Does the Bible Esteem Happiness?

That's a good question my wife asked me. Answering it will involve a bit of word study, since it seems that Hebrew's asher (ק ר א) and Greek's makarios (&mu &alpha &kappa &alpha &rho &omicron &sigma) (sp?), which the King James Version translate as "happy" mean it in the sense "blessed", so "joy" or "delight" might be the word to focus on. See, too, Aristotle, Aquinas, and Hooker. I wonder what Calvin and Luther have to say? I should also let Professor Kimball know what I find, since he gave an econ seminar last week on happiness as one of multiple goals.

GM and the Unions

Professor Bainbridge has a big comment discussion going about the amazingly high wages the UAW union has extracted from the automakers it is bankrupting. What is really going on is that the workers own the firm. They are the residual claimants, and the company is run for their benefit. A residual claimant has a risky claim, though, and in a bad year he will earn less. The workers have avoided this so far by letting the capital of the company run down. Now they are at the point where they must take a temporary wage cut, unless they can use their political clout.

Or so I hypothesize. This would make a good paper. Some facts are easily checkable. Has GM been investing less than the value of true depreciation? Has it been able to sell new stock? If it were freed of the unusually high pension obligations and wages, would it be in sound financial shape?

November 16: Here is one of the many good comments from the Bainbridge post (his readers seem to be far smarter than those of other blogs!):

I'm sorry, but if you try to make a point like this, and don't back it up
with an outside source supporting your assertion, you only leave yourself
open to people (like me) who will show you an outside source that proves
you wrong.

http://www.jdpower.com/corporate/news/releases/pressrelease.aspx?ID=2008115

JD Power 3 Year Vehicle Dependability Study

Problems per 100 Vehicles, by Brand, for the first 3 years of ownership,
for cars sold in 2005, surveyed in 2008.

(I'm only going to list the non-luxury brand names, since in the luxury
brands, Lexus/Toyota has been winning this thing for the past 15 years)

Mercury - 151
Toyota - 159
Buick - 163
Honda - 177
Ford - 204
Industry Average - 206
Nissan - 224
Pontiac - 225
GMC - 225
Chrysler - 229
Dodge - 230
Chevrolet - 239
Scion - 243
Saturn - 250
Jeep - 253

A little statistical analysis:

The average Ford has 1/3 more problems than the average Toyota.

The average GMC, Chrysler, Dodge, and Chevrolet has 50% more problems than
the average Toyota.

The average Saturn and Jeep has 2/3 more problems than the average Toyota.

The Optimal Savings Rate

Some people think that although people make efficient decisions about how much to save personally, the social discount rate we use is too low. The market gets it right, but government does not. I think the opposite is true.

Individuals are too eager to consume in the present instead of the future. Think of a person as a sequence of selves over time. Most people are selfish and favor the present self over the future self. They save too little.

On the other hand, when it comes to decisions across generations, we have to remember that future generations will be richer than we are. Thus, we should not incur too much cost now in exchange for benefits for them later.

Subsidiarity and Hierarchies

The idea of "subsidiarity" came up today at a church meeting. The idea is that affairs ought to be handled at the lowest, most decentralized level. An individual congregation, for example, and not the denomination ought to discipline church members. The term is a Roman Catholic one.

The discussion made me think of the following problem. Suppose we have a worker who is misbehaving. It makes sense for his immediate boss to discipline him, since the boss knows the situation best. His immediate boss, however, likes his employees and is reluctant to bear the emotional cost of intervening. Thus, it may actually work out better to have the top boss-- or some central committee-- begin the discipline process. Perhaps the immediate boss can then handle details, having been positioned as the friend of the worker rather than as the "tough guy".

This reminds me of the style of hierarchy models in economics. I'm not sure whether modelling is useful here or not.

Longer Sale Times in Depressed Housing Markets

Why should it take longer to sell a house in a depressed market? The answer may seem obvious-- nobody wants to buy-- but it is not. If the price fell enough, somebody would buy. The question is why the weak market is reflected in both lower prices and longer waiting times, rather than just lower prices.

I think there is a 1995 Jeremy Stein article on this where he thinks about the financing of housebuying. Christopher Mayer has some papers too. But I wonder whether the answer may not lie in transaction costs.

Suppose too many houses have been built by mistake. It will take a few years before population growth catches up. We can forecast the house price will recover by that date. We could sell now, though, and somebody now renting could live in the house until demand recovered. If transaction costs were zero, that is what would happen. The person would buy the house, live in it cheaply until demand recovered, and then move out when a house that size became expensive again. But if there is a fixed cost to moving in and out (or to arranging sale or rental) then that won't happen.

This seems too obvious an explanation, but I haven't heard it mentioned. It could be modelled by assuming that there are big houses and little houses, with two types of people who prefer each at their construction cost. Everyone prefers a big house, but poor people would prefer a small house if they must pay the cost of building a house. Population grows steadily, but then there is a shock and not enough rich people enter in one year. If there is no transaction cost, then some poor people move into big houses, and some small houses stay empty. If there is a big enough transaction cost, big house prices fall somewhat, but no poor people move into big houses. The best model might have a distribution of moving costs across people, so that there would be some poor people moving into big houses, but some big houses staying empty. Note that the price of small houses would fall too, because of poor people's demand for them falling as some move into big houses.

