Why Does the General Public Have Such a Flawed View of What Economists Do?

The comments on the post Neo-classical economics is dead. Sort of. and Why economics textbooks are (sometimes) ideological show there is a fundamental disconnect between what economists do and what the general public thinks we do.  There's also a fundamental disconnect on what economists believe and what the general public thinks we believe.  And it's mostly our fault.  Why?

The Economics Profession and Incentives

If you want to gain tenure as an economics professor, either Publish or Perish.  You need to publish articles in the top-tier journals.  Everything else is secondary or tertiary.  This includes promoting your research to the general public or even having research that is valuable to society at large (if it is, great, but all that matters is that it's published!).  As such, spending time helping the public at large better understand economics or the economic profession comes at a real cost to an economist.

Business schools are a bit better in this regard.  Mainstream business publications (e.g. Profit Magazine) often publish findings from academic business research.  At Ivey, for instance, incoming tenure-track faculty attend media training and there is an expectation that faculty members promote their work to the media.  I once asked a senior faculty member if media relations matters with tenure decisions and he stated "At the margins, yes.  A superstar is going to get tenure no matter what she does and no amount of media spotlight is going to save a poor candidate.  But for the borderline candidate, it is taken into consideration." 

Incentives Determine Which Economists Seek Media Spotlight

Being in the media overall at most is a slight benefit to one's career and at worst a major distraction.  And there isn't much/any money in it, particularly at lower levels.  I've done dozens of radio interviews, from CBC to local radio to NPR in the US.  All of the gigs were unpaid though occasionally I would be sent a small perk, such as movie tickets, etc.  At higher levels I'm sure there are more benefits, but I can't imagine they're a whole lot.  I can't say with a lot of certainty, as the closest I've ever got was an unsolicited (by me) first phone job interview with a TV show on Fox and the discussion never got to money.  Or to a second interview, which makes sense because I'd be horrible at the job.

Like everyone else (or perhaps moreso), economists will gravitate towards the media when the benefits outweigh the costs.  There is little direct financial benefit, so the benefit has to come from getting a soapbox to promote something else.  It could be a book, but often what is being promoted is a political candidate or party that the economist believes in.

This skews the view of the profession to the general public, as the economists they typically see have an ideological or partisan axe to grind and aren't fully representative of the thoughts of the profession as a whole.

Incentives of the Media

Like anyone else, the media too have their incentives - and the incentive is to provide a show that is interesting to their viewers and listeners.  The difficulty is that most mainstream economists have to give boring answers.

I used to be a semi-regular guest on one radio call-in-show with my topic of choice being exchange rates.  On my seventh or eighth appearance on the show, the host made a remark along the lines of "High oil prices: Good for Canada.  Agree or Disagree?"  My answer, "well, it depends..." and talked about some of the things it depended on.  I like to joke with my students that the answer to any economic question is 'well, it depends' and our role as economists is to figure out what it depends on.

As soon as the interview was over, I knew they were never going to call me back.  That's not what they wanted - they wanted someone to either excitedly agree with the host OR someone who would argue strongly against.  That's entertaining radio.  But a sensible, level-headed analysis of the costs and benefits?  BORING.  They never did ask me to appear on the show again.  I don't blame them - if I was in their position, I'd look for someone else.

The economists who stay on the air tend to be the ones who are most willing to promote a black/white worldview.  That tends to skew the view of the general public, as most economists tend to see everything in shades of grey.  But shades of grey makes for bad TV.

Comments

[Nick Rowe]

An alternative theory:

Because the general public has never taken the time to read an intro economics textbook.

Take Tom Slee. (I apologise for picking on you again Tom, but I think you do illustrate my theory so very well). I spent a few minutes skimming Tom's blog. http://whimsley.typepad.com/ . Tom is clearly very intelligent, well-educated, and widely-read. (See for example his review of Akerlof and Kranton). Plus, he has the sort of analytic brain that could handle economics easily (economics is tougher for some people than for others, even those who are otherwise equally intelligent). I think he could learn basic economics in a couple of days by reading any intro text. But I think he has never done so.

If my theory is correct, it does however raise the question: why? Is it the fault of the textbooks (as philosopher Joseph Heath would I think argue -- their tone, perspective, and assumptions turn off people like Tom, as they did Joe as a student)? Or is it the fault of the public (economic opinions are like assholes -- everybody's got one)? Or, is it because economics is not a compulsory subject in schools (God forbid, but I have to put this option out there)?

Dunno.

[Nick Rowe]

Actually, a really interesting experiment would be for someone (Tom or anyone) who has never read an intro econ textbook, to set aside the day it would take to read it, holding his nose if necessary, and then tell us what you think.

[Kien Choong]

Hi, Mike and Nick. I think to the lay person, a "professional economist" includes economists the economists employed by the private sector (such as banks) and the public sector. I get the impression (perhaps mistakenly) that academic economists don't consider these private sector economists to be "real" economists. Is that correct? Certainly, your discussion lamenting the public's flawed view of what economists do seem to omit the role of private sector economists, particularly banks and consulting firms, that the media seem to turn to regularly for commentary on the state of affairs. Do you think the public also has a flawed view of what these private sector economists do? Or is your lament confined to academic economists? (In which case I suspect the lament applies to most if not all academics, not just academics who are economists.)

[Tim Worstall]

"I like to joke with my students that the answer to any economic question is 'well, it depends'"

The thing is, that isn't actually a joke. Simple, plain, unvarnished truth.

[Frances Woolley]

Nick, didn't P.J. O'Rourke do the kind of non-economists reaction to economics that you're thinking about in Eat the Rich?

Mike, the differences between Canada and the US are interesting.

In the US, I think the 'public economist' field is much more crowded - look, for example, at the economix blog in the New York Times as well as the freakonomics blog in the same paper. There's lots of theories one could advance about that, e.g.
- in the US the average economist is more to the centre of the political spectrum whereas in the Canada that is not true, primarily (but not, I think, entirely) because the political spectrum in Canada is so much to the left of the US political spectrum
- the Canadian economics community is relatively small and intimate. It's easy to know just about everyone working in your field. There's no need to compete in public fora to get your voice heard - just call up your former student/classmate/neighbour who's now a senior bureaucrat at the Department of Finance. (Did you notice that in my last post I carefully said things like "Tom Slee thinks Parkin and Bade's book is ideological" rather than making any comment about what I think? That's partly because I am almost certain to run into Mike in the next year or two and he could possibly have read this blog.)
- the cost of domestic labour is much lower in the US so people don't spend so much time doing housework

[Peter T]

Hmmm. Well, the intelligent general public cannot help but notice that the "economists" who appear on the media will give the same reasons for why something (stock market, oil prices...) are up as they are down or sideways. Which tends to put them in the same class as astrologers and consultants.

