Greg Mankiw Wakes Up: Demography Does Matter

I recently berated Greg Mankiw (and the top ten world economists he pretends top cite) for the folly of suggesting that fertility rates don’t matter to economists. Well today Mankiw seems to be having (an implicit) rethink. Dependency ratios, it seems, do matter.

Now since dependency ratios are really a function of three factors – fertility, life expectancy and net migration – it is hard to deny the obvious: that fertility is important.

Mankiw also cites approvingly the opinion of US economist Jeremy Siegel to the effect that the “way to finance the baby boomers’ retirement is persistent capital inflows and trade deficits with developing countries”. Now Siegel doesn’t quite have this right here. The way to finance a high old-age dependency ratio, is through a high level of saving, and running persistent capital *outflows* and trade *surpluses*. This, of course, is precisely what Germany and Japan are now doing, (and also, incidentally, steering the currency down to reduce deflationary pressure, which is again what has been happening in Japan) and this is one of the reasons I give so much importance to this phenomenon. It is also one of the reasons why I discount the likelihood of domestic-demand-driven growth in these countries.

So all I can say is, well, well, well, welcome onboard Greg. As is well known both time consistency and cognitive dissonance are phenomena which constitute important problems for economic theory, but normally not in the sense that we can see them at work here.

A topic whose time has finally come? We will see. To quote the evolutionary biologist Linda Partridge (in another context) “there is much to do”. Would that economists were as aware of this as theoretical biologists seem to be.

Update: the problem is more perplexing than I initially imagined, since I now discover that on July 20th Greg approvingly cites a paper by Nir Jaimovich and Henry Siu. The title of the paper is The Young, the Old, and the Restless: Demographics and Business Cycle Volatility , and the extract he cites is this one:

changes in the age composition of the labor force account for a significant fraction of the variation in business cycle volatility observed in the US and other G7 economies“.

Greg says that this was the most intriguing hypothesis he had heard all day (he was at the NBER Summer Institute), which is fair enough, and I don’t expect him to agree with the hypothesis simply because he finds it intriguing, but I *am* stumped to understand how he can then go on on August 26 to describe the idea that low fertility posed a serious economic problem as one of the most wrong headed ideas he had heard recently, since, obviously, it is fertility levels which in part determine age structures which in part influence volatility in business cycles (according to the intriguing hypothesis). So come on Greg, which is it, wrong-headed or intriguing?

Seriously though, my point here is not to have a go at Greg Mankiw (although I have rather done that haven’t I?). My point is to draw attention to all the confusion which is knocking about on this topic. Material not unrelated to all of this is to be found in a recent article in the FT by John Kay. Kay asks hijmself why it is that Eureka moments seldom happen to economists. Basically he suggests that the reason is down to the difference between the natural and the social sciences. I don’t buy that, and I think that we social scientists sell ourselves too cheap if we succumb to it. But by the by Kay touches on another point, and it is one which brings us back to the struggle Greg Mankiw is having with the recalcitrant phenomena, since:

“It will rarely, if ever, be the case in economics that an old account of the world will be shown to be simply wrong, like the medieval account of planetary motion, or the phlogiston theory of heat.”

Well sorry John, but we have just found one that is: the neo classical account of steady state growth, there is no real factual basis for this theory, and theoretically it isn’t hard to see that it must be flawed, if, that is, the ‘intriguing hypothesis’ which Greg was scratching his head about is a valid one, and thus, since age structures constantly change, so must rates of economic growth. In which case both steady state growth and convergence theory go quietly west, off into the sunset. The intriguing question is then of course what exactly it is which modulates the changes in age structure. This is, of course, just the kind of problem that Archimedes was toiling away with in the relatively unturbulent waters of his bathtub. Aha, now I know why it is economists seldom have Eureka moments: they all take showers.

Now just let me step outside a moment, what is going on out there, is that the sun going round the earth, or could it just be that somehow or another the earth – unbeknownst to me – is actually turning round the sun.

Wolfgang Lutz and the Low Fertility Trap

Back in July I published a post about Austrian demographer Wolfgang Lutz’s hypothesis that those countries which sustain total fertility rates below 1.5 for any length of time may have fallen into a self-reinforcing low-fertility trap. Old Rottenhat (Ray to his friends) argued in comments that I had explained the reasons for the existence of low fertility but that I had not justified the idea that this was a ‘trap’. Old Rottenhat was right, and taking advantage of the fact that Lutz himself has now given a fuller outline of the hypothesis at the recent Postponement of Childbearing in Europe Conference (see presentation) I will now try and remedy this lacuna.

So here finally Ray, is your reply: I hope it is something which indeed goes beyond the obvious.
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Unified Growth Theory

According to Oded Galor it has become evident that in the absence of a unified growth theory that is consistent with the entire process of development, the understanding of the contemporary growth process would be limited and distorted. He quote Copernicus to the effect that:

?It is as though an artist were to gather the hands, feet, head and other members for his images from diverse models, each part perfectly drawn, but not related to a single body, and since they in no way match each other, the result would be monster rather than man.?
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the amateur anthropologist

20 years ago I had an Idea. Maybe someone who knows something about the field can tell me what is wrong with it in 20 seconds (including maybe someone else had the idea 40 years ago).

