In the 1950's, economists Alchian, Arrow, and Capron wrote a paper discussing the existence of a shortage of scientist/engineers in America.
What exactly does a shortage mean? For economists, it's essentially a matter of price not being able to adjust to clear the market. If apples cost 10 cents each but not everyone wanting to buy apples at this price is able to do so, then there is a shortage of apples. In a properly functioning market, this should not happen -- the price of apples should rise until the market clears. Only price controls can prevent this from happening! The government can cure shortages by not interfering with the market.
The layman usually has another meaning in mind. A dramatic increase in the price of apples might lead to a shortage of apples at the old "normal" price. While people are concerned with the "proper" price of apples, economists understand prices as simple market-clearing mechanisms and therefore pretend not to share the intuition that there are proper prices and improper prices. For example, the authors mock the idea of a proper price by discussing those who claim that there is a shortage of servants (instead of realizing that servants are now able to command much higher wages on the market -- hurray!) Such an example is only partially useful rhetorically, because it avoids confrontation with the idea that a dramatic increase in the price of food might be morally problematic.
People who refer to shortages may also believe that engineers are socially undervalued. Not surprisingly the authors find this claim dubious. They are responsive to the notion that competition with the Soviet Union dictates that we increase our supply of engineers, but do a good job pointing out the limits of that logic.
The authors do allow for "dynamic shortages," where institutional factors and market inefficiencies lead to prices adjusting slowly (but in the right direction). They acknowledge possible market inefficiencies due to uncertainty, myopia, monopsonies (the government has considerable market power as a major employer of engineers), and externalities. The monopsony effect is probably particularly relevant -- a large employer of engineers is more exposed to wage increases and therefore more reluctant to provide them. There is also the fact that while greater demand for engineers drives up their wages and serves as a signal that more workers should become engineers, there is a considerable time lag due to the long training period.
There is a discussion of how engineers decide how much education to puruse. It seems misguided to me -- at one point the authors suggest that wages for MSc engineers should be the same as wages for PhD engineers, accounting for education costs (including time), but this would only be true for marginal engineers and even then it would only be true if the PhD didn't serve a useful signalling function (not everyone might have the "choice" to pursue a PhD, constrained only by earnings).
This paper is very long (over 100 pages) and it would be possible to go into a lot more detail, but that doesn't seem like a particularly good use of time. I note the authors discomfort with actively suggesting to children that engineering is a good career (clearly indicating an "inaction is morally more excusable than action" worldview) although the points they make regarding the hidden costs of more engineers are good (more engineers = fewer doctors, all things being equal).
The authors emphasize two reasons why prices should be allowed to fluctuate in a free market. (1) Prices serve as a signal to encourage greater production. (2) Fluctuating prices ensure that resources are allocated efficiently (put to their most produtive use).
Thursday, March 29, 2007
Game Theory and "Commitment"
Jack Hirshleifer, "Game-Theoretic Interpretations of Commitment"
Where to begin? We can start by looking at the examples of game situations that Hirshleifer uses to illustrate his points.
1. Chicken. Two people drive cars directly at each other. If one of them bails out, the other wins; if neither bail out, they both get killed.
2. Land or Sea. The British choose to attack by land or by sea. The Americans choose to defend either the land or the sea. The Americans win if they defend where the British attack, otherwise the British win.
3. Prisoner's Dilemma. Two prisoners have to choose whether or not to rat out their co-conspirator. If both prisoners keep quiet, they each face a small punishment. But if one of them sells out, he gets off free while the other gets screwed.
4. Battle of the Sexes. A boy and a girl try to arrange a date. The boy prefers to attend a sporting match while the girl prefers to attend the opera. However, each prefers going on a date to not going on a date.
The games all involve two self-interested parties that must each be concerned with the other's actions. In Battle of the Sexes, interests are largely aligned; in Land or Sea, interests are entirely opposed. In Prisoner's Dilemma, the optimal outcome involves cooperation but each party has a selfish interest in defecting. Chicken has a similar structure to Prisoner's Dilemma...
