Thursday, February 28, 2008

Simplify, simplify

I might just go ahead and quote myself:

"One of the principles of writing economic theory is to create a simplified abstraction of reality."

This is from an article by Russell Jacoby in the Chronicle of Higher Education:

"The world is complicated, but how did "complication" turn from an undeniable reality to a desirable goal? Shouldn't scholarship seek to clarify, illuminate, or — egad! — simplify, not complicate? How did the act of complicating become a virtue?"

This is quite clearly not an article about economics (phew). It goes to show how very, very different we've become from the other social sciences and arts. Yesterday I was talking about the development lab at MIT; would they say, "Ah, there's a million and one things that affect the quality of education. I'm going for a drink."? Of course not. Economics seeks to expose in the simplest possible terms the relationships around us. Indeed, the world is complicated; that's why the MIT lab has to perform randomized trials to isolate the effects of programs. It's why theorists create little models of the world.

Contrast this with this characterization from Jacoby:

"The refashioning of "complicate" derives from many sources.... [acaemics] will prize efforts not only to complicate but also to "problematize," "contextualize," "relativize," "particularize," and "complexify.""

In economics we want to know: what you're saying, why you're right, and what could make you wrong. That's about it. One of the most valuable consequences of treating economics as a science is that we parachuted out of this borderline nonsense:

"They will denounce anything that appears "binary." They will see "multiplicities" everywhere. They will add "s" to everything: trope, regime, truth. They will sprinkle their conversations with words like "pluralistic," "heterogenous," "elastic," and "hybridities." A call for "coherence" will arrest the discussion. Isn't that "reductionist"?"

This explains a big part of the schism between positive economics and other social sciences; we are OK with leaving some things out if it helps. When it comes to the policy debate and the normative questions, we have to throw all the other stuff back in, but "it depends" is a conclusion acceptable in positive economic research only if you can tell me exactly how and why it depends.

Jacoby has the neat sign-off:

"The cult of complication has led — to alter a phrase of Hegel's — to a fog in which all cows are gray."

In economics, our judgment cows are gray, but our scientific cows are black and white.

Wednesday, February 27, 2008


Making Economics Relevant Again, from David Leonhardt in the New York Times, has been recommended to me by more than one tipster. First of all, the most astonishing thing in the article, to me, is this table that includes an account of the number of economics degrees given every year since 1949: I thought majoring in economics had been on a steady upswing for decades, but apparently a lot fewer people were studying economics in the 90s. The number is just back up to where it was in 1990.

Anyway, the article kicks off:

"It was only a decade ago that economics seemed to be an old and tired discipline. The field no longer had intellectual giants like John Maynard Keynes or Milton Friedman who were shaping public policy by the sheer force of their ideas. Instead, it was devolving into a technical discipline that was even less comprehensible than it was relevant."

Possible revisionism here, but it's certainly a tempting argument. It might reflect the sleepy state of economic policy rather than the discipline as a whole, but I take the point. We're pointed to an old New Yorker article from 1996 which drives the point home in spectacular fashion; forgive the long quotation:

"A few weeks ago, the Nobel Prize in Economics was awarded to William Vickrey, an 82-year-old professor at Columbia, and James Mirrlees, a 60-year-old professor at Cambridge.... the newspapers had some difficulty explaining the prize-winning work, which the Nobel committee referred to as "the economic theory of incentives under asymmetric information." ..But when reporters tracked down Vickrey, an amiable bear of a man, he refused to play along: instead of expanding on the obscure mathematical theory that gained him world attention, he insisted on talking about his practical ideas for reforming the subways, the electoral system, the budget deficit, and much else besides. A "Times" reporter tried to pin him down, but Vickrey quickly dismissed his prize-winning 1961 paper as "one of my digressions into abstract economics." And he went on to say, "At best, it's of minor significance in terms of human welfare.""

What a priceless story. However, it might not just be the abstract math that marginalizes economics: Leonhardt goes on to argue that some economists are disgruntled at what they see as the cause of the "recovery" he perceives in economics. I can't really argue with this:

"the new research often consists of cute findings — which inevitably get covered in the press — about trivial subjects, like game shows, violent movies or sports gambling."

It's like the Christmas stuff I talked about before. It isn't a true reflection of economics research and it makes economics look ridiculous. To try and figure out what really mattered, Leonhardt decided to survey economists to find out who they thought "was using economics to make the world a better place". It's a question begging to reject Vickrey's digressions into abstract economics. Presumably, to be an economist who actually does some good for the world, your research must be good science and very, very close to a solid and appealing economic policy. And lo:

"there was still a runaway winner.... the Jameel Poverty Action Lab at M.I.T., led by Esther Duflo and Abhijit Banerjee."

I won't try to put this any better than the original article:

"They want to overhaul development aid so that more of it is spent on programs that actually make a difference. And they are trying to do so in a way that skirts the long-running ideological debate between aid groups and their critics.... The basic idea behind the lab is to rely on randomized trials — similar to the ones used in medical research — to study antipoverty programs. This helps avoid the classic problem with the evaluation of aid programs: it’s often impossible to separate cause and effect."

Let's figure out what's going on here. The research uses randomized trials to disentangle causality, the ubiquitous problem for figuring out relationships from real-world data; because the method is strong, they can rely less on normative judgment when they make the jump from the science to the policy, thus cutting ideology out. Just like the Obama team I was talking about yesterday, the gap between science and policy is vanishingly small here, but clearly it's crucial for the success of the whole venture that the science be pure as snow. The science can't tell you you're right or wrong to hold the belief that children should be educated - that's all on your head - but it can perform the true role of positive economics and help you figure out exactly how to improve the quality of education if that's what you want.

The reason why these development economists are perceived as the most "relevant" is twofold: they have easy to understand, convincing science and they explicitly embrace the normative implications of their science. Their science is as sophisticated as it gets, but they certainly don't need esoteric math. On that note, the last word goes to that New Yorker article:

"One way to encourage economists to become more worldly might be to abolish the Nobel Prize for economics, which since its introduction, in 1969, has helped foster a professional culture that values technical wizardry above all else. Deprived of the publicity surrounding the annual Stockholm ceremony, economists would actually have to do something useful to get noticed."

EDIT: Actually I'm not sure that should be the last word. By the merits of, for example, the work Duflo, Banerjee and co. are doing, they would absolutely qualify for a Nobel memorial prize in economic science. The prize does seem to have become at least as much an applied math prize as a "good economic science" prize, which I guess is the problem the New Yorker article is highlighting. The problem isn't the prize, but the criterion for winning, perhaps.

Tuesday, February 26, 2008

Turning economics research into policy

Hat tip to the inimitable GoodLiberal for pointing me in the direction of an excellent article I would certainly have missed otherwise. It's by Noam Scheiber and it's about Barack Obama's advisers; in particular some of the economic policy advice he's been getting. You can find it here, but get it while it's hot because it might move behind the subscriber's wall at the New Republic. To be clear, the economic policy parts are most interesting to me, but there's more to it than that.

It's interesting both how Scheiber characterizes the type of economic theory that's apparently fueling some Obama policy, and how the path from one to the other winds. There are so many fun lines I might just go ahead and start quoting. On the distinction between academics and nonacademics:

"In economics, it's the academics who are first-rate engineers and the nonacademics who are either dreamers or technicians."

Very well put, though I fear a little harsh on dreamers. Research and teaching in academia are indeed geared towards the sterile positivism; the engineering analogy is well drawn. I do wish we had a bit more dreaming in the dreamy spires of academia though.

The article starts out by describing "behavioral economics", that field that's trying to figure out how people act and how to build it into economics.

"Behaviorists like Thaler believed that the perfectly rational, utterly selfinterested maximizers of economists' imaginations had little in common with actual human beings, who frequently err when making simple calculations, who have trouble with self-control, who often act out of altruism or spite. But what's really interesting is how Thaler and his fellow behaviorists responded to this fairly critical insight. Though rational self-interest was the central tenet of neoclassical (i.e., modern) economics, they didn't take a wrecking ball to the field and replace it with some equally sweeping theory of human behavior."

