Sunday, 29 November 2020

Climate change denial, narratives, and loss aversion

The Conversation had an interesting Climate Explained article a few weeks ago by Peter Ellerton (University of Queensland), which answered the question:

Why do humans instinctively reject evidence contrary to their beliefs?

The question was, of course, asked in the context of climate change denial. Ellerton's response included this:

We understand the world and our role in it by creating narratives that have explanatory power, make sense of the complexity of our lives and give us a sense of purpose and place.

These narratives can be political, social, religious, scientific or cultural and help define our sense of identity and belonging. Ultimately, they connect our experiences together and help us find coherence and meaning.

Narratives are not trivial things to mess with. They help us form stable cognitive and emotional patterns that are resistant to change and potentially antagonistic to agents of change (such as people trying to make us change our mind about something we believe).

If new information threatens the coherence of our belief set, if we cannot assimilate it into our existing beliefs without creating cognitive or emotional turbulence, then we might look for reasons to minimise or dismiss it.

I like the framing about understanding the world through the narratives we tell ourselves. However, Ellerton could easily have gone a bit further in his explanation, linking the unwillingness to accept new information that threatens our narrative to the behavioural economics concepts of endowment effects and loss aversion, as I have previously done in this 2018 post:

People are loss averse. We value losses much more than equivalent gains (in other words, we like to avoid losses much more than we like to capture equivalent gains). Loss aversion makes people subject to the endowment effect - we are unwilling to give up something that we already have, because then we would face a loss (and we are loss averse). Or at least, there would have to be a big offsetting gain in order to convince us to give something up that we already have. The endowment effect applies to objects (the original Richard Thaler experiment that demonstrated endowment effects gave people coffee mugs), but it also applies to ideas.
I've thought for a long time that ideology was simply an extreme example of the endowment effect and loss aversion in practice. Haven't you ever wondered why it's so difficult to convince some people of the rightness of your way of thinking? It's because, in order for them to agree with you, that other person would have to give up their own way of thinking, and that would be a loss (and they are loss averse). It seems unlikely that the benefits of agreeing with you are enough to offset the loss they feel from giving up their prior beliefs, at least for some people. Once you consider loss aversion, it's easy to see how ideologies can become entrenched. An ideology is simply lots of people suffering from loss aversion and the endowment effect.

Climate change denial is a good example of an ideological viewpoint. People are endowed with a particular view about climate change. They are unwilling to give up that view, because that would involve a loss to them (a loss of one of their beliefs), and people are loss averse (they want to avoid losses). So, people are reluctant to adjust their internal narratives about climate change, even in the face of overwhelming evidence, because they are loss averse.

Read more:

Monday, 23 November 2020

Book review: The Soulful Science

I've been a bit quiet on the blog the last week or so, because I've been busy with population projections work (more on that in a future post). However, I have found time to read, and I just finished Diane Coyle's 2008 book The Soulful Science. The book contains a summary of recent advances (at least, up to 2008) in economics research, and to my mind she does an even better job of it than similar books of a similar vintage such as Economics 2.0 (which I reviewed here). Coyle has an ambitious goal for the book, expressed in its first sentences:

I want to persuade you that economics gets an unfairly bad press. Even though economists are widely criticized for either failing to predict the financial crash, or for causing it, or sometimes both, economics is nevertheless entering a golden age.

It seems to me that those who might benefit most from reading a book with that purpose in mind, are unlikely to be willing to read it. As Coyle notes:

The popular unpopularity of economics rests on perceptions which are twenty or thirty years out of date and were always a bit of a caricature anyway.

In my experience, people have a misguided view of what economics is and what economists do. Towards the end of the book, Coyle discusses what the nonspecialist sees of economics, being:

...largely the kind of macroeconomic debate covered in the news programs and newspapers: the forecasts about how much the economy will grow or how severe the recession will be, what will happen to inflation or the dollar, whether the financial markets will go up or down. Most of this economics is:

(a) of poor quality and spuriously precise, as it's not possible to forecast these things in any detail...

