Tuesday, July 27, 2010

Economic myths - another dose

Population growth

I have written at length on why population growth does not improve welfare. Mark Crosby over at Core Economics reiterates these fundamental arguments.

The pro-population growth arguments are theoretically flawed, and empirically dismissed. Below is a chart of the relationship between population growth and GDP per capita for around 200 countries and localities, showing a distinctly inverse relationship. If I was in the business of improving welfare, low population growth would be a key avenue.
Another emerging myth is that population growth will decrease interest rates. Renowned property spruiker Chris Joye has created plenty of media fanfare recently with his spurious connection between population growth and interest rates. This table shows the interest rates in 23 countries, and if I’m not mistaken, shows that countries with the lowest population growth (and highest GDP per capita) also have the lowest interest rates.


Food myths are widespread. The environmental movement wants us to believe that vegetarianism is better for the environment and that ‘organic’ (what does that mean?) food is more nutritious and can solve hunger around the world. The agricultural lobby would have us believe that food self-sufficiency is of utmost importance, although their argument is shallow at best.

The latest myth to be busted is that chickens are pumped with artificial hormones and steroids to make them grow faster and larger. However, it appears that hormones are not part of the poultry picture at all.

While I firmly believe that raising animals for food should be conducted in a humane manner, those who push for change would garner more support if they were fully informed of current practices - their message could then be taken seriously by industry and government. Furthermore, the organic food movement could concentrate on promoting farming practices that reduce externalities, as a result of chemical use for instance, and improving land quality. The incentives for such change often align with the long term goals of the agricultural industry and may attract wider public support.


Under the rebound effect banner I have discussed how some innovations to improve safety can backfire if peoples’ behavioural response is to take on more risk. For example, the vigorous uptake in sunscreen use has led to a culture of sun exposure, offsetting the intended consequence of reduced skin cancer rates. The name for this behavioural response in the context of risk taking is the Peltzman Effect.

You can find this type of response in broad range of situations. Most recently, in trials of automatic lane correction technologies in cars, one participant noted:

...that she would love to have this feature in her own car. Then, after a night of drinking in the city, she would not have to sleep at a friend’s house before returning to her rural home

Minimum wage

The business lobby loves the textbook response to minimum wage laws, but even world renowned economists are sceptical.  No doubt this debate will continue.


  1. Wealthier societies are associated with lower rates of population growth. But, which causes which, if there is any causation?

    It seems to me more likely that increased wealth from societal changes and industrialization has reduced the incentive to have many children. It seems less likely that people decided to have fewer children, then later enjoyed greater wealth per capita.

    It would be interesting to see the natural experiments where some change in culture alone lowered the birthrate, and prosperity followed.

    - -
    About minimum wages. I believe the observation that lowering the price of a commodity causes more of it to be purchased. (Sometimes, a higher price for a specialty good signals quality to people who otherwise can't judge the quality, say of an automobile.)

    Employers can judge the quality and productivity of their employees. They are going to hire more employees at lower wages, because this puts more workers in the position of offering a profit to the employer.

    Tyler Cohen is not arguing directly that minimum wage theory is wrong. He says "market oriented economists" MOE's believe two things that supposedly show a contradiction.
    (1) When the governmnet sets the price of labor higher, employers are not fooled into hiring them because they are supposedly worth more.
    (2) When the government sets interest rates lower (the price of borrowing), MOE's say that employers ARE fooled into increased and wasteful investment, because they don't look through to the fundamentals.

    Cohen asks, why do MOE's think that employers are smart enough to see through artificial minimum wages, but not smart enough to see through artificial interest rates? So, the MOE's must be wrong in something.

    My simple answer is that employers know that the minimum wage is artificial and they can judge the productivity of their employees and business. So, they aren't fooled.

    Employers and economists are less certain about interest rates, so there is more room to make mistakes. What is the "real" interest rate when the government is interfering? So, some employers make the mistake of believing the interest rate as presented by the market, although manipulated by the government.

    Then again, many businesses don't believe that current interest rates are real. They know that there is official manipulation, and they don't know what to do. I think this accounts for the lack of current business borrowing, even at quite low interest rates.

    Tyler Cohen sees a contradiction that I don't see.


  2. appreciate there aren't many other options but using GDP growth per capita as a measure of "welfare" in itself is questionable in my opinion

  3. Andrew,
    I agree that the causation question is not untangled in the population debate. Maybe China and India are reasonable examples see here. If we searched hard there may be some natural experiments taking place around the world.

    Your explanation of Cohen's contradiction appears sound. However I don't believe that the direction of the initial 'shock' is always the same as the long run outcome. The net effects of minimum wage law are a grey area, and the textbook response ignores change over time. Just like sunscreen, safety laws, and energy efficiency, one needs to consider the flow-on effects in addition to the first order effect.

    I used the term welfare and then plotted GDP. Although I don't agree the GDP = welfare, it does help to make my point about inverse correlation. I am confident the same correlation would apply using an alternative welfare measure.