Behavioral economics is possibly the least revolutionary revolution ever to hit an academic discipline, because, as Scheiber is alluding to, the behavioral school is absolutely not changing or abandoning the methodology of economics. As I've noted before, the "perfectly rational" economic man can happily do whatever the behavioralists want him to do to be more "realistic"; it's therefore not necessary to come up with a whole new way of modeling people.

Instead the behavioral school is writing down models of "perfectly rational, utterly selfinterested maximizers" who act in accordance with the behavioral evidence. That is, writing rationalization of the "irrationality" we observe. Contrast this with the traditional criticism of economic man, which is to throw up ones hands and loudly reject the whole idea of trying to predict what people will do. I prefer the behavioral way.

Anyway, what's coming from having this type of economist on the Obama team?

"For example, one key behavioral finding is that people often fail to set aside money for retirement even when their employers offer generous 401(k) plans. If, on the other hand, you automatically enroll workers in 401(k)s but allow them to opt out, most stick with it. Obama's savings plan exploits this so-called "status quo" bias."

Does it take an economist to suggest this? Of course it does not; the article argues, however, that the "engineers" in academia are the ones who can tell you if the opt-out policy will increase saving or not. That's a nice example of the value of positivist economic science: it gives you the evidence that switching from opt-in to opt-out might increase retirement saving, which is handed off to the policymaker, who says "I want to increase retirement saving", and proposes opt-out. Presto. Did any part of the economic science at the bottom of the pyramid require esoteric math or have an ideological bias? Doubtful.

Here's an even better one:

"Obama wonks tend to be inductive--working piecemeal from a series of real-world observations. One typical [economic adviser Austan] Goolsbee brainchild is something called an automatic tax return. The idea is that, if you had no tax deductions or freelance income the previous year, the IRS would send you a tax return that was already filled out. As long as you accepted the government's accounting, you could just sign it and mail it back. Goolsbee estimates this small innovation could save hundreds of millions of man-hours spent filling out tax forms, and billions of dollars in tax-preparation fees."

How simple, how wonderfully useful that would be. How fickle am I that I would vote purely on the basis of an easier tax return?

"The Clintonites were moderates, but they were also ideological.... The Obamanauts are decidedly non-ideological. They occasionally reach out to progressive think tanks like the Economic Policy Institute, but they also come from a world-- academic economics--whose inhabitants generally lean right."

Oh really? Aside from the repetition of this common error about economists' politics, this implies that the positivist approach to academic economics is bleeding into economic policymaking, drastically shrinking the gap between the science and the normative judgment informed by the science. The crucial distinction remains - for example, I could argue that it's wrong to make people opt-out of a retirement scheme rather than opt-in, a violation of their right to be left alone, and I couldn't be wrong, despite what the science said would happen - but the information on which the policy is based is very close to the policy itself.

Monday, February 25, 2008

The Cold War revisited; elections and policy

Here's a third-hand recommendation, with a hat tip to Economist's View: an interesting Paul Krugman article on why capitalism "won" the Cold War. The thesis is this:

"Communism failed because of an inability to provide a sustaining reason for existance; only under crisis could it work.... [it] failed as an economic system because people stopped believing in it, not the other way around."

The hybrid system of regulated capitalism alongside a centrally planned public sector dominates the modern world. As far as I can tell, a purely capitalist economy is equally difficult to find in history as a purely communist society; perhaps the hybrid reflects some natural impossibility of living at either extreme. The argument that some resources are best allocated, or some goals best achieved, by one mechanism and some by the other is a strong argument - though of course not one immune to counterpoint.

There isn't a lot of big economic policy debate these days. The dominance of the hybrid system naturally pushes policy debate into a very small subset of all the possible economic policies. That's not necessarily a criticism; you could, for example, blame either status quo lethargy or status quo satisfaction for containing the debate.

That makes the Krugman article a bedfellow of a recent mini-debate about whether elections matter for economic policy. Economist's View also covered that one here; it seems to have kicked off with a Tyler Cowen article in the New York Times with the perfectly descriptive title "It’s an Election, Not a Revolution".

Cowen says:

"This election is certainly important. But based on the historical record, it isn’t likely to result in a major swing in economic policy. Fundamentally, democracy is not a finely tuned mechanism that can be used to direct economic policy as a lever might lift a pulley. The connection between what voters want, or think they want, and what ultimately happens in the economy, is far less direct.... Shifts in economic policy are usually quite moderate."

The Economist's View cites a counterpoint from Kevin Grier:

"I see real differences. I don't see McCain lifting the cap on FICA earnings. I don't see McCain going for publicly created "green jobs". I do see both of them "fixing" the AMT. I don't see McCain as so anti-trade as Obama."

I'm sorry, but I think I just went in to an apathy coma. Not to be too obnoxious, but if that's the best we can come up with, I'm taking Cowen's side all day long: the big questions are not asked. It could be a product of the political system, of apathy, of satisfaction, of something else entirely. Reflexive defense against attacks on the significance of democracy have grounds far larger than just economic policy, but it's difficult to deny that, for better or worse, we won't see any seismic shifts any time soon.

Saturday, February 23, 2008

Economists' political preference

While we're sitting in the old ivory tower, some economists are out there in the real world. They're very different from the academics, in their work and their demographics. The Wall Street Journal runs periodic surveys of private-sector economic forecasters; here's a bit from January:

"On the political front, most of the respondents expect a Democrat to be elected president this year, although they personally prefer a Republican."

Contrast this with the academic economists; here's the summary from a 2003 survey of members of the American Economic Association, one of the big "trade groups" of academic economists:

"The responses show that most economists are supporters of safety regulations, gun control, redistribution, public schooling, and anti-discrimination laws. They are evenly mixed on personal choice issues, military action, and the minimum wage. Most economists oppose tighter immigration controls, government ownership of enterprise and tariffs. In voting, the Democratic:Republican ratio is 2.5:1."

The academics seem like "social liberals", but I'd bet both the academics and the private-sector economists are "fiscal conservatives" (with apologies for possibly bastardizing the political terminology). Perhaps it relates to the liberal-friendly character of academia, the subject of the study I cited here. Here's another result from the survey of the forecasters:

"Some 56% of the economists disapproved of President Bush's stewardship of the economy, while 44% approved. That is especially startling considering 59% of the economists said the stock market performs better under Republican presidents, compared with 28% who said it favored Democrats."

The Republican preference of the private-sector economists does seem to be grounded in their beliefs about the effect of the political climate on the financial sector. Academic economists, by and large, don't care a lot about what's happening in the financial sector (or, indeed, about anything that might be identified as "economics" by a layperson). The first-guess potted conclusion is probably that the non-academics care about the financial ship - which is indeed their livelihood - enough that they want a Republican to steward it, while the academics care more about politics that isn't economic policy, where they prefer Democrats.

Friday, February 22, 2008

Does positivism indocrinate?

Somewhere in the history of the practice of economics we went positivist. Research and teaching of the subject both became technical and methodological, preoccupied with the "if this, then what?" questions of economic science, and rejected policy debate as unscientific. A semi-famous quotation from Keynes:

"The Theory of Economics ... is a method rather than a doctrine, an apparatus of the mind, a technique of thinking, which helps the possessor to draw correct conclusions."

Weirdly, this sterilization has in fact had the paradoxical effect of reducing the scope of economics that's presented to students and researched by economists. Ronald Coase puts it like this:

"Mainstream economics, as one sees it in the journals and the textbooks and in the courses taught in economics departments has become more and more abstract over time, and although it purports otherwise, it is in fact little concerned with what happens in the real world.... economists since Adam Smith have devoted themselves to formalizing his doctrine of the invisible hand, the coordination of the economic system by the pricing system."

I'm not arguing for anarchy in the profession. It just seems strange that we sterilized the science, freed it from value judgments and the real-world status quo, then presented it using nothing but the status quo to illustrate our tools. We worked so hard to show that our method gives you all the levers and buttons you could ever want, then obsessed over one or two of them.

Did the positivist revolution lead to a sterilization of normative economics as well as positive economics? Keynes' "correct conclusions" are positivist conclusions; there cannot be "correct conclusions" to the actual, real-world questions that the science of economics is supposed to inform.

There's a crucial difference between carving normative judgment from economic science and ignoring normative judgment altogether. It's particularly difficult to illustrate in classes the difference between the two sides of our coin when we never hold normative debate. Does that make the positivist content of our classes seem like ideological indoctrination?

