Sunday, January 30, 2005

Ask Dr. Economist

by Tom Bozzo

At JFW, sociologist-proprietor Jeremy recently picked on the title of an economics paper presented last week in the UW economics department's labor economics workshop for not being "so much about 'economy.'" The paper's mouthful of a title:
Understanding Schooling: Using Observed Choices to Infer Agent's Information in a Dynamic Model of Schooling Choice when Consumption Allocation is Subject to Borrowing Constraints
indeed shows little economy of language in its 24 words, and further manages to convey almost no useful information about the contents. Though I have to say "consumption allocation subject to borrowing constraints" does at least sound amply like (micro)economics to me.

After locating and reading the first few pages of the paper, which is the job talk paper for a Chicago Ph.D. candidate who is a student of James Heckman, 2000 economics Nobel co-laureate,* I noted in JFW comments a feature of the paper's economic model — a constraint that agents cannot die in debt — that sparked just the sort of high-minded exchange the blogiverse is known for. Jeremy asks,
Tom B.: Something I've always wondered: When an economist reads that a person has "died penniless", do they think this is sad like most other people do, or is their first reaction: "Cool. So optimal."

Jeremy: With an elephantine Chicago-school economics target in the crosshairs, I can't tell you how much I'd like to say yes. You might be able to get that answer out of Donald Luskin. But economic "theory" says that it's only optimal to die penniless (in the absence of a bequest motive, etc.) if an agent has perfect foreknowledge of the agent's own death.** This is in part why more-or-less rational people will convert wealth into annuities (foregoing up some of the wealth in the process), and why programs such as Social Security are popular, given the alternative of running out of money and having to eat cat food or worse.

So an economist would consider it a shame that the person made a poor choice ex post.

Note: unlike Dr. Science, I have a Ph.D. … in economics.

* The other 2000 economics laureate, Daniel McFadden, may be known to quantitative sociologists via McFadden's conditional logit model.

** A corollary is that if God is dead but was omniscient, then God died penniless.
But, Tom, wouldn't an economist assume that a person had perfect knowledge of the time of his own death? It'd make the math so much easier!
Economists are more audacious than that. If we really need to simplify the math, we just assume immortality.

I see that Salvador Navarro's model assumes (mainly for the sake of its credit constraint?) that its agents live exactly T+1 periods, but that looks relatively innocent given that he's looking mainly at beginning-of-agent-life choices.
One more thing, you need uncertainty to model key aspects of late-life consumption choice, such as the willingness of younger investors to place bets on one's longevity.
Dear Sir or Madam,

I recently was having a conversation with a friend of mine and he commented to me about OPEC and inflation. He is somewhat of an economics buff and I would like to respond to him in a somewhat informed manner. The statement was:

In the long run, OPEC (or any other foreign organization) is incapable of causing inflation in the U.S."

What is the economic justification for this view.

I am trying to gather opinions and points of view. Could you offer any on this matter.

Thank you
I have read a number of books written by economist of law Richard A. Posner. The word utility is used often, for instance, we make choices based on their utility, that kind of thing, but I'm not quoting Posner there, that is rather my impression of what he is saying.

When psychologists talk of people's motivations, it frequently reminds me of the utility Posner references in his books. Last week, I asked the psychologists (in our Math and Cognition seminar): what is the relationship between what they are calling decisions of psychology and the utility discussed by economist Posner? They basically answered that utility is abstract. The psychology part is what we choose here and now independent of the abstract utility of the choice.

Further, one of the psychologists later said how much he enjoyed my comments about Posner and utilitarianism. Well, I never talked about utilitarianism, and here is my second, more important question: when economists speak of utility, that is not synonymous with utilitarianism, is it? Can't utility be looked at from the vantage point of many philosophical positions?

This identity thing, not sure what that is, so I'll choose "Other".
Gayla, if you check back, a mostly responsive post is here.
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