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I think its important to stress to those on the left that the term 'self interest' is NOT synonymous with "selfish". Self interest simply means to act in a way that furthers your goals, whether they are financial, personal, or social goals. If you are an organizer for a charity it is in your self interest to get more donations to help more poor people, it is in your self interest to donate more of your own time and money to help others.


Well Nick, if the "self interest" phrasing is a turn off then it can be dispensed with easily. The key to having well defined utility is that prefrences satisfy the basic axioms (completeness, transitivity, etc). None of those axioms rules out a utility function that includes benefit to others, a sort of positive externality of benefits to me is your altruistic satisfaction.

Perhaps we should just be a bit more precise and say that people act according to consistent preferences and not in "self interest" as that phrase is comonly understood.

From my own personal experience (as someone who took one first year economics course, was turned off and didn't take anymore afterwards - albeit in my 3rd year of an undergraduate degree), it wasn't the notion of self-interest that I could not accept so much as the simplification of human beings to a single self-interest (whatever that may be). The rational, self-interested homos economicus just isn't anywhere near what I know most (perhaps all) human beings to be. We are messy individuals. We often don't even know what our interest is, and sometimes our own multiple interests conflict with each other.

During the introductory lecture on supply and demand, I'd find myself asking questions wondering about the effects of slick marketing, induced demand, or some other complication, only to be shot down with a promise that we'd get to that 'later'. (And 'later' never happened.) So, I studied the textbook and a trained to the test, and passed the multiple choice (no essay, in contrast to every other course I took) exam handily. But I felt like I'd learned virtually nothing and that critical thinking was actively discouraged. I asked other students if all the courses were taught that way - thinking that perhaps I just had a particularly unimaginative professor - and I was assured that the rote memorization, rigid structure and lack of debate was pretty much the standards of instruction (at least at my institution). So while I occasionally looked at the subject through the more flexible discipline of political economy, I abandoned economics after that initial dip of my foot in the waters.

So, as a centre-left non-economist who is interested, I'm heartened to see a philosopher take on the subject and am looking forward to reading Heath. If anything, it should be refreshing to approach the topic again in book length, without reading solely in order to pass a multiple choice test.

"Later" could have meant "in another course"; there are only so many things you can cover in a principles course. It's a challenge to get people to understand the idea of comparative advantage even when you make the strongest of simplifying assumptions. A more realistic setting would only complicate matters, without affecting the more fundamental point.

Training in economics consists almost entirely of revisiting and relaxing the (extremely strong) simplifying assumptions made in Econ 101. But the basic intuition of Econ 101 is never entirely abandoned.

Stephen, I remain unconvinced that the introduction of nuance would be so damaging to the fragile young minds of students so as to undermine their understanding of basic principles. Many other disciplines (most notably, philosophy) do not seem nearly so fearful of introducing complexity right at the introductory level.

That said, not everyone learns the same way, and perhaps most economists prefer an extraordinary degree of structure compared to those who gravitate towards other disciplines. I've always found testing and questioning a system of logic to be the fastest way to understand it, but I realize not everyone shares that.

Kuri: "That said, not everyone learns the same way, and perhaps most economists prefer an extraordinary degree of structure compared to those who gravitate towards other disciplines."

Yep. What worries me though is that the way we teach it might be the cause of that: that the only ones who survive the first and second year undergrad courses are the ones who like that structure.

Thanks for the reminder Nick, I'd been meaning to check to see if Filthy Lucre had been released yet. For folks interested in Heath's work, I'd recommend 'The Efficient Society' over 'The Rebel Sell' - the 350 pages of Rebel Sell are pretty much covered off by chapter 11 of 'Efficient Society', plus there's a lot of more interesting stuff on ethics and economics packed in to 'Efficient Society' as well.

It's interesting that in 'The Efficient Society', Heath refers to Economics' 'PR problem' and then launches into a discussion of how his first Economics teacher was a 'right wing hack' - (my experience as well, and step one on my way to liking capitalism but hating right wing hack economists) - maybe he was just being polite in his answer to you :) The whole self-interest assumption (without the caveats that Adam allows above) really is a turnoff - I'm in the middle of Mancur Olson's 'Logic of Collective Action' and I have to keep tuning out my irritation at his constant assumption of 'rational' agents, even though Olson is very careful and precise in his usage of the term.

