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What is the cause of the rise in the rates of obesity in the United States?

Budd begins with a story about obesity in the United States. The facts are that obesity rates are on the rise in the United States as they are in the UK. What has this to do with economics, he asks? Budd explores the possible causes of this rise. One of the reasons is likely to be the increase in fast food restaurants in the United States - there must have been a reason for the explosion of fast food outlets. This might be due to some or all of the following:

• Changes in the labour market
• A fall in real wages of those on the lowest incomes
• A rise in single earner households
• The substitution of work for leisure and the effect on the time available for preparing meals
• The opportunity cost of preparing food in relation to the price charged by fast food outlets
• The reduced transaction costs involved given the availability and access to these restaurants
• The quality of the food served at fast food restaurants

Tracing through these factors, Budd argues that we can come to a conclusion about the cause of the rise in obesity in the US.

The conclusion? The rise in obesity is associated with an increase in the number of people on low incomes in the US - a rise in the number of people living in poverty.

Such a conclusion might not be what we expected. Budd asks the questions as to whether economists could have predicted this. After all, science develops theories that do not just explain events and phenomena, but also have some predictive qualities.

Economics is certainly good at explaining why things have happened. Its value, as a subject, is nothing like as great, however, if all it can do is to explain rather than predict. To be able to make predictions that have some substance (i.e. they are going to actually happen), economists have to be certain of what they know.

Budd asked some of his associates if they could tell him what they think economists know. One of the associates was none other than Mervyn King, Governor of the Bank of England. Bear in mind that Alan Budd was one of the founding members of the Monetary Policy Committee and has been involved in macroeconomic policy-making for many years.

Imports from foreign countries cause UK citizens to lose jobs because they pay workers such low wages. Is this an accurate perception of international trade? Copyright: Luiz Baltar, from stock.xchng.

The responses he gained are summarised below:

What Economists Know

• Economists know that demand curves slope downwards from left to right.
  • This suggests that when prices rise, the quantity demanded of a product (under normal circumstances) will fall, and vice versa.
• Economists know that supply curves slope upwards from left to right.
  • This suggests that when prices rise, the quantity supplied by producers will also rise and vice versa.
>Economists know that the proportion of income spent on food falls as income rises.
• This is what is referred to as Engel's Law, after the German statistician Ernst Engel. Budd points out that this law applies not only to studies of the differences in the proportion of income spent on food by the rich and the poor, but also over time. When nations go through economic development and become richer, the proportion of national income spent on food falls.

The choice of food and drink in the developed world is extensive. Are supermarkets and food growers threatened by increases in wealth in the developed world? Copyright: Jelle Weidema, from stock.xchng.

• Economists know that there are gains from trade to be had when countries or individuals have comparative advantage.
  • What this means is that one country might be better at producing a number of goods compared to another. However, if it focuses its attention on producing the good in which it has a comparative advantage, both countries can gain from trade and the world economy will be in a better state. By focusing on production of one good at the expense of others, countries move resources from the production of one good to another. By doing so, the country sacrifices the output of this other good that it could have produced. However, the gains made from shifting resources into production of products in which they are more efficient in production helps to raise total output. A mutually beneficial rate of exchange between the two countries means they both are better off than before.
• Economists tend to think in terms of general rather than partial equilibrium.
  • Economies are made up of millions of interrelated markets. Non-economists, argues Budd, tend to see things from a partial equilibrium point of view. In many cases, this view is based around a zero-sum outcome - the benefit received by one party to an economic decision is offset by a negative impact on someone else. Looking at the big picture gives a more accurate understanding of how economies work and what the consequences of economic policy can be.
• Economists know that sunk costs should not affect pricing decisions.
  • Sunk costs are those costs have been spent and cannot be recovered or affected by future economic activity. What this means is that the spending on projects like the Olympic Games site in east London and the associated infrastructure will be largely academic. Arguments about how much it will cost to build a new rail link from London to the Channel coast to support the staging of the Games are simply not relevant. What will be important are the ongoing costs of actually running the line and the infrastructure that is built when the Games go ahead, as well as the cost of running the legacy that the Games will leave.

Large-scale infrastructure projects such as the development of the high-speed line between the Channel ports and London mean massive capital investment. Ashford station in Kent has become a major part of the link between London and Europe. Was the investment worth it? Copyright: Tamlyn Rhodes, from stock.xchng.

• There is a difference between what economists know and what non-economists know.
  • This can be summarised under the heading 'folk economics'. Folk economics is the intuitive understanding that untrained people have about how the economy operates. If you like, this can be seen as being a novice perspective as opposed to an expert one.
    Budd makes an interesting observation here. If you (as a non-physicist) were engaged in conversation with a physicist who tells you about string theory, you are unlikely to interrupt him or her and disagree with what they were telling you. An economist engaged in a discussion about obesity, for example, with a non economist would be far more likely to be questioned about the views being put forward. If I, as an economist, told you, a non-economist, that obesity was caused by the rise in poverty levels in countries, it is likely that there would be some disagreement with my view. In short, economists think in the subject, whereas non-economists do not!

Few people might argue with a physicist or a mathematician about what they know but try convincing people that the rise in obesity in the US has got something to do with the increase in poverty levels and you might get a different reaction! Copyright: Eamon Ambrose, from stock.xchng.

The dilemma facing economists

Given the suggestions above (it is not meant to be an exhaustive list) there is quite a lot that economists know that can have powerful predictive qualities. One of the problems faced by the subject is the problem that what economics is able to predict and thus what the solutions or preventions might be is not necessarily always seen as being desirable. There are plenty of economists and people at the World Bank and the World Trade Centre who know of the theory of comparative advantage, but getting agreements to reduce trade barriers to boost world trade is quite a different matter.

Equally, it is increasingly obvious that the challenges presented to us by climate change are likely to have significant long term effects on global wealth. Getting something done about changing behaviour - even if an economist is able to tell us what we should be doing - is proving rather more difficult.

Sir Nicholas Stern's report on the Economics of Climate Change is widely accepted as being a 'good piece of economic research'. Why then is it so difficult to get something done to change behaviour to avoid the problems that he has predicted will occur if nothing is done? Copyright: Daniel West, from stock.xchng.

One reason for this is that in dealing with human behaviour we are dealing with a significant error term - human behaviour is not as predictable as we might like it to be and is certainly not as predictable as some of the variables in experiments that are conducted in physics and chemistry labs around the world. Budd suggests that economics can explain about 40% of human behaviour. That leaves 60% that is open to all sorts of random shocks and effects which are almost impossible to account for.

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