The Miasma School of Economics
I’ve been reading Steven Johnson’s The Ghost Map, about the London cholera epidemic of 1854, and one passage reminded me exactly of today’s economics discipline.
The sense of similarity was heightened because I also (instigated by Nick Rowe) happened to be reading Mankiw’s micro textbook section on the rising marginal cost of production — a notion that 1. is ridiculous on its face, 2. is completely contrary to how profit-maximizing producers think, and 3. is based on just-plain incorrect math.* It’s just one of many central pillars of “textbook” economics that are still being taught with a straight face, even though they been resoundingly disproved by the discipline’s own leading practitioners, on the discipline’s own terms, and using its own language, constructs, and methods. These zombie ideas just won’t die. (Or to quote my friend Ole, “People never learn, and they never forget.”)
Economics today has a profound resemblance to medicine before the germ theory of disease.
Lots of people in 1854 were trying to figure out what caused cholera, and how it was transmitted. The dominant theory was “miasma” — basically bad air emanating from smelly, unsanitary conditions, especially in poor areas with lots of leaking, overflowing basement cesspools full of shit. These were contaminating the water supply, of course, so the real transmission mechanism was people drinking the effluent from previous victims.
The solution to the miasma problem? Empty the cesspools into the Thames — systematically poisoning the water supply. Yes, that’s what they did.
The miasma theory had incredible staying power, even though it was clearly and patently disproved by the thousands of Londoners whose vocation was slopping through the sewers, day and night (presumably in the thickest of possible miasmas), searching for anything valuable that they could sell. They didn’t get cholera or die at any greater rate — perhaps even less.
Why was the miasma theory so persuasive? Why did so many brilliant minds cling to it, despite the mounting evidence that suggested it was false? … Whenever smart people cling to an outlandishly incorrect idea despite substantial evidence to the contrary, something interesting is at work. In the case of miasma, that something involves a convergence of multiple forces, all coming together to prop up a theory that should have died out decades before. Some of those forces were ideological in nature, matters of social prejudice and convention. Some revolved around conceptual limitations, failures of imagination and analysis. Some involve the basic wiring of the human brain itself. Each on its own might not have been strong enough to persuade an entire public-health system to empty raw sewage into the Thames. But together they created a kind of perfect storm of error.
Miasma certainly had the force of tradition on its side. … Just about every epidemic disease on record has been, at one point or another, attributed to poisoned miasma. …
But tradition alone can’t account for the predominance of the miasma theory. The Victorians who clung to it were in almost every other respect true revolutionaries, living in revolutionary times: Chadwick was inventing a whole new model for shaping public health; Farr transforming the use of statistics; Nightingale challenging countless received ideas about the role of women in professional life, as well as the practice of nursing. Dickens, Engels, Mayhew — these were not people naturally inclined to accept the status quo. In fact, they were all, in their separate ways, spoiling for a fight. So it’s not sufficient to blame their adherence to the miasma theory purely on its long pedigree.
The perseverance of miasma theory into the nineteenth century was as much a matter of instinct as it was intellectual tradition. Again and again in the literature of miasma, the argument is inextricably linked to the author’s visceral disgust at the smells of the city. The sense of smell is often described as the most primitive of the senses, provoking powerful feelings of lust or repulsion…
I think it’s worth pointing out here the work of Jonathan Haidt et al showing that conservatives have a big “purity” and “disgust” dimension to their moral roadmap, a dimension that is largely absent or far more muted among liberals. Which leads to…
Raw social prejudice also played a role. Like the other great scientific embarrassment of the period – phrenology — the miasma theory was regularly invoked to justify all sorts of groundless class and ethnic biases. … The predisposing cause lay in the bodies of the sufferers themselves. That constitutional failing was invariably linked to moral or social failing: poverty, alcohol abuse, unsanitary living. One alleged expert argued in 1850: “The probability of an outburst or increase during [calm, mild] weather, I believed to be heightened on holidays, Saturdays, Sundays, and any other occasions where opportunities were afforded the lower classes for dissipation and debauchery.”
So disease epidemics are clearly the result of the 40-hour work week. You can find the modern-day equivalent in John Cochrane and Casey Mulligan’s assertions that today’s unemployment has nothing to do with the high job-seeker-to-job-opening ratio (caused by lack of demand for producers’ goods, and their ensuing non-need for more workers), but rather results from workers being unwilling to work at low wages (and being coddled by government programs).
