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Things Economists Agree On

gregmankiw.blogspot.com

61–70 of 131 posts

Re: Things Economists Agree On

#61

Here's one broad way Mankiw and company are going wrong. I start with three preliminary points and then point to the going wrong: (1) They have physics envy . In particular, they want to sit in a small, dark, closed room and with just pure thought , with little to no contact with any real economy, come up with some economics version of Newton's second law F = ma or Einstein's result in special relativity E = mc^2. No…

I agree with your post but there's a detail you have wrong.

> Then, sew buttons in China? Sure, if the Chinese women had 20 fingers on each hand. But they don't.

You're talking about _advantage_. The economists are talking about _comparative advantage_. China doesn't have to actually be better at sewing buttons. They don't have to be better at anything. They just have to suck less at sewing buttons than they do at other things. If you had two people on an island, and one of them is the best at making fires and carrying firewood, but he's 500% times better at making fires and only 50% better at carrying firewood, the other guy should carry the firewood. That's all they're saying.

The comparative advantage thing is broken for a whole different reason. It ignores the fact that sewing buttons sucks! They act like it's irrational for a country to want to protect its, say, technology industry, to coax it past its infancy. Instead they should just be button-sewers forever. Why? Because somebody else is already a bit better at technology. This is nonsense.

Re: Things Economists Agree On

#62

Earlier quoted context omitted.

Well, unlike with physical laws, economic "laws" rarely describe direct causal mechanisms, but rather generalizations about what happens when you poke a multi-agent system, whose behavior is often rather complex. It's hard to test, tests often throw up quirks, it's nearly impossible to control for all confounding variables, etc. In the rent-control case, for example, here is one (paywalled and somewhat dated) dissent…

Indeed. In particular, I've noticed that nearly all of the cities I've lived in and love (SF, Berkeley, NYC, Montreal) have rent control, whereas many cities that don't have rent control (Dallas, Houston, Phoenix) I've really had no interest in visiting. The historical justification of rent control is that it allows for security of tenure: hence, even renters can put down roots, and a community can have time to devel…

Rent control creates a shortage of affordable housing. Sure, it might make cities nicer because with rent control only wealthy people can afford housing, so all of the low-income people live elsewhere. Think about living in SF on a teacher or fireman's salary, and compare that to anywhere else.

The problem with arguing about economics is that for some people, this is a desirable outcome -- rent control creates nice cities. For others, the outcome is undesirable -- rent control makes it more difficult for the poor to afford housing.

Nobody can argue that rent control is good or bad as a matter of fact; this is an opinion. That's why economists don't model that, it's like trying to calculate whether chocolate or vanilla is a better flavor.

What can be argued is the stated intention vs. the outcome; when a politician argues that rent control will keep housing affordable for low income people, we can state with a very high degree of certainty that he's wrong.

The ugly side of this is that most people don't care whether the politician has got his facts straight. They want the outcome he's promising.

Re: Things Economists Agree On

#63
post #55

Here's one broad way Mankiw and company are going wrong. I start with three preliminary points and then point to the going wrong: (1) They have physics envy . In particular, they want to sit in a small, dark, closed room and with just pure thought , with little to no contact with any real economy, come up with some economics version of Newton's second law F = ma or Einstein's result in special relativity E = mc^2. No…

I read your comment with great interest as it reflects a lot of my reactions when I took economics, particularly from the way Mankiw teaches it; much like this blog post, he starts with roughly 10 "assumptions" that the course will make comprising general consensus opinions that most economists use to make their theories. These are such broad assumptions like "people always make rational decisions", "people always th…

What I said about supply and demand curves is well within common presentations by econ profs.

What you did was patch up such presentations. There are many ways to do that, and with enough such patches the theory can have fewer counterexamples but, then, look so narrow it looks useless.

One way to patch up the theory is to say that transistors in 1955 are NOT THE SAME good or product as transistors in 2010. Then my data is not a counterexample, but the theory looks much more narrow.

You went a little farther and tried to relate the supply and demand curves for the two different points in time. Okay.

Similarly for wheat from 1800 to 2000.

Then I will say, even at one point in time, if I buy a wheat contract on the futures market, then I pay much less per bushel than in a feed supply store. So, again, the patch up is that the two sources of wheat do not supply the same same product. Take one scoop of each wheat and try to tell the difference and don't see any, but academic econ says that they are not the same. What's not the same is that their theory is not the same as the way prices work for real wheat.