(b) jargon-ridden and possibly not understood even by the person - often not actually an economist but an investment manager or media pundit - spouting the jargon on television; and

(c) being used for a purpose such as advancing one political party or gaining ones' employer some good PR. 

Nothing has really changed in the twelve years since this book was published. The problems of the misunderstanding of what economics is, and negative public perception of economics, are not new issues, and aren't going away any time soon.

So, one book isn't going to unwind economics' 'popular unpopularity'. However, I do see great value in this book, for beginning economics students trying to get a sense of the possibilities. Even though the book, and the research to which it refers, is getting a bit dated, it still outlines a number of interesting (and relatively recent) developments in economics research, including advances in economic history, models of economic growth, life satisfaction, and the economics of information. I certainly made a number of notes that I will use in teaching next year.

Coyle is also an excellent writer, and incredibly well-read (as a quick few minutes spent on her blog, The Enlightened Economist, provides ample evidence to support). She also embeds a lot of subtle (and sometimes not so subtle) humour into the book. For instance, where else could you read about Jeremy Bentham's testicles?:

In fact, Bentham was an all-round eccentric. He was ahead of his time in wearing knitted woollen underpants (so it was discovered post mortem by Mr. Smith): most Victorian men simply tucked their shirt tails between their legs. And, whether or not due to the scratch of wool on his testicles, Bentham was the intellectual father of utilitarianism, the philosophy that can be summed up as "the greatest happiness of the greatest number."

I really enjoyed this book, and I highly recommend it to current and future students of economics. It captures more 'mainstream' economics research than books like Freakonomics, but does so in a way that is engaging and entertaining. I wish there were more books like this, capturing economics research advances in the twelve years since.

Saturday, 14 November 2020

PhD students shouldn't be picking fruit

An email from the University of Auckland to some PhD students blew up in the media on Thursday and Friday. As the New Zealand Herald reported:

Auckland University has advised its doctoral students to "take a holiday from your academic work" - and go fruit picking.

The email, sent to all PhD students in the university's School of Cultures, Languages and Linguistics, has drawn astonished and sarcastic comments from students.

"As we near the end of the year, some of you may be wondering about whether to take a holiday from your academic work schedule," the email says.

"If it is possible for you to take a break, we really recommend that you do so. It has been a very difficult year, and most of us have not left Auckland at all. A break out of the city doing a very different activities [sic] can refresh the mind and body and help you have a productive year in 2021.

This rightly led to a collective 'WTF?' from PhD students. However, much of the commenting online seems to be of the form "When I was a student, we picked fruit during summer...". This demonstrates how little the general public understands what it is that PhD students do, and a failure to consider the opportunity cost of fruit picking.

Most undergraduate students are not studying over summer. So, taking two or three months of their summer to pick fruit will have no effect on how long it takes those students to graduate. The opportunity cost of fruit picking is fairly low for undergraduate students - these students give up time that they could have spent on summertime leisure pursuits, or for most of them, in some other employment.

In contrast, a PhD student is undertaking a sustained period of self-directed study (under the supervision of a panel of academic staff). If a PhD student takes two or three months off to pick fruit, then that means it will take them two or three months longer to complete their thesis. The opportunity cost of fruit picking is that the student potentially gives up three months of much higher earnings that they could have achieved after they have completed their PhD. Sure, those higher earnings don't happen until up to three years later, but no one's discount rate is so high that a barely-above-minimum-wage fruit picking job is a superior alternative. On top of that, many international PhD students are spending time away from their family, and taking longer to complete their thesis means more time away.

I'm sure that some students will be looking for work over summer, and some of those students will end up working in the horticulture industry. But PhD students should not be among them, and the University of Auckland should know better.

Thursday, 12 November 2020

Climate and internal migration in Kiribati, and what that might tell us about climate refugee flows

I've posted a few times about the effect of climate change on migration, including on my own research about the effects of climate change on internal migration in New Zealand. I'm often asked about how climate change is going to affect international migration to New Zealand, and whether we will face a flood of 'climate refugees' in the near future. Especially, people tend to focus on the effect of sea level rise on island nations.

