How do you change a paradigm?

Mar 3 JDN 2458546

I recently attended the Institute for New Economic Thinking (INET) Young Scholars Initiative (YSI) North American Regional Convening (what a mouthful!). I didn’t present, so I couldn’t get funding for a hotel, so I commuted to LA each day. That was miserable; if I ever go again, it will be with funding.

The highlight of the conference was George Akerlof‘s keynote, which I knew would be the case from the start. The swag bag labeled “Rebel Without a Paradigm” was also pretty great (though not as great as the “Totes Bi” totes at the Human Rights Council Time to THRIVE conference).

The rest of the conference was… a bit strange, to be honest. They had a lot of slightly cheesy interactive activities and exhibits; the conference was targeted at grad students, but some of these would have drawn groans from my more jaded undergrads (and “jaded grad student” is a redundancy). The poster session was pathetically small; I think there were literally only three posters. (Had I known in time for the deadline, I could surely have submitted a poster.)

The theme of the conference was challenging the neoclassical paradigm. This was really the only unifying principle. So we had quite an eclectic mix of presenters: There were a few behavioral economists (like Akerlof himself), and some econophysicists and complexity theorists, but mostly the conference was filled with a wide variety of heterodox theorists, ranging all the way from Austrian to Marxist. Also sprinkled in were a few outright cranks, whose ideas were just total nonsense; fortunately these were relatively rare.

And what really struck me about listening to the heterodox theorists was how mainstream it made me feel. I went to a session on development economics, expecting randomized controlled trials of basic income and maybe some political economy game theory, and instead saw several presentations of neo-Marxist postcolonial theory. At the AEA conference I felt like a radical firebrand; at the YSI conference I felt like a holdout of the ancien regime. Is this what it feels like to push the envelope without leaping outside it?

The whole atmosphere of the conference was one of “Why won’t they listen to us!?” and I couldn’t help but feel like I kind of knew why. All this heterodox theory isn’t testable. It isn’t useful. It doesn’t solve the problem. Even if you are entirely correct that Latin America is poor because of colonial and neocolonial exploitation by the West (and I’m fairly certain that you’re not; standard of living under the Mexica wasn’t so great you know), that doesn’t tell me how to feed starving children in Nicaragua.

Indeed, I think it’s notable that the one Nobel Laureate they could find to speak for us was a behavioral economist. Behavioral economics has actually managed to penetrate into the mainstream somewhat. Not enough, not nearly quickly enough, to be sure—but it’s happening. Why is it happening? Because behavioral economics is testable, it’s useful, and it solves problems.

Indeed, behavioral economics is more testable than most neoclassical economics: We run lab experiments while they’re adding yet another friction or shock to the never-ending DSGE quagmire.

And we’ve already managed to solve some real policy problems this way, like Alvin Roth’s kidney matching system and Richard Thaler’s “Save More Tomorrow” program.

The (limited) success of behavioral economics came not because we continued to batter at the gates of the old paradigm demanding to be let in, but because we tied ourselves to the methodology of hard science and gathered irrefutable empirical data. We didn’t get as far as we have by complaining that economics is too much like physics; we actually made it more like physics. Physicists do experiments. They make sharp, testable predictions. They refute their hypotheses. And now, so do we.

That said, Akerlof was right when he pointed out that the insistence upon empirical precision has limited the scope of questions we are able to ask, and kept us from addressing some of the really vital economic problems in the world. And neoclassical theory is too narrow; in particular, the ongoing insistence that behavior must be modeled as perfectly rational and completely selfish is infuriating. That model has clearly failed at this point, and it’s time for something new.

So I do think there is some space for heterodox theory in economics. But there actually seems to be no shortage of heterodox theory; it’s easy to come up with ideas that are different from the mainstream. What we actually need is more ways to constrain theory with empirical evidence. The goal must be to have theory that actually predicts and explains the world better than neoclassical theory does—and that’s a higher bar than you might imagine. Neoclassical theory isn’t an abject failure; in fact, if we’d just followed the standard Keynesian models in the Great Recession, we would have recovered much faster. Most of this neo-Marxist theory struck me as not even wrong: the ideas were flexible enough that almost any observed outcome could be fit into them.

Galileo and Einstein didn’t just come up with new ideas and complain that no one listened to them. They developed detailed, mathematically precise models that could be experimentally tested—and when they were tested, they worked better than the old theory. That is the way to change a paradigm: Replace it with one that you can prove is better.

The “market for love” is a bad metaphor

Feb 14 JDN 2458529

Valentine’s Day was this past week, so let’s talk a bit about love.

Economists would never be accused of being excessively romantic. To most neoclassical economists, just about everything is a market transaction. Love is no exception.

There are all sorts of articles and books and an even larger number of research papers going back multiple decades and continuing all the way through until today using the metaphor of the “marriage market”.

In a few places, marriage does actually function something like a market: In China, there are places where your parents will hire brokers and matchmakers to select a spouse for you. But even this isn’t really a market for love or marriage. It’s a market for matchmaking services. The high-tech version of this is dating sites like OkCupid.
And of course sex work actually occurs on markets; there is buying and selling of services at monetary prices. There is of course a great deal worth saying on that subject, but it’s not my topic for today.

