Saturday, October 16, 2010

Analysis vs. Asinine Analogy

 Cross-posted at the Mises Economics Blog.

Robert Murphy just finished his weekly office hours session for his online class, Principles of Economics.  As I mentioned previously on the Mises Academy blog, this week, he’s been covering supply and demand charts.  The educational opportunities that web conferencing software makes possible are really amazing.  Over video broadcast, he was able to field question after question about supply and demand from the student posts in the chat window, and in the main display window, he was able to pull up, on the fly, just the right chart to use to demonstrate what he’s talking about.
Supply and demand curves seem to be one of the economic concepts that is the most abused by pundits. Once when I was in a political science class at Berkeley, some guest lecturer (I believe he was a journalist) came in purporting to explain the 2000/2001 California energy crisis, blaming market manipulation. He made his two hands (which were supposed to represent supply and demand curves), rise up, and come together like the top of a triangle saying that “at the point where supply and demand meet”, there is a “market tweak” that insiders can perform that makes the price explode upward.  As he said that last part he made his “supply/demand curve” hands bump into each other and then shoot up like a volcanic eruption.
That was the extent of his analysis.
And when a student asked him what the heck that was supposed to mean, he didn’t elaborate at all; h just impatiently repeated the whole little hand routine.  I think he expected the students to just sit there in awe at his brilliant mechanistic analogy and apparent mastery of economics, and was irritated that a student wanted him to actually make sense.
I still have no idea what he was trying to say, and even he probably didn’t know.  But I do know now that his little hand play was nonsense.  A single pair of S/D curves represents possible price/quantity relationships in a single snapshot of time; so representing them as slithering toward each other across time, like two snakes meeting in the desert, is a complete mischaracterization of what they represent.
As Professor Murphy helps his students (many of whom are in high school) understand how to accurately interpret S/D graphs, they will be able to spot mischaracterizations like that one, and economic charlatan-pundits will have a few less dupes in their broadcast audience.

No comments: