I see in one of Jim Manzi old posts he is asking for anyone to come up with 14 non-obvious empirically verified and useful rules made by economists.
I believe each one of these represents a prediction of the economics community that was at odds with the conventional wisdom at the time.
- The price and quantity of objects sold are determined jointly by the desires of buyers and costs of sellers.
- Holding the price constant of a object that becomes more desired will result in fewer people obtaining that object than if the price were left free to float.
- The wages of workers in a free market are determined by the amount the marginal worker produces not the average.
- If a set of producers specializes in what each can produce relatively not absolutely most cheaply, the total value of production will rise.
- An increase in the mass of citizenry will not lead to an increase in the proportional mass of the unemployed.
- The total flow of services available to the community cannot, in general, be increased by destroying some stock of assets. I.E. one cannot raise general living standards by breaking glass to give work to the glass maker.
- A valuable, storable and costly to extract resource will last longer than current extraction rates divided by known reserves implies.
- The contagion rate of sexually transmitted diseases will fall as the disease becomes more widespread. IE, there is decreasing marginal infectibility.
- Increasing the supply of medicine and vaccines to a preindustrial society will cause living standards to fall.
- Requiring increased training to practice a profession will cause the price of the service to rise more than amortized the cost of the training.
- Permitting the construction of more expensive high-rise buildings will cause rents to fall.
- The expansion of heavy industry will cause wages for service workers to rise.
- Under the same economic regime poorer countries will tend to grow faster than richer ones.
- Competitive profit seeking organizations will produce products more greatly desired by consumers, at lower costs, than universalist benevolent organizations.
This is fourteen off the top of my head. I tried to think of areas where there was active pushback from the public not simply areas that the public hadn’t considered since then “obviousness” would be at stake.
However, I would point out that modern insurance and finance are descended from economics in much the same way that modern phrama and tech are descended from biology and physics. I am not sure if you want to call business analytics a joint child of econometrics and pure statistics but my sense in pursuing job application a few years back was that for Commercial Analytics researchers the criteria was Ph.D. in applied statistics or econometrics.
But a key point to remember in all of this is that economics is not business analytics for government. For example Manzi says
OK, please state the rules developed by economics that can actually make useful, reliable and non-obvious predictions about the result of alternative proposed courses of government action on the issues of the day
Yet, this is not what economics or any other science does. More or less scientists investigate things that are interesting to them. What Manzi seems to be asking here is “why isn’t there better policy engineering.”
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Monday ~ March 21st, 2011 at 12:18 pm
JazzBumpa
I’d say point three is imperially proven to absolutely false. It it were true, then wages would rise as more value is produced by the worker, and that has clearly not been the case in the U.S during the last 30 years. The reason is the power asymmetry between employers and employees. The loss of union power and therefore membership over these decades is certainly correlated. And now you see carefully orchestrated assaults on the last remaining vestiges of labor unions.
Point 5 may be true in some times at some places. It is certainly not true at all times and all places. Specifically, it’s not true when U6 is at 16% for years on end. One thing increasing the mass of citizenry can accomplish is increasing the supply of workers, and thus putting downward pressure on wages.
Cheers!
JzB
Tuesday ~ November 22nd, 2011 at 2:43 am
Jiminy Cricket
Your comments regarding point 3 and the asymmetry of employers vs. employees actually speaks to a fundamental nuance that illustrates Manzi’s arguments. Keep in mind that point 3 is regarding the wages of a worker in a FREE market. The labor market you discussed is not a free market because employers hold market power over employees.
But that gets to the core of Manzi’s criticisms: that economists inevitably resort to ad-hoc justifications about why their empirical predictions failed by stating that the necessary starting assumptions required for those predictions did not hold. That’s precisely the problem: those starting assumptions never completely hold. There may be no 100% perfectly free markets anywhere in the world – where no players hold any market power to set prices, where all players have complete information and exchanges can be made with no transaction costs. Certainly there seem to no perfectly free labor markets.
Point #3 is therefore not a predictive statement but rather a mathematical outcome that inexorably flows from equilibrium calculations derived from functions regarding marginal products of labor and marginal profits. It is not a falsifiable statement because there are no perfectly free labor markets.
