Economists Do It With Models

In a recent article, labor economist David Autor was quoted as saying that “If we automate all the jobs, we’ll be rich—which means we’ll have a distribution problem, not an income problem.” David, have you been reading drafts of my dystopian future economic science-fiction novel again?

The synopsis of my (mostly, but not entirely) hypothetical Hunger Games fan fiction goes something like the following: Imagine a world where technology has progressed to the point where one person can create all of the output that we have today (or maybe even then some) by pushing a really fancy version of the Staples easy button- you know, like this:

Would society in the aggregate be better off economically as a result? The answer is most surely yes- if we believe that most people would rather sit on a beach and have their work done for them than actually do the work, then the button basically has to be a boon to society overall. In this situation, people would have two options: one, they could be content with the current standard of living and continue sitting on the beach, or they could use their newly-acquired free time to produce new (hopefully) cool stuff for society. (You know you were just looking for the right moment to get into the artisan cupcake pick business.) Let’s, for the sake of argument, assume that people take option number one- this is what Autor meant when he said that technology would make us richer, since we would now have all of the stuff and all of the free time rather than just all of the stuff.

You’ve probably caught on by now, however, that the GDP button presents some interesting challenges for society. We are currently pretty much accustomed to distributing money in exchange for labor and capital- that’s how markets for the factors of production work. Under this regime, the guy/girl who owns the GDP button (Katniss Everdeen in my fan fiction, obviously, to make up for being from a poor family) would get all of the factor payments. (Hence the distributional problem that Autor referred to.) But this is where it gets sticky- payments from whom? If Katniss keeps pressing the button and people keep buying her output, eventually everyone but KAtniss is going to run out of money and not be able to buy the output anymore. Granted, this might not bother Katniss, since she has the button that makes stuff and therefore doesn’t really need your money. Everyone else, on the other hand, runs into a bit of a problem.

This problem is not technically insurmountable, so it’s not a given that everyone but Katniss is going to die of starvation. (I suppose this is where the narrative diverges from the parent books a bit.) That said, the problem isn’t the easiest to solve either. One option would be for Katniss to give away the stuff that she doesn’t use. This would prevent at least some of the starvation problem, but it would introduce new logistical problems- giving stuff away doesn’t exactly get said stuff to those who value it the most. For example, if I saw that, say, a motorcycle was being given away, I might go get it because hey, free motorcycle, but I don’t actually like motorcycles that much. Now, you might think that this would take a motorcycle away from a motorcycle enthusiast, but think this through a little more. Since I’m not the only person wandering around perusing free stuff, society would likely end up in a situation where the more popular free items have longer lines. (Just ask the people who tried to get free Krispy Kreme the other day.) This would solve the resource allocation problem to some degree, since I would be more likely than the motorcycle enthusiast to balk at the line for motorcycles, and it approximates a world where time is the currency used for resource allocation. On the up side, this seems pretty fair, since everyone has the same endowment of time. On the down side, we’ve now gone from a wondrous society on the beach to a society where we’re all waiting in line for our “free” stuff.

What if, instead, Katniss kept giving out the money that people pay her for stuff each period so that people can keep paying for stuff? Prices would adjust so that resources are allocated efficiently, so this approach seems promising (especially if Katniss realizes that this approach doesn’t make her worse off)- just don’t think too much about how the money gets allocated. Does each adult get the same amount? Do parents with more children get more? Do people with health issues get more than healthy people? These sorts of questions really highlight the fact that issues of fairness don’t have a “right” answer.

The world described above is obviously a very extreme version of what we actually see in society today and what Autor is referring to, but it presents a nice allegory for some of the issues that society is currently facing or worried about facing in the future. Specifically, how can companies continue to thrive by selling stuff to middle-class and working-class households if these households don’t continue to get the money to spend? Conversely, how can middle-class and working-class households thrive if they aren’t endowed with or have the means to develop the factors of productions that are valued in the economy? If capital (the analogue to the magic button) becomes the most crucial factor in production, how does society ensure that citizens have an endowment of capital equivalent to their current endowment of labor? (You have to admit that nature does a nice job of leveling the playing field by endowing most people with the ability to work.) At the risk of channeling Piketty, I will fully acknowledge that it seems like a shift towards capital being the main factor of production would have to, as per the allegory, be accompanied by some serious thought as to the heritability of wealth and even possibly a wealth endowment. (For comparison, consider that the median household is endowed with somewhere in the neighborhood of $1 million of labor “wealth,” assuming a 5% return and $50,000 median household income.)

