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I guess the follow up question to this is: what superior alternative do you propose we use for evaluating competing government policies?

by spangry 10y ago

js8 10y ago
I don't think we should ditch "utility" entirely but rather the idea people are actors that try to rationally maximize utility. One problem is of uncertainty (this was pointed out by Keynes) - people simply do not trade higher risk for higher profits, even if the mean value increases in the mathematical sense. Rather, they set a horizon of uncertainty. The other big problem is that utility is ill-defined for an individual. We are competitive beings and value many things for reasons that are related to how other people value them. This cannot be modeled within the theory of rational choice. (It's also somewhat related to the fact that supply-demand is not that great model.) In other words, we should augment the models to take the above issues (at least, IMHO those are the biggest problems but certainly not the only ones) into consideration.
- spangry 10y ago
  I agree. I think at this point even the most conventional academic economist would start giving you sideways glances if you asserted that people are always rational utility maximisers. It seems that most econometric modelling takes a top-down approach; implicitly making homogenising assumptions about the models 'atoms' (e.g. individuals, firms, states, countries etc.). I often wonder if the future of economic modelling is to be found in 'agent-based' models, where you start at the lowest level and aggregate up. This approach makes it possible to account for the effects of non-homogeneous actors and to also include 'non-rational' behaviours observed in experimental/behavioural economics. I feel that the other issue is how beginner-level economics is taught at university. I would agree that there's no practical way to teach economics to beginners without making a bunch of simplifying assumptions and presenting a bunch of simplified models for study (e.g. a perfectly competitive market). However, I think the problem is that insufficient effort (if any) is made to emphasise that these models do not really reflect reality, and are just 'toy models' to help you develop your analytical thinking. At best, in a real world context, understanding these models gives you an analytical framework for reasoning about whether some policy proposal is pointing in the right or wrong direction, though even that is a pretty fraught assertion. EDIT: I figured I'd address some of the comments below regarding randomised-controlled trials, since its related to agent-based modelling / simulation. Comments below have pretty much highlighted the crux of the problem with economics and public policy (albeit without comprehending the implications): barring the rare 'natural experiment', its virtually impossible to collect 'clean' data that allows comparison of different policies. It's true that RCTs are being run in a 'public-administration' context, and the idea is gaining popularity. Most notably, the UK government has run a bunch of RCTs on various things. But the crucial thing to note is that these RCTs are generally only run for 'low-stakes' issues. For instance, one of their RCTs involved varying the wording of their tax authority's "you haven't submitted a tax return" letter to determine what gets the highest compliance rate. How comfortable, from an ethical standpoint, would you feel running state-by-state RCTs to determine the best government healthcare policy? Particularly given that the outcome in some states will be higher levels of preventable death and permanent disability? I've chosen healthcare here because the connection between different policies and higher or lower rates of mortality is fairly direct. But for any other government policy (of any significance), you're generally looking at the same sort of stakes. It's just that the ultimate ill-effects of a bad policy are not immediately apparent, take a long time to unfold, and often only eventuate at the margins.
sprafa 10y ago
The fact there is no alternative doesn't mean we should use something that we know barely works. This is exactly the problem with economism
- spangry 10y ago
  That all sounds very clever and all, but there's still a rather important question being left unanswered here: on what basis should a government make decisions? Coin flips? Gut feelings? The phase of the moon? Let's say you're the King of the United States. One of your noblemen comes in to your palace and says 'Your majesty, I suggest we eliminate corporate taxation and replace the lost revenue with a tax on consumption.' What happens next?
  - chongli 10y ago
    Coin flip sounds good to me. If you honestly don't know how to solve a problem, inventing a discipline for the express purpose of having an authority to point to sounds like the worst possible idea. It makes it much harder to change course if you can't merely say "oh, we should try tails instead due to xyz" because now you've got another institution fighting to justify its own survival.
    - angry_octet 10y ago
      We need a reason to sound Certain. We should do away with the Fed, etc and systematise on the Oracle. That way when things go wrong we can still say it was the will of the Gods without needing to have an inquiry about it. Though we would probably just have one about who offended the gods.
  - Noseshine 10y ago
    Coin flips are actually okay when you don't know something: Create many small experiments instead of trying the "world formula" solution. Also, create an environment where responsibility and decision making authority is as low as possible, not as high as possible - meaning where both the data and the consequences can both be found together. Oh and use "muddling through" more openly, because that's what life is about no matter how much data you collect. So don't pretend that there even IS an "optimal" answer, and/or that you know it and/or even that anyone can find it. Let's admit that we are all just trying things and that failure IS an option. So create systems that a) actually encourage and allow experimenting, and b) let those fail safely.

