Archive for the 'economics' Category

How Little We Know: Big Gaps in Psychology and Economics

Thursday, May 22nd, 2014

Seth’s final paper “How Little We Know: Big Gaps in Psychology and Economics” is published in a special issue of the International Journal of Comparative Psychology (Vol 27, Issue 2, 2014). This issue is about behavioral variability and is dedicated to Seth. Abstract of the paper follows:

A rule about variability is reducing expectation of reward increases variation of the form of rewarded actions. This rule helps animals learn what to do at a food source, something that is rarely studied. Almost all instrumental learning experiments start later in the learning-how-to-forage process. They start after the animal has learned where to find food and how to find it. Because of the exclusions (no study of learning where, no study of learning how), we know almost nothing about these two sorts of learning. The study of himan learning by psychologists has a similar gap. Motivation to contact new material (curiousity) is not studied. Walking may increase curiosity, some evidence suggests. In economics, likewise, research is almost all about how people use economically valuable knowledge. The creation and spread of knowledge are rarely studied.

The family is grateful to Aaron Blaisdell Ph.D. who completed final edits to Seth’s final manuscript for publication.

Korean Bakery Opens in Berkeley

Tuesday, April 15th, 2014

After I wrote my recent post about Korean innovation, I noticed an example in downtown Berkeley. A few months ago, the Korean bakery Paris Baguette opened a branch in a good location (next to a BART station) that has seen two businesses — two different cafe chains — fail in the last 5 or 6 years. It seemed to be doing well. There were more customers than I’d ever seen with the previous business (Tully’s Coffee). Paris Baguette has about 20 American branches.

Jane Jacobs once called Berkeley a “pretentious suburb” but it is where Peet’s — the original of Starbucks — began and where Chez Panisse is. It had a farmer’s market and an emphasis on organic food long before the rest of America. (A new survey suggests the health benefit of organic food is small or zero.) If you could call a location an “early adopter” Berkeley would qualify, but that would be understating it. Via the Free Speech Movement and the whole notion of student protest, little Berkeley shaped an entire decade (the Sixties). But it seems to have been a long time, like half a century, since anything important started here. The Bay Area, however, remains enormously innovative (Google, Twitter, Intel, and so on).

 

Burnt Sugar Grapefruit: Give Thanks for South Korea

Sunday, April 13th, 2014

A Marginal Revolution commenter wrote:

South Korea being prosperous has had no benefit to me, yet I have borne the cost.

I say: Wait ten years. No country combines innovation and quality like South Korea. Samsung illustrates quality but the innovation is less clear. Here are examples. (more…)

Questions for Jeffrey Sachs

Monday, March 31st, 2014

On Econtalk, Russ Roberts recently interviewed Jeffrey Sachs, author of The End of Poverty and head of the Millennium Village Project (MVP). I enjoyed it but thought Roberts was too easy on Sachs. Here’s what I wished he had asked:

Your book, The End of Poverty — did you get anything wrong?

What mistakes have you made with MVP?

You say Nina Munk [author of The Idealist] chose a non-representative village. [Sachs said that Munk spent her time in the only village in "a war zone."] Did you tell her that? If not, why not?

Munk was on your side when she began reporting, but changed her mind. Why is that?

Why was the project set up in such a way that evaluation is difficult? Why not pick ten villages and randomly select five for treatment?

You say the MVP project is successful because people are copying it — but those people are government officials. Is it plausible they are copying it because they see it as a good way to make money for themselves or improve their career? You must know many worthless medical treatments have been widely copied. Is this your best evidence of success?

No doubt your employees have often told you what you wanted to hear rather than the truth. What’s an example? What have you done to get honest assessments of how things are going?

What did you learn from Nina Munk’s book?

Roberts says he didn’t ask Sachs certain questions because there wasn’t enough time.

Interview with Zeynep Ton, Author of The Good Jobs Strategy

Tuesday, February 18th, 2014

The Good Jobs Strategy by Zeynep Ton, published in January, argues that retailers should change low-level jobs in four ways:

  1. Offer fewer choices — fewer versions of each product.
  2. Standardize common tasks and empower employees to handle unusual situations.
  3. Cross-train employees so that each employee can do several jobs.
  4. Operate with slack, that is, hire more employees than seemingly necessary.

