Wednesday, January 12, 2011

Hoisted from comments -- more on Mankiw's assumptions

David had this to say about my post critiquing the way Greg Mankiw and many other economist who defend the magic of the market don't spell out the highly restrictive assumptions they use in their arguments:
An often neglected aspect of these standard assumptions is that they are *sufficient* not necessary conditions. Perfect information, for example, might not exist, but that doesn't mean there won't be an equilibrium capturing all the potential gains from exchange.

These statements may well form a set of conditions that are sufficient but for the most part not necessary to support Mankiw's conclusions. You could say the much same foe some list of statements in most intellectually mature movements. With Mankiw, I'd go even further and say that if these statements don't have to be true; they just have to approximate reality to a sufficient degree in order to make his case.

But we're talking about something slightly but significantly different. In this context, these assumptions are part of the arguments that Mankiw is making. It is, of course, possible for invalid argumnts to lead to correct conclusions and you can have a trivially valid argument that starts with a false premise, but (putting aside those old logic lessons about the implications of the existence of unicorns) you can't have a valid and meaningful argument based on false assumptions.

It's important to put this in context. Mankiw is arguing that, in addition to being immoral, a return to Clinton era tax rates would cause a sharp drop in productivity and economic growth. It is possible that he's right, but there is considerable historical evidence and any number of counterarguments (many by Nobel Prize winners) that contradict his conclusions. Under those circumstances, I think the burden of proof should rest with the guy who's saying this time it will be different.


  1. I think its important to examine the robustness of assumptions in a model and assumptions supporting a policy conclusion.

    Assumptions may be very sensitive in a model such that if they deviate even slightly, then the results change substantially. And, of course, some assumptions are robust to substantial changes. It would seem that this is the language that Mankiw is speaking in, according to the few short quotes in the past post.

    This seems to me to be a different question when evaluating the policy conclusion. For example, I don't believe that all workers earn their Marginal Product (and in some sense there's no way that we could ever tell). In this sense, Mankiw is mostly likely wrong. However, I do strongly believe that there is an important relationship between productivity and wages. The more productive a worker is, the more he or she will likely be paid. This latter formation is much less precise than the former, but I would submit that they carry very similar policy conclusions. Importantly, the assumptions necessary to make the latter statement are much more robust than the former.

    I didn't follow through each of the links previously posted nor am I an expert on the topic. This is just my two cents.

    In a recent interview ( Ronald Coase explains what he sees as good and bad economics:

    "The bad or wrong economics is what I called the 'blackboard economics'. It does not study the real world economy. Instead, its efforts are on an imaginary world that exists only in the mind of economists, for example, the zero-transaction cost world."

    The good economics focuses on the world rather than falsely precise models. His discussion later in the interview about what he considered to be important coming out of the Journal of Law and Economics is illustrative.

    (PS. I had trouble posting, so I apologize is there are repeated comments from me.)

  2. David,

    Everything you've said is correct but here's the problem: at the level of generality you're talking about, everyone from Mankiw to Paul Krugman to Dan Ariely is in agreement, but many of Mankiw's arguments seem to require much more specific definitions.

    Keep in mind I'm a statistician, not an economist, so I may be getting some of this wrong but let's assume (except for workers on commission) the relationship between a worker's productivity and wages is generally monotonic but with plateaus and possibly even the occasional local optimum (which I suspect is a pretty good description of what's going on). I'm pretty sure some of Mankiw's arguments break down if you make this assumption.

    Or look at his statements about the inheritance tax. He assumes that one component of money's value to a worker is to leave money to an heir (so far, so good) and that the value of that component holds its value even as the inheritance gets well into the millions. If parents start to worry progressively less about each dollar after, say, the first million then the other value components (such as spending, bragging, charitable giving) will swamp the inheritance component long before the inheritance taxes kick in.

    In other words, if your arguments are sufficiently robust or your assumptions are obviously true, you can do what Mankiw does. Unfortunately, neither case applies