Birks – Mankiw 7th edn Chapter 2: Thinking Like an Economist

A commentary on Mankiw 7th Edn Chapter 2: Thinking Like an Economist (Mankiw 7th edition)

Mankiw, N. G. (2015) Principles of macroeconomics (7th ed.)
Principles of microeconomics (7th ed.)
Principles of economics (7th ed.)
Mason, OH: South-Western Cengage Learning.

Chapter 2 – Thinking Like an Economist

When reading the chapter, here are some aspects to consider:

1. Some academics, especially those active in the media, present as if they are experts who have “the answers”. This is required for the news media with its use of sound bites, as described by Noam Chomsky in a video recording, Manufacturing consent: Noam Chomsky and the media (1992)[1], and by Bourdieu (1998) in reference to “fast thinkers”. Textbooks which claim to explain real world phenomena should be viewed in this context. They are presenting a particular framing of the issues, within which the conclusions may follow. However, the same issue can be framed in many different ways. An alternative approach is to respond to claimed findings by seeking to provide alternative explanations of the evidence. This fits with Milton Friedman’s assertion: “Observed facts are necessarily finite in number; possible hypotheses, infinite. If there is one hypothesis that is consistent with the available evidence, there are always an infinite number that are.” (Friedman, 1953, p. 9) In other words, evidence cannot prove a theory. It can only show consistency or inconsistency.
2. Economists as scientists: Some people have argued that economics has tried to model itself on physics, whereas it might he more akin to biology or geology in the information, uncertainties and interdependencies in the subject matter. Structures and relationships in society may not be constant over time, so a more dynamic, evolving representation may be desirable.
3. Groups, including those linked to an academic discipline or sub-discipline, may have a “conventional wisdom”, commonly accepted beliefs, concepts, etc.. These are described in Chapter 2 of Galbraith (1999). “Best practice” may involve adherence to these conventions. Conventions are often implicit in the language used by a group, be it a profession or a discipline. The language associated with such groupings is termed, in discourse analysis, as Ideological-discursive formations (IDFs) (Fairclough, 1995).
4. On gathering evidence and testing theories, there is a selection process choosing what out of all the available information will be “the facts” (see Carr, 2008), then tests of theories can only show that the theory is consistent with the evidence (on the basis of the selected test criteria). Robert Lucas’s “Lucas critique” suggests that evidence of past relationships may not be useful for the future because people learn and change their behaviour.
5. Many economic models are based on static analysis, which has no time dimension. Comparative static analysis involves comparing two static situations. We could be at one equilibrium position and consider an alternative equilibrium to be preferred. It is not enough simply to set up the conditions for the second. We have to move from one to the other. This can take time and involve costs, and it may not even be possible to reach the second from the first. The term “transition economies” refers to the economies of the former Soviet Union, which went through a transition to rely more on markets for resource allocation decisions. For a very readable description of the problems they faced in this process of change, see Hare, P. (2008). Vodka and pickled cabbage: Eastern European travels of a professional economist, http://www.sml.hw.ac.uk/documents/dp0808.pdf
6. The use of assumptions could be seen as creating an alternative, simplified structure which, it is hoped, is useful as an analogy for the real world. Many alternative analogies could be constructed, each with its own framing, emphasising certain aspects and excluding others. Consequently there is unlikely to be a single “best” approach, and all approaches should be seen as having limitations. Keynes (2007, pp. 297-298) talked of the need to consider additional reserves, qualifications and adjustments if findings are to be applied in the real world.
7. When discussing assumptions, Mankiw refers to short-run or long-run effects. Note that adjustments can take some time. Classification into either short- or long-run is a simplification, commonly based on a theoretical distinction as to what is permitted to change. There are not really two distinct situations. In estimating the relationships specified by this framing, we are reliant on the same data for both situations. The data may not accurately reflect either of these.
8. Those of you with a text that includes macroeconomics will see in subsection 1F of Mankiw’s Chapter, “Money growth and inflation”, a formula for the Quantity Theory of Money. It is MV=PY. An earlier version of this is the “Fisher formula”, MV=PT. The left hand side gives the quantity of money (M) times V, the velocity of circulation, or the number of times a unit of money is used in transactions in a period. These are similar to the flows given by the green arrows in the top half of Figure 1 on p.23. There are also money flows from firms to households in the bottom half of the diagram, so we should not think only of spending on final goods and services (expenditure) we should also think of spending on factors of production (income). In the real world we should also note the possibility of “intermediate transactions”, such as the purchase and sale of components at various stages in the production process. Hence there are differences between Y and T. The right hand side of the second equation, PT, represents the price level times the number of transactions, or the total value of transactions. As by definition the value of transactions equals the amount of money spent on those transactions, the equation is an identity, it is always true.
9. Section 2a distinguishes between positive and normative analysis. This is discussed further in a commentary here.
10. Table 1 on p.32 lists “propositions about which most economists agree”. Members of a group will have some things in common (hence the group). It is perhaps not surprising that a list of propositions such as this could be constructed. To the extent that there is a widely accepted framing of issues, many things would be seen in a similar way by members of the group. This does not necessarily make them correct.

Bourdieu, P. (1998). On television (P. P. Ferguson, Trans.). New York: New Press.

Carr, E. H. (2008). What is history? Harmondsworth: Penguin.

Fairclough, N. (1995). Critical discourse analysis: the critical study of language. London: Longman.

Friedman, M. (1953). The methodology of positive economics. In M. Friedman (Ed.), Essays in positive economics (pp. 3-43). Chicago, Ill.: University of Chicago Press.

Galbraith, J. K. (1999). The affluent society (New ed.). London: Penguin.

Keynes, J. M. (2007). The general theory of employment, interest, and money (New ed.). Basingstoke: Palgrave Macmillan.

 

[1] See the extract beginning, “Suppose I get on “Nightline”” at: http://www.imdb.com/title/tt0104810/trivia?tab=qt&ref_=tt_trv_qu

Commentary by Stuart Birks, last updated 24 February 2015