The brilliance of this book is that it addresses a major problem (bad jobs), includes substantial evidence and persuasive argument, is practical, and is exceedingly non-obvious (judging by how many retailers already follow her recommendations). Ton is an MIT business school professor whose area of expertise is operations.

I interviewed her by email. (more…)

More on Government as Useful Irritant: Why Are Economists Stupid About Innovation?

Friday, January 17th, 2014

Martin Feldman, a Harvard professor of economics and former advisor to President Reagan, is against a hike in the minimum wage. One of his arguments:

When low-skill labor becomes more expensive, employers have a greater incentive to mechanize or outsource their work.

He — like most economists — ignores the point that an increase in the minimum wage, by forcing employers to reexamine familiar practices, will increase innovation. (I have seen non-economists make this point.) (more…)

Rules of Innovation: Two Examples about Snowden and Greenwald

Tuesday, December 17th, 2013

In a recent post called “Government as useful irritant” I said five factors increase innovation: 1. Freedom. 2. Benefit. 3. Resources. 4. Pain. 5. Stability. The effect of government isn’t simple. It might freedom — to the extent the coercion outweighs the protection — and of course corrupt governments make it harder to benefit from your innovation. On the other hand, governments often provide resources, pain and stability. Several of the factors are contradictory — pain and stability, for example — which makes it hard to produce optimal conditions, at least without paying attention to what actually happens.

A article I read soon after that (“Snowden and Greenwald: The Men Who Leaked the Secrets”) had two relevant examples. One of my points was that increasing inequality reduces innovation bad because it means the people at the top get more and more comfortable, which reduces their desire to innovate. The more inequality, the more of the population falls into two categories: 1. Too poor to innovate (not enough resources). 2. Too comfortable to innovate (not enough pain).

Greenwald saw the value of pain:

After graduation, he accepted a job in the litigation department of Wachtell, Lipton, Rosen & Katz . . . “I could not thrive or even function in a controlling institution like that. There’s a huge dichotomy between people who grow up with alienation, which, for me, was invaluable, and people who grow up so completely privileged that it breeds this complacency and lack of desire to question or challenge or do anything significant.

Snowden had all five factors in large amounts. He had freedom because his bosses paid him little attention and, because of his IT talent, it was easy to get a job. He also had a lot of money. Obviously he had great resources, including IT talent, knowledge and access. He had pain because he was disgusted by NSA overreach and Obama’s failure to improve things. He had stability because he had a steady job. The money helped here, too. Because the revelations are so large, he benefits a lot, even if there is also a very big cost.

Assorted Links

Sunday, December 15th, 2013
  • Interview with sufferer from mercury amalgam fillings. Stephen Barrett, founder of Quackwatch, says mercury amalgam fillings are perfectly safe. For many people, this might be true. It is not always true.
  • “She was given a three to five year sentence.” One of the greatest wrist-slaps of all time. She deserves at least one year in jail per falsification, which would be several thousand years in jail.
  • Ron Unz, the minimum wage and social innovation
  • Dairy consumption and heart disease risk. “The majority of observational studies have failed to find an association between the intake of dairy products and increased risk of CVD, coronary heart disease, and stroke, regardless of milk fat levels.”
  • Tourism and mental illness. “A Canadian woman was denied entry to the United States last month because she had been hospitalized for depression in 2012. Ellen Richardson could not visit, she was told, unless she obtained “medical clearance” from one of three Toronto doctors approved by the Department of Homeland Security.” Horrifying.
  • Snorting baby shampoo to cure sinusitis. A good example of personal science. His understanding of biofilms led him to try baby shampoo. It is also interesting that he doesn’t try to strengthen his immune system to solve the problem or maybe he doesn’t know how to. A professional sinusitis researcher would never discover what he did, yet another example of how our healthcare system ignores cheap treatments.

