The capitalist welfare state

The Economist has a nice article on the fact that global GDP in PPP-dolars has been revised upwards because the International Comparison Programme has documented that many prices on many products in many countries are lower than last time they checked. Interestingly, the extra purchasing power is not evenly distributed, and the article mentions India, China, Russia and Ukraine.

The article is worth reading for many reasons, one of them being that it includes a simple explanation of PPP-dollars and why calculating them requires knowing prices.

The article does not, however, spell out what I assume is an immediate consequence of the revised numbers: That absolute poverty has fallen by more than previous data indicated, and that global inequality between countries have fallen (this should be the case because lower prices in China and India mean hifger purchasing power for many poor people).

After some searching I can confirm the consequences for global inequality. In a blog post by the World Bank we find the following remarkable statement:

That is a substantial decrease in only 4 years! Also, the blog post says the following:

The blog post even has Lorenz-curves:

The article in The Economist also does not mention why some prices have fallen in a way that increases purchasing power of the poor. The fact is that the development is only to be expected as a result of market forces: Where more people are poor, it is more important to produce cheaply and to invent and produce cheaper substitute good. The article touches upon this when they write:

Luckily, a paper in Southern Economic Journal by myself and Therese Nilsson shows that inequality of purchasing power is likely to be lower than inequality of income precicely because lower prices to some extent mitigate poverty. The revised data from the World Bank show that this is not merely a theoretical oddity, it an important mechanism behind falling poverty.

See further

Bergh, Andreas, & Therese Nilsson. "When More Poor Means Less Poverty: On Income Inequality and Purchasing Power". Southern Economic Journal 81: 232–46.

Murphy, R.H. (2024). Fundamentals of Institutional Quality and Economic Freedom. The Journal of Developing Areas 58(1), 209-220. Link.

From the abstract of

Afonso, Alexandre, och Samir Mustafa Negash. 2024. "Building a wall around the welfare state, or around the country? Preferences for immigrant welfare inclusion and immigration policy openness in Europe". Journal of European Social Policy.

Utilizing data from two waves of the European Social Survey across 23 European countries, we develop a typology of individual stances that encapsulate attitudes towards both immigration policy openness and immigrant inclusion in the welfare state. [...] higher education levels are linked to a higher likelihood of supporting either a combination of openness and inclusion or, to a lesser extent, openness paired with welfare exclusion. Additionally, more exclusionary attitudes are observed in countries where welfare usage by migrants is higher.

The Christian Science Monitor has a long piece on Sweden (not mainly about economy, bur more cultural...) , citing me amogn many others

The welfare state needs to be lagom, says Dr. Bergh. Benefits can’t be so generous that they reduce work incentives, nor can taxes be so high that they frustrate the broad middle class.

In one of the papers that I am currently working on, I analyze market friendliness and market bashing. I just found out that it is related to what Pál Czeglédi (2023) call "The post-materialist economic freedom puzzle"

From the abstract:

Countries with a higher proportion of people with post-materialist values are freer economically than those with a lower proportion. The reasons why this is puzzling are that post-materialist values are not obviously more supportive to economic freedom than materialist ones, and that post-materialism correlates negatively with market friendliness in the West and positively outside it.

More soon!

Source:

Czeglédi, Pál. "The Post-Materialist Economic Freedom Puzzle." International Review of Economics, November 3, 2023. https://doi.org/10.1007/s12232-023-00436-5.

This paper contains many reasonable findings:

Kleven, Henrik Jacobsen, Martin B. Knudsen, Claus Thustrup Kreiner, Søren Pedersen, och Emmanuel Saez. "Unwilling or Unable to Cheat? Evidence From a Tax Audit Experiment in Denmark". Econometrica 79, nr 3 (2011): 651–92. Link

From the abstract (my emphasis)

using quasi-experimental variation created by large kinks in the income tax schedule, we find that marginal tax rates have a positive impact on tax evasion for self-reported income, but that this effect is small in comparison to legal avoidance and behavioral responses. Third, using the randomization of enforcement, we find that prior audits and threat-of-audit letters have significant effects on self-reported income, but no effect on third-party reported income. All these empirical results can be explained by extending the standard model of (rational) tax evasion to allow for the key distinction between self-reported and third-party reported income.

My first contribution to the Journal of brief ideas was just published.

The idea: Does it take longer to choose among more alternatives?