But in general, love is really nothing like a market. First of all, there is no price. This alone should be sufficient reason to say that we’re not actually dealing with a market. The whole mechanism that makes a market a market is the use of prices to achieve equilibrium between supply and demand.

A price doesn’t necessarily have to be monetary; you can barter apples for bananas, or trade in one used video game for another, and we can still legitimately call that a market transaction with a price.

But love isn’t like that either. If your relationship with someone is so transactional that you’re actually keeping a ledger of each thing they do for you and each thing you do for them so that you could compute a price for services, that isn’t love. It’s not even friendship. If you really care about someone, you set such calculations aside. You view their interests and yours as in some sense shared, aligned toward common goals. You stop thinking in terms of “me” and “you” and start thinking in terms of “us”. You don’t think “I’ll scratch your back if you scratch mine.” You think “We’re scratching each other’s backs today.”

This is of course not to say that love never involves conflict. On the contrary, love always involves conflict. Successful relationships aren’t those where conflict never happens, they are those where conflict is effectively and responsibly resolved. Your interests and your loved ones’ are never completely aligned; there will always be some residual disagreement. But the key is to realize that your interests are still mostly aligned; those small vectors of disagreement should be outweighed by the much larger vector of your relationship.

And of course, there can come a time when that is no longer the case. Obviously, there is domestic abuse, which should absolutely be a deal-breaker for anyone. But there are other reasons why you may find that a relationship ultimately isn’t working, that your interests just aren’t as aligned as you thought they were. Eventually those disagreement vectors just get too large to cancel out. This is painful, but unavoidable. But if you reach the point where you are keeping track of actions on a ledger, that relationship is already dead. Sooner or later, someone is going to have to pull the plug.

Very little of what I’ve said in the preceding paragraphs is likely to be controversial. Why, then, would economists think that it makes sense to treat love as a market?

I think this comes down to a motte and bailey doctrine. A more detailed explanation can be found at that link, but the basic idea of a motte and bailey is this: You have a core set of propositions that is highly defensible but not that interesting (the “motte”), and a broader set of propositions that are very interesting, but not as defensible (the “bailey”). The terms are related to a medieval defensive strategy, in which there was a small, heavily fortified tower called a motte, surrounded by fertile, useful land, the bailey. The bailey is where you actually want to live, but it’s hard to defend; so if the need arises, you can pull everyone back into the motte to fight off attacks. But nobody wants to live in the motte; it’s just a cramped stone tower. There’s nothing to eat or enjoy there.

The motte comprised of ideas that almost everyone agrees with. The bailey is the real point of contention, the thing you are trying to argue for—which, by construction, other people must not already agree with.

Here are some examples, which I have intentionally chosen from groups I agree with:

Feminism can be a motte and bailey doctrine. The motte is “women are people”; the bailey is abortion rights, affirmative consent and equal pay legislation.

Rationalism can be a motte and bailey doctrine. The motte is “rationality is good”; the bailey is atheism, transhumanism, and Bayesian statistics.

Anti-fascism can be a motte and bailey doctrine. The motte is “fascists are bad”; the bailey is black bloc Antifa and punching Nazis.

Even democracy can be a motte and bailey doctrine. The motte is “people should vote for their leaders”; my personal bailey is abolition of the Electoral College, a younger voting age, and range voting.

Using a motte and bailey doctrine does not necessarily make you wrong. But it’s something to be careful about, because as a strategy it can be disingenuous. Even if you think that the propositions in the bailey all follow logically from the propositions in the motte, the people you’re talking to may not think so, and in fact you could simply be wrong. At the very least, you should be taking the time to explain how one follows from the other; and really, you should consider whether the connection is actually as tight as you thought, or if perhaps one can believe that rationality is good without being Bayesian or believe that women are people without supporting abortion rights.

I think when economists describe love or marriage as a “market”, they are applying a motte and bailey doctrine. They may actually be doing something even worse than that, by equivocating on the meaning of “market”. But even if any given economist uses the word “market” totally consistently, the fact that different economists of the same broad political alignment use the word differently adds up to a motte and bailey doctrine.

The doctrine is this: “There have always been markets.”

The motte is something like this: “Humans have always engaged in interaction for mutual benefit.”

This is undeniably true. In fact, it’s not even uninteresting. As mottes go, it’s a pretty nice one; it’s worth spending some time there. In the endless quest for an elusive “human nature”, I think you could do worse than to focus on our universal tendency to engage in interaction for mutual benefit. (Don’t other species do it too? Yes, but that’s just it—they are precisely the ones that seem most human.)

And if you want to define any mutually-beneficial interaction as a “market trade”, I guess it’s your right to do that. I think this is foolish and confusing, but legislating language has always been a fool’s errand.

But of course the more standard meaning of the word “market” implies buyers and sellers exchanging goods and services for monetary prices. You can extend it a little to include bartering, various forms of financial intermediation, and the like; but basically you’re still buying and selling.

