Increasing Marginal Utility

A blog so good it violates the law of diminishing marginal utility.

Browsing Catharsis – 05.28.15

Maverick: Talking with Dallas owner Mark Cuban about the playoffs, the Rockets rivalry, Rajon Rondo, Tim Donaghy, and his 15 outspoken, wild, and successful years in the NBA,” by Kirk Goldsberry.

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“We document that rules for leadership succession in ethnic societies that antedate the modern state predict contemporary political regimes; leadership selection by election in indigenous societies is associated with contemporary representative democracy. The basic association, however, is conditioned on the relative strength of the indigenous groups within a country; stronger groups seem to have been able to shape national regime trajectories, weaker groups do not. This finding extends and qualifies a substantive qualitative literature, which has found in local democratic institutions of medieval Europe a positive impulse towards the development of representative democracy. It shows that contemporary regimes are shaped not only by colonial history and European influence; indigenous history also matters. For practitioners, our findings suggest that external reformers’ capacity for regime-building should not be exaggerated.”

Jeanet Bentzen, Jacob Gerner Hariri, and James A. Robinson. 2015. “The Indigenous Roots of Representative Democracy.” NBER Working Paper no. 21193.

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Browsing Catharsis – 05.27.15

Where a Higher Minimum Wage Hurts the Poor,” by Charles Kenny.

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“After highly publicized lawsuits against McDonald’s in 2002, 26 states adopted Commonsense Consumption Acts (CCAs) – aka ‘Cheeseburger Bills’ – that greatly limit fast food companies’ liability for weight-related harms. We provide the first evidence of the effects of CCAs using plausibly exogenous variation in the timing of CCA adoption across states. In two-way fixed effects models, we find that CCAs significantly increased stated attempts to lose weight and consumption of fruits and vegetables among heavy individuals. We also find that CCAs significantly increased employment in fast food. Finally, we find that CCAs significantly increased the number of company-owned McDonald’s restaurants and decreased the number of franchise-owned McDonald’s restaurants in a state. Overall our results provide novel evidence supporting a key prediction of tort reform – that it should induce individuals to take more care – and show that industry-specific tort reforms can have meaningful effects on market outcomes.”

Christopher S. Carpenter and D. Sebastian Tello-Trillo. 2015. “Do ‘Cheeseburger Bills’ Work? Effects of Tort Reform for Fast Food.” NBER Working Paper no. 21170.

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Browsing Catharsis – 05.26.15

We Asked Brits To React To American Culture And They Totally Nailed It,” by Erin Chack and Logan Rhoades.

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“The typical analysis on the effectiveness of soda taxes relies on price elasticity estimates from static demand models, which ignores consumers’ inventory behaviors and their persistent tastes. This article provides estimates of the relevant price elasticities based on a dynamic demand model that better addresses potential intertemporal substitution and unobservable persistent heterogeneous tastes. It finds that static analyses overestimate the long-run own-price elasticity of regular soda by 60.8%, leading to overestimated consumption reduction of sugar-sweetened soft drinks by up to 57.9% in some cases. Results indicate that soda taxes will raise revenue but are unlikely to substantially impact soda consumption.”

Emily Yucai Wang. 2015. “The impact of soda taxes on consumer welfare: implications of storability and taste heterogeneity.” The RAND Journal of Economics 46, no. 2: 409-441.

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Economists and Utility

Following a discussion of interpersonal utility comparisons, a blogosphere debate has erupted (most recently with Robert Murphy – no relation – here) about the old cardinality-ordinality debate. My feelings are mixed. This is the type of topic for which a few years ago I would be eager to use this blog as a forum to be a gadfly. Today, less so. But still, a few points.

