Rich Karlgaard opens his column at Forbes by pointing out something I posted about yesterday:
During the Great Recession and its aftermath, the U.S. economy has performed slightly better than flat. That’s hard to believe, isn’t it? But the numbers tell the story. In 2008, 2009 and (projected) 2010, the U.S. GDP was (and is), $14.3 trillion, $14.2 trillion and $14.6 trillion.
Yes, it’s hard to believe the economy was flattish – factually, ever-so-slightly growing – over the worst patch in our lifetimes. Why did the economy feel so much worse if it was merely flat? Good God, what would happen if the economy actually shrank over several years?
Answer: Americans are accustomed to growth. And with a growing population, we need growth.
and then turns to a prescription for growth that I wrote about a couple of weeks ago:
Carl Schramm, who heads America’s top entrepreneurial think tank, the Kauffman Foundation, has a stunningly good insight into what causes an economy to grow. Growth, he says, is directly correlated to startups that get big. I interviewed Schramm onstage last week at a Churchill Club event at Microsoft’s Silicon campus in Mountain View.
Schramm said:
“The single most important contributor to a nation’s economic growth is the number of startups that grow to a billion dollars in revenue within 20 years.â€
Schramm says the U.S. economy, given its large size, needs to spawn something like 75 to 125 billion-dollar babies per year to feed the country’s post World War II rate of growth. Faster growth requires even more successful startups.
What are the factors that enable a new company to grow to that size? Obviously, you’ve got to have an idea. There’s got to be space in the market for you—the established guys will push you out any way they can and all of the advantages are theirs.
You’ve also got to want to run a business. That may seem obvious but in the U. S. in the technology sector getting just big enough that you become attractive to the Microsofts, Intels, and now Googles of the world is a proven business model. It’s a model that makes lots of money for its founders but it’s not a model that produces new $1 billion companies and the new jobs that go with them.
I think the correct answer turns to a different path. Yes, GDP is a very useful number. It represents gross economic activity. Some people are so used to treating it as something else, a measure of “progress” or even “quality of life,” that they are surprised when it diverges from those.
When we optimize for GDP that might be what we get, but we might not get things only indirectly related to it.
I think I’ve mentioned that I read some book about numbers and measurements last summer. I can’t remember the name.
The short message was a good one:
Beware any measure which collapses complex systems into a single number. They almost certainly hide as much as they reveal.
Some things are naturally one number, like temperature, but many useful things in our world are not. For those the rules to reduce them become increasingly artificial.
I thought something similar while reading this article about the Android smartphone OS yesterday. Here’s a telling quote:
He was hanging out on a beach in the Cayman Islands when he came up with the idea of creating an open-source operating system for mobile phones. Back in Silicon Valley, he was looking to raise venture funding when Google cofounder Larry Page heard about Android, loved the idea, and acquired the company.
At Google, Rubin has access to virtually unlimited resources from one of the richest companies on the planet, and no need to generate revenue, at least not in the conventional sense. Rubin won’t say how many engineers work on Android, only that “it’s much smaller than you would think.†Some of the work is done by HTC, Motorola, and Samsung engineers, who work alongside Google engineers.
Android is a huge success – earlier in the article they claim Google is now activating 250,000 Android phones per day. Yet it creates no direct revenue for the company, nor many direct jobs. And this is in the most dynamic and entrepreneurial sector we have.
And yet the indirect jobs are easy to see. Years ago, when we didn’t have cell phones, we didn’t have storefronts selling them. I don’t even know how many there are in my town now .. 10, 20, more?
And ringtones, and apps, and cases, and accessories.
Phones and their rapid obsolescence really have brought a lot of jobs.
Okay, and what policies has Obama been pursuing to help this? I’d argue none and in fact policies to bail out huge incumbents who have demonstrated not just bad management but that possibly the industry they are in has radically changed (e.g. GM and the glut of automobile manufacturing capacity) actually works against it. Resources that could go into these “billion dollar babies” are mired down in industries that we should probably let die. I understand the politics, letting GM die and having people become unemployed is politically very risky at the very least. However, the long term consequences is lower economic growth…hmmm what was that post about you had up a few days ago?