Fun fact: Fifty Shades of Grey started out as Twilight fan fiction, so feel free to suggest some BDSM aspects of the narrative so that I can make a boatload of money, thanks.

I couldn’t resist…from The Onion:

Half Of Hollywood Test Group Screened Placebo Film

LOS ANGELES—Saying the methodology helps them ensure unbiased results in their marketing research, studio executives at Paramount Pictures confirmed that during a Hollywood test screening this week they showed half of all theatergoers a placebo film. “Instead of watching our authentic big-budget studio film, this randomly selected control group saw a movie that lacked any recognizable star, overt ‘high-concept’ premise, rapidly unfolding narrative, or extensive computer-generated effects, so that we could compare their reactions with those of the real movie’s viewers,” said Paramount production head Marc Evans, acknowledging that many members of the control group exhibited the same level of emotional gratification and entertainment as those who viewed the actual upcoming action-adventure blockbuster. “Such a double-blind screening method allows us to determine whether the thrills, laughs, and heartbreak experienced by audience members actually stem from Arnold Schwarzenegger’s performance in the Terminator sequel we have coming out this July, or whether they are simply the result of a placebo effect.” Despite poor findings that showed no significant improvement upon the placebo film, executives said they had already spent $170 million developing the franchise feature and would just give it a wide international release anyway.

Hmmm…would it be completely unreasonable to create treatment and control films in order to determine how much of a wage premium big stars should really get? Come on, an NSF grant would totally cover the cost of that…in related news, just a reminder that sophisticated data analysis is helpful because experiments aren’t always feasible or practical!

With Fifty Shades of Grey coming out this weekend, I figured it was a good time for a reminder to be careful out there when doing it with models:

Sex toy injuries surged after ‘Fifty Shades of Grey’ was published

The number of Americans requiring emergency room care for injuries involving sex toys has approximately doubled since 2007, according to data from the Consumer Product Safety Commission. Much of that increase happened in 2012 and 2013, following the release of the wildly popular erotic novels in the Fifty Shades of Grey series. And the overwhelming majority of these injuries — 83 percent — require “foreign body removals.”

So do we need to be thinking about the negative public-health externalities of this particular phenomenon? I get the feeling that the headline writer chose her words carefully, but the article itself (and others like it) seem to reallllly want me to think, despite an offhand sentence to the contrary, that the increase in injuries is actually because of the book (or at least that the increase in injuries is a result of the increase in sex toy use that resulted from the publication of the book). But we nerds know better…

This suggestion is a particular form of the correlation versus causation issue known as the “post hoc ergo propter hoc” fallacy (not to be confused with the second episode of The West Wing)- namely, that just because one thing happens after another doesn’t imply that the latter happened because of the former. In this instance, we see a claim that sex toy injuries increased after the book was published, but we can’t conclude that the increase happened because of the book itself.

The fallacy is highlighted further when a more complete dataset is observed:

Now it is more clear that the increase was largely following what appears to be a longer term trend- in fact, the data suggest that perhaps the relationship goes in the other direction and the increased proliferation of sex toys and sexual experimentation lead to the book being published and getting so popular.

It’s worth keeping in mind, however, when causality matters and when it doesn’t- for example, my warning to be careful is relevant regardless of what is causing the increase in injuries. Also, having this data makes this scenario a tad less surprising:

Given the 87 percent figure mentioned in the article, I’m actually kind of surprised that this didn’t show up on the board.