  1. Robert Murphy is 100% right regarding the “correct” theoretical interpretation of von Neumann and Morgenstern. What they showed is that under certain conditions, solving a problem with calculus would yield the same answer you would get with ordinal preferences. And I wholeheartedly agree that, regarding members of the profession, the more nuanced their understanding of microeconomic theory, the more careful they are about things like this.
  2. On the other hand, if we are to take microeconomists’ opinions seriously like that, then we should go full heel. As in, positivist. If that’s the case, then we could say that the ordinal and cardinal interpretations of utility are observationally equivalent, given Von Nuemann-Morgenstern. There’s no reason to privilege the cardinal over the ordinal interpretation. Restricting the functional forms of utility functions could then be interpreted as ensuring robustness regardless of which interpretation of utility is “true.”
  3. While Austrians may have “won” the debate of ordinality over cardinality within utility theory, for practical purposes this never seems to have mattered. I have always had the intuitive sense that utility maps into something like well-being, and if I was out of the mainstream for saying so, then welfare economics wouldn’t exist. That point is perhaps obvious. What is less obvious is that one kind of social welfare function is wealth maximization, which implicitly makes specific assumptions about interpersonal utility comparisons. You need those implicit assumptions to then do any public policy analysis at all. If you want to take a hard line on the importance of cardinality, then you simply cannot do, for example, an analysis of a tax swap. Also, if my definition of utility prevented me from doing an analysis of a tax swap, I would be significantly less interested in economics.
  4. Robert Murphy wrote,

    However, in Austrian economics, we don’t run into this problem because “marginal utility” does NOT mean “the change in total utility that comes from one more unit of the good.” Instead, in Austrian economics “marginal utility” means “the utility of the marginal unit.” To solve the so-called water-diamond paradox, we just need to realize that successive gallons of water are devoted to less and less important ends. The first gallon of water is used (let us suppose) to quench thirst, the second gallon for cooking, the third through 10th for bathing, and the 1000th gallon and subsequent ones are used for washing the car. The reason a gallon of water is so inexpensive, then, is that on the margin it is devoted to a relatively unimportant end; the marginal utility of the 1000th gallon is much lower than the marginal utility of the 1st gallon of water. This statement doesn’t imply cardinal units of utility, any more than saying “a bowl of vanilla ice cream gives Mary less marginal utility than a bowl of chocolate ice cream.”

    My question is, when he says “lower” or “less,” what are the units? In what context would we say “lower” or “less” where there are no cardinal units? We can wrap this back around to defining everything in terms of each other, so that “lower” just means the next position in the ordinal rank, but then why not just say that? The plain meaning of “x is lower” is that x is a quantum which in some cases can be more or less.

    Let’s say I had a list, which one person once chose to recite.
    1. tetherball
    2. Olympic race
    3. sparkling
    4. Tim Duncan
    5. Wisconsin
    6. a book of matches
    7. next week
    8. a lot of money

    Now this academic comes along with his theory of “homestars.” Marginal homestars are greater the higher up the list and lower the further down the list. “Homestars” don’t actually measure anything. The only thing we can say when we go from “a book of matches” to “next week” is that marginal homestars decreased. We can combine this list with other lists, and when we maximize the number of places we go down the list subject to the constraint of a given number of places on the list, we say we have maximized homestars.

    Doesn’t this feel a little bit empty? Isn’t this simply a bizarre way of addressing whatever question it is we seek to address? Above all, why is a homestar something there can be more or less of?

This is not intended to be trolling. I appreciate that ordinality is the correct interpretation according to essentially anyone who knows anything, but there is more here than meets the eye.

Browsing Catharsis – 05.25.15

A Plea for Culinary Modernism: The obsession with eating natural and artisanal is ahistorical. We should demand more high-quality industrial food,” by Rachel Laudan. This is a piece in… the Jacobin (?) about how the buy local / buy natural / etc. intelligentsia are Culinary Luddites. 4/4 stars.

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“The Fair Trade (FT) coffee initiative attempts to channel charity from consumers to poor producers via increased prices. We show that the rules of the FT system permit this rent to be eliminated due to free entry and costly excess certification of output. Using data from an association of coffee cooperatives in Central America, we verify that expected producer benefits are close to 0 when we take into account the output that is certified but not sold as FT. Our results illustrate how free entry undermines the attempt at extending charity via a price distortion in an otherwise competitive market.”

