Tag: diane coyle

Is It Time to Reboot Welfare Economics?

Before we begin, interested readers should note that this blogpost (and the paper it covers) are a welcome violation of Betteridge’s law. In this case, the paper argues (and I agree), the answer is very much yes.

The paper in question is written by Diane Coyle, Mark Fabian, Eric Beinhocker, Tim Besley and Margaret Stevens. It was published about a week ago or so, and the abstract is below:

The contributions of economists have long included both positive explanations of how economic systems work and normative recommendations for how they could and should work better. In recent decades, economics has taken a strong empirical turn as well as having a greater appreciation of the importance of the complexities of real-world human behaviour, institutions, the strengths and failures of markets, and interlinkages with other systems, including politics, technology, culture and the environment. This shift has also brought greater relevance and pragmatism to normative economics. While this shift towards evidence and pragmatism has been welcome, it does not in itself answer the core question of what exactly constitutes ‘better’, and for whom, and how to manage inevitable conflicts and trade-offs in society. These have long been the core concerns of welfare economics. Yet, in the 1980s and 1990s, debates on welfare economics seemed to have become marginalised. The articles in this Fiscal Studies symposium engage with the question of how to revive normative questions as a central issue in economic scholarship.

Coyle, D., Fabian, M., Beinhocker, E., Besley, T. & Stevens, M. (2023), Is it time to reboot welfare economics? Overview. Fiscal Studies, 00 1–13. https://doi.org/10.1111/1475-5890.12334

Positive economics is describing the world as it is, and normative economics is describing the world as it ought to be. Or as I prefer to explain it in class, positive economics is me standing in front of a normal mirror, and normative economics is me standing in front of a mirror that makes me look thinner than I am.

This paper, the one we’re talking about today, focusses on welfare economics, which concerns itself with the normative side of things. Which fits just fine with question number three in macro – this paper is about answering the question that goes “what can we do to make the world a better place?”

The first section of the paper after the introduction explains why the authors think that revisiting the ideas of welfare economics is a good idea in 2023. The tweet version of this section is that in 2023, efficiency is overrated, and welfare economics is underrated. As a person who has explored themes related to maximizing soul, this is an idea that resonates. This section is worth lingering over for two other reasons.

One, it covers Jim Buchanan’s definition of economics:

“Buchanan (1964) defined economics as the study of exchange relations. He distinguished it from the study of power relations (politics) and moral relations (sociology and anthropology).”

It is worth quoting the relevant paragraph from the original paper:

Economics is the study of the whole system of exchange relationships. Politics is the study of the whole system of coercive or potentially coercive relationships. In almost any particular social institution, there are elements of both types of behavior, and it is appropriate that both the economist and the political
scientist study such institutions. What I should stress is the potentiality of exchange in those socio-political institutions that we normally consider to embody primarily coercive or quasi-coercive elements. To the extent that man has available to him alternatives of action, he meets his associates as, in some sense, an “equal,” in other words, in a trading relationship. Only in those situations where pure rent is the sole element in return is the economic relationship wholly replaced by the political

https://www.cooperative-individualism.org/buchanan-james_what-should-economists-do-1964-jan.pdf (See pages 220, 221)

To what extent do people today have “alternatives of action”? In other words, when person X meets person Y today in India, do they meet as equals? Might income have a role to play? Might language have a role to play? Might caste have a role to play? Might religion have a role to play? Might gender have a role to play? To what extent is trade then purely economic in India? Or does politics (not to mention sociology and anthropology) have a role to play too?

Second, this nice little line that hides a world of pain: “What discount rate to use is a normative question.” Ask ChatGPT to tell you more about it, with examples. But in general, if you are starting off on studying economics, think carefully about time, and what time-horizons you keep in mind when you evaluate policies. Most underrated thing to do, in my opinion.

The next section begins thus:

One area in which the normative shortcomings of traditional economics are readily apparent is the way we measure progress. Businesses are freely depleting or damaging natural resources, the financial sector enriches the top 1 per cent, the food system is contributing to obesity and promoting antibiotic resistance, pharmaceutical firms rely on people being unwell for the pursuit of profit, and new AI technologies create value for a few technology firms mostly by learning from existing creators without compensation. It is, not surprisingly, widely perceived by citizens that the economic model encourages extraction and exploitation. Yet conventional economic statistics say that society is doing better than ever. The measurement focus on unidimensional metrics of ‘the domain of socially organised production’ calculated using exchange values or market prices is under sustained challenge from a demand to go ‘Beyond GDP’.

