Economic Depths – Econlib

Philosopher Daniel Dennett recently died. Although his work focused on things like cognition and philosophy of mind, his ideas can find application in other areas of life, including economics. There is one idea in particular that he describes in his book Intuition Pump and Other Intuition Tools I want to highlight here – what Dennett calls “depth.”

Dennett defines “profundity” as a seemingly meaningful comment that is actually marred by ambiguity. There are two different ways to interpret the statement. In one interpretation, it makes a sound and plausible claim, but that claim is a blatant lie. On the other hand, the claim is true, but only partially true.

This has some similarities to the “motte-and-bailey” illusion that Scott Alexander has explained before:

Both views are similar in that they refer to claims that change between interpretations, but there are slight differences. In motte-and-bailey, it’s not necessarily that the bold statement is false – it’s that the bold claim isn’t actually defended. Motte-and-bailey is a trickier strategy to counter than defend a claim. Depth, as Dennett describes it, is very much like a trick you can play on yourself. The deep can paralyze our thinking when we unwittingly transfer the truth value of a trivial explanation to a logical explanation.

That being said, here are two examples of the economic depth one often finds. The first is the idea that imports reduce GDP, and the second is the idea that price increases are the result of greed.

For the first example, I’m actually being generous in allowing it to feel like this claim might be a little true. That’s all Pierre Lemieux has called “a little bit of bean counting” – if we look at the accounting property of GDP, we see that GDP = G + C + I + X – M. That is, GDP is equal to government spending, and spending, and investment spending, and exports, minus imports. While exports are an addition to GDP, imports subtract from GDP, so doesn’t that clearly mean that imports decrease GDP?

Well, no. Although I have complained more than once that there are many misunderstandings in economics because economists are just bad at naming (public goods!), this time I have to release the work of that case. What GDP represents is right there in the name – gross domestic product. That is, the ratio of things that were – wait – produced at home. Imports, by definition, are things that exist not produced at home. While it is a little true that imports are excluded from the GDP statistics, that is because GDP estimates, by definition, do not include imports. The subtraction occurs to prevent double counting. Recently, I spent $5 on an avocado from Mexico. That $5 would come from part C of the above ownership – it was $5 for consumption. But since the avocados were not domestically produced, that $5 is subtracted from the GDP calculation as M. That doesn’t mean GDP was “reduced” by $5 in any meaningful way. It means that this $5 spent was not part of GDP as defined.

A plausible claim made by the “imports reduce GDP” crowd is the idea that Americans would have a higher standard of living if we exported more and imported less. But this is false. Exports (again, by definition) are things that American workers spend time, money, and resources producing and foreigners get to enjoy. Consumption is profit, and production is the cost of obtaining that profit. (Indeed, as Adam Smith wisely said, “consumption is the only end and purpose of all production.”) Exports are what the citizens of a nation incur in the cost of production but do not receive the benefit of purchase. Because exports are domestically produced (by definition) they are part of GDP, but that is very different from the fact that more exports and fewer imports can improve living standards or make citizens richer in any meaningful way. Another way to show this is to rearrange the identity of the GDP figures. Say you want to live in a society where citizens benefit from higher levels of consumption and investment. You get C + I = GDP – G – X + M. That is, more exports and fewer imports mean lower levels of consumption and investment, and more exports and fewer exports mean higher levels of consumption and investment.

The second implication, that greed explains the rise in prices, can be interpreted in a less realistic way. Manufacturers want to make as much money as possible and will choose to sell at higher prices to make more money. But this claim is often made to explain things like price gouging, and in this strict context, the claim is patently false. The desire to make more money than less is always there. Price changes vary. Explaining a change in outcome by applying it to factors that have remained the same is descriptive inference. For example, not long ago the prices of eggs increased dramatically in the United States. Does “greed” explain this price increase? Partially yes, but clearly no. If egg producers were selling eggs for $3 per dozen and then raised the price to $6 per dozen, how does “greed” define this? change? If greed is the reason for selling at $6 a dozen, then why were they selling at $3 a dozen to begin with? Were egg producers motivated in the past, and then all of a sudden they all got greedy at the same time, before they all suddenly became greedy again? Economist Justin Wolfers once tweeted the most amazing graph of egg prices:

The same idea that large increases in prices near the end of a graph are explained by “greed”, if applied regularly, can also mean that large declines that occur shortly thereafter are explained by large decreases in greed. Or, instead of trying to explain changes in terms of things that haven’t changed, we can try to explain changes in terms of other things that have changed. Such as, say, changes in the supply and demand situation brought about by the spread of bird disease which greatly reduced the availability of eggs in a short period of time.

Those are two typical examples of economic deepening. If you can think of anything, dear reader, by all means share it in the comments!