This week in research #70

Here's what caught my eye in research over the past week:

• Burton (with ungated earlier version here) finds that smoking bans in bars in the US result in a 1-drink-per-month (5 percent) increase in alcohol consumption and no economically meaningful effects on smoking
• Perron and Hu (open access) find that, in the NHL, each additional locally born player completing a full season is associated with an increase in home game attendance by approximately 12,000 spectators and $4.8 million in additional revenue
• Dalal and Raju develop a theoretical model of the illegal drugs market, and show that, under risk aversion, increasing punishment costs (i.e., severity) is more effective than increased enforcement (i.e., certainty) and demand reduction is more effective than interdiction
• Faerber-Ovaska et al. (open access) test the accuracy of ChatGPT’s answers to multiple-choice and short essay questions from a widely used economics textbook, and find that ChatGPT scored a high D in multiple-choice questions and a low A in essay questions (I feel like the world has already moved on from this though, as I noted in this post)
• Cheah and Qi develop a theoretical model of the effect of broadcast revenue on competitive balance in sports, and their simulations with the model show that broadcast revenue allows teams with smaller home fan bases to narrow their performance gap against stronger teams (it must depend on revenue sharing rules though, surely?)
• Reimão et al. find that expert judges favour the first dish tasted in a blind test in the Great British Bakeoff (and other English-speaking versions of the show)

Book review: The Economists' Hour

Once upon a time, economists were backroom advisers, crunching numbers and developing theories, but rarely in the limelight and certainly not the central actors in political decision-making. However, as Binyamin Appelbaum outlines in his 2019 book The Economists' Hour, that all changed in the late 1960s. The title of the book references the period from 1969 to 2008, a period of unprecedented policy change (in the US and in other countries), and a period where economists had the ear of the key governmental decision-makers. As Appelbaum notes in the introduction to the book:

This book is a biography of the revolution. Some leading figures are relatively well-known, like Milton Friedman, who had a greater influence on American life than any other economist of his era, and Arthur Laffer, who sketched a curve on a cocktail napkin in 974 that helped to make tax cuts a staple of Republican economic policy. Others may be less familiar, like Walter Oi, a blind economist who dictated to his wife and assistants some of the calculations that persuaded Nixon to end military conscription; Alfred Kahn, who deregulated air travel and rejoiced in the cramped and crowded cabins on commercial flights as the proof of his success; and Thomas Schelling, a game theorist who persuaded the Kennedy administration to install a hotline to the Kremlin - and who figured out a way to put a dollar value on human life.

That paragraph neatly sums up the book. Each chapter is devoted to one particular aspect of policy that changed as a result of the influence of economists. Before reading the book, I had no idea of the important role that economists played in ending military conscription in favour of volunteer armed forces. I was, however, well aware of economists' role in deregulation of airlines, as well as deregulation of interstate trucking in the US, and of financial markets, and the development of monetary policy and the independence of central banks. Some particular parts are surprising, such as the relatively late impact of economists on antitrust regulation (only from the 1960s). However, like other areas covered in the book, economists drove a radical change in policy in that space:

The rise of economics transformed the role of antitrust law in American life. During the second half of the twentieth century, economists gradually persuaded the federal judiciary - and, to a lesser extent, the Justice Department - to set aside the original goals of antitrust law and to substitute the single objective of providing goods and services to consumers at the lowest possible prices.

Appelbaum describes in some detail the contributions of the key players in each case, including economists as well as political decision-makers and their other advisors. Some figures, such as Friedman and various US presidents, make many appearances, and often similar ideas come up across multiple chapters. This repetition might turn some readers off. However, it is difficult to see how the book might have been constituted in any other way, because the thread of each case would easily be lost if all the material were presented chronologically.

The book is incredibly well researched, with nearly 90 pages of footnotes. As is sometimes the case in books like this, particularly for readers that are familiar with the general story, the footnotes present details that are of more interest than the text itself. For example, consider this footnote on Milton Friedman, and real and nominal interest rates:

This is another example of a battle Friedman won so completely that his victory is largely forgotten. He insisted during the 1950s and the 1960s that there was a significant difference between real and nominal rates. Conventional economists disagreed... Today the distinction between real and nominal rates is universally understood to be significant.

Indeed, we teach the difference between real and nominal interest rates (and the relationship between them known as the 'Fisher equation'), but Friedman's battle to have this recognised is largely forgotten.