Coyle, D., Fabian, M., Beinhocker, E., Besley, T. & Stevens, M. (2023), Is it time to reboot welfare economics? Overview. Fiscal Studies, 00 1–13. https://doi.org/10.1111/1475-5890.12334

You might say this is getting into the weeds a little bit, but please do read the whole section carefully. How we measure progress, why current methods are limited, and why willingness-to-pay methodologies are today overrated are topics that more young students of economics should be reading about.

“The desire to trade away realism for tractability in service to cost–benefit analyse is one of the most common critiques of ‘neo-liberal’ public administration.” And there is some merit in these critiques. How much merit is a question that will never see full agreement, and that is just fine. But I begin to worry when extreme solutions are favored! Too much realism with next to no tractability is as bad as too much tractability with next to no realism. The truth always lies somewhere in the middle.

When I say that I will skip the next two sections, it is not because they’re unimportant. On the contrary, they’re important enough to merit separate blog posts in their own right. These sections are behavioral economics, and inequality and power. I’ll write more about them tomorrow and day after.

But I would like to end this blogpost with a paragraph that resonates a lot with me:

As Erik Angner argues in his paper, our students need better guidance than this if they are to make practical judgements, as citizens, policymakers, employers and employees, about the economic challenges facing society. Those teaching economics to decision-makers of the future should provide a framework that encompasses both normative and positive aspects of economic decisions. If we focus only on those where we feel comfortable, we convey the message that other considerations do not matter to us.

Coyle, D., Fabian, M., Beinhocker, E., Besley, T. & Stevens, M. (2023), Is it time to reboot welfare economics? Overview. Fiscal Studies, 00 1–13. https://doi.org/10.1111/1475-5890.12334

It is something that I need to keep in mind when I teach, and I don’t think I’ve always succeeded. Onwards!

EC101: Links for 10th October, 2019

  1. “Coase’s originality was not in his reasoning, but in recognizing that economic exchange is not the mere trading of physical goods but trading rights to property or rights to engage in certain types of conduct affecting property.”
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    Was Ronald Coase the first to come up with the Coase theorem?
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  2. “However, the joy of this book is less in the big picture than in the detail. And what a lot of it! The mind boggles at Smil’s extensive reading and absorption of information. We get the speed at which marathons are run – over the entire course of human history; the growth rates of piglets and weight of chicekns over time; sales of small non-industrial motors over time; the envelope for the maximum speed of travel; Kuznets cycles; Zipf’s law for city size…. The middle section of chapters offer a fantastic overview of technical progress over long periods in a wide range of technologies. I love all this detail.”
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    Diane Coyle thoroughly approves of Growth and Civilization.
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  3. “When a daughter is married, we do worry about her future. But why should I worry when the government of India is my son-in-law who married my daughter Syndicate Bank,” asked the late Tonse Madhav Ananth Pai in 1969, in the aftermath of the nationalization of the first-generation private-sector banks. Fondly known as “Brahma of Manipal”, Pai was the founding father of Syndicate Bank in 1925.”
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    A lovely read on bank mergers, bank nationalization and banks from a particular part of Karnataka.
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  4. “This is where the popcorn enters the picture. Pricey popcorn makes those lower ticket prices possible, And that is why you should buy popcorn at the movies.”
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    Expensive popcorn? Uh, no, cheap movie tickets. Yes, really. Cheap for whom, you ask? Welcome to microeconomics.
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  5. “This leads to the question: Why try these markets at all? This is quite similar to creation of super highways which help reach destinations much quicker but lead to accidents as well. Should we then not create highways?Policies always raise such trade-offs and hopefully, the regulator will take steps which minimise the negative aspect of creation of these markets.”
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    Amol Agarwal, in Moneycontrol, on securitization in real estate loans in India. Me, I think this is not such a great idea.