Thanks to Allen Jackson and Phil Alexander.

Government as Useful Irritant and Rules of Innovation: What Libertarians and Other Economists Miss

Friday, December 6th, 2013

Hayek, Keynes, Milton Friedman and Paul Samuelson disagreed about many things but shared one important belief: Their ignorance about innovation didn’t matter. Countless economics textbooks, which say nothing of interest about innovation, agree with them: ignorance about innovation doesn’t matter. This belief freed Hayek et al. and textbook writers to make sweeping policy statements. Had they realized that innovation matters, not just productivity — and, especially, that innovation and productivity are sometimes at odds — it would have been far less clear what policies are best.  (more…)

Modern Cargo Cult Science: Evidence-Based Medicine, Science Fiction in China

Tuesday, November 19th, 2013

In a graduation speech, Richard Feynman called certain intellectual endeavors “cargo cult science,” meaning they had the trappings of science but not the substance. One thing he criticized was rat psychology. He was wrong about that. Sure, as Feynman complained, lots of rat psychology experiments have led nowhere, just as lots of books aren’t good. But you need to publish lots of bad books to support the infrastructure necessary to publish a few good ones. The same is true of rat psychology experiments. A few are very good. The bad make possible the good. Rat psychology experiments, especially those by Israel Ramirez and Anthony Sclafani, led me to a new theory of weight control, which led me to the Shangri-La Diet.

Cargo cult science does exist.  The most important modern example is evidence-based medicine. Notice how ritualistic it is and how little progress medicine has made since it became popular. An evidence-based medicine review of tonsillectomies failed to realize they were worse than voodoo. Voodoo, unlike a tonsillectomy, does not damage your immune system. The evidence-based medicine reviewers appeared not to know that tonsils are part of the immune system. Year after year, the Nobel Prize in Medicine or Physiology tells the world, between the lines of the press release, that once again medical researchers have failed to make progress on any major disease, as the prize is always given for work with little or no practical value. In the 1950s, the polio vaccine was progress; so was figuring out that smoking causes lung cancer (which didn’t get a Nobel Prize). There have been no comparable advances since then. Researchers at top medical schools remain profoundly unaware of what causes heart disease, most cancers, depression, bipolar disorder, obesity, diabetes and so on.

I came across cargo-cult thinking recently in a talk by Neil Gaiman:

I was in China in 2007, at the first party-approved science fiction and fantasy convention in Chinese history. And at one point I took a top official aside and asked him Why? SF had been disapproved of for a long time. What had changed?

It’s simple, he told me. The Chinese were brilliant at making things if other people brought them the plans. But they did not innovate and they did not invent. They did not imagine. So they sent a delegation to the US, to Apple, to Microsoft, to Google, and they asked the people there who were inventing the future about themselves. And they found that all of them had read science fiction when they were boys or girls.

I know about Chinese engineers at Microsoft and Google in Beijing. They want to leave the country. An American friend, who worked at Microsoft, was surprised by the unanimity of their desire to leave. I wasn’t surprised. Why innovate or invent if the government might seize your company? Which is the main point of Why Nations Fail. Allowing science fiction in China doesn’t change that.

Thanks to Claire Hsu.

Assorted Links

Wednesday, October 30th, 2013

“A Debt-Ceiling Breach Would be Very, Very, Very Bad”

Tuesday, October 1st, 2013

At the end of an article by Kevin Roose in New York about the effects of a debt-ceiling breach:

The bottom line: A debt-ceiling breach would be very, very, very bad.

Keep in mind that these are all hypothetical scenarios. Reality could be better, or much worse. The truth is that while we sort of know what a government shutdown would look like (since it’s happened in the past), we have no idea what chaos a debt-ceiling breach could bring. If, in a month, we reach the X Date, run out of money, and are stuck in political stalemate, we’ll be entering truly uncharted waters. And we’ll be dealing our already-fragile economy what could amount to a knockout blow.

This is an example of something common: Someone who has never correctly predicted anything (in this case, Roose) telling the rest of us what will happen with certainty. If Roose is repeating what experts told him, he should have said who, and their track record. Roose is far from the only person making scary predictions without any evidence he can do better than chance. Here is another example by Derek Thompson in The Atlantic.