Granted, in physics, there are no perfect resistors, capacitors, inductors, wires, or infinitesimally-sized point charges. But physics can nevertheless make a wide range of highly precise predictions about real-world electrical systems that are accurate within a tight confidence interval. Indeed, the fact that I am typing this post upon a PC that is connected to millions of other PC’s through quadrillions of individual electron flows through the Internet is proof of that precision. What therefore matters is whether economists can provide reliable predictions regarding particular labor markets that actually exist in the real world, yet this is precisely what they have so much difficulty in providing.
Monday ~ March 21st, 2011 at 1:09 pm
BSE
I would take issue with #3 and #6. Contra Jazz, #5 is fine, new people would tend to crowd in employment.
So 3): Marginal Product equal real wage comes just from the profit maximization of the firm. Its a reasonable ATTRACTOR for the problem, but management of the firms have an incentive to keep compensation artificially low. This is inefficient, but the evolutionary result is that it can persist almost indefinitely (i.e. firms that keep wages artificially low are not automatically out-competed, they are only asymptotically out-competed (for workers); you never get there in finite time). On the other hand, yes it is not the average, like you said.
So, #6: This is just an incorrect statement of the broken windows fallacy. Be careful, because it requires certain assumptions to work the way you think it does. First, it relies on the use of welfare functions that don’t put too much weight on the glassmaker, or the people he hires, and instead puts greater welfare weight on everyone else. Second, we usually apply this argument to times of full employment: that is, the only people without a job are those who don’t want to work. Obviously this isn’t always true. Lastly, you refer to the flow, but the broken windows argument instead points out that welfare is related to the stock of assets; but output as measured could rise after the windows have been smashed. This is especially true if the asset stock that is destroyed (like the windows) is not a factor of production (it is capital which is producing producing or improving on that consumption good we call shelter, but everyone is still paying rent on their apartment). It is only welfare that falls since consumers get less shelter for their money (with the caveat I mentioned in my first point).
Monday ~ March 21st, 2011 at 3:45 pm
Karl Smith
You can get the flow argument simply by asserting that some crowding out occurs at full employment. This is why it has a general qualifier.
Not that the window, not broken, provides a flow of services.
Monday ~ March 21st, 2011 at 2:36 pm
ninechars
re: #10, economists have exploited this effect quite capably by introducing mathematics as a barrier to entry and legitimizing voodoo for their field. Their intellectual stock and compensation has risen as their models have gotten more abstruse even though the empirical validity of those models has not improved.
Monday ~ March 21st, 2011 at 3:21 pm
Arthur Smith
I’m interested particularly in the history of theory and evidence on your #5 , if you could add some citations that would be great, thanks.
Monday ~ March 21st, 2011 at 4:49 pm
James Oswald
There is some circularity going on as well. People immigrate into booming areas, so high immigration periods coincide with economic booms. I don’t agree with his phrasing. The unemployment rate should stay about flat with immigration, assuming immigrants are equal to natives. If they are lower skilled, they would be disproportionately impacted by the minimum wage and thus have higher unemployment rates. In the absence of minimum wage-like laws, jobs are not scarce.
Monday ~ March 21st, 2011 at 5:39 pm
DJ Any Reason
I don’t get #2, perhaps someone will enlighten me.
Consider a situation where parking is priced optimally such that at any time 80% of parking spaces are filled and 20% are empty. The price is set by government fiat. A rash of muggings on the local mass transit system increases demand for parking, and the government, under political pressure, declines to modify the parking price. Do we not result in parking spaces now used at more than 80% capacity, with people paying in driving-around-time? Is this analysis any different for soviet bread lines?
Monday ~ March 21st, 2011 at 5:54 pm
DJ Any Reason
I should note I do understand why a profit-maximizing firm would not theoretically sell more items if demand goes up but price is forced to remain constant, which is different from my above example in which the government is the purveyor of the product (I say theoretically because I would expect, in practice, an initial draw-down in inventory which would lead to an initial spike in sales). I still don’t see, however, why the quantity sold would drop without a change in the marginal cost to produce the item, and I don’t see why an isolate increase in demand for the item itself causes the marginal cost of production to rise. Certainly, there is surplus going to waste in the form of lines (or, perhaps, being captured by scalpers and resellers), but I don’t see how that reduces quantity sold either.
