Some economists have created more specialised indices for long-run comparisons; William Nordhaus created a price index for light (based on hours of work per candela-hour) from the stone age to modern times. This is a little unusual at the moment since macroeconomists don’t usually do comparisons over long time periods (it’s fiendishly hard to get data going back before the 20th Century on most indicators), but it shows you that we are aware of the limitations of our tools, including price indices.
That’s a very interesting paper (available here), thanks for the pointer!
As with nearly all papers addressing such topics, parts of it look as if they were purposefully written to invite ridicule, as when he presents estimates of 19th century prices calculated to six significant digits. (Sorry for being snide, but what was that about spurious precision in economics being the fault of politicians?) However, the rest of it presents some very interesting ideas. Here are a few interesting bits I got from skimming it:
The mathematical discussion in Section 1.3.2. seems to imply (or rather assume) that even assuming omniscience, a “true price index” (Nordhaus’s term) can be defined only for a population of identical individuals with unchanging utility functions. This seems to support my criticisms, especially considering that the very notion of a human utility function is a giant spherical cow.
The discussion in the introduction basically says that the way price indexes are done in practice makes them meaningless over periods of significant technological change. But why do we then get all this supposedly scientific research that uses them nonchalantly, not to mention government policy based on them? Nordhaus is, unsurprisingly, reluctant to draw some obvious implications here.
Nordhaus considers only the fact that price indexes fail to account for the benefits of technological development, so he keeps insisting that the situation is more optimistic than what they say. But he fails to notice that the past was not necessarily worse in every respect. In many places, for example, it is much less affordable than a few decades ago to live in a conveniently located low-crime neighborhood, and this goal will suck up a very significant percentage of income of all but the wealthiest folks. Moreover, as people’s preferences change with time, many things that today’s folks value positively would have been valued negatively by previous generations. How to account for that?
More to the same point, unless I missed the part where he discusses it, Nordhaus seems oblivious to the fact that much consumption is due to signaling and status competition, not utility derived from inherent qualities of goods. I’m hardly an anti-capitalist leftie, but any realistic picture of human behavior must admit that much of the benefit from economic and technological development ultimately gets sucked up by zero-sum status games. Capturing that vitally important information in a price index is a task that it would be insulting to Don Quixote to call quixotic.
Finally, I can’t help but notice that in the quest for an objective measure of the price of light, Nordhaus seems to have reinvented the labor theory of value! Talk about things coming back full circle.
Overall, I would ask: can you imagine a paper like this being published in physics or some other natural science, which would convincingly argue that widely used methodologies on which major parts of the existing body of research rest in fact produce spurious numbers—with the result that everyone acknowledges that the author has a point, and keeps on doing things the same as before?
As with nearly all papers addressing such topics, parts of it look as if they were purposefully written to invite ridicule, as when he presents estimates of 19th century prices calculated to six significant digits. (Sorry for being snide, but what was that about spurious precision in economics being the fault of politicians?)
[facepalm] OK, I’m not making any excuse for that. Given the magnitude of his findings he doesn’t even need them to make his point.
The mathematical discussion in Section 1.3.2. seems to imply (or rather assume) that even assuming omniscience, a “true price index” (Nordhaus’s term) can be defined only for a population of identical individuals with unchanging utility functions. This seems to support my criticisms, especially considering that the very notion of a human utility function is a giant spherical cow.
Yes, you can’t produce a true price index. But less-than-true price indices can still be useful.
Nordhaus considers only the fact that price indexes fail to account for the benefits of technological development, so he keeps insisting that the situation is more optimistic than what they say. But he fails to notice that the past was not necessarily worse in every respect. In many places, for example, it is much less affordable than a few decades ago to live in a conveniently located low-crime neighborhood, and this goal will suck up a very significant percentage of income of all but the wealthiest folks.
But houses keep getting bigger and you have to account for that too. Besides which, housing is no more than a third of most people’s income, at least it is in my country. That is a significant percentage, but it’s still less than half. And things keep getting better (or no worse) in the remaining two thirds.
More to the same point, unless I missed the part where he discusses it, Nordhaus seems oblivious to the fact that much consumption is due to signalling and status competition, not utility derived from inherent qualities of goods.
