the Case Against Multiple Choice Exams

I recently gave a midterm in my intermediate microeconomics class. A portion of the midterms was multiple choice at the request of many students. One of those against a multiple choice portion on the midterm sent me this. I have to say I agree. I hate taking multiple choice exams almost as much as i hate writing them.

AC/DC and the Economy

I'd like to thank my colleague Chris Auld for pointing me to this article. It turns out that AC/DC record sale are counter-cyclical... well, sort of. Basically, an article in the Guardian points out that when times are bad, AC/DC's sales are up. The reasoning is as follows:

AC/DC's appeal in unpredictable times is straightforward. People crave something uncomplicated and dependable in a time of uncertainty, and rock music has never produced a band so uncomplicated and dependable as AC/DC.

For 35 years, they have done exactly the same thing - which in guitarist Angus Young's case involves dressing like a naughty schoolboy - unaffected by changes in fashion or band personnel.

Not even the death of lead singer Bon Scott could stop AC/DC cranking out hard-edged, wilfully basic blues-rock, decorated with lyrics in which the phrase "rock 'n' roll" figures heavily, but not as heavily as sniggering innuendo about scrotums.

This makes my research look a little less silly.

Asking forgiveness

Daniel Klein, is the editor of Econ Journal Watch, a publication which addresses controversies and discourse in economics. He, along with Peter Gordon, are putting together a symposium on preference falsification in economics wherein economists can bear their souls regarding their behavior in the professions, particularly regarding research:

The symposium will be edited by Professor Peter Gordon of University of Southern California. Authors who wish to remain anonymous in print will nonetheless disclose their true identity to Professor Gordon, who will serve as confidante of such authors. No one else will be privy to such information. Authors may need to disguise specific facts. Professor Gordon will verify all facts that are reasonably verifiable.

Professor Kuran will serve as an advisor to the project. In that capacity he may review some of the manuscripts at an advanced stage. He will not be privy to the identity of the authors.

The impetus of the symposium is to provide an outlet for exploring preference falsification and other forms of moral or intellectual compromise within the economics profession. Authors are encouraged to be introspective and personal, and yet impartial. The purpose of each essay should be to share experiences that speak to situations to which many can relate. We seek biographical essays that will help others understand widely shared problems.

In his or her essay, the author should clarify the kind of preference falsification in which he or she has engaged. For example:

• Building models one does not really believe to be useful or relevant.
• Making simplifications that obscure or omit important things.
• Using data one does not really believe in.
• Focusing on the statistical significance of one’s findings while quietly doubting economic significance.
• Engaging in data mining.
• Drawing “policy implications” that one knows are inappropriate or misleading.
• Keeping the discourse “between the 40 yard lines” so as to avoid being outspoken; knowingly eliding fundamental issues.
• Tilting the flavor of policy judgments to make a paper more acceptable to referees, editors, publishers, or funders.
• Disguising one’s methodological or ideological views, such as by omitting revealing activities or publications from one’s vitae.
• For government, institute, or corporate economists: Having to significantly play along with things one does not believe in.

Further clarifications:

• Papers need not be anonymous. It is also OK to propose a paper in which you will write as your true identity.
• The voice should not be bitter or conspiratorial. We are not interested in tales of mistreatment. Rather, we are interested in experiences of preference falsification that instantiate and illuminate broad cultural problems within economics.
• Papers should be autobiographical reflections based on narrative. The style should be personable and plain. (For an example, one might consider the tone and style of this article by Michael Marlow.) Authors may wish to open their essays with reflections about why they became an economist.
• Narratives must avoid accusation. Incidents should be suitably told in a generic way, without identifiers. Any flavor of “getting even” will disqualify a proposal. Any flavor of “this is how the world has been unfair to me” will disqualify a proposal.
• Economists from academia, government, the policy community, and the private sector are welcome to submit proposals. Also, narratives about graduate studies in economics are welcome, even by young economists.
• Economists from all parts of the world are encouraged to submit proposals, but everything must be in English.
• Again, only Professor Gordon will know the true identity of authors who are to write anonymously.
• If successful, the symposium will subsequently be turned into a book proposal, in which case selected papers would also be published in a book.
• Though not crucial or necessary, prospective authors may wish to consult William Davis’s article “Preference Falsification in the Economics Profession,” which relates survey findings to Kuran’s theory of preference falsification.
• Length is open, but probably most essays should be fairly short (1000-2000 words).

