This stuff matters
22/08/2012 § 11 Comments
I’ve been turning over in my head a recent comment from James Zuccollo about the discussion on this blog, TVHE, and Offsetting. Regarding the tone some of us economists have taken with physical scientists, he asked, does this have to be a gladiatorial encounter?
My answer is, this stuff matters.
First, this stuff matters in a narrow sense. We have competitive funding for research in New Zealand. Economists try to get funding — oh, let’s own this, I try to get funding — and we find ourselves having to explain economics to engineers, psychologists, sociologists, geographers, etc. And time and again, economics research isn’t quite important enough to be funded. Since it is a zero-sum game — if you get funded then I don’t — it is a fight.
Secondly, this stuff matters in a much broader sense. An important reason for doing economics is to understand how to maximise welfare. We can argue about efficiency versus equity, individualism versus collectivism, narrow versus broad definitions of welfare, the role of externalities, and the impact of cognitive heuristics and biases. But still, we are trying to make the world a better place.
The role of applied microeconomics — my little corner of the world — is even more focused on this goal than other areas, such as econometrics or theoretical economics. We are looking at how people and businesses are directly and indirectly affected by policies and decisions. One of the things I keep finding is how little we really know. We keep making policies and decisions and hope they are the right ones, but we don’t really know.
Let’s take a clear example, one of Eric Crampton’s bugbears: alcohol policy. The Government is discussing instituting a minimum price regime in order to curb harm from drinking. Importantly, a minimum price will make it more expensive for anyone who wants to buy cheaper alcohol. Why might people want cheap alcohol? Well, maybe they drink a lot of it, ‘too much’ by some standard. Maybe they have decided that a little ethanol is nice, but don’t want to spend too much on it. But maybe, just maybe, they are poor. They like a drink or two at the end of the day, just like richer people. Wine at $15 a bottle doesn’t fit the budget, but chateau cardboard tastes just fine and does the trick.
What we know from economic theory is that putting up the price of cask wine has both a price and an income effect. The price effect means that people buy less of it. The income effect means that they buy less of everything else, including heating, medicine, fruit, and all those things that are considered ‘healthy’.
To continue in catechism form:
Q: How much less healthy stuff do people buy?
A: We don’t know.
Q: What’s the net impact on health?
A: We don’t know.
Q: Why don’t we know?
A: The research hasn’t been done.
Q: Why hasn’t the research been done?
A: Because no one has funded it.
Q: Why hasn’t anyone funded it?
A: Because it lost the competition for scarce research funding.
So, to recap: real people are going to have their health and wellbeing directly affected by policy, but we don’t know how much and haven’t bothered to find out. We will possibly make the world worse, all because the social science research — the economic research — hasn’t been funded.
So yeah, it is a fight. Because this stuff really does matter.