Everyday Economics: Bioshock Edition

On my recent trek between Virginia and Massachusetts (and back), I listened to an audio version of the book Bioshock: Rapture by John Shirley (If you’re looking for something light to take your mind off of things, this is a good book).  The book details the rise and fall of Rapture, a massive underwater city built by Andrew Ryan (a not so subtle jab at Ayn Rand) to escape the “parasitic” governments of the world and build a society dedicated to freedom and free markets.  While the initial goal of Rapture may have been freedom and free markets, as the novel (and the video game that the novel is based on) details, Rapture becomes a totalitarian police state with an extremely wealthy (and often sadistic) upper class, and extremely poor low class, and no one in between.  Some see Bioshock as a refutation of Randian philosophy, however, I will not address that here as I am no expert in Ayn Rand (for an excellent discussion, see The Value of Art in Bioshock: Ayn Rand, Emotion, and Choice by Jason Rose).  I’ll leave that to people far smarter than I.  Rather, I want to address the economic situation of Rapture and discuss, briefly, how that contributed to the downfall.

A few quick disclaimers before I begin:

  1. As far as I know, Bioshock: Rapture is not canonical.  However, it is the only detailed source I can find thus far on the days of Rapture that take place before the video game (which is canon) so I will operate on the assumption that my source material is canonical knowing full well everything I write here could become completely worthless insofar as discussing canonical information (the lessons gleaned from this book are still important, however).
  2. Nothing in this essay should be taken as implying the rise or fall of Rapture is purely economic.  There are many other factors involved (social, political, medical, psychological, etc).  I skip or gloss over these not because I think they are unimportant (quite the opposite, really), but because I simply lack the expertise to discuss them with any confidence.
  3. I will be avoiding using direct quotes in this version of this essay.  The reason for this is simple: I have the audio book, not the book itself.  I can’t easily do verbatim quotes and attribute them to proper pages for citations.  Therefore, the reader should be aware that I am doing this partly out of memory (although I did scribble some notes) and further the reader should assume that whenever I describe what’s happening in Rapture, that is a reference to the work of Mr. Shirley.  The only original material will be my analysis.  Any inaccuracies, either to details or analysis, belong to me and me alone.

The short version of what follows: Rapture cannot be classified in any meaningful sense as a “free market.” It suffers from several deficiencies that prevent us from labeling Rapture as a free market: lack of property rights, lack of free trade (autarky), lack of labor mobility (autarky in the labor market), rejection of altruism, widespread and institutionalized fraud (this issue is speculative based off of interviews with characters within the book but not substantiated by details), and censorship (indirect at first, but more direct later).  In Andrew Ryan’s Rapture, “free market” and “laissez-faire” were not much more than dishonored buzzwords.  It can best be described, in the words of James Buchanan, as “moral anarchy,” (see Moral Science and Moral Order, especially page 190 and Limits of Liberty, especially Chapter 7).  These factors, coupled with other psychological, social, and other factors, lead to the decline, civil war, and eventual fall of Rapture.  Continue reading

A Non-Technical Guide to Econometrics

Chris Auld has an excellent piece on his blog regarding interpreting the “competing” Seattle minimum wage studies from the University of Washington and UC Berkeley.  It’s long, but very much worth the read.  In fact, it’s probably the best short introduction to statistics/econometrics I think I’ve read (another great one is Chapter 1 of Robert Abelson’s Statistics as a Principled Argument.  I’m also a big fan of Angrist & Pischke’s Mastering ‘Metrics).

Allow me to highlight two items in particular from this blog:

There is no statistical magic which can fully overcome these fundamental [causal] problems.  We will never be able to “prove” what the effect of the minimum wage was: that’s not the way statistics work in general, and in a case study like `what was the effect of the 2015 increase in minimum wages on employment in Seattle?’ the best we can hope for is to bring some suggestive evidence to the table. [Emphasis added]

 

In other words, what they Berkeley team means when they report “no effect” on employment is not that there is no effect on employment (yes, that is confusing).  What they mean, again, is that there is no statistically significant effect on employment, whereas the UW team, using different data and somewhat different statistical methods, finds a statistically significant effect.  But the difference between statistically significant and statistically insignificant is often itself not statistically significant.

One team found there were no statistically significant effects on employment, but that result should not be misunderstood as a claim that the study “proves” the effect was actually zero… [original emphasis]

Any additional commentary I add here will only detract.  Read Dr. Auld’s post.  It’s excellent stuff.

