Gershchenkron effect

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It isn't merely your imagination "grass is greener on the other side." When a determination of relative value is calculated, between two distinct, discrete entities, one in terms of the other, the phenomena whereby aggregate value discerned tends to be statistically overstated is known, as The Gershchenkron Effect (e.g., pronounciation: Gursh-kun-kron).

Said another way, the aggregate value of everything you have tends to be statistically overestimated by others, in terms of the aggregate value of what they have, and the aggregate value of what everyone else has, tends to be statistically overestimated, in terms of the aggregate value of everything you have.

Iff (e.g., if and only if) relative marginal value (e.g., price) of the aggregates is equal (e.g., purchasing power parity), will there be no Gershchenkron Effect. The greater the disparity in marginal value (or price), the greater the Gershchenkron affect.

Henceforth, by definition, a function of the inconsistency of marginal value or price (e.g., The Gershchenkron Effect), grass seems greener on the other side (e.g., emphasis on the word "seems").

[edit] Example: The Gershchenkron Effect, Illustrated

For simplicity sake, assume two countries, Iraq and the United States, which produce but two aggregates, Food and Fun. Suppose Iraq produces the equivalent of 5 billion metric increments of food priced at 17 Dinar per increment, and 100 billion metric increments of Fun, priced at 7 Dinar per increment. And, let's assume the United States produces the equivalent to 100 billion metric increments of Food priced at 6 dollars per increment, and the equivalent of 15 billion metric increments of Fun, priced at 10 dollars per increment. Henceforth, illustrated in the table, below:




Output/price combinations in the table of hypothetical values above, illustrate 19th Century Economist David Ricardo notion, of comparative advantage (e.g., Iraq, a comparative advantage in fun; the U.S. a comparative advantage, in food). Price discrepancies across these two markets, opportunities for arbitrage ripe, nested in the output/price combinations between the two trading partners depicted in the adjacent graphic looms large, an archetypical Gershchenkron effect.

In the hypothetical example given above, as the Iraqi monetary authority compares its national income, relative to the United States, in terms of its currency (e.g., Dinar), it would perceive itself less than twice as wealthy as the United States, a function of food and fun (e.g., as per its valuation, in Dinar, Iraq perceives itself 39% as wealthy as the U.S.). The United States would discern a diametrically opposite circumstance, when calculating its relative wealth, in terms of itself. When the Federal reserve compares its GDP, relative to Iraq, in terms of its currency (e.g., the Dollar), it would perceive Iraq to be approximately 27% wealthier than itself, a function of food and fun (e.g., as per its valuation, in U.S. Dollars, the United States perceives its income 73% of Iraq's).

The Gershchenkron effect: Discrepancies in marginal value looming between the two price indices, both nations possess an inherent hypothetical propensity to perceive each other to be wealthier than they really are.

Because hypothetical food and fun aggregates in the example are valued (e.g., priced) differently, by each nation, the statistical phenomena whereby the bias observed in the determination of relative wealth results in an overestimate of others, in terms of yourself (e.g., the "grass is greener, on the other side" hypothesis) is known as the Gershchenkron effect. Henceforth, it's not grass that's greener on the other side. It's merely price, and/or marginal value (e.g., there is no accounting for taste and preference).

What you don't know can hurt you. Implications of the Gershchenkron effect, with regard to foreign policy and domestic spending, cannot be understated.

Substitution of parameters in the aforementioned example, interchanging Iraq with the USSR, supplanting food and fun, with Cold War expenditures by the former USSR and the United States, illuminates exactly how the 20th Century nuclear arms race spiraled out of control. Via satellite reconnaissance, and other intelligence sources, CIA analysts employed a defective repricing procedure intended to valuate Soviet expenditures on warheads, missiles, ordinance, high performance aircraft, ships, military personnel and so forth, in terms of U.S. Dollars. KGB analysts attempting likewise, U.S. defense expenditures valuated in terms of Soviet rubles, the two superpowers aloofly overestimated and overshot each others' defense expenditures in their ideological rivalry, to win the hearts and minds of the rest of the world.

Rival policy communities, the USSR and the United States, myopically leapfrogging each other in a folly of unprecedented gross negligence, mass paranoia, 20th Century bureaucrats run amok overspending, plundered their national wealth on defense expenditures during peacetime to such extent, the 45 years of oneupmanship ascended their rivalry teetering upon the specter whereby either nation could arbitrarily obliterate all life on planet Earth, several times over, with thermal nuclear weapons of mass destruction which bear 450 thousand year environmental implications.

What you don't know can (CAN) hurt you. Profoundly.

[edit] Sources, References & Works Cited

• Angresano, J. Comparative Economics.
  

Upper Saddle River, NJ: Prentice-Hall, 1996.

• Gardner, S.H. Comparative Economic Systems.
  

New York: Dryden Press, 1991.

• Joseph, A.S. Crony Socialism & Crony Capitalism.
  

Pomona, CA: California Polytecnic, 2002.

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