Picturing economic complexity

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People often talk about the greater complexity of modern economies in a descriptive sense. Underlying this is the increased diversity of types of goods and services produced in an economy, and the increasing specialization of production.

Some economists, a growing number perhaps, are using formal complexity models to simulate the behaviour of the economy. I’ve always enjoyed looking at the online Observatory of Economic Complexity, where Ricardo Hausmann and Cesar Hidalgo and their colleagues measure complexity. They have been assembling statistics on the diversity of the production base of many economies, and on the trade, or links, between different national economies.

A physical version of the [amazon_link id=”0262525429″ target=”_blank” ]Atlas of Economic Complexity[/amazon_link] arrived at the weekend and it’s tremendously interesting. “The secret of modernity is that we collectively use large volumes of knowledge, while each one of us only holds bits of it. Society functions because its members form webs that allow them to specialize and share their knowledge with others,” the introduction states. The Atlas measures complexity by counting the range of products countries can make.

Often online data sources are preferable because of the timeliness of their data; but the measurements of interest here will not vary quickly, and it is just as easy to page to a country of interest as to click through. This is a beautiful book, too. It will give me many happy hours of browsing.

[amazon_image id=”0262525429″ link=”true” target=”_blank” size=”medium” ]The Atlas of Economic Complexity: Mapping Paths to Prosperity[/amazon_image]

Life satisfaction, GDP and sense

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Normally, I’m a sunny-natured optimist but every so often I get grumpy. A recent post on Vox made me grumpy – it’s about life satisfaction and GDP. At first I thought I’d ignore it. But this morning I was dipping into A Century in Books, the little volume from 2005 celebrating the centenary of Princeton University Press, and it fell open at the page on Clive Granger’s 1964 book, Spectral Analysis of Economic Time Series. My PhD used a lot of time series econometrics – Mark Watson, now at Princeton, was one of my supervisors. I did my PhD so long ago that it’s now Once Upon A Time, and it is simply depressing that a generation after time series econometrics matured so many economists fail to think about the statistical properties of different kinds of time series data –  like GDP and reported life satisfaction.

(Actually – this is a rant for another time – it’s depressing that so many economists aren’t interested in data and statistics at all, but just expect to be able to download data files and run them through packages that churn out impressive-looking test statistics, without ever pausing to think about how the statistics are constructed or what the regressions might really mean. See Deirdre McCloskey eg [amazon_link id=”1843761742″ target=”_blank” ]Measurement and Meaning in Economics[/amazon_link].)

One of the first things you learn about in time series econometrics is the importance of understanding whether your data have the property of stationarity or not. (It’s on page 3 of my antique textbook, Granger and Newbold’s [amazon_link id=”0199587159″ target=”_blank” ]Forecasting Economic Time Series [/amazon_link] and no doubt equally early in [amazon_link id=”0521634806″ target=”_blank” ]Hendry and Clements[/amazon_link].) In other words, does the series drift over time far away from where it started? If so, it is non-stationary. GDP is like this; it is an analytic construct with no theoretical upper limit. Life satisfaction, however, is a stationary time series – in the World Values Survey it is measured on a scale of 1 to 10 – so it can never go above 10 over time.

So you don’t need to do any fancy econometrics at all to know that the correlation between GDP and life satisfaction over time is zero. You just need to plot the two separately on a chart over time. One is an almost flat line, one goes up a lot.

Or just engage the brain a bit. Over the course of many decades, average height in most developed countries has increased, thanks to better nutrition, healthier mothers, public health measures etc, all the fruit of economic prosperity. There is certainly a link between GDP and height – but you would not expect average height to have increased in proportion with GDP or we’d all be many metres tall; our average height in the UK would have roughly trebled since 1955. Life satisfaction is similarly an organic kind of characteristic and there is no reason at all to expect it to increase proportionately with GDP. That does no mean economic prosperity has no bearing on happiness.

Think of it another way. There has been next to no growth – indeed, falling GDP in some cases – since 2008. Has this really not diminished life satisfaction?