And just to head of the usual dimwitted responses, no I don’t thing would have been different/better with McCain. He’s a politician too and would have likely bailed out GM. The method/details might have been different, but overall the final result would have been the same.
Seems to me we keep running into the same thing here. The U.S. pretty much has a corporatist economy. This is not good for economic growth. The solution seems rather obvious, less political meddling in the economy. Of course, given that is how politicians get elected/get rich that ain’t going to happen. So, get used to the new lower economic growth. It may not be intentional, but the guys in DC are not only doing nothing to improve growth they are actively working against it.
Apple was founded under the Ford administration and really got going under Carter. They had tough times under Reagan. Prospered hugely under Clinton and Bush and now Obama.
I see empty malls and then walk into a jam-packed Apple store.
Not quite sure I see what presidents have to do with it. Or government itself for that matter.
I have an alternate scapegoat: business schools. Roughly 100% of the people responsible for the most recent bubbles and crashes and assorted quasi-criminal and entirely unproductive activities are B-school grads. Whereas Steve Jobs was a college drop out, and so was Bill Gates, and neither Larry Page nor Sergey Brin went near a business school. John Sculley, the nitwit who pushed Jobs out of Apple? Wharton MBA.
I’m just saying. It’s as likely as blaming government.
Steve, I listened a little bit to Morning Joe this morning. I liked Joe more when I listened to him less …
He and you have a similar vibe today, in that you never started with the idea that governments can create economies, or guarantee employment, but you don’t mind playing the game, and asking why a Democratic president hasn’t done so.
You had to get that out of the way first, and so you buried your lede:
Yeah, let’s not start there.
michael:
Agree totally on MBAs.
This is not to say that I don’t think that people learn useful and valuable things when they get an MBA. I just think that the degree is misused. MBAs are good for staff; not so good for line.
Drew’s being a recovering engineer redeems him somewhat IMO. 😉
1. Steve Verdon for President!
2. “He and you have a similar vibe today, in that you never started with the idea that governments can create economies, or guarantee employment, but you don’t mind playing the game, and asking why a Democratic president hasn’t done so.”
You got it backwards, dude. The message is get the hell out of the way, and don’t be an impediment! WTFU
3. “Drew’s being a recovering engineer redeems him somewhat IMO”
Heh, I guess when you dish it out liberally, you gotta take it too!!
;-> nyuk, nyuk, nyuk
Look, the generalized proposition that MBA’s are the problem is just the sort of economic and business insight I would expect from a children’s book author: nonexistent. Business success is complex, and requires so much multidicsiplinary resources and experience it would make your head spin. There are odd exceptions – which Mr. Reynolds has childishly latched on to, but they are very rare.
I’ve recently become involved in the entrepreneurship organizations at two of my prior schools. One a B-School; one an engineering school. (Sort of “Grandpa comes home” – ouch!) The real issue is to take young, energetic and fertile (although undisciplined and inexperienced) minds and channel them through the realities of product and engineering development, distribution and sales channel establishment, capital raising, working capital needs, management developent….etc, etc. And not just: “our product or service is so wonderful, we are going to save the world.” Sure you are, you poor dears.
I understand “get the hell out of the way” but I also understand no mainstream politician (and few right of center commentators) will complete the thought “and then wait for the next business cycle, whenever it comes.”
It is simply factually false that without government spending there are no business cycles. It’s also false that “hands off” yields immediate recoveries.
Michael and John,
Jesus it is so hard not be insulting when you guys keep insisting on being partisan when I’m not. This isn’t a Republican v. Democrat thing its big business/big government vs. individuals/individualism. By playing the Rs vs. Ds you end up playing right into the big side’s hands.
As for government guaranteeing employment, sorry governments can’t do that. That is a losing game. Always has been always will be. There might be cases for maybe some short run make work programs in a theoretical world, but come…join the rest of us in the real world.