If we either presented a full diversity of positive models when we taught our methods, or engaged in actual normative policy debate to illustrate the application of our methods to real, difficult problems, we can preserve the positivist revolution and show the next generation of economists that Keynes was right. Economics can be a method for everyone, not a doctrine of the status quo. Economics can be scientific, but teaching economics like a natural science would certainly not be my first choice.

Wednesday, February 20, 2008

Visiting the real world

Economists don't spend a great deal of time in the real world. We're especially bad at having arguments, which is strange, considering that we have an infinitely flexible method and a bunch of unanswerable normative questions.

Unfortunately we're all adrift on the ocean of economic science. The work that researchers do generates the kind of tedious methodological debates that help seminar audiences catch up on their sleep, but it doesn't generate actual ideological debate: perhaps that's the biggest possible endorsement of positivism in economics, but we didn't need to lose it.

I always liked the Oxford Review of Economic Policy; it's one of the few examples of a true economic policy journal, which means that while it's still a bit dry, it's non-technical and, more to the point, actually talks about real stuff. For example, this issue from last year is a survey of what's going on with pensions - not exactly riveting, but if you're into that kind of thing, an invaluable look at how economic science can inform ideological debate on pension reform. This one does much the same for growth and development in India.

The saddest misconception about positivism in economics is that we must sweep out all normative debate in order to be "scientific". Yes, we have to avoid ideological prejudice when we research what's actually going on, but doesn't it seem like we're building a fancy machine and never turning it on? Our "scientific" results don't change the fact that our economic models don't provide any "answers" to the great normative questions of what we should be doing.

It all must be especially boring for the poor undergraduates who are the cannon fodder of scientific economics. They get the distilled versions of some of our scientific methods and modeling - without, mind, necessarily finding out about their flexibility - but don't get any practice in using economic analysis to engage in real policy debate. Perhaps it's another casualty of the loss of the essay in economics; perhaps that comes from our huge enrollments, victims of our own success.

Just because positive economic modeling is supposed to separate itself from ideology, it doesn't mean that economists should. Perhaps if we argued a bit more, we'd bring some life back to our discipline.

Tuesday, February 19, 2008

Do as I say, not as I do

Another Arts & Letters tipoff today. The teaser for the article reads:

"Do professors indoctrinate students by expressing a political ideology in the classroom?"

Similar to what I was talking about the other day when I was arguing that ideology leaks into economics courses when we start using them as civics lessons. The article being referred is from the Chronicle of Higher Education, asking why academia is liberal. Yesterday I reported a survey that found majority liberal political views among economics grad students; it's not controversial to suggest that university and college faculties are predominantly more liberal than the population.

The article also mentions the real source of the Arts & Letters teaser quote: a study by Matthew Woessner and April Kelly-Woessner called, delightfully, "My Professor is a Partisan Hack" (you can read the whole study (pdf) here). That study tried to figure out how students perceive the political leaning of their professors, and how similarity with the students' own views affected their enjoyment and perception of their courses.

The authors asked students to complete course evaluations that, among other questions, asked them to identify their professors' political and ideological views, and to report their own confidence in their answers. The surveys were all done after political science courses. The Chronicle article summarizes one of the big results:

"their research showed that students were turned off when professors expressed views that were contrary to their own..."

Perhaps not surprising. The article goes on:

"Mr. Maranto asked the Woessners to contribute a chapter to his book on why conservatives don't pursue doctorates. Typically, he says, there are a few answers to the question. Liberals say conservatives want to make more money than professors earn, while conservatives argue that they get less encouragement from professors than liberal students do."

I would love to do a similar study for economics courses. Some interesting questions:
  • Can students confidently identify political ideology of economics professors? Should they be able to, given the supposed neutrality of what we teach?
  • Would students correctly guess that the majority of economists identify themselves as liberal? Does the content of economics courses skew this perception of the professors' beliefs?
  • Are non-conservatives turned off by economics courses?
  • Do students see economics professors as spreading ideology? If so, is the ideology consistent with the professors' beliefs? Is it consistent with the students' perception of the professors' beliefs?
We need to know how the teaching of economics meshes with the students beliefs and opinions. I strongly believe that the economic method is capable of accommodating and being used by people of any political or ideological belief, but I'd be astonished if such a survey of economics students revealed that this was in fact the case.

Here's my pitch: do economics professors indoctrinate students by expressing ideology in the classroom? If they do, I believe they are committing a far graver sin than political science professors who do the same. We can separate policy debate from opinion in economics; we can separate out method from our beliefs. Do we?

The Woessner article concludes:

"professors may be well advised to strive for political balance—vigorously challenging students’ viewpoints and presenting multiple perspectives without identifying their own political orientations."

If we could accomplish something like this in economics - value-free and varied economic method, plus lively ideological debate on economic policy - we might get economics courses that are interesting, useful and diverse. That would beat the mangling of positive and normative economics that too often passes for a real economics course.

Monday, February 18, 2008

The Making of an Economist, Redux

Last summer I read "The Making of an Economist, Redux" by David Colander, a 2000s do-over of a 1980s survey of whats going on in the wee brains of economics grad students. A little bit of introspection goes a long way, but not much of what's going on in the book really seems like me or economics grad students I know.

Right up front we get a peach of a definition:

"For example, were an undergraduate student to ask an economist how to become an economist.... he would most likely tell her, 'To become an economist who is considered an economist by other economists, you have to go to graduate school in economics.'"

And we thought defining "economics" was hard! Indirectly, this really tells you as much as the book itself about what economists are up to - that is, forming a closed shop where only PhDs may enter. That would be less worrisome if we weren't beating diversity out of PhDs almost as aggressively as we beat it out of "Principles of Economics" students...

Anyway, the book surveys economics graduate students. Well, economics graduate students at one of the "elite" (book's word) schools (Harvard, Yale, Stanford, Chicago, Columbia, MIT, Princeton, Yale). Colander defends this choice by pointing out - correctly - the disproportionate influence of economists stationed at those schools, which hire new faculty predominantly from one of the others' PhD pools. Perhaps limitations in the research budget are to blame, but it would be very interesting to see what was going on at other institutions as well. Non-US universities, smaller schools...

It might change a few of the most surprising results of the surveys. On the issue closest to my heart, 40% of the grad students surveyed disagree that "we can draw a sharp line between positive and normative economics". Which makes my eyes water.

On the other hand, a bunch of boring-type economic policy questions drew pleasingly all-over-the-place answers. One with some degree of consensus: A strong majority agreed with the statement "Income distribution in developed nations should be more equal", which is emphatically not what I would expect the public perception of an economists' opinion to be. It probably partly reflects political beliefs; the students' stated political allegiance breaks down like so:

Conservative: 16%
Moderate: 24%
Liberal: 48%
Radical: 6%

Not sure what "radical" is trying to catch, but there it is. Is it strange that all these budding economists are "liberal"? In my experience, not really, and in any case, the stereotypical right-wing markets-crazy economist is actually not one with actual basis. Believe it or not, devotees of the "economic method" are not necessarily fiscal conservatives, for example.

More relevant to the issue of what economists do is the question of what the students believe helps people succeed in grad school: a full 67% said "having a thorough knowledge of the economy" was unimportant, which I would wholeheartedly agree with. In courses at the undergraduate level, I was exposed to plenty of history, of the subject and of the world, and plenty of policy debates; at the graduate level, math. And statistics.

The closed shop isn't much interested in policy debate. It's not necessarily the job of academic economics to do these things, but I can attest that it makes most graduate-level courses as much fun as a slap to the head. We dive down the rabbit-hole of the literature of our chosen field, but lose whatever tenuous grasp on reality we once had.

An interesting side-effect of this infatuation with what other economists have written (even at the expense of what other economists have thought) and of the closed shop is that PhD theses are interchangeable. Everyone's doing pretty much the same thing, geared towards the ubiquitous "job market paper" that is supposed to prove to the union bosses how good you'll be at publishing papers like theirs. It's either a theoretical paper that looks like other theoretical papers, or an empirical paper that looks like other empirical papers.

