Friday, May 31, 2013

Abolish the Corporate Income Tax

Liberals always want to raise the corporate income tax thinking that it will force "fat cat" corporations to pay their "fair share." Little do they know, since economics and reality are irrelevant in their ideology, that corporations do not pay the income tax. The corporations force the tax increase onto the consumer with higher prices.  Pat Buchanan has a nice proposal; end the corporate income tax: 
Far from being condemned, Apple's CPAs ought to be inducted into the Accountants Hall of Fame. 
It is no more immoral for Apple to move its headquarters for foreign sales to Ireland than for Big Apple residents to move to Florida to escape the 12 percent combined state and city income tax. 
Among the reasons the Sun Belt is booming at the expense of the Rust Belt is not just the weather. Southern states strive to keep income and estate taxes low or nonexistent. They want companies and families to relocate and live there, and to spend their money there. 
The problem here is not with Apple, it is with Sen. Levin & Co.
Here is the article: Abolish the Corporate Income Tax 

Thursday, May 30, 2013

Goldwater and the Conscience of a Conservative

(Image Courtesy of Google Images)

I am not sure why it took me so long to read Barry Goldwater's "The Conscience of a Conservative."  I tore through it in one sitting.  

Here are a few gems:
"The root difference between the Conservatives and the Liberals of today is that Conservatives take account of the whole man, while the Liberals tend to look only at the material side of man's nature.  The Conservative believes that man is, in part, economic, an animal creature; but that he is also a spiritual creature with spiritual needs and spiritual desires. " - Barry Goldwater
"Surely the first obligation of a political thinker is to understand the nature of man.  The Conservative does not claim special powers of perception on this point, but he does claim a familiarity with accumulated wisdom and experience of history, and he is not too proud to learn from the great minds of the past." - Barry Goldwater   

Wednesday, May 29, 2013

Austrians and Game Theory

My favorite area of economics and mathematics is Game Theory.  It is a fascinating subject with a wide variety of applications.  As someone who used to consider myself an adherent of the Austrian school of economics I know it deals with some of the issues Austrian Economists have with normal General Equilibrium methods of economics. Also, it just so happened to be "co-founded" by an Austrian economist, Oskar Morgenstern.  I knew Mises was not a fan of game theory, however, I was interested to see what current Austrian economists think of it and that is what motivated this post.  Needless to say there is a lack of understanding.

I went searching on to find as many articles I could, this first led me to the blog.  People there had varying opinions of game theory but the overwhelming understanding of game theory was completely mistaken.  One person mentioned how game theory is largely based off the prisoners dilemma and therefore is a useless thing to study.  This is very frustrating because game theory has roots all the way back to Emile Borel and other mathematicians, it's most influential work was published in 1944, and the prisoner's dilemma as we know it is credited to Luce and Raiffa in 1957!  This, amongst other fallacious arguments, were very common in these blog discussions.

Okay, so people writing on the blogs misunderstand game theory, but the trained economists couldn't be so drastically mistaken could they?  In an article entitled "The Games Economists Play" by Robert Murphy he attacks the conclusions of game theory in a clearly misinformed fashion.  He analyzes the aforementioned prisoner's dilemma and uses it to claim that because of this we should not accept game theory in general.

In the prisoners dilemma, two players are accused of committing crimes, one minor crime in which their guilt can be proven with out a confession, and major crime for which they cannot be convicted unless at least one confesses.  The confessor will go free but the other will go to jail for 6 years.  If neither confess, they will go to jail for only 1 year.  If they both confess they will go to jail for 5 years.  In this game without communication, the Nash Equilibrium is for each player to confess and hence go to jail for 5 years.  This, to Robert Murphy, is the downfall of game theory because each person could increase their non-jail time time by not confessing.

What Dr. Murphy does not understand is that Nash Equilibrium does not tell you the outcome will be optimal, only the strategies that rational players will make.  The reason the prisoner's dilemma is so famous is because it was the first example of an inefficient Nash Equilibrium (at least that I have found in my research)  Furthermore, he says

"Even here, the game theorists orthodox analysis is not entirely appealing: real world players often do cooperate even in a one-shot prisoner's dilemma"

This made me wonder if he is completely unaware of the study of games with communication?  Or even the study of cooperative game theory.  In the situation described above it is assumed that the prisoner's cannot communicate and have zero way of knowing what the other will do.  Hence, it certainly becomes much more plausible to confess (I have watched enough First 48 on A&E to see that people often do confess).  Also, if we analyze the game properly the outcome makes complete sense.  Since the criminals are not cooperating or communicating in any way, as soon as criminal A thinks criminal B will not confess, criminal A has all the incentive to confess.  His choice becomes either go to prison for one year or zero years.  Likewise for the other criminal.  Now one could argue that many criminals would rather go to jail than be a "rat".  This is where I would like to point out that the focal point effect already deals with this objection.  

Now, if we look at this game through a cooperative game theory lens, the outcome changes entirely.  Through this lens, we can consider any way in which the criminals will cooperate.  Consider the possibility that there is a contract signed before hand in which the criminals agree to not confess otherwise face a punishment worse than prison.  In this game, the person does not have any incentive to cheat because the time he spends free will be worse than time in prison due to the punishment.  Hence, the equilibrium now becomes both criminals not confessing.  

Two more points to consider: first, he mentions people using the prisoner's dilemma to argue for government intervention.  Again, these people do not understand the fact that the criminals have no way to communicate or cooperate.  Hence, their argument is invalid.  Further, the fact that Robert Murphy would actually use this argument to argue against game theory is intellectually dishonest.  He is misrepresenting something he should have studied while getting his PhD.  Any game theorist knows the prisoner dilemma can actually be used to argue for LESS government.

