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Robert Fogel on Pessimistic Economists


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July 12, 2005

Robert Fogel on Pessimistic Economists

Michael Mandel

Robert Fogel, the 1993 winner of the Nobel Prize in Economics, has an interesting observation about the long-term historical pessimism of economists. He writes:

Simon Kuznets...used to give a one-year course in growth economics at both Johns Hopkins and Harvard. One of the points he made was the if you wanted to find accurate forecasts of the past, don't look at what the economists said. The economists in 1850 wrote that the progress of the last decade had been so great that it could not possibly continue. And the economists at the end of the nineteenth century wrote that the progress of the last half century has been so great that it could not possibly continue during the twentieth century.

Sounds familiar, no?

11:48 AM

Growth

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One thing I've noticed more and more lately is policital and/or professional affiliation that appears to influence economists views.

Case in point, there is a huge disparity in the consensus regarding the housing bubble. The home builders and realtors economists always support the theory that it can go on indefinitely and disregard the bubble notion, while many private economists state that housing is in a bubble. The news reports that so many people read always quote from one side and then another. The only views I really trust are from independents like Economy.com. Do you think it's possible that employement category has an influence on outlook?

There are also wide views between big economists Ms. Tyson and Mr. Hubbard regarding the Bush policies on economic growth (I highly respect both of their viewpoints), but at times it seems their support borders along basic Democrat vs. Republican schools of thought.

Posted by: Wes at July 12, 2005 03:00 PM

I find that most Economists do not understand that all these trends are accelerating and exponential in nature. They falsely assume that everything is linear.

For example :

1) The technological innovation from 1580 to 1600 was less than from 1880 to 1900, which in turn was much less than from 1985 to 2005. All are 20-year intervals.

2) The world economy now grows around 4% per year. It certainly did not grow at 4% per year in the middle ages, the Roman Era, the Egyptian Era, etc..

3) Moore's Law means that there is an effective doubling of improvement per unit cost every 18 months. In the 1960s, this did not affect average people (zero home items), only a few corporations, universities, and governments that had large computers. In the 1980s, it affected the average family's home PC or video game system (1 or 2 home items). In the 1990s, it affected PCs, DVD players, games, internet speeds, etc (3-4 home items). Today, it additionally effects home networking equipment, cell phones, digital cameras, HDTVs, iPods, Roombas, etc. (6-10 home items). Look at how this number is increasing, and how a larger and larger number of household items are getting pegged to the improvement rate of Moore's Law. At this rate, by 2020 we might have 25-50 average household items that consists of rapidly improving and accelerating techonlogy.

4) The stock market returns about 7% a year, and this is widely accepted. In the 19th century, what was the average return? It was much less than 7% a year, it was only 2-3% per year.

5) The world has much fewer wars between sovereign nations than it did even 20-30 years ago. In the 1970s and 1980s, there were at least 5-6 wars going on at a time between nations. Before that, an even greater percentage of the world's population was at war any given time.

Why has it dropped? Because after countries cross $5000/year in per-capita GDP, they tend to have wars less often. There has hardly ever been a war between two countries that both have $5000/yr or more in per capita GDP.

Before, few countries had cross this milestone in prosperity. Now a large percentage have, and that number is growing. It appears that after crossing this barrier, the economy of a country by definition is interlinked with many others through trade, and a war would just disrupt all economies at once - a lose/lose. After $5000/yr, people have more fun things to do than war, and have a bigger stake in the stability and vitality of the system, a system they share with other countries.

The last 20 years has seen a bigger change than all of the 19th century, which was in turn more than all of the first millenium, etc. More proof of accelerating, rather than linear trends.

Posted by: Kartik at July 12, 2005 05:39 PM

I find that most Economists do not understand that all these trends are accelerating and exponential in nature. They falsely assume that everything is linear.

For example :

1) The technological innovation from 1580 to 1600 was less than from 1880 to 1900, which in turn was much less than from 1985 to 2005. All are 20-year intervals.

2) The world economy now grows around 4% per year. It certainly did not grow at 4% per year in the middle ages, the Roman Era, the Egyptian Era, etc..

3) Moore's Law means that there is an effective doubling of improvement per unit cost every 18 months. In the 1960s, this did not affect average people (zero home items), only a few corporations, universities, and governments that had large computers. In the 1980s, it affected the average family's home PC or video game system (1 or 2 home items). In the 1990s, it affected PCs, DVD players, games, internet speeds, etc (3-4 home items). Today, it additionally effects home networking equipment, cell phones, digital cameras, HDTVs, iPods, Roombas, etc. (6-10 home items). Look at how this number is increasing, and how a larger and larger number of household items are getting pegged to the improvement rate of Moore's Law. At this rate, by 2020 we might have 25-50 average household items that consists of rapidly improving and accelerating techonlogy.

