Monday, 18 March 2019

Should economists be licensed?

Ross Guest (Griffith University) wrote a provocative piece in The Conversation last week about whether economists should be licensed:
The great British economist John Maynard Keynes said he longed for the day when economics could be thought of as a “matter for specialists - like dentistry”.
It’s easier to become an economist than a dentist, or a doctor or a lawyer. For those and other professions you need to be accredited - you need a licence to practice.
The economics profession requires nothing other than a university degree, and this month in its regular poll of 54 leading economists, the Economic Society of Australia asked whether it should set the bar higher.
The first question asked whether:
"…professional accreditation for the economics profession would attract more people to economics as a career."
This was rather timely, since this week in my ECONS101 class we were discussing market power. One source of market power occurs when the government gives you an exclusive right to operate. Occupational licensing is an example of this. It makes sense to licence some occupations, like doctors, dentists, or nurses, where the government wants to ensure certain safety standards are met. Other occupations are licensed because the government wants to ensure trust in the profession, like real estate agents or financial advisors. On one (or both) of those two grounds, you could (and many do) argue in favour of continued licensing of teachers, and taxi drivers. However, it's a little harder to argue in favour of some other licensed occupations in overseas jurisdictions, like beekeepersfortune tellers, dog groomers, and librarians. What about economists?

Guest's article quickly strays into talking about ensuring certain standards of education for economists, which is separate from the question of whether they should be licensed. He also points out the gender gap in economics (which has been a theme I have discussed many times on my blog - see here and here for my latest posts on that topic). However, it isn't clear how licensing would address the gender gap, or the number (or distribution) of students studying economics more generally.

One thing we do know about occupational licensing is that it restricts competition. Only people who are licensed are allowed to practice that profession. That gives the licensed practitioners some degree of market power - it allows them to command a higher price (or salary, in this case). The outcome of licensing economists would likely be higher salaries for economists. It seems somewhat self-serving for an economist to argue in favour of licensing economists, in the same way that social workers or sex workers who argue for licensing are being self-serving.

It isn't clear to me that higher salaries for economists would address the gender gap in economics. In fact, it might even make it worse, if the marginal student that is attracted to economics by higher salaries is male, rather than female (at the least, we know that female economics students are less likely to specialise in finance, which tends to pay more).

Probably the best argument against licensing economists is defining who they are. Most economics graduates don't get a job with the title of 'economist'. Instead, the majority would end up an 'analyst' of some description (market analyst, business analyst, price analyst, etc.). So, how would you even enforce licensing? This probably explains why Guest focused on certifying economics education, rather than licensing economists directly.

So, should economists be licensed? It seems to me that the only people who would benefit would be economists.

Sunday, 17 March 2019

Game theory failure in Come Dine With Me?

Last week in my ECONS101 class, we covered game theory. One of the starting points of understanding game theory is to recognise dominant strategies. A strategy is dominant for a player if it provides that player with a better payoff than any other strategy, regardless of what the other players do. A player should always choose to follow their dominant strategy - to do otherwise would simply make them worse off.

The real world is filled with examples of game theory. However, most games don't have strongly dominant strategies, and even when they do, people may choose not to follow them. Take the example of the cooking programme, Come Dine With Me. In the show, the five contestants take turns to cook a meal and prepare an evening's entertainment for the other players. At the end of the evening, each contestant (except for the host) rates the evening on a scale of 1-10. The winner is the contestant who receives the highest total score for their evening as host. Importantly, none of the scores is revealed until the show is aired on television (some weeks or months later). So, there is no effective way to reward or punish other players, or to ensure cooperation (like two players each making a deal to rate the other player's evening highly).

Can you see the dominant strategy in Come Dine With Me? If you guessed that the dominant strategy is to rate every one of the other players a zero, regardless of how good (or not) their hosted evening was, then give yourself a gold star. Of course, that isn't what happens. So, why not?

A 2014 article by David Schüller (University of Duisburg-Essen), Harald Tauchmann (Friedrich-Alexander-University Erlangen-Nürnberg), Thorsten Upmann, and Daniel Weimar (both University of Duisburg-Essen), published in the Journal of Economic Psychology (ungated earlier version here), provides a partial answer. Schüller et al. used data from the German version of the show over the period from 2006 to 2011. They wondered whether it was the potential loss of reputation (from their family, friends, and acquaintances) that prevented players from choosing the dominant strategy. Essentially, no one wants to look like a dick on national television, so while it was the best strategy for winning, it might not be the best strategy overall in the 'game of life'. Instead, they expected the contestants to follow the social norm established in early episodes of the show. However, the data didn't support this social norm explanation:
We measured the impact of reputation by the voting behavior observed in previous shows. This had no significant influence on voting behavior once we accounted for the impact of the objective sophistication of a dinner and personal traits. Therefore, reputational factors as measured by past voting behavior does not seem to play an important role in this setting.
Instead, dinners that used more ingredients (a measure of 'sophistication') scored higher, the contestants who hosted later in the week scored higher (probably because they could learn about the other contestants and what would appeal to them), and contestants scored the others lower after they themselves had hosted. The authors argue that:
...a contestant who has already cooked attaches a higher weight to his own performance once it has been carried out... termed the 'overestimations effect'.
However, I prefer their alternative explanation, which is that:
 ...a contestant that has performed is now free to be more critical of the performance of others since he no longer has to fear being evaluated. However, this effect should play no role because the evaluations remain concealed until the show is broadcast.
Even though it should play no role in their evaluations, the contestants might be concerned that their evaluations are known to the television production crew, who might accidentally (or purposely) reveal that information to the other contestants. If they were found to be scoring the others as zeroes, then they could be punished. However, there is no risk of punishment after they have hosted. Still, despite this, the contestants weren't fully choosing the dominant strategy after hosting.

