Is There Accounting for Taste? Part III

[Part I] [Part II]

First, a quick finishing up of Stigler-Becker, and then on to Caplan.

Fashions and Fads

The existence of fashions and fads…seems an especially striking contradiction of our thesis of the stability of tastes. We find fashions in dress, food, automobiles, furniture, books, and even scientific doctrines… The rise and fall of fashions is often attributed to the fickleness of people’s tastes…

The obvious method of reconciling fashion with our thesis is to resort again to the now familiar argument that people consume commodities, and only indirectly to they consume market goods, so fashions in the market goods are compatible with stability in the utility function of commodities…

The commodity apparently produced by fashion goods is social distinction: the demonstration of alert leadership, or at least not lethargy, in recognizing and adopting that which will in due time be widely approved.

This commodity is somewhat different from those considered previously in that it depends on the social environment; if everyone in a society decided to increase their production of social distinction by 100%, everyone would end up in the same place. Social distinction is largely conserved in society; its supply is inelastic, and so only the distribution is what can be changed:

[D]istinction is scare and is to a large extent simply redistributed among persons: an increase in one person’s distinction generally requires a reduction in that of other persons. This is why people are often ‘forced’ to conform to new fashions.

This section is a little less developed than the others mathematically, but I still think it’s a good insight.

To finish up I want to quote at length from the paper’s conclusion, because it helps set the stage for the next paper.

Continue reading “Is There Accounting for Taste? Part III”

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Is There Accounting for Taste? Part II

Last time I began going through the classic paper by George Stigler and Gary Becker, ‘De Gustibus Non Est Disputandum’, a work than aimed to extend the reach of neoclassical economic analysis into areas of human behavior long considered noneconomic.

By using a concept of ‘consumption capital’ that can be built up with experience, education, and other factors, we saw that addiction could be explained not as a change in tastes, but as a utility maximizing response to changes in said capital. Today we’ll finish up with the other three areas they address in the paper: Custom and Tradition; Advertising; and Fashions and Fads.

Continue reading “Is There Accounting for Taste? Part II”

Is There Accounting for Taste? Part I

Today I want to begin a review of two different accounts of human preference. One is George Stigler and Gary Becker’s seminal ‘De Gustibus Non Est Disputandum’. The other will be Bryan Caplan’s ‘Stigler-Becker versus Meyers-Briggs: why preference-based explanations are scientifically meaningful and empirically important’.

As setup last time, Stigler and Becker are seeking to extend the extend the use of neoclassical marginalist analysis beyond traditional markets:

[W]e are proposing the hypothesis that widespread and/or persistent human behavior can be explained by a generalized calculus of utility-maximizing behavior…

They focus on four areas: addiction, custom and tradition, advertising, and fashions and fads. All of these analyses are framed with ‘the new theory of consumer choice’, which is a rather clever extension of utility-maximizing theory. Normally, when modelling consumer utility, consumers choose a bundle of goods from the marketplace based on whatever gives them the most utility, and then consumption takes place immediately.

But when you buy a sack of potatoes, you don’t eat them as soon as you finish with checkout. The end product you will consume is not yet finished; the potatoes have to be transformed into a delicious massaman curry through further use of labor time and combination with other goods.

So instead of instantaneous consumption, consumers or household use goods from the market to create ‘commodities’, which are then used to produce utility. Simply by adding another step to the consumption process, a whole new range of behavior can be modeled.

The next extension to consider is the possibility of adding ‘capital’ to this production process. Capital is anything that aids in production and is not labor; it is not relegated to physical machinery. Practice is a form of capital building; you can work a little bit faster next time, get a little higher quality. You could buy a really nice pan, or take a cooking course.  This notion of building ‘consumption capital’ is the key to the argument, as applied to a range of human behaviors.

One of the main categories of behavior Stigler and Becker analyze is addiction. Normally behavior like addiction is seen as a change in preference: you didn’t have a taste for cigarettes, then you were exposed to them however many times, and now you have a preference for them. But using the capital consumption framework, both good and bad addictions can be explained holding tastes constant. The examples considered are music (good) and heroin (bad).

