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Things Economists Agree On (gregmankiw.blogspot.com)
119 points by robobenjie 1631 days ago | 123 comments



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 at, say, the minimum wage, or the sports franchise question, and I think, "It depends."

3) There's an assumption in the questions that contain "should". That assumption is that economists all share the same goals. They don't. The ones who do may agree about the methods to achieve it.

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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.

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I find it rather strange that even predictions that should be fairly clear-cut and straightforward (e.g. "A ceiling on rents reduces the quantity and quality of housing available.") only get around 9/10 agreement. As a non-economist, I would have thought that a seemingly simple (and testable!) question like that would be like polling physicsts with the question "Does F = ma?". And I would sure hope that more than 93% of physicists would say yes.

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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) dissenting view: http://www.springerlink.com/content/k75072652rkxut61/. Pointed out mostly as an example--- it's quite possible that particular paper is now obsolete and adequately responded to. It's a common approach to dissenting from economic conclusions, though: you admit that a particular widely held belief is true in a particular model, but then argue that the model doesn't sufficiently correspond to reality, e.g. because it doesn't incorporate certain important effects.

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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 develop. The communities I love seem to have required more time to develop than the cycles of the real estate market would allow. Even if I personally pay more rent, I benefit from those communities.

How do the economists model that? They probably don't. They do answer one question: the housing stock in Dallas and Houston is dramatically more affordable and probably built to a higher standard than the equivalent in SF and NYC, but the quality of life is significantly different (to my personal tastes, sacrificed.) The economists are answering the wrong question.

Rent control does seem to create quite an affordable housing shortage, though. One wonders, however, if ultimately it spurs on a lot of upscale development, since the premium you can charge for new units is so much higher, relatively. (giving you SF's South Beach...)

Edit:

Cato's article on the subject describes the change of Boston and Cambridge from a rent controlled to a free market system, on January 1, 1997.

http://www.cato.org/pubs/pas/pa-274.html

Can anyone describe the change in vibe from before January 1, 1997 to now?

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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.

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A ceiling on rents reduces the quantity and quality of housing available. (93%)

Counterpoint: surprising to me is the number of economists who "agree" with this statement.

First of all, it does not compute, intuitively, to me as a logical "AND" statement. "Quantity" and "quality" are two completely different things.

"Quality of housing" would be a function of renting vs. owning status (e.g. paying rent vs. paying a mortgage), further subjected to the degree of separation between the tenant and the actual mortgage/title holder. "Quantity of housing" would be a function of information asymmetry between "buyers" and "sellers", and obviously price (determined by the kind of information asymmetry).

Wikipedia has a pretty good summary / history about the origin of rent control: http://en.wikipedia.org/wiki/Rent_control

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>"Quantity" and "quality" are two completely different things.

They both cost to maintain or increase though - and rent control limits the returns of increasing either; which reduces the owner's incentive to maintain the quality of existing housing or to build new.

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That question is a tad bit more subjective than "F = ma" (an economist from a Marxist school of thought would probably disagree that is is entirely clear-cut), and it would depend entirely on the specific way it was asked and exactly what counted as an "agree".

Professionals will tend to hedge their answers when they can conceive of any kind of scenario that would contradict an absolute like "A ceiling on rents reduces the quantity and quality of housing available.". A ceiling of 2 trillion dollars/sq. foot would likely not impact on the quality or quantity of housing in the US, to make up a wild counter-claim off the top of my head.

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Are you sure more than 93% of physicists would say yes? I would say "what if the mass changes" or "what if the speed of the mass is relativistic" -- then you have to use something else, like F = Integral[dp, dt], and F = ma no longer holds. Rather, it turns out to be F = (gamma)^3 m a.

Assumptions, assumptions! They plague everybody, not only economists. F = ma only in the non-relativistic limit with a constant mass.

Before you say "of course we are thinking in the non-relativistic limit", be mindful most of the rest of the universe, moving around at sizable fractions of c compared to us, disagrees with you.

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There are people who think the Earth is flat, but they aren't called physicists; yet Marxists are still called economists.

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The 1/10 perspective makes a strong claim about the price elasticity of supply of housing. It would seem to be testable, but while it's easy to measure elasticity in a controlled environment, for something complex like the market for housing, doing so might entail some assumptions that 1/10 economists don't choose to get on board with.

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Interesting that all economists seem to be pro-business, anti-tax, anti-worker rights. You would almost think that most economists worked at banks or for university business schools.

In other research naval officers believe in a larger navy with lots of ships

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Economists pursue productivity single-mindedly and forget that their freedom to think about productivity and nothing else is based on the assumption that certain moral abuses are outlawed. Only the most deluded ideologue really thinks that economic efficiency just happens to coincide with human moral values. Sure, if you bring up eight-year-olds working in coal mines, a few people will say, "But that must have been caused by government interference, because eight-year-olds working in coal mines is really quite economically suboptimal! I can tell it's economically suboptimal because thinking about it makes me feel bad!" But they are in the minority. Most economists take for granted that economic productivity should be pursued only in a context in which certain moral wrongs are outlawed.

I pointed out in an earlier thread that the sales department will agree with you that systems reliability affects the bottom line, but when it comes to setting priorities, they'll fight tooth and nail to get all engineering resources dedicated to new products and features, and zero dedicated to reliability and infrastructure. It's the same with economists: they agree in principle that there should be laws enforcing basic human decency, but when push comes to shove they can't bring themselves to subordinate economic considerations. It's garden-variety déformation professionnelle. They have a hard time accepting that the value they dedicate their professional lives to is occasionally in conflict with something higher.

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Yep, many economists do work for those institutions. And yep, all of them have /some/ particular axe to grind (everyone does -- I do, you do, etc). That doesn't mean that what they're saying isn't correct.

- Businesses are, in fact, what generates most of the wealth and innovation in a country

- Taxes, whether personal or corporate, are not economically efficient. Government can be compared to an electrical grid -- the money comes in one place, flows out somewhere else, and there are line losses on the way. (Government overhead, wastage, etc)

- As to workers' rights: any society represents a particular set of choices about production needs and social needs. Sometimes those needs are cooperative, sometimes orthogonal, and sometimes they are in opposition. When "workers' rights" means "give us the money and the time to innovate and consume outside of work", it's good for society. When it means instead "give us the power to force you to comply with stupid and inefficient rules about who can do what" (e.g. most modern union shops that I've encountered), that's bad for society.

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But it does suggest that economics is just politics by another name.

A survey of doctors would presumably agree on the function of an organ, a survey of hospital administrators might also agree on the need to cut treatment costs - this doesn't mean the opinions are equally accurate.

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The labelling that you've chosen "pro-business, anti-tax, anti-worker rights" is politics itself.

