Search for One-Handed Economist Continues (Updated)

In a New York Times op-ed this morning Tyler Cowen airs his own profession’s dirty laundry and takes note of the things that economists have gotten wrong lately. Tyler’s article is eminently worth reading but, rather than citing it, I’d like to extract his bullet items and do a little descant on them.

The Chinese economy is smaller than economists thought

Ordinary Chinese people have been acting as though China had runaway inflation for some time now. That’s been reported in any number of NYT articles over the last year or so. We need to remember that economics is a science of human behavior. Pay less attention to the numbers (particularly the numbers coming from the Chinese government) and more to how the people are behaving and we’re more likely to derive sensible conclusions about what’s happening in China.

Fraudulent borrowing as well as predatory lending has contributed to the subprime mortgage crisis

I think that we need to reserve our sympathy for people who’ve actually been injured as a result of default and people who are genuinely in need. Solutions like moratoria on foreclosures subsidize speculators, people who haven’t been injured, people who aren’t in need, and people who borrowed money fraudulently right along with people more deserving of our concern.

The business model for music distributors is collapsing

Tyler writes:

The music companies don’t have a good business model for making money from this.

“This” being the music distribution market of today. We need to come to terms with the reality that it’s worthwhile compensating people for creating things not for distributing things. While it might have made sense to compensate risk-averse distributors when distribution was costly and difficult the Internet has changed that for good. Intellectual property distributors are today’s equivalent of buggy-whip manufacturers. There is no good business model for what it is they do. I heard a story the other day about some EMI execs who conducted a focus group of young people and encouraged those participating to take the stack of CD’s on the table with them for free. The stack remained untouched. The execs finally understood they were in trouble.

Cold weather is a killer

Well, yes. Here in Chicago we’re not completely unhappy with how warm our winters have been for the last few years. Dogsledding has become somewhat harder though.

And I’d be happy to explain the increase in income inequality to Tyler if he’s interested. Gotta get that post done some time. Basically, developments of the last couple of decades have reduced the need for capital expenditures. That makes companies a lot more profitable than they used to be. There are a couple of other factors, too, but I don’t want to steal my own thunder.

Update

Brad Delong and Barry Ritholtz aren’t happy about Tyler’s observations on the subprime mortgage matter. I found Barry’s characterization of economists rather amusing:

Over the years, I’ve noted the problems I’ve had with Economists in general seem to fall into one of three categories:

1) They are not particularly good at their jobs — assuming their jobs require them to review economic data and determine what it means;

2) Economists, like academics, can be “reality challenged.” This typically involves a skewed conception of reality, often so divergent from the real world experience as to make their conclusions erroneous and their methodology suspect;

3) The abuse of economic data for political purposes.

It would help if economists got out more. I also note that it seems to me that while abusing data for political purposes is a common failing in the behavioral sciences, there seems to be a lot of it going around these days.

6 comments… add one
  • Solutions like moratoria on foreclosures subsidize speculators, people who haven’t been injured, people who aren’t in need, and people who borrowed money fraudulently right along with people more deserving of our concern.

    It also penalizes those of us that actually made intelligent decisions concerning mortgages in recent years. About three years ago my wife and I were looking to buy here in Central Florida, and after a few months decided that the market was simply insane. (One house we loved had increased in value by ~20% a year for the previous five years.) We decided that we weren’t insane and that we would wait for the markets to also become more sane. Subsidizing those that made bad decisions also punishes us for having made (a relatively) good decision.

    (Of course, it doesn’t really matter. The local market will never again be sane. What happened to places like the Napa and Sonoma Valleys has now happened to the Florida Keys, is happening all along the coasts of the state, and is even reaching into the middle of the state. Retirees from up North are bringing the accumulated wealth of their lifetimes with them and are inflating the prices of all housing. Given that projections have the state’s LEGAL population adding a number of citizens equal to the entire population of the state of New York in the next four decades, it won’t be long before no one but the rich and the very poor can live here.)

  • Yes, you’re right, Icepick. I really should have mentioned the “moral hazard” issue. It’s been so much a part of the right-leaning blogs’ discussion of this subject that I, incorrectly, took that as a given.

  • It’s been so much a part of the right-leaning blogs’ discussion of this subject that I, incorrectly, took that as a given.

    I don’t read all that many blogs, so I wasn’t familiar that this has been a common point. Mostly I’m just annoyed that people are (potentially) being rewarded for making bad decisions. I’ve mostly given up poker for the same reason, LOL. Chess is a MUCH more just game in that regard.

  • My understanding in re the Chinese economy, is that the issue of recalib came from World Bank, lacking data, having to make an assumption on prices that was only updated recently given actual access to survey information.

    I don’t see this as a failure per se (ignoring numbers based on sketchy information on behaviour, reportedly anecdotally strikes me as rather more problematic).

  • In my view that means that it makes sense to do more observation (and measurement) of behavior rather than simply relying on reported numbers of unknown accuracy. I’m not discounting the Chinese government’s numbers completely, merely saying that they need to be corroborated.

    Economics is a behavioral science and the more closely it hews to observed behavior the more accurate its predictions are likely to be, no?

  • thank to the information

    seo optimization

Leave a Comment