Monday, April 2, 2012

Mindless Statistics

In chapter 10 of The Darwin Economy, Robert Frank, again, sets out to invalidate the economic theories and "mindless slogans" of "movement libertarians" and right-leaning economists, whom he considers one and the same. This time he sets his sight on the Laffer Curve and the underlying premise that high marginal tax rates act as a disincentive to work hard. Personally, I disagreed with his argument against the Laffer Curve, but that's not what I want to talk about. I've already touched on that in another post and it's, Frankly, not interesting enough for a second post. Instead I'll address a claim that he casually made, one with profound implications.
Frank rejected the theoretical construct of the Laffer Curve because of a counter-incentive that higher marginal tax rates may create. Essentially, lower wages may actually incentivize hard work. This is because people may end up working harder to overcome the obstacle that high taxes create to their desired standard of living. I disagree, because I doubt that people set target incomes and work as hard as they find necessary to hit their target. But it was, nevertheless, a fair point. His next claim wasn't. He wrote: "Economic theory tells us nothing - absolutely nothing - about which one of these opposing effects might prevail."At that point he switched to using statistics to make his case against the Laffer Curve. That's where things got ugly.
His first point was that work hours have been decreasing throughout American history even as wages have increased. He may be right, maybe higher wages did cause us to spend more of our time on leisure, but we have no way of knowing from that one statistic. Throughout American history, hundreds of changes to the labour market have occured in areas such as union representation, work-hours legislation, regulation, corporate governance, inflation, tax structure, and a shift from work in agriculture to factories to services. Any one of these variables can be pointed to as the reason that we work less and none of them can be easily tested. His next few claims weren't any better. They consisted of statistics that compare Japanese and American CEOs, another comparison between modern and historical America, and an OECD study that lumps together first-world and second world countries. In all of these examples we see the same problem, apples and orages comparisons. Unfortunately for Frank, there isn't a statistic out there that doesn't have that problem, although he could have chose better ones.
This is why more work should be done improving economic theory. A better understanding of human nature and our motivations would have been infinitely more usefull than survey data that compare very different economies. Had Frank chose to work on developing economic theory rather than dismissing it, he might have gained some intellectual ground against the libertarians he opposes.


  1. i see a economics professor at a distinguished university using actual numbers, and i see a economics pupil disagreeing with him because i guess "because I doubt" constitutes as actual empirical evidence. try working for lower wages, you literally STRIVE for as many hours as you can get.

    1. Jack the technocrat? Striving for hours and working hard are two very different things. Easiest way to extend your hours? Work slower. This only works on the margin, like everything else, but it shows the subjectivity of the question.
      Remember that Frank is trying to disassemble widely held beliefs and economic conceptions. It is incumbent upon his argument to be well versed and defended. Calling out Frank's shortcomings in an academic manner is both desirable and expected.

  2. working slower does way more than get you a couple more hours, it gets you fired. You assume that in any situation that people want more hours they will obviously just work slower, and while i bet this happens in some cases, the relevance of one possible example is more the exception than the rule. And also he says that frank should simply agree to current theory and possibly refine it to gain support of liberals, when he does not want their approval because he feels they are utterly led astray and wrong. He IS improving economic theory by tearing down illogical misconceptions that are only accepted because they have been repeated so often. He does not call out any shortcomings, he tries to build them out of thin air by discrediting frank and building a straw man about some sort of " anti laffer curve " rant which he simply says frank is wrong because he does not include variables of reduced work hours, which makes no sense. This was not an academic dressing down, it was a george bush style straw manning of franks entire argument.