GOD: Grand Old Dollar

Lloyd Blankfein is the FT’s man of the year, with a citation that names him the ‘Master of Risk’ and quotes, apparently without irony, his own opinion that he did God’s work for Goldman Sachs. This has set me to wondering which God this might be – certainly not the one I learned about in Sunday School.

The dollar is the God of the global market, but when I last looked this false idol was much closer to Mammon. This blog has already retold the tale of larceny that was the US bailout of AIG. Combined with the ‘creation of money’ through the purchase of corporate debt it was this ’socialised medicine’ for the financial sector that guaranteed their huge profits last year. Blankfein’s only skill was to have the friends in the right places, his only risk that he might make an inappropriate remark at a cocktail party or business breakfast.

When the gap between your position and the management of the nation’s finances is only one promotion, it does not take a great deal of skill to embezzle public funds on a massive scale. If you must choose a US figure who has excelled economically this year it would have to be the American Everyman who has toiled to create the goods that can be sold for the money the government has allowed its private financiers to create. Or rather their as yet unborn offspring who have already been sold into slavery to fund the lifestyle of Lloyd and his ilk.

Having taken the value of our work they are now in the process of stealing the planet itself through the International Emissions Trading Association. The IETA is a coalition of private companies including AES, Barclays Capital, Chevron Texaco, Conoco Phillips, DuPont, Ecosecurities, Gaz de France, Goldman Sachs, Gujarat Flurochemicals, J-Power, KPMG, Lafarge, Lahmayer, RWE, Shell, Total, Toyota, TransAlta, and Vattenfall. This is an explicit list of the implicit conspiracy of energy, automotive and financial corporations who are controlling the debate about policy responses to climate change, and destroying our chance of a future life on this earth.

This choice by the FT establishes with certainty that newspaper’s unashamed support for the worst excesses of corporate capitalism. As the only UK newspaper that can still pay its journalists enough to ensure quality research and writing, this is a disturbing note on which to begin the next decade.

GOD: Grand Old Dollar

Lloyd Blankfein is the FT’s man of the year, with a citation that names him the ‘Master of Risk’ and quotes, apparently without irony, his own opinion that he did God’s work for Goldman Sachs. This has set me to wondering which God this might be – certainly not the one I learned about in Sunday School.

The dollar is the God of the global market, but when I last looked this false idol was much closer to Mammon. This blog has already retold the tale of larceny that was the US bailout of AIG. Combined with the ‘creation of money’ through the purchase of corporate debt it was this ’socialised medicine’ for the financial sector that guaranteed their huge profits last year. Blankfein’s only skill was to have the friends in the right places, his only risk that he might make an inappropriate remark at a cocktail party or business breakfast.

When the gap between your position and the management of the nation’s finances is only one promotion, it does not take a great deal of skill to embezzle public funds on a massive scale. If you must choose a US figure who has excelled economically this year it would have to be the American Everyman who has toiled to create the goods that can be sold for the money the government has allowed its private financiers to create. Or rather their as yet unborn offspring who have already been sold into slavery to fund the lifestyle of Lloyd and his ilk.

Having taken the value of our work they are now in the process of stealing the planet itself through the International Emissions Trading Association. The IETA is a coalition of private companies including AES, Barclays Capital, Chevron Texaco, Conoco Phillips, DuPont, Ecosecurities, Gaz de France, Goldman Sachs, Gujarat Flurochemicals, J-Power, KPMG, Lafarge, Lahmayer, RWE, Shell, Total, Toyota, TransAlta, and Vattenfall. This is an explicit list of the implicit conspiracy of energy, automotive and financial corporations who are controlling the debate about policy responses to climate change, and destroying our chance of a future life on this earth.

This choice by the FT establishes with certainty that newspaper’s unashamed support for the worst excesses of corporate capitalism. As the only UK newspaper that can still pay its journalists enough to ensure quality research and writing, this is a disturbing note on which to begin the next decade.

Book Clubs

Starting in mid-January, the following is a partial list of some of the books I want to cover in the next few months if people are interested in sparing a few hours off-campus. Recent sessions included Theory of Justice, Animal Spirits, The Politics, Theory of Moral Sentiments and Nudge. Michael Collins in TCD got me into the habit of doing these and they have been a fantastic source of intellectual inspiration over the last few years. Sessions have ranged from two people to 20, but it is really immaterial how many people actually attend. It is also irrelevant whether everyone has read the book being discussed. It is important that one person has read it carefully to moderate things (feel free to volunteer but am more than happy to cover the ones listed below).

1. Robert Nozick is practically a household name due to Anarchy, State and Utopia and I would like to cover this, given that Theory of Justice was covered previously. However, a book that has substantial relevance to our discussions and research here is the 1993 work “The Nature of Rationality”. The wiki description is here Among other things, the work contains novel solutions to the Prisoner’s Dilemma, discussions of how principles can reduce discounting and enable life-time utility maximisation, ideas on the adapability of incorporating sunk costs and a substantial number of other ideas.

2. Hayek “The Road to Serfdom“. A shame we have not yet covered this. Various versions available through the links on the wiki page. I will get a copy of the definitive version. Readers digest version here

3. Jon Elster’s books have been a revelation to me over the years. Brilliantly lucid discussions of core issues at the intersection of economics, philosophy and psychology. His work on emotions and self-restraint are particularly interesting to behavioural economics. His classic work Ulysses and The Sirens is one of the most cited books in behavioural economics and completely gripping.

4. Robert Putnam. “Bowling Alone“. Again, already a classic work that placed the concept of Social Capital on the agenda of many national and international policy agencies. My copy currently rests somewhere in the North of Ireland, as I gave it to a football manager a few years back after giving a talk on sport and social capital to the Ulster GAA association, in between talks by the President of the GAA and the DUP Minister for Sport. The book has received a lot of attention in Ireland over the years and it still has a strong life in current debates.