Links for 31st May, 2019

  1. “For economists, the idea of “spending” time isn’t a metaphor. You can spend any resource, not just money. Among all the inequalities in our world, it remains true that every person is allocated precisely the same 24 hours in each day. In “Escaping the Rat Race: Why We Are Always Running Out of Time,” the Knowledge@Wharton website interviews Daniel Hamermesh, focusing on themes from his just-published book Spending Time: The Most Valuable Resource.”
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    Almost a cliche, but oh-so-true. The one non-renewable resource is time. A nice read, the entire set of excerpts within this link.
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  2. ““Bad writing makes slow reading,” McCloskey writes. Your reader has to stop and puzzle over what on earth you mean. She quotes Quintilian: “One ought to take care to write not merely so that the reader can understand, but so that he canot possibly misunderstand.” This is harder than it sounds. As the author of several books, I’ve learned that many readers take out of a book whatever thoughts they took into it. Still, what else is worth aiming for if you want to communicate your ideas?”
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    As the first comment below the fold says, she herself doesn’t follow her own advice all the time (and yes, that is putting it mildly), but the book that Diane Coyle reviews in this article is always worth your time. Multiple re-readings, in fact. Also, I am pretty good at writing bad prose myself, which is why I like reading this book so much.
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  3. “Popper acknowledged that one can never know if a prediction fails because the underlying theory is false or because one of the auxiliary assumptions required to make the prediction is false, or even because of an error in measurement. But that acknowledgment, Popper insisted, does not refute falsificationism, because falsificationism is not a scientific theory about how scientists do science; it is a normative theory about how scientists ought to do science. The normative implication of falsificationism is that scientists should not try to shield their theories by making just-so adjustments in their theories through ad hoc auxiliary assumptions, e.g., ceteris paribus assumptions, to shield their theories from empirical disproof. Rather they should accept the falsification of their theories when confronted by observations that conflict with the implications of their theories and then formulate new and better theories to replace the old ones.”
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    I wouldn’t blame you for thinking that the author of this essay should read the book reviewed above first – but if you aren’t familiar with falsification, you might want to begin by reading this essay.
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  4. “Upheaval, by Jared Diamond. I’m a big fan of everything Jared has written, and his latest is no exception. The book explores how societies react during moments of crisis. He uses a series of fascinating case studies to show how nations managed existential challenges like civil war, foreign threats, and general malaise. It sounds a bit depressing, but I finished the book even more optimistic about our ability to solve problems than I started.”
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    Bill Gates has this annual tradition of  recommending five books for the summer – and I haven’t read a single one of the five he has recommended this year. All of them seem interesting – Diamond’s book perhaps more so than others.
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  5. “Books don’t work for the same reason that lectures don’t work: neither medium has any explicit theory of how people actually learn things, and as a result, both mediums accidentally (and mostly invisibly) evolved around a theory that’s plainly false.”
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    To say that I am fascinated by this topic is an understatement – and I have a very real, very powerful personal incentive to read this especially attentively. That being said, I can’t imagine anybody not wanting to learn about how we learn, and why we learn so poorly.

Links for 27th May, 2019

  1. ” In today’s world, we’re typically writing contracts in natural language, or actually in something a little more precise: legalese. But what if we could write our contracts in computational language? Then they could always be as precise as we want them to be. But there’s something else: they can be executed automatically, and autonomously. Oh, as well as being verifiable, and simulatable, and so on.”
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    Stephen Wolfram on computational languages, and what it might mean for all of us in the future. Can’t say I understood all of it right off the bat, to be honest – which is why I’ll be reading it again sometime later.
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  2. “I was interested in the notion that you could take a busy place — an airport and a marketplace, you can call it kind of a mall, with hundreds of shops and all that comes with it — and cohabit it with a magical park, which is nature at its best, which is relaxing and serene, and is the escape from all of that busyness.Airports are not exactly relaxed places, and I thought, what would be better than to create a place of total serenity?

    We’ve planted thousands of trees and all kinds of other vegetation. And now, six months since we planted it all, it’s already a lush jungle.

    You walk through the trails, and you forget you’re in a city, and you forget you’re in an airport, and you forget you’re in a building. You’re just out there in nature and, in that sense, it’s completely magical.”
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    Singapore’s Changi airport now has a seven storey waterfall apparently. Of course it does.
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  3. “Econtwitter is wonderful. Yesterday, an undergraduate emailed me to ask for book recommendations about the overlap between economics and philosophy. I recommended:Amartya Sen The Idea of Justice
    Michael Sandel What Money Can’t Buy: The Moral Limits of Markets
    Agnar Sandmo Economics Evolving
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    D M Hausman and M S McPherson and D Satz Economic analysis, moral philosophy, and public policy
    Then I asked Twitter, and here is the resulting, much longer, list. I won’t editorialise about them, although some are not good undergraduate intros in my view. One striking thing is how few recent overviews there are, however (as @esamjones also pointed out on Twitter). Huge thanks to all who made suggestions. This is a fantastic collective list.”
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    Whatever bookmarking method you use, add this to that resource. And as she mentions, #econtwitter, really is wonderful. Diane Coyle with a very important, very useful list. Undergrad resources for the intersection of economics and philosophy.
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  4. “If you missed the Chinese mission, maybe it’s because you were focussed on the remarkably inexpensive spacecraft from SpaceIL, an Israeli nonprofit organization, which crash-landed into the moon on April 11th, soon after taking a selfie while hovering above the lunar surface. The crash was not the original plan, and SpaceIL has already announced its intention of going to the moon again. But maybe you weren’t paying attention to SpaceIL, either, because you were anticipating India’s Chandrayaan-2 moon lander, expected to take off later this year. Or you were waiting for Japan’s first lunar-lander-and-rover mission, scheduled to take place next year. Perhaps you’ve been distracted by the announcement, in January, on the night of the super blood wolf moon, that the European Space Agency plans to mine lunar ice by 2025. Or by Vice-President Mike Pence’s statement, in March, that the United States intends “to return American astronauts to the moon within the next five years.””
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    The New Yorker explains how the moon is becoming a rather crowded place, and is likely to only get even more crowded in the years to come – and also explains why.
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  5. “Santacreu and Peake compared research and development (R&D) efforts of the U.S. and China for the period 1999-2015. As of the most recent year, China’s R&D intensity, measured by R&D spending as a percentage of GDP, was 2.1% of GDP versus 2.8% for the U.S.However, China’s R&D intensity grew from less than 1% over the period studied, therefore increasing considerably faster than that of the U.S. “Because R&D intensity is a proxy for technological advancement, these data suggest that China is catching up to the U.S. in technology,” the authors wrote.”
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    Ask yourself this: in about thirty years from now, are you more likely to see the world’s innovation hub be in China or America? This article points to the likely answer.