H/T: Michael Enz

The Subtle Cruelty of Efficiency Wages

One of the more sophisticated arguments for minimum wage stems from the Efficiency Wages Hypothesis (EWH).  The EWH asserts that firms will sometimes pay higher-than-market wages for their workers.  These wages reduce turnover and increase productivity, making the wages more viable for the firms.  However, it is important to note that with EWH, there is still unemployment in the industry: higher-than-equilibrium wages reduce quantity demanded and increase quantity supplied from the equilibrium point, creating a surplus of labor (unemployment).

Minimum wage activists will cite the EWH for reasons for the minimum wage, claiming the reduced turnover and increased productivity is a positive for the firms.  That much is true.  But how does the EWH increase productivity and reduce turnover?  Workers may be feeling better with a higher wage, so they’ll naturally work harder.  That’s possible.  But the real reason is the cost of losing the job is now higher.  With persistent unemployment in the industry, the threat of firing forces workers to work harder in order to keep their jobs (thus increasing productivity).  Turnover is reduced not out of some sense of loyalty to the firm now paying higher wages but because there are fewer jobs available and they are being competed for by more workers!  

In short, an Efficiency Wage (especially if legally mandated like the minimum wage) gives employers more power over workers; it reduces worker bargaining power and reduces worker ability to leave if conditions are unfavorable to them.

The minimum wage is a very cruel policy.  The minimum wage as an efficiency wage is even more so.

Ruminations on Equal Pay Day

Today is Equal Pay Day, which means two things are certain: 1) some groups will be arguing that the pay gap is very real and must be addressed and 2) some groups will be arguing the pay gap is a myth and should be dismissed.  Both groups are simultaneously right and wrong.  It is true that, adjusting for various economic factors, much of the pay gap goes away (Group 2 is correct).  However, it is also true that there is some gap that remains which could be due to discrimination (Group 1 is correct).

But economics is limited in this story.  We can provide economic explanations, but there are other factors that other fields could provide insight into as well.  For example, why is it that there is an unadjusted 80-cent gap to begin with?  Are women encouraged to avoid the higher-paying fields?  Sociology could help answer that.  Are women just worse negotiators then men?  Psychology could help answer that.  Are the biological differences that could account?  Biology could help answer that.  Is there legislation that encourages discriminatory hiring practices?  Legal studies can help answer that.  These various disciplines could provide valuable insights.

A mistake I think many economists make (myself included) is sometimes thinking the economic way of thinking is the only way of thinking.  It is powerful, to be sure, but it is not alone.  We can help provide some answers (like on the pay gap) but not all the answers (nor should we.  Division of labor).

My two cents on the pay gap: Is discrimination an explanation for the difference between men’s and women’s pay?  It’s probable; the size of the effect is difficult to know.  Unlikely responsible for a large portion.  Is government the solution?  Possibly.  If the issue is poor incentives from legislation, then government would have to repeal such legislation.  If there are other causes, governmental interference would likely cause more harm than good.

I think the pay gap deserves more thought than many economists are willing to give it, and it especially deserves thought from the sociologists and legal scholars (my gut feeling is that is where we will find much of the gap explained).

Throwing Out the Baby With the Bath Water

At Cafe Hayek, Don Boudreaux highlights a new paper by Jonathan Rothwell challenging the findings of David Autor et al that trade with China is harming American workers.  The abstract of the paper sounds interesting, but I want to focus on one point in particular (Emphasis mine):

At the community level, Autor, Dorn and Hanson (2013) find that local areas have experienced slower job and wage growth and higher unemployment because of import competition with China. Upon analyzing their data, I conclude that their results are biased by the weaker macroeconomic performance of 2000-2007 relative to the 1990s. When I analyze inter-local area economic changes — rather analyzing changes within and across areas — I fail to reject the null hypotheses that import competition has no effect on wage or employment growth, except within the manufacturing sector during the most recent period, or that it has no effect on many other outcomes, including labor force participation, intergenerational mobility, and mortality.

There’s an interesting lesson to be learned here, beyond just what Rothwell finds:

Findings can depend on how one slices the data. To wit, Autor et al find significant negative effects when the data is within or across areas and Rothwell finds significant positive effects when the data is inter-local area. We see the same in minimum wage (time series vs panel data, etc).