Halloween Economics

With Halloween approaching, I thought it might be fun to bring to your attention a new paper by Dean Karlan et al. This is a great paper on an important and interesting field experiment.

In the paper, the authors discuss and experiment conducted on Halloween 2007 in which they had trick-or-treaters (you know the kids who show up at your door asking for candy) to choose from an ambiguous urn of types of candy or an urn in which the distribution of candy types was known. Here's the abstract:

We examine whether ambiguity aversion correlates with costume choice amongst children at Halloween. We conducted an ambiguity aversion experiment with children on Halloween during trick-or-treating and correlated this with their choice of costumes. We find that children wearing the most commonly chosen costumes are more likely to avoid a gamble with ambiguous odds. This inquiry is in line with a series of recent papers observing whether choices in simple experimental economics games correlate with theoretically similar non-laboratory behavior.

They actually conducted two experiments, but the second one resulted in such a long queue outside one of the author's house that it proved infeasible. In the results section, they discuss a number of kids who particpated in the experiment but were not wearing costumes. Who shows up to go trick-or-treating without a costume? Maybe you forget a bag or something to carry your Halloween bounty in, but no costume? Which brings up the other question, who gives kids with no costume a treat on Haloween? If they don't have a costume, aren't they chaperones? I usually offer the adults in this "trick-or-treaters" a choice between an urn with an ambiguous distribution of beer or known candy. When given this type of offer, they display no ambiguity aversion.


The complete paper is available here.

Arrow on the Financial Crisis

I'm currently teaching Arrow's work on risk and uncertainty in a graduate course. Here's an editorial from the Guardian by Kenneth Arrow, winner of the 1972 Nobel prize in economics and truly one of the ground-breakers in modern economics. Here's he provides his insights on the current financial crisis.

The current financial crisis, the loss of asset values, the refusal to extend normally-given credit and the great increase in defaults on obligations ranging from individual mortgages to the debts of great investment banks presents, of course, a pressing challenge to the fiscal authorities and central banks to take measures to minimise the consequences. But they also present a challenge to standard economic theory, a challenge all the more important since the development of policies to prevent future financial crises will depend on a deeper understanding of the processes at work.

That economic decisions are made without certain knowledge of the consequences is pretty self-evident. But, although many economists were aware of this elementary fact, there was no systematic analysis of economic uncertainty until about 1950. There have been two developments in the economic theory of uncertainty in the last 60 years, which have had opposite implications for the radical changes in the financial system. One has made explicit and understandable a long tradition that spreading risks among many bearers improves the functioning of the economy. The second is that there are large differences of information among market participants and that these differences are not well handled by market forces. The first point of view tends to argue for the expansion of markets, the second for recognising that they may fail to exist and, if they do come into being, may fail to work for the benefit of the general economic situation.

The value of spreading risks has, of course, been recognized as the basis of conventional insurance as well as the issue of company shares that spread corporate risks widely. The central element of standard economic analysis since the 1870s has been the concept of general economic equilibrium, which, under competitive conditions, leads to an optimal allocation of resources. In the 1950s, it was shown how to incorporate uncertainty into general equilibrium, which suggests, at least, that increasing the number and coverage of risk-bearing instruments would improve the running of the economy. Not only would risks be more efficiently borne, but, more importantly, additional socially valuable risky enterprises would be undertaken. Research showed how derivative securities should be priced, how individuals should choose portfolios to minimise their variability, and how individual contracts, such as mortgages, could be bundled so as to distribute the risks for different parts of the market with different risk tolerances.