Heath is one of the few people, in my opinion, who has a decent understanding of, and respect for, economic and ethical arguments all across the left-right spectrum, which is what made 'The Efficient Society' such a worthwhile read for me - hopefully Filthy Lucre maintains the same high standard.

Hmm, just in case it's not clear from my comment, I wasn't suggesting that *you* were a right wing hack economist Nick.

Declan: It's alright, I didn't think you were ;).

But the thought did cross my mind though: economist-tick; right-wing-tick; hack- hmmmm, have to think about that one.

But oh dear, I do find it depressing. I've been teaching ECON1000 for many years, and enjoy it, and like to think I'm better than most. But then for every student I really turn on to economics, there's a second student who just wants the grade to go on in Business or whatever, a third student who just cannot think abstractly and will never get it, and I suspect a fourth student like Joseph Heath.

The key to having well defined utility is that prefrences satisfy the basic axioms (completeness, transitivity, etc). None of those axioms rules out a utility function that includes benefit to others, a sort of positive externality of benefits to me is your altruistic satisfaction.

I hope utility functions were one of the dragons slayed in this book.

Adam: You've gotten it backwards. There is no calculus or algebra of utility. Completeness, transitivity, etc are not meaningfully satisfied and the edifice of utility calculation is largely useless.

As regards the 'teaching of economics'; too much stuff that is taught is actually part of the history of economics, not a recitation of modern thought. This makes for millions who believe once vogue and now discredited ideas like utility functions.

Jon: what replaced utility functions? Or do we take Demand & Supply functions as primitives?

What other things do you have in mind that we teach in economics that are part of the history of economics and not part of modern thought?

(I would have thought we teach too little of the history of our thought. Few ideas are ever totally "discredited", in any discipline. There's usually some grain of truth. Even the Labour Theory of Value, which is an absolute total load of rubbish IMHO, should perhaps be taught, even if it's just to vaccinate the students against Poli Sci, where it's sometimes still taught as gospel.)

test

"As regards the 'teaching of economics'; too much stuff that is taught is actually part of the history of economics, not a recitation of modern thought."

I think that this is true of a lot of disciplines besides Economics. I took an Intro to Philosophy class that was notoriously bad (according to other profs at U of T) and totally turned me off of philosophy. It was taught by an 80+ senile theologian from St. Mike's who taught Thomas Aquinas not as a historical figure, but as a valid modern philosopher. We spent an entire year going over circular medieval proofs of God that no-one in their right mind has taken seriously in over 500 years. No utilitarianism, no Kant, no analytic philosophy, no Descartes, no ancients - 100% Christian theology. The most modern that we got was Levinas and (of course) the Russell-Copleston debate.

At the end of the year, my friend who was in the other section of Phl100 (who had a good prof and studied an actual survey of philosophy) said that, when asked for advice on choosing courses, their prof's only instruction was "Yeah, don't take anything taught by the guy who does the other section of this course". I wish I had known that when signing up.

Funnily enough, I had the exact opposite experience in first year philosophy (my first degree is BA philosophy). We just waded straight into doing philosophy, using the most recent books as texts, right from first year. It was great, and certainly intellectually stimulating. But I somehow missed ever taking a survey course, so finished the 4 years having only a very hazy map of the overall history of philosophy and where all the different approaches fit into that map.

Economics is a bit more cumulative than philosophy. Or "progressive" if you like, if you don't read into that the presumption that it's always going in the *right* direction. But a lot of interesting older historic byways, bypassed by the main channel, are worth exploring at times.

"The Efficient Society" is, I think, what solidified my interest in economics as a teen. Before then, my experience with economics was coloured by the politics of Mike Harris and a lot of the bad policy that came from that era. Most of those policies were claimed to have a basis in economics, and how the free market was the answer to everything, ignoring market failure. I'd consider myself centre-left, but generally friendly to the idea of using markets to achieve social goals. Thus, that book made it clear to me that economic arguments weren't all bullshit used to support a right-wing agenda. I guess it's about using markets where they make sense, rather than slavishly insisting that they be used for everything or that the mechanism itself is evil/wrong/unfair.

