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Category Archives: Microeconomics

Imagine a simulation in which a large of number of actors, defined by a large range of properties, acquire utility based on a set of complicated rules that are applied to their properties and to other actors’ properties.  For instance, a particular actor might accrue utility if it shares three specific properties with a large number of other actors.  A different actor might accrue utility only if other actors share two of those properties but do not share the third.  Actors are able to modify their own properties based on certain constraints, but there is a utility to cost to these modifications.  Further, actors have limited information about other actors’ properties (for instance maybe they are only aware of actors that share a particular property with them, or they only have out-dated information about most actors) and also about the rules that define the simulation (their utility function is not exactly what they think it is).

You could plot a very simple version of this simulation on a grid, with each axis representing a property and dots representing each actor, or imagine a more complicated version in n-dimensional space.  Presumably, the simulation would play out by actors moving from their starting position and arranging themselves in better locations, eventually finding local maxima and remaining there, or at least creating fairly stable sub-optimal equilibria.

Now suppose you modify the simulation such that actors are suddenly able to access all of the information across the entire simulation.  Both rules and all other actors’ properties become immediately accessible to every actor.

With this change to the simulation, presumably two things would happen: drastic reorientation of actors, and vastly higher total utility.

If you haven’t yet guessed, the simulation is meant to describe humanity; the modification to the simulation is the advent on the internet and real-time communications networks; properties are physical location and things like political orientation, job skills, and membership in organizations, etc.  The point of the exercise is to try to illustrate just how significant this technological development is.  Humans have built our social framework premised on communication being expensive, and the entire framework now can be rearranged to exploit the fact that communication is essentially free.

In other words: this internet thing is going to be huge.  We’re only just starting to figure it out.

  • Tea Party voters’ embrace of Rick Santorum largely perplexes me.  I feel completely baffled as to how these individuals think, and don’t know how to learn.  Will Charles Murray’s book help on this front?
  • This post from the Cato Institute and this and this from Ezra Klein have me thinking that the difference between right and left on fiscal policy is much smaller than I’d thought.  Is it just me, or are these gaps remarkably small?

 

America is productive enough that it could probably shelter, feed, educate, and even provide health care for its entire population with just a fraction of us actually working.

Phil at Transparency Revolution

It is possible to have an enjoyable life without earning and spending a whole lot of money. If health care and education are the areas where costs are growing, and if their marginal benefits are in doubt, then if you just get your basic needs met and focus on the enjoyment you get from the stuff that is not so expensive, you can do pretty well without a ton of money.

Arnold Kling

I think a lot of us would rather not work for somebody else. It’s not necessarily that we’re burgeoning entrepreneurs eager to start small businesses. It just sucks to have a boss.

Will Wilkinson

A job seeker is looking for something for a well-defined job. But the trend seems to be that if a job can be defined, it can be automated or outsourced.

Arnold Kling again

What many, maybe most, people actually want, it turns out, is the creativity and autonomy of entrepreneurship combined with the stability of a 1950s corporate drone.

Megan McArdle

These ideas are rattling around in my head.  Commentary to follow…

This is a place-holder for a much more detailed series of posts, but reading Will Wilkinson and then Pascal-Emmanuel Gobry writing about Steve Jobs, I find myself hanging onto this thought:

It’s entirely consistent with capitalism to think poorly of Steve Jobs on the basis of a) the vast majority of Apple products being overpriced status symbols that provide little real value and b) his lack of charitable donation.  That is, one can fully support an economic system that allows Steve Jobs to have the career he had, while simultaneously having a system of values that assigns very low esteem to Steve Jobs as a person.  Which is to say, capitalism is very different than consumerism.

David Henderson has a good post on how studying economics led him to combat his emotional feelings and adopt a more libertarian viewpoint:

I started to understand that the vast majority of income in a relatively free society is earned. It’s true that a small number of wealthy people did get their money by fraud or dishonesty. More common, especially in societies with lots of government controls, were people who got wealthy by using political pull. But I started to see that the typical high-income person in a relatively free society gets his or her income the old-fashioned way–by earning it.

What interests me about the post has less to do with the intellectual underpinnings of Henderson’s argument and more to do with the relationship between reasoning and emotion.  Even after adjusting his intellectual framework, Henderson retained the emotional effects of a prior framework:

Even though this was a full four years after I had realized that the vast majority of “the rich” get their money relatively honestly, I felt the old resentment at these people who had what I could not imagine myself ever being able to afford. I looked down at my fists and saw that I had clenched them in anger.

It’s fundamentally difficult to confront one’s own emotional intuitions, and if you surround yourself with like-minded thinkers (or include only the most extreme and moronic opponents) you never have to do so, because you’ll never have to change your views.  This is, in my humble opinion, a very bad thing.  It turns you into a fundamentally unthinking person.  Instead, I strongly advocate a deliberate attempt to seek out the most intelligent opposing voices you can tolerate, to engage with them in argument, and when tension arises between your emotions and reason, acknowledge and address the tension, no matter how difficult or painful.

The more I think about this Andrew Gelman post, the more ridiculous it seems.  Gelman argues that economists, especially popular economists, use a pair of contradictory arguments to explain phenomena:

1. People are rational and respond to incentives. Behavior that looks irrational is actually completely rational once you think like an economist.