That makes this the bailey: “Humans have always engaged in buying and selling of goods and services at prices.”

And that, dear readers, is ahistorical nonsense. We’ve only been using money for a few thousand years, and it wasn’t until the Industrial Revolution that we actually started getting the majority of our goods and services via market trades. Economists like to tell a story where bartering preceded the invention of money, but there’s basically no evidence of that. Bartering seems to be what people do when they know how money works but don’t have any money to work with.

Before there was money, there were fundamentally different modes of interaction: Sharing, ritual, debts of honor, common property, and, yes, love.

These were not markets. They perhaps shared some very broad features of markets—such as the interaction for mutual benefit—but they lacked the defining attributes that make a market a market.

Why is this important? Because this doctrine is used to transform more and more of our lives into actual markets, on the grounds that they were already “markets”, and we’re just using “more efficient” kinds of markets. But in fact what’s happening is we are trading one fundamental mode of human interaction for another: Where we used to rely upon norms or trust or mutual affection, we instead rely upon buying and selling at prices.

In some cases, this actually is a good thing: Markets can be very powerful, and are often our best tool when we really need something done. In particular, it’s clear at this point that norms and trust are not sufficient to protect us against climate change. All the “Reduce, Reuse, Recycle” PSAs in the world won’t do as much as a carbon tax. When millions of lives are at stake, we can’t trust people to do the right thing; we need to twist their arms however we can.

But markets are in some sense a brute-force last-resort solution; they commodify and alienate (Marx wasn’t wrong about that), and despite our greatly elevated standard of living, the alienation and competitive pressure of markets seem to be keeping most of us from really achieving happiness.

This is why it’s extremely dangerous to talk about a “market for love”. Love is perhaps the last bastion of our lives that has not been commodified into a true market, and if it goes, we’ll have nothing left. If sexual relationships built on mutual affection were to disappear in favor of apps that will summon a prostitute or a sex robot at the push of a button, I would count that as a great loss for human civilization. (How we should regulate prostitution or sex robots are a different question, which I said I’d leave aside for this post.) A “market for love” is in fact a world with no love at all.

Sexism in the economics profession

Jan 20 JDN 2458504

I mentioned in my previous post that the economics profession is currently coming to a reckoning with its own sexist biases. Today I’d like to get back to that in more detail.

I think I should include some kind of trigger warning here, because some of this sexism is pretty extreme. In particular, there are going to be references to anal sex, which certainly isn’t something I was expecting to find. I won’t quote anything highly explicit—but I assure you, it exists.

There is reason to believe that these biases are not as bad as they once were. If you compare the cohorts of new economics PhDs to those of the past, or to the professors who have been tenured for many years, the pattern is quite clear: The longer back you look, the fewer women (and racial minorities, and LGBT people) you see.

In part because of the #MeToo movement (which, I really would like to say, has done an excellent job of picking legitimate targets and not publicly shaming the wrong people, unlike almost every other attempt at public shaming via social media), the economics profession is also coming to terms with a related matter, which could be both cause and consequence of these gender disparities: Sexual harassment by economists of their students and junior faculty.

It wasn’t until last year that the AEA officially adopted a Code of Professional Conduct mandating equality of opportunity for women (and minorities, and LGBT people). Of course, sexual harassment has been illegal much longer than that—but it’s probably the most under-reported and under-prosecuted crime in existence. Last year’s AEA conference was the first to include panels specifically on gender and discrimination in economics, and this year’s conference had more.

Grad students have been a big part of this push; hundreds of econ grad students signed an open letter demanding that universities implement reporting and disciplinary systems to deal with sexual harassment in economics (one of the signatories is friend of mine from UCI, though strangely I don’t remember hearing about it, or I would have signed it too).

One of the most prominent economists accused of repeated sexual harassment unfortunately happens to be the youngest Black person ever to get tenured at Harvard. This would seem to create some tension between gender equality and racial equality. But of course this tension is illusory: There are plenty of other brilliant Black economists they could have hired who aren’t serial sexual harassers.

It’s still dicey for grad students and junior faculty to talk about these things, because of the very real power that senior faculty have over us as committees for dissertations, hiring, and tenure. Some economists who wrote papers about sexism in the profession have chosen to remain anonymous for fear of retaliation.

Part of how this issue has finally gotten so much attention is by concerned economists actually showing it using the methods of social science. One of the most striking studies was a data analysis of the word usage on econjobrumors.com, a job discussion board for PhD grads and junior faculty in economics. (More detail on that study here and also here.)

I’ve bolded the terms that are sexual or suggest bias. I’ve italicized the terms that suggest something involving romantic or family relationships. I’ve underlined the terms actually relevant for economics.
These were the terms most commonly associated with women:

hotter, lesbian, bb, sexism, tits, anal, marrying, feminazi, slut, hot, vagina, boobs, pregnant, pregnancy, cute, marry, levy, gorgeous, horny, crush, beautiful, secretary, dump, shopping, date, nonprofit, intentions, sexy, dated and prostitute.

