Breaking windows, doors, and GDP

This week Mieke Welvaert discussed (Infometrics link) the broken window fallacy.

GDP measures the value produced within a geographic entity.

Even though it seems damaging property could increase GDP, this is unlikely – and when it does, it does not do so in a way that increases wellbeing.  In truth, it would be better if we didn’t have to repair what we have and could just add to it.

Although this is not possible in the case of natural disasters, it is possible when we can prevent destructive events from happening.

The moral of the story is: If it ain’t broke, don’t break it.


On microfoundations

Some recent post on the necessity of microfoundations that I found interesting.

  1. Issues about microfoundations.
  2. Why you don’t need rigorous microfoundations.
  3. UpdateZombie Marx – illustrating the similarities between Marxism and Neo-classical economics.  ht Guan.

I agree with these in part, especially when it comes to macroeconomics (whether this is appropriate depends on your view on the nature of how we should treat macroeconomic aggregates).  But as with all things it is a matter of balance.

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Quote of the day: Pinker on changes in social sciences

Via Noah Smith.  We have the following post on the Pinker vs Wieseltier debate on science and humanities (if you have a chance I would suggest reading the debates themselves as well).

The era in which an essayist can get away with ex cathedra pronouncements on factual questions in social science is coming to an end.

Very good, and Pinker’s co-operative version of science with the humanities seems appropriate to me (where instead we are merely asking about how to deal with certain propositions and using the best tools available).  I think Pinker won this debate, I am unsure why Wieseltier felt it necessary to take such an extreme position though – I think he initially believed Pinker was trying to force through a view based on the superiority of scientific authority (one that Pinker rules out in his initial article!), when he was really just suggesting the use of the scientific method (namely introducing a degree of the positivist view of theory creation) given the improvements in data availability and usability we have had.

As XKCD says:

But even within Pinker’s reasonable claims there is one area where I would be a touch careful Read more

Resource booms and income distribution

Via Vox Eu comes a piece looking at the distributional consequences of resource booms – using Australian data.  Their conclusion:

We need good time series data from developing countries to see whether the distributional impact is bigger there than what we find for Australia. Until then, the analysis here seems timely and relevant, not just for Australia, but for all resource-rich developing countries as the price volatility experienced by the former since the late 19th century was greater than that for the average commodity-exporting low-income country.

The distributional impact of commodity-price shocks in Australia (Canada and New Zealand) should yield important lessons for primary producers from the developmental south.

True – the idea that taxation should be more progressive the more dispersed income and wealth is is an old and widely accepted idea.  And this gives us another way to conceptualise it, with a relevant shock for the NZ and Australian context.  However, a couple of things to keep in mind when thinking about these issues are: Read more

On economics as method

Via Mark Thoma’s twitter feed came this gem on “neo-classical economics”.  It strongly supports my view on what economics is so let’s have a peak at the conclusion:

I sometimes argue that the main version of economics,  at its best, is that  it is a disciplined way of thinking and arguing that makes clear where people disagree. If two economists disagree, they can unpack each other’s arguments. Do they disagree in their underlying assumptions? In their model of how those assumptions fit together? In their arguments over cause and effect? In their beliefs about what data to use? In the statistical methods they use? Even when economist end up disagreeing, they should be able to pinpoint the sources of their disagreement–and thus to agree on what issues need to be further researched and resolved. From this process, provisional truths (and is there really any other kind?) do emerge.

This is completely true, and the way a vast vast majority of economists see economics and developing economic knowledge.

However, the sentence prior to this description also raises an interesting point for me:

For noneconomists, I guess the obvious question is: “If economics doesn’t give a correct and clear answer most of of the time, what good is it?”

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The excel error in Rogoff-Reinhart

I see the Rogoff-Reinhart figures regarding the correlation between GDP growth and the size of the debt stock are currently under attack – due largely to an unfortunate excel error discovered reported by Mike Konczal.  Here are the list of posts about it at the moment:

All very nice.  Depending on the message people were trying to sell they either said the result was meaningless, or central, so I don’t think this makes any actual difference.  Honestly, without clear causal drivers there just were not good evidence based claims for actual policy adjustments – a lot of people were actually just saying we need to do X based on their preconceptions.  And they found this correlation either something that supports that (somehow) or something they need to rule out.

Over the last few years I have seen authors, at different times, use R-R as central to their argument on one thing, and then dismiss it for arguments regarding other issues (I’m not going to name names).  For example, you can’t use this result to say we need more savings policy because the stock of debt is to high, then complain that the study is flawed when you want more government borrowing … just focus on the actual core elements of your frikken argument instead!

My problem with the result isn’t the excel errors, or anything R-R appear to have said – it is the way it has been used as an inconsistent marketing tool by people for selling their own unrelated ideological policies.  I’m just hoping that this shuts that up.

As a side note, here are my feelings on twitter:

People who think the R&R result caused austerity overestimate the impact evidence has on government policy.