Friday, June 8, 2012

We skid over the concepts underling economics

I want to briefly divert and develop one point in the last post, about how the 'givens' in economics and resistance to examining ideas,.

It isn't just in the areas McCloskey talks about in her book, of course. Many other of the central concepts in economics need a lot more fresh and rigorous thought.

Capacity and potential output is at the top of the list for me. Some measure of an output gap is at the hear of nearly every major forecasting macro mode, of course, and plays a central role in most central bank decision-making.

But what does capacity mean now? Marginal costs of accommodating extra demand for computing capacity, for example, is virtually zero. You call up Amazon internet services if you need to add to your website transaction capacity. What does capacity mean in the US if you can get the folks in Bangalore to catch up with work overnight? What is the capacity of the "US economy" in that circumstance?

What does depreciation of the capital stock mean? Software doesn't depreciate in the same way as a physical structure or automobile. Does it depreciate more slowly, because it does not wear out and can continue its function. Or does it depreciate faster because it becomes obsolete and replaced by newer and better methods so quickly that there is no choice but to replace it much faster than old depreciation schedules imply?

What is the capital stock if more of it than ever before is locked up in human brains rather than on shop floors? How do you measure the capital value of new organizational techniques or better management processes?

We've seen before how intangible goods and services are likely hugely mismeasured. And the bulk of the economy is now intangible.

We have a system of economic statistics which is very good at measuring manufacturing and very poor at measuring service output. If you want to know all about cold rolled steel production, you're in luck. If you want to know how many Kindles Amazon has sold - we have no idea.

And how many people really deeply think about this at a conceptual level in economics departments? Very few, as a rule. They just want to run regressions.


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