Imagine consuming music is not merely the act of listening in the moment; surely that yields some utility, but as with other arts, experience and education can be combined with the listening experience to obtain even greater utility.  For example, my appreciation of Beethoven’s symphonies was greater enhanced by learning about and listening to his contemporaries, the dominant structure of music at the time, and how he pushed against the formalism of the day.

So too it is with the Beatles; when I listen to the Fab Four, I’m not merely appreciating the production, the chord changes, and the songcraft; I’m also thinking about the cultural moment, the turn in the post-war British and American culture, the pressures of fame, interpersonal group dynamics, human frailty, and so on. All of this comes from having spent years increasing my ‘consumption capital’ of music. (For the other fans in the audience, someone has created an augmented Anthology podcast that I really enjoyed).

And when one has built up such consumption capital, the return the additional music listening becomes even greater; a music ‘addiction’ has formed:

On this interpretation, the (relative) consumption of music appreciation rises with exposure not because tastes shift in favor of music, but because its shadow price falls as skill and experience in the appreciation of music are acquired with exposure.

With a harmful addiction, the math is the same with the signs flipped. Consuming heroin destroys consumption capital in this model, so more and more of the drug is needed subsequently to obtain the same level of utility. Again, no change in tastes is necessary to explain the junkie’s behavior.

Of course, we know that in the real world, people *do* have differing susceptibilities to addiction, some of which seems to simply be genetic. But this shouldn’t be taken to mean the Stigler-Becker model is wrong; it may often be more useful to model addiction with the consumption capital concept than to develop a model based on brain chemistry.

 

Narrow vs Broad Economics

In his economics text Price Theory and Applications Jack Hirshleifer makes a distinction between ‘narrow’ and ‘broad’ economics, and I think it’s a useful concept for elaborating on the ideas in the previous post on economic methodology.

I’ll quote again from Silberberg and Suen in The Structure of Economics:

What economists have in common with each other is a methodology, or paradigm, in which all problems are analyzed. In fact, what most economists would classify as noneconomic problems are precisely those problems that are incapable of being analyzed with what has come to be called the neoclassical or marginalist paradigm.

So we can broadly classify problems into economic and noneconomic problems, and further divide economic problems into narrow vs broad economics. The types of problems the marginalist paradigm can solve are of two sorts: equilibrium and optimization.

Narrow economics is what people traditionally think of as economics: acting within markets, supply and demand (equilibrium) and profit maximization (optimization), among other things. But starting in the 1960s and 70s, particularly with the work of Gary Becker, economic analysis was extended to nonmarket human activities: crime and punishment, the family, addiction, information, and politics. These fall under the purview of broad economics: any human behavior that can be analyzed with the marginalist paradigm.

One of the classic papers in this vein of analysis is George Stigler and Gary Becker’s ‘De Gustibus Non Est Disputandum’, or ‘In matters of taste, there can be no dispute’. The paper was a broadside against the limitations of ‘narrow’ economics, specifically the tendency to ascribe differences in human behavior to different preferences. Recall that the marginalist paradigm requires an assumption of stable tastes. As such, in instances where tastes appear to change, such as developing an addiction, standard economic analysis is powerless.

Stigler and Becker argue that simply throwing up your hands at the first sign of differences in tastes is too easy; indeed, with some hard work and clever models, the basic tools of prices and incomes can explain quite a lot with the seemingly radical assumption that ‘tastes neither change capriciously nor differ importantly between people’.

In the authors’ words:

On the traditional view, an explanation of economic phenomena that reaches a difference in tastes between people or times is the terminus of the argument: the problem is abandoned at this point to whoever studies and explains tastes (psychologists? anthropologists? phrenologists? sociobiologists?). On our preferred interpretation, one never reaches this impasse: the economist continues to search for differences in prices or incomes to explain any differences or changes in behavior.

