On the irrelevance of sunk costs…
… and the difficulty humans have recognising them. Click through to xkcd for the, very worthwhile, rollover text.
Archive for month: November, 2011
Fun with fiscal forecasting
Apparently fiscal forecasts are the cool new thing to blog about since both major parties are talking about them. As the frantic blogging shows, even political commentators are getting excited about their spreadsheets at the moment. However, the only consensus so far is that nobody really knows who’s right about what.
Thankfully economists have a lot of experience with forecasting, and the accompanying abuse when one gets it wrong. As Matt has written about many times previously, the main thing to remember is that forecasting isn’t about the numbers: it’s about the story. Your numbers, however good at the time, will always be overtaken by events and end up being wildly inaccurate. What’s important is the reasoning behind the numbers and how it stacks up. For example, the argument about accounting conventions that’s presently raging in the political blogs may or may not be good politics — that’s not my area of expertise — but it doesn’t seem to be adding to our understanding of either party’s policies. Whether borrowing to invest in the Super Fund adds to a particular measure of debt is fairly irrelevant and won’t change anyone’s views on the policy. What people care about is whether the government borrows to invest in it at all, and each party’s policy on that seems fairly well established. Read more
More Mankiw
Well, shame on Greg Mankiw for failing to cover the eternal battle between the adherents of Smith and Keynes in his 101 course. More interestingly, he also reposted this from FlowingData.
More protesting for the sake of it: Economics students
I know what its like to be a student, and feel like you know everything there is to know. But the truth is that you don’t, you really don’t. And that is something that the students walking out of Econ 10 should realise.
I learnt this the easy way – I listened to my lecturers, asked about the issues, and was able to tell that they were significantly smarter than me … and that they had critically analysed many of the same issues in the past.
From this I discovered that economics provides a framework that can be used for understanding the allocation of resources when we have scarcity. It doesn’t prescribe to us what policies are right or wrong, it just gives us a transparent framework where we can hang up our dirty assumptions for everyone to see and then look at what conclusions pop out.
Look, there is nothing wrong with critical thinking – hell critical thinking is essential in the framework I’ve described about. But they are complaining about a course that leaves all its assumptions out in the open, leaves itself open to criticism, and helps the student to engage in critical thinking.
If you want to know how poor the understanding of the students is look here:
There is no justification for presenting Adam Smith’s economic theories as more fundamental or basic than, for example, Keynesian theory
Comments like this show to me that the students actually know nothing – and just want to protest the course because they don’t know what the course is, or what economics is.
In fact, I’m surprised at this idiocy. I’m a fluffy business economist – nowhere near academia or study – but I read the General Theory and Wealth of Nations in my first year of study. At that point I knew the fact that “Adam Smith’s theories” and “Keynesian theories” were about different things, and shared a lot in terms of the fundamental framework – the framework that is taught by Mankiw in Econ 10.
I find it difficult to believe that anyone could have the arrogance to walk out like this when they have no knowledge or understanding – but then again, maybe I’m underestimating the arrogance of Harvard students …
And this is my issue with a lot of the protests at the moment. There are real issues in the US and Europe, where protesters SHOULD be out complaining – and the knowledge gained from a course like Econ 10 would help to provide this. In fact, once you start to understand allocation, you begin to realise just how much there is to protest about – especially with regards to the developing world, and the inequities we tolerate for the worlds real poor. Instead, the protests are dominated by self-centred narcissists who want attention and want to “fight the system” – giving the whole idea of protest a bad name.
Update: Mankiw discusses here.
Update 2: Reading the comments to the articles linked to by Mankiw is one of the most depressing things I’ve ever done. I hope to god these aren’t actually Harvard students, because the comments are:
- Moronic
- Filled with a lack of evidence gathering – with people discussing Marx who don’t seem to understand that Marx’s method was Ricardian economics, and people saying there are no empirical studies in economics …
NZAE (blog) splits
It appears that the mainstay of NZAE’s recent blogging efforts, Bill Kaye-Blake, now has a blog of his own: Groping towards Bethlehem. No doubt full of enthusiasm from the joy of blogging he decided he needed an outlet where he can talk about Meat Loaf, post-modern cliches, psycho-analysis, and welfare reform; a more idiosyncratic blend of thoughts than one might expect to see on NZAE’s website. It seems that Bill’s blog might be a bit more fun than most economists’ and I was particularly delighted to see no mention of inflation or interest rates in the first few posts! [Not that there’s anything wrong with those, Matt ;)]
Eric Crampton comments on the first few posts here and reckons “Bill’s thinking about things in the right way”. Sounds like a pass mark to me!
The Economist on ‘job creation’ in the energy sector
A very timely opinion piece in The Economist here on how energy policy should not be confused as with job creation.
Too often investment in the energy sector, especially around low-carbon energy, is held up as a way to ‘create’ jobs for the economy. This article dispels the myth:
At the risk of being obvious: energy policy is not a jobs programme. Here are three reasons why politicians shouldn’t try to create jobs through energy policy: it’s ambiguous, it’s inefficient, and, most importantly, it’s undesirable.
In summary the author’s critiques are as follows:
1. What counts as a ‘green’ job, for example? Would that job have occurred anyway? Did the ‘creation’ of that job crowd-out another job?
2. The energy sector is typically capital intensive rather than labour intensive and hence efforts to ‘create’ jobs may be better directed elsewhere.
3. More important issues exist in energy, such as accessing cheap, sustainable energy and the security of energy supply – adding a further goal of ‘job-creation’ muddles this.
Given job-creation via energy seems such a hot topic throughout much of the world right now due to weak economic activity, elections forthcoming in the US and NZ and ongoing concern with carbon emissions and a need to ‘green’ the energy sector, it’s worth keeping in mind these criticisms.