Saturday, November 19, 2005

Economics TV Show

A letter sent to the radio show hosts
So I just listened to a radio podcast on “The mysterious equation 14” and I have to say that the piece dates you in two big ways.

First of all, culturally, economics is still misunderstood, but no longer quite reviled. I am about to finish my PhD in economics, and when I tell people on airplanes, blind dates, etc. that I am an economist, there are only two possible responses: “So you want to be Alan Greenspan?” or “Do you have any stock tips?” So in today’s post-stockmarket bubble age where Greenspan is subject to hero worship, economics is misunderstood, but not so much boring anymore.

Also, as for a television show about economics, one actually exists, and is doing surprisingly well. The CBS show Numb3rs is in its second season and is one of the highest rated show in its timeslot (albeit Friday night, when only dorks are watching TV) and it is a standard cop/detective show, except the main character is a mathematician who solves crime by using math to predict human behavior. Basically, an economist. Most episodes use standard economic tools: game theory, Bayesian analysis, statistical regression, regression to the mean, social networks etc. I just wish people would understand this is not pure fantasy, and actual economists do this kind of thing all the time. I dream that maybe young people will be turned onto math and eventually economics by it.

The second way the piece dates you though is your economic analysis. So while I am perhaps one of the most neo-classically minded of my peers (my advisor is a Chicago school diehard), it seems that most economics of the past 30 years has been focused on identifying examples when trade is not beneficial, win-win, perhaps because as you say, the win-win situation is boring.

So to the first order you are perfectly right, markets work. However, arguably, in the cases you mention, the second order effects that cause markets to fail may come to dominate. Also, our economy seems to get most of the first order things right already, so it makes sense for people to focus on the second order effects.

Take your examples. The Toyota commercial does represent mutually beneficial exchange, but it also represents externalities, it represents preference shifts (which economics does not have a good handle on) which may be bad for society though welfare theory cannot handle it.

The idea that a company might not try to suppress the invention of a durable fabric in that Alec Guiness film is like that pernicious urban myth of the oil cartel conspiracy to squelch renewable energy. But still there are plenty of examples of planned obsolescence, of HP spending money to make their printers slower, or IO theory that shows that a firm makes more money renting than from selling, and thus there are potential welfare losses from such scenarios. Not to mention all the questions of innovation and pricing of information.

And finally, there may be quite rational reasons for strikes, that depend on incomplete information, though admittedly, the theory has yet to be come up with a definitive model of two person bargaining that does have delay.

Anyway, thanks for provoking some interesting thoughts on my morning jog.


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