Nobody understands that nobody understands supply and demand

Paul Krugman often makes claims like something to the effect that nobody understands liquidity traps—expressing frustration with the views of his fellow economists.  But liquidity traps are a fairly esoteric issue.  Why is there so little outrage that nobody understands supply and demand?

Marcus Nunes has a new post pointing to the latest atrocity, in the WSJ:

Oil’s Plunge Could Help Send Its Price Back Up

If something is cheaper, people will likely buy more of it. That core principle of economics is proving to be especially true with oil after its recent plunge.

The first two sentences of the article are breathtakingly wrong.  It would be easy to mock the particular reporter who wrote this piece, but let’s face it:

1.  The WSJ hires people from top universities, who probably got As in economics.

2.  Just a few days ago I did a post on Nobel Prize winner Robert Shiller doing the exact same thing.

Non-economists don’t know this, but economics instructors in the lunchroom will often sort of roll their eyes at the fact that students are unable to distinguish between shifts in demand and shifts in quantity demanded.  Thus student essays will sometimes say “price fell, so demand rose, so price went up, so demand fell, so price went down . . . ” in an endless circle.

Yes, it’s easy to mock those who know less that we do.  But when even high-level academics, pundits and reporters are making what is essentially the exact same error we accuse the students of making, then something is clearly wrong.

I’ve always thought that we teach economics the wrong way.  In the intro chapter to supply and demand we have all these stupid examples of a frost hitting the orange crop in Florida, reducing supply and driving up prices.  Or heavy demand for Super Bowl tickets driving up prices.  Actually, this is the sort of stuff students already know before taking economics. And it’s exactly what they know after taking economics.  I firmly believe that the value added of the supply and demand chapter in most textbooks is zero.  Students know no more S&D a year after taking the course then they knew going in. Maybe that’s inevitable, maybe supply and demand, like quantum mechanics, is simply too hard for most people.

But I’m not convinced.  QM is too hard for me, but I do understand supply and demand.  Maybe textbooks should reorient their coverage of the supply and demand chapter, putting less emphasis on the stuff that students already know going in and focusing far more heavily on the identification problem.  A good start would be to include 5 examples of experts reasoning from a price change, so you could tell the students, “if you learn this stuff you be smarter than Nobel Prize winners in economics.”  Young people love the idea that they are smarter that old people.  They love challenges.

Heart of Darkness (Can we learn anything from Pitcairn Island?)

Here’s The Telegraph:

Land is free and plentiful, the weather is good and there would be little chance of confrontation with the neighbours.

Yet almost nobody wants to wants to move to Pitcairn, the tiny Pacific island that was settled by mutineers from HMS Bounty.

The population on Britain’s smallest colony has been dwindling for years, and there are now fewer than 50 islanders left. But locals are struggling to find new settlers to follow in the footsteps of Fletcher Christian, who led the mutiny.

Only one application has been received to move to the island, even though the government provides all immigrants with a plot to build their own house and temperatures stay above 62F (17C) all year round.

.  .  .

Most of the island’s population is descended from the eight mutineers who settled on the island in 1789 after Christian mutinied against William Bligh, the Bounty’s captain. They brought six Polynesian men and twelve women from Tahiti with them.

Ms Christian admitted that the island’s location seemed like “the middle of nowhere”.

“But once you are there, you are as connected as anywhere else,” she said. “The island has electricity and the internet now.

“It is a special place and it is beautiful seeing the stars without light pollution. There are the bluest waters you have ever seen.”

Let’s start from the fact that Pitcairn is perhaps the least populous society on Earth—the polar opposite of China.  It has beautiful weather and fertile soil.

But—you knew there had to be a catch—there is a dark side.  From Wikipedia:

In 2004, charges were laid against seven men living on Pitcairn and six living abroad. After extensive trials, most of the men were convicted, some with multiple counts of sexual encounters with children. On 25 October 2004, six men were convicted, including Steve Christian, the island’s mayor at the time. After the six men lost their final appeal, the British government set up a prison on the island at Bob’s Valley.  The men began serving their sentences in late 2006. By 2010, all had served their sentences or been granted home detention status.

In 2010 a senior Pitcairn Islands official faced 25 charges of possessing images and videos of child pornography on his computer.

Children under the age of 16, even from the cruise ships, who wish to visit the island, must obtain the prior entry clearance.

.  .  .

The Pitcairn Islands are an overseas territory of the United Kingdom, meaning defence is the responsibility of the Ministry of Defence and Her Majesty’s Armed Forces.  In 2004, the islanders had about 20 guns among them, which they surrendered ahead of the sexual assault trials.

.  .  .