Any statistician can tell you that regression models can change depending on how you cut and categorize the data: different “n” can give different outcomes, different controls and dummies can give different signs, etc. We try for robustness, but it is still at the end of the day a model.

Of course, none of this is to disparage the work of Autor et al or Rothwell, or even econometrics in general (an important field, if used correctly). But we need to fully understand its limitations and our own assumptions, and be very careful before tossing out theory.

Gordon Tullock, in his 1967 paper in the Western Economic Journal, demonstrates exactly this.  Tullock begins with a conversation regarding welfare costs from monopolies and tariffs, citing recent research that finds these welfare losses are pretty minimal.  In fact, they’re so small that Tullock finds:

Judging from conversations with graduate students, a number of younger economists are in fact drawing the conclusion that tariffs and monopolies are not of much importance.  This view is now beginning to appear in the literature.

Does this mean our theory about trade and tariffs are wrong?  Does this mean tariffs can be helpful, or at least not substantially harmful?  Does this mean microeconomists spend too much time focusing on tariffs at the expense of other topics?  Or is it a measurement issue and the theory is fine?  Tullock explores this issue and finds it is a measurement issue, not a theoretical issue.  In other words, our tools not theory were incomplete.  Tullock explains in the article the need to factor in lobbying costs which do not show up in the standard welfare analysis but are nonetheless substantial (read the article for yourself to see his argument.  It’s short, 9 pages, and not technical at all).

Had Tullock not looked beyond the initial challenge to trade theory, had he (and other economists) just thrown off the theory based upon the small welfare losses, the world would be a far worse place.  As it is, his (and Jim Buchanan’s) explorations eventually lead to the field of Public Choice and provided us with a cleaner understanding on the theory of trade, tariffs, monopolies, politics, and the costs associated therefrom.

The story of Gordon Tullock in the 1960’s is why anyone should be weary of claims that theory of any kind is “mistaken” or “proven wrong” by this or that study.  We see this all the time with minimum wage.  The good economist (or scientist) will ask the question, as Tullock (and Mundell) did back in the 60’s: Is the theory invalid, or our tools?  It may be the theory is (such as with the case of geo-centrism) or our measurement tools are lacking.  In fact, we see this with regards to minimum wage: measurable job losses may be minimal, but there are many other margins firms adjust along, not all of whom are measured.  It would be mistaken to toss out the theory.

Economics is still a young science.  I suspect, as has already happened, some of our theories will be tossed out as we gain more insight and knowledge.  But we musn’t be too hasty in doing so (especially when there is political pressure to do so), lest we sacrifice knowledge for convenience and insight for what my professor Thomas Startmann calls “naive analysis.”

An Economist’s Dream

It’s not often one gets so many economic fallacies contained in one area, but this article in Bloomberg is one of those rare instances where we do.  Rather than quote relevant areas, I’ll just let you read through it; it’s short but contains many mistakes.

There are several econ 101 problems the author makes this article:

1) the first two charts are meaningless. Looking at total unemployment and total wages and not minimum wage unemployment and wages, obscures the truth. For example, if a minimum wage worker was laid off but two new CEOs were hired, then the unemployment rate would fall and real wages would rise. The cost of the minimum wage would be hidden by the hiring of the CEOs.

2) The final graph is the clincher: the minimum wage, at $11 is well below what the workers were already making! According to the graph, they’ve earned well above that for at least a decade! Since the minimum wage was set below the market rate, then it wasn’t “binding”, which means it wouldn’t have had an effect because workers were already earning more!

3) Assuming away my first two points, there is still nothing conclusive. Laying workers off is just one of the margins employers can adjust to a minimum wage hike, and it’s one done more in the long term than the short term (see work by David Neumark). In the short run, which this change represents, employers are more likely to adjust by cutting hours, benefits, or supplementing with capital equipment (to the extent they can). There are many margins they can adjust along. To look only at unemployment (and especially so in such a flawed manner such as this) is mistaken.

4) My final point is one must remember to look for the “unseen” job losses. These are hard to measure but still very real. Let’s say, for example, a business owner was going to expand her store, and to do so needed 4 extra workers. The hike goes into effect. It is now cheaper for her to hire 3 workers and have one machine to augment them (prior to the hike, the relative cost of the machine was too high). The official employment statistics would count this as 3 jobs added, but not count the one job lost. That job was very real, but now it’s gone.