latest – Page 17 – Garrett M. Petersen

Economics and the Cognitive Minefield

What sounds more difficult to you, figuring out supply and demand, or accurately measuring the Earth’s circumference? It must be supply and demand, because Eratosthenes figured out the other one two thousand years before anyone really managed any progress on that supply-and-demand stuff.

So now that we’ve established that supply and demand is much harder than accurately measuring the Earth’s circumference, we should ask ourselves why it is so. If you don’t know how Eratosthenes managed it, try thinking for a moment about how you might go about accurately measuring the Earth’s circumference with only the tools available in Ancient Egypt. Hint: you can compute the circumference of a sphere with the arc length and angle between two points.

Have you figured it out?

Eratosthenes heard that on the summer solstice, the sun shone to the bottom of a deep well in Syene, a town far to the south of Alexandria, implying that the Sun’s rays hit Syene vertically at noon of that day. He measured the shadow cast by a vertical pole in Alexandria at noon of the same day. This gave him the difference in angle between the Sun’s rays hitting Alexandria and the Sun’s rays hitting Syene. Knowing how far apart Alexandria and Syene were, he had everything he needed to calculate the Earth’s circumference. He estimated a circumference of 25,000 miles. The actual circumference is 24,902 miles.

This isn’t something your average high school student would come up with, but once you know the solution it’s easy to see how someone really putting his mind to it could figure it out. And indeed, pre-modern people from other cultures made similar calculations with similarly impressive results.

Asking the Right Questions

So why didn’t Eratosthenes or any of these other smart people figure out supply and demand some time on the weekend between measuring the Earth’s circumference and devising clever ways to find prime numbers? It’s not like they had to wait around for someone to invent a special microscope or something. As with Eratosthenes’ calculation of the Earth’s circumference, you can take a few basic observations and derive general and useful truths about markets and prices: People use means to achieve ends. Two people exchange when both expect to benefit from doing so. Individuals use subsequent units of the same good for progressively less urgent uses, so units diminish in value as more are acquired. Supply and demand follow surprisingly easily from these simple premises.

This doesn’t seem so hard that the Greeks couldn’t handle it, so that’s out as an explanation. And it’s not like it wouldn’t be useful information! Many peoples could have spared themselves unnecessary hardship by understanding basic economics. While the Earth’s circumference might have some use to seafarers, supply and demand is relevant to all aspects of life.

My preferred hypothesis is that people just failed to ask the right questions. The circumference of the Earth is a known unknown. Once you figure out that the Earth is (roughly) spherical, the next obvious question is, how big a sphere? But you could go to the market every day to buy and sell goods, and never ask yourself whether there was a deeper order to the movement of prices beyond the proximate causes you know well from your personal experience. What do you mean, why are fish $3? The fishmonger wrote $3 on the sign, so that’s what they cost. That greedy fishmonger!

The Tribal Mind

Humans are social creatures. We evolved in a tribal setting. Our brains are specialized to understanding the social environment to a degree that we aren’t even aware of. Take something as simple as noticing someone is sad. There might be a minute change in the position of the person’s facial muscles, a slight change in posture, a small adjustment in the tenor of her voice. But you don’t consciously notice these things and reason out the person’s sadness; your brain does all that in the background. And have you ever noticed how precise we are at knowing where someone’s eyes are looking? It’s like a superpower!

Our social intuitions seem to be hard-coded into our thinking, to the point where we apply them in situations where we know they don’t apply. Have you ever heard lightning and thought it sounded “angry?” And since we have this astounding, hard-coded apparatus for understanding the social world, nothing is more natural than to fall back on it in understanding economic phenomena. The problem is that our brains are hard-coded to understand a tribal setting of no more than a hundred people or so. In a hundred-person tribe, the trading that existed happened in extremely thin markets, with no more than a few buyers and sellers of any particular commodity. The people exchanging would know each other well, and the exchange would take place within the larger social structure of the tribe. Consequently, price would probably have more to do with one’s place in the status hierarchy of the tribe than with other considerations. If I catch a fish, I might trade it a low price to a high-status tribesman to gain favour.

Think about the hypothesis that implies. When a merchant sells at a low price, we think he is doing something nice for us to gain our favour. He makes us feel esteemed and we raise his status in return. When a merchant charges a high price, we see him as brashly acting beyond his social status. This is consistent with the common complaint against “greedy” merchants, I think. When there’s an oil shock, we attribute malice to gas station owners for circumstances beyond their control. Obviously, our ancient ancestors never faced an oil shock.

