Equity in economics – a series

(This is a first post, focused on where equity fits in the world of economics.)

Economics somehow defined

By Orlando Roncesvalles 

Economics was once said to be the study of the “ordinary business of life.” Today that definition seems to falter if only because many now can’t or won’t accept “ordinary business” as just getting up everyday to work and then going home to eat, rest, and watch tv.  There must be more to life than that. Otherwise, the only specialties in economics that matter would be labor economics, the economics of food and shelter (agricultural economics, urban planning), and the economics of entertainment. Okay, so we need to sleep and that presupposes elements of conscience and health, which should make economists also study the economics of health and spiritual care.  

It’s no longer about ordinary business

That’s not what happens. Economists are a wily bunch. Somehow they’ve embedded “work” into the conjunction of human and physical capital, which has then led to serious questions about saving and investment, and thus we have all sorts of controversies about the “macroeconomy,” business cycles, monetary economics, and the role of  “finance.”  The scope of “life” itself took on deep meanings about households functioning as “agents” so that the time horizon of economic decisions could encompass overlapping and future generations. In short, economists worked up models where economic actors didn’t even die!

So where do we now go with  economics? I don’t know. It certainly is not about the universe, and mathematical economists emulating the physicists are now pretty much in disrepute. The good economists turn to math or just plain-vanilla logic, not for window dressing but as necessary cogs for weeding out bad theories. At least, Occam’s Razor still lives. The even better economists camp out with historians to explain the past, while humbly admitting that the future can only be seen through a thick fog. Economists cannot make time travel, nor make easy profits. They let fantasies stay within the bounds of Hollywood and Ponzi artists.

Then, it was a case of choice

The discipline of economics remains then a study of human behavior, but differentiated from anthropology, sociology, psychology, psychiatry, political science, history, or literature. Where to draw the line seems a mystery but it’s in there somewhere.

This leads to another view on economics as, grandly, the study of human choice. The emphasis here is on the element of choosing. We choose because we’re not dogs, or (pet) rocks, or robots.

Whether we like it or not, humans do grapple with a task or choice all the time. That choice often involves division, something we intuit as a matter of taking a whole and breaking it down into parts or portions. That “whole” may literally be time, as in the question of what we do with our time. But why divide? Is it because time inexorably passes, but is finite because we are mortal? Is it because we say, “No man is an island?” Is it because we strive to solve the “economic problem”? We remind ourselves that the economic problem, according to the textbooks, is that of who should produce and use whatever it is that we decide to produce; this problem boils down to Adam Smith’s “division of labor” – the division of tasks – and also to the distribution or allocation of the things produced among those who wish to use these things. There are thus two sides to the economic problem. One shows how we make the economic pie; the other, how we divide it. 

There is thus no avoiding the idea that economics is about division. The positive side of economics looks at how we do the division; the normative side asks how we should do the dividing. 

But can it discover fairness?

The distinction is however not clearly cut. Imagine that we were given a certain or particular division to undertake. Suppose that we then ask if the suggested division is “fair.” Is that a fair question? It seems not because it would be a form of begging the question. But it also seems more correct to ask if the division was fairly arrived at, and fair is fair because division is first a process and then an outcome. There is no chicken-egg problem in analyzing answers to fair division questions. Still, we haven’t yet a clear idea of what fairness is.

The dictionary definition of fairness is interestingly hopeless. Merriam-Webster gives the one meaning of interest as “marked by impartiality and honesty: free from self-interest, prejudice, or favoritism.” In a way, it seems that fair is, like many primitive concepts, something more easily recognized than defined. The literature on fair division suggests that fairness is characterized by being “envy free.” Here, we get to define freedom from envy in a sense close to Rawls’s idea of justice. “Envy free” (or justice) means that we wouldn’t want to trade places with others. There is peace on earth, a secular Christmas.

There is no end

So there we are. Economics has traveled from the business of life to the choices we make, and we end with asking, “Is it fair?” I conclude from all this that economists are philosophers at heart, and pesky ones for sure.  They are incomprehensible much of the time, but that’s perhaps because thinking is hard, and because we still haven’t fathomed a bunch of other mysteries. One is about what choice really means in today’s age of artificial intelligence and robots. There are others: Where do machines end and humans begin? Is there a fundamental difference between machines and man? Do humans have souls? If they do, do animals also have souls? Are there alien civilizations out there who laugh at us humans for our propensity to engage in internecine wars? 

I stop.

****

Twitter: @ORoncesvalles

All is fair until we divide

FAIR DIVISION

[The following thoughts arrived this morning, February 28, 2019, after perusing a book on Fair Division (Brams and Taylor, 1996).]

