Tuesday, 11 August 2009

Supply and demand...for anarchy?

Scott Sumner has got me spotting supply and demand mistakes all over the place.

This post combines that theme with the question of 'the price of anarchy', outlined by Gravity and Levity last week.

Niall Ferguson has blended both of them into a particular detail of his FT article on "lucky" Barack Obama. It would take a long time to critique the whole article, but here's the salient point:
Iraq is likely to become more unstable as US troop levels are reduced.
Now on the surface, that sounds obviously correct. But how about if we turn it around to make the real causality clear:
US troop levels are being reduced as Iraq becomes more stable.
The thing about supply and demand, like any equilibrium system, is that any change tends to create a pressure to counteract itself. In this case, the reduced "supply" of anarchy has increased its price, thus reducing the production returns on its complementary good, the US Army. Thus the army's supply curve shifts left and its quantity falls. OK, mapping this onto supply and demand is a bit confusing, but it's the same principle.

A simpler example of equilibrium forces: a ball in the bottom of a curved bowl. If the ball is pushed upwards away from the lowest point, a force is created to move it back down again.

If you only notice the counteracting pressure and not the original change, you may completely misread the direction of the effect.

One moment you see a ball at the bottom of the bowl; blink, and you see the ball moving downwards. Would you infer that it's now below the bottom of the bowl? I hope not.

But this is the argument that Ferguson is making about Iraq, just as the supply and demand mistake leads people to think the opposite of what's really happening.

Update: James Fallows, Paul Krugman and Brad DeLong have somewhat more substantive criticisms of Ferguson's article, all of which I agree with.

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