Gina Rinehart, Napoleon, and other economic data points

The new book Paul Frijters and I have just released is an exercise in pattern recognition in the service of social science. My interview below with Tim Harcourt, the Airport Economist, gives a quick overview of some of its big themes. Launches still to come in Sydney, Canberra, and Melbourne!

http://www.youtube.com/watch?v=Jk7eac53oG4

 

The economics of incapacity

The “rational man” assumption of mainstream economics is alternately defended and pilloried presuming that it stands or falls on the capacity of a fully functional human adult to understand, and act on, his personal self-interest. Yet large chunks of our population are not fully functional adults. Do they have a role to play in economic models?

Children are usually incorporated either as mute drains on resources, or as part of a second generation who are decision-less in the first period but in whom the first generation can invest, hoping for productive returns in the second period. Mentally unsound people, including those living in insane asylums, together with those whose capacity as economic agents is physically restricted by the state (i.e., prisoners), are generally paid no notice in economic models. Older people whose minds have gone down the gurgler but whose bodies carry on are either ignored or considered mute drains, like children. Yet all of these groups have independent needs and resources of their own. Do these needs and resources get counted in actual economies? Let’s consider this question for each case in turn.

Kids. Indirectly, they contribute hugely to the economy, to which any parent glancing at the recent transactions on his bank account can testify. The usual idea is that parents, acting as children’s agents, buy things for kids in a more or less rational manner, knowing what is in kids’ best interests and purchasing those things. One might claim that this is not always true – does private school really deliver a benefit compared to public school for every child enrolled, for example, or are those French fries really a good idea in the long run? – but any departures from rationality committed by the parents can be argued to be merely outgrowths of the parents’ own irrationality, rather than the irrationality that kids’ incapacity would lead to if they were let loose on markets to make their own decisions.

Next up are the crazy people and the convicts. Every society has them, whether or not the bulk of them are institutionalized. For mentally sick people cared for by the state, representatives of that state serve as the agents who compensate for their incapacity by purchasing things, typically from state funds, that are deemed to be required. Like those in insane asylums, prisoners too are at least temporary wards of the state, whose representatives decide what is required for them during the period of their (forced) incapacity. For mentally unsound people cared for within families or living on their own, it is usually loving relations or friends who act as agents, compensating for incapacity when that seems necessary.

Older people professionally judged to lack the capacity to manage their own affairs make up a sizeable chunk of our societies, and this chunk is growing by the day as our lifespans increase and our ability to combat mental deterioration fails to keep pace. As with crazy people, the irrationality of older people who have become incapacitated is potentially compensated for either by the state or by loving family and friends.

In all of these cases, the big question for economists is why we do not see more rampant exploitation of these groups in our societies who are so vulnerable. They are in many cases simply ripe for the picking: easily manipulated, sometimes with access to significant resources (particularly in the case of older people with large estates), and/or completely at the mercy of their so-called agents. Why are there not huge numbers of cases – rather than the under 10% that has been estimated – of abuse and theft of elders, as well as of prisoners, children, and the mentally unsound? Why instead do we see the purchases of vast quantities of medicines, child enrichment services, mental and physical health services, and so many other goods and services that directly nurture the incapacitated? Why do the needs and resources of these groups feed into the economy, through their agents, more or less as they would if the incapacity did not exist?

The answer I believe fits best is that most incapacitated people have been adopted psychologically, either by individuals or by collectives such as the nation state. The loving parent has essentially re-defined his own identity to include that of his child, so that when he acts to further the child’s interests, he feels his own interests to be furthered. Members of the nation state have re-defined their identity to include the welfare of all Australians (or Germans, or French), including those who are insane or have strayed. It is then our collective will to care for our group members, enforced both by our identification with each group member and by our identification with the ideal of “caring for all Australians”, which motivates the state representative serving as an agent to indeed further the interests of his incapacitated ward. This re-definition of self, central to the continued contributions of all of these groups to the economy in line with their actual needs, is called love. It is high time that economists gave it a nod.

The price of morality

Notwithstanding the philosophical bent of some of its founding minds, including Adam Smith, mainstream economics today does not concern itself explicitly with matters of right and wrong.

