Russell: Superfreakonomics; Superplug for Intellectual Ventures [LWN.net]

Rusty Russell looks at the last chapter of Superfreakonomics on his blog. That chapter is a glowing overview of the "business model" of the huge and well-funded patent troll, Intellectual Ventures. "Now, I don't really care if one company leeches off the others. But if they want to tax software, they have to attack free software otherwise people will switch to avoid their patent licensing costs. And if you don't believe some useful pieces of free software could be effectively banned due to patent violations, you don't think on the same scale as these guys."

to post comments

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 13:55 UTC (Wed) by loevborg (guest, #51779) [Link] (7 responses)

Too bad the author doesn't actually go through the trouble of criticizing the claims in Dubner's and Levitt's book. However, there's independent reason to be doubtful of Superfreakonomics's radically pro-free-market approach to almost everything, such as this criticism on the the book's stance on global warming is well written: http://www.newyorker.com/arts/critics/books/2009/11/16/09... (Disclaimer: I haven't read the actual book.)

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 18:42 UTC (Wed) by salimma (subscriber, #34460) [Link]

I loved the original Freakonomics book, but from what I've heard of Superfreakonomics, that book won't be in my reading list anytime soon either.

There are no need to read the book

Posted Jul 7, 2010 21:34 UTC (Wed) by khim (subscriber, #9252) [Link] (5 responses)

Any book which advocates "pro-free-market approach" and copyrights/patents must include good chunk which explains exactly why such "pro-free-market approach" fails when presented with areas where patent/copyrights are applicable. For the facts are simple: patents and copyrights are government-granted monopoly and while it's legal monopoly it's as far from "free-market approach" as you can ever get.

From what I'm seeing Superfreakonomics lack such explanation and as such it can only be scam or fraud - take your pick.

The "business model" of Intellectual Ventures is very simple: CC-PP game 101. If you can convince government to spend taxpayers money to maintain any kind of monopoly while reducing cost of obtaining said monopoly you can profit handsomely indeed. But why this idea is new? it was discussed to death many, many years ago... And recently, too

There are no need to read the book

Posted Jul 8, 2010 6:58 UTC (Thu) by AndreE (guest, #60148) [Link]

Exactly.

Of course most so called "free-market capitalists" are nothing more than corporatists.

There are no need to read the book

Posted Jul 8, 2010 15:37 UTC (Thu) by dps (guest, #5725) [Link] (3 responses)

Patents, design rights and copyrights were established to promote useful things by making them profitable. If a drug company has invested $$$$$$ in developing a drug then they need arguably need a temporary monopoly to recoup that investment.

Likewise outfits that make a living from writing books, making films, writing software, etc for a living arguably need the ability to charge people fees for reproducing them.

All the above makes sense and arguably benefits most people. My salary is funded by the money people spend on by employer's software :-)

A through book *should* talk about abuses of patents, design rights and copyrights including, but not limited to, trolls.

There are no need to read the book

Posted Jul 8, 2010 16:08 UTC (Thu) by nye (guest, #51576) [Link] (2 responses)

>All the above makes sense and arguably benefits most people.

Regardless, it is still contrary to free-market ideals, so an explanation is warranted in cases where an author claims to support the idea of the free market but chooses to make this one exception.

Otherwise they appear to be picking it specifically because it's an area where a free market wouldn't benefit them - that isn't being pro-free-market; it's simple self-interest.

There are no need to read the book

Posted Jul 8, 2010 23:02 UTC (Thu) by zlynx (guest, #2285) [Link] (1 responses)

Depends on your definition of "free-market ideals" of course.

I am thinking that the ideal of having all the costs being passed on to the right people. This is the free market argument against the tragedy of the commons: that the commons is destroyed because the costs aren't passed on properly to the users. Or so I understand the argument.

Copyright and patents are attempts to do the same thing in order to avoid destroying the commons of idea generation by passing on the costs of development to the users.

Copyrights and patents are just as real or fake as the laws governing land, water or mineral rights.

There are no need to read the book

Posted Jul 9, 2010 1:02 UTC (Fri) by dlang (guest, #313) [Link]

copyrights and patents don't exist to try and avoid _destroying_ the commons, they exist to tray and _enlarge_ the commons by adding things to the commons that would not be there otherwise (in the case of patents due to trade secrets, in the case of copyrights by encouraging publication)

continuing to extend copyrights goes a long way to undermining their purpose.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 14:49 UTC (Wed) by njs (subscriber, #40338) [Link]

AFAICT, Dubner and Levitt's stock in trade is controversy. Sure, they achieve this with analyses and sound surprising, plausible, and that will let you look clever by repeating them (some of my relatives *love* them for this). But if you look closer, they're often skimming over some critical details that potentially up-end the whole argument. Certainly both of their most notorious chapters -- about the relationship between abortion and crime rate, and about global warming -- have been extensively debunked. I'm not expert enough to know for certain who's right in these cases (though in both cases the oh-so-plausible sounding Freakanomics analysis turns out to include incredibly embarrassing errors) -- rather, my point is that in the resulting debates they don't come across as primarily worried about finding the truth as worried about stirring up as much noise as possible while protecting their reputations. IMHO.

