Ask What Changed: An Error in Cowen/Tabarrok Textbook
A body at rest will remain at rest and a body in motion will remain in motion unless acted upon by an outside force.
— Sir Isaac Newton’s First Law of Motion
Have you ever had a conversation like this? You point out to a friend that the stock price of Hunky Chunky Potato Chip Company doubled in the last six months. Then your friend explains, “Yeah, that’s because people love potato chips. Their love borders on addiction.” Or you comment that far fewer people are attending Major League Baseball games this year, and your friend’s explanation is that baseball is so boring.
Your friend explained nothing. If people love potato chips so much, didn’t they love them last year too? Then why wasn’t Hunky Chunky Potato Chip’s stock just as high six months ago? If baseball is so boring, why were so many people attending last year? To explain a change in some variable, you have to point to something else that changed, not to something that stayed the same. What did change? Are people disgruntled over the baseball strike? Did ticket prices go up? Have people fallen in love with another sport? Something caused the change you’re observing. The trick is to identify the key elements that changed and not the fundamental elements that didn’t. We doubt that baseball has gotten less exciting or that people just recently discovered potato chips. It is entirely possible that the popularity of potato chips and baseball ebbs and flows, but then the variable that changed is the popularity itself.
These are the opening paragraphs of Chapter 4, “Ask What Changed,” in David R. Henderson and Charles L. Hooper, Making Great Decisions in Business and Life, Chicago Park Press, 2006.
I thought of it when I read the following in Tyler Cowen and Alex Tabarrok, Modern Principles: Macroeconomics, Worth Publishers, 2010:
Alternatively, many governments of sub-Saharan Africa have failed to secure the property rights of foreign investors. The demand to invest is correspondingly weak, shifting the demand curve for these countries’ currencies to the left and lowering the value of these currencies. P. 415)
Their error is in their second sentence. Can you spot it?
May 21 2021 at 8:25pm
Do they mean something like “if sub-Saharan African governments did a better job of securing property rights of foreign investors then the countries currency would be worth more then they actually are” in the same way that one might argue “attendance at baseball games would be higher if baseball was less boring”?
That is: They are looking at a price at a point in time based on current facts , not on a change in those facts (the “shifting of the demand curve” for sub-Sahara Africa is then relative to the counterfactual when they did a better job of securing property rights)
May 21 2021 at 10:05pm
Good point. They should have shown a change in property rights (maybe after colonialism, though did those places have their own currencies?)
May 21 2021 at 11:14pm
Kevin L, Bingo.
May 22 2021 at 8:36am
“Shifting” and “lowering” sound like temporal processes, and that is how you are interpreting them. But the authors meant them counterfactually, as comparing the actual present situation not with the *past* but with an *imaginary ideal*.
May 22 2021 at 1:02pm
Like Philo, I’m a charitable sort of fellow, and I suggest that Philo’s interpretation is correct.
FWIW, the passage that you quote doesn’t appear to be in either the fourth (2018) or fifth (2021) editions of their textbook.
May 22 2021 at 4:15pm
Of course that’s what they mean. They’re too good economists not to understand that. My criticism is of what they wrote. Remember, Mark, that they’re writing for undergrads who could easily make the mistake of taking them literally.
It’s good, though, that they probably noticed their error and didn’t repeat it in later editions.
May 23 2021 at 6:54pm
When I took PhD Microeconomics from the late, great Walter Williams in 2016, he initially struck me as unnecessarily pedantic. He would knock points off if we gave an answer that wasn’t exactly as he wanted it. But, over the course of that class and my own teaching, I have come to appreciate his precision in language. I came to appreciate the subtle, but important, differences in what I was trying to convey and what I was actually saying.
It’s very easy to be imprecise in what we say and, consequently, lead our listeners to incorrect conclusions.
From what I understand, Alchian was also very picky about language, right?
May 22 2021 at 1:39pm
I have a question I hope someone will answer. Is this an example of what Scott Sumner refers to as “reasoning from a price change?”
May 22 2021 at 4:15pm
May 22 2021 at 7:01pm
Vincent P, My answer above was a little terse.
This is reasoning from no change. That’s the problem.
May 23 2021 at 12:42pm
I agree with David that it’s not reasoning from a price change. As David indicated, it’s not so much that their reasoning was flawed, rather they explained their point in a misleading fashion. Reasoning from a price change is not just bad exposition, it’s bad analysis.
Perhaps there were more secure property rights during the colonial period. In that case, property rights would have deteriorated after independence, causing the demand curve to shift to the left. But they don’t actually say that; they merely say that property rights are weak, which is the issue that David addresses at the top of the post.
May 23 2021 at 1:18pm
I see it now. Thanks to both of you for the clarification and taking time to reply. I appreciate it!
May 23 2021 at 12:43am
The error you describe is clearly not present in the text you quote. All of your examples up front discuss explaining a change in the level of something in terms of a fact. (“The stock price doubled over the last six months.”) You’re right that, to explain a change, you should identify something that has changed.
But Cowen and Tabarrok do not claim or even imply that anything has changed. They explain the absolute level of investment demand in terms of a fact. That’s the correct thing to do.
May 24 2021 at 9:01am
Correct. That’s the problem here.
Except they don’t. The second sentence is talking about relative levels, not absolute. Relative implies a shift (which is the word they use). A shift requires a change.
May 24 2021 at 4:02am
It is a misuse of the word “shift” which economic means change over time, but here they are using the technical term as meaning change from what it would have been with a different policy
May 24 2021 at 8:58am
That doesn’t correct the error. Remember that we are starting at a given status quo of weak property rights. A differing policy regime would shift the curve to the right. It does not explain why the curve is where it currently is; one cannot claim that the curve shifted to the left. One can say the demand curve is more to the left than it would be without some other policy. That statement is accurate (though risks falling into the Nirvana Fallacy). But one cannot say a non-change in policy causes a leftward shift.
By way of example, it would be incorrect to say a newborn’s language skills regressed because they are young. They are born without language skills. Over time, their language skills improve. But they have not regressed.
Christian G. Warden
May 24 2021 at 10:07am
It sounds like time passing is the relevant change. My reading is that in period A investors buy property in sub-Saharan Africa in anticipation of property rights being made more secure by governments. In period B, with no change in policy, investors realize property rights are not being made more secure, and the demand for property, and therefore local currency, decreases.
May 24 2021 at 10:58am
Perhaps, but that would require us to import two assumptions that are not present in the initial example, namely that the governments promised to increase property rights and that people acted on that promise
May 24 2021 at 11:31am
My guess is sub-Saharan Africa has failed to secure the property rights of foreign investors compared to other countries. No change in the absolute value in sub-Sahara, but a relative change. And yes, it should have been communicated.
May 24 2021 at 4:45pm
In order to learn to think like an economist, I’m putting myself through Economics boot camp. I’m learning that being grounded in fundamental theory helps understand the subtleties and nuances of those concepts. DH’s blog, particularly this one, others on Econlog and their commenters have already made this subject so much richer.
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