Edward Hadas

Candidates as consumer products

Edward Hadas
Nov 21, 2012 15:06 UTC

Barack Obama did not win the election because more Americans thought he would be a better president than Mitt Romney. More Americans voted for the incumbent than for the challenger, but it is Obama’s superior campaign organisation, and not his personal appeal, that deserves most of the credit. In particular, his product managers were better than Romney’s at using the technique of “data mining”.

The technique, pioneered by supermarkets, is conceptually simple: measure everything and tweak as necessary. In practice, it is a delicate affair. Suppose a popular soft drink has 4 percent higher sales when it is stocked next to a salty snack than when healthier raisins are its shelf-neighbour. Should shelf locations be swapped? There are many variables: the effect on sales of salty snacks and raisins, the profit margins of the different products, and customers’ sensitivity to any price changes. Most of the effects are tiny, but the study of millions of data, including a large number of computer simulations, can increase a retailer’s revenue and profit by a few percent.

In elections, data mining can bring votes to candidates and can increase the supply of contributions which pay for vote-gaining advertising. The work is detailed. Time magazine reports that the Obama campaign carefully tested how much more likely undecided voters in each close state were to yield to the blandishments of local rather than to out-of-state volunteers. The superiority in detailed computer work – “We ran the election 66,000 times every night”, as one expert explained to Time – probably gave Obama a few more percentage points of votes than Romney. It was the margin of victory.

Is data mining good, bad or ethically neutral? Supermarket executives may say that the practice is good because it increases profit, but profit should not be the only goal of any company. A more nuanced judgment is appropriate. The careful study of purchase patterns is truly valuable insofar as it helps consumers shop more wisely and helps stores reduce wasteful investment in inventory. It is pernicious insofar as it manipulates consumers into buying things they do not or should not really want. By this higher standard, commercial data mining is at best a mixed blessing.

In politics, political data mining would clearly be a good thing if votes were all that mattered. In the terminology of marketing, this scientific electioneering is a proven, cost-efficient method of improving electoral outcomes. However, an election is supposed to be quite a different matter from a contested retail market or a sporting event. The candidates’ goal should not be to win at any cost, but to help voters shape the nation’s future by giving them a clear choice of policies and philosophy.

The angel is in the detail

Edward Hadas
Nov 14, 2012 15:47 UTC

Barack Obama will not solve America’s most profound economic problems. That is not a partisan political statement about the newly re-elected president. Had Mitt Romney won last week’s contest, he also would not have been able to reduce unemployment, improve the trade balance, rebuild U.S. manufacturing excellence and strengthen the middle class. The fixing of the American economy is just not a one-man or one-woman job.

The Federal Reserve is trying to help with one of those problems, unemployment, but the central bank does not possess the refined tools needed to address this complex issue. Indeed, bold decisions made by the highest authorities cannot resolve any of the developed world’s greatest economic problems. The devil – and the angel – is in the innumerable details.

Of course, there are times when big policy decisions change the course of economic history, as when the new governments of formerly communist countries abandoned central planning, or when the U.S. government rescued its banking system during the last financial crisis. Less dramatically, changes in government deficits and central bank policies on interest rates can moderate fluctuations in the economy by compensating, to some extent, for hyperactivity or sluggishness.

EU for the 2018 economics Nobel

Edward Hadas
Nov 7, 2012 14:44 UTC

It may be a little early, but I want to make a conditional nomination for the 2018 Nobel Prize for economics. If all goes well, the European Union, which has just won the 2012 Peace Prize, will by then have met the criteria for the economics award: a “work on economic sciences of eminent significance”. The EU writes in deeds rather than essays or equations, but the unconventional form only adds to the accomplishment. Here is a preliminary draft of the citation.

The European Union is awarded this prize for its advances in the theory of economic organisation in modern industrial economies. The EU has added to our knowledge of the relationships between the economic good and political goals, between bureaucracy and entrepreneurial initiative and between private and state ownership. It has also contributed to the study of managing economic change. The EU’s “European theory” is supported by the most persuasive evidence: a unified, prosperous and fairly just economy.

