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realitygrill comments on Open Thread June 2010, Part 3 - Less Wrong
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James_K:
Aside from the standard arguments about the shortcomings of GDP, my principal objection to the way economists use it is the fact that only the nominal GDP figures are a well-defined variable. To make sensible comparisons between the GDP figures for different times and places, you must convert them to "real" figures using price indexes. These indexes, however, are impossible to define meaningfully. They are produced in practice using complicated, but ultimately arbitrary number games (and often additionally slanted due to political and bureaucratic incentives operating in the institutions whose job is to come up with them).
In fact, when economists talk about "nominal" vs. "real" figures, it's a travesty of language. The "nominal" figures are the only ones that measure an actual aspect of reality (even if one that's not particularly interesting per se), while the "real" figures are fictional quantities with only a tenuous connection to reality.
It's pretty easy to get this sort of view just reading books. In my (limited) experience, there are a fair percentage of divergent types that are not like this - and they tend to be the better economists.
You may like Morgenstern's book On the Accuracy of Economic Observations. How I rue the day I saw this in a used bookstore in NY and didn't have the cash to buy it..
EDIT: fixed title name
I'm going through Morgenstern's book right now, and it's really good. It's the first economic text I've ever seen that tries to address, in a systematic and no-nonsense way, the crucial question of whether various sorts of numbers routinely used by economists (and especially macroeconomists) make any sense at all. That this book hasn't become a first-rank classic, and is instead out of print and languishing in near-total obscurity, is an extremely damning fact about the intellectual standards of the economic profession.
I've also looked at some other texts by Morgenstern I found online. I knew about his work in game theory, but I had no idea that he was such an insightful contrarian on the issues of economic statistics and aggregates. He even wrote a scathing critique of the concept ot GNP/GDP (a more readable draft is here). Unfortunately, while this article sets forth numerous valid objections to the use of these numbers, it doesn't discuss the problems with price indexes that I pointed out in this thread.
realitygrill:
Could you please list some examples? Aside from Austrians and a few other fringe contrarians, I almost always see economists talking about the "real" figures derived using various price indexes as if they were physicists talking about some objectively measurable property of the universe that has an existence independent of them and their theories.
Thanks for the pointer! Just a minor correction: apparently, the title of the book is On the Accuracy of Economic Observations. It's out of print, but a PDF scan is available (warning -- 31MB file) in an online collection hosted by the Stanford University.
I just skimmed a few pages, and the book definitely looks promising. Thanks again for the recommendation!
I meant personally - I did my undergrad in economics. I'm extremely skeptical of macroeconomics and currently throw in with the complex adaptive system dynamicists and the behavioral economists (and Hansonian cynicism; that's just me). But, to give an example, Krugman has done quite a bit of work in the complexity arena.
Yeah, you're welcome! The first I heard of that book was someone using the example of calculating in-flows and out-flows of gold. Each country's estimates differed by orders of magnitude or something like that, and even signs.
There are a number of reasonably priced copies on amazon.
Oh good, they certainly weren't that reasonable the last I checked.