A price index is an attempt to work out how much things cost relative to what they used to cost. Real GDP is an attempt to measure how much stuff is being produced relative to how much stuff was being produced. GDP is not an attempt to determine what that stuff is worth in a metaphysical or personal sense, the production is merely valued at its market price (adjusted for inflation, in the case of real GDP). To a pacifist, the portion of GDP spent on the military is worth less than nothing, but it’s still part of GDP because it was stuff that was produced.
But now we’re back to square one. Since different things are produced in different times and places, to produce these “real” figures for comparison, we need to come up with a way to compare apples and oranges (sometimes literally!). Now, if economists just said that they would consider an apple equivalent to an orange for some simple Fermi problem calculation, I’d have no problem with that.
However, what economists use in practice are profoundly complicated methodologies that will tell us that an orange is presently equivalent to 1.138 of an apple, and then we get subtle arguments and policy prescriptions based on the finding that this means an increase in the orange-apple index of 2.31% relative to last year. Here we enter the realm of pure nebulosity, where the indexes and “real” figures stop being vague heuristics where even the order of magnitude is just barely meaningful, and acquire a metaphysical existence of their own, as “real” variables to be calculated to multiple digits of precision, fed into complex mathematical models and policy guidelines, and used to measure reified true, objective value.
Yes, the closer the consumption patters of the two economies being compared, the more useful the comparison is. If there were no common goods between two economies it would be impossible to compare them meaningfully. As to where to draw the line, well I wish I had a good answer for you, but I don’t. All I can say is that the value of the comparison decays over “distance” (meaning differences in consumption patterns).
So, here is a straightforward question then: how do we know that it is meaningful to do comparison across, say, between the U.S. in 2010 and the U.S. in 1960 or 1910? What argument supports the assumption that the differences between them are small enough?
The social science we have has significant limitations, but right now, we don’t have anything better. [...] So we do what we can, help thing along as much as our knowledge and the institutional frameworks decisions are made will permit. What else can you do?
Sometimes it’s safer to just leave things alone if you don’t know what you’re doing. Presenting dubious conclusions and questionable expertise as scientific insight leads to the equivalent of dilettante surgery being performed on entire countries by their governments, sometimes with awful consequences, and with even worse ones threatening in the future. (Prominent macroeconomists will in fact agree with me, it’s just that they’ll claim that their professional rivals are the dilettantes, and only they are true experts who should be listened to.)
Here we enter the realm of pure nebulosity, where the indexes and “real” figures stop being vague heuristics where even the order of magnitude is just barely meaningful, and acquire a metaphysical existence of their own, as “real” variables to be calculated to multiple digits of precision, fed into complex mathematical models and policy guidelines, and used to measure reified true, objective value.
So, here is a straightforward question then: how do we know that it is meaningful to do comparison across, say, between the U.S. in 2010 and the U.S. in 1960 or 1910? What argument supports the assumption that the differences between them are small enough?
I would be careful about using a price index over that kind of time frame, I don’t actually know how macroeconomists treat it, but I have read books that point out the inherent difficulty of making comparisons over long time periods (where long means more than about 20 years), and that if you’re trying to capture differences in standard of living over a long period one should try to account for differences in product quality and product mix over time. Of course that’s incredibly hard to do, and I don’t know how seriously this issue is treated in macroeconomics, but it should be taken seriously.
Sometimes it’s safer to just leave things alone if you don’t know what you’re doing.
I strongly agree. However, there are two limiting factors when applying to this logic to policy advice:
1) If you don’t give a politician any advice, their reaction won’t be to do nothing, it will be to do whatever they think is a good idea. The average macroeconomist may not know a lot, but they know enough that their advice will probably help a little. I do think that macroeconomists should be less willing to offer active advice, as opposed to “we don’t understand this problem, the best thing to do here is nothing”, but politicians have a strong aversion to doing nothing in the face of a crisis, and if their advisers keep telling them to do politically unpalatable things, they’ll find advisers that will tell them what to hear.
2) You can’t run experiments in macroeconomics, the only way to acquire data on how well an intervention works is to try it (multiple times in multiple countries) and find out how it goes, and even then you end up arguing what would have happened if you did nothing. That means that if you don’t try to fix and/or prevent macroeconomic problems you don’t get any better information on how to fix future ones. Maybe that’s an acceptable trade off, but I’m sure you can see why macroeconomists don’t think so. Also bear in mind that what brought macro into its own as a discipline was the Great Depression. Maybe it’s worth risking some bumps in the road to try to work out how to stop something like that happening again.
