Disequilibrium economics is a logical impossibility

This is going to be super abstract, potentially infuriating and probably wrong.

I sometimes hear people talk about „disequilibrium economics“ and I think I know what they have in mind. Equilibrium is often associated with a system at rest. That’s the physicist’s notion of equilibrium: a ball sitting at the bottom of a bowl, a planet moving around the sun in a stable orbit, etc. Disequilibrium is something not at rest: you hit the ball and it jiggles around inside the bowl, a planet collides with another and flies off its orbit.

Economists have a different notion of equilibrium. Indeed, they have several different notions depending on the context. But basically, an economic equilibrium is a consistency condition imposed on a model by the economist. It follows that „disequilibrium economics“ is a logical impossibility.

Let me explain. Economists build models to explain certain real-world phenomena, say bank runs. Inside these models there are agents, e.g. savers, banks, firms, each described by their preferences, beliefs and constraints. For instance, a saver wants to keep her money in the bank as long as she believes she will get it back eventually. Whether she can get it back depends on the number of savers who demand their money back. As long as most of them don’t want to withdraw their money, everything is fine. However, if there is a critical mass of savers who want their money back, the bank needs to liquidate its assets prematurely at „fire-sale“ prices, which means it cannot repay all the savers’ deposits in full. You have two equilibria: one in which nobody runs on the banks, the banks carry their investments to maturity, everyone gets repaid; another one in which everyone runs, the banks liquidate their investments prematurely, people don’t get repaid in full.

Only the first of these equilibria can sensibly be characterized as „a system at rest“. In the second equilibrium, nothing is at rest: there is chaos in the streets, banks go bust and people get hurt.

What characterizes both equilibria are two conditions:

  1. Everyone is doing the right thing given their preferences, beliefs, and constraints. The saver who runs on the bank is doing the right thing: Given that everyone else runs, she should run, too, or else she will get nothing. This is called rational behavior, but it should really be called consistent behavior. It’s behavior that is consistent with an agent’s preferences, beliefs and constraints.
  2. Things need to add up. Or to put in fancier language: individual decisions need to be consistent with each other. The total value of deposits repaid cannot exceed the total value of assets held by the banks. If there are 10 cookies and I want to eat 8 and you want to eat 5, that’s not an equilibrium. It’s a „disequilibrium“. It’s a logical impossibility.

If you’re a behavioral economist, you may take issue with condition (1). You may argue that people often don’t do the right thing, they are confused about their beliefs and they don’t understand their constraints very well. That’s fine with me. Let agents do their behavioral thing and make mistakes. (Although you must be explicit about which mistake out of the approximately infinite number of mistakes they could make they actually do make.) But still, things need to add up. I may be mistaken to want 8 cookies and you may be confused to want 5, but there are still only 10 cookies. Behavioral economics still needs condition (2).

If you’re a first-year undergrad, you may think equilibrium means that markets clear. Then you learn about asymmetric information and realize that things like credit rationing can occur in equilibrium. And you learn about the search models. Adding up constraints may be inequality constraints.

Finally, you cannot „test for equilibrium“ with data. Equilibrium is that which your model predicts. If your prediction is contradicted by the data, it’s because your model is wrong, not because there is „disequilibrium“. I have heard econometricians talk about error correction models where they call the error correction term a measure of „disequilibrium“. What they mean by that is that their economic model can only explain the long-run relationship between variables (the cointegration part), from which there are unexplained short-run deviations. But that just means the model is wrong for these short-run movements.

Equilibrium means consistency at the individual and at the aggregate level. It doesn’t mean stable, it doesn’t mean perfect. In fact, it is completely devoid of empirical content in and of itself. It only becomes meaningful in the context of a concrete model. And without it, economic models wouldn’t make any sense.

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Die Gegenfinanzierung von Steuerreformen: Eine Pi-mal-Daumen-Rechnung

Vor der anstehenden Nationalratswahl haben die wahlwerbenden Parteien ihre Steuerpläne vorgestellt. Sowohl SPÖ als auch ÖVP und FPÖ versprechen Steuersenkungen, hauptsächlich bei der Lohn- und Einkommenssteuer. Wie immer bei solchen Versprechen stellt sich die Frage der Gegenfinanzierung, d.h. an welcher Stelle im Staatsbudget Ausgaben eingespart werden soll. Und dabei sorgt ein Punkt immer wieder für Verwunderung: das Volumen der vorgeschlagenen Einsparungen ist immer geringer als das Volumen der Steuersenkungen. Zum Beispiel: Im Reformvorschlag der Volkspartei steht eine Senkung der Steuern und Abgaben von 12 Milliarden einer Ausgabensenkung von 8 Milliarden gegenüber. Woher sollen die restlichen 4 Milliarden kommen? Die Antwort lautet: aus Mehreinnahmen durch höheres Wirtschaftswachstum.

Wie soll das gehen und sind Mehreinnahmen in dieser Höhe realistisch?

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Video: David Friedman’s case for anarchy

On June 6, David Friedman gave a lecture at the Economics Club making the case for an archo-capitalist society. For those of you who missed it, you can watch a video of the talk here!