The economists are more accurately characterized by 'anti-distortion'. The amount of distortion that should be accepted (for instance, to protect the disabled) is a matter of politics, but the article only addresses consensus issues.

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True, but the article implies that "economists all agree on these things, economists are experts - therefore these things are correct"

But the same responses would come from US politicians of both types - would Swedish or French economists have the same views?

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- Businesses are, in fact, what generates most of the wealth and innovation in a country

wealth and innovation are not the only things worth optimizing , nor are they the most important.

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Money, not necessarily. But wealth means "stuff people want".

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according to this definition farmville , booze and cocaine are "wealth". So people who are using those on a daily basis should be considered wealthy ?

on the other hand , aren't good relationships considered wealth by your definition ? Businesses do relatively little to facilitate those(in more primitive societies they still had relationships , and probably at least as good as ours).

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> That doesn't mean that what they're saying isn't correct.

But it can mean they are only seeing one small area of what is possibly correct. There could be many other correct things out there, that might be even better, but their view is constrained.

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>When it means instead "give us the power to force you to comply with stupid and inefficient rules about who can do what" (e.g. most modern union shops that I've encountered), that's bad for society.

You've somehow managed to bring two logical fallacies in the same sentence — the straw man and the false dichotomy. No one genuinely struggling for the rights of workers ever advocates for either of those ways, and those outcomes aren't by any means the only possible alternatives.

The purpose of unions has always been to bargain collectively in situations where individual actions alone would result in a greater detriment to each worker. A corporation is by nature this same mechanism applied in the market, so which side you prefer — the worker or the owner — is fundamentally one of politics in the end.

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>You've somehow managed to bring two logical fallacies in the same sentence — the straw man and the false dichotomy.

You're misreading.

I presented two possibilities, but nowhere did I claim that they were the only two possibilities -- ergo, no false dichotomy. You aren't clear about where exactly you believe that I presented a straw man, so I can't respond to that one. If you're saying that modern union shops do not result in the sort of inefficiencies I mention above, then the kindest response I can find is that we must have very different experience of union shops. I invite you to examine the union-imposed rules at, e.g., Yale Medical School, which is what I was particularly thinking of when I wrote that.

> The purpose of unions has always been to bargain collectively in situations where individual actions alone would result in a greater detriment to each worker.

Thank you for that basic restatement of the definition of "union." You did, however, leave out the important bit: that the nature of union bargaining is always the workers of a corporation demanding policy changes from the owners of a corporation.[1] These changes always involve a cost which reduces the bottom line profit of the corporation -- e.g. higher pay, shorter hours, etc. From a strictly short-term, monetary POV, anything that reduces the bottom line is non-optimal. In the long term, however, or when other measuring sticks are used (social health, GDP, etc) these changes may be enormously better than the policies they replace, because they result in more total wealth in the hands of the consumer, more leisure time in which to consume / innovate / create / be healthy / etc.

This is exactly what I said in my original post. Hopefully you will more clearly understand the more spelled-out version.

> A corporation is by nature this same mechanism [for using collective action when individual action would be sub-optimal] applied in the market, so which side you prefer — the worker or the owner — is fundamentally one of politics in the end.

While this is technically true (as in, it does not contain an explicit inaccuracy), there are some significant differences between a corporation and a union. Most notably, the benefits of being in a union accrue essentially equally to all members, whereas the benefits of being in a corporation do not -- the owners and top officers reap far more of the rewards than the "bottom rung" employees. Furthermore, their incentive structures are very different -- a tech support guy is paid $N/year as long as he shows up for work and the company doesn't go bust (incentive to keep the status quo), but the CEO is making most of his money off of stock options and/or bonus (incentive to change the status quo).

[1] I'm using the word "corporation" loosely here because it's more commonly applicable and it's easier than naming the various possible employing bodies (government, NGO, non-profit, etc). Most often it's a corporation per se.

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Re: Taxes

Keep in mind the polar opposite of the power grid is that everyone keeps a personal generator they build with their own hands and continually feed fuel they gather with their own hands.

Sometimes a little ineffiency in one place allows you to be more efficient in other places. Don't knock the power grid and transitively the federal government.

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You might think that economistshold pro-business, anti-tax, anti-worker rights biases. Or you might think that the more easily demonstrated principles of economics hold pro-business, anti-tax, anti-worker rights biases. Given my limited studies of history and economics, I'd suggest the later.

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If only we could discover a series of rules that would explain how perfectly self-interested robots behaved in a fictional market with no government/community interference in business on behalf of workers, where capital could be employed as a wealth-yielding instrument purely in and of itself, and where property gained from the proceeds of such was protected by the threat of violence. Surely then we could use those fundamental rules to help us predict how an ideal society should function. And I say ideal because clearly my preferred set of premises were definitely not chosen as a convenient rationalization for maintaining a pre-existing social structure that enabled the effective subjugation of most of society by a minority owner class.

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I found #4 and #11 to be interesting because it is difficult to spend money, reduce taxes, and not have a deficit. Everyone can agree that it'd be great to have all of those things. Economists are far less in agreement when it comes to what the correct balancing act is.

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What does this one mean?

"If the federal budget is to be balanced, it should be done over the business cycle rather than yearly. (85%)"

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This is a Keynesian and Monetarist view of budgets. The idea is that IF you balance the budget (they often don't think this is ever a great idea anymore) then it should be balanced over the ups and downs of the business cycle.

So let's say a business cycle starts up again and somehow the government doesn't spend all that extra money before it comes in and there is surplus. Now booms are followed by an inevitable bust no matter what anyone tells you when the next one starts up.

Keynes argued that you should spend during busts to keep aggregate demand up and let the economy recover. So you run a deficit during this time. If you consider a balanced budget then they might argue that you should balance it with consideration to short term gains and losses.

If you're interested this video is a fun and very accurate way to learn about two different views of the business cycle:

http://www.youtube.com/watch?v=d0nERTFo-Sk

For the record I'm with Hayek in this video :)

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It means its okay to go into debt for a few years, as long as we pay it back when the going gets good.

A business cycle doesn't have a defined length, which is one of the problems of the approach. I think 3-7 years is a decent range.

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The federal budget process and the economic reality on the ground are out of phase. To achieve stability in the system, these processes need to be brought more into phase.

Put another way: the budget contains a de facto representation of the current economic position as well as economic "velocity" and higher derivatives. In forming the budget, legislators encode these values. In many cases, these values over- or under-shoot reality with poor consequences.

tl;dr: Balancing the budget is a stabilization criterion and bringing the active driver into synchrony with the driven body (the economy) should improve stability.

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It's a question about how a balanced budget amendment should work (if we had one). Balancing the budget every year would be a worse idea than requiring it to balanced over several years.