And tying back into the discussion of economic methodology:

The choice between these two views of the role of tastes in economic theory must ultimately be made on the basis of their comparative analytical productivities. One the conventional view of inscrutable, often capricious tastes, one drops the discussion as soon as the behavior of tastes becomes important – and turns his energies to other problems. On our view, one searches, often long and frustratingly, for the subtle forms that prices and incomes take in explaining differences… If the latter approach yield more useful results, it is the proper choice.

What we assert is not that we are clever enough to make illuminating applications of utility-maximizing theory to all important phenomena – not even our entire generation of economists is clever enough to do that. Rather, we assert that this traditional approach of the economist offers guidance in tackling these problems – and that no other approach of remotely comparable generality and power is available. (emphasis added)

Again we see the influence of Friedman: the best theory is the theory that works best, regardless of the ‘realism’ of its assumptions. It seems obvious that human tastes differ, but if a theory that assumes they don’t can better explain human behavior, we should use that theory. It’s a deeper question as to whether we can take the usefulness of a theory as evidence of its assumptions; this is a central concern of the philosophy of economics (and science more generally). I won’t get into that now, except to say that one has to be extremely careful moving between models and the real world, and economists in the public sphere in particular often play too fast and loose.

The paper itself is quite interesting, is foundational to modern economics (over 5000 citations), and deserves a post of its own, so that’s what we’ll do next time.

Economic Methodology

What is the methodology of economics? That is, how does economics come to make positive claims about the state of the world? In this post I’ll explore some key papers that explore the foundations of the modern mainstream economic paradigm

Milton Friedman’s 1953 paper ‘The Methodology of Positive Economics’ is widely cited as one of, if not the, most influential papers in economic methodology.  One of the key aspects of the paper is the distinction between ‘positive’ and ‘normative’ economics; that is, most simply, a distinction between ‘what is’ and ‘what ought to be’. Friedman argues that much confusion about economics results from the mistaking of one for the other. Economics as a positive science should be concerned only with the facts of the world and make no value judgements. Normative economics is where philosophy and morality come into play, but Friedman argues that normative economics depends upon positive economics in the first instance. Deciding whether an increase in the minimum wage is good or bad depends first on knowing what the impact will be. Only with that knowledge can arguments about whether the tradeoffs are worth it be had.

Friedman makes an interesting aside that, while it may have been true at the time of his writing, strikes me as deeply wrong today:

‘I venture the judgement, however, that currently in the Western world, and especially in the United States, differences about economics policy among disinterested citizens derive predominantly from different predictions about the economic consequences of taking action – differences that in principle can be eliminated by the progress of positive economics – rather than from fundamental differences in basic values, differences about which men can ultimately only fight.’

As I wrote about recently, it seems for most people economic policy only matters insofar as it signals other things like group identity and who deserves to be raised/lowered in status.  As such, it seems to me that the case is the opposite of that Friedman describes: most differences in views on economic policy derive from fundamental differences in basic values.

However, the main point Friedman addresses in the paper is regarding the realism of assumptions in theory. He was reacting to a criticism at the time that economic models couldn’t be taken seriously if their assumptions were ‘unrealistic’. For example, if the owners of firms are unable to to obtain all the necessary information to truly maximize profits, is the workhorse profit maximizing model then useless? Friedman argues essentially that if the model works for its intended purpose, then the realism of its assumptions is unimportant.

This article has inspired a variety of reactions; some agreed, some vehemently disagreed. One author, Ernest Nagel, agreed with Friedman’s conclusion but not the path he took to get there. His paper, ‘Assumptions in Economic Theory’, published two years after Friedman’s article, argues that care needs to be taken in what sense ‘unrealistic’ is meant.

Friedman seems to use ‘unrealistic’ in the sense that it is impossible to specify the ‘totality of traits embodied in any existing thing’, and therefore any model requires abstraction to actually be useful. Here Nagel agrees. However, there is also ‘unrealistic’ in the sense of just being wrong; that is, false or highly unlikely given the current state of knowledge.  Finally, there is ‘unrealistic’ in the sense that the object being assumed doesn’t exist in the real world. A pure vacuum is an ‘ideal type’; it doesn’t exist in the real world, yet that doesn’t mean Newtonian mechanics is useless. Likewise, just because there are no infinitely divisible substitutable commodities doesn’t mean that the model of perfect competition yields no insight into real world behavior.

