The world is models

I’m going to argue that Tyler Cowen’s new book showed something important, but not what everyone is debating.  Most of the discussion revolves around the issue of whether real economic growth has slowed dramatically in recent decades, and is likely to continue to disappoint over the next few decades.  Perhaps what it really showed is that real GDP is itself becoming an increasingly meaningless concept.

Much of the debate revolves around whether we have accurately measured inflation.  But this debate assumes there is a “true” inflation rate out there, and we just have to correctly measure it.  OK, but what is inflation and real GDP growth trying to measure?  How much more stuff we have?  Or how much more happiness?

I vaguely recall that price indices are supposed to measure how much more money we’d need to keep the same level of utility.  But what is utility?  Lots of economists seem to think it means something like ‘happiness.’   But that can’t be right, as surveys indicate little or no increase in US happiness over time, yet even the pessimists agree that RGDP/capita has grown significantly since 1945.

If RGDP is supposed to measure how much “stuff” we have, then how do we compare items?  Is an iPod more or less stuff than a washing machine?  Is an hour with a pet psychologist more or less stuff than a microwave?  Sometimes when a new product arrives, its value can be estimated by looking at how much more it sells for than an older version of the product.  But this won’t work if the early adopters are wealthy people willing to pay much more for a slightly improved version of flat panel TVs. The masses won’t buy that slightly improved version until its price falls to the old version, and when people take it home they won’t notice much difference when actually watching TV shows.

Maybe inflation doesn’t exist out in reality, rather is merely a concept we create with statistical tools.  Indeed according to the smartest man in the world, it’s not even clear that any sort of reality exists:

Hawking gives a good description of how scientists come to the conclusion that something is real.  We construct intellectual models that, within some range of phenomena, and to some degree of approximation, agree with observation.  But he calls this “model-dependent reality,” and suggests that this is all there is to reality.

Questions about the nature of reality have puzzled scientists and philosophers for millenia.  Like most people, I think that there is something real out there, entirely independent of us and our models, as the earth is independent of our maps.  But I believe this because I can’t help believing in an objective reality, not because I have good arguments for it.  I am in no position to argue that Stephen Hawking’s anti-realism is wrong.  [from a book review by Steven Weinberg]

That’s right, Stephen Hawking says it’s turtles . . . er . . . it’s models all the way down.

But I’m also a pragmatist.  During the 100 years leading up to 1973, RGDP was a reasonable way of thinking about the obvious fact that lots more of almost every type of “stuff” was being churned out.  Living standards were clearly rising as we accumulated vastly more cars, TVs, appliances, restaurant meals, etc.

But how will we measure RGDP growth in the information-oriented economy that Tyler Cowen describes?  We’ve gone from watching TVs with 4 channels, to watching computer monitors with 100 million “channels.”  What is the monetary value of that?  What’s the utility value?  Tyler points out that many of the info tech innovations produce surprising little revenue.  I’d add that in the long run that’s also true of biotech, the other great technological hope.  A complete cure for cancer will initially earn great revenue, but after coming off patent will sell for relatively little, despite continuing to cure cancer.

Tyler Cowen’s book as been both a marketing coup and an intellectual game changer.  It has gotten people to focus on issues they intuitively knew were out there, but for which they lacked a framework for thinking about.  The WSJ recently called him a 21st century Thomas Friedman.  That got me thinking about Friedman’s famous “suck on this” comment.  Well here’s my own suck on this:

If we are serious about utility being the be all and end all of economic growth, then isn’t it possible that there was little economic growth between 1945 and 1973, but lots of growth since?  Suppose all that postwar growth in “stuff” didn’t really make people any happier.  But then after 1973 the widespread use of anti-depressants made people much happier than before.  In that case, isn’t it possible that utility has actually risen faster since 1973?  Economists think they are just technicians, collecting data about the economy.  No need to think about what the purpose of life is.  No need to read Nietzsche.  But if we don’t know what we are measuring, how likely is it that we will come up with accurate measurements?

As soon as I saw Tyler Cowen compared to Thomas Friedman, I knew that his commenters would ridicule him mercilessly.  And I was right.  But those sarcastic comments come from little people, envious of great men like Thomas Friedman.  I’m not too proud to try to emulate the great sage of the 1990s.  Hence the title of this post.

PS.  God I hope that the “sensory impression of snow outside my window” isn’t real; I really don’t want to do anymore shoveling.  Do any others readers have a similar sensory impression?  Confirmation from others won’t show that the snow is “real,” but it will accurately predict whether I am about to suffer.  And pain is real.  That’s because pain (and happiness) are the only things for which the reality and the perception are one and the same.