Wednesday, August 08, 2012

The perils of Phlogistonomics



In a recent post, Matt Yglesias complains about a kind of economic analysis that has always kind of bothered me. I've called it "label-the-residual economics"; on Twitter, Matt suggested "phlogistonomics" and Richard Thaler suggested "aether". I like "phlogistonomics" a bit better, despite its unwieldliness, for reasons I'll explain later. In the meantime, let me go into a bit more depth than Matt did about the dangers of the approach.

What is this type of analysis that I'm warning about? In economics, when explaining a phenomenon, you generally encounter a "residual". The residual is the part you can't explain in terms of things you can measure directly. For example, suppose you are trying to explain a country's GDP. You can (somewhat inaccurately) measure how much labor the country has. You can (somewhat more innacurately) measure the amount of capital it has. So you assume that GDP is a function of capital, labor, and something else:

GDP = TFP * K^a * L^1-a

Here, K is capital ("das kapital"), L is labor, and TFP is the "something else". TFP is the residual.

This residual represents how productive capital and labor are, which is why we call it "total factr productivity" (TFP). What determines TFP? It could be "human capital". It could be technology. It could be institutions like property rights, corporate governance, etc. It could be government inputs like roads, bridges, and schools. It could be taxes and regulations. It could be land and natural resources. It could be some complicated function of a country's position in global supply chains. It could be a country's terms of trade. It could be transport costs and urban agglomeration. It could be culture. It could be inborn racial superpowers. It could be God, Buddha, Cthulhu, or the Flying Spaghetti Monster. It could be an ironic joke by the vast artificial intelligences that govern the computer simulation that generates our "reality", putting their metaphorical thumb on the scales because they are bored underpaid research assistants with nothing better to do.

Many, many economists refer to TFP as "technology". They are usually careful to stress that what they mean is not "technology" as we usually think of it, but a "generalized technology" that represents all the ways that society has found to utilize capital and labor to pump out GDP. But despite this careful qualifier, using the label "technology" has implications for how people think about and evaluate models like this. "Technology" sounds like something exogenous, something that we can't predict and can't control. Hence, using the label "technology", which has outside meanings, instead of the more neutral term "TFP", puts us in danger of allowing semantic biases to cloud our judgment.

This is "labeling the residual". Another example is in development economics, where the things we don't understand are often labeled "culture". This can lead to semantic biases. For example, when explaining Japan's wealth, many people turn to old cultural stereotypes such as "Japan is conformist" or "Japanese people imitate foreign things but don't invent new things". These stereotypes are blunt and inaccurate. Many of them were manufactured by either Japan's fascist government in the 1930s (as a way to promote the idea of racial differences) or else by writers in the British Empire. Many may no longer be very accurate. Others may never have been very accurate. Others may be somewhat accurate but miss crucial details. Nearly all of them greatly annoy Noah Smith.

What is the danger of semantic bias? Semantic bias may discourage us from trying to delve deeper into the workings of the economy. For example, suppose we find that TFP looks kind of like an AR(1) random process:

TFP_t = p*TFP_t-1 + e_t

In other words, TFP looks like it has "random" shocks (e_t) that decay after a while. Most of the action is in the shock, e_t. If e_t is truly random - if it's like a quantum fluctuation or a sunspot - then we're done, we can't do any better. But if e_t depends on things that we can observe, then we can do better than this model. We can explain more than we have already explained. So the question of whether e_t is truly random is crucial to the question of how well we can explain the economy.

I argue that calling TFP "technology" biases us toward thinking that e_t is truly random. After all, things like the invention of the internet can't be predicted in advance with any kind of certainty. For all intents and purposes, they are truly random events, like sunspots or earthquakes. So even though TFP might include a lot of things other than what we normally think of as technology, using the label "technology" for TFP discourages us from trying to actually go and predict TFP. In reality, we might be able to predict other determinants of TFP, like terms of trade or government investment. I know some economists try to predict these things. Good!! But maybe if we didn't call TFP "technology", more people might try, and they might get more funding to develop new sources of data that would help explain TFP.

I also argue that calling TFP "technology" allows some models to get a free pass on the Lucas Critique. TFP (or the persistence parameter p) might be a function of all kinds of government policies, in which case the model presented above would not be policy-invariant. Remember that applying the Lucas Critique involves a judgment call - the only thing deciding whether a parameter like TFP is "structural" is the consensus judgment of macroeconomists. And I suspect that the label "technology" makes it easier for economists to just assume that TFP is structural...because hey, policy can't affect whether some genius invents something in his garage, right?