Alain de Janvry, Craig McIntosh, and Elisabeth Sadoulet. 2015. “Fair Trade and Free Entry: Can a Disequilibrium Market Serve as a Development Tool?” The Review of Economics and Statistics. 

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Browsing Catharsis – 05.24.15

Who Wants Thick Democracy?” by Robin Hanson.

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“A lack of political diversity in psychology is said to lead to a number of pernicious outcomes, including biased research and active discrimination against conservatives. The authors surveyed a large number (combined N = 800) of social and personality psychologists and discovered several interesting facts. First, although only 6% described themselves as conservative ‘overall,’ there was more diversity of political opinion on economic issues and foreign policy. Second, respondents significantly underestimated the proportion of conservatives among their colleagues. Third, conservatives fear negative consequences of revealing their political beliefs to their colleagues. Finally, conservatives are right to do so: In decisions ranging from paper reviews to hiring, many social and personality psychologists said that they would discriminate against openly conservative colleagues. The more liberal respondents were, the more they said they would discriminate.”

Yoel Inbar and Joris Lammers. 2012. “Political Diversity in Social and Personality Psychology.” Perspectives on Psychological Science 7: 496-503.

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Browsing Catharsis – 05.23.15

Know Your Baseball Tropes,” by John Sickels.

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HT Rick.

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“Since Aristotle, a vast literature has suggested that economic inequality has important political consequences. Higher inequality is thought to increase demand for government income redistribution in democracies and to discourage democratization and promote class conflict and revolution in dictatorships. Most such arguments crucially assume that ordinary people know how high inequality is, how it has been changing, and where they fit in the income distribution. Using a variety of large, cross-national surveys, we show that, in recent years, ordinary people have had little idea about such things. What they think they know is often wrong. Widespread ignorance and misperceptions of inequality emerge robustly, regardless of the data source, operationalization, and method of measurement. Moreover, we show that the perceived level of inequality—and not the actual level—correlates strongly with demand for redistribution and reported conflict between rich and poor. We suggest that most theories about political effects of inequality need to be either abandoned or reframed as theories about the effects of perceived inequality.”

Vladimir Gimpelson, Daniel Treisman. 2015. “Misperceiving Inequality.” NBER Working Paper no. 21174.

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Browsing Catharsis – 05.22.15

The Black Swan Theory of Drafting Pitchers,” by Kiley McDaniel.

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“This study addresses the central question in political economy how the objectives of attaining economic growth and restricting income inequality are related. Thus far few studies explicitly distinguish between effects of income inequality as such and effects of redistributing public interventions to equalize incomes on economic growth. In fact, most studies rely on data that do not make this distinction properly and in which top-coding is applied so that enrichment at the top end of the distribution is not adequately captured. This study aims to contribute using a pooled time-series cross-section design covering 29 countries, using OECD, LIS, and World Top Income data. No robust association between inequality and growth or redistribution and growth is found. Yet there are signs for a positive association between top incomes and growth, although the coefficient is small and a causal interpretation does not seem to be warranted.”

Stefan Thewissen. 2014. “Is it the income distribution or redistribution that affects growth?” Socio-Economic Review 12, no. 3: 545-571.

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U.S. Cities, Ranked

Last summer, I created an index ranking large U.S. cities (population 250,000+), somewhat on a whim, but somewhat with the intention of making it something serious. After sitting on it all this time, I want to release it on my blog after having updated a few variables. I will be interested in doing something beyond self-publishing in the future, but for now I just want to share it.

The idea is overall livability, but with a very minor libertarian spin. A common trope is that government intervention may be undesirable, but it is necessary to provide public goods or economic growth or certain amenities beneficial for well-being. What I did was to construct an index ranking cities where there are no such tradeoffs, places where you have public goods provided, vibrant economies, desirable amenities, but also small government. Each of those four – public goods, economy, amenities, and policy – are equally weighted in the index.