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I would argue that the questions asked are largely wrong. A ceiling on rents does reduce the amount and quality of housing. The question, then, is: how much does it reduce amount and quality of housing, and how much does it lower prices? If we have minimum wages, unemployment will be higher, but how much higher? On the other hand, how much higher will average wage be?

Economics is a cost/benefit trade-off. If minimum wage doesn't reduce unemployment that much (and all evidence is that it doesn't -- the US is at about a natural level of unemployment in the long term, moving up and down with business cycles), we're better off with it in place. If it kills employment, we're better off without it.

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#4 is a bit misleading. It states "Fiscal policy (e.g., tax cut and/or government expenditure increase) has a significant stimulative impact on a less than fully employed economy. (90%)".

While that sounds harmless, a lot of people will take that item and extrapolate it to our current situation and say the correct policy response is to stimulate the economy with fiscal policy. That has to be right since 90% of economists agree right? Well, what happens if you add a little context to the quote and add the text "with high levels of debt as a share of GDP". That 90% number would likely come down massively most likely skewed by biases not related to economic theory.

In short, the quote is very misleading if you are trying to use it as a guide to our current mess. What does this imply the right policy response for us is now?:

We have to make major cuts in areas of excess that have little stimulative impact. This means cutting back on government pensions, entitlement reform, and cutting things like 9/11 contracts that don't provide any real increase in safety. It means we can also strategically spend in areas that have been neglected the last 10 years like an energy grid for a more stable energy policy, alternatives to petroleum based fuels, a modernized air traffic control system and infrastructure.

At a macro level this means net spending decreases in very sensitive areas like entitlements but also strategic increases that make our country more able to compete like education, energy independence and infrastructure.

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"If all the economists were laid end to end, they'd never reach a conclusion." -- George Bernard Shaw

Edit: note that the article only claims a maximum of 93% of economists agreeing on any one of the items.

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Interesting that most of these were fiscal and regulatory policies, but no monetary policies held a broad consensus. I would have thought there would be more consensus on interest rates and money supply.

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The classic response is "nothing".

That being said, getting 4 out of 5 economists to agree on something doesn't mean it's right. Most economists will tell you that public policy works best when you have the capability/political will to iterate on solutions. Not unlike a startup really.

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I was shocked when I didn't get an empty white page.

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That's because the media loves an argument, and politicians love lobbyists...

When most economists see a debate between 'experts' on CNN (or Fox) I'm sure they're shaking their heads and sighing.

Imagine seeing a debate on TV about the merits of Java vs Windows - with the two experts being marketing people from Oracle and Microsoft. The whole thing would be a facepalm for HN readers - except that to an outsider, it would sound like a clash of brilliant minds.

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Last time I checked, economics was still considered "scientific." That means we should not be operating on consensus basis, but proof. What is the scientific model of these things that economists agree on? Have them be checked against history? Have them predicted future accurately? Have we been able explained whatever deviation they have with reality?

Until such model exists, consensus means nothing but politics. Maybe, just maybe, we should start considering demote economics status to "pseudo-science." Last time I check, fortune tellers also agree on shit, you know.

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"consensus means nothing but politics"

Actually, why don't you do this if you think it's all about politics. Get your favorite politician, see who their economic advisers are, then understand their views. Mankiw stated economic points that are accepted by a wide political spectrum.

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"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.

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The problem is that the only real way most unskilled workers have to increase their skills is by working. Even those hired at minimum wage usually quickly move up to a higher wage as they get experience. Unskilled workers don't stay unskilled once they actually start getting experience.

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Only 2 percent of nonsalaried workers earn minimum wage.

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The statement "A minimum wage increases unemployment among young and unskilled workers." is probably true, but if maximizing employment is the only goal, then just pay them peanuts and abolish overheads like health and safety.

I'd say that maximizing employment is not the only goal.

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Whilst it doesn't really support or refute any points, economists and interested people might be interested in the light-hearted http://www.youtube.com/watch?v=VVp8UGjECt4

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Great article. I fully agree with its findings that 93% of US economists are me-too academics who don't understand economics and whose "consensus" is destroying the world.

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Surprisingly, I agree with all 14 statements on that list.

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I'm curious about the "Eliminate Agriculture Subsidies" one. I don't know enough to give a good opinion, but it seems to me like that could wind up pricing basic, quality food out of the hands of the poorest people, and they'd either have problems with starvation or be forced to eat junk.

I mean, maybe I'm wrong, but I could have sworn it was The Man that is keeping eggs down at around $3/dozen and milk around $4/gallon.

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The government has very little to do with keeping food inexpensive, in fact through various forms of subsidies and tariffs they make some foods more expensive - sugar vs corn syrup.

Also:

Myth #3: Maintaining a cheap and stable food supply. Some contend that food markets would fluctuate wildly without farm subsidies. In reality, food prices of both subsidized and unsubsidized crops are relatively stable. Given that the percentage of family budgets spent on food has dropped from 25 percent to 10 percent since 1933, any potential price instability would have an increasingly small impact on family budgets.[7] Even if price stabilization was necessary, price support programs have largely been replaced by commodity subsidies that stimulate overproduction rather than stabilize prices. Nor do farm subsidies contribute to lower food costs. Two-thirds of food production is unsubsidized and thus relatively unaffected by subsidies. Of the remaining one-third, price reductions caused by crop subsidies are balanced by conservation programs that raise prices. Furthermore, food prices are based not only on crop prices, but also on food processing, transportation, and marketing costs. Bruce Babcock, professor of economics at Iowa State University, has calculated that eliminating farm subsidies would have virtually no effect on food prices.[8]

http://www.heritage.org/research/reports/2007/06/how-farm-su...

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can you quote something a little less biased?

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Given the level of agreement, you will have a hard time finding much disagreement from any source.

I would even suspect that a significant number of those who "disagree" disagree more on technicalities than on the general idea that the US's agricultural subsidies are a bad idea as implemented. For instance, I could argue:

1. A free market economy tends to surprisingly precisely match production to demand; producing extra costs you more than your competition is spending and tends to drive you out of business.

2. Food is subject to unpredictable random failures on a large scale.

3. It is better to have too much food than too little.

4. The economic effect of a subsidy is to cause overproduction. (As opposed to price fixing, which is to cause shortage. Rather a lot of verbiage is expended on the internet trying to explain away these two facts, yet the facts remain.)

Therefore, it may actually be desirable strategically for a country and even for the species to subsidize food production, in the hopes that the excess will offset the unpredictable disasters that a free market would tend to produce very little slack for. This will cost the society as a whole more than a "precise match" produced by the free market, but it only takes one bad harvest for this insurance to pay off bigtime. This could lead an economist to vote "disagree" on principle, even if they probably would agree the current subsidy is not an efficient way of accomplishing this goal. As others have pointed out, slamming this to a "true/false" question does erase many of the finer distinctions.

