Tuesday, January 25, 2011

Film Subsidies, Coordination Problems, and Network Effects

A headline in yesterday’s International Herald Tribune read: “In a budget bind, U.S. states consider cutting film subsidies.”  And well they should—why should we taxpayers subsidize the cost of Hollywood (or even independent, although there is more of a case to be made here) films?

This is a case in which reducing choice can actually increase freedom.  State film subsidies started as a way to attract the well-paying, if temporary, jobs they bring.  Add a little inducement and reap the rewards of huge crews with big budgets.  But as more and more states adopted the practice, competition emerged, pushing up the subsidies beyond the point of reason.  A Massachusetts study in 2009 showed that film subsidies cost that state $88,000 per job.  Even California provides $100 million a year in film subsidies.

Now states would be better off just trying to attract films on their own merits and not resorting to the costly inducements.  But it is hard to get out of the game with everyone else competing (they are stealing our jobs!).  So, an agreement (or even law) that prohibited such subsidies would benefit those now freely participating in the competitions.

This is a sort of coordination problem or network effect, in the terms of economics.  A network effect is when the value of something depends on how many others use it.  Telephones are the classic example: the more people that have phones the more valuable it is to have one.  The internet economy has many examples (including the internet itself).  We generally think of the network effect in terms of “positive network externalities,” but there are down sides as well. 

Robert Frank has written about the subtle and profound network effects of status (and status income) competition (see his books Luxury Fever, The Winner-Take-All Society, and Falling Behind).  With positional goods, a goodly portion of their value comes from how many (or few) others possess the same of similar items, a network effect, if inverse to that of telephones and Facebook.  If everyone one knows has a 10,000 square foot house, that become the norm.  And in a social environment in which aspirations are to exceed the norm, positional competition pushes up average sizes well beyond what the material utility justifies.  In such cases, regulations can solve the coordination problems (I won’t do it as long as no one else does) without reducing satisfaction  

Sunday, January 23, 2011

Every Night This Week on the PBS NewsHour website: Merle Hazard

Pioneer of that musical subgenre pecuniary country Merle Hazard's new European country country songs will be rolled out this week (Jan. 24-28) on Paul Solman's segment of the NewsHour website.  Check out: Merle Hazard Makes Sen$e

Planet Money's "Ranking Cute Animals" Experiment

Planet Money--consistently one of the most thoughtful sources of news and analysis on the economy--recently conducted a clever experiment.  Inspired by Keynes' quote that the stock market is like a beauty pageant in which judges try to determine who everyone else will think is prettiest (not who they themselves think is prettiest.)   

Using photos of three cute animals (a kitten, a polar bear, and a loris), participants were asked to select the cutest one.  And then they were asked to select which one other participants would think is the cutest.  While only 50% thought the kitten was cutest, over 75% thought that others would think the kitten was cutest.  And as played out in the market, these are predictions that can make themselves come true (and reward a supposed widely appealing mediocrity over excellence). 

Saturday, January 22, 2011

Two Kinds of Happiness--and the the influence of inequality

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

What sort of happiness was Jefferson et al. referring to here?  We can be pretty sure what was meant by “life,” and while the contours of liberty are much discussed there is general agreement of its essential core.  But happiness?  What exactly is it?

Researchers who study these sorts of things generally distinguish two types of happiness.  There is “hedonic” happiness, that everyday contentment (and the vacuous cheeriness the term calls to mind in common American usage).  But there is also a broader sense of “life satisfaction,” judged by the criteria of “wellbeing” and “the good life”—Aristotle’s “meaningful life” (eudaimonia).  Surely, the founding fathers were referring to happiness in this older, classical sense of fulfillment (and one firmly embedded in the collective as well as the private good.)

While Easterlin and others have pointed out that income above a certain level does not seem to affect hedonic happiness proportionately, new research does show that income plays a big role in overall life satisfaction.  Research by Daniel Kahneman, Angus Deaton (mentioned below) and others show that income is positively correlated with overall life-satisfaction (“happiness” in the sense of fulfillment).  Di Tell and McCulloch (2008) find a positive correlation between happiness and “absolute income, the generosity of the welfare state and (weakly) with life expectancy; it is negatively correlated with the average number of hours worked, measures of environmental degradation (SOx emissions), crime, openness to trade, inflation and unemployment” in OEDC countries.

This makes sense: we adjust our daily expectations to what is “reasonable” for us and our circumstances, and adapt our happiness to that norm.  But when we look back (or forward) over the broad sweep of possibilities, of what was obtainable and what was not in terms of life paths, we are struck more by what could have been.  And the more income one has, the smaller the universe of what-could-have-beens.
As I have discussed previously, we must expand our notion of poverty out from just income.  As Amartya Sen argues, poverty is also about a lack of freedom, the lack of capabilities and power to chart one’s own life course.  And we must consider poverty in all of its multiple dimensions (as do Sabine Alkire and James Foster at the Oxford Poverty and Human Development Initiative).  This new work does remind us that we should not forget the importance of income—income allows greater degrees of self-determination (Sen’s freedom) that lead to greater overall life satisfaction. 

BUT: poverty is also always relational, and so poverty is felt more intensely in situations of great inequality.  Eduardo Porter, in his new book The Price of Everything, notes that inequality often reduces folks’ motivations.  In winner-take-all games, people are less likely to exert effort and more likely to cheat.  Some inequality is good and necessary—the hard working and deserving should be awarded as in our meritocratic ideals. But too much inequality reduces the sense of common purpose and ground rules and erodes the desire to succeed. 