Some Ideas From Academia to Policy for 2010

Throughout the last year, our research group here has given a number of talks to political parties, government agencies and voluntary groups. These have been conducted in formal settings such as the third crisis conference, as well as a substantial number of internal sessions conducted in Geary and outside, including briefings to the Commission on Taxation, IBEC, Gallup learn@lunch and a number of other forums. We are certainly not restricted to Ireland and have given a number of European policy briefings, but simple geography does make it easier to organise informal sessions at short notice with Irish policy-makers and we do consider it part of our remit to feed in as much as possible from the literature to real-world policy in Ireland. For many of us here, part of 2010 will be to attack the question of the relevance of social science to policy with fresh energy and ideas. Colm Harmon has written on a number of occasions (e.g. here ) about the potential for policy to absorb ideas from academia and the type of structures that might promote this. One method that Colm himself has always promoted is the simple model of the academic as sounding-board. Our research culture here will continue to promote this. Most of us see it as part of our job to be available freely to answer questions to anyone on why our research areas matter.

There is, of course, also the backdrop of the main thrust of government policy in university funding, the belief that funding activity within universities will lead to externalities outside the university system. Like most of my colleagues, I continue my research agenda on top of a full teaching load and I’m not sure I accept the idea that I need to demonstrate value beyond the intrinsic value of teaching and researching the ideas in and of themselves. Having said that, part of the excitement of behavioural economics and related areas lies in the potential application of the ideas, and research groups such as ours are as well placed as any to explore the application of ideas. It is also the case that I have rarely given a talk to a policy or business group without hearing some ideas that I could not have accessed from the academic literature.

Some of the ideas that many of us here will be discussing and researching on throughout the next year are listed below. This is an illustrative overview and I do not claim to have special knowledge of my colleagues interests, all of whom are free to post here. As always, we are happy to talk to any groups who are interested in the implications of these literatures for their own areas. A number of established academics here such as Colm Harmon and Kevin Denny are active in some of these areas but also many of our PhD students are working very hard on a number of these topics and some of our best sessions have involved the interaction between experienced policy-makers and enthusiastic, knowledgeable students. The ideas below give a snapshot of areas at the cutting edge of modern economics and are areas that we have sufficient expertise here to coordinate their interaction with policy. The US literature, in particular, has provided an enormous menu of new policy options that we are only beginning to discuss in countries like Ireland. Off-the-shelf US solutions are clearly not a panacea, but having a world leader to observe is a clear advantage.

1. The influence of behavioural economics on financial regulation, innovation, health policy, environmental policy, consumer protection and other areas. This is currently one of the dominant streams of thought in public policy, driven to a large part by Richard Thaler and Cass Sunstein. We strongly encourage any policy group working on these areas to get in touch if they would like to discuss ideas from this field with us. We have already had a number of interesting sessions with policy groups from revenue, financial regulation, transport and related fields.

2. The issues associated with an aging society. For example, the Mannheim-led SHARE study is in the field for a second round in Ireland and will be completed in 2010 by researchers at Geary.

3. Psychological Consequences of Recession. The implications of the literature on well-being economics for public policy is a regular feature of discussion on this blog and an area where there are a number of potential policy applications.

4. The Economics Early Childhood Intervention. See, for example, a recent paper by colleagues on this topic. Professor James Smith’s Ulysses lecture captures inspiringly the vast economic consequences of protecting childhood physical and mental health. It is hard to watch this lecture carefully without feeling ground shifting underneath one’s feet even if the core message may seem well-known to anyone with common sense.

5. Trust. The inspiring work of Ernst Fehr and others on the nature and function of trust should be given high consideration in 2010 as the nations of the world try to rebuild financial and social institutions that have been run ragged over the last few years.

6. The importance of measurement for policy. We have been absorbed here in discussions around issues such as comparability of survey questions across countries, the use of bio-markers in economic data-sets, accurate measures of preferences and so on. Once again, the relevance of this for policy is a question worth exploring.

7. The determinants and consequences of health inequalities. Awareness of the economic and social contexts of health inequalities has picked up markedly in recent years yet much of the debate rests on a very simplified causal model of the effect of income on health. Research areas such as reducing inequalities in chronic illness management will get a lot of attention here throughout the year.

8. Youth unemployment. In October, David Blanchflower gave us a chilling snapshot  of what lies ahead without concerted effort on this core issue. This should be one of the main areas of study and debate in 2010.

9. The importance of causal inference for policy design and evaluation. This is a very large area to condense into a sentence but one major thrust in modern economics is an increased emphasis on development of policies that have in-built designs to subject them to causal tests of effectiveness.

10. The communication of risk in areas such as emerging technologies, food scares and so on. The FoodrisC programme, coordinated by Professor Patrick Wall will begin in February 2010. This five year FP7 programme will bring together leading academic and policy groups from across Europe to explore key issues in risk perception and risk communication, particularly in food contexts. We are participating in this network here and have been working on a major Irish study for the last three years. The food literature is clearly established in policy, but the experience of our banking crisis suggests a gaping hole in the ability of policy-makers to explain financial risks to citizens.

Some Ideas From Academia to Policy for 2010

Throughout the last year, our research group here has given a number of talks to political parties, government agencies and voluntary groups. These have been conducted in formal settings such as the third crisis conference, as well as a substantial number of internal sessions conducted in Geary and outside, including briefings to the Commission on Taxation, IBEC, Gallup learn@lunch and a number of other forums. We are certainly not restricted to Ireland and have given a number of European policy briefings, but simple geography does make it easier to organise informal sessions at short notice with Irish policy-makers and we do consider it part of our remit to feed in as much as possible from the literature to real-world policy in Ireland. For many of us here, part of 2010 will be to attack the question of the relevance of social science to policy with fresh energy and ideas. Colm Harmon has written on a number of occasions (e.g. here ) about the potential for policy to absorb ideas from academia and the type of structures that might promote this. One method that Colm himself has always promoted is the simple model of the academic as sounding-board. Our research culture here will continue to promote this. Most of us see it as part of our job to be available freely to answer questions to anyone on why our research areas matter.