These were the terms most commonly associated with men:

juicy, keys, adviser, bully, prepare, fought, wharton, austrian, fieckers, homo, genes, e7ee, mathematician, advisor, burning, pricing, fully, band, kfc, nobel, cat, amusing, greatest, textbook, goals, irritate, roof, pointing, episode, and tries.

I imagine the two lists more or less speak for themselves. I’m particularly shocked by the high prevalence of the word “anal”—the sixth-most common word used in threads involving women.

Who goes to an economics job forum and starts talking about anal sex?

I actually did a search on “anal” to see what sort of things were being discussed: This thread is apparently someone trying to decide where he should work based on “Girls of which country are easiest to get?”, so basically sex tourism as job market planning. Here’s another asking (perhaps legitimately) about the appropriate social norm for splitting vacation costs with a girlfriend, and someone down the thread recommends that in exchange for paying, he should expect her to provide him with anal sex. This one starts with a man lamenting that his girlfriend dumped him on his birthday (that’s a dick move by the way), but somehow veers off into a discussion of whether anal sex is overrated. And this one is just off the bat about frequency of sexual encounters.
So yeah, I’m really not surprised that there aren’t a lot of women on these so-called “job discussion boards”.

The only bias-related word associated with men was “homo”—so it’s actually a homophobic bias, itself indicative of sexism and a profession dominated by cisgender straight White men. I’m not entirely sure that “juicy” was intended to be sexualized (one could also speak of “juicy ideas”), but I’ll assume it was just to conservatively estimate the gender disparity.

Also of special note are “fieckers” and “e7ee”, which refer to specific users, who, despite being presumably economists, caused a great deal of damage to the discussion boards. “fieckers” was an idiosyncratic word that one user used in a variety of sexist and homophobic troll posts, while “e7ee” is the hexadecimal code for one of the former moderators, who apparently uilaterally deleted and moved threads in order to tilt the entire discussion board toward right-wing laissez-faire economics.

Of course, that one discussion board isn’t representative of the entire profession. As anyone who has ever visited 4chan knows, discussion boards can be some of the darkest places on the Internet.

Clearer evidence of discrimination where it counts can be found in citation studies, which have found that papers published by women in top economics journals are more highly cited than papers published by men in the same journals.

What does that mean? Well, it’s the same reason that female stock brokers outperform male brokers and firms with more female executives are more profitable. Women are held to a higher standard than men, so in order to simply get in, women have to be more competent and produce higher-quality output.

Admittedly, citation count is far from a perfect measure of research quality (and for that matter profit is far from a perfect measure of a well-run corporation). But this is very clear evidence of actual discrimination. Not innate differences in preferences, not differences in talent—actual discrimination. It’s less clear where and how the discrimination is happening. Are journals simply not accepting good papers if they see female authors? (This is possible, because most top journals in economics don’t use double-blind peer review anymore—for quite flimsy reasons, in my opinion). Are there not enough mentors for women in academia? Are women moving to more accepting fields before they even enter grad school? Are they being pushed out by harassment as grad students? Likely all of these are part of the story.

There’s reason to think that economic ideology has contributed to this problem. If you think of the world in neoclassical laissez-faire terms, where markets are perfect and always lead to the best outcome, then you are likely to be blind to bias and discrimination, because a perfect market would obviously eliminate such things. This is why the recognition of bias has largely come from empirical studies of labor markets, and to a lesser extent from experiments and more left-wing theorists. If you assert that markets are perfectly efficient, labor economists are likely to laugh in your face, while a surprising number of macro theorists will nod and ask you to continue.

Interestingly, recent field experiments on bias in hiring of new faculty did not find any bias against women in economics (and found biases toward women in several other fields). Of course, that doesn’t mean there never was such bias; but perhaps we’ve actually managed to remove it. So that’s one major avenue of discrimination we maybe finally have under control. Only several dozen left to go?

What would a new macroeconomics look like?

Dec 9 JDN 2458462

In previous posts I have extensively criticized the current paradigm of macroeconomics. But it’s always easier to tear the old edifice down than to build a better one in its place. So in this post I thought I’d try to be more constructive: What sort of new directions could macroeconomics take?

The most important change we need to make is to abandon the assumption of dynamic optimization. This will be a very hard sell, as most macroeconomists have become convinced that the Lucas Critique means we need to always base everything on the dynamic optimization of a single representative agent. I don’t think this was actually what Lucas meant (though maybe we should ask him; he’s still at Chicago), and I certainly don’t think it is what he should have meant. He had a legitimate point about the way macroeconomics was operating at that time: It was ignoring the feedback loops that occur when we start trying to change policies.

Goodhart’s Law is probably a better formulation: Once you make an indicator into a target, you make it less effective as an indicator. So while inflation does seem to be negatively correlated with unemployment, that doesn’t mean we should try to increase inflation to extreme levels in order to get rid of unemployment; sooner or later the economy is going to adapt and we’ll just have both inflation and unemployment at the same time. (Campbell’s Law provides a specific example that I wish more people in the US understood: Test scores would be a good measure of education if we didn’t use them to target educational resources.)

