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Comment by ewjordan | Hacker News Reader

Karelis doesn't understand econ, but criticizes it because econ disagrees with his thought experiments and political leanings.

Sounds like a model economist to me - because of his political leanings, he doesn't like what the oversimplified toy models of the more mainstream theories tell him, so he invents another toy model with different oversimplifications, and claims that it's more fundamental. Surprise, surprise, it happens to reinforce his pre-existing beliefs!

Isn't this the way the game is always played in the soft sciences, where we can't actually figure anything out for reals?

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I say he doesn't understand econ, simply because he says "traditional economics doesn't apply" and then describes a theory which is traditional econ with a simple mathematical modification.

Also, the theory of diminishing marginal utility has been tested empirically many times. While quite a lot of econ is the theory spinning you describe, DMU is pretty solid and accepted by economists of all political stripes (it's the primary argument for progressive taxation, among other things).

If traditional economics applied to the poor, a whole lot of things would be working a whole lot differently now.

So it seems he's right about that. Whether he actually understands economics or not. And it's likely that he does understand traditional economics to some degree, it's not hard, he prob took intro, micro and macro like everyone else. Those models quite clearly do not apply to the poor or else we'd see a different poor.

Those models quite clearly do not apply to the poor or else we'd see a different poor.

Could you explain this statement in more detail?

If traditional economics, specifically "Econ 101" (which is actually what he disparages in the article) applied, the poor wouldn't be so dumb with their money, wouldn't be the biggest buyers of lottery tickets, drop out of school disproportionately just for being poor, etc.

According to "Econ 101", people are supposed to pursue their rational self-interest and maximize utility regardless of their conditions. Which is a bit of a problem with all of economics, and a huge problem when it comes to applying it to the poor.

Does that make sense?

I read an interesting paper a few months back about the lottery ticket thing. This guy's theory was that it actually was rational, because many poor people don't have access to bank accounts, they just buy a scratch ticket every day and that's effectively a probabilistic bank account. Dunno that I buy it. But a neat thought.

Traditional economics characterizes the poor as having a very high discount rate. Thus, they assign a low value to events which might happen in the future - that is, a high paying job in 5 years is less valuable than using meth now.

In much the same way, I (a middle class person) would rather have $100 now than $102 in 50 years.

As for lotto tickets, traditional econ says the poor derive utility from playing lotto, not just from winning. Am I foolish and not obeying the laws of economics for buying video games, which have an expected payoff of $0?

Thus, they assign a low value to events which might happen in the future - that is, a high paying job in 5 years is less valuable than using meth now.

That's two different classes of events and you are misrepresenting what was claimed by attempting to further devalue poor peoples choices by saying they would rather use meth than work. It's also insulting towards poor people to imply they are all meth users. A proper analogy would be that they disproportionaly value a job they can have right now over a higher paying job they can have in 5 years.

So, the original author's point was that the discount rate thing applies differently than you're applying it.

They're not choosing less satisfaction now rather than more satisfaction later. They see things as hopeless (too many bee stings), throw their hands in the air and say screw it. A 0% chance of a high-paying job in the distant future discounts to 0 utility at present for any discount rate.

Karelis isn't talking about discount rates at all.

He is claiming the poor have a flat utility function with a kink at zero. I.e., the ability to cure 1 bee sting (out of 5) now is worth nothing to them, only the ability to be bee sting free holds utility.

I think to understand the point I'm trying to make, we could re-examine your previous statement: "Am I foolish and not obeying the laws of economics for buying video games, which have an expected payoff of $0?"

If the laws of economics predict that you shouldn't buy that video game, then you're not foolish -- they are.

People's behavior changes radically when you give them experimental situations that involve gaining or losing money -- they're way more risk averse with losing 100$ then they are with changing their odds of winning 100$. This isn't baked into the assumptions that economics makes, and neither are a million other wrinkles of human behavior.

"What economists say" isn't the be-all and end-all, it's just another prism to be used.

If the laws of economics predict that you shouldn't buy that video game, then you're not foolish -- they are.

The laws of economics make no such prediction, and they make no corresponding prediction about lottery tickets. That's the point.

There are places where the laws of economics don't work, I just don't believe that your previous post (or Karelis article) identifies any of them.

"In many cases, Karelis says, diminishing marginal utility certainly does apply:"

Either way, I'd like to know why exactly he and the article are crap. I'm not completely sold on it myself, but you've really only managed to appeal to authority so far.

The main reason his theory is crap is it just doesn't agree with experiment. The article mentions several, all of which tend to encompass the income regime Karelis is presumably talking about. One example is the negative income tax experiment of the 70's, another is welfare to work.

If Karelis has evidence of his theory, he should present it. But as it stands, he is pushing thought experiments and analogies, and telling us to ignore the empirical evidence when it disagrees with his theory.

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