I can read Adam Smith with appreciation, sometimes follow Marx, see what Keynes is saying. But the times I have tried to read a basic economics text, I give up after the first few chapters - I cannot believe that anyone thinks what is outlined therein is a description of any known world. At the same time, I admire the intellectual virtuosity.

Maybe ordinary people resent what is done to them in the name of economics, and have an inkling that somehow academic economists are connected to the whole enterprise?

[tomslee]

Nick - thanks for the compliments, but I may have misled you. I borrowed Samuelson several times from our local library some years ago, and even have a copy of Varian's Intermediate Microeconomics on my shelf. Samuelson did seem less ideological than Parkin and Bade, but maybe I mean his ideology was closer to mine. That said, I don't think you learn things the same way when you browse books as when doing a course (I did hardly any problems, for example), and by the time I did read it my politics were that much more fixed and I found myself arguing against the textbooks far more than I would have done as a student (unlike Simon, who argues against anything).

Personally, I studied chemistry instead of economics because that's what boys who got good marks did in England in the '70s - and,yes, because Economics was not a school subject. That obviously didn't hold back those with imagination, but I didn't fall into that category.

But I think chemists have some of the same frustrations as economists. Doesn't everyone realize that *everything* is a chemical, not just pollutants? Why does everyone think chemists are evil scientists behind BP catastrophes and thalidomide? Why don't people understand that a synthesized molecule is identical to the same molecule extracted from a plant? But (especially now that I've been out of chemistry for a long time) I think chemists were mistaken. Yes, everything is a chemical, but chemists talk about "the chemical industry" too, and what is wrong with chemicals = products of the chemical industry? And synthesized active ingredients in medicines, it turns out, are not always identical to natural extracts in a medical context because the secondary ingredients differ (sometimes better, sometimes worse).

If I had to think of a place where economists get the same self-inflicted damage as chemists, I'd say it is in the use of (Pareto) efficiency as both a technical term and in public utterances (with its everyday meaning) as a desired end goal, and in the dismissal of "fairness" as a fuzzy concept that has no real meaning (I know, I'm caricaturing).

And now I have to respond to pecuniary incentives, so I won't be able to respond during the day.

[Adam P]

Nick, you really think macro can be understood in a day?

As far as I see the problem is well captured in this quote from Peter T above:

"But the times I have tried to read a basic economics text, I give up after the first few chapters - I cannot believe that anyone thinks what is outlined therein is a description of any known world. "

The quote is just plain false and reveals that Peter simply didn't understand what he was reading. However, when I was in grad school (getting a Phd in economics) I felt exacty the same way. I didn't understand the models (I did understand the math but found it trivial), I was not a very good student.

Since I left school and have worked in the markets and read a lot more economic history the thing that has absolutely amazed me on a continual and ongoing basis is how good a description of the world these models actually are. The thing is though, you need a certain depth of understanding, a simple minded, completely literal reading of the models gets you nowhere.

[Whitfit]

One person who drives me crazy in the Canadian media is Michael Hlinka, who does business and economics commentary for CBC radio. He takes strong, often unsupported positions. He may be entertaining to the person who knows nothing, but he is of the type that will take strong positions with no discussions of the counterargument or explaining the "it depends" issues or taking into account any shade of grey.

I would like to think the CBC would have some more intelligent commentary on business and economics. But, they don't.

[Stephen Gordon]

I think it's time I pointed out that Tom Slee has actually spent a lot of time thinking and writing about economics, albeit from a non-economist point of view. His book even attracted the attention of Alex Tabarrok at Marginal Revolution.

[Nick Rowe]

Kien: good point. I do think of private sector (and public sector) economists (or, at least many of them) as real economists (and some are extremely good too). But I confess I did have academic economists in mind when thinking about this.

Frances: good example. As you know, I'm a big fan of P.J.. But his is perhaps not exactly the sort of analytical mind that would take to economic theory easily.

Peter T: "But the times I have tried to read a basic economics text, I give up after the first few chapters - I cannot believe that anyone thinks what is outlined therein is a description of any known world."

This is similar to what Joseph Heath said. He thought the assumption that people are selfish was so badly false that he lost interest as an undergrad. Care to expand on what you saw as so unbelievable?

(I might as well give my response now: "all models are false, blah, blah.."!)

Tom. So much I agree with in your comment. My God, so you're another 70's Brit too? (I was good at Physics A-level, but lost interest, and ran out of both interest and horse-power in maths. And there were so many other distractions for a teen-age boy in the early 70's.)

[Nick Rowe]

Stephen: Damn! You could have said that earlier!

[Patrick]

I think it's a losing battle.

People's brains only have so much bandwidth to devote to material that doesn't relate to how they earn their bread, and for most people economics just isn't that important.

I suspect that most people get their impressions about economists from the media. In the media you mostly see business economists (who often get macro wrong) who either seem to be shilling for big business, or who are presented as weathermen of sorts predicting just how miserable we're all going to be (no soup/pension/job/healthcare for you!).

Then when things get ugly (e.g. fall 2009/winter 2009), the policy prescriptions offered by economists who really do know something are so counter-intuitive relative to most people's experience (e.g. gov't should dissave in a liquidity trap), that people simply refuse to believe them, even if they are absolutely the correct thing to do.

You're hosed no matter what you do.

[Adam P]

Nick, again. Do you really think macro can be understood in a couple days? Even undergrad macro? Really?

[Stephen Gordon]

Nick: I kept waiting for Tom to say so himself, but I suppose modesty forbade him from bringing it up.

[Nick Rowe]

Adam P.: I'm not sure. In one sense, I have never really understood it absolutely completely. Every time I teach ECON1000 I seem to learn something new, even about the most basic macro. But I remember as an undergrad, suffering a sleepless night, I read the whole of Lipsey (I think it was) cover to cover. Suddenly it all came clear. But did I *really* understand it, no, not really. But I think anyone with a (say) science or engineering background, used to thinking of the world in terms of abstract models that cannot capture all of reality, and comfortable with graphs, could get the basics in a couple of days.

That said, your own comment above, that it didn't really sink in for you until you started working, strikes me as very important. But your undergrad was in something else? Because (and this relates back to a point Frances made earlier in comments) I think that those who miss intro economics really miss something important. Even though everything is covered again, with far greater formal rigour, at higher levels.

I only felt I *really* understood economics after I started teaching intro. Because I had to try to explain it to others.

God, I don't know.

Stephen: Tom's a sleeper/Q ship. I shall be tougher on him in future (or try to be) ;-)

Patrick: yes, the mental bandwidth problem is very real. Come to think of it, I have never read any book on intro biology. I have no idea where I learned the Darwinian theory of evolution, for example. Yet I think I understand the basics of it. I wonder if I really do?

[Just visiting from Macleans]

I posted this link quite some time ago, but I thought I'd repost here:

A debate on TVO's The Agenda The Limits of Economics

I found the debate informative and entertaining. The behavioural economist had a good go at the other economists (one academic) but they held their own.

