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Identity Economics is Bad Economics

Summary:
Identity economics is bad economics. The excellent Nick Rowe puts it well: Animals can be divided into Carnivores and Non-Carnivores: A = C + NC. Therefore, if we add some wolves to an island of sheep, the number of animals on that island will increase. It’s easy to see why that argument might not be right. Wolves kill sheep. But if you didn’t know that fact about wolves and sheep, the argument looks very appealing. But the equation A = C + NC tells us absolutely nothing about the world; it’s an accounting identity that is true by definition. The only thing it tells you is how I have chosen to divide up the world into parts. And I can choose an infinite number of different ways to divide the world up into parts. Here are two more examples: 1. Y = C + I + G + X – M. Therefore an increase in

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Identity economics is bad economics. The excellent Nick Rowe puts it well:

Animals can be divided into Carnivores and Non-Carnivores: A = C + NC. Therefore, if we add some wolves to an island of sheep, the number of animals on that island will increase.

It’s easy to see why that argument might not be right. Wolves kill sheep. But if you didn’t know that fact about wolves and sheep, the argument looks very appealing. But the equation A = C + NC tells us absolutely nothing about the world; it’s an accounting identity that is true by definition. The only thing it tells you is how I have chosen to divide up the world into parts. And I can choose an infinite number of different ways to divide the world up into parts.

Here are two more examples:

1. Y = C + I + G + X – M. Therefore an increase in Government spending will increase GDP.

2. Y = C + S + T. Therefore an increase in Taxes will increase GDP.

My guess is that you are much more uncomfortable with the second of those two examples than the first. You have probably seen the first argument before, but have probably not seen the second. But they are both equally correct accounting identities and are both equally rubbish arguments.

As Nick notes, the identities we write down frame our thinking. Write an identity in a different way to check whether the frame really fits.

The post Identity Economics is Bad Economics appeared first on Marginal REVOLUTION.

Alex Tabarrok
Alex Tabarrok is Bartley J. Madden Chair in Economics at the Mercatus Center at George Mason University and a professor of economics at George Mason University. He specializes in patent-system reform, the effectiveness of bounty hunters compared to the police, how judicial elections bias judges, and how local poverty rates impact trial decisions by juries. He also examines methods for increasing the supply of human organs for transplant, the regulation of pharmaceuticals by the FDA, and voting systems.

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