Of course, some general notion of “welfare maximization” is taken by the profession to be “right”, and by implication all alternative objectives are at least dubious if not outright wrong. But this does not get us very far. It merely gives rise to a highly simplistic and subjective handling of what Jack on the street would consider to be “moral” questions. What are an economist’s views on gay marriage, abortion, drug legalization, vegetarianism, gun control, and so on? Some economists will have more permissive attitudes on these issues, and some will have more conservative attitudes. If asked to defend a moral stance, an economist who has donned his “economist” hat will rationalize whatever position he has adopted based on some notion of welfare maximization. The end.

One could claim that this chameleon-like ability of economics to support multiple and often completely conflicting moral stances is perfectly fine, and that economics is a pragmatic science that should not be asked to generate advice on philosophical questions beyond the vague notion of welfare maximization. But the real problem is not any innate limitation of economics, but a limitation of measurement. Even if we were to accept the maximization of a particular discounted welfare function as the sole ethical criterion that should guide moral decisions, the measurement of marginal welfare obtainable from adherence to different moral codes is incredibly fraught, and this is what leads to our discipline’s routine moral ambiguity.

What makes measurement particularly difficult in cases of morality? First, a significant fraction of felt pleasure from witnessing, imagining, or performing acts that the beholder believes to be moral goes unseen by not only the economist, but by everyone except the person experiencing it, as it is generated via non-market-based and hence non-priced interactions. Second, we face the perennial problem of not observing a reasonable counterfactual. How can we measure how much joy the drug addict receives from his injection, and even if we knew that with certainty, how can we measure, for comparison, the amount of marginal pain he will cause his friends and family in future periods due to his addiction (relative to the counterfactual of his not being addicted)?

Public figures discovered to have violated a social moral code do face material consequences evident to all. The recent scandal surrounding the American general Petraeus is a case in point. Yet there is no observable price placed on his behavior – only public disapprobation and loss of status – and even thinking about how to measure the welfare of all relevant players in each of two possible states of the world (say, affair versus no affair) boggles the mind. Hence the “price of immorality” in this and similar cases is a quantity that we would struggle to measure.

Events in international trade may get us a bit closer to measuring, by contrast, the price of morality. Indonesia is now buying less live beef from Australia. This is likely (despite the denial of a causal link from some quarters) due to fear that the same type of political interference seen in the middle of last year will again unpredictably interrupt trade. Why is this casual link so likely? Because all the fundamentals point to a robust Indonesian-Australian beef trade link. Our cows are big and tasty, free of foot and mouth disease, and geographically close, and Indonesia has a strong history of importing Aussie beef cattle.

Not only was it the most likely cause of the trade decline, but our country’s political interference was purely moral in nature. Our minister for agriculture proclaimed that Australians would not countenance Australian cattle being treated in what was felt to be a cruel way, and as Indonesian abbatoirs were not up to the “killing standard”, they were barred from receiving shipments of Australian cattle, effective immediately. This was an action taken to obtain a benefit that only exists in the minds of Australians, and is hence invisible.

The rightness or wrongness of this unilateral action was evaluated in rough “welfare-maximization” terms even by non-economists. But in this case we can do more than hand-wave: as with any public policy evaluation, we can attempt to estimate the effect of the treatment. We have the value of Australian live cattle exports to Indonesia before and after the decision, and could use as a control, for example, Indonesian imports of a subset of Australian foods that do not substitute for live cattle. With a difference-in-difference estimate of the value of the export market decline, together with some understanding of the structure of the beef industry, we could generate estimates of the loss to upstream markets in Australia (cattle feed, transportation, labor, and so on). With detailed supplier cost information we could even estimate the costs and benefits of the medium-run industrial repositioning that may occur. We cannot measure the size of the invisible benefit, but economic tools might yet demonstrate that the luxury good of morality, just like lunch, is not free.

MOOC-spook: Symptoms, causes, and cures

An epidemic is running riot through our university administrators in Australia. Infected individuals can be identified by their obsession with the quantity and quality of their university’s online course offerings; the mass emails they send with startling frequency advertising sundry “online resources” that they urge academics to take under advisement when planning their courses; and their audible gulps and stares of terror during meetings at the mention of any type of new web-based collaboration software.