A big stumbling block for early science was to get past the tendency to anthropomorphize the natural world. Since economists study man, there’s no problem with attributing human qualities to our subjects. The problem is with using social connotations that apply within the tribe or small group, but don’t apply to a large, impersonal marketplace with millions of participants. In the marketplace, pricing decisions don’t reflect tribal status games but supply and demand. Price movements are not driven by greed, which is always present, but by changing conditions affecting the market. Many economic errors are driven by this sort of thinking.

As Paul Rubin put it in his study of “folk economics,”

Naïve people or those untrained in economics think of prices as allocating wealth but not as influencing allocation of resources or production of goods and services. In folk economics, the amount of a good traded—whether in aggregate or by each
individual—is fixed and independent of price. Moreover, each individual is concerned with the distribution of wealth and income (with particular but not exclusive attention to his/her own wealth), not with any efficiency gains from economic activity. (p. 157)

The Politicization of Positive Problems

The biggest modern stumbling block to economic understanding is that people learn about politics before they learn about economics. As Eliezer Yudkowsky put it on Less Wrong, politics is the mind-killer:

People go funny in the head when talking about politics. The evolutionary reasons for this are so obvious as to be worth belaboring: In the ancestral environment, politics was a matter of life and death. And sex, and wealth, and allies, and reputation… When, today, you get into an argument about whether “we” ought to raise the minimum wage, you’re executing adaptations for an ancestral environment where being on the wrong side of the argument could get you killed. Being on the right side of the argument could let you kill your hated rival!

…

Politics is an extension of war by other means. Arguments are soldiers. Once you know which side you’re on, you must support all arguments of that side, and attack all arguments that appear to favor the enemy side; otherwise it’s like stabbing your soldiers in the back—providing aid and comfort to the enemy. People who would be level-headed about evenhandedly weighing all sides of an issue in their professional life as scientists, can suddenly turn into slogan-chanting zombies when there’s a Blue or Green position on an issue.

I have experienced multiple instances of giving the standard, econ 101 answer to a question of fact, only to be told that I am spewing vile right-wing propaganda. As someone who is not right-wing commenting on a basic issue in a field I have a graduate degree in, this is alarming. Alarming, but not surprising.

Economics and politics are intertwined. Even value-free statements about economics have political implications. Ideally, people would live the first twenty years of their lives in a politics-free environment where they would learn economics as a value-free and apolitical science. Then they could form political beliefs informed by sound economics rather than forming economic beliefs based on the political inclinations they developed as uninformed teenagers. (Of course, this politics-free bubble would be prohibitively costly to build and maintain.)

A libertarian sociology PhD student (the only one I know to exist) said to me that when you go around a sociology department saying you like markets, people think you hate gay people. I laughed, but he was only partly joking.

What I think is happening here, and in my interactions on twitter and elsewhere, is that people hear you speak the language of the hated Red tribe and see you as an enemy. As soon as that happens, there’s little you can say to persuade them. I can’t find it now, but there was an obscure political scientist whose blog I stumbled across during the student walkout from Greg Mankiw’s microeconomics class. The post burned itself into my memory in a way that only something profoundly annoying can. The author entered his first microeconomics class and was horrified by what he found: that minimum wages caused unemployment, rent controls made housing more scarce, and high taxes caused people to work less. Horrified by this doctrinaire right-wing discipline, he dropped the class and never set foot in an economics classroom again.

The blog post went on to detail how he (allegedly) learned a whole lot of economics through independent reading. This person decided all his policy positions before age 18 and has spent the rest of his life learning how to defend them in ever-more elaborate ways, acquiring degrees along the way. If he ever becomes famous enough to deserve a biography, it should be called Confirmation Bias. I doubt he’s atypical.

Conclusion

Economics isn’t hard because it’s technically difficult. Many of the most valuable insights are easily logically derived from basic principles, and seem unremarkable and even obvious once explained. The hardest thing about economics is navigating the cognitive minefield in which it lives. One needs to overcome an array of cognitive biases to even grapple with the technical problems of economics. One misstep and *BOOM* you slip into error. To understand economics, you must detach your thinking from both your social intuitions and your political affiliations. Even for the best of us, that is a difficult task.

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The Meta-Economics of Mathiness

The perennial debate about “mathiness” in economics has returned, this time sparked by a Paul Romer article in the AER P&P.

The arguments largely focus around the usefulness of mathematics for various applications. These are the technical arguments of practitioners. I’d like to abstract from these arguments and look at the issue as an economist.

