Why Is Macroeconomics So Hard? The Asymmetry Fantasy Surplus

People assume asymmetries in behavior that are fantastical … and don’t skip a beat before using them as the basis for an argument.

I did a project 6-7 years ago with Chris Fawson from Utah State. Chris made this point forcefully over dinner, but it didn’t occur to me until tonight that it fits in with my “What Makes Macroeconomics So Hard?” meme.

The best example of this is non-abusers view of drug legalization.

Many people, on both the pro and con side, recognize that inelastic demand is the core problem with most drugs. Inelastic means not very sensitive to outside influences: illegal drug abusers can’t/won’t quit because their demand isn’t responsive to the usual laundry list of things that cause people to modify their other demands: price, income, and externalities like danger.

Yet for those against legalization, there is often an implicit assumption that demand will respond elastically after legalization: I, for one, have no interest in trying heroin, legal or not. Yet, it doesn’t take much reading between the lines to recognize that opponents of drug legalization are implying that I would.

I view this as a fantasy because it is really about inventing a behavior to support an argument you’re already willing to make: you know … yes, we know drug demand is inelastic currently, but after you (benighted) people make drugs legal that will all change.

One of the prime tenets of economics is that demand is either elastic or inelastic, but it isn’t both (other than when we assume demand as a straight line because it allows us to use algebra). Demand can adjust, and become more elastic with the passage of time, but it’s still unlikely to go from inelastic to elastic.

For those trying to recall their supply and demand diagrams to see my point, this sort of asymmetry implies a very sharp and sever kink at the current equilibrium: possible, but not likely.

I don’t think this is especially widespread in economics. Yet, there’s a doozy: Keynes’ view of aggregate demand was that it shifted between periods of elasticity (less than full employment) and inelasticity (full employment).

Perhaps Keynes fooled himself into believing his own assumption of asymmetry. And perhaps so many people have trouble with the Keynesian model because it’s easier to spot that pitfall in others.

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Comments

[jim`]

Good thought. I read your blog daily but don't think I've ever thanked you. Well, now I have.

[Dave Tufte]

Thanks a bunch. This was a difficult point to get across, and I was pretty sure I'd done a lousy job. Perhaps not!