[Mike Moffatt]

Kien: Great question! The fact I didn't even reference private sector economists in my blog post is telling. If you ask 10 different economists 'what makes some a real economist' you might get 10 different answers. One that might come up a fair bit is 'graduate training in economics', in which case the answer would largely be 'no', since most of those economists have MBAs and at best an undergrad degree in economics (but might even have an HBA or degree in applied math instead).

That being said, many of the same issues would apply to them as well - that the ones on TV are disproportionately be ones 'selling something' and for media purposes it's more important to be interesting than accurate.

[William Hayes]

For sure the general public doesn’t know what economists really do, but don’t believe academic economists actually know the vast doings in their own profession either. It’s impossible to keep up with developments with literally hundreds of academic economic journals. Indeed, there’s an explosion of ideological analysis and no real synthesis on how to solve social and environmental problems, as far as I can see. Frankly, economists appear as part of the problem both ways in theory and practice. For example: Take the assumption of “selfishness” (not the same as self-interest, as I see it), the pivotal theoretical principle of modern economics I believe. You’re professors: please, tell me the developments in your field regarding this key concept (Gintis & Bowles were very informative for me). And, it’d be a good idea to step out of your field and into evolutionary theory (excellent, but a difficult read is Elliot Sober & David Sloan Wilson’s Unto Others: The evolution and psychology of unselfish behavior). An easy read with a lot of empirical evidence is Frans de Waal (world's top primatologist) The Age of Empathy: Nature's Lessons for a Kinder Society.

[Phil Koop]

I am having trouble accepting your premise in any but the most banal and inconsequential interpretation. Any specialist - doctors, lawyers, engineers, philosophers, politicians architects, police, etc etc - thinks that "the public" has a distorted and naive view of their profession. The specialist has hard-won, recondite knowledge and it is only human nature to assume this gives advantage, even if one's specialty is astrology or naturopathy; certainly it is appealingly self-flattering to regard criticism from this perspective. Working in finance, I know this myself all too well. (And for my purposes, "the public" includes professional academic economists.)

Things always look different from the inside. Is the public really so wrong in its appreciation? I'm not so sure. One thing is certain: the public has a firmer grasp on the difference between a physicist and an economist than Mike Moffat. But except for that aberration, I would be hard pressed to single out the economists for special distinction.

[Ed Seedhouse]

I think that one reason people don't understand macro is that economics doesn't have an Isaac Asimov explaining it. I read "The Intelligant Man's Guide to Science" in my twenties along with much of both the fiction and non fiction that he wrote. That left me with a good general idea of how Chemistry and Physics, Biology and the rest of the world work.

Also, of course, Economics is not an empirical observational science but it's practicioners often act as if it were.

[Stephen Gordon]

Phil Koop: The crucial difference is that in most fields, outsiders are nowhere near as willing to ignore what the insiders say, make stuff up off the top of their heads and pass it off as a deep insight beyond the feeble wit of insiders to understand.

[William Hayes]

With respect professor, this isn’t fact (“the crucial difference”) it’s an opinionated belief as it stands. It appears you're making stuff up off the top of your head and passing it off as fact with weak wit. Now, what “appears” to me may be wrong and as someone who loves to learn would like to know how you evidently know this is “the crucial difference”?

[Blikktheterrible]

I think one popular view of professional economists is that when it comes to anything or real significance, anything worth more than a passing mention on the news, economists rarely come to any consensus, and that when they do, that consensus falls apart every 10 or 20 years. The evidence for that is that whenever an economist speaks on TV, one can easily find an economist online who sees things in exactly the exact way. What do you think of that assessment?

[Peter T]

Stephen, Nick and others

A blog post is too short for a deep reply. Let's start by observing that the test of a theory is not what it explains, but what (within the field it purports to cover) it does NOT explain. All moderately plausible theories explain a lot. This should be no surprise - they would not be plausible if they explained little or nothing. A good set of theories may not explain everything but, within their domain, they should not have large areas where they are obviously false.

I take economics as trying to explain how people produce and consume what they do. My issue with the approaches I see is that the assumptions are blatantly unrealistic, and the common theories simply do not cover a great deal (in fact, the majority) of either production or consumption in any known human society. The usual approach is to take market exchange among individuals as the paradigm, and then treat all other means of production and consumption as deviations (distortions) from this. This simply does not fit with what we know about human society historically, sociologically, anthropologically or biologically.

Two test cases:

1. how much production/consumption is actually done through markets? (according to OECD and any economist who has looked at it- about a third of the total). Explain why not.

2. Use maximisation of individual utility to explain war - one of the oldest and most constant features of human society - and the conspicuous role of war in production and consumption.

Mind you, I am not dismissing the whole enterprise. I just wish economics would begin by acknowledging that it presently explains only a small part of the whole, and that imperfectly, and then show some signs of a serious approach to what it does not explain.

[Nick Rowe]

Peter T:

I like your 2 test cases. I think those are good questions. They are good questions in two senses: why doesn't economics say much about these questions? and, what is the economist's answer to these questions?

Let me try.

1. We sometimes define economics as the study of the allocation of resources -- how societies decide what to produce, how to produce it, and who gets to consume it. But economists spend most of their time talking about markets, and as you observe, only some of these decisions are handled by markets. Now some economists do study households/family (Frances for example), the internal workings of the firm, and governments, and non-market economies. But your point still stands. The total amount of time economists spend on non-market allocation of resources is nowhere near proportionate to the importance of non-market mechanisms in allocating resources.

My gut response: yes, but market allocation is so puzzling, and so in need of explanation, especially since nobody is in charge. Robinson Crusoe's allocation of resources just isn't very interesting, from a social science point of view. He just does what he thinks is best. What more can we say? And formal organisations, like governments or firms, at least have some sort of internal explanation, some sort of organisation chart, that give the "official" explanation of how decisions get made and resources allocated. There is no "official" explanation of how markets allocate resources. The markets themselves are silent. Who do we ask?

We did what most needed doing, and what we thought we could do. And economics could be defined as "whatever it is that economists do". It's a circular definition, of course, since it begs the question "what is an economist?" but it says something useful. You can think of economists as people with a bag of tools. And whenever they see a question that they think those tools might be useful at tackling, one of them will have a go, whether it's an "economic" question or not. And they tend to ignore "economic" questions if they don't see any way to use their tools.

Should economists, sociologists, political scientists etc., be defined (demarcated) according to the questions they study (an area definition), or by the tools they use to study those questions (a methodological definition)? The second way of defining the social scientists works quite well in practice, but it does raise a puzzle: suppose the economic method (e.g. methodological individualism, utility-maximisation, equilibrium, etc.) were the whole truth about human interaction (just suppose). What then are the other social scientists supposed to do? Succumb to economic imperialism?