The European arrangement is sometimes called the Social Market Economy. That title captures two key tenets: that the economy should always be considered as part of the broader society, and that competitive markets should play a major role in modern economies. However, “Social Market” misses several important European ideas: that regulation and enterprise should be mutually reinforcing; that supranational and national governments can perform complementary economic tasks; that many economic activities, including health care and education, are best offered by enterprises which are neither under direct government control nor purely private and profit-seeking; and that meritocratic bureaucracies can make valuable contributions in all parts of the economy.

Admit economic ignorance

Edward Hadas
Oct 31, 2012 13:40 UTC

It is time for economists to admit that they are stumped. Four years after being blindsided by Lehman Brothers’ collapse, the profession is still stumbling in the dark. Policymakers and pundits still make confident pronouncements, but the conclusions are radically different. The expert disagreements give away the truth: ignorance reigns.

Here are six crucial questions which professionals should stop pretending they can answer:

1) What creates retail inflation?

If, as some economists think, ample supplies of money push up prices, then the current inflation rates of around 2 percent are inexplicably low. After all, monetary and fiscal policies have never been as generous. If, as other professionals believe, prices fall when there is excess supply of goods and labour, then inflation rates are inexplicably high. Production is still well below trend levels and unemployment rates have rarely been as high.

Unrealistic Nobel economics

Edward Hadas
Oct 24, 2012 12:34 UTC

Stable pairwise matching won Lloyd Shapley and Alvin Roth the Nobel prize for economics. It is an idea that is simple, slightly illuminating for economists, occasionally useful for everyone – and profoundly misleading.

The matches in question are between members of two groups, for example potential husbands and potential wives, or medical school graduates and hospitals that might employ them. The “stable” is defined narrowly: the pairing off is stable as long as no individual can find a way to improve his or her situation by trading partners. What counts as “improvement”? The game theory of Shapley and Roth does not really address that question.

The simple idea, demonstrated by Shapley a half century ago, is that under certain conditions a methodical process of elimination – many rounds of tentative pairings – leads to stability. Take a pool of equal numbers of would-be brides and grooms. The men keep on proposing to their favoured women. At first, only the irresistible men garner acceptances from the most appealing women. Gradually, though, each less attractive man will win the favour of some less attractive woman, who accepts the sad reality that she cannot do any better. At the end, while many people may wish they had a different spouse, no one will be able to arrange a trade. Any alternative pairing will be less desirable than the current one to one side or the other. That is exactly game theory stability.

Welcome the U.S. relative decline

Edward Hadas
Oct 10, 2012 13:53 UTC

Whoever wins the U.S. presidential election will preside over a relative decline in the country’s global economic position. He should, but probably will not, accept the inevitable.

There was a time when almost everything about the American economy set the world standard. In 1960, The United States was the world’s largest market. It had by far the most developed infrastructure, easily the best educational system and undoubtedly the most business-friendly government. It was the source of most innovations, from safe highways and comfortable suburban houses to computers and advanced pharmaceuticals.

Those days are long gone. The creation of the European Union has left the U.S. market in second place. Overall, the infrastructure in Europe and Japan is at least as advanced. The United States is still the global leader in many areas of industry, education and government, but it has fallen behind in some, and the gaps have narrowed in all.

The EAST cure for unemployment

Edward Hadas
Oct 3, 2012 13:52 UTC

The winner of the presidential election should do something about U.S. unemployment. The current rate of 8 percent is high by America’s historical standards, and that measure does not capture the gravity of the problem – too many people have spent too long out of work or have decided to leave the workforce because jobs are too hard to find. European leaders face an even greater challenge. The EU unemployment rate is 10.4 percent, and during the last decade it has been below 7 percent for only half a year.

