Christmas redux

It's Christmas time again. Tim Harford's on the case of that gift-giving economics article I talked about back in January, with typical accuracy:

"Waldfogel’s work is often misinterpreted as suggesting that gift-giving is pointless. That is not true. He explicitly excluded the sentimental value of gifts from his calculations, and, of course, the sentimental value is part of the purpose of giving presents."

More than that, though; his positivist reading of the original article leads to some very sensible, common-sensical normative prescriptions:

"the economists Sara Solnick and David Hemenway have discovered that we prefer unsolicited presents to those we have specifically requested... All this points to the optimal gift-giving strategy: you need to minimise the deadweight loss while maximising the sentimental value. This suggests buying small gifts and striving for emotional resonance. Look for something inexpensive, and consider supplementing it with a letter, a photo, or time spent together."

Prescriptions we can all relate to.

Positive bias and normative bias

The opposite of analysis is bad cliché, a sloppy knee-jerk. It's whenever an innocent-looking question in Econ 1 provokes a response that is answered with a phrase like "greedy companies"; it might even be whenever economics is confused with "business" or "finance", because, after all, what short-circuits economic analysis faster than pinning a label of bias on economists?

Not that you couldn't defend such a label. After all, it certainly looks like economists are biased when your first contact with them as a student of the subject is our friendly principles course. What a delicate balancing act, though. Bryan Caplan quotes Paul Krugman:

When the latest batch of freshmen shows up for Econ 1, textbook authors and instructors still try to separate students from their prejudices. In the words of the famed economist Paul Krugman, they try "to vaccinate the minds of our undergraduates against the misconceptions that are so predominant in educated discussion."

Make no mistake, there's a reason why it's so difficult to play devil's advocate to argue against the very real work of introductory economics courses. Is there a fundamental difference between positive bias and normative bias? Normative bias is opinion, and represents healthy disagreement: "I believe the minimum wage should be raised, even if it raises unemployment, because those people who do work at minimum wage are impoverished", or "I believe the minimum wage should not be raised, even given that those who work at minimum wage are impoverished, because it might wreak havoc with the labor market". Both acceptable, both, arguably, representative of what you might call "normative bias".

Positive bias is more problematic. It could be accurately called "being wrong". That's the kind of problem that leads the designers of introductory economics courses to swing wildly to the extreme of trying to batter the bias out, looking suspiciously like indoctrination in the process. Think of how disheartening it is, though, to face a whole class who have heard about "competition" with Russia, China, India, whatever country is the current flavor of Evil, and try to teach the theory of comparative advantage. A very real challenge for economists is to explain the (deceptively simple) positive theories that form the foundation for the argument in favor of trade (personal and international), markets, government, etc etc, while walking the tightrope across the normative ravine.

The challenge, then: is a student who says "globalization hurts America" wrong? Is this a positive bias or a normative bias? More accurately: is this an opinion or a misreading of fact? What about a student who uses the sinking-feeling phrase "greedy oil companies" when asked to evaluate the effects of a gas tax? Here's a passage from that Bryan Caplan article:

People tend, for example, to see profits as a gift to the rich. So unless you perversely pity the rich more than the poor, limiting profits seems like common sense.

Yet profits are not a handout but a quid pro quo: If you want to get rich, you have to do something people will pay for. Profits give incentives to reduce production costs, move resources from less-valued to more-valued industries, and dream up new products. This is the central lesson of The Wealth of Nations: The “invisible hand” quietly persuades selfish businessmen to serve the public good. For modern economists, these are truisms, yet teachers of economics keep quoting and requoting this passage. Why? Because Adam Smith’s thesis was counterintuitive to his contemporaries, and it remains counterintuitive today.

And again, on international trade:

How can anyone overlook trade’s remarkable benefits? Adam Smith, along with many 18th- and 19th-century economists, identifies the root error as misidentification of money and wealth: “A rich country, in the same manner as a rich man, is supposed to be a country abounding in money; and to heap up gold and silver in any country is supposed to be the best way to enrich it.” It follows that trade is zero sum, since the only way for a country to make its balance more favorable is to make another country’s balance less favorable.

Even in Smith’s day, however, his story was probably too clever by half. The root error behind 18th-century mercantilism was an unreasonable distrust of foreigners. Otherwise, why would people focus on money draining out of “the nation” but not “the region,” “the city,” “the village,” or “the family”? Anyone who consistently equated money with wealth would fear all outflows of precious metals. In practice, human beings then and now commit the balance of trade fallacy only when other countries enter the picture. No one loses sleep about the trade balance between California and Nevada, or me and iTunes. The fallacy is not treating all purchases as a cost but treating foreign purchases as a cost.

