To each economy its economics

I spend a few days in Washington DC talking about the IDSC of IZA. I met some old friends, got to know some new ones and attended a very interesting talk by John Haltiwanger on the state of the US economy. One of John’s remarks about the current state of the economy was that something fundamentally new appears to be happening: the quits, which dropped in the crisis as expected, do not seem to come back up as the country is coming out of the recession. In other words while job destruction is mostly over most people prefer to keep their job if they have one rather than look around for a better match. There is so far no clear story as to whether a benign or a more malignant explanation exists.

Job matching is the key word which sparked the thoughts in this text. It needs to be taking place along with periodic job destruction and job creation as the economy realigns its potential and optimizes its ways. Very dynamic, sometimes merciless and in some ways very healthy. I love coming to the US, as my friends never stop hearing me say. There is nothing more invigorating than the sidewalks and subways of an American metropolis like Washington DC in the morning. You feel that distinctly American,  contagious vigor and fighting spirit which sucks you in and carries you like a slipstream. On the other hand if you are at all able to process what you see and hear on the street there is one concept which jumps out at you over time: inequality, extreme inequality. Nothing is more dominant than inequality as soon as your senses collected enough data. These two aspects fit well together: the go-get-em attitude that so excites you on the street also claims its victims which are none but the losers of competition, the specter of which feeds back into the society sparking more competition; an example of positive feedback.

I remembered a meeting as the current recession was breaking out, in which one of the better known German social scientists was explaining, in his characteristic way, the subtleties of “selling science to politicians”. “You can’t convince” his point was, “the politician to allocate more resources for the collection of say crime data without selling the idea that more and better data will improve crime fighting and cause say crime reduction”. “This” he continued “is risky because the politician knows it to not be true as a look at the sad state of the American economy and its juxtaposition to the so many economics Nobel prizes won by Americans” shows.  I looked it up and indeed I counted 49 American Nobel prize winners in economics out of a total of 69 economists. There is, on the other hand for example, no German economist who won the prize (there are of course German born economists but that’s not the point). There is a fundamental error in the argumentation of our social scientist. In an economy of “laissez faire” capitalism like the one in the US you are bound to have more frictions, more dynamics and more intellectually challenging complex phenomena which in turn attract more intelligent young people who study economics who then create more of the better economic ideas and of course become more often Nobel laureates. So our German social scientist did not discover the non effectiveness of science but quite the contrary he rediscovered supply and demand: more interesting problems attract more and better brains. To have expected, for example, that there could ever have been more German economic Nobel laureates than American (given the more social nature of German capitalism) would be to expect that more of the better wild life zoologists work in a zoo than in the jungles. To expect then that more economists would mean a better economy (a more stable one) is like expecting that more wild life zoologists would cause a more civilized jungle.

There is a lot of uncertainty out there as some of the data breaks with past pattern but one thing is for sure: we are in for a ride. Moreover if you want to bet on the Nationality of the next economics Nobel laureates you are well advised to put your chips on an American more often than not.

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