And their error-riddled chapter on global warming is actually quite relevant here -- their main source of information on global warming, and the inventor of their preferred, terrifying geoengineering solution, is Nathan Myhrvold, who is not an expert on climate science but who is the co-founder of Intellectual Ventures. I guess they *really* love this guy. Or something.

Sadly, given S&L's obvious smarts and credentials, they're basically trolls -- maybe that gave them common ground.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 15:11 UTC (Wed) by Trelane (guest, #56877) [Link] (2 responses)

"when a respected information source covers something where you have on-the-ground experience, the result is often to make you wonder how much fecal matter youve swallowed in areas outside your own expertise."

I love this quote so much.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 21:57 UTC (Wed) by martinfick (subscriber, #4455) [Link]

Wow, this sentiment is one often expressed in my circles, but that wording is fabulous.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 23:42 UTC (Wed) by wblew (subscriber, #39088) [Link]

Serious LWN quote material.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 17:00 UTC (Wed) by dskoll (subscriber, #1630) [Link] (51 responses)

I enjoyed Super Freakonomics, but the problem with the authors is that they're economists. If they can't measure it in dollars, they simply don't understand it (or they pretend it doesn't exist.)

The entire concept of "Free Software" is probably so far outside their world view that they'd have no clue how to even begin to approach it.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 18:54 UTC (Wed) by josh (subscriber, #17465) [Link] (47 responses)

That would make them *bad* economists. Good economists have no problems quantifying indirect or "intangible" benefits like goodwill, reputation, community, transparency, and so on. And as uncomfortable as it seems to make people sometimes, those qualities can have dollar amounts attached to them.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 20:39 UTC (Wed) by dskoll (subscriber, #1630) [Link] (46 responses)

And as uncomfortable as it seems to make people sometimes, those qualities can have dollar amounts attached to them.

Sure. Attached by economists. Their world view does not encompass anything else.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 21:34 UTC (Wed) by nybble41 (subscriber, #55106) [Link] (45 responses)

It has nothing to do with being an economist. The trade-off between material and immaterial goods is inherent to the human condition. Goodwill and transparency, and even reputation, while valuable, are rarely considered to be worth dying for; they are often held to be worth less than material goods, such as food, shelter, or medical care for oneself or others, or even less essential items.

Personal integrity, of course, is quite another matter. Many would claim to value it above life itself (at least until put to the test). Even then, would you value your integrity above the material goods necessary to save a friend's life? Your own child's?

If you truly cannot imagine any circumstance in which you would choose to give up any of these qualities in exchange for marketable currency, you must have a very limited imagination. Some things truly are beyond price, but they are not so common as you appear to believe.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 21:48 UTC (Wed) by Trelane (guest, #56877) [Link] (29 responses)

What is an "immaterial good"?

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 7, 2010 23:29 UTC (Wed) by drag (guest, #31333) [Link] (28 responses)

respect, power, emotional reassurance, happiness, security, family togetherness, etc etc.

All that stuff matters and needs to be taken into account when your a good economist.

-------------------------------------

Here I'll give you a example:

Remember how iPhone user's were all pissed off that Apple did a price a couple months after releasing their phones? People refered to the original high price as 'early adopter tax' and such things. I expect people even tried to do class actions suites against Apple.

Well that sort of response is completely illogical. If you paid 400 dollars for a phone and a couple months later you could of gotten it for 200 dollars, what does it matter to you? You obviously were happy to trade the money for the phone and thus any sort of price drop later would be irrelevant. From your perspective it does not matter how much it cost to manufacture or how much profit Apple made or anything like that. You wanted the phone, you knew how much the money was worth to you, you knew how much the phone was worth to you and you felt it was a good trade.

So if your looking at a pure money standpoint getting upset was irrelevant.

But when you take 'immaterial goods' into account then it makes sense.

Apple is extremely good at marketing it's product. They have convinced a significant number of people that if you purchase a Apple product instead of a more mundane phone or computer then that helps to show how enlightened you are. 'Creative people' use Apples, right? How many times have you seen that said in the past?

Instead of being suckered in with cheap knock-offs or being forced to nerd out to get a good computer, or whatever, you can purchase a Apple product and get a superior item that works effortlessly and obviously your pretty successful and smart dude for doing that right?

So Apple is not just selling a iPhone, Apple is selling self-validation. Self-validation that your smart and you have a good eye for new products and so on and so forth.

So when Apple slashed prices it made people feel stupid. The feeling of being made a fool totally threw out a huge amount of value of being a early adopter of the iphone. All of a sudden you could not show your iPhone off like you could to other people because they would know that you paid twice as much as they did for the same product.

Boom, so a lot of the value of owning a iPhone was gone and thus people got extremely upset.

-----------------------------

There are all sorts of things like that.

People pay money for home repair 'warrentees' and car 'warrentees', not because it makes economic sense (it does not. By definition paying for those things is does not make economic sense), but because it makes people feel safer.

If you are not able to take that into account as a economist then your not very good.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 0:13 UTC (Thu) by drag (guest, #31333) [Link]

Also some forms of 'IP' would be considered immaterial goods.

Basically if what your selling does not exist in 4 dimensions (time + space) then it's immaterial. Just because something does not exist in material space does not mean you cannot buy or sell it, of course. :)

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 0:38 UTC (Thu) by dskoll (subscriber, #1630) [Link] (26 responses)

respect, power, emotional reassurance, happiness, security, family togetherness, etc etc.

