Thursday, August 13, 2009

Putting an Economics Degree to Work

Robert Mugabe, President (Dictator?) of Zimbabwe does not suffer from a shortage of education. In the 1950s, 60s and 70s he earned no less than seven degrees. These are not honorary degrees of which he has many, though some have since been revoked.

Mugabe has three Bachelors degrees, in Economics, Education, and History and Literature. While imprisoned for 11 years from 1963 to 1974 he completed four degrees by correspondence which were awarded by the University of London. He gained a Masters degrees in Economics, a Bachelors degree in Administration as well as two Law degrees.

Thus with two Economics degrees including a Masters one would expect that Mugabe would have a grasp of basic economic concepts. One example should be enough to question the value of these degrees.

Question: What is the solution to rampant inflation?
Mugabe: Print more money and introduce price controls.

Here is a stunning image that brilliantly illustrates that Mugabe has little understanding of the role of property rights and the effect of The Tragedy of the Commons on economic outcomes. This image gives an aerial view of farmland in Zimbabwe.

The Centre for Global Development provides a handy interactive tool using this and other images. They also provide the following analysis which gives a nice pointer on causality.

Land reform begun in Zimbabwe in 2000 was supposed to redistribute land from predominantly white-owned commercial farms to much poorer black farmers who toiled on communal lands. Proponents argued that the redistribution was necessary because commercial farms occupied the most fertile lands, leaving only dry, dusty land for communal use. This rationale reflects confusion about cause and effect regarding land ownership and land quality. In the "Before" photo below, the dry communal lands on the left are sharply delineated from the green private farms dotted with lakes and ponds on the right--so sharply that soil quality and rainfall are unlikely to explain the difference. Now click the arrow to see what happened after land reform. The dams and irrigation systems on the private farms collapsed, making them look more like communal lands, to the detriment of all.

This is not the only aerial image that shows the power on institutions in determining economic outcomes. Check out this night time image of the Korean peninsula.

Finally there is the suggestion that it is not the fault of Robert Mugabe and other failed economists that they have such a poor understanding of the subject. The Economic Naturalist , Robert Frank in a 2005 New York Times column wrote the following:

Virtually all economists consider opportunity cost a central concept. Yet a recent study by Paul J. Ferraro and Laura O. Taylor of Georgia State University suggests that most professional economists may not really understand it. At the 2005 annual meetings of the American Economic Association, the researchers asked almost 200 professional economists to answer this question:

"You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50."

The opportunity cost of seeing Clapton is the total value of everything you must sacrifice to attend his concert - namely, the value to you of attending the Dylan concert. That value is $10 - the difference between the $50 that seeing his concert would be worth to you and the $40 you would have to pay for a ticket. So the unambiguously correct answer to the question is $10. Yet only 21.6 percent of the professional economists surveyed chose that answer, a smaller percentage than if they had chosen randomly.

When they posed their original question to a large group of college students, the researchers found that exposure to introductory economics instruction was strikingly counterproductive. Among those who had taken a course in economics, only 7.4 percent answered correctly, compared with 17.2 percent of those who had never taken one.
Maybe Mugabe would be better able to deal with Zimbabwe's hyper-inflation if he'd never taken an Economics degree!

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