Like much of the reasoning that lay behind the miasma theory, the idea of an inner constitution was not entirely wrong; immune systems do vary from person to person, and some people may indeed be resistant to epidemic diseases like cholera or smallpox or plague. The scaffolding that kept miasma propped up for so long was largely made up of comparable half-truths, correlations mistaken for causes. Methane and hydrogen sulfide were in fact poisons, after all; they just weren’t concentrated enough in the city air to cause real damage. People were more likely to die of cholera at lower elevations, but not for the reasons Farr imagined. And the poor did have higher rates of contagion than the well-to-do, but not because they were morally debauched.
Likewise, there are many valid and semi-valid ideas, theories, and constructs floating around in the world of textbook economics. But they are so intertwined with, caught up in the miasma, or phlogiston, or epicycle theories that today constitute mainstream economics (think: equilibrium, rational expectations, etc.) that it’s hard for even the clearest-eyed economist — much less the everyday person or Washington staffer, legislator, or policy wonk — to tell the shit from the shinola.
Without trying to take the metaphor too far, I’d like to suggest that today’s austerians are in favor of emptying the cesspools into the water supply — based on similarly loopy reasoning.
* The rising marginal cost theory is ridiculous on its face because it assumes that producers add one factor of production at a time — hire more workers, for instance, without renting more space for them to work. (This is exactly what Mankiw describes in his textbook; see “Thirsty Thelma’s.”) Voila! Each worker’s productivity declines. This is of course not what producers do, which is why only 11% of top-corporation execs say they face rising marginal costs of production. (I’m wondering if that 11% made the mistake of taking an intro econ class in college.) For a nice recap of that executive survey, and the faulty math of rising marginal costs, see here (PDF).
Cross-posted at Asymptosis.
oddly enough I agree with everything you say here, but were you aware that
“John Cochrane and Casey Mulligan’s assertions that today’s unemployment has nothing to do with the high job-seeker-to-job-opening ratio (caused by lack of demand for producers’ goods, and their ensuing non-need for more workers), but rather results from workers being unwilling to work at low wages (and being coddled by government programs).”
was the view presented in Paul Samuelson’s textbook around 1977 or 79. That’s the real Samuelson.
Steve: I have read down to page 63 of the pdf you linked to. It is very bad.
1. In a Cournot game, the demand curve facing the individual firm is more *elastic* than the demand curve for the market as a whole. They have the same *slope*. Elasticity and slope are not the same thing.
2. They show that if all firms jointly maximise profits the result is very different from what happens if each firm maximises profits taking other firms’ outputs as given. That is their “proof” that MR=MC is not profit-maximising. First, we know that, and teach it in intro. That’s why we have laws against collusion. Read Mankiw on this. Second, if all firm increase output together, elasticity, and hence MR, will be very different from what they would be if one firm increased output taking other firms’ outputs as given. MR=MC will still be true, but MR is very different if firms collude than if they don’t. You can’t take the definition of MR from where they don’t collude and see if it maximises profits in the case where they do collude.
Look, if you want to make the case that (long run) MC curves slope down in the real world, great! Ditch the chapter on perfect competition, and switch to the chapters on natural monopoly, monopolistic competition, and oligopoly instead.
But citing Steve Keen’s “proof” that MR /= MC for profit-maximisation really doesn’t help your case.
If I thought I had a simple mathematical proof that MR /= MC for profit-maximisation, and all neoclassical economists were ignoring it, I expect I would be peeved at neoclassical economists too. Probably much more peeved than Steve appears to be, which is to his credit.
What should I do now? Engage further, or stay well clear? God only knows. To engage would be stressful, and probably not productive.
I will probably wimp out, and post my semi-related post quietly.
industrial organization guys do regularly insist that the data show average cost curves are L shaped as Steve claims.
I didn’t know that orthodox economics includes teaching undergraduates that marginal costs increase in scale. I always teach with constant returns to scale, then depending on the course, maybe aggregate increasing with Marshallian spillovers).
