by Ian Pollock
* Paul Krugman (a bit dated but still good) on Ricardo’s law of comparative advantage, which makes nonsense of a lot of economic nostrums on the left and right. A great quote from Krugman:
“There is nothing that plays worse in our culture than seeming to be the stodgy defender of old ideas, no matter how true those ideas may be. Luckily, at this point the orthodoxy of the academic economists is very much a minority position among intellectuals in general; one can seem to be a courageous maverick, boldly challenging the powers that be, by reciting the contents of a standard textbook. It has worked for me!”
* Richard Chappell on plausible and implausible motivations for ethics. This is one of the reasons why, although I think consequentialism is incomplete, I am still very sympathetic, and it still serves as my meta-theory (for evaluating other theories).
* Suppose you read in the news that Widget & Sons has a market capitalization (i.e., total price of all shares) of $3 billion. Personally, I find it hard to put that number in context — how big or small is Widget & Sons compared to, say, Google? Another of many fantastic xkcd infographics is very helpful in getting a sense of scale in the domain of money.
* The new version of Scott Siskind’s non-libertarian FAQ, updated in response to criticism from libertarians. Interestingly, the author is notably more sympathetic than before.
* Worthwhile Canadian Initiative on ‘Milton Friedman’s thermostat.’ The author claims that this has strong implications for fiscal policy; my main take-away is the general point: not only does correlation not imply causation — causation doesn’t even imply correlation!
Ian: Re: the Chappell piece, I think you said it better:ReplyDelete
"...in order to actually make your way in this world as an agent who is sincerely attempting to do the right thing, you’re going to have to use the vocabulary and concepts of consequentialism, deontology and virtue ethics, or your understanding will be impoverished."
By the way, I too would say that I care more about people's welfare than I do about abstract concepts like justice, equality, or virtue, but that acknowledgement begs a lot of questions (e.g. all people equally? how to define 'welfare'? and by what means to achieve desirable ends?) - and I'm not sure that consequentialism (let alone utilitarianism) does justice (so to speak) to the process of working all this out - thus, the appeal of "ethical pluralism."
Bear with me, mufi, I change my mind on this every couple of days. Someday my opinions will settle!Delete
RE: Milton's thermostat. It is true that causation does not imply correlation if there are unknown confounding variables. But I think it is not true that you cannot uncover the data generating process if you have all the relevant variables measured correctly. The author of this piece makes 2 claims here.ReplyDelete
First, he says you can't get around the problem using multiple regression if the predictors are perfectly correlated. It is true that multiple regression fails in this case, but you don't need to use multiple regression if there is no variability in the relationship! Just plot the 3 variables together and you see a perfect relationship. If you really want to use multiple regression, just add some random noise to one of the two variables and it works fine. In practice, we don't have perfectly precise measurements, so we aren't going to run into this problem
Second, he claims that if the driver doesn't control the gas perfectly with respect to hills so that there is some fluctuation in speed, you still can't uncover the true data generating process using multiple regression. You get a combination of the data generating process of interest plus the error process of the driver. He argues that the only way you could get an unbiased estimate of the relationships is if the measurement error had mean 0. I don't think this is true.
Take the relationship speed=2*hill+3*gas. Given the same hills, if you give too much or too little gas on average to maintain a constant speed, the speed variable adjusts accordingly because the relationship is deterministic.
Maybe this is just a poor analogy. It would be problematic if there was bias in how you recorded some of the variables. For example, if you systematically underestimated how much gas you were giving the car, you would end up with a biased estimate of the coefficient for gas. But this is not the claim being made here. I haven't read Milton's original account so I don't know what he was claiming.
Is this analysis right or am I missing something here?
I'm not sure, I'll have to think about it a little!Delete
Either way I think the insight is useful that even a perfectly straightforward causal link may not express itself as a correlation.
Thanks Ian, for pointing out the Krugman article to me. I must confess I am a bit stunned by it, as Krugman usually has a more compassionate, humanistic viewpoint on Economics.ReplyDelete
I was also surprised at the tone: Krugman spends most of the piece ranting about critics of "comparative advantage", stooping to such ad hominem attacks as asserting that critics seek to be "intellectually fashionable", don't understand economics, or wish to take the "stance of a rebel". The essay was light on specifics and heavy on cheap shots at critics -- comparing them to creationists and comparing advocates of "comparative advantage" to Darwinists -- a bit ironic, since Ricardo and Malthus were *social* Darwinists: a thoroughly discredited philosophy. It's sort of like comparing "cold fusion" scientists to Albert Einstein.
In his essay, Krugman breezily dismisses the notion that Ricardo's idea is "invalid in the modern world". Yet Ricardo himself acknowledged that comparative advantage doesn't work unless one assumes that capital is relatively immobile -- a ridiculous notion in a world of trillions of dollars of electronic transfers daily. Ricardo also espoused that this defect in his theory would be offset by the idea that home bias would lead men of property to "be satisfied with the low rate of profits in their own country, rather than seek a more advantageous employment for their wealth in foreign nations" -- a quaint expectation in today's world, to say the least!