This thought was stimulated by reading Structural Anthropology a collection of essays by Claude Levi-Strauss. There are two questions. One is why are some cultures monogynous and others polygynous ? The other is why do the Bororo divide their tiny villages into 3 endogamous clans ?

OK first question. Why in some cultures men can marry more than one woman and in others only one ? One possbile explanation is polygyny occurs when the gender ratio is many women for each man. This can happen if lots of men get killed by other men. So women share husbands or go single wasting their uteruses (the Moll Flanders problem described by Daniel Defoe some time ago).

Could be the explanation, but I would like to talk about another. Levi Strauss was very interested in a very simple mathematical model which pointed out that hunter gatherers typically live in tiny groups (have too to avoid killing off all the game within walking distance). Someone else (really some two else) calculated that these groups were about as small as could be sustained given risk that a generation would be all male or all female and thus the last (he didn’t explain this model very clearly and I didn’t look it up). OK see how much worse this problem is if monogynous. If people live in small groups and are mostly endogamous (must have some flow with other villages/bands to avoide inbreeding but I assume this is pretty low). If each man is allowed to get only one woman pregnant, the number of woman who reproduce each generation is the lesser of the number of woman and the number of men. If each man is allowed to get as many women pregnant as are available then the number of women who reproduce each generation is the number of women. Polygyny might be required in people who live in small mostly endogamous villages to deal with random fluctuations in the sex ratio.
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Metis, Bie and Kerdos: Some Thoughts On Defeating Terrorism

Maybe it’s the presence of Talos in the comments section, or maybe it’s the arrival of the Athens Olympics on my personal horizon, but something this morning is carrying me back to the world of the Greeks, and to some early ideas of how best to secure objectives in the face of adversity.

First metis and bie:

What Does Metis Mean?

The history of the word goes back more than 28 centuries to the time of Homer around, 850BC. To the ancient Greeks, metis represented a particular type of cunning intelligence used if success was to be won in the most diverse fields of action. In the Iliad and the Odyssey, Odysseus is the hero most commonly associated with metis. The most famous strategem (metis) is the Trojan Horse, by which the Greeks finally managed to conquer Troy. This is a good example of metis for it represents a solution to a problem not resolvable by conventional means.

Metis is often contrasted with the word, bie, which means brute force. All through the Iliad, the big question is, will Troy fall by metis or bie – by wiliness or brute strength? The answer is by metis.

In the intellectual world of the Greek philosopher, there was a radical dichotomy between being and becoming, between the intelligible and the sensible. On the one hand there is the sphere of being, of the one, the unchanging, of the limited, of true and definite knowledge; on the other hand, the sphere of becoming, of the multiple, the unstable and the unlimited, of oblique and changeable opinion. Metis is characterised by the way it operates by continuously oscillating between the two opposite poles. Within a changing reality with limitless possibilities, a person with metis can achieve.

So metis is a type if intelligence and of thought, a way of knowing; it implies a complex but coherent body of mental attitudes and intellectual behaviour which combine flair, forethought, resourcefulness, vigilance, pragmatism, opportunism and the wisdom of experience.

When art and science unite, extra possibilities and opportunities are made resulting in innovation that can be driven by creativity. Metis is about finding elegant solutions to difficult problems instead of relying on brute force.

Now are you with me? What is lacking in our war with terrorism today, and all too often woefully lacking, is the component of metis. It is as if 2,000 years or more of history did not lie behind us, as if we had to learn every day anew the painful lessons of yesterday. Why am I saying this now? Well look what happened in Spain yesterday, what is happening today, and what will happen in the elections tomorrow.
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Madrid Bombing: Evidence So Far

Ok: it’s just gone half past six, and demonstrations all over Spain are getting ready to go. Meantime I will leave you with the following thoughts:

I think it must be difficult for anyone outside Spain to understand just how complicated this situation here is. As everyone by now knows, the Spanish police are following two leads: one that of Eta, and the other that of Al Qaeda. On the one hand the difference between the two – since in either case the question is one of terrorism – is minimal, on the other it couldn’t be greater.

In assessing the impact and consequences of the attack, perhaps the first of the major questions which strikes you is the quantity of immigrants – both documented and undocumented – who were involved. Just looking for five minutes at the TV images of the relatives filing past the cameras in the hospitals and mortuaries makes this abundantly clear. There are in fact victims from 11 countries, many of these countries surely being in Latin America. In fact so important is this question that Jos? Maria Aznar spent a significant part of his public appearance this morning underlining that any person among the victims who was found to be ‘undocumented’ would automatically be ‘regularised’. In addition any immigrants who have died in the attack and who had not been naturalised are automatically to be conceded the status of Spanish citizens, for themselves (posthumously) and for their families. What this decision highlights is the quantity of recently arrived immigrants that there are now here in Spain, and confronting some of the all too evident implications of this reality will undoubtedly now be one of the first priorities of the incoming government.

This brings me to my first ‘correction’: yesterday morning I said.. “and the victims are a total cross-section of Spanish society: from executives to recently arrived illegal immigrants”….. in fact this is wrong. There are relatively few executives, the majority of the victims it is now obvious come from poor families.
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