There is, of course, also the backdrop of the main thrust of government policy in university funding, the belief that funding activity within universities will lead to externalities outside the university system. Like most of my colleagues, I continue my research agenda on top of a full teaching load and I’m not sure I accept the idea that I need to demonstrate value beyond the intrinsic value of teaching and researching the ideas in and of themselves. Having said that, part of the excitement of behavioural economics and related areas lies in the potential application of the ideas, and research groups such as ours are as well placed as any to explore the application of ideas. It is also the case that I have rarely given a talk to a policy or business group without hearing some ideas that I could not have accessed from the academic literature.

Some of the ideas that many of us here will be discussing and researching on throughout the next year are listed below. This is an illustrative overview and I do not claim to have special knowledge of my colleagues interests, all of whom are free to post here. As always, we are happy to talk to any groups who are interested in the implications of these literatures for their own areas. A number of established academics here such as Colm Harmon and Kevin Denny are active in some of these areas but also many of our PhD students are working very hard on a number of these topics and some of our best sessions have involved the interaction between experienced policy-makers and enthusiastic, knowledgeable students. The ideas below give a snapshot of areas at the cutting edge of modern economics and are areas that we have sufficient expertise here to coordinate their interaction with policy. The US literature, in particular, has provided an enormous menu of new policy options that we are only beginning to discuss in countries like Ireland. Off-the-shelf US solutions are clearly not a panacea, but having a world leader to observe is a clear advantage.

1. The influence of behavioural economics on financial regulation, innovation, health policy, environmental policy, consumer protection and other areas. This is currently one of the dominant streams of thought in public policy, driven to a large part by Richard Thaler and Cass Sunstein. We strongly encourage any policy group working on these areas to get in touch if they would like to discuss ideas from this field with us. We have already had a number of interesting sessions with policy groups from revenue, financial regulation, transport and related fields.

2. The issues associated with an aging society. For example, the Mannheim-led SHARE study is in the field for a second round in Ireland and will be completed in 2010 by researchers at Geary.

3. Psychological Consequences of Recession. The implications of the literature on well-being economics for public policy is a regular feature of discussion on this blog and an area where there are a number of potential policy applications.

4. The Economics Early Childhood Intervention. See, for example, a recent paper by colleagues on this topic. Professor James Smith’s Ulysses lecture captures inspiringly the vast economic consequences of protecting childhood physical and mental health. It is hard to watch this lecture carefully without feeling ground shifting underneath one’s feet even if the core message may seem well-known to anyone with common sense.

5. Trust. The inspiring work of Ernst Fehr and others on the nature and function of trust should be given high consideration in 2010 as the nations of the world try to rebuild financial and social institutions that have been run ragged over the last few years.

6. The importance of measurement for policy. We have been absorbed here in discussions around issues such as comparability of survey questions across countries, the use of bio-markers in economic data-sets, accurate measures of preferences and so on. Once again, the relevance of this for policy is a question worth exploring.

7. The determinants and consequences of health inequalities. Awareness of the economic and social contexts of health inequalities has picked up markedly in recent years yet much of the debate rests on a very simplified causal model of the effect of income on health. Research areas such as reducing inequalities in chronic illness management will get a lot of attention here throughout the year.

8. Youth unemployment. In October, David Blanchflower gave us a chilling snapshot  of what lies ahead without concerted effort on this core issue. This should be one of the main areas of study and debate in 2010.

9. The importance of causal inference for policy design and evaluation. This is a very large area to condense into a sentence but one major thrust in modern economics is an increased emphasis on development of policies that have in-built designs to subject them to causal tests of effectiveness.

10. The communication of risk in areas such as emerging technologies, food scares and so on. The FoodrisC programme, coordinated by Professor Patrick Wall will begin in February 2010. This five year FP7 programme will bring together leading academic and policy groups from across Europe to explore key issues in risk perception and risk communication, particularly in food contexts. We are participating in this network here and have been working on a major Irish study for the last three years. The food literature is clearly established in policy, but the experience of our banking crisis suggests a gaping hole in the ability of policy-makers to explain financial risks to citizens.

Book Clubs

Starting in mid-January, the following is a partial list of some of the books I want to cover in the next few months if people are interested in sparing a few hours off-campus. Recent sessions included Theory of Justice, Animal Spirits, The Politics, Theory of Moral Sentiments and Nudge. Michael Collins in TCD got me into the habit of doing these and they have been a fantastic source of intellectual inspiration over the last few years. Sessions have ranged from two people to 20, but it is really immaterial how many people actually attend. It is also irrelevant whether everyone has read the book being discussed. It is important that one person has read it carefully to moderate things (feel free to volunteer but am more than happy to cover the ones listed below).

1. Robert Nozick is practically a household name due to Anarchy, State and Utopia and I would like to cover this, given that Theory of Justice was covered previously. However, a book that has substantial relevance to our discussions and research here is the 1993 work “The Nature of Rationality”. The wiki description is here Among other things, the work contains novel solutions to the Prisoner’s Dilemma, discussions of how principles can reduce discounting and enable life-time utility maximisation, ideas on the adapability of incorporating sunk costs and a substantial number of other ideas.

2. Hayek “The Road to Serfdom“. A shame we have not yet covered this. Various versions available through the links on the wiki page. I will get a copy of the definitive version. Readers digest version here

3. Jon Elster’s books have been a revelation to me over the years. Brilliantly lucid discussions of core issues at the intersection of economics, philosophy and psychology. His work on emotions and self-restraint are particularly interesting to behavioural economics. His classic work Ulysses and The Sirens is one of the most cited books in behavioural economics and completely gripping.

4. Robert Putnam. “Bowling Alone“. Again, already a classic work that placed the concept of Social Capital on the agenda of many national and international policy agencies. My copy currently rests somewhere in the North of Ireland, as I gave it to a football manager a few years back after giving a talk on sport and social capital to the Ulster GAA association, in between talks by the President of the GAA and the DUP Minister for Sport. The book has received a lot of attention in Ireland over the years and it still has a strong life in current debates.

Are economists human?