I think this semantic bias is even more evident when "culture" is the residual being labeled. Culture is assumed (wrongly, I believe) to be something ancient and immutable. Japanese "culture" (i.e. cultural stereotype) is usually explained in terms of ancient traditions and conditions - Japanese people are risk-averse because they live on an island with lots of earthquakes, Japanese people are imitators because of the dominance of China in East Asian culture hundreds of years ago, Japanese labor markets are a reflection of samurai-era feudalism, etc. This in turn implies that "culture" cannot easily change. (The assumption is clearly false. For example, Japan had very little lifetime employment or seniority-based pay before World War 2; so much for samurai feudalism!)

Labels like "technology" and "culture" may bias economists toward being lazy and sloppy. If we allow our beliefs to be guided by our labels, we risk reducing ourselves to speculating about the future trends of technology or invoking the same tired cultural stereotypes that fill internet forums, instead of searching out new sources of data to explain the heretofore inexplicable. I should caution the reader that I don't know how much of this sort of thing really happens; I am NOT alleging that the econ profession as a whole commits these mistakes. It just seems like a danger. If pressed for examples of when the "technology" label was over-influential, I'd point to the wide acceptance of the RBC paradigm in the 1980s. Regarding "culture"...well, let's just say the whole country of Japan is a serial offender on this count.

Another danger of residual-labeling is that it may bias us against parsimony. When we see a new phenomenon that is difficult to explain - for example, the slowness of Japanese cafes to offer free wi-fi - we may be tempted to postulate a new cultural trait ("Japanese businesses are suspicious about giving anything away for free") instead of looking for some incentive (Perhaps Japanese cell phone service is so good that few people own laptops?) to explain the phenomenon. We just point at stuff we can't explain and say, in the parlance of blogs, that it's "the culture that is Japan". But if you add a new parameter to explain a new data point, you haven't really explained anything.

So what should we call the practice of labeling residuals with semantically laden words? I like Matt Yglesias' proposed label of "phlogistonomics" a little better than Richard Thaler's suggestion of "aether". In the late 1800s and early 1900s, "aether" was something we could and did investigate; it was supposed to be the medium in which light waves moved. We proved it didn't exist. On the other hand, "phlogiston" was more like a residual - it was just "whatever makes stuff burn" (the error was in thinking it had mass). We know there is something that makes stuff burn. And we know there is something that makes some economies function differently from others. The danger in labeling this residual is that in doing so we may trick ourselves into thinking we understand the residual as well as we ever will. That would be a mistake. Eventually, we figured out what makes stuff burn. Someday we may figure out what makes economies different.

69 comments:

  1. Anonymous3:52 AM

    I think making generalisations about what economists write about TFP without any kind of literature review is also a form of 'phlogistonomics', no? I mean because the literature on productivity is massive, both you and Matt fail to make any reference to this, which gives a very misleading impression.

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    1. Did you read the part where I wrote:

      "I should caution the reader that I don't know how much of this sort of thing really happens; I am NOT alleging that the econ profession as a whole commits these mistakes. It just seems like a danger."

      ???

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  2. I have the impression that the risk is taking the model too seriously. Does an aggregate production function adequately describe the growth path of an economy? Probably not, but it provides an understanding of the interaction of aggregate capital and aggregate labor.

    Note that much is left unexplained in K and L as well. You may have huge productivity variations in L (both short term and long term), as was recently pointed out by your Japanese growth debate, just like you may have varying depreciation rates for K.

    And then, this is a supply-side model that does not say what happens when you have a persistent demand weakness. Or should we understand TFP as demand-driven?

    Finally, the model may not apply universally. You may have growth driven by demand in leading economies (and boosted when innovations make people craving for them: fridges, cars, televisions, mobile phones, the internet), and by structural (supply) conditions in laggard economies.
    Take the model for what it's worth, and it certainly is worth a lot, but keep your eyes open on the rest.

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  3. Paul Andrews6:06 AM

    I think the semantic bias applies very broadly, as alluded to by Zorblog.

    When someone proposes a model, they say "this is obviously a gross oversimplification". Terms are given the same names as real world phenomena, but it is acknowledged that they don't actually refer directly to those real world phenomena.

    Later, when the model is in the hands of a policymaker, the difference between terms as defined in the model, and real world phenomena, is easily forgotten.

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  4. Please tell me that's not a real TFP model. Absent positive "technology" shocks TFP, and GDP, decay to zero? Why would TFP decay at all?