In September 2003, a baby was born on the island for the first time in 17 years. Another child, Adrianna Tracey Christian, was born on Pitcairn on 3 March 2007. In February 2005, Shirley and Simon Young became the first married outsider couple in recorded history to obtain citizenship on Pitcairn.

.  .  .

The Pitcairn Islands has the smallest population of any democracy in the world.

.  .  .

Potential extinction

As of July 2014 the resident population of the Pitcairn Islands was 56, including the temporary residents like doctor, teacher etc. In fact the actual permanent resident population was only 49 Pitkerners spread across 23 households.  At the same time is rare for the 49 residents to be all on-island at the same time as it is common for several residents to be off island for varying lengths of time and reasons, for example, visiting family, medical reasons and attending international conferences. At the beginning of November 2013 approximately seven of the residents were known to be off-island.  A diaspora survey revealed that by 2045, if nothing is done, only three people of working age will be left on the island with the rest being very old. In addition, the survey revealed that residents who had left the island over the past decades showed little interest in coming back. Of the hundreds of emigrants contacted, 33 were willing to participate in the survey and only 3 expressed a desire to return. This may be partially attributable to the 2004 sexual assault trials which has caused many emigrants to be ashamed of their Pitcairn heritage. The current labour force consists of 31 able-bodied persons, 17 males and 14 females aged between 18 and 64 years of age. Of these 31 able-bodied persons 18 are over the age of 50, with only three in their 20s, and four in their 30s.

This sad story makes me wonder about small populations that are both isolated, and are composed of a tiny number of people (in this case from 2 vastly different cultures.)  And it somehow reminds me of Marlon Brando in Apocalypse Now. Ironically, Brando played Fletcher Christian in Mutiny on the Bounty.  Even more oddly, Brando’s first son was named Christian. Later he married an Mexican actress, who had starred in the 1935 version of  . . .  Mutiny on the Bounty.  His third wife was a Tahitian actress who co-starred with him on the 1962 version of Mutiny on the Bounty.

Want more ironies?  Brando mutinied while filming Mutiny on the Bounty, refusing to cooperate with the director. Nothing happened on the set until Brando gave the nod.

Attn. Noah Smith:  NGDP targeting might not be optimal for Pitcairn Island, especially as its population approaches zero.  I’d suggest a breadfruit standard:


The fertile soil of the Pitcairn valleys, such as Isaac’s Valley on the gentle slopes south-east of Adamstown, produces a wide variety of fruits: including bananas (Pitkern: plun), papaya (paw paws), pineapples, mangoes, watermelons, rockmelons, passionfruit, breadfruit, coconuts, avocadoes, and citrus (including oranges, mandarins, grapefruit, lemons and limes). Vegetables include: sweet potatoes (kumura), carrots, sweet corn, tomatoes, taro, yams, peas, and beans. Arrowroot (Maranta arundinacea) and sugarcane are grown and harvested to produce arrowroot flour and molasses. Pitcairn Island is remarkably productive and its benign climate allows a wide range of tropical and temperate crops to be grown.

Fish are plentiful in the seas around Pitcairn. Spiny lobster and a large variety of fish are caught for meals and for trading aboard passing ships. Almost every day someone will go fishing, whether it is from the rocks, from a longboat or diving with a spear gun. There are numerous types of fish around the island. Fish such as nanwee, white fish, moi and opapa are caught in shallow water, while snapper, big eye and cod are caught in deep water, and yellow tail and wahoo are caught by trawling. A range of minerals—including manganese, iron, copper, gold, silver and zinc—have been discovered within the Exclusive Economic Zone (EEZ), which extends 370 km offshore and comprises 880,000 km2.

Honey production

In 1998 the UK’s overseas aid agency, the Department for International Development, funded an apiculture programme for Pitcairn which included training for Pitcairn’s beekeepers and a detailed analysis of Pitcairn’s bees and honey with particular regard to the presence or absence of disease. Pitcairn, it was discovered, has one of the best examples of disease-free bee populations anywhere in the world and the honey produced was and remains exceptionally high in quality. Pitcairn bees were also found to be a particularly placid variety and, within a short time, the beekeepers were able to work with them wearing minimal protection. As a result, Pitcairn today exports its renowned honey to New Zealand and to the United Kingdom, where it is stocked in London by Fortnum & Mason on Piccadilly and Partridges near Sloane Square. The honey has become a favourite of Queen Elizabeth II and Prince Charles.  The Pitcairn Islanders, under the “Bounty Products” and “Delectable Bounty” brands, also export dried fruit including bananas, papayas, pineapples and mangoes to New Zealand.

It would be sad to see Pitcairn NGDP fall to zero.

Noah Smith has “incredible confidence” that he understands my views

Here’s Noah Smith:

Scott Sumner expresses incredible confidence that NGDP targeting is best .  . . .  I think normal people realize that that certitude is basically never warranted.

