Economic depths – Econlib

The philosopher Daniel Dennett recently passed away. While his work focused on issues such as consciousness and the philosophy of mind, his ideas can find applications in other areas of life, including economics. There is one idea in particular that he described in his book Intuition pumps and other thinking aids I want to emphasize here what Dennett calls a ‘profundity’.

Dennett describes a “profoundness” as a seemingly meaningful statement that is actually marred by ambiguity. There are two different ways to interpret the statement. According to one interpretation, a meaningful and substantive claim is being made, but that claim is plainly false. On another interpretation, the statement is true, but only trivially true.

This has some similarities to the motte-and-bailey fallacy that Scott Alexander has described for:

Both ideas are similar in that they refer to statements that fluctuate between interpretations, but there are a few differences. In motte-and-bailey, it is not necessarily the case that the bold statement is false; it’s just that the bold claim actually put forward is not defended. Motte-and-bailey is a sneaky argumentative tactic to avoid defending a claim. A depth, as Dennett described it, is more like a trick you can play on yourself. Depths can cause our thinking to stumble if we unconsciously transfer the truth value of the trivial interpretation to the substantive interpretation.

That said, here are two examples of depths in economics that you often encounter. The first is the idea that imports reduce GDP, and the second is the idea that price increases are the result of greed.

For the first example, I am actually being generous in admitting that this statement may even be trivially true in some sense. It’s only in what Pierre Lemieux has called “a limited meaning for bean counting” – if we look at the accounting identity of GDP, we see that GDP = G + C + I + X – M. That is, GDP is equal to government expenditure, plus consumer expenditure, plus investment expenditure, plus exports, minus imports. Although exports supplement GDP, imports subtract from GDP. Doesn’t that just plainly mean that imports reduce GDP?

No. While I have complained more than once that many economic misunderstandings arise because economists are simply bad at naming concepts (public goods!), in this case I must absolve the profession of that charge. What GDP expresses is already in the name: gross domestic product. That is, it’s a measure of the things that – wait for it – produced in your own country. By definition, import is something that is not produced domestically. While it is trivially true that imports are subtracted from the accounting identity of GDP, that is because what GDP measures, by definition, excludes imports. Subtraction is done to avoid double counting. Recently I spent $5 on avocados imported from Mexico. That $5 would appear in the C section of the above identity – it was $5 in consumption. But since the avocados were not produced domestically, that $5 is subtracted from the GDP calculation as M. That does not mean that GDP has been “reduced” by $5 in any meaningful sense. It means that this $5 of consumption was not part of GDP as defined.

The substantive claim of the “imports reduce GDP” crowd is the idea that Americans would have a higher standard of living if we exported more and imported less. But this is plainly untrue. Exporting is (again by definition) something that American workers spend time, money and resources on and foreigners benefit from consuming. Consumption is a benefit, and production is the cost of acquiring that benefit. (Indeed, as Adam Smith wisely said, “consumption is the sole end and end of all production.”) Exports are what a country’s citizens get through the costs of production but do not get the benefit of consuming. Because exports are (by definition) produced domestically, they are part of GDP, but that is very different from saying that more exports and fewer imports would improve living standards or make citizens richer in any meaningful way. Another way to demonstrate this is to rearrange the accounting identity of GDP. Suppose you want to live in a society where citizens benefit from high levels of consumption and investment. You get C + I = GDP – G –

The second profundity, that greed explains price increases, can be interpreted in a way that is trivially true. Producers want to make as much money as possible and will therefore prefer to sell at higher prices to make more money. But this claim is often made to explain things like price spikes, and in this more substantive context the claim is clearly false. A desire to make more money instead of less is a constant. Price changes are variable. Explaining a change in outcome by appealing to factors that have remained the same is an explanatory dead end. For example, not so long ago, egg prices in the United States rose sharply. Does ‘greed’ explain this price increase? Trivial yes, but not substantive. If egg producers used to sell eggs for $3 a dozen and then raised the price to $6 a dozen, how does “greed” explain the change? If greed is the reason for selling at six dollars a dozen, why did they ever sell at three dollars a dozen? Were egg producers in the previous era altruistically motivated, then suddenly all became more greedy, before suddenly all becoming less greedy again? Economist Justin Wolfers once tweeted a rather striking graph of egg prices:

The same reasoning that says the huge price spike at the end of the chart is explained by “greed” would, if applied consistently, also imply that the steep drop that occurs shortly afterwards is explained by a huge decline in greed. Or, instead of trying to explain change by appealing to the unchanged, we could try to explain change by appealing to other factors that also changed. Such as, for example, changes in the supply and demand situation due to the spread of an avian disease, which has significantly reduced the supply of eggs in the short term.

Those are two common examples of economic depth. If you can think of some, dear reader, be sure to share them in the comments!