Links for 24th April, 2019

  1. “Really? When is the last time you ran a search with DuckDuckGo? Too often, he seems to be stretching the evidence. He argues that, given the social aspects of the workplace, “companies are actually responsible for some of our most important relationships.” But that’s a function of work — not of corporate life. People at nonprofits make friends, too. Cowen asserts in defense of Amazon, “My options as a book consumer never have been better.” He includes as evidence of a competitive book market the option (which he doesn’t condone) of “illegal downloads of free PDFs.” Jeff Bezos must rue such defenders. (Bezos founded Amazon and owns The Washington Post.)”
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    Roger Lowenstein reviews Tyler Cowen’s latest book. I myself have not read it yet, but the review was interesting to me, in particular this excerpt about illegal PDF’s and how they encourage competition.
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  2. “Alwyn’s related analysis of published studies is even more striking. He shows that, in a sample of 1359 IV regressions in 31 papers published in the journals of the American Economic Association,
    “… statistically significant IV results generally depend upon only one or two observations or clusters, excluded instruments often appear to be irrelevant, there is little statistical evidence that OLS is actually substantively biased, and IV confidence intervals almost always include OLS point estimates.” ”
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    Econometric nerds/students only (consider yourself warned) – but IV isn’t as great as it is made out to be. Occam’s razor is massively ignored in econometrics.
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  3. “The Fiscal Affairs Department and the Institute for Capacity Development of the IMF are pleased to announce that the online course on Public Financial Management (PFM) will relaunch on May 1, 2019 and remain open year-round. In its two previous offerings, this free online course has been taken by more than 2,200 participants in 194 countries, with very high satisfaction rates. Taught by more than 15 experts of the Fiscal Affairs Department, the course is open for government officials, staff of bilateral and multilateral development agencies, civil society organizations, parliamentarians, academics and the general public. The course has been updated in 2019 to reflect the revisions brought to IMF’s PFM standards and tools and adopted in the last twelve months – namely the Public Investment Management Assessment (PIMA) framework and the Natural Resource Management pillar of the Fiscal Transparency Code (FTC).”
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    You might, as a student of economics or policy making, want to consider taking this course.
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  4. “So why, then, does the government tax, under the MMT view? Two big reasons: One, taxation gets people in the country to use the government-issued currency. Because they have to pay income taxes in dollars, Americans have a reason to earn dollars, spend dollars, and otherwise use dollars as opposed to, say, bitcoins or euros. Second, taxes are one tool governments can use to control inflation. They take money out of the economy, which keeps people from bidding up prices.And why does the government issue bonds? According to MMT, government-issued bonds aren’t strictly necessary. The US government could, instead of issuing $1 in Treasury bonds for every $1 in deficit spending, just create the money directly without issuing bonds.”
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    Yet another explainer of MMT – it’s counterintuitive (at least to me), and I’m still not sure it makes sense and will work – but I understand it better than I did before upon reading this article.
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  5. “This is an issue for economics too: the construction of the deflators used to turn nominal pound or dollar GDP into ‘real’ GDP, on which so much policy hangs, relies on a theory of constant, known preferences which determine the utility of consumption, and yet modern economic growth is all about creating wants for new goods and services for which preferences have to be created. So at a time of rapid innovation it is not at all clear what the deflators and ‘real’ GDP measures are measuring.”
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    Diane Coyle reviews a book that helps us understand Amartya Sen’s work better. I found this excerpt above quite interesting.