A nice review by Deaton of Nudge and related matters

http://www.princeton.edu/~deaton/downloads/Are_Economists_Human.pdf

Galama and Kapteyn: Grossman's Missing Threshold

Grossman's Missing Health Threshold 

Author info | Abstract | Publisher info | Download info | Related research | Statistics

Author Info

Titus J. Galama (RAND Corporation)
Arie Kapteyn (RAND Corporation)

Abstract

We present a generalized solution to Grossman's model of health capital (1972), relaxing the widely used assumption that individuals can adjust their health stock instantaneously to an "optimal" level without adjustment costs. The Grossman model then predicts the existence of a health threshold above which individuals do not demand medical care. Our generalized solution addresses a significant criticism: the model's prediction that health and medical care are positively related is consistently rejected by the data. We suggest structural and reduced form equations to test our generalized solution and contrast the predictions of the model with the empirical literature.

Galama and Kapteyn: Grossman's Missing Threshold

Grossman's Missing Health Threshold 

Author info | Abstract | Publisher info | Download info | Related research | Statistics

Author Info

Titus J. Galama (RAND Corporation)
Arie Kapteyn (RAND Corporation)

Abstract

We present a generalized solution to Grossman's model of health capital (1972), relaxing the widely used assumption that individuals can adjust their health stock instantaneously to an "optimal" level without adjustment costs. The Grossman model then predicts the existence of a health threshold above which individuals do not demand medical care. Our generalized solution addresses a significant criticism: the model's prediction that health and medical care are positively related is consistently rejected by the data. We suggest structural and reduced form equations to test our generalized solution and contrast the predictions of the model with the empirical literature.

Happy Holidays

I will start blogging again before the New Year.  Try not to discount the future too heavily during the holidays. I will leave you with a blog favourite from Merle Haggard

Thinking Entropically

As my Christmas gift this festive season I hand you an interesting concept, which has kept me entertained during several recent train journeys. It is the concept of entropy. To understand entropy you need to have a scientific mind, so I am at something of a disadvantage. Here is how a scientific friend of mine, Steve Harris, has helped me explain it:

‘Thermodynamics is among the most important topics in science; it studies how energy is exchanged between physical systems as heat and work, resulting in changes in pressure, volume, temperature and entropy, the measure of disorder within a system. The laws of thermodynamics provide some of our most basic understandings of what is physically possible.’

He goes on to explain why the laws of thermodynamics – which explain how our physical universe functions – are of fundamental importance:

‘The first law of thermodynamics, also known as the conservation law, states that energy can be neither created nor destroyed, only transformed. However, the second law of thermodynamics—
'the entropy law'—tells us that in general, the total amount of useful, organized energy available to do work is always declining. For example, a lump of coal is a high-quality, highly organized form of energy; when burned it turns into smoke and heat, which are low-quality, dispersed and much more disordered forms of energy. This process is irreversible; we cannot recapture all the heat and smoke produced by burning and turn it back into a lump of coal. The second law tells us that all energy systems have a tendency to increase their entropy (or degree of disorder) rather than decrease it. This appears to apply to everything in the physical universe. So, although many natural and technological processes do increase order on a local scale—through the growth of plants, say, or the manufacture of goods from raw materials—the material waste and heat produced by these processes steadily, if imperceptibly, increases the general disorder of the physical universe.’

To my unscientific mind this concept is very appealing. My anarcahist inclinations are soothed by the thought that the inherent tendency in the universe is towards chaos, rather than order. The idea of entropy seems intuitively to help explain what is going wrong with our relationship with the planet, and how this relates to our economic activity. It was used in this way by the ecological economists, following up on the work of Nicolae Georgescu-Roegen.

The first law of thermodynamics is about quantity – there is only so much energy in the universe and it can only be changed from one form to another, never created or destroyed. The second law is about the quality of that energy, which changes as its form changes, and with an inherent tendency towards a higher level of entropy, or disorder.

The first economists to consider why our economy was growing out of control and why economists had no concern for the physical limits of the universe soon identified the cause: the pseudo-science of economics pre-dates the discovering of the laws of thermodynamics by some fifty years. Its Promethean optimism about what humans can achieve operates outside physical reality, and has never been brought into line.

There is something intriguing about the relationship between entropy and life itself. Natural processes are able to transcend the movement between disorder and order more creatively than our industrial systems can, an example being the way that nature transforms wastes into life-giving systems, potato peelings into soil, for example. I hope you will be able to do something similarly creative with the concept of entropy itself. It could change your life and could fill a dull moment between meals.

New Labour; New Redistribution

In an era when investigative journalism is a nostalgic memory and even the best political parties worry more about how they can present a policy than whether it is right, how reassuring it is to find a report that is full of good hard numbers. Such is the recent report on assets and wealth from the Office for National Statistics.

This is a rare and welcome survey, since too much policy attention is focused on income – whether in terms of taxation or inequality – whereas assets are a much better indication of the social health of a society. The graph indicates how unequal the distribution of wealth is according to deciles of the population. So the first bar represents the poorest 10%, the next bar the next poorest 10% and so on, up to the 10% who hold the most assets. It includes physical wealth (like cars and washing machines) and property wealth, as well as potential wealth, like pension plans, and actual savings.

Asset inequality, as measured by the Gini coefficient (where 0 is perfect equality and 1 perfect inequality), varies between different kinds of property. The gap between the richest and poorest was least in terms of actual stuff (0.46) and greatest in terms of cash holdings (0.81), with pension savings (0.77) and property wealth (0.62) coming somewhere in between.

The greatest weakness of the report is that it is a snapshot and includes no trend data. So we cannot gain a sense of how asset wealth has been changing during the years of Thatcherite policy. This information is available for income inequality, and is illustrated in the second graph, again measured by the Gini coefficient.

The rise in inequality under the Tories can have come as no surprise, since part of the purpose of the Thatcherite ideology was to reintroduce the economic incentive that fearing for your well-being and fighting your way up the wealth ladder provides. There is not much point in competition if everybody comes out a loser. However, the recent rise in income inequality under Labour is much more depressing. Mandelson’s crack that he was seriously relaxed about the super-rich has clearly found its way into policy.

