Opinion

Felix Salmon

from Barbara Kiviat:

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

Nov 1, 2010 20:58 UTC

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.

COMMENT

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

from Justin Fox:

Economists respond to incentives

Oct 29, 2010 21:28 UTC

Here's my short take, following on Barbara's post Wednesday, on economists:

1. The single most valuable and durable lesson of economics is that incentives matter. Monetary incentives don't always matter more than other motivations, and sometimes people's behavior regarding money is a little nutty. But as an organizing principle for a social science, incentives matter is pretty good.

2. Economists respond to incentives, too. Real and potential financial awards affect what they choose to study, how they go about it, and what conclusions they draw. This doesn't mean all economists are evil sellouts. It means they're human beings.

3. For people who purport to believe that incentives matter, economists can be strangely touchy when anyone brings up point No. 2.

COMMENT

yep, economists are people who respond to incentives; as a result, they believe everyone else does…

Posted by rjs0 | Report as abusive

from Barbara Kiviat:

Why economists are(n’t) the answer to all our problems

Oct 27, 2010 13:45 UTC

Over at the Curious Capitalist, my former colleague Steve Gandel asks me to react to this NYT article about how economists manage to disagree on such fundamental questions as whether the government should spend more or less money in response to economic malaise. I've been perplexed by this sort of thing before. In this post from August, I worried about the influence of ideology, and then decided that maybe the bigger take-away is that we should spend less time listening to economists, who, after all, represent just one possible lens onto the world of human behavior, decision-making and social dynamics:

[T]he economy is as much a product of sociology and policy as it is pure-form economics. Yet we'd not expect a sociologist or a political scientist to be able to write a computer model to accurately capture system-wide decision-making. The conclusion I've come to: while economists may have an important perspective on whether it's time for stimulus or austerity, maybe we should stop looking to them as if they are people who are in the ultimate position to know.

After rereading my post, I started to wonder how economics and its famously flawed assumption of rational behavior came to dominate the discussion. If confidence is such an important part of getting the economy growing again, then why aren't we taking advice from legions of social psychologists? If multinational corporations are back to profitability but still not adding jobs, then why aren't we asking the organizational behavior experts for their models?

In search of an answer, I took a cue from Steve: I called Justin. He had all sorts of interesting things to say, like how economists after WWI thought long and hard about why they hadn't played a larger role in the war effort (ostensibly hoping to do better next time), and how in the 1960s economists moved to get everyone working from the same basic model partly because a unified voice would be more influential. That is to say, economics won out over other social sciences, at least in part, because the discipline got its act together. (Justin may fill in more of the details later, but, if not, you've always got his history-packed book to turn to.)

So what do we do now that economics doesn't, in fact, have all the answers? Well, some of us try to shoe-horn other approaches, like psychology, back into the picture. And some of us denounce academic economics altogether. But most of us just listen to the debate among economists and don't quite understand how it can be happening because these are the guys and gals who are supposed to know this stuff. We have so completely absorbed the economic world view in so many aspects of our lives—public policy is determined by cost-benefit analysis, doing good in the world has become return on social investment, efficiency has morphed from the best way to reach a goal to the goal itself—that it doesn't even occur to us that there could be a more illustrative starting point for asking a question or framing a debate.

That's one idea, anyway. The economists disagree because they don't have the tools to see the big picture. And most of us can't see that.

COMMENT

I remember a guy (Bob Mcnamara) who, if not an actual economist, sure was a guy who liked to use numbers and analysis. He was the best and brightest.
The only people demonstrated to know less than he were the ones who listened to him.

Posted by fresnodan | Report as abusive
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