The reason we must get rid of dynamic optimization is quite simple: No one behaves that way.

It’s often computationally intractable even in our wildly oversimplified models that experts spend years working onnow you’re imagining that everyone does this constantly?

The most fundamental part of almost every DSGE model is the Euler equation; this equation comes directly from the dynamic optimization. It’s supposed to predict how people will choose to spend and save based upon their plans for an infinite sequence of future income and spending—and if this sounds utterly impossible, that’s because it is. Euler equations don’t fit the data at all, and even extreme attempts to save them by adding a proliferation of additional terms have failed. (It reminds me very much of the epicycles that astronomers used to add to the geocentric model of the universe to try to squeeze in weird results like Mars, before they had the heliocentric model.)

We should instead start over: How do people actually choose their spending? Well, first of all, it’s not completely rational. But it’s also not totally random. People spend on necessities before luxuries; they try to live within their means; they shop for bargains. There is a great deal of data from behavioral economics that could be brought to bear on understanding the actual heuristics people use in deciding how to spend and save. There have already been successful policy interventions using this knowledge, like Save More Tomorrow.

The best thing about this is that it should make our models simpler. We’re no longer asking each agent in the model to solve an impossible problem. However people actually make these decisions, we know it can be done, because it is being done. Most people don’t really think that hard, even when they probably should; so the heuristics really can’t be that complicated. My guess is that you can get a good fit—certainly better than an Euler equation—just by assuming that people set a target for how much they’re going to save (which is also probably pretty small for most people), and then spend the rest.

The second most important thing we need to add is inequality. Some people are much richer than others; this is a very important fact about economics that we need to understand. Yet it has taken the economics profession decades to figure this out, and even now I’m only aware of one class of macroeconomic models that seriously involves inequality, the Heterogeneous Agent New Keynesian (HANK) models which didn’t emerge until the last few years (the earliest publication I can find is 2016!). And these models are monsters; they are almost always computationally intractable and have a huge number of parameters to estimate.

Understanding inequality will require more parameters, that much is true. But if we abandon dynamic optimization, we won’t need as many as the HANK models have, and most of the new parameters are actually things we can observe, like the distribution of wages and years of schooling.

Observability of parameters is a big deal. Another problem with the way the Lucas Critique has been used is that we’ve been told we need to be using “deep structural parameters” like the temporal elasticity of substitution and the coefficient of relative risk aversion—but we have no idea what those actually are. We can’t observe them, and all of our attempts to measure them indirectly have yielded inconclusive or even inconsistent results. This is probably because these parameters are based on assumptions about human rationality that are simply not realistic. Most people probably don’t have a well-defined temporal elasticity of substitution, because their day-to-day decisions simply aren’t consistent enough over time for that to make sense. Sometimes they eat salad and exercise; sometimes they loaf on the couch and drink milkshakes. Likewise with risk aversion: many moons ago I wrote about how people will buy both insurance and lottery tickets, which no one with a consistent coefficient of relative risk aversion would ever do.

So if we are interested in deep structural parameters, we need to base those parameters on behavioral experiments so that we can understand actual human behavior. And frankly I don’t think we need deep structural parameters; I think this is a form of greedy reductionism, where we assume that the way to understand something is always to look at smaller pieces. Sometimes the whole is more than the sum of its parts. Economists obviously feel a lot of envy for physics; but they don’t seem to understand that aerodynamics would never have (ahem) gotten off the ground if we had first waited for an exact quantum mechanical solution of the oxygen atom (which we still don’t have, by the way). Macroeconomics may not actually need “microfoundations” in the strong sense that most economists intend; it needs to be consistent with small-scale behavior, but it doesn’t need to be derived from small-scale behavior.

This means that the new paradigm in macroeconomics does not need to be computationally intractable. Using heuristics instead of dynamic optimization and worrying less about microfoundations will make the models simpler; adding inequality need not make them so much more complicated.

MSRP is tacit collusion

Oct 7 JDN 2458399

It’s been a little while since I’ve done a really straightforward economic post. It feels good to get back to that.

You are no doubt familiar with the “Manufacturer’s Suggested Retail Price” or MSRP. It can be found on everything from books to dishwashers to video games.

The MSRP is a very simple concept: The manufacturer suggests that all retailers sell it (at least the initial run) at precisely this price.

Why would they want to do that? There is basically only one possible reason: They are trying to sustain tacit collusion.

The game theory of this is rather subtle: It requires that both manufacturers and retailers engage in long-term relationships with one another, and can pick and choose who to work with based on the history of past behavior. Both of these conditions hold in most real-world situations—indeed, the fact that they don’t hold very well in the agriculture industry is probably why we don’t see MSRP on produce.

If pricing were decided by random matching with no long-term relationships or past history, MSRP would be useless. Each firm would have little choice but to set their own optimal price, probably just slightly over their own marginal cost. Even if the manufacturer suggested an MSRP, retailers would promptly and thoroughly ignore it.