Finally, he gives a formidable representation of "backward-substitution".  Again, I am wondering if he is unaware of the vast literature on the subject of repeated games.  In 1982 Kreps, Milgrom, Roberts and Wilson constructed a way to show that "non-confession" strategy will be employed given an initial certain doubt and actions during the game.  The explanation gets very technical with a lot of game theoretical terms so I will not go into it here, but it is discussed in full detail in "Game Theory: Analysis of Conflict" by Roger B. Myerson in section 7.6.  Also, there are game theorists who study forward induction as well.

In conclusion, it is clear to see Robert Murphy builds up a straw man representation of game theory in order to tear it down.  No where does he address any of the advancements of game theory in the last 20-30 years.  He does not address perfect equilibrium, proper equilibrium, sequential equilibrium, subgame perfect equilibrium, trembling hand perfect equilibrium, the focal point effect, repeated games and the list could go on.  He does however, address Nash equilibrium and the prisoners dilemma, two aspects of game theory developed in the 1950's.  Both of which have been greatly advanced.

Monday, May 13, 2013

Food Labeling

As of late I have seen many discussions about the government forcing food companies to label whether their food contains GMOs or not.  To my surprise, many of the people in favor of this government regulation are hardcore free market libertarians.  These are the type of people that will scoff at the roads argument liberals make, (rightfully so) so why are they in favor of these regulations?  In all honesty I do not know.  Maybe it is because they don't fully understand how the free market works, maybe it is because they are not as libertarian as they claim.  Or maybe it is because they have not heard the proper argument why these regulations are unnecessary.  Anyway, here is my take:

If the public became aware of GMOs as they are now demand for non-GMO food will increase.  This means that companies that don't use GMOs will begin to label that their food does not contain any GMOs in order to increase their profits.  Other companies will be forced to follow along and label their food as non-GMO in order to not lose market share.  If you look at this through a game theoretical approach it is easy to see that the equilibrium will be to label their food.  Hence, we will know which food contains GMOs by a non-label.  

One response I always get from this is how do you know the company won't lie?  Well, for one thing, fraud is illegal.  No one is advocating fraud.  In reality, what would happen is that with the fear of fraud there would be a demand for a company to test these foods for GMOs, and without the approval of the company the label of non-GMO means nothing.  Now, we have companies labeling that their food does not contain GMOs and a third party company approving which food can be labeled.

Another thing I hear is that this way of the free market handling these food labels will hurt mom 'n' pop stores.  I don't see how this follows at all.  They claim that they won't be able to afford the labeling.  However, why would a mom 'n' pop store need the labeling at all?  Usually these small mom 'n' pop stores are in business due to a loyal customer following where the owners know the customers.  If they are selling their own food I think a simple sign above their door about non-GMOs would suffice to convince loyal customers, and if they are selling others foods they don't have to pay for the labeling at all.  Furthermore, the way the free market handles this doesn't force them to label anything if by chance their food does contain GMOs.

Moral of the story is whenever someone is arguing for more government regulation try first to think how the market would handle it.  Usually it is not overly-complicated and almost common sensical.  If it is not, you might be over thinking it.

Mathematical Economics, Good or Bad?

Mathematical economics, is it a good thing or a bad thing?  This seems like more of a philosophical question than an economical question, and being trained in economics and mathematics I am going to try and avoid the philosophical implications at this point.  One can read many different Austrian economists give differing opinions of why math is an unnecessary facet of economics today, but Mises has a quote that pretty much sums up the underlying belief about mathematical economics amongst Austrian economists today.

"The mathematical method must be rejected not only on account of its barrenness. It is an entirely vicious method, starting from false assumptions and leading to fallacious inferences."  - Mises

This quote, and hence disdain for mathematical economics amongst Austrians is very troublesome to me for many reasons, but there is one main reason: Game Theory.

Lets take a look at this quote by Mises and see if it applies to game theory.  Should game theory be rejected on account of its barrenness?  Well, it is almost absurd to answer this question being that there have been multiple mathematicians who have won the Nobel Prize in economics for work in game theory.  However, we all know a Nobel Prize in economics doesn't mean what it used to.  Without going into too much detail, game theory tells us why anti-trust laws are irrelevant in a free market because collusion is not an equilibria.  It tells us unions are no longer needed to "protect" workers because managers and employees will reach an equilibrium within the range of the employees demands.  It tells us why no nuclear weapons were launched during The Cold War.  This list is not even close to being exhaustive.  Game Theory's results are rich and can only help economists because it is a mathematical field grounded in logic and truth.

One last thing to consider from this quote is the "false assumptions" portion of Mises's claim.  There are three assumptions to game theory.  The players are rational.  This is self explanatory and no need to argue why it is not false.  Same goes for the next assumption: intelligence.  All this assumption is saying is that if person X employs strategy A, person Y will employ the best response to strategy A.  Furthermore, person X knows that person Y is intelligent and will therefore not employ a strategy in the hopes that person Y will play the wrong strategy.  The final assumption is that the actual playing of the game won't affect the outcome of the game.  This one is a bit more difficult to explain, but in general it is saying that if we decide what moves are the best before the game is played that each of our outcomes won't change based on something unaccounted for in the game.  IE, if my opponent employs strategy B and my best response is strategy A, this will actually be my best response.  A good argument for this can be found in "Game Theory: Analysis of Conflict" by Roger B. Myerson.  This discussion is in chapter 2.

So, are the assumptions of game theory false and do they lead to fallacious inferences?  Not as far as I have ever found.  It is odd to me that Mises should be against game theory at all given Oskar Morgenstern was an Austrian economist and laid the groundwork for the theoretical foundation of game theory.  Thus, if an Austrian economist makes fallacious assumptions in this area of thought, why should we trust their assumptions in other areas?