Well I’m certainly not a normal person, but he’s got it exactly backwards. I think it very unlikely that NGDP targeting is best, and have said so on many occasions.  As far as certitude, I’m not certain of anything.  I’m not certain that I’m not dreaming right now, or that the world won’t end next week.  More seriously, my hunch is that there are other targets that are better than NGDPLT, and that for some developing countries even an inflation target might be better.  There’s also a non-trivial chance that I’m wrong about almost everything, and that Paul Krugman or Bob Murphy is much closer to the truth.

Although I believe absolute certainty is never warranted, my impression is that “most people” believe exactly the opposite. Most people are certain that free will exists, that personal identity exists, etc. Indeed I find most people to be wildly overconfident in their beliefs in all sorts of areas.  I’m an extreme skeptic, out there on the 99.9% end of the skepticism distribution.  In fairness, I probably have occasionally used the term “certain” when I meant fairly sure, but I am quite confident I’ve never even hinted that I’m certain NGDP targeting is best.  It certainly, err, almost certainly is not.

Richest and poorest states

I thought it might be interesting to look at America’s three richest states, and three poorest states.  Here are the top three in real income per household in 2013 (adjusted for cost of living differences between states).  Income from this source, cost of living from here:

1.  New Hampshire   $67,158

2.  Virginia   $65,523

3.  Utah     $65,049

And now I’ll list the three poorest states, in terms of real income per capita in 2012, again adjusted for cost of living differences:

1.  Utah   $34,580

2.  Idaho   $34,818

3.  Arizona   $34,905

Notice anything odd?  BTW, which three American states have lots of Mormons?

And people ask why I don’t care about income inequality.

PS.  Mississippi?  Eighth poorest, beating even Hawaii.



The burden of history

[I actually wrote this before the agreement, so perhaps it’s a moot point.]

It seems to me that some of the recent commentary on Greece doesn’t provide the appropriate background information. Here’s a Bloomberg article:

When the euro region’s finance ministers gather later today, countries other than Germany need to make themselves heard with ideas for reconciling Greece’s democratic mandate for change with the integrity of the existing bailout rules.

And here’s Matt Yglesias:

This gets at the fact that the Germans simply don’t trust the Syriza government that is running Greece. It also gets at the fact that one of the reasons they don’t trust them is simply that they are Greek. The Greeks are viewed as an unreliable country that is in need of discipline and reform, and Syriza is seen as a political project that is fundamentally about resisting reform.

I can’t really argue with either statement, but the framing doesn’t really give much of a sense of why the Germans are so reluctant to negotiate with the new Greek government. Previous Greek governments lied, cheated, and swindled tens of billions of euros from northern Europeans. Unfortunately for the Syriza government, those earlier decisions, made by other governments, sharply constrain their current options. And I might add that this is also a problem for the voters in Greece, the so-called “democratic mandate.”  By electing a government containing everyone from Maoists to right-wing nationalists, united only by their fierce belief that the crimes of previous Greek governments should not reduce the willingness of Northern Europeans to lend Greece even more money to prop up social spending, the voters implicitly walked away from the burden of history.  As of today, it looks like the rest of the eurozone won’t let them off that easily.

PS.  Just to be clear, I do think a part of the problem in Greece is the tight money policy of the ECB, strongly supported by Germany.  However, this view is not at all widely held in Europe.  So Germany is not perceived as having any “guilt” for the problems in Greece–except perhaps due to its tight fiscal policy (a bum rap.)  That’s why you can’t really equate the two.  If it was ever widely believed that tight money was to blame, the solution would not be more aid for Greece from the North, but rather less tight money.  An ECB policy error that was signed off on by the policy elite of the entire eurozone is viewed as being very different from borrowing money under false pretenses, even if in some sense it is the greater “crime.”

The 20th century was a battle between the left and the right.  That’s over.  The 21st century is a battle between insiders and outsiders. The most extreme outsiders are ISIS and Boko Haram, hated by all governments.  North Korea is perhaps the most outside government that controls an entire country.  Then you have Venezuela, Iran, Russia, etc.  Somewhat more moderate are Hungary, Greece, and the surging populist parties of the left and right in Western Europe.  In contrast, the ECB (and the EU elite more generally) are the world’s ultimate insiders.

Off topic:  Commenters often remind me that sensible Keynesians favor monetary stimulus.  But of course many Keynesians, even Nobel Prize winners like Joe Stiglitz, are skeptical.  Here’s another name to keep in mind next time you read Paul Krugman trashing those Neanderthals on the right who oppose monetary stimulus:

By inflating asset prices, Mr Abe’s schemes could increase the gap between haves and have nots, Mr Piketty warned during his visit.

That’s not helpful.