But other than those directly monetarily benefiting and those who don't understand the economics well enough to understand how bad these things are, you're not going to find much thoughtful support of these subsidies as they currently exist.

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Governments could buy up large strategic reserves of grain and twinkies. They've done this since Joseph and the Technicolor Dreamcoat.

Overproducing beef and corn syrup won't be as efficient. In fact, it might even bring on the "random failure", by screwing up the water table.

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Actually, you'd like federally unsubsided foods. It would mean more locally grown produce and meats. Most of the big agricultural subsidies are for corn and sugar, the really bad stuff. Agricultural subsidies are making the nutrition crisis worse, not better.

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It's unlikely that the removal of agricultural subsidies would create a significantly large market for locally grown produce and meats.

In fact, it would probably do precisely the opposite, as food could be outsourced just like the rest of our industry to areas with minimal labor laws to hamper cheap food production.

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Don't corn subsidies make food-corn more expensive (the majority of corn subsidies are for ethanol production, which diverts supply from food/feed)?

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Also, read about what ethanol subsidies are doing to prices elsewhere. Farmers are replacing fields of grains and other crops with corn, in part because corn was already profitable before the subsidies. This has in turn increased the prices of a wide variety of food. One sad example are the prices of hops and barley, which has strained beloved micro-brewers.

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The subsidies cause harmful distortions. They ruin farmland and create unnecessary pollution because farmers overproduce. They put farmers in poorer countries out of work because we export our excess crops. This causes harm to relations with our neighbors and hampers trade agreements. They cause unhealthy eating habits by making high fructose corn syrup artificially cheap. They make our cattle sick because we feed them corn instead of grass. I could go on and on.

It's fair to say we don't want people starving, but removing farm subsidies wouldn't have a large effect on grocery prices and there are better solutions such as giving additional funds to the poor.

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An additional problem with subsidies is the detrimant to international trade.

For example, massive subsidies make corn in America TOO cheap, that everyone in Mexico City buys American corn! Yet comparative advantage would say Mexico, with a higher proportion of unskilled laborers, should be able to put corn on the marketplace in their own country cheaper, and build up their economy.

Subsidizing exportable domestic goods has similar negative effects to tariffing imports.

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The only glaring flaw with your argument is that corn production is a capital-intensive process, not a labor-intensive one. High-yield corn is produced using big machines and lots of nitrogen-based fertilizer. A high proportion of unskilled laborers is useless for corn, but is useful for fruits and vegetables. This is why you have large pools of unskilled migrant labor working the fields in California but now Iowa.

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"Basic, quality food" isn't the issue. Right now we have an abundance of junk made from subsidized crops. High fructose corn syrup only came into vogue because there was a surplus of corn lying around because of corn subsidies.

Food represents such a small part of the average American's budget (about 12%) that the real restraints on healthy eating are convenience (Chicken sandwich---five minutes of ordering and waiting in line on the way somewhere. Grilled chicken---25 minutes at home) and education (looking up how to make grilled chicken---10 minutes). If anyone actually looks at what they're eating, they can almost certainly increase quality AND decrease cost.

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Indeed. A lot of the junk food culture comes from agricultural subsidies, not just the obvious corn syrup. I recall (but can't find the link) a study showing that a really high proportion of supermarket products had traces of corn (even meat).

When you cross the border you see these effects more clearly. Here in brazil, for example, for most of my childhood McDonalds was an expensive-ish place people went out to eat in, and even today junk american-style chocolate bars cost way more than standard not-so-junky chocolate. With an exception for soda (which can be cheaper than bottled water in some places) junk food is not at all attractive if you don't actually have a lot of money (the standard no-money food around here is beans and rice, with maybe cheaper cuts of meat thrown in the beans or served with the food; junk food costs a lot more than twice that).

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yes, I have heard that one of the reasons why there are 99 cent cheeseburgers in all of the major fast food chains here in the US is because of the subsidies. Essentially all the ingredients that go into those burgers are subsidized. When you think about an actual market economy it would seem that some kind of rice and beans with mixed vegetables would be what would cost 99 cents.

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In that case, why not spend the subsidies on reducing taxes for those poorest people, or on giving them benefits in other ways?

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Notice that subsidizing the 'best' foods basically gives the poorest people a break ONLY when they eat good foods. Which may not be such a bad thing. Notice food stamps already do much the same thing. I personally know I would much rather subsidize a poor guy buying milk and bread than a poor guy buying donuts or alcohol.

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Many of the subsidies are price supports and protection from foreign competition -- which raise food prices.

'The Man' is keeping milk prices up; read this expose from the (usually very pro-government) Washington Post:

http://www.washingtonpost.com/wp-dyn/content/article/2006/12...

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I often wonder in conversations like this how many people have actual backgrounds in agriculture? Yes, in some states milk is price regulated and subsidized. Sometimes to keep prices low and sometimes to keep prices high (it kinda depends on the place - yes, screwy and in the same place people argue about the reasons). Messing with subsidies will raise input costs to a lot of businesses, much like rising truck transport costs.

Generally someone will pull out this local plots / in city farms and forget a lot of basic economic truths about mass production and transportation.

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Well I tend to believe the really poorest people are more affected by the current dumping of the excess produce than the poor americans you refer to would ever be affected.

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Agricultural subsidies are one of the weird parts of countries economic policies. Simply put, nearly every single developed country has them. And nearly every country agrees that 'in the long run we should probably get rid of them', but then also agrees 'realistically, nothing will budge, so we'll ignore it as much as we can at every WTO (previously GATT) meeting'

And the reason why they continue to exist, and will probably continue to exist is that there are relatively few farmers in each of those countries, who make up incredibly homogenous democgraphics within their election ridings. Government that even proposes eliminating the tariffs will lose their rural seats/votes/whatever. Every single one of them.

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The effects on seats depends a lot on how the seats are distributed. It is a much less powerful effect in countries that have a proportional distribution compared to the effects in a winner takes all system.

Sigh. Here in Sweden we had finally managed to totally do away will all subsidies in the early 90's. Then we entered EU and got more subsidies than ever. :(

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Some governments have gotten rid of them. I believe New Zealand cut its agricultural subsidies greatly in recent years without ill effect.

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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. Nonsense. Incompetent, intellectually bankrupt nonsense.

(2) With their physics envy, they want mathematical economics and to build mathematical models. E.g., for some decades after Dantzig's simplex algorithm, they fell in love with optimization. As optimization moved forward with nonlinear programming, the Kuhn-Tucker conditions, nonlinear duality, deterministic optimal control and the Pontryagin maximum principle, and stochastic optimal control, the mathematical economists continued to use such applied math to build their models. A shockingly large fraction of the Nobel prizes in economics are from just such nonsense. The math is rock solid; there are occasional good applications to particular, small problems, e.g., the climb, cruise, and descent of an airplane or what mix of refined products should come today from an oil refinery; an application to a real economy is nearly always just total BS.