My own bias is to worry that we mistakenly strangle normative bias out of the economics classroom by too-much, too-soon overzealousness. Yet how else will we be able to impart the simple, counterintuitive lessons that will help us to fight positive bias?

Samuelson's "Economics"

Isn't this just a marvelous observation:

What sex is to the biology classroom, stocks and investment riskiness is to the sophomore economics lecture hall. That chapter on personal finance, put there to keep hard-boiled MIT electrical engineers awake, helped make introductory economics the largest elective course at hundreds of colleges.

That's from Paul Samuelson's article (pdf) discussing the 50th anniversary of the publication of his economics textbook. What a perfect quotation it is: students enroll in economics courses to learn about the stock market, despite it being, really, secondary to the discipline, and by indulging them we made economics courses wildly, unimaginably popular. Even Samuelson saw it!

Then again, Samuelson seemed to see a lot of things more clearly than most. Justin Wolfers at the Freakonomics blog discusses the textbook, and says this:

And while modern textbooks typically begin with a list of the dozen or so key lessons of economics, Samuelson begins with a single claim: “The first lesson in economics is: things are often not what they seem.”

This is the enduring brilliance of Samuelson's book. He would never have had the audacity to write down a list of "principles" in some misguided attempt to simplify or to circumvent argument or to hook a bored student; he discussed, sensibly, correctly, reasonably, lucidly. Even after he delivers his "first lesson" in the first chapter of the book, Samuelson gives a few examples then says:

...each of the above seeming paradoxes will be resolved. Once explained, each is so obvious that you will wonder how anyone could ever have failed to notice it. This again is typical of economics.

That's how it feels to study economics. Things might not at first be what they seem, but soon they are revealed to be exactly what they seem, and my goodness how did it ever seem otherwise.

That first chapter is rightly championed by Wolfers. It shows precisely why it's such a tragedy that Samuelson's textbook doesn't still dominate, why it's a tragedy that we now have textbooks that put the cart before the horse and show questionable "principles" up-front rather than discussing what's about to happen, then developing them patiently. Can this be beaten:

It is the first task of modern economic science to describe, to analyze, to explain, to correlate these fluctuations of national income. Both boom and slump, price inflation and deflation, are our concern. This is a difficult and complicated task. Because of the complexity of human and social behavior, we cannot hope to attain the precision of a few of the physical sciences. We cannot perform the controlled experiments of the chemist or biologist. Like the astronomer we must be content largely to "observe." But economic events and statistical data observed are unfortunately not so well behaved and orderly as the paths of the heavenly planets. Fortunately, however, our answers need not be accurate to several decimal places; on the contrary, if only the right general direction of cause and effect can be determined, we shall have made a tremendous step forward.

There you have a perfect, simple explanation of the problem of measurement. Here's more, this time on positivism and its limits:

At every point of our analysis we shall be seeking to shed light on these policy problems. But to succeed in this, the student of economics must first cultivate an objective and detached ability to see things as they are, regardless of his likes or dislikes... there is only one valid reality in a given economic situation, however hard it may be to recognize and isolate it. There is not one theory of economics for Republicans and one for Democrats; not one for workers and one for employers...

This does not mean that economists always agree in the policy field... Ethical questions each citizen must decide for himself, and an expert is entitled to only one vote along with everyone else.

Reading that collection of reminisces (same pdf as earlier) on the 50th anniversary of the book, I'm humbled again by how groundbreaking Samuelson's textbook must have been. We must fight, fight and fight over again to make sure that the foundations of his book - the true principles of economics - live on and on.

Ideology, politics, economics

Simply excellent paragraph from Free Exchange:

I have trouble with any ideological reading of the economics, because the two (ideology and economics) so rarely fit well together. I don't want to elect a free-market supporter or an interventionist. I want to elect someone who will carefully consider the issues and determine that here the government ought to assign pollution property rights, while here the government should reduce licensure, and so on. I want, in short, someone with enough intellectual heft to know the difference between good policy and good politics.

This promotes the idea a kind of cipher-wonk as a political leader, which is an interesting idea - do we want ideology-free politicians? - but I think extrapolating the point to economics in general is worthwhile. Ideology and economics really don't get on, and perhaps a lot of the misuse and misunderstanding of "economics" in political stumping and election coverage is indeed due to that tension, that ideology infests politics more than it can get into economics.

The very concept of positivist economics is precisely what the Free Exchange quotation is invoking when arguing that we should be electing someone who can do a proper analysis - an objective analysis - instead of someone whose prejudices and ideology biases them consistently in one direction or the other, regardless of the evidence.

