Jun 13, 2007

Dismal (but getting used to it) Science

Most modern macroeconomic models are based on the paradigm of ultrarational and super-far-sighted economic agents (that's economese for "people") who act to maximize their expected lifetime utility (which is quantified happiness, more or less). Utility is usually modeled as an increasing function of consumption (not TB, but how many toys you get to buy) and leisure time (important if people have a choice of how much to work). For ease of computation (and, usually, for lack of strong evidence to the contrary), there is often a simplifying assumption that utility is time-separable and additive, which means that your lifetime utility is just the sum of your utilities in each year (perhaps discounted by some impatience factor). That is, your happiness this year depends only on how much you buy this year, not, for example, on how much you had last year and got accustomed to it; and it contributes to your lifetime happiness independently of what happens in any other year. Everyone knows the model is oversimplified, but at least it is as objective as can be... isn't it? Maybe not:
folks on the left get used to money, but not status and the reverse for folks on the right. (...) the fact that the happiness-effects of various things seem to be mediated by ideological leanings seems to basically ruin the prospect of using happiness research as a neutral, scientific way of assessing policy. It may just end up sort-of-usefully reminding us that one group may like a certain policy and another group may not simply because it makes one group feel better and another group feel worse.

Holy Wotan and Fricka! If this German study and Wilkinson's interpretation, above, are correct, any analysis of well-being based on the time-additive-utility-for-consumption model will measure the well-being only of politically right-leaning agents. Policies that aim to maximize social welfare (that's well-being, not dole) will, in fact, maximize the welfare of the righties and may well screw the lefties.

Well, I feel guilty: of course I use those models. But at least I always thought (and said) that welfare analysis in those models was fishy business. I think I can convince the jury that my transgressions have been mere misdemeanors.

There may be a less devastating interpretation, according to Quiggin:

Rather than duplicate all the excellent discussion, I’ll offer the possibility that those on the right may not be so different from the rest of us as they seem to be at first sight. Money is valued because it provides access to goods and services, but it can also be used to keep score in a competition.

In other words, in the long run, everybody cares only for status, but righties measure status by income, while lefties perceive status along some other dimension. (Who has higher status? An endowed full professor of philosophy making $110,000/yr or a starting assistant professor of finance making $125,000/yr?) This makes a lot of sense. If Quiggin is right, the paradigm isn't biased (it is just wrong for everyone), but the practical results would still have right-leaning bias: it is not crucial how the alignment of conservatives with the model assumptions arises.

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