Wednesday, September 05, 2007

Students, Beware!


I'm speaking especially to the students of Kevin Quinn, who teaches economics at Bowling Green State University in Ohio. Quinn also blogs at EconoSpeak. His first substantive entry there, "Safety," leads me to fear that his students -- if they do not question and challenge him -- will learn socialism rather than economics.

Consider the example that Quinn uses to show how workers are "forced" to accept a high level of risk (breaks added for clarity):
Suppose there are two types of jobs, safe and risky, and 2 workers. Safe jobs have a safety index of 2 and pay $20,000, while risky jobs have a safety index of 1 and pay $30,000. Further suppose workers utility is the product of three factors: income measured in thousands of dollars, safety( measured by the index), and relative income. Now we have a standard prisoner's dilemma [link added: LC]:

If you take the safe job, [my] taking the safe job as well gives me utility of (20)(2)(1) = 40. [My t]aking the risky job gives me (30)(1)(3/2) = 45, so I take the risky job.

If you take the risky job, I get (20)(2)(2/3) = 26.67 if I take the safe job and (30)(1)(1) [=30] if I take the risky job, so I take the risky job in this case too.

Each of us does better choosing the risky job whatever the other does, but when we choose the risky job we are worse off, with utility of 30 each, than had we both taken the safe job and gotten utility of 40 each.
Putting it more directly and explicitly, here are the "payoffs" to "you" and "I" (calling them "A" and "B," respectively):
A takes a safe job and B takes a safe job -- A = 40, B = 40
A takes a safe job and B takes a risky job -- A = 26.67, B = 45

A takes a risky job and B takes a safe job -- A = 45, B = 26.67
A takes a risky job and B takes a risky job -- A = 30, B = 30
These results, when displayed in a 2x2 table, make it obvious (granting many assumptions, discussed below) that both A and B minimize their losses (the strategy of the game of prisoner's dilemma) by choosing a risky job. If A chooses a safe job, his payoff could be as low as 26.67, instead of 30; if B chooses a safe job, his payoff could be as low as 26.67, instead of 30. Both therefore choose a risky job to ensure themselves of the "less bad" payoff: 30.

But prisoner's dilemma rests on the assumption of non-cooperation. In fact, there is an alternative, known as a coordination game, in which A and B cooperate to their mutual benefit. In that instance, both A and B would choose a safe job. They needn't cooperate explicitly; each of them could calculate that the best result for both is to choose a safe job.

In any event, Quinn's conclusion rests on many convenient assumptions, explicit and implicit:
  • Utility is a simple, multiplicative function of three factors: pay, safety, and pay relative to that of a particular person (or class of persons).
  • Relative pay for the two jobs is as specified by Quinn.
  • Relative pay is an important determinant of utility -- as opposed to the enjoyment one derives from one's own pay, for example.
  • The pay of the other person (or class of persons) is determined by riskiness of his job, not by such factors as his productivity or the market value of the good or service he is involved in producing.
  • Safety can be indexed as in Quinn's example.
  • The indices of safety for the two jobs are precisely 1 and 2 (or a multiple thereof).
  • A and B must choose jobs simultaneously and irrevocably, each without knowledge of the other's choice, according to the stylized logic of prisoner's dilemma.
Just like real life, eh?

Even if Quinn's utility formula is realistic (which it isn't), and even if prisoner's dilemma is a valid model (which it isn't), the outcome is sensitive to the values chosen for pay, safety, and the importance of relative pay. Different values yield different outcomes: A takes a risky job, B takes a safe job; both A and B take safe jobs; etc.