These figures all pre-date the costs of the bank bailout, which, as I have blogged previously, represents a massive transfer of wealth from poor to rich. The debt that has been foisted on us will be repaid at the expense of those who earn, not those who own. Labour’s particular new twist on redistribution will ensure that both income and asset inequality increases rapidly over the next decade

Thinking Entropically

As my Christmas gift this festive season I hand you an interesting concept, which has kept me entertained during several recent train journeys. It is the concept of entropy. To understand entropy you need to have a scientific mind, so I am at something of a disadvantage. Here is how a scientific friend of mine, Steve Harris, has helped me explain it:

‘Thermodynamics is among the most important topics in science; it studies how energy is exchanged between physical systems as heat and work, resulting in changes in pressure, volume, temperature and entropy, the measure of disorder within a system. The laws of thermodynamics provide some of our most basic understandings of what is physically possible.’

He goes on to explain why the laws of thermodynamics – which explain how our physical universe functions – are of fundamental importance:

‘The first law of thermodynamics, also known as the conservation law, states that energy can be neither created nor destroyed, only transformed. However, the second law of thermodynamics—
'the entropy law'—tells us that in general, the total amount of useful, organized energy available to do work is always declining. For example, a lump of coal is a high-quality, highly organized form of energy; when burned it turns into smoke and heat, which are low-quality, dispersed and much more disordered forms of energy. This process is irreversible; we cannot recapture all the heat and smoke produced by burning and turn it back into a lump of coal. The second law tells us that all energy systems have a tendency to increase their entropy (or degree of disorder) rather than decrease it. This appears to apply to everything in the physical universe. So, although many natural and technological processes do increase order on a local scale—through the growth of plants, say, or the manufacture of goods from raw materials—the material waste and heat produced by these processes steadily, if imperceptibly, increases the general disorder of the physical universe.’

To my unscientific mind this concept is very appealing. My anarcahist inclinations are soothed by the thought that the inherent tendency in the universe is towards chaos, rather than order. The idea of entropy seems intuitively to help explain what is going wrong with our relationship with the planet, and how this relates to our economic activity. It was used in this way by the ecological economists, following up on the work of Nicolae Georgescu-Roegen.

The first law of thermodynamics is about quantity – there is only so much energy in the universe and it can only be changed from one form to another, never created or destroyed. The second law is about the quality of that energy, which changes as its form changes, and with an inherent tendency towards a higher level of entropy, or disorder.

The first economists to consider why our economy was growing out of control and why economists had no concern for the physical limits of the universe soon identified the cause: the pseudo-science of economics pre-dates the discovering of the laws of thermodynamics by some fifty years. Its Promethean optimism about what humans can achieve operates outside physical reality, and has never been brought into line.

There is something intriguing about the relationship between entropy and life itself. Natural processes are able to transcend the movement between disorder and order more creatively than our industrial systems can, an example being the way that nature transforms wastes into life-giving systems, potato peelings into soil, for example. I hope you will be able to do something similarly creative with the concept of entropy itself. It could change your life and could fill a dull moment between meals.

New Labour; New Redistribution

In an era when investigative journalism is a nostalgic memory and even the best political parties worry more about how they can present a policy than whether it is right, how reassuring it is to find a report that is full of good hard numbers. Such is the recent report on assets and wealth from the Office for National Statistics.

This is a rare and welcome survey, since too much policy attention is focused on income – whether in terms of taxation or inequality – whereas assets are a much better indication of the social health of a society. The graph indicates how unequal the distribution of wealth is according to deciles of the population. So the first bar represents the poorest 10%, the next bar the next poorest 10% and so on, up to the 10% who hold the most assets. It includes physical wealth (like cars and washing machines) and property wealth, as well as potential wealth, like pension plans, and actual savings.

Asset inequality, as measured by the Gini coefficient (where 0 is perfect equality and 1 perfect inequality), varies between different kinds of property. The gap between the richest and poorest was least in terms of actual stuff (0.46) and greatest in terms of cash holdings (0.81), with pension savings (0.77) and property wealth (0.62) coming somewhere in between.

The greatest weakness of the report is that it is a snapshot and includes no trend data. So we cannot gain a sense of how asset wealth has been changing during the years of Thatcherite policy. This information is available for income inequality, and is illustrated in the second graph, again measured by the Gini coefficient.

The rise in inequality under the Tories can have come as no surprise, since part of the purpose of the Thatcherite ideology was to reintroduce the economic incentive that fearing for your well-being and fighting your way up the wealth ladder provides. There is not much point in competition if everybody comes out a loser. However, the recent rise in income inequality under Labour is much more depressing. Mandelson’s crack that he was seriously relaxed about the super-rich has clearly found its way into policy.

These figures all pre-date the costs of the bank bailout, which, as I have blogged previously, represents a massive transfer of wealth from poor to rich. The debt that has been foisted on us will be repaid at the expense of those who earn, not those who own. Labour’s particular new twist on redistribution will ensure that both income and asset inequality increases rapidly over the next decade

Happy Holidays

I will start blogging again before the New Year.  Try not to discount the future too heavily during the holidays. I will leave you with a blog favourite from Merle Haggard

Behavioural Economics Lectures

One major task for break will be to find a quiet place somewhere in the country to sit down and work on my behavioural economics lectures, and to begin the process of writing them into a book. Suggestions for somewhere to go and any suggestions for the contents of the lectures welcome. I have added lectures on consumption, investment and growth.

link here (sorry, bit of a building site at present)

Non-cognitive skills

Papers on non-cognitive skills are increasingly common in economics & they are also appearing in political science. Often they lack much by way of theory. This paper looks like a useful overview.

