I just watched a Niall Ferguson presentation on the "The Six Killer Apps of Prosperity" (TEDTalks, on Netflix). These factors explain "The Great Divergence," or how the West came to dominate the East in terms of wealth, and how the East has now erased the West's advantage by adopting the killer apps themselves.

For context, it is useful to know that Ferguson endorsed Romney for President a year ago. His rationale: we need "a private-equity guy in the White House." Simultaneously, he dismissed the Occupy movement as "Occupopulists." If nothing else, this conservative has a dry wit.
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Niall Ferguson
Back to his thesis. Ferguson, and a vast number of conservatives like him, assume it is OK to sum the wealth of everyone living in a country, divide it by the total number of people in the country, and use the resulting average to compare nations, continents, or civilizations with one another. To make things exciting, conservatives then compete with one another to invent stories, called "theories," for why average wealth went up or down over time. 

For all his brilliance, Ferguson's work is flawed by an egregious statistical error: you can't use averages to describe skewed numbers! This tenet is taught in every introductory statistics class; it is a very basic principle. 

As we all know, wealth is highly concentrated –– or skewed. For example, in 2007 the top 10% owned an incredible 83% of all non-home wealth! (See Part 2, Disparity for more details.) 

Averages would allow Ferguson to proudly proclaim that average wealth has been rising in the US, when, in fact, wealth has been declining for most people. Since wealth has increased dramatically at the top, the average is inflated, and the important story impacting the greatest number of people is concealed.

Numbers can reveal the truth, or they can disguise it. It depends on your values. If you value compassion and the general welfare, then you studiously avoid averages in economics. But if you value greed or winning at any cost, then averages are a great tool for hiding the carnage.

Ferguson's failure to abide by the fundamental rules of statistics means his work is fundamentally flawed. It also means that every economist who uses averages is very likely making the same mistake. And, since there are lots of economists using averages, then ... well, I think I've made my point. The leading killer app in economics is averages.



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