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.

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"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."

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

6 comments:

Kelsey said...

(rolling eyes). A truly appropriate response. I would expect nothing less from an economist. You may remain ODI #2.

re: #5 - Does that mean if I jump off a bridge you will as well. It could just be the most rational and reasonable thing I do all day.

re: #6 - Two words. Jeffrey Sachs / Shock Therapy. Ok, so that's actually four words but we all know I can't count.

Lee said...

Well we all know Jeffrey Sachs is an idiot, that goes without saying...

Michael Kevane said...

Lee,
As an economist, and also founder of Friends of African Village libraries, and someone who used to know Marcel when he was at Stanford, I have to disagree with both you and Marcel. I think you both underestimate the extent to which economics as an academic discipline is fast-merging with psychology, sociology, marketing and political science, to understand that very much of human behavior depends on how choices are framed, i.e. the social contexts of choices. That is, one of the fundamental axioms of much a "rational actor" economics and game theory is that of independence of irrelevant alternatives, but it turns out this is routinely violated everywhere one looks in ordinary behavior. And it it ordinary "undeliberative" behavior that matters, not repeated simple deliberatively calculative decision-making. For example, in the decisions to have children, which take place slowly over time, 2-3 times per human, and are "undeliberative" (we don't sit down and write lists of pros and cons and assign values to them and discount the future values and argue about what discount rate to use, nor ponder how to best raise a child for maximum return to us or even itself). So does anyone really believe that anything like "rationality" is the only way to address the issue? Of course, it is a powerful and useful way, but why stop at explaining 20% of the variation, as if that was good enough? e.g., Becker says toasters lead to increased women;s formal labor supply and less housework. Sure thing, dude. But there is no reason to think that parallel shift in people's preferences, or a different framing of the choices of staying at home versus being in the work force, was not also important (maybe even toaster-magnitude ;-)

So it's time to agree that the rational actor model was a great ride, and as a discipline we figured out how to teach it extremely effectively to undergraduates, and we even get undergraduates to understand it, at least for a few months, and as a discipline we helped to transform other disciplines so that they too take it as the "starting place" when inquiring about some social phenomenon, but the time is long past when we can think of it as the ending point of social inquiry.

PS Your blog is great.

Michael

Simon said...

I think economists are sometimes more honest than some people would like on uncomfortable truths. For example, what if it really is true that if you make it difficult to fire people then firms employ fewer people and employment is lower? In other words, there is a positive relationship between job security and unemployment.

Lots of people find that uncomfortable - I am speaking as a result of a recent conversation in which my conversant just could not accept that this should ever, ever be the case.

That is not to say that this is always the case, and economists are in the forefront of criticising their own theories - e.g. finding examples when there might actually be a negative relationship between job security and unemployment.

But we accept that sometimes at least, we have to make difficult choices. Tough for some to realise that whatever their opinion there are losers and the losers might not always be evil rich people.

An easier option is to ignore the difficult trade-offs in life in case you start to feel like a bad person and criticise those who realise the difficult trade-offs exist. I prefer the honesty of economists myself (but then, I am an evil economist myself).

Anonymous said...

“Point #6” takes two equally irritating forms in my experience.
1)Overlooking or quickly dismissing obvious social/political/cultural factors that render the novel economic experiment practically irrelevant. Such as in the case of the World Bank economists who give lip-service to the impact of politics & political meddling on the efficacy of decentralization programs in a recent paper on these programs in 6 countries.

My summary of their summary … “this hasn’t worked in any way that could reasonably be described as successful in any of the countries studied due to massive political interference at every level of government. However it is our conclusion that if these (corrupt, undemocratic) governments just followed our recommendations exactly as prescribed in our peer-reviewed academic paper and stopped letting politics interfere this decentralization thing would work like a charm.”

This willingness to overlook major deal-breaking barriers to the success of development experiments is irritating to me, but potentially damaging to the countries they are inflicted upon. The opportunity cost of the resources committed to these endeavors is massive.

2)Applying western cultural norms to rational actor/self-interest theories. Again, to beat up on the World Bank a little. Since the “massive success” of the Progresa cash transfer scheme in Mexico there has been a proliferation of similar studies. I am not saying these programs don’t/can’t work. I am saying there are certain areas where this sort of program should be disregarded prima facie because it is so obviously inappropriate, such as HIV/AIDS in east & southern Africa. For example I was recently speaking with an economist about a study of “incentivized STI prevention” (basically paying people to not get STI’s/AIDS). The economist suggested that for a small cash reward in the future people will change/limit their risky sexual behavior. This is stupid. First because it assumes that a small cash reward will impact sexual risk behavior in a meaningful way. Second, it ignores the heavy discount people (in this little corner of Africa) put on the future in general and especially on this already insubstantial cash reward (this attitude of discounting the future is borne out in attitudinal surveys).

Maybe this isn’t the best case to make my point because I think this would be a stupid idea in a western country where people tend to discount the future less. However the absurdity of the idea is certainly compounded by the local attitudes regarding sexuality, fatalism, and the future.

If an honest, transparent, apolitical bureaucracy is requisite for decentralization programs to work in Ethiopia let’s stop wasting resources by pretending that Ethiopia is any of these things. If you are planning an economic experiment regarding something as culturally nuanced as sex, spend a little time learning about local attitudes towards sex. In both of these cases an honest assessment of local social/political/cultural conditions and a good dose of common sense could have saved a ton of time, work and money.

Roving Bandit said...

Point 6 is a fault of bad economists not all economists. Any economist worth their salt should know political economy and be thinking about political economy.

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