Depraved economics

The University of Canterbury's truly excellent Economics & Finance Student Society has a semi-regular column in the University's student newspaper, Canta. For their themed issue on "depravity", Canta asked for a column on economics and depravity. EFSoc punted it to me; here's the column.

They edited out a couple of my favourite parts in the print edition, but the online version has the whole thing. A teaser:

In 1997’s “The Devil’s Advocate”, Al Pacino’s version of the Devil, John Milton, explained why economists really are best placed to understand depravity. Well, he didn’t exactly mean to. But when Pacino explained to Keanu Reeves just why Reeves ought to be taking the Devil’s side, a lot of economists would have been pretty sympathetic. At least I was cheering for Pacino when he explained:

“I cared about what he [mankind] wanted and I never judged him. Why? Because I never rejected him. In spite of all his imperfections, I’m a fan of man! I’m a humanist. Maybe the last humanist.”

Like Pacino’s Devil, economists take people as they are. We try to understand their decisions as they’re influenced by the costs and benefits they’d receive from various actions rather than trying to moralise about what they should or shouldn’t do. It’s part of the methodological foundation of our discipline: another Milton, this time Milton Friedman, insisted that we take individuals' preferences as given and explain changes in behaviour by looking to changes in prices and incomes. The standard guideline in welfare economics, the branch of economics that tries to explain whether we’re in a generally happy place, is the even-older Pareto criterion: something is good if it makes at least one person better off while hurting nobody else.

Because people differ in how they get their jollies, it’s tough for an economist, as an economist, to equate depraved with bad unless we define depraved in a very particular way: you’re doing something depraved and bad when you get joy from hurting others without their consent. Where the old Sunday School teachers talked about putting a thorn in Baby Jesus’s heart when you sin, I worry instead about putting thorns in Baby Pareto’s heart when you hurt someone else without their consent. And I’ll define hurt pretty broadly too: when you prevent two people from doing something that they enjoy and that doesn’t harm anyone else, because you disapprove of what they’re doing, that’s depraved. It has hurt them, without their consent, for your enjoyment. Getting joy from preventing the voluntary interactions of others is more properly considered depraved than whatever people get up to, consensually, behind closed doors.

So, if activities others consider depraved make you happy, and you’re not hurting anybody else at the same time, then the world’s a better place when you’re able to satisfy whatever freaky urges you have. Baby Pareto says so.

I then point to some of the empirics on sex, love, and economics. For my sins, I also owe Canta a follow-up column on the economics of self-control for the next issue.

Update: Enjoy! Slightly NSFW, Pacino's brilliant speech.

The value of outreach

I enjoyed the CBC's radio show, The Invisible Hand. Rather than take a Freakonomics-style "wow, isn't this counterintuitive" take, they instead simply presented standard economic theory as it is understood by professional academic economists.

• Episode 1 covered price gouging, with a nice contribution from Mike Munger. (audio)
• Episode 2 takes on value theory. In the event of a zombie apocalypse, chickens rise in value relative to gold (as the Lannisters may yet discover when winter comes). (audio)
• Episode 3 explains why profit isn't a bad word and shows that rather a few capitalists - people who make their living from investments - look rather more like our parents and grandparents than like Mr Scrooge. (audio)
• Episode 4 covers love, marriage and economics. (audio)
• Episode 5 explains moral hazard and insurance. (audio)
• Episode 6, on sweatshops, includes Ben Powell along with a former sweatshop worker. (audio)
• Episode 7 demonstrates that David Suzuki knows absolutely nothing about economics: we have ways of dealing with externalities. (audio)
• Episode 8 explains a bit of macroeconomics: the old Paradox of Thrift. (audio)
• Episode 9 walks through one of my favourite topics: perverse incentives (see the masthead). Frances Woolley helps out. (audio)
• And Episode 10 explores some of the behavioural economics literature. (audio)
• [Update: the audio at the CBC link isn't working, but the (audio) link should take you to the podcast version. Thanks to Wobbly in the comments!]

Worthwhile Canadian Initiative's Stephen Gordon provided academic assistance for the project.

The CBC more typically airs standard economic fallacies as fact, or at least it did back when I was in the country, so this was really rather nice.

What reaction did they get? Here's the show's producer Matthew Lazin-Ryder. Start listening at the 14 minute mark. At 15:55 he talks about his "honest to goodness depression" about the show's being criticized for being "brazen right-wing propaganda". He says [transcription errors mine]:

We wanted to make a show that had a completely different perspective from the things most people hear. And our probably naive anticipation was that people would take it in that way. We didn't honestly expect the angry backlash that we got. ... Our agenda was to present how mainstream economists think about things. 

He also tweeted: 

"Lightning Rod For Hatemail" was the working title for the series. RT @danieloong: A show like that'd be a lightning rod for hate mail.
— The Invisible Hand (@CBCTheHand) April 12, 2013

There is a body of things that economists know about the economy. Sure there's stuff we argue about, but especially in microeconomics, we kinda know what's going on. And the basic set of things about which economists agree diverges wildly from how the public thinks the economy works. The profession attaches perhaps too high of reward for deriving the results of some model when you change a plus to a comma in a utility function when the first order welfare gains are in just getting the voting public to appreciate principles-level economics.