The same thing happens with climate change, except that it is models, not people, making predictions. Models that have never predicted climate correctly — for example, none predicted the current pause in warming — are assumed to predict climate correctly. We are supposed to be really alarmed by their predictions. This makes no sense, but there it is. Hal Pashler and I wrote about this problem in psychology.

A third example is the 2008 financial crisis. People who failed to predict the crisis were put in charge of fixing it. By failing to predict the crisis, they showed they didn’t understand what caused it. It is transparently unwise to have your car fixed by someone who doesn’t understand how cars work, but that’s what happened. Only Nassim Taleb seems to have emphasized this. We expect scary predictions based on nothing from religious leaders — that’s where the word apocalypse comes from. From journalists and the experts they rely on, not so attractive.

I don’t know what will happen if there is a debt-ceiling breach. But at least I don’t claim to (“very very very bad”). And at least I am aware of a possibility that Roose (and presumably the experts he consulted) don’t seem to have thought of. A system is badly designed if a relatively-likely event (debt-ceiling breach) can cause disaster — as Roose claims. The apocalyptic possibilities give those in control of whether that event happens (e.g., Republican leaders in Congress) too much power — the power to scare credulous people. If there is a breach, we will find out what happens. If a poorly-built system falls down, it will be much easier to build a better one. Roose and other doom-sayers fail to see there are plausible arguments on both sides.

Myopia Increases Innovation

Monday, June 17th, 2013

Big public works projects inevitably cost far more than the original budget. I heard a talk about this a few years ago. The speaker gave many examples, including Boston’s Big Dig. His explanation was that these projects would not be approved if voters were told the truth. The German newspaper magazine Der Spiegel has just published an interview with several architects responsible for recent German projects with especially large discrepancies between what people were told at the beginning and the unfolding reality — Berlin’s new airport, for example. The article’s headline calls them “debacles”. One architect gives the same explanation as the speaker I heard: “The pure truth doesn’t get you far in this business. The opera house in Sydney would never have been approved if they had known how much it would cost from the start.”

I disagree. I see the same massive underestimation of time and effort in projects that I do and that my colleagues and friends do, projects we do for ourselves that require no one’s approval. I think something will take an hour. It takes five hours. Plainly the world is more complicated than our mental model of it, sure, but there is more to it than that. Someone did a survey of people in Maryland who had been in a car accident so bad they had had to go to the hospital. Within only a year, a large fraction of them (half?) had forgotten about it. When asked if within the last year they had had an accident so bad they were hospitalized, they said no. Apparently we forget difficulties, even extreme ones, really fast. If you forget difficulties, you will underestimate them.

If I had realized how difficult everything would be, I couldn’t have done any of it is one explanation, which I’ve heard attributed to Gregory Bateson. From Malcolm Gladwell’s excellent review in this week’s New Yorker of a biography of Albert Hirschman, the economist, I learned that Hirschman — had he realized that this was human nature — would have had a different evolutionary explanation: We underestimate difficulties because this way of thinking increases innovation. Debacle . . . or opportunity? Difficulty is the mother of invention. 

 

 

 

Assorted Links

Friday, March 1st, 2013
  • An Epidemic of Absence (book about allergies and autism)
  • Professor of medicine who studies medical error loses a leg due to medical error. “Despite calls to action by patient advocates and the adoption of safety programs, there is no sign that the numbers of errors, injuries and deaths [due to errors] have improved.” Nothing about consequences for the person who made the error that caused him to lose a leg.
  • Doubts about spending a huge amount of research money on a single project (brain mapping). Which has yet to produce even one useful result.
  • Cancer diagnosis innovation by somebody without a job (a 15-year-old)
  • Someone named Rob Rhinehart has greatly reduced the time and money he spends on food by drinking something he thinks contains all essential nutrients. Someone pointed out to him that he needs bacteria, which he doesn’t have. (No doubt several types of bacteria are best.) He doesn’t realize that Vitamin K has several forms. I suspect he’s getting too little omega-3. This reminds me of a man who greatly reduced how much he slept by sleeping 15 minutes every 3 hours. It didn’t work out well for him (his creativity vanished and he became bored and unhappy). In Rhinehart’s case, I can’t predict what will happen so it’s fascinating. When something goes wrong, however, I’ll be surprised if he can figure out what caused the problem.