(3) To keep their models relatively simple, they make a lot of assumptions. E.g., in finance, they assume perfect information and f'get about the guy on a motorcycle at an airport who asked the guy on the ramp where the plane was going (as in the movie Wall Street), naked shorting, etc. E.g., they make a lot of Brownian motion assumptions that then say that the LTCM disaster was wildly improbable, which it was not. They make assumptions about which workers are more productive and feed that into their optimization looking for some case of a non-inferior solution or Pareto optimality as if Chinese women had 20 fingers on each hand so could sew buttons much faster than women in South Carolina.

Going Wrong. They take their assumptions of their simplistic models and the corresponding conclusions and say that a real economy SHOULD be like that. So, they want to bend the real economy to their Procrustean bed of simplistic assumptions and conclusions. If physical science had done such a thing, then they would still be saying that the planets should move as Ptolemy said, that falling bodies should still move like Aristotle said, and that we should still be looking for flogiston.

This economic science is intellectually both incompetent and dishonest; it's contemptible, and dangerous.

Once I went through Samuelson's college text: I found NOTHING that made any sense at all except for his chapter on the Federal Reserve; in that chapter, he just described what the laws had established and was clear. All the rest of the book was total BS disconnected from any real economy. E.g., if we buy more transistors, then the price of each transistor has to go up. Right: Transistors used to cost several dollars each, and now, after buying many billions, maybe trillions, of transistors, we can buy a few hundred million for less than $100, retail. Wheat: For years 1800, 1850, 1900, 1950, and 2000, take the quantity in bushels of wheat produced in the US and the price per bushel of wheat, corrected for inflation, see that the quantity has gone way up and the price, way down. Similarly for iron, steel, chickens, and pork. We're talking total suckage. The very first things in academic econ, the supply and demand curves, just do not work in any meaningful way in a real economy; real economies mostly just don't work that way, guys. Total BS.

E.g., the econonuts argue for free trade based on simplistic nonsense. Their idea is that, for some global benefit or some Pareto optimality for the world, it is better if the production is where it is most efficient. So, yes, grow teak wood in Thailand, grow rubber in Viet Nam, mine tin in Indonesia, and pump oil in Saudi Arabia. Fine. Then, sew buttons in China? Sure, if the Chinese women had 20 fingers on each hand. But they don't. And a sewing factory in China has to struggle with bad situations for each of suppliers, legal system, transportation system, communications infrastructure, information technology infrastructure, etc. Still, the econonuts want to conclude that China is more efficient at sewing buttons. No they aren't: Instead, the Chinese government understands what the econ profs don't: China takes their young women and makes each of them "an offer they can't refuse", work for pennies a hour under whatever conditions, or else, period. It's not a matter of being efficient. So, businesses, careers, lives, and communities in South Carolina are ruined. So, we pay the former textile workers to do nothing or just let them die. I know: A few of the textile workers get to serve BBQ. From such destructive nonsense, instead of textile workers, I have a better suggestion for who deserves to die. They are doing it, and we should say so: The academic econ profs are KILLING Americans.

Then there's US competitiveness: In the 1950s the US had a great economy. Except for some points of information, biomedical, and materials technology, it's not clear that our standard of living is as high now. Our imports were meager, maybe some tin from Indonesia, etc. We didn't buy much from outside because the other industrialized economies were devastated and, thus, had little to sell us. But we did sell some products: Telephone systems, construction machinery, airplanes, etc. Then the idea is that since we could sell at what were astoundingly high prices, especially for the buyers, that is why our economy was doing well: NONSENSE. Total 100% nonsense: So, Joe went to work at, say, Caterpillar, and made great machines which we shipped to, say, France. France paid us in silly paper which we converted to gold. So, we accumulated a lot of gold. What good did this do Joe or the US? Next to none: In particular, Joe's labor got consumed in France instead of the US. Econonuts are confused. It is easy to see why, say, Japan, Saudi Arabia, or Jamaica needs foreign trade. But the US was doing just fine, thank you, as essentially a self-sufficient economy in the 1950s and, with foreign trade, is doing worse now. We are shipping our going businesses, market position, education, technology secret sauce, and intellectual property overseas, and the econonuts conclude that this is good. Total BS.

Now, sure, we want to import some oil: Saudi Arabia has oil and needs national defense, wheat, construction expertise, water and sewer systems, information technology, cars, etc., so we can swap. Fine.

So, why did we give away major parts of the US economy? Sure: Some econonuts had excuses for why this was optimal, and the Foggy Bottom types wanted to save the world by exporting the US economy. Meanwhile, back in the US, the citizens got it in the rear. US citizens were killed, and are still dying.

So, several large US industries got shipped to Taiwan, South Korea, Pakistan, and China, and whole states in the US had their economies devastated. There is a loss the econonuts don't count: The human capital that gets written off. Or, the econonuts assume that the textile workers and metal bending manufacturing workers can, of course, just move to Redmond and write software for Microsoft, which has so far likely never happened even once, to sell to China, which, of course, steals software and doesn't buy it.

The econ profs conveniently f'get about market manipulations we learned about in the US in the 1890s -- predatory marketing practices, etc. And they f'get about the assets of a going business, technology secret sauce, market position, etc. The simplistic econ models just don't count such things, so the econonuts assume that we shouldn't think about such things in the real economy and, thus, just give them away.

In school, I knew the applied math MUCH better than the econ profs, and their nonsense and its intellectual dishonesty were infuriating. After the first lecture, I asked the econ prof, nicely, what he was assuming -- continuity, differentiability, continuous differentiability, convexity, pseudo convexity, quasi convexity, or what. Then within an hour he had called my Ph.D. advisor and got me OUT of his class. That was not my intention but was GOOD.

Academic economics has NOTHING important to do with any real economy and is from irrelevant, incompetent, dishonest, and contemptible down to seriously dangerous.

We're talking ordinary crooks way down to the lawyers way, way down to bucket shop operators and from there way, way, way down to the politicians and from there, far, far down where just can't see at all, the econ profs. I know what we should export next: If all the econ profs were lined up on a cargo ship, it would be a good thing. And still better if the ship sank far out at sea.

The real economy is IMPORTANT, way, WAY too important ever to be touched by anything like econ profs.

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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 think at the margin", "the market is comprised of many different roughly equal players that can freely enter and exit", etc. which I found hard to swallow and made me wonder if there was going to be anything valuable in the conclusions. Once I got over that hump, I did find that economists have come up with some interesting ideas in their dabblings with logical purity; sure they only work correctly within the artificial sandbox, but once in a while things line up well enough with the real world that you can make fair comparisons. I'm sure that the more you delve into economics, though, the less overlap you will find between any "simple" model and the behavior of societies, since economies in the real world almost always act on a societal if not global scale, incorporating causality in a way that definitely evokes "the butterfly effect" or chaos theory more than a few silly equations...

