Category: Methodology

“Forgotten not for lack of importance, but for lack of theoretical frame-works”

A paper by current head of the President’s Council of Economic Advisors, Ed Lazear, is significant for what it says near the end about economists forgetting facts, because the facts do not fit into current theory.

(p. 260)  Human capital theory is primarily a supply-side approach that focuses on the characteristics and skills of the individual workers.  It pays far less attention to the environments in which workers work.  As such, the human capital framework has led researchers to focus on one class of questions, but to ignore others.  Specifically, little attention has been paid to the jobs in which workers are employed. 

(p. 263) The fact that some jobs and some job characteristics are more likely to lead to promotions than other jobs is not surprising.  But the analysis suggests that other ways of thinking about wage determination, namely, through job selection, may have been unduly ignored in the past. 

. . .

Researchers have begun to make jobs rather than individuals the unit of analysis.  This change of focus can illuminate new issues and provide answers to questions that were once posed and forgotten.  The questions were forgotten not for lack of importance, but for lack of theoretical frame-works.  The theory is now developed and awaits confirmation in the data.

 

For the full paper, see:

Lazear, Edward P.  "A Jobs-Based Analysis of Labor Markets."  American Economic Review 85, no. 2 (May 1995):  260-265.

(Note:  elipsis added.)

 

Does Focus on Scarcity, Blind Us to Abundance?

Chris Anderson ends chapter 8 of his stimulating The Long Tale, with a provocative jab at economists:

(p. 146)  Finally, it’s worth noting that economics, for all its charms, doesn’t have the answer to everything.  Many phenomena are simply left to other disciplines, from psychology to physics, or left without an academic theory at all.  Abundance, like growth itself, is a force that is changing our world in ways that we experience every day, whether we have an equation to describe it or not.

 

The reference to Anderson’s book, is:

Anderson, Chris. The Long Tail. New York: Hyperion, 2006.

R&D Stats Better; But Still Omit a Lot of Innovation

GDPgrowthWithR&Dgraph.gif  Source of graphic:  online version of WSJ article cited below.

Note well Romer’s caveat below that, although we may be measuring better, we are still not measuring Schumpeterian innovations (such as the Wal-Mart innovations that are vastly increasing the efficiency of retailing).

 

That research and development makes an important contribution to U.S. economic growth has long been obvious.  But in an important advance, the nation’s economic scorekeepers declared they can now measure that contribution and found that it is increasing.

. . .

Since the 1950s, economists have explained economic output as the result of measurable inputs.  Any increase in output that can’t be explained by capital and labor is called "multifactor productivity" or "the Solow residual," after Robert Solow, the Nobel Prize-winning economist considered the father of modern growth theory.

From 1959 to 2002, this factor accounted for about 20% of U.S. growth.  From 1995 to 2002, when productivity growth accelerated sharply, that grew to about 33%.  Accounting for R&D would explain about one-fifth, by some measures, of the productivity mystery.  It suggests companies have been investing more than the official data had previously shown — a good omen for future economic growth.  "The slump in investment is not as drastic as people thought before they saw these figures," says Dale Jorgenson, professor of economics at Harvard University.

Mr. Jorgenson noted a lot of the multifactor productivity growth remains unexplained.  "The great mystery of growth . . . is not eliminated."

Paul Romer, an economics professor at Stanford Business School, said the better the measurements of R&D become, the more economists and policy makers will realize other factors may be more important.  "If you look at why we had rapid productivity growth in big-box retailing, there were lots of intangibles and ideas that . . . don’t get recorded as R&D."

 

For the full story, see:

GREG IP and MARK WHITEHOUSE.  "Why Economists Track Firms’ R&D; Data on Knowledge Creation Point to an Increasing Role In Domestic Product Growth."  Wall Street Journal  (Fri., September 29, 2006):  A2.

(Note:  The slightly different online version of the title is:  "Why Economists Track Firms’ R&D; Data on Knowledge Creation Point to an Increasing Role In Domestic Product Growth.")

(Note:  ellipses in Jorgenson and Romer quotes, in original; ellipsis between paragraphs, added.)