All that stuff matters and needs to be taken into account when your a good economist.

OK, give me twenty bucks worth of respect, $10 of power, and I'll splurge for $50 of emotional reassurance.

See how ludicrous it is? Economists observe human behaviour, then work backwards to assign dollar values to intangibles to "prove" that the behaviour is rational, then write hip books congratulating themselves for being so smart.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 3:15 UTC (Thu) by neilbrown (subscriber, #359) [Link] (22 responses)

I'm sure there are 1900 numbers where you by buy emotional reassurance.

Money *is* power. That $10 is power already. You can use it to make someone give you a loaf of bread - or maybe two.

But I think you under-value respect. You cannot get $20 of respect any more than you can get $20 of a new house. But ask any con-man how to buy respect and I'm sure they can give you some pointers. However that will probably only be short-lived respect. Buying enduring respect is a lot more expensive and given the exchange rate it is much cheaper to earn it by effort (grace, humility, selflessness) than by a cash outlay.

But economic value isn't only about what something costs to get, but also what it costs to not-have.

You cannot really buy enduring respect (despite what I said above), but you sure can sell it - i.e. lose it in exchange for cash.

Or another example - would you take a 30% pay cut to have more time with your family, or to be able to live in a safer neighborhood. Obviously different people would have different answers, but for each individual there is a clear economic question. And for the society you can apply statistics and get some averages and make ball-pack statements about the cost of e.g. encouraging part-time work.

Don't think of the dollar figure as a purchase price, think of then like an exchange rate - where the 'buy' and 'sell' prices are often quite different. It can start to seem less ludicrous then.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 12:42 UTC (Thu) by dskoll (subscriber, #1630) [Link] (21 responses)

Please read my important point carefully:

Economists observe human behaviour, and then work backwards to assign monetary value to prove that the behaviour is rational..

Of course it all works out neatly! It has to! But it's a circular, self-serving argument that proves nothing.

Glossing over "irrational" behaviour is simply a case of economists ignoring what they can't explain. But I believe people are much less rational than the Freakonomics authors would have you believe. Sure, it's possible to explain some aspects of human behaviour on a statistical basis in general terms. But explaining a particular individual's behaviour using economics? That's snake oil.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 16:18 UTC (Thu) by nybble41 (subscriber, #55106) [Link] (20 responses)

> "Economists observe human behaviour, and then work backwards to assign monetary value to prove that the behaviour is rational.... Of course it all works out neatly! It has to! But it's a circular, self-serving argument that proves nothing.... Glossing over 'irrational' behaviour is simply a case of economists ignoring what they can't explain."

In economics, behavior is rational by definition; it is taken as a given that people always act with the goal of maximizing economic wealth (i.e. minimizing their present discomfort). This is a point which cannot be proved or disproved, and is not meant to prove anything in turn. It simply provides a suitable--nay, essential--frame of reference in which to study human behavior. If human choices were not presumed rational to some degree then there would be no point whatsoever in studying them, as nothing of value could be learned. I would, however, challenge you to produce a persuasive example to the contrary--that of someone deliberately working to increase their own overall discomfort. In this respect humans generally do behave quite rationally.

What "present discomfort" or "wealth" means to a given person *right now* is unknowable, of course, even given all their past behavior, and a good economist will make no assumptions in this area. This is where most claims of irrationality arise, but it lies in the domain of behavioral psychology and related fields, not economics. In economic terms, individual *preferences* are free to be perfectly irrational.

The predictive abilities of economics only really take hold once you're considering enough individuals for statistics to get involved; at that point the chaos of individual preferences fades to insignificance, and reliable patterns begin to emerge in terms of aggregate supply and demand--so long as no attempt is made to influence the outcome. The underlying chaotic nature of economic activity is inescapable, and forcible intervention is always accompanied by unforeseeable side effects.

> "But I believe people are much less rational than the Freakonomics authors would have you believe. Sure, it's possible to explain some aspects of human behaviour on a statistical basis in general terms. But explaining a particular individual's behaviour using economics? That's snake oil."

On this point I tend to agree with you. At the very least, it involves a large dose of psychology in addition to statistics and economics. Economics alone cannot explain individual behavior; you have to start with some idea of what the individual's preferences are, which is beyond the scope of economics to determine.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 22:35 UTC (Thu) by Wol (subscriber, #4433) [Link] (12 responses)

Bear in mind, also, that what appears (ir)rational may also only be so from one particular viewpoint - yours!

Ask yourself whether you are a rational being. Ask your friends whether they are rational. EVERYbody, pretty much, would describe themself as rational. Which means that if you think someone else is being irrational, then they clearly have a different world-view to you, because it makes perfect sense to them.

And if you - honestly - say to them "what you're doing seems daft to me, can you explain why you're doing it?", then you may be able, in all humility, be able to explain to them what they've missed, and put them on the path to enlightenment. HOWEVER, there is a damn good chance that they'll explain what YOU've missed, and put YOU on the path to enlightenment ... :-)

Cheers,
Wol

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 9, 2010 17:16 UTC (Fri) by nix (subscriber, #2304) [Link] (2 responses)

Anybody who says they are perfectly rational is deluding themselves, to be perfectly blunt. Perfect rationality is highly unlikely to be a survival trait in any case.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 9, 2010 21:52 UTC (Fri) by neilbrown (subscriber, #359) [Link] (1 responses)

True, but maybe not entirely relevant. (Indeed. I'm probably not being rational posting this, but who cares....).