Among your many colorful examples, I'm going to call out your transistor and grain market examples, because they seem to be a misrepresentation of supply and demand. S&D doesn't say that "if we buy more transistors the price will go up", that's a misrepresentation of the theory. The whole point of S&D is that there is a relationship between the two and you can only predict price shifts (and quantities purchased) by seeing how both behave, not just one, and certainly not by just looking at quantity purchased. So demand for transistors has picked up over the decades, but the supply side has responded at an even greater magnitude, owing to improved technologies bringing the cost of supplying transistors down. This is the reason price has shifted down while quantities have risen. If anything is pretty unassailable in micro, it's S&D in a fair market with commodified goods. The numbers there actually match reality fairly well, once you have data on the shape of each curve (ah, econometrics). And it is totally legit for either curve to evolve over time; that's part of how you assess how people will react to taxes, supply shocks, etc. I would fix your examples for this point, the others seemed more legit.

Silly ASCII diagram for the transistor market:

  P                      P
  |\   /S -->+4          |  \     S
  | \ /                  |   \   /
  |  X         ==time=>  |    \ /
  | / \                  |     X
  |/   \D -->+2          |    / \D
  ---------Q             ---------Q      

  ++demand, ++++supply
  => quantity purchased increases
  => price goes down     
As for how economics treats technology, one of the more interesting conclusions of Mankiw's macro syllabus is that in the long run, only greater efficiency can increase the rate of growth of GDP. Simply increasing the growth of labor supply, growth of money supply, or capital investments, or decreasing rate of aggregate consumption has no long-term effect. Efficiency is essentially output per worker, so things like education and research are apparently the best effectors for accelerating GDP (and therefore the most important to preserve long-term). I can't argue with the sensibility of that result ;-)

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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.

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I enjoyed your original rant against economists and the damage some of their bold but ultimately baseless claims can do, but many of your examples seem ill-chosen. It's really no more complex to incoporate bundling vs budget constraints and the time value of money into neoclassical economic models than it is to incorporate friction into a physical model. Appending "given no corresponding increase in supply" to a claim that the price of a commodity will rise given an increase in demand is really no more of a "patch up" than appending "given the absence of air resistance and other frictional forces" to a statement that the earth's gravitational field will cause a falling object to accelerate at approx 9.81ms^2. "Demand" being the level of quantity which would be purchased at a given price at a given point in time is as fundamental to microeconomics as the concept of net force to Newtonian classical mechanics.

Sure, a number of economists attach undue weight to some underlying assumptions which are only partly true, such as economic actors to some degree exhibiting "economically rational" (perhaps akin to a disciple Newton fan asserting the wave nature of matter has no meaningful implications for their bodies, this kind of abstraction is harmless when applied to sufficiently large numbers). But whilst this economic model appears to break down at levels as simple as individuals being ineffective at computing stochastic optimisations in their heads, it works rather well when analysing the behaviour of crowds. It's not so good at identifying when bubbles will burst, but then meteorologists can't predict the weather next year with any reasonable degree of accuracy either, and that's arguably a simpler system to model.

Where economists overstep the mark is not so much the tendency to oversimplify as the fusion of normative arguments with their models, such as the sleight of hand that dresses Pareto "efficiency" as a static optimisation problem rather than a rights claim made on behalf of the status quo.

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I'm pretty sure I don't agree. Many of the fundamental assumptions in economics aren't just first-order approximations; they're about tractability. You can leave out friction and get reliable ballpark figures, but when you assume monotonicity, you're liable to end up wildly off base sooner or later.

That's what I consider the main problem of economics. To use the gp's expression, they have physics envy when they need to be demanding statistics and psychology. The problem area is difficult and overpopulated, and what's worse, worth money. That means that the most apt people do business for themselves instead of suggesting on the business of others.

Much of economics is useful, but little is reliable. As much as it pains me to say this, I believe we could do with more (quiet) focus on economic policies - just not from the math people, but from the social studies people.

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> 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.

I do this, and it's a real problem. It takes me forever to buy groceries.

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A few points:

(1) Many if not most economists are empirical. Recent John Bates Clark medals---a good reflection of what academic economists think is the best work being done right now---have gone to economists doing empirical work. Recent examples include what works for development (evaluated with large randomized controlled trials), what are the causes of growing income inequality, how should we structure auctions etc. http://en.wikipedia.org/wiki/John_Bates_Clark_Medal . To say that most economists have no contact or interest in empiricism is incorrect.

(2) The point about simple models is not that economists fully believe them---it's that they force everyone to be explicit about assumptions. They also try to identify what are the key features of admittedly very complex phenomena. This is what models do in most scientific endeavor. That the models often perform poorly is a sign of an immature science---not fraud or dishonesty. You'd get eternal fame and become fantastically rich if you came up with a financial model with great predictive powers---do economists not create such models because they are stupid and corrupt? That seems unlikely.

(3) The transistor example completely misses the key distinction that every presentation of the simple supply and demand model always makes - i.e., there is a difference between the short term and long term. If demand doubled for transistors tomorrow, the price wouldn't rise?

(4) You confuse absolute and comparative advantage.

(5) "In the 1950s the US had a great economy. Except for some points of information, biomedical, and materials technology, it's not clear that our standard of living is as high now."

This is where I stopped reading - this is so obviously wrong http://www.wolframalpha.com/input/?i=GDP/capita+real+US that it's hard to take seriously any conclusions on the relative merits of different industrial policies the follow from this "fact."

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In response to point 5. Is it clear that per capita GDP is a good measure of standard of living? Adjusted median income has not risen much with GDP. Do you have an argument for why standard of living should be evaluated as a mean instead of a median?

http://www.stanford.edu/class/polisci120a/immigration/Median...

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There are lots of different moments & quantiles of the income distribution that are interesting and useful to look at, but its not like the mean is terribly misleading here. In the plot you provide, median income in real dollars has increased from 25K in 1950 to 40K in 1990---a 70% increase in real income.

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> Is it clear that per capita GDP is a good measure of standard of living?

Yes. This is something else virtually every economist will agree on. ACists, neoclassical, keynesian, Chicago, Austrian, I'm sure there are other major schools I'm forgetting, but this is a very accepted measure of standard of living in the field of economics.

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> Yes. This is something else virtually every economist will agree on.

A statement which only help to make his point about economists being ignorant crocks. GDP is heavily doubted as a good measure of standard of living in all other social sciences.