I don't know how much this is true of other disciplines, but I often feel that very little of what we research is question-led, which also kills a big chunk of the chance to be daring or creative. There's not a lot of big-picture, big-idea, thesis-for-its-own-sake intellectual masturbation going on - and I do mean that as a criticism. Colander's survey shows our diversity; do we really all want to produce the same work? Can there be more than one way to do good science, good economics? What made us want to become economists? What happened to the questions we wanted to ask? Graduate students: this might be our last chance to ask them.

Saturday, February 16, 2008

Economic literacy, or how we squashed dissent

My heart smiles on veterinarians today:

"Popular misconceptions

Economics is commonly viewed as being focussed on money. This notion has been reinforced in veterinary medicine..."

A quotation, apparently, from "Veterinary Epidemiology" by Michael Thrusfield, that I stumbled upon while prowling for some evidence on what we're doing to economics students.

A large chunk of the evidence on that subject comes from formal economics articles ridiculing the population's incompetence. This one actually asks students some questions testing so-called "economic literacy" (who sets monetary policy in America, what are profits for, what happens to export if the dollar increases in value (yawn)) and this one has some suggestions on how to promote it.

I'll put aside my skepticism that knowing, for example, the difference between fiscal and monetary policy is important to a person. The questions that aren't purely civic literacy are boring and/or irrelevant; more dangerously, the promotion of "economic literacy" in an introductory economics course represents another challenge to the correct perception of what economics actually is. If we make civics the goal of introductory economics courses, we lose any semblance of teaching "principles", and slide further into pretending that economics will offer the technocratic "answer" to your every question.

As if to reinforce this fear of mine, the questionnaire article finishes up by trying to convince me that

"...economic knowledge has a direct and substantive effect on opinions about economic issues"

That's seems reasonable, until the example:

"An opinion question asked: If the supply of oil was reduced by a crisis in the Middle East, do you think the United States government should prohibit oil companies from raising oil and gasoline prices?

Over four in ten college seniors were opposed to allowing the oil companies to raise prices, hardly a strong endorsement of competitive markets.... what college seniors know about economics directly affects their acceptance of a market result."

Where do I begin? What breathtaking arrogance it must take to assume one has the unimpeachable answer to an "opinion question". What a sad revelation of the true failure of economics teaching it is to equate "economic literacy" with "a strong endorsement of competitive markets". Worse than sad, it's infuriating. When this passes - in the supposedly prestigious American Economic Review, no less - I am entirely unsurprised that students who take economics courses answer "opinion" questions differently than other students. Our economics courses are dogmatic and pass opinion and ideology as scientific fact.

This isn't political: I hold my own beliefs, as anyone is entitled to. Perhaps "economic literacy" would help people decide what they believe. That's the difference between "I'm not sure would happen if we tried to move to socialized health care" and "I think I have a reasonable idea of what might happen if we tried to move to socialized health care". I'd be thrilled if we could help someone answer that question.

What my profession seems to be pushing is instead the difference between "I don't believe that the market mechanism is always best" and "I believe that the market mechanism is always best". Is it possible that "economic literacy" could change my mind? Of course it's possible; that doesn't mean that it will, or that it should. There's a very fine line between wishing for economic literacy and wishing that people believed what you believe, and crossing it is unacceptable.

Of course it would be great if we all knew a bit more about how the institutions that control our resources operate. Keep it out of my "principles of economics". If you care so deeply, make everyone take a course called "how economic policy works in the United States". Don't pollute my discipline with your sleight of hand. If suppression of debate, and sacrificing the chance to teach economics without ideology attached are the price of "economic literacy", it's a price far too high.

Now that I've gone off the deep end, I should point out the classic survey of public versus economists, the "Survey of Americans and Economists on the Economy" which is actually pretty interesting. The (comparatively) reasonable "Straight Talk About Economic Literacy" (pdf) by Bran Caplan is a nice (but long) article that talks about the survey and asks why the responses diverge.

Is it too late to enroll in veterinary school?

Friday, February 15, 2008

The Affluent Society

Today I learned that it's been fifty years since the publication of The Affluent Society, by one of the 20th century's great normative economists, John Kenneth Galbraith. That I found out is thanks to this article that, remarkably, argues that Galbraith was "the midwife of miserabilism" because he rejected growth as the sole societal goal, which fits nicely into what I was saying about metrics the other day.

Probably predictably, I dislike the phrase "economic growth" and avoid it wherever possible. What does it mean? Presumably growth in "GDP", whatever that is, not that "GDP growth" gets a lot of play in the contexts that use economic growth instead. The kind of argument Galbraith was making - that we should aim for more than growth, and that growth can have ill consequences - often gets wrapped up as an "anti-economics" argument, for the same reason that "economic growth" is considered the correct phraseology.

It's true that "political economy" was money centric in the beginning: it was called "The Wealth of Nations", after all. While - perhaps because - authors like Galbraith were attacking the "value of our stuff" as a meaningful objective, economic science was maturing to the point where we could suppress the objective and attempt to sterilize the descriptive part of our job. Whether society aims for "GDP growth", putting a man on the moon or turning lead into gold is another one of those normative questions that belong to a forum of debate.

That's what makes Galbraith's essays so important - he was trying to convince, not to prove. He was a master of the provocative opinion piece. The Affluent Society remains a vital argument in support of public works. Paul Krugman was very critical of Galbraith's stature as an economist in "Peddling Prosperity", which probably misses the point that Galbraith was making arguments, not scientific economic theory. As a manifesto writer, he was very special indeed.

Thursday, February 14, 2008

Economic systems in action

Here's a neat article (found via the invaluable Arts and Letters Daily) which is, indirectly, about applied economics. How do you allocate scare places in college classes to a student body?

The article talks about the systems at a few colleges, ranging from sleeping in line to auction systems; the question at hand is "what should we do to allocate these places?", a nice normative economic question. Wharton's business school apparently gives students points which they spend in anonymous online auctions to bid for places in courses.

"In other words, Wharton has what may be the most sophisticated, and most confusing, course-registration system ever devised. And, arguably, the fairest. "It's capitalism gone nuts, but it's also absolute socialism because everyone is born with the same number of points," says Justin Wolfers, an assistant professor of business and public policy."

It's certainly not "socialist" to give everyone the same number of points: capitalism and socialism are methods of allocating resources, not methods that decide who gets the resources to start with. A socialist system of allocating places would presumably get all the students on campus into a big room and have them decide, which would at least be good fun. I think Wolfers might mean it's "capitalist but egalitarian". Equality of opportunity is a different concept from resource allocation.

It's interesting to see systems of resource allocation go off the deep end: the middle way of just allocating places randomly or having people line up is significantly simpler than either the auction system, or my hypothetical socialist system. How can we make the decision about what system to use? Just like all normative questions, we can't say which system is "best" or "fairest", only try to figure out what each system would mean and argue about the rest.

The ends versus means issue in economic systems is an important one. The thought experiment goes like this: if the people's council knew how a capitalist system would allocate resources, they could choose that allocation. Would that make the socialist system the same as the capitalist system, or is there more invested in the resource allocation mechanism than just the end product? Even figuring out consequences is not enough to answer normative questions.

Here's the clincher though, about the MIT lottery system:

"The lottery is supposed to be equitable and impersonal, according to Bette K. Davis, office director of the School of Humanities, Arts, and Social Sciences. But that's not always how it works out. Ms. Davis says that often students who lose the lottery wheedle their way in by talking directly to the professor."

Capitalist, socialist, anarchist: it's all about who you know.

Wednesday, February 13, 2008


Just after talking about the euphemistic use of "economy" yesterday, I found an even better one here:

"Nearly all Italians drink bottled water rather than the piped stuff. The industry is worth an estimated 3.2bn euros (£2.38bn) a year to the Italian economy."

It would be very refreshing if they'd just say "GDP", since that's what they mean. That wouldn't make it any less understandable either, because "economy" is equally vacuous. Let's play the show and tell game again: what does the quotation mean?

It can't mean that "if no bottled water was sold, people would spend 3.2bn euros less" - I'm sure they'd find another way to spend it. It can't mean "worth 3.2bn euros a year to the Italian resource allocation", because that's not a sentence. It can't mean that "Italian workers/producers would get 3.2bn less in wages/payments a year", because I'm sure that they could do something else besides produce bottled water.

