The Undercover Economist Strikes Back: How to Run — or Ruin — an Economy
Jan 23, 2014
auto_awesome
Tim Harford, a Senior columnist for the Financial Times and author of 'The Undercover Economist Strikes Back,' teams up with Alex Tabarrok, Professor of economics at George Mason University. They dive into intriguing economic concepts, contrasting the complexities of macroeconomics with accessible storytelling. Harford discusses the impact of financial crises, the importance of income inequality, and critiques traditional economic models. Their conversation highlights the challenges of public policy shaped by misunderstandings in economic theory and advocates for innovative, evidence-based approaches.
Tim Harford critiques contemporary macroeconomic discussions for prioritizing political narratives over genuine economic analysis, highlighting the need for a deeper understanding of complex issues like inequality.
The podcast illustrates Bill Phillips' innovative approach to visualizing economic factors, cautioning economists against oversimplifying theories that risk overlooking practical complexities.
Addressing income inequality and social mobility is crucial, as Harford emphasizes that declining social mobility represents a more significant challenge than mere income disparities.
Deep dives
Complexity of Macroeconomic Models
Macroeconomics often grapples with complexities that make it challenging to achieve consensus among economists. There is a distinction between microeconomics, where theoretical frameworks tend to yield more specific and universally accepted conclusions, and macroeconomics, where the lack of a single theory leads to varied perspectives on phenomena like government interventions. Policy questions, like the effectiveness of the Obama stimulus package, demonstrate this ambiguity, revealing that without controlled experiments, insights remain uncertain. Consequently, the podcast underlines the importance of addressing these complexities and avoiding overly simplified narratives in the macroeconomic discourse.
Tim Harford's Perspective on Economic Discourse
Tim Harford enunciates his frustration with the nature of contemporary macroeconomic discussions, which often seem to favor political soundbites over a genuine exploration of underlying economic truths. He critiques the sensationalism surrounding inequality statistics, exemplified by the report claiming that 85 individuals hold more wealth than the poorest half of the global population. By humorously illustrating the absurdities of such comparisons, Harford emphasizes the need for deeper analysis rather than superficial headlines. He aims to bring a nuanced understanding of economics back into public debate, especially around complex issues like inequality and macroeconomic performance.
Bill Phillips and the Foundations of Economic Theory
The story of Bill Phillips, a notable figure in economic history, is shared as a compelling illustration of the interplay between personal experience and economic understanding. Phillips, who faced numerous challenges and adventures throughout his life, eventually created a pioneering economic model using water tanks to simulate national income flows. This innovative approach was symbolic of his efforts to visualize the interconnectedness of economic factors, yet Phillips' legacy became predominantly associated with the Phillips curve, a concept that later faced significant criticism. The podcast suggests that the divergence between his original work and its later interpretations serves as a cautionary tale for economists about the importance of not losing sight of the practical complexities behind the theories they develop.
Critique of Modern Macroeconomic Assumptions
In discussing macroeconomic theories, both Harford and Alex acknowledge the challenges posed by assumptions such as the stickiness of wages and prices. Alex critiques the notion that these factors can sufficiently explain economic downturns, arguing instead for a perspective that includes real business cycle theory and the importance of understanding underlying supply-side nuances. Moreover, the podcast points out that while aggregate demand plays a role, focusing solely on it risks neglecting the vital supply dynamics at play. This discourse reveals a growing awareness among economists that addressing macroeconomic challenges requires an approach that incorporates both demand and supply factors into a comprehensive framework.
Income Inequality and Economic Opportunities
The discussion addresses the rising concern over income inequality and how it intersects with social mobility, particularly in contexts like the United States and the UK. Harford notes that while income inequality has increased, it is the decline in social mobility that poses a more significant problem, as it contradicts the foundational belief in equality of opportunity. Alex adds to this perspective by framing the conversation in terms of earnings inequality, attributing disparities not merely to economic systems but largely to technological advancements that enable certain individuals to leverage their skills to unprecedented heights. This angle encourages a broader examination of educational access and social mobility initiatives, emphasizing the need for robust economic opportunities across all strata of society.
In his new book, Tim Harford attempts to demystify macroeconomics in the same way his earlier bestseller, The Undercover Economist, demystified microeconomics. Using his characteristic conversational style, Harford will discuss abstract macroeconomic ideas, explaining the most common models of recessions and the difficulty of discriminating between them on empirical grounds. For example, was the crisis of 2008 driven by supply- or demand-side factors? And why do failures of the financial sector seem to have such severe economic consequences? He will not shy away from other topics, including income inequality, or the growing interest in alternative measures of economic well-being, such as self-reported happiness. Please join us for a discussion of what macroeconomists believe about the economy and of why those beliefs often seem to lead to bad public policy.