Similarly volume discounts are common all across the economy. So, we have to say that if we buy Grey Poupon mustard in the big bottle at A&P then that is not the same Grey Poupon mustard in the small bottle at A&P. Now we are getting to be absurd. It's the same GD mustard, from the same tube, from the same vat, from the same plant. No chemist can tell the difference, but academic econ can! And they do it looking only at the bottle and never the contents. SUCH a science!

And, if I operate a fleet of trucks and want to order 100 from Ford, then academic econ has to say that those are not the same trucks I get if I order just two. E.g., for 100 trucks, Ford may put on an an extra shift to supply them. Their 'marginal cost per truck' goes down, and they let me have some of the savings. Besides, if they don't want to deal, then maybe Dodge, Chevy, or Toyota will. And there's MUCH more to the price than just the 'marginal cost' -- MUCH more. Easy it's not; the academic econ supply and demand curves are easy, and that's part of why they don't work.

So, have to strain to find where supply and demand curves actually describe the real economy.

Net, supply and demand curves need so many patch ups they are basically just nonsense. That's just not how the real economy works.

For optimization, the idea is that each shopper in a grocery store solves some complicated problem in nonlinear, integer, stochastic optimization just to get the groceries. This nonsense is part of their rational assumption. Intellectual self-abuse.

They want to apply this optimization also to the micro economics of the firm assuming that, of course, with optimal material requirements planning from, say, SAP software, that of course any significant firm actually does such things. No they don't. Sorry 'bout that.

The nonsense goes on and on: They are talking about their imaginary, "sand box" economies and not any real economies.

I have an imaginary "sand box" too: I'm young, rich, athletic, handsome, and all the girls like me! That's not real, either.

Apparently by the time you got to the course, the field had been hit over the head often enough with objections such as mine that they started off the course with a defense, a long list of assumptions. Yup, if pigs could fly, then cast iron umbrellas would sell well.

Physics, chemistry, engineering, medical science, and technology actually DO work very well and do not work anything at all like academic econ, and academic econ essentially just doesn't work in any comparable sense. That dog won't hunt. It's a late parrot. They are like medicine back in the days of snake oil -- they haven't made any real progress in their subject and just don't know what they are doing. And they are killing people and don't care.

The first and last thing I saw in economics that made any sense was the Leontief input-output matrix. For a one point in time, first cut of the macro economy, it made some sense. It was used in US WWII production planning. Alas, the econ profs hated any such things, and it lost traction in academics.

One of the worst sins is that they take their simplistic assumptions and the corresponding conclusions and say that this is the way that a real economy should be FORCED to work. Now they are killing people.

As we saw in the 1930s, have seen in the US since the 1950s, and see again now with the Great Recession, academic economics doesn't have a weak little hollow hint of a tiny clue about how the US economy works. Bernanke, Geithner, etc. have been struggling and just hoping. They don't know what will happen to employment, taxes, the deficit, interest rates, house prices, the stock market, imports, exports, oil, the dollar, etc. They just don't know, even roughly. They don't know where we will be in five years, in a world war like we were in the 1930s or growing nicely. They don't know. Yup, it's an invisible hand that no one in economics can see.

In particular, academic econ and even the Federal Reserve Board staff are just not in touch with the real economy. They driving a big truck looking only at their belly buttons and never out the window. If anyone had had any reasonable empirical description of the US economy, and any credibility, then they could have given some advice to Clinton or W or even Barney Frank, and certainly to AIG, Lehman, Bear Stearns, BoA, Citi, and the FDIC, on the clear and present dangers. But, no one did. In this age of computers, data storage, and Internet communications, no one has even the first-cut, basic data, data that we now know is absolutely crucial. We don't even have a basic, competent dashboard.

When I looked at academic econ, the first thing I was looking for was the first-cut, empirical description of the US economy. So, we need to know the inventories and the flows, of money, goods, people, etc. Then for the 102 version, we need the same for the world economy. Nope: Not there. No meaningful data at all. At least Chairman Greenspan commonly was up to his neck in empirical data; he was also up to his ears in Ayn Rand, smoking funny stuff, total, dangerous nonsense.

At one point I was ready to chip in and try to make some progress. Sure, I would have started with what it is said that Bernanke did: Get a LOT of numerical data, get a description, and then try to build some decent theories. But, for what is in academic econ, dump at least 99 44/100% of it in the trash. But the field was so full of their arrogant incompetence that it was clear that there was no hope of doing anything constructive within their field.

Bernanke SHOULD be the man of the hour since he did his research on the details of the Great Depression. Still, he is clueless.

Net, for the US and the world, the situation is clear: The economy is REALLY important, and academic econ is from next to useless down to really dangerous.

