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3 econo-smack downs

1. Will Wilkinson is upset about economists:

I agree that it is impossible to think intelligently about policy without some minimum of economic literacy. But the economist has no competence whatsoever to tell us, say, the appropriate discount rate to apply to future costs and benefits, to take one important example. I’ve heard philosophical arguments to the effect that the discount rate for future welfare should be zero and that the discount rate should approach infinity as we consider the welfare of furture beings with whom there is no possibility of reciprocity. The funny thing is that I think people get the implications of discount rates wrong, and that both zero and infinity point to more or less maximizing growth. A zero discount rate plus a basic grasp of the relationship between technology and growth plus a reasonable projection of the current trend of technological progress implies an obligation to maximize economic growth rates with no concern whatsoever to avoid the incidence of future externalities of current activity. This is an economic argument, but it is also something rather more. Likewise, an infinite discount rate implies that we should do the best we can for our children and grandchildren, and leave it to our grandchildren to worry about their grandchildren. If we’re doing something now that might hurt people none of us will coexist with 100 years, then so what?

I think the comments are correct. Economics (as currently practiced) has enormously useful tools for counting things – who benefits, who pays, aggregate benefits, how choices follow incentives, etc. This is essential for any rational policy analysis. But it’s silent on how things should be valued, especially when people just disagree on what’s valuable. Wilkinson expands in a later post:

I am thinking that the meanings of “cost” and “benefit” are either contested, due to diversity in reasonable evaluative standards, or their meanings are stipulated for technical purposes.

If the meaning is plural and contested, economists have no special comptence to decide between the different evaluative standards underlying different meanings of “cost” and “benefit”. Economists are people, and people can make arguments and exchange reasons for an against various evaluative standards, but economists do this as people with a conception of value, not as economists.

2.  Lawrence Mead at the Claremont Institute magazine reviews Thaler and Sunstein’s Nudge. He definitely does not like economists. A choice clip:

What economists mainly study in graduate school is not the economy but the mathematical methods required to frame and confirm rational choice hypotheses. They then apply this “tool kit” promiscuously to all manner of questions. Pride in their quantitative skills makes leading economists among the most cocksure figures in academia. In Freakonomics (2005), for instance, Steven D. Levitt and Stephen J. Dubner showed how economic methods can explain numerous puzzles in social behavior. The results are intriquing but also superficial.

For example, Levitt and Dubner show why teachers in public schools have incentives to help their students cheat on achievement tests—to make themselves look better. But they cannot explain why the teachers would violate their professional ethics to do this. Similarly, they show why low-level drug dealers have an incentive to work for low wages—to become drug bosses and make much more. But they cannot explain the climate of failure that causes poor youth to go into the drug trade in the first place. To explain behavior more fully would require the authors to undertake a deeper, more humble inquiry, involving more information sources and more hands-on contact with the phenomena under study. That sort of labor generates few academic plaudits today, and most economists avoid it.

Whoomp! There it is!

3. Matt Yglesias likes economists, but he’s got his finger on a real problem in macro-economics – the misguided need to base macro theories on micro foundations:

But as a methodological matter, it seems deeply unsound. As a general principle for investigating the world, we normally deem it desirable, but not at all necessary, that researchers exploring a particular field of inquiry find ways to “reduce” what they’re doing to a lower level. To make that concrete, in the modern day we have achieved a decent understanding of how principles of chemistry are grounded in physics’ understanding of the behavior of atoms. But it’s just not the case that advances in chemistry were made by demanding that chemists ground all their models in subatomic physics. On the contrary, chemistry moved forward in the first instance by having chemists investigate issues in chemistry and see which models and theories held up. Similarly, though psychology is intertwined with the detailed study of the biology of the brain, it’s not deemed illegitimate to research psychological issues in the absence of a specific neurological theory. Nor, for that matter, do microeconomists generally deem it necessary to explore in detail the psychological foundations of their models. The models are, rather, judged by whether or not they produce fruitful insights about economics. Trying to enhance models with better information about psychology isn’t against the rules, but it’s not required either. What’s required is that the models do useful work.

Yglesias has it right on. A more subtle formulation: correct theories should be consistent with each other, but valuable theories can be logically independent of each other. Or: if X and Y describe the same world (e.g., micro behavior and macro phenomena) then X and Y should not contradict each other, but X and Y can be derived in different ways. As Yglesias notes, that’s how lots of science works, but it’s a lesson that people conveniently ignore, especially in modern economics. At Econlog, Kling adds some historical context, as does David Henderson.

Written by fabiorojas

June 9, 2009 at 2:34 am

Posted in blogs, economics, fabio

2 Responses

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  1. Economics (as currently practiced) has enormously useful tools for counting things – who benefits, who pays, aggregate benefits, how choices follow incentives, etc. This is essential for any rational policy analysis. But it’s silent on how things should be valued, especially when people just disagree on what’s valuable.

    It’s not who votes that counts, but who counts the votes? If economics has useful tools for counting things – and I agree that it does – then it cannot also be silent on “how things should be valued”. The two are linked in practice if not always entirely in principle. Or, more simply: economists may tell you they don’t how to value something, but I bet they will try to value it in dollars, utils, or both.

    Like

    Dan Hirschman

    June 11, 2009 at 1:22 pm


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