2. War. What is fascinating about war (and strikes and other conflicts) from an economic perspective is that it's so blatantly inefficient. Resources get destroyed, and both sides presumably know this will happen in advance. So there must always be some deal they could make which could make both sides better off than if they went to war. So why don't rational players choose this deal, and forgo war? Maybe both sides think they can win (or, at least, one or both sides overestimates its chances of winning). But this seems to violate Aumann's agreement theorem (with common knowledge of rationality, the very fact that the other side rejects this deal, and wants to go to war, should be telling you that maybe they know something you don't know, so maybe you should rethink your beliefs about your chances of winning).

One of my thesis papers was actually an equilibrium theory of wars and strikes. (War exists because the only incentive-compatible way to establish an agreed-on boundary is to destroy resources equal in value to the resources that both sides claim. I don't think I really succeeded). Yes, war's a puzzle. I'm not up on the economics of war. My guess is we haven't made much progress (in explaining why war exists).

"I just wish economics would begin by acknowledging that it presently explains only a small part of the whole, and that imperfectly, and then show some signs of a serious approach to what it does not explain."

Yep. We do tend to ignore stuff we cannot explain. But maybe it's better than repeatedly bashing our heads against a problem we can't solve yet. We "black box" it, and get on with the things where we can actually get somewhere. Leave it to the next generation.

[Nick Rowe]

Oh, and going back to non-market production, this was one of the questions Coase addressed. Why is there (for example) a boundary between the firm and the market? Why aren't all decisions handled by individuals in markets? Why isn't there just one big firm (communism) that handles everything? Coase's answer was "transactions costs". Where transactions costs are low, you get markets. Where they are high, you get non-market allocation. It was more the beginnings of an answer, than an answer. Though people have been trying to flesh it out since then.

[Peter T]

Nick

thanks for the reply. Yes - the answers make sense. Except that economics is not just an academic pursuit. All governments have economic advisers, trained in economics, and make their decisions at large part under the guidance of these advisers. And some governments have been led by economists. When "economics' as a discipline lends authority to eg the post-Soviet experiment, some millions die (and if Marxism is thought of as an economic experiment, the same is true of the Soviet period). When it endorses markets as "efficient", and they are not, or are applied to areas where they are inappropriate, some millions of Americans lose their homes. So taking on board some insights and methods from other social disciplines might not only improve our insights into how economies work, it might actually save lives.

Incidentally, they key to war is that it is not an individual activity, but an emergent "property" of social groups. The calculation is not about what any person might get or lose, but what the group stands to gain or lose as a group. What other emergent properties of groups operate economically?

[Ian Lippert]

I'm really liking this discussion, just to add my two cents

I think I would simply define economics as the study of consumer behaviour. I would define this more broadly than usual to encompass production, consumption, distribution and trade. Not sure if consumer is the right term but it seems for a general definition everyone is a consumer at some level, consumption is the ultimate end of all market transactions. I like this definition because it addresses the criticism that economists assume people are selfish. We dont assume people are inherantly self-interested, simply that they are self-interested when engaging in market transactions and if we are limiting ourselves to the study of these transactions we can safely make the assumption that people are self-interested.

Another thing to address is that there really doesnt exist a thing called 'the firm' or 'the government', these are simply descriptions of relations between people. All decisions are handled by individuals, its just how those individuals relate to each other that determines if they are part of the market or government. I hope that makes sense, but to give an example of what im trying to get at, the only thing that differentiates market transactions from government transactions is that one is a voluntary transaction between two people and the other involves a third party with the right to initiate coercion upon the transaction. You could simply label them as voluntary market transactions and coercive market transactions. So I would argue there is no all knowing central planner within government either, just people that know more than the average person and have been given the right to force others to transact in their best interests (hopefully this is the case in reality, although the opportunities for abuse are pretty obvious). By this arguement it follows that government allocation should be just as puzzling to you as market allocation, I really dont think there is an inherant difference between the two.

As for war, I think it becomes more understandable under social-psychological analysis that economics analysis. Although there is a time and place for war, the majority of wars are so rediculously wasteful and pointless that I think it defies typical rational economic explanation. I think it more a classic case of people taking on the values of the society they grow up in, values that are often promoted by those that profit from war and the complete control of the economy that often comes with it. Luckily in the western countries war has almost completely diminished but its hard to look back at almost all wars before WWI/WWII (and many of the wars that came after) as anything but rent seeking by those that profited from war.

[Tom Slee]

I am also really liking this discussion.

Nick - so you are also a product of Harold Wilson's "white hot heat of technological revolution" and Slade? Glad to meet you.

Peter T. - "according to OECD and any economist who has looked at [market production] - about a third of the total" This surprises me. Do you have any references? I'd be interested in them.

Steven - "in most fields, outsiders are nowhere near as willing to ignore what the insiders say". I assume you defer respectfully to criminologists in discussions of crime, and that you defer to sociologists on social policy questions? :)

[Stephen Gordon]

Oh yes. I feel especially sorry for criminologists.

[20th century workforce]

Ian I like your description of gov as coerced markets. Even if economics is going to hide from non-market allocations of resources, it still has to define them to know where the boundaries are; where markets are efficient and where not. Health insurance is better universal as is non-piecemeal MRI provider compensation, the goal should've been to deduce this before USA empirical observation. Defining economics narrowly only addresses 1/2 the equation. You get the supply signal with market forces prices, but demands are shaped by income and info. Just going with price signal reinforces bad income and info distributions, look how USA universal health killed by their rich using wealth to stupidify America.

[Nick Rowe]

Peter: yes, when economists get it wrong, people die. Sometimes millions of people. And we cannot evade responsibility for that. And maybe we should be more like engineers, wearing those iron rings from the bridge that collapsed (only when our bridges collapse they kill far far more people).

Marxism was an economic experiment. Tens (hundreds?) of millions died as a result. My one solace though, when economists screw up again, is to remember that (mainstream) economists eschewed Marxism. There have been very few Marxists among western economics department. The same is certainly not true of other social sciences. They are, and have been, heavily dominated by Marxist thinking (that's perhaps less true in the US). Put it this way: if the sociologists had been in charge of western civilisation, we would now all be starving to death in the gulags.

That is an appalling indictment of the other social sciences, but I think it's largely true.

So when you say that economists could learn from other social disciplines, you may be right, of course. But you could also be very very wrong. It depends what we learn. Sure, if we were smart enough to learn the best, and ignore the rest. But are we smart enough to distinguish?

Taking the social sciences as a whole, the people who are supposed to understand better than regular people how society should best be run, and then thinking of the influence of Marxism within the social sciences, and its appalling consequences, I think "Christ! Let's put the engineers in charge of society".

The big question of the 20th century was "Capitalism vs communism" (Add in "vs fascism/Nazism" in there too, if you like). We got that one right. The other social scientists didn't. I'm really proud of that, even though we screwed up badly in so many other cases.