There are a number of important points to make in relation to climate refugee flows to New Zealand. First, New Zealand is a long way away from the most populous places that will be most affected by sea level rise, including Bangladesh, the Mekong Delta, and the Red River delta in South and South East Asia (there are many places more distant that may be even more affected). Travelling a long distance entails a high cost that is prohibitive to most people. Second, the places that are relatively close and affected by sea level rise, like the Pacific Islands, generally do not have large populations. The most populous islands tend to also be larger and have inland areas that will be less affected by sea level rise. Migrating inland is a much lower cost alternative than migrating internationally (albeit with its own challenges). Third, even if people choose to migrate internationally, New Zealand is just one of many alternative destinations they could choose, including Australia, the United States, or other Pacific islands. Finally, if New Zealand chose to admit a large number of climate refugees on humanitarian grounds and covered the cost of their travel and settlement, that still only covers the monetary cost. People have an attachment to place, and moving away entails a psychic cost (for example, see here). That explains why many people prefer to migrate short distances rather than long distances, even when they have the means to migrate further away.

It is on the basis of those points that I make the case that climate refugee flows to New Zealand are likely to be small. There is a theoretical model underlying most of those points, and that is related to the costs of migration.

A new article by Hugh Roland and Katherine Curtis (both University of Wisconsin-Madison), published in the journal Population and Environment (sorry, I don't see an ungated version online), demonstrates the importance of costs in the migration decision, in the context of environmental change. Roland and Curtis use five-year origin-destination migration data from the Kiribati Censuses of 2005 and 2015. They set out to compare two competing environment-migration theories:

According to the traditional, dominant framework known as the environmental scarcity thesis, poor environmental conditions may prompt out-migration in search of more hospitable natural environments and better livelihoods. In contrast, the environmental capital thesis asserts that resource scarcity and limited financial means associated with poor environmental conditions may actually restrict out-migration...

Notice that the environmental capital thesis exacerbates the points I made above, in relation to migration costs. Roland and Curtis test these theories by comparing how migration rates to the main island of Tarawa have changed over time between islands that are more isolated from Tarawa, and those that are less isolated. As they explain:

Isolation dampens the migration-promoting effect of declining natural resources asserted in the environmental scarcity thesis. However, isolation exacerbates the migration-prohibiting effect of declining natural resources outlined in the environmental capital thesis. With this theoretical distinction in mind, we anticipate that the migration-incentivizing role that environmental and economic challenges play in the environmental scarcity hypothesis only pertains to contexts in which migration costs are reasonable and, associated, distances to potential destinations are short. In remote settings, the environmental capital thesis is likely the more applicable framework.

Kiribati has been experiencing acute and increasing impacts of climate change over the period Roland and Curtis study. They expect to confirm that the environmental capital thesis dominates, and indeed, that is what they find based on cross-sectional comparisons:

Analysis of migration probabilities shows that out-migration to Tarawa is higher among the least geographically isolated islands as compared with the more isolated islands... Consistent with the environmental capital thesis, probabilities of Tarawa-bound migration from the more spatially proximate North and Central Gilbert Islands in 2000–2005 are generally larger than probabilities for the more distant South Gilbert Islands... While small numbers, the direction of the differences in out-migration is consistent with the environmental capital thesis and contrasts with the environmental scarcity thesis.

Then, looking at changes over time:

At first glance, the increase in out-migration among the North and Central Gilbert Islands appears consistent with the environmental scarcity thesis: as environmental, related economic, and other conditions decline, residents migrate to new places in search of better opportunities and livelihoods. For more geographically isolated islands, however, we generally find negative changes in migration probabilities. Such declines are consistent with the environmental capital thesis: isolation exacerbates the migration-prohibiting influence of environmental degradation. The positive change in outmigration probabilities for the North and Central Gilbert Islands contrasts with the negative changes in out-migration probabilities found for most of the more isolated islands...

The differences in the changes in out-migration probabilities between more and less geographically isolated islands support the environmental capital thesis. Migration is markedly lower from more isolated islands than from less isolated islands and generally decreases during a period in which environmental and economic conditions worsened.