This is because the one-shot Bertrand pricing game has a unique Nash equilibrium, at pricing just above marginal cost. The basic argument is as follows: If I price cheaper than you, I can claim the whole market. As long as it’s profitable for me to do that, I will. The only time it’s not profitable for me to undercut you in this way is if we are both charging just slightly above marginal cost—so that is what we shall do, in Nash equilibrium. Human beings don’t always play according to the Nash equilibrium, but for-profit corporations do so quite consistently. Humans have limited attention and moral values; corporations have accounting departments and a fanatical devotion to the One True Profit.

But the iterated Bertrand pricing game is quite different. If instead of making only one pricing decision, we make many pricing decisions over time, always with a high probability of encountering the same buyers and sellers again in the future, then I may not want to undercut your price, for fear of triggering a price war that will hurt both of our firms.

Much like how the Iterated Prisoner’s Dilemma can sustain cooperation in Nash equilibrium while the one-shot Prisoner’s Dilemma cannot, the iterated Bertrand game can sustain collusion as a Nash equilibrium.

There is in fact a vast number of possible equilibria in the iterated Bertrand game. If prices were infinitely divisible, there would be an infinite number of equilibria. In reality, there are hundreds or thousands of equilibria, depending on how finely divisible the price may be.

This makes the iterated Bertrand game a coordination gamethere are many possible equilibria, and our task is to figure out which one to coordinate on.

If we had perfect information, we could deduce what the monopoly price would be, and then all choose the monopoly price; this would be what we call “payoff dominant”, and it’s often what people actually try to choose in real-world coordination games.

But in reality, the monopoly price is a subtle and complicated thing, and might not even be the same between different retailers. So if we each try to compute a monopoly price, we may end up with different results, and then we could trigger a price war and end up driving all of our profits down. If only there were some way to communicate with one another, and say what price we all want to set?

Ah, but there is: The MSRP. Most other forms of price communication are illegal: We certainly couldn’t send each other emails and say “Let’s all charge $59.99, okay?” (When banks tried to do that with the LIBOR, it was the largest white-collar crime in history.) But for some reason economists (particularly, I note, the supposed “free market” believers of the University of Chicago) have convinced antitrust courts that MSRP is somehow different. Yet it’s obviously hardly different at all: You’ve just made the communication one-way from manufacturers to retailers, which makes it a little less reliable, but otherwise exactly the same thing.

There are all sorts of subtler arguments about how MSRP is justifiable, but as far as I can tell they all fall flat. If you’re worried about retailers not promoting your product enough, enter into a contract requiring them to promote. Proposing a suggested price is clearly nothing but an attempt to coordinate tacit—frankly not even that tacit—collusion.

MSRP also probably serves another, equally suspect, function, which is to manipulate consumers using the anchoring heuristic: If the MSRP is $59.99, then when it does go on sale for $49.99 you feel like you are getting a good deal; whereas, if it had just been priced at $49.99 to begin with, you might still have felt that it was too expensive. I see no reason why this sort of crass manipulation of consumers should be protected under the law either, especially when it would be so easy to avoid.

There are all sorts of ways for firms to tacitly collude with one another, and we may not be able to regulate them all. But the MSRP is literally printed on the box. It’s so utterly blatant that we could very easily make it illegal with hardly any effort at all. The fact that we allow such overt price communication makes a mockery of our antitrust law.

For labor day, thoughts on socialism

Planned Post 255: Sep 9 JDN 2458371

This week includes Labor Day, the holiday where we are perhaps best justified in taking the whole day off from work and doing nothing. Labor Day is sort of the moderate social democratic counterpart to the explicitly socialist holiday May Day.

The right wing in this country has done everything in their power to expand the definition of “socialism”, which is probably why most young people now have positive views of socialism. There was a time when FDR was seen as an alternative to socialism; but now I’m pretty sure he’d just be called a socialist.

Because of this, I am honestly not sure whether I should be considered a socialist. I definitely believe in the social democratic welfare state epitomized by Scandinavia, but I definitely don’t believe in total collectivization of all means of production.

I am increasingly convinced that shareholder capitalism is a terrible system (the renowned science fiction author Charles Stross actually gave an excellent talk on this subject), but I would not want to abandon free markets.
The best answer might be worker-owned cooperatives. The empirical data is actually quite consistent in showing worker co-ops to be as efficient if not more efficient than conventional corporations, and by construction their pay systems produce less inequality than corporations.

Indeed, I think there is reason to believe that a worker co-op is a much more natural outcome for free markets under a level playing field than a conventional corporation, and the main reason we have corporations is actually that capitalism arose out of (and in response to) feudalism.

Think about it: Why should most things be owned by the top 1%? (Okay, not quite “most”: to be fair, the top 1% only owns 40% of all US net wealth.) Why is 80% of the value of the stock market held by the top 10% of the population?

Most things aren’t done by the top 1%. There are a handful of individuals (namely, scientists who make seminal breakthroughs: Charles Darwin, Marie Curie, Albert Einstein, Rosalind Franklin, Alan Turing, Jonas Salk) who are so super-productive that they might conceivably deserve billionaire-level compensation—but they are almost never the ones who are actually billionaires. If markets were really distributing capital to those who would use it most productively, there’s no reason to think that inequality would be so self-sustaining—much less self-enhancing as it currently seems to be.