On the other hand, in the short run, it is reasonable to assume increasing marginal costs. Workers are paid time and half for overtime (you can make fancy implicit contracts arguments for why this doesn’t imply increasing marginal costs but I don’t believe them). It makes no sense to expand to a new rented establishment for a week during peak sason, nor does it make sense to hire new workers and train them for a month.
Short term and long term cost curves should be different and also clearly are different.
Robert: Mankiw (and I think most intro texts, IIRC) switches to talking about ATC in the long run. It draws a picture with initially declining LRATC, then a long flat bit, then an upward-sloping bit. “Coordination problems” are given as the likely reason for eventually increasing LRATC, which I think is realistic (though coordination problems are not in the formal model).
It does talk about natural monopoly later. And about how monopolistically competitive firms will always be on the declining bit of their ATC curves, in LR equilibrium.
We have to remember that the LR industry supply curve can be upward-sloping even if the individual firm has constant returns to scale. Mankiw discusses that in “Why the LR supply curve might slope upwards”. Universities may have constant returns to scale, but the supply curve of profs can be upward-sloping.
i may be over my head here, but i wonder if “increasing production” involving increased labor inputs, and even overtime
don’t still result in lower costs per unit as labor is not as big a cost as capital (plant and equipment and implicit “interest.”)
One factor is not being considered: Motivation. The biggest problem in economics — the widespread belief that in a Monetarily Sovereign government, deficits should be reduced — is only partly caused by intuitive misunderstanding.
A more fundamental cause is the desire by the rich to widen the gap between rich and poor.
Today’s push to reduce deficit spending is a direct attack on the poor. Whatever “grand bargain” emerges from today’s Congressional debate, you can be sure it will have strong negative effects on the middle and lower classes.
This is no accident and it is not a misunderstanding. It is with knowledge and intent.
Lindsey Graham was being interviewed on PBS (WNYC) this afternoon. He seems to be making the rounds of media stops in order to say how flexible he is going to be in budget discussions and how inflexible those darn Democrats and liberals are and have been. So what is he flexible about? He’s willing to violate Grover’s pledge though not by raising any marginal rates, but instead by closing the loop holes of deductions. And this he is willing to do if “entitlements” are on the cutting block. he was smart enough not to more clearly define entitlements, and his host was dumb enough not to ask and especially not to ask in what way such entitlements add to the deficit. This pathetic manner of presenting propaganda as news and analysis is ubiquitous across media forms and outlets.
Brian Lehrer interviewed Kathryn Wylde several days ago and guess what? Same conversation, same lame refusal to question the validity of the entitlements as deficit drivers without clarifying what those entitlements are and how they are actually funded. This isn’t news, its propaganda brought to us by that media behemoth Deceit & Deception, Inc. As Roger Mitchell notes, and its worth repeating, “This is no accident and it is not a misunderstanding. It is with knowledge and intent.”
Nightingale’s real insight was military. She showed that the army was losing more soldiers to disease in crappy hospital conditions than to the ostensible enemy. This led armies to start upgrading their medical corps and funding medical research by the late 19th century. Her real impact was in 20th century war fighting. People tend to ignore her major contribution in this area, because she was a girl.
Software people tend to think of declining marginal productivity based on The Mythical Man Month where adding manpower destroys productivity by increasing coordination, training and other systemic costs which, in turn, bogs down the project much as ice age mammals were bogged down in the La Brea tar pits as shown on the cover of the book. (Amazon it. It’s classic.)
That’s because software development is not a linear process, but an awful lot of other lines of work are. If you hire more workers you can get all sorts of benefits of scale in that you can hire specialized workers and build specialist organizations to take advantage of them. You can also afford to buy highly specialized and jumbo sized equipment that wouldn’t have made sense for a smaller organization.
thank you. i think economists tend to narrow their field of vision so a simple equation will “explain everything.”
of course if you don’t consider everything you can’t explain it.
i certainly had days when it was obvious i could get more done by sending some of my “help” home. but i would hardly generalize that into a proposition that marginal costs increase with increased production.
absolutely. no other explanation makes sense.
the thing about Lyndsey Graham you have to watch out for is the stripes: Red and Yellow kill a fellow.
does that mean we owe advances in public health to military spending?
Steve: for you: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/11/four-mc-curves-and-two-ppfs.html