Recently I’ve been reading a fair amount of material in economics. In addition to popular books on specific economic topics aimed such as Farewell to Alms and Knowledge and Wealth of Nations, I’ve been hitting texts such as Hal Varian’s Intermediate Microeconomics.
As I told a friend of mine who is an economist the learning curve is definitely a bit gentler because the formalism in much of low level economics isn’t that different from evolutionary biology, as attested by the parallel developments of game theory within the two fields in the mid-20th century. Mathematical tools from calculus, algebra and statistics also tend to intersect a great deal, while translations between concepts like price and fitness seem quite natural. For me one of the most interesting developments has been the much greater yield of information and insight I get from material which I had previously encountered. As an example, I used to read Paul Krugman’s column in Slate with interest and generally enjoyed them, but when I went back and reread some of the pieces the increased illumination was incredible. The marginal return on investing even a small additional portion of my time in familiarizing myself with the basics of economic modeling and history has been very high, and I am in such a shallow end of the pool in terms of my self-education that I suspect that these returns won’t be diminishing for quite some time.
This illustrates to me the power of a field with theory, a few general principles and foundations allows one to intelligibly navigate esoteric and exotic terrain. In contrast, in some disciplines one must wade through an enormous amount of scholarship as it is rather easy to selectively sample bias the perception of a field where there are no abstract principles to serve as guardrails. Below the fold is an excerpt from a dialogue that Paul Krugman had with James K. Galbraith. 11 years after I first read it I feel that I really “get it,” not necessarily because of its particular economic insight, but the general way of thinking that Krugman is promoting:
Now what should Lind have done before publishing this passage? He should have had an internal monologue–something like this: “Hmm, do these numbers make sense? Well, historically, compensation of workers has been around 70 percent of national income. So let’s say that initially, output per worker is 100, and the wage is 70. Now if productivity is up 30 percent, that means that output is 130, while if wages are down 13 percent, that brings the wage down to around 61, which is less than half of 130–wow, that means that the share of labor in national income must have fallen more than 20 percentage points. Let me check that out in the Statistical Abstract. …” Of course, if he had, he would have found out that the share of compensation in national income, far from declining 20 percentage points, was about the same (73 percent) in 1992 as it was in 1977, offering a clear warning bell that something was wrong not only with his numbers–for example, he turns out to have confused productivity in manufacturing with productivity in the economy as a whole–but with his story. (This was not a throwaway passage marginal to his main argument; the claim that globalization has shifted the distribution of income drastically in favor of capital was central to his article.)
How could Lind have failed to go through this little monologue? Well, I have had several conversations with impressive, highly articulate men, who believe themselves sophisticated about economic matters, but who simply do not understand that if productivity is up and wages are down, this must mean that labor’s share in income has fallen. These conversations are not pleasant: They want to discuss deep global issues, and end up being given a lesson in elementary arithmetic. But that is precisely the point: All too many people think that they can do economics by learning some impressive phrases and reciting some gee-whiz statistics, and do not realize that you need to think algebraically about how the story fits together.
Presumably, Galbraith will say that this example has nothing to do with him and his friends. But consider the concept of “deindustrialization,” which has been a centerpiece of much economic writing over the past 15 years–in fact, it could be considered Bob Kuttner’s signature contribution to the field. The story is that wages in the United States have stagnated or declined largely because trade deficits have eliminated high-paying jobs in manufacturing. There is nothing wrong with this story, in theory–in fact, it is a perfectly good example of what is known as the “domestic distortions” argument for harm from international trade, which is covered in many undergraduate textbooks on the subject, mine included. But if you do even a rough back-of-the-envelope calculation–a little more complicated than the one Michael Lind should have done, but still very simple–and check it against the data, you immediately realize that the displacement of high-wage manufacturing jobs by imports cannot have pushed average wages down by more than a fraction of a percentage point. The point is that the deindustrializers have a good story, but lack the instinctive urge they should have had to see if that story actually adds up.
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