But when you realize that capitalism emerged out of a system where the top 1% (or less) already owned most things, and did so by a combination of “divine right” ideology and direct, explicit violence, this inequality becomes a lot less baffling. We never had a free market on a level playing field. The closest we’ve ever gotten has always been through social-democratic reforms (like the New Deal and Scandinavia).

How does this result in corporations? Well, when all the wealth is held by a small fraction of individuals, how do you start a business? You have to borrow money from the people who have it. Borrowing makes you beholden to your creditors, and puts you at great risk if your venture fails (especially back in the days when there were debtor’s prisons—and we’re starting to go back that direction!). Equity provides an alternative: In exchange for giving them the downside risk if your venture fails, you also give your creditors—now shareholders—the upside risk if your venture succeeds. But at the end of the day when your business has succeeded, where did most of the profits go? Into the hands of the people who already had money to begin with, who did nothing to actually contribute to society. The world would be better off if those people had never existed and their wealth had simply been shared with everyone else.

Compare this to what would happen if we all started with similar levels of wealth. (How much would each of us have? Total US wealth of about $44 trillion, spread among a population of 328 million, is about $130,000 each. I don’t know about you, but I think I could do quite a bit with that.) When starting a business, you wouldn’t go heavily into debt or sign away ownership of your company to some billionaire; you’d gather a group of dedicated partners, each of whom would contribute money and effort into building the business. As you added on new workers, it would make sense to pool their assets, and give them a share of the company as well. The natural structure for your business would be not a shareholder corporation, but a worker-owned cooperative.

I think on some level the super-rich actually understand this. If you look closely at the sort of policies they fight for, they really aren’t capitalist. They don’t believe in free, unfettered markets where competition reigns. They believe in monopoly, lobbying, corruption, nepotism, and above all, low taxes. (There’s actually nothing in the basic principles of capitalism that says taxes should be low. Taxes should be as high as they need to be to cover public goods—no higher, and no lower.) They don’t want to provide nationalized healthcare, not because they believe that private healthcare competition is more efficient (no one who looks at the data for even a few minutes can honestly believe that—US healthcare is by far the most expensive in the world), but because they know that it would give their employees too much freedom to quit and work elsewhere. Donald Trump doesn’t want a world where any college kid with a brilliant idea and a lot of luck can overthrow his empire; he wants a world where everyone owes him and his family personal favors that he can call in to humiliate them and exert his power. That’s not capitalism—it’s feudalism.

Crowdfunding also provides an interesting alternative; we might even call it the customer-owned cooperative. Kickstarter and Patreon provide a very interesting new economic model—still entirely within the realm of free markets—where customers directly fund production and interact with producers to decide what will be produced. This might turn out to be even more efficient—and notice that it would run a lot more smoothly if we had all started with a level playing field.

Establishing such a playing field, of course, requires a large amount of redistribution of wealth. Is this socialism? If you insist. But I think it’s more accurate to describe it as reparations for feudalism (not to mention colonialism). We aren’t redistributing what was fairly earned in free markets; we are redistributing what was stolen, so that from now on, wealth can be fairly earned in free markets.

How (not) to destroy an immoral market

Jul 29 JDN 2458329

In this world there are people of primitive cultures, with a population that is slowly declining, trying to survive a constant threat of violence in the aftermath of colonialism. But you already knew that, of course.

What you may not have realized is that some of these people are actively hunted by other people, slaughtered so that their remains can be sold on the black market.

I am referring of course to elephants. Maybe those weren’t the people you first had in mind?

Elephants are not human in the sense of being Homo sapiens; but as far as I am concerned, they are people in a moral sense.

Elephants take as long to mature as humans, and spend most of their childhood learning. They are born with brains only 35% of the size of their adult brains, much as we are born with brains 28% the size of our adult brains. Their encephalization quotients range from about 1.5 to 2.4, comparable to chimpanzees.

Elephants have problem-solving intelligence comparable to chimpanzees, cetaceans, and corvids. Elephants can pass the “mirror test” of self-identification and self-awareness. Individual elephants exhibit clearly distinguishable personalities. They exhibit empathy toward humans and other elephants. They can think creatively and develop new tools.

Elephants distinguish individual humans or elephants by sight or by voice, comfort each other when distressed, and above all mourn their dead. The kind of mourning behaviors elephants exhibit toward the remains of their dead family members have only been observed in humans and chimpanzees.

On a darker note, elephants also seek revenge. In response to losing loved ones to poaching or collisions with trains, elephants have orchestrated organized counter-attacks against human towns. This is not a single animal defending itself, as almost any will do; this is a coordinated act of vengeance after the fact. Once again, we have only observed similar behaviors in humans, great apes, and cetaceans.

Huffington Post backed off and said “just kidding” after asserting that elephants are people—but I won’t. Elephants are people. They do not have an advanced civilization, to be sure. But as far as I am concerned they display all the necessary minimal conditions to be granted the fundamental rights of personhood. Killing an elephant is murder.