Take Argentina in the 1990s, as a small example of a bad policy mistake. Some economists said that pegging to the US dollar was bad policy, and would lead to tears. But even those who thought it was bad policy, couldn't really prove, or even argue totally convincingly, that it was bad. We really didn't know. It worked fine for Hong Kong! So, as a profession, we failed. Could the sociologists and political scientists have helped us prove that it wouldn't work in Argentina, because Argentina is so different from Hong Kong? Maybe. But I don't have much confidence. After the fact I'm sure they could come up with many reasons, just as we can, with the benefit of hindsight. But beforehand?

Back to war: "Incidentally, they key to war is that it is not an individual activity, but an emergent "property" of social groups."

I disagree. Individuals fight too. Understanding individual costly conflicts is just as difficult.

But (again) you have a point. I read a book on the 1945 surrender of Japan, where your point applies. It was really, really hard for Japan to surrender, even if a majority of individuals, including those in power, wanted to. The first person to advocate surrender would be shot, and someone always has to go first. And anyone who didn't agree with shooting him would be shot too, and so on. So there's a game-theoretic coordination problem. (Economist Timur Kuran uses this model to explain political correctness and why revolutions happen suddenly). "Emergent properties" is another name for this sort of game-theoretic equilibrium (a name that economists don't typically use, we just talk about whether Nash equilibria are Pareto Optimal, but it comes to sort of the same thing).

[Frances Woolley]

Nick: "if the sociologists had been in charge of western civilisation, we would now all be starving to death in the gulags."

Seriously? Stalinism is not the same as Marxism.

You've spent a long time in Cuba so you know that the reason that socialist revolutions are supported by significant segments of the population is that they ensure everyone has access to basic necessities. Cuba survives precisely because Cubans don't starve. They just get very thin.

Socialist revolutions arise for the same reason that Islamic fundamentalist groups arise: corrupt regimes fail to deliver basic social services to people. You might not like Hezbollah, but it provides basic income support, schooling, etc when the state fails to do so.

[Nick Rowe]

Yes, this is a great discussion.

Tom: it must be really hard to define, let alone measure accurately, but that estimate of 1/3 market production sounds to be about the right ballpark for me. Government (federal, provincial, municipal) is around a third of GDP, IIRC. And GDP (mostly) leaves out home production, and we typically spend about as many hours cooking, cleaning, washing, shopping, cutting the grass, fixing cars, shovelling snow, gardening, looking after kids, traveling to work etc. as we do at the office. And that's for an advanced, "market economy". A lot of people are still peasants, growing most of their own food, making their own houses, clothes, etc. Sounds about right.

Harold Wilson "This doesn't mean the pound in your pocket will be devalued" (He got a bad rap on that one). And Slade were just bad! Yep, similar vintage. I went from St Albans school to Stirling University in 73, then to UWO and Canada in 77.

Ian: "We dont assume people are inherantly self-interested, simply that they are self-interested when engaging in market transactions and if we are limiting ourselves to the study of these transactions we can safely make the assumption that people are self-interested."

That reminds me of something David Laidler once said. IIRC (I probably don't) it went something like this: the Germans had a big Germanic discussion about "Der AdamSmithProblem" - how could Smith consistently assume selfishness in the Wealth of Nations and not in the Theory of Moral Sentiments? It's a non-puzzle. It's not selfishness, but "non-tuism" ("tu" = Latin for "thou"). In some contexts (deciding what I want to eat, or playing card games) things can work better if we just do what's best for us, and set aside altruism. It doesn't mean we are selfish when we try to win at cards.

But there's another take. Suppose everyone were perfectly altruistic (i.e. they valued any other person's utility as much as their own, like Act-Utilitarians, for example). Game theory (and all social interaction) would be very very different. There could be no conflict, only the occasional coordination game where there are two optimal Nash Equilibria. It would be as if every person had exactly the same preference-ordering over outcomes. As soon as you depart from that assumption of perfect altruism, even in the slightest, conflict becomes possible, Nash Equilibria are not always Pareto Optimal, and social interaction becomes genuinely interesting. So you might as well go the whole hog and assume people are selfish, because it amounts to the same thing. In any case, philosophically, how could you ever define "selfishness" except by saying that different people want different outcomes? Imperfect altruism is theoretically indistinguishable from selfishness. And would anyone want to build economics on the assumption of perfect altruism? (Nope).

[Nick Rowe]

Frances: yes, I think I'm serious. I always saw the fight between capitalism and communism as a very close thing. Maybe Britain in the 1970's influenced my thinking. I believed the enemy propaganda. I thought they would win ("communism is inevitable", though more on Schmpeterian grounds than Marxian). I was stunned when we won. It wouldn't have taken much for Western Europe to fall. Maybe the US (and Canada?) could have gone on alone for some time. Putting the sociologists in charge of western civilisation would have been plenty to have tipped the balance.

And Marxism is not Stalinism, but it does seem to lead to it (Mao, Pol Pot, etc.) They let enough people starve until the survival of the regime (against internal or external threats) became threatened, then backed off a bit. I think I saw this in Cuba on my second visit (94/5?, at the beginning of the first MA cohort). The balseros were still leaving (and the one I saw washed up on the Malecon was clearly desperate enough to risk death at sea). This was just after the riot when they broke into the Hotel Deauville(?). They were very close to starvation, and social order was breaking down. You could feel and see it on the streets. All the usual behavioural norms were being abandoned. Then they opened the Mercardos.

I think the only reason fewer Cubans died than Russians is that Cubans are harder to control than Russians. They don't obey orders. So Castro had to lighten up earlier than Stalin.

[Frances Woolley]

Nick,

Whatever kind of ism you're living with, people try to do what's best for themselves, their families and others. People make choices, usually more-or-less rational ones, to do the best that they can given the constraints that they're under.

Whatever kind of ism you're living with, there is some system of property rights. It's just a question of what kind of rights people have, and who has those rights.

My great-great-grandmothers might have lived in a so-called capitalist society. But as married women they had no right to own property.

The enemy is not communism or capitalism, but oppression, and oppression can come in all sorts of guises.

If you don't think capitalism can be oppressive, read about the treatment of workers building the railroads, or in the mining towns out West during the depression.

[Adam P]

Frances Woolley: "Whatever kind of ism you're living with, people try to do what's best for themselves, their families and others. People make choices, usually more-or-less rational ones, to do the best that they can given the constraints that they're under."

Peter T: "I take economics as trying to explain how people produce and consume what they do... The usual approach is to take market exchange among individuals as the paradigm, and then treat all other means of production and consumption as deviations (distortions) from this."

All this discussion and the disconnect remains. Frances is is describing how economists view the world, purposeful choices to do the best onecan under constraints. We do not always assume that the objective is simply to consume the most possible (though in many contexts we do because in many contexts it is).

Peter T is not describing economics, he apparently seems to think it doesn't go beyond the first model one learns in the first week of the first econ course one takes as a first year undergrad.

