Is everything debatable?

Near the beginning of this semester, in my macro principles class, we were talking about all the reasons why economists might disagree. Belief in different theories or methodologies, differing interpretations of evidence, and differences in values or priorities: these pretty much capture everything, I think, although you could elaborate on each of these and delineate subcategories. During this discussion, one of my students asked, "So, in economics, is everything debatable?"

Quantitative and qualitative economics

A post on the Scientific American blog asks, "Is Economics More Like History Than Physics?" I do not think that this is a useful question to ask, in that it implies that we must choose one approach or the other. A much better question is how we might use each kind of approach (historical and scientific), what insights there are to be gained from each, and what pitfalls each presents. This is really a two-sided argument (or perhaps a two-front war): there is nothing inherently wrong with the use of mathematical tools to analyze economic questions, and these methods have generated many valuable insights; but non-mathematical methods may also be useful. 

On election day, a half-baked proposal

Election day today, albeit not one of the more exciting ones for Texans. Reminds me of an idea I had a while back for reforming the government. A party of sorts forms, with congressional candidates all across the country, on a platform consisting solely of campaign finance reform. Something really drastic, along the lines of Ayres and Ackerman or Lessig. Once these folks get into office and pass the Campaign Finance Reform Act, or whatever it comes to be known, they all resign. Then we can have a serious election. As I noted previously, taking the money out of politics wouldn't solve all of the problems with our current system, but it would sure help a lot.

I think it might actually work if voters could be convinced that a vote for one of these candidates is a vote for campaign finance reform, with no other implications. Two problems I can see: a coordination problem, in that people don't want to vote for one of these candidates if they don't feel confident that enough of them will be elected to pass the law; and there isn't any way for the candidates to commit to the deal, including the resignation part. They could be voted out of office eventually, but I imagine voters would be nervous about the prospect of people with random political stances (except on the one issue) running amok in the federal government for any length of time. Those with a vested interest in the status quo could exploit that nervousness. Thus the characterization of the proposal as "half-baked."

Do we really need to regulate that?

Why is it illegal to smoke on domestic flights in the U.S.? Whatever benefit there is of prohibiting smoking on a flight accrues to those who are actually on the plane. If this benefit is large enough, then it is in the interest of the airline itself to prohibit smoking, because the benefit to passengers translates directly into greater willingness to pay for airfare and greater profits for the airline. Is it somehow easier to enforce a smoking ban if the force of law is behind it? Did the government pass the law to insulate airlines from the ire of those passengers who would prefer to smoke in flight? Maybe, but I would also note that some airlines had their own smoking ban before the law took effect in 1998. Is the purpose of the law to level the playing field, because there is some negative consequence of allowing airlines to compete through their policies regarding smoking? Again, maybe. I wouldn't suggest that anyone should be able to smoke on airplanes, either as an economist or as an air traveler; but it is clearly incorrect to assume that the only way to achieve this outcome is by passing a law. This seems to be a fairly common belief: that if the government doesn't make something happen, it won't happen.

Siri, tell me what I want to hear

Web sites use increasingly sophisticated algorithms to tailor content to the individual user: Netflix and Amazon deliver personalized recommendations, news aggregators filter content, and Google search results depend not just on the search terms themselves but also on whatever personal characteristics or details of one's historical usage are available. I imagine a near future in which I'll get into my driverless car around dinner time and be driven to my favorite Mexican restaurant without even having to say anything. If the car has enough predictive ability and access to enough data, I won't have to specify that I'm in the mood for Mexican, or even that I'm hungry. The car would never be able to get it exactly right every time, but it's easy to imagine it being close enough that the user wouldn't bother quibbling about it.

So, could this possibly be a bad thing? Eli Pariser, author of The Filter Bubble (and presenter of a TED talk), thinks so. His concern is that all this personalization of content has an isolating effect. My starting point is an idealized view of filtering as a way of culling some subset of information from all of the information available. The user can sift through the information the old-fashioned way and decide what to consume--e.g., glance over the headlines and decide what articles to read--or allow the filter to do the sifting. If the filter arrives at the same subset of information that the user would have ultimately consumed anyway, then the filter is unambiguously beneficial insofar as it eliminates the cost to the user of sifting through the information.