Migration costs are an important constraint on migration. If climate change reduces access to the resources necessary to fund migration, people will not be able to migrate, even as the climate continues to worsen. The environmental capital thesis may be thought of as a type of climate-induced poverty trap. I think that this research is also instructive in terms of wider migration flows arising from climate change in the Pacific, because this dynamic is likely to apply (perhaps even more so) in the case of international migration.

It would be really interesting to conduct a similar study looking at how Pacific international migration flows are changing over time and how isolation, or a more proximate estimate of migration costs, affects those migration flows. I would expect to see something similar, justifying my contention that we are unlikely to face a flood of climate refugees from the Pacific in the near future.

Read more:

Monday, 9 November 2020

Economists in schools of public affairs, and compensating differentials

New Zealand doesn't have any schools of public affairs, but they are a reasonably common feature of U.S. universities (Victoria University does have a School of Government, but I'm not sure that is quite the same). Economists in the U.S. are employed in both economics departments, and in schools of public affairs. You would think that they would be paid the same (conditional on their 'quality' as an academic) regardless of which school or department they are employed in. Not so, according to this 2019 working paper by Lori Taylor, Kalena Cortes, and Travis Hearn (all Texas A&M University).

They first compile salary and demographic data from 2152 academics employed in schools of public affairs, economics departments, or political science departments, from the 33 public universities with schools of public affairs ranked in the top 50 in the U.S. (the other 17 are private universities, where data on salaries are not readily available). Their data demonstrate three key facts:

First, leading schools of public affairs employ a large number of economists. The 33 leading public affairs departments in our sample employed more than 100 economists, or 12 percent of the economists in the sample.

Second, a disproportionate number of the economists employed by schools of public affairs were female... 19 percent of the faculty in departments of economics were female; whereas 23 percent of the economists in departments of political science were female and 35 percent of the economists in schools of public affairs were female...

Third, average salaries in schools of public affairs were lower than those in traditional economics departments. On average—and without adjustment for faculty rank or institution reporting differences—salaries were 33.5 percent higher in departments of economics than they were in schools of public affairs. Among economists, average salaries were 11 percent higher in departments of economics than they were in schools of public affairs.

Taylor et al. then go on to explore the differences in salaries between schools of public affairs and departments of economics (and political science) in a bit more detail. In particular, they are interested in whether, given that schools of public affairs employ more women, and there is a gender gap in salaries, the proportion of female faculty makes a difference. It turns out it doesn't, and they report that:

...we found a significant, negative differential for female faculty members, but controlling for gender did not eliminate the public affairs discount...

...female faculty members were paid significantly less than male faculty members regardless of discipline or department.

Interestingly, there was no difference arising from the seniority of faculty in the schools or departments either. However, then they go on to investigate measures of 'research productivity' (or quality) and find that:

...controlling for citation metrics as well as years since degree and faculty rank, we estimated that economists in schools of public affairs earned at least 28 percent more than otherwise similar faculty members, and economists in departments of economics earned 17 percent more than economists in schools of public affairs. On the other hand, political scientists were better paid in a school of public affairs than in a traditional department of political science, even after controlling for research productivity.

Including citation metrics (as a measure of research productivity) rendered the gender difference in salaries statistically insignificant, suggesting that the difference in salaries was capturing differences in research productivity. That is quite a different result from much of the earlier literature on this topic (for example, see my earlier post here).

This working paper seems a bit unfocused to me. It starts with the premise of comparing salaries between schools of public affairs and departments of economics, but quickly strays into evaluating the gender gap in salaries. The analysis and the exposition would be a lot clearer if they could distinguish those two aims. The finding that the gender gap is explained by differences in research productivity needs a bit more unpacking, especially given that it contradicts the previous literature.