Sunday, January 16, 2011

Deirdre McCloskey's Bourgeois Dignity, and Anthropology and Science

In her new book, Bourgeois Dignity, iconoclast economist Deirdre McCloskey makes an eloquent case for capitalism’s virtues.  It is at once erudite and fun truly fun to read—perhaps a first for the dismal science.  At times she may press forward with a Leibnizian optimisism, an enthusiasm that can brush aside serious critiques and shortcomings.  But she rightly reminds us of the enormous wealth created, and the drop in absolute poverty worldwide—the hockey stick of income levels of the last centuries.  And, for an anthropologist, she makes the important observation that the capitalist revolution was driven not only by technology and new modes of capital accumulation but more importantly by ideas and ideals, particular cultural traditions and values, and a rhetoric that valued bourgeois dignity. 

In the book, she uses the word “science” in its older, wider sense of “systematic inquiry,” which, as she notes:

Is what it means in every language except the English of the past 150 years: thus in Dutch wetenschap, as in kunstwetenschap [“art science,” an English impossibility], in German Wissenschaft as in die Geisteswissenschaften [the humanities, literally a very spooky sounding “spirit sciences’], or in French science as in les sciences humaines [serious and systematic inquiries concerning the human condition, such as studies of literature or philosophy or anthropology, literally “the human sciences,” another impossible contradiction in modern English], or plain “science” in English before 1850 or so.  Thus Alexander Pope in 1711: “While from the bounded level of our mind / Short views we take, nor see the lengths behind: / But more advanced, behold with strange surprise: / New distant scenes of endless science arise!”  He did not mean physics and chemistry.  John Stuart Mill used the science word in its older sense in all his works.  Confining the word to “physical and biological science,” sense 5b in the Oxford English Dictionary—which was an accident of English academic politics in the mid-nineteenth century—has tempted recent speakers of English to labor at the pointless task of demarcating one kind of serious and systematic inquiry from another.  McCloskey 2010: 38-39
McCloskey is writing of economic science and the ways that economists have fetishized a particular kind of hard science.  What she says, however, also applies to recent controversies among anthropologists about the scientific aspect of their discipline.

At last year’s annual meeting, the AAA voted to take out the word “science” from a long-range plan (although it remains in the statement of purpose, as long as we are splitting hairs).  

The New York Times reported: “The decision has reopened a long-simmering tension between researchers in science-based anthropological disciplines — including archaeologists, physical anthropologists and some cultural anthropologists — and members of the profession who study race, ethnicity and gender and see themselves as advocates for native peoples or human rights.” (Nicholas Wade in the NYT 12/9/2010; Anthropology a Science? Statement Deepens a Rift: http://www.nytimes.com/2010/12/10/science/10anthropology.html )

This is a broad stroke description, and many of us anthropologists would resist such easy categorization, but it is revealing.  Anthropologists are often well positioned to advocate for native peoples or decry human rights abuses—it is the nature of where we tend to work and with whom we tend to study.  

But ethnography and cultural anthropology is not about reifying a priori political positions but rather the dialectical construction of knowledge through engagement with the field.  It is as much inductive as deductive. 

What we cultural anthropologists do is certainly serious and systematic inquiry—science in this common sense of the word.  And what could be more appropriate for the discipline than to embrace this folk terminology.          

Friday, January 7, 2011

Happiness and Income

Would you rather be rich or happy?  You might think the one naturally brings the other, but it turns out not to be so simple.

One important factor is how we frame the alternatives.  Would you rather make $80,000 a year or $140,000?  It’s a no brainer.  But if framed, as Daniel Benjamin, Ori Heffetz, Alex Reese-Jones, and Miles Kimball did in a recent study: would you prefer to earn $80,00 a year and sleep 7.5 hours a night or $140,000 and sleep 6 hours?  When framed this way, 70% of folks said that would prefer more sleep. (see http://www.economist.com/node/17578888)
Or, as my colleague Bob Frank has present it, would you prefer to live in a 4000 sq. ft. house with a 45 minute commute or a 2500 sq. ft. house with a 10 minute commute?  Or what about if the smaller house were closer to friends and family?  Often, what seems at first blush to be an obvious choice (bigger is better) becomes much more complicated considering all of the (often social) implications.  And lots of research shows that investment in social relations has a big impact on long-term happiness.

In the mid 1970s, economist Richard Easterlin made a remarkable observation that seriously challenged the simple equation of money=happiness.  The Easterlin Paradox holds that overall hedonic happiness within countries does not correlate with higher GNP per head between counties (above a certain level, often cited by Richard Layard as $15,000). 

But a lot rests on what “happy” means.  Folks who try and measure such things distinguish between an immediate here-and-now happiness (“hedonic” happiness: how happy are you right now?) and longer term life-satisfaction (wellbeing: how satisfied are you with your life as a whole these days?).

For hedonic happiness, the immediate evaluation of one’s present state does not dramatically increase with income (below a certain level).  Daniel Kahneman and Angus Deaton (2010) argue that this is due to the psychological phenomenon of adaptation: we are adapted to our social contexts and measure of day-to-day ups and downs in terms of the norms of our lives and social worlds.  

But, it is a different story for overall life satisfaction.  This longer term view, assessing the full sweep of one’s life, tends to be correlated with income.  As Kahneman and Deaton observe, “high income buys life satisfaction but not happiness.” 

The geography of life satisfaction:
From: Wikipedia entry on Happiness Economics