My best guess is "the Italian bottled water industry makes sales worth 3.2bn every year". Why, oh why, can't the reporter simply say that? It's not remotely the same thing as any of the other suggestions I just made, yet I guess they're all technically possibilities if we read "economy" as "system of production and consumption" or something like that. If I want to be really obnoxious I could ask whether the reporter has measured every consequence of the hypothetical disappearance of the Italian bottled water industry to come up with his figure.

More to the point, let's forget about the absurdity of the quotation in itself and ask why the "worth" of any effect on the "economy" measured in money? This screams a confusion of metric and quality, a cardinal sin of positive science; even if I could get an accurate figure for the effect of something on "Gross Domestic Product", I still think "worth" is too loaded a term.

A big chunk of the gulf between theoretical economics and empirical testing of real-world relationships is the metrics we use. Our abstractions work (or can, or should work) in a world where we measure outcomes agnostically: if you care about this. Theoretical economists can play in imaginary worlds all day, exploring the "relationships" between fundamentally unmeasurable things under their assumptions. On the other hand, some imaginary concept like "utility" is singularly useless if we want to actually talk about the real world. Empirical economists must deal with this problem somehow: if you want to talk about the effect of this measurable thing on that measurable thing you must explicitly ignore the intangible (like, perhaps, satisfaction).

Then what conclusions can we draw? This affects that, but not how "good" it is. This is, again, the reason why economics can never be a technocratic prescription of what "should" be done; we simply have no real-world metric to answer the question, and our theoretical metrics are unobservable. It's the power and beauty of the science - we don't have the answers. Is someone pretending to? Just for fun, I Googled "what's wrong with GDP". When our metrics are the sole determinant of policy, of course the metric - and, by extension, economics - comes under intense attack.

Now that's all well and good until we get to economics teaching, practice and discussion which ignores this important conclusion. I don't deny the challenge of constant vigilance to make sure student, reader, researcher know that we're dealing with only what we can measure, but nothing short of a commitment to acknowledge the limitations of measurement at every turn will be enough to dispel the notion that the science of economics can tell us what to do.

Tuesday, February 12, 2008


It's just semantics, but I wish there was an easy solution to the problem of using the word "economics" as a euphemism for real stuff. How unusual would it be for this story on General Motors' headache-inducing losses to expire without a use of the word "economics" or "economy"? There's actually only one:

"But the worsening economy in the United States led to higher fourth-quarter losses in the region: $1.1 billion, compared to $30 million in 2006."

What does that mean? Does it mean "people are losing their jobs"? "There might be inflation going on"? "People are defaulting on their mortgages"? Seriously, if it means anything in itself, I don't know what it is. I even looked up the word "economy", and I think the definition that's being implied is "the system or range of economic activity in a country, region, or community": almost a perfect tautology.

That old writer's maxim "show, don't tell" should be, in my ideal world, applied to every use of the phrase "worsening economy", "economic trends", "the economy", and all the others you can think of. They're empty on two levels: structurally there's the reflexive definition, but more importantly in a news story designed to inform, it obscures whatever the actual thing is.

Here's another example:

"The Bank of England cut UK interest rates last week to 5.25% from 5.5% in an attempt to prevent a major slowdown in the economy."

What does "major slowdown in the economy" mean? More unemployment? Less money for the common man? So help me, GDP? It surely can't mean a "slowdown in the allocation of resources", because that's not a sentence. Show, don't tell. Actually, the second example actually might be a step up from the first because it has the slightly less loaded "slowdown" rather than "worsening". Don't tell me how to feel when whatever you're talking about happening happens!

Monday, February 11, 2008

Heterodox economists

A couple of months ago, seemingly every book review section in every newspaper or magazine carried a review of "How To Talk About Books You Haven't Read" (here's an example). How is a literary critic supposed to resist reviewing a title like that?

I have here a book called "A Guide To What's Wrong With Economics"; how am I supposed to resist looking at a book like that? More to the point, I haven't actually read it properly yet, but just by browsing I know what it'll say, because it's actually a (very thorough) critique of that thing called "neoclassical economics", which is familiar but important stuff, even if my guide would be a bit different. Economists who write these kind of books are, by the way, called "heterodox economists", though perhaps not by themselves.

There are lots of promising chapter titles, anyway: "The Pitfalls of Mainstream Economic Reasoning (and Teaching)", "Five Pieces of Advice for Students Studying Microeconomics"... there's a whole section called "Micro Nonsense"! I feel compelled to share this brilliant quotation:

"Because there is no direct access to the 'real' world, an economist is forced to see that world through the lenses of theory."

Either I'm living in a complicated dream, or we do actually have access to the real world... I see what the author (Charles Wilber, in the chapter "Teaching Economics as if Ethics Mattered") is getting at, though. It's a theme that keeps cropping up throughout the book, one that seems to be raised again and again, something like "there is not enough diversity in economics teaching and practice". I think Wilber might be saying that the economist is forced to see the world through the lenses of a particular theory that he, and the heterodox economists, dislike.

Superficially, I agree, if by that we mean that too often differences of opinion are suppressed in the profession, when in fact positive economics is logically incapable of doing so. However, the criticisms being raised again and again in the book are that "neoclassical economics" is taught as a loaded dogma, which is terrible, but not the same thing. The method of economics, whatever you think of it, can accommodate anything, any theory. Not just that, but exactly the same "anything" could happily be accommodated in any other method.

Would the authors be happy if we taught our methods on a blank slate, or would they demand that their own particular views were put on the academic pedestal? This must not degenerate into an arms race: the method is the language, not the meaning. I am suspicious that the "heterodox" economists want to change the language only to change the meaning. Please: there is no substance in a method, a language.

Actual theories are invoked incessantly, through all chapters: the usual suspects, like perfect competition, "rationality", equilibrium... what's "wrong" with economics, according to these essays, is that these theories are presented as "true". Now, of course, a proved theory cannot be false under its own conditions; by "true" we really mean "does not conform to the real world, either in assumption or prediction". That's something I can buy into, and that is, perhaps, the valid, practical version of the criticism.

It's twofold: first, using methods to promote a single normative angle is certainly possible, but doesn't show what the method can do, and in any case is probably bad teaching. Second, it might indeed be nice to bring some more reality into introductory economics courses, not just "applications". There are certainly valid reasons to construct abstractions, but it might keep people on board if we devote at least some time to economics that conforms to reality - it's odd that when a student progresses through an economics sequence, the economics she sees often gets less unreal as it gets more esoteric, if that makes sense. We don't need boring tables of numbers, just show the flexibility of the economic method to deal with the real.

What bothers me about this so-called "heterodox economics" is that it's attacking the wrong thing. They are not questioning the teaching and practice of economics by digging as far as it's possible to dig to find the true foundations of what we do, absent any superficial details. Whether it's right or wrong to try that, it's fundamentally different to the heterodox method. See the wood for the trees: you don't have to convince anyone - student, economist, layperson - that economic theory is usually unrealistic. Deep down, though, we're all playing for the same team, and if we could just figure out what our team was doing, we could have a real competition.

Sunday, February 10, 2008

Principles of Economics

Here at Brown University, our Econ 101 course is actually numbered EC0110 and is called "Principles of Economics". Like a lot of introductory undergraduate-level economics courses, it uses Greg Mankiw's book of the same name. What is a principle of economics? Here's the list that Mankiw suggests in the book:

1. People Face Tradeoffs
2. The Cost of Something is What You Give Up to Get It

3. Rational People Think at the Margin
4. People Respond to Incentives

5. Trade Can Make Everyone Better Off

6. Markets Are Usually a Good Way to Organize Economic Activity

7. Governments Can Sometimes Improve Market Outcomes

8. A Country's Standard of Living Depends on Its Ability to Produce Goods and Services

9. Prices Rise When the Government Prints Too Much Money

10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment

Are these principles? I cannot square any of 5 through 10 with any definition of "principle"; those are, at best, positive economic results (not to be too facetious, but by 10 I think many students must be asleep). A principle, to me, is something that you hold as a fundamental truth, before, during and after you do anything. I see the logic in writing a list that looks like this: it summarizes a lot of the "received wisdom" in our discipline.