Laudable? Probably. The sticking point, again, is that pesky word ought, as in "I want to elect someone who will carefully consider the issues and determine that here the government ought to assign pollution property rights, while here the government should reduce licensure, and so on." Then we're back to square one: we can elect our wonk, who does an objective analysis before enacting any policy, but at some point we need to figure out which option to take, and all the objective analysis in the world can't prescribe; again, there's no such thing as technocratic economics. Surely that makes it impossible to avoid ideology in politics? Surely, also, that's why sterilizing economics can't also sterilize economic policy. We can do that economic analysis, but we always have to answer the normative question of what we want if we are to make use of it.

Economics = devil's advocacy

There's some low-key furore over in Chicago over the naming of a new research institute after Milton Friedman: here's a little background from the New York Times. The real joy in the story comes from the "protest letter" sent to the powers-that-be by a ton of Chicago faculty, and John Cochrane's double-barreled destruction of said letter.

Highlights:

As usual, academics need to waste two paragraphs before getting to the point, which starts in the first bullet.

If academic writing stopped wasting ink, I'd eat all my hats. The point of the protest seems to be that the signatories don't want to be associated with the evils of "the neoliberal global order", "monetization", "globalized capital", etc etc, which are apparently inexorably linked to poor ol' Friedman, and Chicago. Leaving aside the issue of whether naming a research institute after Friedman would invite some kind of new or extra, real or perceived bias to the actual work of that institute, Cochrane makes a stab at devil's advocacy:

The content of course is worse. There isn’t even an idea here, a concrete proposition about the human condition that one can disagree with, buttress or question with facts. It just slings a bunch of jargon, most of which has a real meaning opposite to the literal. “Global South,” “neoliberal global order,” “the service of globalized capital,” “substitution of monetization for democratization.”

It's a familiar problem for all economists. Everything we're perceived to believe in and stand for - whether or not we do - is simply evil, enemy of the environment, the people, democracy(?), happiness, community, the poor. I mean, I'm super sympathetic to the perception that economics has an agenda; as I've argued with tedious regularity, the pollution of the beautifully hopeful positivist method by normative judgment - the very sin positivism tried to prevent - is the great tragedy of the teaching of economics, but, by god, when we have to argue against this kind of jargon with no intellectual content, is it any wonder we end up sounding like the frontline warriors of 'capitalism'?

Classifying economics: humanity or science?

How should the discipline of economics be classified within academia - does it belong to the arts, sciences, social sciences, humanities? A wonderful article called 'The Burden of the Humanities' by Wilfred McClay in the Wilson Quarterly got me thinking about that this morning.

Even if we go by something so simple as what degrees are offered in departments of economics there doesn't seem to be much consensus. While the Bachelor of Arts remains perhaps the most common undergraduate degree in economics, the Bachelor of Science isn't unheard of; indeed, the London School of Economics, one of the most recognizable schools for the subject, awards the BSc. At Oxford University, the undergraduate degree is the BA, but at postgraduate level the MSc - is this a good reflection of the journey up the hill of science, math and statistics that we economists make on the course of our study? If so, why do so many North American universities - NYU, Yale, Brown, Toronto, etc etc - award the MA as a postgraduate degree (albeit in the US usually as a consolation prize for those abandoning the PhD)? What about something like Economics and Finance? Is that more BSc-ish than just economics?

Do we belong to the humanities or to science? This question is obviously closely tied to the ethos of economics teaching, especially the positivist teaching method and the quantification of the discipline. If your economics education focuses on the political, moral, philosophical, historical, intellectual parts of economics, it sounds more like the humanities. If it focuses on the mathematical, statistical, empirical, experimental, computational parts, it sounds more like science, or at the very least, 'social' science. Maybe since there's no 'standard' blend of these two categories in an economics degree it's right that we don't know which degree is more appropriate; all I know is that the scientific categories are much, much more prevalent in the content of US undergraduate economics education than the humanities categories.

McClay's essay talks about the defining characteristics of humanities, borrowing first from the National Endowment for the Humanities definition which allows the humanities to include, among other things:

"those aspects of social sciences which have humanistic content and employ humanistic methods..."

This would seem to allow economics into the party, since it is closely concerned with human behavior, especially microeconomics which is obsessed with how people make choices and decisions. Or is it? Historically, macroeconomics has often relied on a characterization of a country as a big machine, to ask how, for example, exchange rates interact with interest rates, or whatever. There has to be a human element buried somewhere, unlike in the natural sciences, but it's not the focus. McClay addresses just this point:

"But this can be stated more directly. The distinctive task of the humanities, unlike the natural sciences and social sciences, is to grasp human things in human terms, without converting or reducing them to something else: not to physical laws, mechanical systems, biological drives, psychological disorders, social structures, and so on. The humanities attempt to understand the human condition from the inside, as it were, treating the human person as subject as well as object, agent as well as acted-upon."

