jamesz

Wants, needs and production

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What is a ‘want’ and what is a ‘need’? Do these things change over time and how do we provide for them? These are the issues being considered by Pablo at Kiwipolitico in a fashion that may confuse many economists. He says:

The current phase of globalised capitalism brought with it the uncoupling of production from consumption even as the “wants into needs” syndrome persists. The specific result is that, relatively speaking, global production of goods has declined while the consumption of non-productive commodities has increased. That means that there is an excess of wants with respect to needs. In fact, mass focus on obtaining a proliferation of wants has served to obscure the basics of needs.

When I read that I had no idea what it meant and I think that is because of some definitional problems. First, what are ‘wants’ and ‘needs’? To an economist the distinction is fairly meaningless because there are only ‘things that people want to varying degrees’. Of course, there are trade-offs that one must make — I can’t buy a car and a bicycle with the same $5,000 — but the things we want are not inherently different and the degree to which we want them differs between individuals.

So, when Pablo talks of ‘wants’ being converted to ‘needs’, what does he really mean? What I think he means is that, as technology advances, our incomes rise and the relative cost of purchasing complex goods drops. Consequently, more people buy them and they become ubiquitous. You don’t need the nature of goods to change for that to happen. You don’t even need peoples’ preferences to change — although that may have happened, too — for smartphones to be in every pocket, either. It is enough that the cost of manufacturing has dropped and our incomes have risen due to technological progress.

What of his contention that these smartphones are ‘unproductive consumption’? I’m a bit baffled by that because it suggests that everything we purchase should be useful for producing something else. As if enjoying our purchases were not enough in itself. Either he is suggesting he knows better than we do about what makes us happy or, more likely, I am reading too much into a poetic flourish!

Finally, he suggests that there has been a ‘decoupling of production from consumption’, which is probably the most confusing statement of all. All production is consumption – as it is either consumption now, or it is investment which translates into consumption in the future. There can be no sustained difference between production and consumption in modern, market-based economies.

Rather than railing against the way he perceives society to be, it would be helpful for Pablo to refine the problems he sees and ask why things are the way they are. Once we understand the problems we can ask whether there has been a systematic misallocation of resources that has caused these problems. At the moment it appears that these issues are being clouded by some confusion over what wants, needs, production and consumption really are.

Matt Nolan

Strawman at the centre of the discussion of economics

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In an article in the Herald it is suggested that the separation of economics from moral philosophy is morally abhorrent, and as a result we should ignore what economists say about tax.

I will put the tl;dr up first:  Economic theory is “descriptive” – which in turn allows us to discuss how economic theory is actually a very useful thing for discussing these issues.  In my opinion it is important to make these trade-offs that are described transparent –  and that is all economists are trying to do.  In that context, economists don’t actually seem morally abhorrent 😀 .  Furthermore, by showing a willingness to discuss and identify trade-offs, we can find some issues and facts that seem to get slightly missed in the article 😉

Read more

Matt Nolan

Quote of the day: On theory and data

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From Eric Crampton:

I tend to be pretty skeptical of results that aren’t grounded in basic price theory or that aren’t confirmed by a lot of different methods, including both Ocular and Ordinary Least Squares.

A single paper merely helps people to update their priors – it doesn’t provide conclusive evidence of a result.  Often when it comes to economic discourse there is too much “faith” put in single results that tend to reinforce whatever the authors prior is.

That is why the economic method in itself is a useful tool – but the process of reaching a conclusion, or justifying why a result holds, is one of debate and discussion.  It is more of an art form than anything else.

Unless you can say why a stated result means very little.  No matter how fancy your data analysis or theoretical model is, unless you can explain it it means nothing.  Luckily, economists out there do go around explaining why – which is why I have much more faith in the analysis of economists than many other disciplines.

Matt Nolan

How many economists see government

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I have seen economists termed “growth fatalists” for the fact that we don’t believe that there is much government can do to change underlying economic fortunes.  Greg Mankiw posted a quote that summed up the position well:

Politicians are in charge of the modern economy in much the same way as a sailor is in charge of a small boat in a storm. The consequences of their losing control completely may be catastrophic (as civil war and hyperinflation in parts of the former Soviet empire have recently reminded us), but even while they keep afloat, their influence over the course of events is tiny in comparison with that of the storm around them. We who are their passengers may focus our hopes and fears upon them, and express profound gratitude toward them if we reach harbor safely, but that is chiefly because it seems pointless to thank the storm.

If I’m honest, I think that the belief that government can create growth magically stems from the fact that people want to feel like they have control of things – economic growth is something that impacts upon our daily lives that we have no control over, but if we can tell ourselves we have control it is easier to live our lives.

In the same way our forefathers would worship the sun, or a “god of the harvest” our modern society worships government policies that “will provide economic growth”.

Discuss 😉

Matt Nolan

TVHE bleg: Good history books

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Hi everyone,

We haven’t done a bleg in a while – so I think its time to bring up a new one.  I’m wondering what good history books are out there.  They can be about any period in history, focused on any part or portion of a historical incidence, the key is that they provide a good descriptive discussion of whatever it is.

Matt Nolan

Maths and economics … again

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Not PC has a critique of the use of mathmatics in economics.  Critising the discipline of economics has been especially popular lately.  I have had engineers (and some physicists) call me up to tell me that we do economics wrong and we need more maths (to which my reply would be to look more closely at the methodology of your own discipline before even trying to apply it to our one).  I have had business people (and my dear mother) call me up and say that there is too much “voodoo maths” and economists need to work in real jobs first.

What I have found in common with all these criticisms is that their implicit view of what an economist does, and the point of economics, differs remarkably from my own.  The scope, methods, and reasoning behind economic analysis which we are imbued with at university most definitely differ from the scope, methods, and reasoning which I often hear people accuse economists of using/making.

Now I don’t agree with either side except my own here, as I think the current implementation of maths in the study of economics makes sense.  In fact, I don’t believe the level of maths is a fixed thing – it merely depends on what “language” people who use economics are willing to use.  This is because maths is merely a language.  Using mathematical form, economists are able to place down ideas and clarify thinking, as long as economists understand the implicit assumptions they make when writing out a mathematical model then this is a valuable way of doing things.

Rather than reiterating my defense of economics, I will link to things.  Here is where I last discuss math and economics, here I mention “Marshal’s view” of maths, which is close to the way economists still function.  Here is a set of links where I build up an idea of “what is economics“.  And before anyone says that predictive failure indicates that maths is an issue, I say that the purpose of economic language and discussion is trying to build a case for description and explanation.  There are a myriad of links saying this (*, *, *,*).

So the typical conclusion from this is that maths is useful in economics as it provides a powerful tool/language that allows us to set issues down – in the hope of being able to describe/explain relationships in reality.

Not PC adds another element though.  Specifically he counters by calling on the lack of causal inference available from pure mathmatics – however, when this is the case we have to rely on explicit judgments and theory.  In this situation we can DEBATE causality when we set up the mathmatical model – but it does not make the use of such models invalid.

That is why I always say – use the theory as much as possible before you get onto using the data.  Now I have no doubt that the data may then impact on the way you view the theory, there is a significant circularity problem here, but that is part of the reason why economists are so determined to formalise and set down in mathmatical stone the theoretical roots of their analysis.  And this is, of course, the main area where economics is trying to improve itself and evolve at the moment – hence why I don’t think there is an issue with training and research in the discipline per see.