These are the classic symptoms of MOOC-spook: an overpowering fear of Massive Open Online Courses. Victims envision catastrophic consequences of MOOCs, chief amongst which is usually a wholesale redefinition of the higher-education sector, complete with mass redundancies and a dramatic reduction of the university’s market power, leading to tanking profits and the eventual bust of universities that cannot weather the storm. With students directly in charge of their own learning, and most academics and administrators made superfluous, it will be the end of Australian higher education as we know it.

Or so the nightmare goes. Fortunately, there is a cure for this syndrome, and it is an understanding of economics. Herewith the antidote.

1 – The essential difference between today’s “online learning” landscape and the learning landscape facing previous generations is that more information is more easily available to more people – even those who have not paid enrolment fees. This has always been the case to a limited extent, through the unmonitored sharing of course notes and the availability of textbooks in libraries and bookstores. The difference now is that the information is easier to access. In economic terms, transaction costs have declined. Importantly, the signalling value of obtaining one’s degree from a university that has a good reputation is still very much alive and well.

2 – The most efficient means of producing human learning of a specific task varies greatly by task. For simple physical algorithms like walking, simply watching someone else do it is sufficient to learn the task. For more complex tasks, more active engagement through writing, verbal repetition, or directed application to examples or case studies is often the most efficient way to learn. In almost all cases, human learning at an intellectually advanced level is inherently a social activity, and is in general most efficiently accomplished when a person teaches another person face to face. This is partly because there is an emotional component to most successful university-level learning that is very hard to replicate outside of the face-to-face context.

3 – Those universities who are selling MOOCs and otherwise offering their products online in many cases trade off of their reputations (or lack thereof) as bricks-and-mortar institutions. MIT and Harvard are still respected sources of MOOCs and online case study materials because of the reputation of the actual physical institutions, complete with real live professors and on-campus students. Similarly, the online offerings of “institutions” that are exclusively virtual generally occupy the bottom rung of perceived quality. Moreover, whole degrees are often not offered online by reputable providers – only singleton courses – and completing one or even a set of singleton courses has far less signalling value than completion of an entire degree.

4 – The results of centuries of experimentation appear to indicate that the production function for new knowledge involves getting a lot of smart, well-trained, motivated, and creative people together in one place with lots of resources and letting them ask and try to answer questions. This kind of place is a hotbed for the research frontier in almost every field and is thus the best place to train the next generation of researchers. Bricks-and-mortar institutions provide such an environment.

5 – An important influence on a given student’s success is also an important influence on his engagement with the traditional university: his motivation and commitment to study. Under-motivated students will not learn well from MOOCs because they are unable to adequately discipline themselves to work through the material, whereas students with plenty of motivation will want to come to universities and have full-blown learning experiences firsthand.

The rise of online learning will have far less an effect on the present constellation of teaching, learning, the student experience, or physical infrastructures of good universities than many other changes we are presently grappling with, including demand-driven admissions and changes in international student movements. Online learning may put some pressure onto programs of study that are primarily about learning rote algorithms, such as TAFE programs and “light” programs at universities, but even there the effect will be marginal.

To the extent that universities are implicitly targeting a niche essentially identical to MOOCs, for example through providing insufficient resources for meaningful and high-quality student-teacher interaction (including by casualising their staff, letting student-staff ratios get too high, or relying too heavily on under-trained tutors), student enrolments may fall slightly.

But all of this is if anything a positive force for the longer-term preservation and fortitude of the international academy. Good students will continue to be pulled to the research frontier locations, which will continue to be housed within good universities, and poorer students will find themselves in need of more spoon-feeding than they can obtain from online courses, and thus will also end up at universities. The lower transactions costs of acquiring basic knowledge through online courses may even whet the appetites of those who would otherwise not consider university, and thereby increase the inflow of students to campuses.