Another contemporary reaction is Fritz Machlup’s ‘The Problem of Verification in Economics’. Machlup classifies the two extremes in economic methodology as ‘extreme apriorism’ and ‘ultra-empiricism’.

Continue reading “Economic Methodology”

Readings for June 4

Jiang Shigong: ‘Philosophy and History: Interpreting the “Xi Jinping Era” through Xi’s Report to the Nineteenth National Congress of the CCP: An English translation of a recent work of Chinese scholarship on ‘Xi Jinping thought’; the preface by the translators is probably enough for most, though the text itself is very interesting in seeing a Xi sympathetic scholar lay out his case.

Meanwhile, this week’s Economist cover story is a terrifying piece of reporting on how China has turned Xinjiang into a police state like no other. Truly scary stuff.

And while we’re talking about countries with heavy state intervention in the economy, the Trump administration is considering using wartime rules to prevent coal plants from being closed due to…being unprofitable. That’s right, the President and his Energy Secretary, Rick Perry, feel that ‘national security’ will require power grid operators to buy energy from a list of operators of their choosing, based on ‘reliability’, which they define as being a coal plant. It’s hard not to be cynical when, as this Ars Technica article points out, this is only the latest legal attempt by Perry to favor coal plants:

Initially, Perry issued a politically charged memo commissioning a study to find the regulatory causes of coal retirements. The resulting study, however, said that no particular regulation was causing coal plants to retire: instead the cheap cost of natural gas was convincing power companies to switch over to that fuel. Perry then proposed a rule that would require power purchasers to compensate coal and nuclear plants over and above the compensation they were already due for their part in supplying “baseload” energy. However, the rule had to be approved by the Federal Energy Regulatory Commission (FERC), and that regulatory body found that there wasn’t sufficient evidence to approve Perry’s rule.

Failing that, coal and nuclear plant operator FirstEnergy requested that the DOE use an emergency order to bail out one of the company’s subsidiaries shortly before it declared bankruptcy. In April, E&E News reported that an interagency group was exploring the use of the Defense Production Act, which gives the president broad power to boost industries that are deemed necessary for national defense.

This Washington Post article puts the move in the larger context of Trump’s efforts to more directly pick winners and losers in the economy, such as with recent moves on tariffs and false attacks on Amazon and the USPS. Of course, this is directly at odds with decades of Republican party ideology. But, as we’ve learned from the political sociology literature highlighted in books like Democracy for Realists, it seems that most people come to political economy views after identifying with their party. If so, we should expect that most Republicans actually don’t care that much about government intervention in markets.

 

Clearing out the queue, late spring 2018

Why did the human brain evolve its large size? An answer from ecology and culture. While the need for the brain to accommodate complex social interactions has long been an explanation with intuitive appeal, the authors here argue, using quantitative models, that social cooperation actually decreases the need for a large brain (computation can be shared among peers); instead, a combination of ecological and social challenges leads to increased brain size in their model. It’s fairly well established at this point that early humans inhabited a world of changing climate; the ability to understand, predict, and accommodate a high variability environment was certainly crucial for the survival of our species. It’s nice to see explicit modeling being used here; in evolutionary history, it’s far too easy to come up with multiple, often conflicting, explanations for phenomena using dreaded ‘Just So‘ stories.

Does economics matter?  I just recently had a conversation along these lines, about how depressing following politics is when you start to understand how the economy works; basically nobody in political power ever talks about any economic issues seriously, ever. But perhaps, as is argued here, this is somewhat of a category mistake. Politics is almost never about policy; it’s about identity, community, morality, who deserves to be raised and lowered in status, etc. For whatever reason, politicians often feel the need to wrap economic language around these topics. Immigration policy, for example, is often framed as an American jobs protection issue, despite the preponderance of evidence that immigration is good for local economies; people are somewhat reluctant to come out and say what they really mean (though Trump is changing that), and using more ‘neutral’ economic language gives them some cover (whether consciously or not).