Let me refer you the the excellent work to be published by Hari Seldon, as reported by the excellent Science Writer (now deceased) Isaac Asimov in his "Foundation" publication (in the best of traditions, it is a trilogy in about 6 parts).

He clearly showed that while no individual can be assumed to act rationally, in large groups people are at least reasonably predictable. So while an economist who tries to explain individual behaviour is skating on very thin ice, and economist who attempts to predict populations has, according Seldon, substantially better chance of success. It certainly worked (... or I should say "will work") for him.

Then again, it has also been said that the only thing a degree in economics prepares you for is teaching others to do economics.... but that sounds like the sort of thing you would read on XKCD.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 10, 2010 17:24 UTC (Sat) by nix (subscriber, #2304) [Link]

Let me refer you the the excellent work to be published by Hari Seldon

And Neil guns for Quote of the Week, he shoots, he scores!

(or words to that effect. Despite the typo.)

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 10, 2010 16:23 UTC (Sat) by dskoll (subscriber, #1630) [Link] (8 responses)

Ask yourself whether you are a rational being.

It depends on the subject matter. For some decisions, I believe I am rational. But on other decisions, I behave quite irrationally. Anyone who is truly honest would admit the same thing.

For example, I eat way more junk food than is good for me. I know (rationally) that it's a bad tradeoff: The momentary pleasure will be much less than the long-term bad effects on my health. Yet I do it anyway, because humans haven't yet evolved to cope with a society with generally available food. We're hard-wired to crave sugar, fat and salt. Cultural evolution has simply outpaced biological evolution, so we behave irrationally.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 12, 2010 15:26 UTC (Mon) by nybble41 (subscriber, #55106) [Link] (7 responses)

Your example does not demonstrate irrational behavior. Rather, it demonstrates that you value the present comfort derived from consuming junk food over the projected future opportunity cost in terms of health. This suggests that you do not really believe that "the momentary pleasure will be much less than the long-term bad effects on [your] health", which sounds to me like something you have been taught to accept axiomatically but have yet to internalize. Regardless, economics does not care whether your preferences are based on cold-blooded logic, emotions, or biological imperatives; all that matters is that the preferences exist, and that you act on them.

This pattern is quite commonplace, actually, as people tend to steeply discount future goods and costs relative to the present; this is known as "time preference". There are trade-offs either way, of course: those with exceedingly steep time-preferences cannot expect much in the way of long-term wealth, while those who continually place all their value on the future can hardly be said to live at all in the present. The correct balance between present and future goods is entirely up to the individual.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 12, 2010 15:58 UTC (Mon) by dskoll (subscriber, #1630) [Link] (6 responses)

You see, you are falling into the very trap I've been accusing economists of all along! Step one: Assume people are rational. Step 2: Jigger the numbers to prove that they are rational.

This is like religion. I can prove anything I like by fooling with the numbers, so the whole discipline is facile.

You can't predict anything that way. However, I can quite easily predict that people will crave junk food because they're biologically wired that way. Economics is facile snake-oil; evolutionary biology is science.

Re: Straw Man (or Economics Misapplied)

Posted Jul 12, 2010 17:32 UTC (Mon) by nybble41 (subscriber, #55106) [Link] (5 responses)

"You see, you are falling into the very trap I've been accusing economists of all along! Step one: Assume people are rational. Step 2: Jigger the numbers to prove that they are rational."

Except that it's not a "trap". What makes you think that I'm trying to prove that "people are rational"? I'm only saying that the "rational actor" axiom in economics is perfectly compatible with irrational *preferences*, and thus with any observed human action. This is in response to the argument that economics is useless because it assumes rational actors, and humans are irrational. Even if humans are partly irrational, the irrationality can be isolated at the level of individual preference so as not to hinder economic analysis.

"You can't predict anything that way. However, I can quite easily predict that people will crave junk food because they're biologically wired that way."

More precisely, you can't predict human behavior that way. That's fine, however, because economics is not meant to predict human behavior. Economics is "the branch of social science that deals with the production and distribution and consumption of goods and services and their management". In short, it tells you how to optimally allocate your resources to meet your goals. (Or more generally, what the result will be of allocating resources in a particular way, e.g. supply vs. demand.) It does not attempt to tell you what those goals are, or what they should be.

You undervalue economics simply because you do not understand its scope. Naturally it is useless for solving problems it was never meant to solve, such as predicting individual behavior--just as evolutionary biology will not help you in the slightest when it comes to solving resource-allocation problems. That does not make the discipline as a whole "facile snake-oil".

Re: Straw Man (or Economics Misapplied)

Posted Jul 12, 2010 19:51 UTC (Mon) by dskoll (subscriber, #1630) [Link] (4 responses)

What makes you think that I'm trying to prove that "people are rational"?

Well, earlier above, you wrote: Your example does not demonstrate irrational behavior.

That's fine, however, because economics is not meant to predict human behavior.

It's used extensively in Super Freakonomics to predict (or at least explain) human behavior. Have you read the book?

You undervalue economics simply because you do not understand its scope.

No, I think I understand it pretty well. It's Levitt and Dubner who seen to misunderstand its scope.