So, instead of academic econ, proceed VERY carefully, almost entirely just empirically. For econometrics, be careful, be very, very careful. Yes, there may at times be some cases where someone from academic econ, in spite of their field, actually has some positive contribution to make. Maybe. But their hands are dripping with blood.

Re: Things Economists Agree On

#64

Here's one broad way Mankiw and company are going wrong. I start with three preliminary points and then point to the going wrong: (1) They have physics envy . In particular, they want to sit in a small, dark, closed room and with just pure thought , with little to no contact with any real economy, come up with some economics version of Newton's second law F = ma or Einstein's result in special relativity E = mc^2. No…

Samuelson have thought that the Soviet economy would keep growing and surpass the US's GDP. Boy, he was wrong. Then the Soviet collapses in the 1990 or so.

Others, like the Austrian economist Ludwig von Mises predicted the death of the Soviet Union and he has dealt with Red Vienna. He also thought that soviet style economy wouldn't work.

Re: Things Economists Agree On

#65

Here's one broad way Mankiw and company are going wrong. I start with three preliminary points and then point to the going wrong: (1) They have physics envy . In particular, they want to sit in a small, dark, closed room and with just pure thought , with little to no contact with any real economy, come up with some economics version of Newton's second law F = ma or Einstein's result in special relativity E = mc^2. No…

I agree with your post but there's a detail you have wrong. > Then, sew buttons in China? Sure, if the Chinese women had 20 fingers on each hand. But they don't. You're talking about _advantage_. The economists are talking about _comparative advantage_. China doesn't have to actually be better at sewing buttons. They don't have to be better at anything. They just have to suck less at sewing buttons than they do at ot…

What I said about efficiency in China is a faithful description of what academic econ commonly says.

You patched up their argument.

Still, my explanation for why China is sewing the buttons and South Carolina is not is correct: The government in China makes their young women offers they can't refuse. The young women in South Carolina can do just as well and, with better nutrition, medical care, information systems, transportation systems, public health, public education, communications systems, connections with customers, etc., actually do better. But, still, China is CHEAPER, and they use other advantages.

Why? China wants the business, and the basic facts are not from academic econ or efficiency but from some centrally planned economy to attack a market and take it. It's not economic theory or even being more efficient; instead it's international economic strategy, and academic econ ignores it.

You asked why we shouldn't just let China have such work and have us concentrate on more advanced technology. Well, that's an excuse, and it's silly: The businesses in South Carolina are now toast, and their suffering does nothing to help US technology, net, likely hurts it a little.

So, we had an asset in South Carolina, and we just threw it away. Academic econ doesn't count that asset as a loss, but the loss is huge, and so is the resulting loss of social capital and the increases in public expenditures.

Sure, maybe slowly over time we should get out of the button sewing business, but the way we've done it is a disaster.

More generally, there's next to nothing that China can actually do more efficiently than the US can. So, they sell us stuff just because they are cheaper, not because they are more efficient.

Sure, I'm about to buy parts for a server. It will have a motherboard with 10 SATA ports and 2 GbE ports, from Taiwan. If the board were made in the US, then it would cost me more, maybe three times as much. The US contribution will be the design of the AMD processor, the Kingston memory, the design of the Seagate hard disks, maybe an SSD, and especially the Microsoft software. Then the crucial work will be mine, the software the server runs, using the Radon-Nikodym theorem (with, say, von Neumann's proof), yes, some Hilbert space results (work from von Neumann and others), and some of my original work, and be high technology.

Still, we shouldn't be killing people in South Carolina, and the academic econ profs say that doing so is optimal.

Re: Things Economists Agree On

#66

1) Getting answers to collide when there's only two choices, Agree or Disagree, is simple, absurdly simple. 50% represents maximum dissension. How many other questions were there? How did they coincide with the presented questions? What is the expected distribution if answers were assigned randomly? 2) A question that deals with global or national finance often can't be accurately stated in a single sentence. I look…

Agree. It's positively dangerous to assume a simple, selectively chosen set of questions are a basis for public policy recommendations.

Take the argument about minimum wages increasing unemployment amongst the unskilled and the young, for example. It's not too difficult to infer an implicit policy recommendation from the answer to that question...

If, however, you had asked the question "minimum wages increase unemployment overall" you would find a much lower level of agreement (not least empirical observations of the introduction of minimum wages in many jurisdictions have contradicted that claim). There's no inconsistency here since there are plenty of plausible economic mechanisms for believing that imposing a minimum wage leads to a countervailing increase in older, more skilled labourers, but even amongst the subset of economists that believe the actual effect of a minimum wage is to concentrate unemployment amongst the young and unskilled you'll find a large degree of dissent over whether this has good or bad implications for society and the economy as a whole.