That, however, is exactly the problem. How can I teach an anti-capitalist student economics if my first lesson says "Markets Are Usually a Good Way to Organize Economic Activity"? "Good" is a normative judgment; the statement is loaded with value and intent. It's a huge result built on so many layers of qualifications that I couldn't possibly say it with a straight face. It's not possible to sell economics as scientific and flexible if we recite dogma in lesson one. Economics is not capitalism. Maybe that should be a principle.

I should probably make some kind of attempt to define "principles" as I see them.

1. Economics tries to describe and predict things about the world around us.
2. Economics is divided into value-free positive method (what will happen, or how do I achieve a particular goal) and normative opinion (what ought to be done). It can inform debate through the former, but cannot settle it, because there are no right or wrong opinions.
3. Economists assume people act as if they try to get their preferred outcome of the ones that are available, but they don't restrict what people's preferences are.
4. Positive economics uses simplified models or empirical observation to describe or predict what will happen, and must never make value judgments. We can try to interpret the validity of positive results by testing them against real-world data or by figuring out what would happen if we made different simplifying assumptions.

I'm just thinking (typing?) out loud, and certainly a more thoughtful attempt would be justified. My "list" is certainly less snappy, that's for sure. In general, though, I really believe that "principles" should describe the foundations of economics, not its received wisdom. The foundations of economics can accommodate everyone, not just those who would find themselves nodding agreement at a statement like "A Country's Standard of Living Depends on Its Ability to Produce Goods and Services". With no exaggeration, I can say this is like opening Music 101 with a list of principles that includes "Only Rock Music Is Good Music" or something equally ridiculous. It is heartbreaking.

Rather delightfully, this list of "Principles of Feminist Economics" - again, I must confess, I don't often see how "[blank] economics" is distinct from "economics", especially since the [blank] is usually a value judgment - is, despite dripping with normative statement, actually more palatable to me than Mankiw's list. At a bare minimum, looking at them side by side reveals how neither of them can possibly be considered "principles of economics". I'm sure mine can't either, but you get the point: I think a minimum requirement for a list of principles is that they be basic and as agreeable as possible to the people who care.

I applaud the goals of this page entitled "Great Ideas For Teaching Economics", even if a few of them are really more "how to get people interested". Allow me to quote at length this contribution from Hugh Himan:

"For a number of years I have devoted 6-9 class meetings in the Principles of Economics course to class debates on current economic issues.


1) to acquaint students with the reality that economists as well as people in general do not think alike on economic issues;

2) to have students realize that disagreements on issues reflect both different positive economic views (cause and effect) as well as normative difference (values)

3) to challenge their own thinking about economic issues

4) to have each student experience through a debate on the beliefs and values of the three major paradigms of Conservative, Liberal and Radical.

The debates are evaluated by the students and instructor on the basis of specific criteria with final scores tabulated on a 100 point scale. The evaluations are based upon how well the team presented their assigned position, not whether the evaluator agrees or disagrees with that particular paradigm.

It has been my experience that the students truly get involved with these debates, well beyond the proportion of the final grade their scores represent. Most enjoy the role playing, some even dressing as they think a Conservative, Liberal or Radical would appear.

Beyond the enjoyment many experience, I like to think that they have gained deep insight into issues i.e., that problems can be viewed differently based upon one's belief as to “truth” causes and effects as well as on the basis of values (no good vs. bad but in terms of relative priorities). For so many students I have taught over the years who tend to think there are single, simple answers to such problems as poverty, unemployment, national defense, acid rain, exposure to the complexity of such issues is important to their education."

This is, indeed, a great idea. Is there a better way of understanding the very concept of normative judgment than to force students to debate from all sides? I think it might be fun to ask students to shout out anything they can think of, and to write down an "economic model" that proves it. This really invites students to think of 1) how flexible positive economics is, 2) the importance of assumptions, 3) how to judge an economic theory, and 4) the role of normative opinion.

We need all three levels of understanding in economics: positive, value-free, empty economic science; interpreting whether the positive results are correct, either empirically or by exploring the implications of alternative assumptions; normative, value-laden opinion. Exercises that can explore these distinctions are the most valuable in our teaching arsenal. A list of "principles" pregnant with loaded statements is not the right way to present our discipline.

Friday, February 8, 2008


Just a quick footnote to the economic man stuff. Talking about Wikipedia probably gives me a credibility problem, but the page I referred to yesterday to is actually pretty impressive, and has some good points worth mentioning.

"One problem with making the Homo economicus model more sophisticated is that sometimes the model becomes tautologically true, i.e., true by definition. If someone has a "taste" for variety, for example, it becomes difficult if not impossible to distinguish economic rationality from irrationality. In this case, the Homo economicus model may not add any new information at all to our economic understanding."

Indeed: anything can be rationalized. The whole sorry debate about economic man could probably be avoided if we understand that "the Homo economicus model" isn't supposed to add new information to our economic understanding. The economist's ultimate goal is not to figure out how people behave - that's just something we have to address along the way to describing things. Economic man is no more of an end than the super-supercomputer I invoked yesterday.

However, my favorite bit from the page is this nice little dig:

"These criticisms [of economic man] are especially valid to the extent that the professor asserts that the simplifying assumptions are true and/or uses them in a propagandistic way."

No argument here. Economics teaching is usually depressing. Why is the first thing students of economics see a supply and demand diagram? How does that help them understand what we're trying to do, what we assume? How, more importantly, is that value free? How can that separate economics from capitalism, money, markets? How can that be economics?

"It is primarily when targeting the limiting assumptions made in constructing undergraduate models that the criticisms listed above are valid."

Imagine hundreds, thousands of students come to you every year. You can show them why your subject is exciting, what it can do philosophically and practically, ask big questions, educate an astonishing number of diverse students, make the next generation of economists good scientists while allowing all normative opinion to flourish around the argument. You can take students with all preconceptions, with all beliefs, and send those students away in their diversity of thought as economists. The next generation of economists would have a fighting chance of being value-free, and the debate wouldn't be "us versus the economists", but just "us".

Hundreds of thousands of students do come to Econ 101 every year. We show them a supply and demand diagram and reinforce all prejudices. We present economics as an answer. How many minds do we lose? How can we tolerate the waste?

Who is economic man?

A provocative opening to this article attacking something called "economic man":

"Myth: Homo economicus is a valid assumption of human behavior.
Fact: Homo economicus is a fiction useful to right-wing economists."

"Economic man" would be too easy, of course; "Homo economicus" sounds more intellectual and somehow also more ridiculous. Anyway, if I pretend not to see the right-wing bit - what's a right-wing economist? - I think the fact is a fact and the myth is a fact too, and not just because defining a "valid assumption" is not quite as obvious as it seems.

The essay is actually pretty interesting, though obviously normatively motivated. It goes on to say:

"Specifically, social scientists believe that human behavior is often complex, imperfect, limited, self-contradictory and unpredictable. Homo economicus, however, is a greatly simplified model which assumes that individuals possess the following traits:

* Perfect self-interest
* Perfect rationality
* Perfect information"

I love that "human behavior is.... unpredictable"; the logical conclusion of that argument would be to abandon all social science, would it not? Let's take the long view and ignore that bit. Aside from that, as I've argued before, the perfect information trait has been scrutinized intently for a few decades, so it's probably an obsolete criticism. The rationality bit is, again, untestable, since what we mean by rationality is that some pattern that's to some degree predictable - whatever it might be - affects behavior.

The self-interest trait is the one that comes in for a lot of criticism, in the essay and generally. The most important myth to dispel right away is that "self-interest" means "cares only about things that materially affect me"; it means "cares only about things that I care about", which is delightfully tautological and more innocuous. We have a special definition of "selfish". I think what the critic really means is more in the spirit of the following, from Wikipedia (sorry):

"Economic man is also amoral, ignoring all social values unless adhering to them gives him utility. Some believe such assumptions about humans are not only empirically inaccurate but unethical."