Examples of what the GDP measure fails to take into account: ecological sustainability, wealth distribution, non-market transactions, underground economy, non-monetary economy, subsistence economy, quality improvements and inclusion of new products, what is being produced, externalities, sustainability, etc, etc...

http://en.wikipedia.org/wiki/Gross_domestic_product#Limitati...

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I don't understand your argument here.

You won't find an economist (or any other person person) in the world that thinks GDP exhaustively covers every aspect of an economy and how it provides a standard of living.

What you will find is that they all agree GDP is the best available measure to determine a standard of living that is derived from some level of economic production.

If GDP is a terrible metric for determining standard of living, I'd like to know why it is still the most often used metric (by economists and non-economists alike) and a coherent argument for some alternative standard.

Any satisfaction based metric means that the majority of the developed world is doing something wrong -- numerous happiness studies show indigenous peoples often have a higher "happiness index" than people in the developed world.

Environmental based metrics have their own problems because environmental benefits and harms are not internalized by nations.

Income distribution based metrics aren't acceptable because the harms of great income distribution disparity are not easily mapped and are rarely agreed upon.

The only thing that might make sense is a metric based on life expectancy and education (Human development index from your Wikipedia link), but even that is problematic. Research created free-riding, regardless of patents.

The second a US company makes a drug that eliminates cancer, any lab that gets their hand on the drug can reverse engineer it with ease. The however many millions of dollars that went into building it (and become a function of its cost) are undercut by countries/people that do not respect the intellectual property rights of such a patent.

The outlay of spending becomes highly concentrated while the company doesn't see the returns that it expects. The drug copier gets the benefits of the hundreds of millions in R&D expenditure while only spending a few extra days of a scientists time.

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The reason why GDP is still used is because we have a lot of historical GDP data available and it is a fairly simple measure to understand and collect data on. Nor do we have a good enough alternative measure yet. We do have several candidates, but just as you state they all have weaknesses that needs to be understood.

The problem with economic sciences is that the GDP measure is used without critique, without fully understanding its trade-offs or by simply ignoring it deficiencies. That I believe is very careless when you are in the end dealing with the lives of real people.

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I have a (procedural) problem with your critiquing something not inherently bad with no alternative. You haven't presented any new arguments against the GDP nor have you attempted to argue that any possible alternative is more viable than the GDP. I invite you to respond to any of the arguments I made against GDP alternatives.

> The problem with economic sciences...

Honestly, this is hard for me to read.

Lectures on the inadequacies of the GDP are Macro 101 stuff. Throughout college in my different econ classes the shortfalls of the GDP were frequently discussed by several different teachers.

This economic sciences conspiracy to prevent indictments of the GDP you're trying to present as fact is completely fabricated and gives a bad name to economists that do discuss the shortcomings of the GDP (read: every economist ever).

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GDP / capita is a pretty meaningless metric if you consider that wealth is a lot more concentrated these days.

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Income is more concentrated today compared to the post-war period, but I don't think that makes the mean meaningless---it depends upon how much weight you put on a dollar held by different parts of the distribution. That being said, I think you'd be hard pressed to show that any part of the income distribution is worse-off in real terms than they were in 1950.

Incidentally, we only know about these changes in the income distribution because empirically oriented economists have been collecting and analyzing this data for many years.

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I agree with you on the assumption that most likely all parts of the income distribution are better of today compared to the 50's -- on absolute terms. But _relative_ wealth becomes an important metric as soon as basic needs -- food, shelter etc. -- are satisfied.

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Agreed - relative inequality definitely matters.

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Could you suggest better metric than GDP per capita?

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Human development index (HDI)

Genuine progress indicator (GPI)

Index of Sustainable Economic Welfare (ISEW)

Gross national happiness (GNH)

The Gini coefficient

Just to name a few. None of which is perfect, but at least better than the GDP when it comes to actually saying something about the quality and state of an economy.

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> The Gini coefficient

Why do I care how much someone else has?

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Rich man in a ghetto or rich man among friends. Pick one.

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> Rich man in a ghetto or rich man among friends. Pick one.

Rich people don't live in ghettos - that's why ghettos have a very "good" Gini coefficient. (Ghettos would be better off if they did have rich residents.)

I didn't hate rich folks when I lived in a ghetto. Was I doing something wrong?

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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.

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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.

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

No, you won't get a single econ prof to say that the Chinese are more efficient at sewing buttons. But then again:

>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.

This is exactly what comparative advantage is about. It's clear that you've simply misunderstood the material.

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"No, you won't get a single econ prof to say that the Chinese are more efficient at sewing buttons."

Are you serious? A Chinese worker will produce more sewing buttons for $1 than an American can. I'm very sure every reputable economist agrees.

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Obviously, but we're talking absolute terms here. Look at his examples (20 fingers etc). He's talking about the efficiency of sewing buttons, not about the efficiency of sewing buttons compared to the salary.

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>E.g., if we buy more transistors, then the price of each transistor has to go up. Right: Transistors used to cost several dollars each, and now, after buying many billions, maybe trillions, of transistors, we can buy a few hundred million for less than $100, retail

He's making the common ceteris paribus assumption, taking only into account supply at demand (common in elementary economics), ie. the point is to demonstrate how mainly the price elasticity of materials and capable labor force affect the price. Obviously the model will break down if you selectively add variables to it, that's like going to an elementary school physics class and complaining about how they're not taking wind resistance into account in their calculations. There are models that give you the price of transistors as a function of time, with the improving production efficiency taken into accout. You won't find any sufficiently complex one in an elementary economics textbook, though.

>Still, the econonuts want to conclude that China is more efficient at sewing buttons. No they aren't: Instead, the Chinese government understands what the econ profs don't: China takes their young women and makes each of them "an offer they can't refuse", work for pennies a hour under whatever conditions, or else, period. It's not a matter of being efficient.

You won't find a single econ prof that will say Chinese have some inherent, more efficient way of sewing. What they're saying, is that the Chinese have comparative advantage.

How much do you think people living in South Carolina would get paid for sewing buttons? People in South Caroline have better education, health care, infastructure, communications sytems etc. Would you want to have someone like that sewing buttons, when they'd be perfectly capable of doing many jobs that deliver higher added value to the economy?

I don't agree on much of the other points either, but sorry to say, I'm pretty limited on time.

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"Except for some points of information, biomedical, and materials technology, it's not clear that our standard of living is as high now."

This is probably the most uninformed, illogical, and inept points I've ever read on HN. Third-world children are now texting their friends on mobile phones, instead of dying of hunger. You have no idea what it was like growing up in the 50s. Do you even know what "economic growth" even means? Do you understand how many consecutive periods of growth our economy has had?

Unbelievable.