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    1. Please tell me that's not a real TFP model.

      I wish I could tell you that, but I can't. It's real. Furthermore it won a Nobel prize. Here is the (incredibly famous) paper:

      http://minneapolisfed.org/research/prescott/papers/timetobuild.pdf

      Why would TFP decay at all?

      If it's really technology, it presumably would not.

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  5. It strikes me that labeling the residual "culture" or "technology" is a bit like using the ultimate explanation for all mysteries: god did it, which is the non answer some are willing to accept. Perhaps such broad sloppy labeling of actual complex phenomena could be called voodoo, or religion, or superstition, or appeal to nebulous emergence.

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  6. Noah's terminology is sloppy (presumably to avoide being anal). The TFP in the AR(1) process could be called tfp, and TFP in the GDP equation, TFP = exp(gt + tfp).

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    1. That's better, but it still doesn't make sense that, say, a technological innovation beyond the normal growth rate would wash out over time.

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    2. Dcomerf: Yes, writing it that way would just be annoying for readers.

      Lars: Yes, it does not make sense. True technological changes should be unit-root.

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    3. Hmmm, should they be unit-root if they become obsolete over time due to creative destruction? See for example Caballero and Jaffe (1993): http://www.nber.org/papers/w4370.pdf

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    4. Anonymous10:49 AM

      I was going to write something about what's being lost in the translation from econ-speak to layman explanations via the whole natural log / exponent thing. Glad someone else mentioned it. That being said, I think Noah was right to skip over it. Introducing that math probably adds more confusion than clarity for many readers...and it doesn't even necessarily fix all the problems anyway. It's better, but still not terribly satisfying.

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  7. Can we just go ahead and call it "mislabel-the-residual economics" then?

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    1. Yes, but it's a bit clunky... ;)

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    2. Larry Headlund2:17 PM

      Perhaps you could go real old school and label your terms in Latin without current English meanings. That would give your papers class and remind all concerned that these are technical terms without mundane meanings.

      I nominate refugium economics.

      By the way, I think you're hard on phlogiston theory. It wasn't given its final comeuppance until a scant century before aether.

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  8. An overlooked semantic bias in economics is "The Invisible Hand".
    The metaphor is too powerful, it leads economists to believe that price and quantity adjustments (etc) happen all by themselves. A license for scientific lazyness that has plagued us since the beginning.

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  9. There is a related tendency in economics which is akin to the problems experienced by pre-Copernican astronomers. They developed ever more complex models to try to explain planetary motion from a geocentric basis. The trouble was that the underlying assumption (which no-one questioned, or if they did they were silenced) was fundamentally wrong....I am trying to think of a good name for this tendency. Does anyone have a neat suggestion?

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    1. "Does anyone have a neat suggestion?"

      What about "Neoclassical economics”? That is probably what future economic historians will call it anyway.

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    2. Sorry to be pedantic Nemi, but the correct term for the profession of that field would be "historians of economic thought", not "economic historians".

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  10. "Labels like "technology" and "culture" may bias economists toward being lazy and sloppy."

    you are confusing cause and effect. label the residual essentially boils down to "all these other variables i have accounted for aren't statistically significant, but the unknown one is. Since I am lazy and sloppy (but need to sound smart for the peers reviewing my paper) i am going to call it xxxx." where xxxx = whatever appeals to the audiences' sensibilities. xxxx could be culture, tax reform, technology, confidence, aggregate demand, aggregate supply...

    Its the economics version of the Full Moon Effect: i have a bad (good) day, i look up and see the full moon, and conclude that the Full Moon induces behavioral changes.

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    1. oh, and why does there need to be a reason for everything? some evolutionary changes are just random, and we can only tell whether they confer a survival or breeding advantage over a very long time (multiple generations). how do we really know productivity is really advancing except over a very long span of time?

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    2. you are confusing cause and effect.

      Could be...

      oh, and why does there need to be a reason for everything?

      No reason...

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  11. Four comments:

    1. Culture may change, but it changes slowly...unless a big war followed by foreign occupation accelerates the process like it did for Japan. But just because we do not like that culture is hard to change, we should not assume its influence away (as many neoclassical economists have done to the dismay of institutionalists). After all, empirical studies (e.g. Jones, 1999) show that fixed factors like language spoken and geography are significant predictors of the quality of institutions.

    2. Despite the fact that the term "relativity" in the theory of relativity has been used out of context by postmodernists to make weird social inferences (see for example "Fashionable nonsense" by Sokal and Bricmont), physicists have not felt compelled to use a different term. Why should economists?