BTW, the reason why government cannot ensure employment boils down to two words: deadweight loss. I know what they mean, Drew knows what they mean, as does our host here. It is time you guys learned it too.
Now that being said, government can facilitate economic growth. Providing a stable legal system is one way. Providing public goods is another. And then there are things that have external costs and benefits as well as even just information. I see those various issues as being necessary (although not sufficient) conditions for government to exist. So it would cover roads, the court system, fire departments, air traffic control and government compiled statistics on thins like unemployment, prices, etc. It would even possibly allow for some type of EPA type of government entity. However, we’d also see a vastly smaller government.
In short government can help set up the conditions for economic growth. I think our government does these things. I also think it does things that work against improving economic growth such as propping up failing businesses. Another is Medicare.
I know that last one will likely make some of y0u sneer, but here me out….or at least read for a bit longer. Where does investment come from? Savings. Does the U.S. have a high savings rate? No. So quite a bit of investment in the U.S. is done by foreigners. Which isn’t bad, but things are out of balance in terms of current accounts and if other countries see their savings rates drop for whatever reason investment in the U.S. could drop. What does that mean? Less investment today means less economic activity (i.e. economic growth) tomorrow. How does Medicare play into this? Medicare is a huge disincentive to save. Why should I save for my retirement medical expenses if I know they will be pretty much covered via Medicare?
So one of the reasons we are seeing what we are seeing today is due to crap incentives set in place by our government. On top of it, it also sets up other bad incentives. Why worry about my overall level of health when I know the government is going to foot the bills I’ll be racking up 30-40-50 years down the road? I’ve heard the bromide “an ounce of prevention is worth a pound of cure” but we’ve set up a huge disincentive for people to stay fit and healthy in their non-Medicare years. Or more simply, we’ve set up an incentive to avoid prevention (this ties in with all that hand wringing over obesity). Would people be a bit more inclined to take care of themselves if they realized they’d be footing a major chunk of their retirement health care bill?
Now, that isn’t to say we should just kill Medicare right now and tomorrow we’ll have rainbows and unicorns. My point is that incentives matter and if you aren’t willing to consider what various government programs imply in terms of their incentives, which I don’t think anyone did with Medicare or Social Security, then you just aren’t being serious or sensible.
That is aside from the larger philosophical point of when you give the government power…and the government is made up of people, they are going to use that power. And since people in government are not any better (or worse) than the rest of us, why is it surprising when they do things to make themselves better off? In other words, it goes back to Lord Acton, “…power tends to corrupt, and absolute power corrupts absolutely….[A]lmost all great men are bad men….”
By the way the irony that I’m claiming that John Personna and Michael Reynolds are arguing the big business (and big government) side is indeed most amusing.
Medicare is a huge disincentive to save. Why should I save for my retirement medical expenses if I know they will be pretty much covered via Medicare?
Medicare is a huge assist to those who wish to take entrepreneurial risks. Just to stick with Jobs (the Steve, not the employment,) do you think he might have been less willing to risk starting a company if he’d had to worry about the possibility of paying for grandpa’s stroke?
What in God’s name would be better about a system where everyone had to behave cautiously for fear of suddenly incurring crushing medical expenses for their aging parents? We spread the cost through Medicare and young hustlers feel more free to take risks. And taking risks is good, right?
Having a safety net allows us the freedom to do things we might not otherwise dare to do. And given that every, single wealthy and developed nation on earth actually has a social safety net at least as comprehensive as our own, where is your real world example of the benefits of going without? You’re talking about a system where we would all have to play life much safer than we do.
And by the way, if anything stops China’s forward march it will be their lack of a safety net. Peasants won’t stay hungry in the villages forever watching millionaires live large in Shanghai. The biggest threat to China’s entrepreneurs is an income disparity that may end by toppling their entire regime.
I got what you mean Steve, that is why I said you buried your lede.
I don’t know why you think you can lead with Obama and then express surprise that anyone noticed.
If you wanted to lead with a bipartisan problem, you could have done that. It’s as simple as that.
I have no idea what you read into my comments to come up with this.
MBAs are a generalist degree. I have one, and my wife has an MPH. Want to know how much difference there was in our respective educations? I had to take three accounting and finance courses, whereas she had to take epidemiology and extra statistics. That’s it! Every other course in our core curriculum, with the exception of my dumb-as-a-wooden-post “leadership” course, was exactly the same. She even took as much marketing as I did, although they call it “social marketing.” And if anything her program was more rigorous and far less riddled with cheats and plagiarists.
Both of us graduated in the top 5% of our respective classes. For all that my salary after graduating was nearly twice hers at the same point in her life. In and of themselves, MBAs are horribly overrated.
micahel, I’m trying to square in my head two positions you’ve taken.
1. In the face of greater hardship (increased taxes) you will work harder and produce more.
2. In the face of greater hardship (increased risk of medical costs), Jobs will work less and produce less.
I understand Deadweight Loss, but I also understand that you’ve got it after some assumption that an unencumbered economy provides full employment.
There is no such guarantee. I understand that there is another economic term, the Natural Rate of Unemployment, but it has some very interesting connections to our experience in the boom years, say 1950 to 1980.
I don’t think anyone knows the Natural Rate of US Unemployment given globalization and rising Asian economies.
“It is simply factually false that without government spending there are no business cycles. It’s also false that “hands off†yields immediate recoveries.”
Nice straw man. Who ever claimed the that? Further, you need to complete the argument, and acknowledge the damage done by government.
“In short government can help set up the conditions for economic growth. I think our government does these things. I also think it does things that work against improving economic growth such as propping up failing businesses. Another is Medicare.”
1) If you calculate GDP the same way, European countries with universal health care have about the same rate of growth we do.
2) What happens if you eliminate Medicare in the US? I dont know for sure, but I think it likely you need the following to make up for it.
a) Larger families that are less mobile. Wages have been close to stagnant for most people for a long time. The amount of saving you describe, Japan level (notice how I worked that in), would be a real AD shock I believe if it occurred suddenly. Even if it did not, given the costs of technology, even the lower cost Europeans spend at least half what we do, it would not be possible for a large segment of our society to save adequately. So, we could just let them die and rid ourselves of the surplus population. Or, if we had larger families that lived close together, the families could manage much of that care. What would be the economic downside to our population if we become less mobile?
b) Most of the safety rules and quality standards in health care are set by Medicare. We would need to replace that. We would also need to redo funding for training.
c)What do we do for those without large families? For those of limited means who worked hard all their lives at jobs that paid only minimally above minimum wage?
Lord Acton is also a personal favorite.
““Property is not the sacred right. When a rich man becomes poor it is a misfortune, it is not a moral evil. When a poor man becomes destitute, it is a moral evil, teeming with consequences and injurious to society and morality.—
““Liberty is not the power of doing what we like, but the right to do what we ought.—
And just for you.
““The danger is not that a particular class is unfit to govern: every class is unfit to govern.—
Adam Smith, Acton and a lot of the writers of old seemed to understand that there is a moral component to economic activity. Too bad that has been largely lost.
Steve
He’s the President?
Obama is President, he’s the guy making the policy, signing legislation and taking credit. It his policies, hence he’s the guy on the hot seat.
You are still playing the R v D game.
Michael,
Chicken and egg problem. Because of Medicare, there is no savings to pay for grandpa’s stroke or to purchase insurance….so we need Medicare, which ensures we don’t have the savings to pay the next generations medical expenses. By setting up Medicare and Social Security in this way it assures that neither system can be tampered with except at considerable cost–i.e. political suicide. Of course not that demographics and bad incentives have us in deep shit we’ll probably see the program cease to exist anyways.
