Saturday 7 March 2009

What makes Kiwis think like economists?

In previous posts, I described how I constructed a measure of "economic thinking" and a measure of political ignorance. I also discussed some of the general contours of the debate about whether ignorance matters in the real world.

We'll now turn to the determinants of economic thinking.

The seminal work in this area has been done by Bryan Caplan. He finds that, in a survey of Americans and economists on questions of positive economics, the public is severely biased. Compared to economists, the public is very scared of foreigners, favor make-work schemes, pessimistic, and skeptical about business and markets. He finds that people with more education, higher income growth (not just higher income), and men think more like economists than do others, all else equal. There were of course other factors that reduced the extent of disagreement, but those were the big ones.

I checked correlates of my measure of "economic thinking" in the New Zealand Election Study. The results are in Table 3 of the full paper, available at SSRN.

You'll probably need to click the link to see the table properly.

The biggest absolute effect comes from having a very high income: being in the top income bracket increases your "economic thinking" score by 0.39 standard deviations. Second, Maori ethnicity reduces the score by 0.31 standard deviations. Next, having a university degree increases the score by 0.29 standard deviations. Being male increases the score by 0.25 standard deviations. Identifying with a left-wing ideology reduces the score by 0.2 standard deviations. Anything that has an effect close in absolute magnitude to having a university degree I count as being pretty important.

So, what about political ignorance? Well, a standard deviation decrease in political ignorance increases your economic thinking score by 0.23 standard deviations. Is this a big effect? If I re-run the specification so we can compare folks with a university degree to those with less than a high school degree, I find that the difference is 0.33 standard deviations: moving from the lowest possible education to the highest increases your economic thinking by a third of a standard deviation. How about moving from the highest amount of ignorance to the lowest? The difference between the highest and the lowest ignorance score is 4.9 units, so moving from the highest to the lowest level of ignorance increases economic thinking by more than a full standard deviation. That's a bigger effect than anything else in my specification. As a robustness check, I split the ignorance variable into the lowest, middle, and highest levels of ignorance (with anything more than 2 standard deviations above mean counting as highest and anything more than 1 standard deviations below mean counting as lowest). Compared to those with the highest levels of ignorance, those with the lowest are 0.46 standard deviations higher in economic thinking, an effect which still greatly dominates the effect of moving from the lowest level of education to the highest. I think this suggests that political ignorance is of substantial real-world importance.

Other fun facts on economic thinking. Caplan finds that expected income growth correlates with economic thinking. I similarly find that those with a better household financial situation as compared to the prior year also think more like economists (0.1 standard deviations), but those who expect the economy to do worse in the next year also think more like economists. As Caplan's study relied on data from 1996 and mine from 2005, perhaps those who think more like economists are better able to forecast economic trends. This is something I plan on testing in later work look back through prior iterations of the NZES.

Next time: ignorance, economic thinking, and policy preferences. Sneak peak: the politically ignorant really really like the death penalty.


  1. But raw 'economic thinking' only measures how much time you spend thinking about economics, not whether you're "right" or not.

    Besides, I would venture that the higher the education and income the more this 'economic thinking' centers around the abstraction of money, while the 'economic thinking' at the lower end of the scale would bolster thinking about the context and environment in which money is made and earned.

    "In any comparison of oranges to apples, the unit that is standard wins" - me :)

  2. Check the previous post for how I constructed the "economic thinking" variable: basically, it scores respondents' answers on a set of policy questions where I argue that economists' answers would essentially be unidirectional. The more the respondent agrees with the set of propositions, the higher the "economic thinking" score. That's it. I'm trying to compare respondents' answers to what economists would say, so it should be closer to a gauge of being correct. My measure is nowhere near as clean as Bryan Caplan's from the Survey of Americans and Economists on the Economy, but I think it's defensible.

  3. It begs the question how many economists are pakeha males with a university degree in the top income bracket? Maybe the causality goes the other way - economists have constructed their discipline as a reflection of their privileged social position ;)

  4. @Nandor: A pretty high proportion of us are going to be foreign men, and we're mostly high income. But on that question, you really need to check Bryan Caplan's work on differences between economists and the public. My stuff only compares Kiwi views with what most economists believe. Caplan has a survey where both economists and the public were asked a set of questions about their views on the economy. There, he's able to control for things like income, income growth, job security, education, and so on. Those factors sometimes reduce the gap in beliefs between economists and the public, but sometimes make it larger.

    Putting it another way, Caplan's able to statistically give the median voter the same income, education and so on as the typical economist. The views of these "enlightened voters" still differ substantially from those of economists.

  5. But your model explains only 30% (adjusted R2) of the observed variability of the economic index. It sounds like much to do about a phenomenon for which you can't explain 70% of the variability.

  6. @Luis: 0.3 would be terrible for time series work, but is actually respectable for cross-sectional.

  7. Compared to economists, the public is very scared of foreigners.

    because they get the butt end of the deal?

    From Community newspaper:
    Once Redcliffs was an unprepossessing fishing village, distinguished by a collection of modest fishermen's cottages. Most have now dissapeared, replaced by more luxurious residences, and property values have escalated.

    “It's a standing joke that we're being taken over by the Americans and British, who have taken advantage of the stronger property markets in their own countires and favourable exchange rates”

    “I know an English couple who have summer here and go back to England in the winter”

    “What other parts of the city have such nice walks?.....

  8. @jh: I corrected for income, education and whatnot. So economists are compared to others of similar education and income.

    I'd expect further that the folks selling property to foreigners are rather happy that they're allowed to purchase.

  9. There is a substantial body of books explaining cosmology and natural history to educated lay people. Hence a fair fraction of the middle class has some idea of how science works and has tentatively concluded. Books elucidating the basics of economics for general readers are very rare, and I can think of only one offhand that I recommend: John Mcmillan's Natural History of Markets.

  10. Thank you for this series of blogs. I've found it easier to understand the statistical process when not couched in strict academic language.

    My understanding is that you've found an inverse relationship between political ignorance and economic thinking. Further, the overall scale of this relationship can be predicated by variables such as gender, income, education and ethnicity. Is this accurate?

  11. Yes. Those with less political knowledge also have less economic knowledge, and the correlates you mention matter.