Most “economists” aren’t

I’d suggest that “transaction cost” is right up there with “opportunity cost” in importance.

Interesting. My grandfather-a labor economist trained half mathematically/half institutional school–he got his PhD at Harvard in late early 50s) taught me the principles of sunk costs and opportunity costs when I was a youngster (12 or so), while illuminating them with the idea of Nietzsche’s “eternal recurrence.” In reflecting on this, after jet’s comment, it occurs to me that with questions like this, it’s easy to let “non-rational” elements into play–but also, to see how the non-fungibility of a lot of experience also makes the “rational” elements seem, well, irrational (or, at least, no wholly rational).

There was a really interesting dicussion about this on marginal revolution awhile back. Here are the links:

Marginal Revolution

Marginal Revolution

John: What’s more likely, that economists as a group don’t really understand the concept of opportunity cost, or that the study was in some way not well-designed? (Brandon gives a plausible account of the latter.)

“The stress factor doesn’t explain worse than random correct response rates”

and ummm…

“the proportion choosing (b) was 21.6 per cent”

and ummm… an N of what? (I don’t have a subcription). So t(N-1)=(25-21.6)/st.err, probably will get you about random. Even more plausible if you expect, as you indicate above, that there are about 30% or so genuine dummies in the sample.

And really, AEA job market intervies are not the place to be giving out surveys of any kind. Free coffee yes. Surveys no.

N = 199, but I’m not calculating confidence intervals. The paper is available for free on Ferraro’s site here:
http://epp.gsu.edu/pferraro/docs/ferrarotaylorbep.pdf

By the way, isn’t the bolded part here: “Bob Dylan is performing on the same night and is your next-best alternative” strictly speaking unnecessary? If on “any given day you are willing to pay up $50 to see Dylan,” it follows that on any given day you can’t get more than $10 in net earnings, doesn’t it?

The idea that individuals have well-structured demand functions and reservation prices for everything is a fantasy – it’s combinatorially impossible for an animal brain to rank the universe of possible shopping carts in Wal-Mart, let alone the whole of life. So actual shopping and leisure choices must be made in some other way. The concept of opportunity cost may be clear, but is it really as important as John Q and the survey team think?
Even for investments, it’s rare for a company to have a fixed pool of capital available for project A or B. The rational course for a firm is to carry out all projects where the expected, risk-discounted yield is greater than the cost of capital, and the lexical ordering of the good projects (with the parallel schedule of relative opportunity costs) is irrelevant. The one case where opportunity cost seems essential is land use, where the choices are exclusive.

As I got the answer right where do I collect my Ph.D.? It would be a definite step up from my current B.Sc.

Or is reading Marginal Revolution (as many have pointed out) not sufficient study to collect the higher degree?

Can someone explain the question to me. I read it that the concerts are going on at the same time, so I can only attend one. I am told I prefer Dylan, and I have a free ticket. So why would I go to the Clapton concert instead, based on the information available? What am I reading wrong?

Matt, the free ticket was for the Clapton concert, not Dylans’.

The question is badly worded – the Clapton bit is in fact a redherring, since it has no affect on the result.

Here’s a better way to word it for all you husbands out there.

Your wife comes home and tells you there is a sale on at Myer. 20% off all babywear! Yippee! That cute jumpsuit she was so willing to buy at $50 is now only $40!

You groan, pointing out that your baby already has 10 jumpsuits and that buying another one is a waste. Your wife pleads with you, using the classic argument: “but if we buy the jumpsuit then we will be *saving* money” !!!

How much money will you ‘save’ by buying the jumpsuit? Or, in other words, what is the ‘opportunity cost’ of not buying the jumpsuit?

Cheers,
Sean.

Sorry, yes, I see I swapped around the names in my original post. Sorry!

Yeah, okay, I now see the point. I give up 10 dollars (which I would have saved by getting cheap tickets to see Dylan) by going to see Clapton. But in the real world, shouldn’t the massive benefit of seeing a better (in my opinion, as stated in the question) artist for free also count? But that’s not relevant to the quiz, as such, so point taken.

The question is badly worded – the Clapton bit is in fact a redherring, since it has no affect on the result.

It’s expected that economists who understand opportunity costs are able to distinguish relevant information from irrelevant noise – the basic reading comprehension.

In other words, the red herring is PART OF THE TEST.

Let’s say you would gladly pay $30 to see Clapton. You get a free Clapton ticket and you think it made you 30 bucks richer, but because of the Dylan option you’re only $20 richer, because you’ve forgone that profitable Dylan concert – is it the point all this?

If it is, it doesn’t seem to make much sense.