[20th century workforce]

If everyone was perfectly altruistic it wouldn't change too much unless psychic. Many people are driven to create out of, err, drive. Einstein's uncle gave him a freetime job. I doubt extra compensation beyond that family GAI would've motivated him much further. The initial supply signals work fine if market failures accounted.

Demand is quantized, are 7 billion people. You need purchasing power to live and more to be educated/creative. The weaker the utilitarianism (altruism and self) and trickle-down consumerism of a group of people, the more they should be taxed to pay for purchasing power of poor. IDK just how rich a society needs to be before switching from welfare to retrain/job-search, to just $10000 PPP GAI...Under USA's present wealth distribution, 1% wealthy as lowest 95%, I doubt Einstein's Uncle would've been middle class enough to give Einstein patent clerk position. If this selfish behaviour were measured, higher rich taxes and safety net would've given 2008 Einstein a chance.
Quality-of-living is a direct component of demand, while initial supply is merely a derivative of quality-of-living. If you let the price/quantity equilibrium happen without inserting a Cosmological Quality-of-living Constant in the demand side of equation....

[Adam P]

Nick, what is Stalinism? Marxism at least is a theory of how best to organize society, is Stalinism?

What exactly do we mean by Stalism?

[Frances Woolley]

Adam P:

"All this discussion and the disconnect remains. Frances is is describing how economists view the world, purposeful choices to do the best one can under constraints. We do not always assume that the objective is simply to consume the most possible (though in many contexts we do because in many contexts it is)."

I think you must be agreeing with me, since doing the best that one can for oneself, one's family and others whom one cares about is certainly not the same as consuming as much as possible. That people make choices can be criticized as being tautological, but I don't see how it is wrong. People act. They do one thing and not another. That's a choice.

Now some choices 'cake or death' are better than others 'slavery or death'.

Oppression is about having lousy choices.

[Adam P]

Frances, of course I was agreeing with you. I think you misread what I said.

[Nick Rowe]

Adam: (I'm not actually sure that Marxism *is* a theory of how best to organise society, even though many Marxists act as if it were such).

I don't really know, but I think there isn't much of an "ism" to "Stalinism". For my purposes, I think I would define it as "rule by some paranoid totalitarian terroristic genocidal nut-job who at least purports to follow Marxism, like Stalin".

That's definitely one question on which I would at least listen to the Poli Sci.

(Off-topic: I was just thinking about your post on the Law of Excluded middle, and about infinite asset prices.)

Frances: What's different about Capitalism is that it does (i.e. should) allow different forms of social organisation within it (the family, firms, hippy communes, etc. And it has the right of free contract (the right to alienate your rights).

The biggest threat to freedom in capitalism is deficiency of aggregate demand, for so many reasons. It's no accident you cite the Great Depression. AD deficiency turns the market economy into a game of musical chairs, where each individual can choose his chair, but there aren't enough chairs (AD) to go round. So there's always somebody left over who can't choose. Maybe that's one reason why I'm a short run macroeconomist.

And marriage can make balseros look like a good option!

C20th: I'm not sure we would even need money, if everyone were perfectly altruistic. I'm not sure we could even talk about "demand" and "supply" and "purchasing power" in anything like the same sense. We would still face the Hayekian problem of coordinating millions of people's knowledge and actions, and might ask people to pretend they are selfish to make the whole thing work, and ask people to use markets. You wouldn't need taxes, (and taxes wouldn't create inefficiencies anyway). People would just donate voluntarily.

[Frances Woolley]

Adam P, yes, I did. Sorry. Nick's comments got me a bit steamed up.

[Just visiting from macleans]

I think "Christ! Let's put the engineers in charge of society".

If you look at the top membership of the Chinese Communist party - most are engineers. Probably why they can raze whole cities and rebuild from scratch so efficiently. Of course the displaced might not be so quick to exclaim "Confucius!"

[Patrick]

The revolutions market is supply constrained, highly illiquid, and suffers from information asymmetries. A good revolution isn't always available when you need it, and many of those available are lemons. So you take what you can get. In 1917 the Bolsheviks probably looked like the best option to many, considering the context : very high inflation due printing to finance WWI, the failure of the 1905 revolution to deliver any improvements, the Bloody Sunday massacre, ridiculous levels of inequality etc...

[Jim Rootham]

Stalinism is an extremely centralized political-economic control system. It is the developed and established form of government derived from left vanguardism. Lenin (hence Leninism) wrote the theoretical basis of what was referred to as democratic centralism. Stalinism kills off the democratic part of that.

Marxism comes in two parts. The analytic part and the prescriptive part. The analytic part holds up pretty well, not perfectly but enough to have an argument about it (in particular the part of the theory that says unrestrained capitalism will always concentrate wealth to the point of killing aggregate demand). The prescriptive part, not so much.

Then there is the Eileen McGann version of meritocracy: "Folk singers in the government, and all the laws must rhyme".

Economics suffers from a subject partitioning problem. Politics (the exercise of power) is too deeply entangled in economics (the allocation of resources) to have them be really separate subjects.

Free markets do not absolutely require capitalism. I live in a housing co-op, that's really an anarchist organization. Big tent anarchism, anybody who puts Lord Acton's dictum at the centre of their political philosophy is inside. The Catalans are still working on scaling it up.

And, yes, the Pollyana view of capitalism is very much on display here.

Two things that annoy me about economists when they start making policy pronouncements is their unwillingness to temper their recommendations given what they know about the weaknesses of their models (the oligolipolistic nature of modern economies in particular) and their obliviousness to constraints of the physical world.

[Blikktheterrible]

Frances, are you claiming that communism is not objectively inferior to capitalism?

Returning to my earlier question, do economists agree on the answers to the big/important questions? If so, are they generally correct?

[Adam P]

Nick, on the excluded middle:

http://canucksanonymous.blogspot.com/2010/08/bank-of-englands-excluded-middle.html

[William Hayes]

Regarding communism being objectively inferior to capitalism. When I was young I had two selfish pigs named Commie and Cappie. I’d put down a common food pile – and yup, Cappie was objectively superior to Commie. She could nose her sister out every time.

[William Hayes]

Humans, individually and collectively, are not by nature selfish pigs, I believe. They are by culture, reinforced by societal economics, theoretically and practically.

[Jim Rootham]

Compare the infant mortality rates between Cuba and Jamaica.

[Rob]

Lesson of the thread:

Economists are really, really, appallingly bad at history and politics. Frances gets a pass for being the lone voice of reason.

[Frances Woolley]

Blikktheterrible - I don't think communism v. capitalism is a particularly useful way of thinking about the world. I don't even know what a capitalist society looks like. Sweden? India? Haiti?

Is China communist or capitalist? Well, it's governed by the communist party, some markets and some aspects of people's lives are very tightly controlled, so that makes it communist. But some markets are unregulated and competitive, which tends to make it capitalist.

And which is better depends on who you are. If I had to live in the bottom 2% of the income distribution, I would pick the USSR over the US.