Thanks to Amish Mukharji.

Rent-Seeking Experts

Friday, January 4th, 2013

Two thought-provoking paragraphs from Matt Ridley:

From ancient Egypt to modern North Korea, always and everywhere, economic planning and control have caused stagnation; from ancient Phoenicia to modern Vietnam, economic liberation has caused prosperity. In the 1960s, Sir John Cowperthwaite, the financial secretary of Hong Kong, refused all instruction from his LSE-schooled masters in London to plan, regulate and manage the economy of his poor and refugee-overwhelmed island. Set merchants free to do what merchants can, was his philosophy. Today Hong Kong has higher per capita income than Britain.

In July 1948 Ludwig Erhard, director of West Germany’s economic council, abolished food rationing and ended all price controls on his own initiative. General Lucius Clay, military governor of the US zone, called him and said: “My advisers tell me what you have done is a terrible mistake. What do you say to that?” Erhard replied: “Herr General, pay no attention to them! My advisers tell me the same thing.” The German economic miracle was born that day; Britain kept rationing for six more years.

This is standard libertarianism. I like the stories but I don’t agree with the interpretation. I don’t think it is “economic planning and control” that causes stagnation in these examples.  I believe  it is expertise — more precisely, rent-seeking experts who know too little and extract too much rent. There are libertarian experts, too. They too are capable of doing immense damage (e.g., Alan Greenspan), contradicting Ridley’s view that “economic liberation” always causes  prosperity. In both of Ridley’s examples, the experts give advice that empowers the experts. In the first example, Cowperthwaite is told by “LSE-schooled” economists to “plan, regulate and manage the economy.” All that planning, regulation and management require expertise, in particular expertise similar to that of the experts who advised it. Which you cannot buy — you have to rent it. You must pay the experts year after year after year to plan, regulate, and manage. Because the advice must empower the experts, there is  a strong bias away from truth. That is the fundamental problem. (more…)

Online Teaching Versus What?

Sunday, December 9th, 2012

Is online teaching (e.g., MOOC) a big deal? In an essay (“Why Online Education Works”), Alex Tabarrok argues for the value of online education (meaning online lectures) compared to traditional lectures. A friend told me yesterday that MOOC was “a frontier of pedagogy”. No doubt online lectures will make lecture classes cheaper and more available. Lots of things have gone from scarce/expensive to common/cheap. With things whose effects we understand (e.g., combs), the result is straightforward: more people benefit. With things whose effects we don’t understand, the results are less predictable. Did the spread of sugar help us? Hard to say. Did the spread of antibiotics help us? Hard to say.  It may have helped sustain simplistic ideas about what causes disease (e.g., “acne is caused by bacteria”, “ulcers are caused by bacteria”) reducing effective innovation. Do we have a good idea of the effects of lectures (or their lack of effect), or a good theory of college education? I don’t think so. Could their spread help sustain simplistic ideas about education? Maybe. (more…)

Who is the Richest Person in China?

Wednesday, December 5th, 2012

If you open the American edition of Forbes, you will find articles about the richest people in America. If you open the Russian edition, you will find articles about the richest people in Russia. If you open the Chinese edition, you will find articles about the richest people in America.

A Russian friend of mine noticed this. He happened to know an sophomore economics major at Tsinghua. It is incredibly difficult to get into Tsinghua and the economics major is the most desirable major of all. To be an economics major at Tsinghua you need a test score that is in something like the top 1 out of 100,000. Staggeringly high. My Russian friend asked the Tsinghua economics major, “Who is the richest person in China?”

The economics major didn’t know. He seemed a little angry. “Why should I know? We’ve never been taught that,” he said.