I get irritated when bog-standard economics is cast as having a "right wing" agenda. Mainstream economics helps you figure out what works and what doesn't work for achieving any particular end and the trade-offs that are involved. If you want a fair bit of redistribution, that's entirely consistent with mainstream economics so long as you set up the transfers appropriately; heck, it drops out of most models where you assume diminishing marginal utility of income.* But bog-standard mainstream economics in Canada says a lot of unpalatable things: ditch supply management to reduce milk prices; get rid of barriers to both interprovincial trade and labour mobility; get rid of all the zany exemptions in the GST and adopt New Zealand's version instead.

Imagine a genie gave you a button. If you push the button, every voter in the country thoroughly and intuitively understands principles-level economics. At the same time, the most recent n issues of every academic journal in economics disappear along with all knowledge of their results: we would need to re-invent or rediscover every one of them, with some chance of never finding them at all. Up to what value of n do you leap to push the button? 5 years' worth? More?

Imagine a world where the physicists and engineers spent most of their time figuring out how to get internal combustion engines from 20 to 22 percent efficiency but where, outside of the lab, everyone else is riding horses because they think engines are evil and witchcraft and tools of capitalist oppression. Maybe it's not quite that bad in economics, but it isn't far from it.**

Update: Brennan McDonald suggests, or at least this is what I draw from his comment, that there may be little potential trade-off between high-powered theorem building and public conversion efforts since the public broadly isn't truth-seeking. In that he echoes Patri Friedman's complaint about folk activism. But we are all part of the equilibrium, and I do think that we could use to move a bit at the margin.

* But be careful! Cowen points out that utilitarian theories may be less egalitarian than you'd like. I asked a couple years ago about appropriate egalitarian policy when we start opening up the margins:

Pity the borderline Asperger's investment banker who, despite his financial success, seems at a bit of a disadvantage in dating. Reddit posted the 1600 word email that the would-be suitor sent to the woman who dumped him after the first date; it's since shown up all kinds of places. But folks snickering at it seem an awful lot like a rich one-percenter laughing at a pleading email from a starving man.

If I can play armchair psychiatrist, the same Asperger tendencies that helped this poor guy in investment banking have killed him in dating.

If you're an egalitarian, what is appropriate policy? Is this guy better or worse off than the poor musician who dates easily? With whom would you rather trade places, taking both their positions and their characteristics? If we redistribute income because the investment banker's last dollar is worth less to him than it would be to the poor musician, think too about the marginal utility of the musician's last date relative to the banker's.

 And should we compensate the beauty-challenged?

** See, for example:

• Caplan on systematically biased beliefs
• Me on economic thinking in NZ

Choosing your major

Choose a double Econ/Psych major under the B.A. or B.Sc. schedules, or a Psych major with an econ minor, add in some courses in marketing after finding the ones that have some rigour. Go heavy on stats where you can. And then you can do this.

As a Marketing Insight Analyst, your responsibility is to understand how a game works as a service for its customers and how the customers behave in it, identifying and developing the purchase drivers in the game economy context, and providing recommendations based on player psychology (that can be backed up by statistics data) on design, tuning and pricing in order to improve game financial performance.

To do this, pre-release, you will direct the design of virtual products and have input on the features and methods a game uses to drive the desired purchase flow with tempting choices, based on basic psychological studies.
You will need to work with the GMM to measure the impact of updates/design changes in a given title, and work closely with the development team and the Game Economy Designer to refine the design.

Your job will be focused on both Game Evolution updates and new Creations.

...

Skills:


• Strong sensitivity to gameplay and game design, understanding how to build needs and emotions in the context of a game. 
• Strong analytical and formal thinking, able to break problems down in their key variables and identify the relations between them. 
• Strong econometrics skills, able to model problems into quantitative systems, and draw qualitative conclusions out of quantitative data
• Statistic knowledge, able to formulate ratios and indexes specific to each game, identifying specific weaknesses and strengths in its economy design. 
• Strong marketing knowledge, able to formulate adequate selling strategies to improve the financial performance.

Requirements :


• Graduate degree in Psychology or BA, preferably specialized in Marketing or Strategic direction.
• Fluent written and spoken English, concise writing skills. 
• Mastery of Excel. 
• Deep, up-to-date knowledge of the free-to-play market, both web-based and on smartphones. 
• Passion for games on all existing formats: board games, card games, sports, paper RPGs, gambling, all genres of videogames with special focus on MMOs and competitive games. 

While marketing is turning into a data-driven science blending econometrics and psychology, New Zealand's marketing majors are not particularly quantitative. So Gameloft has more particular requirements.

@WillTaylorNZ tells me they'd also had an ad up for a game economy designer. But what do economists know about games anyway? Ahem...

What can you do with a B.A. in Econ?