    3. A great deal has been written on the relationship between TFP and economic freedom, TFP and R&D investment, TFP and education, TFP and quality of institutions, etc. Any intermediate textbook on economic growth (e.g., Weil) or even some principles textbooks (e.g., Mankiw) include discussion on such determinants. Unless someone has slept in class during these discussions, in which case I wouldn't expect them to have a Ph.D. in econ, they should be aware of what we really mean when we refer to TFP as technology.

    4. As a mentioned above, should technology be a unit-root process if discoveries slowly become obsolete due to creative destruction as in Caballero and Jaffe (1993)? They find an average annual rate of technological obsolecense of about 7%.

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    1. Correction: The paper is by Hall and Jones

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    2. Culture may change, but it changes slowly

      Really? I don't think this is usually true. Look how fast America's culture changed with regards to racism, sexism, acceptance of gays...or the change from small-town culture to suburban culture...or the internet...etc etc etc etc etc...

      economic freedom

      Now there's a misleading term if ever I heard one!!

      As a mentioned above, should technology be a unit-root process if discoveries slowly become obsolete due to creative destruction

      Yes, obsolescence does not make us forget technology. It is still available for use, just superseded by something better.

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    3. American culture changed fast with regards to racism? Hmmm, I suppose it depends on the point of reference. But you are also talking about a nation that is famous for its willingness to change (a cultural trait that has not changed :) )! Moreover, how has this change materialized in terms of economic outcomes for blacks? Because that's what we are interested in here.

      Well, in the specific context economic freedom has a very narrow definition. But I get your point, lol.

      Regarding technology, again, we don't forget it. But the question here is how its economic impact behaves over time. This is just a question, I haven't done the algebra, but if the economic impact of any discovery diminishes over time due to obsolescence would TFP still follow a random walk, or would it be trend-stationary with persistent but not permanent deviations?

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    4. ut you are also talking about a nation that is famous for its willingness to change (a cultural trait that has not changed :) )!

      See? Pure ad-hoc-ery and just-so-story-ism...

      if the economic impact of any discovery diminishes over time due to obsolescence would TFP still follow a random walk, or would it be trend-stationary with persistent but not permanent deviations?

      It's not clear why obsolescence would occur unless some better technology comes along to supersede the old one (as in vintage capital models), in which case we should expect permanent shocks. If you can think of a reason why this is not the case - why obsolescence truly represents a loss of know-how - I'd be happy to hear it.

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    5. But it isn't a loss of know-how. These shocks represent deviations from trend. Suppose a burst of discoveries pushes the TFP up by 3% instead of the usual 2%, so its level jumps above its long-run trend. In the absence of another burst, how would the deviation from trend look like? If this additional stock of discoveries did not depreciate then its effect on TFP would be permanent, and the latter would stay higher than otherwise forever. However, if this stock depreciates over time then won't the level slowly converge back to the path it would have taken under a deterministic trend? Better technology does continue to come along, but at its previous pace.

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    6. But it isn't a loss of know-how. These shocks represent deviations from trend.

      Sure. Compare a trend-stationary time series from a random walk with drift. In the first case, a burst of innovation today forecasts slower-than-trend innovation tomorrow - in other words, discovering more today means you will discover less tomorrow than you otherwise would have - In the latter case, a random walk with drift, discovering more today has no bearing on how much you discover tomorrow.

      Is it plausible that technological improvements today somehow crowd out technological improvements tomorrow? Maybe. Suppose improvements persist at a steady clip with very little variance, and the economy chooses when to actually build the machines and such that embody the new technology. In that case, spending more to upgrade your machines today means you have less to spend tomorrow.

      However, this presents a problem for RBC-type theories, because TFP is no longer exogenous at business cycle frequencies. If TFP represents "embodied technology" rather than knowledge, then what would make the economy suddenly stop spending on upgrading its machines? A negative shock to the rate of knowledge formation? But again, if shocks to knowledge formation are big enough to move TFP, we should see a unit root in TFP.

      How's that for an explanation?

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    7. An excellent explanation indeed! (lol)

      I did some quick math and I believe you are right, obsolecense does not make a difference if it is conditional on new innovation. However, I want to give this anothe shot. I am thinking of Helpman's "General Purpose Technologies" (e.g., the transistor) and Brian Arthur's description of how technology advances in "The Nature of Technology". The idea is that major discoveries that occur at random intervals create a new set of technological opportunities, and generate a wave of inventions that use it as a building block. Arthur describes this phase as a deepening process, but argues that this process has diminishing returns. As more opportunities are exploited, fewer remain to be discovered. That is, until the next GPT comes along. Isn't this story consistent with a scenario where higher than average rates of innovation are followed by lower than average rates until the next technology shock?