The economics labour market is very competitive. Researchers need to demonstrate their quality to compete for the top academic jobs. Now, why should we expect this competition to produce anything besides the optimal research methods? Let’s apply some economics to this problem.

One reason you might have more math than the social optimum is that it’s used as a signalling device. As a graduate student, I’ve definitely felt this. Comprehensive exams are essentially colossal math tests that determine whether you’re allowed to go on in grad school and eventually enter the profession. Your professors want to know that you can complete years of tireless research. Doing so will take intellect and diligence. Passing a big math test also takes intellect and diligence, and it takes less time than demonstrating research skill. Professors don’t know which students are smart and diligent, so they screen them with comprehensive exams.

That could explain the use of math in graduate school, but what about the discipline more generally? The gatekeepers of the profession are journal editors and department committees in charge of hiring and tenure. All of them need to judge whether academics’ research is of high quality and importance. The real measure of a paper’s importance is how much derivative research it generates. There’s a reason they give the Nobel about thirty years after a researcher’s major contribution: we just don’t know which exciting research today is going to spawn a greater debate and propagation of novel ideas. If we could predict future research, it wouldn’t be novel.

So editors and hiring and tenure committees have a problem. They need to evaluate research but they can’t know the most important factor: Will this stand the test of time? One factor affecting whether it will is the level of care and effort the author put into crafting his argument. It isn’t necessarily easy to see how much care and effort has gone into a verbal argument, but when the argument uses elaborate mathematics, you know it must have been worked over carefully. Thus, mathematics serves as a signal that a given piece of research has been carefully constructed.

To summarize, we can apply the economic theory of signalling to the use of mathematics in economics. Academics and the other academics who evaluate them face an asymmetric information problem. By using mathematics, these academics can signal their own quality and that of their research. Thus, mathiness has become ubiquitous.

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It All Comes Back to the Minimum Wage Debate

I shared Jeffrey Tucker’s article about Hillary Clinton, and pulled out this quote:

Meanwhile, Hillary’s actual policies on women are a disaster waiting to happen. Consider her support for “equal pay for equal work.” What effect will this have on women in the workforce? It not only puts government in charge of micromanaging every aspect of payroll and personnel of every business in America. It also incentivizes managers to keep women in lower positions in a firm in order to comply with the wage mandates, and disincentivizes advancing women up the ladder by making the costs of ascending too high. The result will be the very “glass ceiling” that mainstream feminism abhors.

An intelligent friend, who shall remain nameless, replied:

I feel like this runs on the same logic that if you raise minimum wage to a livable wage, jobs will be destroyed and small business will crumble, when in fact the opposite has been shown to be true.

Now, this friend is not an economist. What I suspect is that the news sources he typically reads report heavily on the few studies that show positive employment effects of minimum wage increases, and ignore the rest of the literature. This isn’t exclusively the territory of the left, I’m sure people who read only right-wing or libertarian news sources overestimate the disemployment effects in the other direction. But look at the conclusion he drew! Since he got the false impression that raising the minimum wage has positive employment effects, he concluded that there is essentially no tradeoff in government artificially boosting any wage; in this case the wages of half (!) the population. But given the initial error, this extreme conclusion naturally follows. This is why the minimum wage debate matters so much. It’s a matter of educating people about the basic principles of economics. It’s a highly visible price control; everyone knows about it. If we can convince people that this one law has a different effect from its intended one, we can make people realize more generally that price controls, regulations, and restrictions have unintended consequences. I don’t think the minimum wage is the most important policy in terms of its consequences. For the chronically unemployed and unskilled, it might very well stop them from ever building the skills to rise beyond the minimum wage. That’s heartbreaking, but it only affects a small fraction of the population, and most of us manage to find a first job and advance beyond minimum wage fast enough despite the law. Migration restrictions are a far more consequential, in that they trap billions of people in poor countries where they can’t live up to their potential. Actually, the minimum wage would be far more consequential if migration were liberalized, because it would block many unskilled migrants from first-world labour markets. But despite its not being the most consequential bad policy, it is vitally important that we win the minimum wage debate. It’s the strategic pass that, once captured, affords the victor total control over a vast region of ideas. First, we let people believe that cranking up the minimum wage will improve, or at least not harm, employment. Next, they’re citing that as proof that a Soviet-style takeover of half the wage decisions in the entire economy can only be beneficial. The post It All Comes Back to the Minimum Wage Debate appeared first on The Economics Detective.