Utility can be used in the sense of ordinal preference. Otherwise, yes supply and demand is a primitive. If you are very careful you can use utility functions: again if you avoid composing them, etc, avoid making recursive aggregates.

In some sense supply and demand are utility functions, but people are plainly aware that you cannot linearly compose functions for different products--this is the very consequence of there being cross-elasticities.

I would have thought we teach too little of the history of our thought. Few ideas are ever totally "discredited", in any discipline.

I think history of thought classes are valuable, but should that be the subject of econ 101? I think you need to be deliberately clear about which is which. Econ 101 should explain why the labor theory of value is wrong, not present it free of judgment.

I once took a class that reviewed efforts to understand the motion of celestial bodies using geometry alone; it was fun and interesting, but I'm happy that my introductory physics class was based on Newtonian mechanics.

Jon says: "Utility can be used in the sense of ordinal preference. "

That, Jon, is the only sense in which I used it.

What Andrew F said.

In general I think economics main contribution is for informing policy decisions so that we actually achieve our goals. Unfortunately, the more I learn about economics the more it's becoming clear that policy makers have a level of understanding that was current circa 1937 - as evidenced by 'Keynesian' being used in the pejorative (why is it that we never hear 'Newtonian' used in the pejorative? After all he was wrong ... just a thought)

For example, of late I've often though that had policy makers and regulators taken 10 minutes to understand the gist of much of Joe Stiglitz work (and to be fair I only have a kindergarten level understanding), they may not have been so eager to apply the chainsaws to the regulatory framework, and we might have averted the train wreck that is the global economy in 2009. Maybe that's too simplistic ... I dunno. But it seems to me economics really did now better and really did predict the crisis. The real problem is that policy makers just weren't listening because it was an "inconvenient truth".

I would add two more point:

First, underlying utility functions are real people for whom life is not an abstract exercise. For example, the unemployment statistics represent real people experiencing real hardship, and in some places in the world unemployment doesn't just mean cutting back on dinners at the restaurant, it means cutting out meal altogether. I find it disturbing when people use economics (or pseudo-economics) to support mean spirited policies (like the Harris welfare reforms or just about all social programs in Alberta).

Also, I've noticed that business school finance people are often presented by the media as economic experts, and are very free with their opinions about economics and public policy (especially taxes, funnily enough), and they are almost invariably free market zealots.

I really think these people need to be ignored when it comes to setting public policy. What works in markets for highly liquid assets traded between sophisticated actors has little bearing on the realities faced by households and small businesses.

Count me in as a big fan of Joseph Heath. I'm happy to hear he has a new book and will get it post-haste. On the issue of self-interest and rationality generally, he has written a very interesting book, *Communicative Action and Rational Choice*, in which Habermasian ideas about rationality meet rational choice theory - oil and water, pre-Heath - and both benefit from the encounter.

arggghh

What Patrick & Andrew F said.

Especially this:

"For example, of late I've often though that had policy makers and regulators taken 10 minutes to understand the gist of much of Joe Stiglitz work (and to be fair I only have a kindergarten level understanding)..."

To me, Stiglitz is clearly the way forward for the left. I don't think that many people on the left realize the implications of Stiglitz' work, while those on the right & in mainstream economics who understand Stiglitz seem to just largely ignore his challenges, AFAIK. From what I can tell, Stiglitz has been systematically dismantling the microeconomic foundations of University of Chicago-style economics for the past 30 years but hasn't been very successful in popularizing his ideas.

This paper gives a good overview of his arguments against mainstream econ:

The Invisible Hand and Welfare Economics - NBER working paper
http://www.scribd.com/doc/12103054/Stiglitz-Invisible-Hand

This book is also good for lefties who are in search of solid economic foundations:

Whither Socialsim - Joseph E. Stiglitz

One more thing. On self-interest: yes you can put anything you want in the objective function, but you need "narrow" not tautologically broad self-interest to get lots of the results that are said to follow from rationality and competition, such as the First and Second Theorems of Welfare Economics. So it's somewhat disingenuous of those who tout these results to say at the same time that all you need are people seeking to satisfy whatever goals they have in the best way. I mean, hello interdependent preferences (for example), goodbye First Theorem.

bob,

110% agreed. I just can't say it stronly enough! Whither Socialism is a masterpiece.