To this end, I took the philosophy that I would only measure outcomes. If a city has low pollution but not much in the way of green public transportation, it still gets credit for low pollution. If the city doesn’t have a strong reputation for public schools, but still ends up with a lot of college educated people, it still gets credit for having a lot of college educated people.

One strange thing that happened, which I promise was not my intention, was that my hometown of Boston ended up as number 1. The two policy indexes I use rate Massachusetts and Boston each as having average policy, while Boston rates well in the other three components of the index. That’s enough to beat the others.

The top 10 cities are,

  1. Boston, MA
  2. Denver, CO
  3. Portland, OR
  4. Nashville, TN
  5. Raleigh, NC
  6. Aurora, CO
  7. Houston, TX
  8. Tampa, FL
  9. Lincoln, NE
  10. Seattle, WA

A pdf of the top 20 with a little more detail can be found here.

The bottom ten cities are (where “1” is the worst),

  1. Stockton, CA
  2. Riverside, CA
  3. Fresno, CA
  4. Bakersfield, CA
  5. Long Beach, CA
  6. Anaheim, CA
  7. Santa Ana, CA
  8. Sacramento, CA
  9. Buffalo, NY
  10. Detroit, MI

That’s a lot of California, but it is possible for California cities to do well in the index. San Francisco, for all its problems, still ranks as 21/79, and San Jose ranks 28/79.

Each component of the index (raw data not given) are scaled 0-10 such that 10 is “good.” The detailed ratings in spreadsheet form can be found here. For something complete that’s easier on the eyes, download this pdf.

Now I will go through and explain what is actually in the index, in useful but not excruciating detail.

AMENITIES

“Weather” is broken into three subcomponents, the average January low, average yearly snowfall, and the average July Heat Index (the high adjusted for humidity). The weights are one each for January low and snowfall, and two for the heat index.

Proximity to Water. 10 if on the ocean, 5 if a brief drive to the ocean, 2.5 if major freshwater (like the Great Lakes) is nearby, otherwise 0.

Globalization. Derived from GaWC 2012. This is meant to give cities credit for scale. It also implicitly gives extra credit for centers of metropolises (e.g. San Francisco, New York City, Dallas) for standing out amongst its large suburb cities (e.g. Oakland, Jersey City, Arlington).

Airports. Ten if in the metro area there is a large hub, 6.67 if a medium hub, 3.33 if an international airport, otherwise 0. See here for definition.

Sports. I created an ad hoc sub-index based on the presence of the NFL, MLB, NBA, NHL, top attended College Football, College Basketball, Women’s College Basketball, and College Hockey, NASCAR, MLS, WNBA, and AAA baseball. Each of these were given somewhat arbitrary weights.

Arts. Number of Arts & Entertainment establishments per capita, according to census.

Food. Number of Restaurants & Hospitality establishments per capita, according to census.

POLICY

State level policy. The Mercatus Freedom in the 50 States index.

Local Policy. The local component of Stansel 2013.

PUBLIC GOODS

Pollution. The prevalence of PM-10.

Traffic. Average commuting time to work, according to census.

Education. Percentage of the population with Bachelor’s degrees, according to census.

ECONOMY

Cost of Living.

Cost of Living-Adjusted Income per capita (both were included because they capture different things)

5 year per capita real growth rate.

The unemployment rate.

Some of these variables gave surprising results, especially for the food and arts variables, although in the extremes they appear to be correctly measuring what I was trying to measure. The one variable I could not find was something for scenic beauty, which perhaps makes the middle of the country a little overrated and California and Denver underrated. But to my knowledge workable data for that simply does not exist and I could not ad hoc something as I did with proximity to water.

Comments welcome.

Browsing Catharsis – 05.21.15

Paul Romer’s Case for Ad Hominem,” by Arnold Kling.

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George Selgin guest edits the April 2015 issue of Journal of Financial Stability.

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