In economics costs are kind of like energy in physics. It never goes anywhere it merely changes its state. In economics the costs don’t go anywhere they merely change in terms of who pays and how much. With Medicare we’ve set up an unsustainable system. And to add some whip cream it has made our health care in general unsustainable in terms of costs. And the nice cherry on top you may not be dead by the time it all comes crashing down.
Yes, and just about all of them are in the same pickle we are in. The two exceptions I know of are: Singapore and the Netherlands, both small countries and it isn’t at all clear we could “import” their systems here.
Ooops.
+1 to PD for sliding the knife in between the ribs.
Let’s back up Drew and acknowledge that the electorate is economically challenged. The look to Presidents to bring in good economies just as their great^5 grandparents looked to the Chief to bring in a good harvest. For most, it doesn’t go beyond superstition.
Politicians of both parties play against this reality. Republicans, being a little more market aware should at least be up front. “How can we cure the recession? We we believe in free markets, so we won’t. It’s up to you.”
Of course that didn’t play well in Hoover’s day and it doesn’t play well today. I could get the zing if they just said “Hey Dems say they can cure the economy, but let’s be real they can’t!” But they don’t do that either.
They are limited by the fact that voters want “solutions” and will vote for whoever promises them. If the Dems were the only ones to promise, they’d win.
So yeah, Repubs are reduced to promising that if burdens are reduced, the economy will snap back in short order and jobs will ensue.
You know that’s true. There are unemployed Republicans on OTB right now believing it.
“You are still playing the R v D game.”
Try a post where you don’t play it first, and see what happens.
BTW, when I listened to the California Governors debates, and I heard both candidates asked “how will you created jobs” I thought it was a stupid question, and I though both candidates had equally stupid answers.
Yes, Whitman did promise that if she cut government jobs would come back. And yes, Brown promised green energy jobs.
I wasn’t playing it. Admit it you didn’t read my entire post. I did not that things would be pretty much the same under McCain. But he isn’t President. He isn’t setting the agenda. To write a post like Obama is not there would be stupid. Obama isn’t a problem simply because he is a Democrat, he is a problem because his policies are corporatist just like any other President’s policies would be.
Wasn’t always this way, the part about president’s bringing in good economies. That is a completely 20th century modern invention. That it is reminiscent of primitive tribal beliefs says something, I think, about democracy and voting.
Look, in just your previous post you wanted it both ways. You wanted:
and then you followed that immediately by saying:
Oh yeah, obviously it’s all me. Pfft.
Given that I quoted your last paragraph and called that your buried lede, I think that’s kind of unlikely.
I don’t think you read me.
“The presidential election of 1896 was fought on economic issues and was marked by a decisive victory of the pro-gold, high-tariff Republicans led by William McKinley over pro-silver William Jennings Bryan.”
This page discusses the Panic of 1893 and the impact on the 1896 elections:
http://en.wikipedia.org/wiki/Panic_of_1893
I believe there are government policies that can be helpful here.
1. Tax policy.
2. Regulatory policy.
3. Using the bullypulpit to talk up confidence.
JP, do you want to take the opposite position, that none of these can help the economy? I’m not talking specific policies, but that these are available levers with the right policy.
Or perhaps I should extend the questoin to Steve Verdon as well.
Chicken and egg problem. Because of Medicare, there is no savings to pay for grandpa’s stroke or to purchase insurance….so we need Medicare,
One wonders why anyone supported Medicare to begin with. You don’t suppose it was because in fact people were not saving enough to cover their medical expenses?
And do you think that condition might have been fairly general throughout a rather large part of the population?
Do you have some evidence that our economy has suffered terribly since the start of Medicare? How about Social Security, since that’s the same basic issue? Let’s make a graph, plot out the death of entrepreneurship and our descent into poverty since the starts of SS and Medicare.
Free-wheeling Victorian England vs. England today. Want to run the numbers on that? America in the 20’s vs. today. How many more poor people do we have now? How many more suffering early death?