From an optimization-view of human decision making it makes sense that choosing among more alternatives would take longer, simply because there are more alternatives to evaluate before deciding. If humans use simple rules of thumb or use satificing rather than maximizing strategies, it is far fram clear that choosing among more options will take longer.

To examine the question empirically, one could add a real life choice situation towards the end of a survey, for example by having the respondents choose among several options for e.g. charity donations. By randomizing the number of options displayed, data on time to choose among N alternatives for N ranging from 2 to around 25 (or even higher) can be easily collected.

Here is the published version.

I am currently experimenting with generative AI in order to understand better how and when to use it. I have discovered that it works well for tasks such as "summarize explanations of the rise of right-wing populist parties" and "provide full references to ten classical papers in institutional economics".

The output after the latter instruction was the following list:

Coase, R. H. (1937). "The Nature of the Firm." Economica, Vol. 4, No. 16, pp. 386-405.

Granovetter, M. (1985). "Economic Action and Social Structure: The Problem of Embeddedness." American Journal of Sociology, Vol. 91, No. 3, pp. 481-510.

North, D. C. (1991). "Institutions and Economic Theory." The American Economist, Vol. 35, No. 2, pp. 3-6.

Williamson, O. E. (1985). "The Economic Institutions of Capitalism." Firms, Markets, and Hierarchies: The Transaction Cost Economics Reader, pp. 15-45.

Ostrom, E. (1990). "Rules, Games, and Common-Pool Resources." Annual Review of Political Science, Vol. 2, pp. 41-78.

Davis, L. E., & North, D. C. (1971). "Institutional Change and American Economic Growth." Cambridge University Press.

Coase, R. H. (1960). "The Problem of Social Cost." The Journal of Law and Economics, Vol. 3, pp. 1-44.

Barzel, Y. (1989). "Cultural Beliefs and the Organization of Society: A Historical and Theoretical Reflection on Collectivist and Individualist Societies." The Journal of Political Economy, Vol. 97, No. 5, pp. 1155-1189.

Olson, M. (1965). "The Logic of Collective Action: Public Goods and the Theory of Groups." Harvard University Press.

Stiglitz, J. E. (1988). "The Economic Role of the State." Oxford Review of Economic Policy, Vol. 4, No. 1, pp. 21-42.

Dan Ariely and Francesca Gino (and most likely many others) are in trouble, the kind of trouble that involves data manipulation (by the looks of it) and paper retractions. Data Colada has all the details, but the story was also told by an Israeli investigative TV show, transcribed and translated here.

From a standard rational choice perspective, episodes like these are only to be expected, given that:

These facts add to an already significant pile of spectacular results in behavioral economics and social psychology that do not replicate. Sometimes the results were genuinely shaky (e.g. power posing), and sometimes the findings were simply made up, as in the case of Diederik Stapel (wikipedia, NY-Times). See further:

The standard in behavioral economics and social psychology has long been that good papers are empirical articles that show that humans behave strangely and irrationally in ways that rational choice theory and neoclassical economics cannot account for. Mainstream economics' mathematical models were frequently criticized as having little to do with reality. The irony is that behavioral economists respond to incentives in a predictable rational manner – and some of their papers fail to describe the real world.

Perhaps we are witnessing the retaliation of neoclassical economics?

Update aug 17:

Gino is suing Data Colada. This is not the scientific exchange we wanted. Donate to their legal defense here.

This workshop will bring together scholars that examine economic, political and cultural differences between urban and rural parts of the Nordic countries. A broad mix of paper submissions from a variety of disciplines (e.g. economics, economic history, political science, geography, sociology) is encouraged, including a multitude of methods and theoretical perspectives.

All papers related the broad topic of urban rural differences will be considered, but we particularly welcome paper contributions that

• use a longitudinal perspective and changes over time

• shed light on center-periphery tensions within municipalities

• study migration decisions

• examine urban/rural differences in culture, values and voting

The workshop takes place in Malmö at Elite Hotel Savoy close to the central station. For those who arrive on the 17th, there will be an informal gathering on the evening before the workshop. The program is scheduled to star at 10 am on the 18th, and is planned to end by lunch on the 19th. For presenters the Arne Ryde foundation covers food and hotel accommodation (one or two nights). Participants will make and pay their own travel arrangements.

Submit your proposal (full paper or abstracts are accepted) to

david.sandberg [at] nek.lu.se

and to

gissur.erlingsson [at] liu.se

no later than May 1st.