One very important concept in economics is 'goods'. They're one of the most fundamental building blocks of the tangible side of economics. If economics is about resource allocation, 'goods' are what the resources are being allocated towards. What is a 'good'?
It's not quite so simple as just a thing, like a TV or a sandwich; 'goods' are anything - any thing - that one can allocate resources towards that contains value for that allocator (rather confusingly, 'services' are 'goods' too, by this definition; so is something like 'charitable contributions'). Yes, we're going to have to plunge into the pool of abstraction. First of all, we have to think about time and space: is a hot coffee in the morning in winter in New England the same as a hot coffee in the afternoon at a swim-up bar in the summer in the Caribbean? Doubtful.
We have two broad strategies, as economists, for dealing with that problem. One might be to say, well, people have different preferences at different places, at different times. That's difficult to work with because we have to try and hit a moving target, so to speak, and since we can't know preferences for sure anyway we sure can't know changes in them either. A second might be to say, those two coffees are different goods. That's also difficult to work with because then it's difficult to compare things at all.
In fact, in either case it will be very difficult to generalize. On the individual level, knowing how you allocated your resources in this situation at that time doesn't help me describe what you did or predict what you'll do in the future: if I see what you did at 11a.m. on Thursday when faced with the decision of coffee versus tea, how can that help me figure out what you might do at 10a.m. on Friday when faced with the same decision. These aren't necessarily the same 'goods' at both times, and in any case, the difference might not just be the time or something else that I can measure; it might be your mood or whether you're especially tired or just feel like a nice cup of tea for some mystical reason.
Seems trivial, but raise that to the level of the market for coffee, or the global coffee industry, or the impact of consumer decisions on the American economy, and the difficulty of defining a 'good' has snowballed into modeling chaos. For example, it's impossible to properly think about the current climate in the market for oil without thinking of the market for oil in the future. Of course, in the real world, the financial world, it's well understood that things vary in space and time: that's why we have things like futures markets, which let you buy 'thing X at time Y' (which is just a special case of 'good X now', really). These things are considered separate (though connected) markets, with separate prices.
And that's just how they were treated by economists as we developed microeconomics. The definition of a good was allowed to be very, very flexible and abstract, so that these 'things' don't just vary in physicality but in time, space, functionality, and so on and so forth.
It's not just time and space, though. An example: think of a college education. Is the good being sold by universities a 'college education'? Is it a 'degree from college X'? Is it a 'college education of quality Y from college X'? The signaling model by Michael Spence wondered (and I obviously paraphrase wildly) if people would still pay for a college education if it the education was intrinsically worthless but had the value of 'signaling' that you were willing to give up four years to prove that you were great.
Should it be surprising that the cost of a college education has been rising despite there being a bigger supply of colleges? Maybe not, if our definition of the 'good' includes 'quality', perceived or actual; it's easy to build a new college, but impossible to build a new college with a reputation to rival Oxbridge or the Ivy League. The supply of that good, whatever it is, is fairly well fixed. Econ 101 is obsessed with 'supply and demand' analysis; the fact is, supply and demand analysis takes you very, very far if you're prepared to speculate properly on what a 'good' is.
This is all quite similar to the corporate strategy mantra of identifying your 'core competencies' and defining the industry. For example: railroads and train companies aren't 'the railroad industry', but 'the transport industry', competing with airlines and buses, and maybe even 'the food industry' if they serve food, etc etc. That leads us dangerously close to the kind of 'provider of transport services' corporate-speak euphemisms that plague so many firms, but it's pretty much the same question as how to define a good in economics.
Wednesday, July 16, 2008
Monday, July 7, 2008
Game theory often looks silly
From Tim Harford's blog:
"Game theorists know all about the centipede game:
One instance of the centipede game is as follows. A pile of $4 and a pile of $1 are lying on a table. Player I has two options, either to “stop” or to “continue.” If he stops, the game ends and he gets $4 while Player II gets the remaining dollar. If he continues, the two piles are doubled, to $8 and $2, and Player II is faced with a similar decision: either to take the larger pile ($8), thus ending the game and leaving the smaller pile ($2) for Player I, or to let the piles double again and let Player I decide. The game continues for at most six periods. If by then neither of the players have stopped, Player I gets $256 and Player II gets $64. Figure 1 depicts this situation. Although this game offers both players a very profitable opportunity, all standard game theoretic solution concepts predict that Player I will stop at the first opportunity, getting just $4.