Again: where are the real world examples of countries rolling in dough without a safety net? Saying, “they’re all in the same pickle,” is sidestepping the question. What pickle do you think they might be in without a safety net? You think maybe a lot of western countries would have gone communist? You think maybe there might be a great deal more social unrest? Maybe life would be a great deal worse for the majority of people?
1. In the face of greater hardship (increased taxes) you will work harder and produce more.
2. In the face of greater hardship (increased risk of medical costs), Jobs will work less and produce less.
Yes, Steve, because as much as it irritates you to acknowledge, people are not machines. People perceive risk differently and respond differently. It’s emotional as much as rational. Person A does not respond identically to Person B. Individual circumstances, individual beliefs and philosophies, individual history affects behavior. We are not integers in an equation. A fact which may explain why economists fail so regularly to predict the future. You’re fundamentally math nerds trying to reduce irrationality to a set of equations. Doesn’t work. Never will.
You know, the reason the Founders were so successful at creating a system of government for us was that they were good anthropologists: they got people to a degree that eludes you.
Higher taxes force me to work harder, and to be more productive in order to maintain a lifestyle I enjoy.
But I feel safe to engage in economically risky behavior in part because I know my kids won’t starve or go without basic medical care.
That may look like a contradiction to you, but in practice, in the real world, it makes sense.
” And to add some whip cream it has made our health care in general unsustainable in terms of costs. And the nice cherry on top you may not be dead by the time it all comes crashing down.”
I remain unconvinced that Medicare acts as a price floor. It seems rather the opposite to me, that Medicare is priced to keep up with private rates so that providers will be willing to see them.
Steve
If done properly, those things are there in the background, and we’d still have business cycles.
I’m all for improving those things, but I don’t think they can much change this business cycle.
Not by themselves.
John,
Yes, I’m going to mention Obama. I’m not going to write as if these policies come into existence spontaneously. That isn’t partisan.
No, it is most people. Most people play that game. I never said it was all you, but you are indeed playing that game.
Oh my god, I’m off by 4 years.
Of course changing taxes and regulations will have an effect. However, I don’t think they are used in ways that are….good for the country. Ask 100 economists about switching to some form of VAT or Hall/Rabushka type consumption tax and I bet most would consider it an improvement. Why not switch? Because tax policy is not set with enhancing consumer welfare, household incomes, and improving economic efficiency….at least not entirely. A major factor is the tax prep lobby. Everything from the makers of Turbo Tax to CPAs to tax attorney’s would be on the march if we were to make changes like Hall/Rabushka propose.
So right there you see the corporatist agenda at work imposing efficiency losses and slower economic growth to the benefit of those in the tax industry.
Regulations matter very little, IMO, to incumbent firms. Such regulations can be the result of rent seeking. Excluding competitors and driving up profits. Also, there is the issue of regulatory capture. All in all, while in theory I can see it being used for “good” socially speaking, I think a fair amount of it is again the corporatist agenda at work. Gasoline blend requirements is one such example, it creates separate gasoline markets where firms enjoy reduced competition and higher profits at the expense of consumers.
Michael,
The first people in a Ponzi scheme always make money. Latter participants can make money if the scheme goes on long enough and they can get out. Also, early on, the cost issue wasn’t well known.
I’ll repeat what I wrote earlier because apparently you did not read it.
Now, that isn’t to say we should just kill Medicare right now and tomorrow we’ll have rainbows and unicorns. My point is that incentives matter and if you aren’t willing to consider what various government programs imply in terms of their incentives, which I don’t think anyone did with Medicare or Social Security, then you just aren’t being serious or sensible.
Even today when you’ve been informed of the adverse incentives and consequences you still refuse to address the problem of bad incentives.
It could be the same person yet you want us to believe they’ll behave differently even though the two situations are rather similar. Hiding behind the “its the emotion” part of it is quite unpersuasive.
We’ve already gone over this. YOU may work harder, but YOU may be on the backward bending portion of YOUR labor supply curve. YOU are well off owning millions in intellectual property. The working as a cashier at Albertson’s on the other hand is almost surely not.