      Finally, to be fair, Kydland and Prescott's definition of technology is much broader. It includes the entire economic environment. Specifically, in the paper they mention investment tax credits and accelerated depreciation rates. Such policies, and therefore their effect, are usually temporary.

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    8. Isn't this story consistent with a scenario where higher than average rates of innovation are followed by lower than average rates until the next technology shock?

      I don't think so, no. Each improvement should still be permanent in this scenario. I think what you're envisioning is a unit-root process with serially correlated errors (and drift). Think carefully about the "trend", or "drift" in the time-series, and what that represents, and how it happens.

      Finally, to be fair, Kydland and Prescott's definition of technology is much broader.

      Well, this is kind of what I was talking about in the original post...

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  12. If economists were to go to a Kardashev scale, it would make things a lot more fun and may well answer Yglesias question of growth. The scale, proposed by Soviet astronomer Nikolai Kardashev in the 60's, ranks civilizations by the amount of useable energy they have at their disposal. We're potentially a Kardashev Type 1 civilization, which is able to effectively command the equivalent of the total solar insolation of the home planet, but have a long and expensive way to go.

    One might say that growth comes from the ability to control increasing amounts of energy in a sustainable manner, which is bad news for a lot of economic assumptions and a hydrocarbon based economy. Our current economic models are liable to cook us ( http://somewhatlogically.com/?p=649 ) long before we even begin to reach the higher levels.

    Definitions from Wikipedia

    In 1964, Kardashev defined three levels of civilizations, based on the order of magnitude of the amount of power available to them:
    Type I: "Technological level close to the level presently (here referring to 1964) attained on earth, with energy consumption at ≈4×1019 erg/sec[2] (4 × 1012 watts.) Guillermo A. Lemarchand stated this as "A level near contemporary terrestrial civilization with an energy capability equivalent to the solar insolation on Earth, between 1016 and 10 17 watts."[3]

    Type II: "A civilization capable of harnessing the energy radiated by its own star (for example, the stage of successful construction of a Dyson sphere), with energy consumption at ≈4×1033 erg/sec.[2] Lemarchand stated this as "A civilization capable of utilizing and channeling the entire radiation output of its star. The energy utilization would then be comparable to the luminosity of our Sun, about 4 × 1026 watts."[3]

    Type III: "A civilization in possession of energy on the scale of its own galaxy, with energy consumption at≈4×1044 erg/sec."[2] Lemarchand stated this as "A civilization with access to the power comparable to the luminosity of the entire Milky Way galaxy, about 4 × 1037 Watts."[3]

    It will be too bad if humanity simply cooks itself before we reach our full type 1 potential. Were there any economists on the USS Enterprise "to go where no economy has gone before?"

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  13. PaulS5:24 PM

    Dark matter is a much more current analogy--it's the residual of the rotation curves. It's also more mysterious--we don't know what it is, while phlogiston is something already ruled out, proven not to exist.

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    1. Phlogiston is only nonexistent if you insist that it has mass. If phlogiston is just defined as "that which makes things burn and is used up in the course of combustion", then reducing potential is phlogiston, and it does exist.

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  14. This comment has been removed by the author.

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  15. I don't think this is right, but let's pretend it is pronounced FLOGistonomics. In which case I think it has another attribute: implying abuse. Like "flogging the data," "flogging the logic," "flogging the dolphin..."

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    1. Data are like people: torture them enough and they will say anything.

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  16. Rhetorical question: in what units are TFP, K and L expressed?

    The form of the production function in the model is chosen because it is tractable and because it has two desirable mathematical properties: (1) output scales so that if you double all inputs output doubles; and (2) it exhibits diminishing returns if one input is fixed and the other is increased. The real world production function will be much more complicated.

    TFP is some sort of expression of efficiency (converting labor and capital into production) and it may be a measure of the aggregate quality of the design of machines, roads, institutions etc. As technology advances, the best possible design (corresponding to the highest possible TFP) increases but that does not mean that every individual, company or society adopts that design.

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    1. in what units are TFP, K and L expressed?

      TFP is unitless, K and L are in dollars.