Except, nobody really thinks this is the way players would behave in reality. The optimal strategy seems sociopathic; isn’t it worth playing cooperatively in the hope that the other player will do the same thing? (Unlike much real human interaction, standard game theory does not accomodate the “hope” that someone else will play suboptimally: optimal play is to be expected at all times. )"
Game theory is very clever and very useful, but often seems very naive. When it's used in economics, it's arguably the part of economics most hamstrung by the scattershot application of the "money=utility" fallacy. If you want your game theoretic result to be predictive or descriptively powerful, you must (must must) try really hard to make the payoffs reasonably accurate; in Harford's quoted example the assumption is that the players care only about cash and that, as Harford says, they aren't willing to take a shot on the other player prolonging the game. At the risk of being tautologically critical: can you read the setup of that game and not entertain the idea of waiting? I remember being taught the centipede game in David Myatt's excellent game theory course as an undergrad; he showed us the 'crazy centipede' variant, which wondered exactly that: what chance of you choosing to continue the game is enough to make me also want to continue?
The kicker to me is that 'game theoretic predictions' are overwhelmingly often not as successful for the players as alternative strategies, even when we're just measuring 'success' in the same cash-payoff terms as the theory. This is just what Harford goes on to describe:
But Ignacio Palacios-Huerta (best known to Undercover Economist readers as discovering that strikers and goalkeepers play optimal strategies in penalty-taking) and Oscar Volij gave the centipede game to skilled chess players. They found that the chess players were far more likely to play optimally; grandmasters always played optimally and took the $4. Hyper-rationality can be a disadvantage. (Or did the experiment discover something else: that chess grandmasters are sociopaths?) Palacios-Huerta and Volij don’t speculate. My guess is that they have discovered something about the rationality rather than morality or empathy of chess players, but I may be wrong.
It really does just beg for the 'behavioral economics' explosion: if predictions aren't great, and in any case are less profitable than reality, we're up the creek without a paddle or a boat.
"Game theorists know all about the centipede game:
One instance of the centipede game is as follows. A pile of $4 and a pile of $1 are lying on a table. Player I has two options, either to “stop” or to “continue.” If he stops, the game ends and he gets $4 while Player II gets the remaining dollar. If he continues, the two piles are doubled, to $8 and $2, and Player II is faced with a similar decision: either to take the larger pile ($8), thus ending the game and leaving the smaller pile ($2) for Player I, or to let the piles double again and let Player I decide. The game continues for at most six periods. If by then neither of the players have stopped, Player I gets $256 and Player II gets $64. Figure 1 depicts this situation. Although this game offers both players a very profitable opportunity, all standard game theoretic solution concepts predict that Player I will stop at the first opportunity, getting just $4.
Except, nobody really thinks this is the way players would behave in reality. The optimal strategy seems sociopathic; isn’t it worth playing cooperatively in the hope that the other player will do the same thing? (Unlike much real human interaction, standard game theory does not accomodate the “hope” that someone else will play suboptimally: optimal play is to be expected at all times. )"
Game theory is very clever and very useful, but often seems very naive. When it's used in economics, it's arguably the part of economics most hamstrung by the scattershot application of the "money=utility" fallacy. If you want your game theoretic result to be predictive or descriptively powerful, you must (must must) try really hard to make the payoffs reasonably accurate; in Harford's quoted example the assumption is that the players care only about cash and that, as Harford says, they aren't willing to take a shot on the other player prolonging the game. At the risk of being tautologically critical: can you read the setup of that game and not entertain the idea of waiting? I remember being taught the centipede game in David Myatt's excellent game theory course as an undergrad; he showed us the 'crazy centipede' variant, which wondered exactly that: what chance of you choosing to continue the game is enough to make me also want to continue?
The kicker to me is that 'game theoretic predictions' are overwhelmingly often not as successful for the players as alternative strategies, even when we're just measuring 'success' in the same cash-payoff terms as the theory. This is just what Harford goes on to describe:
But Ignacio Palacios-Huerta (best known to Undercover Economist readers as discovering that strikers and goalkeepers play optimal strategies in penalty-taking) and Oscar Volij gave the centipede game to skilled chess players. They found that the chess players were far more likely to play optimally; grandmasters always played optimally and took the $4. Hyper-rationality can be a disadvantage. (Or did the experiment discover something else: that chess grandmasters are sociopaths?) Palacios-Huerta and Volij don’t speculate. My guess is that they have discovered something about the rationality rather than morality or empathy of chess players, but I may be wrong.
