The Miasma School of Economics

I’ve been reading Steven Johnson’s The Ghost Map, about the London cholera epidemic of 1854, and one passage reminded me exactly of today’s economics discipline.

The sense of similarity was heightened because I also (instigated by Nick Rowe) happened to be reading Mankiw’s micro textbook section on the rising marginal cost of production — a notion that 1. is ridiculous on its face, 2. is completely contrary to how profit-maximizing producers think, and 3. is based on just-plain incorrect math.* It’s just one of many central pillars of “textbook” economics that are still being taught with a straight face, even though they been resoundingly disproved by the discipline’s own leading practitioners, on the discipline’s own terms, and using its own language, constructs, and methods. These zombie ideas just won’t die. (Or to quote my friend Ole, “People never learn, and they never forget.”)

Economics today has a profound resemblance to medicine before the germ theory of disease.

Lots of people in 1854 were trying to figure out what caused cholera, and how it was transmitted. The dominant theory was “miasma” — basically bad air emanating from smelly, unsanitary conditions, especially in poor areas with lots of leaking, overflowing basement cesspools full of shit. These were contaminating the water supply, of course, so the real transmission mechanism was people drinking the effluent from previous victims.

The solution to the miasma problem? Empty the cesspools into the Thames — systematically poisoning the water supply. Yes, that’s what they did.

The miasma theory had incredible staying power, even though it was clearly and patently disproved by the thousands of Londoners whose vocation was slopping through the sewers, day and night (presumably in the thickest of possible miasmas), searching for anything valuable that they could sell. They didn’t get cholera or die at any greater rate — perhaps even less.

Johnson:

Why was the miasma theory so persuasive? Why did so many brilliant minds cling to it, despite the mounting evidence that suggested it was false? … Whenever smart people cling to an outlandishly incorrect idea despite substantial evidence to the contrary, something interesting is at work. In the case of miasma, that something involves a convergence of multiple forces, all coming together to prop up a theory that should have died out decades before. Some of those forces were ideological in nature, matters of social prejudice and convention. Some revolved around conceptual limitations, failures of imagination and analysis. Some involve the basic wiring of the human brain itself. Each on its own might not have been strong enough to persuade an entire public-health system to empty raw sewage into the Thames. But together they created a kind of perfect storm of error.

Miasma certainly had the force of tradition on its side. … Just about every epidemic disease on record has been, at one point or another, attributed to poisoned miasma. …

But tradition alone can’t account for the predominance of the miasma theory. The Victorians who clung to it were in almost every other respect true revolutionaries, living in revolutionary times: Chadwick was inventing a whole new model for shaping public health; Farr transforming the use of statistics; Nightingale challenging countless received ideas about the role of women in professional life, as well as the practice of nursing. Dickens, Engels, Mayhew — these  were not people naturally inclined to accept the status quo. In fact, they were all, in their separate ways, spoiling for a fight. So it’s not sufficient to blame their adherence to the miasma theory purely on its long pedigree.

The perseverance of miasma theory into the nineteenth century was as much a matter of instinct as it was intellectual tradition. Again and again in the literature of miasma, the argument is inextricably linked to the author’s visceral disgust at the smells of the city. The sense of smell is often described as the most primitive of the senses, provoking powerful feelings of lust or repulsion…

I think it’s worth pointing out here the work of Jonathan Haidt et al showing that conservatives have a big “purity” and “disgust” dimension to their moral roadmap, a dimension that is largely absent or far more muted among liberals. Which leads to…

Raw social prejudice also played a role. Like the other great scientific embarrassment of the period – phrenology — the miasma theory was regularly invoked to justify all sorts of groundless class and ethnic biases. … The predisposing cause lay in the bodies of the sufferers themselves. That constitutional failing was invariably linked to moral or social failing: poverty, alcohol abuse, unsanitary living. One alleged expert argued in 1850: “The probability of an outburst or increase during [calm, mild] weather, I believed to be heightened on holidays, Saturdays, Sundays, and any other occasions where opportunities were afforded the lower classes for dissipation and debauchery.”

So disease epidemics are clearly the result of the 40-hour work week. You can find the modern-day equivalent in John Cochrane and Casey Mulligan’s assertions that today’s unemployment has nothing to do with the high job-seeker-to-job-opening ratio (caused by lack of demand for producers’ goods, and their ensuing non-need for more workers), but rather results from workers being unwilling to work at low wages (and being coddled by government programs).