      Delete
    2. Anonymous11:16 AM

      I don't think calling it "unitless" is quite right. Technically, you can write out it's "units" as some combination of other things, like capital, labor, and whatever else you include in your production function (which need not be limited to K, L, etc). I think the more correct answer would be "it's units are a nonsensical mix of the other things in the equation and dollars that depends on what exactly you included in your equation." ie, it varies and can't be described in a way that makes sense to any normal person.

      Rather than saying "it's unitless," I think the better answer is, "it's units are inconsistent, nonsensical, and not very meaningful so we've never bothered to name them and don't ever talk about them."

      But, if we wanted to, I'm sure we could name them, just like we did with the "Util" for the units of utility. Heck, in keeping with the theme of this post, I say you name it a "phlog."

      I think that would actually help you reach your end-goal. If Every paper had a sentence like, "in our simulation, we add shocks with a magnitude of 1 phlog," it would become even clearer just how silly the whole thing can be at times...or maybe you'd have to use log-phlogs to make the math work out.

      I like that...log-phlogs. Of course, in my head, I hear it being said in the same duck-voice as "Aflac."

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    3. Having strange units does not imply to be useless, take the Boltzmann constant as an example:
      1.3806503 × 10-23 m^2 kg s^-2 K^-1

      what is strange here is that, if I understood well, TFP isn't just a constant introduced to bridge the variables in the equation, but it is a variable in its own, and it changes according to time, but I wasn't able to understand how it is the path of decline (I looked also here for that: http://en.wikipedia.org/wiki/Solow_residual but it didn't help).

      I mean I didn't understand if TFP goes up and down following some random (at least as far as we know now) pattern or, given a certain "country", TFP tends to decrease during time inexorably?

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  17. I just posted a new blog post on Professor Arthur Laffer's op-ed in the Wall Street Journal and mentioned David Glasner's post on the op-ed and Nick Rowe's post on Milton Friedman's Thermostat.

    http://socialmacro.blogspot.com/2012/08/laffernomics-strikes-again.html

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  18. Out of curiosity Noah Smith, what field work do you do as an academic economist? Do you actually go out an interview people, and all that? Economists are capable of good field work. (Just look at the book Why Wages Don't Fall in a Recession. I think that would be a good example.)

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    1. In Texas, where I come from, it is considered rude to address people directly by their first names.

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    2. Really, Noah? I don't think that's true, Noah. :D

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    3. Impassive calm...

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    4. Did I just offend you, Noah, or were you just kidding? I'm confused...

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  19. I expect you're familiar with this already, but Solow called TFP the measure of our ignorance. That's the right way to think about it.

    (also as you would expect there are tons of paper that try to explain TFP variations, factor misallocation being a popular candidate. In fact there are probably say 100 papers each proposing a mechanism that they then take to the data and discover explains 50% in the variation in cross-country TFP, so far from being ignorant we are able to explain 5000% of it!)

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    1. Anonymous11:33 AM

      Technically, it truly just is the difference between our predicted value of GDP and the actual measured value, so "ignorance" is about as good a term as any, and arguably better than "technology."

      I recall a talk where a speaker was making a big deal about how large TFP was during the Great Depression and making a big deal about how this showed that the Great Depression wasn't such a bad period after all, but one with unprecedented amounts of technological growth. I was in a pissy mood, so just to be a smart alec I said, "Well, since TFP is just the error term in a regression of GDP on the factors of production, couldn't you just as easily say that our model to predict GDP just especially sucks when used over the period of the Great Depression? That, whatever it is you're leaving out of your equation, just happened to be very very important during that time period?

      But hey, if you're an economist, which would you rather say, "Society was filled with innovation during these years!" or, "Our model is especially inaccurate during this time period!"

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  20. Anonymous5:55 AM

    And yet, the same people (Chicago economists) that like to label this "technology" and "culture" are the ones that also want to force nations to change their productivity and labor culture (Southern Europe now, South America and Asia in the 90's). It's ironic that those people want to label this as exogenous, unaffected by economic conditions (like recessions), but they do insist they can be affected by putting immense economic pressure by, for instance, the IMF. Isn't that just a little bit inconsistent?

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    1. I don't think that anyone is trying to force anybody else to change. If people like to tax-evade, park on the side-walk or double-park because it is convenient, bribe officials (or, if they are politically connected, threaten that they will send them to some remote village) to expedite their case, and ban private universities because the private sector is the big bad wolf and education should not be commercialized (examples pertinent to Greece), then they should have every right to do so. However, they should also accept the consequences of their decisions, and not demand from those who have made different choices to subsidize their income.

