24 Dec 2016

Economists: Spell Out Your Premises

Economics, Game Theory 16 Comments

I think this is probably a phenomenon that happens in all disciplines, but I know economics so that’s where I see it. Anyway, while helping some of the Texas Tech grad students study for their qualifiers, I noticed that it’s hard to answer economics questions, when you don’t know what assumptions the professor has in mind.

For example, take Bryan Caplan’s recent lament:

A recurring final exam question for my undergraduate Public Choice class:

“Suppose voters were rational [in the Rational Expectations sense] and the SIVH [Self-Interested Voter Hypothesis] were true.

T, F, and Explain: Democracies would spend a higher share of their budgets on genuine public goods.” 

Almost no one gets it right – and we cover the most relevant material just one week before the final exam!

Now at the time I read that, I thought, “I could give any answer you want, and justify it by making the appropriate assumptions.” For what it’s worth, here’s Bryan’s suggested answer. And I’m sure if someone sat in his class, it would be “obvious” what Bryan wanted. But really, that means the metric is, “What does Bryan Caplan think the answer to this question is?”

Now what I worried about, when I first read the question, was the motivation to vote in the first place. After all, if people are rational in the game theoretic sense, and they’re self-interested, then they shouldn’t bother studying political platforms and casting votes if they think there’s a better chance of dying in traffic than their vote influencing the outcome of the election.

However, you can’t just say, “Nobody would vote!” because then, there would be an incentive for one guy to show up and write himself in as president.

I hope you see now what I mean, when I say I could justify either True or False, and craft the assumptions accordingly. Or more specifically, the things I chose to worry about in my analysis, would decide whether the answer turned out to be True or False. (Incidentally, this is how Krugman manages to almost-always justify the political conclusion his fans want, while always pulling mainstream economics off the shelf to do so.)

While I’m venting, here’s an anecdote from grad school that contributing to my disillusionment:

At the weekly Austrian colloquium, a guy presented a paper showing that there were two strands in the voting literature. On the one hand, you had “median voter theory” kind of stuff. But on the other hand, you couldn’t explain why anybody voted in the first place.

So I’m sitting there thinking, “Wait a minute… I bet I could build models with purely instrumental voting, where I get large numbers of people to vote in a Nash equilibrium.” And sure enough, I did that. (The intuition: Build a 3-person voting game involving a mixed strategy. Then add voters to each side, to either abstain or vote with certainty, so that they cancel each other out. You can build up families of equilibria.)

The NYU expert on this stuff at first told me my idea was impossible. So I sat in his office and after about 15 minutes I got him to realize he was wrong, and that my result *was* possible. Then he changed his tune to, “Nobody would be interested in this result.”

I thought, “Well since you had earlier said something false, surely my result is *moderately* interesting?” But I just submitted my result on my own to a journal. A month later the report came back: “We are rejecting your submission because So and So in 2001 published a more general result including yours as a special case.”

And now you have more insight into my personality…

16 Responses to “Economists: Spell Out Your Premises”

  1. Josiah says:

    Sometimes I feel like we are living out the parable of the Emperor’s New Clothes, except if turns out all of us are naked.

    • Bob Murphy says:

      Is that how you conquered your fear of public speaking?

      Joking aside, I’m not sure what you mean Josiah.

  2. Major.Freedom says:

    There are no such things as “genuine” public goods that are not zero sum game public goods.

    If a good was “genuine”, it would not need tax theft to finance it.

    • Dexter Morgan says:

      Or maybe the purpose of taxation is taxation itself. A sort of fascination in compelling people to do things for you. Taxation is its own good.

      • Craw says:

        Perhaps we all prefer to be taxed and we all enjoy hiding that preference. There is way to disprove this. People avoid taxes? They are just hiding their desire to pay taxes due to their the desire to hide that desire.

        • Major.Freedom says:

          Obviously the threat of aggression has something to do with what people say and do.

          Perhaps you take people for fools?

    • Tel says:

      Generally “public good” means that the benefits of that good are non-exclusive and also when one person benefits from that good it does not reduce the benefit other people get. For example, knowing that germs can cause disease is quite often useful, but the benefit to me is neither increased nor reduced if you choose to wash your hands regularly… that sort of knowledge is considered a “public good” regardless of how it was paid for.

      I know, sometimes these terms pick up political meanings which tend to get carried along into the economics. If everyone has a similar understanding of the meaning of a word then the language operates more effectively (and that’s also a public good).

      • Major.Freedom says:

        Then every good is a public good, because I derive subjective utility from knowing that you Tel are living a better more prosperous life consuming the private goods and services that you consume.