And yet, the ivory trade continues to be profitable. Most of this is black-market activity, though it was legal in some places until very recently; China only restored their ivory trade ban this year, and Hong Kong’s ban will not take full effect until 2021. Some places are backsliding: A proposal (currently on hold) by the US Fish and Wildlife Service under the Trump administration would also legalize some limited forms of ivory trade.
With this in mind, I can understand why people would support the practice of ivory-burning, symbolically and publicly destroying ivory by fire so that no one can buy it. Two years ago, Kenya organized a particularly large ivory-burning that set ablaze 105 tons of elephant tusk and 1.35 tons of rhino horn.

But as economist, when I first learned about ivory-burning, it seemed like a really, really bad idea.

Why? Supply and demand. By destroying supply, you have just raised the market price of ivory. You have therefore increased the market incentives for poaching elephants and rhinos.

Yet it turns out I was wrong about this, as were many other economists. I looked at the empirical research, and changed my mind substantially. Ivory-burning is not such a bad idea after all.

Here was my reasoning before: If I want to reduce the incentives to produce something, what do I need to do? Lower the price. How do I do that? I need to increase the supply. Economists have made several proposals for how to do that, and until I looked at the data I would have expected them to work; but they haven’t.

The best way to increase supply is to create synthetic ivory that is cheap and very difficult to tell apart from the real thing. This has been done, but it didn’t work. For some reason, sellers try to hide the expensive real ivory in with the cheap synthetic ivory. I admit I actually have trouble understanding this; if you can’t sell it at full price, why even bother with the illegal real ivory? Maybe their customers have methods of distinguishing the two that the regulators don’t? If so, why aren’t the regulators using those methods? Another concern with increasing the supply of ivory is that it might reduce the stigma of consuming ivory, thereby also increasing the demand.

A similar problem has arisen with so-called “ghost ivory”; for obvious reasons, existing ivory products were excluded from the ban imposed in 1947, lest the government be forced to confiscate millions of billiard balls and thousands of pianos. Yet poachers have learned ways to hide new, illegal ivory and sell it as old, legal ivory.

Another proposal was to organize “sustainable ivory harvesting”, which based on past experience with similar regulations is unlikely to be enforceable. Moreover, this is not like sustainable wood harvesting, where our only concern is environmental. I for one care about the welfare of individual elephants, and I don’t think they would want to be “harvested”, sustainably or otherwise.
There is one way of doing “sustainable harvesting” that might not be so bad for the elephants, which would be to set up a protected colony of elephants, help them to increase their population, and then when elephants die of natural causes, take only the tusks and sell those as ivory, stamped with an official seal as “humanely and sustainably produced”. Even then, elephants are among a handful of species that would be offended by us taking their ancestors’ remains. But if it worked, it could save many elephant lives. The bigger problem is how expensive such a project would be, and how long it would take to show any benefit; elephant lifespans are about half as long as ours, (except in zoos, where their mortality rate is much higher!) so a policy that might conceivably solve a problem in 30 to 40 years doesn’t really sound so great. More detailed theoretical and empirical analysis has made this clear: you just can’t get ivory fast enough to meet existing demand this way.

In any case, China’s ban on all ivory trade had an immediate effect at dropping the price of ivory, which synthetic ivory did not. Before that, strengthened regulations in the US (particularly in New York and California) had been effective at reducing ivory sales. The CITES treaty in 1989 that banned most international ivory trade was followed by an immediate increase in elephant populations.

The most effective response to ivory trade is an absolutely categorical ban with no loopholes. To fight “ghost ivory”, we should remove exceptions for old ivory, offering buybacks for any antiques with a verifiable pedigree and a brief period of no-penalty surrender for anything with no such records. The only legal ivory must be for medical and scientific purposes, and its sourcing records must be absolutely impeccable—just as we do with human remains.

Even synthetic ivory must also be banned, at least if it’s convincing enough that real ivory could be hidden in it. You can make something you call “synthetic ivory” that serves a similar consumer function, but it must be different enough that it can be easily verified at customs inspections.

We must give no quarter to poachers; Kenya was right to impose a life sentence for aggravated poaching. The Tanzanian proposal to “shoot to kill” was too extreme; summary execution is never acceptable. But if indeed someone currently has a weapons pointed at an elephant and refuses to drop it, I consider it justifiable to shoot them, just as I would if that weapon were aimed at a human.

The need for a categorical ban is what makes the current US proposal dangerous. The particular exceptions it carves out are not all that large, but the fact that it carves out exceptions at all makes enforcement much more difficult. To his credit, Trump himself doesn’t seem very keen on the proposal, which may mean that it is dead in the water. I don’t get to say this often, but so far Trump seems to be making the right choice on this one.

Though the economic theory predicted otherwise, the empirical data is actually quite clear: The most effective way to save elephants from poaching is an absolutely categorical ban on ivory.

Ivory-burning is a signal of commitment to such a ban. Any ivory we find being sold, we will burn. Whoever was trying to sell it will lose their entire investment. Find more, and we will burn that too.