It really does just beg for the 'behavioral economics' explosion: if predictions aren't great, and in any case are less profitable than reality, we're up the creek without a paddle or a boat.
Friday, July 4, 2008
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.
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.
Monday, June 30, 2008
Cash and sports
Short interlude for some sports today, spurred only by the fact that this article by Gene Wojciechowski at ESPN was rather delightfully titled "The economics of insanity" by my iGoogle newsbar; sadly it didn't carry over into the article, but still some food for thought. The issue at hand is rookie contracts in the NFL:
"NFL commissioner Roger Goodell said it's "ridiculous" to reward untested rookies with lucrative contracts, and wants the issue addressed in contract talks."
I'm tempted to point out that no-one's forcing teams to enter into these contracts, but then I'm not completely sure what the rules are about draft picks going unsigned. In any case, the negotiated salary cap rules determine the total pot available to pay rookies, right? Either way, it's just more evidence in favor of the old truism that American sports are more socialist than their capitalist European counterparts: try this or this for some of the arguments.
It's staggering how exactly the analogy holds, precisely opposite to the stereotypes of American and European rules for resource allocation. American sports are organized to give every team a fighting chance of winning within a few years, with the help of active intervention in the form the draft and salary caps and the guarantee that a terrible season is not punished the following year, while European sports are dog-eat-dog, pure capitalism. Maybe it's because of cross-country competition in Europe: it would be hard for Spain, say, to use American-sport policies to level the playing field without players jumping ship to Italy or England and without Spanish teams being destroyed on the field by the elite of other countries.
"NFL commissioner Roger Goodell said it's "ridiculous" to reward untested rookies with lucrative contracts, and wants the issue addressed in contract talks."
I'm tempted to point out that no-one's forcing teams to enter into these contracts, but then I'm not completely sure what the rules are about draft picks going unsigned. In any case, the negotiated salary cap rules determine the total pot available to pay rookies, right? Either way, it's just more evidence in favor of the old truism that American sports are more socialist than their capitalist European counterparts: try this or this for some of the arguments.
It's staggering how exactly the analogy holds, precisely opposite to the stereotypes of American and European rules for resource allocation. American sports are organized to give every team a fighting chance of winning within a few years, with the help of active intervention in the form the draft and salary caps and the guarantee that a terrible season is not punished the following year, while European sports are dog-eat-dog, pure capitalism. Maybe it's because of cross-country competition in Europe: it would be hard for Spain, say, to use American-sport policies to level the playing field without players jumping ship to Italy or England and without Spanish teams being destroyed on the field by the elite of other countries.
Saturday, June 28, 2008
Happiness and behavioral stuff again
Via Arts & Letters Daily (again) comes a wonderful (and long) article by Alan Wolfe for the New Republic: "Hedonic Man, The new economics and the pursuit of happiness." There's far, far too much for me to discuss in suitable depth here, but, beyond recommending the article, let me pick out a couple of choice bits.
I wholeheartedly agree with Wolfe when he says:
"The social sciences are not just empirical; they are normative, too. It was precisely the insistent normative preference for market-based social arrangements that turned me against Chicago School economics. Governmental regulation is always sub-optimal, they inevitably maintained. Individual freedom is worth more than social equality. If market logic works for firms, surely it can work for recruiting an army, fighting poverty, or providing kidneys. Non-Chicago economists were subtler about these matters, and at times questioned the reliance on markets; but for the many sons and daughters of Milton Friedman, we are hard-wired to be rational choosers, and any efforts we make to direct the course of our actions collectively are bound to fail. Myself, I do not believe that any of these propositions bring us closer to a good society. Other people feel differently. Democracy requires that we argue out our differences. But democratic debate is not well served by pretending that the empirical findings of a single controversial approach in a single academic discipline contain definitive answers to these questions."
The presentation of economics as a discipline of study certainly does make it seem like we've magically cracked the nut of what is the 'best' way to organize a society, and, as I've argued before, that's not just dangerous, it's a misrepresentation of what good economic science is capable of. One reason why it's a misrepresentation is the measurement issue at work again: to say 'best', we need a metric, and to do that we need to ask what people want, to speculate on their motivations and desires. Of course, as misrepresentations go, it's a tempting one, because from day one of a Principles of Economics course it's made again and again and again.