The Vox column gives the appearance of addressing some recent work challenging the idea of no links between GDP and life satisfaction – this by Stevenson and Wolfers is the best known but there are several papers – but it misrepresents them. The Vox authors write: “This last interpretation [ie the no-link interpretation] has been questioned by Deaton (2008) and Stevenson and Wolfers (2008), who claim that there is a positive relation between GDP and life satisfaction in developed countries.” In fact, this is exactly what they do not claim; they agree there is none. However, they find strong evidence for a positive relation between life satisfaction and GDP growth. GDP growth is a stationary time series (ranging between say -10 and +10 percentage points), so this positive correlation can be meaningful.

The psychology of adaptation might well help explain why the level of GDP has no relation to life satisfaction, which could be reflected in the statistical properties. There are equally strong psychological reasons for expecting the change in GDP to be positively associated with life satisfaction.

As Hobbes put it in [amazon_link id=”0199537283″ target=”_blank” ]Leviathan[/amazon_link]: “There is no such Finis Ultimus, no summum bonum as is spoken of in the books of the old Moral Philosophers. Nor can a Man any more live, whose desires are at an end, than he whose senses and Imaginations are at a stand. Felicity is a continual progress of the desire from one object to another.”

GDP is often thought of as just more of the same stuff, and of course how could having one more car or handbag or house make you happier once you already have a certain number? But this is to misunderstand fundamentally what GDP growth indicates (see my forthcoming [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief but Affectionate History[/amazon_link]) – which is in fact variety and innovation, new services and goods, from new medicines to graphene, or the internet, that speak to the fundamental human curiosity identified by the Enlightenment philosophers.

Shipping and statistics

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A link from Twitter this morning to these photos of the now-demolished Taoho Design Office and Studio appealed to my interest in shipping containers, which will be well-known to readers of this blog. The ur-text is of course Marc Levinson’s [amazon_link id=”0691136408″ target=”_blank” ]The Box[/amazon_link], published in 2007, but selected by Bill Gates as one of the best books he read in 2013.

[amazon_image id=”0691136408″ link=”true” target=”_blank” size=”medium” ]The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger[/amazon_image]

Parenthetically, I thought the whole list was terrific  – I quite enjoyed William Rosen’s [amazon_link id=”1845951352″ target=”_blank” ]The Most Powerful Idea in the World[/amazon_link]. I’ve not read the others but they all sound interesting. I have read some papers preceding Morten Jerven’s [amazon_link id=”080147860X” target=”_blank” ]Poor Numbers[/amazon_link], although the book wasn’t out in time before I finished writing [amazon_link id=”0691156794″ target=”_blank” ]GDP: A Brief But Affectionate History[/amazon_link]. It’s interesting – and encouraging – to see new interest in what the aim is in measuring ‘the economy’. It must be a good thing if the wider world is getting interested in shipping containers and statistics.

[amazon_image id=”1845951352″ link=”true” target=”_blank” size=”medium” ]The Most Powerful Idea in the World: A Story of Steam, Industry and Invention[/amazon_image]

urbanphoto_blog
Ahead of its time: HK architect Tao Ho built eco-friendly office from shipping containers… in 1989 http://t.co/pFufIZWwdy
10/01/2014 02:56

Charles Dickens on economics

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In Household Weekly, 1850:

“Political economy is a mere skeleton unless it has a little human covering, and filling out, a little human bloom upon it and a little human warmth in it.”

Courtesy of Sylvia Nasar’s [amazon_link id=”1841154563″ target=”_blank” ]Grand Pursuit: The story of the people who made modern economics[/amazon_link], which I’m finally reading now it’s out in paperback.

[amazon_image id=”1841154563″ link=”true” target=”_blank” size=”medium” ]Grand Pursuit: The Story of the People Who Made Modern Economics: A Story of Economic Genius[/amazon_image]

In last Saturday’s FT John Sutherland opted for [amazon_link id=”1853262374″ target=”_blank” ]George Eliot[/amazon_link], rather than [amazon_link id=”014143967X” target=”_blank” ]Dickens,[/amazon_link] as the Victorian author with the most to say about poverty and wealth. I’d go for [amazon_link id=”046087781X” target=”_blank” ]George Gissing[/amazon_link] or [amazon_link id=”014043464X” target=”_blank” ]Mrs Gaskell[/amazon_link] or [amazon_link id=”0199538697″ target=”_blank” ]Zola[/amazon_link] or [amazon_link id=”0140444300″ target=”_blank” ]Victor Hugo[/amazon_link] above either.

