Consumerism, Depression, and Causality
Here on Seth Roberts’ blog, I respond to a comment by someone who suggests that low serotonin levels cause depression. (Thinking that low serotonin levels cause depression leads to solutions such as drugs that increase serotonin levels, which is convenient for the pharmaceutical industry.) In this case, the causality is exactly backwards (at least in the large majority of cases) - depression, rather, causes low serotonin levels. Change the things that cause depression, and not surprisingly the serotonin levels go up on their own.
In economics, people often talk about economic health in terms of consumer spending - that is, a healthy economy is caused by robust consumer spending. The basic problem is that here, too, this causal structure is backwards: good consumer spending is caused by healthy economic fundamentals, not the other way around. If you believe that consumer spending causes a healthy economy, you will probably be more likely to prescribe policies that give short-term boosts in consumer spending. These policies will tend to merely cover up the symptoms of - or even lead to further - economic problems. To illustrate this, during the run-up to the U.S. recession financial analyst Peter Schiff made the following analogy:
Let’s say you’re on an island, where the main economic activity is fishing. Some of the tribal elders believe that the basis of an economy is fish consumption and that to expand the economy you need people to buy more fish. Instead of expanding your fishing fleet, innovating more productive fishing techniques, and so on, you decide to get the people on the next island over to lend you fish. Your fish-buying consumer activity starts going way up. You pay for the fish with clam shell tokens (which have little value in themselves). Everyone is happy, so you start shutting down your own fishing fleet, instead trading more and more clam shell tokens for more and more fish from the next island. Your “economy” is booming. You see where this is going.
In other words:
Consumer activity is to an economy
as
Serotonin levels are to a person’s psychology
Properly understood, low levels of either are effects, not causes, of (psychological or economic) depression. If you get the basic causality wrong, you can end up with short-term crutches and policies that have negative long-term side effects.
29. November 2008 at 00:29
Good analogy, but the other islands (China) are currently taking clamshells (US dollars) since if they stopped, they would have a problem trying to liquify the 2 trillion clamshells they’ve already collected.
Also, shutting down the fishing fleet has been done in many industries without ill effects. If there’s a trade disruption, however, watch out below. But long time ago the decision to specialize was made instead of “buying insurance” by having the capability of having a fishing fleet on standby.
29. November 2008 at 00:55
Right, what China (and so on) will ultimately do is the (in this case) $2T question.
Here’s an argument to the effect that there have been or will be ill effects from shutting down industries as described above:
The U.S. is in a place where it doesn’t have much relative advantage in trade, and so job growth has been largely in the non-tradable domestic sector. That is, many countries outside the U.S. enjoy absolute advantage (due to innovations in communication and transportation technologies, which effectively allow for labour arbitrage), and so the basis of mutually beneficial free trade doesn’t apply. One country gains a productive industry, while the workers in the U.S. transition to bartending, waitressing, health care, and so on.
While this is occurring, the U.S. economic “growth” is maintained by international loans, such as by the Chinese, Japanese, Saudis, and so on. If at some point further loans are cut off, the economy collapses on itself. That is, the decisions made a long time ago to specialize were in a different technological and political time, and have not made sense for some time.