Like much of the reasoning that lay behind the miasma theory, the idea of an inner constitution was not entirely wrong; immune systems do vary from person to person, and some people may indeed be resistant to epidemic diseases like cholera or smallpox or plague. The scaffolding that kept miasma propped up for so long was largely made up of comparable half-truths, correlations mistaken for causes. Methane and hydrogen sulfide were in fact poisons, after all; they just weren’t concentrated enough in the city air to cause real damage. People were more likely to die of cholera at lower elevations, but not for the reasons Farr imagined. And the poor did have higher rates of contagion than the well-to-do, but not because they were morally debauched.

Likewise, there are many valid and semi-valid ideas, theories, and constructs floating around in the world of textbook economics. But they are so intertwined with, caught up in the miasma, or phlogiston, or epicycle theories that today constitute mainstream economics (think: equilibrium, rational expectations, etc.) that it’s hard for even the clearest-eyed economist — much less the everyday person or Washington staffer, legislator, or policy wonk — to tell the shit from the shinola.

Without trying to take the metaphor too far, I’d like to suggest that today’s austerians are in favor of emptying the cesspools into the water supply — based on similarly loopy reasoning.

* The rising marginal cost theory is ridiculous on its face because it assumes that producers add one factor of production at a time — hire more workers, for instance, without renting more space for them to work. (This is exactly what Mankiw describes in his textbook; see “Thirsty Thelma’s.”) Voila! Each worker’s productivity declines. This is of course not what producers do, which is why only 11% of top-corporation execs say they face rising marginal costs of production. (I’m wondering if that 11% made the mistake of taking an intro econ class in college.) For a nice recap of that executive survey, and the faulty math of rising marginal costs, see here (PDF).

Cross-posted at Angry Bear.

 

  1. Pedro Alvarez
    November 24th, 2012 at 19:49 | #1

    In philosophy of sciences, esp Lakatos’ theory, there is a notion called “protective belts” in every research paradigm. Whenever you present facts (evidence) that contradicts the main hypothesis in a research paradigm, the defenders of that paradigm come up with other hypotheses (protective belts) to explain them away.

    Unless the rival paradigm replaces it, the current paradigm will be protected by such protective belts. There are some cognitive reasons for it–esp how humans learn, etc.

  2. November 24th, 2012 at 22:18 | #2

    Neoclassical economics is based on scarcity and only scarcity it seems!

  3. JKH
    November 25th, 2012 at 06:13 | #3

    Interesting piece, with a potentially complex metaphor

    In addition to the viral belief aspect:

    Economics struggles with causality
    So various schools confuse or debate cause and effect
    E.g. saving and investment at the macro level; bank reserves; etc…

    The miasma theory apparently confused a by-product effect for cause
    And in treating the by-product effect, exacerbated the cause

    (Perhaps a bridge too far, from Metaphors R us…)

    :)

  4. vimothy
    November 25th, 2012 at 09:54 | #4

    Oh, man–that Keen piece…

  5. Ramanan
    November 25th, 2012 at 09:58 | #5

    I came across this word “miasma” again today reading Nicholas Kaldor’s “The Economic Consequences Of Mrs Thatcher”.

    Page 47…

    There can be no dispute that the advent of this Government marks a break with the past which is little short of revolution. This is true, even though the true extent of the change has been masked from public view by the fact that the previous Government in their dying days themselves became victims of the same intellectual miasma which afflicts the present Government. What exactly is the nature of this miasma? The money supply, which was virtually an unknown quantity throughout the post-war period, has come to occupy the centre of the stage; it is endowed, in the view of our present Ministers, with an almost mystic importance. For reasons that nobody could explain or even tried to explain, it is assumed to be the main factor responsible for inflation, and this in turn the source of other evils…

  6. November 25th, 2012 at 19:48 | #6

    I found very amusing the quick quiz question (page 270):

    “QUICK QUIZ If Farmer Jones plants no seeds on his farm, he gets no harvest. If the plants 1 bag of seeds, he gets 3 bushels of wheat. If he plants 2 bags, he gets 5 bushels. If he plants 3 bags, he gets 6 bushels. A bag of seeds costs $100, and seeds are his only cost. Use these data to graph the farmer’s production function and total-cost curve. Explain their shapes.”

    The idea is to show the decreasing marginal product of the input (wheat seeds):

    0 bags –> 0 bushels
    1 bags –> 3 bushels –> marginal increase product = 3
    2 bags –> 5 bushels –> marginal increase product = 2
    3 bags –> 6 bushels –> marginal increase product = 1

    Instead of answering Prof. Mankiw’s questions (the correct answer is, btw, because his book says so) I’d like to ask Prof. Mankiw some questions:

    why should additional bags of seed increase the harvest less than the previous bags? Are successive bags any less fertile? Is Farmer Jones getting hungrier and starts eating larger portions of the seeds?

    More importantly, other than to make the example fit the theory, has Prof. Mankiw any personal reason to believe something as bizarre? I mean, when was the last time Prof. Mankiw planted some wheat?

  7. November 26th, 2012 at 21:59 | #7

    Magpie: he’s holding the acres of land constant. If we could keep on doubling the output of wheat by doubling the input of seeds, holding land constant, we could grow enough wheat to feed the whole world in my back garden. (That’s a very old idea of diminishing marginal returns, that goes back to Malthus.)

  8. November 27th, 2012 at 02:06 | #8

    Prof. Rowe

    Thanks for the comment.

    He is, indeed, holding the land surface constant; but not just that: he is also holding it constant at a small size, just enough to make a kind of “saturation effect” **always** felt.

    Let me explain with a counter story.

    Robinson Crusoe is sitting at the beach, shortly after the shipwreck and wondering what to do. Suddenly, he remembers: he saw a box somewhere containing plenty hooks and Nylon thread. Why not try fishing?

    He cuts a bamboo branch, ties a piece of thread and a hook at the end of it, and leaves the whole thing there. After a while, Crusoe comes back and finds a fish.

    “Well, if one fishing rod gets one fish, two should get two, three should get three, and so on”, thinks Crusoe. That is, Crusoe formulates the following rule: “One additional fishing rod, one additional fish”.

    But let’s think things over. Could this go on forever? Probably not. Although the ocean is big, really big, and that island is, well, all surrounded by it, there will be a moment when thousands and thousands of lines, set in close proximity, could start interfering with each other: say, maybe the lines could get entangled and the more lines, the worse the mess; maybe Crusoe cannot attend them all, or whatever.

    Bottom line, eventually, Crusoe’s rule (“one additional fishing rod, one additional fish”) could break down and he could get less additional fish for each additional fishing rod. That, at least in theory, could happen: the marginal product (MP) of the input could decrease.

    But surely, this would not happen with just a couple of lines? Maybe ten or fifteen? Perhaps thirty? At least within these few first lines, the MP need not be decreasing.

    In fact, within these limits, I can see no reason why Crusoe’s rule should not hold: one additional fishing rod, one additional fish.

    Maybe the MP could start to decrease after thirty, and it may reach 0 additional fishes when the number of fishing rods is really large. But, then again, Crusoe doesn’t need fifty fishes every day: his demand is satisfied with five mackerels.

    Mankiw is not only assuming that the “saturation effect” happens, he also assumes it happens **soon**: his farm is a pond. In his example, there is no “Crusoe’s rule”. This I dispute.

    Further, to find the point where the MP reaches 0, Crusoe would have to experiment. And perhaps he can, as he is a fictional character.

    But is there any real life businessman who can actually do that?

  9. November 27th, 2012 at 02:55 | #9

    By the way, regarding Malthus. He published the first edition of “An Essay on the Principle of Population” in 1798.

    The world’s population today, some two hundred twenty years after that, is over 7 billion people. In developed countries the talk is about an epidemic of obesity.

  10. November 27th, 2012 at 09:12 | #10

    @Nick: “he’s holding the acres of land constant”

    Exactly. Which, I think, is why the model doesn’t make sense. Producers don’t hire more workers without providing other inputs for those workers at the same time. Yes, long term vs short term, that is in the textbooks, but I still think it’s a fatally flawed or at least incredibly unwieldy model.

    In a comment on the textbook post, I think, you talked about holding everything else equal, and also simultaneity. I think these time issues may explain why much textbook economics doesn’t make sense to me. Maybe because I can’t grok it, but maybe because it doesn’t make sense.