The second strand of analysis was a growing recognition of the importance of information in governing reactions to uncertainties. If individuals in the market have different degrees of information, the ability to create securities or engage in other forms of contracts becomes limited; the less informed understand that the more informed will take advantage and react accordingly. This situation was long recognized by insurance companies under such terms as, "moral hazard" (when the insurer cannot tell how well the insured is avoiding risks) and "adverse selection" (when the insurer cannot distinguish among differentially risky insured, so that, at any given premium, the more risky insure themselves most extensively). Economists began to realise that "asymmetric" information was the key to understanding the limits of health insurance and the incentive problems of socialism and then that these concepts found their most important application in financial markets, precisely in the complex securities that the first strand of analysis had called for.

There is obviously much more to the full understanding of the current financial crisis, but the root is this conflict between the genuine social value of increased variety and spread of risk-bearing securities and the limits imposed by the growing difficulty of understanding the underlying risks imposed by growing complexity.

Krugman on Krugman

Paul Krugman won the Nobel prize in economics on Monday. Today, his NYT column was on.. well, him and his research. I think he does a good job explaining his contributions and new trade theory. Here's an excerpt:

The new trade theory starts with the observation that while this explains a lot of world trade, it also misses a lot. France and Germany sell lots of stuff to each other, even though they have similar climates and resources; so do the United States and Canada. What’s that about?

The answer is that there are many goods that aren’t like wheat or bananas, but are instead like wide-bodied jet aircraft. There are only a few places in which wide-bodied jets are produced, because of the enormous economies of scale – you only want a couple of factories worldwide. Those factories have to be somewhere, and those countries that get the factories export jets, while everyone else imports them.

But who gets the aircraft factories, or the factory producing a specialized kind of machine tool, or the plant producing a particular model of car that selected consumers all over the world want? The answer of new trade theory – and it was a tremendously liberating answer – is that it doesn’t matter. There are many economies-of-scale goods; everyone gets some of them; and the details, which may be largely a story of historical accident, aren’t important.

What matters, instead, is the overall pattern of trade: the broad pattern of what countries produce is determined by things like resources and climate, but there’s a lot of additional specialization due to economies of scale, and there’s much more trade, especially between similar countries, than you would expect from a purely resource-based theory.

You may think all this is obvious, and it is – now. But it was totally not obvious before 1980 or so – except for some prescient quotes from Paul Samuelson, you really can’t find anyone describing trade this way until after the theory had been laid out in mathematical models. The plain English version came later.

And you should bear in mind that economists have been thinking and writing about international trade for a couple of centuries; to come along and say, “Hey, we’ve been missing half the story” was a pretty big thing.

Now, on to geography. A decade after the original new trade stuff, I started thinking about what happens when some (but not all) economic resources, especially labor and capital, can move. In the world of the old trade theory, “factor mobility” was a substitute for trade: if factories and industrial workers can move freely, they’ll spread out to be close to the farmers, and neither food nor manufactured goods will have to be shipped long distances. But in the economies-of-scale world I had been studying, the “centrifugal” effect of widely dispersed resources, which tends to push economic activity into spreading out, would be opposed by the “centripetal” pull of access to large markets, which tend to promote concentration of economic activity.

Think of Henry Ford and his Model T. He could have established many factories, spread across the country, to be close to his customers. Instead, however, he found that it was worth incurring extra shipping costs to achieve the economies of scale of one big factory in Michigan.

And once you’re concentrating production in a limited number of locations, which locations will you choose? Locations where there’s a large market – which will be locations where lots of other producers have also chosen to concentrate their production. If the centripetal forces are strong enough, you’ll get a cumulative process: regions that for historical reason have a head start as centers of production will attract even more producers, becoming the economic “core” while other areas become the “periphery.” Thus for about a century, until the rise of the Sunbelt, the great bulk of U.S. manufacturing was crammed into a fairly narrow belt from New England to the inner Midwest; today, 60 million people live along a narrow stretch of the East Coast. Those 60 million people aren’t there because of the scenery; each of them is there because the other 60 million people are also there.

John Kenneth Galbraith

Today would be the 100th birthday of John Kenneth Galbraith. I read his book The Affluent Society in grad school after it as recommended to me by Douglas Dowd.