Stiglitz's problem is he writes kind of like a dry boring academic, brilliant, but not huge on charisma.

Just skimmed the Stiglitz paper. Why doesn't he reference Lancaster/Lipsey on the second best? How is Lancaster/Lipsey different from Stiglitz arguing that equilibrium with (say) informational asymmetry is not constrained Pareto Efficient?

OK, there are reasons why a market doesn't work that Stiglitz knows that Lancaster/Lipsey didn't know when they wrote their 2nd best paper. But they are drawing the exact same implication: it's generally optimal to tax or subsidise some other good(s).

I just skimmed it as well. It's all very well to say that claim that a model is not literally true, but the proper response to that is "Duh!". Models are approximations and approximations are false by definition. The challenge is to come up with a better model. And I didn't see one there.

I've read "Whither Socialism", and he does the same thing there, too.

Stephen, Nick: The Stiglitz paper is beyond me, but if the abstract does say in the first sentence that the paper "reviews and puts into perspective ... ". Doesn't sound like he set out to present a better model, at least not in that paper. So maybe you're looking in the wrong place?

There's tons of stuff on his website.

http://www.josephstiglitz.com/

Well, no, he doesn't. Going from "I've shown that this model is not perfectly correct" to "therefore [insert conclusion here] " is a non sequitur. We know those models are not perfectly correct; that's why we call them models. If we thought that they were literally true, we'd call them "truths".

Stephen: sorry, I don't follow. Stiglitz doesn't what?

I'm a little surprised at the reaction to the mention of Stiglitz. I don't want to fall into the fallacy of appealing to authority, but the guy is really is awfully accomplished, and when I see him (and Paul Krugman too) talk he makes a lot of sense. I don't think I'm guilty of reading more into his work (to the extent I understand it) than is really there when I say that it seems to me that his contribution should really have put the nail in the coffin of the laissez-faire zealots.

So what's the problem? What am I not understanding?

Oh, I agree, and the Nobel is richly-deserved. But going after laissez-faire zealots is a pretty easy gig - as is going after anti-market zealots. Trained economists are aware that if the conditions for the First or Second Welfare Theorems aren't satisfied, then markets won't generate optimal results.

The question is "Then what?" Central planning is certainly not the answer; in "Whither Socialism", he makes it clear that the bad incentives faced by managers in a centrally-planned economy also yield bad outcomes.

Unfortunately, it isn't trained economists who dominate the public discourse on these topics. I don't think there is much danger of central planning becoming the dominant model, but I think there is a real strong push by lots of powerful well connected people to get back to the Gilded Age 2.0 as soon as possible. They can't wait to party like it's 2005 again.

My hope (naive though it may be) is that society will one day internalize a few simple facts about the functioning of markets so that when a clown like Sean Hannity or whoever the right wing shill is currently in the pages of the G&M get's on their soapbox and runs his or her mouth about transparency rules being the first steps on the road to serfdom, he or she will get laughed out of the room.


Yeah, what Patrick said.

Patrick: "I don't think there is much danger of central planning becoming the dominant model, but I think there is a real strong push by lots of powerful well connected people to get back to the Gilded Age 2.0 as soon as possible."

My fear is that there will be lots of ad hoc interventions in the market, motivated not by any economic reasoning, but by political expediency, and by wanting to transfer wealth to the politically-favoured in a highly visible but inefficient manner. And the "politically-favoured" (or powerful) might be groups we associate with "left-wing" causes as much as "right-wing" causes.

A case in point: the arbitrary confiscation of Chrysler bondholders' wealth and its transfer to UAW, on the grounds that the bondholders are not "economically active". This is economic illiteracy as well as moral turpitude.

Even more worrying, a world in which the rules of the game are not just economically inefficient (taking due allowance for redistribution in that definition of efficiency), but there are no rules of the game. The government just makes decisions as it goes along, like some corrupt third world kleptocracy, where everyone is in on the game.

1st choice: negative income tax with universality and market interventions only on good cost-benefit grounds.

2nd choice: Sweden.

Third choice: Zimbabwe.