    Briefly, it strikes me that simulation models like the ones Steve Keen and very few others are trying to build hold much more promise. All the variables are free to move simultaneously, and mutually react over time. Such a dynamic system may be completely different *in type* from the comparative statics that are far more widespread, quite possibly making those static models completely invalid by comparison.

    This is how weather modeling works — textbook-economics-style models would be laughed out of the room — and economies strike me as being very similar complex dynamic systems to the weather/climate system.

    Set up the parameters in a bunch of different simulation models, and watch them run. Run them against historical data. Which ones simulate accurately? Given your constantly demonstrated willingness to think creatively and outside the box (and often brilliantly), it really surprises me that your thinking hasn’t taken you to that place. What do you think? Why isn’t more work done in this style of modeling?

    I corresponded with a young econ Phd candidate a while back who really wanted to do a dynamic modeling thesis. But he said the institutions structures all prevented it — “just grab a data set, build a regression model, and call it good.” IOW, stick to miasma and you’ll get a job.

    John Snow would have been hard-pressed to get a job in London’s public health establishment…

    http://en.wikipedia.org/wiki/John_Snow_(physician)#Cholera

  11. November 27th, 2012 at 09:21 | #11

    IOW, the correct predictions resulting from textbook-economics models, like the correct predictions arising from miasma theory, might all be false positives. They only prove the model’s efficacy if you ignore the negatives.

  12. Nathanael
    January 21st, 2013 at 22:19 | #12

    In fact, producers spend a lot of time working out the correct ratios of the “cofactors of production” — the optimal number of square feet of space per worker, the optimal number of seeds per hectare, etc.

    Then, once they can hit those cofactor rates, they use those cofactor rates *exclusively*, and scale up or down using the optimal cofactor rates.

    Mainstream economics has a completely broken model of the firm. I wonder if this is deliberate. An honest model of the firm leads to the conclusion that firm owners extract wealth from workers, proving Marx largely correct in his theory of capitalism.

  13. barleysinger
    December 29th, 2013 at 11:47 | #13

    People tend to hang on to ideas that tell them what they WANT to hear (not those ideas that are factual). This has a lot to do with the emotional investment that people place in their ideas, theologies, etc. Quite often the ideas that people cling to in the face of contrary evidence, are being clung to for irrational reasons.

    For example : Think of the envoy from the pope who refused to look through Galileo’s telescope because he KNEW he would see a thing that contradicted the pope’s statements (and did not want anything to challenge his faith in the popes infallibility)…. and think again of the cosmologists who refused to even consider the idea of the “big bang” with its’ expanding universe – and instead clung to the steady state” universe, because to them a “big bang” meant there was a beginning point, and they were atheists who had spent their entire lives fighting the pervasive magical thinking that dominated the majority of the population.

    As for me, I find the diminishing returns concept especially odd in light of :

    * the reality of mass production in manufacturing, which uses a single large period of increased investment (often quite short) to dramatically *decrease* the cost per item produced. IN the real world things are just more complicated that “one bag of seeds” (etc). An investment into mass production will increase the rate of production per dollar spent – which shows INCREASED returns.

    * the reality of advertising which can often convince people (these days often by using the applied psychology) to buy anything, no matter how useless, or how poorly made – or even when it has been proves years ago that they cause serious health problems : ie -cigarettes which cause cancer, coco cola which leaches calcium from the bones and is so acidic that it rapidly rots teeth, aspartame as a diet aid – which is a neurotransmitter and causes an INCREASE in thirst and hunger in most people, anti-bacterial soaps that increase rates of autoimmune disease like asthma, and products containing artificial fragrances that use carcinogenic ‘scent carriers’ like tolulene

    * diminishing returns also ignores the reality of innovation, which again tends to (even after mass production has been in place for decades) dramatically increase productivity and reduce expenditures – as in the application of robots in modern auto manufacturing which (although they do not produce as high quality an end result) do not need to rest, or to eat, and do not get sick

    * the primary ideas of modern economics also state very flatly (it is after all a “faith based” belief system) that one can achieve endless growth in any market along and have endless and increasing returns, all with no thought to the ideas that markets DO become saturated and thatresources really ARE limited (you can only feed your sailors on “dodo’s and their eggs” if you do not make them extinct…and even if you could, people are only able to stomach so much “dodo” in their diet)

  1. No trackbacks yet.