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  21. Good post.

    Reminds me why I like Caesar Hidalgo's work so much. He and Ricardo Hausman have moved away from the whole the lump of labor putty and lump of capital putty equation. Instead they look at the product spaces of what countries actually produce to infer information about their underlying capabilities and development.

    Here's his research page at MIT:

    http://www.chidalgo.com/papers.html

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  22. I know next to nothing about economics, except that I have been lurking here and other places for a while. But I would like to make the following opinion, if I might.

    The original phlogiston theory was a theory of combustion. It stated that phlogiston was chemically bonded to materials (like wood or candle wax). When that bond was broken, energy was released as heat and light. If a candle was burned in a closed container, then the air would become saturated with phlogiston and the reaction would stop. Most things when burned left behind an ash that was lighter than the original material. It explained many observations.

    This is considered the first modern chemical theory. It was later replaced by a theory of combustion that stated there was a material in the air called oxygen; Oxygen combined with flammable stuff and forming that bond released energy as heat and light.

    Phlogistonomics is an interesting name for an economic theory: The original phlogiston theory seemed to work at first. It was with careful analytical work that it was first shown not not work that well (some metals are heavier after they burn than before- now we know that is because they form an oxide. Magnesium oxide is heavier than magnesium)

    The idea that phlogiston could be mass-less (or even had negative mass) came later as the scientists who proposed it became more and more desperate to save the theory in the face of contrary evidence.

    The overturning of the phlogiston theory was the first time that real, analytical work was done in chemistry and set the foundations for it to become a truly modern science.

    To say phlogiston is reducing potential is to redefine it so far from its original meaning as make it meaningless. All this makes it an interesting choice to me.

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    1. To say phlogiston is reducing potential is to redefine it so far from its original meaning as make it meaningless.

      Why? You can just say "Phlogiston is the word for whatever is used up in combustion." You can easily establish experimentally that something gets used up in combustion. Then you just look for what the phlogiston is. We still have a word for "lightning" even though we subsequently discovered that it's a manifestation of the more general phenomenon of static electricity. So if people want to use the word "phlogiston" to mean "reducing potential in combustion reactions", I say let em.

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    2. --To say phlogiston is reducing potential is to redefine it so far from its original meaning as make it meaningless.--

      I have trouble expressing myself. I was spending so much time thinking about that final thought, that i finally just posted it, before the topic thread died. I guess it didn't come out the way I meant.

      My point in my reply was two-fold - That the phlogiston theory was based on superficial observations and was refuted by analytic work. Secondly, that the proponents of the theory stubbornly held on to it, even in the face of mounting contrary evidence. The theory had falsifiable predictions that were, well, falsified. But some scientists couldn't let it go.

      Like I said, I don't know anything about economics. I'm not saying that current economic theories are based on superficial observations that often are refuted by more careful analytic work, or that some economists are holding on to their theories far too long in the face of contrary data. I was just pointing out, the pholgiston theory was like that; interesting that an economist would refer to it... Maybe I was being more snarky/sarcastic/trying to be funny/ than I have a right to be.

      As to the quote. I was just parenthetically thinking that it's ironic that you should say

      '"phlogiston" was more like a residual - it was just "whatever makes stuff burn" (the error was in thinking it had mass)'.

      Because one of the contortions scientists went through trying to save the theory was to say that phlogiston had no mass.

      One might say that with that tweak to the theory, they came oh so close to getting to the truth- but, the fact is, they stubbornly refused to take the next step of thinking of phlogiston as a residual. They always thought of it as an element that was given off; never as the potential to combine with an element in the air.

      It occured to me that your definition was sort of like the contortions those scientists might have done, trying to save the theory, taken to an illogical extreme (You have defined phlogiston as the opposite of its original meaning). Now, I know that you are not a proponent of the theory and weren't trying to save it.

      But, I had the thought that if someone were trying to save some legitimacy to the theory by redefining its terms the opposite of their original meaning, that would make defining things pretty meaningless. Does that make sense?

      Again I think of economics. If it turns out that austerity does not help an economy expand out of a recession (I don't know, just a hypothetical) Anyway if careful analytic work were to show that austerity does not help an economy expand out of a recession, and then someone came along and said "I wasn't wrong. 'Expansionary austerity' is just a phrase for 'whatever makes the economy expand'" - wouldn't you say that makes defining austerity pretty meaningless? The indirect point of my statement was to ask - Do economists ever do that? Scientists in my field (chemistry) do.