Recovering MOOC-spook victims may be observed campaigning for re-investment in their university’s physical infrastructure, in hopes of providing the maximum bang for the buck in the face-to-face lecture hall and tutorial, and for the enrichment of the campus experience. They may also be seen arguing for higher investment into recruiting top-quality researchers from around the globe, and for re-structuring the teaching personnel arrangements on campus so that fewer ill-trained or temporary staff are in charge of classes. Truly reformed MOOC-spook survivors will start explicitly asking the government for money for such initiatives.

Might MOOCs spell the end of Australian higher education as we know it, after all?

To rest or not to rest, as you like it

The laid-back Australian work ethic – reflected in cultural throw-away lines like “too easy” and “she’ll be right mate” – may make some of us wince, but it’s probably on the whole healthier than the masochistic American work ethic of “get on the treadmill and go full-throttle until you wear out.”

I like living in a country where few people are walking around with psychological, physical, or social dysfunctions brought about by work. I would also readily support universal compliance with a few cultural norms that have clear economic benefits. Speaking English, wearing clothing, and refraining from attacking other people violently in the street come to mind. But what about norms around how much one works, either on the intensive or the extensive margin? Should we use government or company policy to push people into compliance with prevalent social norms around work, and thereby encourage uniformity on work-related choices?

First let’s consider the extensive margin. There is a strong case to be made for encouraging universal adherence to the idea that performing regular productive labor is a desirable goal. When state welfare is seen by everyone as a last resort, then everyone wishes to avoid it, thereby helping to keep the government’s budget in balance and at the same time boosting the positive psychological effects of having a job for the job-holding majority. This is not to say that welfare receipt should be dehumanizing, or that the level of welfare should be set below the poverty line. But a moderately generous state welfare system cannot be sustained economically if it is viewed as an acceptable long-term survival strategy by able-bodied citizens. So yes, we should use the tools at our disposal to make it psychologically unpleasant to be on welfare and we should widely advertise this unpleasantness, not for the immediate benefit of those on welfare, but in order to promote a healthy and sustainable society.

On the intensive margin, we already allow flexibility in terms of hours of work per week, and this flexibility is heavily exploited by the working population as any glance at part-time/full-time employment figures will show. This allows those with caring duties or lower stamina to work at a pace that suits them, enabling them to contribute productive paid labor, thereby both bolstering their self-esteem and contributing to the visible economy.

For those working full-time however, there is a striking rigidity about the number of vacation days that they must take per year. In the university sector for example, there is a requirement that full-time workers take 20 days of vacation per year. If one does not, then not only an argument about reducing the University’s pent-up IOU towards the worker, but also serious social shaming, is brought to bear.

Is it really optimal to push into uniformity the year-to-year work-intensity choices of full-time workers?

Casual observation suggests that some full-time workers live for their work, whereas others work to live. Some have little use for more than a week or two of vacation per year, whereas others barely make it through 48 35-hour weeks of work per year without serious losses in productivity. Moreover, people’s preferences and constraints in this area change with the lifecycle, with full-time workers who are parents of small children facing a very different optimization problem than single 20-year-old men. Economists see such diversity as an opportunity for gains from trade, so the natural question is how to open up this potential market.

One simple solution would graft a market onto the present system. Federal laws and union-negotiated contracts mandate that a certain number of vacation days per year must be allocated to each worker, which seems a reasonable way to level starting endowments. Yet, some workers would value money more highly than more days off, whereas some would rather have more days off than more money. So, we could allow anonymous trades in some fraction of allocated vacation days (say, half) to occur at market-determined prices, paid through automatic pay adjustments, within salary bands at large employers. Different industries might place different caps on the total amount of extra vacation that could be bought, in order to ensure smooth work processes.

The presumption that workers “don’t know what’s good for them” and would always take more money rather than some vacation is not only patronizing to workers, but senseless given the logic of diminishing marginal utility. As in the case of cap-and-trade pollution markets and babysitting clubs, rather than trying to standardize people’s choices around how much to work, we could simply let the market decide how much a day of vacation is worth.

