International Trade and GDP

Posted on by

Tyler Cowen finds an FT story about data from the World Trade Monitor, which calculates that global trade contracted in the first half of 2015.

Global trade is a subset of world GDP. That is, world GDP is a measure of the value of all goods and services traded, whether across borders or not.

Let us assume that world GDP expanded in the first half of this year. What ought we to conclude?

One possibility is that cross-border trade and overall trade are not perfectly correlated, and this is a blip in the relationship. However, another possibility is that GDP is mis-measuring economic activity. The value of government purchases is not market determined. The same might be said for health care and education, in that third-party payments are important.

In other words, there are three components of world GDP: goods and services exchanged at market prices across borders; goods and services exchanged at market prices domestically; and goods and services exchanged at artificial prices. If the first component of world GDP has been contracting, then my guess would be that the second component is, also.

The Status of Models in Economics

Posted on by

Paul Romer says

Ultimately, the test of the model is its correspondence with the world. If we use certain frameworks, you can understand a much richer set of facts about the world. Growth is a difficult area to work because you’re addressing questions about the very long run, so you don’t have an abundance of data. You’re trying to invoke evidence from history over the very long run. We needed to come up with a way to think about all of these facts about the broad sweep of human history.

Math can be a very clear, concise, effective way to communicate ideas. What I saw in some of the people I was criticizing for mathiness was an almost obstinate adherence to positions, and then a use of any kind of mathematical argument that would support that position. What was missing was one of the characteristics of good science, which is to say “Well, given these new arguments, I may have been wrong before.”

Pointer from Mark Thoma.

Earlier, a reader’s comment brought me to Itzhak Gilboa’s review of a book by Mary Morgan.

Clearly, there are many instances in which economic analysis yields qualitative predictions, providing robust insights that allow us to predict trends, compare economic systems, and so forth. Yet, economics is not considered to be a successful science when quantitative predictions are concerned.

There is, however, another view of economics, by which it can have other successes: it is a field of enquiry whose goal is to critique reasoning about economic phenomena

This is an idea with chewing on. The purpose of a model, either theoretical or empirical, is not to provide a definitive “correspondence with the world,” as Romer would have it. Rather, it is to point out possibilities that deserve the attention of economists and those interested in economic policy.

A PSST Story for China

Posted on by

Tyler Cowen writes,

there is significant excess capacity on the real side of the economy. It will be very hard to fix this problem without letting significant numbers of SOEs go under. The central government fears the resulting unemployment, plus the SOEs are the Party’s power base. Yet the leaders know what must be done, and the SOEs have been reformed before. …One danger is that SOE reform leads to a loss of political stability. A second and more likely danger is that reform is incomplete and China ends up full of zombie companies and banks.

Market-oriented economies get rid of heavy accumulations of unsustainable patterns of specialization and trade through financial convulsions. For China, the process will have to be top down.

An interesting question is which sort of economy does better at putting the pieces back together. Offhand, I would say that China could get through a transition with less person-years of unemployment. However, the risk is that the new patterns of specialization and trade are no more sustainable than the ones that are discarded.

The WaPo and the Train Terror Incident

Posted on by

Yesterday, they put the story on page 7. They could not bear to move the story about the Cuban sustainable farmer off the front page to make room for it.

Today, they put it on the front page, with the headline “Train Suspect Known to be a Risk.” They focused their page one coverage on this aspect, and waited until the end of the story on the jump page to discuss the Americans and a Brit who overcame the terrorist.

I can only conclude that anything that smacks of Civilization vs. Barbarism is just too much for WaPo editors, or perhaps their readers, to bear.

Speaking of which, whether this “known risk” slipped through or not depends on the denominator. I mean, how many names are on this list of “terror risks”? Are we talking about 100, or are we talking about 10,000? If it’s 100, then, yes, the security forces should be able to keep tabs on them and not leave it up to unarmed heroes. On the other hand, if it’s 10,000, then the list has no tactical value, but it gives you an idea of what you are up against.

What I’m Reading

Posted on by

Why Him? Why Her? by Helen Fisher. A family member was reading this at the beach, and I picked it up. An attempt at personality psychology, sort of like the controversial Myers-Briggs with four main types. Think of her Explorer as an SP, her Builder as an SJ, her Director as an NT, and her Negotiator as an NF. Anyway, a couple of excerpts:

The Explorer-Explorer match does not appear to be a good strategy for raising children. Yet here, too, nature has a plan. Since Explorers are more likely to divorce and remarry, they are also more likely to bear children with more than one partner. In fact, it’s commonplace to encounter the man or woman who has married twice and had children with each spouse. I don’t recommend divorce and remarriage, but there’s genetic wisdom here…If ancestral Explorers produced more variety in their young, some of these children would survive hard times–passing on their DNA.