Mutual Insurance Companies

From Answers.com comes a useful article:

Over 200 mutual life insurance companies have demutualized since 1930. At the end of the 20th century and beginning of the 21st century numerous large mutuals such as Prudential, MetLife, John Hancock, Mutual of New York, Manufacturers Life, Sun Life, Principal, and Phoenix Mutual decided to demutualize and return to policyowners all the profits they had accumulated as mutual life insurers. Policyowners were awarded cash, stock and policy credits exceeding $100 billion in a wave of demutualizations, which have been regarded as socially desirable.

Other large mutual life insurance companies decided to not return their accumulated profits to policyowners. The boards of directors of these other companies, which include Northwestern Mutual, Massachusetts Mutual, New York Life, Pacific Life, Penn Mutual, Guardian Life, Minnesota Life, Ohio National Life, National Life of Vermont, Union Central Life, Acacia Life, and Ameritas Life decided to either remain mutual or they decided to form mutual insurance holding companies. In either case, policyowners were awarded nothing. At the end of 2006 there were less than 80 mutual life insurers in the United States whose continued existence as mutuals rests largely on the financial ignorance of their policyowners....

A mutual holding company is a hybrid concept, part stock company and part mutual company. Technically, the members still own over 50% of the company as a whole. Because of this, they are generally not significantly compensated for what would otherwise be viewed as loss of property. (This is also why many jurisdictions, including Canada,[1] disallow the formation of MHCs.) The core participants are isolated into a special segement of the company, still viewed as "mutual". The rest is a stock company. This part of the business might be publicly traded, or held as a wholly owned subsidiary until such time that the organization should choose to go public.

Mutual holding companies are not allowed in New York where attempts by mutual insurance to pass permissible legislation failed. Opponents of mutual insurance holding companies referred to the establishment of mutual holding companies in New York as “Legalized Theft.”

Deriving Utilitarianism from First Principles

(revised May 14, May 16, June 2, in light of the objection that the argument doesn't have several people's small gains justifying one person's big loss; that characteristics shouldn't matter)

I heard Professor Terence Irwin talk on 'Prudence, morality, and the importance of persons: a dilemma for Sidgwick' yesterday. He said that Sidgwick does a poor job of moving from his two axioms to utilitarianism, which is correct. Even the axioms aren't spelled out very clearly, it seems. Here's a fix-up.

Axiom A1. Pareto Improvements Are Good. If you can make one person better off without hurting anybody else, do it.

Axiom A2. Impartiality. Whether a change in welfare is good or bad shouldn't depend on the identity of the particular person affected or any personal characteristics. more precisely, whether an action that changes welfare by amount A affects person i instead of person j does not affect the action's moral goodness.

Result R1. By A1, if Jones can take an action that increases his welfare by 800 utils, he should do it.

Result R2. Suppose Jones can either do nothing or take the trio of actions T1:
Action X reduces Jones's welfare by 2000 utils.
Action Y1 increases Jones's welfare by 700 utils.
Action Z1 increases Jones's welfare by 500 utils.

By R1, Jones should take the trio of actions T1.

Result R3. Suppose Jones can either do nothing or take the trio of actions T2:
Action X reduces Jones's welfare by 2000 utils.
Action Y2 increases Smith's welfare by 700 utils.
Action Z2 increases Lee's welfare by 500 utils.

By A2 and R2, Jones should take this trio of actions T2.

Result R4. R3 would remain true for any trio of numbers (a,b,c) such that a is less than b+c. Thus, we have utilitarianism.

A possible flaw: Trio T1 has the same identity label for both actions, whereas Trio T2 has a different identity label for each action. Does A2 really require them to be treated in the same way?

Axiom 2 is different from saying that welfare pairs (2,3) and (3,2) are equivalent, and stronger. Even if (2,3) and (3,2) are equivalent, that does not imply that (3,3) and (2,4) are equivalent. Using Axiom 2, though, if start by saying (2,3) and (3,2) are equivalent, then the actions of "give 1 to person 1" and "give 1 to person 2" are equivalent, so we do get the implication that (3,3) and (2,4) are equivalent. Probably we can derive that (x,y) and (y,x) are equivalent too, from Axiom 2, though I don't see how immediately.

Now that I think about it, Axiom 2 is not so different from the contractarian axiom that if a person is willing to accept a gamble, then he should not complain if he is the loser. A contractarian introduces probability, though, and so needs expected utility perhaps-- or at least some comment on what happens to non-expected-utility maximizers.

Seminar Presentation Ideas

I thought of two ways to improve seminars today:

1. Put all my references on a slide, so people can tell me if I am missing anything. Do this AFTER the model is presented, so they know what is relevant.

2. Start the presentation on the blackboard and put the notation and main proposition there, and diagrams, for later reference. Then go to the projector. This is a substitute or supplement for a handout.

Democracy: Elections and Referenda. At my workshop today at the business school, the issue came up of whether people's votes express their preferences or whether they are too easily misled. Can we decide the intensity of feeling over abortion by seeing which candidate wins an election? A referendum would not work as well, since it is a vote on a single issue, so there is no opportunity for tradeoff. Everyone who voted would vote their preference, intense or mild, and the only opportunities for intense preferences to count for more would be in turnout and in spending on advertising to convince those with mild preferences. Interestingly enough, in such a case the presence of many almost indifferent voters could be very helpful in making the vote display intensity too. Someone who is almost indifferent is up for grabs, and so the intensity of other voters can obtain a double vote where it could not if the voter had somewhat stronger views. The danger from a tyranny of the majority is greatest not when there is a large number of voters with weak views, but where there are few such people, but many whose views are just strong to induce them to vote on their own initiative and to be immune to persuasion by the efforts of those with intense feelings.