2. People are irrational and they need economists, with their open minds, to show them how to be rational and efficient.

In the comments, he clarifies his position:

My problem with some pop-economics is not with the use of arguments 1 or 2 but rather with what seems to me as the arbitrariness of the choice, accompanied by blithe certainty in its correctness.  This looks more to me like ideology than science.

I have no problem criticizing economists for their blithe certainty, a criticism I’d also to apply to just about everyone, myself included.  But I don’t follow Gelman’s criticism of the fact that economists apply different models to different situations.  This happens in all disciplines, including Gelman’s field of statistics.  For instance, statisticians often apply one of the following arguments:

  1. Phenomenon X follows a normal distribution.
  2. Phenomenon X follows a log-normal distribution.

1 and 2 are entirely contradictory, and to a non-statistician, it would appear entirely arbitrary whether to apply 1 or 2.  But to a statistician, there is a logic (part science, part art) as to whether to apply 1, 2, both, or neither.  Similarly, it may appear arbitrary to Gelman whether to assume rationality or non-rationality in a particular situation, when there is a consistent logic apparent to economists.  Ultimately, models should be judged based on the reliability of their predictions, not perceived arbitrariness by outsiders.

Annie Lowrey has a piece about customer surplus, citing studies that attempt to measure it for computers:

Karen Kopecky of the Federal Reserve Bank of Atlanta and Jeremy Greenwood of the University of Pennsylvania…tackled the value of the personal computer…they estimated that PCs are worth 2 percent or 3 percent of personal consumption expenditures…a more sophisticated analysis by the Wall Street Journal suggests something like $1,700 [per year].

She also cites Tyler Cowen saying this:

The more we are changing the use of our time, the less we can trust real income statistics.

An interesting point for Cowen to make, given that he recently wrote a book that heavily depends on real income statistics.

And also a thank you to Cowen, who set up two posts with his assorted links. Perhaps he was thanking me for my recent business advice.

Tyler Cowen is an academic economist, author of books, and prolific blogger.  His blog, Marginal Revolution, sees about 42,000 pageviews per day and has a loyal following.  I have no advanced insight into Cowen’s personal finances, but I suspect that a very small fraction of his income stems directly from the ads on his blog; rather, the blog is essentially a loss leader, which Cowen uses to advance his career in other ways.  This is a perfectly reasonable business model, and I have no doubt Cowen is doing just fine financially.  But I’m not sure it’s the best business model for Cowen.

My intuition is that Cowen’s blog creats more economic surplus than his teaching, lectures and books combined.  Cowen captures almost none of this revenue.  Suppose Cowen were to post the following one day:

I have immensely enjoyed writing this blog these past years and would like to continue to do so.  However, it’s very time-consuming and I’ve decided to devote more time to other activities.  Writing on this blog will cease in two months time.

I am willing to reconsider my decision.  I recognize that this blog probably creates much consumer surplus for loyal readers, and that many readers would probably be willing to pay for its continuation.  However, if I am to continue writing it, I want it to be freely available to everyone.  Thus, I’ll make the following offer: if, within the next two months, readers pledge a combined $200,000, I will continue to write this blog for one year.  If, after two months, that goal has not been met, all pledges will be returned, and this blog will end.

The $200k figure is arbitrary, but I think it’s pretty reasonable it would be hit–10,000 loyal readers times $20 pledge would do it, as would a wide assortment of combinations.  And $200k is a pretty sizable chunk of cheese for an economist, judging by this Scott Sumner post.  The free-rider problem might take effect, but since there’s a real threat of losing something of value, and a lock-in mechanism to prevent people from not getting value from their pledge, it seems like it could work.

I once asked a friend how much he’d be willing to pay to have the (very good) television series Firefly revived and continued for one season.  He said $30, reasoning that this is roughly the price for a TV series on DVD.  It was an interesting response, because the price I thought I’d be willing to pay was at least an order of magnitude higher–I was thinking somewhere between $300-$1000.

I suspect this rather large difference in willingness to pay stemmed neither from me being wealthier nor from my liking the show more.  Rather, we were just thinking about the question differently.  I was trying to assess my reservation price–the point at which I would be indifferent between buying and not buying the product.  My friend was giving the price point that he would expect a store to charge.  The difference between our two prices is consumer surplus.  Like my friend, I expect that were Firefly extended and sold as DVD boxed sets in stores, its price probably would be $30.  That’s what I’d expect to pay.  However, I’d actually be willing to pay a whole lot more.  As would, I suspect, my friend.

Thinking in terms of reservation price has two benefits.  First, it provides a more accurate estimate of wealth.  My Netflix membership might cost $240 per year, but the value I derive from it is significantly higher, since it allows me to discover and view gems like Firefly.  The same applies to my refrigerator (rented), facebook, and other goods–their price does not capture their value.  Second, recognizing that products often have far more value to their customers than the going price would indicate may open up new potential business models.  If Firefly season two can become profitable when X people buy it for $30, it can also become profitable when X/10 people buy it for $300.  At a time when the accelerated communication technologies are disrupting everything, these insights may prove valuable.