The uses of declinism

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The title of Josef Joffe’s new book tells you the argument: [amazon_link id=”0871404494″ target=”_blank” ]The Myth of America’s Decline: Politics, Economics and a Half Century of False Prophecies[/amazon_link].

[amazon_image id=”0871404494″ link=”true” target=”_blank” size=”medium” ]The Myth of America’s Decline: Politics, Economics, and a Half Century of False Prophecies[/amazon_image]

The first part of the book sets the scene with an entertaining history of American declinism through the decades, starting with the Sputnik shock and fear of the Communists in the 1950s, through the upheavals of the 60s, the impact of Vietnam and dire economic situation in the 70s, the Japan-bashing of the 1980s, a 1990s hiatus thanks to the end of the Cold War and the New Economy (as Joffe writes, “It doesn’t take much to vault from declinism to triumphalism when the geopolitics is right”), and the 2000s angst about the rise of China culminating in what the Chinese call the North Atlantic crisis of 2008.

The most interesting aspect of this first section is Joffe’s analysis of the political uses of declinism. For he convincingly shows it is used as a prelude to the promise of redemption. Ronald Reagan for one, John F Kennedy for another, used the claim of present decline very effectively in election campaigns to promise a brighter future. Joffe writes that declinist prophecies are intended to be self-averting: “Declinism is a political programme even though it comes in the guise of an empirical exercise such as counting guns or measuring growth.” He contrasts the 20th century declinist political philosophy with the Enlightenment tradition of optimism about the possibility progress, noting how feted pessimistic pundits are these days. (Though there are some optimistic ones – Matt Ridley’s [amazon_link id=”0007267126″ target=”_blank” ]The Rational Optimist[/amazon_link] is one, Mark Steven’s [amazon_link id=”1846683572″ target=”_blank” ]An Optimist’s Tour of the Future[/amazon_link], Charles Kenny’s [amazon_link id=”0465020151″ target=”_blank” ]Getting Better[/amazon_link] – and his new one, [amazon_link id=”0465064736″ target=”_blank” ]Upside of Down[/amazon_link]).

The next section of Joffe’s book turns to the empirical matters when it comes to comparing the US now with the challengers, especially China. He argues that direction of travel is irrelevant – the BRICs have grown rapidly but from such a low base that there is no challenger to the US: “It is size and weight that count.” A lengthy section runs through all the by now well-known arguments about China’s prospects. He is dismissive of the BRICs concept, arguing that the countries are too dissimilar to be relevant to each other, and a neat acronym has had too much purchase. It’s true they are not at all alike but I think this greatly underestimates the impact the concept has had in drawing attention to a genuine shift in the world economy – as I noted here recently writing about Jim O’Neill’s [amazon_link id=”1907994130″ target=”_blank” ]The BRIC Road to Growth[/amazon_link] and Danny Quah’s work.

The final section considers America’s prospects and status in the world, especially vis a vis China. Joffe concludes that if America’s relative decline continues, it will be self-inflicted. America’s demography is in its favour, he argues, its military might is vastly ahead of its rivals, it is still the most innovative country with free and flexible markets to bring innovations to fruition. He seems to think this will outweigh problems such as the disintegrating infrastructure, inequality and social problems and so on, but is it possible to predict how relative global growth rates will play out when there are such uncertainties on both sides of the Pacific? Writing in a country which did have the world’s leading empire and then did decline (the flavour so well captured in Corelli Barnett’s books such as [amazon_link id=”033034790X” target=”_blank” ]The Audit of War[/amazon_link] and [amazon_link id=”0330346393″ target=”_blank” ]The Lost Victory[/amazon_link]), but I’m not sure.

Inevitably, Joffe is selective in his evidence and fails to address the kind of questions many people have now about the American model. The gross inequality of income and wealth, and consequent accumulation and abuse of power, is just one aspect of it. There are questions about the US tradition of freedom, post-NSA revelations. In a time of generally polarised party politics, American politics stands out as particularly grotesque. Many people would also challenge’s Joffe’s rather positive view of how America is currently exerting its military power overseas.

It is interesting to hear his rather contrarian view. I would have preferred, though, more on the politics and philosophy of declinism, and the use to which it is being put, which is the best part of this book.