Deliver me from Australia Post

Most of us living in highly urbanized areas of Australia have had the experience of finding the dreaded Australia Post Ticket upon arriving home after work. No sooner do we see the ticket than we realize, feeling slightly sick, that we will most likely need to find time during working hours to physically go to the post office with our identification over the next few days, join a long queue, and retrieve a package. Worse, our partner cannot do this task for us, if the package is addressed to us alone; and we know from experience that if we ring the phone number on the ticket, all we will succeed in doing after being on hold is to confirm that the package exists and will soon be on its merry way back from whence it came, if we do not hurry up and come get it. Arranging for its actual delivery is out of the question.

We can of course ignore the whole issue, and forego whatever goods are in the package, which I have done more than once. Depending on where you live, there may be an option of signing the ticket with a big red tick-mark next to “Please Leave Package” and praying upon your departure that morning that the postman will actually leave the package on your doorstep. In some locations this might not be wise due to the likelihood of theft. Where I live at least, this is not an option because the postman simply does not deliver packages. Period.

I would like to think that this is not entirely his fault. He may well be instructed by the main office to cover his route so quickly that he essentially has no choice. He already must fight with the ubiquitous antique letterboxes constructed to be just large enough to accommodate approximately one formal acceptance of your luncheon invitation, one handwritten thank-you note from the neighbour for the lovely daffodils, and two small calling-cards from travelling salesmen. The perennial creative folding and stuffing (not to mention tearing) of modern mail that are therefore part of our postman’s everyday job already slow him down and frustrate him. Finding some way to actually deliver packages – including not only lugging them around but ringing doorbells, often hanging around until he realizes no one is coming, and filling out and leaving tickets on the spot – is probably just a bridge too far, particularly considering that to make it through his route on time he almost must use one of those little AusPost mopeds, on which there is simply no space to carry packages. So, he fills out all package tickets before he leaves the distribution centre, and heads off each day with no intent of delivering any packages.

Or so I wish to believe. It could be that our postmen are simply getting away with doing less than their full job because of poor monitoring, the monopolistic hue of AusPost, and/or sticky labor contracts.

Whatever the reason, the non-delivery of packages results in a huge cost shift from the post office to consumers. The asymmetry involved in the actual trade is also unusual: the person or business sending the package, often sitting in some foreign land, does not have to pay any extra cost if it is not actually carried the final kilometer or so to our door. If the recipient does not build the expected package-pickup cost into his decision about whether or not to make the trade in the first place, then the trade perhaps should not have even occurred.

In the long run of course, that cost should be built into our decisions. Yet do we really accept that for some Australia-specific reason, our postal infrastructure cannot exploit the returns to scale in package delivery that are exploited by the national postal systems in other developed countries? Besides, do we really want Aussie consumers ordering less stuff from overseas because of what is effectively a big fat import tax? Doesn’t sound very FTA to me.

Even without knowing the AusPost revenue or cost structures in detail, we can still weigh up a few potential economic options for addressing this problem.

  1. Have Aus Post admit (which won’t be easy) that they cannot deliver every package on the day it arrives. Have a logistics team work out an optimal day of the week on which packages will be delivered for each postal route, and advise residents. Allocate a van or some other cheap but capacious vehicle for the postman to use on that day, rather than his moped. If recipients are home on that day, then their package is delivered; if not, they must deal with the Dreaded Ticket. I predict that this would solve 50% of the problem, and reduce post office queues accordingly.
  2. Allow people to sign up for subsidized package-hold services at their local post offices, whereby any packages delivered to their address are held for some reasonable amount of time – at least a month or two – in order to allow the recipient enough time to find a chance to collect them. This idea is already being trialled by the private sector.
  3. Use a tiered pricing system, where guaranteed actual delivery of a package is an extra service that attracts a higher price, similar to the idea of registered versus regular mail. One problem here is integrating the different options effectively into the infinite variety of senders’ online ordering platforms. However, this could also be implemented as a default on the recipient side, whereby a consumer can sign up (for a price) for a “deliver my packages” premium service that kicks in by default whenever a package arrives.
  4. Have the government offer partial subsidies for consumers to replace their antique mailboxes with some receptacle that can accommodate as much incoming mail as a standard post office box, with no stuffing or tearing required. Use the accumulated time savings across an entire postal route to fund an extra package-delivery run across the route at the end of each day.