Lest you think this is grossly naive - yes, I did travel in Eastern Europe while it was still communist. I remember trying to explain to people what unemployment was (this was the '80s). They just didn't get the concept. They really didn't believe us when we tried to explain yes, you can be smart and educated and hard working, and still not be able to find a job.

[Blikktheterrible]

Frances, I believe I was in kindergarten when the Soviet Union collapsed, so I had no opportunity to see what it was like in the Soviet sphere of influence. I feel pretty confident that no textbook I ever had in US public schools expressed any of what you just said about communism. The implicit message always seemed to be that communism was worse for every segment of the population. By communism, I mean the system in the Soviet sphere as well as China under Mao.

I want to clarify that my question wasn't intended as any sort of anti-communist dig on you. I've just never heard a Western economist make these sort of statements, so I wanted to be clear about what you were saying. I personally favor economic policies that are best for the poorest of the poor, but I had always gotten the impression that complete state control failed to do that (especially in the long run), hence the failure of the Great Leap Forward. I'm not saying that you have single-handedly changed my view, but your commentary is totally different from that of anyone I have ever considered worth listening to.

[Blikktheterrible]

"Humans, individually and collectively, are not by nature selfish pigs, I believe. They are by culture, reinforced by societal economics, theoretically and practically."

I don't think any mainstream economic theory of the last 100 years has relied on the assumption that humans are "selfish pigs". I don't think that's an issue that economists concern themselves with professionally. I could be wrong.

[Peter T]

Tom Slee

On markets: Google OECD Household production. Or see eg Butlin on the Australian economy, or the Australian Bureau of Statistics (and similar bodies in other countries) studies of the size of the household sector. All these put household production of goods and services at equivalent to around 30-40% of GDP. Figure in that government is, in most developed countries, 25-30%. Factor in off-market transactions inside firms, and add the not-for-profit sector. Then make some allowance for the market activities of government and households. Apparently we do not, even in "market economies" trust the market to actually produce and deliver most goods and services.

The comment that "government are coerced markets" cracked me up. It took a lot of expensive mis-education to produce that one.

I thought Nick's reply to my comment was thoughtful and honest. It basically said "economics has an incomplete understanding of a part of the relevant phenomena".

My ask is that some equivalent words accompany all policy advice. As one of the bunnies embarked on the ship, I prefer the officers to appreciate that they are using dead reckoning in poorly-charted waters.

[Jim Rootham]

Part of the problem of economists bad standing in the world is that some of the representation of what they think and do is made by the Gordon Gekko's of the world. The willingness of economists to separate themselves from that representation is in question.

[William Hayes]

"I don't think any mainstream economic theory of the last 100 years has relied on the assumption that humans are "selfish pigs". I don't think that's an issue that economists concern themselves with professionally. I could be wrong."

Pigs appear by nature selfish with little or no consideration for others. Humans are not. With humanity ego (regard for self-interest) and empathy (regard for others-interest) evolve together in children. They learn selfishness (lacking consideration for others; only concerned with one's own personal profit or pleasure).

Yes, professional economists haven’t been concerned with selfishness, but they’ve been inadvertently culturing it. And more broadly, no materialistic philosophy, communist or capitalist, has thought about it – though, in my view they are collectively unconscious slaves to its passion: perhaps from observing Commie’s and Cappie’s piglets competing for the best nipples on mum.

Economists don’t need to rely on selfishness though I think they believe they do. Perhaps without it they believe the whole damn theoretical system will fall apart. Not so: I think competing self-interest with personal sovereignty, specialization, free and fair markets are needed to create a valid economics.

[Blikktheterrible]

I have to say that I haven't had the same issues with economics that most of the other posters have had. My academic experience has consisted of just two introductory econ classes.

I don't remember having any problems with the assumptions made in introductory micro, except maybe continuity of supply and demand curves, but I was willing to assume that the differences would aggregate out. None of the "philosophical" assumptions bothered me at all.

I did have some major issues with introductory macro. There were two big ones and they both had to with the relationship between money and the real economy. The first was the assumption that the velocity of money is independent of changes in price, money supply, and GDP. We were given essentially no evidence that that was the case, which left me feeling like there was no reason to believe in the Quantity Theory of Money. The second issue was why an increase in the money supply should cause an increase in aggregate demand. In both cases, I would've been mollified if the professor had just said that studies had shown those results to be true, but she didn't and I saw no a priori reason to think that either was true. That was where introductory econ fell flat on its face for me.

I'm MUCH more concerned with whether a model's predictions match reality than whether its assumptions do. The former is a matter of intellectual concern, while the latter is a matter of practical concern, at least if the model has predictive power.

[Josh]

I've never taken any economics; the closest I've come is reading about early theories of political economy or books by Joseph Heath. I agree that the field isn't terribly well represented in the popular (or any) media, though it's fair to say that journalists - who generally have little to no specialized knowledge - often do an appallingly poor job of representing any field. My own background is in political science, math, and stats, all of which have given way to medicine (2 years to go...) on a more or less permanent basis.

The census issue aside, the media never talks to mathematicians or statisticians, and they tend to interview and solicit commentary from the relatively rare but loud partisan political scientists (e.g. Tom Flanagan) over the vast majority of apolitical academics. I remember once during a seminar class in undergrad my prof made a remark about economics as being associated with more "right-wing" viewpoints (contrasted with sociology, etc.). I disagreed that that was actually the case, but he was of course talking about the *perception*. My view is that there are simply far too many people with "libertarian" or similar viewpoints who don't actually know anything about economics (except possibly at the level of an intro course), yet feel little reluctance to cite the field to justify their ideology. They aren't interested in models or caveats or data but in supporting a political project (the worst ones usually talk a lot about "Austrian" economics and seem to metastasize around cyberspace).

Anyway, my personal impression is that economics as a field has become too technical and divorced from the sorts of political and social questions that were on the mind of early political economists. It's a lay view, but it could be applied to other fields in social science as well. As for models, as George Box said, they're all false, but some are useful. And models with fewer assumptions are to be preferred where feasible.

[William Hayes]

"We dont assume people are inherantly self-interested, simply that they are self-interested when engaging in market transactions and if we are limiting ourselves to the study of these transactions we can safely make the assumption that people are self-interested."

Not just market transactions: also in how the economic system framed by the organization of the collective firm, which is “selfishly” bent on maximizing profits and minimizing costs. To me collective firms and collective farms represent the “fat pigs” of capitalism and communism. Both are a product of social engineering.

Are people just self-interested/selfish when engaging in market transactions? Think not. Empathy is involved and it is easily see in the flexible price (barter) and personal service public markets in Asia.