Or more generally, what the result will be of allocating resources in a particular way, e.g. supply vs. demand.

It's not even very good at that. If something fails to follow the classical supply/demand law, it's simply termed a "supply-inelastic good" and the problem is considered solved. In short, economists simply twiddle a parameter (price elasticity of demand) until they get the results they observe.

Re: Straw Man (or Economics Misapplied)

Posted Jul 13, 2010 8:51 UTC (Tue) by paulj (subscriber, #341) [Link] (3 responses)

To be fair, your last paragraph could be applied to many fields of engineering, as to how they evolved their formal models for the behaviour of systems. You are describing the process of applied science:

1. Observe the behaviour of some physical system
2. Postulate a model that describes the behaviour
3. Predict behaviours and carry out experiments to confirm the model
4. If observations are made that disagree with the model, return to 2.

The problem for economists, and many social sciences, is that it's very hard to carry out truly meaningful, controlled-environment experiments. Often the real world is the only meaningful environment, and they are limited to waiting for events to take their course and gather data from that.

But models get tweaked and refined in all the engineering/applied sciences fields, surely?

Re: Straw Man (or Economics Misapplied)

Posted Jul 13, 2010 14:39 UTC (Tue) by dskoll (subscriber, #1630) [Link] (1 responses)

But models get tweaked and refined in all the engineering/applied sciences fields, surely?

To some extent. I'm most familiar with electrical engineering. Maxwell pretty much nailed all of electrical engineering in 1865; Maxwell's equations haven't needed tweaking since then. Also, although scientific and engineering theories do get tweaked, they tend to converge on something that produces better and better predictions. I don't think that's the case with economics; economists don't seem to be any better at predicting things than they ever were.

Re: Straw Man (or Economics Misapplied)

Posted Jul 13, 2010 18:01 UTC (Tue) by paulj (subscriber, #341) [Link]

Yes, the economic models evolve much *much* more slowly. Imagine if took decades to setup and measure an electrical circuit; imagine if the variables were not directly controllable - they just varied by chance. Imagine now how much longer it would take electrical engineers and theorists to develop good models under such conditions!

Also, economics is still quite a young field, at least in the sense of developing formal models. I have only a passing interest, but if I remember a piece by Krugman correctly, it's only really in the last hundred years that the field really seriously started to try develop such. (I'm away from the book at the moment, I can check later).

I see where you're coming from, but to be fair, they're working under extremely difficult conditions. I don't quite think you can discount the field, the way you, least not yet. ;)

Re: Straw Man (or Economics Misapplied)

Posted Jul 15, 2010 16:20 UTC (Thu) by nix (subscriber, #2304) [Link]

Many harder sciences which study events far from the human scale (such as astrophysics) suffer from this problem too. There are perennial debates over whether such things are 'really' sciences, but I suspect that anyone trying to describe Hawking as 'not a scientist' would be laughed out of the pub.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 9, 2010 16:27 UTC (Fri) by nix (subscriber, #2304) [Link] (6 responses)

In economics, behavior is rational by definition; it is taken as a given that people always act with the goal of maximizing economic wealth (i.e. minimizing their present discomfort). This is a point which cannot be proved or disproved

But it can be disproved. It has been disproved. It's pretty trivial to disprove, in fact. Economics is welcome to continue to construct models that assume that humans are perfectly rational actors, but if they do, they should not be surprised when those models have no discernible relationship to reality, and they should not be surprised if sane politicians start to turn to disciplines that actually have some predictive power.

(Disclaimer: by this metric there are very, very few sane politicians.)

Rational behavior is impossible to disprove

Posted Jul 12, 2010 14:57 UTC (Mon) by nybble41 (subscriber, #55106) [Link] (5 responses)

In what way do you--mistakenly--think that it has been disproved? Absolutely any observation one can make regarding human behavior can be interpreted from the point-of-view that it is a rational response to potentially irrational (and unknown) preferences. There is no test which could prove that the behavior itself was the irrational component.

Rational behavior is impossible to disprove

Posted Jul 12, 2010 16:03 UTC (Mon) by dskoll (subscriber, #1630) [Link] (3 responses)

Absolutely any observation one can make regarding human behavior can be interpreted from the point-of-view that it is a rational response to potentially irrational (and unknown) preferences.

That was exactly my point. Economics can be used to "explain" anything and predict nothing. So what use is that, exactly?

There is no test which could prove that the behavior itself was the irrational component.

Occam's Razor. It's far simpler to assume that people sometimes (or even often) behave irrationally than to assume they always (or mostly) behave rationally and then erect a Byzantine framework of costs and benefits to "prove" said rationality.

Rational behavior is impossible to disprove

Posted Jul 12, 2010 18:03 UTC (Mon) by nybble41 (subscriber, #55106) [Link] (2 responses)

"That was exactly my point. Economics can be used to 'explain' anything and predict nothing. So what use is that, exactly?"

All human behavior (even seemingly irrational behavior) is consistent with the rational-actor axiom. This is good, because if economics required perfectly rational humans it would be rather useless. Economics must encompass all human behavior, even the irrational parts. On the other hand, if there is no rationality in human behavior at all then the study would be just as pointless. The rational-actor axiom separates human behavior into rational choices and preferences, the latter being outside the scope of economics. This lets us get on with the business of economics proper, which is (contrary to popular belief) not about predicting how individual humans will act in a given situation, but rather about predicting how a given allocation of one's resources will serve to achieve one's goals.