I guess the follow up question to this is: what superior alternative do you propose we use for evaluating competing government policies?

by spangry 10y ago

I guess the follow up question to this is: what superior alternative do you propose we use for evaluating competing government policies?

js8 10y ago

I don't think we should ditch "utility" entirely but rather the idea people are actors that try to rationally maximize utility. One problem is of uncertainty (this was pointed out by Keynes) - people simply do not trade higher risk for higher profits, even if the mean value increases in the mathematical sense. Rather, they set a horizon of uncertainty. The other big problem is that utility is ill-defined for an individual. We are competitive beings and value many things for reasons that are related to how other people value them. This cannot be modeled within the theory of rational choice. (It's also somewhat related to the fact that supply-demand is not that great model.) In other words, we should augment the models to take the above issues (at least, IMHO those are the biggest problems but certainly not the only ones) into consideration.

spangry 10y ago
I agree. I think at this point even the most conventional academic economist would start giving you sideways glances if you asserted that people are always rational utility maximisers. It seems that most econometric modelling takes a top-down approach; implicitly making homogenising assumptions about the models 'atoms' (e.g. individuals, firms, states, countries etc.). I often wonder if the future of economic modelling is to be found in 'agent-based' models, where you start at the lowest level and aggregate up. This approach makes it possible to account for the effects of non-homogeneous actors and to also include 'non-rational' behaviours observed in experimental/behavioural economics. I feel that the other issue is how beginner-level economics is taught at university. I would agree that there's no practical way to teach economics to beginners without making a bunch of simplifying assumptions and presenting a bunch of simplified models for study (e.g. a perfectly competitive market). However, I think the problem is that insufficient effort (if any) is made to emphasise that these models do not really reflect reality, and are just 'toy models' to help you develop your analytical thinking. At best, in a real world context, understanding these models gives you an analytical framework for reasoning about whether some policy proposal is pointing in the right or wrong direction, though even that is a pretty fraught assertion. EDIT: I figured I'd address some of the comments below regarding randomised-controlled trials, since its related to agent-based modelling / simulation. Comments below have pretty much highlighted the crux of the problem with economics and public policy (albeit without comprehending the implications): barring the rare 'natural experiment', its virtually impossible to collect 'clean' data that allows comparison of different policies. It's true that RCTs are being run in a 'public-administration' context, and the idea is gaining popularity. Most notably, the UK government has run a bunch of RCTs on various things. But the crucial thing to note is that these RCTs are generally only run for 'low-stakes' issues. For instance, one of their RCTs involved varying the wording of their tax authority's "you haven't submitted a tax return" letter to determine what gets the highest compliance rate. How comfortable, from an ethical standpoint, would you feel running state-by-state RCTs to determine the best government healthcare policy? Particularly given that the outcome in some states will be higher levels of preventable death and permanent disability? I've chosen healthcare here because the connection between different policies and higher or lower rates of mortality is fairly direct. But for any other government policy (of any significance), you're generally looking at the same sort of stakes. It's just that the ultimate ill-effects of a bad policy are not immediately apparent, take a long time to unfold, and often only eventuate at the margins.

sprafa 10y ago

The fact there is no alternative doesn't mean we should use something that we know barely works. This is exactly the problem with economism

spangry 10y ago
That all sounds very clever and all, but there's still a rather important question being left unanswered here: on what basis should a government make decisions? Coin flips? Gut feelings? The phase of the moon? Let's say you're the King of the United States. One of your noblemen comes in to your palace and says 'Your majesty, I suggest we eliminate corporate taxation and replace the lost revenue with a tax on consumption.' What happens next?
- chongli 10y ago
  Coin flip sounds good to me. If you honestly don't know how to solve a problem, inventing a discipline for the express purpose of having an authority to point to sounds like the worst possible idea. It makes it much harder to change course if you can't merely say "oh, we should try tails instead due to xyz" because now you've got another institution fighting to justify its own survival.
  - angry_octet 10y ago
    We need a reason to sound Certain. We should do away with the Fed, etc and systematise on the Oracle. That way when things go wrong we can still say it was the will of the Gods without needing to have an inquiry about it. Though we would probably just have one about who offended the gods.
- Noseshine 10y ago
  Coin flips are actually okay when you don't know something: Create many small experiments instead of trying the "world formula" solution. Also, create an environment where responsibility and decision making authority is as low as possible, not as high as possible - meaning where both the data and the consequences can both be found together. Oh and use "muddling through" more openly, because that's what life is about no matter how much data you collect. So don't pretend that there even IS an "optimal" answer, and/or that you know it and/or even that anyone can find it. Let's admit that we are all just trying things and that failure IS an option. So create systems that a) actually encourage and allow experimenting, and b) let those fail safely.