Wolfe's article is built around the review of two books: Predictably Irrational by Dan Ariely (which I've talked about before, much to the author's chagrin, so I won't return to it now) and Happiness: A Revolution in Economics by Bruno Frey. 'Happiness', as discussed by Wolfe, is concerned with exactly that big question in normative social science, which is: what exactly constitutes a 'good' outcome? It's exactly that question that's the dangerous misunderstanding within economics, the dangerous belief that we know what's 'good'.
Wolfe talks at length about Daniel Kahneman and Amos Tversky, the pioneers of what has become 'behavioral economics', and I admit that I share Richard Thaler's reaction, as reported by Wolfe:
"When I read this paper," [Thaler] wrote of Kahneman and Tversky's classic article "Judgment Under Uncertainty," which appeared in 1974, "I could hardly contain myself."
He talks further about the supposed 'revolution' in economics to account for the kind of behavior documented by Kahneman and Tversky and the whole slew of experiments run by economists since:
"One has to wonder why the revolution in economics failed so badly even before it really got off the ground. Neoclassical economics may in some ways be preferable to what the revolutionaries offer, but it remains a vulnerable approach, stuck in unrealistic assumptions about human behavior and all too complacent about the beneficial equilibria established by markets. Nor can one deny the ingeniousness of the early days of economic psychology, especially the inventive puzzles that Kahneman and Tversky devised. If ever a field were ripe for revolution, it is economics. Yet if these two books are any indication, supply and demand, marginal utility, rational choice, and cost-benefit analysis are not going away. At best, economists will tweak their models a bit to account for some of our odder calculations. More likely, they will simply reiterate their belief that we need not examine the internal mechanisms of utility satisfaction because the price someone is willing to pay for something is really all we need to know."
Again, though, I offer this as the reason why the 'revolution' has 'failed': we simply can never say what motivates people, whether a person is "rational" or not. 'Neoclassical economics' does not restrict the range of assumptions one can make about human behavior. It is therefore completely resilient to any evidence on how people act in a given situation. That's not a defense of the approach, it's a fact. It's distressing, because my prejudice is definitely to agree that economics is 'complacent' about the superiority of markets (again, because we ignore the variety of normative metrics of comparison), and that there's too much arcana.
We need true normative debate. Look again at what Wolfe says about economics: "it remains a vulnerable approach, stuck in unrealistic assumptions about human behavior and all too complacent about the beneficial equilibria established by markets". It's a mistake to conflate this problem - the arrogant assumption that we know what's 'best' - with the neoclassical assumptions on human behavior, because, as I've argued repeatedly, the method of scientific economics doesn't actually assume anything about human behavior, as evidenced by the fact that the 'behavioral revolution' is comfortably within the confines of 'neoclassical economics'.
The real revolution would be quieter, and would say something much more familiar: keep your science separate from your opinion.
I wholeheartedly agree with Wolfe when he says:
"The social sciences are not just empirical; they are normative, too. It was precisely the insistent normative preference for market-based social arrangements that turned me against Chicago School economics. Governmental regulation is always sub-optimal, they inevitably maintained. Individual freedom is worth more than social equality. If market logic works for firms, surely it can work for recruiting an army, fighting poverty, or providing kidneys. Non-Chicago economists were subtler about these matters, and at times questioned the reliance on markets; but for the many sons and daughters of Milton Friedman, we are hard-wired to be rational choosers, and any efforts we make to direct the course of our actions collectively are bound to fail. Myself, I do not believe that any of these propositions bring us closer to a good society. Other people feel differently. Democracy requires that we argue out our differences. But democratic debate is not well served by pretending that the empirical findings of a single controversial approach in a single academic discipline contain definitive answers to these questions."
The presentation of economics as a discipline of study certainly does make it seem like we've magically cracked the nut of what is the 'best' way to organize a society, and, as I've argued before, that's not just dangerous, it's a misrepresentation of what good economic science is capable of. One reason why it's a misrepresentation is the measurement issue at work again: to say 'best', we need a metric, and to do that we need to ask what people want, to speculate on their motivations and desires. Of course, as misrepresentations go, it's a tempting one, because from day one of a Principles of Economics course it's made again and again and again.
Wolfe's article is built around the review of two books: Predictably Irrational by Dan Ariely (which I've talked about before, much to the author's chagrin, so I won't return to it now) and Happiness: A Revolution in Economics by Bruno Frey. 'Happiness', as discussed by Wolfe, is concerned with exactly that big question in normative social science, which is: what exactly constitutes a 'good' outcome? It's exactly that question that's the dangerous misunderstanding within economics, the dangerous belief that we know what's 'good'.