Camp fire

Summer camp. It’s a given part of childhood, even a rite of passage, for a large chunk of middle-class urban American kids, yet it has almost no analogue in Australia. For urban Aussie schoolchildren, the four instances per year of school holidays (three times two weeks, plus six weeks over the summer) are often spent either lounging around at home or participating in school-based activities with many of one’s normal class cohort. Some so-called “camps” offer more intensive engagement in specific activities, often sport or art, but participants still sleep and eat at home. Precious few secular sleep-away camps exist for Australian children. As a result, unless they take the whole family away on vacation, parents face heightened childcare constraints during school holidays, and our developing young people idle away long hours goofing off on their X-boxes or engaging in mainly the same types of activities that keep them busy during school terms. How can this make economic sense?

Sleep-away camps offer far more than their media image might suggest. They thrust children into a completely new environment, offer them activities they normally could not access, and confront them with a completely new set of other children with whom to interact. The geographical isolation of most camps in some natural rural setting encourages tight emotional bonding. Children learn how to form fast friendships and how to try new things.

Perhaps the most important element of camp from an economist’s perspective is that children trying out new activities and new social roles might just hit upon clues about where their true comparative advantage lies.

Why is the holiday sleep-away camp niche not filled by suppliers here in Australia?

First let’s consider topographic and geomorphologic fundamentals. Are there spots that would make for good camps in Australia? Sure. One could quite easily erect a residential dorm-style building somewhere in the Blue Mountains region of NSW, for example, and feature regular excursions into the natural surroundings. Beachfront camps featuring ocean-based activities could operate at suitable locations along the Western Australian, Queensland, and New South Wales coasts. Farm camps are a third obvious alternative: get a bunch of self-centred urban adolescents to work together for a week to two on a farm. Free labour for the farm, and a taste of hardworking country life for the city child. What’s not to like?

Perhaps the costs are too steep. A private stateside camp can cost anywhere between a few hundred and a few thousand dollars per week. Private charity and the government help to finance some stateside camps (particularly those with a public service element, and those designed for special-needs or disadvantaged children), in which case the costs are even lower.

There is no obvious supply-side reason – abstracting from any offense that a camp establishment would give to government bureaucrats – why Australian camp costs in the long run should be significantly higher than this, particularly if past campers were used as supervisors, a regular practice in the US. Even with no government subsidy, financing one or two weeklong camp experiences per year should be manageable for a large chunk of Australian middle-class families.

Is it cultural norms? Australian parents as a rule don’t like giving up their kids overnight to universities, and may baulk even more strongly at the prospect of giving them up overnight at younger ages. They also may be faintly suspicious that any person trying to persuade a whole bunch of kids to come together in one place far from a city has some sort of nefarious motive, ideological or otherwise. (By contrast, despite their reputation as prudish and paranoid about pedophiles, many middle-class American parents view sleep-away camps as a normal part of growing up.)

Yet, Australian parents do let their kids go on multi-day overnight school camps, and some children’s organisations do require their members to participate regularly in overnight camp-like experiences, touting the intense bonding and support for creativity that such experiences provide. There appears to already be a basic cultural understanding that camps can be beneficial. With some well-placed marketing, this understanding could be built upon.

School holidays are just around the corner. Who’s up for a joint venture?

The queen’s speech

Michelle Obama’s speech to the Democratic National Convention last week received wide acclaim, with some pundits even implying that her address opened the door for Michelle to be considered for the democratic ticket in 2016. The relatively large post-convention bump enjoyed by the democrats may or may not have been partly her doing.

As economists we start at a disadvantage in explaining political phenomena like this, because despite the contributions of governments to supporting trade and investment, mainstream economic models of the world capture political power in only a limited way. The implicit stance of mainstream economics is that power can only derive from differences across agents in either material possessions or market control.

Michelle Obama is surely not powerful because of her material possessions, whose importance she even implicitly refuted during her address. However, a particularly fervent economist might attempt to graft a market model onto the political process, defining the Obamas as monopolist suppliers of a “good” (leadership, say).

The process through which the “market for leaders” clears in the modern world might then be seen as the result of generations of technological experimentation and institutional evolution, resulting in our present “production function for leadership” taking the form of the infrastructure of the democratic nation state, presumably featuring returns to scale that support a natural monopoly.