Instead of going to either concert you could dig a $100 ditch or maybe even write a $1,000 article for the Economist. Forget Dylans and Claptons, start diggin’.

This is great. Several Timberite commenters are now arguing that the economists of the world are out of touch irrelevants, which implies they agree A) Aliens control the economy, or B) The Invisible Hand of the Market controls the economy.

This is going to be an odd day.

“One more thing: An Olympic Gold Medal goes to the first person who can find an actual example of where and when in fact Clapton and Dylan were playing rivalling concerts on the same night in the same town.”

No, no proof, but I wouldn’t be at all surprised if it did in fact happen. Dylan was in the UK a lot mid sixties, Clapton with the Yardbirds/Cream/John Mayall.

Have you ever tried buying tickets for concerts by either one of those two performers? Then rethink prices you are giving.

Answer is: “e”

(e) There is no such unicorn as a free ticket to see an Eric Clapton concert without no resale value.

…more proof that even honest-to-god, bona fide “Economists” (please note the capitalization) are completely disconnected from reality.

Jet, some say economics is in turmoil:

Fullbrook et al, “What’s Wrong with Economics”;
Colander et al, “The Changing Face of Economics”;
Mirowski “Machine Dreams”.

Ok. Everybody go back to dictionary.com and get a refresher of “Opportunity Cost”. Ok. Now, let’s break it down for the economists out there.

Opportunity Cost has to do with return on investment. “On any given day, you would be willing to pay up to $50 to see Dylan” means that you believe that a Dylan concert is worth $50, that is to say, your return on investment is $50 worth of enjoyment at a concert.

If you can get (what you believe to be) $50 worth of concert for $40, then your return on investment is $10 off of a $40 investment.

Now, that is not opportunity cost. We haven’t gotten far enough for that yet. We need a choice of investments in order to calculate that.

Our other investment possibility for the evening is the Clapton concert. In fact, we were given a free ticket, so our investment is $0. What is our return on investment? What? It isn’t specified? How much do we value the Clapton concert? Who knows? We can make no assumptions here. There IS a red herring in the question: “[the ticket] has no resale value.” The resale value of the ticket DOES NOT equal your return on investment. You are not a scalper, you are a concert goer, and our returns are measured in our perceived value of the concert.

So in order to calculate the opportunity cost, we would have to subtract the return on investment of going to the Clapton concert from the return on investment of going to the Dylan concert. Since we are not told what we feel the value of the Clapton concert is, we cannot answer the question.

Now for a bit of further analysis: if Dylan is “your next-best alternative”, you can infer that the Clapton concert has a positive value for you, in which case we can rule out c) and d), since you can only acheive c) and d) if the return on investment of the Clapton concert has a negative value. Now, if you were a literal-minded economist, you would say “next-best” means that the return on investment of a “next-best” option is less than the first option, meaning the Clapton concert has a higher value to you than the Dylan concert, thus there is no Opportunity cost at all, and you would have to pick a).

I don’t think we can take that liberty with the question, though, because I don’t want to assume that it was a trick question. I’m just going to assume that the questioner is misapplying the concept of opportunity costs.

-mike

Please tell me again: I should take seriously any economists because…???

Barry, next time I’ll stomp my foot so you can laugh with everyone else. If someone mentions aliens, you can be 100% positive they are not being serious.

Jet, it’s hard to tell when you’re serious. The possibility “never” has occured to me

Radek, read the non-Collander books.

“Even if there really is no such thing as “Neoclassical Economics”.”

Explain that to the co-editors of the Collander book, who distinguish it from Institutionalist, Austrian, neo-Keynsian, Marxist, and feminist economics. Joan Robertson called it neo-neoclassical, since the neoclassicals were Marshal, et al, and the classicals were Ricardo, et al.

The people in the second book call themselves “broadband” economists. They used to be “post-autistic economists”, but the term was an unfortunate one.

I’m not actually sure that econ is in turmoil, but from these books it seems that it should be. The Collander book is by mainstream people who are trying to convince the profession to meet the challenge.

Ironically, these attack (basically from the left) coincide with the hard right’s decision to ignore the fiscal economics, after riding to power in part on a wave of dogmatic free-market ideology. Such is life.

If you liked Clapton and Dylan equally well, the opportunity cost of going to the Dylan concert would be $50, right?

I suppose that part of being an economist is knowing how to tease the specific question (opportunity cost of Dylan) out of the whole story, but it seems to me that this kind of analysis is best applied to things like alternative investment opportunities rather than to consumer entertainment choices.

To put it differently, the opportunity-cost question asked, in this context, is not really very useful in the actual analysis of the actual choice selected for an example.