Make awesome video games even more awesome, that's what. Valve's hiring another economist:

Economist

Valve’s multi-player games, as well as Steam (Valve’s successful trading platform), have allowed for the spontaneous emergence of complex virtual, yet quite real, economies. These economies are replete with rich trading patterns, fascinating ‘institutions’ (which have also sprung up organically), socio-economic conventions, and, generally, a host of economic phenomena that partly reflect what we observe in the analogue world and partly constitute new and unexplored behavioural patterns.

The task of a Valve economist is to make good use of the incredible wealth of data concerning these social economies, to pose fresh questions about their workings, and to generate methods for converting new knowledge about these economic vistas into tangible ideas that help improve our customers’ experiences.

Duties:

• Research, design, develop, and validate economic models to explain user behavior for all of Valve’s products.
• Design experiments to validate experimental hypotheses for in-game economies.
• Provide insight into short- and long-term behavioral patterns of participants in virtual economies.
• Inform decision-making at Valve by providing quantitative and economic rationale for various lines of inquiry.
• Create new avenues of analysis based on existing economic metrics, as well as generating new domains of data to collect and investigate.
• Collaborate with our business development team to improve the performance of existing pricing strategies and incentives for our customers and partners.

Requirements:

• Graduate degree in Economics or related field
• Advanced knowledge of statistics
• Four years experience with:
  • Econometrics/data-mining or related field
  • Relevant analysis techniques that inform the creation of economic models

Recommended:

• Proficiency in one or more of the following programming languages: C++, SQL, PHP, or equivalent

Apply for this position >

Now, what do I mean another economist?  Yanis Varoufakis has been working at Valve and blogged on his experience. I'm not sure if he's still there, but the blog doesn't say that he isn't. Here's Varoufakis on his first visit to Valve:

Within hours, an agreement was reached: I would become, in some capacity (that was to be hammered out later), Valve’s economist-in-residence. Valve is not the first video game company to have brought an academic economist on board (e.g. EVE Online were the first to do so, recruiting Eyjólfur Guðmundsson – whom I would like to thank for making my name sound almost easy-going…). My intention at Valve, beyond performing a great deal of data mining, experimentation, and calibration of services provided to customers on the basis of such empirical findings, is to to go one step beyond; to forge narratives and empirical knowledge that (a) transcend the border separating the ‘real’ from the digital economies, and (b) bring together lessons from the political economy of our gamers’ economies and from studying Valve’s very special (and fascinating) internal management structure.

Academia's a pretty good place. When it's working properly, it doesn't sound all that different from work at Valve, at least according to Varoufakis:

If I were asked my opinion of what Valve’s symbol should be, I would recommend a depiction of a wheel, like those which every desk at Valve comes equipped with so as to enable us to move about the company at will, to join whichever working group we want, to form new ones spontaneously and without seeking anyone’s permission. The said wheel, at least in my eyes, symbolises Valve’s attempt to create, within the company, a successful ‘spontaneous order’ based not on price signals but, rather, on decentralised, individuated, time allocations.

Many enlightened corporations do a song and dance about their readiness to let employees allocate 10% or even 20% of their working time on projects of their choosing. Valve differs in that it insists that its employees allocate 100% of their time on projects of their choosing. 100% is a radical number! It means that Valve operates without a system of command. In other words, it seeks to achieve order not via fiat, command or hierarchy but, instead, spontaneously.

I wonder what Paul Walker would make of this form of organization for the knowledge-based firm. As the New York Times writes:

Mr. Newell said that there was a better chance that Valve would “disintegrate,” its independent-minded workers scattering, than that it would ever be sold.

If the firm is just a bundle of contracts....

Economic Dilettantism

Bill Kaye-Blake takes a Rothbardian turn!*

Rothbard wrote:

“It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” 

Bill takes on the disappointing proclivity of New Zealand's bench scientists to opine on economics.

In the June issue of AgScience, Prof Shaun Hendy has an article entitled, ‘New Zealand’s voyage of economic self-discovery’. He also has a post with the same title over a Sciblogs. Before I get too wound up, I should give Prof Hendy his dues. He does do fieldwork amongst economists in their native habitat. But in the end, it is dilettantism.

The article sounds impressive — we have a new approach! we have pretty pictures! Nokia! But really, what he is able to tell us is:

• New Zealand is small and distant
• its economy is based on what has worked in the past
• scale is important
• we should be more productive.

He isn’t telling us anything new. No, really, there is nothing new there. And what is there is either useless or confused.

Bill goes on, citing underpants-gnome theories. He concludes:

But then I’m just an economist. Maybe Prof Hendy would like to hear my thoughts on the Higgs boson. After all, I’ve been watching The Big Bang Theory.

While I agree with Bill, I'm somewhat less annoyed by the Hendy piece's content than he is; the bits from the article that aren't new aren't useless either. It's worth emphasizing that a fair bit of New Zealand's lagging performance comes from being small and distant rather from particular policy failures. We can always do better, but there aren't a whole ton of low-hanging policy fruit around waiting to be picked. Land use policy, the RMA, and immigration would be the first places I'd look for gains. But it would be pretty optimistic to expect large or quick improvements from any of them.

* The position is hardly unique to Rothbard; he just said it well. But I do think it's fun to paint Bill as agreeing with Rothbard.