I really enjoyed that Appelbaum didn't limit the book to only considering the US case. Economists had important roles in reshaping the economies in Chile and Taiwan, and in deregulating markets across the developed world. Appelbaum writes a lot about deregulation in Iceland. If there is one missing element to the book, it would be the relative lack of attention paid to economists' roles in the transitional economies of former Communist countries such as Poland, Hungary, of the Soviet Union. However, New Zealand does make an appearance a couple of times, including this bit:

In December 1989, New Zealand passed a law making price stability the sole responsibility of its central bank, sweeping away a 1964 law that, characteristically for its time, had instructed the central bank to pursue a laundry list of goals including economic growth, employment, social welfare, and trade promotion. The man picked to lead New Zealand's experiment was an economist named Don Brash, who ran one of the nation's largest banks and then one of its largest trade groups, the Kiwifruit Authority...

Appelbaum is careful not to provide an overly rosy view of the role of economists, and the impacts of these changes. Indeed, in the introduction he warns that:

This book is also a reckoning of the consequences...

Markets make it easier for people to get what they want when they want different things, a virtue that is particularly important in pluralistic societies which value diversity and freedom of choice. And economists have used markets to provide elegant solutions to salient problems, like closing a hole in the ozone layer and increasing the supply of kidneys available for transplant.

But the market revolution went too far. In the United States and in other developed nations, it has come at the expense of economic equality, of the health of liberal democracy, and of future generations.

And almost as quickly as it began, perhaps, the economists' hour was over:

The Economists' Hour did not survive the Great Recession. Perhaps it ended at 3:00 p.m. on Monday, October 13, 2008, when the chief executives of America's nine largest banks were escorted into a gilded room at the Treasury. The government had tried to support the banks by purchasing bonds in the open market, but the market had collapsed, so the government decided to save the financial system by taking ownership stakes in the largest financial firms.

Or perhaps it was one of a dozen other moments during the financial crisis; it doesn't really matter which. In the depths of the Great Recession, only the most foolhardy purists continued to insist that markets should be left to their own devices...

However, it would be fair to note that economists continue to have a strong influence in policy, in other countries if not in the US (as the current furore over tariffs attests).

I really enjoyed this book, and if you have an interest in understanding how economics (and economists) came to have such an important influence on policy, I am sure that you will enjoy it too. Highly recommended!

Supply curves slope upwards... Nigerian cocoa edition

The New Zealand Herald reported last month:

Booming cocoa prices are stirring interest in turning Nigeria into a bigger player in the sector, with hopes of challenging top producers Ivory Coast and Ghana, where crops have been ravaged by climate change and disease.

Nigeria has struggled to diversify its oil-dependent economy but investors have taken another look at cocoa beans after global prices soared to a record US$12,000 ($21,000) per tonne in December.

“The farmers have never had it so good,” Patrick Adebola, executive director at the Cocoa Research Institute of Nigeria, told AFP.

More than a dozen local firms have expressed interest in investing in or expanding their production this year, while the British Government’s development finance arm recently poured US$40.5 million into Nigerian agribusiness company Johnvents.

When the price of a good increases, sellers become willing and able to supply more of the good. In general, sellers want to increase their profits. When the price of a good increases, it becomes more profitable to sell it, and so sellers want to sell more of it. [*] This intuition is embedded in the supply curve, as shown in the diagram below. When the price of cocoa is P0, sellers want to sell Q0 tonnes of cocoa. But when the price increases to P1, sellers want to sell Q1 tonnes of cocoa.

What might have caused the increase in the global price of cocoa? The New Zealand Herald article explains that:

Ivory Coast is by far the world’s top grower, producing more than two million tonnes of cocoa beans in 2023, followed by Ghana at 650,000 tonnes.

But the two countries had poor harvests last year as crops were hit by bad weather and disease, causing a supply shortage that sent global prices to all-time highs.

I'll refrain from drawing the global market for cocoa, but suffice to say that the high global price of cocoa is attracting Nigerian farmers to produce more, illustrating that the supply curve for Nigerian cocoa is upward sloping.