Nick, I think we saying the same thing more or less. Simon Johnson has been making the point quite eloquently, I think. And I agree with him.

As a guy foolish enough to be working 20 hrs a day to start a new business in the middle of the worst recession in living memory, believe me I find the ad-hoc and politically motivated interventions in the economy to be infuriating.

I also know what it's like to have no money; when I was a kid my parents business was wiped out in the early '90s recession. The bank took the house, my dad went personally bankrupt and we had nothing. Zilch. There were days when there was no money for food. It's a spirit crushing experience, and I don't think my dad really ever recovered from it. So I care what happens to people. I care about smoothing over the worst of the rough patches. If that is economically inefficient, then I don't care. There's more at stake than economic efficiency.

On the car thing: FWIW I think the car makers should go into bankruptcy. There are ways to support the families who will suffer unemployment that won't unfairly advantage them over others suffering the same fate in other industries (e.g better retraining, EI etc...). In other words, I'd like to see investment in people rather than subsidies for a industry that has failed and needs to die.

Anyway, I veered off topic, but I guess my original point was simply that, in my view, economic theory and history supports the notion of leashing markets with rules and that the rules actually make the game fairer and more fun to play. That's it. It may not be a novel or revolutionary idea among trained economists, but it IS among a large number of politically important circles.

I would just add that the business failure I mentioned was precipitated by the bank calling the operating loan - despite the business being profitable at the time. They just wanted to reduce their credit exposure and my family got clobbered in the process. Not exactly economically efficient. If I remember correctly, the bank in question was later beat-up by parliament for capriciously pulling loans from small businesses in this period. As I see it, a few rules against banks acting capriciously (which they are apparently wont to do every 10 years or so) would have gone a long way.

Sorry to hear that Patrick. And i hope very much your current business succeeds.

It's very strange that contracts exist in equilibrium where lenders have the right to call their loan at any time, and yet borrowers invest in illiquid assets. It can only be because borrowers trust the lender will not exercise that right capriciously.


A banker like JHK would know better than me, but I think it is typical for small businesses loans to have terms under which a loan can be called or a credit line pulled/reduced. Say inventory is the collateral, and the bank is afraid the inventory is, for whatever reason, worth less than they once thought it was. Or they decide that you're more of a credit risk than you once we're (maybe because they pooched or skipped the initial assessment). They might get panicky and call the loan or snip the line of credit. Most small businesses are liquidity constrained anyway, and if they suddenly have to liquidate a bunch of inventory to reduce a credit line, they'll be in big trouble. Nothing to sell and no money to buy more product ... don't forget to turn out the lights on the way out ...

I tell you, running a small business is really a white knuckle ride.


Patrick: "Most small businesses are liquidity constrained anyway,..."

And more so now than ever, I suspect. Despite the apparent surfeit of cash.

We HAVE to understand this better. I'm building up a head of steam to write another post: "Loanable funds OR liquidity preference". Must wait till I get back from canoeing.

"It's very strange that contracts exist in equilibrium where lenders have the right to call their loan at any time, and yet borrowers invest in illiquid assets. It can only be because borrowers trust the lender will not exercise that right capriciously."

Actually, it's the basis of one of the oldest con games in the book - almost literally. I think it was Balzac who first identified the nefarious abuse of this dynamic, but it has been going on for hundreds of years. Caprice is a convenient excuse, but often it's a method of calculated predation carried out by the liquid against the liquidity constrained.

The concept is pretty simple: lend money when money is cheap and assets are expensive - ask for it all back when money is dear and assets are cheap - take the assets as payment at current market prices - rinse and repeat. It's an easy way to get rich if you start out in a liquid position, have a bit of patience, a good lawyer and no sense of ethics whatsoever.

"negative income tax with universality and market interventions only on good cost-benefit grounds."

Well I'm clearly on the record as being in favour of some sort of negative income tax like redistributive measure, I'm no so overwealmed by confidence in cost-benefit studies. As has been forcefully pointed by George Monbiot for instance, the costs and benefits include inbuilt distribution assumptions and it is very easy to steer the results one way or the other by controlling the scenarios that are considered or not considered. That doesn't mean, I don't think there is good policy and bad policy, it is just that I think C/B analyses should be treated with a good deal of healthy scepticism.

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