However, the most interesting finding to me is the salary penalty for economists who work in schools of public affairs, and that the penalty remains statistically significant even after controlling for research productivity. Departments of economics have been labelled a toxic environment for women (for example, see my earlier post here). Could the public affairs salary penalty reflect a compensating differential? Are (female) economists willing to accept a reduction in salary in order to locate in a department that has a more welcoming environment (and in reverse, do they require a higher salary to compensate for the toxic working environment in a department of economics)? The public affairs salary penalty for economists was higher for women than men, and was statistically significant in some (but not all) of Taylor et al.'s results, after controlling for research productivity (see Table 4 in the working paper). That provides some further evidence that the salary penalty might be capturing a compensating differential that is more salient for women than for men.

On the face of it, the salary penalty for working in a school of public affairs would tend to suggest that economists should avoid working there. That probably holds true for male economists. However, if it reflects a positive compensating differential, which it probably does for women, then that changes the parameters of the decision and may favour jobs at the schools of public affairs. The problem with taking that interpretation though, is that it may 'lock in' the cultural differences between schools and departments that are the very source of the compensating differential. Food for thought.

[HT: Marginal Revolution, last year]

Sunday, 8 November 2020

The story of sexual economics should not be written by psychologists

On Thursday, I posted about the economics of sex robots. In particular, I drew attention to search models as a way of thinking through the economics related to sex. The key driver in a search model is the relative bargaining power of the parties to the agreement. If some change gives a party more relative bargaining power, they will get a better deal.

However, search models are not the only way to think about the economics of sex. This 2017 article by Roy Baumeister (Florida State University) and co-authors, published in the Journal of Economic Psychology (open access), instead uses the workhorse model of microeconomics - supply and demand. They note that:
Sexual economics theory rests on standard basic assumptions about economic marketplaces, such as the law of supply and demand. When demand exceeds supply, prices are high (favoring sellers, that is, women). In contrast, when supply exceeds demand, the price is low, favoring buyers (men)...

Importantly, they aren't describing the market for sexual services (i.e. prostitution). Instead:

 ...often what is sold is not just sex but exclusive access to sex with a particular person.

How do Baumeister et al. justify their theory? As follows:

The core idea is that women are the sellers and men are the buyers. This starts with the abundant evidence that ‘‘everywhere sex is understood to be something females have that males want”...

Because the man typically wants sex more than the woman, she has a power advantage. According to the ‘‘principle of least interest,” the person who desires something less has greater control and can demand that the other (more desirous) person sweeten the deal by offering additional incentives or concessions... Hence sexual economics theory begins with the assumption that female sexuality has exchange value, whereas male sexuality does not...

In return for sex, women can obtain love, commitment, respect, attention, protection, material favors, opportunities, course grades or workplace promotions, as well as money. Throughout the history of civilization, one standard exchange has been that a man makes a long-term commitment to supply the woman with resources (often the fruits of his labor) in exchange for sex — or, often more precisely, for exclusive sexual access to that woman’s sexuality. Whether one approves of such exchanges or condemns them is beside the point. Rather, the key fact is that these opportunities exist almost exclusively for women. Men usually cannot trade sex for other benefits.

The onset of a sexual relationship thus involves the man and woman choosing each other. In perhaps overly simple terms, he chooses her presumably on the basis of her sex appeal, that is, how much he expects to enjoy having sex with her. Meanwhile, she chooses him on the basis of the resources he can provide, that is, on the basis of nonsexual benefits he can furnish to her. This exchange defines the nature of the same-sex competition. Women compete to seem more sexually attractive than their rivals. Men compete to seem a better provider than their rivals.

The rest of the article describes differences in competition between women, and between men. It is interesting to read, but I'm more concerned about the framing of the model. It's not clear to me that the authors, all of whom are psychologists of various types, have really thought through the plausibility of the economic model they are attempting to use.

The basic model of supply and demand relates to a perfectly competitive market, which has a number of characteristics: (1) many buyers and sellers; (2) homogeneous 'products'; (3) complete information; and (4) no barriers to entry into or exit from the market. Under those conditions, neither buyers nor sellers have any control over the price - they are 'price takers', and the market 'price' is determined by the interaction of supply and demand.