Dear Jacksonville, FL,

I will be in you tomorrow to talk about the economics of The Simpsons. All I ask is that you have better weather than exists here in Boston, which is not a tall order. (Technically, I also request good coffee, so feel free to leave suggestions in the comments.) The details are as follows:

Presented by Florida State College Jacksonville
Thursday, February , 2015
7pm
Kent campus
3939 Roosevelt Blvd.
Free (or, as Dan Ariely would say, FREE!)
For tickets and more info, email Susan Reilly – sreilly at fscj dot edu

I hope to see some of you tomorrow!

xoxo,
Jodi

P.S. The official flyer:

So I made something new for you:

A couple of years ago, I was told a story about how Milton Friedman would teach his Principles of Economics courses by walking into the classroom each day, opening the newspaper, and discussing the economics behind the stories that he saw. Now, I don’t know whether this tale is an urban legend or not, but the idea is quite solid, since it’s of crucial importance to tie back what is taught in the classroom to what students see out in the world. The downside of this approach, of course, is that the outside world isn’t organized for the purposes of providing examples in a logical order that students can easily follow and instructors can piece together into a syllabus in real time.

That’s where this document comes in- as an instructor and consumer of information myself, I spend a number of hours each day looking for interesting things that happen in the world that illustrate (or, in some cases, are at odds with) economic theory. Such an activity, with its high fixed cost and low marginal cost (when quantity is measured as number of instructors served), has the structure of a potential natural monopoly. In this case, however, the document has the features of a public good, since I’m making it open to everyone. Whoever said that public goods wouldn’t be provided by the free market? Oh right, (non behavioral) economists.

I hope that this database of Econ 101 examples (or, technically, spreadsheet, as some persnickety individuals have pointed out) is helpful to you! I will continue adding to it, hopefully almost daily, as I come across new things to talk about. There are a few features that I’ve put in to make the document easy to navigate and use:
– Sheets: The examples, not shockingly, are on the sheet labeled “Examples.” (This is the “Overview” sheet- see the tabs at the bottom left of the sheets to toggle between them.)
– Description/Comments: I’ve tried to provide enough information so that you don’t have to click through to the sources to understand what they are and whether you want to use them. In addition, I often give suggestions on how you can use the source in your classroom.
– Date: Where possible, I’ve added a date so that you can avoid sources that you feel are outdated. You can (reverse) sort by date and stop looking when you feel that the sources get too old. Note, however, that not every item has a date- such sources are obviously timeless!
– Date Added: You can (reverse) sort by date added in order to look at only those items that you haven’t already examined.
– Course: You can filter by course to only see items that are relevan to what you are teaching. Note, however, that some items are assigned to both Micro 101 and Macro 101, and this designation gets its own filter category.
– Tags: Created to help you find relevant items more easily, and I would search this column rather than trying to sort of filter, since a lot of items have multiple tags. When possible, I recommend scanning the items rather than relying solely on the tags so that you don’t miss anything relevant- for example, an item I’ve tagged as “price ceiling” when you’re looking for “price controls” or something like that.
– EDIWM Post: Where applicable, I’ve added links to posts on my web site that give more extensive discussion on the sources presented.
– Submitted By: For the most part, I am compiling this document myself with some help from a few econ friends. That said, I want to give proper credit where credit is due! In related news, email  econgirl at economistsdoitwithmodels.com if you have something relevant/fun to share, and be sure to let me know how you would like to be credited.

I hope this is helpful to you and makes economics more interesting to your students! You can also follow my Twitter- @jodiecongirl- in order to see most if not all of the items as I find them (as well as other econ stuff). If you want even more Econ 101 materials, be sure to check out the “Econ Classroom” section of my web site (listed below).

Happy Econ-ing,

Jodi Beggs
Lecturer, Northeastern University Department of Economics
www.economistsdoitwithmodels.com

My current plan is to update the database as I find new examples and then post a summary of new items once a week as a reminder. I also added a link to the document at the top of the Economics Classroom page for easy reference.

In a lot of ways, non-economists are in the best position to create economic humor, since their outsider status basically makes it so they are looking in on the world of economics and being like wtf? On the other hand, Zach Weinersmith might argue that the nature of economics makes relevant humor relatively challenging:

Nonetheless, I convinced Zach to give it a go at the AEA Annual Meeting Humor Session:

If that (or economics in general I suppose) hasn’t given you your fill of bad ad-hoc hypotheses, you can see much more at BAHfest.com.