Wolfe talks at length about Daniel Kahneman and Amos Tversky, the pioneers of what has become 'behavioral economics', and I admit that I share Richard Thaler's reaction, as reported by Wolfe:
"When I read this paper," [Thaler] wrote of Kahneman and Tversky's classic article "Judgment Under Uncertainty," which appeared in 1974, "I could hardly contain myself."
He talks further about the supposed 'revolution' in economics to account for the kind of behavior documented by Kahneman and Tversky and the whole slew of experiments run by economists since:
"One has to wonder why the revolution in economics failed so badly even before it really got off the ground. Neoclassical economics may in some ways be preferable to what the revolutionaries offer, but it remains a vulnerable approach, stuck in unrealistic assumptions about human behavior and all too complacent about the beneficial equilibria established by markets. Nor can one deny the ingeniousness of the early days of economic psychology, especially the inventive puzzles that Kahneman and Tversky devised. If ever a field were ripe for revolution, it is economics. Yet if these two books are any indication, supply and demand, marginal utility, rational choice, and cost-benefit analysis are not going away. At best, economists will tweak their models a bit to account for some of our odder calculations. More likely, they will simply reiterate their belief that we need not examine the internal mechanisms of utility satisfaction because the price someone is willing to pay for something is really all we need to know."
Again, though, I offer this as the reason why the 'revolution' has 'failed': we simply can never say what motivates people, whether a person is "rational" or not. 'Neoclassical economics' does not restrict the range of assumptions one can make about human behavior. It is therefore completely resilient to any evidence on how people act in a given situation. That's not a defense of the approach, it's a fact. It's distressing, because my prejudice is definitely to agree that economics is 'complacent' about the superiority of markets (again, because we ignore the variety of normative metrics of comparison), and that there's too much arcana.
We need true normative debate. Look again at what Wolfe says about economics: "it remains a vulnerable approach, stuck in unrealistic assumptions about human behavior and all too complacent about the beneficial equilibria established by markets". It's a mistake to conflate this problem - the arrogant assumption that we know what's 'best' - with the neoclassical assumptions on human behavior, because, as I've argued repeatedly, the method of scientific economics doesn't actually assume anything about human behavior, as evidenced by the fact that the 'behavioral revolution' is comfortably within the confines of 'neoclassical economics'.
The real revolution would be quieter, and would say something much more familiar: keep your science separate from your opinion.
Monday, June 23, 2008
Happy happy joy joy
Via the wondrous fark.com comes 'How Rich People Spend Their Time' from the Washington Post - it's about an article in Science written by a battery of psychologist/economist types, including Daniel Kahneman. Very relevant to the question of what motivates people; my first instinct was to assume that it might reveal what people with the time to do what they want do with their time, if you see what I mean, and while the actual intention of the article is somewhat different it's still full of fun.
The original article is behind the Science subscriber wall, but via the wonders of institutional access, I can get access to metaphysical nuggets like this:
Schkade and Kahneman noted that, "Nothing in life is quite as important as you think it is while you are thinking about it."
Perhaps some intriguing fact about human nature; perhaps not. The article goes on to talk about some well-known results in the burgeoning 'happiness' literature, like the importance of relative rather than absolute income, and adaption to circumstances. I think a great article about this stuff, for the terminally interested, is Richard Layard's 'Happiness and Public Policy'.
But the thing that hooked me on this particular Science article is the following piece of weird:
"In a representative, nationwide sample, people with greater income tend to devote relatively more of their time to work, compulsory nonwork activities (such as shopping and childcare), and active leisure (such as exercise) and less of their time to passive leisure activities (such as watching TV)."
Let me get this straight: richer people work more and buy more stuff, and poor schmucks watch a lot of TV? Stop those presses. The point of the article is well-made (from the the title, 'would you be happier if you were richer', right on down), and that is to say that people with higher incomes aren't necessarily engaging in relatively more 'fun'; however, there are a bunch of unasked questions. Does 'TV'='fun'? Is this really evidence that the rich are wasting their time, or are there other reasons why they endure work to get money?
The happiness literature is desperate to find an answer to the question of whether money buys happiness; an eerie similarity to the oft-(mis?)perceived economists' equation of money with happiness when modeling people, and surely as deserving of the same retort: we know people care about more than money. The obvious question is, well, obvious. What does motivate people?