      I agree with the point that Phlogiston as an explanation for the residual (combustibility) was wrong-headed. Proponents focused too much on the Thing (that the capacity to burn was some Physical Entity within materials) and not enough on the concept. Just like in economics, some might concentrate too much on some made up entity that they don't even know has any affect on TFP (like culture?) (think I'll shut up here)

      Thus I also think that phlogistonomics is a good term. Forgive my rant. Its just that this blog was recently on the topic of analytic work, the nature of scientific thought, etc and I could not help myself.

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  23. Your point can be made in a great many ways besides invoking phlogistonomics:

    –economics is a system of differential equations where everything interesting is in the boundary conditions

    —economics is a set of simple linear graphs separated by fudge factors

    —economics is a variant of Epicurean materialism that's all swerves and no atoms.

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  24. Phlogiston is very close to the logical and functional inverse of oxygen. This is rather different than what is going on in the failure of economics.

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  25. "economics is a system of differential equations"

    Economics is a system of first order differential equations where everything interesting is in the imaginary parts of the eigenvalues of the Jacobian.

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  26. Anonymous5:39 PM

    Good post Noah! I've been thinking about this ever since I was presented with the Solow Residual in school. I have wondered whether I can find two other things and label them "factors of production"- let's say toilet paper and oranges - and by plugging these amounts into the Solow Model you can actually create a similarly predictive residual? Essentially concluding that capital and labor move around the same way other basic commodities do and there's nothing this model tells us about economic growth, except maybe we should invest in more oranges and toilet paper.

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    1. No, the model tells you a whole bunch of things:

      a) That contrary to Harrod and Domar's prediction, a market economy will not drift to ever-increasing unemployment or capital underutilization unless it is "fine tuned".
      b) that politicians are (semi) lying to you when they say that cutting taxes will lead to faster growth (it won't in the long-run, and depending on what they do with spending it may reduce the level of income).
      c) that technology is the only engine of long-run growth, and that any growth miracles (Asian or otherwise) should come to an end.
      d) that, in the long-run, the size of population is irrelevant (an argument that rebuts the anti-immigration hysteria and the notion that immigrants are depriving Americans of jobs). What matters is population growth.
      e) that increasing saving today will generate higher consumption for future generations if the marginal product of capital exceeds the sum of the rates of depreciation, TFP, and population growth, and lower it otherwise. Countries can therefore check to see where they fall.

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    2. I have wondered whether I can find two other things and label them "factors of production"- let's say toilet paper and oranges - and by plugging these amounts into the Solow Model you can actually create a similarly predictive residual?

      You need to find two things that, together, receive 100% of GDP in the form of income. Try "people over 40" and "people under 40".

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  27. Just be careful, not every residual is bogus. Fermi postulated the neutrino as a residual and every physicist knows about the curve of binding energy: all of nuclear physics was based on residuals. Modern epigenetics is built on the residuals after one subtracts genetics.

    Granted, no one labeled neutrinos "culture" or "technology".

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    1. I never said residuals were bogus! The problem is when the labels we assign the residuals cause us to assume behavioral properties of the residuals for which we really have no evidence...

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  28. I put together a little piece on my view on the Lesser Depression:

    http://socialmacro.blogspot.com/2012/08/the-balance-sheet-recession-hypothesis.html

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    1. Julian, do you ever write comments that do not consist entirely of links to your own blog posts? I'm just asking out of curiosity.

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  29. "I argue that calling TFP "technology" biases us toward thinking that e_t is truly random."


    Do economists really view technology as "random"? What about Moore's law? Is predictable innovation not labeled technology but rather "Kapital" precisely because it is predictable?

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    1. Good point! And no, they don't.

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  30. Anonymous3:14 PM

    If you read Griliches or anything that Hulten has recently done, you'll realize that the residual quandary is nothing new...

    And insofar as capital and depreciation, consider Huang and Diewert.

    Either way you try to go about measuring technology and its impact on the economy, it's a tough road. You either measure everything else, figure out their impacts, and assume the rest is due to tech (residual method). This only works when prices are directly representative of the marginal products or utility.

    Or, you try to measure "technology" directly and assign a market value to it... and then figure out its impact on the economy.

    Both measures assume that GDP is well-measured, as it is the outcome in both scenarios.

    Basically, this is a super duper measurement problem. And if anyone has a solution, I would more than love to hear it.

    Now, back to my patent/publication and citation data...

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  31. I think it's simply a fact that the Japanese are preternaturally gifted in their aesthetic sense.

    And no, I'm not Japanese.

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