Assuming it’s even possible to adjust for that, I’d really want to apply the adjustment to GDP, not prices. Signalling isn’t a matter of cost but rather value.
Finally, I can’t help but notice that in the quest for an objective measure of the price of light, Nordhaus seems to have reinvented the labor theory of value! Talk about things coming back full circle.
No, you’re confusing cost and value. The labour theory of value is the theory that the value of a good derives from the labour taken to produce it. If Nordhaus were using this theory he’d be arguing that the value of light keeps falling. Measuring cost with labour is another thing entirely.
Overall, I would ask: can you imagine a paper like this being published in physics or some other natural science, which would convincingly argue that widely used methodologies on which major parts of the existing body of research rest in fact produce spurious numbers—with the result that everyone acknowledges that the author has a point, and keeps on doing things the same as before?
No. I recognise this is a problem. I can only imagine they thing it’s too had to correct for technological change robustly, but that’s not really an excuse. If you can’t do it well, it’s generally still better to do it badly than not at all. And I didn’t realise the research was that old (I’ve actually never read the paper, I read a summary in a much more recent book). Apparently macroeconomists have more catch-up to do than I thought.
This sentence of yours probably captures the heart of our disagreement:
If you can’t do it well, it’s generally still better to do it badly than not at all.
We don’t seem to disagree that much about the limitations of knowledge in this whole area, epistemologically speaking. Where we really part ways is that I believe that historically, the whole edifice of spurious expertise produced by macroeconomists and perpetuated by gargantuan bureaucracies has been an active force giving impetus for bad (and sometimes disastrous) policies, and that it’s overall been a step away from reality compared to the earlier much simpler, but ultimately more realistic conventional wisdom. Whereas you don’t accept this judgment.
Given what’s already been said, I think this would be a good time to conclude our discussion. Thanks for your input; your comments have, at the very least, made me learn some interesting facts and rethink my opinions on the subject, even if I didn’t change them substantially at the end.
(Oh, and you’re right that I confused cost and value in that point from my above comment. I was indeed trying to be a bit too much of a smartass there.)
This sentence of yours probably captures the heart of our disagreement:
If you can’t do it well, it’s generally still better to do it badly than not at all.
Yes, I think so. It’s not that I think that macroecoonmics has covered its self in glory, it hasn’t. But this really is literally the only way to learn for those guys. And I believe it’s worth it in the short run, though I’m less sure of that, than I was before we started this. Maybe those macro guys should go try micro or something.
Given what’s already been said, I think this would be a good time to conclude our discussion. Thanks for your input; your comments have, at the very least, made me learn some interesting facts and rethink my opinions on the subject, even if I didn’t change them substantially at the end.
Heh. Yeah, I’m going to go out on a limb and guess that Nordhaus didn’t subtract off the previously-free sunlight lost to global dimming and the attenuation of natural sources of nightlight due to interference from artificial light.
This is NOT to say I’m endorsing some kind of greenie move toward a pre-industrial time just so we can see the undimmed sky or have less “light pollution”. I’m just saying that ignoring natural and informal sources of wealth is a bad habit to get into.
James_K:
That’s a very interesting paper (available here), thanks for the pointer!
As with nearly all papers addressing such topics, parts of it look as if they were purposefully written to invite ridicule, as when he presents estimates of 19th century prices calculated to six significant digits. (Sorry for being snide, but what was that about spurious precision in economics being the fault of politicians?) However, the rest of it presents some very interesting ideas. Here are a few interesting bits I got from skimming it:
The mathematical discussion in Section 1.3.2. seems to imply (or rather assume) that even assuming omniscience, a “true price index” (Nordhaus’s term) can be defined only for a population of identical individuals with unchanging utility functions. This seems to support my criticisms, especially considering that the very notion of a human utility function is a giant spherical cow.
The discussion in the introduction basically says that the way price indexes are done in practice makes them meaningless over periods of significant technological change. But why do we then get all this supposedly scientific research that uses them nonchalantly, not to mention government policy based on them? Nordhaus is, unsurprisingly, reluctant to draw some obvious implications here.