Now, thinking about sexual economics, it's not clear to me that either (2) or (3) is satisfied. Every person is different, with different preferences. So, the assumption of homogeneous products cannot be fulfilled. Also, we don't know everything about other people we might like to match with (at least, not at first, so complete information is also not available. So, the market is not perfectly competitive, and therefore cannot be described by supply and demand curves. [*]

Another important problem is that, in the supply and demand model, sellers can sell more than one unit of the product (in fact, they will continue to sell until the point where their marginal cost of production is equal to the price), and can sell to more than one buyer. And buyers will buy more than one unit of the product. None of this seems to be a fair characterisation of sex (unless psychologists inhabit quite a different world from the rest of us).

Now, if you read through the quote from the Baumeister et al. article above, and then go back and read my description of search models from Thursday's post, it should be immediately clear that the search model is a better characterisation of sexual economics. Moreover, it doesn't rely on the assumptions of homogeneous products or complete information, and definitely copes with faithful matches between single individuals.

The sad thing is that the rest of the Baumeister article is, as I said above, really interesting. And, the narrative probably stands up well if you take out the supply and demand framing, and replace it with a framing based on a search model. Someone needs to re-write an improvement on that article.


[*] I'm being a little bit harsh here. As I note in my ECONS101 class, even though the demand and supply model relates to perfectly competitive markets, it still does a good job of describing qualitatively the changes in the price and quantity that will result from a change in market conditions, even when the market is not perfectly competitive.

Thursday, 5 November 2020

The economics of sex robots

In my ECONS101 class, we cover search models of the labour market. Unlike the supply and demand model, search models do not rely on a concept of market equilibrium. Instead, it is the relative bargaining power of the parties (employers and workers) that determine the wage.

The simple explanation works like this. Each matching of a worker to a job creates a surplus that is shared between the worker and the employer. Because job matching creates a surplus, this provides the worker with a small amount of market power (or bargaining power). That is because if the worker rejects the job offer, the employer has to start looking for someone else to fill the vacancy. The employer is somewhat reluctant to start their search over, so the worker can use that to their advantage. The division of the surplus created by the match, and therefore the wage, will depend on the relative bargaining power of the worker and employer. If the worker has relatively more bargaining power, the wage will be higher. And if the employer has relatively more bargaining power, the wage will be lower.

This search model doesn't just apply to the labour market. You can also apply it to many situations that involve matching two or more parties. Which brings me to this post on sex robots by Diana Fleischman. Sex involves matching (unless you go it alone). The agreement on the what-where-how of sex will depend on the relative bargaining power of the sexual partners. The increasing availability of increasingly realistic sex robots looks likely to shake things up, because sex robots and women are substitutes (see also this earlier post on pornography and marriage as substitutes). As Fleischman explains:

What does this mean for women? When the sex ratio changes, so too do sexual norms; sex robots are going to emulate an increase in the ratio of women to men. Contrary to a prediction based on the idea that men would wield greater patriachal [sic] control if they were in higher numbers, a larger percentage of women relative to men on University campuses is associated with women who are more likely to have casual sex and less likely to be virgins. When there are more men than women, women are much less likely to have casual sex. The majority sex (in this case men) competes for the minority sex (in this case women) and the minority sex calls the shots. When there is a female majority in the population, women compete for access to mates with casual sex. Whereas a male majority competing for access to scarce women compete with long-term commitment.

Sex robots will emulate a majority women ratio, shifting women to compete for men’s attention by requiring less courtship and commitment in exchange for sex.

Taking a heteronormative perspective, the availability of sex robots reduces the relative bargaining power of women, and therefore increases the relative bargaining power of men. That means that men may be able to extract more of the surplus from potential sexual liaisons. That is, men may be able to get more of what they want. Fleischman notes that:

The long-term ramifications are unclear, especially the way long-term technologies and cultural norms will interact. Perhaps women will discover they have to make the costs of courtship both low and transparent to compete with sex robots.

Women, having to compete with sex robots, may have to offer men more. But not so fast:

Or, perhaps, new technology could enable women to recombine their genes with one another, making men enamored with sex robots (or men generally) totally redundant.