It's possible to agree wholeheartedly with Mankiw's simple observation of minimum wages => youth unemployment whilst disagreeing passionately with any policy recommendation against imposing a wage floor, even using narrow economic efficiency criteria.

Re: Things Economists Agree On

#67
post #54

"A minimum wage increases unemployment among young and unskilled workers. (79%)" The fair market price for young and unskilled workers would be lower than the minimum wage, yes. Is this a good thing? For young workers, if young is less than 18 (ie, still in school), then this is OK. But, for unskilled workers? That entire class would be in poverty, as if they aren't on the edge of it now.

Only 2 percent of nonsalaried workers earn minimum wage.

Re: Things Economists Agree On

#68
post #60

Here's one broad way Mankiw and company are going wrong. I start with three preliminary points and then point to the going wrong: (1) They have physics envy . In particular, they want to sit in a small, dark, closed room and with just pure thought , with little to no contact with any real economy, come up with some economics version of Newton's second law F = ma or Einstein's result in special relativity E = mc^2. No…

@HilbertSpace, your critique of "academic economics" is obviously heartfelt, but I couldn't tell what you're proposing as an alternative. Is it your view that governments, central banks, investment banks, etc., should just ignore economics entirely?

I was really responding to the start of this thread, but the larger situation, including for your questions, is just awful. I wrote something: The economy is IMPORTANT, but academic econ is a disaster. So, we have to roll back from academic econ and proceed mostly just empirically. For that, the AIG problem, etc. clearly show that we do need much more data. Net, we just didn't know accurately enough to know what was coming even to see within 6 percentage points in the unemployment index, say, from 4% to 10%.

Policy makers in DC just didn't have any solid advice, from academic econ or elsewhere. So the policy makers took chances and hoped. Such things don't happen in public policy where there is solid advice: E.g., we know darned well just what the F-22 can do. Aeronautical engineering is highly competent; academic econ is not.

Academic econ needs to get real, and start like biology did -- get the data and be descriptive. Actually, physics did that, too: Get the data on the motion of the planets and eventually observe that the orbits were ellipses. Finally (1) invent calculus, (2) postulate the law of gravity, (3) postulate that force equals mass times acceleration, (4) argue about motion under a central force being in a plane, (5) finally derive that the orbits have to be ellipses as observed. Easy it's not. But have to start with observing reality, and here academic econ fails.

We will be safer if we use a lot of good empirical data and a lot of common sense and prudence and set aside bad theory.

Re: Things Economists Agree On

#69

Here's one broad way Mankiw and company are going wrong. I start with three preliminary points and then point to the going wrong: (1) They have physics envy . In particular, they want to sit in a small, dark, closed room and with just pure thought , with little to no contact with any real economy, come up with some economics version of Newton's second law F = ma or Einstein's result in special relativity E = mc^2. No…

[deleted]

Re: Things Economists Agree On

#70

Earlier quoted context omitted.

I agree with your post but there's a detail you have wrong. > Then, sew buttons in China? Sure, if the Chinese women had 20 fingers on each hand. But they don't. You're talking about _advantage_. The economists are talking about _comparative advantage_. China doesn't have to actually be better at sewing buttons. They don't have to be better at anything. They just have to suck less at sewing buttons than they do at ot…

What I said about efficiency in China is a faithful description of what academic econ commonly says. You patched up their argument. Still, my explanation for why China is sewing the buttons and South Carolina is not is correct: The government in China makes their young women offers they can't refuse. The young women in South Carolina can do just as well and, with better nutrition, medical care, information systems, t…

---What I said about efficiency in China is a faithful description of what academic econ commonly says.

Moving production to the location with the highest comparative advantage is the most efficient things for a market to do, that doesn't imply that the final producer is the most efficient producer.

---Still, my explanation for why China is sewing the buttons and South Carolina is not is correct: The government in China makes their young women offers they can't refuse.

So what about all the young woman in Taiwan where this happened before China was the low-wages threat? What about South Korea before that or Japan before that? The "offer they can't refuse" is that if a young woman goes to a factory she makes twice as much as she did on the farm, but with better access to "nutrition, medical care, information systems, transportation systems, public health, public education" than she would have had on the farm. From a global welfare perspective its a lot better that three Chinese women go from desperate rural poverty to moderate (by global standards) urban poverty even if it means some woman in Carolina going from working in a textile factory to a lower paid job at Walmart.

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