Tuesday ~ March 22nd, 2011 at 2:28 am
TJS
@ DJ Any Reason: I think the key point is that the supply curve is upwardly sloping.
Tuesday ~ March 22nd, 2011 at 10:33 am
Johnnie Linn
In regard to #5, the employed are more likely to increase their body mass than those who are unemployed.
Tuesday ~ March 22nd, 2011 at 10:51 am
HonestAbe
If you define a supply curve as the relationship between the price of a good and the quantity supplied, then specifying an upward slope would imply that as demand increases (regardless of the slope of the demand curve), that for any given price the quantity consumed/supplied would change (increase) by a non-negative value.
In the case of a price ceiling, an inefficiency is created through the loss of producer surplus, as more consumers are able to receive the product at a artificially low price.
In the absence of further clarifying or defining assumptions, I don’t see how 2) can be stated as fact.
Tuesday ~ March 22nd, 2011 at 12:28 pm
lance
Samuelson would have chided you for forgetting comparative advantage
Tuesday ~ March 22nd, 2011 at 2:12 pm
David B
In your last comment I think you are misunderstanding a basic part of the physical sciences. I would propose that when a theory is stated – for example Einstein’s theory of General relativity – that is someone working on something that they are interested in. What you are missing is the follow up work that is done based on the theory.
In physics, other scientists will study the implications of the theory and will look for examples in the physical world that match the inputs – and check that the outputs match what the theory says. If this study continues to support the theory it gains credibility.
Then other scientists will use the theory to make predictions on things that haven’t been observed – these are then tested to see if the theory’s predictions are true.
The political need to make economic theory conform to the morality of the people responsible for implementation of economic policy seems to be the only reason it continues to be useless as a guide.
Tuesday ~ March 22nd, 2011 at 3:29 pm
Zenobia
I think #4 is about comparative advantage.
Tuesday ~ March 22nd, 2011 at 4:55 pm
B
What is the idea behind #9? Is there an author or movement that purports this?
Tuesday ~ March 22nd, 2011 at 9:31 pm
Andy
I would add two more off the top of my head:
* Comparative advantage, and
* The value of an option does not depend on the expected appreciation of the underlying commodity
Wednesday ~ March 23rd, 2011 at 2:42 am
Modelled Behavior « Trinkets Of Frivolous Utility (TOFU)
[...] 14 Non-Obvious Points From Economics [...]
Wednesday ~ March 23rd, 2011 at 11:30 am
stickman
Not to nitpick, but how about economics of segregation a la Thomas Schelling (alongside his many other non-obvious contributions)? That you can arrive at segregated outcomes at the aggregate of society — even though the majority of neighbours harbour a desire for mixed race neighbourhoods — is one of the most profound things that I’ve taken away from my education.
(A nice video clip on the subject for those that haven’t seen it)
You could make a number of parallel cases for phenomena in the “micromotives, macrobehaviour” category.
Thursday ~ March 24th, 2011 at 1:08 am
brucetheeconomist
I think a non-obvious proposition is that import quotas on oil imports would likely raise not lower the price of an oil cartel. The demand curve the cartel faces become perfectly inelastic at the import quota quantity, and thus the cartel has no reason to not charge the highest price the quota quantity will bear. This was a flaw of one of President Carter’s energy proposals. At first blush you could say reduce our demand, and reduce the price we’ll be charged, but a more sophisticated analysis based the behavior of a monopolist shows otherwise.
Tuesday ~ November 22nd, 2011 at 2:57 am
Jiminy Cricket
To build on Arthur Smith’s post, I would actually like to see the empirical evidence for all 14 of these predictions. Remember that to meet Manzi’s challenge, any predictions stipulated must not only be non-obvious, but also be empirically validated. Manzi’s specifically required that they “survived rigorous, repeated falsification trials”.
Perhaps there is indeed such strong empirical evidence for some of those points. However, I suspect that they do not exist for all of them. Indeed, many seem to be mathematical outputs derived from manipulations of the standard suite of marginal functions typical of the microeconomics toolkit. But mathematical outputs are not empirically validated statements.