As an action researcher I set up a small trial, where there is uncertainty as to quality: my market for melons with flexible prices and personal service. Here’s what I did. Honeydew melons when ripe are not so good looking with varicose-like veins and skin a touch tacky. The vendor knows this but doesn’t know I know since I smile sweetly and ask her to pick for me. Invariably, they pick the best one. Why? The hypothesis is that they empathize with me. They don’t selfishly supply something inferior if they can get away with it and save the better to make a sale later – which is what I see happening with Akerloff’s market for lemons based on fixed prices and selfish service.

Another indication that not only self-interest but empathy is involved in the marketplace is seen with barter - and is just common sense. To barter well and be a good salesperson you need to read your customers to find a price where you both win as well find the qualities that suits the consumer. That “read” is empathy.

Another example of empathy and altruism in the marketplace is with my wife, who is a fashion designer and clothes maker. She has four price levels: a regular price, a higher one for police uniforms (she literally charges them for being corrupt) and highest price for the rich (who have way too much). For the poor and female monks she altruistically works for free. She says: “Every poor person needs good clothes to go to the temple on monk day.”

[Nick Rowe]

Blikk: "I did have some major issues with introductory macro. There were two big ones and they both had to with the relationship between money and the real economy. The first was the assumption that the velocity of money is independent of changes in price, money supply, and GDP. We were given essentially no evidence that that was the case, which left me feeling like there was no reason to believe in the Quantity Theory of Money. The second issue was why an increase in the money supply should cause an increase in aggregate demand. In both cases, I would've been mollified if the professor had just said that studies had shown those results to be true, but she didn't and I saw no a priori reason to think that either was true. That was where introductory econ fell flat on its face for me."

That's interesting (to me, as a macroeconomist, and teacher of intro).

In defence of your prof, and speaking as an economist who has spent a lot of time thinking about and trying to explain those points, I just want to say: it's hard (not all economists understand it, and none of us understand it all really fully); and it's harder still to explain. The transmission mechanism from money to AD is one of the things I have been arguing about, for example, with people like Adam P, who knows a lot of macro.

By the way, there is no a priori reason to think that V will be independent of real GDP. In general it won't be. But it works reasonably well as a very rough empirical approximation (the income elasticity of the demand for money is somewhere near one, just don't interpret "near" in the way a physicist or engineer would interpret "near" ;-) ). The higher your income, the more money you want to hold, other things equal. Suppose it's roughly proportional.

[Adam P]

Blikk, I more or less second what Nick said.

However, I would point out that in the typical undergraduate level model the assumption that velocity is constant implies that an increase in the money supply should cause an increase in aggregate demand. These are not two issues, this is one issue.

To me the constant velocity model is just a simple example that helps one see how an increase in the money supply might increase AD. After all, if M increases and V stays the same then P and/or Y must increase and if you think through the mechanism of what makes P and Y increase it, in the simple model, must be that AD increased.

Now, my "in the simple model" statement hides a lot. Basically it imposes a decentralized market structure and a certain restriction on the information that agents in the economy have. The idea here is that the increase in the money supply is not known to everyone (or its implication not understood) which rules out everyone realizing together that "well the money supply doubled so I should double my price". Thus, the "in the simple model" statement rules out that sort of co-ordinated price response.

This is important because a lot of people do believe that in real life people will respond like that (which they should if they know that the money supply doubled) and thus that money will not change ouput, only prices. However, in the absence of such a coordinated response it follows that P and/or Y only rise if higher AD drives them up. (I suspect Nick might disagree a bit with this explanation but that's my understanding of the undergad type macro model).

The important point though, (and here I'm certain Nick would agree) is that we've now made actually a large amount of progress. Arguing through the constant V example has led us to conclude that how monetary policy effects the real economy depends crucially on the details of agent's information and how they themselves understand the macro economy. This is a conclusion that is pervasive and survives a generalization beyond the assumption of constant V (even to models of economies with no money in them). Of course it also points up why your teacher couldn't give you a simple "studies have shown..." qualifier, since these sorts of expectations on the part of agents is hard to observe different studies have shown different things.

Carrying on though, I personally happen to think that the quantity theory of money is completely useless. I think that any real effects of monetary policy have to work through the real interest rate/asset prices and that the quantity theory is a poor, poor context for understanding this. (But that's something I know Nick disagrees with).

[Mike Moffatt]

"If I had to live in the bottom 2% of the income distribution, I would pick the USSR over the US."

How can you really choice either way?

If the year is 1955 and you lived in the US, you'd be a poor black man from the South during the Jim Crow era, worried that if you made eye contact with the Sheriff's (white) daughter, you'd either be jailed or lynched.

If you lived in the USSR in 1995, you'd be Aleksandr Solzhenitsyn.

The question reminds me of one of those "Would you rather?" drinking discussions: "Would you rather be hit in the face with a 2x4 by Jose Canseco or lose several toes in an industrial accident?"

Both options are so positively awful, I'm not sure how you pick.

[Mike Moffatt]

err, USSR in *1955*.

[Mike Moffatt]

How can you really *choose*. I knew not going to Starbucks this morning was a bad idea.

[Jim Rootham]

Solzhenitsyn wasn't in the bottom 2% of the income distribution. He was in the bottom 2% of people willing to get along with the government.

Part of the point that I took from the statement was that even if both sides had people in horrible situations, they were not the same class of people in both places, so for some people it would make sense to switch.

[Blikktheterrible]

"Both options are so positively awful, I'm not sure how you pick."

I think that's a good point in the sense that we do generally have a poor sense of how to feel about very abstract hypotheticals, but I think the question itself is of a variety deeply fundamental to economics and one that many people deal with fallaciously. Economics is about choice. It's about choosing the option that is best relative to whatever else is available. Arguments about whether any of the options are good are (in my eyes) fundamentally non-economic. More than that, I think those arguments can lead us to choose bad policies.

This is something that comes up frequently in employment and trade regulations. Most controversially, it appears in most arguments about whether prostitution should be legal. We may observe that women find themselves choosing between working as prostitutes or having themselves or their children starve. The most common response is that no one should have to make that choice because those options are both terrible. That doesn't solve anything, though. The only way to keep people from (rationally) choosing either of those options is to make a third better/good option available, but that's not usually what people suggest. People usually try to make the choice illegal, as if that would solve the problem.

Choices between evils are a fundamental part of life for many, if not all people. Economics needs to take that into account. Nothing is more important.

[Blikktheterrible]

"However, I would point out that in the typical undergraduate level model the assumption that velocity is constant implies that an increase in the money supply should cause an increase in aggregate demand. These are not two issues, this is one issue."

The two issues are short-run and long-run behavior.

I just remembered a third issue that bothered me in macro: the fictional nature of "price level". Mike Moffat has written about that. Until I saw his posts about it, I felt like I was the only one who was bothered.

[Blikktheterrible]

I tried to find a trustworthy source that would show either Frances or Nick to be correct regarding the effects of communism. This is the result:

http://upload.wikimedia.org/wikipedia/commons/2/21/Is_this_tomorrow.jpg

Given the lack of punctuation, I'm not entirely sure what they're saying.