Tuesday, 17 April 2012

Beware of real-life analogies

Readers usually enjoy it when economists (or experts in other fields) use real-life analogies to try and explain things more clearly. You will very often hear of economists using medical terminology in trying to explain the situation in the economy ("the medicine is harsh, but the patient requires it" - this one is actually from Margaret Thatcher), or automotive analogies ("pulling the economy into the faster gear"), sporting analogies (numerous examples, usually referring to boxing but also first halfs and second halfs) and so on.

I ran into another interesting one a few months back but I completley forgot about it before I read today's post by Scott Sumner, quoting George Soros. I meant to write something about it back then on the essence of Soros plans to fix the eurozone but I was preoccupied with other subjects. Besides, since then I covered the eurozone topic quite thoroughly (see here, here and here).

What I'm drawing my attention to now is this part of the quote (pay attention to the underlined bit):
"To be a little more specific, let me suggest the outlines of a European solution to the euro crisis. It involves a delicate two-phase maneuver, similar to the one that got us out of the crash of 2008. When a car is skidding, you first have to turn the steering wheel in the direction of the skid, and only after you have regained control can you correct your direction. In this case, you must first impose strict fiscal discipline on the deficit countries and encourage structural reforms; but then you must find some stimulus to get you out of the deflationary vicious circle—because structural reforms alone will not do it. The stimulus will have to come from the European Union and it will have to be guaranteed jointly and severally. It is likely to involve eurobonds in one guise or another. It is important, however, to spell out the solution in advance. Without a clear game plan Europe will remain mired in a larger vicious circle in which economic decline and political disintegration mutually reinforce each other." "How to Save the Euro", 23/02/12
So the crisis is like a car skidding, and we need to know how to control it both in the short run ("immediate turning of the steering wheel") and in the long run (steer normally once control is regained). The analogy implies that the economy would stand still unless there is someone (presumably the government or any other form of central authority) to steer it properly. If you really think a central authority needs to steer an economy like you do with a car, then this analogy may even work. But for those who don't understand how the economy works (e.g. politicians), this can be quite confusing. 

One needs to be very careful when using real-life analogies as they can very often backfire.

For example, take this analogy: When fixing an economic system you need to treat it like a sick part of a plant (do some pruning every now and then). You need to cut off all the infected branches in order to leave room for the healthy ones to grow on their own out of the new tissue. Even if you have to cut down a lot, you are doing so to help the plant by removing the malign parts. Even when it isn't infected you still need to cut out some dying branches every year (in spring) in order to leave space for new ones to grow. The result is you get more and better fruit next season (by the summer).

Another analogy in the same level is when a person is sick - sometimes doctors amputate limbs in order to save the rest of the body, i.e. to save a life. This analogy is much harder to grasp since limbs unlike branches in a plant don't grow back. Using this analogy to call for austerity would clearly backfire, as leaving an economy crippled isn't quite the solution everyone is hoping for. 

Using analogies this way only creates confusions among people who don't understand the subject very well and can likely lead to an increase in their biases. In the example of steering a vehicle by Soros or my example of gardening both arguments could make perfect sense to someone with an upfront biased belief on how an economy works (or is supposed to work). Just for the record I think the gardening example is much more realistic to describe an economy since it looks at it as a natural dynamic system (like human behavior) - unlike a car which is static and man made. 

In conclusion, be vary of using real-life analogies to explain theoretical assumptions. Rather, use real-life data and apply it to logic - this strategy never fails. 

3 comments:

  1. Even though I agree that real-life analogies can often lead to increasing biasness, I would say that very often they can be useful. Economists use them to simplify reality mostly to those who don't understand economics. Politicians use it the same way.. can you imagine explaining the recovery process - for example - to local villagers? You would only confuse them. It's best you apply the analogy of medicine or as you've said - gardening.
    That's exactly why politicians use analogies.

    But overall I agree, if used too often and in order to confirm one's predetermined beliefs, analogies could increase misunderstanding. But then, it's always important to know from whom are they coming from :-)

    ReplyDelete
    Replies
    1. "it's always important to know from whom are they coming from" - ah, good point - doesn't this imply bias as well? :)

      For example, if your favourite economist with whose ideological views you fully agree on, uses an analogy that isn't necessarily true and correct (like the Soros one), are you more likely to agree with him than with an economist who used a good analogy but with whom you don't agree on at all?

      Delete
    2. Sure I will, but this goes for anything someone whom I agree with says, which has a lot to do with why I agree with them in the first place.
      That's why I wouldn't call it bias, but opinion which is formed based on ideas I find acceptable and upon which I form my ideology..

      Delete