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I have a bachelors 'of science' degree in Economics, with a minor in Finance. The only thing I really took away from that program is that there is virtually nothing scientific about economics. It hasn't moved beyond high-school physics ("imagine a frictionless surface with no gravity").

With that said, there is no real way to do economic 'science' - you cannot stage experiments with controls, or test the vast majority of hypothesis, aside from back-fitting against existing data.

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@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?

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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.

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I would add that academic econ should put more focus on what is not known and may not be knowable as well. Learn to accept and work within and around that constraint, rather than try to assume it away.

Additionally, academic econ favors optimization and efficiency at the cost of robustness and self sufficiency. It would be in the best interest of the country to reverse that, or at least strike a more healthy balance.

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Just a quick note: The Nobel prize in economics is not actually a "real" Nobel prize. It's called "The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel" and was instituted by the Swedish Central bank in 1968, 73 years after Alfred Nobel's will. Apparently, Nobel wanted to promote real sciences and some people couldn't accept that. A few laureates (including Hayek) have protested the prize.

http://nobelprize.org/nobel_prizes/economics/ http://en.wikipedia.org/wiki/Nobel_Memorial_Prize_in_Economi...

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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.

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One random good prediction proves nothing, unfortunately. I tend to believe that Ricardo's comparative advantage and similar economic principles established for more than 150 years are solid enough to be relied upon when dealing with a relatively large markets; I'd go with HilbertSpace about the global macroeconomic BS, however. I'm pretty sure that global markets are too complex to be described by any current model.

One point that particularly saddens me is the utter misunderstanding of growth by economists, because they go with the easy assumption first (GDP growth is a representative value), then with the oversimplification about the sources of growth, particularly the salient dependency of available cheap energy to sustain growth (see for instance http://netenergy.theoildrum.com/node/7069#more ).

Then they generally proceed by forgetting that Adam Smith wrote his books in a time of immemorial non existent or extremely slow growth, which change radically the view. Market efficiency is to be considered in a radically different manner when the general environment is economically quite stable, which naturally should prevent concentration, for instance.

This is just to mention a couple of things that struck me, I generally don't pretend to know much about economy, though.

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One random good prediction proves nothing, unfortunately. I tend to believe that Ricardo's comparative advantage and similar economic principles established for more than 150 years are solid enough to be relied upon when dealing with a relatively large markets; I'd go with HilbertSpace about the global macroeconomic BS, however. I'm pretty sure that global markets are too complex to be described by any current model.

I think one of the epistemological problem with economics is that it's almost impossible to run experiments(except maybe college kids experiments), and it would probably be irresponsible to run experiments on whole nations. That why some economists approach it by using entirely deductive logic as a mean of study.

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> I think one of the epistemological problem with economics is that it's almost impossible to run experiments[...]

It's also true of cosmology, though cosmological errors won't ruin people lives :) If you haven't read "the shock doctrine", it states that actually there was many economic experiments, in Chile and other countries, usually for the worse... Well USSR made some large scale experiments too, from 1917 to 1921, then 1921 to 1927.

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(Coming in a day late.) I'm not going to trust the Shock Doctrine after reading about how its "facts" were collected.

http://www.cato.org/pubs/bp/bp102.pdf

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another figure - johan galtung (mathematician, peace advisor) - talking about the state of the world: * the berlin wall will fall before 1990 * shortly thereafter the soviet union will collapse

* when the udssr collapsed for real, he said there will be a new enemy: it will either be the green party or islam.

* his recent prediction: the american empire will fall before 2020. he usually continues arguing the american republic will be better.

johan galtung is doing "integrative assesment". he is taking into account the non-uniformity observed in some situations. and he considers different attitudes influencing each other.

one example: when the avantgarde left the church, they turned to science. why does science describe the world in terms of perfection? it is easy to see, he says - because "god's creation was perfect".

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Thank you much for crafting this finely worded commentary!!! One point to add:

Many economists assume equilibrium in their models. Often, economists will invoke [Nash] equilibrium as the resting state of the economy. This simplifies their maths, but seems like a dubious assumption for most real world situations. Human activity is biological, and evolving. Economies are complex systems composed of biological entities (humans), and need not ever reach equilibrium.

Out of respect for the recently deceased economics genius, B. Mandelbrot, I urge brave souls to learn his two cents on the topic.

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do you have a blog ?

seriously, this was a superbly informative rant.

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The author is a crackpot. If you enjoyed this, there are thousands of crackpot blogs in this style. The style includes, but is not limited to, emphasizing random words in a sentence, inventing neologisms for people he disagrees with, and expressing extremely populist views.

The fact is that more people have risen out of poverty in the last 50 years than in the entire previous history of the world, largely due to economic globalization. And the average wealth of an American has also increased greatly.

The author is full of the excrement of male cattle. I hope he is getting upvotes for the reasonable critiques he makes at the beginning of his wall of text and not the dishonest crap at the bottom.

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It's interesting to see how people react to walls of text with significantly less critical thinking than they do to shorter posts. I will admit that I was briefly under his spell as well, mostly because reading it all is quite fatiguing. It's also interesting to see that the author seems to write walls of text exclusively.

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If you loved this you'd love http://unqualified-reservations.blogspot.com/

The older stuff is pretty stellar, I wrote an post on Metafilter about it a few years ago: http://www.metafilter.com/66006/The-Unqualified-Reservations...

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I am not an economist, but I think economists have been doing a lot of catch up lately. Traditional economists have tended to see people as rational agents, whereas more recent behavioral economists are showing how people are pretty universally irrational.

Sure, in an idealized economic simulation we would consider every possibility and only choose the most optimal one. It only stands to reason in such an environment we should remove barriers and maximize choice. But the reality is people are limited and take shortcuts in decision making that traditional economists never even imagined. Those human cognitive limitations need to be seriously considered before jumping to any conclusions about economic policy.

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But economists would all agree that the models have limitations - that's not really news. The news here is that the limitations are a 10% slice rather than a 1% slice.

But that doesn't stop the theory being 90% correct.

Incentives-wise : is it easier to get people to buy a book about 'classical economics' or the 'whole new type of economics that makes those classical guys look like dinosaurs'?

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I would liken it more to elaborate geocentric models of the solar system. Sure, they can explain the data. And they can make accurate predictions within a certain margin of error.

But then there are the cases they can't explain or predict accurately. Not to mention they keep getting more complex and more uncomfortable to believe. At the end of the day it's just the completely wrong idea tortured to give the right answers. The solar system was heliocentric all along.

That's the kind of place I think traditional economic models are in right now. We're steps away from proving out the planets orbit the Sun, but there are still a lot of smart people writing elaborate dissertations about the Sun orbiting the Earth.

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> more recent behavioral economists are showing how people are pretty universally irrational

I suspect economists might phrase it more guardedly, along the lines of "people don't always behave in a totally-rational manner."

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