4) The stock market returns about 7% a year, and this is widely accepted. In the 19th century, what was the average return? It was much less than 7% a year, it was only 2-3% per year.

5) The world has much fewer wars between sovereign nations than it did even 20-30 years ago. In the 1970s and 1980s, there were at least 5-6 wars going on at a time between nations. Before that, an even greater percentage of the world's population was at war any given time.

Why has it dropped? Because after countries cross $5000/year in per-capita GDP, they tend to have wars less often. There has hardly ever been a war between two countries that both have $5000/yr or more in per capita GDP.

Before, few countries had cross this milestone in prosperity. Now a large percentage have, and that number is growing. It appears that after crossing this barrier, the economy of a country by definition is interlinked with many others through trade, and a war would just disrupt all economies at once - a lose/lose. After $5000/yr, people have more fun things to do than war, and have a bigger stake in the stability and vitality of the system, a system they share with other countries.

The last 20 years has seen a bigger change than all of the 19th century, which was in turn more than all of the first millenium, etc. More proof of accelerating, rather than linear trends.

Posted by: Kartik at July 12, 2005 06:00 PM

It is widely reported that American industry has gone through revolutionary changes to improve productivity and compete in a global economy. The ability of American companies to adapt has enabled America to continue to lead the world in growth. The American legal system has historically provided the stability and fairness to foster economic growth. The legal system has remained unchanged despite the changes in the business world. Has the legal system become a choke point in the economy? Do legal costs and uncertainties pose a threat to the ability of America to continue to grow? I suspect that the legal costs (including insurance premiums which are hidden legal fees) represent an uncompetitive element that could severely hamper American companies. Also the great uncertainties and instabilities of our legal system are a drag on productivity and innovation. Can America reform its legal system in time to avoid falling behind economically?

Posted by: Donald Struckmann at July 12, 2005 07:21 PM

In the late 1980s, if I remember, there was some academic research which compared the number of lawyers and engineers in Japan and the U.S. The conclusion was that the U.S. had too many lawyers, and was therefore doomed to slow growth.

But that didn't happen, and here's part of the reason why. There are two ways of keeping a capitalist economy under control. One is ex ante regulation, the other is ex poste litigation. An innovative society, I think, will prefer ex poste litigation.

Posted by: Michael Mandel at July 13, 2005 03:14 PM

The number of lawyers is not an indicator of economic strength or weakness. A large number of lawyers may represent a very vigorous system of adjudicating disputes and keeping the economy working. The key indicators on whether the legal system promotes or hinders growth are (1)the level of uncertainty imposed by the legal system and (2) the relative cost of the system as a share of total costs of production. Uncertainty dissuades investment and innovation. The small aircraft industry is an example of the effect of uncertainty. Litigation against small aircraft manufacturers crippled that industry and prevented innovation. Legal fees are a hidden cost of production. Many of those fees are concealed in insurance premiums. The uncertainty and cost of the legal system is an impediment to growth. Ask any fortune 500 leader whether they trust the legal system to provide fair and predictable resolution. There needs to be a quantitative analysis of the cost of the legal system on productivity. Lawyer jokes are funny but miss the point. The joke is really on the client.

Posted by: Donald Struckmann at July 13, 2005 11:33 PM

Government regulation authorized by legislation and decisions by appellate courts are two forms of government regulation. Appellate decisions regulate business as directly and effectively as legislation or rules published by government agencies. The difference is that Congress and Executive Branch agencies hold hearings open to all interested parties. Appellate decisions are based on just hearings given to two opposing parties with a special interest in the outcome.

Appellate decisions often ignore the large policy consequences. The preference for appellate regulation over legislative regulation is misplaced. Either forum can produce good and bad regulation.

Appellate regulation has the disadvantage of being entirely passive. Litigants frame the issues by filing suit. This can distort the policy issues at stake. The supposed preference of capitalists for appellate regulation may reflect a view that appellate regulation is less effective at impairing the freedom of action of business than the legislatively created regulation. The lack of an effective judiciary does expose the public to the abuses of economic power. Such freedom carries unintended and adverse consequences.

There is a truism that bad facts make bad law. Successful litigants often burden the rest of the business community with bad law. This is an inherent weakness of appellate litigation. Another weakness is that the courts move too slowly to address emerging economic policy issues.

There are many critical economic policy issues that remain unresolved. The weaknesses of our regulatory legal system are an economic drain on our economy that need to be addressed. Our prosperity and freedom require a fair and efficient justice system.

We need to breath new vitality into the common law. To do so, we need to examine how to bring our three century old court regulatory sytem up to speed for the new century.

Posted by: Donald Struckmann at July 14, 2005 11:25 PM


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