For example, after the fact, an investor who had made an investment choice for business purposes would end up with a tangible gain or loss based on his choice between tangible investments, whereas an entertainment consumer ends up with nothing but intangible memories after a choice between two intangible potential experiences of two different musicians.

This question and its book answer are such fine examples of the shallowness of thought that characterizes much of pure commodity economics.

It’s clear that Fred prefers Clapton over Dylan, otherwise Dylan would not be next-best.

Given Fred’s preference, let’s say he’d pay $20 more to see Clapton over Dylan on any night he had to choose between the two.

If a ticket to Dylan costs $40, Fred would pay $60 to see Clapton.

Since he’s getting that ticket for free, however, he has a net benefit of $60 going to the Clapton concert.

To get a net benefit of $60 from the Dylan concert, the ticket to that concert would need to be minus $10. Given the Clapton ticket is for free, the Dylan ticket — for that night, given the other opportunity — is less that worthless.

Bryan, oops! When I reread your comment it looks like you got it right and I got it wrong. Sorry about that.

It seems as if a lot of people are objecting to answer (b) because they think it’s implying that going to see Clapton is the wrong choice. But I didn’t think that “the opportunity cost of seeing Clapton” was supposed to be the whole calculation of whether you’re ahead from the transaction. It’s just one piece. It’s not supposed to include the benefit to you of seeing Clapton; that’s the other part of the calculation.

matt has the simple answer absolutely correct.

john emerson (#54): Your argument is consistent with those ascribing a substantial positive worth to the (free) Clapton concert, let’s say W. No, bad letter, let’s say C. Then the “net benefit” of the Clapton concert would be C-$10 (discounted by the opportunity cost of the “next-best” alternative). Of course that’s still disregarding the opportunity cost of spending $40 — you can have a nice dinner for two, pay a few days’ rent, fill up and get an oil change (maybe not at today’s fuel prices), etc.

Not unrelated point on “differential” cost measures — often there is an implied assumption that the “base” amount of money involved is free. I guess it’s a feature of US economic thinking.

Knowing the terms’ meaning is the economist’s art. Additionally, the proportion of incorrect answers related to the setting, namely, the question was asked at a public meeting with sideline job interviews and social gatherings; the social context colored factors much like the proposition of who would stop to sign a political signature gatherer’s petition form. Maybe this contextual factor is part of what you alluded to in your mention of game theory.
Some replies I enjoyed were the ones that tended to examining other derivative mathematical views of value; immediately one instance that came to mind was marcom prognostications during the telecom bubble in 1999 concerning how to motivate the cellphone viewer to shop, and how to datamine cellphone owner behavior analysis records. Overlaying cost analysis on the r+d expenditure to sift the data and design the behavior filter templates, and deploy the database servers into the neighborhoods haunted by the correlated cellphone owner(s), or by later technology, to map the behavior onto geographical maps.
Yet, somewhat irrespective all these parsings, other values need to map onto the proposition of the question as actually asked; and, humorously put, it is estimable that those other parameters torsed the anticipated correct-answers curve beyond wildest predictions.
Because the question was asked in very real societal terms, i.e., describing parts of decision trees as acquirable entertainment values, survey respondents were further driven off the scent of the simple answer.
One of the several threads I read through the links you provided contained a professor’s rudimentary restatement of what, on a quiz, would have been a fractional statement of the question, but an encapsulation more direct in language terms; his question was easy to answer quickly, as it was barebones and not clothed in attractive diversions.
And here, too, we arrive at yet another interesting avenue for economists’ activity, the craft as newly responsive to Sarbanes-Oxley, at least on US shores.
Having read and written a bit based on such business literature as the corporate prospectus compared to SEC quarterly statements, compared to corporate investor website content which dynamically varies and which is responsive to such software elements as cookies, passwords, permissions, adware and the like, I suspect that, far from a withering science, economics, indeed, has a place in the sun, if our governments are to rely on good economists to help structure our development and integration.
I imagine your cite of the Bernanke book is associated with the living theory as it is beginning to be applied.
_____________
The professor who rephrased the survey question fairly without the spurious and partial information attributes is: J at Sep 2, 2005 2:16:05 PM on the thread at MarRev; the MarRev site only has text links so you will have to search on the time parameter to find the commenter whose name begins with J there; I have omitted the full name out of deference. It is always nice to have a prof who makes it easy.

…however, even if we do assume that emotions induced by a concert can eventually be converted into dollars (e.g.: Dylan will inspire you write $50-worth of a song), there’s still a small problem: you are taking the $40 to pay for Dylan’s concert from your interest-earning bank account and thus the opportunity cost is somewhat less than $10.

