Wednesday, January 20, 2010

Modeling as a hobby

We’ve talked a bit of late about Jaron Lanier and his remarkable and prescient statement that information underrepresent reality, and his criticism of models and algorithms to represent reality. Economists, especially, love models.

But there are a lot of things that make economic models difficult, and as Lanier might say, unrepresentative of reality. The failure to account for externalities is one reason that economic models are like Lionel trains compared to the real thing.

Do you have any real world examples of what you’re talking about, Spot?

Why yes, grasshopper; it’s funny you should ask.

A few days ago, King Banaian (here’s a ear worm for you: every time Spot thinks of the Professor, Grieg’s In the Hall of the Mountain King starts to play in his head) bleated, Spot means tweeted, about the fact that India’s version of the 1938 Volkswagen Beetle, selling for $2500 in India, might retail for $8,000 in the US! Criminal! It’s the safety and environmental bullies to blame, of course.

Well, Charlie picked up the tweet, observant fellow that he is.

Banaian has been playing with his Lionels so long that he refuses to — or maybe no longer can — recognize what the DOT safety and the EPA environmental rules represent: the political effort of government to make a manufacturer of goods account for more of the externalities of the cost of their production and sale of articles in the stream of commerce. To better approximate reality, that is.

It is foolish and callow to assert, or even think, that the sale of an automobile without safety or environmental considerations doesn’t impose these costs on everyone else: anybody with respiratory problems, or anyone who pays insurance premiums for car or health insurance, or someone who pay property taxes that support institutions like Hennepin County Medical Center where trauma patients are handled, sometimes without compensation.

But they don’t fit well in Banaian’s arithmetic, so we’ll pretend they don’t exist.

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