*****

[*] There are at least two other explanations for why the supply curve is upward sloping, and both relate to opportunity costs. First, as sellers produce more of the good, the factors of production (raw materials, labour, capital, etc.) become more scarce and so become more expensive. Also, less relevant (and so more costly) inputs begin to be used to produce the good. So, the opportunity costs of production increase, and as the sellers produce more the minimum price they are willing to accept increases more because their marginal cost is increasing. Second, when the price is low the opportunity cost of not selling is low, but as the price rises the opportunity cost of not selling rises, encouraging the sellers to offer more for sale. In other words, as the price increases, the sellers do less of not selling (yes, that is a double negative, and it was intentional). As the price increases, the sellers want to sell more.

Do economists act like the self-interested decision-makers from our models, and if so, why?

Economics models typically assume that decision-makers are self-interested, trying to maximise their own 'economic rent'. Does exposure to these models, and the assumption of self-interest, lead people who have studied economics to make more self-interested decisions? Or, are people who make more self-interested decisions more likely to study economics (perhaps because it accords with their already-established world view)?

These are questions that many studies have tried to grapple with (and which I have written about before, most recently in this 2023 post). What is needed is a good systematic review of the literature. We don't have that, but this 2019 article by Simon Hellmich (Bielefeld University), published in the journal The American Economist (sorry, I don't see an ungated version online), provides a review of the literature (up to 2019, of course).

Hellmich prefers the term "people trained in economics" rather than "economists", noting that much of the literature focuses on undergraduate students who have only taken one or a few courses in economics, and can hardly be considered "economists". Hellmich reviews the empirical literature that comes from both lab experiments and field experiments, although it is worth noting that most of the literature makes us of lab experiments. He draws three broad conclusions from the literature:

• People trained in economics behave more in accordance with the standard paradigms of their discipline in situations that are typically described in economic categories. They tend to prioritize their self-interest in games... but this is at least in part an outcome of their expectations about other peoples’ behavior and social interaction can strengthen their cooperativeness.

• Most of the experiments reviewed here involve economic decisions (i.e., involve the allocation of money); in most of the less obviously economic decisions, people trained in economics do not seem to be much less concerned with other people’s welfare and no more likely than other people to expect opportunism from other individuals. All in all... there is not much unambiguous support for the view that training in economics affects the fundamental preferences of people by making them more “selfish” or opportunistic.

• Most empirical evidence seems to be consistent with the self-selection assumption and more than half of the relevant studies—some of them providing high-quality evidence— seem to suggest that there are training effects... Probably both forces play a role.

In other words, the review doesn't really tell us much more than we already knew. People trained in economics behave in a more self-interested way, and part (or perhaps most) of the reason for that is the types of people who choose to train in economics. What Hellmich adds to this research question, though, is a concern about the way that previous research has tried to identify the effects, and in particular, the way that the research is framed (from the perspective of the research participants). He notes that:

...most of the experiments reviewed here lack sufficient consideration of the fact that human subjects in experiments do not mechanistically and passively respond to selected stimuli consciously created and controlled by the experimenter, and in so doing reflect their fundamental preferences. Instead, human subjects tend to interpret cues given to them—perhaps unconsciously— by the experimenter or the environment and what they might know about the theories underlying the experiment... In social dilemmas that involve decisions that are clearly identifiable as being of an economic nature (e.g., because they involve the allocation of money), people compete more than if this trait is less clear... In market-like contexts, there is broad acceptance of self-interest. It may even constitute the social norm to follow...

In other words, perhaps people trained in economics act differently in these experiments because the lab environment, and the wording of the decisions, induces them to apply their economics skills. This would explain why, in the field experiments conducted in more naturalistic settings, the behaviour of people trained in economics differs much less from other people than it does in the lab experiments. Hellmich is essentially arguing for more investigation of real-world decisions, and how they differ between people trained in economics and people who are not. That seems like a sensible suggestion.

However, the overwhelming result from Hellmich's review is that people trained in economics are "different" in meaningful ways (including higher levels of self-interest), and that difference should be recognised. He concludes that:

...as provisional steps, we should perhaps try to make students more aware of the fact that most economists understand key elements of neoclassical theory—like the homo economicus—as an instrument to explain macrophenomena rather than as a normative model of micro-behavior and how other elements of the “culture” of the discipline might make their judgments deviate from that of other groups.

In other words, our students (and other people) need to understand that self-interested behaviour is an assumption that we make in economic models, and not an ideal to strive for.

Read more:

• Does education in economics make politicians corrupt?
• The impact of business and economics education on moral competence
• This study tells us nothing about whether studying economics make students less ethical
• Does studying economics make you selfish?