Micheal, that is fine as far as YOU go. PD’s question was more general. Why would a not-rich Steve Jobs not worker harder when faced with hardship, but will work harder when faced with hardship. Relating it back to you, a person who has substantial wealth, is not really what PD was asking.
steve,
I didn’t say it acted as a price floor. Didn’t imply it either. In fact, using market terms for a market that is to a significant degree not market based is not very reasonable.
I see this as not really related to the point I was making. My point was that having a program that massively subsidizes the consumption of health care is going to make health care costs rise faster than they would without the subsidy.
John,
BTW are you seriously implying that merely mentioning Obama’s name in regards to economic policy automatically renders that comment Partisan?
Is this post partisan then since I mention both economic policy and Obama.
Are you one of the Knights Who Say Ni? Cause if you are….
IT
It could be the same person yet you want us to believe they’ll behave differently even though the two situations are rather similar. Hiding behind the “its the emotion†part of it is quite unpersuasive.
I believe it was Tolstoy who pointed out — and at great length — that today’s coward is tomorrow’s hero. Faced with similar circumstances, yes, the same person can behave differently. Quite frequently do in fact.
Wow so much to respond too….
I don’t think anyone would say the first part about no government => no business cycles. As for the hands off = immediate recovery I think that is a straw man too. I think a case can be made that excessive meddling in a contracting economy can prolong that contraction. Robert Higgs has made precisely that argurment in some of his research. That Roosevelt’s sharp anti-business turn during the Great Depression slowed the recovery as it increased regime uncertainty.
I think in our current case there is increased uncertainty regarding the regulatory and tax regimes facing many businesses. Health care reform, the carbon tax thing, bailouts, stimulus spending, soaring government debt, have all created more uncertainty regarding investment and spending. Not just amongst business people but also consumers.
“Rule one: Never allow a crisis to go to waste,†Mr. Emanuel said in an interview on Sunday. “They are opportunities to do big things.â€
All too true, those big things also increase regime uncertainty, IMO, and all other things equal, those big things slow economic growth.
Having just this minute come from the mall, one more point on irrationality: it seems to me that major portions of our economy require people to behave irrationally — to want things they don’t need and can’t use; to want things only because someone else wants them; to spend money on impulse; to buy things they actually know in advance are unlikely to work; to buy things they know full well are actually harming them (The Cheesecake Factory, the cigar store.) Even to buy things simply for the pleasure of making a purchase — any purchase.
People also make irrational decisions about careers, about benefits and risks. They are ruled by emotion, not by reason.
Economists must know that people are irrational. But they assume that people will respond in a rational and predictable way to incentives and disincentives. Or maybe they just imagine that people writ large will in sum behave rationally. This is clearly not the case as the least 10,000 years of human history show.
My entirely uninformed guess is that economists assume a rational actor because a rational actor better fits their theories. Which would be one way of understanding why economics works well in describing past events, and not at all in predicting future ones.
My entirely uninformed guess is that economists assume a rational actor because a rational actor better fits their theories.
Hmm. And what’s cool is that that in itself would be irrational.
You know, I got up this morning and decided to patiently read the whole thread, from top to bottom.
You know what I noticed?
Do you know the first person here to use the word Obama?
Steve Verdon, of course.
I said above that Steve could have opened with recognition of a bipartisan problem. The striking thing looking back is that until his post we all had.
If you look at my first response to him, I didn’t defend Obama, or attack any Republican. I just said he should have led with his 3rd, non-partisan paragraph.
He’s been going off on me ever since.
I’ve had enough of this thread. That crazed double-standard is woven through it all.
Michael,
If you really think people are simply irrational then economic policy is a fools errand and it should be stopped as such. Why? It has at is core the assumption that people will respond rationally to the policy. Since you believe that to be untrue your continued support for Obama and his economic policy is…well…incoherent.
John,
Awwww you poor little thing.
HTFU.
I suppose its fine to sit around singing Kumbaya but ignoring current policies from the current administration is stupid.