Noncognitive skills in economics: models, measurement, and empirical evidence
H Theil, S L Thomsen

There is an increasing economic literature considering personality. This paper provides an overview on the role of these skills regarding three main aspects of economic analysis: measurement, theoretical modeling, and empirical estimates. Based on the relevant literature from different disciplines, the common psychometric measures used to assess personality are discussed. A recently proposed theoretical framework of human capital production takes personality explicitly into account. It is reviewed to clarify the understanding of crucial features of skill development. Based on these foundations, the main results of the empirical literature regarding noncognitive skills are classified along the research questions and summarized.
http://d.repec.org/n?u=RePEc:zbw:zewdip:09076&r=cbe

Geary Working Paper: Van Soest and Kapteyn on Mode and Context Effects

Mode and Context Effects in Measuring Household Assets 

Author info | Abstract | Publisher info | Download info | Related research | Statistics

Author Info

Arthur van Soest (Netspar, Tilburg University, RAND)
Arie Kapteyn (RAND)

Abstract

Differences in answers in Internet and traditional surveys can be due to selection, mode, or context effects. We exploit unique experimental data to analyze mode and context effects controlling for arbitrary selection. The Health and Retirement Study (HRS) surveys a random sample of the US 50+ population, with CAPI or CATI core interviews once every two years. In 2003 and 2005, random samples were drawn from HRS respondents in 2002 and 2004 willing and able to participate in an Internet interview. Comparing core and Internet survey answers of the same people, we analyze mode and context effects, controlling for selection. We focus on household assets, for which mode effects in Internet surveys have rarely been studied. We find some large differences between the first Internet survey and the other three surveys which we interpret as a context and question wording effect rather than a pure mode effect.

Geary Working Paper: Morgan Kelly on Credit Bubble

Morgan Kelly has been among the most forceful critics of government banking policy in Ireland in the last few years. His latest work on this is available as a working paper.

link here

Geary Working Paper: Van Soest and Kapteyn on Mode and Context Effects

Mode and Context Effects in Measuring Household Assets 

Author info | Abstract | Publisher info | Download info | Related research | Statistics

Author Info

Arthur van Soest (Netspar, Tilburg University, RAND)
Arie Kapteyn (RAND)

Abstract

Differences in answers in Internet and traditional surveys can be due to selection, mode, or context effects. We exploit unique experimental data to analyze mode and context effects controlling for arbitrary selection. The Health and Retirement Study (HRS) surveys a random sample of the US 50+ population, with CAPI or CATI core interviews once every two years. In 2003 and 2005, random samples were drawn from HRS respondents in 2002 and 2004 willing and able to participate in an Internet interview. Comparing core and Internet survey answers of the same people, we analyze mode and context effects, controlling for selection. We focus on household assets, for which mode effects in Internet surveys have rarely been studied. We find some large differences between the first Internet survey and the other three surveys which we interpret as a context and question wording effect rather than a pure mode effect.

Non-cognitive skills

Papers on non-cognitive skills are increasingly common in economics & they are also appearing in political science. Often they lack much by way of theory. This paper looks like a useful overview.

Noncognitive skills in economics: models, measurement, and empirical evidence
H Theil, S L Thomsen

There is an increasing economic literature considering personality. This paper provides an overview on the role of these skills regarding three main aspects of economic analysis: measurement, theoretical modeling, and empirical estimates. Based on the relevant literature from different disciplines, the common psychometric measures used to assess personality are discussed. A recently proposed theoretical framework of human capital production takes personality explicitly into account. It is reviewed to clarify the understanding of crucial features of skill development. Based on these foundations, the main results of the empirical literature regarding noncognitive skills are classified along the research questions and summarized.
http://d.repec.org/n?u=RePEc:zbw:zewdip:09076&r=cbe

Curiosity Killed the Trac

I am working hard not to go down the route of allowing my personal economic situation – as a university academic – to influence either my views or the content of this blog, but the system for tracking the value of the psychic and intellectual labour of the staff of the UK’s universities can be used as an object lesson in the futility of accounting for work.

It is one part of a strategy to turn creative intellectuals into contracted brains in the industrial vats. The level of animosity has reached such a pitch in the wake of Mandelson’s Higher Ambitions report that a couple of weeks ago the country’s professoriat – hardly the most radical sector of society – marched on Westminster en masse.

It is all part of a move to turn universities into training institutes for corporations. According to the latest in a round of futile measurement exercises the Research Excellence Framework, the value of universities is to be measured partly in terms of their ‘impact’. I am listing the list of impact measures in full at the end of this post since it gives a clear idea of how universities are being manipulated. I particularly enjoy the way that quality-of-life indicators are included as an afterthought – and we are expected to suggest ways to measure these for ourselves. The drafters of these proposals clearly lost confidence in their ability to translate quality into quantity when it came to life itself.

The order of priorities for universities is also made clear by these proposals. First comes subsidising corporate training budgets, then providing free inventions for industry, then helping out the public sector (activities which are defined in a pure managerialist way), then advancing sustainable development, increasing cultural richment, and finally helping society’s losers and improving quality of life. This list encapsulates what is wrong with our whole social and political system, for which our universities are now intended to be an uncritical support system.

Part of the fun or working in a university is that you are permitted to spend some of your time devising typologies and taxonomies (I promise that other more useful things are done with the share of your taxes spent on HE as well). One such is the diagram illustrated below of Pasteur’s Quadrant. It is intended to distinguish between the different sorts of research that ’scientists’ carry out.

Obviously the two-by-two is a gross simplification and the graphic would work better if you thought of the two axes as continua, but there is probably some validity in considering how immediately useful in a practical sense research is intended to be, and to what extent the researcher was concerned to seek fundamental understanding as opposed to a more superficial explanation (or typology?).

The complaint of the Professors and other notables such as Sir Alec Jeffries, so-called inventor of DNA profiling is that it is impossible to know when research in the top left square, the blue-skies square, might generate practical outcomes. Jeffries claims that his own work was based on pure curiosity about the genetic make-up of seals. It was only as a by-product that his research team found that their insights could be used to map DNA found at crime scenes.

The purpose of the REF and other such impact-based measurement exercises is to force academics into the bottom right square. It seems to me that what they are actually doing is forcing academics to focus so hard on proving usefulness and avoiding deeper explanations that more and more are being forced into the bottom left square. This is the square of doom for any intellectual – the place where your work is not only shallow but useless as well. The sort of work that wins the annual Ignobel Prizes.

And in the latest assault on academic freedom researchers are to be ‘tracked’ according to a new process devised by accountants to require us to justify every minute of our time. In what Professor of Critical Accounting Rebecca Boden has called ‘a deeply flawed and inoperable system’, we are to keep note of how we spend the hours of our days, as though thinking could be subjected to a time-and-motion study. This will not only kill research driven by curiosity, as Jeffries feared, it will also undermine the place of thinking as a part of academic life.