Here's the bottom line:
  • Prisoner's dilemma is a dubious model of behavior.
  • Quinn's utility model is dubious.
  • Quinn's example uses numerical values that conveniently support a certain conclusion.
  • That conclusion? A labor market that is unregulated with respect to safety "forces" workers to take risky jobs.
Why does Quinn want to reach that conclusion? Answer: So that he can make a case for mandatory safety measures. How does he do that? By rigging his example (as I have discussed), and then by asserting this:
Making safety level 2 mandatory makes both workers better off and has no effect on employers (the pay differential is assumed to reflect the cost of making the workplace safer) and is thus a Pareto-improvement.
Here, Quinn assumes that the pay differential between the safe and risky jobs is determined solely by "the cost of making the workplace safer." That is:
  • The marginal cost of safety measures is constant ($10,000 per worker per year). (There might be one-time costs, as well, and those might drive the employer out of business or make the employers' type of business less attractive to new entrants, thus eliminating a source of jobs for new entrants to the labor market. But I'll let that go, for now.)
  • The employer simply reduces each worker's annual wage by $10,000 to compensate for the cost of the safety measures, thus holding output, total cost, and profit at their "pre-safety" levels.
  • Given Quinn's earlier (rigged) assumptions, workers gladly accept lower wages in return for greater safety, or...
  • Workers do not "gladly" accept lower wages, but they accept lower wages, anyway, because there are no other jobs for them, anywhere, or...
  • Other employers are unwilling to "exploit" the workers' pay cuts by offering them more than they make as a result of Quinn's government-enforced safety measures.
In other words, what Quinn dismisses, without discussion, is the likely effect of safety regulations: raising the cost of employing workers in jobs affected by those regulations and, therefore, reducing employment and wages in those jobs, in the longer run if not immediately. Safety regulations, in other words, narrow workers' options by forcing them to accept certain levels of risk -- set by regulators -- regardless of how those levels affect workers' jobs and pay, and regardless of workers' own risk-reward schedules.

Why should government narrow workers' options and force them to accept fewer jobs and less pay? After all, workers are not literally forced to take risky jobs. The choice is theirs, no matter how Quinn rigs his example. Perhaps Quinn thinks he's living in the Soviet Union, where workers actually were forced by the "dictatorship of the proletariat "to take certain jobs -- many of them risky ones.

What Quinn wants is an end to "injustice." But he has a strange formula for ending it: Cut jobs, cut pay, and narrow workers' options. Why? Because, in effect, Quinn doesn't believe that workers should take certain risks, even if they voluntarily choose to do so.

Quinn, in other words, is a paternalist or a socialist. Actually, it doesn't matter which of those he is (in his heart of hearts) because government-enforced paternalism is just socialism in a Santa Claus costume. Both regimes attempt to substitute the preferences and judgments of élites (the Quinns of this world) and their minions for the preferences and judgments of the millions of workers and businesspersons who face the actual risks and rewards of daily life.

The judgments can be made by fiat, but they can't be made correctly by socialists or by "libertarian" paternalists; viz.:
Practical Libertarianism for Americans: Part I (especially the paragraph that begins "Whether or not you subscribe to the abstraction of self-ownership...")
Practical Libertarianism for Americans: Part II (especially the synopsis of Friedrich Hayek's views toward the end of the section on "The Evolution of Libertarian Thought: The Unification of Economic and Personal Liberty") and the Addendum (especially the first three block quotations)
Socialist Calculation and the Turing Test
The Social Welfare Function
Libertarian Paternalism
A Libertarian Paternalist's Dream World
The Short Answer to Libertarian Paternalism
Second-Guessing, Paternalism, Parentalism, and Choice
Another Thought about Libertarian Paternalism
Ten Commandments of Economics
A Little Putdown of Politically Correct Shopping
More Commandments of Economics
Three Truths for Central Planners
Risk and Regulation
A Further Note about "Libertarian" Paternalism
Apropos Paternalism
UPDATE (10/04/07): Interesting paper here about the positive relationship between cooperation and IQ. (Thanks to Arnold Kling for the pointer.) That the relationship is weaker now that it was about 40 years ago supports the thesis that the rise of socialism leads to the breakdown of civil society. How? The state rips asunder socially evolved norms and networks and replaces them with impersonal laws and bureaucracies.