 

Static Assumptions Undermine Economic Policy Analysis


Over 50 years ago, Schumpeter emphasized that static models of capitalism miss what is most important in capitalism.  Yet static analysis still dominates most policy discussions.  But there is hope:


(p. A14) A bit of background:  Most official analysis of tax policy is based on what economists call "static assumptions."  While many microeconomic behavioral responses are included, the future path of macroeconomic variables such as the capital stock and GNP are assumed to stay the same, regardless of tax policy.  This approach is not realistic, but it has been the tradition in tax analysis mainly because it is simple and convenient.

In his 2007 budget, President Bush directed the Treasury staff to develop a dynamic analysis of tax policy, and we are now reaping the fruits of those efforts.  The staff uses a model that does not consider the short-run effects of tax policy on the business cycle, but instead focuses on its longer run effects on economic growth through the incentives to work, save and invest, and to allocate capital among competing uses.

 

For the full story, see:

ROBERT CARROLL and N. GREGORY MANKIW.  "Dynamic Analysis."  The Wall Street Journal  (Weds., July 26, 2006):  A14.


Test That Showed No Life on Mars, Now Also Shows No Life on Earth, Either

  One of the Viking landers on Mars.  Source of photo:  http://www.msss.com/mars/pictures/viking_lander/viking_lander.html

 

When scientists announced Monday that the search for life on Mars 30 years ago may not have been quite the bust it has long been portrayed, it didn’t mean that the mission had missed any microorganisms, let alone advanced life forms.  But it did underline the growing sense that decades of assumptions about extraterrestrial life need serious re-examination.

In 1976, scientists studying data sent back by the Viking landers were quick to dismiss life on Mars.  . . .

. . .

Some three decades later, more-sophisticated instruments have shown that the Vikings couldn’t have detected organic molecules even if any were present.  When scientists fed soil from the Atacama Desert of Chile and Peru, and the Dry Valleys of Antarctica, experiments like those the Vikings conducted came up empty.  Yet, new techniques show the samples contained 10 to 1,500 micrograms of carbon per gram.

"If we knew this 30 years ago, our interpretation of the Viking results would have been very different," says Rafael Navarro-González of Mexico’s National Autonomous University, who led the study published in Proceedings of the National Academy of Sciences.

 

For the full story, see: 

SHARON BEGLEY.  "SCIENCE JOURNAL; Scientists Revisit Data On Mars With Minds More Open to ‘Life’."  The Wall Street Journal  (Fri., October 27, 2006):  B1.

 

 

Omit the Footnotes?

When I was a graduate student at Chicago, Milton Friedman was rumored to have given a presentation on how to write a doctoral dissertation in which he said something like: 

Take everything nonessential, and move it into footnotes.  Then collect all the footnotes into an appendix.  Finally, delete the appendix.

My memory is that Deirdra McCloskey, in her wonderful advice on how to write economics clearly, also advises against footnotes.  I at least attribute this advice to McCloskey (and Friedman) when I pass it on to students.

But sometimes, when I write an article, a misguided referee, or editor, insists that I omit some stuff that I think is really good.  When that happens, sometimes, if I feel strongly, I sneak some of that material back into the paper in footnotes.  Maybe no one will ever read it, but I feel better that it is still there.

And every once in awhile, it may turn out that the footnotes are what matter most: 

It was typical of Schumpeter’s love for theory that he rejected Marshall’s view that the reader could skip the footnotes and appendixes.  If time were short, Schumpeter advised, read them and skip the text!  (p. 7; italics in original.)

In this case, though, I suspect that Marshall was right, and Schumpeter wrong.

 

Source:

Samuelson, Paul. "Compete as an Economic Theorist." In Schumpeterian Economics, edited by Helmut Frisch, New York: Praeger Publishers, 1981, pp. 1-27.

 

Becker on Goals of Economics: Understand the World, and Improve It

 

Becker.jpg   Gary Becker at April 7, 2006 tribute dinner.  Source of image:  online press release cited below.

 

Gary Becker has made enormous contributions to economic theory, most notably in convincing the profession of the importance of human capital and the family.  A new center has been established at the University of Chicago in Gary Becker’s honor.

 

Becker’s brief remarks concluded the evening.  Economics will change over time, but one constant—whatever the tools or techniques—is the goal of economics, he said.   “It is judged ultimately by how well it helps us understand the world, and how well we can help improve it.”

 

For the full story, see:

Goddu, Jenn Q.  "Gift Names the Becker Center on Chicago Price Theory, Founded by Richard O. Ryan."  University of Chicago News Office, 2006.