There are two problems with that: one is the use of "unethical", which I'll save for another day, and the second is methodological. It's possible to write down a rational, self-interested "economic man" who will do anything. Literally anything can be "rationalized"; it's meaningless to say that it's "empirically inaccurate" to assume that "social values" give a person utility, because it's impossible to empirically answer that question one way or another. Economists seeking accuracy would, methodologically, model a person who acted in accordance with social values as if that person got utility from conforming to social values. Our rational, self-interested man has magically developed a social conscience!

Later in the original article, the author says (in direct contradiction to their earlier claim that behavior is unpredictable, by the way):

"Biologists recognize four levels of survival: the gene, the individual, the group, and the specie. All of them interact to produce the complex and often paradoxical behavior we witness in humans. The error of Homo economicus is that it focuses only on one level: the individual. It cannot explain why couples bear children (to promote genetic survival), or why soldiers often sacrifice their lives in war (to promote group survival), or why people practice charity (to promote human survival)."

Again, I can only plead that we recognize that whatever economists do or are perceived to do, their method of modeling people can explain anything, and I mean that as both a criticism and a compliment. Our method is neutral, our method is empty. Attack the normative interpretation of our conclusions. Attack the assumptions we make. Don't attack the method: you're shooting at thin air.

Let's do a thought experiment: imagine we had a super-supercomputer that could accommodate all the complexity we wanted, and imagine that our computer has also figured out how to perfectly model every single human being, and imagine that we believe it. Forget the fatalist implications and just ask: would an economist - who seeks to model choice and the allocation of scarce resources, to describe the world, to make predictions, and, ultimately, to inform - reject the computer? Would he reject the model? If he would, he is not a scientist: if the economist would reject it, then I'll let all the critics of economics attack him, because surely the only way to justify rejection of that gift would be because the model would generate predictions that the economist didn't like.

Economists should never make their "economic man" to suit their ideological goals. That's not science. We must make our "economic man" realistic but clear, acknowledge what he does and does not do, what he does and does not embody. He can be anything we want: we are therefore powerful, and must then be honest, if nothing else.

Thursday, February 7, 2008

Perhaps we should stop using this phrase

I mentioned the old "dismal science" slight on economics the other day. It's not exactly new news, but I like the story of the origins of the term a lot, because knowing it would surely cause people to think twice before using the phrase.

Here's a good article that tells the story of Thomas Carlyle's first uses of the phrase.

"Carlyle attacked Mill, not for supporting Malthus's predictions about the dire consequences of population growth, but for supporting the emancipation of slaves. It was this fact—that economics assumed that people were basically all the same, and thus all entitled to liberty—that led Carlyle to label economics "the dismal science.""

Now, economics is probably pretty low on the list of reasons to oppose slavery, but it seems that Carlyle was taking issue with John Stuart Mill (among others) for arguing that since people are basically the same, there's no such thing as a "natural" hierarchy of people. Carlyle's position, sadly, speaks for itself:

"Carlyle disagreed with the conclusion that slavery was wrong because he disagreed with the assumption that under the skin, people are all the same. He argued that blacks were subhumans ("two-legged cattle"), who needed the tutelage of whites wielding the "beneficent whip" if they were to contribute to the good of society."

Aside from its connotations - which are about as politically incorrect as it's possible to be these days, and would certainly not be allowed to be printed in any of the places where we see the phrase "dismal science" - the target Carlyle was directing his argument towards is not much like the method of economic science at all. In fact, he seems to really be taking issue not with the practice of scientific, positive economics but with the assumptions the economists made about people. From another article on the same subject:

"In short, Carlyle was of the view that compulsion, rather than market forces should regulate the supply of labour on plantations in the West Indies because the laws of supply and demand are not appropriately applied to the relationship between White and Black as they are contrary to "their mutual duties" (white = master and black = servant) as ordained by "the Maker of them both". In Carlyle's opinion: "declaring that Negro and White are unrelated, loose from one another, on a footing of perfect equality, and subject to no law but that of supply and demand according to the Dismal Science", "is clearly no solution" to the problem."

Oddly enough, and though it's probably ridiculous to compare them, Carlyle is attacking exactly the same assumption that is still criticized today: the assumption on the motivation of people in economic models. Certainly the reasoning of the critic of today is significantly less outrageous than Carlyle's, but they're shooting at the same target.

Carlyle certainly seems to demand a different kind of response than today's defense of the modeling of people - "it's just an abstraction, we know we're not being realistic". Luckily, as some of Mill's angry and eloquent responses indicate, Carlyle's normative beliefs were vigorously challenged right from the start. His assumption was, I hope we can agree, unrealistic. If he had performed a positive economic analysis based on his assumption, it would have been badly wrong and inaccurate.

No normative belief or opinion can ever be "wrong", but an assumption can certainly be wrong. Which assumption would lead to better economic science: Carlyle's assumption of natural servitude or Mill's assumption of natural equality? If Carlyle had argued that slavery was a good thing, plenty of people would have disagreed with his opinion. When he argued that people are inequal and thus servitude is a better use of people than freedom, he didn't just have an objectionable opinion, he had bad science.

Modern economics has fought hard to work the number of abstractions made on the motivation of people down to just one: rationality. We don't restrict what people care about, we just require there to be some method to the madness. Economics should be value-free, boring, scientific, clinical, and, yes, dismal, but I'd think twice before I called it the "dismal science".

Wednesday, February 6, 2008

Looking at brains

A related question to what people want is what makes people happy. The answers aren't necessarily the same, but in thinking about one, especially as a modeler, it helps to think about the other.

I saw Andrew Caplin talk a couple of months ago about this paper, in the growing neuroeconomics field. My layperson's understanding of neuroeconomics is that it looks at the brain to try and figure out what's going on while we make choices. It seems to be concerned at least as much with "what makes people happy" (or at least what makes their brain light up on the machines) as it is with what people actually choose, a point that separates it somewhat from other economic fields that take preferences as given and observe only choices. The argument, presumably, is that knowing more about what motivates people might shed more light on their choices.

Caplin described a paper titled, excellently, “Responses of monkey dopamine neurons to reward and conditioned stimuli during successive steps of learning a delayed response task” (link) which described a Pavlovian experiment on monkeys. First the monkeys were given food, which set off a dopamine response in their brains, supposedly a sign of pleasure. Then the researchers started to ring a bell before giving the food, and the dopamine response shifted from the food to the bell. Finally, they rang the bell and withheld the food, and the dopamine measure showed pleasure at the bell and disappointment at the time when the food was expected.

The upshot is that this physical measure of pleasure in the brain seems to show that news was just as important as the tangible outcome: the monkeys don't just care about the food. People, too, clearly care about more than just money, goods or tangible outcomes: perhaps I am happy to see a good weather forecast for tomorrow even though I didn't actually get anything.

It's related to the great loss and rediscovery of preferences in economics. At some point (to grossly oversimplify the history) the profession settled on making abstract simplifications of people's motivations. Then a while went by and someone said "people don't conform to your economic theory, they must be irrational!", when of course the more obvious explanation is that people's motivations are more complex than the simplification. If people care only about money, then according to some theory I should see this. If I see that instead, I have not disproved the theory independently from the assumption on preferences.

The potentially exciting thing about neuroeconomics is that, even allowing for inexactness, it might tell us more about the actual hedonic motivators of people. Ambitious, yes, but not unimaginable. Of course, to an economist who wasn't under the mistaken impression that simplified preferences are supposed to be realistic, it might just amount to saying "your simplification is a simplification", which is slightly less exciting news. Or not news at all.

In fact, one interpretation of the monkey result might be that new information - or expectations - matters to people's decisions. Macroeconomists - Nobel memorial winners, Phelps and Friedman - incorporated expectations into their models forty years ago. If anything, what we're seeing is individual-level (or at least individual monkey-level) evidence that, yes, expectations are important. That might be another way of saying that evidence from experimental/behavioral/neuroeconomics like this is fun, but it doesn't materially change what economists are up to: if more complexity makes our modeling more accurate, we often end up doing it.

Tuesday, February 5, 2008

What do you want to happen?

Step one in normative economics is, I think, finding out what you want. Without a goal, positive economics is as useless as a coffee break (unless, of course, your goal was a cup of coffee). Is it odd, then, that economists don't seem to spend any time figuring out what people want?