The original article is behind the Science subscriber wall, but via the wonders of institutional access, I can get access to metaphysical nuggets like this:
Schkade and Kahneman noted that, "Nothing in life is quite as important as you think it is while you are thinking about it."
Perhaps some intriguing fact about human nature; perhaps not. The article goes on to talk about some well-known results in the burgeoning 'happiness' literature, like the importance of relative rather than absolute income, and adaption to circumstances. I think a great article about this stuff, for the terminally interested, is Richard Layard's 'Happiness and Public Policy'.
But the thing that hooked me on this particular Science article is the following piece of weird:
"In a representative, nationwide sample, people with greater income tend to devote relatively more of their time to work, compulsory nonwork activities (such as shopping and childcare), and active leisure (such as exercise) and less of their time to passive leisure activities (such as watching TV)."
Let me get this straight: richer people work more and buy more stuff, and poor schmucks watch a lot of TV? Stop those presses. The point of the article is well-made (from the the title, 'would you be happier if you were richer', right on down), and that is to say that people with higher incomes aren't necessarily engaging in relatively more 'fun'; however, there are a bunch of unasked questions. Does 'TV'='fun'? Is this really evidence that the rich are wasting their time, or are there other reasons why they endure work to get money?
The happiness literature is desperate to find an answer to the question of whether money buys happiness; an eerie similarity to the oft-(mis?)perceived economists' equation of money with happiness when modeling people, and surely as deserving of the same retort: we know people care about more than money. The obvious question is, well, obvious. What does motivate people?
Monday, June 16, 2008
The arrogance of economics?
A while ago I mentioned the mysterious science of "welfare analysis". It tries to evaluate outcomes or predictions of economic analysis or modeling; the idea is to figure out whether x is "better" than y.
That's not an easy task; we have to figure out how we're going to measure things if we're going to compare them. Unfortunately, the only way to answer the question is to take a position on the motivations of the people who'd be affected by your policy. It's sometimes said that the noxious euphemism "thinking like an economist" means "taking all consequences into account"; leave aside for a moment the obvious point that that's not "thinking like an economist", it's "thinking properly", but rather let's figure out what "thinking like an economist" actually requires.
It often seems to require answering that question of "better", to require taking a position on how you're going to evaluate policies. It's more fundamental than assuming something about a utility function, or whatever it takes to perform welfare analysis, but rather seems to require an acceptance of those nefarious so-called "principles" of economics, an agreement with what constitutes a "better" outcome for society.
Then we're led into a world in which very few people who self-identify as "economists" profess support for any policy or means or resource allocation that lies outside the capitalism-with-some-government model that is the status quo. Is that because once a person has studied economics, it's obvious to them that this is "best"? Is it because it's impossible to succeed in the study of economics if you don't agree that it's "best", because you're turned off or ridiculed?
Economists run the risk of being seen as arrogant if we pretend to understand what a "better" outcome is. In the small this manifests as our faith in the cipher of "welfare analysis"; in the large it manifests as the homogeneity of belief and thought among economists.
That's not an easy task; we have to figure out how we're going to measure things if we're going to compare them. Unfortunately, the only way to answer the question is to take a position on the motivations of the people who'd be affected by your policy. It's sometimes said that the noxious euphemism "thinking like an economist" means "taking all consequences into account"; leave aside for a moment the obvious point that that's not "thinking like an economist", it's "thinking properly", but rather let's figure out what "thinking like an economist" actually requires.
It often seems to require answering that question of "better", to require taking a position on how you're going to evaluate policies. It's more fundamental than assuming something about a utility function, or whatever it takes to perform welfare analysis, but rather seems to require an acceptance of those nefarious so-called "principles" of economics, an agreement with what constitutes a "better" outcome for society.
Then we're led into a world in which very few people who self-identify as "economists" profess support for any policy or means or resource allocation that lies outside the capitalism-with-some-government model that is the status quo. Is that because once a person has studied economics, it's obvious to them that this is "best"? Is it because it's impossible to succeed in the study of economics if you don't agree that it's "best", because you're turned off or ridiculed?
Economists run the risk of being seen as arrogant if we pretend to understand what a "better" outcome is. In the small this manifests as our faith in the cipher of "welfare analysis"; in the large it manifests as the homogeneity of belief and thought among economists.
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