 

Studies Show Economic Freedom Boosts Economic Growth

A trio of European economists have just published a meta-analysis on the effects of economic freedom (EF) on economic growth. After many pages, here is their bottom-line conclusion:

(p. 182) Most studies reviewed in this paper have serious drawbacks, including lacking senstitivity analysis and poor specifications of the growth model used. However, studies that have applied some kind of sensitivity analysis and sensible specfications generally find support for a positive relationship between changes in EF and growth. This suggests that liberalization will indeed boost economic growth.

For the full article, see:
De Haan, Jakob, Susanna Lundström, and Jan-Egbert Sturm. “Market-Oriented Institutions and Policies and Economic Growth: A Critical Survey.” Journal of Economic Surveys 20, no. 2 (2006): 157-91.

Owlish Evidence: More on Why Crichton is Right

Environmentalists have hypothesized that there is a link between harvesting old-growth forests and declines in owl populations. But there is reason to believe that the hypothesis may be false, and apparently environmentalists and the federal government do not have much interest in testing it:

. . . , we know little about the relationship between harvesting and owl populations. One such study — privately funded — infers an inverse relationship between harvesting and owls. In other words, in areas where some harvesting has occurred, owl numbers are increasing a bit, or at least holding their own, while numbers are declining in areas where no harvesting has occurred.
This news will come as no surprise to Oregon, Washington and California timberland owners who are legally required to provide habitat for owls. Their actively managed lands are home to the highest reproductive rates ever recorded for spotted owls. Why is this?
One possible answer is that the anecdotal evidence on which the listing decision was based is incomplete. No one denies the presence of owls in old-growth forests, but what about the owls that are prospering in managed forests and in forests where little old growth remains? Could it be that spotted owls are more resourceful than we think?
We don’t know — and the reason we don’t know is that 16 years ago federal scientists chose to politicize their hypothesis rather than test it rigorously, to flatly reject critiques from biometricians who questioned the statistical validity of the evidence on which the listing decision was based, and to declare with by-god certainty that once the old-growth harvest stopped owl populations would begin to recover.

For the full story, see:
JIM PETERSEN. “RULE OF LAW; Owl Be Damned.” The Wall Street Journal (Sat., February 18, 2006): A9.

Solow’s Wit (But Not Wisdom): Treat Schumpeter “Like a Patron Saint”


(p. 195) As Robert Solow wrote acidly in 1994, commenting on a series of papes on growth and imperfect competition, “Schumpeter is a sort of patron saint in this field. I may be alone in thinking that he should be treated like a patron saint: paraded around one day each year and more or less ignored the rest of the time.”
Schumpeter was a most unwelcome guest at the neoclassical table. Yet it was hard for the mainstream to reject him out of hand, since Schumpeter was such a celebrant of capitalism and entrepreneurship. He thought it a superb, energetic, turbulent system, one that led to material betterment over time. He hoped it would triumph over socialism. He just didn’t believe it functioned in anything close to the way the Marshallians did, and he was appalled that economists could apply an essentially static model to something as profoundly dynamic as capitalism. Schumpeter wrote presciently, “Whereas a stationary feudal economy would still be a feudal economy, and a stationary socialist economy would still be a socialist economy, stationary capitalism is a contradiction in terms.” Its very essence, as the economic historian Nathan Rosenberg wrote, (p. 196) echoing Schumpeter, “lies not in equilibrating forces, but in the inevitable tendency to depart from equilibrium” every time an innovation occurs.



Source:
Kuttner, Robert. Everything for Sale: The Virtues and Limits of Markets. Chicago: University of Chicago Press, 1999.

Theory Uncomplemented by History, “Is Worse than no Theory at All”

I have been primarily a theorist all my life and feel quite uncomfortable in having to preach the historian’s faith. Yet I have arrived at the conclusion that theoretical equipment, if uncomplemented by a thorough grounding in the history of the economic process, is worse than no theory at all.

Excerpted from a letter from Schumpeter to Miss Edna Lonegan, dated February 16, 1942, stored in the Schumpeter archives at Harvard, and reprinted in:
Swedberg, Richard. Schumpeter: A Biography. Princeton, NJ: Princeton University Press, 1991, pp. 229-230.