Although I'm certainly no authority, it seems to me that psychologists and sociologists spend a lot more time on this question. For example, I recently came across a psychology article with the wonderful title "Not Having What You Want versus Having What You Do Not Want"(here's a link, but the full text is subscriber-only). I cannot resist quoting the first paragraph:

"No childhood passes without disappointment about a birthday present, no adolescence seems to be complete without a disappointing love affair, and hardly anyone is a stranger to the unpleasant feeling that stems from buying an expensive consumer product that turns out to be less than expected. All in all, a life without disappointment seems rare."

And they call economics the dismal science... I wish we could be so melancholy. The point, however, is that while behavioral economics might be trying to push the boundary of what the people in economic models care about by incorporating, for example, disappointment, I don't know of any economics literature that's trying to figure out what people actually care about.

Of course, it's difficult. How could we go about it? Economists are very distrustful of surveys as unscientific. One of my favorite normative economics results is hidden in a paper called "Economics of the Endangered Species Act" (link): US household surveys asked people what they'd be willing to pay to save each of a set of endangered species. Scaled up, the answers implied that the US population would be willing to pay one percent of its total income to save two percent of endangered species. It's a bit of a facetious point, but it's a neat way of showing that talk is cheap in answering surveys. Simply observing what people do can't really answer the question either, especially when we're talking about a bigger scale than the individual level.

Do we assume that democracy will elect leaders who represent the goals and ambitions of the people? I think the whole thing poses a serious problem for any economist bold enough to make a policy recommendation: how has the normative branch of economics tried to figure out what people want?

If someone asked you what you wanted, specifically or generally, for you or for the country, or the world, what might make the list? Money, a job, friends, lovers, health, the environment? How closely will the list match the things inside your head? What if you had to give up one thing on your list to get another? Again, a common recourse in economics is to turn our back on this whole sorry mess and just take the things in which we have relatively high confidence: most people like money to some degree.

No economics paper seems to be complete without the mysterious "welfare analysis", which is essentially a bolted-on normative exercise attached to a positive, descriptive theory. How valuable is such an exercise if we have simplified the motivation of people in the theory? Obviously the normative "welfare analysis" is equally dependent on the assumptions of our theory as the theory itself. It's a false dawn that is equally as unsuited to answering the question of "what should be" as positive economics itself: again, if we could come up with the metric that captured the quality of any conceivable thing, the magical normative criteria, we should pack up and start a technocracy.

Yet there is no reason to force the positive and normative analyses into the same box. Expanding the foundations of normative analysis, in particular, to include the hypothetical answer to the question of what people want to happen, can happily be done without affecting the quality of positive theory, whether or not it rests on the same foundations. The economist who claims to evaluate the quality of an outcome fails to see that what he calls normative economics is only as realistic as positive economics: not at all. Real normative economics would spend more time trying to figure out what people really want.

Monday, February 4, 2008


As someone who laments misperceptions of what economists are and do, the barriers to communication with anti-capitalist groups make me very sad indeed. How did I get there? I was looking for something entirely different when I stopped to read an article by Roy Weintraub talking about neoclassical economics. To someone with my beliefs in what economics is, it's a bit schizophrenic. This is nice:

"Neoclassical economics is what is called a metatheory. That is, it is a set of implicit rules or understandings for constructing satisfactory economic theories. It is a scientific research program that generates economic theories."

This is pretty good news: the beast called "neoclassical economics" is merely a box inside which we concoct scientific theories: inside our box, this would lead to that. Weintraub continues to say that the assumptions of neoclassical economics

"include the following:

1. People have rational preferences among outcomes. 2. Individuals maximize utility and firms maximize profits. 3. People act independently on the basis of full and relevant information."

Of these, 1 is redundant to me because I think rationality is not testable and is therefore irrelevant, especially since it's probably implied by 2, and 3 is at best outdated (economists these days are very interested in the implications of imperfect or asymmetric information). If I was pressed to define neoclassical economics, I think perhaps the definition I would use is similar to 2. I'd say that neoclassical economics is the branch of economics that models entities (individuals, firms, governments, etc) as if they try to get the outcome they like best from the ones that are available.

I disagree more with the stance of the article when Weibtraub repeatedly invokes "the neoclassical vision". The connotations of this phrase probably reinforce the misconception that economists think the box in which neoclassical economics works obeys the same rules as the real world. I doubt a physicist thinks that a vacuum is the same as the real world, just as I doubt that any economist thinks that the abstractions of economic modeling are the same as the real world.

It's true that a positive economist who seeks to explore "what is" should not neglect to examine the differences between abstraction and reality, but again we must ask at what point the value of realism is eroded by its inability to draw any conclusions. I think the real choice we're faced with is the application of the economic method that says "if this unrealistic simplification, then that" versus a shrug of the shoulders; if it were possible to achieve the ideal "if this, then that", who would reject it? Should we stop trying because we can't be perfect?

Perhaps partly because of such confusions, "neoclassical economics", aside from having a silly name, seems to have become something of a lightning rod for the anti-capitalist set as much as it is for economists with different ideas. Google neoclassical economics and you get - on page one - a page from adbusters (an anti-consumerist publication - Wikipedia entry), and a less histrionic "critique of neoclassical economics" by Herb Thompson.

"Neoclassical economists normally treat economic instability as the effect of exogenous, stochastic factors even though nonlinear economics suggests that what may previously have been considered exogenous, or random, may more likely be endogenous to capitalist social formations."

I confess I'm not sure what "nonlinear economics" means (the almighty Google was inconclusive): clearly I, too, have been indoctrinated to the neoclassical cabal. However, I actually think that the quotation touches on an interesting idea. Can we figure out if the primacy of money as a measurement of outcomes "caused" the rise of the capitalist method of organizing resources, or if the capitalist method "caused" the rise of the primacy of money?

A difficult one. For example, to take a typical example of an anti-capitalist complaint, do people buy sweatshop goods because they don't know they're sweatshop goods or because they care more about cheap goods than where they came from? I think the latter is more consistent with "money primacy leads to capitalism" and the former is more consistent with "capitalism leads to money primacy", although I'm sure that could be debated.

It is possible to imagine that incorrect normatization of positive economics - by which I mean the mistaken assumption that some measurable positive economic variable is a measure of the quality of an outcome - actually causes problems within the economic system. People will do what they will, but if a policymaker chooses a policy based on the primacy of money as a measure of the quality of an outcome, there's a real possibility that the system itself is influenced by its measurement.

The Thompson article also includes the following excellent paragraph:

"The 'rational' consumer of the mainstream economist is a working assumption that was meant to free economists from dependence on psychology.... The dilemma is that the assumption of rationality as intertemporally optimising is often confused with, and regularly presented as, real, purposive behaviour. In fact, the living consumer in historical time routinely makes decisions in undefined contexts. They muddle through, they adapt, they copy, they try what worked in the past, they gamble, they take uncalculated risks, they engage in costly altruistic activities, and regularly make unpredictable, even unexplainable, decisions."

First of all, this is crucially wrong: "rationality" is not something that can ever be more than an assumption, unless you think you can test it. Further, assuming rationality does not exclude any of the motivations Thompson talks about. It would be trivial to write down a model of a rational person who "engaged in costly altruistic activities" - I simply have the person care about others and optimize rationally. The assumption that Thompson is really discussing here is the straw man of "rationality equals maximizes money", which I have previously argued is absolutely not an assumption of any economic theory, neoclassical or otherwise.

Beyond that, this is really back to the same problem that the Weibtraub article was getting at: we're doing the "if this unrealistic simplification, then that". There's a strong push in so-called "behavioral economics" to figure out if there's a workable way to first make realistic generalizations on how people behave and second to incorporate them into the unrealistic simplification of neoclassical economics. While that goes on, the economist who seeks to defend his method must be clear on what his unrealistic simplification actually is and what it is used for.

As usual, no-one is fit to judge if the anti-capitalist model is "better" than the capitalist status quo, but I greatly hope that we would be able to talk about what each would mean. If somehow I were able to convince adbusters to sit down with me and I asked them what they wanted to do and what they wanted to achieve, what might they reply? I don't know what they would say, but whatever their answer, I would like to figure out what it would take to achieve their goals, what the consequences of their chosen actions would be, what it would mean for people, not just them or me. I hope they would like to figure that out too. That's positive economics.