It’s not the economists, it’s the economics

November 1, 2010

There’s been some interesting discussion in response to my earlier post about why we expect too much from economists, although a lot of the comments miss my larger point. What I was trying to say is that economics might not entirely be up to the task of explaining what we generally consider to be economic phenomena because we are overconfident about what the discipline has the ability to account for. You might call this the Freakonomics Fallacy. Whatever it is in the world we are trying to explain—crime, climate change, test scores—economics has the answer.

If this isn’t in fact true, then why would we think it? Again, to underscore a part of my earlier argument that I probably didn’t make forcefully enough: we think economics has all the answers because economics has become our major mode of understanding the social world around us. Charities are social businesses. Policy makers are cost-benefit analyzers. Education is a market.

This has not always been the case. In earlier eras, we were often more likely to understand human behavior and social dynamics through other prisms, such as political science, sociology, psychology, anthropology or biology. Indeed, for better or for worse, many of these fields took a turn being the dominant social science. I’m not saying that one frame gives a more accurate or useful picture of the world than another. Just that each leads to a different way of understanding why things happen the way they do because each comes with its own set of assumptions and simplifications.

Now here is the part I didn’t talk about earlier. Using one frame over another may also lead to changes in perception and behavior. As economist Robert Frank once wrote, “Our beliefs about human nature help shape human nature itself.” I am indebted to Joe Magee for pointing me to this fantastic paper (PDF), which explains how the economic world view might be influencing us to act more in line with its assumptions—such as the primacy of self-interest in how people make decisions. The paper includes a number of great examples, including how the Chicago Board Options Exchange wound up conforming to option-pricing theory and why companies often think layoffs are the path to maximum value. Here’s a more trivial, although particularly salient, illustration that involves people playing the prisoner’s dilemma:

[The] game was called, in one instance, the Wall Street Game and, in the other, the Community Game. This simple priming using different language produced differences in participants’ choice of moves, as well as differences in the moves subjects anticipated from their counterparts. When the game was called the Community Game, “mutual cooperation was the rule. . .and mutual defection was the exception. . . . whereas the opposite was the case in the Wall St. Game” (Liberman et al., 2003: 15). Both participants and those that nominated them did not anticipate the extent to which this simple labeling or naming affected responses, and subjects’ responses to the situation were much more strongly predicted by the name of the situation than by the person’s presumed likelihood and reputation for being cooperative or defecting.

The same payoff matrix
and game was called, in one instance, the
Wall Street Game and, in the other, the Community
Game. This simple priming using different
language produced differences in participants’
choice of moves, as well as differences in the
moves subjects anticipated from their counterparts.
When the game was called the Community
Game, “mutual cooperation was the rule. . .
and mutual defection was the exception. . . .
whereas the opposite was the case in the Wall
St. Game” (Liberman et al., 2003: 15). Both participants
and those that nominated them did not
anticipate the extent to which this simple labeling
or naming affected responses, and subjects’
responses to the situation were much more
strongly predicted by the name of the situation
than by the person’s presumed likelihood and
reputation for being cooperative or defecting.

This is not an indictment of the economic world view, nor a way of complaining about how it has won out out above all others for all time (it hasn’t). Rather, this is simply a friendly reminder that we have all, to a large extent, adopted this world view as our own—and that has altered both the way we perceive problems, as well as the way we analyze and try to solve them. But this way of understanding  the world is, ultimately, only one of many. In certain circumstances it will fail. Economics cannot explain everything that comes our way. But sometimes we’re too enmeshed in economic thinking to see that.

14 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Well said. Economics, as a science, works best when it assumes that humanity is full of a bunch of fairly rational, utility-maximizing actors. And as a science, that model can be very revealing, erasing some of the troubling fuzziness of human behaviour.

But in that fuzziness is much of the richness of the human condition. People don’t always behave perfectly rationally, sometimes to their detriment. But also sometimes to their credit – in charitable giving, in social conduct, or in values that don’t easily express in the language of currency. To the extent that economic models treat these behaviors as frictions to be calculated, the profession is poorer for it.