You could plausibly argue that the history of economic thought has been a reduction of the human to something else; this is valuable because it allows us to abstract from the uncertain world of how people behave into a place where we might be able to draw plausible, tangible conclusions, but just as it's taken the discipline into a place of backlash where 'behavioral economics' wants to recover a keen interest in the way humans operate, it might have carried away much claim we had to be part of the humanities. Of course this also implies that a bunch of the psychological-type economics that's so very popular at the moment might arguably be 'humanities', but that probably overstates the case, since psychology itself isn't usually considered as such.

McClay argues further about the tendency towards science and away from the humanities:

"For many Americans... [the humanities go] against the grain. After all, we like to think of ourselves as a practical people. We don’t spend our lives chasing fluffy abstractions. We don’t dwell on the past. We ask ­hard headed questions such as Where does that get you? How can you solve this problem? What’s the payoff? If you’re so smart, we demand, why aren’t you rich?"

There's a strong similarity between this line of argument and the tendency towards science within economics itself, and perhaps all the same questions apply there. If I imagine arguing that we should have more normative content in economics courses, I immediately imagine being challenged, 'where does that get you?', 'what's the payoff?'. Plus, as a nice bonus, 'why aren't you rich?' could, in another context, be a very pithy summation of the boneheadedness of economists towards the normative metrics of happiness or success.

The weird paradox, however, is that, to this eye, the practical value of the majority of economics research is very difficult to find; I know science for its own sake is still science, pushing the bounds of knowledge etc etc, and I know the charge can be leveled at any subject, but still, for better or worse, 'what's the payoff?' is a question we could rightfully ask in response to any claim of economics to be a science.

And what do we lose when we drop the humanistic from economics? McClay says:

"For you can’t really appreciate the statuary of our ­country—­our political and social and economic ­institutions—­or know the value of American liberty and prosperity, or intelligently assess America’s virtues and vices against the standard of human history and human possibility, unless you pay the price of learning the ­stories."

This is certainly true of the abandonment of economic history and the history of economic thought as fields of study in so many departments of economics. If we can argue for economics as science or as humanity, why have we dropped all humanistic study of it? Won't we lose the 'stories', the lessons of the past, the normative context, the ability to critically evaluate the scientific results that we might be able to squeak out of our modeling and empirical analysis?

Finally, McClay ends discussing the role of the humanities in contributing to the attainment of 'happiness' or satisfaction in life.

"...the lure of a pleasure-swaddled posthumanity may be the particular form of that temptation to which the Western liberal democracies of the 21st century are especially prone.

One of those things left behind may, ironically, be happiness itself, since the very possibility of human happiness is inseparable from the struggles and sufferings and displacements experienced by our restless, complex, and incomplete human natures. Our tradition teaches that very lesson in a hundred texts and a thousand ways, for those who have been shown how to see and hear it."

In the context of the study of economics, can't we make a similar argument? It's not just that economics may have contributed heavily to the 'happiness as goal' business, or to the wedding of income, GDP and money to 'wellbeing'; By abandoning the humanistic in the teaching of our subject, don't we neglect to show the next generation how to see and hear the humanistic as it relates to the organization of our economies, our world? Economics is not a technocracy. We need to understand its humanistic foundations if we are to wield its tools and arguments as experts.

'Good' versus 'bad' economics

A peculiar distinction is often made between 'good' and 'bad' economics when analyzing economic policy. The current hot potato of a gas tax holiday in the US is a case in point - though it might be a trivial issue in the scheme of things, it did provide this absolutely outstanding moment from Hillary Clinton:

“Well I’ll tell you what, I’m not going to put my lot in with economists,” Clinton said, a response in line with some of the populist notes she’s been hitting in recent stump speeches on the gas tax.

There are a couple of things going on here. First, it just shows that declaring opposition to economists is just as popular a political strategy as declaring opposition to 'business' or 'the elite' or 'greedy oil companies'. This is almost certainly because 'economics' is perceived as being one and the same with these things, an ax wielded by the establishment to crush little people under the wheels of capitalism. Again, true economic analysis is valueless, and is subjective only once we evaluate the outcomes or the processes that would lead to or from one thing or another.

The other point, related, is the implicit invocation of a consensus among 'economists'. It's related because it is unambiguously true that the majority of economists evaluate things in a particular way - the subjective part is a collective subjectivity rather than a diversity of opinion. Why is that? Are economists molded into a particular normative stance that evaluates policies or outcomes in a particular way? A significant amount of work has been done on the question of which way the causality runs between studying economics and policy opinions: do economists dislike the gas tax holiday because they've studied economics or because people who dislike these kind of policies study economics?

The truth is that it's very easy to identify what 'good' and 'bad' economics are, because that label can be attached only to the logical, scientific chain of argument - the positive side - that draws the map from cause to effect. Of course we can argue about the validity of the links in the chain, test our assumptions, look to evidence, but the fact remains that 'bad' economics is that which fails to acknowledge the true effects of an action.