New technology for recombining genes and completely excluding men won't rebalance bargaining power back towards women. The technology necessary to reproduce without involving sex has existed for some time. Fleischman is conflating the reproductive goal of sex, with the pleasure goal of sex. To rebalance bargaining power back towards women, women need their own sex robots. Sex robots for all!

[HT: Marginal Revolution]

Tuesday, 3 November 2020

Charles Plott's strategies for getting published

There are plenty of critiques of peer review, one of which is that it is incremental and leads to the most novel research failing to get published. If you are a researcher doing incredibly novel research, using methods that reviewers don't fully understand because those methods are not yet widely employed, then you could have real difficulty in getting your best work into top journals. That has been the case for many emerging fields. In economics, in (relatively) recent times (prior to the 1990s), that applies to behavioural economics and to experimental economics. The challenge, then, is how to get your work accepted if you are one of these researchers employing novel or misunderstood methods.

In a new article published in the journal Oxford Economic Papers (ungated version here), Andrej Svorencik (University of Mannheim) documents how one of the pioneers of experimental economics, Charles Plott, overcame the reluctance of editors and journal reviewers to accept the validity of laboratory experiments. As Svorencik writes:
Whereas there were no public detractors of experimentation in economics, the early and most prolific experimenters, such as Charles Plott and Vernon Smith, encountered skeptics and systematic rejections of their submitted papers. Getting them published required tenacity on the writers’ part to go through several rounds of often heated discussions with editors and referees. These iterations present a unique perspective on the arguments raised against experiments in economics and the specific strategies developed by experimental economists to counter them.

Svorencik uses the 'research corpus' of Plott, covering letters and responses to editors and reviewers dating from the mid-1970s to the mid-1990s, and establishes nine different strategies that Plott employed to disarm reviewers and convince editors that his publications using experimental economics should be published:

S1 Asking for knowledgeable referees because previous referees were ignorant of experimental economics;
S2 Claiming that results are interesting, relevant for theory, and have applications;
S3 Claiming that the experiments present real situations;
S4 Claiming that the theory applies to simple cases;
S5 Citing basic research;
S6 Conducting more experiments;
S7 Shifting of the burden of proof;
S8 Steering clear of a specialized journal;
S9 Claiming that field has been confused with method.

One particular example of strategy S4 struck me as particularly important. From a 1979 letter that Plott wrote to George Borts, the editor of the American Economic Review:

The laboratory processes are simple and very special markets... but they are nevertheless real markets which should be governed by the same principles that are supposed to govern all markets. The justification for studying them is the same as the justification for studying the simple special cases and special types of any complicated phenomenon.

In order to see why these markets are real, one need only apply directly the theory of derived demand. It works as follows. Let Ri(xi) be the revenue received by individual i from some source expressed as a function of the number of units (xi) he has to sell. Standard derived demand theory tells us that δRi/δxi is limit price (inverse demand) function for this individual. It is important to note that the theory places no restriction upon the source of the revenue so when the source is an experimenter the derived limit price function for this individual is just as real as when the source is a business. Furthermore, the theory places no restriction on what x is called (unless the individual gets consumption pleasures from it) so the theory applies equally as xi becomes baseball cards, shirts, food, or ‘commodities’ created especially for the purposes of an experiment. There are no ‘side payments’ or incidental sources of enjoyment so as long as the individual prefers more money to less we can be assured the preferences for units of x have been induced. The individual is indeed a ‘demander.’

The supply side of the market is handled similarly. Each supplier, j, faces an individualized cost function Cj(xj) which indicates what j must pay the experimenter as a function of units purchased for resale. Profits to j, which are j’s to keep, are simply the revenues received by j over costs Cj(xj). Clearly that δCj(xj)/δxj is a real marginal cost function. The fact that it was constructed by the experimenter makes the concept no less relevant because the concept is intended to apply universally.

We have then a valued and scarce resource. Almost any textbook will say that those conditions are sufficient for the existence of an economic problem. The laboratory markets are thus real markets and the principles of economics should apply to them as readily as they are supposed to apply to any other market.

