Right on, bro

I stumbled across Noah Smith’s blog Noahpinion a while back, and it’s been on my list of “archive binges waiting to happen” ever since.  After his latest post, I might have to bump it up the list…

Clearly Noah started from very much the same place I’m in now:

Reading most macro papers, I can follow the math, but I have no idea why the modeler chose to do things the way they did, and I wouldn’t have been able to invent the same model if someone had told me to model the same phenomenon. This is true not only for original, breakthrough stuff, but for pedestrian models that are small tweaks on existing models.

I’ve wondered why this is, and I’ve concluded that it’s mostly because there are few bedrock principles I can go back to.

No kidding.  This kind of “yes, I know it’s rubbish, but what if” mindset is a skill that takes a lot of effort to develop.  I took a (very basic) economics course a couple years back, and wasted far too much time hurling abuse at the textbook.  I just couldn’t see the point of learning something so profoundly, brazenly wrong.

Since then, I’ve developed a slightly healthier respect for some of the apparent nonsense I was taught.  For example, viewed empirically, the Austrian concept of demand and supply curves is bullshit on an epic scale – it’s the classic example of a theory that explains everything and hence nothing.

Today, having spent a lot of time arguing with various people who have even less clue about economics than me… I can see the point.  Demand curves may be bollocks, but they are quite a good metaphor for some underlying dynamics that are not.  You can’t rely on them for a serious decision, but you can use them to brainstorm quite effectively what could go wrong with your chosen approach.

An example would be the perennial belief that, in places where house prices are beyond the reach of the average Joe, the government should step in and mandate lower prices.  Maybe set them by committee so as to be affordable.  This sounds like a good idea at first glance.

But, on considering the incentives involved, you realise that the high prices are just the symptom.  The cause (usually) is that more people want to move to an area than there are houses, and those people have money to burn.  That problem will not go away if prices are lowered.  In fact, lowering prices could make it harder for the children of locals to get on the property ladder, by encouraging even more immigration.  This awareness of consequences is neatly encapsulated in the demand/supply equilibrium.

Now you could come to the same conclusion by creating a heavy-duty economic model of the housing market, testing it in depth against historical data, and then running your scenario through it.  But in the time it takes to do that, everyone listening to the debate will have got bored and wandered off.  Rules of thumb, even ones that are essentially baseless, are an acceptable solution to this problem.

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