By contrast, the normative side cannot be labeled 'good' or 'bad', because it is only opinion. To argue against a normative stance is to argue against an opinion. This is why it is so dangerous for the 'Principles of Economics' to include value-loaded statements; this is why it is so dangerous to have a normative consensus among people who call themselves 'economists'. When that happens, we risk confusing the normative opinions of these people with a scientific conclusion; it is not.

If a politician was to ignore or lie about the tangible consequences of a policy, that is bad, in the sense of being misleading or untrue. However, if a politician acknowledges the best guess of the consequences, whether they argue for or against the policy is neither bad nor good. Economists would do well to remember that they are part of the second group, not the first. It is fine to point out misinformation, but to argue that 'economics tells us what to do here' is to assume that their opinion is good, which is a great sin of arrogance.

When one responds to the gas tax stuff with a line like (from Paul Krugman)

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory...

I'm sure they are really pointing out the tangible consequences of the policy, but the line between the positive and the normative is fuzzed, the value-free analysis becomes loaded with subjectivity. The two must be separated.

Searching for a schism

Word reaches my desk this afternoon of an interesting-looking new book on the horizon, called "The Foundations of Positive and Normative Economics", an essay collection edited by Andrew Caplin (of the monkey brains) and Andrew Schotter. Details are a bit sketchy, but the idea is just fine with me. I have a high tolerance for this kind of thing, and hopefully it lives up to my expectations.

On that note, I hope for something a bit different to the endorsement quotes on the book's rather empty webpage:

"Are you puzzled by the implications of behavioral economics? Are we in the throes of a paradigm shift? Is neoclassical economics refuted? Economic methodology has never been more disputed. If you want to be part of the debate, this book is the place to start."--Ken Binmore, University College London

I still don't see this distinction between 'behavioral economics' and 'neoclassical economics', to be honest (see here, for example). Why is a different model of people an abandonment of neoclassical economics? 'People maximize stuff' is my minimalist description of neoclassical economics, and the behavioral set is just trying to figure out what the stuff is. Again (again, again), since it's not possible to test rationality, the 'maximize' bit just has to float out there unattached.

I don't really get this one either:

"Should economics take account of neuro-physiological data? Can subjective states of mind play a useful role in economic analysis? These and other provocative questions are examined and debated in this fascinating volume of essays from some of the deepest thinkers in contemporary economics."--Eric Maskin, Nobel Laureate in Economics, Institute for Advanced Study

Maybe I'm behind the curve on this one, but I'm not sure what that really means. It gives the impression that this book might be predominantly concerned with the implications of psychological and neurological research, but to me all that is really something different from the epistemological question of what positive and normative economics are doing for us, where they came from and where they're going. The state-of-the-art in economic theory or modeling is one thing, but I hope the book tackles the big questions rather than obsessing about the value of behavioral evidence.

I disagree fundamentally that "economic methodology has never been more disputed", hence the futility of chipping away at the tiny and ultimately boring debates at the root of modern research. The assumptions, the beliefs can surely differ, but I think the approach is set on some fundamental level. Superficial differences in approach do not go down very far: yes, a 'behavioral economist' might be searching for realism by figuring out how people act, and an 'empirical economist' is running regressions on cleverly constructed data, a 'theorist' is off in the land of abstraction and algebra, but all are operating on the same field of positive economic science. The real question is how we got to be that way, not why some economists do one thing and some another. That's the question of the foundations of positive and normative economics.

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.

Relevance

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.

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.

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.

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.

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.

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.

Objectives:

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.

Psychologists are evil

This is just an outstanding quotation, from a New York Times article:

"Often introducing money into the exchange — putting it into the marketplace — is what people find repugnant. Mr. Bloom asserted that money is a relatively new invention in human existence and therefore "unnatural."

Economists are asking the wrong question, Mr. Bloom said at the panel. They assume that "everything is subject to market pricing unless proven otherwise."

"The problem is not that economists are unreasonable people, it’s that they’re evil people," he said. "They work in a different moral universe. The burden of proof is on someone who wants to include" a transaction in the marketplace. (Mr. Roth, who acknowledges that "economists see very few tradeoffs as completely taboo," did not take the criticism personally.)"

Sadly, it seems that Bloom was kidding. Isn't it nice that "economists are evil" is a statement that can be mistaken for seriousness, but "psychologists are evil" is so clearly ridiculous?

How can economists plausibly evil, but psychologists cannot? I think the idea that economists "assume that “everything is subject to market pricing unless proven otherwise.”" is wrong. It's a common criticism: economists reduce everything to dollars and cents, trying to measure the value of stuff that's invaluable (the article is talking about how "repugnance" affects trade, using the example of selling organs).