As Noam Chomsky has said:
>Take the earliest serious work on politics, Aristotle’s
Politics.... he said a democracy cannot function if there
are extremes of wealth. Everyone has to be roughly equal
-- everyone has to be middle class, he said. In fact, he called for a super welfare state. He said in any democratic society, public resources will have to be used in ways that he outlines, like communal meals, to ensure that the poor are relatively well off and that there are no big differences. Otherwise, it’s impossible to have a properly functioning democracy.
Or go on to, say, Adam Smith. His argument for markets was
nuanced; it’s not as extreme as people claim. He argued that
under conditions of perfect liberty, markets will lead to
perfect equality. That’s basically the argument for them.
Maybe the first real break with this, apart from
pathological cases, is capitalist ideology. So after
Ricardo, you start getting the conception that it’s better
for the poor if I’m rich. As capitalist ideology becomes
dominant, this conception that you’ll only hurt the poor by
helping them, takes over. Then comes the idea that you have
no intrinsic rights. The big intellectual revolution for
capitalism, I think, was the principle that human beings
have no rights other than what they can gain on the labor
market. So Malthus and Ricardo and others said that if you
can’t survive by what you can gain on the marketplace, go
somewhere else. Any effort to try to help you will just harm
you in the long run, because of market interference. This
was a real intellectual revolution reflecting the economic
emergence of capitalist relations of ownership and
production. People fought against it. The British army was
putting down riots in the 1820s and 1830s, because people
would not accept the fact that they had no right to live.<
>Thanks Ian, for pointing out the Krugman article to me. I must confess I am a bit stunned by it, as Krugman usually has a more compassionate, humanistic viewpoint on Economics.Delete
Well, Ricardo's law has descriptive and normative components, but it is primarily descriptive. One usually tries not to qualify descriptive ideas with the language of ethics (compassionate, humanistic). Krugman thinks Ricardo's law describes how the world works (modulo certain conditions); the fact that this liberal economist emphasizes it should perhaps be a clue that it is not just so much free trade propaganda.
>In his essay, Krugman breezily dismisses the notion that Ricardo's idea is "invalid in the modern world". Yet Ricardo himself acknowledged that comparative advantage doesn't work unless one assumes that capital is relatively immobile -- a ridiculous notion in a world of trillions of dollars of electronic transfers daily.
Ricardo emphasized capital mobility, but there are many other factors impacting comparative advantage. To take the low-hanging fruit, there's a reason Florida grows so many oranges!
Well, as I've mentioned, Ricardo was a social Darwinist -- so to describe his writings as being merely descriptive is a bit misleading as Ricardo was not shy about attempting to derive an "ought" from an "is". In Ricardo's words, "The principle of gravitation is not more certain than the tendency of such laws [the "Poor Laws", providing the poor with a guaranteed level of subsistence] to change wealth and vigor into misery and weakness....until at last all classes should be infected with the plague of universal poverty". Such over-reaching language is not being merely descriptive; it is being a drum-major for a particular political viewpoint. Quoting Ricardo is hardly value-neutral. To use an extreme example, if I were to quote (accurate!) statistics written by Hilter regarding ownership of assets by Jews or criminal activities by Jews, then I should not be able to hide behind a facade of value-neutral scientific analysis because everyone knows who Hilter is, what he advocated, and what his purpose was in gathering such (albeit accurate) statistics.ReplyDelete
I think Krugman misperceives: the critics are not denying the theoretical accuracy of comparative advantage, they are pointing out that the "certain conditions" or "reasonable assumptions" are rarely met and that the theory is often being mis-applied. To use Krugman's own analogy, the feather may indeed fall as fast as the cannonball in a perfect vacuum, but we rarely *have* a perfect vacuum. In 99.9% of the cases we are likely to encounter, the cannonball will hit the ground first. Likewise, Ricardo's vision of the immobility of capital, or of "home bias" is not being met in real life, and thus his theory is being mis-applied to inappropriate cases. The question is not whether C.A. is theoretically accurate, it is whether it is appropriate to insist upon its application in today's world without regard to other factors (including development, environmental damage, suppression of labor, direct subsidies, undervalued exchange rates, etc.).
No one is denying that it is appropriate for Florida to grow oranges, but Florida land owners also plow up orange groves in order to build hotels. If the U.S. had followed the philosophy of comparative advantage, we'd be selling fish and furs today. All great powers ignored the C.A. rule and moved from selling primary resources into manufacturing, often using protectionist measures to accomplish that goal.
Preventing development of poor countries by preaching laws of comparative advantage that rich countries themselves never followed is hypocritical to say the least. Krugman is wittingly or unwittingly promoting highly politicized views when he praises Ricardo.