Prominent macroeconomists will in fact agree with me, it’s just that they’ll claim that their professional rivals are the dilettantes, and only they are true experts who should be listened to.
Yes, it’s depressing how much a macroeconomists’ opinion on what caused the recent troubles matches up with their political ideology. But it’s a function of the low quality of evidence available, in Bayesian terms when you only have access to weak evidence, your prior matters more than when the evidence is strong. The inevitable influence politics has on the discipline doesn’t help either. Politicians are all too keen to build up economists who are telling them to do things they want to do anyway.
James_K:
But now we’re back to square one. Since different things are produced in different times and places, to produce these “real” figures for comparison, we need to come up with a way to compare apples and oranges (sometimes literally!). Now, if economists just said that they would consider an apple equivalent to an orange for some simple Fermi problem calculation, I’d have no problem with that.
However, what economists use in practice are profoundly complicated methodologies that will tell us that an orange is presently equivalent to 1.138 of an apple, and then we get subtle arguments and policy prescriptions based on the finding that this means an increase in the orange-apple index of 2.31% relative to last year. Here we enter the realm of pure nebulosity, where the indexes and “real” figures stop being vague heuristics where even the order of magnitude is just barely meaningful, and acquire a metaphysical existence of their own, as “real” variables to be calculated to multiple digits of precision, fed into complex mathematical models and policy guidelines, and used to measure reified true, objective value.
So, here is a straightforward question then: how do we know that it is meaningful to do comparison across, say, between the U.S. in 2010 and the U.S. in 1960 or 1910? What argument supports the assumption that the differences between them are small enough?
Sometimes it’s safer to just leave things alone if you don’t know what you’re doing. Presenting dubious conclusions and questionable expertise as scientific insight leads to the equivalent of dilettante surgery being performed on entire countries by their governments, sometimes with awful consequences, and with even worse ones threatening in the future. (Prominent macroeconomists will in fact agree with me, it’s just that they’ll claim that their professional rivals are the dilettantes, and only they are true experts who should be listened to.)
I happen to agree that macroeconomists are overdoing it on the level of precision they can provide. Arnold Kilng (himself a macroeconomist) made this same point in a blog post last year: http://econlog.econlib.org/archives/2009/03/paragraphs_to_p.html
I would be careful about using a price index over that kind of time frame, I don’t actually know how macroeconomists treat it, but I have read books that point out the inherent difficulty of making comparisons over long time periods (where long means more than about 20 years), and that if you’re trying to capture differences in standard of living over a long period one should try to account for differences in product quality and product mix over time. Of course that’s incredibly hard to do, and I don’t know how seriously this issue is treated in macroeconomics, but it should be taken seriously.
I strongly agree. However, there are two limiting factors when applying to this logic to policy advice: 1) If you don’t give a politician any advice, their reaction won’t be to do nothing, it will be to do whatever they think is a good idea. The average macroeconomist may not know a lot, but they know enough that their advice will probably help a little. I do think that macroeconomists should be less willing to offer active advice, as opposed to “we don’t understand this problem, the best thing to do here is nothing”, but politicians have a strong aversion to doing nothing in the face of a crisis, and if their advisers keep telling them to do politically unpalatable things, they’ll find advisers that will tell them what to hear.
2) You can’t run experiments in macroeconomics, the only way to acquire data on how well an intervention works is to try it (multiple times in multiple countries) and find out how it goes, and even then you end up arguing what would have happened if you did nothing. That means that if you don’t try to fix and/or prevent macroeconomic problems you don’t get any better information on how to fix future ones. Maybe that’s an acceptable trade off, but I’m sure you can see why macroeconomists don’t think so. Also bear in mind that what brought macro into its own as a discipline was the Great Depression. Maybe it’s worth risking some bumps in the road to try to work out how to stop something like that happening again.
Yes, it’s depressing how much a macroeconomists’ opinion on what caused the recent troubles matches up with their political ideology. But it’s a function of the low quality of evidence available, in Bayesian terms when you only have access to weak evidence, your prior matters more than when the evidence is strong. The inevitable influence politics has on the discipline doesn’t help either. Politicians are all too keen to build up economists who are telling them to do things they want to do anyway.