As the social science of the allocation of scarce resources, how could economics operate without trying to figure out some concept of the value of something to someone? I think environmentalists have long despised economists for this reason. Say we're talking about a scarce natural resource, a rain forest for example. Again, positive economic science cannot possibly hope to tell us what the "best" use of this resource is, but it can hope to tell us the consequences of each use. Unfortunately, it's clearly easier to measure, say, the value of this resource to the logger and grazer who seek to use it today than it is to measure the value to humanity of preserving the forest.

Similarly, it's easier to measure the willingness to pay for an organ by a terminally ill individual, and to measure the willingness of another individual to give up an organ, than it is to measure the potential consequences of allowing the sale of organs. The question at hand is: do we do what we can, even given this imbalance, or does the imbalance justify making no valuation, even the ones that are possible? Is attempting to value anything an assumption that "everything is subject to market pricing"?

Trying to understand more about the consequences of a particular allocation of resources is not the same as either propagandizing for that allocation or method of allocation, that is, markets. Even in jest, the charge that we "operate in a different moral universe" is a serious one. It actually makes me very sad, because I'm very familiar with the particular problem of introducing myself as an economist: it alienates a decent percentage of people you meet. ("I'm an economist, but I'm not evil, honest".) Economists are evil, or at least morally bankrupt, to some people. I wish that wasn't the case.

It's understandable. Let's take the ideal world where all positive economics is done scientifically and without normative judgment. Is it surprising that value-neutral economic science seems evil, while value-neutral physics, or chemistry, or psychology, seems like the noble pursuit of knowledge? The Methodology of Positive Economics by Friedman is, again, eloquent on this subject:

"The subject matter of economics is regarded by almost everyone as vitally important to himself and within the range of his own experience and competence; it is the source of continuous and extensive controversy and the occasion for frequent legislation. Self-proclaimed "experts" speak with many voices and can hardly all be regarded as disinterested; in any event, on questions that matter so much, “expert” opinion could hardly be accepted solely on faith even if the "experts" were nearly unanimous and clearly disinterested. The conclusions of positive economics seem to be, and are, immediately relevant to important normative problems, to questions of what ought to be done and how any given goal can be attained. Laymen and experts alike are inevitably tempted to shape positive conclusions to fit strongly held normative preconceptions and to reject positive conclusions if their normative implications - or what are said to be their normative implications - are unpalatable."

It's not just confusion between positive and normative economics, between the practice of the science and its interpretation, it's the very attempt to be value-neutral, to be agnostic, that makes economics seem evil. This is all the more true if, as Friedman is arguing, that there's temptation to attach value judgment to positive economics. If there's any hope of us shedding the "evil" tag, this is a temptation that all economists must resist and fight.

Getting what you want: when should politics invoke economics?

The health policy exchange during the Democratic debate on Thursday shows exactly where economics should fit into policy, and politics. I'm not in the business of policy analysis, so instead let's ask how an economist could help Senator Clinton achieve the goal she stated in the debate:

"But if you don't start by saying you're going to achieve universal health care, you will be nibbled to death."

As I said before, I think there are two places for positive economics in the formulation of policy. One is when we ask "what will happen if we do this?", and the second is when we ask the question Hillary's statement invites: "how can I achieve that?". America is no technocracy, so there's no way positive economics can tell us what to do; that question is for every person and every candidate to decide.

This doesn't just apply to questions within the rules of the game. If we take the biggest possible economic question, "how should our resources be allocated?", it's still the case that positive economic science cannot tell us, for example, which of capitalist markets, socialist planning, or making decisions by rolling dice is "best". It's not even difficult - it's impossible. The furthest positive economics can go is to say that if you want to achieve some particular objective then one of the systems might be the most successful, but that obviously relies on the purely subjective notion of what you want.

Even when our questions get more specific - for example, not "how should our resources be allocated?" but "what should we do about health care?" - exactly the same principle applies. So, with that in mind, Senator Clinton has taken the subjective position in support of "universal health care". Let's take a look at the second part of the quotation from the debate:

"But if you don't start by saying you're going to achieve universal health care, you will be nibbled to death."

The argument there is that if you don't define your normative goal well enough, even getting close to it becomes more difficult, which is probably true. Even more fundamentally, it's impossible for a politician to be "wrong" when taking a normative position. Like I said, I won't try a policy analysis asking whether Clinton's policies will really achieve her goal, and I make no judgment on that question.

With that in mind: unfortunately, actual policy has to be made to try to achieve the normative goal. If there's significant doubt that the policy will lead to the outcome stated in the goal, then the politician is misguided or, worse, lying. Political campaigns sometimes seem to promote either depressive pronouncements of how we're all going down in flames, or their ideological counterpart, the Utopian "I can make it all better", neither of which have much in common with the real goals of the candidate. Realism doesn't often sell well, but noble aims without realism run dangerously close to fraud.