Here's something written in commemoration of his 97th birthday:

If ever there was a legend in his own lifetime, it is John Kenneth Galbraith, professor emeritus of Harvard University, adviser to Presidents from Roosevelt to Kennedy and Lyndon Johnson, author of more than 40 books, and a man due to celebrate his 97th birthday next Saturday.

Known as JK Galbraith to most and Ken to his close friends, he is the tallest (at 6ft 8in) and oldest economist in America. He is also the most famous living economist in the world - and indeed the best-selling.

In common with many of my generation, I first came across Galbraith's work in The Affluent Society (1958), a hugely successful book - so brilliant and so unmathematical that it incurred the envy and wrath of a certain cohort of his fellow economists.

It was a book that challenged many assumptions about economics and politics (which, for Galbraith, have always been closely linked) and which gave the world some great insights and lasting sayings, including 'the conventional wisdom' and 'private affluence and public squalor'.

The phrases were good summaries of Galbraith's argument that the goals of economic policy had been distorted and more attention should be paid to the quality of economic growth and the distribution of its fruits.

I first met Galbraith in 1980, after we at The Observer asked him - a redoubtable Keynesian - to comment on Mrs Thatcher's adoption of Milton Friedman's monetarist policies, under which unemployment rose to 3.5 million.

He famously wrote: 'Britain has, in effect, volunteered to be the Friedmanite guinea pig. There could be no better choice. Britain's political and social institutions are solid and neither Englishmen, Scots nor even the Welsh take readily to the streets.'

Galbraith has certainly lived to see Nemesis descend on Friedman. In the Financial Times of 7 June 2003, Friedman conceded: 'The use of quantity of money as a target has not been a success ... I'm not sure I would as of today push it as hard as I once did.'

Galbraith was introduced to Keynesian ideas for curing unemployment in the 1930s and never forgot them. As a wonderful new biography, John Kenneth Galbraith, His Life, His Politics, His Economics by Richard Parker, makes clear, despite some minor differences he adhered to the essential teachings of Keynes.

In advising Kennedy, Galbraith warned of the inflationary consequences of tax cuts and was more interested in channelling any 'Keynesian' budgetary measures towards public spending. By that he did not mean military spending, of which there was quite enough already under what was known as 'the military-industrial complex'.

Galbraith was so close to Kennedy he could have been in White House chief economist Walter Heller's job, but preferred to be ambassador to India, a position from which he was still able to advise his young protégé in a series of letters, of which he once told The Observer: 'First he would call me up to ask what to do. Then to tell me what he was doing. Then he would not call me at all.' Perhaps Kennedy's biggest mistake was in not taking Galbraith's advice over Vietnam ('Don't do it'), although the evidence from the new biography is that the young President certainly took that advice seriously.

Before The Affluent Society, Galbraith had already written a best-seller in The Great Crash, 1929, published in the 1950s and never out of print. But many regard his greatest work as The New Industrial State (1967), a study of the power of big business and large corporations.

And it is a subject that still fascinates him. For some years now I have had the privilege of calling on him at his home in Massachusetts on my way back from annual meetings of the World Bank and International Monetary Fund in Washington.

This year he was showing his age and clearly did not want a full-scale interview. But he certainly wanted to talk about corporations. 'The modern corporation operates under the mystique of the market, which is extensively under its control. This is a matter which modern economics recognises but does not pursue.'

And the man who warned Kennedy about the championing of war in Vietnam added: 'Our military operations, including notably Iraq, are under corporate direction through Rumsfeld and a compliant military staff. In the absence of corporate initiative and power we would not be in Iraq. And, a more poignant matter, we would not have George Bush.'

The great man is still in fighting form.

Paul Krugman wins the Nobel Prize in Economics

Monday, Paul Krugman was announced as the winner of the 2008 Bank of Sweden's Nobel Prize in Economics. He's the third economics Nobel laureate at Princeton, but their first in the economics department (John Nash is in mathematics and Daniel Kahneman is in psychology). Here's the blurb from the Financial Times (14 October 2008).