The alignment of interests in Battle of the Sexes means that it is advantageous to have the first move (in this case, decide where you want to go for the evening). The opposite is true in Land or Sea (it is better to be able to react to your opponent). Flexibility is a crucial advantage in Land or Sea but is somewhat of a hindrance in Battle of the Sexes. We can view "commitment" as the opposite of the flexibility -- it's the ability to lock in your move, to tie your hands. Often tying your hands can be an advantage. A child who throws an uncontrollable temper-tantrum gains an advantage over a responsive parent.
If the Prisoner's Dilemma is not an anonymous one-off, parties may reach an optimal outcome through the use of promises and threats. For example, consider the announcement that "like will be met by like." This is essentially a promise that cooperation will be matched by cooperation (because pure cold calculation implies that defection will be matched by defection). If the promise is sufficiently credible, then it will be in the other player's interest to cooperate. (It is not necessary for the promise to be 100% credible.)
Similarly, in Chicken, the second player might announce that "I will defect." This is a threat to crash the car if the other player stays on the road. If the threat is sufficiently credible, then it will be in the other player's interest to bail out. One way to make the threat credible would be to remove the steering wheel and conspicuously throw it out of the window.
It is also possible to combine a threat with a promise. For example, in Chicken a player might announce that "like will be met by like." The advantage in combining a threat with a promise is that the credibility of the promise can make up for a deficiency in the credibility of the threat.
It seems likely that this sort of analysis can provide insights into human passions such as anger and gratitude.
Where to begin? We can start by looking at the examples of game situations that Hirshleifer uses to illustrate his points.
1. Chicken. Two people drive cars directly at each other. If one of them bails out, the other wins; if neither bail out, they both get killed.
2. Land or Sea. The British choose to attack by land or by sea. The Americans choose to defend either the land or the sea. The Americans win if they defend where the British attack, otherwise the British win.
3. Prisoner's Dilemma. Two prisoners have to choose whether or not to rat out their co-conspirator. If both prisoners keep quiet, they each face a small punishment. But if one of them sells out, he gets off free while the other gets screwed.
4. Battle of the Sexes. A boy and a girl try to arrange a date. The boy prefers to attend a sporting match while the girl prefers to attend the opera. However, each prefers going on a date to not going on a date.
The games all involve two self-interested parties that must each be concerned with the other's actions. In Battle of the Sexes, interests are largely aligned; in Land or Sea, interests are entirely opposed. In Prisoner's Dilemma, the optimal outcome involves cooperation but each party has a selfish interest in defecting. Chicken has a similar structure to Prisoner's Dilemma...
The alignment of interests in Battle of the Sexes means that it is advantageous to have the first move (in this case, decide where you want to go for the evening). The opposite is true in Land or Sea (it is better to be able to react to your opponent). Flexibility is a crucial advantage in Land or Sea but is somewhat of a hindrance in Battle of the Sexes. We can view "commitment" as the opposite of the flexibility -- it's the ability to lock in your move, to tie your hands. Often tying your hands can be an advantage. A child who throws an uncontrollable temper-tantrum gains an advantage over a responsive parent.
If the Prisoner's Dilemma is not an anonymous one-off, parties may reach an optimal outcome through the use of promises and threats. For example, consider the announcement that "like will be met by like." This is essentially a promise that cooperation will be matched by cooperation (because pure cold calculation implies that defection will be matched by defection). If the promise is sufficiently credible, then it will be in the other player's interest to cooperate. (It is not necessary for the promise to be 100% credible.)
Similarly, in Chicken, the second player might announce that "I will defect." This is a threat to crash the car if the other player stays on the road. If the threat is sufficiently credible, then it will be in the other player's interest to bail out. One way to make the threat credible would be to remove the steering wheel and conspicuously throw it out of the window.
It is also possible to combine a threat with a promise. For example, in Chicken a player might announce that "like will be met by like." The advantage in combining a threat with a promise is that the credibility of the promise can make up for a deficiency in the credibility of the threat.
It seems likely that this sort of analysis can provide insights into human passions such as anger and gratitude.
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