(Unfortunately, the sound quality is not great. If anyone has an idea how to improve it, please leave a comment.)

There will be a video of the second lecture at some point, but it still needs some editing which is definitely not my comparative advantage.

Hartz-IV: Alternative Fakten

Es gibt zwei Arten von alternativen Fakten: solche, die frei erfunden sind, und solche, die wahr aber irreführend sind. Wie man letztere erzeugt,  zeigt der “Standard” lehrbuchmäßig in einem Artikel über die Hartz-IV-Reformen:

Die Reform wollte eigentlich erreichen, dass Langzeitarbeitslose zurück in den Arbeitsmarkt kommen. Daran ist sie gescheitert. In Deutschland gibt es deutlich mehr Menschen, die über Jahre keinen Job finden, als in Österreich. Und das, obwohl die Sozialleistungen hierzulande höher sind.

Wörtlich genommen stimmt die Aussage natürlich. Die absolute Anzahl der Langzeitarbeitslosen ist in Deutschland höher als hierzulande. Es gibt aber auch ungefähr zehnmal so viele Menschen in Deutschland wie in Österreich. Relevant ist das Verhältnis der Langzeitarbeitslosen zur Bevölkerung und wie sich dieses Verhältnis seit Einführung der Hartz-Reformen in den Jahren 2003-2005 entwickelt hat.

Hier der Anteil der Langzeitarbeitslosen an der Erwerbsbevölkerung in Deutschland im Vergleich zu Österreich während der vergangenen 14 Jahre (Quelle: Eurostat).

hartz4blog

Diese Grafik zeigt so ziemlich das Gegenteil von dem Bild, das der Standard-Artikel vermittelt. Die deutsche Langzeitarbeitslosigkeitsquote ist drastisch gesunken, während sie in Österreich leicht gestiegen ist. Im letzten Jahr lag sie in beiden Ländern ca. bei 1,8%.

Weiter unten im Artikel wird es noch ein bisschen “alternativer”:

Frage [sic!]: Aber immerhin ist die Arbeitslosigkeit stark gesunken.

Antwort: Das stimmt zwar, hat aber den meisten Fachleuten zufolge relativ wenig mit Hartz IV zu tun. Deutschland hat sich zur gleichen Zeit auch in vielen anderen Bereichen reformiert, die Löhne wurden schon Jahre zuvor kaum mehr erhöht und Unternehmen haben sich auf Märkte wie China spezialisiert, was sich als ein mehr als glücklicher Handgriff entpuppte. Außerdem sinkt die Zahl der Leute, die arbeiten wollen, weil es weniger Junge und Zuwanderer und mehr Alte gibt als in Österreich.

1. Wenn die Anzahl der Erwerbsfähigen bzw. -willigen sinkt, sinkt der Nenner der Arbeitslosenquote, wodurch die Quote ceteris paribus steigt, nicht sinkt. 2. Löhne und Exporte sind endogen. Die geringen Lohnzuwächse sind zum großen Teil eine Folge der Hartz-Reform. Schließlich hat sie dazu geführt, dass das Arbeitskräfteangebot gestiegen ist. Das geringe Lohnwachstum hat wiederum deutsche Exportgüter relativ billiger gemacht, was den Exportboom zumindest zum Teil erklärt. Die vom “Standard” angebotene Erklärung der gesunkenen Arbeitslosigkeit ist ungefähr so als würde man sagen: “Dass ein Kind im Laufe der Zeit größere Kleider braucht, liegt nicht daran, dass es älter wird, sondern größer.”

Diese Passage liefert Beispiele für eine weitere Subkategorie von “alternativen Fakten”, die dadurch entstehen, indem man einen Kausalzusammenhang zwischen zwei oder mehreren Fakten behauptet, der logisch inkohärent oder zumindest höchst fragwürdig ist.

Ich glaube, dass diese Art von irreführender Berichterstattung wesentlich schädlicher ist als die klassische Falschmeldung. Letztere wird nämlich für gewöhnlich rasch aufgedeckt und berichtigt. Die Art von “Fake News”, wie sie der “Standard”-Artikel enthält, bleibt in der Regel unwidersprochen und unberichtigt. Was hier nach seriöser, kompetenter Berichterstattung aussieht, ist letztendlich einfach nur Quatsch.

Can robots pay taxes?

Bill Gates thinks robots should pay taxes. My first reaction was: Mr Gates obviously doesn’t know much economics. If he did, he would know that things do not pay taxes. Only people do.

Robots, so I thought, are machines. They don’t have an income of their own, they don’t consume stuff. The income they help produce goes to whoever owns the robot. If I own a robot, my willingness to let it (him? her?) work for a firm increases with the robot wage rate, the amount of money I receive per hour of work done by my robot. A tax on robot wages would shift the supply curve of robot labor up (or, if you prefer, to the left), increasing for each given amount of robot labor the wage rate employers must pay to get it. The gross robot wage increases, although probably by less than the tax rate, depending on how elastic the demand for robot labor is. Assuming that the demand elasticity is not infinite, the tax burden will be split between the robot owners and the employers of robots. So the robot tax would just be another form of a capital tax, which would partly be shifted to other factors of production, including human labor. In no real sense would it „tax robots“.