 

How Helpful Are New Drugs? Not So Clear

Friday, November 30th, 2012

Tyler Cowen links to a paper by Frank Lichtenberg, an economist at Columbia University, that tries to estimate the benefits of drug company innovation by estimating how much new drugs prolong life compared to older drugs. The paper compares people equated in a variety of ways except the “vintage” (date of approval) of the drugs they take. Does taking newer drugs increase life-span? is the question Lichtenberg wants to answer. He concludes they do. He says his findings “suggest that two-thirds of the 0.6-year increase in the life expectancy of elderly Americans during 1996-2003 was due to the increase in drug vintage” — that is, to newer drugs.

An obvious problem is that Lichtenberg has not controlled for health-consciousness. This is a standard epidemiological point. People who adopt Conventional Healthy Behavior X (e.g., eat less fat) are more likely to adopt Conventional Healthy Behavior Y (e.g., find a better doctor) than those who don’t. For example, a study found that people who drink a proper amount of wine eat more vegetables. Another reason for a correlation between conventionally-healthy practices is mild depression. People who are mildly depressed are less likely to do twenty different helpful things (including “eat healthy” and “find a better doctor”) than people who are not mildly depressed. (And mild depression seems to be common.) Perhaps doctors differ. (Lichtenberg concludes there are big differences.) Perhaps better doctors (a) prescribe more recent drugs and (b) do other things that benefit their patients. Lichtenberg does not discuss these possibilities.

A subtle problem with Lichtenberg’s conclusion that we benefit from drug company innovation is that drug-company-like thinking — the notion that health problems should be “solved” with drugs — interferes with a better way of thinking: the notion that to solve a health problem, we should find out what aspects of the environment cause it. I suppose this is why we have Schools of Public Health — because this way of thinking, advocated at schools of public health, is so incompatible with what is said and done at medical schools. Public health thinking has a clear and impressive track record — for example, the disappearance of infectious disease as a major source of death. There are plenty of other examples: the drop in lung cancer after it was discovered that smoking causes lung cancer, the drop in birth defects after it was discovered that folate deficiency causes birth defects. Thinking centered on drugs has done nothing so helpful. Spending enormous amounts of money to develop new drugs shifts resources away from more cost-effective research: about environmental causes and prevention. Someone should ask the directors of the Susan K. Komen Foundation: Why “race for the cure”? Wouldn’t spending the money on prevention research save more lives?

 

Assorted Links

Thursday, October 4th, 2012

Thanks to Rashad Mahmood.

Two Dimensions of Economic Growth: GDP and Useful Knowledge

Monday, October 1st, 2012

Ecologists understand the exploit/explore distinction. When an animal looks for food, it can either exploit (use previous knowledge of where food is) or explore (try to learn more about where food is). With ants, the difference is visible. Trail of ants to a food source: exploit. Solitary wandering ant: explore. With other animals, the difference is more subtle. You might think that when a rat presses a bar for food, that is pure exploitation. However, my colleagues and I found that when expectation of food was lower, there was more variation — more exploration — in how the rat pressed the bar. In a wide range of domains (genetics, business), less expectation of reward leads to more exploration.  In business, this is a common observation. For example, yesterday I read an article about the Washington Post that said its leaders failed to explore enough because they had a false sense of security provide by their Kaplan branch. “Thanks to Kaplan, the Post Company felt less pressure to make hard strategic choices—and less pressure to venture in new directions,” wrote Sarah Ellison.

Striking the right balance between exploitation and exploration is crucial. If an animal exploits too much, it will starve when its supply of food runs out. If it explores too much, it will starve right away. Every instance of collapse in Jared Diamond’s Collapse: How Socieities Choose to Fail or Succeed was plausibly due to too much exploitation, too little exploration (which Diamond, even though he is a biologist, fails to say). I’ve posted several times about my discovery that treadmill walking made studying Chinese more pleasant. I believe walking creates a thirst for dry knowledge. My evolutionary explanation is that this pushed prehistoric humans to explore more.

I have never heard an economist make this point: the need for proper balance between exploit and explore. (more…)