Economics is a fine way to look at social transactions. It’s a nihilist way, though, to look at life.

Posted by strawman | Report as abusive

@strawman, economics is not a science. If it were, its behavior would be more understood, and models would actually work as expected. It’s at best an art.

Barbara, you say “we think economics has all the answers”. I think only economists think that. Nobody else really believes it, except when it says what they want to hear.

And don’t confuse economics with mathematics. Math explains lots of things, but economics uses math as a weapon.

Posted by OnTheTimes | Report as abusive

Highly insightful post, Barbara!

I fear that the country is sliding into attitudes of selfish entitlement rather than cooperative society-building. Those who have bought into the “Wall Street mentality” might disagree, or at least disagree that this is a bad thing. Was the “greed is good” speech meant in irony? Or supposed to be accepted at face value? (Personally I cannot accept the latter.)

Economics can perhaps suggest ways to manipulate selfish motives to better serve a population that believes in personal entitlement, but it doesn’t satisfy those who believe in a greater good.

Posted by TFF | Report as abusive

[...] It’s not the economists, it’s the [...]

Do a thought experiment – what are the similarities between economics and religion of 800 AD?
“Experts” who receive specialized training in cloistered institutions, mediate between the individual and the “higher” or “true” world, who have a doctrinaire explanation for everything.
Yup.
Oh, and not too grounded in reality.

Posted by fresnodan | Report as abusive

That’s an excellent insight, and one well worth remembering by all of us. It rather makes me wonder what will take its place as our world view when its limitations become accepted.

@OnTheTimes: I’m not sure that mathematics explains anything. It is a language for constructing unambiguous models of natural and behavioral phenomena. Some models are better than others, but none are exact across the entire range of observations.

Posted by Curmudgeon | Report as abusive

@Curmudgeon, If you break any explanation of how anything works to its most basic level, you will end up with a math problem. It is fair to dismiss it as a language for constructing economic models, but only because those models ARE ambiguous.

If you just want to understand how things work at the highest of levels, sure, you don’t need math, but if you want to know why those sub-systems interact they way they do, you will need to understand math, and not just the simple stuff. It is not just a language, it is also a set of laws. Physics is just applying the laws of math, and chemistry is just applying physics. Economics seems to be using math to justify a specific brand of wishful thinking.

Posted by OnTheTimes | Report as abusive

Thanks Fresnodan. I quant quite quell my laughter and my ex with Aspergers is nodding uncontrollably!

Posted by hsvkitty | Report as abusive

@OnTheTimes: Math itself is internally consistent, but the world, not even the physical world, exactly follows the laws of mathematics. In physics, for example, Newtonian mechanics are highly useful, but don’t hold when velocities get higher than about 1/10th the speed of light. For those problems we use Einstein’s laws of relativity, but even they are not perfect. Even phyical laws are models, not truths.

Posted by Curmudgeon | Report as abusive

Mathematics is a language, along with a collection of “accepted truths” that can be logically derived from postulates. The latter is in quotes, because the truth of the conclusions depends on the validity of the postulates.

Mathematical models always begin with some simplifying assumptions — essentially postulates in their own right. And as with the broader field, the validity of the model depends on the validity of the postulates.

Mathematics says nothing about Newtonian mechanics unless you add postulates that pertain to the physical world (e.g. Newton’s laws of mechanics). Mathematics says nothing about ANY aspect of the physical world unless you add postulates.

And yes, I am a math teacher (if not really a mathematician).

Posted by TFF | Report as abusive

@Curmudgeon, Adding qualifiers to laws of physics does not make them invalid, it just provides boundaries for where they are to be used. It sounds like you know you should not use Newtonian mechanics above 1/10th the speed of light, but for all cases below that speed, it is pretty consistent.

@TFF, math doesn’t say anything about newtonian mechanics, or anything else. Math is the tool used for proving those laws, and all other principles of physics. When I was an EE student, I completed math classes before I had the engineering and physics classes that used that math. I had no idea why I was learning those differential equations, until they were applied a year or so later. I was solving equations in math class that had nothing to do with physics or passive networks.