Whether we like it or not, we humans grapple with a task or choice all the time. That choice involves division, something we intuit as a matter of taking a whole and breaking it down into parts or portions. That “whole” may literally be time, as in the question of what we do with our time. But why divide? Yes, why? Is it because time inexorably passes, but is finite because we are mortal? Is it because we say that “No man is an island?” Is it because we strive to solve the “economic problem”? (We may remind ourselves that the economic problem, according to the textbooks, is that of who should produce and use whatever it is that we decide to produce; this problem boils down to Adam Smith’s “division of labor” – the division of tasks – and also to the distribution or allocation of the things produced among those who wish to use these things.)

If economics is then the science dealing with the economic problem, there is no avoiding the idea that economics is about division. The positive side of economics sees how humans actually solve the economic problem. The normative side of economics asks how humans ought to solve the problem.

Given a certain or particular division, we then ask if it’s “fair.” Is that a fair question? It is not because it would be a form of begging the question. But it seems more correct to ask if the division was fairly arrived at, and fair is fair because division is first a process and then an outcome. There is no chicken-egg problem in analyzing answers to fair division questions.

The dictionary definition is interestingly hopeless. Merriam-Webster gives the one meaning of interest as “marked by impartiality and honesty : free from self-interest, prejudice, or favoritism.” In a way, it seems that fair is, like many primitive concepts, something more easily recognized than defined.

TraffIc Woes: The enemy is us


By Orlando Roncesvalles

Almost gridlock

Just about everyone complains these days about traffic in Dumaguete that I often wonder whether we’re fast approaching the gridlock of Los Angeles, Washington (DC), or even Manhattan. The common culprits are easily all over the place. The local economy has grown, and car dealers sell cars like pancakes on easy financing terms. This has added to the more traditional problem of big trucks and buses competing with motorcycles and tricycles. The owners of new Wigos, Eons, and Picantos are left to scratch their heads at their mix of newly acquired mobility amidst near gridlock conditions around 8am and 5pm.

What to do then? Though not immediately obvious, it’s not simply a case of too many cars and trucks using the limited roads. That much we ought to know from the infamous Law of TraffIc formulated by one Anthony Downs. He said that when we widen the road, we just get more vehicles and only a little improvement. It would be better to look at traffic problems from other angles. (For the curious, I sketch a proof of Downs’ Law at the end of this column.)

The status quo

The city officials cannot be faulted for lack of trying. Today, we have a complicated one-way system for the central business district; this seems to work well enough even as car owners complain that they have to drive more. The advent of private parking garages is reportedly at hand, which should reduce the “parking-space hunter” problem downtown. The cap on the number of public motorized tricycles has also limited the well-known traffic-generating disparity between these vehicles’ slowness (maximum 30kph) and the speed of private cars. So far so good? Not quite. We are still some way from traffic sanity.

More than a decade ago, a halfway solution emerged from recognizing that certain places generated unnecessary traffic in their midst. This is particularly true of schools, hospitals, and churches. The full solution was to enact laws ensuring that such institutions wouldn’t be the source of traffic problems. The analogy with environmental pollution is apt. The trick is to require a Traffic Compliance certificate, of the same nature as the Environmental Compliance certificate now required to protect the environment. But it seems that these institutions are so politically powerful that city officials were reduced to “begging” them to convert real estate into service roads. The Silliman Grade School actually responded positively. Others appear to just ignore the problem they’ve created. Why?

A good long-term solution includes the bypass road concept. Cut-through traffic from outside the city needs to be shunted away from downtown. The coastal road and Rizal Boulevard are now unable to function well as bypass routes because of the new restaurants and tourism growth. I once asked city officials about the by-pass, and it seems that the answer is something out of eminent-domain hell. The city has to acquire the roadway, but landowners play the cat-and-mouse game of guessing where this road might be, thereby almost interminably delaying the solution.

Self-help

For the meantime, the literature on traffic problems gives some nuggets of folk and science-based wisdom. The following is a limited list:

One is obvious. Walk or bicycle. Here, city officials have to get better at giving pedestrians and cyclists a fairer shake at the benefits of city-hood. These folks pay taxes too; they deserve sidewalks and bicycle lanes. I once asked my students to study the idea of making half of Perdices Street downtown as a pedestrian zone (combined with availability of parking spaces at both ends). That idea should be kept alive and kicking.

Two, legislate and enforce no-parking rules. Some streets are not so bad if only “lawless” parking were controlled.