The Nobel economics prize was awarded yesterday to Paul Krugman, one of the great popularisers of economic ideas and a trenchant critic of the Bush administration. However, the prize was awarded for work done almost three decades ago in developing what is known as “new trade theory” and “new economic geography”.

Earlier trade theories suggested that a country would trade with partners that were different - rich would trade with poor, and capital-intensive would trade with labour-intensive. In practice, rich countries tend to trade with other rich countries.

Mr Krugman’s analysis showed why this was to be expected: many products were most efficiently produced by large companies, but consumers wanted variety and would buy products from foreign giants as well as the dominant domestic corporations.

Mr Krugman’s ideas on the importance of economies of scale could be traced back to Adam Smith, but the new ingredient was a usable mathematical description of what was going on.

Economic geography uses much the same mathematics to explain the location of jobs and businesses. Mr Krugman showed that the forces of globalisation, far from creating a “flat world”, could enhance the power of global cities such as New York and London, because they could do business with a global market.

Mr Krugman, a professor at Princeton University and a prominent columnist for the New York Times, has long been seen as a future Nobel laureate. He won the John Bates Clark medal for young economists in 1991. Yet if the choice is not surprising, the timing - just before the US presidential election - might be. Mr Krugman is an influential and partisan political commentator.

His columns, first in Slate magazine and then the New York Times, were at first clever refutations of popular misconceptions about trade protection or the “new economy”, but they have become far more notable for their stinging attacks on the Bush administration. He has recently criticised Hank Paulson, the US Treasury secretary, for mishandling the credit crisis, while praising the British government for being “willing to think clearly about the financial crisis, and act quickly on its conclusions”. He also warned of the US housing bubble in 2005.

This is not the first time that the Nobel prize committee has recognised an economist with a public profile and an appetite for political debate. Joseph Stiglitz shared the prize in 2001, after a combative stint as chief economist of the World Bank; Milton Friedman was an early laureate in 1976.

Among professional economists, Mr Krugman is admired for his work on currency crises as well as the work on trade that won the prize. Avinash Dixit, a Princeton colleague, once described Krugman’s methods: “He spots an important economic issue months or years before anyone else. Then he constructs a model of it, which offers new and unexpected insight. Soon the issue reaches general attention, and Krugman’s model is waiting for other economists to catch up.”

Mr Krugman’s trade model showed that there were circumstances in which trade protection could be in a nation’s economic interest. This idea was joyfully embraced by protectionists, and Mr Krugman spent much of the 1990s vigorously defending free trade and arguing that trade protection in practice was almost always harmful.

The experience may have fuelled his enthusiasm for economic popularisation, although even his early writing betrayed a wit and clarity not common amongst economists: he wrote, in 1978, “A theory of interstellar trade”, commenting that it was “a serious analysis of a ridiculous subject, which is of course the opposite of what is usual in economics.”

Upcoming Event: Law School

As a professor, you often get questions from students regarding options for graduate school, careers, etc. Many ask about graduate school opportunities outside of economics (i.e., grad school opportunities that are available with an economics undergraduate degree but do not involve and M.A. of Ph.D. in economics). I know several individuals who have pursued law degrees and are not fully immersed in what economists study under the rubric of "law and economics." with that in mind, here's an upcoming event on the UofC campus:

Interested in a Career in Law?

Wed, Oct. 22, 5 - 7 p.m. Education Building C179
Are you thinking about going to Law School? If the answer's yes, you'll want to attend an upcoming info session to learn all about:

- The Application Process - including deadlines, tips on submitting a good application, and available scholarships
- Career Prospects - Hear from practicing lawyers about career prospects and the type of work they're involved in. - Student's Perspective -Gain an understanding of what law school life entails from a current law student

Understanding the Financial Crisis in the U.S.

I've been asked by a number of people about the current financial crisis in the U.S. I've been struggling to find a simple way to explain it, but now have some resources.

First, Roger Congleton has put together a good set of notes explaining the credit crisis. (HT to Tyler Cowen)

Secondly, Joesph Stiglitz was on Democracy Now today (October 2nd). He gave an easy to understand presentation of the crisis, its causes, and its relation to the current war in Iraq.