Consequences of Recession in Ireland?

The debate into the Irish recession has naturally focused on the banking system and the fiscal adjustment. Ireland ran a large bubble in property for at least five years that added to revenue, inflating both the public sector coffers and the banking systems balance sheets. When the financial crisis hit, the vulnerability of this situation became rapidly apparent and we have witnessed an astonishing increase in unemployment as well as collapse of our banking system and a need for rapid fiscal adjustment that has, among other things, reduced take-home pay of public servants.

One real shame about our current situation is the lack of data to monitor how it is actually affecting people. The current micro-data infrastructure of Household Budget Survey, SILC, SLAN, SHARE, QNHS and others is simply ill-equipped to examine events that occur at this level of frequency. Thus, we simply do not know how households are smoothing consumption through this time period. For example, we know that many people have taken drastic reductions in their housing wealth but do not know how this actually affects their day-to-day lives with respect to availability of credit. Nor do we have any real sense of the extent to which certain groups are facing hard liquidity constraints in ways that may lead to real consequences for health and life outcomes. Anecdotally, we are hearing reports of paid doctors visits declining as the recession bites but have no sense of whether people’s health is being placed in jeopardy. Similarly, preliminary data suggests an increase in suicide rates, but we are unable to examine the mechanisms through which the economy impacts on psychological distress. Savings have increased sharply as has consumption has declined but the academic community has no way of providing any micro-founded explanation of why this is happening.

We have been collecting monthly panel data here to track things like risk perception but the research is still too early stage to provide sufficient sample sizes for sub-groups to answer the questions above. My personal new year’s resolution is to get this to a state where we can start engaging properly with policy in Ireland. High-frequency (i.e. monthly) data delivered quickly to academic researchers in a manner comparable to other countries is the only solution to the massive knowledge hole that exists in Ireland at present. We need to speed up the delivery of data so that papers can be written that are scientifically robust and timely enough to actually enter into the debate.

Independent Article on Graduate Unemployment

useful piece by Katherine Donnelly and John Walshe

link here 

Independent Article on Graduate Unemployment

useful piece by Katherine Donnelly and John Walshe

link here 

Behavioural Economics Lectures

One major task for break will be to find a quiet place somewhere in the country to sit down and work on my behavioural economics lectures, and to begin the process of writing them into a book. Suggestions for somewhere to go and any suggestions for the contents of the lectures welcome. I have added lectures on consumption, investment and growth.

link here (sorry, bit of a building site at present)

Curiosity Killed the Trac

I am working hard not to go down the route of allowing my personal economic situation – as a university academic – to influence either my views or the content of this blog, but the system for tracking the value of the psychic and intellectual labour of the staff of the UK’s universities can be used as an object lesson in the futility of accounting for work.

It is one part of a strategy to turn creative intellectuals into contracted brains in the industrial vats. The level of animosity has reached such a pitch in the wake of Mandelson’s Higher Ambitions report that a couple of weeks ago the country’s professoriat – hardly the most radical sector of society – marched on Westminster en masse.

It is all part of a move to turn universities into training institutes for corporations. According to the latest in a round of futile measurement exercises the Research Excellence Framework, the value of universities is to be measured partly in terms of their ‘impact’. I am listing the list of impact measures in full at the end of this post since it gives a clear idea of how universities are being manipulated. I particularly enjoy the way that quality-of-life indicators are included as an afterthought – and we are expected to suggest ways to measure these for ourselves. The drafters of these proposals clearly lost confidence in their ability to translate quality into quantity when it came to life itself.

The order of priorities for universities is also made clear by these proposals. First comes subsidising corporate training budgets, then providing free inventions for industry, then helping out the public sector (activities which are defined in a pure managerialist way), then advancing sustainable development, increasing cultural richment, and finally helping society’s losers and improving quality of life. This list encapsulates what is wrong with our whole social and political system, for which our universities are now intended to be an uncritical support system.

Part of the fun or working in a university is that you are permitted to spend some of your time devising typologies and taxonomies (I promise that other more useful things are done with the share of your taxes spent on HE as well). One such is the diagram illustrated below of Pasteur’s Quadrant. It is intended to distinguish between the different sorts of research that ’scientists’ carry out.

Obviously the two-by-two is a gross simplification and the graphic would work better if you thought of the two axes as continua, but there is probably some validity in considering how immediately useful in a practical sense research is intended to be, and to what extent the researcher was concerned to seek fundamental understanding as opposed to a more superficial explanation (or typology?).

The complaint of the Professors and other notables such as Sir Alec Jeffries, so-called inventor of DNA profiling is that it is impossible to know when research in the top left square, the blue-skies square, might generate practical outcomes. Jeffries claims that his own work was based on pure curiosity about the genetic make-up of seals. It was only as a by-product that his research team found that their insights could be used to map DNA found at crime scenes.

The purpose of the REF and other such impact-based measurement exercises is to force academics into the bottom right square. It seems to me that what they are actually doing is forcing academics to focus so hard on proving usefulness and avoiding deeper explanations that more and more are being forced into the bottom left square. This is the square of doom for any intellectual – the place where your work is not only shallow but useless as well. The sort of work that wins the annual Ignobel Prizes.

And in the latest assault on academic freedom researchers are to be ‘tracked’ according to a new process devised by accountants to require us to justify every minute of our time. In what Professor of Critical Accounting Rebecca Boden has called ‘a deeply flawed and inoperable system’, we are to keep note of how we spend the hours of our days, as though thinking could be subjected to a time-and-motion study. This will not only kill research driven by curiosity, as Jeffries feared, it will also undermine the place of thinking as a part of academic life.

Geary Working Paper: Morgan Kelly on Credit Bubble

Morgan Kelly has been among the most forceful critics of government banking policy in Ireland in the last few years. His latest work on this is available as a working paper.

link here

Consequences of Recession in Ireland?

