Wednesday 27 January 2010

Keynes, Hayek, Booms and Busts

This morning a friend of mine sent me this link:

http://www.youtube.com/watch?v=d0nERTFo-Sk


It's a video. A rap music video. With economic theory in it! Keynes and Hayek return to life to attend the "World Economic Summit". Keynes suggests that he and Hayek go out for a night on the town, during which they each outline their theory of booms and busts, all in the company of pretty ladies and ample amounts of alcohol (and a barman who is eager to serve).

It was a good start to my day. The video is really well done, and there are so many well thought-of details; even the barman serving the shots looks a bit like Bernanke (and his name is Ben)! Kudos to John Papola and Russ Roberts, and to the main actors, Billy Scafuri (John Maynard Keynes) and Adam Lustick (F. A. Hayek).

If you like their project, go to their website at http://www.econstories.tv to read more about the project and those behind it, and to donate for what's coming next. May there be lots more!!

Monday 25 January 2010

On why killing three billion people may not be such a bad idea

During a recent coffee conversation, members of the faculty were discussing on the difficulties of establishing Pareto optimality in situations with an infinite horizon. In cases like those, it is complex to ascertain what schedule of taxes and transfers from one generation to another can make all generations better off. At some point the conversation arrived at an extreme example: Suppose we kill half the population of the planet, that is, three billion people. That will ensure that global warming will not take place, that valuable resources will remain unexploited and that pollution will not ruin the environment forever. That is, the potential gains for future generations from an exercise like that are huge. The next step would be to compensate the three billion people we are about to kill in order to ensure a Pareto improvement. We could throw them a party wild and big enough to leave them indifferent between dying just after it ends or continue living. That is reminiscent of that old sci-fi film called Logan’s Run (in the photo) in which people in a dystopian society were “renewed” when they turned 30 in the middle of a ceremony with great celebration and joy. The incredible welfare gains derived from having half the population of the planet exterminated should be enough to compensate those who are killed and that would ensure Pareto optimality. There is however an obvious problem with this scheme: Those gains will take place in the future. Only after the three billion people are dead the rivers and the air will become clean, the level of the sea will stop threatening millions of people living in the coast and humans will avoid extinction. Unfortunately, those large welfare gains cannot be transferred from the future.

At this point you may be horrified. Morally, the idea of killing half of the Earth’s population seems repulsive at first glance. But what if it ensures the survival of the human race? Let’s put in a different way. Suppose now that people care about the welfare of their children and of their grandchildren. In that case, the transfer necessary to leave them indifferent between dying or not (the size of the party) may not be that big if by leaving things as they are their descendants will face extinction or, even worse, a miserable life. Maybe, just maybe, the total amount needed to compensate those three billion people is not that big and it can be generated by the current generation...

... This is what happens when you take economic reasoning to its last consequences.

Monday 18 January 2010

Are economists cheapskates?

Happy new year to everybody!

Economists are widely regarded as heartless bastards. It is assumed that we only care about money and profits and that we disregard ethics and morals. That, as with all clichés, contains a small element of truth. Surveys and experiments have shown that it is not that economists are bad people, it is just that they care more about efficiency. Given that, as you should know, efficiency and equity are frequently in conflict with each other, economists may look stingy and cold. Economic training is to "blame" for this. Economics students learn concepts like opportunity cost or learn to think strategically by studying game theory. When taken seriously and when applied to everyday life, these ideas can make a person behave in apparently bizarre and cheap ways.

This is the topic of this very nice article, kindly contributed by our student Ankita Patnaik. It is a comprehensive overview of the reasons behind our apparent coldness. To some extent it is true that we are less averse to put a price to things like time. But on the other hand, as we have argued elsewhere in this blog, being a "bastard", that is, caring about efficiency and being realistic about people's motivations can often be the best way to improve their welfare and make the world a better place.

A final question for you students: Do you feel that your "dark side" is growing as as your economic studies progress?