Coming back to the original hypothesis about social factors affecting the contestants' choices though, I think the authors could have done a better job of measuring this. Deviation from the social norm is a pretty weak way of measuring how concerned the contestants were about what the television viewers would think of them after the show. However, using publicly available data, better measures could not be used and so we are left wondering to what extent this drives the results.

I guess the moral of this post is that I should probably never be invited to participate in Come Dine With Me (not least because of the quality of the meal that would be served!).

Saturday, 16 March 2019

Why study economics? Amazon edition...

I've written a number of posts about opportunities for economics graduates in tech companies (see the list at the end of this post). Earlier this week, a CNN article covered economists in Amazon:
The company has turned so many businesses, from retailing to cloud computing, inside out. Now Amazon is upending the traditional role of economists within companies, as well as the field of economics...
At other companies, economists are often clustered in a small team, but at Amazon, they are integrated into many teams across the company. In a glossy recruiting brochure, Amazon describes how its economists help build risk models for lending to third-party sellers, advise on product design and engagement tracking for devices like Alexa and Kindle, help target customers for its booming cloud services business, and forecast server capacity needs for the consumer website.
Among the 46 jobs and internships currently posted for economists on Amazon's hiring website, there are positions open for economists to help fine-tune seller pricing, figure out the best way to route trucks through Amazon's vast distribution network and identify the characteristics of top-performing talent in order to make the best hires.
For example, Amazon runs a program called Connections, which sends out small questionnaires to employees: Does your work provide you with opportunities to learn new things? Does your team always put the customer first? How often does bureaucracy get in the way of your ability to deliver results?
To improve that feedback, Amazon tries out interventions like training managers to interact better with their subordinates. Originally, the company brought on a team of psychologists, other scientists and product managers, but before long, it became apparent that they weren't well suited to achieving what Amazon was ultimately after: Better performance. Economists, by contrast, were able to analyze which interventions led to higher worker productivity.
"The psychologists had a really hard time at Amazon, because they weren't trained in what economists are trained in, which is how this relates to profitability," said one former Amazon economist who spoke on the condition of anonymity. "Amazon is a very data-driven place, and if you can't prove that your program is beneficial to customers, you're at risk of having your program defunded."
In an age where there is substantial anxiety over whether certain jobs will exist in the future due to automation, jobs that are complementary to data and algorithms are among the safest. Include economists in that. And increasingly, as the CNN article notes, the most exciting economist jobs are in the tech sector.

Although the article focuses on PhD economists, there's many opportunities for graduates with an undergraduate degree in economics as well. Economics isn't going away - an understanding of economics is arguably more important than ever, especially if you want to differentiate yourself from the average business or social science graduate (note the comment above about psychologists). That's why you should study economics.

[HT: Marginal Revolution]

Read more:

Tuesday, 12 March 2019

Book review: Whatever Happened to Penny Candy?

Readers of a certain vintage will remember a time when the cheapest lollies in the local dairy were one cent (in contrast, some younger readers probably never used a New Zealand one cent coin, which along with the two cent coin was demonetised in 1990, while the five cent coin was demonetised in 2006). Now the cheapest lollies are much more expensive (ok, I'll admit I have no idea how much more expensive they are, having long since stopped buying them). Anyway, that is a very long-winded introduction to my latest read, Whatever Happened to Penny Candy?, by Richard Maybury. Penny candy in New Zealand being, of course, the one-cent lolly.

I can't recall who recommended this book to me, but it wasn't quite what I expected. The cover suggests that it is "a fast, clear, and fun explanation of the economics you need for success in your career, business, and investments". That would be accurate, if the economics you needed for success was limited to a thinly-veiled rant against monetary policy and inflation, and in favour of small government.

The book was loaded with "what the f***?" moments, such as this:
Inflation is not the same thing as rising prices.
Actually, it is. The definition of inflation is literally "an increase in the general price level in the economy" (from my ECONS101 textbook, the excellent free e-book The Economy by Core). Or, if you prefer Mankiw (the most widely used introductory textbook), then inflation is defined as "an increase in the overall level of prices in the economy".

To be fair, Maybury does make clear that his definition of inflation is an increase in the number of dollars (that is, effectively an increase in the money supply). And to be fair, that was the original use of the word inflation by economists (for example, see this article by Michael Bryan of the Federal Reserve Bank of Cleveland). However, that is clearly not the current use of the term, and despite Maybury's protestations that governments "have redefined inflation to mean rising prices", it was actually economists that did so, and the change had happened by the 1930s according to Bryan's article. So, Maybury's terminology is at least 80 years out-of-date. The arguments against monetary policy decisions might be valid, but to couch them in outdated use of terminology against virtually all currently-understood use of those terms is a little odd.

Another WTF comes from this:
During a depression, businesses go broke and people lose their jobs. Many become poorer. It's all caused by the inflation.
The first two sentences are correct, and few would argue with them. However, to argue that depressions are caused by inflation not only rejects the idea of monetary neutrality, but is effectively diametrically opposed to it. While strict monetary neutrality is probably not a good description of the real world, there is little evidence to suggest, as Maybury does, that business cycles are caused by inflation (by which he means that they are caused by fluctuations in the money supply).

The book does have some highlights though, including interesting descriptions of Gresham's Law, and the origin of the name of the "dollar" (which dates to the "Joachimthaler" in Bohemia in the Middle Ages, later shortened to "thaler"). However, despite those few highlights, I really wouldn't recommend this book to anyone, least of all anyone who want "a fast, clear, and fun explanation of the economics you need for success in your career, business, and investments".