Three, traffic enforcers and stop lights are band-aid solutions for problem intersections. For example, near schools, it is probably more productive to get the schools to give solutions that get students to school without adding to traffic problems. Relocating the school may be a better alternative. As to stop lights, they work in the first world but probably not in Dumaguete. We thrive on the idea of traffic in scooter-crazy Rome, where almost anything goes!

Four, drive smart. Waze helps the car driver avoid peak-hour congestion. A few minutes earlier or later can reduce trip times albeit by not much. Another form of smart driving is to take the straight route or to avoid left turns. At times, even three right turns can beat waiting for a left.

Five, for the spoiled rotten, get a driver. Parking is hard work, time is scarce, and good drivers can give you the latest gossip, or tune the radio to sad and funny radio-seryes.

Finally, consider Stoicism. Maybe staying home is best. Living well is a form of revenge. That’s how Netflix makes its money. Now, if only we could speed up that internet!

****

Note on Downs’ Law: The basic model is one of getting from one place to another using two roads, the main road and a next-best alternative. Typically, the main road is already congested (it’s not the main road for nothing). The city decides to widen the main road. What happens? Traffic that used to use the next-best road then shifts to the widened main road. The traffic problem then remains unsolved. The shifting traffic is called induced demand, and this explains why the widening of the road doesn’t solve the problem. 

Recognizing Downs’ Law means that city officials should concentrate their limited resources on next-best routes, not on the main roads. It means the opening or speeding up of such parallel routes.

Comments at oroncesval4@gmail.com

The Perfect Bet

What are financial markets?  Financial markets at first apprehension are simply places where borrowers meet lenders, or where risk-takers meet investors. But these markets do more than channel what economists call “savings” into claims on the (profitable) outcome of “investments.” Savers shift their consumption from the present to the future; borrowers often do the opposite when they shift future consumption to the present. Investors and lenders absorb the “foregone consumption” of savers into “capital accumulation,” which, if deployed intelligently, would yield future interest or profits. This process feeds the engine of economic growth, while giving meaning to the idea that market participants should be able to shift their consumption patterns over time according to their individual preferences. There is thus also embedded in this process that concept made popular by Adam Smith, the idea of the Invisible Hand.

The process is not always perfect. The plans of mice and men often go awry. The markets then adjust to these changes in fortunes. Debt papers get discounted to reflect the lessened ability of a borrower to repay, and stock prices drop on expectations of a cut in future profits.

Underlying the adjustments, or even the initial transactions, are acts that constitute betting. The lenders bet that the borrowers will repay, while the (stock market) investors bet on the actual or eventual profitability of the business of the corporations that issue stocks. At times the betting does not even relate to these economic “fundamentals.” There are also those who bet on the basis that there would be, at some point in the future, a “greater fool.” For such bettors, the wait can take forever, although successful practitioners are usually “gurus” who can inspire the “greater fool” following, and who get out soon enough. The gurus win at the expense of their followers. It seems unfair, but there is rough justice meted to the greater fools in this story. The motto should be “know your guru!”

Is there a perfect bet?  In such an imperfect world, can there be a perfect bet? This is like saying we’ve experienced hell or purgatory, and then asking if we will get to heaven. A religious bettor would bet his soul on it, but can expect the payoff only in the afterlife.

Despair not. Philosophers, mathematicians, and diehard gamblers have at various times achieved success. To do this, they’ve had to set the bar a bit low. A “perfect bet” is definable as one that beats any other in the circumstances. Often this ranking of bets is simply based on an arbitrarily chosen aiming for the highest return for a given level of risk, or for the smallest risk for a target rate of return. And typically, the perfect bet is revealed after the fact, but not before!

If risk avoidance is valued highly, insurance can be a perfect bet. Indeed it is one that can go on forever because insurer and insured do not play a zero-sum game. Both parties to the insurance contract “win.” The insured avoids an unbearable catastrophe, while the insurer, who pools the risks from individual contracts, gets a more or less steady income. This means that stock in good insurance companies, those who employ honest actuaries and whose managements are kind enough not to engage in Ponzi schemes, are great long-term (though somewhat risky) investments.