Nordhaus considers only the fact that price indexes fail to account for the benefits of technological development, so he keeps insisting that the situation is more optimistic than what they say. But he fails to notice that the past was not necessarily worse in every respect. In many places, for example, it is much less affordable than a few decades ago to live in a conveniently located low-crime neighborhood, and this goal will suck up a very significant percentage of income of all but the wealthiest folks. Moreover, as people’s preferences change with time, many things that today’s folks value positively would have been valued negatively by previous generations. How to account for that?
More to the same point, unless I missed the part where he discusses it, Nordhaus seems oblivious to the fact that much consumption is due to signaling and status competition, not utility derived from inherent qualities of goods. I’m hardly an anti-capitalist leftie, but any realistic picture of human behavior must admit that much of the benefit from economic and technological development ultimately gets sucked up by zero-sum status games. Capturing that vitally important information in a price index is a task that it would be insulting to Don Quixote to call quixotic.
Finally, I can’t help but notice that in the quest for an objective measure of the price of light, Nordhaus seems to have reinvented the labor theory of value! Talk about things coming back full circle.
Overall, I would ask: can you imagine a paper like this being published in physics or some other natural science, which would convincingly argue that widely used methodologies on which major parts of the existing body of research rest in fact produce spurious numbers—with the result that everyone acknowledges that the author has a point, and keeps on doing things the same as before?
[facepalm] OK, I’m not making any excuse for that. Given the magnitude of his findings he doesn’t even need them to make his point.
Yes, you can’t produce a true price index. But less-than-true price indices can still be useful.
But houses keep getting bigger and you have to account for that too. Besides which, housing is no more than a third of most people’s income, at least it is in my country. That is a significant percentage, but it’s still less than half. And things keep getting better (or no worse) in the remaining two thirds.
Assuming it’s even possible to adjust for that, I’d really want to apply the adjustment to GDP, not prices. Signalling isn’t a matter of cost but rather value.
No, you’re confusing cost and value. The labour theory of value is the theory that the value of a good derives from the labour taken to produce it. If Nordhaus were using this theory he’d be arguing that the value of light keeps falling. Measuring cost with labour is another thing entirely.
No. I recognise this is a problem. I can only imagine they thing it’s too had to correct for technological change robustly, but that’s not really an excuse. If you can’t do it well, it’s generally still better to do it badly than not at all. And I didn’t realise the research was that old (I’ve actually never read the paper, I read a summary in a much more recent book). Apparently macroeconomists have more catch-up to do than I thought.
This sentence of yours probably captures the heart of our disagreement:
We don’t seem to disagree that much about the limitations of knowledge in this whole area, epistemologically speaking. Where we really part ways is that I believe that historically, the whole edifice of spurious expertise produced by macroeconomists and perpetuated by gargantuan bureaucracies has been an active force giving impetus for bad (and sometimes disastrous) policies, and that it’s overall been a step away from reality compared to the earlier much simpler, but ultimately more realistic conventional wisdom. Whereas you don’t accept this judgment.
Given what’s already been said, I think this would be a good time to conclude our discussion. Thanks for your input; your comments have, at the very least, made me learn some interesting facts and rethink my opinions on the subject, even if I didn’t change them substantially at the end.
(Oh, and you’re right that I confused cost and value in that point from my above comment. I was indeed trying to be a bit too much of a smartass there.)
Yes, I think so. It’s not that I think that macroecoonmics has covered its self in glory, it hasn’t. But this really is literally the only way to learn for those guys. And I believe it’s worth it in the short run, though I’m less sure of that, than I was before we started this. Maybe those macro guys should go try micro or something.
Same here, it’s been fun.
How much did it cost a cave man to walk outside? Or are we including the time he spent digging renovations to put the sky-light in his roof?
Heh. Yeah, I’m going to go out on a limb and guess that Nordhaus didn’t subtract off the previously-free sunlight lost to global dimming and the attenuation of natural sources of nightlight due to interference from artificial light.
This is NOT to say I’m endorsing some kind of greenie move toward a pre-industrial time just so we can see the undimmed sky or have less “light pollution”. I’m just saying that ignoring natural and informal sources of wealth is a bad habit to get into.
Reading paper to see if I can guess them right...
ETA: Ohhhhhh! Can I call ’em or what?