Hmm, having read through this all, I have to agree with #65, and the commentator at Marginal Revolution who re-worded the question. It’s an awful question. We’re told that we value Clapton over Dylan, but are then meant to ignore the value of going to the Clapton concert, apparently.

What’s wrong with the following idea. My TV has broken, and after doing research, I decide on either sets #A or #B, which I’m prepared to pay $500 for. I’ve read lots of reviews which say the picture on #A is a bit better.

i) I get to the store, and sure enough, both sets cost $500. So chosing #A gives an O.C. of 0, and so I go with #A, as it’s the better model.

ii) I get to the store, and #B is discounted to $400. So, choosing #A will involve an OC of $100, and hence I have to decide if the extra quality of #A is worth 100 bucks or more.

iii) I get to the store, and now #A is discounted to $400. So, choosing #A will involve an OC of 0
(surely -100 just makes no sense), so I’d be insane to choose #B.

Carrying this through, if #A is actually free (say I won a raffle) and #B is 400, then surely the OC must infact be 0 (as I guess negative OC doesn’t make much sense). So how does this differ from the question involving Dylan and Clapton?

Actually, I still don’t understand. According to some other commentators over at Marginal Revolution, it appears that the first choice should be irrelevant to the OC, so assuming #A is my default choice, the OC is *always*

600 – (cost of #B)

At least this is always consistent… However, given the raging arguments over at M.R., it appears that *any* of the given multiple choice answers can be backed up, if one has an appropriate choice of definition for OC. So I still think the question is rather unfair…

I don’t really see how paying less for something than I might be prepared to do so can possibly count as a “gain”, unless I’m already comitted to buying this something anyway.

That’s why they have this phrase there:
On any given day, you would be willing to pay up to $50 to see Dylan.

wrong in either case

They could be both right – if one of them is on the north pole and the other one on the south pole.

They could be both right – if one of them is on the north pole and the other one on the south pole.

This is incorrect, and I’ll use the North Pole case as an example. (The South Pole case is symmetric.) Exclude the time of year around the Summer Solstice during which the sun is visible through the entire 24-hour day (i.e., there is no period of darkness during the day) and around the Winter Solstice during which the sun is invisible through the entire day (i.e., there is no period of light during the day). During those periods, the sun neither rises nor sets.

During other times of the year, from the perspective of the person at the North Pole, the sun appears to rise from the South East and set in the South East. This is a result of the fact that the North Pole is always north of the trace of the sun over the earth as the earth rotates.

Back to why econ grad students failed the quiz: econ students are famous for their concrete material goals. For a lot of them, econ was probably just a steppingstone to something else, so they learned everything purely by rote, in order to pass tests, without necessarily trying to understand the meaning of the principles taught or their application to reality.

The horrible broad-band economics people say that neoclassical economics is a formalized fossil ideology with no necessary connection to economic reality, but of course you can tell that their wrong about this by the name they chose for themselves.

If you have intuitive brilliance, you don’t need no freakin economics.

The critics say that a lot of economics as taught, especially at the introductory levels, is an ideological false front. They’re all economists themselves, and none of them say that there’s no value at all in economics.

You oughta read the books. Even some of the mainstream critics in the Collander book say that parts of economics, as taught, are simply false. Not just highly abstracted and schematic, but false.

One of the ill-effects of this that they speak of is the production of flocks semi-educated economists by the mediocre schools. They go out into the community with their ideological misinformation and do harm.

Herbert Gintis and other say that the general equilibrium model is not true and that this has been known for years, but that it’s still taught. Gintis is in Colander’s relatively mainstream collection.

I highly recommend the Colander and Fullbrook books. I’m still waiting for the Mirowski book. I’m not an economist myself and often find myself not understanding what’s being said, but these two books somewhat validate my ignorant mistrust of the profession.

$50 loses its fungibility

Yes, and that’s what I said too. Doesn’t quite work for concerts; makes much more sense with investments and stuff like that – where everything can be translated into dollars and cents.

I left for the weekend and missed a bit – so I apologize if my reply is out of date in this fast moving world of the thing they call they internet. Anyway:

“Radek, read the non-Collander books.”

After giving that hack Stephen Keen an honest try I’m a bit wary of ‘critiques of mainstream economics’, but since you group’em with Collander I might just risk it.

“Even if there really is no such thing as “Neoclassical Economics”.”

“Explain that to the co-editors of the Collander book, who distinguish it from Institutionalist, Austrian, neo-Keynsian, Marxist, and feminist economics. Joan Robertson called it neo-neoclassical, since the neoclassicals were Marshal, et al, and the classicals were Ricardo, et al.”