Religion is akin to insurance. The high priests play the role of insurer; the faithful are the insured. No one is being taken for a ride, except perhaps for those cult religions where the believers give up too much on Ponzi-like fraudulent claims of their leaders. By and large, mainstream churches are institutions that promote social good and order on earth. Whether religions should escape taxes is, however, another story. My own view is that if insurance companies, doctors, dentists, and fortune tellers like Warren Buffett pay taxes, then so should churches.
Are lotteries perfect bets? No, because innumerable studies of winners tend to conclude that the winners get a brief high from a temporary surge in income or wealth; but they soon go back to their pre-winning miseries. Humans are decidedly social beings who prove time and again that misery loves company, and company soothes misery. But lotteries are perfect bets for those who benefit from the house edge, typically governments and charities.
When the game is a simple one in the mind of an individual investor, it is pretty much a zero-sum game. Cash or short-term government paper becomes the perfect bet when the likely foreseeable event is a rise in interest rates or a fall in stock prices. The problem is that interest rates and stock prices are inherently unpredictable. If they could be predicted, the acts of capable individual investors acting on their “predictions” would cause interest rates and stock prices to move in directions that would eliminate the profitable trades that might be envisioned from such predictions. The next time somebody comes to you to tout his (past) great stock market performance, just ask if he thinks he can replicate that performance forever. His honest answer has to be in the negative. He could do better because of luck; or worse, if the future is one of “reversion to the mean.” The mean in this context is also not a fixed thing; it depends on how long a time frame you take to calculate the mean.

What about the risk of ruin? Or the risk of missing the “next great move”?Can an individual nonetheless learn to avoid the most egregious errors when investing his hard-earned savings? This is a difficult question requiring a definition of what an egregious error is. The answer to this question will be for another column.

Steak Intelligence

Orlando Roncesvalles

In a celebrated movie (When Harry Met Sally), we are treated to a reverential dig at the leisure habits of the first world. Restaurants in the ‘80s were, according to Nora Ephron’s writer-philosopher character, what the theater was in the ‘60s. That, after all the angst suffered by English departments in the ’60’s, was an inevitable consequence of the oft-repeated idea that the theater had died. If you believe pop music, even that (music) died when Buddy Holly took that damned plane. Why is life so tough? We don’t really know, but from today’s gadget-driven internet of things, we realize that whining is part of the human condition, amplified by social media but dulled by the haptic syndrome of touch screens, or even (by now anyway) accepted, without a nasty retort by the likes of Siri and Alexa. Machines can substitute for psychotherapists if you know how to tweak settings.

Tough is however that thing we do not accept in certain things. The night has to be tender. Terms of endearment also must be. Criticism directed at our significant others must be delivered sotto voce. And, of course, steak must with a capital T be Tender. Thus, Anthony Bourdain expressed his disdain for the despicable heathens who order their steak well done. Chefs welcome such arrogant ignorance because they can get rid of mis-delivered meat without offending a free-spending type (usually on a business account, if not using plundered funds as though that never went out of style).

What does it take to get steak tender? According to Guenther Sanin of Casablanca Boulevard fame, it must be aged and just so. Our tourism honchos don’t understand this. They ought to be bringing in technology so we would do our aging locally, but they seem fixated on media contracts and duty-free shopping. That’s what we get when we have the best and brightest officials. Tough steak. But who cares? Our lucky officials travel to exotic places, outside the country, to get their beef. Lucky them. But I exaggerate.

A steak ought to sing for itself without a backup band of exotic sauces. A-1 will hate me for saying this, but they sell something to hide the fact that we couldn’t afford the best cut, and have to do with a little ‘taste enhancement.’ A-1 is good at what it does, so give it credit. Still, I remember that a good steak-frite combo could be had in the ‘80s in a now-gone place called Le Steak in Georgetown (that place by the Potomac River), and it came de rigeur with Béarnaise. So I asked Guenther why Béarnaise sauce appears almost incognito hereabouts. The answer was that it was too special a sauce to make, and it would eat up too much expertise and good butter to be just right, though you can try some from a cheap substitute fix served up by Amazon. Basically, for authentic Béarnaise, you need expert whisking.

How often can one indulge in a steak? The answer is ‘not too often,’ because, as the cardio experts say, it can clog up those arteries. There are remedies. I had a German mission chief who lined up his statins soon after he ordered the best steak in the best restaurant in Tripoli, Libya. Then there’s also red wine. Why white wine pales is a mystery I have not explored; I look for a good Cabernet and keep my counsel. But if any white wine guys can point me to a cholesterol-cutting moscato, I’d gladly take their tips under advisement.

The end matters too. What dessert goes with steak? Le Steak had something called La Surprise de Monique (an ice cream confection with candied chestnuts in the unseen bottom, hence the surprise). In another dining room in Washington, DC, it was called Coupe aux Marrons. It may still be there; just go to 700 19th St., NW. If all else fails, there’s creme brûlée (leche flan). Deciding the best creme brûlée in Dumaguete is still on my bucket list.