atans1

Pricing is not the only way PM! Try cooperative game theory?

In Economy, Political economy, Political governance on 05/11/2012 at 4:57 am

The Economist, a British weekly newspaper, seems to the PAP’s bible*. It believes that pricing is the best way to allocate scare resources and long before the government introduced road pricing, the Economist was advocating it: just like high taxes on petrol (we got this) , permits to drive cars (our COEs), consumption taxes with rebates for poor (GST and rebates) , low rates of corporate and personal income taxes, and no tax on savings (All present and reporting). Oh yes and it believes low fertility rates are bad and that immigration is to be encouraged, screw the social problems.

But even the Economist accepts that there are limits to using prices to allocate resources. It recently wrote:

People often exclude financial considerations from their most important decisions, from the person they marry to the foster child they adopt. Even some transactions that do involve money are not really about price. Universities in America do not admit students based on who pays the most, for example. Rather, they select students based on complex criteria that include grades, test scores and diversity. Similarly, students choose their university on more than just financial factors.

Money is not essential to a market. After all, economics is about maximising welfare, not GDP. But the absence of a price to allocate supply and demand makes it harder to know whether welfare is being maximised. This year’s Nobel prize in economics went to two scholars—Alvin Roth, who has just joined the economics department at Stanford University, and Lloyd Shapley, a retired mathematician at the University of California, Los Angeles—who have grappled with that very problem http://www.economist.com/news/finance-and-economics/21564836-alvin-roth-and-lloyd-shapley-have-won-year%E2%80%99s-nobel-economics.

– Mr Shapley’s and Mr Roth’s Nobel prize illustrates a larger point about economics. Undergraduates often study “utility functions” to learn how people choose alternative consumption baskets in a way that makes them better off. Once they go on to graduate school and then a job, they deal almost exclusively with priced transactions: for wheat, autos or equities.

Yet in countless private and public policy questions, welfare can be improved in ways that do not show up in the price. Mr Roth’s work on public school admissions and kidney donations are an obvious example, but there are countless others.  I recall reading that Starbucks had a plan that would let an employee in one store trade jobs with an employee in another so that both could work closer to home. The result would not change either employee’s output or wages, or Starbucks’ profits. Conceivably GDP would fall because the employees would spend less on petrol or bus fare. But provided the swap was voluntary, the welfare of both would without question rise http://www.economist.com/blogs/freeexchange/2012/10/understanding-economics.

(Cooperative game theory is waz the above is all about. It looks at how well people can do when acting together; by examining all the possible combinations, theorists can spot outcomes that individuals acting alone cannot achieve http://www.economist.com/blogs/freeexchange/2012/10/microeconomics)

Well one hopes that the government too recognises the limitations of using prices to allocate everything. And that bit about “maximising welfare, not GDP”. It’s in the PAP’s bible. Juz read it, not juz Hard Truths which incidentally is derived from this book book.

*Where they differ is on democracy and a free media. The Economist is a strong advocate and proponent of both these principles, unlike the PAP. BTW I used to joke that the government doesn’t need high-salaried ministers and civil servants to think up policy. They need to read the Economist. Declaration of interest: the Economist is my favourite source of info and analysis. I like its combi of social liberalism and conservative economics and its style of prose, entertaining, and irrelevant irreverent.

It says things like: “The branding function of philosophy in politics is to give individual conscience a form congruent with group interest, to transform the mathematical necessities of coalitional partisan politics into many millions of separate acts of self-congratulating private virtue. It’s a neat trick. It would be neater still if fewer pundits played along.”

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  1. You are right that the “Economists ” is the bible of PAP leadership,in addition to Fortune and Forbes,One point about the “Economists:” is that it err badly on the economy of Communist China,I am not only referring to the famous BET between it and economist Michael Pettis of Beijing U,but overall all the conclusions it reach with regards to Communist China have been wrong.and we shall all know this fact very soon.

  2. The last word in the second last para – irrelevant . I think you meant irreverent, no?

  3. Fortunately they can still use the excuse of increasing GDP as a KPI to maximise their own welfare, otherwise what use is political power?

  4. Economics is not the government bible. To give a very clear example (and plug the SDP Housing Paper), look at Annex B of http://yoursdp.org/_ld/0/7_Housing_a_Natio.pdf

    It shows how the Government’s housing grant scheme (and by extension rental scheme) is micro-economically unsound to a degree that it would be obvious to any fresh graduate of economics who took a good look. To put things plainly, there are disincentives built in for low-income workers to increase their productivity for higher wages.

    And certainly, doing a rigorous economic analysis of other government policies, one would find holes, possibly gaping ones such as that in the housing grant scheme.

  5. On a larger point, and this time relating to the Nobel prize, many of our institutions and systems are silly. Balloting for flats? Seriously?? Pricing based on eyeballing the buildings around??? (I’d plug Annex C of the SDP Housing paper, but that uses knowledge from a few Nobel prizes ago, and I’ll stick to this recent prize…)

    The way students are matched to schools is not meeting the policy intent of giving schools flexibility to select for different dimensions of student performance… The patch is the DSA system, which remains inadequate. Using Gale-Shapley matching in “student-optimal” mode (“student proposes school disposes”), it becomes safe for students to state their true preferences without worrying about bad outcomes. This means their do not need to estimate whether there are enough slots and compare it with their chances. This fairness consideration means that those who are unable to strategize (or whose parents are unable to strategize) or who do not have inside information, are not penalized.

    The PAP government’s economics are unsound. This probably has been clear to economists (especially micro-economists) for the longest time.

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