Well, I certainly didn’t mean to imply that there isn’t such a thing as ‘mainstream economics’, just that this ‘Neoclassical’ term, despite its historical pedigree by now just has essentially become a stand in term for ‘the kind of economics I don’t like’ or ‘the kind of economics that don’t jive with my apriori ideological conclusions’. I.e. the term is at best useless, likely an obfuscating tactic.
As to your list, think about it the other way. Is Matthew Rabin (behavior stuff) a Neo-Classical? Akerlof (Neo-Keynsian)? John Roemer (Marxian)? Them New Institutionalist folks? Many Austrians are out of the mainstream (like the Von Mises Institute folks) but that’s mostly because they prefer to whine about how ignored they are rather then engage in honest discussion or actually try to develop an alternative approach (unlike the folks mentioned above).
By the way, the editor of the Collander books might distinguish out Neo-classical economics but Collander also thinks the term useless.

“I’m not actually sure that econ is in turmoil, but from these books it seems that it should be. The Collander book is by mainstream people who are trying to convince the profession to meet the challenge.”

Well, I don’t think it’s in any more turmoil then it usually is. But the ‘mainstream’ is very fluid and readily incorporates (appropriates if you wanna be less kind) stuff that a few years back wasn’t mainstream. It’s the normal process of intellectual pursuit.

None of them would be neoclassical according to what I said and what the book said, except perhaps Rabin.

Herbert Gintis and other say that the general equilibrium model is not true and that this has been known for years, but that it’s still taught. Gintis is in Colander’s relatively mainstream collection.

Comment?

John, I never said you were neoclassical. I have no idea what you are. When I first posted I even thought you might not be entirely hostile.

Even in the Collander book, which is moderately dissident or heterodox, there’s a sort of circle-the-wagon insistence on being “mainstream” but not “neo-classical”. Though if there’s no such thing as a neoclassical economist, of course none of you are neoclassical.

One of the points of the Collander collection, and even more so the other one, is that regardless of how open-minded and adventuresome the top guys at the top schools are, it takes decades for new ideas to filter down to the average and below-average schools, with the result that large numbers of miseducated economists are pumped out into the body politic to do their dirt.

And what Gintis says is that the majority of students learn GE without any reservations. Gintis does not believe that the limitations of GE should be an esoteric secret to be revealed only to upper-level students. He thinks that things that are not true should not be taught.

“He thinks that things that are not true should not be taught”

I don’t know the article so this is commentin’ in the dark, but strictly speaking there isn’t anything in ge that “is not true”. Given certain assumptions certain results obtain. Then you get to argue about how strong/meaningful assumptions are.

Also even at the grad level, usually you get two or three core micro courses and there’s a lot (200+ years!) of material to cover. Usually ge is one out of these three courses – which generally is not enough time to go into the subtleties, many of which are very messy.

And anyway, a very large portion of economics these days is empirical work and at least I get a sense that theory, and disputes over theory have taken a back seat to obtainin’ better data, using better estimation methods and dealing with real world data problems.

John and Radek: Many of the authors in the Collander book may be fairly close to your opinions, though several seem less benign about the field as a whole than you do.

I still thin that you should read both books, but whatever.

My own animus against economics comes from the fact that whenever I run into a hard-core, bloddthirst, social- Darwinist free-marketer, he invariably has studied economics and believes in it as gospel. I do also run into liberals and moderates, but I don’t get the feeling that the center of balance of the profession is there, and the liberals and moderates seem unwilling to break solidarity with their profession. By and large I think that the political effect of mass teaching of economics has been highly negative.

That’s not their sole criticism. And they find a link between the unrealism of some of the theory, and the ideology learned.

More than one author in the Collander book comments on the very slow (decades-long) way in which important theoretical changes and new results filter down to the teaching/ textbook level. This is very odd indeed, because economics is one of the disciplines where students are milked the most efficiently with new textbook editions every two or three years. There are various reasons for this kind of inertia, but ideology (I don’t mean that in a technical sense) is probably one of them.

I haven’t cited anyone from the other book, since it’s been declared here already that those authors not worth bothering with.

It’s my specialty, abb1.

I’m working on an analysis of “intellectual rent”, which is what professional monopolies collect by virtue of their monopoly. For example, they can equivocate about the problems with GE.

“I haven’t cited anyone from the other book, since it’s been declared here already that those authors not worth bothering with.”

never said that. In fact I said it’s probably worth checking out.

“What do people think about the Wikipedia article on General Equilibrium?”

It’s a bit schizo. You can see the different contributor’s different styles and biases.