        Much like I am happier with my neighbor cleaning and maintaining their front yard and property in general, so too am I happier living in a world where people can do what they are doing that makes them better off.

        Here’s the thing about goods. It is a fallacy to believe that the default, or standard, or basis for what a good does for a person, to be a good that somehow should, or generally speaking, be completely and totally isolated and focused to a specific person or persons, such that anytime we come across a good consumed by one person having unpaid for or spill over benefits to other people, we have to come up with a label for those goods, treat them with a different science, and as is so often the case, clam that the free market is unsuited to produce and distribute such goods on account of the good having such spill over benefits.

        It is economic fallacies, covered with madness, and pretending to be a good excuse to justify people pointing guns at each other threatening to shoot, so that these goods are properly managed.

        You want to talk about a private good that you believe has “exclusive” benefits, as distinguished from a public good that has “non-exclusive” benefits? Sorry, no such demarcation exists. Every good always has some positive exclusive benefits and some positive non-exclusive benefits.

        You consuming what you believe are exclusive goods, has the spill over benefits of you standing in a better relation to your fellow human beings. Be it better clothes, better health, more intelligence, owning a nicer home, everything that you have a right to consume, is never solely exclusive and never solely non-exclusive.

        One of the benevolent aspects of a laissez faire market economy is precisely the tremendous amount of spill over, non-exclusive benefits that we can all share without any violation of property rights, indeed with often the emphatic consent of others.

        One of the great myths about private property rights, is the notion that private control and ownership, should, or must, or is naturally expected to, or must live up to the standard of, or actually consists of, exclusive benefits.

        The amount of spill over benefits we all experience, from private ownership and control, is vastly underestimated, so much so that people have become so accustomed to it, so used to it, that they believe they are entitled to it such that if there is ever any change towards more exclusive benefits and less non-exclusive benefits, that a virtual crime, or injustice, has been committed.

        One seeming paradox to the superficial minded, which is more obvious to those who study it in more detail, is that with more respect for private property rights, with tighter private property laws, with stronger protections in place, the more that non-exclusive benefits arise and are shared by all.

        Generosity and philanthropy are annihilated in totalitarian systems that deny individual property rights.

        • Tel says:

          I grant you that subjective valuation spoils a lot of standard economic classification… but at the same time you must accept there is some intrinsic and objective difference between a piece of fruit (e.g. after I have eaten the apple it becomes impossible for anyone else to eat the same apple) and a poem where many people might enjoy this poety without interfering with other people, and without ever consuming the poem (although the NOVELTY of the work does get consumed so people can become bored with it).

          Getting back to the “public goods” debate, look at the example of a military dictatorship (clearly not democratic) which maintains a large standing army and strong police force. Mostly standard economic classification puts national defence and rule of law as “public goods” but perhaps some citizens don’t feel such a large military is necessary. The real value of these public goods is very difficult to measure. From one perspective the military dictatorship provides very high quantity of “public goods” but maybe not, you might be tempted to think the dictator is primarily benefiting himself.

          This question is really quite non-trivial.

  3. Tel says:

    Rationality is terribly poorly defined by economists. No one can build a machine that can do the regular day to day tasks of a human in terms of economic decision making. The computerised trading algorithms are only profitable because they are faster than humans, they don’t make better trading decisions.

    Given that no one can build an automated system that operates better than a human, it seems kind of weird to have some kitsch little definition of “rational” that is known to be useless in practice.

    • Craw says:

      Good point about the trading algorithms.
      And the definition of rational used seems always to be for the wildly unrealitic one-time game.

  4. skylien says:

    While I am not actually saying professors shouldn’t be more careful actually stating their hidden assumptions properly, I think to a certain degree this is unintentional. I guess they (maybe all of us) have certain (favourite) assumptions that are so entrenched in their thinking that it doesn’t even come to their mind that their questions are contingent on those assumptions, and aren’t necessarily held by other people.

    Like driving a car especially a manual. It is so automated in my thinking that it is super hard to explain to someone what and when you are supposed to do what with your feet and hands… But yes a trainers, teachera, instructora or professora of whatever profession should focus on this. However especially professors, according to my experience, are usually rather bad teachers, even if they are great in their field.

    • skylien says:

      *But yes trainers, teachers, instructors or professors*

  5. Levi Russell says:

    His easy answer is the one I came up with too, but I had to first figure out what assumptions he was making. Writing vague exam questions is not a good way to help your students; strange that he can’t see this.

    • Craw says:

      My first thought was higher than what? Higher than now? Higher than if voters were not rational? Higher than if voters weren’t self-interested?

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