The debate into the Irish recession has naturally focused on the banking system and the fiscal adjustment. Ireland ran a large bubble in property for at least five years that added to revenue, inflating both the public sector coffers and the banking systems balance sheets. When the financial crisis hit, the vulnerability of this situation became rapidly apparent and we have witnessed an astonishing increase in unemployment as well as collapse of our banking system and a need for rapid fiscal adjustment that has, among other things, reduced take-home pay of public servants.

One real shame about our current situation is the lack of data to monitor how it is actually affecting people. The current micro-data infrastructure of Household Budget Survey, SILC, SLAN, SHARE, QNHS and others is simply ill-equipped to examine events that occur at this level of frequency. Thus, we simply do not know how households are smoothing consumption through this time period. For example, we know that many people have taken drastic reductions in their housing wealth but do not know how this actually affects their day-to-day lives with respect to availability of credit. Nor do we have any real sense of the extent to which certain groups are facing hard liquidity constraints in ways that may lead to real consequences for health and life outcomes. Anecdotally, we are hearing reports of paid doctors visits declining as the recession bites but have no sense of whether people’s health is being placed in jeopardy. Similarly, preliminary data suggests an increase in suicide rates, but we are unable to examine the mechanisms through which the economy impacts on psychological distress. Savings have increased sharply as has consumption has declined but the academic community has no way of providing any micro-founded explanation of why this is happening.

We have been collecting monthly panel data here to track things like risk perception but the research is still too early stage to provide sufficient sample sizes for sub-groups to answer the questions above. My personal new year’s resolution is to get this to a state where we can start engaging properly with policy in Ireland. High-frequency (i.e. monthly) data delivered quickly to academic researchers in a manner comparable to other countries is the only solution to the massive knowledge hole that exists in Ireland at present. We need to speed up the delivery of data so that papers can be written that are scientifically robust and timely enough to actually enter into the debate.

Gallup Behavioural Economics Event

Spoke at this event in Brussels on Tuesday. Clearly a strong interest in ideas from behavioural economics among European policymakers.

link here

Some Events in Development

The main seminar series will go ahead as normal in the new year. Some events in development from the group behind this blog include those listed below. Preliminary so suggestions more than welcome. This year was packed and created many ideas that will have lasting impact on our work. We are devoting a lot of time to thinking about how to keep the formats interesting and to keep learning from these events as well as working out interactions with many different kinds of audience.

one day session on behavioural economics and business (march)

half day session on unemployment (march)

session on irish universities (april)

third economics and psychology event (november)

third health symposium (november)

more regular book-clubs (suggestions welcome)

Good Cop or Bad Cop?

So what are we to make of the failure of the meeting that was billed as our last chance to save ourselves as a species? The conference was a demonstration of the gap between media spin and political substance in the modern world. Nothing demonstrated this better than the impotence of the man who many of the world’s disempowered have viewed as somebody who could wield power to make a difference. From rhetorical bravura to rhetorical bravado, in one short speech Obama demonstrated that, like every other US President, he is utterly controlled by the economic actors who dominate his domestic politics.

The clue to what was going on was given by the separation, in the wake of Obama’s arrival, of emissions reductions from the transfer of cash to larger but less diplomatically savvy countries that were once part of the patronisingly titled ‘third world’. ‘We haven’t managed to agree on emissions’, went the spin, ‘but the other main issue has been resolved’. The creation of US dollars from thin air is not, and never was the purpose of Copenhagen. As followers of this blog will know, creating money in this way is actually driving economic growth and environmental destruction. Worse still, this deal does not offer the bulk of the money until after 2020, by which time it will be much too late to make the cuts necessary to ensure a habitable environment for humankind on planet earth.

The most galling aspect of the conference was to have to accept lectures from the US about leadership in climate change. As the table makes clear, Obama would do well to adopt a position of humility rather than the arrogance he showed at Copenhagen. The numbers make clear who the main culprits are in terms of CO2 per capita, the only just way of measuring emissions. These figures should be the real focus of our attention, and until every number in the second column of that table stands at 1 or less then we are in very deep trouble.

This gives a sense of the scale of reductions in carbon emissions we are talking about. Not giving more money to Brazil or South Africa, not cutting by 9% or 17% or 23%, but completely changing our lifestyle so that we end the 200 years of oil-fuelled over-consumption and return to a balanced relationship with the earth that is the source of all our wealth.

Obama’s purpose in travelling to Copenhagen was to sidestep the main issue of actually reducing emissions and shift the debate to an area he could control, i.e. the production of worthless pieces of paper by the US mint, and an issue where he could take the moral high ground, i.e. the regime of inspection. He has also provided himself with a media opportunity that will give him some leverage in taking a bill of sorts through the Senate.

The EU and Japan, who have been acting with a moderate degree of commitment on this issue, have been left sidelined by a degenerate superpower and a group of wannabee nations who ought to know better. Leadership is still possible, although a negotiated settlement may not be. The way ahead is clear: an agreement between the developed nations who are prepared to make cuts and the poorer countries of the world. The contraction and convergence model can be made to work first in a club of nations, with transfers of technology to be exchanged for our excess emissions during our period of transition to a low-carbon economy.

Christmas Spirit

Ive searched hard for a suitable christmas song on youtube. this one does it for me.

NBER Paper on Environmental Behaviour

Discontinuous Behavioral Responses to Recycling Laws and Plastic Water Bottle Deposits 

W. Kip Viscusi, Joel Huber, Jason Bell, Caroline Cecot NBER Working Paper No. 15585* Issued in December 2009 This article examines the effects of recycling and deposit laws on consumer recycling of plastic water bottles using a nationally representative sample of 2,550 bottled water users. Economic theory predicts individual behavior that gravitates toward extremes—either diligent recycling or no recycling at all. This pattern is borne out in actual recycling behavior. Both water bottle deposits and recycling laws foster recycling behavior through a discontinuous effect that converts reluctant recyclers into diligent recyclers. More stringent recycling laws have a greater effect on recycling rates. The efficacy of these interventions is greatest for those who would not already recycle and especially for those in lower income groups or who do not consider themselves to be environmentalists.

Colm Harmon on Higher Education

Nice talk by Colm to the graduating class at UCD. focus on higher education and economic recovery.

link here