Fundamental Attribution Error

You should read this post by Greg Mankiw (economics professor at Harvard).

Here is an excerpt:

"In the psych class I've been auditing, Steven Pinker yesterday talked about a phenomenon called the fundamental attribution error. When evaluating others, people have a tendency to overestimate the importance of personal characteristics and underestimate the role of situation.

Example:Why am I smiling? Because it is a sunny day.
Why is he smiling? Because he is a cheerful person.

I wonder if this common error can help explain some unfortunate impulses in economic policy.

Example:Why did I raise my price? Because demand increased more than supply.
Why did the gasoline station raise its price? Because oil companies are greedy price gougers."

This is an especially big problem among a growing swath of anti-market, anti-understanding-anything-about-economics lawmakers. It is also the main flaw of those who rail against price gouging and globalization, and protest in favor of fair-trade, "living" wages and more government regulation of prices. These people fundamentally believe that prices are not determined by marketplace forces, but rather by greedy people taking advantage of others. With that sort of mindset, who wouldn't support passing a law that would cause people to be more generous and kind-hearted?

Amusing Hypocrisy...

The image says it all.

Update: Ok, I should qualify this. My point here was more or less to mock those who either have no knowledge, or worse, willful disbelief in economics and yet still pontificate on economic issues. I will admit that there is such thing as price gouging, but that it is much more nuanced than just prices becoming 'unfairly' high.

Price gouging DOES occur when...

1) There is an emergency situation and demand for a particular good (such as water or electricity) skyrockets, and

2) In place of a competitive market there is only one or a few firms that can exert substantial market power.

3) Those firms, in their effort to maximize profits (as only makes sense), a) jack up prices in response to the high demand, but still artificially hold down production because of their market power, and/or b) collude in order to hold prices artificially high.

When (1) - (3) occur, price gouging is taking place and it is highly disadvantageous to those in need (ie those with high demand). However... if firms are relatively competitive and the market price happens to go up, even by a large amount, during an emergency, then that is potentially *good*! How can that be?

In competitive markets, the price equates marginal benefit and marginal cost. If demand goes up, the only way to avoid a price increase under normal circumstances would therefore be to tolerate a shortage (a potentially large shortage at that). This is because we cannot expect firms to operate at a loss, so they would just stop production before they run into loss territory. Therefore, while some people would get the much-needed good, there would be less of it out there in total and people perfectly willing to pay for the good would be left empty-handed.

Check out the diagram below:

Ignoring all the various solid and dashed lines, just take note of a few simple facts. First of all, in either state of the world (low demand vs. high demand), the monopoly price is noticeably higher than the market price, and the monopoly output is noticeably lower. Secondly, note that when demand increases, the market price increases somewhat but market output increases much more. The opposite is true for the monopoly case.

For all the do-gooders out there, I will also point out that if we were to prevent "unfair price gouging" by imposing a rule that prices not go up in an emergency, then the level of output in the emergency would be the same as before the emergency. In other words, we would be left with a huge shortage in the amount of (high market output - initial market output). If you think that causing shortages of needed goods is the way to go, then by all means, do try, but most people won't be calling you a do-gooder when they see can't buy what they need in an emergency.

Romney Rocks!

As various Republicans and Democrats jump into the race for the Presidency in 2008, I want to take time to highlight who I think, *so far*, is definitely the best likely candidate out there: Mitt Romney.

In my opinion we need somebody not only with solid principles-- someone who believes in the worth of the individual and in the primacy of individual rights over collective demands-- but equally importantly, somebody who can articulate those principles clearly. We need somebody who thinks creatively, systematically, and rigorously about how to solve the nation's most pressing problems. Here are some excerpts on Romney:

• Romney loves the very vocabulary of business—the rhythm of charts and diagrams and boardroom presentations. One afternoon, standing in a newly built Silver Line bus station in South Boston, he introduced a transportation plan that he hoped would be a blueprint for the next twenty years. Speaking in terms that only a consultant could love, he said, "Let me now take a journey with you in … PowerPoint."
• Romney concedes his love of analysis, up to a point. "I like data," he says. He sees issues such as transportation and health care and education as analytical problems to be solved—things that can be tinkered with and fixed, like an unprofitable company.
• The importance of using evidence and rigor and logic and data is something Romney gets in part from the Bain world view.
• Mitt Romney's initial foray into politics was not a success. In 1994 he spent $3 million of his own money in a campaign to topple the mighty Ted Kennedy from his perch in the U.S. Senate. Why did he waste money on such a quixotic project? "I felt very strongly that the social programs of the sixties and seventies, the liberal agenda—I'll call it the Johnson agenda—had hurt working families, had hurt the poor in many instances," he told me. "And while the liberals had the best of intentions, I felt that the programs themselves had created a permanent underclass and had fostered poverty instead of eliminating it."

This is somebody we need. We need somebody who can think beyond our existing paradigms and who solves problems head on not by referring to mantras (whether conservative or liberal), but by actually jumping in the data, looking at the models, and approaching issues from a scientific point of view to determine how to solve the problem.

At the same time, we need somebody whose principles guide him to identify the valid problems we face-- not the pseudo-problems like income inequality and price gouging, but the fundamental underlying problems that erode our economy, our security, our freedom, and our values. Mitt Romney has the complete package-- he has the competence and the principles. Here are some videos/links you should definitely go to in order to learn more about Romney:

Hear Romney talk about his innovative healthcare plan.

Watch this thorough interview with Romney on the Charlie Rose show. Skip the first 3 1/2 minutes to get to the Romney interview.

Watch this Q&A with Romney.

Hillary Takes the Plunge

Not that anybody should be surprised, but the New York Post reports today that Hillary wants in:
http://www.nypost.com/seven/12052006/news/nationalnews/im_going_to_go_for_this_nationalnews_ian_bishop_and_maggie_haberman.htm

"Sen. Hillary Rodham Clinton yesterday answered the question on everyone's mind - telling one New York lawmaker flat out: 'I'm really going to go for this.'"

People concerned (like myself) with the possibility of a Clinton Presidency risk catastrophe if we underestimate her electability and political acumen. While Hillary is very polarizing to many, the polarization is mostly residual conservative hatred from the '90s with the failed "Hillarycare" plan as well as her paranoid "right-wing conspiracy" politics. Since then, whether through truth or deceit she has made herself out to be a moderate, and one to be reckoned with at that...

Welcome!

Welcome to my new blog! This is a new beginning after a long period of neglect of my previous blog, found at http://www.xanga.com/aarondh84.

This blog will include personal commentary on developments in my life, but will more prominently feature discussion of world events, including US politics, as well as discussions on economics and any other interesting topics of note.