Timothy Taylor, at Conversable Economist, had a publish on August 13 titled “What Financial Concepts are True and Nontrivial?”
He begins with a well-known story that Paul Samuelson informed and I’ll quote it right here:
[O]ur topic places its greatest foot ahead when it speaks out on worldwide commerce. This was introduced residence to me years in the past after I was within the Society of Fellows at Harvard together with the mathematician Stanislaw Ulam. Ulam, who was to develop into an originator of the Monte Carlo methodology and co-discoverer of the hydrogen bomb, was already at a young age a world well-known topologist. And he was a pleasant conversationalist, wandering lazily over all domains of data. He used to tease me by saying, ‘Title me one proposition in all the social sciences which is each true and non-trivial.’ This was a take a look at that I all the time failed. However now, some thirty years later, on the staircase so to talk, an applicable reply happens to me: The Ricardian concept of comparative benefit; the demonstration that commerce is mutually worthwhile even when one nation is totally extra – or much less – productive by way of each commodity. That it’s logically true needn’t be argued earlier than a mathematician; that it’s not trivial is attested by the hundreds of vital and clever males who’ve by no means been capable of grasp the doctrine for themselves or to imagine it after it was defined to them.
Tim keys in on the final sentence within the above Samuelson quote. He writes:
If the “non-trivial” criterion may be met by any financial concept the place hundreds of clever and vital individuals are unable to understand or imagine it, then it appears to me that many financial theories are true and (apparently) non-trivial, together with the (apparently) widespread perception that governments can set costs or impose tariffs with out experiencing tradeoffs, together with many extra. The information headlines present examples of (apparently) clever and vital individuals who appear unable to understand or imagine financial insights just about daily.
I believe Tim signifies that the true assertion is {that a} authorities that units costs and imposes tariffs will expertise tradeoffs.
That jogged my memory of a query that Armen Alchian and William Allen requested of their economics textbook College Economics. I got here throughout it after I was TA-ing for an introductory microeconomics course throughout my first yr at UCLA.
Right here’s query #21 from Chapter 13 of the third version of College Economics (p. 21):
Proof of the very extent of specialization of data is supplied by Albert Einstein’s assertion simply previous to his dying (Socialist Worldwide Data): “The financial anarchy of capitalist society because it exists right this moment is for my part the primary explanation for our evils. Manufacturing is carried on for revenue, not to be used.” Give proof of your superiority over Einstein by exposing his error in financial evaluation.
I received’t hassle answering their query as a result of I believe that, particularly to readers of EconLog, the reply is apparent.
I’ll give one other one. We regularly see apparently clever individuals, observing that the share of earnings of the underside 20% has fallen, argue that the poor are getting poorer. There are two issues with this. The extra apparent is that the share of a rising earnings may be falling however the common incomes of individuals in that lowest quintile may be rising. The second, and fewer apparent, is that the individuals within the lowest quintile in a single yr usually are not all the identical individuals within the subsequent yr. And over a decade, there’s large mobility amongst earnings quintiles. (There’s a 3rd drawback additionally: earnings, although positively correlated with wealth, it not completely correlated. Somebody may be within the backside quintile of earnings and nonetheless be pretty rich.)
Observe: The associated pic is of Common Economics, an replace of the previous Alchian and Allen textual content.