For example, let's say that you run a business. Economics will tell you that if you raise your prices, sales will fall, and visa-versa. It also says that there is a price-point which will generate the maximum revenue, such that either raising or lowering the price will decrease your profits. It furthermore predicts that increased competition (supply) will reduce the specific demand for your goods, shifting that optimal price-point. These are all specific, testable predictions.

Economics works because most people do make the (ex post) rational choice most of the time, such that those rare cases where seemingly irrational preferences or incomplete information dominate are lost in the noise. Economic laws deal with whole populations, not individuals, and make no claims regarding individual behavior. However, they tend to hold true within their proper domain.

Rational behavior is impossible to disprove

Posted Jul 12, 2010 19:56 UTC (Mon) by dskoll (subscriber, #1630) [Link]

All human behavior (even seemingly irrational behavior) is consistent with the rational-actor axiom.

It's also consistent with the idea that twelve invisible cats live in our heads and conduct daily conferences to determine what we should do. That's why I commented that economics is like religion: You can always explain away anything by twiddling with the parameters.

On the other hand, if there is no rationality in human behavior at all then the study would be just as pointless.

No, not at all. People are sometimes or often rational, and even their irrational behaviour is often understandable.

Economics will tell you that if you raise your prices, sales will fall, and visa-versa.

Except that doesn't always work, so we introduce a tweakable parameter called "price elasticity of demand" so that when our predictions fail to meet reality, we can always do a post-observation fixup.

However, they tend to hold true within their proper domain.

Maybe. But Levitt and Dubner go way beyond the "proper domain" in their book. Have you read it?

Rational behavior is impossible to disprove

Posted Jul 15, 2010 15:23 UTC (Thu) by nix (subscriber, #2304) [Link]

All human behavior (even seemingly irrational behavior) is consistent with the rational-actor axiom.

If this were true, the axiom would be completely useless because it would constrain nothing. That it is not considered useless makes me wonder if you might be oversimplifying.

Economics works because most people do make the (ex post) rational choice most of the time

Repeated economic crashes and irrational booms make it quite plain that even on a timescale of decades, people such as stockbrokers whom one would hope were attempting to be rational actors (and who have responsibility for the allocation of resources in our civilization) are doing a very bad job of it. If even stockbrokers can make wildly irrational decisions for many years at a time when allocating resources, the axiom can be said to be about as inconsistent with reality as it is possible for an axiom to be.

Rational behavior is impossible to disprove

Posted Jul 15, 2010 14:57 UTC (Thu) by nix (subscriber, #2304) [Link]

There's a whole academic *field* formed around this: look up behavioural economics.

... but, hang on, do you actually believe that all humans are always rational at all times? Is your own behaviour always purely rational? (I know mine isn't, and as I'm a human being of sorts that is sufficient disproof for me.)

Was your behaviour perfectly rational when you were two years old? How about just after you woke up, or when you were very tired, or when you were in the grip of that peculiar insanity called romantic love? Or are you suggesting that humans only become rational economic actors when they pass whatever age is appropriate in your jurisdiction to allow them to enter into commercial contracts (which is generally older than the age at which they can e.g. be convicted of murder), and that they never again waver until and unless they are declared incompetent by a court? This seems an extraordinary claim to me.

The very claim that all humans are rational economic actors is so laughable and so easily disproved that I'm amazed that anyone considered it for a moment, even as a simplifying assumption. There are entire fields of industry (diamond sales and florists spring to mind) predicated around the premise that humans will act irrationally. (Hint: most people who buy wedding rings do not do it in consideration of their long-term investment value. Nobody who buys flowers for someone else does it in the expectation of being able to resell them.)

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 4:10 UTC (Thu) by drag (guest, #31333) [Link] (2 responses)

Go walk into a casino, study what is going on, and then come back and tell me that there is no monetary value for people's emotions.

--------------

BTW, I did not make up the iPhone example. I got it from a economist.

If your a economist and you cannot take into account people's irrational behavior how the hell are you suppose to understand anything that is going on?

These are not stupid people and not all of them are frauds.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 12:47 UTC (Thu) by dskoll (subscriber, #1630) [Link]

Go walk into a casino, study what is going on, and then come back and tell me that there is no monetary value for people's emotions.

It could be that gamblers carefully consider the monetary value of the highs they get gambling against the amount of money they are almost certain to lose, and make a rational decision on that basis.

Or it could be that people have evolved to have addictive centers in their brains (some more than others) and that casino operators are masters at stimulating those addictive centers, causing people to behave irrationally.

The nice thing about economics is that you can use it to prove anything. The horrible thing about economics is that you can't use it to predict much. That's why it falls under the category "snake oil" rather than "scientific theory".

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 13:09 UTC (Thu) by nix (subscriber, #2304) [Link]

Go to a newsagent in one of the parts of London where traders cluster. Every Wednesday you will see huge numbers of these traders lining up to buy almost-guaranteed-to-fail lottery tickets.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 0:35 UTC (Thu) by dskoll (subscriber, #1630) [Link] (11 responses)

The trade-off between material and immaterial goods is inherent to the human condition.

