Big Ideas and Just-So Stories

Part of what you're supposed to learn in college is a smattering of the really big ideas.

1. You may have already read my response to Tommy's question in the Quodlibet (the one with the story about airplane damage, and how that might relate to how we think about recessions), and
2. I don't know if any of you subscribe to Quora. It's a tech website that is also a Quodlibet (with answers that are crowd-sourced). Anyway ...
3. Today on Quora there are several voices using the same example to address this tangentially related question.

What's interesting is that the same insights are used at Facebook to figure out what their users are doing.

I'm not special. Lots of people know this story, and understand why it's important. But I may be the first professor you've had to point out that the surface story the data is telling us is often very different from the truth.

Here's another example, entitled "The Wittgenstein Test" that Scott Sumner (a macroeconomist from Bentley) posted on EconLog about a week ago. He has 5 examples saying pretty much the same thing: maybe the Great Recession didn't mean what we think it means. The best one is # 2. We've been told endlessly that there was a speculative bubble in real estate prices. If there was a bubble, prices would run up, and then collapse rapidly. At first glance this sounds like a reasonable description of our experience around the Great Recession. Except the Great Recession was global, so it behooves us to look at global data. Here's that data:



Oops. That kind of looks like 1) a run-up in prices that was driven by a common global factor, followed by 2) a dispersion of price behavior across countries because the common global factor went away and was replaced by locally important ones. Gee ... almost like there never was a bubble at all.

The beauty of the asset bubble story is that is supports a view that market behavior is both irrational and unbeneficial. My ... what an interesting position to gain popularity in the U.S. during a period when government has been dominated by a party with an  agenda to increase government regulation.

All I'm saying is that when you learn (and do) macroeconomics you need to be aware that a lot of analyses amount to "just-so stories".