To put this in a real context, even if I don't care about your immigration policy, I care about whether or not you are honest in presenting it. Again, positive economics can't say whether you should close the borders; it can (perhaps) describe some of the likely consequences of doing so, and to convince me that your plan to close the borders is sensible you must convince me that, on balance, the many dimensions (moral, financial, political) of the problem favor your plan. If, in doing so, you fail to acknowledge or deny the consequences your argument is immediately bankrupt. That doesn't only apply to whatever consequences economic science can help us figure out - it applies to everything.

Even though I believe that economics can be a tool for analyzing more than just financial consequences, it would be wrong to claim that economic science can tell us everything we need to do. If it could, we might as well just cede to a technocracy. What we can do is help set out the means to your chosen end (as in the example of achieving universal health care), or describe the consequences of your policy (as in the example of closing the borders). To argue that other things matter more than what economic science tells us is defensible; to lie about what economic science tells us is wrong.

Arguing in economics: the gray area

Despite being interested in figuring out exactly what economics is, really, I have to confess that I don't really care about the common question "is economics a science?". Trying to answer it seems to tie people in knots, and I don't think the question by itself is very important. However, I just found a nice article on the subject which set me thinking.

My economics education was very essay-centric, and, perhaps paradoxically, I think was a good means to understanding what it takes to be "scientific" in a social science. A good essay has to contain more than raw emotion, but similarly should not avoid interpretation. It's equally difficult to argue using facts alone as it is to argue without them.

Is "good economics" the same? A theorem or result is, by nature, empty in itself - it's just a logical chain from start to finish. With the right starting point, you can "prove" anything; with an unproveable starting point, you're really in business. However, for the result to matter, it has to be put in context. What does it mean? Maybe it's semantics, but the search for meaning - the interpretation - is the birth of a normative judgment, still value-free but certainly pushing that label as far as it can go, before the true normative judgments of what we want are made.

The separation of the "scientific method" of economics and the use of its results must be sacred. The former, done from a position of honesty, can never be "wrong", since it's just logic. Why, then, must we introduce interpretation at all? The best reason to do so is the problem of "underdetermination", the idea, captured in the Friedman quotation I mentioned in a previous post, that if there exists another theory at least as consistent with the evidence, our theory is "underdetermined": all, perhaps, related to the problem of the unproveable starting point.

The underdetermination issue is, I think, especially relevant to theories which rely on behavioral assumptions, given that we know that humans are (sometimes) capable of being pretty nuanced in their behavior. Whether or not any scientific theory can be airtight is up for debate; in economics, I am convinced that no theory can be airtight. That's not to say we can't be nice empiricists and check predictions against evidence like scientists do, but it is to say that the alternative, consistent theories must be addressed before we can cross the line from positive science to normative policy. I have to show that my theory can be right, but also argue that mine is the most right, especially if I want to take my theory from the sterile, all else equal, scientific vacuum into inference about the real world.

Just like a debater or an essay writer, any position I occupy can be attacked, and defense is the only response that will preserve that positive, scientific position. If we can prove anything, if any hypothesis is underdetermined, then whether or not economics can be called a science, the scientific method alone won't be enough. Somewhere between that scientific method and the politicking of normative selection lies that subtle gray area which all of our correct, consistent theories must cross. There we must decide what we want to use them for, and how they should be received; the "useful" ones must be the only ones allowed to survive.

Who was Pareto anyway?

Students of economics will hear about "Pareto efficiency" very early in Econ 101. It's a tool to compare outcomes. Sadly, poor Pareto now has his name attached to a disastrously misunderstood concept - Pareto efficiency is everywhere used and frequently abused.

From a biography of the man himself, Vilfredo Pareto:

"Like Irving Fisher (1892), Pareto stumbled on the idea that cardinal utility could be dispensed with. Preferences were the primitive datum, and utility a mere representation of preference-ordering. With this, Pareto not only inaugurated modern microeconomics, but he also demolished the "unholy alliance" of economics and utilitarianism. In its stead, he introduced the notion of Pareto-optimality, the idea that a society is enjoying maximum ophelimity when no one can be made better off without making someone else worse off."

Two reasons to be cheerful: apart from featuring the excellent word "ophelimity" (n., economic satisfaction), this could not be clearer on the definition of Pareto optimality (now synonymous with Pareto efficiency). A situation is Pareto optimal if no one can be made better off without making someone else worse off.