Plott's responses to editors and reviewers was very forceful, and it appears that more often than not, he got his way. And generations of experimental economists have benefited from his efforts, as by the 1990s economics research using laboratory experiments had been broadly accepted and was regularly being published in top journals. Svorencik's article provides a key insight into how this process happened, and is a really interesting contribution to the history of economic thought.

Monday, 2 November 2020

Book review: Plagues and the Paradox of Progress

When we went into lockdown earlier this year, I quickly gathered together some books from my office, not knowing how long it would be before I could return. One of those books was Plagues and the Paradox of Progress by Thomas Bollyky. It seemed quite relevant (perhaps too relevant) at the time, but I've only just gotten finished with reading it now.

The premise of the book is relatively simple. High-income countries took a long time to tackle their own problems of infectious disease (like cholera, typhoid, etc.), and in the process of tackling infectious diseases, those countries developed the types of institutions (like health systems) that have contributed to high income countries' ongoing success. In contrast, modern-day low-income countries haven't had to go through the same long process of institution building in order to combat infectious diseases, as they have been able to import the solutions from high income countries, often with the support of international aid or philanthropic donors. So, while infectious disease no longer kills millions of people in low income countries, the lack of effective institutions keeps those countries poor - that is what Bollyky terms the paradox of progress. As Bollyky summarises:

...the world has gotten better in ways that should make us worry. The last two decades have brought dramatic reductions in endemic infectious disease and child mortality, but not the improvements in health-care systems, responsive governance, and employment opportunities that accompanied these changes in wealthier nations in the past. 

On the face of it, it's a compelling narrative, supported by what is among the most extensively researched evidence base I've seen in a book (for instance, Chapter 4 is 34 pages, but has 180 endnotes of references). However, the narrative is not entirely convincing, because it lacks strong causal evidence. It is all very well to present lots of evidence of how bad infectious diseases were in the past, and describe how high income countries dealt with them, but quite another to export that experience to low income countries. If you're not able to first establish the causal links, then your evidence base is at best partial. This is one of the problems that the Kuznets Curve faces - it looks good based on the experience of high income countries, but falls apart when exposed to data from low income countries.

I feel like the book also dramatically oversimplifies the issues. The role of institutions in economic development involves a huge literature, on which Bollyky barely touches the surface. To some extent, that's because that literature would broaden the scope of the book to an unmanageable extent. However, it also leaves the book without a clear relationship to a pretty important section of the literature.

It also leads to a policy prescription in the concluding chapter that can best be described as banal. I think almost anyone could have recommended secure property rights over land, and increased investment in education and primary health care, as important policy goals for low income countries, regardless of any link to infectious disease. And the links between those recommendations that the evidence in the preceding chapters is pretty tenuous, especially in the case of property rights.

Aside from those major gripes, the book is wonderfully well written and easy to read. And as I said, it is incredibly well sourced, so an interested reader can easily follow up on any of the evidence that Bollyky presents. The book also had some prescient moments that call to mind the current pandemic crisis:

Several years after the Ebola outbreak, coordination and funding of international epidemic and pandemic preparedness and response remain ad hoc and dependent on media attention. "We still are not ready for the big one," said Ron Klain, the former US Ebola czar, to the Washington Post in October 2017.

Indeed. Also this:

The United States was (and remains) woefully ill-prepared for the threat of antibiotic resistance and future pandemics.

As Americans have been discovering this year, to the dismay of many. However, Bollyky does make some clear errors, one of which is among my pet peeves - comparing stocks with flows:

The market capitalization of Philip Morris International at $187 billion (as of July 2017) is larger in nominal terms than the economies of most of the 180 countries where that company sells Marlboro and its other brands of cigarettes.

It may be technically true, but it's a worthless comparison, because a market capitalisation is a stock (based on fundamentals, it would be the present value of all future cash flows of the corporation), while GDP is an annual flow.

Overall, while the book was an enjoyable read, I don't feel like I learned much from it, and it certainly falls short of providing a convincing argument to me.