Adding to the pile of articles on neoliberalism is this one: ‘Neo- and Other Liberalisms‘. A sample:

So the notion that “neoliberalism” has any definite meaning is as misguided as the notion that “liberalism” has any definite meaning. “Neoliberalism” now serves primarily as a term of abuse for leftists to impugn the motives of their ideological and political opponents in exactly the same way that right-wingers use “liberal” as a term of abuse — there are so many of course — with which to dismiss and denigrate their ideological and political opponents.

But despite my disclaimer that there is no fixed, essential, meaning of “liberalism,” I want to suggest that it is possible to find some common thread that unites many, if not all, of the disparate strands of liberalism. I think it’s important to do so, because it wasn’t so long ago that even conservatives were able to speak approvingly about the “liberal democratic” international order that was created, largely thanks to American leadership, in the post-World War II era. That time is now unfortunately past, but it’s still worth remembering that it once was possible to agree that “liberal” did correspond to an admirable political ideal.

As a related aside, I’ve just begun reading Jacob T. Levy’s Rationalism, Pluralism, and Freedom, and plan to be actively working through it here in the near future. It’s a work of political theory that aims to draw out the two strands of liberalism, which as you might guess he deems ‘rationalism’ and ‘pluralism’.

An interesting long read from Politico: How the ‘Watergate Babies’ Broke American Politics. I think an underappreciated political dynamic is the structure of power within the Congress. Often our mental model of politics focuses on getting the ‘right’ person elected, and it then follows that if enough of the ‘right’ people are in a room together, they’ll do the ‘right’ thing. But the structure of how those decisions are made matter just as much, because they add an additional layer of incentives to the politician’s decision. And as we learn in economics, you cannot deduce a person’s preferences from their actions, because no decision is made in a vacuum. The thesis here is that the post Watergate generation changed the internal rules of Congress in such a manner that increased partisanship was more rewarding for politicians, setting in motion the bitter political polarization that began in earnest in the 90s.

Global genetic differentiation of complex traits shaped by natural selection in humans: In any story where a trait in a human subpopulation is to be explained by natural selection, we should always ask ourselves whether selective pressure could be strong enough to explain that trait. There is always the possibility of founder effects, genetic drift, and so on, that could be just as plausible as an adaptive response. This paper claims to show that, at least for two complex traits (height and propensity for schizophrenia), natural selection does better explain the genetic evidence than other hypotheses.

Imperialism and the Final Stage of ‘Capitalism’: Argues that blaming ‘capitalism’ for historical injustices like colonialism. imperialism, and slavery is a mostly incoherent critique. Not only is ‘capitalism’ often undefined in these critiques (and, as with neoliberalism, used more as a term of abuse than as a a signifier of a particular state of affairs), but such claims lack any sort of causal mechanism or counterfactual.

What of the supposed natural connection between “capitalism” and colonialism or imperialism? I will not deny that there is a connection between the Great Enrichment and European imperialism, but it is of an utterly different character than the connection described by Marxists. The idea that imperialism was a natural part of the internal “logic of capitalism” was made famous by J. A. Hobson and translated into the language of Marxism by Vladimir Lenin, and continues to be influential among leftist theorists and historians today. Against this, I will argue that the connection is entirely contingent. If the spread of the Great Enrichment had been wider or simply different, if the specific advances in technology and medicine had occurred with different timing, 19th century imperialism may have been far less dramatic than it in fact was. Unlike the old “logic of capitalism” arguments, in other words, I will argue that it was a matter of circumstances rather than logical necessity.

It’s time for liberals to get over Citizens United: I’ve felt for a long time Americans on the left have put way too much stock into the impact of Citizens United, and this article does a good job of making the argument that 1) Citizens really wasn’t that big a shift in the law 2) Transparency of money flows is far more important than magnitudes, and 3) the American left should engage with the law as it exists to reform public participation in campaigns. I don’t know that I agree with the author’s specific proposals, but I do appreciate the starting point.