Tag Archives: economics

Economics – people or facts?

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In preparing for a small workshop I’ve co-organised* in Oxford tomorrow, on “Rebooting Welfare Economics”, I’ve been browsing my bookshelves. Two titles jumped out: Ariel Rubinstein’s wonderful Economic Fables (winner of the first ever Enlightened Economist annual prize in 2012 – I’ve only just realised this blog is 10 years old) and John Hicks’s The Social Framework. Hicks states (p3 of my 1947 edition): “Economics studies facts and seeks to arrange the facts in such ways as make it possible to draw conclusions from them.” The positivist claim to separate ‘facts’ and positive knowledge from the normative shines out (see Chapter 3 of my Cogs and Monsters). Rubinstein says (p15): “Economic theory is concerned precisely with the abstract concepts related to the interaction between people.”

People or facts? I’m in the people camp.

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*With Eric Beinhocker, Tim Besley, Mark Fabian and Margaret Stevens.

In thrall to games?

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Hidden Games: The surprising power of game theory to explain irrational human behaviour by Moshe Hoffman and Erez Yoeli does exactly what it says on the cover. It’s an interesting strategy (ahem): irrational behaviour turns out to be rational after all! When being over-optimistic about our own abilities, fooling ourselves by only believing social media comments that reinforce our prior beliefs, spinning the truth, or over-spending on costly luxury goods, all these and more behavioural phenomena can be explained as dominant strategies in appropriately described games. It’s all about the Nash equilibria, stupid.

I enjoyed the book on the whole. It’s a breezy introduction to game theory applications, written with a light touch and plenty of anecdotes. An early chapter sets the scene with the classic evolutionary explanation for observed sex ratios, moving on then to the Hawks and Doves game, and of course the Prisoners’ Dilemma features extensively too.

It has always astonished me how few people think strategically at all, such that a read of the classic (1993) Thinking Strategically on how to apply game theory by Avinash Dixit and Barry Nalebuff would help almost anybody. I can remember once observing in a committee meeting (all economists) what the Nash equilibrium in a certain policy situation involving all EU member countries would be, which did my reputation among those colleagues a power of good as this made it obvious what decision our (UK) politicians would take, regardless of any economic advice we delivered.

Hidden Games does some of the same groundwork as Thinking Strategically in its first half, throwing in a brief explanation of Bayes theorem en passant. I found it less compelling when it gets to the second half, explaining the ‘irrational’ as Nash equilibria in various games. Perhaps this is because there are already pretty powerful models, whether cognitive – eg the rule-of-thumb argument about conserving brain energy in making decisions – or economic – classic signalling models. The application of game theory seems more interesting in contexts of collective choices (as in Kaushik Basu’s wonderful The Republic of Beliefs) than in individual decision-making.

Having said that, if you don’t mind the trope about rationalising the irrational, Hidden Games is a very nice introduction to applying game theory to life, an enjoyable read.

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Calling economics PhD students

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Thanks to a couple of train journeys – upcoming travel is going to be so good for my work-related reading! – I read again The Economist’s Craft: An Introduction to Research, Publishing and Professional Development by Michael Weisbach. Again, because I looked at a copy in draft a while ago.

I highly recommend this book for economics PhD students and their supervisors. As my blurb for it says, it’s the book I needed when I was starting out. It’s full of advice both wise and practical. It starts with the selection of a research topic, which is surprisingly hard – getting from a broad area of interest to an addressible specific question or hypothesis is something a lot of people struggle with. There are five chapters about writing papers/chapters, which might seem a lot except Professor Weisbach argues researchers should think of writing the paper as part of the research process rather than a dreaded add-on at the end. So this section integrates doing research with writing it, and incorporates sound advice such as not obsessing about statistical significance at the expense of meaning and actual significance. I wholeheartedly agree with all this. The competition to publish is intense and writing good papers is fundamentally important. It’s how disciplinary knowledge progresses.

There is then a section about presentations (don’t put too much on one slide! don’t prepare 50 slides for a 20 minutes slot! don’t stand looking at the display with your back to the audience! A lot of senior academics could do with paying attention), circulating papers and the publication process. The final section is about being a good academic, winding up with becoming a good thesis advisor and planning a research trajectory. Pretty much every page has some points to take on board.

In short, aimed at a specific audience, but for all of its target readers, very well worth buying and reading.

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Facing up to disorder

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I read the proofs of Helen Thompson’s magnificent new book Disorder: Hard Times in the 21st Century a while ago, and specifically before the Russian invasion of Ukraine. Having just read the finished product, it seems all the more prescient and timely. Take this observation, for instance: “For five decades, Central and Southern European energy dependency on Russia has been a geopolitical fact of life. Indeed, since the First World War’s end, the periods in which Germany has eschewed Russian/Soviet oil and later gas have been short … Since it has endured three decades into a post-Cold War world where Moscow uses gas as an instrument of power, Germany cannot escape responsibility for whathappens to states with borders with post-Soviet Russia.”

The book braids together three themes in its synopsis of present disorder and instability. The first is energy-driven geopolitics entwining the fates of the world’s major powers, destabilised periodically by discoveries or technologies (eg fracking in the US) and by events (eg Fukushima and the German abandoment of nuclear). Secondly, and relatedly, there is a sequence of economic crises with their own internal dynamic (the rise of market-oriented philosophies, China’s admission to the world trading system) but also “structural material causes”, in particular the energy shocks of the 1970s and increased energy demand due to China’s economic rise. The final section turns to democratic politics, related to the economic upheavals, and the challenges posed to liberal democracies by plutocracy and inequality, mass migration and the various shocks – the China effect on manufacturing, the GFC.

Along the way, the book weaves in much more – the institutional history of the EU, the breakdown of Bretton Woods, Middle Eastern politics. I’m in awe of Helen’s ability to take a synoptic view of underlying structural trends while mastering so much detail. How much must she read?? The book ends with some observations about what various (democratic) governments might do to tackle these linked predicaments, but it’s pretty pessimistic. I’m left with a sense of not just the length of the shadow of history but also its tenacity: instability is baked in. And as the final words put it: “How… democracies can be sustained as the likely contests over climate change and energy consumption destabilize them will become the central political question of the coming decade.” Read it to be informed, but not to be cheered.

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Firms and households

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Harold Demsetz’s essays in From Economic Man to Economic System are an interesting read. They range over a few subjects, including the selfish gene versus the selfish economic agent, and demographics. But most circle around the idea of property and markets, and Coase’s analysis of externalities on the one hand and firms on the other. Demsetz’s main aim, in my reading, is to argue that the proper scope of markets is wider even than in the free-market interpretation of the Coase theorem. It will be familiar territory to many readers. But there was one point that I’m mulling over, which is that transaction costs don’t determine what happens inside the firm versus in the market – rather, they may change the way firms are structured (more or less verticallyintegrated) but mainly affect the division between household and ‘economic’ production. “Zero transaction cost maximizes the importance of firms in the economic system by raising the percentage of total output of goods produced withing specialised production units as compared to the percentage  produced within self-sufficient households.” This is wrong – there are other reasons for firms to exist – but interesting. Another reason why economic analysis needs to bring household production fully into the picture.41V9pDSQlqL._SX331_BO1,204,203,200_