The question is then in what way or to what extent the actual scenario diverges from this ideal. I can think of three possibilities:

Something I don't understand

This is a tangent to what has been happening in Syria. That situation raises in my mind the question of why some actions (such as the use of certain kinds of weapons) may be deemed unacceptable, even in times of war, and others are not. We have international agreements that, as far as I can tell, essentially say that it's ok to fight and kill each other, but it's not ok to fight dirty. But if we've gotten to the point where we're killing each other, isn't any kind of civility pretty much out the window? And if we are setting rules about how we may behave during times of conflict, why not go a step further and say that killing is not allowed at all? Whatever it is we're fighting over, why not settle the question with a paintball match? Or even chess? Or if we think that the resolution should depend on which side is stronger or more capable in some sense, why not have third-party auditors make a determination on this, without actual bloodshed?

We could view this question from the perspective of one side that considers itself to be in the right: we are only fighting because someone is fighting against us (or doing something else terrible), and we will take what we think are reasonable measures to defend ourselves (or a third party), but we won't fight dirty because we're the good guys. It's possible for both sides to think that they are in the right, but if one side is not trying to maintain that pretense, why would that side agree to any kind of rules? Sometimes they don't, and when they do abide by the rules, perhaps they do so to avoid reprisal once the armed conflict is over. The bad guys might be perfectly willing to commit atrocities in order to win but want to avoid being convicted of war crimes in the event of a loss.

Which raises the question of whether it is easier, or possible, to get away with war crimes for the side that wins the war. In any case, if we have any ability to punish war crimes, couldn't we do the same for any kind of killing? That is, reckon that killing for reasons other than self-defense, or defense of another, is a crime?

In short, what does it even mean to draw a line between war crimes and non-criminal acts of war? I feel I must be missing something.

The liquidity's all right... isn't it?

In discussions of high-frequency trading (HFT), like this paper, liquidity always comes up as one of the benefits of HFT and thus a cost of restricting it. As far as I can tell, the benefit of additional liquidity is generally taken to be self-evident, and I don't understand why that is so. In this paper, I note the value of lots of liquidity in a financial market, but question the additional value of more liquidity:

The stock market is enormously beneficial insofar as it allows firms to raise capital easily; but the vast majority of stock trades involve previously existing shares and thus do not have a direct effect on the firm whose shares are being traded. There is of course some correspondence between a firm’s real economic activity and the trading of its shares; for example, the share price affects whether a management buyout or hostile takeover is attractive. However, this correspondence is not affected to any significant degree by HFT: HFT activity just changes the prices slightly more quickly.

Any statement about improvement in liquidity resulting from HFT typically is based on some measurement of liquidity in terms of assets or volume of trading, without any assessment of its actual benefit.

This new paper by Budish, Cramton, and Shim, which sparked this discussion at Marginal Revolution, proposes frequent batch auctions, i.e. trading intervals on the order of one second. One parameter in the paper is the cost of short delays in trading imposed by restricting HFT. The authors do not attempt to measure the actual cost, but they suggest that it is small. I don't see how this kind of cost is of any significance when the delay is on the order of a second. Does it capture the trader's impatience at having to wait to execute a trade? Lost interest while assets sit in limbo? Fear of missing some deadline? Even if the delay is minutes rather than seconds, what exactly is the problem? There could certainly be some problems if you have to wait a month, but once the market is thick enough that you can pretty much trade any time you want, what is the benefit of being able to trade at 12:00 instead of 12:01?

Budish et al point to the high costs of HFT infrastructure as well as greater stability in trading markets to justify the imposition of frequent batch auctions. I'm not convinced that there are any social benefits of HFT at all, especially in comparison to other forms of algorithmic trading (one of the points I made in my paper referenced above). If there are benefits, they are very small in comparison to the costs. I am no kind of finance guy, but am I missing something?