Were we to go along with such an exercise, we would still need to explain why leadership rotates, or in other words, why Michelle would bother asking the public for their support this November. To account for this, one would presumably require some type of deus ex machina, like time-delayed corruptibility or in-built human obsolescence that erupts over a very short period (like four years), which is not already an accepted facet of economic man.

We would furthermore still face the problem of why there is such a song and dance, with millions of dollars spent, in the run-up to elections in the first place. Why doesn’t some government committee simply choose and then oversee the performance of the person most qualified for the monopolist’s job, just as suppliers in natural monopolies the world over are screened and then regulated? The public’s wishes, if required as a further input to the leadership production function, could then be ascertained simply through public referenda.

More generally, why is “leadership of the US” one good, of France another good, and of every other sovereign nation another good, rather than having leadership goods differentiated along some alternative grouping mechanism? Why don’t leaders rotate, at least sometimes, across differentiated production lines (e.g., the US President moving on to become PM of England), as also happens in the case of real-world monopolists?

Encapsulating all of these real-world political elements into a mainstream economic model where power derives simply from cornering a market quickly begins to seem like a square peg-round hole problem.

In fact, our discipline’s clearest statement about Michelle’s speech is that it was blatant cheap talk and should not have moved anyone to think or do anything differently than they were already planning. So then, why the bump in the polls? More fundamentally, why would the Democrats even bother to host such spectacles, which are devoid even of debate about the best economic policies to include in the party platform in the upcoming face-off against the republicans?

Leaving for another day the discussion of how we economists might develop the means of interrogating the ultimate sources of political power, we can still address the most immediate question of why Michelle’s speech was so successful. For this we need look no further than its primary microeconomic relevance, which is the direct utility hit that it generated for her listeners. It was plain from the rapt faces and steadfast fist-pumps in the audience that people felt good listening to her. My own and others’ musings (this and this, among other related strands) on such matters lead me to conclude that these positive feelings emanated mainly from the support she offered for the optimistic beliefs of audience members about themselves.

First, Michelle offered her audience reasons to believe that things they already cared about, both now and in the future, had great value both materially and ideologically. Their struggles had a higher purpose and would be rewarded; their children’s future looked bright; their jobs and their health were in good shape.

Second, through personal storytelling and emotional sharing, she offered her audience identification with the story of her family, arguably one of the most famous families on the planet at the moment. This implicitly supports the listener’s belief in higher status (read: esteem) for himself, both now and in the future. “I’m just like Michelle or Barack – therefore, since they have high value, I have high value.”

It is difficult to argue that the good feelings generated by Michelle’s support of these beliefs are not economic phenomena, given the wad of material resources spent to generate them. Presumably, party members believe that these feelings will not just make people happy, but will motivate people to take actions favourable to their party – like voting and volunteering.

The ability to make us feel good is what lies behind the economic value of every good we consume (think of food, health club memberships, and housing, not to mention drugs and art). Our internal beliefs about how satisfied we will be with different goods directly motivate our behaviour in economic markets, and so do our internal beliefs about our own worth. Aware of her limited ability to credibly support more optimistic beliefs about the material realm in the current climate, Michelle and her speechwriters opted mainly for the next-best thing: supporting people’s positive beliefs about themselves.

Even while a fundamental understanding of the political system is still outside the grasp of mainstream economics, as economists we should not discount the relevance of self-regarding beliefs to our decisions in the real world.

Economics, anyone?

This past Saturday I was tasked with coordinating the economics contingent at my university’s Open Day. This is the annual frenzy where university staff market their programs and disciplines to students who are just about to finish high school.

In a frictionless world of course, I could have stayed home. Those looking to invest in themselves would already know their expected outcomes after undertaking each degree on offer, so it would be pointless to try to convince anyone to study anything other than their first-best program. Students’ expected returns to effort in each program would be readily observable, so students and programs would be matched according to students’ comparative advantages.

What we see instead, on the day, is a deluge of young people breathlessly undecided amongst alternative degrees about which their prior information is either non-existent, very limited, or outright wrong. They are matched on the other side by staff waving glossy brochures and waxing lyrical about the bountiful material returns to studying whichever discipline they happen to represent.

