Monday, April 17, 2017

EconTalk on the Economics of Pope Francis

Russ Roberts recently interviewed Robert Whaples on the EconTalk podcast, which I have listened to regularly for years. I was especially interested when I saw the title of this episode, The Economics of Pope Francis, both because I am a Catholic and because I generally find Roberts' discussions of religion (from his Jewish perspective) interesting and so articulate that they help me clarify my own thinking, even if my views diverge from his. 

In this episode, Roberts and Whaples, an economics professor at Wake Forest and convert to Catholicism, discuss the Pope's 2015 encyclical Laudato Si, which focuses on environmental issues and issues of markets, capitalism, and inequality more broadly. Given Roberts' strong support of free markets in most circumstances, I was pleased and impressed that he did not simply dismiss the Pope's work as anti-market, as many have. Near the end of the episode, Roberts says:
when I think about people who are hostile to capitalism, per se, I would argue that capitalism is not the problem. It's us. Capitalism is, what it's really good at, is giving us what we want--more or less...And so, if you want to change capitalism, you've got to change us. And that's--I really see that--I like the Pope doing that. I'm all for that.
I agree with Roberts' point that one place where religious leaders have an important role to play in the economy is in guiding the religious toward changing, or at least managing, their desires. Whaples discusses this too, summarizing the encyclical as being mainly about people's excessive focus on consumption:
It's mainly on the--the point we were talking about before, consuming too much. It's exhortation. He is basically saying what has been said by the Church for the last 2000 year...Look, you don't need all this stuff. It's pulling you away from the ultimate ends of your life. You are just pursuing it and not what you are meant, what you were created by God to pursue. You were created by God to pursue God, not to pursue this Mammon stuff.
Roberts and Whaples both agree that a lot of problems that are typically blamed on market capitalism could be improved if people's desires changed, and that religion can play a role in this (though they acknowledge that some non-religious people also turn away from materialism for various reasons.) Roberts' main criticism of the encyclical, however, is that: "The problem is the document has got too much other stuff comes across as an institutional indictment, and much less an indictment of human frailty."

I would add, though, that just as markets reflect human wants, so do institutions, whether deliberately designed or developed and evolved more organically. So it is not totally clear to me that we can separate "indictment of human frailty" and "institutional indictment." No economic institutions are totally value-neutral, even free markets. Institutions and preferences co-evolve, and institutions can even shape preferences. And the Pope is of course the head of one of the oldest and largest institutions in the world, so it does not seem beyond his role to comment on institutions as an integral part of his exhortation to his flock.

Friday, April 7, 2017

Happiness as a Macroeconomic Policy Objective

Economists have mixed opinions about the degree to which subjective wellbeing and happiness should guide policymaking. Wouter den Haan, Martin Ellison, Ethan Ilzetzki, Michael McMahon, and Ricardo Reis summarize a recent survey of European economists by the Centre for Macroeconomics and CEPR. They note that the survey "finds a reasonable amount of openness to wellbeing measures among European macroeconomists. On balance, though, there remains a strong sense that while these measures merit further research, we are a long way off reaching a point where they are widely accepted and sufficiently reliable for macroeconomic analysis and policymaking."

As the authors note, the idea that happiness should be a primary focus of economic policy is central to Jeremy Bentham's "maximum happiness principle." Bentham is considered the founder of utilitarianism. Though the incorporation of survey-based quantitative measures of subjective wellbeing and life satisfaction is a relatively recent development in economics, utilitarianism, of course, is not. Notably, John Stuart Mill and many classical economists including William Stanley Jevons, Alfred Marshall, and Francis Edgeworth were deeply influenced by Bentham.

These classical economists might have been perplexed to see the results of Question 2 of the recent survey of economists, which asked whether quantitative wellbeing analysis should play an important role in guiding policymakers in determining macroeconomic policies. The responses, shown below, reveal slightly more negative than positive responses to the question. And yet, what macroeconomists and macroeconomic policymakers do today descends directly from the strategies for "quantitative wellbeing analysis" developed by classical economists.

In The Theory of Political Economy (1871), for example, Jevons wrote:
"A unit of pleasure or pain is difficult even to conceive; but it is the amount of these feelings which is continually prompting us to buying and selling, borrowing and lending, labouring and resting, producing and consuming; and it is from the quantitative effects of the feelings that we must estimate their comparative amounts."
Hence generations of economists have been trained in welfare economics based on utility theory, in which utility is an increasing function of consumption, u(c). Under neoclassical assumptions-- cardinal utility, stable preferences, diminishing marginal utility, and interpersonally comparable utility functions-- trying to maximize a social welfare function that is just the sum of all individual utility functions is totally Benthamite. And a focus on GDP growth is very natural, as more income should mean more consumption.

The focus on happiness survey data I think stems from recognition of some of the problems with the assumptions that allow us to link GDP to consumption to utility, for example, stable and exogenous preferences and interpersonally comparable utility functions (that depend exclusively on one's own consumption). One approach is to relax these assumptions (and introduce others) by, for example, using more complicated utility functions with additional arguments and/or changing preferences. So we see models with habit formation and "keeping up with the Joneses" effects.

Another approach is to ask people directly about their happiness. This, of course, introduces its own issues of methodology and interpretation, as many of the economist panelists point out. Michael Wickens, for example, notes that the “original happiness literature was in reality a measure of unhappiness: envy over income differentials, illness, divorce, being unmarried etc” and that “none of these is a natural macro policy objective.”

I think that responses to subjective happiness questions also include some backward-looking and some forward-looking components; happiness depends on what has happened to you and what you expect to happen in the future. This makes it hard for me to imagine how to design macroeconomic policy to formally target these indicators, and makes me tend to agree with Reis' opinion that they should be used as “complements to GDP though, not substitutes.”