What is to be done? Neither Mitt Romney nor Barack Obama has a clear plan. The Federal Reserve has an idea, but it is hard to see how $40 billion a month of newly printed money will actually help create jobs. I have an alternative approach: EAST. It is both an analysis of the problem and a solution.

E is for Efficiency. The industrial economy continually makes more stuff out of less labour. More efficient workers, machines and systems constantly add to consumption, and constantly subtract jobs. The lost labour has mostly been dangerous or tedious, so there is little to regret.

Who suffers in the U.S. economy?

Edward Hadas
Sep 26, 2012 14:31 UTC

Barack Obama and Mitt Romney put the economy at the top of their campaign agendas. They have both focused primarily on labour – the high rate of unemployment. The attention is deserved, but other parts of the economy should not be ignored. There is the worrying decay of the nation’s capital stock – the physical, social and financial infrastructure. There is also something wrong in the consumption side of the economy, but there is a heated debate on just what the problem is.

Many commentators believe that the middle class, which makes up the bulk of the population, has a big problem: a decline in living standards. After all, the Census Bureau reports that the $50,054 median household pre-tax income in 2011 was 9 percent below the all-time peak, adjusted for inflation, reached 12 years earlier. That decline in income is so large that it must have led to some erosion in the typical family’s consumption.

Even if purchasing power really had declined by a few percent, the slide was from such a high starting place that loud complaints about deteriorating lifestyles would be unseemly. In fact, though, the median income measure distorts consumption reality. It omits services received without cost, for example healthcare provided by the government and insurers. It excludes the effects of changing taxes and shrinking household sizes. It underestimates the value of technological improvements – think mobile phones and the internet – and of the vast expansion of new, now-cheaper housing during the bubble.

Remembering the 1960s

Edward Hadas
Sep 19, 2012 14:28 UTC

Revolution was not on the agenda when the Second Vatican Council of the Catholic Church opened on Oct. 11, 1962, almost exactly 50 years ago. However, the gathering marked the start of a new era, not only for the world’s largest centrally-run religion. During the following years, the hope for a better, freer world led to everything from the sexual revolution to the Prague Spring, from African independence to the hippie culture of Woodstock. A half-century on, it seems a good time for an economist to take stock.

The economy was not the top concern of the ’60s would-be revolutionaries, but calls for a new society had two revolutionary economic implications.

First, like so many other parts of the established order, the economic “system” was to be overthrown. The target was clear enough in Eastern Europe – the Communist planned economy. Elsewhere, the economic villain was harder to pin down, although it was often assumed that “capitalism” was intrinsically evil – heartless corporations and excessive materialism in the West and post-colonial exploitation in the Third World. It was time for radical change; if not a return to some imagined pre-industrial communal paradise then at least a massive refusal to become cogs in the machine. It hardly seemed to matter then that dissidents in the East were longing for what protesters in the West were loathing.

Economic action needs its hard core

Edward Hadas
Sep 12, 2012 15:35 UTC

Economic development is not a simple matter. If it were, the comforts and security of developed economies would be enjoyed by more than one-seventh of the world’s population. Political extremists, especially successful ones, help explain why development has benefited only a minority.

Over the last two centuries, many groups which started out tiny, extreme and persecuted ended up in power. Think of radical socialists in many nineteenth century European nations or the colonial freedom fighters in much of Asia and Africa. The rebels varied in their beliefs and sophistication, but they shared the conviction that the pre-existing social order was irredeemably corrupt. The groups were typically built around a hard core of true believers, with larger groups of fellow travellers and vague sympathisers, some of whom rose to quite high positions.

It is much the same for economic revolutionaries in very poor countries. At first, small bands of devotees emerge. These are people dedicated to the capitalist work ethic – discipline at work, innovation in enterprise and efficiency in production. These dreamers also aim to overthrow the economic arrangements that went before – the feudal hierarchies, economically stultifying social restrictions, aristocratic waste and primitive technology. Economic revolutionaries are invariably more selfish than their political counterparts, but they share the desire to turn everything upside down.