data, and the other claiming the IMF said it was a global phenomenon). Well, after my years on the Competition Commission, I’m a big fan of tough competition policy, and agree it has been lax in the US for some time. The US also has an issue with creeping occupation licensing as the Obama CEA pointed out. But, reading up on the IMF’s recent work on trends in the labour share makes plain the great diversity of national experiences – and indeed, they say the UK labour share has increased.

Well, whenever a phenomenon is so varied across countries, it tells you institutions are playing a big part. Combined with the fact that across countries the big decline in the labour share occurred from the mid-1970s to around 2000, surely labour market institutions played a key part – for all that it’s right to be concerned about concentration in some countries/sectors now. (And the IMF data goes only to 2014, so perhaps there has been a dramatic decline in the latest 3 years of data…)

Anyway, looking out at the rain, on now to proofs of the forthcoming book by Alan Greenspan and Adrian Wooldridge, which I’m going to be reviewing in due course – a history of capitalism in America, which is going to be fascinating, as I’m anticipating a defence. There has also on Twitter been some discussion about what books to put on the syllabus for a history of capitalism course (really, a history of thought course), in which I didn’t participate (& can’t find now), but noted with interest that all the books were critiques, from The Great Transformation on. Maybe the Greenspan/Wooldridge book could balance it out.

Share

Holiday reading

I’m on holiday & luxuriating in the reading time, mostly non-work books. I did, though, read AIQ: How Artificial Intelligence Works and etc etc (am fed up now with these super-long subtitles) by Nick Polson and James Scott. If you read about AI already then this won’t add anything new. However, it’s a very nice, accessible and balanced introduction to AI for those who aren’t semi-immersed already, which is most people of course. The book explains the basics, and gives lots of examples of what ML and AI are already doing, and what they might be capable of in future – while also explaining what the potential risks are. It’s an enjoyable read, too, with lots of stories and real world examples. It isn’t Pollyannaish exactly, but it is nice to read something on this subject that isn’t all gloom and doom. AI beginners should start here.

One thing I particularly appreciated was the way the authors highlight the role of female scientific pioneers: astronomer Henrietta Leavitt (no, I’d never heard of her either), Grace Hopper, and Florence Nightingale. I learnt some new things: that real time data monitoring is already a thing in Formula 1 racing and starting now in basketball, for instance. There’s also a nice section on health explaining that the barriers to using AI and health data are not technological but social and economic – which will make it extremely hard to use data for the benefit of individual patients, even as massive data sets enable research on populations.

Apart from that, it’s been a diet of detective novels – Mick Herron’s Dead Lions (love this series), Abir Mukherjee’s A Rising Man – and also Stanislaw Lem’s The Cyberiad (clever but an acquired taste). And now, the great Swedish outdoors beckons.

Share