Why, then, is this type of statement easily the most common mistake in economics (not intended to pick on the source, which is certainly not unique):

"There is no connection between Pareto efficiency and equity! In particular, a Pareto efficient outcome may be very inequitable. For example, the outcome in which I have all the goods in the world is Pareto efficient (since there is no way to make someone better off without making me worse off)." [Emphasis mine]

To get the cheapest criticism out of the way first, saying "there is no connection between Pareto efficiency and equity" is a bit like saying "there is no connection between Pareto efficiency and the color of my shoes"; why should there be? It's just a definition. It is, or it isn't. The criticism that's actually important is that the bit in bold is a logical falsehood.

The true statement would be "the outcome in which I have all the goods in the world can be Pareto efficient". In fact, equally true: "outcome _____ can be Pareto efficient". Why? The missing link is that Pareto efficient is, inherently, a concept built on utility. The "better off" part implies that our test of Pareto efficiency centers on the relative satisfaction enjoyed under alternative outcomes. This is, again, not the same as the relative levels of income, consumption or stuff enjoyed under alternative outcomes.

A simple proof by contradiction: I have all the goods in the world. I am also ascetic and thus get more satisfaction from having less goods. You always like more goods. The outcome in which I have all the goods in the world is Pareto inefficient.

Simple, no? Again, it's a case of confusing utility with goods or money, a case that would probably have irritated Pareto himself. The hidden assumption in the mistake quotation is the assumption on what the preferences of the person with all the goods are. We can imagine many ways in which that person's preferences would result in the falsehood of the assertion of Pareto optimality, yet we are anyway confronted with this manifestation of the prejudice that the concepts used by economists to compare outcomes are evil manifestations of an imagined money-centric, capitalist doctrine.

So is Pareto efficiency a normatively loaded term? Is the concept of Pareto efficiency part of positive economics or normative economics? Those who would argue that the boundary between the two is fuzzy frequently point to the Pareto efficiency tool as evidence. It's a concept that is, however, firmly positive, at least up to the scale of the interpretation of language. It either is raining, or it isn't. An outcome either is Pareto efficient, or it isn't. This cannot be a normative statement.

Perhaps the problem arises because, like all concepts that rely on assessing utility or satisfaction, Pareto efficiency might be inherently untestable. Unless it's actually possible to know or deduce preferences, we can't make physically true statements about Pareto efficiency or the like; the best we can do is to say "if these people have these preferences, this outcome is or is not Pareto efficient". To do better than conditional truth we somehow have to know preferences, and whether that's possible is, to me, a huge open question. Pareto efficiency might then seem normatively loaded because the assumption on what preferences people hold is folded into the statement of Pareto efficiency, as in the mistake above that omitted "if people only care about their own material possessions".

The irony is that Pareto, the man, for whom "Preferences were the primitive datum, and utility a mere representation of preference-ordering", might perhaps be the first to object to the misuse of his most famous concept.

Is John McCain an economist?

I think John McCain's being a little too hard on himself:

"They are complicated," McCain said of economic issues, "and I freely admit I am not an economist."

It probably depends on whether he's thinking of economics or economic policy. Senator McCain also says:

"But I know there are some people who have literally immersed themselves on issues of economics, how Congress works on it, the tax code, that sort of thing. I would look for that kind of talent not in a vice president but in close advisers."

What economist doesn't like the sound of that? However, studying or doing research in economics is very different from formulating economic policy.

"Economic policy" is simply policy that influences the way we organize our use of resources, and I think Senator McCain is probably a lot better at it than he gives himself credit for.

If Senator McCain asks his advisers "What would happen if I did this?", we need to figure out the chain of causes and effects that trickle through the whole country's decisions and their response to the proposed change in policy. If he asks "How can I achieve that?", we need to do the same thing backwards to somehow ask if there's any action the policymaker can take to alter the end product. These are positive economics questions: what's going to happen? I think this is what McCain might be worried about answering.

Deciding what policy is best is where it gets tricky; we have to somehow compare countless options, many of which have outcomes which aren't even certain. Then we have to deal with the familiar problem of measuring the satisfaction of the people, at least notionally, if we're to make any headway in choosing the "best" policy. These are normative economics questions, and I think John McCain is just as qualified as anyone to answer these.

In the ideal world where our policymaker - or anyone - has figured out or been appraised of the true and full consequences of a policy, it's out of the hands of "science" and becomes all about a value judgment. In a democratic society, who better than our elected representatives to make the value judgment on behalf of his constituents?

Being a normative economist is easy: all you need is an opinion. How informed that opinion is relies on the honest work of true positive economists. The study of economics should never confuse the two. The perception of economics might be inescapably tied to capitalism, but economics is not about promoting one system of organizing our resources over another. It's about figuring out what the consequences of the system would be (positive), seeking a means to compare them (normative) and then asking "what do you want?".

Of course, it is election season. Maybe McCain, normative economist of the people, is just trying to distance himself from economists - it makes him more likeable, I imagine...