2023-04-17 14:33:10
Due to the fuel shortage I see huge queues at the service stations. Suddenly I find that in one of them there is no one waiting to load. Before being happy, I have to answer the following question: will that station have gasoline? The example illustrates a fundamental principle that we economists use to understand what we observe. Without a good explanation of why it is what it is, it’s impossible to imagine fixes for improvement.
In this regard, I spoke with the American Holbrook Working (1895-1985), who spent most of his working life at the Standford Food Research Institute, carrying out statistical work on food products. According to Mary Susanna Morgan, he did not advance significantly from an analytical point of view, a task that his brother, Elmer Joseph, would undertake.
–You are part of my collection of “the Ruggero Leoncavallo of the economy”, because you did several jobs but were immortalized by one of them.
I suspect you are referring to a monograph entitled The Statistical Determination of Demand Curves, which I published in the Quarterly Journal of Economics in 1925.
-That’s how it is. What is the main idea of that work?
–The invention, by statisticians, of methods to estimate the correlation between variables generated enormous interest among microeconomists, interested in quantifying, for each product, the supply and demand curves. Which meant a great advance, because it is not the same to affirm that the rise in the price of a product decreases the quantity demanded and increases the quantity produced, than to say by how much. Qualitative economics, in the best of cases, serves to start the analysis.
But there was a problem.
-Indeed. Let us imagine that, referring to a country or a region, we have data corresponding to the prices at which the pigs were traded and the quantities produced and sold. We apply a correlation procedure, finding that the data align almost perfectly. What did we get? A supply curve or a demand curve? Early researchers were struck by the fact that when seeking to estimate a demand curve, the sign between price and quantity was positive. What to make of this finding: throw away the theory of demand, or the correlation?
–This is where your monograph appears.
–Where I said that there is only one true price-quantity relationship, both in the supply curve and in the demand curve, and a line that describes it; and if we could remove all disturbing factors, the observations would all fall on that line. In technical terms, I put on the table the question of the correct specification of the supply and demand functions, in order to identify them.
Give me an example.
– Suppose that the supply of scarves depends on the price, while their demand depends not only on the price, but also on the income of the demanders. Well, changes in this last variable, in graphic terms, would generate jumps in the demand curve, allowing us to identify… the supply curve! I point out, in passing, that identification problems are solved by getting more information, because they are not due to limitations of the theory.
–The regressions that ignore some variables, what are they for?
–To forecast, to the extent that the structure that could not be identified does not change over time.
–To know what it is, it is enough to observe the data, but to understand why it is what it is, a theory is needed.
-That’s how it is. I don’t need a theory to know the prices of coffees and cell phones; but yes to understand why the prices are those and not others. At the beginning of this conversation you raised a microeconomic example, but it is also true of the economy as a whole. And in both areas, the supply and demand approach is very useful to start the diagnosis. In the example of the service station, the absence of cars to load gasoline is explained by a matter of supply; but it also serves with reference to the GDP of Argentina in 2023.
-I’m interested.
–The vast majority of human beings prefer a growing GDP to a decreasing one, in the same way that they prefer being healthy to being sick. But, in this regard, the relevant question is the following: why, here and now, the GDP is not greater than the observed? When, in his country, one asks this question to businessmen, most of them point to being able to get dollars in the official segment of the exchange market to buy inputs and – although less so – point out the difficulties in finding labor.
–Both factors refer to constraints on the supply side.
–Which, in Argentina 2023, renders crude Keynesianism irrelevant, according to which on all occasions, throughout the world, problems derive from the insufficiency of aggregate demand.
Are you disqualifying John Maynard Keynes?
-No way. I am saying that every empirical statement has to be revalidated, because it was made on the basis of specific circumstances, which are not always repeated. For marketing reasons Keynes called his The General Theory of Employment, Interest and Money, but this is not to say that his application is universal and permanent.
-Finding out why it is what it is will be fundamental, but in economics it is an intermediate step.
-Indeed. All professional work begins with a frustration: that of the worker who wants to earn more, that of the businessman who does not want to melt down, that of the minister who wants the inflation rate to be reduced. For which, in economics, we use the equilibrium analysis as an input of the comparative statics analysis.
-What’s that?
-If the motivation of the analysis consists in helping to alleviate a frustration, the real question is the following: what would have to happen in the exogenous variables, that is, in those that affect me, but that I cannot control, in order to be able to modify my behaviors? decisions, in order to improve my position or, at least, minimize the impact of negative shocks? But, for this, it is essential to have a correct diagnosis.
–explain yourself.
–Those who do not know why it is what it is, can hardly think about what changes should occur so that reality is different. Examples: a country that flirts with hyperinflation cannot afford to think that in 2023 the GDP could fall due to a lack of aggregate demand, in the same way that a country where the supply of rentals has disappeared cannot afford to think that vacant property owners were suddenly gripped by an epidemic of malice.
“Don Holbrook, thank you very much.
#fundamental #question