St. Patrick's Day Economics
Ireland’s potato famine of the 1840s was one of the worst disasters of modern times. When a fungus devastated potato crops, a million Irish starved — some 12 percent of the population — and another 6-8 percent fled the country in terror.
Out of this gruesome tale came one of the most famous — and false — fables of economics.
Economists have long used Irish potatoes as an example of a “Giffen good” — one where demand rises when prices rise, instead of falling. According to economist Sherwin Rosen, “The idea is that when a consumer is close to subsistence and specializes food consumption on one item [like potatoes in 1850s Ireland] … if prices increase, expenditure on other things must fall to satisfy the survival constraint.”
If true, this blows a hole in the law of demand — one of the pillars of microeconomics.
Good thing it’s not. In a famous paper in The Journal of Political Economy, Sherwin Rosen showed the opposite. (download a PDF version here).
Rosen shows what actually happened during the famine was that potato consumption fell as they were hoarded for next year’s planting, since farmers expected the fungus to only last one season. That means consumption fell as prices increased. So potatoes didn’t “go Giffen” after all.
Says Rosen: “Since the Giffen paradox is not useful for understanding the Irish experience, is it asking too much for future writers of elementary texts to find another example? Fictions have no place in the teaching of economics.”
Good point. Only problem is, without the potato famine, there aren’t any other examples. That’s right: in 200 years of scholarship, the entire economics profession has been unable to find a single widely-agreed-upon case of a Giffen good.
Maybe it’s time to reexamine whether the concept of Giffen goods deserves such a prominent place in introductory economics textbooks.
(See here for a great piece on the Irish famine from economist Steven Landsburg.)
Posted by Andrew on Wednesday March 17, 2004 | Feedback?