Yes, it is. But it is not always possible to assign monetary value (or even any kind of tangible value) to immaterial goods. The problem is that economists simplify human nature to make analysing it tractable. So they get interesting and often cool results, but results that are meaningless when applied to individual people.

Some things truly are beyond price, but they are not so common as you appear to believe.

Again, economists are unable to understand that sometimes people are motivated by other than cost/benefit analyses. If you can't put a dollar figure on it, economists don't understand it (and can't understand it and often pretend it doesn't exist.)

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 1:57 UTC (Thu) by PaulWay (guest, #45600) [Link]

So this would imply that most of Economics is filed as a "WORKS FOR ME" bug...

This explains a lot.

Have fun,

Paul

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 3:08 UTC (Thu) by josh (subscriber, #17465) [Link] (5 responses)

You can *always* assign a value to anything. You can't always assign a *monetary* value to everything, because money has non-linear value itself: additional money has diminishing returns, eventually adding no further value. So, some things can surpass any price, making them "beyond price" certainly, but they still have a value.

As for people having motivations other than cost/benefit analyses, that falls under the heading of "irrational behavior", and even then it just means that someone has an unexpectedly skewed or inconsistent value judgment, making it more difficult to understand or predict their behavior.

That said, economics does tend to do worse when dealing with items with value beyond the reach of money, or with items with wildly varying values between individuals. But that doesn't mean economics can't assign a sensible dollar value to Google's "do no evil", or to the open source community around a given project. Those don't come anywhere near the point of "beyond monetary value".

</philosophy>

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 8:53 UTC (Thu) by dgm (subscriber, #49227) [Link] (2 responses)

> You can *always* assign a value to anything.

Of course you can. If anything else fails, you can assign it at random, but what is this good for?

The "value" in economics is a base for comparison, a relative scale in a single dimension. The problem is some things are really not comparable, because they lay in completely different dimensions. You can fake a projection (and most economists simply do that), but it will be completely arbitrary, and wrong. That leads to "interesting" predictions, of course.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 13:36 UTC (Thu) by marcH (subscriber, #57642) [Link]

> The "value" in economics is a base for comparison, a relative scale in a *single* dimension. The problem is some things are really not comparable, because they lay in completely different dimensions.

This is just brilliant, thanks!

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 12, 2010 5:24 UTC (Mon) by cmccabe (guest, #60281) [Link]

Well, publicly traded companies in the US are legally bound to deliver the maximum value to their shareholders. At some point they *have* to flatten all of the axes down to the monetary dimension.

In your personal life, it's obviously silly to try to make all decisions in such a reductionist way. But I think most people are more in danger of underusing economic thinking than overusing it.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 13:06 UTC (Thu) by nix (subscriber, #2304) [Link] (1 responses)

As for people having motivations other than cost/benefit analyses, that falls under the heading of "irrational behavior", and even then it just means that someone has an unexpectedly skewed or inconsistent value judgment, making it more difficult to understand or predict their behavior.

But since every living human including all economists have a large number of motivations that are not reducible to financial matters, that most people's most important motivations are not monetary, and that it is likely that most people almost always judge even matters of monetary value using non-monetary emotionally-driven criteria, any model that assumes that people are perfectly-selfish economic 'rational actors' is bound to fail *far* more than it succeeds.

And this is what we see.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 18:46 UTC (Thu) by josh (subscriber, #17465) [Link]

As for people having motivations other than cost/benefit analyses, that falls under the heading of "irrational behavior", and even then it just means that someone has an unexpectedly skewed or inconsistent value judgment, making it more difficult to understand or predict their behavior.
But since every living human including all economists have a large number of motivations that are not reducible to financial matters, that most people's most important motivations are not monetary, and that it is likely that most people almost always judge even matters of monetary value using non-monetary emotionally-driven criteria, any model that assumes that people are perfectly-selfish economic 'rational actors' is bound to fail *far* more than it succeeds.

I'd agree with *that*; note that I didn't necessarily suggest purely monetary cost/benefit analyses. As a scale, money works passably for a narrow range of possible values, but assuming that it works as an objective linear scale across all humans will certainly fail in all but the simplest of cases.

In any case, this has gone quite far afield of the original issue. I originally just wanted to dispute the notion that because economics works in money, it can't deal with things like Free Software; it very much can, and such things can have reasonable monetary values attached.

Or, in other words, even if you'd consider it distasteful to put a dollar amount on things like goodwill and trust, that does not mean a sensible dollar amount doesn't exist.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 3:25 UTC (Thu) by dbruce (guest, #57948) [Link] (2 responses)

"But it is not always possible to assign monetary value (or even any kind of tangible value) to immaterial goods."

A monetary value can always be assigned by some sort of modeling. I think what you mean is that you don't get an objective, reproducible value that most folks will agree on.

Consider various life-saving medical treatments, some inexpensive, and some (for the sake of discussion) astronomically expensive. Furthermore, assume all the costs come out of the government. While life may be "priceless", as a public policy it is not possible to spend, say, one billion dollars to save one person's life. At the opposite extreme, it obviously seems "worth it" to spend one dollar to save a life. So, as the cost goes up, when does it become "too expensive to be worth it"? An economist might come up with a value derived from some assumptions, but it isn't going to be the kind of thing that will be widely agreed-upon. However, analyses like these really do have to be made in the real world. Sometimes there is no way to avoid putting monetary values on "priceless" goods, distasteful as it may be.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 4:36 UTC (Thu) by drag (guest, #31333) [Link] (1 responses)

> A monetary value can always be assigned by some sort of modeling. I think what you mean is that you don't get an objective, reproducible value that most folks will agree on.