I certainly wouldn’t suggest that all of the verbiage flying around on Open Days is cheap talk, but a casual wander around the tables uncovers eerily similar speeches about the wondrous opportunities for travel, prestige, and earnings that await the graduate. Product differentiation is even thinner on the ground when representatives are barred, via more or less explicit university policy, from portraying competing disciplines in a negative light.

Fairs to court new undergraduate students regularly occur in the US as well, but there the game is played amongst institutions rather than amongst disciplines. At that level, verifying information is easier than it is at the level of the discipline, because universities are regularly ranked by third-party agencies on a host of metrics. By contrast, where can I find an objective and well-founded opinion on whether economics will better prepare me to enter the workforce than, say, human resource management? Apart from the survey-based snapshots of young graduates offered by Graduate Careers Australia, there is little to go on.

Students’ pre-selection of their field of study, before they even enrol, is undoubtedly part of the problem. We would surely have fewer post-matriculation program transfers and outright dropouts if students could sample the goods before they were asked to make their selections.

However, program pre-selection in Australia is not going to be replaced overnight by a liberal-arts system of the sort followed by most American institutions.

One enhancement would be to replace the single-number-based allocation of students to programs with a mechanism that is more informative about the likely comparative advantages of the individual student. This information could include a brief personal essay, reference letters, or a personality test. Someone who is an excellent writer but who has no interest in human behaviour or current affairs, for example, is probably not best off studying economics even if his ATAR is 98.

One problem with this is that many 17-year-olds do not have the foreknowledge of different disciplines required to make such judgments. The burden of matching students to programs would therefore have to be shouldered by Australian institutions themselves, which are not set up at the moment to evaluate student applications in much more than a bean-counting manner.

Another possibility would be for universities to spend more of their marketing effort highlighting those objective signals of worth that are generated by third parties and are available at a discipline level. These signals reflect the value of different disciplines to different parts of society, and hence are essentially market-based. With some care, they also can be decoupled from implications about “overall” relative quality.

Accounting, for example, could emphasize its training of students for the CPA, a professional qualification for which economics has no real analogue. Such a qualification carries the implicit promise of market recognition, and thereby some measure of job security. Other trade disciplines can highlight similar professional certifications. Highlighting professional qualification as a core endpoint illustrates that private material security is the primary aim of the training provided in some disciplines.

By contrast, economics could point not only to the career opportunities it opens up, but to its central ideological aims, including maximizing welfare and improving our understanding of human behaviour. The achievement of these aims is reflected in the kinds of contributions for which it has won Nobel prizes, the disciplinary backgrounds of those who are picked to advise governments, and the positive contributions made to addressing social problems like pollution and the under-provision of public goods.

Similarly, chemistry might point to the ideological aims implicitly rewarded via the external prizes, patents, and so on won by chemists worldwide. Law might highlight the backgrounds of MPs and the fundamental contributions of legal thinking to the generation of new laws that help to grease the wheels of commerce and social life.

A clear statement of the top rung of the ideological ladder, as seen through the eyes of those working in the discipline, is simply a clear message about the ultimate ideals of the discipline. Such statements can help the matching process by encouraging those students who are motivated by the implicit ideals of a given discipline to sort into that discipline.

Why do we not see more of this type of information on display in Open Day brochures? The main reason is that university marketing departments are staffed by people who are explicitly instructed by their bosses to highlight the material aspects of degrees, like job opportunities and starting salary levels, under the presumption that this is what students want to know. While economists would be the first to acknowledge that material rewards are undeniably important, there are also less-observable rewards available from believing in the ideals of one’s profession. This belief can and often is imprinted during the course of study, but this imprinting process is far easier when the initial slate is of the right colour.

More broadly, feeding students mainly information about jobs and salaries implicitly affirms that this is indeed the main information they should want to know, which in turn fuels the unfortunate vision of higher education as merely a means to become financially secure. I don’t think this is what most professionals, including economists, see as the only point of their profession – or even the main point. We should give students more credit, and stand up for what economics stands for when pitching it to the next generation.