Now there are good reasons to believe that we are approaching the “technological singularity“, a scenario in which robots become smarter than humans. Some experts on artificial intelligence reckon we might be only 30 years away from that. I have exactly zero qualifications to judge the plausibility of that claim, but I don’t see any obvious reason why it couldn’t happen.

Suppose the singularity does happen. Then it seems quite ridiculous to assume that humans own robots. More likely, it would be the robots who own humans. Indeed, we can only hope the super-intelligent robots would treat us a little better than we are treating less intelligent life-forms now. Let’s assume, for the sake of argument, that humans will co-exist with the super robots as equals, at least for a while. Then robots would effectively become another class of people competing with us in the market place for jobs and goods. In such a world, robots are capable of bearing a tax in the sense that they would have to cut back on their consumption (whatever it is robots consume) when faced with a tax. But even in this, admittedly unlikely, scenario, it would be the case that humans feel some of the burden of the robot tax. This is because even super-intelligent robots will react to incentives. Why, given that they are super intelligent, they should react much better to incentives than homo sapiens with all its cognitive biases. If we tax their labor, they will supply less of it, which hurts humans.

So yes, robots could pay taxes. But only if they are intelligent and powerful enough to resist being held as slaves by humans, and not as intelligent and powerful as would allow them to enslave humans. Not a very likely scenario I guess.

PS: If you are curious what AI is currently capable of doing, here is some AI-produced poetry.

 

In praise of internet ads

On my recent trip to the United States my flight got canceled. The airline didn’t give any reason for the cancelation, offered no compensation for the resulting delay. Plus, my baggage was lost on the way, probably due to the fact that I was rebooked on a different flight involving two other airlines.

A week after the incident I noticed that a particular ad appeared again and again on my Facebook feed. It simply said “Flight delayed or canceled? Find out if you are entitled to compensation. We can help you start your claim for free.” So I clicked on it, even though I’m usually very skeptical of internet ads. The site behind the link looked reputable to me. I quickly googled “AirHelp fraud” or some similar phrase to see if there are any warnings or complaints about the company, but couldn’t find any.

So I decided to trust the site, filled out a simple online form asking me some details about my flight and uploaded a copy of my ticket. Within a week, I received a message that the airline had agreed to pay me 163 dollars in compensation. AirHelp charged 40 dollars in service fees. The whole thing cost me no more than 30 minutes of my time.

Two things I took away from this story: 1) Annoying as internet ads may be, they sometimes are really useful. Had I not seen the ad, I probably wouldn’t have bothered to contact the airline at all, and if I did, I would have spent hours on the phone talking to some customer service agent in India or, worse, some lawyer. Take this as an example that advertisement can create value for consumers. 2) The internet really does change the service industry profoundly. It’s evident that companies like AirHelp increase competition for service providers, especially highly regulated ones such as lawyering. We (or I, at least) used to think such services require a lot of local, personal interaction which the internet can never substitute for. It turns out more and more that this is wrong, which is probably bad news for lawyers and other service providers. More competition is always harmful for suppliers, hence the fierce resistance against Uber and Airbnb.

PS: I did spend hours on the phone talking to some customer service agent in India about my bag – but that’s a different story.

Insider-Trading: Ein Rätsel

Das folgende Rätsel wurde inspiriert von einen Kommentar von David Friedman, den ich irgendwo (ich weiß nicht mehr wo) gelesen habe.

Es gibt drei Wertpapiere mit folgenden Renditen:

W1: 10%, W2: 5%, W3: -3%.

Auf dem Markt gibt es “Insider”, die über spezielle Informationen über diese Wertpapiere verfügen. Für das Puzzle ist es irrelevant, ob sie diese Informationen legal oder illegal bekommen haben. Sagen wir, Insider halten im Aggregat folgendes Portfolio:

W1: 10, W2: 0, W3: 0.

Alle anderen, die Nicht-Insider, halten folgendes Portfolio:

W1: 10, W2: 10, W3: 10.

Wie man leicht überprüfen kann, beträgt die Rendite von Insidern dann 10% und die Rendite von Nicht-Insidern beträgt 4%.

Wer wie viel von welchem Wertpapier hält, ist private Information. Aber jeder weiß, wie viel von welchem Weltpapier insgesamt am Markt gehandelt wird. Und zwar:

W1: 20, W2: 10, W3: 10.

Jedem Investor steht es frei das Marktportfolio zu halten – also ein Portfolio, in dem Wertpapiere 1,2 und 3 im Verhältnis 2:1:1 enthalten sind. Die Rendite dieses Portfolios beträgt 5,5%.

Das Rätsel lautet also: Wenn Insider überdurchschnittliche Renditen bekommen, müssen alle anderen unterdurchschnittliche Renditen bekommen. Aber jeder kann die durchschnittliche Rendite  bekommen, wenn er das Marktportfolio hält. Warum halten dann nicht alle Nicht-Insider einfach das Marktportfolio? Aber wenn alle Nicht-Insider das Marktportfolio halten, wie können dann die Insider überdurchschnittliche Renditen bekommen?