This is why we having a 'free market' is extremely important. Because it's, very literally, quite impossible to establish reliable theoretical models for assigning monetary value for _material_goods_, much less immaterial ones.

Even simple items, such as pencils, are so incredibly complex in the relationships between lumber people, manufacturers, machine engineers, customers, clients, retail stores, employees. Imagine the level of complexity we are dealing with here... _Everything_ from the rubber plants in South America and political issues with importing it for erasers, cost of the coal used to power the power plants, the cost of fuel used to run the trucks to ship stuff, to the ball bearings used in the manufacturing production line, to the rafters used to build the warehouses, the nails used to hold the shipping containers together, the training of the engineers to design the production line machines, the janitorial staff, the cost of housing for the workers, the health insurance costs.... all of that is taking into account one way or another and goes into the price and profit of each individual pencil that gets sold one way or another.. and it's just pennies per pencil.

How could anybody understand and predict these costs in a reliable manner? They cannot. They can estimate and they can guess, but they will be wrong quite often.

Quite literally the definition of monetary value is established by trade. It's just the price somebody is willing to pay for it. That's it. The value changes and morphs on a individual basis.

If the cost of a item rises above the value of it... then there is little point to producing it and resources will be allocated elsewhere in society.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 17:48 UTC (Thu) by jordanb (guest, #45668) [Link]

The "Free Market" is kinda interesting when it comes to public policy.

It will, for instance, decide that spending $50 million to extend an 80 year old billionare's by a year is worth it, and then decide that it's not worth it to spend $100,000 to extend a 25 year old Wal-mart cashier's life by 50 years.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 9:04 UTC (Thu) by mpr22 (subscriber, #60784) [Link]

"I wouldn't be able to live with myself", "my reputation would suffer", and "I would be sad" are immaterial costs people weigh against material benefits. "I would be able to sleep easy at night", "my reputation would benefit", and "I would be happy" are immaterial benefits people weigh against material costs.

If you sacrifice happiness for a fistful of dollars, you've put an upper bound on the dollar value of your happiness. If you reject a fistful of dollars for the sake of your good name, you've put a lower bound on the dollar value on your good name.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 4:33 UTC (Thu) by samroberts (subscriber, #46749) [Link] (2 responses)

Reputation is worth dieing for, economically speaking:

http://www3.amherst.edu/~cgkingston/duels.pdf

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 9:01 UTC (Thu) by dgm (subscriber, #49227) [Link] (1 responses)

It can be, if you give less value to your future life than to your present reputation. But I personally doubt I could make any use of that reputation after dead.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 18:02 UTC (Thu) by njs (subscriber, #40338) [Link]

That's an interesting article they linked to, actually -- the argument is that in certain real-world systems, the value of your future life (happiness, material comfort, etc.) is tied to your present reputation, which is tied (for good reason, they argue) to your willingness to risk your life. It's worth reading.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 9:52 UTC (Thu) by jwakely (subscriber, #60262) [Link] (2 responses)

> I enjoyed Super Freakonomics, but the problem with the authors is that they're economists.

Actually only one of them is, the other's a journalist.

If you've actually read the book you're in a tiny minority amongst the people who like to give their opinions of it.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 13:06 UTC (Thu) by pboddie (guest, #50784) [Link] (1 responses)

If you've actually read the book you're in a tiny minority amongst the people who like to give their opinions of it.

Sure, but that's like almost every book, and that's why things like reviews exist: to indicate whether it's worth anyone's time reading the thing. But it's interesting to note that one of the authors tries to make this point when responding to the RealClimate critique of the climate change chapter in his book - that is, that the critic misread or didn't read the text at all - to which the critic points out that he actually went down to Borders to read that chapter after hearing the various claims being made.

As others have already said, some economists like to pretend that their "science" is the only one needed to interpret and predict things in the real world. Not only does this show considerable contempt for practitioners of other disciplines, it entices people into believing that those other disciplines are superfluous, leading to strategies where decision makers seek to know less about the actual nature of specific issues, and where their policies end up being more speculative and removed from reality than before. (One might note that this describes modern political decision-making quite well.)

From what I've read from reviews, and let us assume that reviewers for major publications have read more than the back cover, the book looks like a "tour de force" of confusing correlation with causation. This should not be surprising: when one removes domain-specific knowledge and actual understanding, one is typically left to speculate rather than to reason about the causes and effects of things.

Russell: Superfreakonomics; Superplug for Intellectual Ventures

Posted Jul 8, 2010 23:06 UTC (Thu) by Wol (subscriber, #4433) [Link]

Or worse, and I haven't read the book but I meet it quite a lot, getting cause and effect the wrong way round. I can't think of any examples (I don't discuss that sort of thing often), but it's not unusual for me to get into spats where I think that someone is blaming the cause on the effect.

When you're actually trying to fix a problem, tackling the symptoms is usually a waste of time ...

Oh - the other problem with economics, ESPECIALLY the stock market, is that people like to assume it's classical in nature - "observing the system does not change the system". Unfortunately, it's not, it's quantum - "the act of observation alters the system being observed".

Cheers,
Wol