How The Economist dumbed down Economics
Just because some things can be compared does not mean that they are comparable.
An idea can often be very powerful. When it makes something insanely complicated look insanely simple, it can be even more powerful and unfortunately that much more damaging.
The world we live in is interconnected. Scientists do not have the capacity to untangle all of its complexities in a single theory. They use reductionism to reduce that into small bite-sized theories. This supplies us with the arrogance that makes humans believe we understand everything. The gift that it gives us is Climate Change.
The Economist is a revered economic publication, which in the year 1986 published something called the Big Mac Index. It was meant to compare the purchasing power parity between countries. The idea was that McDonald’s has so many stores across the globe, and supplies a standard product. This makes it possible to compare the price of the Big Mac across several economies and understand how expensive or cheap living in a place is.
Takes something insanely complex and reduces it to something supremely simple. Except…
- Does it cost the same to produce a burger everywhere? I know that is the point but read on.
- Does the scale of your operations not make a difference in the cost of it? Would the end product cost the same if you had 2000 restaurants in one country and 200 in another?
- Does the culture and the consumer base not make a difference to the price? In India they don’t even make a beef burger, it is chicken. Beef will not sell.
- Is there not something called positioning that may vary from country to country? McDonald’s is fast food in the US, in India it is almost a respectable restaurant.
The point I am trying to make is that comparing burger prices across economies is a stupid dumbing down of PPP. And there are far too many similar models in use across various parts of the economy.