You can argue that math is based on assumptions, because you can’t prove that they will always be right, but if I bet on the outcome of math problems using solely the underlying assumptions of mathematics, and you bet on the economy based on conventional economic principals, I’m going to end up with more money than you. Unless your economic principals destroy the financial system and make the money worthless.

Posted by OnTheTimes | Report as abusive

“Math is the tool used for proving those laws, and all other principles of physics.”

Sorry, but that’s nonsense. Scientific laws are never proven, merely verified by repeated experiment. I agree that mathematics is used as a tool in physics, however the use of mathematics in physics does not prove anything UNLESS you accept the basic postulates of physics (sometimes asserted as “laws”). I’m not debating the law of gravity or Newton’s laws of mechanics. Except that both have been modified and qualified since their original formulation. Clearly they were never PROVEN.

“When I was an EE student, I completed math classes before I had the engineering and physics classes that used that math.”

Yup. Mathematics is the language of logical relationships. If our understanding of engineering and physics embodies a certain relationship, then the relevant mathematics will apply. Amazing the uses that people have found for mathematics over the years! They even found applications for basic number theory.

You would think that an “imaginary number” would have no applications whatsoever, yet the rotational nature of complex multiplication can be used to elegantly solve certain geometric problems and there are classes of differential equations (stemming from physics applications) that require complex solutions.

“You can argue that math is based on assumptions, because you can’t prove that they will always be right, but if I bet on the outcome of math problems using solely the underlying assumptions of mathematics, and you bet on the economy based on conventional economic principals, I’m going to end up with more money than you.”

Huh? What the heck do you mean? Math *is* based on postulates. That is a statement of fact that isn’t open to debate. I don’t particularly question those postulates, however changing the postulates doesn’t render mathematics useless — it merely generates a structure that lends itself to other applications. Some interesting stuff can be pulled out of non-Euclidean geometries.

And I don’t know of anybody “betting” on math problems. Either your answer is mathematically consistent with your postulates or it isn’t. What is there to bet on?

“Unless your economic principals destroy the financial system and make the money worthless.”

Do you mean “principals” or “principles”? Either way, I don’t accept ownership of them.

Posted by TFF | Report as abusive

When physicists come up with theories, they use math to prove them. You say they can’t prove their theories, but that’s how they get accepted – people buy the math behind them. I don’t want to get into an argument about what “prove” means, then this becomes a philosophy discussion, which I would rather do with wine.

What I meant by “if I bet on the outcome of math problems using solely the underlying assumptions of mathematics, and you bet on the economy based on conventional economic principals, I’m going to end up with more money than you.” is that you say math is is based on simplifying assumptions, as economic “theory” is, and I’m saying it’s not fair to equate the two. Those “simplifying assumptions” used in math are not going to be wrong, unlike the simplifying assumptions made by economists, who effectively bet other people’s money on their flawed theory that is based on simplified assumptions. I don’t want to make those bets.

I actually meant economic principles, but in retrospect, either word would fit. I didn’t mean to assign them to you, but to those who place economics on the same plane as mathematics.

Posted by OnTheTimes | Report as abusive

Restating that in my terms, I would suggest that physicists begin with postulates, then use mathematics to demonstrate that those postulates are consistent with observed results and accepted fact. (Because a model that isn’t consistent with observed reality is pretty useless.)

Did I ever say “math is based on simplifying assumptions”? Because that would be patently false. People developing mathematical models, especially in economics, begin with simplifying assumptions (essentially the assumption that their model reflects reality) and then use mathematics to prove conclusions from that. Don’t blame mathematics if the conclusions are unfounded — the fault is with the assumptions.

My point is that there is a clear distinction between using mathematics as a tool, which both economists and physicists do, and formulating accurate assumptions. I happen to trust the basic premises of physicists far more than I trust the premises of economists. The same can be said of their conclusions.

Posted by TFF | Report as abusive

ok, my mistake – you said mathematical models, not math, are based on simplifying assumptions. I can’t disagree with you there, or with any of your latest comment.

Posted by OnTheTimes | Report as abusive