31 July 2009

Top 10 annoying things about people who complain about economists...

Alright Kelsey it's on.

#1 - That is because "The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else. (Lucas, 1988, On the Mechanics of Economic Development)

#2 - I might just give you this one. But then all jargon is boring, just sadly sometimes useful.

#3 - That's because they can, obviously.

#4 - Um, because they are, obviously (except maybe nuclear physicists or something).

#5 - And you don't enjoy annoying people?

#6 - Sorry - you lost me on this one...

#7 - Robert Shrimsley nails this: "So the question, your Majesty, is not why did we fail to predict the crunch but why did you all fail to incentivise us to predict it?" (thanks Tom)

#8 - Science is about creating and testing theories. That's what economists do. Therefore economics is a science. QED.

#9 - I'm afraid Truman beat you to this by about 50 years

#10 - This is the most important and misunderstood point. I was very much a rationality skeptic (I went to SOAS remember?) until Marcel Fafchamps swung me around. Below is his explanation of why economists believe in rationality, it's well worth a read. It convinced me.


"Economics as a science is based on two fundamental axioms:

1. People pursue their self-interest.
2. People act rationally.

These axioms obviously cannot be a complete description of human behavior. There are many instances where people selfessly seek to help others, their children for instance. There are also many instances where people are not rational, get angry, make mistakes, and the like. But they are certainly a better starting point for examining human interaction than assuming that people do NOT pursue their self-interest and do NOT think about the consequences of their actions.

The main reason why economists continue to base most of their thinking on these two axioms is probably due to Adam Smith. He remarked that, through market interaction, people's pursuing their self-interest results in the good of all. The cobbler makes shoes to earn money for food, and the farmer produces food to earn money for shoes, and in the end the work for each other without knowing it. The market keeps track of how much each has done for society by allocating money to each individual according to the level of their contribution to other people's welfare. To this day, this fundamental insight remains the foundation of economics as a science.

Another reason why economists maintain a fascination for models of the world that assume people to be selfish and rational is that policies based on such models are likely to be robust. We know, for instance, what happens to communists revolutions when they call upon individuals' revolutionary spirits to work hard for the good of society: it may work for a while, but the quality of the work suffers and a repressive apparatus is required to keep the system going. In contrast, the market works without coercion since everyone feels they are working in their own self-interest. We also know what happens to policies that rely on the irrational side of our nature: fear, envy, anger, lust. They often lead to wars and conflict and a lot of destruction in property. Eighteenth century philosophers who invented economics as a science were looking for a better way of organizing society that would rely on logic and science, not lies and superstition. Hence their desire to organize economics around human rationality.

Finally, economists often feel that what distinguishes human beings from, say, animals is their capacity for reasoning. You can fool some people some of the time but not all people all of the time. We may not always reason right, but given time, example for others, and sufficiently high stakes, we are all capable of figuring out how best achieve a particular outcome. Thus, although rationality may be violated in small ways everyday, it should hold in the large, that is, for large enough stakes and a long enough time frame. Rational people cannot be fooled and policies and mechanisms that assume people to be rational are both more robust (they will not collapse when people realize they are being fooled) and more intellectually and ethically satisfying. Again, this is very much an eighteenth century "enlightened" view of the world. It lives on in economic science.

This is not to say that economists never explore violations of these axioms. There is excellent work on altruism by economists, e.g., Becker. There is also excellent work on bounded rationality and various deviations from full rationality, such as time inconsistency, loss aversion, trembling hand equilibrium, etc. Economists have also managed to include practices such as addiction, crime, and mistakes in "rational" models by adding high impatience or high costs of computing rational outcomes. Though these efforts may not always be fully convincing, they indicate that the economic paradigm is alive and well. Explanations of human behavior that simply rely on self-interest and rationality are inherently more intellectually satisfying than explanations that call for people to either systematically act against their own welfare or be perpetually fooled."


If that didn't satisfy you I would also highly recommend Tim Harford's books, and A Very Short Introduction to Economics.


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