Recall that Robert Putnam talks about bifurcated family patterns. Perhaps a lot of Explorer-Explorer matches produce children out of wedlock.

Much later:

The Negotiator is far more idealistic. As a result, the Director can become annoyed by the Negotiator’s far-flung humanitarian concerns, while the Negotiator can begin to regard the Director’s more technological approach to fixing the world’s problems as narrow-minded and unfeeling.

The Negotiator sounds hard to argue with. To the Negotiator, economic logic just “feels” wrong.

The Epistemological Status of Economic Laws

Posted on by

I am reading Robert Murphy’s new book, Choice. Think of it as an English translation of Human Action. I am very happy with it so far. I can see how much of The Book of Arnold can be found in Mises, and yet. . .

I still do not buy into Mises on epistemology. Murphy writes,

Mises shows that economic laws are not obvious and that they do indeed enlarge our body of knowledge, even though economic laws do not need to be verified with empirical observation.

The Anglosphere is largely empiricist, or logical positivist. We tend to believe that there are two types of truths. There are tautologies, which are embedded in language; and there are truths about the world, which are learned by observation.

A claim that 2 + 2 = 5 can be falsified using logic. A claim that pigs know how to fly can be falsified using observation.

Milton Friedman takes an empiricist view of economics. For Friedman, the economist makes predictions about the world, and those predictions are verified or falsified on the basis of observation.

Empiricists give no epistemological status to anything that appears to be a claim about the world that cannot be falsified using observation. Such claims are classified as dogma or nonsense.

Mises was no empiricist. Murphy writes,

From the starting point that humans act, the economist could logically deduce–thereby forming a tautology, it’s true–that individuals have subjective preferences with ordinal rankings, that choices come with opportunity costs, and that the value of second-order capital goods is dependent on the value of the first-order consumer goods that the individual believes they have the technological power to produce.

The way I read Murphy/Mises, economic laws are derived from insight into human nature. At least some insight into human nature comes not from observation but from introspection. The insight that comes from introspection is not falsifiable. For example, suppose I find it inconceivable that I would make choices on some basis other than benefits and costs at the margin. This makes it inconceivable to me that other people would make choices on some other basis. Hence, I appear to arrive at a statement about the world–people make choices on the basis of benefits and costs at the margin–that is not falsifiable by observation.

My take on this is that a statement such as “people make choices on the basis of benefits and costs at the margin” falls into a category that I might term “guiding dogma.” We will use a guiding dogma to make predictions about the world. However, the guiding dogma is not testable. If our predictions go awry, we will not discard the guiding dogma. Instead, we will look for something else that made our prediction go wrong.

“Guiding dogma” may be synonymous with Kuhn’s notion of “paradigm.” In physics, there are some spectacular cases in which a guiding dogma came to be replaced by a new guiding dogma.

The interesting predictions are those which go beyond a guiding dogma. For example, a prediction that a rise in the minimum wage will reduce employment is based in part on the guiding dogma of the Law of Demand. However, the prediction about the effect of the minimum wage is falsifiable empirically. Suppose that a rise in the minimum wage does not produce a decline in employment. Will we throw out the Law of Demand, or will we look for some other factor at work? My claim is that we will do the latter.

Speaking of the minimum wage, consider this sarcastic assault on Larry Summers by John Cochrane:

Never mind centuries of supply and demand, centuries of experience with minimum wages and other price controls, or even the current controversies. Never mind that who works for what business and how many do so is a little bit endogenous. Larry has a new and very clever theory about monopsonistic wage setting in the presence of recruitment and motivation costs. (One that apparently only holds at the lower end of the wage scale where minimum wages bite?)

Thus, if we were to find that an increase in the minimum wage does not reduce employment, then we would credit something like “a new and very clever theory about monopsonistic wage setting in the presence of recruitment and motivation costs” rather than reject “centuries of supply and demand.”

Incidentally, the laws of probability are also not easy to fit into the empiricist framework. When we say that the probability of a coin landing on heads is 1/2, that sounds like a statement about the world, but it also might be thought of as the definition of a fair coin. Once again, the phrase “guiding dogma” comes to mind.

Libertarians and Organ Harvesting

Posted on by

I have not noticed any libertarian commentary on the Planned Parenthood controversy. I assume that if there were such commentary, it would say

1. Planned Parenthood should not receive any government funding. Even if it gets out of the abortion business altogether.

2. There is nothing wrong with Planned Parenthood buying and selling organs from aborted fetuses.

Of course, as far as I know, there is no specifically libertarian position on when life begins. If a libertarian took the view that life begins at conception, then that would make abortion murder, and that would make commerce in organs problematic, because it would be an encouragement to murder.

But if you don’t think that abortion is murder (and please do not try to settle that issue in the comments section of this poor little blog), then should libertarians not be speaking up for the right to sell the organs of the aborted babies?